<PAGE>   1
 
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1998
 
                                                     REGISTRATION NO. 333-
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------
                                    FORM S-4
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                             ---------------------
                         CHESAPEAKE ENERGY CORPORATION*
 
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                             <C>                             <C>
           OKLAHOMA                          1311                         73-1395733
 (State or other jurisdiction    (Primary Standard Industrial          (I.R.S. Employer
incorporation or organization)    Classification Code Number)         Identification No.)
          6100 NORTH WESTERN AVENUE                         AUBREY K. MCCLENDON
        OKLAHOMA CITY, OKLAHOMA 73118                    6100 NORTH WESTERN AVENUE
                (405) 848-8000                         OKLAHOMA CITY, OKLAHOMA 73118
 (Address, including Zip Code, and telephone                   (405) 848-8000
 number, including area code, of registrant's     (Name, address, including Zip Code, and
         principal executive offices)              telephone number, including area code,
                                                           of agent for service)
</TABLE>
 
                             ---------------------
 
                                   Copies to:
                             THEODORE M. ELAM, ESQ.
                            CONNIE S. STAMETS, ESQ.
                    MCAFEE & TAFT A PROFESSIONAL CORPORATION
                       TENTH FLOOR, TWO LEADERSHIP SQUARE
                               211 NORTH ROBINSON
                         OKLAHOMA CITY, OKLAHOMA 73102
                                 (405) 235-9621
                             ---------------------
 
     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
                             ---------------------
     If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box:  [ ]
                             ---------------------
 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                        AMOUNT         PROPOSED MAXIMUM       PROPOSED MAXIMUM       AMOUNT OF
      TITLE OF EACH CLASS OF            TO BE           OFFERING PRICE       AGGREGATE OFFERING     REGISTRATION
   SECURITIES TO BE REGISTERED        REGISTERED         PER UNIT(1)              PRICE(1)              FEE
------------------------------------------------------------------------------------------------------------------
<S>                                <C>              <C>                    <C>                    <C>
9 5/8% Series B Senior Notes due
  2005............................   $500,000,000            100%               $500,000,000        $147,500(1)
------------------------------------------------------------------------------------------------------------------
Guarantees of 9 5/8% Series B
  Senior Notes due 2005...........        --                  --                     --                 (2)
------------------------------------------------------------------------------------------------------------------
</TABLE>
 
(1) Calculated in accordance with Rule 457(f)(2). For purposes of this
    calculation, the Offering Price per Series B Senior Note was assumed to be
    the stated principal amount of each Series A Senior Note which may be
    received by the Registrant in the exchange transaction in which the Series B
    Senior Notes will be offered.
 
(2) Pursuant to Rule 457(n), no registration fee is required for the Guarantees
    of the Series B Senior Notes registered hereby.
                             ---------------------
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
 
* The Restricted Subsidiaries of Chesapeake Energy Corporation will guarantee
  the securities being registered hereby and therefore are also registrants.
  Information about such additional registrants appears on the following page.
================================================================================
<PAGE>   2
 
                             ADDITIONAL REGISTRANTS
 
                             THE AMES COMPANY, INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<CAPTION>
              OKLAHOMA                                1389                               73-1470082
<S>                                   <C>                                   <C>
  (State or other jurisdiction of         (Primary Standard Industrial      (I.R.S. Employer Identification No.)
   incorporation or organization)          Classification Code Number
</TABLE>
 
                             ---------------------
 
                       CHESAPEAKE ACQUISITION CORPORATION
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<CAPTION>
              OKLAHOMA                                6719                               73-1528271
<S>                                   <C>                                   <C>
  (State or other jurisdiction of         (Primary Standard Industrial      (I.R.S. Employer Identification No.)
   incorporation or organization)         Classification Code Number)
</TABLE>
 
                             ---------------------
 
                         CHESAPEAKE CANADA CORPORATION
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<CAPTION>
          ALBERTA, CANADA                             1311                                  N/A
<S>                                   <C>                                   <C>
  (State or other jurisdiction of         (Primary Standard Industrial      (I.R.S. Employer Identification No.)
   incorporation or organization)         Classification Code Number)
</TABLE>
 
                             ---------------------
 
                    CHESAPEAKE ENERGY LOUISIANA CORPORATION
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<CAPTION>
              OKLAHOMA                                6719                               73-1524569
<S>                                   <C>                                   <C>
  (State or other jurisdiction of         (Primary Standard Industrial      (I.R.S. Employer Identification No.)
   incorporation or organization)         Classification Code Number)
</TABLE>
 
                             ---------------------
 
                            CHESAPEAKE GOTHIC CORP.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<CAPTION>
              OKLAHOMA                                1311                               73-1532892
<S>                                   <C>                                   <C>
  (State or other jurisdiction of         (Primary Standard Industrial      (I.R.S. Employer Identification No.)
   incorporation or organization)         Classification Code Number)
</TABLE>
 
                             ---------------------
 
                         CHESAPEAKE MID-CONTINENT CORP.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<CAPTION>
              OKLAHOMA                                1311                               73-1529077
<S>                                   <C>                                   <C>
  (State or other jurisdiction of         (Primary Standard Industrial      (I.R.S. Employer Identification No.)
   incorporation or organization)         Classification Code Number)
</TABLE>
 
                             ---------------------
<PAGE>   3
 
                           CHESAPEAKE OPERATING, INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<CAPTION>
              OKLAHOMA                                1311                               73-1343196
<S>                                   <C>                                   <C>
  (State or other jurisdiction of         (Primary Standard Industrial      (I.R.S. Employer Identification No.)
   incorporation or organization)         Classification Code Number)
</TABLE>
 
                             ---------------------
 
                              SUNOMA ENERGY CORP.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<CAPTION>
          ALBERTA, CANADA                             1311                                  N/A
<S>                                   <C>                                   <C>
  (State or other jurisdiction of         (Primary Standard Industrial      (I.R.S. Employer Identification No.)
   incorporation or organization)         Classification Code Number)
</TABLE>
 
                             ---------------------
 
                   CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<CAPTION>
              OKLAHOMA                                1311                               73-1384282
<S>                                   <C>                                   <C>
  (State or other jurisdiction of         (Primary Standard Industrial      (I.R.S. Employer Identification No.)
   incorporation or organization)         Classification Code Number)
</TABLE>
 
                             ---------------------
 
                           CHESAPEAKE LOUISIANA, L.P.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<CAPTION>
              OKLAHOMA                                1311                               73-1519126
<S>                                   <C>                                   <C>
  (State or other jurisdiction of         (Primary Standard Industrial      (I.R.S. Employer Identification No.)
   incorporation or organization)         Classification Code Number)
</TABLE>
 
                             ---------------------
 
                    CHESAPEAKE PANHANDLE LIMITED PARTNERSHIP
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<CAPTION>
              DELAWARE                                1311                               95-4601927
<S>                                   <C>                                   <C>
  (State or other jurisdiction of         (Primary Standard Industrial      (I.R.S. Employer Identification No.)
   incorporation or organization)         Classification Code Number)
</TABLE>
<PAGE>   4
 
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
 
            PROSPECTUS SUBJECT TO COMPLETION, ISSUED JUNE 19, 1998.
 
                         CHESAPEAKE ENERGY CORPORATION
                               OFFER TO EXCHANGE
                     9 5/8% SERIES B SENIOR NOTES DUE 2005
                                      FOR
             ALL OUTSTANDING 9 5/8% SERIES A SENIOR NOTES DUE 2005
                  ($500,000,000 PRINCIPAL AMOUNT OUTSTANDING)
                             ---------------------
 
     THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
            , 1998, UNLESS EXTENDED (IF AND AS EXTENDED, THE "EXPIRATION DATE").
TENDERS OF OLD NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE.
 
                             ---------------------
 
      SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN
FACTORS WHICH INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER
AND AN INVESTMENT IN THE NEW NOTES OFFERED HEREBY.
 
                             ---------------------
 
     Chesapeake Energy Corporation, an Oklahoma corporation (the "Company" or
"Chesapeake"), hereby offers (the "Exchange Offer"), upon the terms and subject
to the conditions set forth in this Prospectus and the accompanying Letter of
Transmittal relating to the Exchange Offer (the "Letter of Transmittal"), to
exchange $1,000 principal amount of its 9 5/8% Series B Senior Notes due 2005
("New Notes") for each $1,000 principal amount of its 9 5/8% Series A Senior
Notes due 2005 ("Old Notes"). The New Notes and the Old Notes are collectively
referred to herein as the "Senior Notes."
 
     The form and terms of the New Notes are identical in all material respects
to the form and terms of the Old Notes except that the New Notes have been
registered under the Securities Act of 1933, as amended (the "Securities Act").
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and preferences and will be
subject to the limitations applicable thereto under the Indenture governing the
Senior Notes (the "Indenture). Following consummation of the Exchange Offer, the
holders of the Old Notes will continue to be subject to the existing
restrictions upon transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the Securities
Act of the Old Notes held by them.
                             ---------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
                             ---------------------
 
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
                             ---------------------
 
               THE DATE OF THIS PROSPECTUS IS             , 1998
<PAGE>   5
 
Continued from cover
 
    The New Notes will mature on May 1, 2005 and will bear interest at the rate
of 9 5/8% per annum. Interest on the Senior Notes will be payable semiannually
on May 1 and November 1 of each year, commencing November 1, 1998. The Senior
Notes will be redeemable at the option of the Company, in whole or in part, at
any time on or after May 1, 2002 at the redemption prices set forth herein, plus
accrued and unpaid interest to the redemption date, or at the Make-Whole Price
(as defined), plus accrued and unpaid interest to the redemption date, if
redeemed prior to May 1, 2002. The Company may also redeem at its option up to
$167 million of the Senior Notes at 109.625% of their principal amount, plus
accrued and unpaid interest to the redemption date, with the proceeds of one or
more Equity Offerings (as defined) completed prior to May 1, 2001, provided that
at least $333 million principal amount of Senior Notes remains outstanding
immediately following such redemption. Upon a Change of Control (as defined),
the Company will be required to offer to purchase all of the outstanding Senior
Notes at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of purchase. See "Description of Senior
Notes."
 
    The New Notes will be senior unsecured obligations of the Company and rank
pari passu in right of payment with all existing and future senior indebtedness
and other senior obligations of the Company, and senior in right of payment to
all subordinated indebtedness of the Company. Payment of principal, of premium,
if any, and interest on the New Notes will be unconditionally guaranteed,
jointly and severally, on a senior unsecured basis by the Company's Restricted
Subsidiaries (as defined). At March 31, 1998, after giving pro forma effect to
the sale of the Old Notes and the contemporaneous sale of preferred stock (the
"Offerings") and the application of the proceeds therefrom, the Company and its
Restricted Subsidiaries would have had outstanding approximately $420 million of
senior indebtedness in addition to the Senior Notes, none of which was secured.
See "Description of Senior Notes" and "Description of Other Indebtedness and
Preferred Stock."
 
    This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Notes as of            , 1998. The Company will
not receive any proceeds from this Exchange Offer. No dealer-manager is being
used in connection with this Exchange Offer. See "Use of Proceeds" and "Plan of
Distribution."
 
    The Exchange Offer is being made pursuant to the terms of the registration
rights agreement (the "Registration Rights Agreement") entered into on April 22,
1998 between the Company and its subsidiaries guaranteeing the Senior Notes (the
"Subsidiary Guarantors") and Donaldson, Lufkin & Jenrette Securities
Corporation, Bear, Stearns & Co. Inc., Lehman Brothers Inc., J.P. Morgan
Securities Inc. and Morgan Stanley & Co. Incorporated (the "Initial Purchasers")
pursuant to the terms of the Purchase Agreement dated April 17, 1998 between the
Company and the Subsidiary Guarantors and the Initial Purchasers. See "The
Exchange Offer -- Purpose and Effect of the Exchange Offer."
 
    Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than certain broker-dealers, as set
forth below, and any such holder that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such holder's
business and that such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes. Any holder who
tenders in the Exchange Offer with the intention to participate, or for the
purpose of participating, in a distribution of the Senior Notes or who is an
affiliate of the Company may not rely upon such interpretations by the staff of
the Commission and, in the absence of an exemption therefrom, must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Holders of Old Notes wishing
to accept the Exchange Offer must represent to the Company in the Letter of
Transmittal that such conditions have been met.
 
    Each broker-dealer (other than an affiliate of the Company) that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such Senior
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days, if required, from the date on which the Exchange
Offer is consummated (the "Exchange Date"), it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." Any broker-dealer who is an affiliate of the Company may
not rely on such no-action letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction.
 
    THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
JANICE A. DOBBS, CORPORATE SECRETARY, CHESAPEAKE ENERGY CORPORATION, 6100 NORTH
WESTERN AVENUE, OKLAHOMA CITY, OKLAHOMA 73118, BY MAIL, AND IF BY TELEPHONE
(405) 879-9212. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE BY            , 1998.
 
    THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THIS EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
<PAGE>   6
 
                             AVAILABLE INFORMATION
 
     The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Registration
Statement," which term shall include all amendments, exhibits, annexes and
schedules thereto) pursuant to the Securities Act, and the rules and regulations
promulgated thereunder, covering the New Notes being offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission and to which reference is hereby made. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
 
     The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 and at the following regional offices of the Commission:
7 World Trade Center, New York, New York 10048 and 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material can also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, at prescribed rates. The Company's common stock
("Common Stock") is listed on the New York Stock Exchange. The Company's
reports, proxy statements and other information concerning the Company can be
inspected and copied at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Indenture requires the Company to file with the Commission and
provide holders of the Senior Notes with such annual reports and such
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act. The Company and each Subsidiary Guarantor will also comply
with the provisions of Section 314(a) of the Trust Indenture Act of 1939.
 
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
 
     The following documents filed by the Company with the Commission pursuant
to the Exchange Act are incorporated herein by reference:
 
          1. Annual Report on Form 10-K for the fiscal year ended June 30, 1997
     and Transition Report for the six months ended December 31, 1997;
 
          2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1998;
     and
 
          3. Current Reports on Form 8-K filed on January 15 and 26, February 5
     and 13, March 5, 20, 23, 25 and 26, April 17 and 22, and May 20, 21, 22 and
     26, 1998.
 
     All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering described herein shall be deemed to be
incorporated in this Prospectus and to be a part hereof from the date of the
filing of such document. Any statement contained in a document incorporated by
reference herein shall be deemed to be modified or superseded for all purposes
to the extent that a statement contained in this Prospectus, or in any other
subsequently filed document which is also incorporated or deemed to be
incorporated by reference, modifies or supersedes such statement. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
 
     The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy
(without exhibits unless such exhibits are specifically
 
                                        i
<PAGE>   7
 
incorporated by reference into such document) of any or all documents
incorporated by reference in this Prospectus. Requests for such copies should be
directed to Janice A. Dobbs, Corporate Secretary, Chesapeake Energy Corporation,
6100 North Western Avenue, Oklahoma City, Oklahoma 73118, by mail, and if by
telephone (405) 879-9212.
 
                           FORWARD-LOOKING STATEMENTS
 
     This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included and incorporated
by reference in this Prospectus, including without limitation statements under
"Prospectus Summary," "Risk Factors," "The Company" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding planned
capital expenditures, the Acquisitions (as defined), increases in oil and gas
production, the number of wells to be drilled in 1998 and thereafter, the
Company's financial position, business strategy and other plans and objectives
for future operations, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. The Company cautions prospective investors that actual results
could differ materially from those expected by the Company, depending on the
outcome of certain factors, including, without limitation, factors discussed
under "Risk Factors" such as concentration of unevaluated leasehold in
Louisiana, impairment of asset value, need to replace reserves, substantial
capital requirements, substantial indebtedness, fluctuations in the prices of
oil and gas, uncertainties inherent in estimating quantities of oil and gas
reserves and projecting future rates of production and timing of development
expenditures, competition, operating risks, acquisition and integration of
operations risks, restrictions imposed by lenders, liquidity and capital
requirements, the effects of governmental and environmental regulation, patent
and securities litigation and adverse changes in the market for the Company's
oil and gas production. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to release publicly the result of any revisions
to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof, including, without limitation, changes in
the Company's business strategy or planned capital expenditures, or to reflect
the occurrence of unanticipated events.
 
                                       ii
<PAGE>   8
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and the Consolidated Financial
Statements and notes thereto included elsewhere or incorporated by reference in
this Prospectus. Investors should carefully consider the information set forth
in "Risk Factors" in evaluating the Exchange Offer or an investment in the
Senior Notes. Unless the context otherwise requires, all references in this
Prospectus to "Chesapeake" or the "Company" are to Chesapeake Energy Corporation
and its subsidiaries. All references in this Prospectus to fiscal years ended on
or prior to June 30, 1997 are to the Company's fiscal year ended June 30. The
Company has changed its fiscal year end from June 30 to December 31 and has
included information herein for the transition period from July 1 to December
31, 1997 (the "Transition Period"). Certain terms used herein are defined in the
Glossary included elsewhere in this Prospectus. Unless otherwise indicated, all
financial and quantitative information provided in this Prospectus on a "pro
forma" basis gives effect, on the date and for the periods indicated, to the
completion of the Offerings and the application of the net proceeds therefrom,
and the completion of all of the Acquisitions (as defined herein).
 
                                  THE COMPANY
 
     Chesapeake Energy Corporation is an independent oil and gas company engaged
in the acquisition, development, production and exploration of oil and natural
gas in major onshore producing areas of the United States and Canada.
 
     From inception in 1989 through March 31, 1998, Chesapeake drilled and
participated in a total of 824 gross (334 net) wells, of which 768 gross (312
net) wells were completed. From June 30, 1990 to December 31, 1997, the
Company's estimated proved reserves increased to 448 Bcfe from 11 Bcfe and total
assets increased to $953 million from $8 million. During the three months ended
March 31, 1998, the Company drilled and participated in an additional 35 gross
(17.1 net) wells, of which 8 gross (4.5 net) wells were completed. Assets
increased to $1.1 billion at March 31, 1998.
 
     The Company has recently modified its strategy to pursue growth through a
balance of drilling and acquisitions. Since December 31, 1997, the Company has
acquired approximately 655 Bcfe of proved reserves for consideration of $658
million (the "Acquisitions"), resulting in total proved reserves of 1,103 Bcfe
pro forma for the Acquisitions at December 31, 1997, of which approximately 80%
are natural gas. Pro forma for the Acquisitions, the Company had revenues of
$586 million and EBITDA of $252 million for the twelve months ended March 31,
1998 and total assets of $1.6 billion at such date. The Company's assets are
concentrated in three core areas: the Mid-Continent (consisting of Oklahoma,
southwestern Kansas and the Texas Panhandle), the Austin Chalk Trend in Texas
and Louisiana, and western Canada. The Company presently operates approximately
80% of the wells in which it owns a working interest, controls approximately 3.0
million net acres of undeveloped leasehold in the U.S. and Canada and has a
proved reserves-to-production index of 8.5 years.
 
RECAPITALIZATION
 
     On April 22, 1998, the Company issued $500 million aggregate principal
amount of Old Notes (the "Notes Offering") and 4.6 million shares of 7%
Cumulative Convertible Preferred Stock (the "Preferred Stock") having a
liquidation preference of $50 per share (the "Preferred Stock Offering" and
together with the Notes Offering, the "Offerings"). The net proceeds of the
Offerings were approximately $711 million. Of such proceeds, the Company used
approximately $100 million to purchase all $90 million principal amount of its
10 1/2% Senior Notes due 2002 (the "10 1/2% Notes"), $170 million to retire all
of its commercial bank debt, and $310 million to fund the cash portion of
pending acquisitions of oil and gas properties, with the balance of the net
proceeds increasing the Company's working capital.
 
     The Company is currently negotiating with its commercial bank group to
establish a four-year revolving secured credit facility (the "Replacement Credit
Facility"), primarily for the purpose of funding future acquisitions and
development of oil and gas properties. It is anticipated that this facility,
which will consist of
 
                                        1
<PAGE>   9
 
both a U.S. and a Canadian facility, will be completed in June 1998 and will
contain terms and conditions similar to the bank facilities the Company has had
in the past. It is expected that the U.S. facility will be documented at $250
million and the Canadian facility at $50 million, with initial borrowing bases
of $175 million and $25 million, respectively. The total borrowing base of the
Replacement Credit Facility is subject to the amount of secured senior
indebtedness that may be incurred under the Company's indentures, including the
Senior Notes Indenture. At March 31, 1998 on a pro-forma basis, under the most
restrictive debt incurrence covenant, the Company could have incurred $200
million of senior secured indebtedness.
 
BUSINESS STRATEGY
 
     Through mid-1997, Chesapeake's business strategy was growth through the
drillbit. Using this strategy, the Company rapidly expanded its reserves and
production through an aggressive drilling program. In particular, the Company
achieved considerable success in the Giddings Field in the Texas portion of the
Austin Chalk Trend. Beginning in late 1995, the Company undertook a major
initiative to extend the productive range of the Austin Chalk formation into far
southeastern Texas and across central Louisiana (the "Louisiana Trend"). In the
second half of 1997, management modified the Company's strategy in response to
unfavorable drilling results in the Louisiana Trend and higher oilfield service
costs. The Company's revised strategy is designed to lower the Company's risk
profile by building a longer-lived reserve base and by balancing capital
expenditures between acquisitions and drilling. The key elements of Chesapeake's
modified strategy are:
 
     Concentrate in Three Core Areas. Since mid-1997, the Company has
significantly increased its focus in the Mid-Continent and has acquired
properties in western Canada to complement its Austin Chalk Trend activities.
The Company believes the Mid-Continent offers attractive long-lived reserves and
numerous consolidation and exploitation opportunities. The Company also believes
that western Canada offers attractive drilling opportunities and that Canadian
natural gas prices will increase as additional pipelines are completed to meet
growing natural gas demand in the United States. As of December 31, 1997, pro
forma for the Acquisitions, the Mid-Continent represented approximately 70% of
the Company's total proved reserves. The Company also continues to actively
participate in the development of the Austin Chalk Trend, with an
industry-leading leasehold position in Texas and Louisiana.
 
     Acquire Long-Lived Natural Gas Reserves. The Company seeks to acquire
long-lived natural gas properties on an opportunistic basis that (i) contain
multiple producing horizons with the potential for increased reserves and
production, (ii) are located in the Mid-Continent and western Canada, (iii)
offer the potential for the application of sophisticated drilling and seismic
technologies and (iv) present opportunities to improve operating margins.
Management believes that long-lived natural gas reserves will increase in value
as a result of favorable North American natural gas supply/demand fundamentals.
 
     Grow Reserves and Production Through a Balanced Drilling Program. The
Company seeks to maintain a balanced portfolio of drilling opportunities that
offer the potential to grow reserves and production with attractive rates of
return. The Company continues to build a large inventory of lower risk drilling
projects to complement its high impact, higher risk exploration opportunities.
With the properties added through the Acquisitions, management believes it has
an identified portfolio of over 800 developmental drilling opportunities.
 
     Refocus and Reduce Louisiana Trend Drilling Program. In fiscal 1997 and the
Transition Period, the Company's drilling program was spread across 200 miles of
the Louisiana Trend that, to date, has produced inconsistent results. To improve
results, the Company has reduced the size of the Louisiana Trend drilling
program and focused its drilling in the Masters Creek area, which has produced
better results than other areas of the Louisiana Trend. In general, the Company
will limit its future drilling in the area to wells which directly offset
existing producing wells with favorable production histories.
 
     Identify and Complete Innovative Transactions. The Company seeks to
identify and complete innovative transactions where it can leverage its oil and
gas expertise into profitable investments, including direct investments in and
joint ventures with established companies. Recent examples of such transactions
include its investments with Gothic Energy Corporation, Ranger Oil Limited and
Pan East Petroleum Corp.
                                        2
<PAGE>   10
 
(described below) and its former investment in Bayard Drilling Technologies,
Inc. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
COMPANY STRENGTHS
 
     Management believes its future growth potential is attributable to five
distinguishing characteristics of the Company.
 
     High Quality Asset Base. The Company's properties (including the
Acquisitions) are increasingly characterized by long reserve lives, established
production profiles, an emphasis on natural gas and contain further identified
development opportunities. Based upon anticipated 1998 production, the Company's
proved reserves-to-production index is 8.5 years. Although diversified among
three core areas, the Company's properties are concentrated in approximately 25
fields, substantially less than the industry average for similarly sized
companies. This concentration allows for substantial economies of scale in
drilling and production operations and facilitates the application of more
effective reservoir management practices. The Company intends to continue
concentrating its acquisition and drilling opportunities in its three core
areas. The Company operates approximately 80% of the wells on its properties,
providing a high degree of operating flexibility and cost control.
 
     Active Acquisition Program. The Company has implemented a disciplined
acquisition program focused primarily in the Mid-Continent region of the United
States. This region is characterized by long-lived natural gas reserves, low
lifting costs, multiple geological targets that provide substantial drilling
potential, favorable basis differentials to benchmark commodity prices, a
well-developed oil and gas transportation infrastructure and considerable
potential for further consolidation of assets. The Company is well-positioned to
continue this consolidation as a result of its large existing asset base, its
corporate presence in Oklahoma City and management's knowledge and expertise in
the Mid-Continent. From December 1997 through April 1998, the Company acquired
585 Bcfe of estimated proved reserves in the Mid-Continent and 96 Bcfe in
western Canada at an aggregate acquisition cost for such estimated proved
reserves of $694 million, or $1.02 per Mcfe of estimated proved reserves. The
weighted average lease operating expense associated with these estimated proved
reserves is approximately $0.52 per Mcfe, providing the Company with attractive
operating margins in the current commodity price environment.
 
     Large Inventory of Drilling Projects. As a result of the Company's past
acreage acquisition programs and through the Acquisitions, the Company has
developed one of the largest onshore leasehold positions in the U.S. From this
inventory of approximately 3.0 million net acres of undeveloped leasehold, the
Company's technical teams have identified over 800 potential drillsites, pro
forma for the Acquisitions.
 
     Technological Leadership. The Company has demonstrated significant
expertise in the rapidly evolving technologies of 3-D seismic evaluation,
horizontal drilling and deep fracture stimulation. During the past five years,
the Company has been one of the most active drillers in the U.S., especially of
deep vertical and horizontal wells in challenging reservoir conditions. The
Company believes it can significantly enhance the value of the Acquisitions
through 3-D seismic evaluation, exploration of deeper formations and more
intensive development and redevelopment of existing formations.
 
     Entrepreneurial Management. The Company's management team formed the
Company in 1989 and owns more than 28 million shares, or 27%, of the Company's
outstanding Common Stock. The Company's growth during the past nine years has
been characterized by a series of entrepreneurial decisions and strategies that
management believes highlight its ability to react quickly to industry
conditions that are subject to frequent and sometimes dramatic change. The
Company's 19-member senior management team has an aggregate of over 300 years of
experience in the industry, and the Company employs over 125 engineering and
geotechnical professionals among its more than 500 employees.
 
                                        3
<PAGE>   11
 
RECENT DEVELOPMENTS
 
     In implementing its modified strategy, the Company has completed the
following acquisitions, the first of which was announced in October 1997:
 
<TABLE>
<CAPTION>
                                                       ESTIMATED
                                                        PROVED      ACQUISITION
                                         COST(1)       RESERVES      PRICE PER     LOE PER    CLOSING
          TRANSACTION NAME            (IN MILLIONS)    (BCFE)(2)       MCFE        MCFE(3)      DATE
<S>                                   <C>              <C>          <C>            <C>        <C>
AnSon Production Corporation
  ("AnSon").........................      $ 36             26          $1.38        $0.50     12/16/97
Ranger Oil Limited ("Ranger").......        28             54           0.52         0.15      1/30/98
EnerVest Management Company, L.L.C.
  ("EnerVest")......................        38             43           0.88         0.40       2/6/98
Hugoton Energy Corporation
  ("Hugoton").......................       306            246           1.24         0.70      3/10/98
Gothic Energy Corporation
  ("Gothic")(4).....................        31             52           0.60         0.30      4/27/98
Sunoma Energy Corporation
  ("Sunoma")........................        33             42           0.79         0.15      4/27/98
DLB Oil & Gas, Inc. ("DLB").........       122            110           1.11         0.50      4/28/98
MC Panhandle, Inc. ("MC
  Panhandle")(5)....................       100            108           0.92         0.60      4/30/98
                                          ----            ---          -----        -----
          Total Acquisitions(6).....      $694            681          $1.02(7)     $0.52(7)
                                          ====            ===          =====        =====
</TABLE>
 
------------------------------
 
(1) Excludes purchase consideration attributable to unevaluated leasehold, gas
    gathering systems, marketing and other assets of $7 million for AnSon, $20
    million for Ranger, $20 million for Hugoton, $10 million for DLB and $5
    million for MC Panhandle. Also excludes transaction fees and expenses.
    Includes debt assumed or to be assumed and the value attributable to
    Chesapeake Common Stock issued in connection with such transactions.
 
(2) As of December 31, 1997, as estimated by the Company.
 
(3) Includes lifting costs and production taxes.
 
(4) The Company also invested $39.5 million in preferred stock (with a
    liquidation value of $50 million) and warrants to purchase common stock of
    Gothic.
 
(5) A wholly owned subsidiary of Occidental Petroleum Corporation.
 
(6) Does not include an investment of $22 million in the common stock of Pan
    East Petroleum Corp. ("Pan East"), a publicly traded Canadian exploration
    and production company, in December 1997. See "The Company -- Acquisitions."
 
(7) Weighted average acquisition price and LOE per Mcfe of estimated proved
    reserves.
 
     In fiscal 1997, the Transition Period and the three months ended March 31,
1998, the Company incurred net losses of $183.4 million, $31.6 million and
$256.5 million, respectively, primarily as a result of impairment of its oil and
gas properties. These impairments were largely attributable to lower oil prices,
higher oilfield service costs, poor drilling results in the Louisiana Trend and
the Hugoton acquisition. Based on estimated NYMEX prices of $14.50 per Bbl and
$2.00 per Mcf as of June 30, 1998, the Company's estimated proved reserves as of
March 31, 1998, pro forma for Acquisitions completed during the quarter ending
June 30, 1998, and the estimated evaluation of leasehold during the quarter
ending June 30,1998, the Company estimates it will record a full-cost ceiling
writedown of between $225 million and $250 million as of June 30, 1998. In
addition to the effects of lower commodity prices anticipated at June 30, 1998,
this impairment will result from the application of full-cost accounting rules
of the Commission to recently acquired assets recorded in accordance with
purchase accounting. Management believes the book value derived by these
accounting methods does not necessarily reflect the intrinsic value of the
assets acquired. Additional impairments of certain of the Company's other fixed
assets located in the Louisiana Trend may be required at June 30, 1998. Such
impairments would result from lower than expected reserves and production
throughput in gathering, transmission and processing facilities. Such additional
impairment could range from $10 million to $20 million.
 
                                        4
<PAGE>   12
 
                               THE EXCHANGE OFFER
 
THE EXCHANGE OFFER.........  Pursuant to the Exchange Offer, the Company is
                             offering to exchange (the "Exchange Offer") $1,000
                             principal amount of New Notes in exchange for each
                             $1,000 principal amount of Old Notes that are
                             validly tendered and not withdrawn. As of
                                         , 1998, there was one holder of Old
                             Notes, $500,000,000 aggregate principal amount
                             outstanding. See "The Exchange Offer."
 
CONSEQUENCES OF FAILURE TO
  EXCHANGE.................  Holders of Old Notes whose Old Notes are not
                             tendered and accepted in the Exchange Offer will
                             continue to hold such Old Notes and will be
                             entitled to all the rights and preferences and will
                             be subject to the limitations applicable thereto
                             under the Indenture. Following consummation of the
                             Exchange Offer, the holders of Old Notes will
                             continue to be subject to the existing restrictions
                             upon transfer thereof and the Company will have no
                             further obligation to such holders (other than
                             certain holders in the circumstances described
                             below) to provide for the registration under the
                             Securities Act of the Old Notes held by them.
                             Following the completion of the Exchange Offer,
                             assuming the Company has no continuing registration
                             obligations under the Registration Rights
                             Agreement, the Senior Notes will not be entitled to
                             liquidated damages provided for in the Registration
                             Rights Agreement.
 
