<PAGE>   1

                           HUGOTON ENERGY CORPORATION
                                   FORM 10-K
                          YEAR ENDED DECEMBER 31, 1997

                              HUGOTON ENERGY LOGO
<PAGE>   2

================================================================================
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

[X]             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

[ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 0-23166

                              HUGOTON ENERGY LOGO
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                    KANSAS                                       48-1036256
         (State or other jurisdiction                         (I.R.S. Employer
      of incorporation or organization)                     Identification No.)

           301 N. MAIN, SUITE 1900,
               WICHITA, KANSAS                                     67202
   (Address of principal executive offices)                      (Zip Code)
</TABLE>

       Registrant's telephone number, including area code: (316) 262-1522

          Securities registered pursuant to Section 12 (b) of the Act:

<TABLE>
<CAPTION>
                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
             -------------------                           ---------------------
<S>                                            <C>
                     NONE                                           NONE
</TABLE>

          Securities registered pursuant to Section 12 (g) of the Act:

                           COMMON STOCK, NO PAR VALUE
                                (Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference to Part III of this Form 10-K or any amendment to this
form 10-K. [ ]

     As of February 1, 1998, Registrant had outstanding 19,838,574 shares of
Common Stock. The aggregate market value of the voting stock held by
non-affiliates of the Registrant, based upon the closing sale price of the
Common Stock on February 1, 1998 as reported on the NASDAQ National Market, was
approximately $49,925,000.
================================================================================
<PAGE>   3

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>       <C>                                                           <C>
                                      PART I
Item 1.   Business....................................................           3
Item 2.   Properties..................................................          14
Item 3.   Legal Proceedings...........................................          14
Item 4.   Submission of Matters to a Vote of Security Holders.........          14
                                     PART II
Item 5.   Market for Registrant's Common Stock and Related
            Shareholders Matters......................................          14
Item 6.   Selected Financial Data.....................................          15
Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.................................          16
Item 8.   Consolidated Financial Statements and Supplementary Data....          21
Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure..................................          21
                                     PART III
Item 10.  Directors and Executive Officers of the Company.............          22
Item 11.  Executive Compensation......................................          25
Item 12.  Security Ownership of Certain Beneficial Owners and
            Management................................................          30
Item 13.  Certain Relationships and Related Transactions..............          32
                                     PART IV
Item 14.  Exhibits Financial Statements Schedules and Reports on Form
            8-K.......................................................          34
Signatures............................................................          37
Financial Information.................................................  Appendix A
</TABLE>
<PAGE>   4

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

     Hugoton Energy Corporation (the "Company") is an independent oil and
natural gas company engaged in the exploration for and the development,
exploitation, production and acquisition of oil and natural gas reserves and
properties. The Company is one of the most active independent operators in the
Hugoton Field and has expanded its operations throughout the Mid-Continent area
in Kansas, Oklahoma and Texas, and into the Permian Basin in West Texas and New
Mexico, the Austin Chalk Trend of Texas and Louisiana and the Williston Basin in
Montana and North Dakota. The Company intends to expand its reserve base by
continuing its drilling and acquisition activities primarily in its four core
areas. The Company focuses on exploring and developing properties it believes
possess significant upside potential, which can be realized through the
application of 3-D seismic technology and traditional geologic studies, as well
as advanced drilling and completion techniques.

     The Company increased its proved reserves from 22 Bcfe at December 31, 1991
to 246 Bcfe at December 31, 1997. The proved reserves are 75% natural gas and
are 82% proved developed producing, with a reserve-to-production ratio of 8.4
years, based on 1997 production. The Company operates 1,679 wells, representing
87% of its reserves. The Company's average net daily production has increased
from 2.6 MMcfe during 1991 to 80.4 MMcfe during 1997.

     The Company's growth was a result of its aggressive drilling and
acquisition programs. During the last five years, the Company has drilled a
total of 342 wells and completed 270 of them for a success ratio of 79%.

     The Company focuses on potential acquisitions within its core areas, but
also considers selected opportunities in new areas. The Company's strategy is to
acquire producing properties with operational control in oil and natural gas
basins that offer significant exploitation, development and exploratory
prospects. The Company's most significant acquisitions have been the purchase of
limited partnership interests in two oil and natural gas partnerships owned by
The Prudential Insurance Company of America ("Prudential") in 1993 and the
purchase of Consolidated Oil & Gas, Inc. ("COG") in 1995.

     The Company is incorporated in the State of Kansas, its principal executive
offices are located at 301 North Main, Suite 1900, Wichita, Kansas 67202 and its
telephone number is (316) 262-1522.

MERGER WITH CHESAPEAKE

     On November 12, 1997, the Company signed a definitive agreement to merge in
a stock-for-stock transaction with Chesapeake Energy Corporation. The merger
agreement provides for a fixed exchange ratio of 1.3 shares of Chesapeake for
each share of the Company's stock, resulting in the Company's shareholders
owning approximately 26% of Chesapeake upon consummation of the merger.

     On February 17, 1998, the Company and Chesapeake filed with the Securities
and Exchange Commission a Joint Proxy/Prospectus on Form S-4 detailing the
merger transaction to be voted on by shareholders on March 10, 1998.

     On March 10, 1998, the shareholders of the Company and Chesapeake voted to
approve the merger.

IMPACT OF CHESAPEAKE MERGER

     As a result of the merger, the impact to the business strategy of the
Company going forward is unknown. The Company's future operations and business
decisions will be determined by the management of Chesapeake and may potentially
differ from previously stated plans, policies and practices of the Company.

     Effective with the consummation of the merger, certain material events took
place which include, but are not limited to the following: 1) all Board of
Directors and executive officers of the Company resigned and 2)

                                        3
<PAGE>   5

all currently outstanding stock options of the Company were converted to
Chesapeake stock options and became immediately vested and exercisable.

DRILLING

     The following table sets forth the wells drilled by the Company during the
periods indicated:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                 -----------------------------------------------
                                                     1997             1996             1995
                                                 -------------    -------------    -------------
                                                 GROSS    NET     GROSS    NET     GROSS    NET
                                                 -----    ----    -----    ----    -----    ----
<S>                                              <C>      <C>     <C>      <C>     <C>      <C>
Infill and Development:
  Productive...................................   98.0    77.3    30.0     23.9     5.0      2.3
  Non-Productive...............................    1.0     0.2     1.0      0.1     4.0      3.0
                                                 -----    ----    ----     ----    ----     ----
          Total................................   99.0    77.5    31.0     24.0     9.0      5.3
                                                 =====    ====    ====     ====    ====     ====
Field Extension and Exploratory:
  Productive...................................    9.0     4.6    28.0     12.2    23.0     14.4
  Non-Productive...............................   11.0     4.5     8.0      5.8     7.0      5.8
                                                 -----    ----    ----     ----    ----     ----
          Totals...............................  20.00     9.1    36.0     18.0    30.0     20.2
                                                 =====    ====    ====     ====    ====     ====
Total:
  Productive...................................  107.0    81.9    58.0     36.1    28.0     16.7
  Non-Productive...............................   12.0     4.7     9.0      5.9    11.0      8.8
                                                 -----    ----    ----     ----    ----     ----
          Total................................  119.0    86.6    67.0     42.0    39.0     25.5
                                                 =====    ====    ====     ====    ====     ====
</TABLE>

     As of December 31, 1997, the Company had a working interest in 1,198 gross
(515 net) natural gas wells and 1,521 gross (902 net) oil wells.

GAS GATHERING AND PROCESSING

     The Company owns and operates the Kinsler gas gathering system and
processing plant in Morton County, Kansas. The gathering system consists of more
than 30 miles of pipelines and currently serves 28 wells, of which 24 are
operated by the Company. The gathering system has a throughput capacity of
approximately 10 MMcf per day. During the year ended December 31, 1997, the
system gathered an average of 2.9 MMcf of natural gas per day.

     The processing plant is currently processing 1.8 MMcf per day and during
the year ended December 31, 1997, the plant recovered an average of 9,700
gallons of NGLs per day. All gas delivered to the system is purchased by the
Company at the wellhead at prices related to the Panhandle Eastern Pipe Line
monthly index. All NGLs are trucked to the Jayhawk NGL pipeline and delivered to
a Warren NGL, Inc. fractionation plant where they are sold at monthly average
spot market prices. In August of 1996, the Company modified its downstream
transportation arrangements with all residue gas available after processing
delivered to PanEnergy Field Services and marketed on the Panhandle Eastern Pipe
Line system at spot market prices.

                                        4
<PAGE>   6

ACREAGE

     The table below describes the Company's developed and undeveloped leasehold
acreage as of December 31, 1997. A substantial portion of the developed
leasehold acreage is developed above 3,500 feet, but is undeveloped below 3,500
feet.

<TABLE>
<CAPTION>
                               UNDEVELOPED ACREAGE     DEVELOPED ACREAGE        TOTAL ACREAGE
                               --------------------    ------------------    --------------------
                                GROSS        NET        GROSS       NET        GROSS        NET
                               --------    --------    -------    -------    ---------    -------
<S>                            <C>         <C>         <C>        <C>        <C>          <C>
Hugoton/Mid-Continent........  207,992      95,894     319,534    222,194      527,526    318,088
Permian Basin................   13,692       5,533      51,233     38,003       64,925     43,536
Austin Chalk.................  171,903      57,902      16,430      3,603      188,333     61,505
Williston Basin..............  302,329     139,132      55,227     19,193      357,556    158,325
                               -------     -------     -------    -------    ---------    -------
          Total..............  695,916     298,461     442,424    282,993    1,138,340    581,454
                               =======     =======     =======    =======    =========    =======
</TABLE>

     No possible or probable reserves have been assigned to the Company's
undeveloped acreage. As is customary in the oil and gas industry, the Company
can retain its interests in undeveloped acreage by drilling activity which
establishes commercial production sufficient to maintain the leases, or by
payment of delay rentals during the remaining primary term of such a lease. The
Company paid $1.7 million in delay rentals for 1997 and projects an expense of
approximately $1.9 million for 1998. The oil and natural gas leases in which the
Company has an interest are for varying primary terms.

     During 1997, the Company recorded a $12.0 million non-cash charge for
impaired, abandoned and expired undeveloped acreage. The charge was a result of
the Company's periodic review of its undeveloped acreage position and was based
upon factors such as results of exploration activities within a prospect,
current and expected commodity prices, lease terms, delay rental costs and the
Company's business strategy related to individual prospects. See also "Impact of
Chesapeake Merger" as set forth under "Item 1. -- Business."

     In addition to the developed and undeveloped acreage indicated, the Company
is engaged in numerous farmout agreements with other owners of oil and natural
gas leases and is actively leasing additional acreage. A farmout agreement is a
customary industry agreement which provides the assignee drill an exploratory
well or wells on the farmout properties, and if the well is completed as a
commercial producer of oil and/or natural gas, the assignee earns an assignment
of some or all of the assignor's natural gas and oil lease interests.

     As of December 31, 1997, the Company is an assignee in various farmout
agreements. Rights to earn the interest in the farmout acreage can be
surrendered by the Company at any time by giving notice to an assignor, or lost
through nonperformance by the Company.

                                        5
<PAGE>   7

OIL AND NATURAL GAS RESERVES

     The following table summarizes estimates of the Company's proved producing,
proved non-producing and proved undeveloped reserves as of December 31, 1997,
and the discounted present value attributable to the Company's estimated proved
reserves at such date, as estimated by independent petroleum engineers, Ryder
Scott Company.

<TABLE>
<CAPTION>
                                                         PROVED RESERVES
                                      -----------------------------------------------------
                                      PRODUCING    NON-PRODUCING    UNDEVELOPED     TOTAL
                                      ---------    -------------    -----------    --------
<S>                                   <C>          <C>              <C>            <C>
Natural gas (MMcf)..................   152,546         2,757           30,184       185,487
Oil and NGLs (MBbls)................     8,167           497            1,454        10,118
Natural gas equivalents (MMcfe).....   201,548         5,739           38,908       246,195
Present value of estimated future
  net revenues before income taxes
  (discounted at 10%) (in
  thousands)(1).....................  $144,935        $4,451          $23,630      $173,016
</TABLE>

---------------

(1) The present value of estimated future net revenues before income taxes
    determined in accordance with Securities and Exchange Commission regulations
    (discounted at 10%) as of December 31, 1997 was determined using weighted
    average sales prices of $1.83 per Mcf of natural gas and $15.97 per Bbl of
    oil.

     These estimates of the Company's proved reserves have not been filed with
or included in reports to any federal agency.

     In accordance with applicable requirements of the Securities and Exchange
Commission (the "Commission"), estimates of the Company's proved reserves and
future net revenues are made using oil and natural gas sales prices estimated to
be in effect as of the date of such reserve estimates and are held constant
throughout the life of the properties (except to the extent a contract
specifically provides for escalation). Estimated quantities of proved reserves
and future net revenues therefrom are affected by oil and natural gas prices,
which have fluctuated widely in recent years. There are numerous uncertainties
inherent in estimating oil and natural gas reserves and their estimated values,
including many factors beyond the control of the producer. The reserve data set
forth in this document represents only estimates. Reserve engineering is a
subjective process of estimating underground accumulations of oil and natural
gas that cannot be measured in an exact manner. The accuracy of any reserve
estimate is a function of the quality of available data and engineering and
geological interpretation and judgment. As a result, estimates of different
engineers may vary. In addition, estimates of reserves are subject to revision
based upon actual production, results of future development and exploration
activities, prevailing oil and natural gas prices, operating costs and other
factors, of which revisions may be material. Accordingly, reserve estimates are
often different from the quantities of oil and natural gas that are ultimately
recovered. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they are based.

     The volume of production from oil and natural gas properties declines as
reserves are depleted. Except to the extent the Company acquires properties
containing proved reserves or conducts successful exploration and development
activities, or both, the proved reserves of the Company will decline as reserves
are produced. The Company's future oil and natural gas production is therefore
highly dependent upon its level of success in finding or acquiring additional
reserves.

     Due to a significant decrease in commodity prices during the fourth quarter
of 1997, the company concluded an impairment of its oil and gas properties had
occurred and recorded a $36.2 million pre-tax impairment charge reflecting the
difference between estimated fair value and the carrying values of the impaired
properties.

                                        6
<PAGE>   8

PRODUCTION

     The following table sets forth the Company's oil and natural gas production
data during the periods indicated:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                           --------------------------
                                                            1997      1996      1995
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
NET PRODUCTION(1):
  Natural gas (MMcf).....................................  19,269    19,026    14,651
  Oil (MBbls)............................................   1,677     1,700     1,018
  Natural gas equivalents (Mmcfe)........................  29,331    29,226    20,759
AVERAGE NET DAILY PRODUCTION(1):
  Natural gas (Mcf)......................................  52,793    51,983    40,139
  Oil (Bbls).............................................   4,596     4,644     2,789
  Natural gas equivalents (Mcfe).........................  80,369    78,847    56,873
AVERAGE SALES PRICE(2):
  Natural Gas ($/Mcf)....................................  $ 2.24    $ 1.87    $ 1.30
  Oil ($/Bbl)............................................   19.36     18.03     16.37
  Natural gas equivalents ($/Mcfe).......................    2.58      2.27      1.72
OTHER DATA:
  Production cost ($/Mcfe)(3)............................  $ 0.88    $ 0.74    $ 0.56
  Depreciation, depletion and amortization/Mcfe)(4)......    1.17      0.76      0.68
</TABLE>

---------------

(1) Net production and average net daily production excludes NGLs and natural
    gas purchased by AmGas Corporation and resold to third parties.

(2) Includes the effect of hedging transactions. Average prices received from
    sales of natural gas include revenues attributable to NGLs as the Company
    has not historically accounted separately for production or revenues
    attributable to NGLs.

(3) Consists of lease operating expenses, production and severance taxes and
    gathering, transportation and other production expenses.

(4) Excludes depreciation, depletion and amortization not related to oil and gas
    properties.

MARKETING

     Approximately 90% of the Company's natural gas production is sold at index
related, spot-market prices. The balance of the Company's gas is sold under
longer-term contracts at percentage-of-proceeds or fixed prices.

     Natural Gas. Most of the Company's spot market gas is sold to Cibola Energy
Services Corporation ("Cibola"), a wholly-owned subsidiary of TransCanada
Pipelines, Ltd. Under a marketing agreement, Cibola has marketing rights to all
of the Company's undedicated gas production. The agreement mitigates the
Company's exposure to pipeline imbalance penalties and enables the Company to
take advantage of the size, diverse markets and trading expertise of Cibola,
while still maintaining market control. This arrangement increases the Company's
access to premium gas markets and enhances its pricing options. In addition,
Cibola assists the Company in areas such as nominations, scheduling and
solicitation of gathering and transportation discounts. This symbiotic
relationship provides the benefits of an in-house marketing company, without the
overhead expense. The agreement may be canceled by either party upon sixty (60)
days notice.

     Natural Gas Liquids. The Company's natural gas liquids produced from its
processing plant are sold at market prices (see "Gas Gathering and Processing").
The Company's natural gas liquids extracted by third party processors are
generally sold under percentage-of-proceeds contracts.

                                        7
<PAGE>   9

     Hedging Activities. The Company utilizes commodity swap agreements in an
attempt to reduce its exposure to commodity price movements. At December 31,
1997, the Company had not entered into any swap agreements.

     Customers. During 1997, Cibola purchased approximately 20% of the oil and
natural gas sold by the Company. The Company benefits from a long-standing
business relationship with Cibola; however, based on the current demand for oil
and natural gas, the Company does not believe the loss of this purchaser would
have a material adverse effect on the Company (see Note 10 of the Company's
Notes to the Consolidated Financial Statements).

     Oil and Natural Gas Condensate. All of the Company's crude oil and
condensate is sold at current market prices, under various short and
intermediate term contracts. The Company aggregates the majority of its
production into regional packages and periodically solicits offers from
qualified buyers.

     Trading. In December 1995, the Company formed HEC Trading Company ("HTC"),
a wholly-owned subsidiary, to buy, sell and trade various oil and natural gas
products, including financial instruments, in order to add value to the
Company's production through the enhancement of the commodity prices the company
receives.

TITLE TO PROPERTIES

     As is customary in the oil and natural gas industry, the Company makes only
a cursory review of title to farmout acreage and to undeveloped oil and natural
gas leases upon execution of any contracts. Prior to commencement of drilling
operations, a thorough title examination is conducted and curative work is
performed with respect to significant defects. To the extent title opinions or
other investigations reflect title defects, the Company, rather than the seller
of the undeveloped property, is typically responsible to cure any such title
defects at its expense. If the Company were unable to remedy or cure any title
defect of a nature such that it would not be prudent to commence drilling
operations on the property, the Company could suffer a loss of its entire
investment in the property. The Company has obtained title opinions on
substantially all of its producing properties and believes it has satisfactory
title to such properties in accordance with standards generally accepted in the
oil and gas industry. Prior to completing an acquisition of producing oil and
natural gas leases, the Company obtains title opinions on all leases valued at
$25,000 or greater. The Company's oil and natural gas properties are subject to
customary royalty interests, liens for current taxes and other burdens which the
Company believes do not materially interfere with the use of or affect the value
of such properties.

COMPETITION

     The oil and gas industry is highly competitive. The Company competes for
the acquisition of oil and natural gas properties, primarily on the basis of the
price to be paid for such properties, with numerous entities, including major
oil companies, other independent oil and gas concerns and individual producers
and operators. Many competitors have financial and other resources substantially
greater than those of the Company. The Company believes it enjoys a competitive
advantage over most other companies active in the Hugoton Producing Area because
of its extensive database of information and its technical and geological
experience in the area.

REGULATION

  General

     Various aspects of the Company's oil and natural gas operations are
regulated by administrative agencies under statutory provisions of the states
where such operations are subject to various types of regulation, including
regulation by state and federal agencies. Legislation affecting the oil and gas
industry is under constant review for amendment or expansion. Numerous
departments and agencies, both federal and state, are authorized by statute to
issue, and have issued, rules and regulations binding upon the oil and gas
industry and its individual members. The Federal Energy Regulatory Commission
("FERC") regulates the transportation and sale for resale of natural gas in
interstate commerce pursuant to the Natural Gas Act of 1938 ("NGA")

                                        8
<PAGE>   10

and the Natural Gas Policy Act of 1978 ("NGPA"). In the past, the Federal
government has regulated prices at which oil and gas could be sold. While sales
by producers of natural gas, and all sales of crude oil, condensate and natural
gas liquids can currently be made at uncontrolled market prices, Congress could
reenact price controls in the future. Deregulation of wellhead sales in the
natural gas industry began with the enactment of the NGPA in 1978. In 1989,
Congress enacted the Natural Gas Wellhead Decontrol Act ("the Decontrol Act").
The Decontrol Act removed all NGA and NGPA price and nonprice controls affecting
wellhead sales of natural gas effective January 1, 1993.

  Regulation of Oil and Natural Gas Exploration and Production

     Exploration and production operations of the Company are subject to various
types of regulation at the federal, state and local levels. Such regulations
include requiring permits and drilling bonds for drilling of wells, regulating
the location of wells, the method of drilling and casing wells, and the surface
use and restoration of properties upon which wells are drilled. Many states also
have statutes or regulations addressing conservation matters, including
provisions for the utilization or pooling of oil and gas properties,
establishment of maximum rates of production from oil and gas wells and
regulation of spacing, plugging and abandonment of such wells. Some state
statutes limit the rate at which oil and gas can be produced from the Company's
properties. See "Risk Factors -- Compliance with Governmental Regulations."

  Natural Gas Marketing, Gathering, Processing and Transportation

     Federal legislation and regulatory controls in the United States have
historically affected the price of natural gas and the manner in which such
production is marketed.