RESALE.....................  Based on interpretations by the staff of the
                             Commission set forth in no-action letters issued to
                             third parties, the Company believes the New Notes
                             issued pursuant to the Exchange Offer in exchange
                             for Old Notes may be offered for resale, resold and
                             otherwise transferred by any holder thereof (other
                             than broker-dealers, as set forth below, and any
                             such holder that is an "affiliate' of the Company
                             within the meaning of Rule 405 under the Securities
                             Act) without compliance with the registration and
                             prospectus delivery provisions of the Securities
                             Act, provided that such New Notes are acquired in
                             the ordinary course of such holder's business and
                             that such holder has no arrangement or
                             understanding with any person to participate in the
                             distribution of such New Notes. Any holder who
                             tenders in the Exchange Offer with the intention to
                             participate, or for the purpose of participating,
                             in a distribution of the New Notes or who is an
                             affiliate of the Company may not rely upon such
                             interpretations by the staff of the Commission and,
                             in the absence of an exemption therefrom, must
                             comply with the registration and prospectus
                             delivery requirements of the Securities Act in
                             connection with any secondary resale transaction.
                             Failure to comply with such requirements in such
                             instance may result in such holder incurring
                             liabilities under the Securities Act for which the
                             holder is not indemnified by the Company. Any
                             broker-dealer (other than an affiliate of the
                             Company) that holds Old Notes which were acquired
                             for the account of such broker-dealer as a result
                             of market-making or other activities (other than
                             Old Notes acquired directly from the Company or any
                             of its affiliates) may exchange such Old Notes
                             pursuant to the Exchange Offer. Each such
                             broker-dealer that receives New Notes for its own
                             account pursuant to the Exchange Offer must
                             acknowledge that it will deliver a prospectus
                             meeting the requirements of the Securities Act in
                             connection with any resale of such New Notes. The
                             Letter of Transmittal states that by so
                             acknowledging and by delivering a prospectus, a
 
                                        5
<PAGE>   13
 
                             broker-dealer will not be deemed to admit that it
                             is an "underwriter" within the meaning of the
                             Securities Act. The Company has agreed that, for a
                             period of 180 days, if required, after the Exchange
                             Date, it will make this Prospectus available to any
                             broker-dealer for use in connection with any such
                             resale. An affiliate of the Company, however, will
                             not be relieved of its registration obligations.
                             See "Plan of Distribution."
 
                             The Exchange Offer is not being made to, nor will
                             the Company accept surrenders for exchange from,
                             holders of Old Notes in any jurisdiction in which
                             this Exchange Offer or the acceptance thereof would
                             not be in compliance with the securities or blue
                             sky laws of such jurisdiction.
 
EXPIRATION DATE............  The Exchange Offer will expire at 5:00 p.m., New
                             York City time, on             , 1998, unless
                             extended, in which case the term "Expiration Date"
                             shall mean the latest date and time to which the
                             Exchange Offer is extended. Any extension, if made,
                             will be publicly announced through a release to the
                             Dow Jones News Service and as otherwise required by
                             applicable law or regulations.
 
CONDITIONS TO THE EXCHANGE
  OFFER....................  The Exchange Offer is subject to certain
                             conditions, which may be waived by the Company. See
                             "The Exchange Offer -- Conditions of the Exchange
                             Offer." The Exchange Offer is not conditioned upon
                             any minimum principal amount of Old Notes being
                             tendered.
 
PROCEDURES FOR TENDERING
OLD NOTES..................  Each holder of Old Notes in certificated form
                             wishing to accept the Exchange Offer must complete,
                             sign and date the Letter of Transmittal, or a
                             facsimile thereof, in accordance with the
                             instructions contained herein and therein, and mail
                             or otherwise deliver such Letter of Transmittal, or
                             a facsimile thereof, together with such Old Notes
                             and any other required documentation to United
                             States Trust Company of New York, the Exchange
                             Agent, at one of the addresses set forth herein and
                             therein. By executing the Letter of Transmittal,
                             each holder will represent to the Company that,
                             among other things, the New Notes acquired pursuant
                             to the Exchange Offer are being obtained in the
                             ordinary course of business of the person receiving
                             such New Notes, whether or not such person is the
                             holder, that neither the holder nor any such other
                             person has an arrangement or understanding with any
                             person to participate in the distribution of such
                             New Notes and that neither the holder nor any such
                             other person is an "affiliate" of the Company
                             within the meaning of Rule 405 under the Securities
                             Act. See "The Exchange Offer -- Terms of the
                             Exchange Offer -- Procedures for Tendering Old
                             Notes" and "The Exchange Offer -- Terms of the
                             Exchange Offer -- Guaranteed Delivery Procedures."
 
SPECIAL PROCEDURES FOR
  BENEFICIAL OWNERS........  Any beneficial owner whose Old Notes are registered
                             in the name of a broker, dealer, commercial bank,
                             trust company or other nominee and who wishes to
                             tender such Old Notes in the Exchange Offer should
                             instruct such registered holder (or, in the case of
                             Old Notes represented by a Global Note, the
                             participant in The Depository Trust Company ("DTC"
                             or the "Depositary") to tender on such beneficial
                             owner's behalf by following the procedures
                             described above or complying with the procedures
                             for book-entry transfer. If such beneficial owner
                             wishes to
 
                                        6
<PAGE>   14
 
                             tender on its own behalf, such owner must, prior to
                             completing and executing the Letter of Transmittal
                             and delivering its Old Notes, either make
                             appropriate arrangements to register ownership of
                             the Old Notes in such owner's name or obtain a
                             properly completed bond power from the registered
                             holder. The transfer of registered ownership may
                             take considerable time and may not be able to be
                             completed prior to the Expiration Date. See "The
                             Exchange Offer -- Terms of the Exchange
                             Offer -- Procedures for Tendering Old Notes."
 
GUARANTEED DELIVERY
PROCEDURES.................  Holders of Old Notes who wish to tender their Old
                             Notes and whose Old Notes are not immediately
                             available or who cannot deliver their Old Notes,
                             the Letter of Transmittal or any other documents
                             required by the Letter of Transmittal to the
                             Exchange Agent prior to the Expiration Date, must
                             tender their Old Notes according to the guaranteed
                             delivery procedures set forth in "The Exchange
                             Offer -- Terms of the Exchange Offer -- Guaranteed
                             Delivery Procedures."
 
ACCEPTANCE OF OLD NOTES AND
  DELIVERY OF NEW NOTES....  Subject to certain conditions (as described more
                             fully in "The Exchange Offer -- Conditions of the
                             Exchange Offer"), the Company will accept for
                             exchange any and all Old Notes which are properly
                             tendered in the Exchange Offer and not withdrawn,
                             prior to 5:00 p.m., New York City time, on the
                             Expiration Date. The New Notes issued pursuant to
                             the Exchange Offer will be delivered as promptly as
                             practicable following the Expiration Date.
 
WITHDRAWAL RIGHTS..........  Except as otherwise provided herein, tenders of Old
                             Notes may be withdrawn at any time prior to 5:00
                             p.m., New York City time, on the Expiration Date.
                             See "The Exchange Offer -- Terms of the Exchange
                             Offer -- Withdrawal of Tenders of Old Notes."
 
TAX CONSIDERATIONS.........  An exchange of Old Notes for New Notes pursuant to
                             the Exchange Offer will be treated, for federal
                             income tax purposes, as a refinancing and will not
                             produce recognizable gain or loss to either the
                             Company or a holder of an exchanged Old Note. A
                             holder's initial adjusted tax basis and holding
                             period in a New Note will be the same as in the
                             exchanged Old Note.
 
EXCHANGE AGENT.............  United States Trust Company of New York is the
                             Exchange Agent. The address, telephone number and
                             facsimile number of the Exchange Agent are set
                             forth in "The Exchange Offer -- Exchange Agent" and
                             on the back cover.
 
                                        7
<PAGE>   15
 
                      SUMMARY OF TERMS OF THE SENIOR NOTES
 
     The Exchange Offer applies to $500,000,000 aggregate principal amount of
Old Notes. The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes except that the New Notes will
be registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The New Notes will evidence the same debt as
the Old Notes, will be entitled to the benefits of the Indenture and will be
treated as a single class thereunder with any Old Notes that remain outstanding.
See "Description of Senior Notes."
 
SECURITIES.................  $500,000,000 aggregate principal amount of 9 5/8%
                             Senior Notes due 2005.
 
MATURITY DATE..............  May 1, 2005.
 
INTEREST PAYMENT DATES.....  May 1 and November 1 of each year, commencing
                             November 1, 1998.
 
OPTIONAL REDEMPTION........  The Senior Notes will be redeemable at the option
                             of the Company, in whole or in part, at any time on
                             or after May 1, 2002 at the redemption prices set
                             forth herein plus accrued and unpaid interest to
                             the date of redemption, or at the Make-Whole Price
                             plus accrued and unpaid interest to the date of
                             redemption if redeemed prior to May 1, 2002. In
                             addition, at any time or from time to time the
                             Company may, at its option, redeem up to $167
                             million aggregate principal amount of the Senior
                             Notes at 109.625% of the principal amount thereof,
                             plus accrued and unpaid interest to the date of
                             redemption, with the net proceeds of one or more
                             Equity Offerings completed prior to May 1, 2001,
                             provided that (i) such redemption occurs 90 days
                             after such Equity Offering and (ii) at least $333
                             million aggregate principal amount of the Senior
                             Notes remains outstanding immediately following
                             such redemption. See "Description of Senior
                             Notes -- Optional Redemption."
 
MANDATORY REDEMPTION.......  None, except as set forth under "Offers to
                             Purchase."
 
RANKING....................  The Senior Notes are senior unsecured obligations
                             of the Company, ranking pari passu with all
                             existing and future senior indebtedness of the
                             Company and senior in right of payment to all
                             subordinated indebtedness of the Company. As of
                             March 31, 1998, on a pro forma basis, the Company
                             and its Restricted Subsidiaries would have had $420
                             million of Senior Indebtedness in addition to the
                             Senior Notes, none of which was secured. See
                             "Capitalization," "Use of Proceeds" and Note 3 of
                             Notes to Consolidated Financial Statements.
 
GUARANTEES.................  Chesapeake is a holding company which conducts
                             operations through its subsidiaries. The Senior
                             Notes are unconditionally guaranteed (the
                             "Guarantees"), jointly and severally, by each of
                             the Company's Restricted Subsidiaries. The
                             Guarantees are general unsecured senior obligations
                             of the Restricted Subsidiaries, ranking pari passu
                             with all other existing and future senior
                             indebtedness of the Restricted Subsidiaries,
                             including the guarantees by the Restricted
                             Subsidiaries of the Company's outstanding 9 1/8%,
                             8 1/2% and 7 7/8% Senior Notes (the "Existing
                             Notes"). See "Description of Senior
                             Notes -- Guarantees."
 
OFFERS TO PURCHASE.........  Upon a Change of Control, the Company will be
                             required, subject to certain conditions, to offer
                             to purchase all outstanding Senior Notes at 101% of
                             the principal amount thereof, plus accrued and
                             unpaid interest to the date of purchase. See
                             "Description of Senior Notes -- Change of Control."
                             In the event of certain asset dispositions, the
                             Company will be
 
                                        8
<PAGE>   16
 
                             required, under certain circumstances, to use the
                             Excess Proceeds (as defined) to offer to purchase
                             Senior Notes at 100% of the principal amount
                             thereof, plus accrued and unpaid interest to the
                             date of purchase. See "Description of Senior
                             Notes -- Certain Covenants." The Company's ability
                             to purchase the Senior Notes may be limited by
                             agreements relating to existing and future
                             indebtedness.
 
CERTAIN COVENANTS..........  The Indenture contains certain covenants,
                             including, but not limited to, covenants limiting
                             the Company and its Restricted Subsidiaries with
                             respect to the following: (i) asset sales; (ii)
                             restricted payments; (iii) the incurrence of
                             additional indebtedness and the issuance of
                             preferred stock; (iv) liens; (v) sale and leaseback
                             transactions; (vi) dividend and other payment
                             restrictions affecting subsidiaries; (vii) mergers
                             and consolidations; and (viii) transactions with
                             affiliates. See "Description of Senior
                             Notes -- Certain Covenants."
 
FORM AND DENOMINATION OF
  SENIOR NOTES.............  The Old Notes are represented by Global Notes which
                             have been deposited with the Trustee as custodian
                             for, and registered in the name of, a nominee of
                             the Depositary. It is expected that the New Notes
                             will also be represented by Global Notes.
                             Beneficial interests in Global Notes are shown on,
                             and transfers thereof are effected through, records
                             maintained by DTC and its participants. See
                             "Description of Senior Notes -- Book Entry;
                             Delivery; Form and Transfer."
 
USE OF PROCEEDS............  The Company will not receive any net proceeds from
                             the issuance of the New Notes pursuant to this
                             Prospectus.
 
                                  RISK FACTORS
 
     An investment in the New Notes involves certain risks that a potential
investor should carefully evaluate prior to making an investment in the New
Notes. See "Risk Factors."
 
                                        9
<PAGE>   17
 
                        SUMMARY OIL AND GAS RESERVE DATA
 
     The following table sets forth summary information with respect to the
estimated proved oil and gas reserves of the Company at December 31, 1997 and on
a pro forma basis to give effect to the Acquisitions. The reserve information
presented below is based upon reports prepared by independent petroleum
engineering firms and the Company's petroleum engineers. Williamson Petroleum
Consultants, Inc., Porter Engineering Associates, Netherland, Sewell &
Associates, Inc. and the Company's petroleum engineers evaluated 46%, 48%, 4%
and 2%, respectively, of the Company's total proved oil and gas reserves.
Information on the oil and gas reserves associated with the Acquisitions is
based on Company estimates.
 
<TABLE>
<CAPTION>
                                                               ACTUAL    PRO FORMA(1)
                                                                 ($ IN THOUSANDS)
<S>                                                           <C>        <C>
Proved reserves:
  Oil (MBbl)................................................    18,226        34,665
  Gas (MMcf)................................................   339,118       895,175
  Gas equivalent (MMcfe)....................................   448,474     1,103,165
Proved developed reserves:
  Oil (MBbl)................................................    10,087        23,082
  Gas (MMcf)................................................   178,082       579,505
  Gas equivalent (MMcfe)....................................   238,604       717,997
Estimated future net revenue before income tax..............  $715,098    $1,514,592
Present Value(2)............................................  $466,509    $  936,145
</TABLE>
 
------------------------------
 
(1) Pro forma to reflect the Acquisitions as if each had occurred on December
    31, 1997.
 
(2) Calculated in accordance with the applicable requirements of the Commission.
    The average prices used in calculating Present Value as of December 31, 1997
    were $2.29 per Mcf of natural gas and $17.62 per Bbl of oil. The average
    prices used in calculating the pro forma Present Value as of December 31,
    1997 were approximately $2.15 per Mcf of natural gas and $17.00 per Bbl of
    oil. Subsequent to December 31, 1997, oil and natural gas prices have
    declined. Based on estimated NYMEX prices of $2.00 per Mcf and $14.50 per
    Bbl as of June 30, 1998, the Present Value of the Company's reserves would
    have been approximately $310 million ($700 million on a pro forma basis) as
    of December 31, 1997.
 
     The future net revenue attributable to the Company's estimated proved
undeveloped reserves of $275 million at December 31, 1997 and the $160 million
Present Value thereof have been calculated assuming that the Company will expend
approximately $153 million to develop these reserves through 2002. The amount
and timing of these expenditures will depend on a number of factors, including
actual drilling results, product prices and the availability of capital.
 
     There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. The reserve data set forth herein represent only estimates. See "Risk
Factors -- Uncertainty of Estimates of Oil and Gas Reserves" and
"-- Fluctuations in Oil and Gas Prices."
 
     Based on estimated NYMEX prices of $2.00 per Mcf and $14.50 per Bbl as of
June 30, 1998, estimates of proved reserves as of March 31, 1998 (pro forma for
Acquisitions completed during the quarter ending June 30, 1998), and the
estimated evaluation of leasehold during the quarter ending June 30, 1998,the
Company estimates it will record a full-cost ceiling writedown of between $225
million and $250 million as of June 30, 1998. The Company estimates that for
each $1.00 per Bbl change in the price of oil and for each $0.10 per Mcf change
in the price of natural gas, the writedown will change by $22 million and $40
million, respectively. Additional impairments of certain of the Company's other
fixed assets located in the Louisiana Trend may be required at June 30, 1998.
Such impairments would result from lower than expected reserves and production
throughput in gathering, transmission and processing facilities. Such additional
impairment could range from $10 million to $20 million.
 
                                       10
<PAGE>   18
 
                       SUMMARY PRODUCTION AND SALES DATA
 
     The following table sets forth summary data with respect to the production
and sales of oil and gas by the Company for the periods indicated and on a pro
forma basis for the twelve months ended March 31, 1998 to give effect to the
Acquisitions as if each had occurred on April 1, 1997. Information with respect
to the properties acquired or to be acquired in the Acquisitions is based upon
information provided to the Company by the other parties to such transactions.
 
<TABLE>
<CAPTION>
                                                                                                        TWELVE MONTHS
                                                                              SIX          THREE            ENDED
                                                                             MONTHS       MONTHS       MARCH 31, 1998
                                           FISCAL YEAR ENDED JUNE 30,        ENDED         ENDED     -------------------
                                          -----------------------------   DECEMBER 31,   MARCH 31,                PRO
                                           1995       1996       1997         1997         1998       ACTUAL     FORMA
<S>                                       <C>       <C>        <C>        <C>            <C>         <C>        <C>
Net Production:
  Oil (MBbl)............................    1,139      1,413      2,770       1,857         1,176       3,886      6,337
  Gas (MMcf)............................   25,114     51,710     62,005      27,326        15,907      59,401    112,846
  Gas equivalent (MMcfe)................   31,947     60,190     78,625      38,468        22,963      82,717    150,866
Oil and gas sales ($ in thousands):
  Oil...................................  $19,784   $ 25,224   $ 57,974     $34,523       $17,449    $ 68,268   $116,531
  Gas...................................   37,199     85,625    134,946      61,134        32,792     122,984    240,283
                                          -------   --------   --------     -------       -------    --------   --------
        Total oil and gas sales.........  $56,983   $110,849   $192,920     $95,657       $50,241    $191,252   $356,814
                                          =======   ========   ========     =======       =======    ========   ========
Average sales price:
  Oil ($ per Bbl).......................  $ 17.36   $  17.85   $  20.93     $ 18.59       $ 14.84    $  17.57   $  18.39
  Gas ($ per Mcf).......................     1.48       1.66       2.18        2.24          2.06        2.07       2.13
  Gas equivalent ($ per Mcfe)...........     1.78       1.84       2.45        2.49          2.19        2.31       2.37
Oil and gas costs ($ per Mcfe):
  Production expenses and taxes.........     0.13       0.14       0.19        0.27          0.41        0.30        n/a
  General and administrative............     0.11       0.08       0.11        0.15          0.19        0.15        n/a
  Depreciation, depletion and
    amortization of oil and gas
    properties..........................     0.80       0.85       1.31        1.57          1.36        1.62        n/a
Gross productive wells at end of
  period................................      363        474        593       1,113         3,702       3,702        n/a
Net productive wells at end of period...       96        187        270         401         1,796       1,796        n/a
</TABLE>
 
                                       11
<PAGE>   19
 
                      SUMMARY CONSOLIDATED FINANCIAL DATA
 
     The following table sets forth summary consolidated financial data of the
Company for each of the three fiscal years ended June 30, 1997, for the six
months ended December 31, 1997, and for the three and twelve months ended March
31, 1998. The data should be read in conjunction with the Consolidated Financial
Statements and the related notes thereto included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                                     SIX          THREE      TWELVE
                                                                                    MONTHS       MONTHS      MONTHS
                                                 FISCAL YEAR ENDED JUNE 30,         ENDED         ENDED       ENDED
                                              --------------------------------   DECEMBER 31,   MARCH 31,   MARCH 31,
                                                1995        1996       1997          1997         1998        1998
                                                              ($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>         <C>        <C>         <C>            <C>         <C>
STATEMENT OF OPERATIONS DATA:
  Revenues:
    Oil and gas sales.......................  $ 56,983    $110,849   $ 192,920     $ 95,657     $ 50,241    $ 191,252
    Oil and gas marketing sales.............        --      28,428      76,172       58,241       26,524      108,508
    Oil and gas service operations..........     8,836       6,314          --           --           --           --
    Interest and other......................     1,524       3,831      11,223       78,966          224       84,620
                                              --------    --------   ---------     --------     ---------   ---------
        Total revenues......................    67,343     149,422     280,315      232,864       76,989      384,380
                                              --------    --------   ---------     --------     ---------   ---------
  Costs and expenses:
    Production expenses and taxes...........     4,256(1)    8,303      15,107       10,094        9,438       24,457
    Oil and gas marketing expenses..........        --      27,452      75,140       58,227       26,261      108,333
    Oil and gas service operations..........     7,747       4,895          --           --           --           --
    Impairment of oil and gas properties....        --          --     236,000      110,000      250,000      596,000
    Oil and gas depreciation, depletion and
      amortization..........................    25,410      50,899     103,264       60,408       31,342      134,108
    Depreciation and amortization of other
      assets................................     1,765       3,157       3,782        2,414        1,380        4,867
    General and administrative..............     3,578       4,828       8,802        5,847        4,380       12,809
    Interest and other......................     6,627      13,679      18,550       17,448       10,688       36,816
                                              --------    --------   ---------     --------     ---------   ---------
        Total costs and expenses............    49,383     113,213     460,645      264,438      333,489      917,390
                                              --------    --------   ---------     --------     ---------   ---------
  Income (loss) before income taxes and
    extraordinary item......................    17,960      36,209    (180,330)     (31,574)    (256,500)    (533,010)
  Provision (benefit) for income taxes......     6,299      12,854      (3,573)          --           --      (27,153)
  Extraordinary item........................        --          --      (6,620)          --           --           --
                                              --------    --------   ---------     --------     ---------   ---------
  Net income (loss).........................  $ 11,661    $ 23,355   $(183,377)    $(31,574)    $(256,500)  $(505,857)
                                              ========    ========   =========     ========     =========   =========
  Net income (loss) per common share:
    Basic...................................  $   0.22    $   0.43   $   (2.79)    $  (0.45)    $  (3.19)   $   (6.92)
    Assuming dilution.......................  $   0.21    $   0.40   $   (2.79)    $  (0.45)    $  (3.19)   $   (6.92)
  Weighted average common and common
    equivalent shares outstanding:
  Basic.....................................    52,624      54,564      65,767       70,835       80,330       73,094
  Assuming dilution.........................    55,872      58,342      65,767       70,835       80,330       73,094
OTHER FINANCIAL DATA:
  Operating cash flow(2)....................  $ 45,135    $ 90,265   $ 162,716     $141,248     $ 26,222    $ 201,965
  Capital expenditures, excluding cost of
    acquisitions............................   125,760     350,891     502,329      216,770      168,686      533,453
  EBITDA(3).................................    51,762     103,944     181,266       84,696       36,910      164,781
  Ratio of EBITDA to interest expense.......      7.8x        7.6x        9.8x         4.9x         3.5x         4.5x
  Ratio of earnings to fixed charges(4).....      2.9x        2.4x          --           --           --           --
PRO FORMA FINANCIAL DATA(5):
  EBITDA....................................                                                                $ 250,060
  Interest expense and preferred stock
    dividends...............................                                                                   91,548
  Ratio of EBITDA to interest expense and
    preferred stock dividends...............                                                                     2.7x
</TABLE>
 
<TABLE>
<CAPTION>
                                                                 AS OF            AS OF MARCH 31, 1998
                                                              DECEMBER 31,     ---------------------------
                                                                  1997           ACTUAL       PRO FORMA(6)
                                                                            ($ IN THOUSANDS)
<S>                                                           <C>              <C>            <C>
BALANCE SHEET DATA:
  Cash, cash equivalents and short-term investments.........    $136,430       $   39,822      $  196,776
  Oil and gas assets, net...................................     618,127          825,610       1,111,610
  Total assets..............................................     952,784        1,065,335       1,569,732
  Long-term debt, including current maturities and excluding
    discounts...............................................     510,000          655,000         920,000
  Stockholders' equity......................................     280,206          221,097         460,514
</TABLE>
 
                                                                            (See
footnotes on following page)
 
                                       12
<PAGE>   20
 
------------------------------
 
(1) Includes a credit of $594,000 attributable to severance tax on production
    from prior periods.
 
(2) Represents net income (loss) before extraordinary item, income taxes,
    depreciation, depletion and amortization and impairments of oil and gas
    properties.
 
(3) EBITDA represents net income (loss) of the Company and its subsidiaries from
    continuing operations before interest, income taxes, depreciation,
    depletion, amortization, impairments of oil and gas properties,
    extraordinary items, the gain from the sale of Bayard Drilling Technologies,
    Inc. common stock and certain other non-cash charges. EBITDA should not be
    considered in isolation or as a substitute for net income, cash flows from
    continuing operations or other consolidated income or cash flow data
    prepared in accordance with generally accepted accounting principles or as a
    measure of the Company's profitability or liquidity.
 
(4) For purposes of determining the ratio of earnings to fixed charges, earnings
    are defined as income (loss) of the Company and its subsidiaries from
    continuing operations before income taxes, extraordinary items and fixed
    charges. Fixed charges consist of interest (whether expensed or
    capitalized), and amortization of debt expenses and discount or premium
    relating to any indebtedness. Earnings were insufficient to cover fixed
    charges by $193.3 million in fiscal 1997, by $36.7 million for the six
    months ended December 31, 1997, by $258.8 million for the three months ended
    March 31, 1998 and by $542.9 million for the twelve months ended March 31,
    1998. On a pro forma basis, for the twelve months ended March 31, 1998,
    earnings were insufficient to cover fixed charges and combined fixed charges
    and preferred stock dividends by $599.5 million.
 
(5) The pro forma data, which exclude amounts for Chesapeake Energy Marketing,
    Inc. ("CEMI"), which is not a Subsidiary Guarantor, have been prepared on
    the basis of the following assumptions: (i) the Offerings and Acquisitions
    were consummated at the beginning of the period, (ii) $500 million principal
    amount of Senior Notes, bearing an annual interest rate of 9 5/8% and
    4,600,000 shares of Preferred Stock, with an annual dividend rate of 7%,
    were outstanding during the period, (iii) interest as reported for the
    period was reduced by the amount of interest recorded for indebtedness which
    was repaid with proceeds of the Offerings, (iv) the outstanding balance of
    the Company's commercial bank indebtedness was fully repaid at the beginning
    of the period, (v) there was no outstanding balance on the Replacement
    Credit Facility and (vi) there were no 10 1/2% Notes outstanding during the
    period.
 
(6) Gives effect to the consummation of the Acquisitions and the Offerings and
    the application of the net proceeds of $711 million therefrom excluding
    potential writedowns associated with acquired assets. See "-- The
    Company -- Recapitalization."
 
                                       13
<PAGE>   21
 
                                    RISK FACTORS
 
     In addition to the other information set forth elsewhere or incorporated by
reference in this Prospectus, the following factors relating to the Company and
this offering should be considered when evaluating participation in the Exchange
Offer or an investment in the Senior Notes.
 
CONCENTRATION OF UNEVALUATED LEASEHOLD IN LOUISIANA
 
     The Company's future performance will be affected by the development
results of its existing proved undeveloped reserves and its inventory of
unproved drilling locations, particularly in the Louisiana Trend and the
Tuscaloosa Trend. As of March 31, 1998, the Company had an investment in total
unevaluated and unproved leasehold of approximately $144 million, of which
approximately $59 million was located in the Louisiana Trend and the Tuscaloosa
Trend. Approximately 40%, or $96 million, of the Company's 1998 drilling budget
is associated with drilling, construction of production facilities and seismic
activity in the Louisiana Trend and the Tuscaloosa Trend. Failure of these
drilling activities to achieve anticipated quantities of economically attractive
reserves and production would have a material adverse effect on the Company's
liquidity, operations and financial results and could result in future full-cost
ceiling writedowns.
 
IMPAIRMENT OF ASSET VALUE
 
     The Company reported full-cost ceiling writedowns of $236 million, $110
million and $250 million in the fiscal year ended June 30, 1997, the six months
ended December 31, 1997 and the three months ended March 31, 1998, respectively.
Beginning in the quarter ended September 30, 1997, the Company reduced its
drilling budget for the Louisiana Trend overall and concentrated remaining
Austin Chalk drilling activity in the Masters Creek area of Louisiana. In
addition, the Company initiated a strategy to replace and expand its oil and gas
reserves through acquisitions as a complement to its historical strategy of
adding reserves through drilling. The Company has also reduced its emphasis on
acquiring unproved leasehold acreage to be developed through exploratory
drilling. While these actions are intended to mitigate the higher risks
associated with a growth strategy based on significant exploratory drilling,
there can be no assurance that this change in strategy will result in enhanced
future economic results or will prevent additional leasehold impairment and/or
full-cost ceiling writedowns.
 
     Since December 31, 1997, oil prices have declined, reaching ten-year lows
during June 1998. In addition, the Company has completed Acquisitions based on
expectations of higher oil and gas prices than those currently being received.
Based on estimated NYMEX prices of $14.50 per Bbl and $2.00 per Mcf as of June
30, 1998, reserve estimates as of March 31, 1998 (pro forma for the Acquisitions
completed during the quarter ending June 30, 1998), and the estimated evaluation
of leasehold during the quarter ending June 30, 1998, the Company estimates it
will incur an additional full-cost ceiling writedown of between $225 million and
$250 million as of June 30, 1998. Additional impairments of certain of the
Company's other fixed assets located in the Louisiana Trend may be required at
June 30, 1998. Such impairments would result from lower than expected reserves
and production throughput in gathering, transmission and processing facilities.
Such additional impairment could range from $10 million to $20 million. If these
impairments occur, the Company will incur a substantial loss which would further
reduce shareholders' equity.
 
     The Company uses the full-cost method of accounting for its investment in
oil and gas properties. Under the full-cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
into a "full-cost pool" as incurred, and properties in the pool are depleted and
charged to operations using the unit-of-production method based on the ratio of
current production to total proved oil and gas reserves. To the extent that such
capitalized costs (net of accumulated depreciation, depletion and amortization)
less deferred taxes exceed the Present Value of estimated future net cash flows
from proved oil and gas reserves and the lower of cost or fair value of unproved
properties after income tax effects, such excess costs are charged to
operations. If a writedown is required, it would result in a charge to earnings
but would not have an impact on cash flows from operating activities. Once
incurred, a writedown of oil and gas properties is not reversible at a later
date even if oil and gas prices increase.
 
                                       14
<PAGE>   22
 
     Following the Company's announcement in late June 1997 of disappointing
drilling results in the Louisiana Trend and a full-cost ceiling writedown, a
number of purported class action lawsuits alleging violations of Sections 10(b)
and 20(a) of the Exchange Act and Rule 10b-5 thereunder were filed against the
Company and certain of its officers and directors. See "-- Patent and Securities
Litigation."
 
ACQUISITION AND INTEGRATION OF OPERATIONS RISKS
 
     The Company's growth strategy includes the acquisition of oil and gas
properties. There can be no assurance, however, that the Company will be able to
identify attractive acquisition opportunities, obtain financing for acquisitions
on satisfactory terms or successfully acquire identified targets. Future
acquisitions may be financed through the incurrence of additional indebtedness
to the extent permitted under the Company's debt instruments, including the
Indenture, or through the issuance of capital stock. Furthermore, there can be
no assurance that competition for acquisition opportunities in the oil and gas
industry will not escalate, thereby increasing the cost to the Company of making
further acquisitions or causing the Company to refrain from making additional
acquisitions.
 
     The Company is subject to risks that properties acquired by it (including
those acquired in the Acquisitions) will not perform as expected, that estimates
of value will not prove accurate and that the returns from such properties will
not support the indebtedness incurred or the other consideration used to
acquire, or the capital expenditures needed to develop, such properties. The
addition of the properties acquired in the Acquisitions may result in additional
full-cost ceiling writedowns to the extent the Company's capitalized costs of
such properties exceed the estimated Present Value of the related proved
reserves. In addition, expansion of the Company's operations may place a
significant strain on the Company's management, financial and other resources.
The Company's ability to manage future growth will depend upon its ability to
monitor operations, maintain effective costs and other controls and expand the
Company's internal management, technical and accounting systems, all of which
will result in higher operating expenses. Any failure to expand these areas and
to implement and improve such systems, procedures and controls in an efficient
manner at a pace consistent with the growth of the Company's business could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, the integration of acquired properties with
existing operations will entail considerable expenses in advance of anticipated
revenues and may cause substantial fluctuations in the Company's operating
results. There can be no assurance that the Company will be able to successfully
integrate the properties acquired in the Acquisitions or any other businesses it
may acquire.
 
     The Company has also acquired proved reserves in Canada. In addition to the
risks described above, the acquisition of assets in Canada has the additional
risks associated with currency exchange and valuation, foreign regulation and
taxation, and severe climate and operating conditions.
 
NEED TO REPLACE RESERVES; SUBSTANTIAL CAPITAL REQUIREMENTS
 
     As is customary in the oil and gas exploration and production industry, the
Company's future success depends upon its ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. Unless the
Company successfully replaces the reserves that it produces through successful
development, exploration or acquisition, the Company's proved reserves will
decline. Approximately 43% of the Company's estimated proved reserves at
December 31, 1997 (18% on a pro forma basis) were located in the Austin Chalk
formation in Texas and Louisiana, where wells are characterized by rapid decline
rates. Additionally, approximately 47% (35% on a pro forma basis) of the
Company's total estimated proved reserves at December 31, 1997 were undeveloped.
Recovery of such reserves will require significant capital expenditures and
successful drilling operations. There can be no assurance that the Company can
successfully find and produce reserves economically in the future.
 
     The Company has made and intends to make substantial capital expenditures
in connection with the development, exploration and production of its oil and
gas properties. Historically, the Company has funded its capital expenditures
through a combination of internally generated funds, equity and long-term and
short-term debt financing arrangements. Future cash flows are subject to a
number of variables, such as the level of
 
                                       15
<PAGE>   23
 
production from existing wells, prices of oil and gas and the Company's success
in locating and producing new reserves. If revenue were to decrease as a result
of lower oil and gas prices, decreased production or otherwise, and the
Company's access to capital were limited, the Company would have a reduced
ability to replace its reserves or to maintain production at current levels,
potentially resulting in a decrease in production and revenue over time. If the
Company's cash flow from operations is not sufficient to satisfy its capital
expenditure budget, there can be no assurance that additional debt or equity
financing will be available to meet these requirements.
 
RANKING OF THE SENIOR NOTES; EFFECTIVE SUBORDINATION
 
     Obligations of the Company and its Restricted Subsidiaries under the
Replacement Credit Facility will be secured by pledges of specific assets,
subject to limitations on the incurrence of liens set forth in the Indenture and
the Existing Notes Indentures. See "Description of Other Indebtedness and
Preferred Stock."
 
     Holders of secured indebtedness of the Company and its subsidiaries will
have claims with respect to the assets constituting collateral for such
indebtedness that are prior to the claims of holders of the Senior Notes. In the
event of a default on the Senior Notes, or a bankruptcy, liquidation or
reorganization of the Company and its Restricted Subsidiaries, such assets will
be available to satisfy secured obligations before any payment could be made on
the Senior Notes. Accordingly, the Senior Notes will be effectively subordinated
to claims of secured creditors of the Company and its Restricted Subsidiaries to
the extent of pledged collateral. At March 31, 1998, after giving pro forma
effect to the Offerings, the Company and the Restricted Subsidiaries would have
had no secured indebtedness (although the Replacement Credit Facility will be
secured by pledges of specific assets) and no indebtedness that would have
ranked junior to the Senior Notes in right of payment. In addition, the maturity
dates of certain of the Existing Notes precede the maturity date of the Senior
Notes.
 
RESTRICTIONS IMPOSED BY LENDERS
 
     The instruments governing certain indebtedness of the Company and its
Restricted Subsidiaries may impose significant operating and financial
restrictions on the Company. The terms of the Indentures for the 9 1/8% Notes
and the Senior Notes limit or prohibit, among other things, the ability of the
Company to incur additional indebtedness, pay dividends, repay indebtedness
prior to its stated maturity, sell assets or engage in mergers or acquisitions.
See "Description of Other Indebtedness and Preferred Stock" and "Description of
Senior Notes -- Certain Covenants." These restrictions could also limit the
ability of the Company to effect future financings, make needed capital
expenditures, withstand a future downturn in the Company's business or the
economy in general, or otherwise conduct necessary corporate activities. A
failure by the Company to comply with these restrictions could lead to a default
under the terms of such indebtedness and the Senior Notes. In the event of
default, the holders of such indebtedness could elect to declare all of the
funds borrowed pursuant thereto to be due and payable together with accrued and
unpaid interest. In such event, there can be no assurance that the Company would
be able to make such payments or borrow sufficient funds from alternative
sources to make any such payment. Even if additional financing could be
obtained, there can be no assurance that it would be on terms that are favorable
or acceptable to the Company. In addition, the Company's indebtedness under the
Replacement Credit Facility will be secured by liens on a portion of the assets
of the Company and its subsidiaries. The pledge of such collateral could impair
the Company's ability to obtain favorable financing in the future.
 
REPURCHASE OF SENIOR NOTES UPON A CHANGE OF CONTROL AND OTHER EVENTS
 
     The Company must offer to purchase the Senior Notes and the 9 1/8% Notes
upon the occurrence of certain events. In the event of a Change of Control, the
Company must offer to purchase all Senior Notes and 9 1/8% Notes then
outstanding at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of purchase (a "Change of Control
Offer"). In the event of certain asset dispositions, the Company will be
required under certain circumstances to use the Excess Proceeds (as defined) to
offer to purchase the Senior Notes and the 9 1/8% Notes at 100% of the principal
amount thereof, plus accrued and unpaid interest to the date of purchase (a "Net
Proceeds Offer"). See "Description of
                                       16
<PAGE>   24
 
Senior Notes -- Change of Control" and "-- Certain Covenants" and "Description
of Other Indebtedness and Preferred Stock."
 
     Prior to commencing such an offer to purchase, the Company may be required
to (i) repay in full all indebtedness of the Company that would prohibit the
repurchase of the Senior Notes and the 9 1/8% Notes, or (ii) obtain any
requisite consent to permit the repurchase. If the Company is unable to repay
all of such indebtedness or is unable to obtain the necessary consents, then the
Company will be unable to offer to purchase the Senior Notes and the 9 1/8%
Notes, and such failure will constitute an Event of Default under the Indenture
and the 9 1/8% Notes Indenture. It is unlikely that the Company would have
sufficient funds available at the time of any Change of Control or Net Proceeds
Offer to satisfy all such debt obligations (including repurchases of Senior
Notes, the 9 1/8% Notes and payment of its bank credit facilities)
simultaneously without refinancing the indebtedness.
 
     The events that constitute a Change of Control or require a Net Proceeds
Offer under the Indenture and the 9 1/8% Notes Indenture may also be events of
default under any future bank credit facility or other senior indebtedness of
the Company and the Restricted Subsidiaries. Such events may permit the lenders
under such debt instruments to accelerate the debt and, if the debt is not paid,
to enforce security interests on assets of the Company and the Restricted
Subsidiaries, thereby limiting the Company's ability to raise cash to repurchase
the Senior Notes and the 9 1/8% Notes, and reducing the practical benefit of the
offer to purchase provisions to the holders of the Senior Notes. See
"Description of Other Indebtedness and Preferred Stock."
 
SUBSTANTIAL INDEBTEDNESS
 
     As of March 31, 1998, the Company's shareholders' equity was $221 million
($461 million on a pro forma basis) and its long-term indebtedness was $655
million ($920 million on a pro forma basis). Long-term indebtedness represented
approximately 75% (67% on a pro forma basis) of total book capitalization. If
the Company incurs additional full-cost ceiling writedowns (such as the possible
writedown of up to approximately $250 million which could be recorded as of June
30, 1998 using estimates of proved reserves as of March 31, 1998, commodity
prices as of June 30, 1998 and the estimated evaluation of leasehold during the
quarter ending June 30, 1988), shareholders' equity will be further reduced.
Standard & Poor's and Moody's Investors Service ("Moody's") have both recently
downgraded the Company's credit ratings. Moody's has announced that its outlook
for the Company's credit ratings is negative, pending Moody's ongoing evaluation
of the Company's new business strategy.
 
     The Company anticipates funding potential future acquisitions with a
combination of commercial bank debt, long-term debt and/or preferred or common
equity. If, as a result of general market conditions, additional losses, reduced
credit ratings or for any other reason, the Company is unable to issue
additional securities and/or borrow from commercial banks, the Company's
liquidity would be impaired and growth potential reduced. Sustained negative
credit conditions could result in reduced earnings or losses.
 
PATENT AND SECURITIES LITIGATION
 
     Union Pacific Resources Company ("UPRC") has sued the Company alleging
infringement of a patent for a drillbit steering method, including direct
infringement and, subsequent to August 13, 1995, inducement of infringement.
UPRC's claims against the Company are based on services provided to the Company
by a third party vendor controlled by former UPRC employees. UPRC is seeking
injunctive relief, damages of an unspecified amount, including actual and
enhanced damages, interest, costs and attorneys' fees. The Company believes that
it has meritorious defenses to UPRC's allegations and that the UPRC patent is
invalid. The Company has filed a motion to construe UPRC's patent claims, and
other dispositive motions are pending. No estimate of a probable loss or range
of estimate of a probable loss, if any, can be made at this time; however, in
reports filed in the proceeding, experts for UPRC claim that damages could be as
much as $18 million while Company experts state that the amount should not
exceed $25,000, in each case based on a reasonable royalty.
 
     The Company and certain of its officers and directors are defendants in a
consolidated class action suit alleging violations of the Exchange Act. The
plaintiffs assert that the defendants made material misrepresen-
 
                                       17
<PAGE>   25
 
tations and failed to disclose material facts about the success of the Company's
exploration efforts in the Louisiana Trend. As a result, the complaint alleges,
the price of the Company's Common Stock was artificially inflated from January
25, 1996 until June 27, 1997, when the Company issued a press release announcing
disappointing drilling results in the Louisiana Trend and a full-cost ceiling
writedown to be reflected in its June 30, 1997 financial statements. The
plaintiffs further allege that certain of the named individual defendants sold
Company Common Stock during the class period when they knew or should have known
adverse nonpublic information. The plaintiffs seek a determination that the suit
is a proper class action and damages in an unspecified amount, together with
interest and costs of litigation, including attorneys' fees. No estimate of loss
or range of estimate of loss, if any, can be made at this time.
 
     A purported class action alleging violations of the Securities Act has been
filed against the Company and others on behalf of investors who purchased common
stock of Bayard Drilling Technologies, Inc. ("Bayard") in its initial public
offering in November 1997. Total proceeds of the offering were $254 million, of
which the Company received net proceeds of $90 million. Plaintiffs allege that
the Company, a major customer of Bayard's drilling services and the owner of
30.1% of Bayard's common stock outstanding prior to the offering, was a
controlling person of Bayard. Plaintiffs assert that the Bayard prospectus
contained material omissions and misstatements relating to (i) the Company's
financial "hardships" and their significance on Bayard's business, (ii)
increased costs associated with Bayard's growth strategy and (iii) undisclosed
pending related-party transactions between Bayard and third parties other than
the Company. The alleged defective disclosures are claimed to have resulted in a
decline in Bayard's share price following the public offering. The plaintiffs
seek a determination that the suit is a proper class action and damages in an
unspecified amount or rescission, together with interest and costs of
litigation, including attorneys' fees. No estimate of loss or range of estimate
of loss, if any, can be made at this time.
 
     While no prediction can be made as to the outcome of these matters or the
amount of damages that might be awarded, if any, an adverse result in any of
them could be material to the Company.
 
FLUCTUATIONS IN OIL AND GAS PRICES
 
     The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil, natural gas and natural
gas liquids, which are dependent upon numerous factors such as weather,
economic, political and regulatory developments and competition from other
sources of energy. The volatile nature of the energy markets makes it
particularly difficult to estimate future prices of oil, natural gas and natural
gas liquids. Prices of oil, natural gas and natural gas liquids are subject to
wide fluctuations in response to relatively minor changes in circumstances, and
there can be no assurance that future prolonged decreases in such prices will
not occur. All of these factors are beyond the control of the Company. Any
further significant decline in oil and gas prices could have a material adverse
effect on the Company's operations, financial condition and level of
expenditures for the development of its oil and gas reserves, and may result in
additional writedowns of the Company's investments due to ceiling test
limitations.
 
     In accordance with customary industry practice, the Company relies on
independent third party service providers to provide most of the services
necessary to drill new wells, including drilling rigs and related equipment and
services, horizontal drilling equipment and services, trucking services,
tubulars, fracing and completion services and production equipment. The industry
has experienced significant price increases for these services during the last
year and this trend is expected to continue into the future. These cost
increases could in the future significantly increase the Company's development
costs and decrease the return possible from drilling and development activities,
and possibly render the development of certain proved undeveloped reserves
uneconomical.
 
HEDGING RISKS
 
     From time to time, the Company enters into hedging arrangements relating to
a portion of its oil and gas production. These hedges have in the past involved
fixed arrangements and other arrangements at a variety of fixed prices and with
a variety of other provisions including price floors and ceilings. The Company
may in the future enter into oil and gas futures contracts, options, collars and
swaps. The Company's hedging activities,
 
                                       18
<PAGE>   26
 
while intended to reduce the Company's sensitivity to changes in market prices
of oil and gas, are subject to a number of risks including instances in which
(i) production is less than expected, (ii) there is a widening of price
differentials between delivery points required by fixed price delivery contracts
to the extent they differ from those on the Company's production or (iii) the
Company's counterparties to its futures contract will be unable to meet the
financial terms of the transaction. While the use of hedging arrangements limits
the risk of declines in oil and gas prices, it may limit the benefit to the
Company of increases in the price of oil and gas. Beginning in May 1998, the
Company also utilizes interest rate hedging arrangements to limit its exposure
to fixed interest rates in a low and/or declining interest rate environment when
floating rates may be lower than fixed rates. The risks of such hedging are that
interest rates increase above those that would have been incurred under existing
fixed rate obligations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Management Activities."
 
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
 
     There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves, including many factors beyond the control of the
Company. These estimates rely upon various assumptions, including assumptions
required by the Commission as to constant oil and gas prices, drilling and
operating expenses, capital expenditures, taxes and availability of funds. The
process of estimating oil and gas reserves is complex, requiring significant
decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. In addition,
reserve engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in any exact way, and the
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretations and judgment. As a result,
estimates by different engineers often vary, and are subject to great
uncertainty. This is particularly true as to proved undeveloped reserves, which
are inherently less certain than proved developed reserves and which comprise a
significant portion of the Company's proved reserves. In addition, the estimated
future net revenue from proved reserves and the Present Value thereof are based
on certain assumptions, including prices, future production levels and costs,
that may not prove correct. Actual future production, revenue, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and gas reserves may vary substantially from those estimated by the Company. Any
significant variance in these assumptions could materially affect the estimated
quantity and value of reserves set forth in this Prospectus and may justify
revisions of earlier estimates, and such revisions may be material. In addition,
the Company's 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, many of which are beyond the Company's
control. In fiscal 1997, the six months ended December 31, 1997 and the three
months ended March 31, 1998, revisions to the Company's proved reserves, the
estimated future net revenues therefrom and the Present Value thereof
contributed to $236 million, $110 million and $250 million impairments,
respectively, of the Company's oil and gas properties. Based on estimated NYMEX
prices of $14.50 per Bbl and $2.00 per Mcf as of June 30, 1998, the Company's
estimated proved reserves as of March 31, 1998, pro forma for Acquisitions
completed during the quarter ending June 30, 1998, and the estimated evaluation
of leasehold during the quarter ending June 30, 1998, the Company estimates it
will record a full-cost ceiling writedown of between $225 million and $250
million as of June 30, 1998. Additional impairments of certain of the Company's
other fixed assets located in the Louisiana Trend may be required at June 30,
1998. Such impairments would result from lower than expected reserves and
production throughput in gathering, transmission and processing facilities. Such
additional impairment could range from $10 million to $20 million.
 
DRILLING AND OPERATING RISKS
 
     Oil and gas drilling activities are subject to numerous risks, many of
which are beyond the Company's control. The Company's operations may be
curtailed, delayed or canceled as a result of title problems, weather
conditions, compliance with governmental requirements, mechanical difficulties
and shortages or delays in the delivery of equipment. In addition, the Company's
properties may be susceptible to hydrocarbon drainage from production by other
operators on adjacent properties. Industry operating risks include the risk of
fire, explosions, blow-outs, pipe failure, abnormally pressured formations and
environmental hazards such as oil
                                       19
<PAGE>   27
 
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.
 
     The Company has been among the most active drillers of horizontal wells and
may drill a significant number of deep horizontal wells in the future. The
Company's horizontal drilling activities involve greater risk of mechanical
problems than conventional vertical drilling 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 that any insurance will be adequate to cover losses or liabilities.
The Company cannot predict the continued availability of insurance, or its
availability at premium levels that justify its purchase.
 
GOVERNMENTAL REGULATION
 
     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. From time to time, regulatory agencies have
imposed price controls and limitations on production 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. To date, expenditures related to complying with these laws and for
remediation of existing environmental contamination have not been significant in
relation to the results of operations of the Company. There can be no assurance
that the trend of more expansive and stricter environmental legislation and
regulations will not continue.
 
ENVIRONMENTAL RISKS
 
     The Company is subject to a variety of federal, state and local
governmental laws and regulations related to the storage, use, discharge and
disposal of toxic, volatile or otherwise hazardous materials. These regulations
subject the Company to increased operating costs and potential liability
associated with the use and disposal of hazardous materials. Although these laws
and regulations have not had a material adverse effect on the Company's
financial condition or results of operations, there can be no assurance that the
Company will not be required to make material expenditures in the future.
Moreover, the Company anticipates that such laws and regulations will become
increasingly stringent in the future, which could lead to material costs for
environmental compliance and remediation by the Company.
 
     Any failure by the Company to obtain required permits for, control the use
of, or adequately restrict the discharge of hazardous substances under present
or future regulations could subject the Company to substantial liability or
could cause its operations to be suspended. Such liability or suspension of
operations could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
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 for the equipment and labor
required to develop and operate such properties. Many of these competitors have
financial and other resources substantially greater than those of the Company.
 
RELIANCE ON KEY PERSONNEL; CONFLICTS OF INTEREST
 
     The Company is dependent upon its Chief Executive Officer, Aubrey K.
McClendon, and its Chief Operating Officer, Tom L. Ward. The unexpected loss of
the services of either of these executive officers could have a detrimental
effect on the Company. The Company maintains $20 million key man life insurance
policies on the life of each of Messrs. McClendon and Ward.
 
                                       20
<PAGE>   28
 
     Messrs. McClendon and Ward, together with another executive officer of the
Company, have rights to participate in wells drilled by the Company. Messrs.
McClendon and Ward have elected to participate during all periods since the
Company's initial public offering in 1993 with individual interests of between
1.0% and 1.5%. Such participation may result in substantial amounts owing to the
Company, which indebtedness is without interest unless not paid in a timely
manner. Additionally, on June 17, 1998, the Company agreed to make a secured
loan to each of Messrs. McClendon and Ward for $5 million. Each loan will be
payable on December 31, 2001 with interest accruing at an annual rate of 9%
(which is the Company's approximate cost of funds), payable quarterly. Such
transactions may create interests which conflict with those of the Company.
 
CONTROL BY CERTAIN STOCKHOLDERS
 
     At June 1, 1998, Aubrey K. McClendon, Tom L. Ward, the Aubrey K. McClendon
Children's Trust and the Tom L. Ward Children's Trust beneficially owned an
aggregate of 24,710,827 shares (including outstanding vested options)
representing 24% of the Company's outstanding Common Stock, and members of the
Company's Board of Directors and executive officers, including Messrs. McClendon
and Ward and their respective children's trusts, beneficially owned an aggregate
of 28,222,203 shares (including outstanding vested options), which represented
27% of the Company's outstanding Common Stock. As a result, Messrs. McClendon
and Ward, together with executive officers and directors of the Company, are in
a position to significantly influence matters requiring the vote or consent of
the Company's stockholders.
 
ABSENCE OF A PUBLIC MARKET FOR THE SENIOR NOTES
 
     The Senior Notes are a new issue for which there is currently limited
trading. Prior to the exchange of Old Notes for New Notes pursuant to the
Exchange Offer, the Old Notes are subject to significant restrictions on resale.
While the Company intends to apply for listing of the Senior Notes on the New
York Stock Exchange, there can be no assurance as to the liquidity of any
markets that may develop for the Senior Notes, the ability of the holders of
Senior Notes to sell their Senior Notes or the price at which holders would be
able to sell their Senior Notes. Future trading prices of the Senior Notes will
depend on many factors, including, among others, prevailing interest rates, the
Company's operating results and the market for similar securities. The Initial
Purchasers have informed the Company that they currently intend to make a market
for the Senior Notes. However, they are not so obligated, and any such market
making may be discontinued at any time without notice. In addition, such market
making activity will be subject to the limits imposed by the Securities Act and
the Exchange Act and may be limited during the Exchange Offer. See "Plan of
Distribution." Accordingly, no assurance can be given that an active public or
other market will develop for the Senior Notes or as to the liquidity of or the
trading market for the Senior Notes.
 
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF OLD NOTES
 
     In the event the Exchange Offer is consummated, the Company and the
Subsidiary Guarantors will not be required to register any Old Notes not
tendered and accepted in the Exchange Offer (other than, in certain
circumstances, Senior Notes entitled to be covered by a shelf registration
statement). In such event, holders of Old Notes seeking liquidity in their
investment would have to rely on exemptions to the registration requirements
under the securities laws, including the Securities Act. Following the Exchange
Offer, assuming the Company and the Subsidiary Guarantors have no shelf
registration obligation with respect to any Senior Notes, none of the holders of
Senior Notes will be entitled to receive liquidated damages. See "The Exchange
Offer -- Purpose and Effect of The Exchange Offer."
 
                                       21
<PAGE>   29
 
                                  THE COMPANY
 
     Chesapeake Energy Corporation is an independent oil and gas company engaged
in the exploration, production, development and acquisition of oil and natural
gas in major onshore producing areas of the United States and Canada. The
Company's executive offices are located at 6100 North Western Avenue, Oklahoma
City, Oklahoma 73118 and its telephone number is (405) 848-8000.
 
     The Company has recently acquired a substantial amount of proved oil and
gas reserves through mergers and direct acquisitions of oil and gas properties.
From December 1997 through April 1998, the Company acquired approximately 681
Bcfe of estimated proved reserves, together with unevaluated leasehold, gas
gathering systems, marketing assets, securities, interests in joint ventures and
working capital, at an aggregate cost of $817 million. Of these transactions,
two were closed in December 1997, three were closed in the first quarter of 1998
and four were closed in the second quarter of 1998. These transactions are
discussed in more detail later in this section.
 
BUSINESS STRATEGY
 
     Through mid-1997, Chesapeake's business strategy was growth through the
drillbit. Using this strategy, the Company rapidly expanded its reserves and
production through an aggressive drilling program. In particular, the Company
achieved considerable success in the Giddings Field in the Texas portion of the
Austin Chalk Trend. Beginning in late 1995, the Company undertook a major
initiative to extend the productive range of the Austin Chalk formation into the
Louisiana Trend. In the second half of 1997, management modified the Company's
strategy in response to unfavorable drilling results in the Louisiana Trend and
higher oilfield service costs. The Company's revised strategy is designed to
lower the Company's risk profile by building a longer-lived reserve base and by
balancing capital expenditures between acquisitions and drilling. The key
elements of Chesapeake's modified strategy are:
 
     Concentrate in Three Core Areas. Since mid-1997, the Company has
significantly increased its focus in the Mid-Continent and has acquired
properties in western Canada to complement its Austin Chalk Trend activities.
The Company believes the Mid-Continent offers attractive long-lived reserves and
numerous consolidation and exploitation opportunities. The Company also believes
that western Canada offers attractive drilling opportunities and that Canadian
natural gas prices will increase as additional pipelines are completed to meet
growing natural gas demand in the United States. As of December 31, 1997, pro
forma for the Acquisitions, the Mid-Continent represented approximately 70% of
the Company's total proved reserves. The Company also continues to actively
participate in the development of the Austin Chalk Trend, with an
industry-leading leasehold position in Texas and Louisiana.
 
     Acquire Long-Lived Natural Gas Reserves. The Company seeks to acquire
long-lived natural gas properties on an opportunistic basis that (i) contain
multiple producing horizons with the potential for increased reserves and
production, (ii) are located in the Mid-Continent and western Canada, (iii)
offer the potential for the application of sophisticated drilling and seismic
technologies and (iv) present opportunities to improve operating margins.
Management believes that long-lived natural gas reserves will increase in value
as a result of favorable North American natural gas supply/demand fundamentals.
 
     Grow Reserves and Production Through a Balanced Drilling Program. The
Company seeks to maintain a balanced portfolio of drilling opportunities that
offer the potential to grow reserves and production with attractive rates of
return. The Company continues to build a large inventory of lower risk drilling
projects to complement its high impact, higher risk exploration opportunities.
With the properties acquired through the Acquisitions, management believes it
has an identified portfolio of over 800 developmental drilling opportunities.
 
     Refocus and Reduce Louisiana Trend Drilling Program. In fiscal 1997 and the
Transition Period, the Company's drilling program was spread across 200 miles of
the Louisiana Trend that, to date, has produced inconsistent results. To improve
results, the Company has reduced the size of the Louisiana Trend drilling
program and focused its drilling in the Masters Creek area, which has produced
better results than other areas
 
                                       22
<PAGE>   30
 
of the Louisiana Trend. In general, the Company will limit its future drilling
in the area to wells which directly offset existing producing wells with
favorable production histories.
 
     Identify and Complete Innovative Transactions. The Company seeks to
identify and complete innovative transactions where it can leverage its oil and
gas expertise into profitable investments, including direct investments in and
joint ventures with established companies. Recent examples of such transactions
include its investments in Gothic, Ranger and Pan East and its former investment
in Bayard. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
COMPANY STRENGTHS
 
     Management believes its future growth potential is attributable to five
distinguishing characteristics of the Company.
 
     High Quality Asset Base. The Company's properties (including the
Acquisitions) are increasingly characterized by long reserve lives, established
production profiles, an emphasis on natural gas and contain further identified
development opportunities. Based upon anticipated 1998 production, the Company's
proved reserves-to-production index is 8.5 years. Although diversified among
three core areas, the Company's properties are concentrated in approximately 25
fields, substantially less than the industry average for similarly sized
companies. This concentration allows for substantial economies of scale in
drilling and production operations and facilitates the application of more
effective reservoir management practices. The Company intends to continue
concentrating its acquisition and drilling opportunities in its three core
areas. The Company operates approximately 80% of the wells on its properties,
providing a high degree of operating flexibility and cost control.
 
     Active Acquisition Program. The Company has implemented a disciplined
acquisition program focused primarily in the Mid-Continent region of the United
States. This region is characterized by long-lived natural gas reserves, low
lifting costs, multiple geological targets that provide substantial drilling
potential, favorable basis differentials to benchmark commodity prices, a
well-developed oil and gas transportation infrastructure and considerable
potential for further consolidation of assets. The Company is well-positioned to
continue this consolidation as a result of its large existing asset base, its
corporate presence in Oklahoma City and management's knowledge and expertise in
the Mid-Continent. From December 1997 through April 1998, the Company acquired
585 Bcfe of estimated proved reserves in the Mid-Continent and 96 Bcfe in
western Canada at an aggregate acquisition cost of $694 million for such
estimated proved reserves, or $1.02 per Mcfe of estimated proved reserves. The
weighted average lease operating expense associated with these estimated proved
reserves is approximately $0.52 per estimated proved Mcfe, providing the Company
with attractive operating margins in the current commodity price environment.
 
     Large Inventory of Drilling Projects. As a result of the Company's past
acreage acquisition programs and through the Acquisitions, the Company has
developed one of the largest onshore leasehold positions in the U.S. From this
inventory of approximately 3.0 million net acres of undeveloped leasehold, the
Company's technical teams have identified over 800 potential drillsites, pro
forma for the Acquisitions.
 
     Technological Leadership. The Company has demonstrated significant
expertise in the rapidly evolving technologies of 3-D seismic evaluation,
horizontal drilling and deep fracture stimulation. During the past five years,
the Company has been one of the most active drillers in the U.S., especially of
deep vertical and horizontal wells in challenging reservoir conditions. The
Company believes it can significantly enhance the value of the Acquisitions
through 3-D seismic evaluation, exploration of deeper formations and more
intensive development and redevelopment of existing formations.
 
     Entrepreneurial Management. The Company's management team formed the
Company in 1989 and owns more than 28 million shares, or 27%, of the Company's
outstanding Common Stock. The Company's growth during the past nine years has
been characterized by a series of entrepreneurial decisions and strategies that
management believes highlight its ability to react quickly to industry
conditions that are subject to frequent and sometimes dramatic change. The
Company's 19-member senior management team has an
 
                                       23
<PAGE>   31
 
aggregate of over 300 years of experience in the industry, and the Company
employs over 125 engineering and geotechnical professionals among its more than
500 employees.
 
ACQUISITIONS
 
     The following table provides information about the Acquisitions:
 
<TABLE>
<CAPTION>
                                                                                PROVED          TOTAL
                                                                               RESERVES      ACQUISITION
                        CLOSING                   PRIMARY AREA                 ACQUIRED        COST(2)
        SELLER            DATE                    OF OPERATION                 (BCFE)(1)   ($ IN MILLIONS)
<S>                     <C>        <C>                                         <C>         <C>
Pan East..............   12/5/97   Western Alberta, Eastern British Columbia       --(3)        $ 22
AnSon.................  12/16/97   Deep Anadarko Basin                             26             43(4)
Ranger................   1/30/98   Northeastern British Columbia                   54             48(4)
EnerVest..............    2/6/98   Deep Anadarko Basin                             43             38
Hugoton...............   3/10/98   Southwestern Kansas, Northwestern              246            326(4)
                                   Oklahoma, Texas Panhandle
Gothic................   4/27/98   Arkoma and Anadarko Basins                      52             70(5)
Sunoma................   4/27/98   Northeastern British Columbia                   42             33
DLB...................   4/28/98   Southern and Northwestern Oklahoma             110            132(4)
MC Panhandle..........   4/30/98   Texas Panhandle                                108            105(4)
                                                                                  ---           ----
                                                                                  681           $817
                                                                                  ===           ====
</TABLE>
 
------------------------------
 
(1) As of December 31, 1997, as estimated by the Company.
 
(2) Includes (a) cash paid, (b) debt assumed and (c) the value of Chesapeake
    Common Stock issued in the Acquisitions. In the case of Hugoton, does not
    include the value of Chesapeake Common Stock issuable upon the exercise of
    options assumed.
 
(3) No direct interest in reserves acquired; purchased 19.9% of Pan East's
    common stock and entered into a two year, 50/50 drilling and acquisitions
    participation agreement.
 
(4) Includes purchase consideration attributable to unevaluated leasehold, gas
    gathering systems, marketing and other assets of $7 million for AnSon, $20
    million for Ranger, $20 million for Hugoton, $10 million for DLB and $5
    million for MC Panhandle.
 
(5) Includes the purchase of $39.5 million of 12% preferred stock (with a
    liquidation value of $50 million) and warrants to purchase 15% of Gothic's
    common stock at $.01 per share.
 
     In December 1997, Chesapeake purchased from Pan East Petroleum Corp., a
publicly-traded Canadian exploration and production company, 19.9% of Pan East's
common stock for $22 million. Chesapeake has the right to participate as a
non-operator with up to a 50% interest in all drilling activities and
acquisitions made by Pan East during the two years ending December 31, 1999.
 
     In December 1997, Chesapeake acquired AnSon Production Corporation, a
privately owned oil and gas producer that owned approximately 26 Bcfe of
estimated proved reserves (based upon estimates as of December 31, 1997),
undeveloped mineral interests, and a gas marketing subsidiary. Consideration for
the AnSon acquisition was approximately $43 million, consisting of 3,792,724
shares of Chesapeake Common Stock and the payment of $24.8 million on May 7,
1998, pursuant to a make-whole provision.
 
     In January 1998, Chesapeake entered into a 40/60 alliance with Ranger Oil
Limited to jointly develop a 3.2 million acre area of mutual interest in the
Helmet area of northeastern British Columbia. As part of the transaction,
Chesapeake paid Ranger approximately $48 million to acquire 54 Bcfe of estimated
proved reserves (100% natural gas), approximately 160,000 net acres of primarily
undeveloped leasehold and 40% of Ranger's infrastructure in the area.
 
     In February 1998, Chesapeake purchased the Mid-Continent properties of
privately owned EnerVest Management Company, L.L.C. for $38 million. The
properties are 90% natural gas and include approximately 43 Bcfe of proved
reserves.
                                       24
<PAGE>   32
 
     In March 1998, Chesapeake acquired Hugoton Energy Corporation pursuant to a
merger for approximately $326 million, including the assumption of $120 million
in bank debt and the issuance of 25.8 million shares of Chesapeake Common Stock.
Based upon estimates reported as of December 31, 1997, Hugoton owns
approximately 246 Bcfe of proved reserves in addition to its portfolio of
undeveloped mineral interests, gas gathering systems, 696,000 gross (298,000
net) undeveloped leasehold acres and other corporate assets.
 
     In April 1998, Chesapeake acquired from Gothic Energy Corporation 22 Bcfe
of natural gas reserves in the Arkoma Basin of Oklahoma for $20 million, and
purchased $39.5 million of Gothic 12% preferred stock (with a liquidation value
of $50 million) and ten-year warrants to purchase 15% of Gothic's currently
outstanding common stock for $0.01 per share. As part of this transaction, for
additional consideration of $10.5 million, Chesapeake entered into a five-year
drilling and acquisitions participation agreement with Gothic, and Gothic
transferred to Chesapeake approximately 30 Bcfe of proved undeveloped reserves.
 
     In April 1998, Chesapeake acquired the British Columbia properties of
Sunoma Energy Corporation for $33 million. Virtually all of the 42 Bcfe of
reserves acquired are associated with wells operated by Ranger in the Helmet
area. The properties are 98% natural gas and have an estimated
reserves-to-production index of ten years.
 
     In April 1998, Chesapeake acquired by merger the Mid-Continent operations
of DLB Oil & Gas, Inc. for $17.5 million in cash, 5 million shares of Chesapeake
Common Stock and the assumption of $90 million in outstanding debt and working
capital obligations. In its Mid-Continent operations, DLB had approximately 110
Bcfe of proved reserves, nine gas gathering systems and a gas marketing
subsidiary based in Houston, Texas.
 