     Commencing in April 1992, the FERC issued Order Nos. 636,636-A, and 636-B
("Order No. 636"), which require interstate pipelines to provide transportation
separate, or "unbundled," from the pipelines' sales of gas. Also, Order No. 636
requires pipelines to provide open-access transportation on a basis that is
equal for all gas supplies. Although Order No. 636 does not directly regulate
the Company's activities, the FERC has stated it intends for Order No. 636 to
foster increased competition within all phases of the natural gas industry.

     In many instances, the result of Order No. 636 and related initiatives have
been to substantially reduce or eliminate the interstate pipelines' traditional
role as wholesalers of natural gas in favor of providing only storage and
transportation services.

     Order No. 636 has been implemented on all interstate pipelines. In July
1996, the United States Court of Appeals for the District of Columbia Circuit
largely upheld Order No. 636. A number of parties have appealed this ruling to
the Supreme Court and proceedings on remanded issues are currently ongoing at
FERC. In addition, numerous parties have filed petitions for review of Order No.
636, as well as orders in individual pipeline restructuring proceedings. Upon
such judicial review, these orders may be remanded or reversed in whole or in
part. With Order No. 636 subject to court review, and pending ongoing court
reviews of individual pipeline restructuring, it is difficult to predict with
precision its ultimate effects.

     In December 1992, the FERC issued Order No. 547, governing the issuance of
blanket marketer sales certificates to all natural gas sellers other than
interstate pipelines. The order eliminates the need for natural gas producers
and marketers to seek specific authorization under Section 7 of the NGA from the
FERC to make sales of natural gas for resale. The FERC intends Order No. 547, in
tandem with Order No. 636, to foster a competitive market for natural gas by
giving natural gas purchasers access to multiple supply sources at market-driven
prices.

     The FERC has recently announced its intention to re-examine certain of its
transportation-related policies, including the appropriate manner in which
interstate pipelines release transportation capacity under Order No. 636, and
the use of market-based rates for interstate gas transmission. While any
resulting FERC action would affect the Company only indirectly, these inquires
are intended to further enhance competition in natural gas markets.

                                        9
<PAGE>   11

     Regulation of onshore natural gas gathering activities is primarily a
matter of state oversight. Regulation of gas gathering and transportation
activities, depending upon the state involved, may include various
transportation, safety, rate, environmental and non-discriminatory purchase and
transport requirements.

  Oil Sales and Transportation Rates

     Sales prices of crude oil and gas liquids by the Company are not regulated.
The price the Company receives from the sale of these products may be affected
by, among other factors, the cost of transporting the products to market.
Effective January 1995, the FERC implemented regulations establishing an
indexing system under which oil pipelines will be able to change their
transportation rates, subject to prescribed ceiling levels. The indexing system
would generally index such rates to inflation, subject to certain conditions and
limitations. The effects of these regulations on the transportation costs
associated with oil production from the Company's oil producing operations has
not been significant.

     Additional proposals and proceedings which might affect the oil and gas
industry are pending before the FERC and the courts. The Company cannot predict
when or whether any such proposals may become effective. In the past, the
natural gas industry has been heavily regulated. There is no assurance the
regulatory approach currently pursued by the FERC will continue indefinitely.

  Pipeline Safety Regulation

     The Company's gathering operations are subject to safety and operational
regulations relating to the design, installation, testing, construction,
operation, replacement and management of facilities. Pipeline safety issues have
recently been the subject of increasing focus in various political and
administrative arenas at both the state and federal levels. Additional pending
legislation would, among other things, increase the frequency with which certain
pipelines must be inspected, as well as increase potential civil and criminal
penalties for violations of pipeline safety.

  Operating Hazards and Environmental Matters

     The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures and discharges of toxic gases, the occurrence of any of
which could result in substantial losses to the Company due to injury or loss of
life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. Such
hazards may hinder or delay drilling, development and on-line operations.

     Extensive federal, state and local laws govern oil and natural gas
operations regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. Numerous governmental
departments issue rules and regulations to implement and enforce such laws which
are often difficult and costly to comply with and which carry substantial
penalties for failure to comply. Some laws, rules and regulations relating to
protection of the environment may, in certain circumstances, impose "strict
liability" for environmental contamination, rendering a person liable for
environmental damages and cleanup costs without regard to negligence or fault on
the part of such person. Other laws, rules and regulations may restrict the rate
of oil and natural gas production below the rate that would otherwise exist. The
regulatory burden on the oil and natural gas industry increases its cost of
doing business and consequently affects its profitability. These laws, rules and
regulations affect the operations of the Company. Compliance with environmental
requirements generally could have a material adverse effect upon capital
expenditures, earnings or the competitive position of Hugoton and its
subsidiaries. The Company believes it is in substantial compliance with current
applicable environmental laws and regulations and continued compliance with
existing requirements will not have a material adverse impact on the Company.
Nevertheless, changes in environmental law have the potential to adversely
affect the Company's operations. For instance, at least two separate courts have
recently ruled certain wastes associated with the production of crude oil may be
classified as hazardous substances under the Comprehensive Environmental
Response, Compensation, and Liability Act

                                       10
<PAGE>   12

(commonly called "Superfund") and thus the Company could become subject to the
burdensome cleanup and liability standards established under the federal
Superfund program if significant concentrations of such wastes were determined
to be present at the Company's properties or to have been produced as a result
of the Company's operations. Alternately, pending amendments to Superfund
presently under consideration by the U.S. Congress could relax many of the
burdensome cleanup and liability standards established under the statute.

     The Company has established guidelines to be followed to comply with
environmental laws, rules and regulations. The Company has designated a
compliance officer whose responsibility is to monitor regulatory requirements
and their impacts on the Company and to implement appropriate compliance
procedures. The Company also employs an environmental manager whose
responsibilities include causing the Company's operations to be carried out in
accordance with applicable environmental guidelines and implementing adequate
safety precautions.

     Although the Company maintains insurance against some, but not all, of the
risks described above, including insuring the cost of clean-up operations,
public liability and physical damage, there is no assurance that such insurance
will be adequate to cover all such costs or that such insurance will continue to
be available in the future or such insurance will be available at premium levels
that justify its purchase. The occurrence of a significant event not fully
insured or indemnified against could have a material adverse effect on the
Company's financial condition and operations.

EMPLOYEES

     On March 1, 1998, the Company employed 112 people, including 54 that work
in the Company's various field offices. The Company's employees are not
represented by unions. The Company believes its relationship with its employees
is satisfactory.

OFFICES AND EQUIPMENT

     The Company leases its Wichita, Kansas headquarters under a lease covering
approximately 40,000 square feet, expiring in 2006. The monthly rent is
approximately $40,000. The Company also leases office space in Denver, Colorado
and operates six field offices in Kansas, Oklahoma, Texas, and North Dakota. The
Company also maintains an inventory of field equipment and materials including
tubular goods, compressors, pumping units and field vehicles.

FORWARD-LOOKING INFORMATION AND RISK FACTORS

     Certain of the statements set forth under "Item 1. -- Business" and "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Form 10-K, such as the statements regarding
planned capital expenditures, the availability of capital resources to fund
capital expenditures and the number of anticipated wells to be drilled in 1998
and thereafter, are forward-looking and are based upon the Company's current
belief as to the outcome and timing of such future events. There are numerous
risks and uncertainties that can affect the outcome and timing of such events,
including many factors beyond the control of the Company. These factors include,
but are not limited to, the matters described below. Should one or more of these
risks or uncertainties occur, or should underlying assumptions prove incorrect,
the Company's actual results and plans for 1998 and beyond could differ
materially from those expressed in the forward-looking statements. See also
"Impact of Chesapeake Merger" as set forth under "Item 1. -- Business".

     Volatility of Oil and Gas Prices. The Company's future revenue,
profitability and rate of growth are substantially dependent upon the prevailing
prices of, and the demand for, oil and natural gas. Prices for oil and natural
gas are subject to wide fluctuation due to changes in the supply of and demand
for oil and natural gas, market uncertainty, and a variety of additional factors
beyond the control of the Company, such as various economic, political and
regulatory developments, and competition from other sources of energy.

                                       11
<PAGE>   13

     Uncertainty of Estimates of Oil and Gas Reserves. Estimating quantities of
reserves and future net cash flows is not an exact science. There are numerous
uncertainties inherent in estimating quantities of proved oil and gas reserves,
including many factors beyond the control of the Company. This Form 10-K
contains estimates of proved oil and gas reserves of the Company and estimated
future net cash flows therefrom. Such estimates rely upon various assumptions,
including those prescribed by the Commission, such as future oil and gas prices,
drilling and operating expenses, capital expenditures, taxes, and availability
of funds. The present value of future net cash flows referred to in this Form
10-K should not be construed as the current market value of the estimated oil
and gas reserves attributable to the Company's properties. The process of
estimating oil and gas reserves is complex, requiring significant decisions and
assumptions in the evaluation of available geological, engineering and economic
data for each reservoir. As a result, any such estimate is inherently an
imprecise estimation of reserve quantities and estimated future net revenue
therefrom. Actual future production, revenue, taxes, development expenditures,
operating expenses and quantities of recoverable oil and gas reserves will vary
from those assumed in the estimate.

     Any significant variance from the assumptions could materially affect the
quantity and value of the Company's reserves as compared to estimates set forth
in this Form 10-K. The Company's production operations may be curtailed or
suspended as a result of governmental requirements or price controls, mechanical
difficulties or other circumstances beyond control of the Company. The Company's
properties may also be susceptible to hydrocarbon drainage from production by
other operators on adjacent properties. In addition, these reserves may be
subject to downward or upward revision based upon production history, results of
future exploration and development, prevailing oil and gas prices and other
factors.

     Need for Development and Acquisition of Additional Reserves. The Company's
future success, as is generally the case in the industry, depends upon its
ability to find, develop or acquire additional oil and gas reserves that are
economically recoverable. Unless the Company conducts successful exploration,
development and exploitation activities on properties it currently owns or
acquires additional properties containing proved reserves, the Company's proved
reserves will decline. The successful acquisition of producing properties
requires an assessment of recoverable reserves, future oil and gas prices and
operating costs, potential environmental and other liabilities, title issues and
other factors. Such assessments are necessarily inexact and their accuracy is
inherently uncertain.

     There can be no assurance that the Company's exploration and development
projects will result in significant additional reserves or the Company will have
success drilling productive wells at economically viable costs. Furthermore,
while the Company's revenues may increase if prevailing oil and gas prices
increase, the Company's finding costs for additional reserves could also
increase.

     The Company intends to make substantial capital expenditures for the
acquisition, exploration, development and production of its oil and natural gas
reserves. While the Company believes cash flow from operations and borrowings
under the Company's existing bank credit facility should provide sufficient
funds for its planned activities through the end of 1998, additional debt or
equity financing may be required prior to such time or thereafter to fund
further exploration, exploitation and development activities or future property
acquisitions. No assurances can be given as to the availability or terms of any
such additional financing that may be required or that financing will continue
to be available to the Company. If such financing is not available, the
Company's exploration, exploitation and development activities and future
property acquisitions may be curtailed. See also "Impact of Chesapeake Merger"
as set forth under "Item 1. -- Business".

     Risks of Hedging Transactions. In order to manage its exposure to price
risks in the marketing of its oil and natural gas, the Company has in the past
and expects to continue to enter into oil and natural gas price hedging
arrangements with respect to a portion of its expected production. These
arrangements may include futures contracts on the New York Mercantile Exchange
("NYMEX"), fixed price delivery contracts and financial or commodity swaps.
While intended to reduce the effects of volatility of the price of oil and
natural gas, such transactions may limit potential gains by the Company if oil
and natural gas prices were to rise substantially over the price established by
the hedge. In addition, such transactions may expose the Company to the risk of
financial loss in certain circumstances, including instances in which (i)
production is less than expected, (ii) there is a widening of price
differentials between delivery points for the Company's production

                                       12
<PAGE>   14

and the delivery point assumed in the hedging arrangement, (iii) the
counterparties to the Company's future contracts fail to perform the contract,
or (iv) a sudden, unexpected event materially impacts oil or natural gas prices.

     Dependence on Key Personnel. The Company depends to a large extent on the
services of Floyd C. Wilson and W. Mark Womble. Mr. Wilson and Mr. Womble devote
their full time to the Company. The Company has an employment contract with Mr.
Wilson that expires in August 2000 and with Mr. Womble that expires in September
1999. The unavailability of Mr. Wilson or Mr. Womble would have a material
adverse effect on the Company. The Company believes its success is also
dependent upon its ability to continue to employ and retain skilled technical
personnel. See also "Impact of Chesapeake Merger" as set forth under "Item
1. -- Business".

     Marketability of Production. The marketability of the Company's production
depends upon the availability and capacity of gas gathering systems, pipelines
and processing facilities, and the unavailability or lack of capacity thereof
could result in the shut-in of producing wells or the delay or discontinuance of
development plans for properties. In addition, Federal and state regulation of
oil and gas production and transportation, general economic conditions and
changes in supply and demand could adversely affect the Company's ability to
produce and market its oil and natural gas on a profitable basis.

     Competition. The Company operates in a highly competitive environment. The
Company competes with major and independent oil and gas companies for the
acquisition of desirable oil and gas properties, as well as the equipment and
labor required to explore, develop and operate such properties. The Company also
competes with major and independent oil and gas companies in the marketing and
sale of oil and natural gas to marketers and end-users. Many of these
competitors have financial and other resources substantially greater than those
of the Company.

     Drilling Risks. Drilling involves numerous risks, including the risk no
commercially productive oil or gas reservoirs will be encountered. The cost of
drilling and completing wells is often uncertain, and drilling operations may be
curtailed, delayed or canceled as a result of a variety of factors, including
unexpected drilling conditions, pressure or irregularities in formations,
equipment failures or accidents, weather conditions, and shortages or delays in
the delivery of equipment. There can be no assurance as to the success of the
Company's future drilling activities.

     Operating Hazards. The oil and gas business involves a variety of operating
risks, including the risk of fire, explosions, blow-outs, pipe failure,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures or discharges of toxic gases, the occurrence of any of which
could result in substantial losses to the Company due to injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties, and suspension of operations. In accordance with
customary industry practice, the Company maintains insurance against some, but
not all, of the risks described above. There can be no assurance any insurance
obtained by the Company will be adequate to cover any losses or liabilities. The
Company cannot predict the continued availability of insurance or the
availability of insurance at premium levels that justify its purchase.

     Compliance with Governmental Regulations. Oil and gas operations are
subject to various federal, state and local governmental regulations which may
be changed from time to time in response to economic or political conditions.
Matters subject to regulation include discharge permits for drilling operations,
drilling and abandonment bonds or other financial responsibility requirements,
reports concerning operations, the spacing of wells, unitization and pooling of
properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and gas wells below actual production capacity in order to conserve supplies
of oil and gas. In addition, the production, handling, storage, transportation
and disposal of oil and gas, by-products thereof and other substances and
materials produced or used in connection with oil and gas operations are subject
to regulation under federal, state and local laws and regulations primarily
relating to protection of human health and the environment. These laws and
regulations have continually imposed increasingly strict requirements for water
and air pollution control and solid waste management.
                                       13
<PAGE>   15

     No Dividends. The Company has never paid cash dividends on its common stock
and does not intend to pay cash dividends on its common stock in the foreseeable
future. The Company currently intends to retain its cash for the continued
development of its business, including development, exploration and acquisition
activities. In addition, the Company's bank credit facility currently restricts
the ability of the Company to pay dividends. See also "Impact of Chesapeake
Merger" as set forth under "Item 1. -- Business".

ITEM 2. PROPERTIES

     The location and character of the Company's oil and gas properties and its
gathering facilities are described above under Item 1. -- Business.

ITEM 3. LEGAL PROCEEDINGS

     The Company is a named defendant in lawsuits and is a party in governmental
proceedings from time to time arising in the ordinary course of business. While
the outcome of such lawsuits and other proceedings against the Company cannot be
predicted with certainty, management does not believe these matters will have a
material adverse effect on the financial condition or results of operations of
the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At the Company's Special Meeting of Stockholders, held October 16, 1997,
the following proposal was approved:

          1. Approved an amendment to the Restated Articles of Incorporation of
     the Company granting the Board of Directors the right to amend the Bylaws
     of the Company.

<TABLE>
<CAPTION>
AFFIRMATIVE  NEGATIVE     VOTES
   VOTES       VOTES     WITHHELD
-----------  ---------   --------
<S>          <C>         <C>
13,995,956   1,015,892    5,635
</TABLE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

     The Company's common stock trades on the NASDAQ National Market under the
symbol "HUGO." The following table sets forth the high and low bid price per
share for the Company's common stock as reported on NASDAQ:

<TABLE>
<CAPTION>
                                                      HIGH      LOW
                                                     ------    ------
<S>                                                  <C>       <C>
1997
First Quarter....................................    $12.50    $ 9.25
Second Quarter...................................     14.50      9.00
Third Quarter....................................     14.25     11.25
Fourth Quarter...................................     13.25      8.38
1996
First Quarter....................................    $ 9.25    $ 7.25
Second Quarter...................................      8.75      7.00
Third Quarter....................................      9.38      7.38
Fourth Quarter...................................     11.63      8.25
</TABLE>

     On February 13, 1998, the closing price for the Company's common stock was
$8.50.

     The Company has approximately 1,100 shareholders, including 1,000
beneficial owners and 100 holders of record as of February 15, 1998.

                                       14
<PAGE>   16

     No dividends have been paid on the Company's common stock to date. The
Company intends to maintain a policy of retaining cash for the continued
expansion of its business. See also "Impact of Chesapeake Merger" as set forth
under "Item 1. -- Business".

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                            ----------------------------------------------------
                                              1997       1996       1995       1994       1993
                                            --------   --------   --------   --------   --------
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                         <C>        <C>        <C>        <C>        <C>
OPERATIONS STATEMENT DATA:
Revenues:
  Oil and gas.............................  $ 75,703   $ 66,292   $ 35,906   $ 23,696   $ 17,349
  Gas plant...............................     1,142      1,914      1,638      1,945      1,172
  Other(1)................................      (103)        10     (3,315)       (11)        16
                                            --------   --------   --------   --------   --------
          Total revenues..................    76,742     68,216     34,229     25,630     18,537
                                            --------   --------   --------   --------   --------
Expenses:
  Production..............................    25,694     21,667     11,570      7,528      7,178
  Gas plant...............................     1,014      1,420        978      1,189        934
  Exploration(4)..........................    20,304      1,711      2,239      3,036        587
  General and administrative..............     9,981      6,872      4,346      3,117      1,883
  Compensatory stock option expense (2)...        --         --         --         --      3,289
  Depreciation, depletion and
     amortization.........................    35,639     23,423     15,234      8,677      5,582
  Impairment of oil and gas properties
     (5)..................................    36,209         --         --         --         --
                                            --------   --------   --------   --------   --------
          Total expenses..................   128,841     55,093     34,367     23,547     19,453
                                            --------   --------   --------   --------   --------
Operating income (loss)...................   (52,099)    13,123       (138)     2,083       (916)
Other income (expense):
  Interest................................    (6,752)    (6,070)    (5,108)    (3,077)    (2,371)
  Other...................................       220        466        319        252        199
                                            --------   --------   --------   --------   --------
          Total other income (expense)....    (6,532)    (5,604)    (4,789)    (2,825)    (2,172)
                                            --------   --------   --------   --------   --------
  Income (loss) before income taxes and
     extraordinary item...................   (58,631)     7,519     (4,927)      (742)    (3,088)
(Provision) benefit for income taxes......    16,128     (3,316)     1,394         66        582
                                            --------   --------   --------   --------   --------
Income (loss) before extraordinary item...   (42,503)     4,203     (3,533)      (676)    (2,506)
Extraordinary item-loss from early
  extinguishment of debts, net of tax.....        --         --       (136)        --         --
                                            --------   --------   --------   --------   --------
          Net income (loss)...............  $(42,503)  $  4,203   $ (3,669)  $   (676)  $ (2,506)
                                            ========   ========   ========   ========   ========
          Basic income (loss) per common
            share(3)......................  $  (2.15)  $   0.21   $  (0.27)  $  (0.07)  $  (0.41)
                                            ========   ========   ========   ========   ========
          Diluted income (loss) per common
            share(3)......................  $  (2.15)  $   0.21   $  (0.27)  $  (0.07)  $  (0.41)
                                            ========   ========   ========   ========   ========
Weighted average number of common shares
  Outstanding.............................    19,806     19,697     13,460     10,310      6,071
OTHER DATA:
Net cash provided by operating
  activities..............................  $ 32,614   $ 29,484   $ 11,367   $ 10,431   $  5,931
Net cash used in investing activities.....   (48,584)   (36,706)   (36,869)   (39,116)   (78,765)
Net cash provided by financing
  activities..............................    15,998      7,040     27,750     28,683     73,755
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital...........................  $  1,696   $  8,545   $  6,083   $ 11,551   $  1,732
Property and equipment, net...............   197,416    232,778    217,635     96,436     78,842
Total assets..............................   213,220    251,929    234,655    116,634     88,329
Long-term debt............................   110,000     95,000     88,000     60,000     62,500
Shareholders' equity......................    90,229    131,527    127,324     50,225     19,995
</TABLE>

                                       15
<PAGE>   17

---------------

(1) The year ended December 31, 1995 includes a charge of $2.7 million relating
    to the Company's natural gas hedging activities resulting from a loss of
    basis correlation for certain contracts (see Note 11 of Company's Notes to
    the Consolidated Financial Statements).

(2) Reflects a non-cash charge for compensatory stock options granted to certain
    employees that have been or will be satisfied by the Company's Chairman of
    the Board, President and Chief Executive Officer.

(3) The earnings per share amounts prior to 1997 have been restated as required
    to comply with Statement of Financial Accounting Standards No. 128, Earning
    Per Share. For further discussion of earnings per share and the impact of
    Statement 128, see Note 1 of the notes to the consolidated financial
    statements.

(4) Reflects non-cash charges for abandoned, expired and impaired undeveloped
    acreage of $12.0 million during 1997.

(5) Represents a non-cash charge for impairment of oil and gas properties
    pursuant to Statement of Financial Accounting Standards No. 121, "Accounting
    for the impairment of Long-Lived Assets and for Long-Lived Assets to be
    Disposed Of".

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW

GENERAL

     Hugoton Energy Corporation was formed in 1987 through the acquisition of
several limited partnership interests in the Hugoton Producing Area, and until
1993 grew primarily through acquisitions in that core area. Since 1993, the
Company has grown through producing property and leasehold acquisitions and
development and exploratory drilling, primarily in three additional core areas:
the Williston Basin, the Permian Basin and, most recently, the Austin Chalk
Trend. Expansion into these areas marked a shift in the Company's asset base
from the lower risk, limited upside of the Hugoton Producing Area to areas with
much greater exploration and development potential.

     1997 Activity: On November 12, 1997, the Company signed a definitive
agreement to merge in a stock-for-stock transaction with Chesapeake Energy
Corporation. The merger agreement provides for a fixed exchange ratio of 1.3
shares of Chesapeake upon consummation of the merger.

     On February 17, 1998, the Company and Chesapeake filed with the Securities
an Exchange Commission a Joint Proxy/Prospectus on Form S-4 detailing the merger
transaction to be voted on by shareholders on March 10, 1998.

     On March 10, 1998, the shareholders of the Company and Chesapeake voted to
approve the merger.

     1996 Acquisitions and Property Sales. During 1996, the Company spent $17.4
million to acquire 165,000 additional net undeveloped acres, including 95,000
net acres in the Williston Basin. These acreage additions were equal to 70% of
the Company's net undeveloped acres at December 31, 1995.

     On June 20, 1996, the Company purchased a 50% working interest in
approximately 95,000 gross acres in the Austin Chalk Trend in Louisiana for
$12.9 million. This acreage acquisition, coupled with the January 1, 1996
acreage acquisition mentioned below and several smaller acreage acquisitions in
the third quarter, provided the Company with a total of 148,000 gross acres in
the Austin Chalk Trend to explore as of December 31, 1996.

     During 1996, the Company sold its interest in a group of non-strategic
producing gas properties and a gas gathering and salt water disposal system
located in Southern Colorado and Northern New Mexico to a major oil company for
$4.5 million. The Company also sold its interest in approximately 450
non-strategic producing oil properties located in Northeast Oklahoma for $1.5
million.

     On January 1, 1996, the Company purchased an undivided interest in a group
of producing oil and gas properties and undeveloped acreage for $9.7 million
from a privately-held company that owns an undivided interest in and operates
the properties. The producing properties and acreage are located in Southeast
Texas and established a presence for the Company in the Austin Chalk Trend. The
acquisition included eight

                                       16
<PAGE>   18

producing wells and 35,000 gross acres, in which the Company's working interests
are 25% and 50%, respectively.

     Prior Major Property Acquisitions. The Company's current property position
has been shaped by two large acquisitions consummated in 1995 and 1993 and
several smaller acquisitions.

     In September 1995, the Company acquired COG, a privately owned oil and gas
company for $35 million in cash and 9.1 million shares of common stock. The
acquisition extended the Company's operations into several basins outside the
Hugoton Producing Area, primarily into the Williston Basin and Permian Basin.

     In July 1993, the Company significantly strengthened its position as a
major operator in the Hugoton Field with the $73.5 million purchase of interests
in two limited partnerships formed to acquire and develop properties in the
Hugoton Producing Area for which the Company had acted as general partner.

     These two acquisitions were supplemented by a $13.6 million acquisition of
56 producing wells in the Hugoton Producing Area from Mobil Corporation in 1995,
as well as the purchase in 1994 of a 50% interest in 186,000 mineral acres
covering deep rights underlying shallow production located in the Hugoton Field
which is being developed jointly with Oxy U.S.A.

     The future results of the Company may depend on its ability to locate and
develop additional oil and natural gas properties, to attract and employ new
sources of capital, to develop these properties and to successfully market the
resulting production of crude oil and natural gas products. Historically, the
markets for oil and natural gas have been volatile and are likely to continue to
be volatile in the future but it is impossible as to predict these future price
movements. Declines in oil and natural gas prices may adversely affect the
Company's cash flow, liquidity and profitability. Due to the nature of the oil
and natural gas industry and the general risks relating to the exploration for
and production of oil and natural gas, including the volatility of prices for
crude oil and natural gas products, there can be no assurance that these efforts
will be successful. See also "Impact of Chesapeake Merger" as set forth under
"Item 1. -- Business."

RESULTS OF OPERATIONS

     The following table sets forth the Company's oil and natural gas production
during the periods indicated:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                           --------------------------
                                                            1997      1996      1995
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
NET PRODUCTION:(1)
  Natural gas (MMcf).....................................  19,269    19,026    14,651
  Oil (MBbls)............................................   1,677     1,700     1,018
  Natural gas equivalents (MMcfe)........................  29,331    29,226    20,759
AVERAGE SALES PRICE(2)(3):
  Natural gas ($/Mcf)....................................  $ 2.24    $ 1.87    $ 1.30
  Oil ($/Bbl)............................................   19.36     18.03     16.37
  Natural gas equivalents ($/Mcfe).......................    2.58      2.27      1.72
OTHER DATA:
  Production costs ($/Mcfe)(4)...........................  $ 0.88    $ 0.74    $ 0.56
  Depreciation, depletion and amortization ($/Mcfe)(5)...    1.17      0.76      0.68
</TABLE>

---------------

(1) Net production excludes NGL's and natural gas purchased by AmGas Corporation
    and resold to third parties.

(2) Includes the effect of hedging transactions. See Note 11 of the Company's
    Notes to the Consolidated Financial Statements.

(3) Average prices received from sales of natural gas include revenues
    attributable to NGLs as the Company has not historically accounted
    separately for production or revenues attributable to NGLs.

(4) Consists of lease operating expenses, production and severance taxes and
    gathering, transportation and other production expense.

(5) Excludes depreciation, depletion and amortization not related to oil and gas
    properties.

                                       17
<PAGE>   19

  YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

     Net Income or Loss and Cash Flow from Operating Activities. For the year
ended December 31, 1997, the Company reported net loss of $42.5 million, or
$2.15 per share, on total revenue of $76.7 million. This compares to net income
of $4.2 million, or $.21 per share, on total revenue of $68.2 million for the
year ended December 31, 1996. Cash flows from operating activities for 1997
increased 11% to $32.6 million from $29.5 million in 1996. The net loss for 1997
is largely attributable to the non-cash oil and gas properties impairment charge
of $36.2 million, $12.0 million of undeveloped acreage impairment and
abandonments and $5.2 million of exploratory 3-D seismic costs (all amounts
pre-tax). The Company's net income, cash flows and average sales prices for 1997
were impacted by the Company's oil and natural gas swap contracts, resulting in
pre-tax income and the average sales price per Mcfe being increased by $1.3
million and $.05, respectively, for the year ended December 31, 1997.

     Oil and Gas Revenues. Revenues from oil and gas operations increased by 14%
to $75.7 million in 1997, compared to $66.3 million during 1996. The increase
from 1996 to 1997 is attributed to slightly higher average sales prices per Mcfe
($2.58 in 1997 versus $2.27 in 1996) and the existence of positive hedging gains
of $1.3 million in 1997 versus hedging losses of $8.7 million in 1996.

     Production Expense. Production expense for 1997 increased to $25.7 million
compared to $21.7 million in 1996. Lease operating costs, which rose $3.9
million, continued to reflect increasing price pressures in the service and
supply sector of the economy.

     Exploration Expense. Exploration expense increased $18.6 million from $1.7
million in 1996 to $20.3 million in 1997. Undeveloped acreage impairment and
abandonments of $12.0 million, $5.2 million of exploratory 3-D seismic costs and
an increase in delay rentals of $1.4 million over 1996 comprised the 1997
increase.

     General and Administrative Expense. General and administrative expense
increased to $10.0 million in 1997 compared to $6.9 million in 1996. The
increase for 1997 is primarily attributable to costs associated with the
Company's review of strategic alternatives, consummating in the Merger Agreement
signed November 12, 1997.

     Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization ("DD&A") for 1997 was $35.6 million compared to $23.4 million
for 1996. The Company's DD&A expense per Mcfe increased from $.76 in 1996 to
$1.17 in 1997. The higher rate per Mcfe is attributed to: 1) the impact of lower
commodity prices at December 31, 1997 on the Company's oil and gas reserves and
2) higher than anticipated drilling costs incurred, primarily associated with
the Company's Austin Chalk Properties.

     Impairment of Oil & Gas Properties. During the fourth quarter of 1997, the
Company recorded a $36.2 million non-cash impairment charge related to its oil &
gas properties. The charge is attributed to the impact of lower commodity prices
at December 31, 1997 on the Company's oil and gas reserves and higher than
anticipated drilling costs incurred, primarily associated with the Company's
Austin Chalk Properties. The impairment charge was significantly impacted by
substantial decreases of commodity prices during the fourth quarter of 1997.

     Interest Expense. Interest expense was $6.8 million for 1997 compared to
$6.1 million for 1996. This increase is attributable to a higher average
long-term debt balance outstanding during 1997.

     Income Taxes. For 1997, the Company recorded a tax benefit of $16.1 million
compared to a $3.3 million provision recorded in 1996. The effective tax rate
for 1997 was 28% as compared to 44% in 1996. The income tax benefit recorded in
1997 is lower than an expected statutory tax rate primarily as a result of a
$5.4 million valuation allowance recorded against the Company's deferred tax
assets and the amortization of certain non-deductible property costs arising
from the purchase allocation related to the COG acquisition.

  YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     Net Income or Loss and Cash Flow from Operating Activities. For the year
ended December 31, 1996, the Company reported net income of $4.2 million, or
$.21 per share, on total revenue of $68.2 million. This
                                       18
<PAGE>   20

compares to a net loss of $3.7 million, or $.27 per share, on total revenue of
$34.2 million for the year ended December 31, 1995. Cash flows from operating
activities for 1996 increased by 159% to $29.4 million from $11.4 million in
1995. The increase in net income for 1996 is largely attributable to a full year
impact of the addition of the properties acquired in the COG acquisition
completed in September of 1995, higher average sales prices per Mcfe ($2.27 in
1996 versus $1.72 in 1995) and the continued success of the Company's drilling
program. The Company's net income, cash flows and average sales prices for 1996
were all significantly impacted by the Company's oil and natural gas swap
contracts, resulting in pre-tax income and the average sales price per Mcfe
being reduced by $8.7 million and $.30, respectively, for the year ended
December 31, 1996.

     Oil and Gas Revenues. Revenues from oil and gas operations increased by 85%
to $66.3 million in 1996, compared to $35.9 million during 1995. The increase
from 1995 to 1996 is largely attributed to the inclusion of the COG and other
acquisition properties for the full year in 1996, higher average sales prices
and the continued success of the Company's drilling activities. The Company's
1996 gas production increased by 30% and oil production increased by 67% over
1995 production.

     Production Expense. Production expense for 1996 increased to $21.7 million
compared to $11.6 million in 1995. The overall increase reflects the addition of
a substantial number of wells (through the COG and other acquisitions and the
Company's drilling program), and the per unit increase in production expenses
reflects an increase in the oil component of the Company's production, which is
relatively higher cost than gas production.

     Exploration Expense. Exploration expense decreased by $.5 million from $2.2
million in 1995 to $1.7 million in 1996. The decrease was due largely to the
higher success rate achieved by the Company from its drilling program (87% in
1996 versus 72% in 1995).

     General and Administrative Expense. General and administrative expense
increased to $6.9 million in 1996 compared to $4.3 million in 1995. This
increase reflected the impact of a full year of expenses subsequent to the
acquisition of COG and the continued expansion of the Company's operations.

     Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization ("DD&A") for 1996 was $23.4 million compared to $15.2 million
for 1995. The Company's DD&A expense per Mcfe increased from $.68 in 1995 to
$.76 in 1996. These increases are mainly due to higher production levels in 1996
compared to 1995 and the result of increased DD&A rates resulting from the
adjustment of such rates to incorporate the book allocated basis to proved oil
and gas properties acquired from COG, which bear a higher unit of production
DD&A rate than the Company's other producing properties.

     Interest Expense. Interest expense was $6.1 million for 1996 compared to
$5.1 million for 1995. This increase is attributable to a higher average
long-term debt balance outstanding during 1996, principally as a result of
funding the COG and other acquisitions.

     Income Taxes. For 1996, the Company recorded a tax provision of $3.3
million compared to a $1.4 million benefit recorded in 1995. The effective tax
rate for 1996 was 44.1% as compared to 28.3% in 1995. The provision recorded in
1996 exceeds a normal tax rate primarily as a result of the amortization of
certain non-deductible property costs arising from the purchase allocation
related to the COG acquisition.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's working capital position decreased $6.9 million from year-end
1996 to $1.7 million at December 31, 1997. Accounts receivable decreased $3.2
million. The Company's ratio of current assets to current liabilities was 1.1 to
1.0 at December 31, 1997 and 2.0 to 1.0 at December 31, 1996, impacted primarily
by substantially lower oil and natural gas prices at December 31, 1997 and
continued increasing prices pressures of production service and supply.

                                       19
<PAGE>   21

     Capital Expenditures. The Company's primary needs for cash are for
exploration, development and acquisitions of oil and gas properties, payment of
interest on outstanding indebtedness and working capital obligations. Funding
for the Company's exploration and development activities and its working capital
obligations is provided primarily by internally-generated cash flow. The Company
budgets capital expenditures based on projected cash flows and routinely adjusts
the level of its capital expenditures in response to anticipated changes in cash
flows.

     Capital Resources. The Company's capital resources consist of cash flow
from operating activities and funds available under a credit facility. On
September 7, 1995, the Company arranged a bank credit facility, simultaneously
with the closing of the COG acquisition. The facility is an unsecured $250
million revolving credit agreement due September 7, 1999. The facility is
provided by seven banks, led by Bank One, Texas as agent and Texas Commerce Bank
National Association as co-agent. The Borrowing Base, as defined in the loan
agreement, is currently set at $135 million, and is subject to semi-annual
redetermination based upon an evaluation of the Company's oil and gas reserves.
Outstanding borrowings were $110 million at December 31, 1997.

     The credit facility provides the option of borrowing at floating interest
rates based on Bank One's base rate or at a Eurodollar option based on the
London Interbank Offered Rate ("LIBOR") plus 3/4 of 1% to 1.25% per annum,
depending on the outstanding loan balance. Interest is paid quarterly or at the
end of each interest period. The Company also incurs a commitment fee of 1/4 of
1% on the unused portion of the Borrowing Base. In addition, the credit facility
contains customary restrictive covenants, including restrictions on the payment
of dividends in excess of 50% of the Company's annual net income, and requires
the Company to maintain certain financial ratios.

     At December 31, 1997, the Company was a party to one interest rate swap
agreement that was entered into on December 11, 1995 for $25 million in notional
principal amount. The effect of this agreement is to provide the Company with an
interest rate on $25 million in notional principal amount for the three-year
term of the agreement of 5.445% plus a margin of 3/4 of 1% to 1.25%. Under
market conditions at December 31, 1997, the aggregate effective annual interest
rate after giving effect to the swap agreement was 7.13%. The swap agreement was
canceled on January 16, 1998. Over the term of the agreement, the swap reduced
the Company's interest expense by $107,000.

     The Company has historically funded operations and capital spending
programs with cash flow from operations and borrowings under bank credit
facilities. The Company believes cash flow from operations and the borrowing
availability under the credit facility will be sufficient to meet its
anticipated capital requirements for 1998. However, because future cash flows
and the availability of financing are subject to a number of variables, such as
the level of production and the prices received for oil and natural gas, there
can be no assurance the Company's capital resources will be sufficient to
maintain currently planned levels of capital expenditures. See also "Impact of
Chesapeake Merger" as set forth under "Item 1. -- Business."

     Hedging Transactions. With the objective of achieving more predictable
revenues and cash flows and reducing the exposure to fluctuations in oil and
natural gas prices, the Company has entered into various hedging transactions
with respect to both oil and natural gas. While use of these hedging
arrangements limits the downside risk of adverse price movements, it may also
limit future revenues from favorable price movements.

     At December 31, 1997, the Company had no open swap agreements or other
commodity hedge instruments. The Company continues to evaluate whether to enter
into additional hedging transactions for 1998 and future years. In addition, the
Company may determine from time to time to terminate its then existing hedging
positions. (See Note 11 of the Company's Notes to the Consolidated Financial
Statements).

     The Company's net income, cash flows and average sales prices for 1997 were
all impacted by the Company's oil and natural gas swap contracts, resulting in
pre-tax income and the average sales price per Mcfe being increased by $1.3
million and $.05, respectively, for the year ended December 31, 1997.

                                       20
<PAGE>   22

INFLATION AND CHANGES IN PRICES

     The Company's revenues and the value of its oil and natural gas properties
have and will continue to be affected by changes in oil and natural gas prices.
The Company's ability to maintain current borrowing capacity and to obtain
additional capital on attractive terms is also substantially dependent on oil
and natural gas prices. Oil and natural gas prices are subject to significant
seasonal and other fluctuations that are beyond the Company's ability to control
or predict. As realized at December 31, 1997 depressed commodity prices
significantly impacted the Company's operations with respect to the Company's
oil and natural gas reserves and related carrying costs. Although certain of the
Company's costs and expenses are affected by the level of inflation, inflation
did not have a significant effect on the Company's operations during 1997 or
1996.

YEAR 2000 ISSUES

     The Company is aware of the issues associated with the programming code in
many existing computer systems as the millennium approaches. The "Year 2000"
problem is pervasive; virtually every computer operation may be affected in some
way by the rollover of the two digit year value to 00. The risk is that computer
systems will not properly recognize sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail, resulting in business interruption.
The Company has taken steps to identify, correct or reprogram (as necessary) and
test its existing systems for Year 2000 compliance. The Company has determined
that there is no material exposure to the Year 2000 issue, and believes that
remaining Year 2000 issues can be mitigated without a significant potential
effect on the Company's financial position. However, given the complexity of the
Year 2000 issue, there can be no assurance that the Company will be able to
address the problem without costs and uncertainties that might affect future
financial results or cause reported financial information not to be necessarily
indicative of future operating results or future financial conditions.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See the Consolidated Financial Statements and supplementary data listed in
the accompanying Index to Financial Statements and Supplemental Data and
Financial Statement Schedules on page A-1 herein. Information required by other
schedules required under Regulation S-X is either not applicable or is included
in the financial statements or notes thereto.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                       21
<PAGE>   23

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

BOARD OF DIRECTORS

     The Board is divided into three classes with terms of office of the classes
ending in successive years after the annual meetings of stockholders in such
years. Set forth below is certain information regarding the directors of the
Company. See also "Impact of Chesapeake Merger" as set forth under "Item
1. -- Business."