     In April 1998, Chesapeake acquired all of the stock of MC Panhandle, Inc.,
a wholly-owned subsidiary of Occidental, for $95 million, net of working capital
adjustments. MC Panhandle's proved reserves, estimated to be approximately 108
Bcf, are located in the West Panhandle Field of the Texas Panhandle, are 100%
natural gas, have an estimated reserves-to-production index of eight years, and
are 85% proved developed producing.
 
     In pursuing its revised strategy, the Company has positioned itself to
pursue opportunities that provide the highest risk-adjusted returns, either
through the drillbit or acquisitions. Further, the Company believes its
substantial drilling expertise and strong exploration staff will allow it to
more fully exploit acquired assets. Finally, the long-lived nature of the assets
acquired allows the Company greater capital investment flexibility in times of
low commodity prices without experiencing a significant decline in production.
 
PRIMARY OPERATING AREAS
 
     The Company intends to focus its acquisition and drilling efforts in three
areas: (i) the Mid-Continent (consisting of Oklahoma, southwestern Kansas and
the Texas Panhandle), (ii) the Austin Chalk Trend in Texas and Louisiana, and
(iii) the western Canadian provinces of Alberta and British Columbia. In
addition, the Company will selectively pursue exploration projects such as the
Tuscaloosa Trend in Louisiana, the Deep Wilcox project in Wharton County, Texas,
and the Lovington project in New Mexico.
 
     The following table sets forth the Company's estimated proved reserves (net
of interests of other working and royalty interest owners and others entitled to
share in production), Present Value and estimated capital expenditures required
to develop the Company's proved undeveloped reserves at December 31, 1997, and
includes the 26 Bcfe of estimated proved reserves attributable to the
acquisition of AnSon, but does not include approximately 655 Bcfe of proved
reserves acquired after December 31, 1997.
 
<TABLE>
<CAPTION>
                                                                 PERCENT                          ESTIMATED
                                                       GAS          OF          PRESENT            COSTS TO
                                  OIL       GAS     EQUIVALENT    PROVED         VALUE          DEVELOP PUD'S
             AREAS               (MBBL)   (MMCF)     (MMCFE)     RESERVES   ($ IN THOUSANDS)   ($ IN THOUSANDS)
<S>                              <C>      <C>       <C>          <C>        <C>                <C>
Mid-Continent..................   5,832   184,313    219,305        49%         $186,732           $ 64,626
Austin Chalk Trend.............   8,694   138,362    190,526        43           233,601             74,351
Other areas....................   3,700    16,443     38,643         8            46,176             13,944
                                 ------   -------    -------       ---          --------           --------
          Total................  18,226   339,118    448,474       100%         $466,509           $152,921
                                 ======   =======    =======       ===          ========           ========
</TABLE>
 
                                       25
<PAGE>   33
 
     Mid-Continent. The Company's Mid-Continent assets represented 49% of the
Company's total proved reserves as of December 31, 1997. Pro forma for the
Acquisitions, the Company's proved reserves as of December 31, 1997 were
approximately 1,138 Bcfe, of which 813 Bcfe, or 71%, are located in the
Mid-Continent. The Company has budgeted approximately $88 million for the
Mid-Continent during 1998, representing approximately 38% of the Company's total
budget for exploration and development activities during the year. The Company
anticipates the Mid-Continent will contribute approximately 63 Bcfe of
production, pro forma for the Acquisitions, during 1998, or 47% of expected
total production.
 
     Austin Chalk Trend. Chesapeake's second largest concentration of proved
reserves and its highest concentration of Present Value as of December 31, 1997
(before giving effect to the Acquisitions) is located in the Austin Chalk Trend,
which consists of the Giddings Field in Texas and the Louisiana Trend.
 
     The Company initiated exploration and development efforts in the Giddings
Field in 1992 and peak activity occurred in 1994 and 1995. From 1992 through
December 31, 1997, the Company drilled 226 wells in this area with a 97% success
rate. The Company has budgeted approximately $12 million to drill eight gross
(3.9 net) wells in Giddings during 1998.
 
     Chesapeake invested approximately $149 million from fiscal 1995 through
December 31, 1997 to acquire over 1.1 million acres of leasehold in the
Louisiana Trend. Beginning in 1995 and continuing through December 31, 1997,
Chesapeake expended an additional $215 million in drilling efforts on 80 gross
(37.9 net) wells to evaluate its leasehold position. However, as a result of the
disappointing results, the Company has reduced its exploration and development
activities in Louisiana. The Company will focus its Louisiana drilling in 1998
primarily in the Masters Creek area and allow others to lead the exploration of
areas outside of Masters Creek. For 1998, the Company has budgeted $64 million
to drill approximately 10.7 net wells and conduct seismic in the Louisiana
Trend.
 
     Western Canada Region. During 1996 and 1997, the Company began to evaluate
the possibility of developing a third core area of operations in western Canada.
The Company has recently entered into three transactions which have established
a substantial presence in western Canada. Management expects to significantly
increase its natural gas assets in western Canada in 1998.
 
OTHER OPERATING AREAS
 
     Tuscaloosa Trend. In 1997, Chesapeake initiated two large 3-D seismic
projects to evaluate approximately 90,000 acres of leasehold in the Tuscaloosa
Trend portion of Louisiana. The Company anticipates initiating its drilling
program in the Tuscaloosa Trend during 1998 and has budgeted $25 million to
drill four gross (3.2 net) wells.
 
     Permian Basin. In 1995, the Company initiated drilling activity in the
Permian Basin in the Lovington area of Lea County, New Mexico. During the last
half of 1997, the Company initiated ten wells in the Lovington area, six of
which were successfully completed, one was unsuccessful and three were drilling.
The Company has budgeted approximately $17 million to drill 15 gross (10.0 net)
wells and conduct seismic in this area during 1998.
 
     Wharton County, Texas. During fiscal 1997, the Company acquired
approximately 25,000 net acres at a cost of approximately $29 million in Wharton
County, Texas. The Company intends to participate with a 55% interest in an
85,000 acre 3-D seismic program with Coastal Oil & Gas Corporation, Seagull
Energy Corporation, Unocal Corporation and other industry partners during 1998
to delineate potential future drillsites in the vicinity of Coastal's Zeidman
Trustee wells.
 
     Williston Basin. During fiscal 1996, Chesapeake began acquiring leasehold
in the Williston Basin of eastern Montana and western North Dakota, and as of
December 31, 1997 owned approximately 1.0 million gross (0.6 million net) acres.
During the last half of 1997, the Company drilled and successfully completed six
wells targeting the Red River formation on the northern portion of its
leasehold. The Company has budgeted $2 million to drill two gross (1.4 net)
wells during 1998 in the Williston Basin.
 
                                       26
<PAGE>   34
 
                               THE EXCHANGE OFFER
 
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
 
     The Old Notes were sold by Chesapeake on April 22, 1998 to Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc., Lehman
Brothers Inc., J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated
(together, the "Initial Purchasers") in reliance on Section 4(2) of the
Securities Act. The Initial Purchasers offered and sold the Old Notes only to
"qualified institutional buyers" (as defined in Rule 144A) in compliance with
Rule 144A.
 
     In connection with the sale of the Old Notes, the Company and the Initial
Purchasers entered into a Registration Rights Agreement dated as of April 22,
1998 (the "Registration Rights Agreement"), which requires the Company and the
Subsidiary Guarantors (i) to cause the Old Notes to be registered under the
Securities Act, or (ii) to file with the Commission a registration statement
under the Securities Act with respect to an issue of new notes of the Company
identical in all material respects to the Old Notes and use their best efforts
to cause such registration statement to become effective under the Securities
Act and, upon the effectiveness of that registration statement, to offer to the
holders of the Old Notes the opportunity to exchange their Old Notes for a like
principal amount of New Notes, which will be issued without a restrictive legend
and which may be reoffered and resold by all eligible holders without
restrictions or limitations under the Securities Act. A copy of the Registration
Rights Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The Exchange Offer is being made pursuant to
the Registration Rights Agreement to satisfy the obligations of the Company and
the Subsidiary Guarantors thereunder with regard to the Senior Notes. If any
holder of Senior Notes notifies the Company within 20 business days following
the sixtieth day after the commencement of the Exchange Offer that (a) such
holder was prohibited by law or Commission policy from participating in the
Exchange Offer or (b) such holder may not resell the New Notes acquired by it in
the Exchange Offer to the public without delivering a prospectus and this
Prospectus is not appropriate or available for such resales by such holder or
(c) such holder is a broker-dealer and holds Old Notes acquired directly from
the Company or any of its affiliates, then the Company and the Subsidiary
Guarantors are also required by the Registration Rights Agreement to cause such
Senior Notes to be registered under the Securities Act. The term "holder" with
respect to the Exchange Offer means any person in whose name Old Notes are
registered on the trustee's books or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by The Depository Trust Company ("DTC") who desires
to deliver such Old Notes by book-entry transfer at DTC.
 
     The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, the Company believes the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than certain broker-dealers, as set forth below, and any such holder that
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and that such holder has no
arrangement or understanding with any person to participate in the distribution
of such New Notes. Any holder who tenders in the Exchange Offer with the
intention to participate, or for the purpose of participating, in a distribution
of the New Notes or who is an affiliate of the Company may not rely upon such
interpretations by the staff of the Commission and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Failure to comply with such requirements in such instance may
result in such holder incurring liabilities under the Securities Act for which
the holder is not indemnified by the Company. Each broker-dealer (other than an
affiliate of the Company) that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus meeting
the requirements
 
                                       27
<PAGE>   35
 
of the Securities Act in connection with any resale of such New Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The Company has agreed
that, for a period of 180 days, if required, after the Exchange Date hereof, it
will make the Prospectus available to any broker-dealer for use in connection
with any such resale. Affiliates of the Company who exchange Old Notes for New
Notes, if any, will not be relieved of their registration obligations upon a
subsequent sale of the New Notes. See "Plan of Distribution."
 
     The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
this Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
 
     By tendering in the Exchange Offer, each holder of Old Notes will represent
to the Company that, among other things, (i) the New Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such New Notes, whether or not such person is the holder, (ii)
neither the holder of Old Notes nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Notes, (iii) if the holder is not a broker-dealer, or is a broker-dealer but
will not receive New Notes for its own account in exchange for Old Notes,
neither the holder nor any such other person is engaged in or intends to
participate in the distribution of such New Notes, and (iv) neither the holder
nor any such other person is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act or, if such holder is an "affiliate," that
such holder will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
 
     Each holder, by tendering, also acknowledges and agrees that any holder
using the Exchange Offer to participate in a distribution of the New Notes (a)
could not rely on the position of the Commission enunciated in Morgan Stanley
and Co., Inc. (available June 5, 1991) and Exxon Capital Holdings Corporation
(available May 13, 1988), as interpreted in the Commission's letter to Sherman &
Sterling (available July 2, 1993), and similar no-action letters, and (b) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction and that such a
secondary resale transaction should be covered by an effective registration
statement containing the selling security holder information required by Item
507 or 508, as applicable, of Regulation S-K if the resales are of New Notes
obtained by such holder in exchange for Old Notes acquired by such holder
directly from the company.
 
     Following the consummation of the Exchange Offer and assuming the Company
and the Subsidiary Guarantors have no further shelf registration obligations
with respect to any Senior Notes, none of the Senior Notes will be entitled to
liquidated damages provided for in the Registration Rights Agreement. Following
the consummation of the Exchange Offer, holders of Senior Notes (other than
certain holders with shelf registration rights) will not have any further
registration rights, and the Old Notes will continue to be subject to certain
restrictions on transfer. See "-- Consequences of Failure to Exchange."
Accordingly, the liquidity of the market for the Old Notes could be adversely
affected. See "Risk Factors -- Consequences of the Exchange Offer on
Non-Tendering Holders of Old Notes."
 
TERMS OF THE EXCHANGE OFFER
 
     General. Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and all
Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. Subject to the minimum denomination requirements
of the New Notes, the Company will issue $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount of outstanding Old Notes accepted in
the Exchange Offer. Holders may tender some or all of their Old Notes pursuant
to the Exchange Offer. However, Old Notes may be tendered only in amounts that
are integral multiples of $1,000 principal amount.
 
     The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes except that the New Notes will
be registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The New Notes will evidence the same debt as
the Old Notes, will be entitled to the benefits of the Indenture and will be
treated as a single class thereunder with any Old
                                       28
<PAGE>   36
 
Notes that remain outstanding. The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes being tendered for exchange.
 
     As of                     , 1998, $500,000,000 aggregate principal amount
of Old Notes was outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to the registered Holders of the Old Notes.
 
     Holders of Old Notes do not have any appraisal or dissenters' rights under
the Oklahoma General Corporation Act or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder. Old Notes which are not tendered for exchange in the
Exchange Offer will remain outstanding and interest thereon will continue to
accrue, but holders of such Old Notes (except in limited circumstances) will not
be entitled to any rights or benefits under the Registration Rights Agreement.
 
     The Company will be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purposes of receiving the New Notes from the Company. If any tendered
Old Notes are not accepted for exchange because of an invalid tender, the
occurrence of certain other events set forth herein or otherwise, certificates
for any such unaccepted Old Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
 
     Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "-- Fees and Expenses."
 
     Expiration Date; Extensions; Amendments. The term "Expiration Date" shall
mean 5:00 p.m., New York City time, on                     , 1998, unless the
Company, in its sole discretion, extends the Exchange Offer, in which case the
term "Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended. Although the Company has no current intention to extend the
Exchange Offer, the Company reserves the right to extend the Exchange Offer at
any time and from time to time by giving oral or written notice to the Exchange
Agent and by timely public announcement communicated, unless otherwise required
by applicable law or regulation, by making a release to the Dow Jones News
Service. During any extension of the Exchange Offer, all Old Notes previously
tendered pursuant to the Exchange Offer and not withdrawn will remain subject to
the Exchange Offer. The date of the exchange of the New Notes for Old Notes will
be the third New York Stock Exchange trading day following the Expiration Date.
 
     The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "-- Conditions of
the Exchange Offer" shall not have been satisfied, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders. If the
Exchange Offer is amended in any manner determined by the Company to constitute
a material change, the Company will promptly disclose such amendment by means of
a prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of time, depending upon
the significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such period.
 
     In all cases, issuance of the New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of a properly completed and duly executed Letter of
Transmittal and all other required documents; provided, however, that the
Company reserves the absolute right to waive any conditions of the Exchange
Offer or defects or irregularities in the tender of Old Notes. If any tendered
Old Notes are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer or if Old Notes are submitted for a greater principal
amount than the holder
 
                                       29
<PAGE>   37
 
desires to exchange, such unaccepted or non-exchanged Old Notes or substitute
Old Notes evidencing the unaccepted portion, as appropriate, will be returned
without expense to the tendering holder, unless otherwise provided in the Letter
of Transmittal, as promptly as practicable after the expiration or termination
of the Exchange Offer.
 
     Interest on the New Notes. Holders of Old Notes that are accepted for
exchange will not receive accrued interest thereon at the time of exchange.
However, each New Note will bear interest from the most recent date to which
interest has been paid on the Old Notes or New Notes, or if no interest has been
paid on the Old Notes or New Notes, from April 22, 1998.
 
     Procedures for Tendering Old Notes. The tender to the Company of Old Notes
by a holder thereof pursuant to one of the procedures set forth below will
constitute an agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal. A holder of the Old Notes may tender such Old Notes by (i) properly
completing and signing a Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to a Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with any
corresponding certificate or certificates representing the Old Notes being
tendered (if in certificated form) and any required signature guarantees, to the
Exchange Agent at one of its addresses set forth in the Letter of Transmittal on
or prior to the Expiration Date (or complying with the procedure for book-entry
transfer described below), or (ii) complying with the guaranteed delivery
procedures described below.
 
     If tendered Old Notes are registered in the name of the signer of the
Letter of Transmittal and the New Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in DTC (also referred to as a book-entry facility) whose name
appears on a security listing as the owner of Old Notes), the signature of such
signer need not be guaranteed. In any other case, the tendered Old Notes must be
endorsed or accompanied by written instruments of transfer in form satisfactory
to the Company and duly executed by the registered holder and the signature on
the endorsement or instrument of transfer must be guaranteed by an eligible
guarantor institution which is a member of one of the following recognized
signature guarantee programs (an "Eligible Institution"): (i) The Securities
Transfer Agents Medallion Program (STAMP), (ii) The New York Stock Exchange
Medallion Signature Program (MSF), or (iii) The Stock Exchange Medallion Program
(SEMP). If the New Notes or Old Notes not exchanged are to be delivered to an
address other than that of the registered holder appearing on the note register
for the Old Notes, the signature in the Letter of Transmittal must be guaranteed
by an Eligible Institution.
 
     THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT
TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
 
     The Company understands that the Exchange Agent has confirmed with DTC that
any financial institution that is a participant in DTC's system may utilize
DTC's Automated Tender Offer Program ("ATOP") to tender Old Notes. The Company
further understands that the Exchange Agent will request, within two business
days after the date the Exchange Offer commences, that DTC establish an account
with respect to the Old Notes for the purpose of facilitating the Exchange
Offer, and any participant may make book-entry delivery of Old Notes by causing
DTC to transfer such Old Notes into the Exchange Agent's account in accordance
with DTC's ATOP procedures for transfer. However, the exchange of the Old Notes
so tendered will only be made after timely confirmation (a "Book-Entry
Confirmation") of such book-entry transfer and timely receipt by the Exchange
Agent of an Agent's Message (as defined in the next sentence), and any other
documents required by the Letter of Transmittal. The term "Agent's Message"
means a
 
                                       30
<PAGE>   38
 
message, transmitted by DTC and received by the Exchange Agent and forming part
of Book-Entry Confirmation, which states that DTC has received an express
acknowledgment from a participant tendering Old Notes which are the subject of
such Book-Entry Confirmation and that such participant has received and agrees
to be bound by the terms of the Letter of Transmittal and that the Company may
enforce such agreement against such participant.
 
     A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at DTC), is received by the Exchange
Agent, or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided below) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Notes in exchange for Old
Notes tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram
or facsimile transmission to similar effect (as provided below) by an Eligible
Institution will be made only against submission of a duly signed Letter of
Transmittal (and any other required documents) and deposit of the tendered Old
Notes.
 
     All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Old Notes. None of the Company, the Exchange Agent or any
other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification. Any Old Notes received by the Exchange Agent that are not validly
tendered and as to which the defects or irregularities have not been cured or
waived, or if Old Notes are submitted in principal amount greater than the
principal amount of Old Notes being tendered by such tendering holder, such
unaccepted or non-exchanged Old Notes will be returned by the Exchange Agent to
the tendering holder, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
 
     In addition, the Company reserves the right in its sole discretion (a) to
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date, and (b) to the extent permitted by applicable law, to
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers will differ from the terms
of the Exchange Offer.
 
     Guaranteed Delivery Procedures. If the holder desires to accept the
Exchange Offer and time will not permit a Letter of Transmittal or Old Notes to
reach the Exchange Agent before the Expiration Date or the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if the Exchange Agent has received at its office, on or prior to the
Expiration Date, a letter, telegram or facsimile transmission from an Eligible
Institution setting forth the name and address of the tendering holder, the
name(s) in which the Old Notes are registered, the principal amount being
tendered and (if available) the certificate number(s) of the Old Notes to be
tendered, and stating that the tender is being made thereby and guaranteeing
that, within three New York Stock Exchange trading days after the date of
execution of such letter, telegram or facsimile transmission by the Eligible
Institution, such Old Notes, in proper form for transfer (or a confirmation of
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC),
will be delivered by such Eligible Institution together with a properly
completed and duly executed Letter of Transmittal (and any other required
documents). Unless Old Notes being tendered by the above-described method are
deposited with the Exchange Agent within the time period set forth above
(accompanied or preceded by a properly competed Letter of Transmittal and any
other required documents), the Company may, at its option, reject the tender.
Copies of a Notice of Guaranteed Delivery which may be used by Eligible
Institutions for the purposes described in this paragraph are available from the
Exchange Agent.
 
     Terms and Conditions of the Letter of Transmittal. The Letter of
Transmittal contains, among other things, the following terms and conditions,
which are part of the Exchange Offer.
 
     The party tendering Old Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Old Notes to the Company and irrevocably constitutes
and appoints the Exchange Agent as the Transferor's agent
                                       31
<PAGE>   39
 
and attorney-in-fact to cause the Old Notes to be assigned, transferred and
exchanged. The Transferor represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Old Notes and to acquire
New Notes issuable upon the exchange of such tendered Old Notes, and that, when
the same are accepted for exchange, the Company will acquire good and
unencumbered title to the tendered Old Notes, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim. The
Transferor also warrants that it will, upon request, execute and deliver any
additional documents deemed by the Company to be necessary or desirable to
complete the exchange, assignment and transfer of tendered Old Notes or to
transfer ownership of such Old Notes on the account books maintained by DTC. All
authority conferred by the Transferor will survive the death, bankruptcy or
incapacity of the Transferor and every obligation of the Transferor shall be
binding upon the heirs, personal representatives, executors, administrators,
successors, assigns, trustees in bankruptcy and other legal representatives of
such Transferor.
 
     By executing a Letter of Transmittal, each holder will make to the Company
the representations set forth above under the heading "-- Purpose and Effect of
the Exchange Offer."
 
     Withdrawal of Tenders of Old Notes. Except as otherwise provided herein,
tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date.
 
     To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at one of its addresses set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Old Notes), (iii)
contain a statement that such holder is withdrawing its election to have such
Old Notes exchanged, (iv) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes in the name of the person
withdrawing the tender, and (v) specify the name in which any such Old Notes are
to be registered, if different from that of the Depositor. If Old Notes have
been tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"-- Procedures for Tendering Old Notes" at any time prior to the Expiration
Date.
 
CONDITIONS OF THE EXCHANGE OFFER
 
     Notwithstanding any other term of the Exchange Offer, or any extension of
the Exchange Offer, the Company shall not be required to accept for exchange, or
exchange New Notes for, any Old Notes, and may terminate the Exchange Offer as
provided herein before the acceptance of such Old Notes, if:
 
          (a) any statute, rule or regulation shall have been enacted, or any
     action shall have been taken by any court or governmental authority which,
     in the reasonable judgment of the Company, would prohibit, restrict or
     otherwise render illegal consummation of the Exchange Offer; or
 
          (b) any change, or any development involving a prospective change, in
     the business or financial affairs of the Company or any of its subsidiaries
     has occurred which, in the sole judgment of the Company, might materially
     impair the ability of the Company to proceed with the Exchange Offer or
     materially impair the contemplated benefits of the Exchange Offer to the
     Company; or
 
                                       32
<PAGE>   40
 
          (c) there shall occur a change in the current interpretations by the
     staff of the Commission which, in the Company's reasonable judgment, might
     materially impair the Company's ability to proceed with the Exchange Offer.
 
     If the Company determines in its sole discretion that any of the above
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the Expiration Date,
subject, however, to the right of holders to withdraw such Old Notes (see
"-- Terms of the Exchange Offer -- Withdrawal of Tenders of Old Notes"), or
(iii) waive such unsatisfied conditions with respect to the Exchange Offer and
accept all validly tendered Old Notes which have not been withdrawn. If such
waiver constitutes a material change to the Exchange Offer, the Company will
promptly disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders, and the Company will extend the Exchange
Offer for a period of time, depending upon the significance of the waiver and
the manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such period.
 
EXCHANGE AGENT
 
     United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
 
<TABLE>
<S>                                <C>                                <C>
 
            By Mail:                     By Overnight Courier:                    By Hand:
   United States Trust Company        United States Trust Company        United States Trust Company
           of New York                        of New York                        of New York
          P. O. Box 844               Corporate Trust Operations                111 Broadway
         Cooper Station                       Department                         Lower Level
     New York, NY 10276-0844           770 Broadway - 13th Floor             New York, NY 10006
 Attn: Corporate Trust Services           New York, NY 10003           Attn: Corporate Trust Services
  (registered or certified mail              By Facsimile:
          recommended)                      (212) 420-6152
                                   (For Eligible Institutions Only)
                                         Confirm by Telephone:
                                            (800) 548-6565
</TABLE>
 
FEES AND EXPENSES
 
     The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of the Company and its affiliates. No additional compensation will be
paid to any such officers and employees who engage in soliciting tenders.
 
     The Company has not retained any dealer-manager or other soliciting agent
in connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, the Letter of
Transmittal and related documents to the beneficial owners of the Old Notes and
in handling or forwarding tenders for exchange.
 
     The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and transfer agent and registrar, accounting and legal fees and printing
costs, among others.
 
                                       33
<PAGE>   41
 
     The Company will pay all transfer taxes, if any, applicable to the exchange
of the Old Notes pursuant to the Exchange Offer. If, however, New Notes, or Old
Notes for principal amounts not tendered or accepted for exchange, are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered or if a transfer tax is imposed for
any reason other than the exchange of the Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
 
CONSEQUENCES OF FAILURE TO EXCHANGE
 
     The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities within the meaning of Rule 144 of the
Securities Act. Accordingly, such Old Notes may be offered, resold, pledged or
otherwise transferred only (i) to a person who the transferor reasonably
believes is a qualified institutional buyer purchasing for its own account or
for the account of a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A, (ii) in a transaction meeting the requirements of
Rule 144 under the Securities Act (if available), (iii) in accordance with
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel acceptable to the Company), (iv) to the Company
or any of its subsidiaries, or (v) pursuant to an effective registration
statement and, in each case, in accordance with the applicable securities laws
of any state of the United States or any other applicable jurisdiction. The
liquidity of the Old Notes could be adversely affected by the Exchange Offer.
Following the consummation of the Exchange Offer, holders of the Old Notes
(other than certain holders with shelf registration rights) will have no further
registration rights under the Registration Rights Agreement and will not be
entitled to the liquidated damages provided for in the Registration Rights
Agreement.
 
ACCOUNTING TREATMENT
 
     The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company. The costs of the Exchange Offer and the unamortized expenses related to
the issuance of the Old Notes will be amortized over the term of the New Notes.
 
                                USE OF PROCEEDS
 
     The Company will not receive any proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as contemplated
in this Prospectus, the Company will receive in exchange Old Notes in like
principal amount, the term and form of which are identical in all material
respects to the New Notes. The Old Notes surrendered in exchange for New Notes
will be retired and canceled and cannot be reissued. Accordingly, issuance of
the New Notes will not result in any increase in the indebtedness of the
Company.
 
                                       34
<PAGE>   42
 
                                 CAPITALIZATION
 
     The following table sets forth, as of March 31, 1998, the cash and cash
equivalents and the capitalization of the Company as adjusted to give effect to
the consummation of the Acquisitions, the Offerings and the application of the
net proceeds. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and the related notes and other financial
information included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                AS OF MARCH 31, 1998
                                                              ------------------------
                                                                               PRO
                                                               ACTUAL        FORMA(1)
                                                                  ($ IN THOUSANDS)
<S>                                                           <C>           <C>
Cash, cash equivalents and short-term investments...........  $  39,822     $  196,776
                                                              =========     ==========
Long-term debt (excluding discounts on Senior Notes)
  Revolving credit facilities...............................  $ 145,000     $       --
  10 1/2% Senior Notes due 2002.............................     90,000             --
  7 7/8% Senior Notes due 2004..............................    150,000        150,000
  9 5/8% Senior Notes due 2005..............................         --        500,000
  9 1/8% Senior Notes due 2006..............................    120,000        120,000
  8 1/2% Senior Notes due 2012..............................    150,000        150,000
                                                              ---------     ----------
          Total long-term debt..............................    655,000        920,000
                                                              ---------     ----------
Stockholders' equity:
  Preferred Stock...........................................         --        230,000
  Common Stock..............................................      1,001          1,006
  Paid-in capital...........................................    659,868        682,613
  Accumulated deficit(2)....................................   (439,772)      (453,105)
                                                              ---------     ----------
          Total stockholders' equity........................    221,097        460,514
                                                              ---------     ----------
          Total capitalization..............................  $ 876,097     $1,380,514
                                                              =========     ==========
</TABLE>
 
------------------------------
 
(1) As adjusted to give pro forma effect to the Offerings and the Acquisitions
    pending as of March 31, 1998, excluding potential writedowns associated with
    acquired assets.
 
(2) The extinguishment of the Company's revolving credit facilities and the
    Company's purchase and retirement of the 10 1/2% Notes will result in an
    extraordinary charge of approximately $13.3 million.
 
                                       35
<PAGE>   43
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
     The following table sets forth selected consolidated financial data of the
Company for each of the five fiscal years ended June 30, 1997, the six months
ended December 31, 1997 and 1996 and the three months ended March 31, 1998 and
1997. The data are derived from the Consolidated Financial Statements of the
Company, including the Notes thereto, appearing elsewhere herein. The data set
forth in this table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements, including the Notes thereto included
elsewhere in this report.
 
<TABLE>
<CAPTION>
                               THREE MONTHS ENDED       SIX MONTHS ENDED
                                    MARCH 31,             DECEMBER 31,                       YEAR ENDED JUNE 30,
                             -----------------------   -------------------   ----------------------------------------------------
                                1998         1997        1997       1996       1997        1996       1995       1994      1993
                             ----------   ----------   --------   --------   ---------   --------   --------   --------   -------
                                                           ($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                          <C>          <C>          <C>        <C>        <C>         <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS
  DATA:
Revenues:
  Oil and gas sales........  $   50,241   $   57,399   $ 95,657   $ 90,167   $ 192,920   $110,849   $ 56,983   $ 22,404   $11,602
  Oil and gas marketing
    sales..................      26,524       22,410     58,241     30,019      76,172     28,428         --         --        --
  Oil and gas service
    operations.............          --           --         --         --          --      6,314      8,836      6,439     5,526
  Interest and other.......         224        3,277     78,966      2,516      11,223      3,831      1,524        981       880
                             ----------   ----------   --------   --------   ---------   --------   --------   --------   -------
        Total revenues.....      76,989       83,086    232,864    122,702     280,315    149,422     67,343     29,824    18,008
                             ----------   ----------   --------   --------   ---------   --------   --------   --------   -------
Costs and expenses:
  Production expenses and
    taxes..................       9,438        4,308     10,094      5,874      15,107      8,303      4,256      3,647     2,890
  Oil and gas marketing
    expenses...............      26,261       21,747     58,227     29,548      75,140     27,452         --         --        --
  Oil and gas service
    operations.............          --           --         --         --          --      4,895      7,747      5,199     3,653
  Impairment of oil and gas
    properties.............     250,000           --    110,000         --     236,000         --         --         --        --
  Oil and gas depreciation,
    depletion and
    amortization...........      31,342       24,663     60,408     36,243     103,264     50,899     25,410      8,141     4,184
  Depreciation and
    amortization of other
    assets.................       1,380          873      2,414      1,836       3,782      3,157      1,765      1,871       557
  General and
    administrative.........       4,380        2,481      5,847      3,739       8,802      4,828      3,578      3,135     3,620
  Provision for legal and
    other settlements......          --           --         --         --          --         --         --         --     1,286
  Interest and other.......      10,688        3,654     17,448      6,216      18,550     13,679      6,627      2,676     2,282
                             ----------   ----------   --------   --------   ---------   --------   --------   --------   -------
        Total costs and
          expenses.........     333,489       57,726    264,438     83,456     460,645    113,213     49,383     24,669    18,472
                             ----------   ----------   --------   --------   ---------   --------   --------   --------   -------
Income (loss) before income
  taxes and extraordinary
  item.....................    (256,500)      25,360    (31,574)    39,246    (180,330)    36,209     17,960      5,155      (464)
Provision (benefit) for
  income taxes.............          --        9,255         --     14,325      (3,573)    12,854      6,299      1,250       (99)
                             ----------   ----------   --------   --------   ---------   --------   --------   --------   -------
Income (loss) before
  extraordinary item.......    (256,500)      16,105    (31,574)    24,921    (176,757)    23,355     11,661      3,905      (365)
Extraordinary item:
  Loss on early
    extinguishment of debt,
    net of applicable
    income taxes...........          --         (177)        --     (6,443)     (6,620)        --         --         --        --
                             ----------   ----------   --------   --------   ---------   --------   --------   --------   -------
Net income (loss)..........  $ (256,500)  $   15,928   $(31,574)  $ 18,478   $(183,377)  $ 23,355   $ 11,661   $  3,905   $  (365)
                             ==========   ==========   ========   ========   =========   ========   ========   ========   =======
Earnings (loss) per common
  share basic:
  Income (loss) before
    extraordinary item.....  $    (3.19)  $      .23   $  (0.45)  $   0.40   $   (2.69)  $   0.43   $   0.22   $   0.08   $ (0.02)
  Extraordinary item.......          --           --         --      (0.10)      (0.10)        --         --         --        --
                             ----------   ----------   --------   --------   ---------   --------   --------   --------   -------
Net income (loss)..........  $    (3.19)  $      .23   $  (0.45)  $   0.30   $   (2.79)  $   0.43   $   0.22   $   0.08   $ (0.02)
                             ==========   ==========   ========   ========   =========   ========   ========   ========   =======
Earnings (loss) per common
  assuming dilution:
  Income (loss) before
    extraordinary item.....  $    (3.19)  $      .22   $  (0.45)  $   0.38   $   (2.69)  $   0.40   $   0.21   $   0.08   $ (0.02)
  Extraordinary item.......          --           --         --      (0.10)      (0.10)        --         --         --        --
                             ----------   ----------   --------   --------   ---------   --------   --------   --------   -------
Net income (loss)..........  $    (3.19)  $      .22   $  (0.45)  $   0.28   $   (2.79)  $   0.40   $   0.21   $   0.08   $ (0.02)
                             ==========   ==========   ========   ========   =========   ========   ========   ========   =======
Cash dividends declared per
  common share.............  $     0.02   $       --   $   0.04   $     --   $    0.02   $     --   $     --   $     --   $    --
CASH FLOW DATA:
Cash provided by (used in)
  operating activities.....  $   49,185   $   39,686   $139,157   $ 41,901   $  84,089   $120,972   $ 54,731   $ 19,423   $(1,499)
Cash used in investing
  activities...............     166,466      160,107    136,504    184,149     523,854    344,389    112,703     29,211    15,142
Cash provided by (used in)
  financing activities.....      25,366      280,492     (2,810)   231,349     512,144    219,520     97,282     21,162    20,802
OTHER FINANCIAL DATA:
Operating cash flow(1).....  $   26,222   $   50,896   $141,248   $ 77,325   $ 162,716   $ 90,265   $ 45,135   $ 15,167   $ 4,277
Capital expenditures,
  excluding cost of
  acquisitions.............     168,686      162,957    216,770    196,423     502,329    350,891    125,760     37,574    19,085
EBITDA(2)..................      36,910       54,550     84,696     83,541     181,266    103,944     51,762     17,843     7,845
Ratio of EBITDA to interest
  expense..................        3.5x        14.9x       4.9x      13.4x        9.8x       7.6x       7.8x       6.7x      2.9x
Ratio of earnings to fixed
  charges(3)...............          --         4.4x         --       3.2x          --       2.4x       2.9x       2.3x        --
BALANCE SHEET DATA (AT END
  OF PERIOD):
Total assets...............  $1,065,335   $1,190,046   $952,784   $860,597   $ 949,068   $572,335   $276,693   $125,690   $78,707
Long-term debt, net of
  current maturities.......     654,013      508,961    508,992    220,149     508,950    268,431    145,754     47,878    14,051
Stockholders' equity.......     221,097      503,056    280,206    484,062     286,889    177,767     44,975     31,260    31,432
</TABLE>
 
------------------------------
 
(1) Represents net income (loss) before extraordinary item, income taxes,
    depreciation, depletion and amortization and impairments of oil and gas
    properties.
 
(2) EBITDA represents net income (loss) of the Company and its subsidiaries from
    continuing operations before interest, income taxes, depreciation,
    depletion, amortization, impairments of oil and gas properties,
    extraordinary items, the gain from the sale of Bayard common stock and
    certain other non-cash charges. EBITDA should not be considered in isolation
    or as a substitute for net income, cash flows from continuing operations or
    other consolidated income or cash flow data prepared in accordance with
    generally accepted accounting principles or as a measure of the Company's
    profitability or liquidity.
 
(3) For purposes of determining the ratio of earnings to fixed charges, earnings
    are defined as income (loss) of the Company and its subsidiaries from
    continuing operations before income taxes, extraordinary items and fixed
    charges. Fixed charges consist of interest (whether expensed or
    capitalized), and amortization of debt expenses and discount or premium
    relating to any indebtedness. Earnings were insufficient to cover fixed
    charges by $258.8 million for the three months ended March 31, 1998, $36.7
    million for the six months ended December 31, 1997, $193.3 million in fiscal
    1997 and $656,000 in fiscal 1993.
 
                                       36
<PAGE>   44
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
     Chesapeake's operating cash flow (exclusive of changes in working capital)
and production continued to reach record levels during the Transition Period and
the three months ended March 31, 1998. However, during the Transition Period
continuing unfavorable exploration and production results, primarily in the
Austin Chalk Trend, together with increases in drilling and equipment costs and
declines in oil prices as of December 31, 1997, resulted in downward revisions
in estimates of Chesapeake's proved oil and gas reserves and the related Present
Value of the estimated future net revenues from the Company's proved reserves.
In addition to still lower oil and natural gas prices at March 31, 1998, the
application of full-cost accounting rules of the Commission to recently acquired
assets recorded in accordance with purchase accounting led to the impairment of
a significant portion of the recorded book value of the acquired assets. The
Company recorded $110.0 million and $250.0 million asset writedowns and net
losses of $31.6 million and $256.5 million during the Transition Period and the
three months ended March 31, 1998.
 
     In response to the losses recorded in fiscal 1997 and the Transition
Period, Chesapeake significantly revised its business strategy during the
Transition Period. These revisions included (i) reducing the size and risk of
its exploratory drilling program, especially in the Louisiana Trend, (ii)
acquiring significant volumes of long-lived natural gas reserves, particularly
in the Mid-Continent and (iii) building a larger inventory of lower risk
drilling opportunities through acquisitions and joint ventures. Further, the
Company has reduced its capital expenditure budget for exploration and
development to more closely match anticipated cash flow from operations.
 
     As part of this revised strategy, the Company has acquired various proved
oil and gas reserves through merger or through purchases of oil and gas
properties. From December 1997 through April 1998, the Company completed nine
acquisitions, adding approximately 681 Bcfe of estimated proved reserves. Of
these acquisitions, two were closed in December 1997, three were closed in the
first quarter of 1998, and four were closed in the second quarter of 1998. See
"The Company -- Acquisitions." These acquisitions will have the effect of
increasing oil and gas production volumes and revenues, decreasing DD&A per
Mcfe, and increasing production expenses and interest expense during 1998.
 
     The Company has financed the acquisitions primarily through the sale of
securities. In November 1997, Chesapeake received net proceeds of approximately
$90 million from its sale of Bayard common stock in the initial public offering
of Bayard. Chesapeake recognized a gain on the sale of its Bayard stock of $73.8
million. In April 1998, the Company issued 4.6 million shares of Preferred Stock
(total proceeds of $230 million), and $500 million principal amount of Old
Notes. The net proceeds from the Offerings were approximately $711 million.
 
     The Company's strategy for 1998 is to acquire proved oil and gas reserves,
primarily in the Mid-Continent and in western Canada, and to continue developing
oil and gas assets by drilling. The Company has reduced its capital expenditure
budget for exploration and development drilling activities to approximately $235
million and has reduced the Austin Chalk Trend drilling component significantly.
Further, the Company has increased its use of 3-D seismic to assist in reducing
exploratory risks and increasing economic returns from its drilling programs.
The Company has conducted, participated in, or is actively pursuing more than 25
3-D seismic programs to evaluate the Company's acreage inventory.
 
                                       37
<PAGE>   45
 
     The following table sets forth certain operating data of the Company for
the periods presented:
 
<TABLE>
<CAPTION>
                                                   THREE MONTHS         SIX MONTHS
                                                       ENDED               ENDED
                                                     MARCH 31,         DECEMBER 31,           YEAR ENDED JUNE 30,
                                                 -----------------   -----------------   -----------------------------
                                                  1998      1997      1997      1996       1997       1996      1995
<S>                                              <C>       <C>       <C>       <C>       <C>        <C>        <C>
NET PRODUCTION DATA:
  Oil (MBbl)...................................    1,176       801     1,857     1,116      2,770      1,413     1,139
  Gas (MMcf)...................................   15,907    15,742    27,326    30,095     62,005     51,710    25,114
  Gas equivalent (MMcfe).......................   22,963    20,548    38,468    36,791     78,625     60,190    31,947
OIL AND GAS SALES ($ IN THOUSANDS):
  Oil..........................................  $17,449   $17,260   $34,523   $24,418   $ 57,974   $ 25,224   $19,784
  Gas..........................................   32,792    40,139    61,134    65,749    134,946     85,625    37,199
                                                 -------   -------   -------   -------   --------   --------   -------
        Total oil and gas sales................  $50,241   $57,399   $95,657   $90,167   $192,920   $110,849   $56,983
                                                 =======   =======   =======   =======   ========   ========   =======
AVERAGE SALES PRICE:
  Oil ($ per Bbl)..............................  $ 14.84   $ 21.55   $ 18.59   $ 21.88   $  20.93   $  17.85   $ 17.36
  Gas ($ per Mcf)..............................     2.06      2.55      2.24      2.18       2.18       1.66      1.48
  Gas equivalent (per Mcfe)....................     2.19      2.79      2.49      2.45       2.45       1.84      1.78
OIL AND GAS COSTS ($ PER MCFE):
  Production expenses and taxes................  $  0.41   $  0.21   $  0.27   $  0.16   $   0.19   $   0.14   $  0.13
  General and administrative...................     0.19      0.12      0.15      0.10       0.11       0.08      0.11
  Depreciation, depletion and amortization.....     1.36      1.20      1.57      0.99       1.31       0.85      0.80
NET WELLS DRILLED:
  Horizontal wells.............................      7.5      11.4      27.2      34.3       75.7       42.0      28.5
  Vertical wells...............................      9.6      21.5      13.9      13.0       31.3       27.0      23.0
NET WELLS AT END OF PERIOD(1)..................  1,796.0     266.3     401.0     210.3      270.1      187.0      96.4
</TABLE>
 
---------------
 
(1) Gives effect to net wells acquired during period.
 
RESULTS OF OPERATIONS
 
  THREE MONTHS ENDED MARCH 31, 1998 AND 1997
 
     General. For the three months ended March 31, 1998 (the "Current Quarter"),
the Company realized a net loss of $256.5 million, or $3.19 per common share.
This compares to net income of $15.9 million, or $0.22 per common share, in the
three months ended March 31, 1997 (the "Prior Quarter"). The loss in the Current
Quarter was primarily caused by a $250.0 million asset writedown recorded under
the full-cost method of accounting and, to a much lesser extent, a $6.5 million
loss from recurring operations. The asset writedown was primarily caused by the
Hugoton acquisition in March 1998 for consideration in excess of the present
value (10% discount) of the future net revenues of the proved reserves acquired
as of March 31, 1998 (approximately $150 million of the writedown) and by
decreases in oil and gas prices from December 31, 1997 to March 31, 1998. See
"-- Impairment of Oil and Gas Properties." No such writedown occurred in the
Prior Quarter.
 
     Oil and Gas Sales. During the Current Quarter, oil and gas sales decreased
13% to $50.2 million from $57.4 million in the Prior Quarter. The decrease
resulted from significantly lower oil and gas prices, partially offset by a 12%
increase in production volumes. For the Current Quarter, the Company produced
23.0 Bcfe, consisting of 1.2 MMBbl and 16 Bcf of natural gas, compared to 0.8
MMBbl and 15.7 Bcf, or 20.5 Bcfe, in the Prior Quarter. Average oil prices
realized were $14.84 per barrel of oil in the Current Quarter compared to $21.55
in the Prior Quarter, a decrease of 31%. Average gas prices realized were $2.06
per Mcf in the Current Quarter compared to $2.55 per Mcf in the Prior Quarter, a
decrease of 19%.
 
     For the Current Quarter, the Company realized an average price of $2.19 per
Mcfe, compared to $2.79 per Mcfe in the Prior Quarter. The Company's hedging
activities resulted in increased oil and gas revenues of $1.8 million, or $0.08
per Mcfe, in the Current Quarter, compared to decreases in oil and gas revenues
of $0.2 million, or $0.01 per Mcfe, in the Prior Quarter.
 
                                       38
<PAGE>   46
 
     The following table shows the Company's production by region for the
Current Quarter and the Prior Quarter:
 
<TABLE>
<CAPTION>
                                                   FOR THE THREE MONTHS ENDED MARCH 31,
                                                   -------------------------------------
                                                         1998                1997
                                                   -----------------   -----------------
                                                   (MMCFE)   PERCENT   (MMCFE)   PERCENT
<S>                                                <C>       <C>       <C>       <C>
Mid-Continent....................................   7,646       33%     4,241       21%
Austin Chalk Trend...............................  12,054       53     15,017       73
Canada...........................................     730        3         --       --
Other Areas......................................   2,533       11      1,290        6
                                                   ------      ---     ------      ---
          Total..................................  22,963      100%    20,548      100%
                                                   ======      ===     ======      ===
</TABLE>
 
     Natural gas production represented approximately 69% of the Company's total
production volume on an equivalent basis in the Current Quarter, compared to 77%
in the Prior Quarter. This decrease in natural gas production as a percentage of
total production was primarily the result of new production in the Louisiana
portion of the Austin Chalk Trend, which tends to produce more oil than gas. The
Company anticipates that as a result of its recent acquisitions, increased
drilling in the Mid-Continent and Canada and decreased drilling in Louisiana,
natural gas will represent 70-75% of anticipated 1998 production.
 
     Oil and Gas Marketing Sales. The Company realized $26.5 million in oil and
gas marketing sales for third parties in the Current Quarter, with corresponding
oil and gas marketing expenses of $26.3 million, for a margin of $0.2 million.
This compares to sales of $22.4 million, expenses of $21.7 million, and a margin
of $0.7 million in the Prior Quarter. The Company anticipates gross margins will
increase during 1998 as a result of the acquisition of certain gas gathering,
transportation and marketing assets completed in 1998.
 
     Interest and Other. Interest and other revenues for the Current Quarter
were $0.2 million compared to $3.3 million in the Prior Quarter. The decrease
was primarily caused by the Company maintaining lower invested cash balances
resulting in reduced interest income.
 
     Production Expenses and Taxes. Production expenses increased to $7.9
million in the Current Quarter, a $4.7 million increase from the $3.2 million
incurred in the Prior Quarter. On a production unit basis, production expenses
were $0.34 and $0.16 per Mcfe in the Current and Prior Quarters, respectively.
The primary reason for the increase in production expenses was the increased
lifting costs associated with the Louisiana production, which represented a
higher proportion of production in the Current Quarter than the Prior Quarter.
Also contributing to the increase was the addition of production obtained in the
Hugoton and AnSon acquisitions, which typically has higher production expense
per Mcfe of production than the Company's historical production base. The
Company anticipates production expenses will continue to rise during 1998 as the
result of additional acquisitions closed in April 1998, and expects production
expenses to average $0.35 to $0.40 per Mcfe for 1998.
 
     Production taxes, which consist primarily of wellhead severance taxes, were
$1.5 million and $1.2 million in the Current and Prior Quarters, respectively.
This increase, from $0.06 per Mcfe to $0.07 per Mcfe, was the result of the
higher tax rates associated with production obtained in the Acquisitions as
compared to the Company's historical production base.
 
     Impairment of Oil and Gas Properties. The Company utilizes the full-cost
method to account for its investments in oil and gas properties. Under this
method, all costs of acquisition, exploration and development of oil and gas
reserves (including such costs as leasehold acquisition costs, geological and
geophysical expenditures, certain capitalized internal costs, dry hole costs and
tangible and intangible development costs) are capitalized as incurred. These
oil and gas property costs, including the estimated future capital expenditures
to develop the proved undeveloped reserves, are depleted and charged to
operations using the unit-of-production method based on the ratio of current
production to proved oil and gas reserves as estimated by the Company's
independent engineering consultants and Company engineers. Costs directly
associated with the acquisition and evaluation of unproved properties are
excluded from the amortization computation until it is determined whether or not
proved reserves can be assigned to the property or whether impairment
 
                                       39
<PAGE>   47
 
has occurred. To the extent that capitalized costs of oil and gas properties,
net of accumulated depreciation, depletion and amortization and related deferred
income taxes, exceed the discounted future net revenues of proved oil and gas
properties, such excess costs are charged to operations.
 
     The Company incurred an impairment of oil and gas properties charge of $250
million in the Current Quarter, compared to no impairment in the Prior Quarter.
This writedown was caused by several factors, including the Hugoton acquisition,
oil prices declining from $17.62 at December 31, 1997 to $13.92 at March 31,
1998, gas prices declining from $2.29 at December 31, 1997 to $2.01 at March 31,
1998 and higher drilling and completion costs compared to previous estimates.
Additionally, lower oil and gas prices at March 31, 1998 and higher drilling
costs caused downward revisions in the Company's proved reserves as certain
proved undeveloped reserves previously estimated by the Company were rendered
uneconomic and therefore not included in the Company's evaluation of its proved
reserves.
 
     The primary reason for the impairment charge was the completion of the
acquisition in March 1998 of Hugoton, which was accounted for using the purchase
method. The purchase price, which was established in November 1997 when the
acquisition was announced (based on a Chesapeake common stock price of $8.00 per
share), was allocated almost entirely to Hugoton's evaluated oil and gas
properties. Based upon reserve estimates as of March 31, 1998, the portion of
the purchase price which was allocated to evaluated oil and gas properties
exceeded the associated discounted future net revenues from Hugoton's estimated
proved reserves by approximately $150 million.
 
     Since March 31, 1998, oil and gas prices have declined further. If prices
do not increase from current levels by June 30, 1998, the Company could incur
additional impairment charges, reducing earnings and shareholders' equity.
 
     Oil and Gas Depreciation, Depletion and Amortization. Depreciation,
depletion and amortization of oil and gas properties ("DD&A") for the Current
Quarter was $31.3 million, compared to $24.7 million in the Prior Quarter. This
increase was caused by increased production and an increase in the DD&A rate per
Mcfe from $1.20 to $1.36 in the Prior and Current Quarters, respectively. The
Company's DD&A rate is expected to decrease to approximately $1.10-$1.15 per
Mcfe for the remainder of 1998 as the result of the impairment charge, the
acquisitions completed in April, and reduced drilling in Louisiana.
 
     Depreciation and Amortization of Other Assets. Depreciation and
amortization of other assets ("D&A") increased to $1.4 million in the Current
Quarter compared to $0.9 million in the Prior Quarter. This increase in D&A was
caused by increased investments in depreciable buildings and equipment and
increased amortization of debt issuance costs as a result of the issuance of
Senior Notes in March 1997. The Company anticipates an increase in D&A
throughout 1998 as a result of higher building depreciation expense on the
Company's corporate offices, additional equipment and depreciable assets added
from the Acquisitions, and higher amortization caused by the increased offering
costs incurred in the Senior Notes issued in April 1998.
 
     General and Administrative. General and administrative expenses ("G&A"),
which are net of capitalized internal payroll and non-payroll expenses, were
$4.4 million in the Current Quarter compared to $2.5 million in the Prior
Quarter. This increase was primarily caused by increased employment levels
associated with the Company's continuing growth. The increase was also caused by
increased accounting, legal, reservoir engineering and other expenses incurred
in the Current Quarter as a result of the Company's change to a December 31
fiscal year end reporting period for which there were no comparable expenses in
the Prior Quarter. The Company capitalized $2.1 million of internal costs in the
Current Quarter directly related to the Company's oil and gas exploration and
development efforts, compared to $1.4 million in the Prior Quarter. The Company
anticipates that G&A costs for 1998 will continue to increase as the result of
industry wage inflation, legal fees associated with litigation, and increases in
employment due to the acquisition program.
 
     Interest and Other. Interest and other expense increased to $10.7 million
in the Current Quarter from $3.7 million in the Prior Quarter. This increase was
a result of a full quarter of interest expense in the Current Quarter on the
$300 million principal amount of Senior Notes issued at the end of the Prior
Quarter. In addition to the interest expense reported, the Company capitalized
$2.3 million of interest during the Current
 
                                       40
<PAGE>   48
 
Quarter compared to $2.7 million capitalized in the Prior Quarter. Interest
expense will increase during the remainder of 1998 as a result of the issuance
of $500 million of Senior Notes in April 1998.
 
     Provision for Income Taxes. The Company recorded no income tax expense for
the Current Quarter, compared to income tax expense of $9.3 million in the Prior
Quarter. At March 31, 1998, the Company had a net operating loss carryforward of
approximately $383 million for regular federal income taxes which will expire in
future years beginning in 2007. Management believes that it cannot be
demonstrated at this time that it is more likely than not that the deferred
income tax assets, comprised primarily of the net operating loss carryforward,
will be realizable in future years, and therefore a valuation allowance of $174
million has been recorded. The Company does not expect to record any book income
tax expense for the remainder of 1998 based on information available at this
time.
 
  SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
 
     General. For the Transition Period, the Company realized a net loss of
$31.6 million, or $0.45 per common share, on total revenues of $232.9 million.
This compares to net income of $18.5 million, or $0.28 per common share, on
total revenues of $122.7 million in the six months ended December 31, 1996 (the
"Prior Period"). The loss in the Transition Period was caused by a $110.0
million asset writedown recorded under the full-cost method of accounting,
partially offset by a gain of $73.8 million from the sale of the Bayard stock.
 
     Oil and Gas Sales. During the Transition Period, oil and gas sales
increased 6% to $95.7 million versus $90.2 million for the Prior Period. The
increase in oil and gas sales resulted primarily from growth in production
volumes. For the Transition Period, the Company produced 38.5 Bcfe at a weighted
average price of $2.49 per Mcfe, compared to 36.8 Bcfe produced in the Prior
Period at a weighted average price of $2.45 per Mcfe.
 
     The following table shows the Company's production by region for the
Transition Period and the Prior Period:
 
<TABLE>
<CAPTION>
                                                  FOR THE SIX MONTHS ENDED DECEMBER 31,
                                                  --------------------------------------
                                                        1997                 1996
                                                  -----------------   ------------------
                                                  (MMCFE)   PERCENT   (MMCFE)    PERCENT
<S>                                               <C>       <C>       <C>        <C>
Mid-Continent...................................   8,852       23%       8,980      24%
Austin Chalk Trend..............................  26,220       68       26,243      71
Other areas.....................................   3,396        9        1,568       5
                                                  ------      ---     --------     ---
          Total production......................  38,468      100%      36,791     100%
                                                  ======      ===     ========     ===
</TABLE>
 
     Natural gas production represented approximately 71% of the Company's total
production volume on an equivalent basis in the Transition Period, compared to
82% in the Prior Period. This decrease in gas production as a percentage of
total production was primarily the result of new production in the Louisiana
Trend, which tends to produce more oil than gas.
 
     For the Transition Period, the Company realized an average price per barrel
of oil of $18.59, compared to $21.88 in the Prior Period. Gas price realizations
increased slightly from $2.18 per Mcf in the Prior Period to $2.24 per Mcf in
the Transition Period. The Company's hedging activities resulted in decreases in
oil and gas revenues of $4.3 million and $7.1 million in the Transition Period
and Prior Period, respectively. Oil prices received in the first quarter of 1998
are significantly below prices realized in the Transition Period, which has the
effect of reducing oil revenues and decreasing earnings.
 
     Oil and Gas Marketing Sales. The Company realized $58.2 million in oil and
gas marketing sales for third parties in the Transition Period, with
corresponding oil and gas marketing expenses of $58.2 million. This compares to
sales of $30.0 million, expenses of $29.5 million, and a margin of $0.5 million
in the Prior Period.
 
     Interest and Other. Interest and other revenues for the Transition Period
were $79.0 million compared to $2.5 million in the Prior Period. During the
Transition Period, the Company realized a gain on the sale of its Bayard common
stock of $73.8 million, the most significant component of interest and other
revenues.
 
                                       41
<PAGE>   49
 
     Production Expenses and Taxes. Production expenses and taxes, which include
lifting costs, production taxes and excise taxes, increased to $10.1 million in
the Transition Period, compared to $5.9 million in the Prior Period. These
increases were primarily the result of increased operating costs and increased
production. On a unit of production basis, production expenses and taxes
increased to $0.27 per Mcfe compared to $0.16 per Mcfe in the Prior Period. The
Company expects that production expenses and taxes per Mcfe will increase in
1998, primarily as the result of completed and anticipated acquisitions that
generally have higher associated lifting costs per unit than the Company's
historical production.
 
     Impairment of Oil and Gas Properties. The Company utilizes the full-cost
method to account for its investment in oil and gas properties. Under this
method, all costs of acquisition, exploration and development of oil and gas
reserves (including such costs as leasehold acquisition costs, geological and
geophysical expenditures, certain capitalized internal costs, dry hole costs and
tangible and intangible development costs) are capitalized as incurred. These
oil and gas property costs along with the estimated future capital expenditures
to develop proved undeveloped reserves are depleted and charged to operations
using the unit-of-production method based on the ratio of current production to
proved oil and gas reserves as estimated by the Company's independent
engineering consultants and Company engineers. Costs directly associated with
the acquisition and evaluation of unproved properties are excluded from the
amortization computation until it is determined whether or not proved reserves
can be assigned to the property or whether impairment has occurred. To the
extent that capitalized costs of oil and gas properties, net of accumulated
depreciation, depletion and amortization and related deferred income taxes,
exceed the discounted future net revenues of proved oil and gas properties, such
excess costs are charged to operations.
 
     The Company incurred an impairment of oil and gas properties charge of $110
million for the Transition Period. This writedown was caused by several factors,
including oil prices declining from $18.38 at June 30, 1997 to $17.62 at
December 31, 1997, and drilling and completion costs continuing to escalate
during the Transition Period. Higher costs caused the Company's capital spending
to exceed budgeted amounts during the Transition Period and also increased the
estimated future capital expenditures to be incurred to develop the Company's
proved undeveloped reserves. The Company's results from wells completed during
the Transition Period in the Louisiana Trend continued to be inconsistent and
production performance from various properties in the Navasota River and
Independence areas were lower than projected at June 30, 1997. As a result of
the above factors, the Company recorded a downward revision to its proved
reserves of 38 net Bcfe in the Austin Chalk Trend as of December 31, 1997.
 
     Excluding the purchase of additional leasehold, the Company incurred
approximately $85 million in capital expenditures in the Louisiana Trend during
the Transition Period, of which approximately $67 million were incurred in the
Masters Creek area. Approximately $16 million of the drilling costs were
incurred on Company operated wells that had not been completed at December 31,
1997.
 
     In the Masters Creek area, the Company completed operations on 11 wells
during the Transition Period. Although 10 of the 11 wells were commercially
productive, the drilling costs incurred through December 31, 1997 of
approximately $58 million for the 10 wells were higher than anticipated and
assigned reserves were lower than expected. The lower reserve quantities were
due in part to lower oil prices at December 31, 1997. In addition, the Company
transferred approximately $11 million of previously unevaluated leasehold costs
from all areas of the Louisiana Trend to the amortization base of the full-cost
pool during the Transition Period.
 
     In connection with the Company's acquisition of AnSon in December 1997,
which was accounted for using the purchase method, the purchase price of
approximately $43 million was allocated to the fair value of assets acquired.
Based upon reserve estimates as of December 31, 1997, the portion of the
purchase price which was allocated to evaluated oil and gas properties exceeded
the associated discounted future net revenues from AnSon's estimated proved
reserves by approximately $14 million.
 
     Oil and Gas Depreciation, Depletion and Amortization. DD&A of oil and gas
properties for the Transition Period was $60.4 million, $24.2 million higher
than the Prior Period's expense of $36.2 million. The expense in the Transition
Period was computed prior to the writedown from the Impairment of oil and gas
properties charge. The average DD&A rate per Mcfe, which is a function of
capitalized costs, future development costs, and the related underlying reserves
in the periods presented, increased to $1.57 in the
                                       42
<PAGE>   50
 
Transition Period compared to $0.99 in the Prior Period. The Company's DD&A rate
in the future will be a function of the results of future acquisition,
exploration, development and production costs and results, and asset writedowns,
if any. The Company's DD&A rate is expected to be positively affected as the
result of the acquisitions completed and pending.
 
     Depreciation and Amortization of Other Assets. D&A of other assets
increased to $2.4 million in the Transition Period, compared to $1.8 million in
the Prior Period. This increase was caused by increased investments in
depreciable buildings and equipment and increased amortization of debt issuance
costs as a result of the issuance of Senior Notes in March 1997. The Company
anticipates an increase in D&A in 1998 as a result of higher building
depreciation expense on the Company's corporate offices.
 
     General and Administrative. G&A expenses, which are net of capitalized
internal payroll and non-payroll expenses were $5.8 million in the Transition
Period, up 56% from $3.7 million in the Prior Period. The increase in the
Transition Period compared to the Prior Period results primarily from increased
personnel expenses required by the Company's growth and industry wage inflation.
The Company capitalized $2.4 million of internal costs in the Transition Period
directly related to the Company's oil and gas exploration and development
efforts, compared to $1.1 million in the Prior Period. The Company anticipates
that G&A costs for 1998 will continue to increase as the result of industry wage
inflation, legal fees associated with the UPRC and shareholder litigation, and
increases in employment due to the Acquisitions.
 
     Interest and Other. Interest and other expense increased to $17.4 million
in the Transition Period, compared to $6.2 million in the Prior Period. The
increase was due primarily to the issuance of $150 million of 7 7/8% Notes and
$150 million of 8 1/2% Notes in March 1997. In addition to the interest expense
reported, the Company capitalized $5.1 million of interest during the Transition
Period, compared to $7.6 million capitalized in the Prior Period.
 
     Provision (Benefit) for Income Taxes. The Company recorded no income taxes
for the Transition Period, compared to income tax expense of $14.3 million in
the Prior Period, before consideration of the $3.7 million tax benefit
associated with the extraordinary loss from the early extinguishment of debt.
 
     At December 31, 1997, the Company had a net operating loss carryforward of
approximately $337 million for regular federal income taxes which will expire in
future years beginning in 2007. Management believes that it cannot be
demonstrated at this time that it is more likely than not that the deferred
income tax assets, comprised primarily of the net operating loss carryforward,
will be realizable in future years, and therefore a valuation allowance of $77.9
million has been recorded. No deferred tax benefit related to the exercise of
employee stock options was allocated to additional paid-in capital in the
Transition Period. The Company does not expect to record any net income tax
expense in 1998 based on information available at this time.
 
  FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
     General. For the fiscal year ended June 30, 1997, the Company realized a
net loss of $183.4 million, or $2.79 per common share, on total revenues of
$280.3 million. This compares to net income of $23.4 million, or $0.40 per
common share, on total revenues of $149.4 million in 1996, and net income of
$11.7 million, or $0.21 per common share, on total revenues of $67.3 million in
fiscal 1995. The loss in fiscal 1997 resulted from a $236 million asset
writedown recorded in the fourth quarter under the full-cost method of
accounting.
 
     Oil and Gas Sales. During fiscal 1997, oil and gas sales increased 74% to
$192.9 million versus $110.8 million for fiscal 1996 and 238% from the fiscal
1995 amount of $57.0 million. The increase in oil and gas sales resulted
primarily from strong growth in production volumes and significantly higher
average oil and gas prices. For fiscal 1997, the Company produced 78.6 Bcfe at a
weighted average price of $2.45 per Mcfe, compared to 60.2 Bcfe produced in
fiscal 1996 at a weighted average price of $1.84 per Mcfe, and 31.9 Bcfe
produced in fiscal 1995 at a weighted average price of $1.78 per Mcfe. This
represents production growth of 31% for fiscal 1997 compared to fiscal 1996 and
146% compared to fiscal 1995.
 
                                       43
<PAGE>   51
 
     The following table shows the Company's production by region for fiscal
1997 and fiscal 1996:
 
<TABLE>
<CAPTION>
                                                        FOR THE YEAR ENDED JUNE 30,
                                                   -------------------------------------
                                                         1997                1996
                                                   -----------------   -----------------
                                                   (MMCFE)   PERCENT   (MMCFE)   PERCENT
<S>                                                <C>       <C>       <C>       <C>
Mid-Continent....................................  17,370       22%    10,420       17%
Austin Chalk Trend...............................  57,377       73     47,234       78
Other areas......................................   3,878        5      2,536        5
                                                   ------      ---     ------      ---
          Total production.......................  78,625      100%    60,190      100%
                                                   ======      ===     ======      ===
</TABLE>
 
     Natural gas production represented approximately 79% of the Company's total
production volume on an equivalent basis in fiscal 1997. This compares to 86% in
fiscal 1996 and 79% in fiscal 1995. This decrease in gas production as a
percentage of total production in fiscal 1997 was the result of drilling in the
Louisiana Trend, which tends to produce more oil than gas.
 
     For fiscal 1997, the Company realized an average price per barrel of oil of
$20.93, compared to $17.85 in fiscal 1996 and $17.36 in fiscal 1995. The Company
markets its oil on monthly average equivalent spot price contracts and typically
receives a premium to the price posted for West Texas Intermediate crude oil.
 
     Gas price realizations increased from fiscal 1996 to 1997 from $1.66 per
Mcf to $2.18 per Mcf, or 31%, generally as the result of market conditions. Gas
prices in fiscal 1995 averaged $1.48 per Mcf. The Company's gas price
realizations in fiscal 1997 were also higher due to the increase in Louisiana
Trend gas production, which generally receives premium prices at least
equivalent to Henry Hub indexes due to the high Btu content and favorable market
location of the production.
 