<TABLE>
<CAPTION>
                           YEAR FIRST
                            SERVED AS
                         DIRECTOR OF THE                      BUSINESS EXPERIENCE
         NAME                COMPANY       AGE               DURING PAST FIVE YEARS
         ----            ---------------   ---               ----------------------
<S>                      <C>               <C>   <C>
CLASS I DIRECTORS
(TERMS EXPIRING IN
1998)
Alan J. Andreini(1)....       1995         51    President and Chief Operating Officer of
                                                 InterWorld Corporation, a provider of
                                                 enterprise-class Internet commerce software
                                                 for sales, order management and logistics,
                                                 since April, 1997. Prior to joining
                                                 InterWorld, Mr. Andreini was an Executive Vice
                                                 President, member of the Office of the
                                                 President, and continues to serve as a
                                                 Director of Comdisco, Inc., a technology
                                                 services company which is one of the world's
                                                 leading providers of solutions to help
                                                 organizations reduce technology cost and risk.
David S. Elkouri(1)....       1993         44    Member in the law firm of Hinkle, Eberhart &
                                                 Elkouri, L.L.C., Wichita, Kansas, since 1986.
John T. McNabb,               1993         53    Chief Executive Officer and director of Growth
  II(1)................                          Capital Partners, Inc., a merchant banking
                                                 firm, since April 1992. Prior to such time, he
                                                 was a Managing Director and a board member of
                                                 BT Southwest, Inc., a wholly-owned subsidiary
                                                 of Bankers Trust New York Corporation, a
                                                 merchant banking firm, beginning in July 1990,
                                                 Mr. McNabb is also a director of Vintage
                                                 Petroleum, Inc.
CLASS II DIRECTORS
(TERMS EXPIRING 2000)
Jonathan S.                   1996         49    Managing Director of First Reserve
  Linker(2)............                          Corporation, an investment firm, since
                                                 November 1996. He was President of IDC Energy,
                                                 an oil and gas production and investment
                                                 company, since January 1987. Mr. Linker also
                                                 serves as Vice President of Sunset Production
                                                 Corporation, an oil and gas company and is a
                                                 Director of Domain Energy Corporation.
William E. Macaulay....       1995         52    President and Chief Executive Office of First
                                                 Reserve Corporation, an investment firm, since
                                                 1983. Mr. Macaulay also serves as a director
                                                 of Maverick Tube Corporation, Weatherford
                                                 Enterra, Inc., National-Oilwell, Inc.,
                                                 TransMontaigne Oil Company, Domain Energy
                                                 Corporation and Cal Dive International.
</TABLE>

                                       22
<PAGE>   24

<TABLE>
<CAPTION>
                           YEAR FIRST
                            SERVED AS
                         DIRECTOR OF THE                      BUSINESS EXPERIENCE
         NAME                COMPANY       AGE               DURING PAST FIVE YEARS
         ----            ---------------   ---               ----------------------
<S>                      <C>               <C>   <C>
CLASS III DIRECTORS
(TERMS EXPIRING 1999)
Floyd C. Wilson........       1987         51    Chairman of the Board, President and Chief
                                                 Executive Officer of the Company since its
                                                 inception in 1987. He started in the energy
                                                 business in Houston in 1970 as a completion
                                                 engineer. He moved to Wichita in 1976 to start
                                                 an oil and gas operating company, one of
                                                 several successful energy ventures that
                                                 preceded the 1987 formation of the Company.
W. Mark Womble.........       1995         47    Chief Financial Officer and Vice President of
                                                 the Company since October 1, 1993 and a
                                                 director since 1995. Executive Vice President
                                                 of the Company since May 18, 1995. Prior to
                                                 joining the Company, Mr. Womble worked as a
                                                 Financial Consultant in the Dallas office of
                                                 Merrill Lynch & Co. from October 1991 to
                                                 October 1993. Prior to October 1991, Mr.
                                                 Womble was employed by a large independent oil
                                                 and gas company for ten years, the last three
                                                 years of which he served as Vice President and
                                                 Treasurer.
Jay W. Decker..........       1995         46    Executive Vice President of the Company since
                                                 September 8, 1995. Prior to joining the
                                                 Company, he served as President and Chief
                                                 Executive Officer of Consolidated Oil & Gas,
                                                 Inc. from 1991 until it was merged into the
                                                 Company in September 1995. Mr. Decker is also
                                                 a director of FX Energy, Inc. and Patina Oil &
                                                 Gas Corporation.
</TABLE>

---------------

(1) Member of Compensation Committee

(2) Member of Audit Committee

BOARD MEETINGS AND COMMITTEES

     The directors hold regular quarterly meetings, in addition to an annual
meeting held on the date of the Annual Meeting of Stockholders, attend special
meetings, as required, and spend such time on the affairs of the Company as
their duties require. During the fiscal year ended December 31, 1997, the Board
held seven (7) meetings. All directors of the Company attended every meeting of
the Board and the committees on which they served for the fiscal year ended
December 31, 1997, except Mr. Decker who missed one special meeting and Mr.
Macaulay who missed one special meeting.

     The Board has an Audit Committee consisting of Mr. Linker. The Audit
Committee held one (1) meeting during fiscal year ended December 31, 1997. The
Audit Committee's functions include recommending the appointment of the
Company's independent auditors and reviewing with management and the independent
auditors the Company's financial statements, basic accounting and financial
policies and practices.

     The Board also has a Compensation Committee consisting of Mr. Andreini, Mr.
Elkouri and Mr. McNabb. The Compensation Committee held two (2) meetings during
fiscal year ended December 31, 1997. The Compensation Committee reviews and
recommends to the Board the compensation and promotion

                                       23
<PAGE>   25

of officers of the Company, the terms of any proposed employee benefit
arrangements and the granting of awards under such arrangements.

     The Company has no nominating committee or any committee performing similar
functions.

EXECUTIVE OFFICERS

     Set forth below is certain information regarding the executive officers of
the Company. See also "Impact of Chesapeake Merger" as set forth under "Item
1. -- Business."

<TABLE>
<CAPTION>
                             YEAR FIRST
                              SERVED AS
                           DIRECTOR OF THE                      BUSINESS EXPERIENCE
          NAME                 COMPANY       AGE               DURING PAST FIVE YEARS
          ----             ---------------   ---               ----------------------
<S>                        <C>               <C>   <C>
Floyd C. Wilson..........       1987         51    Chairman of the Board, President and Chief
                                                   Executive Officer of the Company since its
                                                   inception in 1987. He started in the energy
                                                   business in Houston in 1970 as a completion
                                                   engineer. He moved to Wichita in 1976 to start
                                                   an oil and gas operating company, one of
                                                   several successful energy ventures that
                                                   preceded the 1987 formation of the Company.
W. Mark Womble...........       1993         47    Chief Financial Officer and Vice President of
                                                   the Company since October 1, 1993 and a
                                                   director since 1995. Executive Vice President
                                                   of the Company since May 18, 1995. Prior to
                                                   joining the Company, Mr. Womble worked as a
                                                   Financial Consultant in the Dallas office of
                                                   Merrill Lynch & Co., a stock brokerage firm,
                                                   from October 1991 to October 1993. Prior to
                                                   October 1991, Mr. Womble was employed by a
                                                   large independent oil and gas company for ten
                                                   years, the last three years of which he served
                                                   as Vice President and Treasurer.
Jay W. Decker............       1995         46    Executive Vice President of the Company since
                                                   September 1995. Prior to joining the Company,
                                                   he served as President and Chief Executive
                                                   Officer of Consolidated Oil & Gas, Inc. from
                                                   1991 until it was merged into the Company in
                                                   September 1995.
David M. Drummond........       1997         44    Chief Operating Officer of the Company since
                                                   April 1997. Prior to joining the Company, he
                                                   served as Regional Vice President of
                                                   Burlington Resources since January 1993.
Randall K. Click.........       1996         45    Vice President of Land of the Company since
                                                   August 1996 and was Manager of Land from June
                                                   1994 to August 1996. Prior to joining the
                                                   Company, he was acting Director of
                                                   Acquisitions and Divestitures for Atlantic
                                                   Richfield Company from September 1993 until
                                                   June 1994 and served as Senior Landman from
                                                   April 1991 until September 1993.
Dallas W. Dobbs..........       1993         40    Vice President of Marketing of the Company
                                                   since May 1996. Controller of the Company from
                                                   June 1993 to May 1996 and Manager of
                                                   Information Systems from October 1991 to June
                                                   1993.
</TABLE>

                                       24
<PAGE>   26

<TABLE>
<CAPTION>
                             YEAR FIRST
                              SERVED AS
                           DIRECTOR OF THE                      BUSINESS EXPERIENCE
          NAME                 COMPANY       AGE               DURING PAST FIVE YEARS
          ----             ---------------   ---               ----------------------
<S>                        <C>               <C>   <C>
Jimmy W. Gowens..........       1993         49    Vice President of Exploration of the Company
                                                   since August 1993, and from April 1987 to
                                                   August 1993 was Manager of Exploration of the
                                                   Company.
Earl W. Ringeisen........       1993         63    Vice President of Operations of the Company
                                                   since August 1993 and from April 1987 to
                                                   August 1993 was Production Superintendent and
                                                   Completion Engineer of the Company.
Shane M. Bayless.........       1996         31    Controller of the Company since May 1996 and
                                                   Manager of Accounting from August 1993 to May
                                                   1996. Prior to joining the Company, he was a
                                                   Senior Auditor with Ernst & Young LLP from
                                                   January 1990 to August 1993.
Les M. Seibert...........       1997         47    Chief Information Officer of the Company since
                                                   October 1997 and Manager of MIS from August
                                                   1993 to October 1997. Prior to August 1993,
                                                   Mr. Seibert was employed with Plains
                                                   Petroleum, Inc. for seven years, the last four
                                                   of which he served as Director of MIS.
</TABLE>

SECTION 16 REPORTING

     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities Exchange Commission.
Officers, directors and greater than 10% beneficial owners of common stock are
required by regulations of the Commission to furnish the Company with copies of
all Section 16(a) forms they file.

     Based solely on its review of the copies of such forms received by it and
written representations that no other reports were required, during or for the
year ended December 31, 1997, all persons subject to these reporting
requirements filed the required reports on a timely basis.

ITEM 11. EXECUTIVE COMPENSATION

     The following table sets forth compensation information with respect to
Floyd C. Wilson (President and Chief Executive Officer of the Company), W. Mark
Womble (Executive Vice President and Chief Financial Officer of the Company),
Jay W. Decker (Executive Vice President of the Company), Randall K. Click (Vice
President of Land of the Company), and Shane M. Bayless (Controller of the
Company) (collectively, the "Named Executive Officers"), who were serving as the
chief executive officer and the four most highly compensated executive officers
of the Company at December 31, 1997.

                                       25
<PAGE>   27

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                    LONG-TERM
                                                                   COMPENSATION
                                                                 ----------------
                                           ANNUAL COMPENSATION   NUMBER OF SHARES
        NAME AND PRINCIPAL                 -------------------      UNDERLYING         ALL OTHER
             POSITION               YEAR    SALARY     BONUS         OPTIONS        COMPENSATION(1)
        ------------------          ----   --------   --------   ----------------   ---------------
<S>                                 <C>    <C>        <C>        <C>                <C>
Floyd C. Wilson...................  1997   $400,000   $191,667       250,000            $9,500
  Chairman of the Board, President  1996   $325,000   $113,542       250,000            $9,500
  and Chief Executive Officer       1995   $275,000   $ 13,542       250,000            $9,240
W. Mark Womble....................  1997   $175,000   $162,292       105,000            $9,500
  Chief Financial Officer and       1996   $150,000   $ 56,250       105,000            $9,500
  Executive Vice President          1995   $127,000   $ 63,750        80,000            $7,800
Jay W. Decker.....................  1997   $169,753   $ 11,250       187,500            $9,500
  Executive Vice President          1996   $160,000         --       250,000            $9,500
                                    1995   $ 39,395         --       125,000                --
Randall K. Click..................  1997   $100,000   $  4,167        23,125            $9,500
  Vice President of Land            1996   $ 87,500   $ 37,146        32,500            $8,750
                                    1995   $ 79,167   $ 18,646        30,000            $7,917
Shane M. Bayless..................  1997   $ 90,000   $ 28,750        10,000            $9,000
  Controller                        1996   $ 72,786   $ 18,229        10,000            $7,281
                                    1995   $ 51,000   $ 10,025        10,000            $5,100
</TABLE>

---------------

(1) 401(k) Company matching contributions

     The Company entered into an employment agreement with Mr. Wilson ("Wilson
Agreement") in September of 1995. Such agreement was amended on June 26, 1997,
and expires in August 2000. Pursuant to the provisions of the Wilson Agreement,
the Company agreed to pay Mr. Wilson an annual salary of at least $325,000, and
he is also entitled to receive a bonus and other benefits each year in amounts
as determined by the Board. Pursuant to the provisions of the Wilson Agreement,
Mr. Wilson received an option to purchase 150,000 shares of Company common stock
on September 7, 1995. The Wilson Agreement also contains certain non-compete and
non-disclosure provisions. If the Company terminates Mr. Wilson for Cause or if
Mr. Wilson terminates his employment for Good Reason, he will be paid his salary
through the month of his termination. If the Company terminates Mr. Wilson
without Cause or if Mr. Wilson terminates the agreement for good reason after a
change in control has occurred, Mr. Wilson is entitled to receive an amount
equal to five (5) times his annual compensation.

     The Company also entered into an employment agreement with Mr. Decker
("Decker Agreement") in September 1995, which was amended on June 16, 1997, and
expires in September 1999. Under such agreement, the Company will pay Mr. Decker
an annual salary of not less than $160,000, and he is also entitled to receive a
bonus and other benefits each year in amounts as determined by the Board.
Pursuant to the provisions of the Decker Agreement, Mr. Decker received an
option to purchase 125,000 shares of Company stock on September 8, 1995 and an
option to purchase 125,000 shares of Company stock on September 8, 1996. If the
Company terminates Mr. Decker for Cause or if Mr. Decker terminates the
agreement for Good Reason after a change in control has occurred, he will be
paid his salary through the month of his termination. If the Company terminates
Mr. Decker without Cause or Mr. Decker terminates his employment for Good
Reason, Mr. Decker is entitled to the amount of his entire salary for the
remaining term of his employment under the Decker Agreement. The Decker
Agreement also contains certain non-compete and non-disclosure provisions.

     The Company entered into an employment agreement with Mr. Womble (the
"Womble Agreement") in December 1996, which was amended on June 26, 1997, and
expires in September 1999. Under such agreement, the Company will pay Mr. Womble
an annual salary of at least $150,000, and he is also entitled to

                                       26
<PAGE>   28

receive a bonus and other benefits each year in amounts as determined by the
Board. If the Company terminates Mr. Womble with Cause or if Mr. Womble
terminates the agreement for Good Reason after a change in control has occurred,
the Company shall pay Mr. Womble the amount of his compensation previously
earned but not yet paid. If the Company terminates Mr. Womble without Cause or
if Mr. Womble terminates his employment for Good Reason, the Company shall pay
him an amount equal to three (3) times his annual compensation, as defined in
his employment agreement. The Womble Agreement also contains certain non-compete
and non-disclosure provisions.

     For purposes of the Wilson Agreement, the Decker Agreement and the Womble
Agreement, "Cause" is defined as (i) the inability of the employee, through
sickness or other incapacity, to perform his duties under the employment
agreement for a period of six months; (ii) dishonesty, theft, or conviction of a
crime involving moral turpitude, in each case only if it could reasonably affect
his ability to perform assigned duties for the Company or cause a material
adverse effect on the Company; (iii) commission of a material act of fraud
against the Company or its subsidiaries; or (iv) failure of the employee to
observe or perform his material duties and obligations as an employee of the
Company or a material breach by the employee of his employment agreement, which
failure to perform or breach shall continue for more than thirty days after
written notice from the Company. For purposes of all the above agreements: (a) a
"Change of Control" shall occur if: (i) 50% or more of the outstanding Common
Stock has been acquired by any person or persons, provided such person is not a
current stockholder of the Company currently holding 10% or more of the
outstanding Common Stock; (ii) a merger or equivalent combination occurs
involving the Company after which 50% or more of the voting stock of the
surviving corporation is held by persons other than those persons who were
stockholders holding 10% or more of the outstanding Common Stock immediately
prior to the date of such merger or equivalent combination; or (iii) there has
been a merger or equivalent combination or stock sale involving the Company and
after such transaction 50% or more of the members of the Board elected by
stockholders are persons who were not directors immediately prior to such
transaction; and (b) "Good Reason" means (i) a change in the employee's duties
or in the title or offices held by him; (ii) a reduction in the employee's
compensation or the failure by the Company to continue to provide prompt payment
or reimbursement of all reasonable business expenses; (iii) a failure of the
Company to waive restrictions that might exist on the exercise of any Company
stock options held by the employee as of date of a Change of Control; (iv)
failure of the Company to obtain the assumption of his employment agreement by
any successor to the Company, or (v) at the employee's option, a change of
control has occurred.

OPTION GRANTS TABLE

     The following is information with respect to grants of stock options in
fiscal year ended December 31, 1997 to the Named Executive Officers reflected in
the Summary Compensation Table. No stock appreciation rights were granted to the
Named Executive Officers in fiscal year ended December 31, 1997.

                       OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                           INDIVIDUAL GRANTS
                        -------------------------------------------------------    POTENTIAL REALIZABLE VALUE
                          NUMBER OF       % OF TOTAL                                 OF ASSUMED ANNUAL RATE
                         SECURITIES        OPTIONS       EXERCISE                  OF STOCK PRICE APPRECIATION
                         UNDERLYING       GRANTED TO     OF BASE                         FOR OPTION TERM
                           OPTIONS       EMPLOYEES IN     PRICE      EXPIRATION    ---------------------------
         NAME           (# OF SHARES)    FISCAL 1997      ($/SH)        DATE          5%               10%
         ----           -------------    ------------    --------    ----------    ---------        ----------
<S>                     <C>              <C>             <C>         <C>           <C>              <C>
Floyd C. Wilson.......         --              --             --         --             --                --
W. Mark Womble........         --              --             --         --             --                --
Jay W. Decker.........         --              --             --         --             --                --
Randall K. Click......      2,500            1.20         $10.00         (1)        $6,184           $13,607
Shane M. Bayless......         --              --             --         --             --                --
</TABLE>

---------------

(1) Subject to continued employment, 25% of the shares are vested on January 6,
    1998, 25% are vested and exercisable on January 6, 1999, and 25% are vested
    and exercisable on January 6, 2000. Options expire thirty-six months after
    the date they become vested.

                                       27
<PAGE>   29

OPTION EXERCISE TABLE

   AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
                                     VALUES

     The following table sets forth certain information concerning unexercised
options held as of December 31, 1997 by the Named Executive Officers reflected
in the Summary Compensation Table. See "Impact of Chesapeake Merger" as set
forth under "Item 1. -- Business."

<TABLE>
<CAPTION>
                                                                                    VALUE OF UNEXERCISED
                                                            NUMBER OF                   IN-THE-MONEY
                                                       UNEXERCISED OPTIONS                 OPTIONS
                            SHARES                    AT DECEMBER 31, 1997         AT DECEMBER 31, 1997(1)
                          ACQUIRED ON    VALUE     ---------------------------   ---------------------------
          NAME             EXERCISE     REALIZED   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
          ----            -----------   --------   -----------   -------------   -----------   -------------
<S>                       <C>           <C>        <C>           <C>             <C>           <C>
Floyd C. Wilson.........         0      $      0     187,500        62,500         $65,625        $21,875
W. Mark Womble..........         0      $      0      72,500        32,500         $33,262        $20,137
Jay W. Decker...........    62,500      $194,293      93,750        93,750         $52,968        $52,968
Randall K. Click........    11,875      $ 40,894      12,500        10,625         $ 5,971        $ 8,193
Shane M. Bayless........    10,000      $ 24,375       2,500         7,500         $   937        $ 4,062
</TABLE>

---------------

(1) Value based on the closing price listed on NASDAQ on 12/31/97.

                COMPARISON OF 48 MONTH CUMULATIVE TOTAL RETURN*
         AMONG HUGOTON ENERGY CORPORATION, THE S&P SMALL CAP 600 INDEX
             AND THE S&P OIL & GAS (EXPLORATION & PRODUCTION) INDEX

<TABLE>
<CAPTION>
                                                                                         S&P OIL &
                                                                                            GAS
                                                      HUGOTON                           (EXPLORATION
               MEASUREMENT PERIOD                      ENERGY          S&P SMALL             &
             (FISCAL YEAR COVERED)                  CORPORATION         CAP 600         PRODUCTION)
<S>                                               <C>               <C>               <C>
1/27/94                                                     100.00            100.00            100.00
12/31/94                                                     70.00             95.23             79.50
12/31/95                                                     70.00            123.76             93.42
12/31/96                                                     81.00            150.14            123.72
12/31/97                                                     73.50            188.56            113.39
</TABLE>

* $100 invested on 1/27/94 in stock or on 12/31/93 in Index -- including
  reinvestment of dividends.

Fiscal year ending December 31.

                                       28
<PAGE>   30

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

     The Board of Directors' Compensation Committee establishes and reviews the
general levels and policies of compensation for the Company. The Committee meets
at least annually to review and to set specific compensation levels for the
executive officers. These levels include the amounts paid to executive officers
in the form of base salaries and annual cash bonuses along with the issuance of
incentive and nonstatutory stock options.

     The Compensation Committee seeks to set overall compensation amounts at
levels sufficient to attract and retain key executives and to provide incentives
to produce superior results for stockholders of the Company. These levels are
set after considering the total cash compensation of executives employed by
selected peer group public companies within the oil and gas industry. The
Compensation Committee specifically determines the total compensation to be paid
to Floyd C. Wilson, W. Mark Womble and Jay W. Decker.

     Base salaries are set at levels determined by various compensation surveys
as adjusted by the experience and capability of each individual officer. The
1997 annual salary of Floyd C. Wilson, the Chief Executive Officer of the
Company, in the amount of $400,000, was paid pursuant to an employment agreement
with the Company that expires in August 2000. The 1997 annual salary of W. Mark
Womble, Chief Financial Officer and Executive Vice President of the Company, in
the amount of $175,000 was paid pursuant to an employment agreement with the
Company that expires in September 1999. The annual salary of Jay W. Decker, an
Executive Vice President of the Company, in the amount of $169,753 was paid
pursuant to an employment agreement with the Company that expires in September
1999. Cash bonuses for the Chief Executive Officer as well as other officers of
the Company are determined by considering the Company's success in achieving
certain operating and financial goals and each officer's contribution to the
overall effort by considering the performance of the area managed, the quality
of the work performed by the department and the executive's ability to
accomplish various assigned tasks.

     Incentive stock options are granted by the Compensation Committee to
certain selected recipients pursuant to the Company's 1993 Stock Option Plan
("1993 Plan"), which was adopted in July 1993 and the Company's 1995 Stock
Option Plan (the "1995 Plan"), which was adopted in January 1995 and approved by
the stockholders in May 1995. Under the 1993 Plan, the Company reserved 600,000
shares for issuance. As of January 28, 1998, there were 648 shares available for
future grants under the 1993 Plan. Under the 1995 Plan, the Company reserved
500,000 shares for issuance. As of January 28, 1998, there were 469,750 shares
available for future grants under the 1995 Plan. The purpose of the 1993 Plan
and the 1995 Plan is to provide a means whereby certain officers and employees
may develop a sense of proprietary and personal involvement in the development
and financial success of the Company and to encourage them to remain with and
devote their best efforts to the business of the Company and its stockholders.