     The Company's hedging activities resulted in decreases in oil and gas
revenues of $7.4 million, $5.9 million, and none in fiscal 1997, 1996 and 1995,
respectively.
 
     Oil and Gas Marketing Sales. In December 1995, the Company entered into the
oil and gas marketing business by acquiring a subsidiary to provide natural gas
marketing services, including commodity price structuring, contract
administration and nomination services, for the Company, its partners and other
oil and natural gas producers in geographical areas in which the Company is
active. The Company realized $76.2 million in oil and gas marketing sales for
third parties in fiscal 1997, with corresponding oil and gas marketing expenses
of $75.1 million, resulting in a gross margin of $1.1 million. This compares to
sales of $28.4 million, expenses of $27.5 million, and a margin of $0.9 million
in fiscal 1996. There were no comparable marketing activities in fiscal 1995.
 
     Oil and Gas Service Operations. On June 30, 1996, Peak USA Energy Services,
Ltd., a limited partnership ("Peak"), was formed by Peak Oilfield Services
Company (a joint venture between Cook Inlet Region, Inc. and Nabors Industries,
Inc.) and Chesapeake for the purpose of purchasing the Company's oilfield
service assets and providing rig moving, transportation and related site
construction services to the Company and others in the industry. The Company
sold its service company assets to Peak for $6.4 million, and simultaneously
invested $2.5 million in exchange for a 33.3% partnership interest in Peak. This
transaction resulted in recognition of a $1.8 million pre-tax gain during the
fourth fiscal quarter of 1996 (reported in Interest and other revenues). A
deferred gain from the sale of service company assets of $0.9 million was
recorded as a reduction in the Company's investment in Peak and is being
amortized to income over the estimated useful lives of the Peak assets. The
Company's investment in Peak is accounted for using the equity method, and
resulted in $0.5 million of income being included in Interest and other revenues
in fiscal 1997.
 
     Revenues from oil and gas service operations were $6.3 million in fiscal
1996, down 28% from $8.8 million in fiscal 1995. The related costs and expenses
of these operations were $4.9 million and $7.7 million for the two years ended
June 30, 1996 and 1995, respectively. The gross profit margin of 22% in fiscal
1996 was up from the 12% margin in fiscal 1995. The gross profit margin derived
from these operations is a function of drilling activities in the period, costs
of materials and supplies and the mix of operations between lower margin
trucking operations versus higher margin labor oriented service operations.
 
                                       44
<PAGE>   52
 
     Interest and Other. Interest and other revenues for fiscal 1997 were $11.2
million compared to $3.8 million in fiscal 1996 and $1.5 million in fiscal 1995.
During fiscal 1997, the Company realized $8.7 million in interest, $1.6 million
of other investment income, $0.5 million from its investment in Peak, and $0.4
million in other income. During fiscal 1996, the Company realized $3.7 million
of interest and other investment income and a $1.8 million gain related to the
sale of certain service company assets, offset by a $1.7 million loss due to
natural gas basis changes in April 1996 as a result of the Company's hedging
activities. During 1995, the Company did not incur any such gains on sale of
assets or basis losses.
 
     Production Expenses and Taxes. Production expenses and taxes, which include
lifting costs, production taxes and excise taxes, increased to $15.1 million in
fiscal 1997, compared to $8.3 million in fiscal 1996 and $4.3 million in fiscal
1995. These increases on a year-to-year basis were primarily the result of
increased production. On a unit production basis, production expenses and taxes
increased to $0.19 per Mcfe, compared to $0.14 per Mcfe in fiscal 1996 and $0.13
per Mcfe in fiscal 1995. During fiscal 1996 and 1995, a high proportion of the
Company's production was from the Giddings Field, much of which qualified for
Texas severance tax exemptions.
 
     Impairment of Oil and Gas Properties. Prior to January 1997, the Company
had completed operations on one exploratory well in each of three separate areas
outside Masters Creek in the Louisiana Trend. Between April 1997 and July 1997,
the Company completed operations on ten Company operated exploratory wells
located outside Masters Creek in the Louisiana Trend that resulted in the
addition of only 0.5 Bcfe of proved reserves. Cumulative well costs on these
non-Masters Creek properties were approximately $43 million as of June 30, 1997.
Of the ten wells, one was completed on April 15, 1997, one on May 3, 1997 and
eight after June 1, 1997. Based upon this information and similar data which had
become available from outside operated properties in these non-Masters Creek
areas of the Louisiana Trend, management determined that a significant portion
of its leasehold in the Louisiana Trend outside of Masters Creek was impaired.
During the quarters ended March 31, 1997 and June 30, 1997, the Company
transferred $7.6 million and $86.3 million, respectively, of non-Masters Creek
Louisiana Trend leasehold costs to the amortization base of the full-cost pool.
 
     Oil and gas prices declined from $20.90 per Bbl and $2.41 per Mcf at June
30, 1996 to $18.38 per Bbl and $2.12 per Mcf at June 30, 1997. Drilling and
equipment costs escalated rapidly in the fourth quarter of fiscal 1997 due
primarily to higher day rates for drilling rigs, thus increasing the estimated
future capital expenditures to be incurred to develop the Company's proved
undeveloped reserves. The oil and gas price declines and the increased costs to
drill and equip wells caused the Company to eliminate 35 gross proved
undeveloped locations in the Knox Field which contained an estimated 45 net Bcfe
of proved undeveloped reserves. Similar factors combined with unfavorable
drilling and production results eliminated approximately 93 Bcfe of proved
reserves in the Giddings and Louisiana Trend areas.
 
     In the Independence area of the Giddings Field of Texas, a single well
completed in late March 1997, which the Company had estimated to contain 15.7
Bcfe of Company reserves at March 31, 1997, was significantly and adversely
affected by another operator's offset well which damaged the reservoir and
reduced the Company's estimated ultimate recovery to 8.0 Bcfe of reserves.
 
     In late June 1997, management reviewed its March 31, 1997 internal
estimates of proved reserves and related present value and, after giving effect
to the fourth quarter 1997 drilling and production results, oil and gas prices,
higher drilling and completion costs, and additional leasehold acquisition costs
and delay rentals, determined that the Company had less reserve potential than
had previously been estimated. As a result, management estimated that at June
30, 1997 the Company would have capitalized costs of oil and gas properties
which would exceed its full cost ceiling by approximately $150 million to $200
million. On June 27, 1997, the Company issued a press release which included
this estimate. Subsequently, based on the Company's final year-end estimates of
its proved reserves and related estimated future net revenues, which took into
account additional drilling and production results, management determined that
as of June 30, 1997, its capitalized costs exceeded its full cost ceiling by
approximately $236 million. No such writedown was experienced by the Company in
fiscal 1996 or fiscal 1995.
 
                                       45
<PAGE>   53
 
     Oil and Gas Depreciation, Depletion and Amortization. DD&A of oil and gas
properties for fiscal 1997 was $103.3 million, $52.4 million higher than fiscal
1996's expense of $50.9 million, and $77.9 million higher than fiscal 1995's
expense of $25.4 million. The expense in fiscal 1997 excluded the effects of the
asset writedown. The average DD&A rate per Mcfe, which is a function of
capitalized costs, future development costs, and the related underlying reserves
in the periods presented, increased to $1.31 in fiscal 1997 compared to $0.85 in
fiscal 1996 and $0.80 in fiscal 1995.
 
     Depreciation and Amortization of Other Assets. D&A of other assets
increased to $3.8 million in fiscal 1997, compared to $3.2 million in fiscal
1996 and $1.8 million in fiscal 1995. This increase in fiscal 1997 was caused by
an increase in D&A as a result of increased investments in depreciable buildings
and equipment and increased amortization of debt issuance costs as a result of
the issuance of Senior Notes in May 1995, April 1996 and March 1997.
 
     General and Administrative. G&A expenses, which are net of capitalized
internal payroll and non-payroll expenses were $8.8 million in fiscal 1997, up
83% from $4.8 million in fiscal 1996 and up from $3.6 million in fiscal 1995.
The increases in fiscal 1997 compared to fiscal 1996 and 1995 result primarily
from increased personnel expenses required by the Company's growth and industry
wage inflation. The Company capitalized $3.9 million of internal costs in fiscal
1997 directly related to the Company's oil and gas exploration and development
efforts, compared to $1.7 million in 1996 and $0.6 million in 1995.
 
     Interest and Other. Interest and other expense increased to $18.6 million
in fiscal 1997 as compared to $13.7 million in 1996 and $6.6 million in fiscal
1995. Interest expense in the fourth quarter of fiscal 1997 was $8.7 million,
reflecting the issuance of $300 million of Senior Notes in March 1997. In
addition to the interest expense reported, the Company capitalized $12.9 million
of interest during fiscal 1997, compared to $6.4 million capitalized in fiscal
1996 and $1.6 million in fiscal 1995.
 
     Provision (Benefit) for Income Taxes. The Company recorded an income tax
benefit of $3.6 million for fiscal 1997, before consideration of the $3.8
million tax benefit associated with the extraordinary loss from the early
extinguishment of debt, compared to income tax expense of $12.9 million in 1996
and $6.3 million in 1995. All of the income tax expense in 1996 and 1995 was
deferred due to tax net operating losses and carryovers resulting from the
Company's drilling program.
 
     The Company's loss before income taxes and extraordinary item of $180.3
million created a tax benefit for financial reporting purposes of $67.7 million.
However, due to limitations on the recognition of deferred tax assets, the total
tax benefit was reduced to $3.6 million.
 
     At June 30, 1997, the Company had a net operating loss carryforward of
approximately $300 million for regular federal income taxes which will expire in
future years beginning in 2007. Management believed that it could not be
demonstrated at that time that it was more likely than not that the deferred
income tax assets, comprised primarily of the net operating loss carryforward,
would be realizable in future years, and therefore a valuation allowance of
$64.1 million was recorded in fiscal 1997. A deferred tax benefit related to the
exercise of employee stock options of approximately $4.8 million was allocated
directly to additional paid-in capital in 1997, compared to $7.9 million in 1996
and $1.2 million in fiscal 1995.
 
RISK MANAGEMENT ACTIVITIES
 
     Periodically the Company utilizes hedging strategies to hedge the price of
a portion of its future oil and gas production. These strategies include (1)
swap arrangements that establish an index-related price above which the Company
pays the counterparty and below which the Company is paid by the counterparty,
(2) the purchase of index-related puts that provide for a "floor" price below
which the counterparty pays the Company the amount by which the price of the
commodity is below the contracted floor, (3) the sale of index-related calls
that provide for a "ceiling" price above which the Company pays the counterparty
the amount by which the price of the commodity is above the contracted ceiling,
and (4) basis protection swaps, which are arrangements that guarantee the price
differential of oil or gas from a specified delivery point or points. Results
from hedging transactions are reflected in oil and gas sales to the extent
related to the Company's oil and gas production. The Company's oil and gas
hedging transactions are all related to the
 
                                       46
<PAGE>   54
 
Company's oil and gas production volumes or physical purchase or sale
commitments of its oil and gas marketing subsidiaries.
 
     As of March 31, 1998, the Company had the following natural gas swap
arrangements for periods after March 1998:
 
<TABLE>
<CAPTION>
                                                                             NYMEX-
                                                               MONTHLY       INDEX
                                                               VOLUME     STRIKE PRICE
                           MONTHS                              (MMBTU)    (PER MMBTU)
<S>                                                           <C>         <C>
May 1998....................................................  5,270,000      $2.310
June 1998...................................................  6,300,000      $2.356
July 1998...................................................  6,510,000      $2.356
August 1998.................................................  6,510,000      $2.356
September 1998..............................................  6,300,000      $2.356
October 1998................................................  4,030,000      $2.317
</TABLE>
 
     The Company has closed a transaction for natural gas previously hedged for
the period April through November 1999 and received proceeds of $0.9 million,
which will be recognized as income during the corresponding months of
production. The Company does not currently have any oil hedge transactions in
place. Gains or losses on the crude oil and natural gas hedging transactions are
recognized as price adjustments in the months of related production.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  FINANCIAL FLEXIBILITY AND LIQUIDITY
 
     In April 1998, the Company completed an offering of $230 million of
Preferred Stock and $500 million principal amount of Old Notes. The net proceeds
of these offerings were approximately $711 million, of which $170 million was
used to retire all of the Company's commercial bank debt, approximately $100
million was used to retire all $90 million principal amount of the Company's
10 1/2% Notes, $310 million was used to fund certain of the Company's
acquisitions, with the balance of the net proceeds increasing the Company's
working capital.
 
     As of March 31, 1998, the Company had a working capital deficit of
approximately $69 million which was eliminated with the proceeds from the April
1998 Offerings. The Company estimates that its capital expenditures (excluding
acquisitions) for 1998 will be between $225 million and $250 million, including
$200-$220 million for drilling and completion expenditures, and the balance for
acreage acquisition and maintenance, seismic programs and capitalized general
and administrative costs. The capital expenditure budget is largely
discretionary, and can be adjusted by the Company based on operating results or
other factors. The Company believes it has sufficient capital resources from
anticipated cash flow from operations and working capital to fund its drilling
program for 1998.
 
     On May 20, 1998, the Company's Board of Directors approved the expenditure
of up to $25 million to repurchase Common Stock. As of June 18, 1998, the
Company had purchased approximately 3.4 million shares of Common Stock for an
aggregate amount of $14.2 million pursuant to such authorization.
 
     The Company is currently negotiating with its commercial bank group to
establish the Replacement Credit Facility, a four-year revolving secured credit
facility. It is anticipated that this facility, which will consist of both a
U.S. and a Canadian facility, will be completed in June 1998 and will contain
terms and conditions similar to the bank facilities the Company has had in the
past. It is expected that the U.S. facility will be documented at $250 million
and the Canadian facility at $50 million, with initial borrowing bases of $175
million and $25 million, respectively. The total borrowing base of the
Replacement Credit Facility is subject to the amount of secured senior
indebtedness that may be incurred under the Company's indentures, including the
Senior Notes Indenture. At March 31, 1998 on a pro forma basis, under the most
restrictive debt incurrence covenant, the Company could have incurred $200
million of senior secured indebtedness. The
 
                                       47
<PAGE>   55
 
primary purpose of the Replacement Credit Facility will be to provide funds for
the acquisition and development of oil and gas properties.
 
     During April 1998, the Company received a senior debt credit rating
decrease from both Moody's Investors Service and Standard & Poor's Rating
Services to B1 and B+, respectively. The rating agencies cited, among other
factors, the Company's long-term debt to total book capitalization, which, after
the Offerings, is approximately 67%.
 
     The Company is subject to certain routine legal proceedings, none of which
are expected to have a material adverse effect upon the Company's financial
condition or operations. The Company is also a defendant in other non-routine
lawsuits, which are described in Note 3 of the notes to the accompanying interim
financial statements. An adverse outcome in one or more of such suits could have
a material effect on the Company, although management is unable to quantify the
Company's exposure to liability. No provision for litigation liability has been
recorded in the Company's financial statements.
 
  FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
 
     Cash Flows from Operating Activities. The Company's cash provided by
operating activities increased 24% to $49.2 million during the Current Quarter
compared to $39.7 million during the Prior Quarter. The increase was due
primarily to cash provided from changes in current assets and current
liabilities between periods.
 
     Cash Flows from Investing Activities. Cash used in investing activities
increased to $166.5 million during the Current Quarter from $160.1 million in
the Prior Quarter. The Company completed several acquisitions requiring cash in
the Current Quarter which totaled $82 million, compared to none in the Prior
Quarter, offset by a significant decrease in drilling activity and leasehold
acquisitions in the Current Quarter compared to the Prior Quarter. During the
Current Quarter the Company expended approximately $62 million to initiate
drilling on 35 gross (17.1 net) wells and invested approximately $5 million in
leasehold acquisitions. This compares to $129 million to initiate drilling on 52
gross (32.9 net) wells and $30 million to purchase leasehold in the Prior
Quarter.
 
     Cash Flows from Financing Activities. Cash provided by financing activities
was $25.4 million in the Current Quarter, compared to $280.5 million in the
Prior Quarter. During the Current Quarter, the Company retired $120 million in
bank debt which it assumed at the completion of the Hugoton acquisition. The
Company refinanced the Hugoton debt and obtained additional working capital of
$25 million with proceeds from the Company's commercial bank credit facility.
During the Prior Quarter, the Company issued $300 million in Senior Notes.
 
  FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
 
     Cash Flows from Operating Activities. Cash provided by operating activities
(inclusive of changes in components of working capital) increased to $139.2
million in the Transition Period, compared to $41.9 million in the Prior Period.
The primary reason for the increase was significant changes in the components of
current assets and liabilities, specifically $92 million of short-term
investments which were converted into cash during the Transition Period. Cash
provided by operating activities is expected to be a significant source for
meeting the forecasted cash requirements for 1998.
 
     Cash Flows from Investing Activities. Cash used in investing activities
decreased to $136.5 million in the Transition Period, compared to $184.1 million
in the Prior Period. This decrease in cash used in investing activities was due
primarily to the $90.4 million received from the sale of the Company's
investment in Bayard common stock during the Transition Period, offset by other
investments. Approximately $189.8 million was expended by the Company in the
Transition Period for development and exploration of oil and gas properties, as
compared to $186.8 million in the Prior Period. In the Transition Period, other
property and equipment additions were $27.0 million primarily as a result of its
$11.9 million investment in the Louisiana Chalk Gathering System and Masters
Creek Gas Plant as well as additional investments in its Oklahoma City office
complex.
 
                                       48
<PAGE>   56
 
     Cash Flows from Financing Activities. Cash used in financing activities was
$2.8 million during the Transition Period, compared to cash provided by
financing activities of $231.3 million during the Prior Period. The decrease was
due primarily to the proceeds received from the issuance of common stock during
the Prior Period of $288.1 million, which was partially offset by the net
payments on long-term borrowings of $56.8 million during the Prior Period.
 
  FOR THE FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
     Cash Flows from Operating Activities. Cash provided by operating activities
(inclusive of changes in components of working capital) decreased to $84.1
million in fiscal 1997, compared to $121.0 million in fiscal 1996 and $54.7
million in fiscal 1995. The primary reason for the decrease from fiscal 1996 to
1997 was significant changes in the components of current assets and
liabilities, specifically $102.9 million of short-term investments at June 30,
1997.
 
     Cash Flows from Investing Activities. Significantly higher cash was used in
fiscal 1997 for development, exploration and acquisition of oil and gas
properties compared to fiscal 1996 and 1995. Approximately $524 million was
expended by the Company in fiscal 1997 (net of proceeds from sale of leasehold,
equipment and other), compared to $344 million in fiscal 1996. In fiscal 1995
the Company expended $113 million (net of proceeds from sale of leasehold,
equipment and other). Net cash proceeds received by the Company for sales of oil
and gas equipment, leasehold and other decreased to approximately $3.1 million
in fiscal 1997, compared to $6.2 million in fiscal 1996 and $12.0 million in
fiscal 1995. In fiscal 1997, other property and equipment additions were $34
million primarily as a result of its $16.8 million investment in the Louisiana
Chalk Gathering System and Masters Creek Gas Plant as well as additional
investments in its Oklahoma City office complex.
 
     Cash Flows from Financing Activities. On December 2, 1996, the Company
completed a public offering of 8,972,000 shares of Common Stock at a price of
$33.63 per share resulting in net proceeds to the Company of approximately
$288.1 million. Approximately $55.0 million of the proceeds was used to defease
the Company's $47.5 million Senior Notes due 2001, and $11.2 million of the
proceeds was used to retire all amounts outstanding under the Company's
commercial bank credit facilities.
 
     On March 17, 1997, the Company concluded the sale of $150 million of 7 7/8%
Notes and $150 million of 8 1/2% Notes which offering resulted in net proceeds
to the Company of approximately $292.6 million. The 7 7/8% Notes were issued at
99.92% of par and the 8 1/2% Notes were issued at 99.414% of par. The 7 7/8%
Notes and the 8 1/2% Notes are redeemable at the option of the Company at any
time at the redemption or make-whole prices set forth in the respective
Indentures.
 
     In fiscal 1996, cash flows from financing activities were $219.5 million,
largely as the result of the issuance of 5,989,500 shares of Common Stock (net
proceeds to the Company of approximately $99.4 million) and $120 million of
9 1/8% Notes. The Company may, at its option, redeem prior to April 15, 1999 up
to $42 million principal amount of the 9 1/8% Notes at 109.125% of the principal
amount thereof from equity offering proceeds. The 9 1/8% Notes are redeemable at
the option of the Company at any time at the redemption or make-whole prices set
forth in the 9 1/8% Note Indenture.
 
YEAR 2000
 
     Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. Although the erroneous date can be interpreted in a number
of different ways, typically the year 2000 is interpreted by the computer as the
year 1900. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business.
 
     The Company has completed an assessment of its core financial and
operational software systems and has found them either already in compliance or
the necessary steps to bring them into compliance have been identified. These
tasks are scheduled for completion by December 31, 1998. The Company believes
that the
 
                                       49
<PAGE>   57
 
successful completion of these tasks will mitigate any critical Year 2000
issues. However, if these tasks are not completed by year-end 1999, the Year
2000 issue could have a material impact on the Company's ability to meet
financial and reporting requirements. It should not impact the Company's ability
to continue exploration, drilling or production activities.
 
     Assessment of other less critical software systems and various types of
equipment is continuing and should be completed by September 1998. The Company
believes that the potential impact, if any, of these systems not being Year 2000
compliant will at most require employees to manually complete otherwise
automated tasks or calculations.
 
     Following the completion of the aforementioned assessment, the Company will
initiate formal communication with its significant suppliers, business partners
and customers to determine the extent to which the Company is vulnerable to
those third parties' failure to correct their own Year 2000 issues. However,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's systems
would not have a material adverse effect on the Company. The Company has
determined it has no exposure to contingencies related to the Year 2000 issue
for the products it has sold.
 
     The Company will utilize both internal and external resources to complete
tasks and perform testing necessary to address the Year 2000 issue. Completion
of the Year 2000 project is based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
 
                                       50
<PAGE>   58
 
                                   MANAGEMENT
 
DIRECTORS AND SENIOR OFFICERS
 
     The following table sets forth names, ages and titles of the directors and
senior officers of the Company as of June 30, 1998:
 
<TABLE>
<CAPTION>
                   NAME                     AGE                     POSITION
<S>                                         <C>   <C>
Aubrey K. McClendon(1)(2).................  38    Chairman of the Board, Chief Executive
                                                  Officer and Director
Tom L. Ward(1)(2).........................  38    President, Chief Operating Officer and
                                                  Director
Marcus C. Rowland.........................  45    Executive Vice President and Chief Financial
                                                    Officer
Steven C. Dixon...........................  39    Senior Vice President -- Operations
J. Mark Lester............................  45    Senior Vice President -- Exploration
Henry J. Hood.............................  38    Senior Vice President -- Land and Legal
Ronald A. Lefaive.........................  50    Senior Vice President -- Accounting,
                                                  Controller and Chief Accounting Officer
Martha A. Burger..........................  45    Treasurer and Vice President -- Human
                                                    Resources
Thomas S. Price, Jr.(3)...................  46    Vice President -- Corporate Development
Frank E. Jordan(3)........................  37    Vice President -- Operations
Stephen W. Miller(3)......................  41    Vice President -- Drilling
Dale W. Bossert(3)........................  53    Vice President -- Production
Michael A. Johnson(3).....................  33    Vice President -- Financial Reporting
Charles W. Imes(3)........................  51    Vice President -- Information Technology
Terry L. Kite(3)..........................  44    Vice President -- Information Technology
Stephen L. Douglas(3).....................  41    Vice President -- Acquisitions
Tony S. Say(3)............................  41    President -- Chesapeake Energy Marketing,
                                                  Inc.
Janice A. Dobbs(3)........................  50    Corporate Secretary and Compliance Manager
E. F. Heizer, Jr.(2)......................  68    Director
Breene M. Kerr(1)(4)......................  69    Director
Shannon T. Self(1)(4).....................  41    Director
Frederick B. Whittemore(2)................  67    Director
Walter C. Wilson(4).......................  62    Director
</TABLE>
 
------------------------------
 
(1) Member of the Executive Committee.
 
(2) Member of the Compensation Committee.
 
(3) Not an executive officer.
 
(4) Member of the Audit Committee.
 
     Aubrey K. McClendon has served as Chairman of the Board, Chief Executive
Officer and director of the Company since its inception in 1989. From 1982 to
1989, Mr. McClendon was an independent producer of oil and gas in affiliation
with Tom L. Ward, the Company's President and Chief Operating Officer. Mr.
McClendon is a member of the Board of Visitors of the Fuqua School of Business
at Duke University, an Executive Committee member of the Texas Independent
Producers and Royalty Owners Association, a director of the Oklahoma Independent
Petroleum Association, and a director of the Louisiana Independent Oil and Gas
Association. Mr. McClendon is a director of Pan East Petroleum Corp., a Canadian
exploration
 
                                       51
<PAGE>   59
 
and production company listed on the Toronto Stock Exchange. Mr. McClendon
graduated from Duke University in 1981.
 
     Tom L. Ward has served as President, Chief Operating Officer, and a
director of the Company since its inception in 1989. From 1982 to 1989, Mr. Ward
was an independent producer of oil and gas in affiliation with Aubrey K.
McClendon, the Company's Chairman and Chief Executive Officer. Mr. Ward is a
member of the Board of Trustees of Anderson University in Anderson, Indiana. Mr.
Ward graduated from the University of Oklahoma in 1981.
 
     Marcus C. Rowland was appointed Executive Vice President and Chief
Financial Officer in March 1998. He served as Senior Vice President and Chief
Financial Officer from September 1997 to March 1998 and as Vice
President -- Finance and Chief Financial Officer of the Company from 1993 until
1997. From 1990 until his association with the Company, Mr. Rowland was Chief
Operating Officer of Anglo-Suisse, L.P. assigned to the White Nights Russian
Enterprise, a joint venture of Anglo-Suisse, L.P. and Phibro Energy Corporation,
a major foreign operation which was granted the right to engage in oil and gas
operations in Russia. Prior to his association with White Nights Russian
Enterprise, Mr. Rowland owned and managed his own oil and gas company and prior
to that was Chief Financial Officer of a private exploration company in Oklahoma
City from 1981 to 1985. Mr. Rowland is a Certified Public Accountant. Mr.
Rowland graduated from Wichita State University in 1975.
 
     Steven C. Dixon has been Senior Vice President -- Operations since 1995 and
served as Vice President -- Exploration from 1991 to 1995. Mr. Dixon was a
self-employed geological consultant in Wichita, Kansas, from 1983 through 1990.
He was employed by Beren Corporation in Wichita, Kansas, from 1980 to 1983 as a
geologist. Mr. Dixon graduated from the University of Kansas in 1980.
 
     J. Mark Lester has been Senior Vice President -- Exploration since 1995 and
served as Vice President -- Exploration from 1989 to 1995. From 1986 to 1989,
Mr. Lester was employed by Messrs. McClendon and Ward. He was employed by
various independent oil companies in Oklahoma City from 1980 to 1986, and was
employed by Union Oil Company of California from 1977 to 1980 as a geophysicist.
Mr. Lester graduated from Purdue University in 1975 and in 1977.
 
     Henry J. Hood was appointed Senior Vice President -- Land and Legal in 1997
and served as Vice President-Land and Legal from 1995. Mr. Hood was retained as
a consultant to the Company during the two years prior to his joining the
Company, and he was of counsel with the law firm of White, Coffey, Galt & Fite
from 1992 to 1995. Mr. Hood was associated with and a partner of the law firm of
Watson & McKenzie from 1987 to 1992. Mr. Hood is a member of the Oklahoma and
Texas Bar Associations. Mr. Hood graduated from Duke University in 1982 and from
the University of Oklahoma College of Law in 1985.
 
     Ronald A. Lefaive has served as Senior Vice President -- Accounting since
March 1998 and as Controller and Chief Accounting Officer since 1993. From 1991
until his association with the Company, Mr. Lefaive was Controller for Phibro
Energy Production, Inc., an international exploration and production subsidiary
of Phibro Energy, whose principal operations were located in Russia. From 1982
to 1991, Mr. Lefaive served as Assistant Controller, General Auditor, and
Manager of Management Information Systems at Conquest Exploration Company in
Houston, Texas. Prior to joining Conquest, Mr. Lefaive held various financial
staff and management positions with The Superior Oil Company from 1980 to 1982
and Shell Oil Company from 1975 to 1982. Mr. Lefaive is a Certified Public
Accountant and graduated from the University of Houston in 1975.
 
     Martha A. Burger has served as Treasurer since 1995 and as Vice
President -- Human Resources since June 1998. She was the Company's Human
Resources Manager from 1996 to 1998. From 1994 to 1995, she served in various
accounting positions with the Company including Assistant
Controller -- Operations. From 1989 to 1993, Ms. Burger was employed by Hadson
Corporation as Assistant Treasurer and from 1993 to 1994, served as Vice
President and Controller of Hadson. Prior to joining Hadson Corporation, Ms.
Burger was employed by The Phoenix Resource Companies, Inc. as Assistant
Treasurer and by Arthur Andersen & Co. Ms. Burger is a Certified Public
Accountant and graduated from the University of Central Oklahoma in 1982 and
from Oklahoma City University in 1992.
 
                                       52
<PAGE>   60
 
     Thomas S. Price, Jr. has served as Vice President -- Corporate Development
since 1992 and was a consultant to the Company during the prior two years. He
was employed by Kerr-McGee Corporation, Oklahoma City, from 1988 to 1990 and by
Flag-Redfern Oil Company from 1984 to 1988. Mr. Price graduated from the
University of Central Oklahoma in 1983, from the University of Oklahoma in 1989,
and from the American Graduate School of International Management in 1992.
 
     Frank E. Jordan has served as Vice President -- Operations since February
1998. From 1994 to 1998, Mr. Jordan served in various engineering positions with
the Company, including District Manager -- College Station in 1996 and Vice
President -- Drilling, Northern Division in 1997. Prior to joining the Company,
Mr. Jordan served as a Drilling Engineer for Sedco Forex Schlumberger from 1985
to 1989 and as a Production Engineer for Kerr McGee Corporation from 1991 to
1994. Mr. Jordan is a member of the Society of Petroleum Engineers and graduated
from Texas A & M University in 1984 and in 1990.
 
     Stephen W. Miller has served as Vice President -- Drilling since 1996 and
served as District Manager -- College Station District from 1994 to 1996. Mr.
Miller held various engineering positions in the oil and gas industry from 1980
to 1993. Mr. Miller is a registered Professional Engineer in Texas, and is a
member of the Society of Petroleum Engineers and graduated from Texas A & M
University in 1980.
 
     Dale W. Bossert has served as Vice President -- Production since 1997. Mr.
Bossert was previously employed by Celsius Energy Corporation as Consulting
General Manager -- Canada in 1996 and by Union Pacific Resources Company of Fort
Worth, Texas from 1978 serving in various capacities, including Vice
President -- Production from 1989 to 1993 and as Vice President -- Exploration
and Production Services from 1993 to 1995. Mr. Bossert graduated from the
University of Alberta in 1966.
 
     Michael A. Johnson has served as Vice President -- Financial Reporting
since March 1998. From 1993 to March 1998 he served as Assistant Controller to
the Company. From 1991 to 1993, he served as Project Manager for Phibro Energy
Production, Inc., a Russian joint venture. From 1987 to 1991, Mr. Johnson served
as audit manager for Arthur Andersen & Co. Mr. Johnson is a Certified Public
Accountant and graduated from the University of Texas at Austin in 1987.
 
     Charles W. Imes has served as Vice President -- Information Technology
since 1997 and served as Director -- Management Information Systems from 1993 to
1997. From 1983 to 1993, Mr. Imes owned Imes Software Systems and served as a
consultant and supplier of software to the Company from 1990 to 1993. Mr. Imes
graduated from the University of Oklahoma in 1969.
 
     Terry L. Kite has served as Vice President -- Information Technology since
February 1997. From 1981 to 1996, Mr. Kite served in various positions in
information technology at Amerada Hess Corporation in Houston, Texas, including
Manager -- Geoscience and Engineering Systems. Prior to joining Amerada Hess,
Mr. Kite held information systems staff positions with Earth Science Programming
in Tulsa from 1979 to 1980 and with Seismograph Service Corporation from 1976 to
1979. Mr. Kite graduated from the Colorado School of Mines in 1976.
 
     Stephen L. Douglas has served as Vice President -- Acquisitions since
December 1997. From 1996 until his association with the Company, Mr. Douglas was
Chief Financial Officer of Peak USA and previously served as Chief Financial
Officer of Bechtel Energy Corporation's Russian joint stock company. From 1992
to 1994, Mr. Douglas was Chief Financial Officer for Phibro Energy Production,
Inc., a Russian joint venture. In 1990, Mr. Douglas served as a strategic
planner and business analyst for FMC, a conglomerate in the oil field equipment
manufacturing business. From 1978 until 1988, Mr. Douglas served in various
finance and accounting positions with Chevron and Gulf. Mr. Douglas is a
Certified Public Accountant and a Certified Management Accountant. He graduated
from New England College in 1978 and from Carnegie Mellon University in 1990.
 
     Tony S. Say has served as President of Chesapeake Energy Marketing, Inc.
since 1995. In 1993, Mr. Say co-founded Princeton Natural Gas Company, which was
purchased by Chesapeake in 1995. From 1986 to 1993, Mr. Say was President and
Chief Executive Officer of Clinton Gas Transmission, Inc., a company he
co-founded and later sold to a major utility in 1993. From 1979 to 1986, Mr. Say
was employed by Delhi Gas
 
                                       53
<PAGE>   61
 
Pipeline Corporation. Mr. Say is a member of the Natural Gas Society of Oklahoma
and the Natural Gas Society of North Texas and graduated from the University of
Oklahoma in 1979.
 
     Janice A. Dobbs has served as Corporate Secretary and Compliance Manager
since 1993. From 1975 until her association with the Company, Ms. Dobbs was the
corporate/securities legal assistant with the law firm of Andrews Davis Legg
Bixler Milsten & Price, Inc. in Oklahoma City. From 1973 to 1975, Ms. Dobbs was
with Texas International Company, an oil and gas exploration and production
company in Oklahoma City. Ms. Dobbs is a Certified Legal Assistant, an associate
member of the American Bar Association, a member of the American Society of
Corporate Secretaries and the Society of Human Resources Management.
 
     E. F. Heizer, Jr. has been a director of the Company since 1993. From 1985
to the present, Mr. Heizer has been a private venture capitalist. He founded
Heizer Corp., a publicly traded business development company, in 1969 and served
as Chairman and Chief Executive Officer from 1969 until 1986, when Heizer
Corporation was reorganized into a number of public and private companies. Mr.
Heizer was assistant treasurer of the Allstate Insurance Company from 1962 to
1969 in charge of Allstate's venture capital operations. He was employed by
Booz, Allen and Hamilton from 1958 to 1962, Kidder, Peabody & Co. from 1956 to
1958, and Arthur Andersen & Co. from 1954 to 1956. He serves on the advisory
board of the Kellogg School of Management at Northwestern University. Mr. Heizer
is a director of Material Science Corporation, also a New York Stock Exchange
listed company in Elk Grove, Illinois and several private companies. Mr. Heizer
graduated from Northwestern University in 1951 and from Yale University Law
School in 1954.
 
     Breene M. Kerr has been a director of the Company since 1993. He is Vice
Chairman of Seven Seas Petroleum Corporation, Houston, Texas, an exploration and
production company with operations in Colombia, South America. In 1969, Mr. Kerr
founded Kerr Consolidated, Inc. which was sold in 1996. In 1969, Mr. Kerr co-
founded the Resource Analysis and Management Group and remained its senior
partner until 1982. From 1967 to 1969, he was Vice President of Kerr-McGee
Chemical Corporation. From 1951 through 1967, Mr. Kerr worked for Kerr-McGee
Corporation as a geologist and land manager. Mr. Kerr has served as chairman of
the Investment Committee for the Massachusetts Institute of Technology and is a
life member of the Corporation (Board of Trustees) of that university. He served
as a director of Kerr-McGee Corporation from 1957 to 1981. Mr. Kerr currently is
a trustee and serves on the Investment Committee of the Brookings Institute in
Washington, D.C., and has been an associate director since 1987 of Aven Gas &
Oil, Inc., an oil and gas property management company located in Oklahoma City.
Mr. Kerr graduated from the Massachusetts Institute of Technology in 1951.
 
     Shannon T. Self has been a director of the Company since 1993. He is a
shareholder of Self, Giddens & Lees, Inc., Attorneys at Law, in Oklahoma City,
which he co-founded in 1991. Mr. Self was an associate and shareholder in the
law firm of Hastie and Kirschner, Oklahoma City, from 1984 to 1991 and was
employed by Arthur Young & Co. from 1979 to 1980. Mr. Self is a member of the
Visiting Committee of Northwestern University School of Law and a director of
The Rock Island Group, a private computer firm in Oklahoma City. Mr. Self is a
Certified Public Accountant. He graduated from the University of Oklahoma in
1979 and from Northwestern University Law School in 1984.
 
     Frederick B. Whittemore has been a director of the Company since 1993. Mr.
Whittemore has been an advisory director of Morgan Stanley & Co. since 1989 and
was a managing director of Morgan Stanley & Co. from 1970 to 1989. He was
Vice-Chairman of the American Stock Exchange from 1982 to 1984. Mr. Whittemore
is a director of Ecofin Limited, London; Partner Reinsurance Company, Bermuda;
Maxcor Financial Group Inc., New York; SunLife of New York, New York; KOS
Pharmaceuticals, Inc., Miami, Florida; and Southern Pacific Petroleum,
Australia, NL. Mr. Whittemore graduated from Dartmouth College in 1953 and from
the Amos Tuck School of Business Administration in 1954.
 
     Walter C. Wilson has been a director of the Company since 1993. From 1963
to 1974 and from 1978 to 1997, Mr. Wilson was a general agent with Massachusetts
Mutual Life Insurance Company. From 1974 to 1978, he was Senior Vice President
of Massachusetts Mutual Life Insurance Company, and from 1958 to 1963, he was an
agent with that company. Mr. Wilson is a member of the Board of Trustees of
Springfield College, Springfield, Massachusetts, and is a director of Earth
Satellite Corporation of Rockville, Maryland and "Q" Companies, Inc. of Houston,
Texas. Mr. Wilson graduated in 1958 from Dartmouth College.
                                       54
<PAGE>   62
 
     The directors are divided into three classes, with each class having as
equal a number of directors as practicable. The directors are elected on a
staggered basis for three-year terms. One class stands for re-election at each
annual meeting of stockholders. The Company's executive officers serve at the
discretion of the Board of Directors.
 
             DESCRIPTION OF OTHER INDEBTEDNESS AND PREFERRED STOCK
 
THE EXISTING NOTES
 
     The following summaries of the Indentures governing the Existing Notes do
not purport to be complete and are subject to, and qualified in their entirety
by reference to, the applicable Existing Notes Indentures. Capitalized terms
used herein but not defined have the meanings assigned to such terms in the
applicable Existing Notes Indenture.
 
     General. In addition to the Old Notes, the Company presently has
outstanding $120 million in aggregate principal amount of 9 1/8% Notes which
mature on April 15, 2006, $150 million in aggregate principal amount of 7 7/8%
Senior Notes which mature on March 15, 2004 (the "7 7/8% Notes") and $150
million in aggregate principal amount of 8 1/2% Senior Notes which mature on
March 15, 2012 (the "8 1/2% Notes."). The 9 1/8% Notes bear interest at an
annual rate of 9 1/8%, payable semiannually on each April 15 and October 15; the
7 7/8% Notes bear interest at an annual rate of 7 7/8%, payable semiannually on
each March 15 and September 15; and the 8 1/2% Notes bear interest at an annual
rate of 8 1/2%, payable semiannually on each March 15 and September 15. The
Existing Notes are senior, unsecured obligations of the Company that rank pari
passu in right of payment with all existing and future Senior Indebtedness of
the Company and rank senior in right of payment to all existing and future
subordinated indebtedness of the Company. The Existing Notes are fully and
unconditionally guaranteed, jointly and severally, by the Company's subsidiaries
other than CEMI.
 
     Optional Redemption. At any time on or after April 15, 2001, the Company
may, at its option, redeem all or any portion of the 9 1/8% Notes at the
redemption prices (expressed as percentages of the principal amount of the
9 1/8% Notes) set forth below, plus, in each case, accrued interest thereon to
the applicable redemption date, if redeemed during the twelve-month period
beginning April 15 of the year indicated:
 
<TABLE>
<CAPTION>
YEAR                                                        PERCENTAGE
<S>                                                         <C>
2001......................................................   104.5625%
2002......................................................   102.2813%
2003 and thereafter.......................................   100.0000%
</TABLE>
 
     Notwithstanding the foregoing, at any time prior to April 15, 2001, the
Company may, at its option, redeem all or any portion of the 9 1/8% Notes at the
Make-Whole Price plus accrued and unpaid interest to the date of redemption. In
addition, in the event the Company consummates one or more Equity Offerings on
or prior to April 15, 1999, the Company, at its option, may redeem up to $42
million of the aggregate principal amount of the 9 1/8% Notes with all or a
portion of the aggregate net proceeds received by the Company from such Equity
Offerings at a redemption price of 109.125% of the aggregate principal amount of
the 9 1/8% Notes so redeemed, plus accrued and unpaid interest thereon to the
redemption date; provided, however, that following such redemption, at least $78
million of the aggregate principal amount of the 9 1/8% Notes remains
outstanding.
 
     At any time prior to March 15, 2004, the Company may, at its option, redeem
all or any portion of either the 7 7/8% Notes or the 8 1/2% Notes at the
Make-Whole Price plus accrued and unpaid interest to the date of redemption. At
any time on or after March 15, 2004, the Company may, at its option, redeem all
or any portion of the 8 1/2% Notes at the redemption prices (expressed as
percentages of the principal amount of the
 
                                       55
<PAGE>   63
 
8 1/2% Notes) set forth below, plus, in each case, accrued and unpaid interest
thereon to the applicable redemption date, if redeemed during the twelve month
period beginning March 15 of the years indicated.
 
<TABLE>
<CAPTION>
YEAR                                                        PERCENTAGE
<S>                                                         <C>
2004......................................................   104.2500%
2005......................................................   103.4000%
2006......................................................   102.5500%
2007......................................................   101.7000%
2008......................................................   100.8500%
2009 and thereafter.......................................   100.0000%
</TABLE>
 
     Change of Control. The 9 1/8% Notes Indenture provides that, following the
occurrence of any Change of Control, the Company must offer to purchase all
outstanding 9 1/8% Notes at a purchase price equal to 101% of the aggregate
principal amount of the 9 1/8% Notes, plus accrued and unpaid interest to the
date of purchase.
 
     Restrictive Covenants. The Existing Notes Indentures contain restrictive
covenants that limit the Company and its Restricted Subsidiaries with respect to
certain matters, including restricted payments, changes in business, liens,
debt, mergers, dividends, investments, sale and leaseback transactions,
transactions with affiliates, and sales of assets. In the event of certain asset
dispositions, the Company will be required, under certain circumstances, to use
Excess Proceeds to offer to purchase 9 1/8% Notes at 100% of the principal
amount thereof, plus accrued and unpaid interest. The 9 1/8% Notes Indenture
prohibits the Company and any Restricted Subsidiary from incurring Indebtedness,
other than Permitted Indebtedness, unless (i) the Adjusted Consolidated EBITDA
Coverage Ratio is at least 2.5-to-1.0, or (ii) Adjusted Consolidated Net
Tangible Assets ("ACNTA") is at least 200% of Indebtedness of the Company and
its Restricted Subsidiaries. The 9 1/8% Notes Indenture permits the Company and
its Restricted Subsidiaries to incur secured bank indebtedness as Permitted
Indebtedness not in excess of the greater of $75 million and $30 million plus
15% of ACNTA.
 
TERMS OF PREFERRED STOCK
 
     The summary contained herein of certain provisions of the Preferred Stock
does not purport to be complete and is qualified in its entirety by reference to
the provisions of the Certificate of Designation, the form of which is available
from the Company upon request.
 
     General. There are presently outstanding 4,600,000 shares of 7% Cumulative
Convertible Preferred Stock, par value $.01 per share (the "Preferred Stock"),
with a liquidation preference of $50 per share. No other preferred stock is
outstanding.
 
     Ranking. The Preferred Stock will, with respect to dividend distributions
and distributions upon the liquidation, winding-up and dissolution of the
Company, rank (i) senior to all classes of common stock of the Company and to
each other class of capital stock or series of preferred stock established after
the Issue Date by the Board of Directors, the terms of which do not expressly
provide that it ranks senior to or on a parity with the Preferred Stock as to
dividend distributions and distributions upon the liquidation, winding-up and
dissolution of the Company; (ii) subject to certain conditions, on a parity with
any class of capital stock or series of preferred stock issued by the Company
established after the Issue Date by the Board of Directors, the terms of which
expressly provide that such class or series will rank on a parity with the
Preferred Stock as to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of the Company; and (iii) subject to
certain conditions, junior to each class of capital stock or series of preferred
stock issued by the Company established after the Issue Date by the Board of
Directors, the terms of which expressly provide that such class or series will
rank senior to the Preferred Stock as to dividend distributions and
distributions upon liquidation, winding-up and dissolution of the Company.
 
     Dividends. Holders of the Preferred Stock will be entitled to receive
cumulative annual cash dividends of $3.50 per share, payable quarterly in
arrears out of assets legally available therefor, on February 1, May 1, August 1
and November 1 of each year commencing August 1, 1998, when, as and if declared
by the Board of Directors. Dividends will accumulate and be cumulative (whether
or not declared) from the Issue Date.
 
                                       56
<PAGE>   64
 
Dividends will be payable to holders of record as they appear on the Company's
stock register on such record dates, not more than 60 days nor less than 10 days
preceding the payment dates thereof, as shall be fixed by the Company's Board of
Directors. Dividends payable on the Preferred Stock for each full dividend
period will be computed by dividing the annual dividend rate by four. Dividends
payable on the Preferred Stock for any period less than a full dividend period
(based upon the number of days elapsed during the period) will be computed on
the basis of a 360-day year consisting of twelve 30-day months.
 
     No dividends or other distributions (other than a dividend or distribution
payable solely in stock of the Company ranking junior to the Preferred Stock as
to dividends and upon liquidation including the Common Stock, and other than
cash in lieu of fractional shares) may be declared, made or paid or set apart
for payment upon the Common Stock or upon any other stock of the Company ranking
junior to or pari passu with the Preferred Stock as to dividends, nor may any
Common Stock or any other stock of the Company ranking junior to or pari passu
with the Preferred Stock as to dividends or upon liquidation be redeemed,
purchased or otherwise acquired for any consideration (or any money paid to or
made available for a sinking fund for the redemption of any shares of any such
stock) by the Company (except by conversion into or exchange for stock of the
Company ranking junior to the Preferred Stock as to dividends and upon
liquidation) unless full cumulative dividends have been or contemporaneously are
paid or declared and a sum sufficient for the payment thereof is set apart for
such payment on the Preferred Stock for all dividend payment periods terminating
on or prior to the date of such declaration, payment, redemption, purchase or
acquisition. Notwithstanding the foregoing, if full dividends have not been paid
on the Preferred Stock and any other preferred stock ranking pari passu with the
Preferred Stock as to dividends, dividends may be declared and paid on the
Preferred Stock and such other preferred stock so long as the dividends are
declared and paid pro rata so that the amounts of dividends declared per share
on the Preferred Stock and such other preferred stock will in all cases bear to
each other the same ratio that accrued and unpaid dividends per share on the
shares of the Preferred Stock and such other preferred stock bear to each other;
provided that if such dividends are paid in cash on the other preferred stock,
dividends will also be paid in cash on the Preferred Stock. Holders of shares of
the Preferred Stock will not be entitled to any dividend, whether payable in
cash, property or stock, in excess of full cumulative dividends. No interest, or
sum of money in lieu of interest, will be payable in respect of any dividend
payment or payments which may be in arrears.
 
     The holders of shares of Preferred Stock at the close of business on a
dividend payment record date will be entitled to receive the dividend payment on
those shares (except that holders of shares called for redemption on a
redemption date between the record date and the dividend payment date will be
entitled to receive such dividend on such redemption date) on the corresponding
dividend payment record date notwithstanding the subsequent conversion thereof
or the Company's default in payment of the dividend due on that dividend payment
date. However, shares of Preferred Stock surrendered for conversion during the
period between the close of business on any dividend payment record date and the
close of business on the day immediately preceding the applicable dividend
payment record date (except for shares called for redemption on a redemption
date during that period) must be accompanied by payment of an amount equal to
the dividend payable on the shares on that dividend payment record date. A
holder of shares of Preferred Stock on a dividend payment record date who (or
whose transferee) tenders any shares for conversion on a dividend payment record
date will receive the dividend payable by the Company on the Preferred Stock on
that date, and the converting holder need not include payment in the amount of
such dividend upon surrender of shares of Preferred Stock of conversion. Except
as provided above, the Company shall make no payment or allowance for unpaid
dividends, whether or not in arrears, on converted shares or for dividends on
the shares of Common Stock issued upon conversion.
 
     The Company's ability to declare and pay cash dividends and make other
distributions with respect to its capital stock, including the Preferred Stock,
is limited by provisions contained in various financing agreements which
restrict dividend payments to the Company by its subsidiaries. Similarly, the
Company's ability to declare and pay dividends may be limited by applicable
Oklahoma law.
 
     Liquidation Preference. In the event of any voluntary or involuntary
dissolution, liquidation or winding up of the Company, the holders of the
Preferred Stock will be entitled to receive and to be paid out of the Company's
assets available for distribution to its stockholders, before any payment or
distribution is made to
                                       57
<PAGE>   65
 
holders of Common Stock or any other class or series of stock of the Company
ranking junior to the Preferred Stock upon liquidation, a liquidation preference
in the amount of $50 per share of the Preferred Stock, plus accrued and unpaid
dividends thereon. If upon any voluntary or involuntary dissolution, liquidation
or winding up of the Company, the amounts payable with respect to the
liquidation preference of the Preferred Stock and any other shares of stock of
the Company ranking as to any such distribution pari passu with the Preferred
Stock are not paid in full, the holders of the Preferred Stock and of such other
shares will share pro rata in proportion to the full distributable amounts to
which they are entitled. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of the Preferred Stock will
have no right or claim to any of the remaining assets of the Company. Neither
the sale of all or substantially all of the property or business of the Company
(other than in connection with the winding up of its business), nor the merger
or consolidation of the Company into or with any other corporation, will be
deemed to be dissolution, liquidation or winding up, voluntary or involuntary,
of the Company.
 
     Optional Redemption. The Preferred Stock is not subject to any sinking fund
or other similar provisions. The Preferred Stock may not be redeemed prior to
May 1, 2001. On or after May 1, 2001, the Preferred Stock may be redeemed, in
whole or in part, at the option of the Company, in cash, by delivery of fully
paid and nonassessable shares of Common Stock or a combination thereof, upon not
less than 30 days' notice nor more than 60 days' notice, during the twelve-month
periods commencing on May 1 of the years indicated below, at the following
redemption prices per share, plus in each case all accrued and unpaid dividends
due thereon to the redemption date:
 
<TABLE>
<CAPTION>
                                                            REDEMPTION
                                                            PRICE PER
                           YEAR                               SHARE
<S>                                                         <C>
2001......................................................    $52.45
2002......................................................     52.10
2003......................................................     51.75
2004......................................................     51.40
2005......................................................     51.05
2006......................................................     50.70
2007......................................................     50.35
2008 and thereafter.......................................     50.00
</TABLE>
 
     In the event that fewer than all the outstanding shares of the Preferred
Stock are to be redeemed, the shares to be redeemed will be determined pro rata.
 
     From and after the applicable redemption date (unless the Company shall be
in default of payment of the redemption price), dividends on the shares of the
Preferred Stock to be redeemed on such redemption date shall cease to accrue,
said shares shall no longer be deemed to be outstanding, and all rights of the
holders thereof as stockholders of the Company (except the right to receive the
redemption price) will cease.
 
     If any dividends on the Preferred Stock are in arrears, no shares of the
Preferred Stock will be redeemed unless all outstanding shares of the Preferred
Stock are simultaneously redeemed.
 
     Voting Rights. Except as required by law, the holders of the Preferred
Stock will have no voting rights except as set forth below or as otherwise
required by law from time to time.
 
     If the dividends payable on the Preferred Stock are in arrears for six
quarterly periods, the holders of the Preferred Stock voting separately as a
class with the shares of any other preferred stock or preference securities
having similar voting rights will be entitled at the next regular or special
meeting of stockholders of the Company to elect two directors of the Company
(such voting rights and the terms of the directors so elected to continue until
such time as the dividend arrearage on the Preferred Stock has been paid in
full). The affirmative vote or consent of the holders of at least 66 2/3% of the
outstanding Preferred Stock will be required for the issuance of any class or
series of stock (or security convertible into stock) of the Company ranking pari
passu or senior to the Preferred Stock as to dividends, liquidation rights or
voting rights and for amendments to the Company's Certificate of Incorporation
that would affect adversely the rights of holders of
 
                                       58
<PAGE>   66
 
the Preferred Stock, including, without limitation, (i) any increase in the
authorized number of shares of preferred stock and (ii) the issuance of any
shares of Preferred Stock after the Issue Date in excess of the number of shares
of such stock as may be issued upon the exercise of the over-allotment option by
the Initial Purchasers. In all such cases each share of Preferred Stock shall be
entitled to one vote.
 
     Conversion Rights. The Preferred Stock will be convertible at any time at
the option of the holder thereof into such number of whole shares of Common
Stock as is equal to the aggregate liquidation preference, plus accrued and
unpaid dividends thereon to the date the shares of Preferred Stock are
surrendered for conversion, divided by an initial conversion price of $6.95,
subject to adjustment as described below (such price or adjusted price being
referred to as the "Conversion Price"). A share of Preferred Stock called for
redemption will be convertible into shares of Common Stock up to and including
but not after, unless the Company defaults in the payment of the amount payable
upon redemption, the close of business on the date fixed for redemption.
 
     No fractional shares of Common Stock or securities representing fractional
shares of Common Stock will be issued upon conversion. Any fractional interest
in a share of Common Stock resulting from conversion will be paid in cash based
on the last reported sale price of the Common Stock on the NYSE (or such other
national securities exchange or authorized quotation system on which the Common
Stock is then listed or authorized for quotation or, if not so listed or
authorized for quotation, an amount determined in good faith by the Board of
Directors to be the fair value of the Common Stock) at the close of business on
the trading day next preceding the date of conversion.
 
     The Conversion Price is subject to adjustment (in accordance with formulas
set forth in the Certificate of Designation) in certain events, including (i)
any redemption payment or payment of a dividend (or other distribution) payable
in shares of Common Stock on any class of capital stock of the Company (other
than the issuance of shares of Common Stock in connection with the payment in
redemption for, or of dividends on or the conversion of Preferred Stock), (ii)
any issuance to all holders of shares of Common Stock of rights, options or
warrants entitling them to subscribe for or purchase shares of Common Stock or
securities convertible into or exchangeable for shares of Common Stock at less
than the Market Value for the period ending on the date of issuance; provided,
however, that no adjustment shall be made with respect to such a distribution if
the holder of shares of Preferred Stock would be entitled to receive such
rights, options or warrants upon conversion at any time of shares of Preferred
Stock into Common Stock and provided further, that if such options or warrants
are only exercisable upon the occurrence of certain triggering events, then the
Conversion Price will not be adjusted until such triggering events occur, (iii)
any subdivision, combination or reclassification of the Common Stock, (iv) any
dividend or distribution to all holders of shares of Common Stock (other than a
dividend or distribution referred to above) made pursuant to any shareholder
rights plan, "poison pill" or similar arrangement and excluding regular
dividends and distributions paid exclusively in cash and dividends payable upon
the Preferred Stock, (v) any distribution consisting exclusively of cash
(excluding any cash portion of distributions referred to in (iv) above, or cash
distributed upon a merger or consolidation to which the second succeeding
paragraph applies) to all holders of shares of Common Stock in an aggregate
amount that, combined together with (a) all other such all-cash distributions
made within the then-preceding twelve months in respect of which no adjustment
has been made and (b) any cash and the fair market value of other consideration
paid or payable in respect of any tender offer by the Company or any of its
subsidiaries for shares of Common Stock concluded within the then-preceding
twelve months in respect of which no adjustment has been made, exceeds 15% of
the Company's market capitalization (defined as the product of the then-current
market price of the Common Stock times the number of shares of Common Stock then
outstanding) on the record date of such distribution, (vi) the completion of a
tender or exchange offer made by the Company or any of its subsidiaries for
shares of Common Stock that involves an aggregate consideration that, together
with (a) any cash and other consideration payable in a tender or exchange offer
by the Company or any of its subsidiaries for shares of Common Stock expiring
within the then-preceding twelve months in respect of which no adjustment has
been made and (b) the aggregate amount of any such all-cash distributions
referred to in (v) above to all holders of shares of Common Stock within the
then-preceding twelve months in respect of which no adjustments have been made,
exceeds 15% of the Company's market capitalization on the expiration of such
tender offer or (vii) a distribution to all holders of Common Stock
 
                                       59
<PAGE>   67
 
consisting of evidences of indebtedness, shares of capital stock other than
Common Stock or assets (including securities, but excluding those dividends,
rights, options, warrants and distributions referred to above). No adjustment of
the Conversion Price will be required to be made until the cumulative
adjustments (whether or not made) amount to 1.0% or more of the Conversion Price
as last adjusted. The Company reserves the right to make such reductions in the
Conversion Price in addition to those required in the foregoing provisions as it
considers to be advisable in order that any event treated for Federal income tax
purposes as a dividend of stock or stock rights will not be taxable to the
recipients. In the event the Company elects to make such a reduction in the
Conversion Price, the Company will comply with the requirements of securities
laws and regulations thereunder if and to the extent that such laws and
regulations are applicable in connection with the reduction of the Conversion
Price.
 
     In the event that the Company distributes rights or warrants (other than
those referred to in (ii) in the preceding paragraph) pro rata to holders of
shares of Common Stock, so long as any such rights or warrants have not expired
or been redeemed by the Company, the holder of any Preferred Stock surrendered
for conversion will be entitled to receive upon such conversion, in addition to
the shares of Common Stock then issuable upon such conversion (the "Conversion
Shares"), a number of rights or warrants to be determined as follows: (i) if
such conversion occurs on or prior to the date for the distribution to the
holders of rights or warrants of separate certificates evidencing such rights or
warrants (the "Distribution Date"), the same number of rights or warrants to
which a holder of a number or shares of Common Stock equal to the number of
Conversion Shares is entitled at the time of such conversion in accordance with
the terms and provisions applicable to the rights or warrants and (ii) if such
conversion occurs after such Distribution Date, the same number of rights or
warrants to which a holder of the number of shares of Common Stock into which
such Preferred Stock was convertible immediately prior to such Distribution Date
would have been entitled on such Distribution Date in accordance with the terms
and provisions applicable to the rights or warrants. The Conversion Price will
not be subject to adjustment on account of any declaration, distribution or
exercise of such rights or warrants.
 
     In case of any reclassification, consolidation or merger of the Company
with or into another person or any merger of another person with or into the
Company (with certain exceptions), or in case of any sale, transfer or
conveyance of all or substantially all of the assets of the Company (computed on
a consolidated basis), each share of Preferred Stock then outstanding will,
without the consent of any holder of Preferred Stock, become convertible only
into the kind and amount of securities, cash and other property receivable upon
such reclassification, consolidation, merger, sale, transfer or conveyance by a
holder of the number of shares of Common Stock into which such Preferred Stock
was convertible immediately prior thereto, after giving effect to any adjustment
event.
 
     In the case of any distribution by the Company to its stockholders of
substantially all of its assets, each holder of Preferred Stock will participate
pro rata in such distribution based on the number of shares of Common Stock into
which such holder's shares of Preferred Stock would have been convertible
immediately prior to such distribution.
 
     Change of Control. Notwithstanding the foregoing, upon a Change of Control
(as defined below), holders of Preferred Stock shall, in the event that the
Market Value at such time is less than the Conversion Price, have a one time
option, upon not less than 30 days' notice nor more than 60 days' notice, to
convert all of their outstanding shares of Preferred Stock into shares of Common
Stock at an adjusted Conversion Price equal to the greater of (i) the Market
Value as of the Change of Control Date and (ii) 66 2/3% of the Market Value as
of April 16, 1998. In lieu of issuing the shares of Common Stock issuable upon
conversion in the event of a Change of Control, the Company may, as its option,
make a cash payment equal to the Market Value determined for the period ending
on the Change of Control Date of such Common Stock otherwise issuable.
 
     The Company's Certificate of Designation defines "Change of Control" as any
of the following events: (i) the sale, lease or transfer, in one or a series of
related transactions, of all or substantially all of the Company's assets to any
Person or group (as such term is used in Section 13(d)(3) of the Exchange Act),
other than to Permitted Holders; (ii) the adoption of a plan relating to the
liquidation or dissolution of the
 
                                       60
<PAGE>   68
 
Company; (iii) the acquisition, directly or indirectly, by any Person or group
(as such term is used in Section 13(d)(3) of the Exchange Act as in effect on
the original date of issuance of the Preferred Stock), other than Permitted
Holders, of beneficial ownership (as defined in Rule 13d-3 under the Exchange
Act as in effect on the original date of issuance of the Preferred Stock, except
that such Person shall be deemed to have beneficial ownership of all shares that
any such Person has the right to acquire, whether such right is exercisable
immediately or only after passage of time) of more than 50% of the aggregate
voting power of the Voting Stock of the Company; provided, however, that the
Permitted Holders beneficially own (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act as in effect on the original date of issuance of the Preferred
Stock), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company than such other Person and
do not have the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the Board of Directors of the Company
(for the purposes of this definition, such other Person shall be deemed to
beneficially own any Voting Stock of a specified corporation held by a parent
corporation, if such other Person is the beneficial owner (as defined above),
directly or indirectly, of more than 35% of the voting power of the Voting Stock
of such parent corporation and the Permitted Holders beneficially own (as
defined in this proviso), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent corporation
and do not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the Board of Directors of such
parent corporation); or (iv) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of 66 2/3% of the directors of the Company then
still in office who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of the Company
then in office. For purposes of the definition of "Change of Control," the term
"Permitted Holders" means Aubrey K. McClendon and Tom L. Ward and their
respective Affiliates.
 
     The phrase "all or substantially all" of the assets of the Company is
likely to be interpreted by reference to applicable state law at the relevant
time, and will be dependent on the facts and circumstances existing at such
time. As a result, there may be a degree of uncertainty in ascertaining whether
a sale or transfer is of "all or substantially all" of the assets of the
Company.
 
                                       61
<PAGE>   69
 
                          DESCRIPTION OF SENIOR NOTES
 
     The New Notes offered hereby will be issued under the Indenture dated as of
April 1, 1998 (the "Indenture") among the Company, as issuer, the Subsidiary
Guarantors, as guarantors, and United States Trust Company of New York, as
trustee (the "Trustee"). A copy of the Indenture is available upon request from
the Company and as indicated under "Incorporation of Certain Documents by
Reference." The following summaries of certain provisions of the Senior Notes
and the Indenture do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, the Senior Notes and the Indenture,
including the definitions therein of certain capitalized terms used but not
defined herein.
 
GENERAL
 
     The aggregate principal amount of the Senior Notes is limited to $500
million. Each Senior Note will mature on May 1, 2005 and will bear interest at
an annual rate of 9 5/8% per annum. Interest on the Senior Notes will accrue
from the date of original issuance, payable semiannually in arrears on May 1 and
November 1 of each year, commencing May 1, 1998, to the Person in whose name the
Senior Note is registered at the close of business on April 15 or October 15
preceding such interest payment date. Interest will be computed on the basis of
a 360-day year of twelve 30-day months. Principal, premium, if any, and interest
will be payable at the offices of the Trustee and the Paying Agent, provided
that, at the option of the Company, payment of interest may be made by check
mailed to the address of the Person entitled thereto as it appears in the
register of the Senior Notes maintained by the Registrar. Initially, the Trustee
will also act as Paying Agent and Registrar for the Senior Notes.
 
     The Senior Notes are senior unsecured obligations of the Company. The
Senior Notes rank pari passu in right of payment with all existing and future
Pari Passu Indebtedness of the Company and rank senior in right of payment to
all existing and future Subordinated Indebtedness of the Company. At December
31, 1997, on a pro forma basis after giving effect to the sale of the Senior
Notes and the application of the net proceeds therefrom, the Company and its
Restricted Subsidiaries would have had Pari Passu Indebtedness in addition to
the Senior Notes of $420 million, none of which was secured, and no Indebtedness
would have ranked junior to the Senior Notes in right of payment.
 
GUARANTEES
 
     All of the subsidiaries of the Company other than CEMI have fully and
unconditionally guaranteed, on a joint and several basis, the Company's
obligations to pay principal of, premium, if any, and interest on the Senior
Notes. The Indenture provides that each Person that becomes a Restricted
Subsidiary after the Issue Date will guarantee the payment of the Senior Notes.
Each of the Guarantees is a senior obligation of the Subsidiary Guarantor
providing such Guarantee, and ranks pari passu in right of payment with all
existing and future Pari Passu Indebtedness of such Subsidiary Guarantor, except
to the extent of collateral securing such Pari Passu Indebtedness, and ranks
senior to all existing and future Subordinated Indebtedness of such Subsidiary
Guarantor. The Guarantees rank pari passu in right of payment with the
guarantees by the Subsidiary Guarantors of the Existing Notes.
 