                             COMPENSATION COMMITTEE
                                Alan J. Andreini
                                David S. Elkouri
                               John T. McNabb, II

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Mr. David S. Elkouri, a member in the law firm of Hinkle, Eberhart &
Elkouri, L.L.C. which firm renders legal services to the Company and Mr. John T.
McNabb, II, a principal in Growth Capital Partners, Inc., which renders
financial consulting services to the Company are directors of the Company and
members of the Company's Compensation Committee. See "Certain Relationships and
Related Transactions" for information regarding transactions with such persons.

                                       29
<PAGE>   31

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1997 by (i) each
person who is known by the Company to be the beneficial owner (as determined in
accordance with Rule 13d-3 under the Securities and Exchange Act of 1934, as
amended) of more than 5% of the outstanding Common Stock; (ii) each director,
(iii) each of the named executive officers as defined in Item 402(a)(3) of
Regulation S-K; and (iv) all executive officers and directors of the Company as
a group.

<TABLE>
<CAPTION>
                                                           NUMBER OF SHARES
                                                          BENEFICIALLY OWNED       PERCENT
                   NAME AND ADDRESS                        AT DECEMBER 31,       BENEFICIALLY
                  OF BENEFICIAL OWNER                            1997               OWNED
                  -------------------                    --------------------    ------------
<S>                                                      <C>                     <C>
Floyd C. Wilson........................................        4,319,415(1)          21.6%
  301 North Main, Suite 1900
  Wichita, Kansas 67202
Comdisco, Inc..........................................        3,859,820(2)          19.5%
  6111 N. River Road
  Rosemont, IL 60018
Belco Energy, L.P......................................        2,940,000(3)          14.8%
  14300 Cornerstone Village Drive, Suite 421
  Houston, TX 77104
First Reserve Corporation..............................        1,143,441(4)           5.8%
  475 Steamboat Road
  Greenwich, CT 06830
Cramer Rosenthal McGlynn, Inc..........................        1,155,834(5)           5.8%
  707 Westchester Avenue
  White Plains, NY 10604
Alan J. Andreini.......................................           65,000(6)(2)      *
David S. Elkouri.......................................           39,000(7)         *
Jonathan S. Linker.....................................           11,500(8)         *
William E. Macaulay....................................            5,000(4)(9)      *
John T. McNabb, II.....................................           55,000(10)        *
W. Mark Womble.........................................           78,002(11)        *
Jay W. Decker..........................................          329,890(12)          1.7%
Randall K. Click.......................................           15,637(13)        *
Shane M. Bayless.......................................            3,421(14)        *
Directors and executive officers as a group (14
  persons).............................................       10,120,817(15)         49.7%
</TABLE>

---------------

  *  Represents less than 1%

 (1) Does not include 131,750 shares currently owned by Mr. Wilson which are
     subject to an agreement with the Company pursuant to which Mr. Wilson is
     required to contribute to the Company the number of shares necessary to
     satisfy the exercise of certain of the options previously granted by the
     Company in exchange for receipt of the exercise price therefor. Includes
     100,000 shares held by Mr. Wilson's wife and 100,000 shares held by a
     family limited partnership, of which Mr. Wilson and his wife are general
     partners and his children are limited partners. Also includes 202,426
     shares held by The Wilson Foundation, 7,565 shares allocated to Mr. Wilson
     pursuant to the Company's 401(k) Profit Sharing Plan (based on a plan
     statement dated as of 6/30/97), and 187,500 shares issuable pursuant to
     presently exercisable options granted to Mr. Wilson pursuant to stock
     option agreements with the Company.

 (2) As a Director of Comdisco, Inc., Mr. Andreini shares voting and investment
     power of the shares owned by Comdisco, Inc. Mr. Andreini disclaims
     beneficial ownership of the Company common stock owned by Comdisco, Inc.

 (3) As disclosed on a joint filing of Schedule 13D, filed with the Securities
     and Exchange Commission on July 3, 1997, by Belco Energy L.P., Belco
     Operating Corp., Belco Oil & Gas Corp. and Mr. Robert A.

                                       30
<PAGE>   32

     Belfer. Belco Energy L.P. is the direct beneficial owner of the shares of
     Company common stock. Belco Operating Corp., as general partner of Belco
     Energy L.P. Belco Oil & Gas Corp., as sole shareholder of Belco Operating
     Corp., and Robert A. Belfer, as a shareholder of Belco Oil & Gas Corp., may
     be deemed beneficial owners of the shares of Company common stock owned by
     Belco Energy L.P. However, Belco Operating Corp., Belco Oil & Gas Corp. and
     Mr. Belfer disclaim beneficial ownership of such shares.

 (4) First Reserve Corporation owns no shares of the Company's common stock
     directly but, as the managing general partner of the entities named below,
     it shares voting and investment power over such shares with such entities.
     First Reserve Corporation is the managing general partner of First Reserve
     Fund V, Limited Partnership ("Fund V") and American Gas & Oil Investors,
     Limited Partnership ("AmGO"). The address of each of such entities is the
     address of First Reserve Corporation. Through their ownership of shares of
     First Reserve Corporation, Mr. Macaulay and Mr. John A. Hill may be deemed
     to share beneficial ownership of the shares shown as owned by First Reserve
     Corporation. Messrs. Macaulay and Hill disclaim beneficial ownership of
     such shares. The following table sets forth certain information regarding
     the beneficial ownership of the Company's common stock as of December 31,
     1997:

<TABLE>
<CAPTION>
                                           NUMBER OF SHARES        PERCENT
                                          BENEFICIALLY OWNED     BENEFICIALLY
                 NAME                    AT DECEMBER 31, 1997       OWNED
                 ----                    --------------------    ------------
<S>                                      <C>                     <C>
Fund V.................................        891,698               4.5%
AmGO...................................        251,743               1.3%
</TABLE>

 (5) As disclosed on the latest Schedule 13G, filed with the Securities and
     Exchange Commission on March 4, 1997.

 (6) Includes 15,000 shares issuable upon exercise of options granted to Mr.
     Andreini pursuant to stock option agreements with the Company.

 (7) Includes 35,000 shares issuable upon exercise of options granted to Mr.
     Elkouri pursuant to stock option agreements with the Company. Includes
     3,000 shares owned by The David S. and Debbi C. Elkouri Foundation and
     1,000 shares owned by The David S. Elkouri Rollover IRA.

 (8) Includes 5,000 shares issuable upon exercise of options granted to Mr.
     Linker pursuant to stock option agreements with the Company.

 (9) Represents 5,000 shares issuable upon exercise of options granted to Mr.
     Macaulay pursuant to stock option agreements with the Company.

(10) Represents 55,000 shares issuable upon exercise of options granted to Mr.
     McNabb pursuant to stock option agreements with the Company.

(11) Includes 72,500 shares issuable upon exercise of options granted to Mr.
     Womble pursuant to stock option agreements with the Company. Includes 4,122
     shares acquired pursuant to the Company's 401(k) Profit Sharing Plan (based
     on a plan statement dated as of 6/30/97).

(12) Includes 93,750 shares issuable upon exercise of options granted to Mr.
     Decker pursuant to stock option agreements with the Company.

(13) Represents 13,125 shares issuable upon exercise of options granted to Mr.
     Click pursuant to stock option agreements with the Company. Includes 2,512
     shares acquired pursuant to the Company's 401(k) Profit Sharing Plan (based
     on a plan statement dated as of 6/30/97).

(14) Includes 2,500 shares issuable upon exercise of options granted to Mr.
     Bayless pursuant to stock option agreements with the Company. Includes 921
     shares acquired pursuant to the Company's 401(k) Profit Sharing Plan (based
     on a plan statement dated as of 6/30/97).

(15) Includes 675,750 shares issuable upon exercise of options under the
     Company's stock option plans and nonstatutory stock option agreements,
     including 131,750 of the shares referenced in (1) above. Also includes
     shares held by Comdisco, Inc. and partnerships for whom First Reserve
     Corporation is the managing general partner.

                                       31
<PAGE>   33

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SHAREHOLDER AGREEMENT

     As a condition to the September 7, 1995 merger between Consolidated Oil &
Gas, Inc. and the Company (the "Merger"), FRSEA, Fund V, AmGO, AmGO II, AmGO
III, Comdisco and Jay W. Decker (such parties are hereinafter referred to
collectively as "the COG Holders"), Odyssey Partners, L.P. ("Odyssey Partners")
and Floyd C. Wilson entered into a certain Agreement of Shareholders. Such
Agreement of Shareholders provides the parties agree, so long as they own their
shares or until the Agreement of Shareholders is terminated, to use their best
efforts (including voting the shares owned by them and their affiliates, calling
special meetings of the stockholders of the Company and executing and delivering
written consents) to elect nine members of the Board, consisting of the
following:

          (a) One Class II member designated by FRSEA;

          (b) One Class II member designated by Fund V;

          (c) One Class III member designated by First Reserve Corporation
     (provided that such member shall be Jay W. Decker so long as he is an
     executive officer of the Company);

          (d) One Class I member designated by Comdisco;

          (e) Two Class III members designated by Floyd C. Wilson;

          (f) One Class II member designated by Odyssey Partners; and

          (g) Two members designated by a vote of a majority of the stockholders
     of the Company (both of whom shall be members of Class I) and the parties
     to the Agreement of Shareholders agreed that such initial directors shall
     be John T. McNabb, II and David S. Elkouri, both of whom were directors of
     the Company prior to the Merger and previously elected by the stockholders
     of the Company.

     The Agreement of Shareholders further provides the party designating a
director may remove such director and designate his or her successor. If the
director designated by a party resigns, dies, becomes incapacitated or is
otherwise unable to serve, the party designating such director may designate his
or her successor. All parties shall vote all shares held by them in favor of the
election or removal of the persons so designated. Action taken by any of the
parties in designating or removing directors shall be in writing executed by the
party entitled to take such action and promptly delivered by to the other
parties and to the Company.

     Each party's right to designate a director shall terminate if such party's
ownership of the Company's Common Stock is below 5% of the outstanding Company
Common Stock, except for First Reserve Corporation whose stock ownership for the
purpose of such provision shall be the aggregate ownership of their managed
funds. If Mr. Wilson is not the Chief Executive Officer of the Company and his
ownership is less than 10% and more than 5% of the outstanding Company common
stock, Mr. Wilson's right to designate directors shall be reduced from two to
one.

     If a party to the Agreement of Shareholders is no longer eligible to
designate a director, or, in the case of John T. McNabb, II or David S. Elkouri,
if either is unable to serve, the Board shall (i) shrink the size of the Board,
(ii) leave the vacated seat empty or (iii) appoint a replacement to serve until
the next election of directors by stockholders and through its normal nominating
procedure, select a nominee to fill the open seat for election by stockholders
of the Company at the next annual meeting.

     The Agreement of Shareholders shall terminate and be of no force and effect
at the close of business on September 7, 2005; provided such agreement may also
be terminated earlier by the vote of the holders of 100% of the shares of
Company common stock subject thereto.

     On April 17, 1997, Odyssey Partners sold all of its shares of Company
common stock. Therefore, pursuant to the provisions of the Agreement of
Shareholders, Odyssey Partners' right to designate a director terminated.
Pursuant to the provisions of the Agreement of Shareholders, the Board has
chosen to shrink the size of the Board to eight members.

                                       32
<PAGE>   34

REGISTRATION RIGHTS AGREEMENT

     On September 7, 1995, the Company, Odyssey Partners, CRM Partners L.P., CRM
Retirement Partners L.P., CRM Hugoton Partners L.P., A.C. Israel Enterprises,
Inc., American Gas & Oil Investors, Limited Partnership, AmGO II, Limited
Partnership, AmGO III, Limited Partnership, First Reserve Secured Energy Assets
Fund, Limited Partnership, First Reserve Fund V, Limited Partnership, Comdisco,
Inc. and Floyd C. Wilson entered into a Registration Rights Agreement. Under
such agreement, if the Company files a registration statement, the Company must,
with certain exceptions and limitations, offer the other parties to the
Registration Rights Agreement ("holders") the opportunity to include their
shares owned at such time in such registration statement. Each of (i) the First
Reserve Group, (ii) Comdisco, (iii) Odyssey Partners and (iv) Floyd C. Wilson,
if he is no longer the Chief Executive Officer of the Company, is also granted a
separate right to require the Company to use its best efforts to cause the
registration and sale in an underwritten public offering of all or a portion of
such holder's shares. The Company will bear the expenses of the above
registration, other than transfer taxes, fees and expenses of counsel to any
holder and fees and commissions of brokers, dealers and underwriters. The
Company also agreed to indemnify the holders against certain liabilities and
expenses arising out of such registration.

WILSON WORKING INTERESTS

     Since the formation of the Company and up to the Company's initial public
offering, which was completed on February 1, 1994, Mr. Wilson had personally
participated in most of the Company's drilling prospects, usually acquiring a
25% working interest in each prospect. Since the date of the initial public
offering, Mr. Wilson's participation in drilling prospects has been limited to
those prospects located in a field where he previously held an interest. Mr.
Wilson has paid his pro rata share of all expenses associated with his interest
in each such prospect.

MCNABB AND ELKOURI BUSINESS RELATIONSHIPS

     The Company retains Growth Capital Partners, Inc. to provide financial
consulting services. Mr. McNabb, is an officer, director and stockholder of
Growth Capital Partners, Inc. During 1997, the Company paid Growth Capital
Partners, Inc. $107,873 for financial consulting services.

     The law firm of Hinkle, Eberhart & Elkouri, L.L.C., of which Mr. David S.
Elkouri, a director of the Company, is a member, renders legal services to the
Company. During 1997, the Company paid Hinkle, Eberhart & Elkouri, L.L.C.
$265,541 for legal services rendered to the Company.

LOANS TO MANAGEMENT

     On May 5, 1994, Jimmy W. Gowens, Vice President of Exploration of the
Company, executed a Promissory Note (amended on August 22, 1997) in favor of the
Company for up to the principal amount of $102,000. Such Promissory Note
provides for interest at the rate of 8% per year on any amounts advanced and all
principal and interest is due and payable on August 22, 1998. Under the terms of
such Promissory Note, if Mr. Gowens exercises certain options to purchase stock
of the Company, the net proceeds from the sale of any such stock shall be
immediately remitted to the Company to the extent necessary to pay any
outstanding principal and interest under such Promissory Note. Mr. Gowens
borrowed $50,000 from the Company on May 5, 1994, $20,000 on December 14, 1994,
$10,000 on October 5, 1995 and $22,000 on August 22, 1997. As of December 31,
1997, all amounts borrowed by Mr. Gowens under such Promissory Note and the
interest accrued on such amounts are outstanding.

     On February 20, 1996 and September 15, 1997, W. Mark Womble, Executive Vice
President and Chief Financial Officer of the Company, executed Promissory Notes
in favor of the Company for up to the principal amounts of $40,000 and $25,000,
respectively. Such Promissory Notes provide for interest at the rate of 8% per
year on any amounts advanced and all principal and interest was due and payable
on February 20, 1997

                                       33
<PAGE>   35

and September 15, 1998, respectively. Under the terms of such Promissory Notes,
if Mr. Womble exercises certain options to purchase stock of the Company, the
net proceeds from the sale of any such stock shall be immediately remitted to
the Company to the extent necessary to pay any outstanding principal and
interest under such Promissory Notes. The due date of the February 20, 1996
Promissory Note has been extended until February 20, 1998. Mr. Womble borrowed
$25,000 from the Company on February 20, 1996, $15,000 on March 11, 1996, and
$25,000 on September 15, 1997. As of December 31, 1997, all amounts borrowed by
Mr. Womble under such Promissory Notes and the interest accrued on such amounts
are outstanding. On March 9, 1998, all amounts borrowed and accrued interest on
such amounts was paid in full.

LEASE AGREEMENTS

     During 1996, the Company entered into several lease agreements with Sky
King, L.L.C. for the lease of Sky King, L.L.C.'s airplane. Sky King, L.L.C. is a
Kansas limited liability company and its members are Floyd C. Wilson, the
Company's Chief Executive Officer, President and Chairman of the Board, and Mr.
Wilson's wife, Carol E. Wilson. The total amount paid to Sky King, L.L.C.
pursuant to such lease agreements during fiscal year ended December 31, 1997 was
$249,922. The lease rate paid from the Company to Sky King, L.L.C. under such
lease agreements was at or below the prevailing market lease rate for similar
airplanes in Wichita, Kansas.

     Any transactions between the Company and its officers, directors, principal
stockholders, affiliates or advisors, including any loans or participation's in
any of the Company's drilling prospects, are on terms no less favorable to the
Company than those reasonably obtainable from third parties and have been
approved or ratified by a majority of the Company's independent directors.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

     (a) The following documents are filed as part of this report:

          (1) and (2) Financial Statements and Schedule:

             See Index to Financial Statements, Supplemental Data, and Financial
        Statement Schedule which appears on page A-1 herein.

          (3) Exhibits: The following documents are filed as exhibits to this
     report.

<TABLE>
<C>                      <S>
           2.1           -- Agreement and Plan of Merger, dated May 26, 1995, by and
                            among Hugoton Energy Corporation, Consolidated Oil & Gas,
                            Inc. and Hugoton Exploration Corporation (Incorporated by
                            reference to Exhibit 4.4 of the Registration Statement on
                            Form S-3, Registration No. 33-97366)
           2.2           -- Amendment to Agreement and Plan of Merger, dated August
                            3, 1995 by and among Hugoton Energy Corporation,
                            Consolidated Oil & Gas, Inc. and Hugoton Exploration
                            Corporation (Incorporated by reference to Exhibit 4.4 of
                            the Registration Statement on Form S-3, Registration No.
                            33-97366)
           3.1           -- Restated Articles of Incorporation of the Company, as
                            amended (Incorporated by reference to Exhibit 3.1 of the
                            Registration Statement on Form S-1, Registration No.
                            33-70924)
           3.2           -- Bylaws of the Company, as amended (Incorporated by
                            reference to Exhibit 3.2 of the Registration Statement on
                            Form S-1, Registration No. 33-70924)
           4.1           -- Specimen Common Stock certificate (Incorporated by
                            reference to Exhibit 4.1 of the Registration Statement on
                            Form S-1, Registration No. 33-70924)
</TABLE>

                                       34
<PAGE>   36

<TABLE>
<C>                        <S>
            10.1           -- Employment Agreement, dated September 1, 1995 between the Company and Floyd C. Wilson
                              (Incorporated by reference to Exhibit 10.1 of the Company's 1995 Annual Report on Form
                              10-K)
            10.2           -- Employment Agreement, dated September 7, 1995 between the Company and Jay W. Decker
            10.3           -- Employment Agreement, dated December 16, 1996 between the Company and W. Mark Womble
            10.4           -- 1993 Stock Option Plan (Incorporated by reference to Exhibit 10.12 of the Registration
                              Statement on Form S-1, Registration No. 33-70924)
            10.5           -- 401(k) Employee Benefit Plan (Incorporated by reference to Exhibit 10.13 of the
                              Registration Statement on Form S-1, Registration No. 33-70924)
            10.6           -- Nonemployee Directors' Stock Option Plan (Incorporated by reference to Exhibit 10.14 of
                              the Registration Statement on Form S-1, Registration No. 33-70924)
            10.7           -- 1995 Stock Option Plan (Incorporated by reference to Exhibit 4.1 of the Registration
                              Statement on Form S-8, Registration No. 33-97092)
            10.8           -- Loan Agreement, dated September 7, 1995, by and among the Company, Amgas Corporation,
                              Hugoton Exploration Corporation, Tiffany Gathering Inc., Bank One, Texas N.A., Texas
                              Commerce Bank National Association, Bank of Montreal, Wells Fargo Bank, National
                              Association, Meespierson N.V., Credit Lyonnais Cayman Island Branch and Bank of
                              Scotland, and Bank One, Texas N.A. as Agent, and Texas Commerce Bank National
                              Association as Co-agent (Incorporated by reference to Exhibit 10.8 of the Company's
                              1995 Annual Report on Form 10-K)
            10.9           -- First Amendment to Loan Agreement dated January 22, 1996, by and among the Company,
                              Amgas Corporation, Hugoton Exploration Corporation, HEC Trading Company, Tiffany
                              Gathering, Inc., Bank One, Texas N.A., Texas Commerce Bank National Association, Bank
                              of Montreal, Wells Fargo Bank, National Association, Meespierson N.V., Credit Lyonnais
                              Cayman Island Branch and Bank of Scotland, and Bank One, Texas N.A. as Agent, and Texas
                              Commerce Bank National Association as Co-agent (Incorporated by reference to Exhibit
                              10.9 of the Company's 1995 Annual Report on Form 10-K)
            10.10          -- Second Amendment to Loan Agreement dated June 11, 1996, by and among the Company, Amgas
                              Corporation, Hugoton Exploration Corporation, HEC Trading Company, Tiffany Gathering,
                              Inc., Bank One, Texas N.A., Texas Commerce Bank National Association, Bank of Montreal,
                              Wells Fargo Bank, National Association, Meespierson N.V., Credit Lyonnais Cayman Island
                              Branch and Bank of Scotland, and Bank One, Texas N.A. as Agent, and Texas Commerce Bank
                              National Association as Co-Agent
            10.11          -- Purchase and sale agreement dated June 1, 1995 by and between Mobil Oil Corporation and
                              the Company (Incorporated by reference to Exhibit 10.10 of the Company's 1995 Annual
                              Report on Form 10-K)
            10.12          -- Shareholder Agreement dated May 26, 1995, by and among the Company, Consolidated Oil &
                              Gas, Inc. and Odyssey Partners, L.P. (Incorporated by reference to Exhibit 10.11 of the
                              Company's 1995 Annual Report on Form 10-K)
            10.13          -- Agreement of Shareholders dated September 7, 1995, by and among the Company, First
                              Reserve Fund V, Limited Partnership, First Reserve Secured Energy Assets Fund, Limited
                              Partnership, American Gas & Oil Investors, Limited Partnerships, AmGO II, Limited
                              Partnership, AmGO III, Limited Partnership, J. W. Decker, COMDISCO, Inc., Odyssey
                              Partners, L. P. and Floyd C. Wilson (Incorporated by reference to Exhibit 10.12 of the
                              Company's 1995 Annual Report on Form 10-K)
</TABLE>

                                       35
<PAGE>   37
<TABLE>
<C>                      <S>
          10.14          -- Registration Rights Agreement dated September 7, 1995, by
                            and among the Company Hugoton Energy Corporation, Odyssey
                            Partners, L.P., Cramer, Rosenthal, McGlynn, Inc.,American
                            Gas & Oil Investors, AmGO II, AmGO III, First Reserve
                            Secured Energy Assets Fund, First Reserve Fund V,
                            COMDISCO, Inc. and Floyd C. Wilson (Incorporated by
                            reference to Exhibit 10.13 of the Company's 1995 Annual
                            Report on Form 10-K)
          10.15          -- Purchase and Sale Agreement dated December 28, 1995 by
                            and between Shield Petroleum Incorporated, P&M Properties
                            and the Company
          10.16          -- Purchase and Sale Agreement dated June 18, 1996 by and
                            between Shield Petroleum Incorporated and the Company
          10.17          -- Agreement and Plan of Merger dated November 12, 1997 by
                            and between Chesapeake Energy Corporation, Chesapeake
                            Acquisition Corp. and the Company (Incorporated by
                            reference to Annex A Company's Joint Proxy Statement/
                            Prospectus on Form S-4)
          10.18*         -- Amendment to Employment Agreement, dated June 26, 1997
                            between the Company and Floyd C. Wilson
          10.19*         -- Amendment to Employment Agreement, dated June 26, 1997
                            between the Company and W. Mark Womble
          10.20*         -- Amendment to Employment Agreement, dated June 26, 1997
                            between the Company and Jay W. Decker
          10.21*         -- Amendment to Employment Agreement, dated June 26, 1997
                            between the Company and David M. Drummond
          21.1           -- List of subsidiaries of the Company (Incorporated by
                            reference to Exhibit 21.1 of the Company's 1995 Annual
                            Report on Form 10-K)
          23.1*          -- Consent of Ernst & Young LLP
          23.2*          -- Consent of Ryder Scott Company
          27*            -- Financial Data Schedule
</TABLE>

---------------

* Filed herewith

                                       36
<PAGE>   38

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 10th day of
March, 1998.

                                            HUGOTON ENERGY CORPORATION
                                            (Registrant)

                                            By     /s/ FLOYD C. WILSON
                                             -----------------------------------
                                                       Floyd C. Wilson
                                              Chairman of the Board, President
                                                              and
                                                   Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 10th day of March 1998.

<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<C>                                                    <S>                              <C>

                 /s/ FLOYD C. WILSON                   Chairman of the Board,           March 10, 1998
-----------------------------------------------------    President and Chief Executive
                   Floyd C. Wilson                       Officer

                 /s/ W. MARK WOMBLE                    Executive Vice President, Chief  March 10, 1998
-----------------------------------------------------    Financial Officer (Principal
                   W. Mark Womble                        Financial Officer) and
                                                         Director

                   /s/ J.W. DECKER                     Executive Vice President and     March 10, 1998
-----------------------------------------------------    Director
                     J.W. Decker

                /s/ SHANE M. BAYLESS                   Controller (Principal            March 10, 1998
-----------------------------------------------------    Accounting Officer)
                  Shane M. Bayless

                /s/ DAVID S. ELKOURI                   Director                         March 10, 1998
-----------------------------------------------------
                  David S. Elkouri

                                                       Director
-----------------------------------------------------
                  John T. McNabb II

                /s/ ALAN J. ANDREINI                   Director                         March 10, 1998
-----------------------------------------------------
                  Alan J. Andreini

               /s/ WILLIAM E. MACAULAY                 Director                         March 10, 1998
-----------------------------------------------------
                 William E. Macaulay

                 /s/ JONATHAN LINKER                   Director                         March 10, 1998
-----------------------------------------------------
                   Jonathan Linker
</TABLE>
<PAGE>   39

                           HUGOTON ENERGY CORPORATION

                  INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTAL
                     DATA AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Consolidated Financial Statements:
  Report of Independent Auditors............................   A-2
  Consolidated Balance Sheets as of December 31, 1997 and      A-3
     1996...................................................
  Consolidated Statements of Operations for the years ended    A-4
     December 31, 1997, 1996,
     and 1995...............................................
  Consolidated Statements of Shareholders' Equity for the      A-5
     years ended December 31, 1997, 1996 and 1995...........
  Consolidated Statements of Cash Flows for the years ended    A-6
     December 31, 1997, 1996 and 1995.......................
  Notes to Consolidated Financial Statements................   A-7
  Unaudited Supplemental Oil and Gas Information............  A-21
  Consolidated Financial Statement Schedule for the years
     ended December 31, 1997, 1996 and 1995(Item 14a):
     II -- Valuation and Qualifying Accounts................  A-23
</TABLE>

                                       A-1
<PAGE>   40

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Hugoton Energy Corporation

     We have audited the accompanying consolidated balance sheets of Hugoton
Energy Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Hugoton Energy Corporation at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

                                            ERNST & YOUNG LLP

Wichita, Kansas
March 24, 1998

                                       A-2
<PAGE>   41

                           HUGOTON ENERGY CORPORATION

                          CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1997        1996
                                                              --------    --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Current assets:
  Cash......................................................  $  3,760    $  3,732
  Accounts receivable, less allowance for doubtful accounts
     of $266
     ($146 in 1996).........................................     9,834      12,985
  Other.....................................................       633         568
                                                              --------    --------
          Total current assets..............................    14,227      17,285
Properties and equipment, at cost (successful efforts
  method):
  Proved properties.........................................   262,783     253,419
  Unproved properties.......................................    14,466      24,696
  Gas plant.................................................     1,524       1,478
  Other.....................................................     6,713       6,303
                                                              --------    --------
                                                               285,486     285,896
Less accumulated depreciation, depletion and amortization...    88,070      53,118
                                                              --------    --------
                                                               197,416     232,778
          Other assets, net.................................     1,577       1,866
                                                              --------    --------
  Total Assets..............................................  $213,220    $251,929
                                                              ========    ========

                       LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
  Accounts payable..........................................  $ 10,094    $  6,534
  Other accrued liabilities.................................     1,105       1,104
  Accrued property taxes payable............................       937         505
  Accrued interest payable..................................       395         597
                                                              --------    --------
          Total current liabilities.........................    12,531       8,740
Long-term debt..............................................   110,000      95,000
Deferred income taxes.......................................        --      16,142
Other deferred liabilities..................................       460         520
Commitments and contingencies...............................        --          --
Shareholders' equity:
  Preferred stock, no par value, 10,000 shares authorized,
     none issued and outstanding............................        --          --
  Common Stock, no par value, 100,000 shares authorized,
     19,839 shares
     issued and outstanding (19,702 in 1996)................       198         197
  Paid-in capital...........................................   135,745     134,541
  Retained deficit..........................................   (45,714)     (3,211)
                                                              --------    --------
          Total shareholders' equity........................    90,229     131,527
                                                              --------    --------
          Total Liabilities and Shareholders' Equity........  $213,220    $251,929
                                                              ========    ========
</TABLE>

                             See accompanying notes

                                       A-3
<PAGE>   42

                           HUGOTON ENERGY CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                              ---------------------------------------
                                                                 1997           1996          1995
                                                              -----------    ----------    ----------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>            <C>           <C>
Revenues:
  Oil and Gas...............................................   $ 75,703       $66,292       $35,906
  Gas Plant.................................................      1,142         1,914         1,638
  Gain (loss) on sales of properties........................       (103)           10        (2,712)
  Loss on certain gas swap contracts........................         --            --          (603)
                                                               --------       -------       -------
          Total revenues....................................     76,742        68,216        34,229
                                                               --------       -------       -------
Expenses:
  Production
     Lease operations.......................................     20,404        16,460         9,214
     Production and severance tax...........................      3,673         3,639         1,974
     Gathering, transportation and other....................      1,617         1,568           382
  Gas plant.................................................      1,014         1,420           978
  Exploration...............................................     20,304         1,711         2,239
  General and administrative................................      9,981         6,872         4,346
  Depreciation, depletion, amortization.....................     35,639        23,423        15,234
  Impairment of oil and gas properties......................     36,209            --            --
                                                               --------       -------       -------
          Total expenses....................................    128,841        55,093        34,367
                                                               --------       -------       -------
Operating income (loss).....................................    (52,099)       13,123          (138)
Other income (expense):
  Interest..................................................     (6,752)       (6,070)       (5,108)
  Other.....................................................        220           466           319
                                                               --------       -------       -------
          Total other income (expense)......................     (6,532)       (5,604)       (4,789)
                                                               --------       -------       -------
Income (loss) before income taxes and extraordinary item....    (58,631)        7,519        (4,927)
(Provision) benefit for income taxes........................     16,128        (3,316)        1,394
                                                               --------       -------       -------
Income (loss) before extraordinary item.....................    (42,503)        4,203        (3,533)
Extraordinary item -- loss from early extinguishment of
  debt, net of income tax...................................         --            --          (136)
                                                               --------       -------       -------
          Net income (loss).................................   $(42,503)      $ 4,203       $(3,669)
                                                               ========       =======       =======
Income (loss) per common share:
  Income (loss) before extraordinary item...................   $  (2.15)      $  0.21       $ (0.26)
                                                               ========       =======       =======
  Extraordinary item........................................   $     --       $    --       $ (0.01)
                                                               ========       =======       =======
  Basic earnings (loss) per common share....................   $  (2.15)      $  0.21       $ (0.27)
                                                               ========       =======       =======
  Diluted earnings (loss) per common share..................   $  (2.15)      $  0.21       $ (0.27)
                                                               ========       =======       =======
Weighted average number of common shares outstanding........     19,806        19,697        13,460
                                                               ========       =======       =======
</TABLE>

                              See accompany notes.

                                       A-4
<PAGE>   43

                           HUGOTON ENERGY CORPORATION

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                               COMMON STOCK
                                PREFERRED    ----------------    PAID-IN     RETAINED
                                  STOCK      NUMBER    AMOUNT    CAPITAL     DEFICIT      TOTAL
                                ---------    ------    ------    --------    --------    --------
<S>                             <C>          <C>       <C>       <C>         <C>         <C>
YEARS ENDED DECEMBER 31,
  1997, 1996 AND 1995:
BALANCE, DECEMBER 1994......       $--       10,606     $106     $ 53,865    $ (3,745)   $ 50,226
Issuance of common stock in
  connection with the
  acquisition of
  Consolidated Oil & Gas,
  Inc.......................        --       9,091        91       80,695          --      80,786
Tax effect of stock options
  exercised.................        --          --        --          (19)         --         (19)
Net loss....................        --          --        --           --      (3,669)     (3,669)
                                   ---       ------     ----     --------    --------    --------
BALANCE, DECEMBER 31,
  1995......................        --       19,697      197      134,541      (7,414)    127,324
Stock options exercised.....        --           5        --           40          --          40
Tax effect of stock options
  exercised.................        --          --        --          (40)         --         (40)
Net Income..................        --          --        --           --       4,203       4,203
                                   ---       ------     ----     --------    --------    --------
BALANCE, DECEMBER 31,
  1996......................        --       19,702      197      134,541      (3,211)    131,527
Stock options exercised.....        --         137         1          997          --         998
Tax effect of stock options
  exercised.................        --          --        --           14          --          14
Compensatory stock options
  granted...................        --          --        --          193          --         193
Net loss....................        --          --        --           --     (42,503)
                                   ---       ------     ----     --------    --------    --------
BALANCE, DECEMBER 31,
  1997......................       $--       19,839     $198     $135,745    $(45,714)   $ 90,229
                                   ===       ======     ====     ========    ========    ========
</TABLE>

                              See accompany notes.

                                       A-5
<PAGE>   44

                           HUGOTON ENERGY CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1997        1996        1995
                                                             --------    --------    --------
                                                                      (IN THOUSANDS)
<S>                                                          <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..........................................  $(42,503)   $  4,203    $ (3,669)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
  PROVIDED BY OPERATING ACTIVITIES:
  Extraordinary loss.......................................        --          --         136
  Depreciation, depletion, and amortization................    35,639      23,423      15,234
  Leasehold abandonments...................................    12,005         225         886
  Deferred income taxes....................................   (16,128)      3,316      (1,504)
  (Gain) loss of sale of proved properties and other
     assets................................................        52         (85)        582
  Gain on sale of marketable securities....................        --          --         (73)
  Impairment of oil & gas properties.......................    36,209          --          --
  Compensatory stock options granted.......................       193          --          --
  Other non-cash charges...................................       317         230         462
CHANGES IN OPERATING ASSETS AND LIABILITIES NET OF EFFECTS
  FROM ACQUISITIONS
  Accounts receivable......................................     3,151      (4,126)     (1,577)
  Other current assets.....................................       (65)        528         530
  Other....................................................        13       1,046          99
  Accounts payable.........................................     3,560       2,095         567
  Accrued liabilities......................................       231         505      (2,452)
  Accrued swap contract liability..........................        --      (1,646)      1,646
  Deferred liabilities.....................................       (60)       (230)        500
                                                             --------    --------    --------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................    32,614      29,484      11,367
                                                             --------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Payment for business acquisition, net cash acquired......        --          --     (28,799)
  Proceeds from sale of proved properties and other
     assets................................................     1,018       7,407       3,357
  Additions to properties and equipment....................   (49,602)    (44,091)    (22,578)
  Proceeds from sale of marketable securities..............        --          --      11,158
  Net change in note receivable............................        --         (22)         (7)
                                                             --------    --------    --------
NET CASH USED IN INVESTING ACTIVITIES......................   (48,584)    (36,706)    (36,869)
CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase in debt issue costs.............................        --          --        (250)
  Proceeds from long term debt.............................    20,000      25,000     113,000
  Repayment of long term debt..............................    (5,000)    (18,000)    (85,000)
  Proceeds from exercised stock options....................       998          40          --
                                                             --------    --------    --------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................    15,998       7,040      27,750
                                                             --------    --------    --------
Net increase (decrease) in cash............................        28        (182)      2,248
Cash at beginning of year..................................     3,732       3,914       1,666
                                                             --------    --------    --------
Cash at end of year........................................  $  3,760    $  3,732    $  3,914
                                                             ========    ========    ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid............................................  $  7,183    $  6,140    $  5,714
  Income taxes paid........................................        --          --          38
  Commons stock issued in connection with the acquisition
     of COG................................................        --          --      80,786
</TABLE>

     During 1996 the Company determined it was necessary to adjust the deferred
tax liability related to oil and gas properties acquired in connection with the
acquisition of COG. The effect of the adjustment was to increase deferred income
tax liability and properties and equipment by $1,991.

                            See accompanying notes.

                                       A-6
<PAGE>   45

                           HUGOTON ENERGY CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND ACCOUNTING POLICIES

  Basis of Presentation

     The accompanying consolidated financial statements include the accounts of
Hugoton Energy Corporation and its wholly owned subsidiaries, AmGas Corporation
(AmGas), which was formed on December 19, 1991, Hugoton Exploration Corporation
(HEX), which was formed on November 9, 1993, Tiffany Gathering, Inc. (TGI),
which was acquired as a result of the acquisition of Consolidated Oil & Gas,
Inc. on September 7, 1995 and HEC Trading Company (HTC), which was formed
December 14, 1995. All significant intercompany accounts and transactions have
been eliminated in consolidation.

  Organization, Line of Business, and Concentration of Credit Risk

     Hugoton Energy Corporation (HEC), incorporated April 23, 1987, and its
wholly owned subsidiaries, Amgas, HEX, TGI and HTC, (hereinafter referred to as
the "Company") are engaged in the acquisition of, exploration for and the
development and production of, natural gas and oil. In addition, the Company
owns and operates a gas gathering system and a gas processing plant. The
principal markets for the Company's natural gas and oil production are
Mid-Continent-based oil and gas marketing and crude oil refining companies.

     The Company's financial instruments subject to concentration of credit risk
consists primarily of cash and accounts receivable. The Company grants credit to
certain first purchasers of oil and gas. The Company also grants credit to
certain oil and gas property owners related to lease operating expenses paid on
their behalf by the Company. Such first purchasers and property owners are
principally located in the United States. The Company places its cash funds with
high quality financial institutions, and at times may exceed federal depository
limits.

  Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles, requires management to make certain estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

  Hedging Activities

     Commodity Hedges. The Company manages the risk associated with fluctuations
in the prices of oil and natural gas primarily through short-term fixed-priced
energy swap contracts. Each energy swap contract is designated to existing
natural gas or oil production of the Company and involves the exchange of
amounts based on a fixed commodity price for amounts based on an average of
quoted index prices of the commodity.

     Gains and losses from hedging transactions are recognized in income and
reflected in the accompanying statements of cash flows as operating activities
in the periods for which revenues from the underlying commodity are recognized
(the accrual accounting method). The fair values of the swap agreements are not
recognized in the financial statements. Gains and losses on terminations of
energy swap contracts are deferred and amortized as an adjustment to income over
the remaining term of the original contract life of the terminated swap
agreement. If the necessary correlation to the commodity being hedged ceases
during the contract period, the basis differential attributable to such
contracts is recognized as a gain or loss and is no longer deferred, but
recognized in current operating results in the period the loss of correlation
was identified (see Note 11).

     Interest-Rate Swap Agreement. The Company has entered into an interest rate
swap agreement to effectively convert a portion of its floating-rate borrowings
into fixed-rate obligations and manage its exposure

                                       A-7
<PAGE>   46
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to interest rate fluctuations. The accrual accounting method is used and the
interest rate differential to be received or paid is accrued and recognized as
an adjustment to interest expense related to the debt.

  Oil and Gas Properties

     The Company accounts for its oil and gas activities using the successful
efforts method. Under the successful efforts method, all costs incurred to
purchase, lease, or otherwise acquire a property are capitalized when incurred.
Costs to drill and equip all development wells and successful exploratory wells
are capitalized. All other exploration costs including geological and
geophysical costs, lease rentals, impaired acreage costs and the cost of
unsuccessful exploratory wells are charged to expense as incurred.

     Depreciation, depletion and amortization of proved properties, wells, and
related equipment is provided on a unit-of-production method based upon
estimated recoverable proved oil and gas reserves.

     With respect to normal dispositions, the cost of properties retired or
otherwise disposed of, and the applicable accumulated depreciation, depletion
and amortization are removed from the accounts, and the resulting profit or
loss, if any, is reflected in current operations.

  Other Property and Equipment

     Other property and equipment are depreciated by the straight-line method
over the following estimated useful lives:

<TABLE>
<S>                                                           <C>
                                                                  31 1/2
Buildings...................................................       years
Gas Plant...................................................    10 years
Vehicles....................................................     3 years
Office furniture and equipment..............................     3 years
</TABLE>

  Debt Issue Costs

     Debt issue costs included in other assets are amortized by the
straight-line method over the four-year term of the related bank revolving note
agreement.

  Rights Related to Operating Agreement

     Costs to acquire rights related to operating agreements for which the
Company is the operator of producing properties for unrelated third parties are
included in other assets and are being amortized on a straight-line basis over
the estimated lives of the managed properties, which approximate 10 years.

  Oil and Gas Sales and Gas Imbalances

     Oil and gas revenues are recognized as production and sales take place. The
Company uses the sales method of accounting for gas imbalances in those
circumstances where the Company has underproduced or overproduced its ownership
percentage in a property. Under this method, a liability is recorded to the
extent the Company's overproduced position in a reservoir cannot be recouped
through the production of remaining reserves. The Company's net overproduced
position at December 31, 1997 and 1996 was not significant.

  (Loss) Earnings Per Share

     In 1997 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earning Per Share". SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
                                       A-8
<PAGE>   47
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements. In 1997 and 1995, diluted
loss per share does not include any incremental shares that would have been
outstanding assuming the exercise of any stock options because the effect of
these shares would have been antidilutive. The following table sets forth the
computation of basic and diluted (loss) earnings per share:

<TABLE>
<CAPTION>
                                                        EARNINGS              PER SHARE
                                                         (LOSS)     SHARES     AMOUNT
                                                        --------    ------    ---------
<S>                                                     <C>         <C>       <C>
Year Ended December 31, 1995
  Basic loss before extraordinary item................  $ (3,533)   13,460     $(0.26)
  Effect of dilutive stock options....................  $     --        --     $   --
  Diluted loss........................................  $ (3,533)   13,460     $(0.26)
Year Ended December 31, 1996
  Basic earnings......................................  $  4,203    19,697     $ 0.21
  Effect of dilutive stock options....................  $     --        19     $   --
  Diluted earnings....................................  $  4,203    19,716     $ 0.21
Year Ended December 31, 1997
  Basic loss..........................................  $(42,503)   19,806     $(2.15)
  Effect of dilutive stock options....................  $     --        --     $   --
  Diluted loss........................................  $(42,503)   19,806     $(2.15)
</TABLE>

  Income Taxes

     Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Valuation allowances are established when necessary to reduce deferred tax
assets to amounts expected to be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.

STOCK BASED COMPENSATION

     SFAS No. 123, "Accounting for Stock-Based Compensation" does not require
companies to change their existing accounting for employee stock options under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees", but instead encourages companies to recognize expense for
stock-based awards on their estimated fair value on the date of grant. Companies
electing to continue to follow present account rules under APB Opinion No. 25
are required to provide pro forma disclosures of what net income and earnings
per share would have been had the new fair value method been used. The Company
has elected to continue to apply the existing accounting rules contained in APB
Opinion No. 25 and the required pro forma disclosures under the new method have
been presented (see Note 7).

2. ACQUISITIONS

  1996 Acquisitions

     On June 20, 1996, the Company purchased a 50% working interest in
approximately 95,000 gross acres in the Austin Chalk Trend in Louisiana for
$12.9 million. This acreage acquisition, coupled with the January 1, 1996
acreage acquisition mentioned below and various acreage acquired in the third
quarter of 1996, provided the Company with a total of 148,000 gross acres in the
Austin Chalk Trend to explore as of December 31, 1996.

     On January 1, 1996, the Company purchased an undivided interest in a group
of producing oil and gas properties and undeveloped acreage for $9.7 million
from a privately held company that owns an undivided

                                       A-9
<PAGE>   48
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest in and operates the properties. The producing properties and acreage
are located in Southeast Texas and established a presence for the Company in the
Austin Chalk Trend. The acquisition included eight producing wells and 35,000
gross acres, of which the Company's working interest is 25% and 50%
respectively.

  Acquisition of Consolidated Oil & Gas, Inc.

     On September 7, 1995, the Company closed its acquisition (effective
September 1, 1995) of Consolidated Oil & Gas, Inc. ("COG"). The acquisition was
financed by cash on hand, bank borrowings under the Company's credit facility
(see Note 4) and by the issuance of 9,090,736 shares of the Company's common
stock.

     The acquisition has been accounted for as a purchase and, accordingly, the
acquired underlying assets and liabilities have been recorded at their estimated
fair values at the date of acquisition. The purchase price was allocated to
assets and liabilities acquired as follows:

<TABLE>
<CAPTION>
                                                             (IN THOUSANDS)
                                                             --------------
<S>                                                          <C>
Cash........................................................    $  9,062
Accounts receivable.........................................       3,595
Other current assets........................................         353
Properties and equipment....................................     118,419
Other assets................................................       1,383
Deferred income tax liabilities.............................     (12,299)
Accrued liabilities.........................................      (1,866)
                                                                --------
Net allocated fair value of assets..........................    $118,647
Less:
  Value of common stock issued net of offering costs
     incurred of $2,167.....................................     (80,786)
Cash acquired...............................................      (9,062)
                                                                --------
Cash paid...................................................    $ 28,799
                                                                ========
</TABLE>

     The operations of COG are included in the Company's consolidated financial
statements from the effective date of the acquisition.

  Other 1995 Acquisitions

     On June 30, 1995, the Company purchased a group of producing oil and
natural gas properties from Mobil Corporation for $13.6 million of cash. These
properties, which produce predominately natural gas, are located in southwestern
Kansas and the Oklahoma panhandle. The effective date of the acquisition was
July 1, 1995.

     The operations of the Mobil acquisition is included in the Company's
consolidated financial statements from the effective date of the acquisition.

  Pro Forma Results of Operations

     The accompanying unaudited pro forma results of operations gives effect to
the COG and Mobil Acquisitions as if the transactions had occurred on January 1,
1995 under the purchase method of accounting. The unaudited pro forma results of
operations data is presented for illustrative purposes and is not necessarily
indicative of the actual results that would have occurred had the acquisitions
been consummated as of January 1, 1995 or of future results of operations. The
data reflects adjustments for (a) the mark to market of open hedging contracts
held by COG at the time of acquisition, (b) the estimated change in general and
administrative expenses giving effect to integration of the administrative
functions of the combined companies,

                                      A-10
<PAGE>   49
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(c) the estimated increase in depreciation, depletion and amortization relating
to the acquisitions, (d) the estimated increase in interest expense resulting
from the increased borrowings relating to the acquisitions and (e) the estimated
provision for income taxes for the change in income taxes resulting from the
inclusion of the historical results of operations of the acquisitions and the
adjustments in (a) through (d) above. The pro forma effects of the property
acquisitions for 1996 are not presented as such amounts are not significant.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                                     1995
                                                             ---------------------
                                                             (IN THOUSANDS, EXCEPT
                                                                PER SHARE DATA)
<S>                                                          <C>
Unaudited pro forma information:
  Revenues.................................................         $58,307
  Net loss before extraordinary item.......................         $(4,239)
  Net loss.................................................         $(4,375)
  Basic and diluted net loss per share.....................         $ (0.22)
</TABLE>

3. TRANSACTIONS WITH AFFILIATES

     The Company accounts for transactions with the Company's Chairman and Chief
Executive Officer (CEO) for his pro rata share of revenues and expenses in
association with his interests in certain oil and gas prospects he personally
has participated in, since the formation of the Company. The Company believes
the terms of the principal shareholder's participation are comparable to those
by other non-affiliated working interest owners.

4. LONG-TERM DEBT

     Long-term debt at December 31, 1997 and 1996, consists of the following:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                          -------------------
                                                            1997       1996
                                                          --------    -------
                                                            (IN THOUSANDS)
<S>                                                       <C>         <C>
Bank credit facility with a group of seven banks,
  principal payable at September 7, 1999, interest
  payable at Bank One's base rate and LIBOR rates at
  various Eurodollar maturity dates (7.22% to 7.25% at
  December 31, 1997)....................................  $110,000    $95,000
</TABLE>

     On September 7, 1995, the Company arranged a bank credit facility,
simultaneously with the closing of the COG acquisition. The facility is an
unsecured $250 million revolving credit agreement due September 7, 1999. The
facility is provided by seven banks, led by Bank One, Texas, N.A. ("Bank One")
as agent and Texas Commerce Bank National Association as Co-agent. The Borrowing
Base, as defined in the loan agreement, is $135 million at December 31,1997, and
is subject to semi-annual redetermination. In connection with the arrangement of
the new bank credit facility, during 1995 the Company recorded an extraordinary
loss of $220,000 ($136,000 after income taxes) which represented the write-off
of related unamortized loan costs.

     At December 31, 1997, the Company was a party to one interest rate swap
agreement entered into on December 11, 1995 for $25 million in notional
principal amount with Bank One. The effect of this agreement is to provide the
Company with an interest rate on $25 million in notional principal amount for
the three-year term of the agreement of 5.445% plus a margin of 3/4 of 1% to
1.25%. Under market conditions at December 31, 1997, the aggregate effective
annual interest rate for the Company's long-term debt after giving effect to the
swap agreement was 7.13%.

     The credit facility provides the option of borrowing at floating interest
rates based on Bank One's base rate or at a Eurodollar option based on the
London Interbank Offered Rate ("LIBOR") plus 3/4 of 1% to

                                      A-11
<PAGE>   50
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1.25% per annum, depending on the outstanding loan balance. Interest is payable
quarterly or at the end of each interest period. The Company also incurs a
commitment fee of 1/4 of 1% on the unused portion of the Borrowing Base.

     In addition, the bank credit facility contains restrictive covenants
requiring, among other things, the maintenance of a specified current ratio,
tangible net worth and a limitation of the declaration or payment of dividends
on the Company's stock to 50% of net income for any fiscal year. The Company is
in compliance with these covenants at December 31, 1997.

5. INCOME TAXES

     Significant components of the provision (benefit) for income taxes are as
follows:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                          1997       1996      1995
                                                        --------    ------    -------
                                                               (IN THOUSANDS)
<S>                                                     <C>         <C>       <C>
Current:
  Federal.............................................  $     --    $   --    $    --
  State...............................................        --        --         --
                                                        --------    ------    -------
          Total.......................................        --        --         --
Deferred:
  Federal.............................................   (14,430)    2,967     (1,247)
  State...............................................    (1,698)      349       (147)
                                                        --------    ------    -------
          Total.......................................   (16,128)    3,316     (1,394)
                                                        --------    ------    -------
          Total income tax expense (benefit)            $(16,128)   $3,316    $(1,394)
                                                        ========    ======    =======
</TABLE>

     Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1997      1996
                                                              ------    -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Deferred tax assets:
  Compensatory stock option.................................  $  220    $   309
  Allowance for doubtful accounts...........................     101         56
  Net operating loss carryforward...........................  22,586      7,091
  AMT credit carryforward...................................     550        550
  Undeveloped acreage writedown.............................   1,003         --
  Valuation allowance for deferred tax assets...............  (5,444)        --
                                                              ------    -------
          Net deferred tax assets...........................  19,016      8,006
                                                              ------    -------
Deferred tax liabilities:
  Book basis of oil and gas properties in excess of tax
     basis..................................................  19,016     24,148
  Other.....................................................      --         --
                                                              ------    -------
          Total deferred tax liabilities....................  19,016     24,148
                                                              ------    -------
          Net deferred tax liabilities......................  $   --    $16,142
                                                              ======    =======
</TABLE>

                                      A-12
<PAGE>   51
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The reconciliation of income tax expense (benefit) computed at the U.S.
federal statutory tax rates to the actual income tax expense (benefit) is:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                          1997       1996      1995
                                                        --------    ------    -------
                                                               (IN THOUSANDS)
<S>                                                     <C>         <C>       <C>
Income tax expense (benefit) at federal statutory
  rate................................................  $(19,934)   $2,557    $(1,675)
State income taxes, net of federal benefit............    (2,345)      301       (197)
Nondeductible amortization............................       443       443         --
Various accruals and expenses not deductible for
  tax.................................................       104        14        102
Valuation allowance...................................     5,444        --        376
Basis differences generated...........................       160        --         --
Other.................................................        --         1         --
                                                        --------    ------    -------
Actual income tax expense (benefit)...................  $(16,128)   $3,316    $(1,394)
                                                        ========    ======    =======
</TABLE>

     At December 31, 1997, the Company had net operating loss carryforwards of
approximately $59.4 million, which can be carried forward to reduce future
federal income taxes payable. Net operating loss carryforwards expire over 15
years beginning in 2009 through 2024 if not utilized.

6. PREFERRED STOCK

     The Company has authorized a class of undesignated preferred stock
consisting of 10,000,000 shares, none of which are issued and outstanding. The
Board of Directors has not determined the rights and privileges of holders of
such preferred stock and the Company has no plans to issue any shares of
preferred stock.

7. STOCK OPTIONS

     The Company has various stock option plans (the "Plans") whereby options to
purchase shares of common stock have been or may be granted to officers,
employees, and non-employee directors. The vesting periods and expiration of
options are determined on a plan-by-plan, or grant-by-grant basis. Expiration
dates of options outstanding at December 31, 1997, range from May 8, 1998 to
January 12, 2004.

     In 1993, the Company adopted an employee stock option plan and a
Nonemployee Directors stock option plan which were amended during 1996 and
provide for the issuance of incentive and non-qualified options to purchase
common stock. The employee stock option plan provides for the issuance of up to
600,000 shares and the Nonemployee Director plan provides for the issuance of up
to 150,000 shares.

     In 1995, the Company and its shareholders approved the 1995 Stock Option
Plan for employees whereby 500,000 shares were reserved for issuance.

     The Company has elected to follow APB Opinion No. 25 and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123 requires use of option valuation models not developed for use in valuing
employee stock options. Under APB Opinion No. 25, if the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

                                      A-13
<PAGE>   52
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following is a summary of stock option activity, and related
information for the years ended December 31, 1997, 1996, and 1995:

<TABLE>
<CAPTION>
                                                 EMPLOYEE                     NON-EMPLOYEE
                                        ---------------------------   ----------------------------
                                        NUMBER OF     PRICE RANGE     NUMBER OF     PRICE RANGE
                                         SHARES        PER SHARE       SHARES        PER SHARE
                                        ---------   ---------------   ---------   ----------------
<S>                                     <C>         <C>               <C>         <C>
Outstanding, December 31, 1994........   550,765    $  .10 -  11.50     95,000    $10.00 -   12.25
  Stock options granted...............   582,500      8.00 - 9.0938      4,000                8.41
  Stock options exercised.............  (101,190)              0.10         --                  --
  Stock options expired or canceled...   (53,000)     8.00 -  10.00     (6,000)     8.41 -   12.25
                                        --------                       -------
Outstanding, December 31, 1995........   979,075       .10 -  11.50     93,000      8.41 -   12.25
  Stock options granted...............   339,000     7.125 -   8.50     40,000                8.75
  Stock options exercised.............  (115,890)      .10 -   8.00         --                  --
  Stock options expired or canceled...  (112,500)    7.125 -  11.50         --                  --
                                        --------                       -------
Outstanding December 31, 1996.........  1,089,685      .10 -  11.50    133,000      8.41 -   12.25
  Stock options granted...............    52,500     10.00 - 10.125     30,000             10.3125
  Stock options exercised.............  (179,810)      .10 -   8.50    (27,000)     8.41 - 10.3125
  Stock options expired or canceled...   (70,000)     7.53 -  11.50    (21,000)     8.41 -   12.25
                                        --------                       -------
Outstanding December 31, 1997.........   892,375    $  .10 -  11.50    115,000    $ 8.41 -   12.25
                                        ========                       =======
EXERCISABLE AT DECEMBER 31,
1995..................................   316,900    $  .10 -  11.50     55,500    $ 8.41 -   12.25
1996..................................   470,350       .10 -  11.50    125,500      8.41 -   12.25
1997..................................   576,000       .10 -  11.50    115,000      8.41 -   12.25
</TABLE>

     At December 31, 1997, 1996 and 1995, there were 604,648, 96,148, and
162,648 shares, respectively, reserved for future grants under existing plans.

     Pursuant to the 1993 Stock Option Plan, a principal shareholder entered
into an agreement with the Company whereby, upon any exercise of an outstanding
option with a $.10 exercise price, he will deliver to the Company the number of
shares to which the optionee is entitled to such exercise and the Company will
pay to the principal shareholder the exercise price paid for such shares by the
optionee. This agreement does not pertain to any future options granted under
the Plan.

     Additionally, the principal shareholder entered into an agreement with the
Company, whereby, upon the exercise of certain of the non-employee stock options
at $10 per share (which were not granted under the 1993 Stock Option Plan), he
will deliver to the Company the number of shares to which the optionee is
entitled pursuant to such exercise and the Company will pay to the principal
shareholder the exercise price paid for such shares by the optionee.

     At December 31, 1997 the number of shares subject to options which will be
delivered to the Company by the Company's Chairman and CEO are as follows:

<TABLE>
<CAPTION>
                      OPTION                        NUMBER OF
                      PRICE                          SHARES
--------------------------------------------------  ---------
<S>                                                 <C>
$  .10............................................   62,750
 10.00............................................   75,000
</TABLE>

                                      A-14
<PAGE>   53
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SFAS NO. 123 PRO FORMA INFORMATION

     Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 which requires the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following range of assumptions for 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                      1997         1996         1995
                                                   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>
Expected life of options (years).................         2-4          2-4          2-4
Expected stock price volatility..................         33%          32%           32%
Risk free interest rate..........................  5.62-5.71%   5.13-5.30%    5.68-6.11%
Dividend rate....................................         -0-          -0-          -0-
</TABLE>

     The range of assumptions for the expected life and the interest rate is
caused by the separation of grants into portions based on their vesting terms.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimated, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                        --------------------------------------
                                                           1997          1996          1995
                                                        -----------    ---------    ----------
                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                     <C>            <C>          <C>
Net income (loss) -- as reported......................   $(42,503)      $4,203       $(3,669)
Net income (loss) pro forma...........................   $(43,180)      $3,505       $(4,195)
Basic earnings (loss) per share -- as reported........   $  (2.15)      $  .21       $  (.27)
Basic earnings (loss) per share -- pro forma..........   $  (2.18)      $  .18       $  (.31)
</TABLE>

     Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect is not fully reflected until 1997.

     The weighted-average remaining contractual life of options outstanding as
of December 31, 1997, 1996, and 1995 were 2.5 years, 3.0 years, and 3.3 years
respectively. The weighted-average option exercise price information for the
years 1997, 1996, and 1995 follows:

<TABLE>
<CAPTION>
                                                          1997       1996       1995
                                                         ------      -----      -----
<S>                                                      <C>         <C>        <C>
Outstanding January 1..................................  $ 8.00      $7.35      $5.49
Stock options granted..................................   10.19       8.15       8.39
Stock options exercised................................    7.33       0.44       0.10
Stock options expired or canceled......................    9.65       9.94       9.74
Outstanding, December 31...............................    8.21       8.00       7.35
Exercisable at December 31.............................    8.08       8.03       8.38
Weighted-average fair value of options granted during
  the year.............................................    2.54       2.23       2.20
</TABLE>

                                      A-15
<PAGE>   54
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. EMPLOYEE BENEFIT PLANS

     The Company sponsors a qualified 401(k) Profit Sharing Plan which permits
eligible employees to defer up to 10% of their compensation. The Company may
make matching contributions related to an employee's deferral on a discretionary
basis.

     During the years ended December 31, 1997, 1996 and 1995, the Company
incurred expenses of $308,326, $215,786 and $138,277 respectively, related to
the plan.

9. OIL AND GAS PROPERTY COSTS

     Capitalized costs relating to the Company's oil and gas producing
activities and the related amounts of accumulated depreciation, depletion and
amortization are shown below (in thousands):

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
Proved properties...........................................  $262,783    $253,419
Unproved properties.........................................    14,466      24,696
                                                              --------    --------
          Total property costs..............................   277,249     278,115
Accumulated depreciation, depletion and amortization........   (83,901)    (49,921)
                                                              --------    --------
          Net property costs................................  $193,348    $228,194
                                                              ========    ========
</TABLE>

     Costs incurred (all of which were incurred in the United States) in the
Company's oil and gas activities were as follows (in thousands):

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                        1997       1996        1995
                                                       -------    -------    --------
<S>                                                    <C>        <C>        <C>
Acquisition of Properties:...........................  $ 8,971    $ 5,355    $129,692
  Proved.............................................    3,465     17,382       1,526
  Unproved...........................................   11,508      9,168       5,530
Exploration..........................................   35,673      7,756       2,313
                                                       -------    -------    --------
Development..........................................  $59,617    $39,661    $139,061
                                                       =======    =======    ========
</TABLE>

     The Company periodically reviews its oil and gas properties for indicators
of impairment. Due to substantial decreases in commodity market prices of oil
and natural gas during the fourth quarter of 1997, the Company concluded an
impairment of its oil and gas properties had occurred and recorded a $36.2
million pre-tax impairment charge reflecting the difference between estimated
fair values and carrying values of impaired properties. The Company utilized
discounted cash flow analyses to determine the fair value of its oil and gas
properties utilizing reserves and future production estimated by the Company's
independent engineers. Market prices and operating costs utilized in the
discounted cash flow analyses reflect those existing at December 31, 1997 and
were held constant except for known determinable escalations. The estimates of
discounted cash flows from existing oil and gas properties are highly subjective
and require significant assumptions in the evaluation of available geological,
engineering, economic and market data. As a result, such estimates are
inherently imprecise and actual future production, revenues and costs will vary
from these estimates.

     The Company also periodically reviews its undeveloped properties for
potential impairment based on factors such as results of exploration activities
within the related area, related production experience, current and expected
commodity prices, lease terms, delay rental costs and overall Company
strategies. During 1997, the Company recognized a $12.0 million pretax charge as
exploration expense for impaired and abandoned undeveloped properties based on
this analysis.
                                      A-16
<PAGE>   55
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. MAJOR CUSTOMERS

     The Company markets its oil and gas production to numerous purchasers under
a combination of short-and long-term contracts. During 1997, 1996 and 1995, the
Company's largest three purchasers accounted for 40%, 38% and 55%, respectively,
of oil and gas revenues of the Company, with Cibola Energy Services Corporation
accounting for 20%, 18% and 22%, respectively. The Company had no other
purchasers that accounted for greater than 10% of its oil and gas revenues. The
Company believes the loss of any single customer would not have a material
adverse effect on the results of operations of the Company.

11. COMMITMENTS AND CONTINGENCIES

  Legal Contingencies

     The Company is not a defendant in any significant pending legal proceedings
other than routine litigation incidental to its business. While the ultimate
results of these proceedings cannot be predicted with certainty, the Company
does not believe the outcome of these matters will have a material adverse
effect on the Company.

  Environmental Remediation Obligations

     The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environmental remediation obligations are not
discounted to their present value. Recoveries of environmental remediation costs
from other parties are recognized as assets when their receipt is deemed
probable.

LEASE AGREEMENTS

     The Company leases office facilities under non-cancelable operating leases.
Future minimum rental commitments as of December 31, 1997 are as follows:

<TABLE>
<CAPTION>
                         YEAR                                AMOUNT
                         ----                                ------
                                                         (IN THOUSANDS)
<S>                                                      <C>
1998...................................................      $  466
1999...................................................         466
2000...................................................         466
2001...................................................         466
2002...................................................         466
Thereafter.............................................       1,558
                                                             ------
          Total........................................      $3,888
                                                             ======
</TABLE>

     Approximately $460,000 of such rental commitments is included in Other
Deferred Liabilities as of December 31, 1997.

  Hedging Transactions

     With the objective of achieving more predictable revenues and cash flows
and reducing the exposure to fluctuation in gas and oil prices, the Company has
entered into various hedging transactions with respect to both gas and oil.
While the use of these hedging arrangements limits the downside risk of adverse
price movements, it may also limit future revenues from favorable price
movements. As of December 31, 1997, the Company had no open hedging
transactions. The Company continues to evaluate whether to enter into additional
hedging transactions for future years. In addition, the Company may determine
from time to time
                                      A-17
<PAGE>   56
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to terminate its then existing hedging positions. Generally, either the Company
or the counter party to the agreements is required to make a settlement payment
of the difference between the specified contract amount and the settlement
amount. The following is a summary of the Company's hedging transactions that
were in effect as of December 31, 1996 and 1995:

     Natural Gas -- at December 31, 1996, the Company had entered into a formal
sale contract for 20 MMcf of natural gas per day for the first three months of
1997 at a net price of $3.68 per Mcf.

     At December 31, 1995, the Company was a party to natural gas swap
agreements which ran from November 1995 through October 1996 NYMEX natural gas
futures contract month for a quantity of 39,000 MMBTU per day at an average
price of $1.80 per MMBTU.

     Oil -- at December 31, 1996, the Company was a party to swap agreements
fixing the price of 70,000 barrels per month, for the first three months of its
oil production for 1997 at a weighted average price of $24.25/barrel.

     At December 31, 1995, the Company was a party to oil swap agreements which
ran from January 1996 through December 1996 NYMEX WTI crude oil futures contract
month for a quantity of 40,000 barrels per month at an average price of $17.28
per BBL.

     During 1995, though its acquisition of COG, the Company assumed certain
hedge contract obligations for crude oil futures. The crude oil futures
obligation was comprised of several swap agreements with fixed prices ranging
from $18.00 to $20.80 per BBL on an aggregate volume of 40,000 to 100,000 BBLS
per month. Of the assumed contracts, only two remained in effect at December 31,
1995, representing a total of 40,000 BBLS at a price range of $18.00 to $20.80
per BBL. Differences between the monthly amortization and the contract
settlement amount was reflected in the Company's oil and gas revenues.

     The Company is required to post margin in the form of cash when projected
commodity prices exceed scheduled fixed prices in certain contracts less any
amount of agreed upon open credit. There were no margin cash requirements at
December 31, 1997 and 1996.

     In 1995, a realized hedging loss of $250,000 was included in oil and gas
sales. The Company had net deferred losses of $1.3 million for settled
derivative contracts at December 31, 1995, relative to future production
periods. During 1995, the Company recorded a charge to earnings of $2.7 million
related to the "decoupling" of the basis correlation between the Company's cash
price and NYMEX contract settlement price.

     In 1996, a realized hedging loss of $8.7 million was included in oil and
gas sales. The Company had no deferred gains or losses at December 31, 1996.

     In 1997, a realized hedging gain of $1.3 million was included in oil and
gas sales. The Company had no deferred gains or losses at December 31, 1997.

                                      A-18
<PAGE>   57
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. FINANCIAL INSTRUMENTS

     The following information is provided regarding the estimated fair value of
certain financial instruments employed by the Company as of December 31, 1997
and 1996 and the methods and assumptions used to estimate the fair value of such
financial instruments:

<TABLE>
<CAPTION>
                                                DECEMBER 31, 1997     DECEMBER 31, 1996
                                               -------------------    ------------------
                                               CARRYING     FAIR      CARRYING    FAIR
                                                AMOUNT     VALUE       AMOUNT     VALUE
                                               --------   --------    --------   -------
                                                            (IN THOUSANDS)
<S>                                            <C>        <C>         <C>        <C>
Fixed-price crude oil swaps..................  $     --   $     --    $    --    $  (251)
Long-term debt...............................   110,000    110,000     95,000     95,000
Interest rate swaps..........................        --        123         --         59
</TABLE>

     Cash, accounts receivable, other current assets, accounts payable and
accrued liabilities are each estimated to have a fair value approximating
carrying amount due to the short maturity of those instruments.

     The fair value of the Company's fixed-price crude oil swaps as of December
31, 1996 were estimated based on quoted market prices of natural gas and crude
oil for the periods covered by the contracts. The net differential between the
fixed prices in each contract and the quoted market prices for future periods,
as adjusted for estimated basis, has been applied to the volumes covered by each
contract to arrive at an estimated fair value.

     The fair value of the Company's long-term debt is estimated to approximate
the carrying amount at December 31, 1997 and 1996, as the debt carries a
variable interest rate.

     The fair value of the Company's interest rate swap at December 31, 1997 and
1996 is based on quoted market prices as of such dates.

13. ADDITIONAL CASH FLOW INFORMATION

     For purposes of cash flows, the Company considers cash to include currency
on hand and demand deposits with banks or other financial institutions.

14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.

     In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information". SFAS 131 establishes standards for the
way public business enterprises report information about operating segments in
annual financial statements and requires those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. Financial
statement disclosures for prior periods are required to be restated.

     The Company has not yet determined the impact of adoption of these
standards; however, the adoption of these standards will have no impact on the
Company's consolidated results of operations, financial position or cash flows.

                                      A-19
<PAGE>   58
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. QUARTERLY FINANCIAL DATA

     Summarized unaudited quarterly financial date for the year ended December
31, 1997 and 1996 are as follows ($ in thousands except per share data):

<TABLE>
<CAPTION>
                                                           QUARTER ENDED
                                       ------------------------------------------------------
                                       MARCH 31,    JUNE 30,    SEPTEMBER 30,    DECEMBER 31,
                                         1997         1997          1997             1997
                                       ---------    --------    -------------    ------------
<S>                                    <C>          <C>         <C>              <C>
Total revenues.......................   $24,000     $17,334        $17,105         $ 18,303
Gross profit (loss)(1)...............     7,710      (2,554)        (1,564)         (55,691)
Basic net income (loss) per share....      0.19       (0.12)         (0.11)           (2.11)
Net income (loss)....................     3,717      (2,473)        (2,185)         (41,562)
</TABLE>

<TABLE>
<CAPTION>
                                                           QUARTER ENDED
                                       ------------------------------------------------------
                                       MARCH 31,    JUNE 30,    SEPTEMBER 30,    DECEMBER 31,
                                         1996         1996          1996             1996
                                       ---------    --------    -------------    ------------
<S>                                    <C>          <C>         <C>              <C>
Total revenues.......................   $16,094     $16,309        $15,203         $ 20,610
Gross profit (loss)(1)...............     2,265       2,517          1,183            7,158
Basic net income (loss) per share....      0.02        0.04          (0.01)            0.16
Net income (loss)....................       471         701           (232)           3,263
</TABLE>

---------------

(1) Total revenue, less total expenses

     During the fourth quarter of 1997, the Company recorded fourth quarter
adjustments aggregating $52.3 million ($38.0 million after-tax). The adjustments
primarily consisted of a non-cash oil and gas property impairment charge of
$36.2 million pre-tax and undeveloped property impairment of $10.5 million
(pre-tax) which were significantly impacted by depressed commodity prices at
December 31, 1997.

16. SUBSEQUENT EVENT

     In accordance with a definitive merger agreement between the Company and
Chesapeake Energy Corporation (Chesapeake) dated November 12, 1997, effective
March 10, 1998, the Company was acquired by and merged into Chesapeake in a
stock-for-stock transaction. Commensurate with the merger, all executive
officers of the Company resigned. After the merger, the shareholders of the
Company will own 26% of Chesapeake.

                                      A-20
<PAGE>   59

                           HUGOTON ENERGY CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      SUPPLEMENTAL OIL AND GAS INFORMATION
                                  (UNAUDITED)

OIL AND GAS RESERVES

     The following information summarizes the Company's net proved reserves of
oil and natural gas and the present values thereof for each of the three years
in the period ended December 31, 1997. The December 31, 1995, 1996 and 1997
reserve estimates were based on the reports by the independent engineering firm
of Ryder Scott Company. All studies have been prepared in accordance with
regulations prescribed by the Securities and Exchange Commission. Future net
revenue is estimated by such engineers using oil and gas prices in effect as the
end of each respective year with price escalations permitted only for those
properties which have contracts allowing specific increases. Future operating
costs are based on the level of operating expenses incurred during each such
year. The reliability of any reserve estimate is a function of the quality of
available information and of engineering interpretation and judgment. Such
estimates are susceptible to revision in light of subsequent drilling and
production history or as a result of economic conditions.

     Estimated Quantities of Oil and Gas Reserves. The following table sets
forth the Company's estimated proved reserves for each of the three years in the
period ended December 31, 1997. All of the Company's reserves are located within
the United States:

<TABLE>
<CAPTION>
                                            1997                1996                1995
                                      -----------------   -----------------   -----------------
                                        OIL       GAS       OIL       GAS       OIL       GAS
                                      (MBBLS)   (MMCF)    (MBBLS)   (MMCF)    (MBBLS)   (MMCF)
                                      -------   -------   -------   -------   -------   -------
<S>                                   <C>       <C>       <C>       <C>       <C>       <C>
PROVED RESERVES
Beginning of year...................  16,178    225,181   13,884    192,962    4,982    139,694
Acquisition of proved reserves......      83      4,403       49      4,829    9,923     60,564
Extension and discoveries...........     552     14,840    4,489     45,199      401      3,093
Revisions of previous
  estimates(A)......................  (4,866)   (39,553)    (106)     4,293     (391)     8,733
Sales of reserves in place..........    (152)      (115)    (438)    (3,076)     (13)    (4,471)
Production..........................  (1,677)   (19,269)  (1,700)   (19,026)  (1,018)   (14,651)
                                      ------    -------   ------    -------   ------    -------
End of year.........................  10,118    185,487   16,178    225,181   13,884    192,962
                                      ======    =======   ======    =======   ======    =======
PROVED DEVELOPED PRODUCING
  RESERVES(B)
Beginning of year...................  11,200    180,610   12,746    189,434    4,745    132,230
                                      ======    =======   ======    =======   ======    =======
End of year.........................   8,167    152,546   11,200    180,610   12,746    189,434
                                      ======    =======   ======    =======   ======    =======
</TABLE>

---------------

(A)  During 1997, the Company's oil and gas reserves were significantly impacted
     by the depressed commodity prices at December 31, 1997 and as a result,
     revisions of previous reserve estimates comprised a significant portion of
     the change in proved reserves from 1996 to 1997.

(B)  Balances are included in Proved Reserve totals.

     Standardized Measure of Discounted Future Net Cash Flows. The following
table reflects the standardized measure of discounted future net cash flows
relating to the Company's interests in proved oil and gas reserves. The future
net cash inflows were developed as follows:

          (1) Estimates were made of quantities of proved reserves and the
     future period during which they are expected to be produced based on
     year-end economic conditions.

          (2) The estimated cash flows from future production of proved reserves
     were prepared on the basis of the weighted average prices received at
     December 31, 1997, 1996, 1995, as follows: 1997 -- $15.97 per Bbl, $1.83
     per Mcf; 1996 -- $24.53 per Bbl, $3.79 per Mcf; 1995 -- $18.01 per Bbl,
     $1.76 per Mcf.

                                      A-21
<PAGE>   60
                           HUGOTON ENERGY CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      SUPPLEMENTAL OIL AND GAS INFORMATION
                                  (UNAUDITED)

          (3) The resulting future gross revenue streams were reduced by
     estimated future costs to develop and to produce the proved reserves, based
     on year-end cost estimates.

          (4) Future income taxes were computed by applying the appropriate
     statutory tax rates to the future pre-tax net cash flows less the current
     tax basis of the properties involved and related carryforwards, giving
     effect to permanent differences and tax credits.

          (5) The resulting future net revenue streams were reduced to present
     value amounts by applying a 10% discount factor.

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                  ------------------------------------
                                                    1997          1996         1995
                                                  ---------    ----------    ---------
                                                             (IN THOUSANDS)
<S>                                               <C>          <C>           <C>
Future cash inflows.............................  $ 500,353    $1,267,988    $ 583,256
Future costs:
  Production....................................    180,133       354,996      233,098
  Development...................................     23,979        44,120        3,799
                                                  ---------    ----------    ---------
Future net cash flows before income taxes.......    296,241       868,872      346,359
Discount at 10% per annum.......................   (123,225)     (404,432)    (154,853)
Discount future income taxes....................    (22,343)     (129,004)     (18,256)
                                                  ---------    ----------    ---------
Standardized measure of discounted future net
  cash flows....................................  $ 150,673    $  335,436    $ 173,250
                                                  =========    ==========    =========
</TABLE>

     The following are the principal sources of change in the standardized
measure of discounted future net cash flows:

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                   ----------------------------------
                                                     1997         1996         1995
                                                   ---------    ---------    --------
                                                             (IN THOUSANDS)
<S>                                                <C>          <C>          <C>
Standardized measure of discounted future net
  cash flows, beginning of period..............    $ 335,436    $ 173,250    $ 80,082
Net changes in prices and production costs.....     (270,086)     169,025      27,837
Revisions in quantity estimates................      (35,768)      10,507      (6,057)
Accretion in discount..........................       46,444       19,151       8,093
New field discoveries and extensions, net of
  future production and development costs......       14,783      120,561       7,173
Purchases of reserves in-place.................        4,545        9,648     101,430
Sales of reserves in-place.....................       (1,161)      (2,634)     (2,904)
Sales of oil and gas produced, net of
  production costs.............................      (50,181)     (53,323)    (24,995)
Net change in income taxes.....................      106,661     (110,749)    (17,409)
                                                   ---------    ---------    --------
Standardized measure of discounted future net
  cash flows, end of period....................    $ 150,673    $ 335,436    $173,250
                                                   =========    =========    ========
</TABLE>

                                      A-22
<PAGE>   61

                                  SCHEDULE II
                           HUGOTON ENERGY CORPORATION

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                  BALANCE AT                               BALANCE AT
                                                  BEGINNING                                  END OF
                 DESCRIPTION                      OF PERIOD     ADDITIONS    DEDUCTIONS      PERIOD
                 -----------                      ----------    ---------    ----------    ----------
<S>                                               <C>           <C>          <C>           <C>
Year ended December 31, 1997:
  Allowance for doubtful accounts.............       $146        $   135      $   (15)      $   266
  Valuation allowance for deferred tax
     assets...................................         --          5,444           --         5,444
Year ended December 31, 1996:
  Allowance for doubtful accounts.............       $155        $    --      $    (9)      $   146
Year ended December 31, 1995:
  Allowance for doubtful accounts.............       $159        $    --      $    (4)      $   155
  Valuation allowance for deferred tax
     assets...................................        623            376      $  (999)(A)        --
</TABLE>

---------------

(A)  At December 31, 1995, the Company decreased its valuation allowance to zero
     as a result of the Company's acquisition of COG, whereby the allocated
     value of the acquired assets exceeded the historical tax basis by an amount
     with will enable the Company to realize the deferred assets recorded.

                                      A-23
<PAGE>   62

                               INDEX TO EXHIBITS

<TABLE>
<C>                      <S>
           2.1           -- Agreement and Plan of Merger, dated May 26, 1995, by and
                            among Hugoton Energy Corporation, Consolidated Oil & Gas,
                            Inc. and Hugoton Exploration Corporation (Incorporated by
                            reference to Exhibit 4.4 of the Registration Statement on
                            Form S-3, Registration No. 33-97366)
           2.2           -- Amendment to Agreement and Plan of Merger, dated August
                            3, 1995 by and among Hugoton Energy Corporation,
                            Consolidated Oil & Gas, Inc. and Hugoton Exploration
                            Corporation (Incorporated by reference to Exhibit 4.4 of
                            the Registration Statement on Form S-3, Registration No.
                            33-97366)
           3.1           -- Restated Articles of Incorporation of the Company, as
                            amended (Incorporated by reference to Exhibit 3.1 of the
                            Registration Statement on Form S-1, Registration No.
                            33-70924)
           3.2           -- Bylaws of the Company, as amended (Incorporated by
                            reference to Exhibit 3.2 of the Registration Statement on
                            Form S-1, Registration No. 33-70924)
           4.1           -- Specimen Common Stock certificate (Incorporated by
                            reference to Exhibit 4.1 of the Registration Statement on
                            Form S-1, Registration No. 33-70924)
          10.1           -- Employment Agreement, dated September 1, 1995 between the
                            Company and Floyd C. Wilson (Incorporated by reference to
                            Exhibit 10.1 of the Company's 1995 Annual Report on Form
                            10-K)
          10.2           -- Employment Agreement, dated September 7, 1995 between the
                            Company and Jay W. Decker
          10.3           -- Employment Agreement, dated December 16, 1996 between the
                            Company and W. Mark Womble
          10.4           -- 1993 Stock Option Plan (Incorporated by reference to
                            Exhibit 10.12 of the Registration Statement on Form S-1,
                            Registration No. 33-70924)
          10.5           -- 401(k) Employee Benefit Plan (Incorporated by reference
                            to Exhibit 10.13 of the Registration Statement on Form
                            S-1, Registration No. 33-70924)
          10.6           -- Nonemployee Directors' Stock Option Plan (Incorporated by
                            reference to Exhibit 10.14 of the Registration Statement
                            on Form S-1, Registration No. 33-70924)
          10.7           -- 1995 Stock Option Plan (Incorporated by reference to
                            Exhibit 4.1 of the Registration Statement on Form S-8,
                            Registration No. 33-97092)
          10.8           -- Loan Agreement, dated September 7, 1995, by and among the
                            Company, Amgas Corporation, Hugoton Exploration
                            Corporation, Tiffany Gathering Inc., Bank One, Texas
                            N.A., Texas Commerce Bank National Association, Bank of
                            Montreal, Wells Fargo Bank, National Association,
                            Meespierson N.V., Credit Lyonnais Cayman Island Branchand
                            Bank of Scotland, and Bank One, Texas N.A. as Agent, and
                            Texas Commerce Bank National Association as Co-agent
                            (Incorporated by reference to Exhibit 10.8 of the
                            Company's 1995 Annual Report on Form 10-K)
          10.9           -- First Amendment to Loan Agreement dated January 22, 1996,
                            by and among the Company, Amgas Corporation, Hugoton
                            Exploration Corporation, HEC Trading Company, Tiffany
                            Gathering, Inc., Bank One, Texas N.A., Texas Commerce
                            Bank National Association, Bank of Montreal, Wells Fargo
                            Bank, National Association, Meespierson N.V., Credit
                            Lyonnais Cayman Island Branch and Bank of Scotland, and
                            Bank One, Texas N.A. as Agent, and Texas Commerce Bank
                            National Association as Co-agent (Incorporated by
                            reference to Exhibit 10.9 of the Company's 1995 Annual
                            Report on Form 10-K)
</TABLE>
<PAGE>   63

<TABLE>
<C>                        <S>
            10.10          -- Second Amendment to Loan Agreement dated June 11, 1996, by and among the Company, Amgas
                              Corporation, Hugoton Exploration Corporation, HEC Trading Company, Tiffany Gathering,
                              Inc., Bank One, Texas N.A., Texas Commerce Bank National Association, Bank of Montreal,
                              Wells Fargo Bank, National Association, Meespierson N.V., Credit Lyonnais Cayman Island
                              Branch and Bank of Scotland, and Bank One, Texas N.A. as Agent, and Texas Commerce Bank
                              National Association as Co-Agent
            10.11          -- Purchase and sale agreement dated June 1, 1995 by and between Mobil Oil Corporation and
                              the Company (Incorporated by reference to Exhibit 10.10 of the Company's 1995 Annual
                              Report on Form 10-K)
            10.12          -- Shareholder Agreement dated May 26, 1995, by and among the Company, Consolidated Oil &
                              Gas, Inc. and Odyssey Partners, L.P. (Incorporated by reference to Exhibit 10.11 of the
                              Company's 1995 Annual Report on Form 10-K)
            10.13          -- Agreement of Shareholders dated September 7, 1995, by and among the Company, First
                              Reserve Fund V, Limited Partnership, First Reserve Secured Energy Assets Fund, Limited
                              Partnership, American Gas & Oil Investors, Limited Partnerships, AmGO II, Limited
                              Partnership, AmGO III, Limited Partnership, J. W. Decker, COMDISCO, Inc., Odyssey
                              Partners, L. P. and Floyd C. Wilson (Incorporated by reference to Exhibit 10.12 of the
                              Company's 1995 Annual Report on Form 10-K)
            10.14          -- Registration Rights Agreement dated September 7, 1995, by and among the Company Hugoton
                              Energy Corporation, Odyssey Partners, L.P., Cramer, Rosenthal, McGlynn, Inc.,American
                              Gas & Oil Investors, AmGO II, AmGO III, First Reserve Secured Energy Assets Fund, First
                              Reserve Fund V, COMDISCO, Inc. and Floyd C. Wilson (Incorporated by reference to
                              Exhibit 10.13 of the Company's 1995 Annual Report on Form 10-K)
            10.15          -- Purchase and Sale Agreement dated December 28, 1995 by and between Shield Petroleum
                              Incorporated, P&M Properties and the Company
            10.16          -- Purchase and Sale Agreement dated June 18, 1996 by and between Shield Petroleum
                              Incorporated and the Company
            10.17          -- Agreement and Plan of Merger dated November 12, 1997 by and between Chesapeake Energy
                              Corporation, Chesapeake Acquisition Corp. and the Company (Incorporated by reference to
                              Annex A Company's Joint Proxy Statement/ Prospectus on Form S-4).
            10.18*         -- Amendment to Employment Agreement, dated June 26, 1997 between the Company and Floyd C.
                              Wilson
            10.19*         -- Amendment to Employment Agreement, dated June 26, 1997 between the Company and W. Mark
                              Womble
            10.20*         -- Amendment to Employment Agreement, dated June 26, 1997 between the Company and Jay W.
                              Decker
            10.21*         -- Amendment to Employment Agreement, dated June 26, 1997 between the Company and David M.
                              Drummond
            21.1           -- List of subsidiaries of the Company (Incorporated by reference to Exhibit 21.1 of the
                              Company's 1995 Annual Report on Form 10-K)
            23.1*          -- Consent of Ernst & Young LLP
            23.2*          -- Consent of Ryder Scott Company
           27*             -- Financial Data Schedule
</TABLE>

---------------

* Filed herewith