     The obligations of each Subsidiary Guarantor are limited to the amount as
will, after giving effect to all other contingent and fixed liabilities of such
Subsidiary Guarantor and after giving effect to any collections from or payments
made by or on behalf of any other Subsidiary Guarantor in respect of the
obligations of such other Subsidiary Guarantor under its Guarantee or pursuant
to its contribution obligations under the Indenture, result in the obligations
of such Subsidiary Guarantor under its Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal, state or foreign law. Each
Subsidiary Guarantor that makes a payment or distribution under a Guarantee
shall be entitled to a contribution from each other Subsidiary Guarantor in a
pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor.
 
     The Indenture provides that, subject to the next succeeding paragraph, no
Subsidiary Guarantor may consolidate or merge with or into (whether or not such
Subsidiary Guarantor is the surviving entity or Person) another corporation,
entity or Person unless (i) the entity or Person formed by or surviving any such
consolidation or merger (if other than such Subsidiary Guarantor) assumes all
the obligations of such
                                       62
<PAGE>   70
 
Subsidiary Guarantor pursuant to a supplemental indenture, in a form reasonably
satisfactory to the Trustee, under the Senior Notes and the Indenture, (ii)
immediately after such transaction, no Default or Event of Default exists; (iii)
such Subsidiary Guarantor or the entity or Person formed by or surviving any
such consolidation or merger will have Consolidated Tangible Net Worth
(immediately after the transaction) equal to or greater than the Consolidated
Tangible Net Worth of such Subsidiary Guarantor immediately preceding the
transaction and (iv) the Company will, at the time of such transaction after
giving pro forma effect thereto as if such transaction had occurred at the
beginning of the Reference Period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the "-- Limitation on Incurrence of
Additional Indebtedness" covenant. The foregoing does not prohibit a merger
between Subsidiary Guarantors or a merger between the Company and a Subsidiary
Guarantor.
 
     The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of any Subsidiary Guarantor, by way of
merger, consolidation or otherwise, or a sale or other disposition of all of the
capital stock or other ownership interests of such Subsidiary Guarantor, or a
Subsidiary Guarantor ceases to be a Subsidiary Guarantor, then such Subsidiary
Guarantor (in the event of a sale or other disposition, by way of such a merger,
consolidation or otherwise, of all of the capital stock or other ownership
interests of such Subsidiary Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all or substantially
all of the assets of such Subsidiary Guarantor) will be released and relieved of
any obligations under its Guarantee.
 
OPTIONAL REDEMPTION
 
     At any time on or after May 1, 2002, the Company may, at its option, redeem
all or any portion of the Senior Notes at the redemption prices (expressed as
percentages of the principal amount of the Senior Notes) set forth below, plus,
in each case, accrued interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning May 1 of the year indicated:
 
<TABLE>
<CAPTION>
                           YEAR                             PERCENTAGE
<S>                                                         <C>
2002......................................................   104.8125%
2003......................................................   102.4063%
2004 and thereafter.......................................   100.0000%
</TABLE>
 
     Notwithstanding the foregoing, at any time prior to May 1, 2002, the
Company may, at its option, redeem all or any portion of the Senior Notes at the
Make-Whole Price plus accrued and unpaid interest to the date of redemption. In
addition, in the event the Company consummates one or more Equity Offerings on
or prior to May 1, 2001, the Company, at its option, may redeem up to $167
million of the aggregate principal amount of the Senior Notes with all or a
portion of the aggregate net proceeds received by the Company from such Equity
Offerings at a redemption price of 109.625% of the aggregate principal amount of
the Senior Notes so redeemed, plus accrued and unpaid interest thereon to the
redemption date; provided, however, that (i) the date of such redemption occurs
within the 90-day period after the Equity Offering in respect of which such
redemption is made and (ii) following each such redemption, at least $333
million of the aggregate principal amount of the Senior Notes remain
outstanding.
 
CHANGE OF CONTROL
 
     The Indenture provides that, following the occurrence of any Change of
Control, the Company must offer to purchase all outstanding Senior Notes at a
purchase price equal to 101% of the aggregate principal amount of the Senior
Notes, plus accrued and unpaid interest to the date of purchase. The Change of
Control Offer will be deemed to have commenced upon mailing of a notice pursuant
to the Indenture and will terminate 20 Business Days after its commencement,
unless a longer offering period is required by law. Promptly after the
termination of the Change of Control Offer, the Company will purchase and mail
or deliver payment for all Senior Notes tendered in response to the Change of
Control Offer. Upon a Change of Control, the Company will also be required to
make an offer to purchase the 9 1/8% Notes at a price equal to 101% of the
aggregate principal amount of such notes plus accrued and unpaid interest to the
date of purchase.
 
                                       63
<PAGE>   71
 
     On the Change of Control payment date, the Company will, to the extent
lawful, (i) accept for payment Senior Notes or portions thereof tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control payment in respect of all Senior Notes or
portions thereof so tendered and (iii) deliver to the Trustee the Senior Notes
so accepted together with an Officers' Certificate stating the Senior Notes or
portions thereof tendered to the Company. The Paying Agent will promptly mail to
each Holder of Senior Notes so accepted payment in an amount equal to the
purchase price for such Senior Notes, and the Trustee will promptly authenticate
and mail to each Holder a new Senior Note equal in principal amount to any
unpurchased portion of the Senior Notes surrendered, if any; provided, that each
such new Senior Note will be in a principal amount of $1,000 or an integral
multiple thereof.
 
     The Company will comply with Section 14 of the Exchange Act and the
provisions of Regulation 14E and any other tender offer rules under the Exchange
Act and any other federal and state securities laws, rules and regulations
which, may then be applicable to any Change of Control Offer.
 
CERTAIN COVENANTS
 
     The Indenture provides that the following restrictive covenants will be
applicable to the Company and its Restricted Subsidiaries.
 
     Limitation on Incurrence of Additional Indebtedness. The Indenture provides
that the Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, issue, incur, assume, guarantee, become
liable, contingently or otherwise, with respect to or otherwise become
responsible for the payment of (collectively, incur) any Indebtedness; provided,
however, that if no Default or Event of Default shall have occurred and be
continuing at the time or as a consequence of the incurrence of such
Indebtedness, the Company or its Restricted Subsidiaries may incur Indebtedness
if, on a pro forma basis, after giving effect to such incurrence and the
application of the proceeds therefrom, each of the following tests shall have
been satisfied: (i) the Adjusted Consolidated EBITDA Coverage Ratio would have
been at least 2.25 to 1.0 or (ii) Adjusted Consolidated Net Tangible Assets
would have been greater than 200% of Indebtedness of the Company and its
Restricted Subsidiaries.
 
     Notwithstanding the foregoing, if no Default or Event of Default shall have
occurred and be continuing at the time or as a consequence of the incurrence of
such Indebtedness, the Company and its Restricted Subsidiaries may incur
Permitted Indebtedness.
 
     Any Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary (whether by merger, consolidation, acquisition or
otherwise) shall be deemed to be incurred by such Restricted Subsidiary at the
time it becomes a Restricted Subsidiary.
 
     Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any Restricted Payment, unless:
 
          (i) no Default or Event of Default shall have occurred and be
     continuing at the time of or immediately after giving effect to such
     Restricted Payment;
 
          (ii) at the time of and immediately after giving effect to such
     Restricted Payment, the Company would be able to incur at least $1.00 of
     additional Indebtedness (other than Permitted Indebtedness) pursuant to the
     first paragraph of the covenant captioned "-- Limitation on Incurrence of
     Additional Indebtedness"; and
 
          (iii) immediately after giving effect to such Restricted Payment, the
     aggregate of all Restricted Payments declared or made after the Issue Date
     does not exceed the sum of (A) 50% of the Consolidated Net Income of the
     Company and its Restricted Subsidiaries (or in the event such Consolidated
     Net Income shall be a deficit, minus 100% of such deficit) during the
     period (treated as one accounting period) subsequent to March 31, 1998 and
     ending on the last day of the fiscal quarter immediately preceding the date
     of such Restricted Payment; (B) the aggregate Net Cash Proceeds, and the
     fair market value of property other than cash (as determined in good faith
     by the Company's Board of Directors, including a majority of the Company's
     Disinterested Directors, and evidenced by a resolution
 
                                       64
<PAGE>   72
 
     of such Board), received by the Company during such period from any Person
     other than a Subsidiary of the Company as a result of the issuance or sale
     of Capital Stock of the Company (other than any Disqualified Stock and
     other than Preferred Stock issued in the Preferred Stock Offering), other
     than in connection with the conversion of Indebtedness or Disqualified
     Stock; (C) the aggregate Net Cash Proceeds, and the fair market value of
     property other than cash (as determined in good faith by the Company's
     Board of Directors and evidenced by a resolution of such Board), received
     by the Company during such period from any Person other than a Subsidiary
     of the Company as a result of the issuance or sale of any Indebtedness or
     Disqualified Stock to the extent that at the time the determination is made
     such Indebtedness or Disqualified Stock, as the case may be, has been
     converted into or exchanged for Capital Stock of the Company (other than
     Disqualified Stock); and (D)(i) in case any Unrestricted Subsidiary has
     been redesignated a Restricted Subsidiary, an amount equal to the lesser of
     (x) the book value (determined in accordance with GAAP) at the date of such
     redesignation of the aggregate Investments made by the Company and its
     Restricted Subsidiaries in such Unrestricted Subsidiary and (y) the fair
     market value of such Investments in such Unrestricted Subsidiary at the
     time of such redesignation, as determined in good faith by the Company's
     Board of Directors, including a majority of the Company's Disinterested
     Directors, whose determination shall be conclusive and evidenced by a
     resolution of such Board; or (ii) in case any Restricted Subsidiary has
     been redesignated an Unrestricted Subsidiary, minus the greater of (x) the
     book value (determined in accordance with GAAP) at the date of
     redesignation of the aggregate Investments made by the Company and its
     Restricted Subsidiaries in such Restricted Subsidiary and (y) the fair
     market value of such Investments in such Restricted Subsidiary at the time
     of such redesignation, as determined in good faith by the Company's Board
     of Directors, including a majority of the Company's Disinterested
     Directors, whose determination shall be conclusive and evidenced by a
     resolution of such Board; and (E) $25 million.
 
     Notwithstanding the foregoing, the above limitations will not prevent (i)
the payment of any dividend within 60 days after the date of declaration
thereof, if at such date of declaration such payment complied with the
provisions hereof; (ii) the purchase, redemption, acquisition or retirement of
any shares of Capital Stock of the Company in exchange for, or out of the net
proceeds of the substantially concurrent sale (other than to a Restricted
Subsidiary of the Company) of, other shares of Capital Stock (other than
Disqualified Stock) of the Company; and (iii) any dividend or other distribution
payable from a Subsidiary to the Company or any Restricted Subsidiary.
 
     Limitation on Sale of Assets. The Indenture provides that the Company will
not, and will not permit any Restricted Subsidiary to, make any Asset Sale
unless:
 
          (i) the Company (or its Restricted Subsidiaries, as the case may be)
     receives consideration at the time of such sale or other disposition at
     least equal to the fair market value thereof (as determined in good faith
     by the Company's Board of Directors and evidenced by a resolution of such
     Board, including a majority of the Company's Disinterested Directors, in
     the case of any Asset Sales or series of related Asset Sales having a fair
     market value of $20 million or greater);
 
          (ii) at least 75% of the proceeds from such Asset Sale consist of
     cash, cash equivalents, or property, equipment, leasehold interests or
     other assets used in the Oil and Gas Business; and
 
          (iii) the Net Available Proceeds received by the Company (or its
     Restricted Subsidiaries, as the case may be) from such Asset Sale are
     applied in accordance with the following two paragraphs.
 
     The Company may apply such Net Available Proceeds, within 365 days
following the receipt of Net Available Proceeds from any Asset Sale, to: (i) the
repayment of Indebtedness of the Company under the Bank Credit Facility or other
Senior Indebtedness, including any mandatory redemption or repurchase or
optional redemption of the Existing Notes or the Senior Notes; (ii) make an
Investment in assets used in the Oil and Gas Business; or (iii) develop by
drilling the Company's oil and gas reserves.
 
     If, upon completion of the 365-day period, any portion of the Net Available
Proceeds of any Asset Sale shall not have been applied by the Company as
described in clauses (i) or (ii) in the immediately preceding
 
                                       65
<PAGE>   73
 
paragraph and such remaining Net Available Proceeds, together with any remaining
net cash proceeds from any prior Asset Sale (such aggregate constituting "Excess
Proceeds"), exceed $15 million, then the Company will be obligated to make an
offer (the "Net Proceeds Offer") to purchase the Senior Notes and any other
Senior Indebtedness in respect of which such an offer to purchase is also
required to be made concurrently with the Net Proceeds Offer having an aggregate
principal amount equal to the Excess Proceeds (such purchase to be made on a pro
rata basis if the amount available for such repurchase is less than the
principal amount of the Senior Notes and other such Senior Indebtedness tendered
in such Net Proceeds Offer) at a purchase price of 100% of the principal amount
thereof plus accrued interest to the date of repurchase. Upon the completion of
the Net Proceeds Offer, the amount of Excess Proceeds will be reset to zero.
 
     Any Net Proceeds Offer will be conducted in substantially the same manner
as a Change of Control Offer. The Company will comply with Section 14 of the
Exchange Act and the provisions of Regulation 14E and any other tender offer
rules under the Exchange Act and any other federal and state securities laws,
rules and regulations which may then be applicable to any Net Proceeds Offer.
 
     During the period between any Asset Sale and the application of the Net
Available Proceeds therefrom in accordance with this covenant, all Net Available
Proceeds shall be maintained in a segregated account and shall be invested in
Permitted Financial Investments.
 
     Notwithstanding the foregoing, the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, make any Asset Sale of any
of the Capital Stock of a Restricted Subsidiary except pursuant to an Asset Sale
of all of the Capital Stock of such Restricted Subsidiary.
 
     Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any Restricted Subsidiary to, create, incur, assume or suffer to
exist any Liens (other than Permitted Liens) upon any of their respective
properties securing any Indebtedness of the Company or any Restricted
Subsidiary, unless the Senior Notes are equally and ratably secured; provided
that if such Indebtedness is expressly subordinated to the Senior Notes or the
Guarantees, the Lien securing such Indebtedness will be subordinated and junior
to the Lien securing the Senior Notes or the Guarantees.
 
     Limitation of Sale/Leaseback Transactions. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, enter into
any Sale/Leaseback Transaction with any Person (other than the Company or any
Wholly Owned Restricted Subsidiary) unless:
 
          (a) the Company or such Restricted Subsidiary would be entitled to
     incur Indebtedness, in a principal amount equal to the Attributable
     Indebtedness with respect to such Sale/Leaseback Transaction in accordance
     with the covenant captioned "Limitation on Incurrence of Additional
     Indebtedness"; or
 
          (b) the Company or such Restricted Subsidiary receives proceeds from
     such Sale/Leaseback Transactions at least equal to the fair market value
     thereof (as determined in good faith by the Company's Board of Directors,
     whose determination in good faith, evidenced by a resolution of such Board
     shall be conclusive) and such proceeds are applied in the same manner and
     to the same extent as Net Available Proceeds and Excess Proceeds from an
     Asset Sale.
 
     Limitations on Mergers and Consolidations. The Indenture provides that the
Company will not consolidate or merge with or into any Person, or sell, convey,
lease or otherwise dispose of all or substantially all of its assets to any
Person, unless: (i) the Person formed by or surviving such consolidation or
merger (if other than the Company), or to which such sale, lease, conveyance or
other disposition or assignment shall be made (collectively, the "Successor"),
is a corporation organized and existing under the laws of the United States or
any state thereof or the District of Columbia, or Canada or any province
thereof, and the Successor assumes by supplemental indenture in a form
satisfactory to the Trustee all of the obligations of the Company under the
Indenture and under the Senior Notes; (ii) immediately before and after giving
effect to such transaction, no Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a pro
forma basis, the Consolidated Tangible Net Worth of the Company (or the
surviving or transferee entity) is equal to or greater than the Consolidated
Tangible Net Worth of the Company
 
                                       66
<PAGE>   74
 
immediately before such transaction; and (iv) immediately after giving effect to
such transaction on a pro forma basis, the Company (or the surviving or
transferee entity) would be able to incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness).
 
     Limitation on Payment Restrictions Affecting Subsidiaries. The Indenture
provides that the Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or consensual restriction
on the ability of any Restricted Subsidiary of the Company to (i) pay dividends
or make any other distributions on its Capital Stock or on any other interest or
participation in the Company or a Restricted Subsidiary, (ii) pay any
Indebtedness owed to the Company or a Restricted Subsidiary of the Company;
(iii) make loans or advances to the Company or a Restricted Subsidiary of the
Company; or (iv) transfer any of its properties or assets to the Company or a
Restricted Subsidiary of the Company (each, a "Payment Restriction"), except for
(a) encumbrances or restrictions under a Bank Credit Facility, provided that any
Payment Restrictions thereunder (other than, with respect to (iv) above,
customary restrictions in security agreements or other loan documents thereunder
securing or governing Indebtedness of a Restricted Subsidiary) may be imposed
only upon the acceleration of the maturity of the Indebtedness thereunder; (b)
consensual encumbrances or consensual restrictions binding upon any Person at
the time such Person becomes a Restricted Subsidiary of the Company (unless the
agreement creating such consensual encumbrances or consensual restrictions was
entered into in connection with, or in contemplation of, such entity becoming a
Restricted Subsidiary); (c) consensual encumbrances or consensual restrictions
under any agreement that refinances or replaces any agreement described in
clauses (a) and (b) above, provided that the terms and conditions of any such
restrictions are no less favorable to the Holders of the Notes than those under
the agreement so refinanced or replaced; and (d) customary non-assignment
provisions in leases, purchase money financings and any encumbrance or
restriction due to applicable law.
 
     Limitation on Transactions with Affiliates. The Indenture provides that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into any transaction or series of transactions
(including, without limitation, the sale, purchase or lease of any assets or
properties or the rendering of any services) with any Affiliate or beneficial
owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of 10% or
more of the Company's common stock (other than with a Wholly Owned Restricted
Subsidiary of the Company) (an "Affiliate Transaction"), on terms that are less
favorable to the Company or such Restricted Subsidiary, as the case may be, than
would be available in a comparable transaction with an unrelated Person. In
addition, the Company will not, and will not permit any Restricted Subsidiary of
the Company to, enter into an Affiliate Transaction, or any series of related
Affiliate Transactions having a value of (a) more than $5 million, unless a
majority of the Board of Directors of the Company (including a majority of the
Company's Disinterested Directors) determines in good faith, as evidenced by a
resolution of such Board, that such Affiliate Transaction or series of related
Affiliate Transactions is fair to the Company; or (b) more than $25 million,
unless the Company receives a written opinion from a nationally recognized
investment banking firm with total assets in excess of $1.0 billion that such
transaction or series of transactions is fair to the Company from a financial
point of view.
 
     SEC Reports. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the SEC and provide the Trustee and Holders with
annual reports and such information, documents and other reports specified in
Sections 13 and 15(d) of the Exchange Act.
 
CERTAIN DEFINITIONS
 
     The following is a summary of certain defined terms used in the Indenture.
Reference is made to the Indenture for the full definition of all such terms and
for the definitions of capitalized terms used herein and not defined below.
 
     "Adjusted Consolidated EBITDA" means the Consolidated Net Income of the
Company and its Restricted Subsidiaries for the Reference Period, (a) increased
(to the extent deducted in determining Consolidated Net Income) by the sum,
without duplication, of: (i) all income and state franchise taxes of the
 
                                       67
<PAGE>   75
 
Company and its Restricted Subsidiaries paid or accrued according to GAAP for
such period (other than income taxes attributable to extraordinary, unusual or
non-recurring gains or losses); (ii) all interest expense of the Company and its
Restricted Subsidiaries paid or accrued in accordance with GAAP for such period
(including amortization of original issue discount); (iii) depreciation and
depletion of the Company and its Restricted Subsidiaries; (iv) amortization of
the Company and its Restricted Subsidiaries including, without limitation,
amortization of capitalized debt issuance costs; (v) any loss realized in
accordance with GAAP upon the sale or other disposition of any property, plant
or equipment of the Company or its Restricted Subsidiaries (including pursuant
to any Sale/Leaseback Transaction) which is not sold or otherwise disposed of in
the ordinary course of business and any loss realized in accordance with GAAP
upon the sale or other disposition of any Capital Stock of any Person; (vi) any
loss realized in accordance with GAAP from currency exchange transactions not in
the ordinary course of business consistent with past practice; (vii) any loss
realized in accordance with GAAP attributable to extraordinary items; (viii) any
charges associated solely with the prepayment of any Indebtedness; and (ix) any
other non-cash charges to the extent deducted from Consolidated Net Income and
(b) decreased (to the extent included in determining Consolidated Net Income) by
the sum of (i) the amount of deferred revenues that are amortized during the
Reference Period and are attributable to reserves that are subject to Volumetric
Production Payments and (ii) amounts recorded in accordance with GAAP as
repayments of principal and interest pursuant to Dollar-Denominated Production
Payments.
 
     "Adjusted Consolidated EBITDA Coverage Ratio" means, for any Reference
Period, the ratio on a pro forma basis of (a) Adjusted Consolidated EBITDA for
the Reference Period to (b) Adjusted Consolidated Interest Expense for such
Reference Period; provided, that, in calculating Adjusted Consolidated EBITDA
and Adjusted Consolidated Interest Expense (i) acquisitions which occurred
during the Reference Period or subsequent to the Reference Period and on or
prior to the date of the transaction giving rise to the need to calculate the
Adjusted Consolidated EBITDA Coverage Ratio (the "Transaction Date") shall be
assumed to have occurred on the first day of the Reference Period, (ii) the
incurrence of any Indebtedness (including the issuance of the Senior Notes) or
issuance of any Disqualified Stock during the Reference Period or subsequent to
the Reference Period and on or prior to the Transaction Date shall be assumed to
have occurred on the first day of such Reference Period, (iii) any Indebtedness
that had been outstanding during the Reference Period that has been repaid on or
prior to the Transaction Date shall be assumed to have been repaid as of the
first day of such Reference Period, (iv) the Adjusted Consolidated Interest
Expense attributable to interest on any Indebtedness or dividends on any
Disqualified Stock bearing a floating interest (or dividend) rate shall be
computed on a pro forma basis as if the rate in effect on the Transaction Date
were the average rate in effect during the entire Reference Period and (v) in
determining the amount of Indebtedness pursuant to the covenant captioned
"Limitation on Incurrence of Additional Indebtedness," the incurrence of
Indebtedness or issuance of Disqualified Stock giving rise to the need to
calculate the Adjusted Consolidated EBITDA Coverage Ratio and, to the extent the
net proceeds from the incurrence or issuance thereof are used to retire
Indebtedness, the application of the proceeds therefrom shall be assumed to have
occurred on the first day of the Reference Period.
 
     "Adjusted Consolidated Interest Expense" means, with respect to the Company
and its Restricted Subsidiaries, for the Reference Period, the aggregate amount
(without duplication) of (a) interest expensed in accordance with GAAP
(including, in accordance with the following sentence, interest attributable to
Capitalized Lease Obligations, but excluding interest attributable to
Dollar-Denominated Production Payments and amortization of deferred debt
expense) during such period in respect of all Indebtedness of the Company and
its Restricted Subsidiaries (including (i) amortization of original issue
discount on any Indebtedness (other than with respect to the Existing Notes and
the Senior Notes), (ii) the interest portion of all deferred payment
obligations, calculated in accordance with GAAP, and (iii) all commissions,
discounts and other fees and charges owed with respect to bankers' acceptance
financings and currency and interest rate swap arrangements, in each case to the
extent attributable to such period), and (b) dividend requirements of the
Company and its Restricted Subsidiaries with respect to any Preferred Stock
dividends (whether in cash or otherwise (except dividends paid solely in shares
of Qualified Stock)) paid (other than to the Company or any of its Restricted
Subsidiaries), declared, accrued or accumulated during such period, divided by
one minus the applicable actual combined federal, state, local and foreign
income tax rate of the Company and its
                                       68
<PAGE>   76
 
Subsidiaries (expressed as a decimal), on a consolidated basis, for the four
quarters immediately preceding the date of the transaction giving rise to the
need to calculate Consolidated Interest Expense, in each case to the extent
attributable to such period and excluding items eliminated in consolidation. For
purposes of this definition, (a) interest on a Capitalized Lease Obligation
shall be deemed to accrue at an interest rate reasonably determined by the
Company to be the rate of interest implicit in such Capitalized Lease Obligation
in accordance with GAAP and (b) interest expense attributable to any
Indebtedness represented by the guarantee by the Company or a Restricted
Subsidiary of the Company of an obligation of another Person shall be deemed to
be the interest expense attributable to the Indebtedness guaranteed.
 
     "Adjusted Consolidated Net Tangible Assets" or "ACNTA" means, without
duplication, as of the date of determination, (a) the sum of (i) discounted
future net revenue from proved oil and gas reserves of the Company and its
Restricted Subsidiaries calculated in accordance with SEC guidelines before any
state or federal income taxes, as estimated by independent petroleum engineers
in a reserve report prepared as of the end of the Company's most recently
completed fiscal year, as increased by, as of the date of determination, the
discounted future net revenue of (A) estimated proved oil and gas reserves of
the Company and its Restricted Subsidiaries attributable to any acquisition
consummated since the date of such year-end reserve report and (B) estimated
proved oil and gas reserves of the Company and its Restricted Subsidiaries
attributable to extensions, discoveries and other additions and upward revisions
of estimates of proved oil and gas reserves due to exploration, development or
exploitation, production or other activities conducted or otherwise occurring
since the date of such year-end reserve report which, in the case of sub-clauses
(A) and (B), would, in accordance with standard industry practice, result in
such increases as calculated in accordance with SEC guidelines (utilizing the
prices utilized in such year-end reserve report), and decreased by, as of the
date of determination, the discounted future net revenue of (C) estimated proved
oil and gas reserves of the Company and its Restricted Subsidiaries produced or
disposed of since the date of such year-end reserve report and (D) reductions in
the estimated oil and gas reserves of the Company and its Restricted
Subsidiaries since the date of such year-end reserve report attributable to
downward revisions of estimates of proved oil and gas reserves due to
exploration, development or exploitation, production or other activities
conducted or otherwise occurring since the date of such year-end reserve report
which, in the case of sub-clauses (C) and (D) would, in accordance with standard
industry practice, result in such decreases as calculated in accordance with SEC
guidelines (utilizing the prices utilized in such year-end reserve report);
provided that, in the case of each of the determinations made pursuant to
clauses (A) through (D), such increases and decreases shall be as estimated by
the Company's engineers, (ii) the capitalized costs that are attributable to oil
and gas properties of the Company and its Restricted Subsidiaries to which no
proved oil and gas reserves are attributable, based on the Company's books and
records as of a date no earlier than the date of the Company's latest annual or
quarterly financial statements, (iii) the Net Working Capital on a date no
earlier than the date of the Company's latest annual or quarterly financial
statements and (iv) the greater of (I) the net book value on a date no earlier
than the date of the Company's latest annual or quarterly financial statements
and (II) the appraised value, as estimated by independent appraisers, of other
tangible assets (including Investments in unconsolidated Subsidiaries) of the
Company and its Restricted Subsidiaries, as of a date no earlier than the date
of the Company's latest audited financial statements, minus (b) the sum of (i)
minority interests, (ii) any gas balancing liabilities of the Company and its
Restricted Subsidiaries reflected in the Company's latest annual or quarterly
financial statements, (iii) the discounted future net revenue, calculated in
accordance with SEC guidelines (utilizing the prices utilized in the Company's
year-end reserve report), attributable to reserves which are required to be
delivered to third parties to fully satisfy the obligations of the Company and
its Restricted Subsidiaries with respect to Volumetric Production Payments on
the schedules specified with respect thereto, (iv) the discounted future net
revenue, calculated in accordance with SEC guidelines, attributable to reserves
subject to Dollar-Denominated Production Payments which, based on the estimates
of production included in determining the discounted future net revenue
specified in (a)(i) above (utilizing the same prices utilized in the Company's
year-end reserve report), would be necessary to fully satisfy the payment
obligations of the Company and its Restricted Subsidiaries with respect to
Dollar-Denominated Production Payments on the schedules specified with respect
thereto and (v) the discounted future net revenue, calculated in accordance with
SEC guidelines (utilizing the same prices utilized in the Company's year-end
reserve report), attributable to reserves subject to participation interests,
overriding
 
                                       69
<PAGE>   77
 
royalty interests or other interests of third parties, pursuant to
participation, partnership, vendor financing or other agreements then in effect,
or which otherwise are required to be delivered to third parties. If the Company
changes its method of accounting from the full cost method to the successful
efforts method or a similar method of accounting, ACNTA will continue to be
calculated as if the Company were still using the full cost method of
accounting.
 
     "Asset Sale" means any sale, lease, transfer, exchange or other disposition
(or series of related sales, leases, transfers, exchanges or dispositions)
having a fair market value of $1,000,000 or more of shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares), or of property
or assets (including the creation of Dollar-Denominated Production Payments and
Volumetric Production Payments, other than Dollar-Denominated Production
Payments and Volumetric Production Payments created or sold in connection with
the financing of, and within 30 days after, the acquisition of the properties
subject thereto) or any interests therein (each referred to for purposes of this
definition as a "disposition") by the Company or any of its Restricted
Subsidiaries, including any disposition by means of a merger, consolidation or
similar transaction (other than (a) by the Company to a Wholly Owned Restricted
Subsidiary or by a Subsidiary to the Company or a Wholly Owned Restricted
Subsidiary, (b) a sale of oil, gas or other hydrocarbons or other mineral
products in the ordinary course of business of the Company's oil and gas
production operations, (c) any abandonment, farm-in, farm-out, lease and
sub-lease of developed and/or undeveloped properties made or entered into in the
ordinary course of business, but excluding (x) any sale of a net profits or
overriding royalty interest, in each case conveyed from or burdening proved
developed or proved undeveloped reserves and (y) any sale of hydrocarbons or
other mineral products as a result of the creation of Dollar-Denominated
Production Payments or Volumetric Production Payments, other than
Dollar-Denominated Production Payments and Volumetric Production Payments
created or sold in connection with the financing of, and within 30 days after,
the acquisition of the properties subject thereto), (d) the disposition of all
or substantially all of the assets of the Company in compliance with the
covenant captioned "Limitations on Mergers and Consolidations," (e)
Sale/Leaseback Transactions in compliance the covenant captioned "Limitations on
Sale/Leaseback Transactions," (f) the provision of services and equipment for
the operation and development of the Company's oil and gas wells, in the
ordinary course of the Company's oil and gas service businesses, notwithstanding
that such transactions may be recorded as asset sales in accordance with full
cost accounting guidelines, and (g) the issuance by the Company of shares of its
Capital Stock.
 
     "Attributable Indebtedness" means, with respect to any particular lease
under which any Person is at the time liable and at any date as of which the
amount thereof is to be determined, the present value of the total net amount of
rent required to be paid by such Person under the lease during the primary term
thereof, without giving effect to any renewals at the option of the lessee,
discounted from the respective due dates thereof to such date at the rate of
interest per annum implicit in the terms of the lease. As used in the preceding
sentence, the "net amount of rent" under any lease for any such period shall
mean the sum of rental and other payments required to be paid with respect to
such period by the lessee thereunder excluding any amounts required to be paid
by such lessee on account of maintenance and repairs, insurance, taxes,
assessments, water rates or similar charges. In the case of any lease which is
terminable by the lessee upon payment of a penalty, such net amount of rent
shall also include the amount of such penalty, but no rent shall be considered
as required to be paid under such lease subsequent to the first date upon which
it may be so terminated.
 
     "Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the product of (x) the
number of years from such date to the date of each successive scheduled
principal payment of such Indebtedness multiplied by (y) the amount of such
principal payment by (ii) the sum of all such principal payments.
 
     "Bank Credit Facility" means a revolving credit, term credit and/or letter
of credit facility, the proceeds of which are used for working capital and other
general corporate purposes to be entered into by one or more of the Company
and/or its Restricted Subsidiaries and certain financial institutions, as
amended, extended or refinanced from time to time.
 
                                       70
<PAGE>   78
 
     "Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of corporate
stock or partnership interests and any and all warrants, options and rights with
respect thereto (whether or not currently exercisable), including each class of
common stock and preferred stock of such Person.
 
     "Capitalized Lease Obligations" of any Person means the obligations of such
Person to pay rent or other amounts under a lease of property, real or personal,
that is required to be capitalized for financial reporting purposes in
accordance with generally accepted accounting principles, and the amount of such
obligations shall be the capitalized amount thereof determined in accordance
with generally accepted accounting principles.
 
     "Change of Control" means the occurrence of any of the following: (i) the
sale, lease or transfer, in one or a series of related transactions, of all or
substantially all of the Company's assets to any Person or group (as such term
is used in Section 13(d)(3) of the Exchange Act), other than to Permitted
Holders; (ii) the adoption of a plan relating to the liquidation or dissolution
of the Company; (iii) the acquisition, directly or indirectly, by any Person or
group (as such term is used in Section 13(d)(3) of the Exchange Act), other than
Permitted Holders, of beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act, except that such Person shall be deemed to have beneficial
ownership of all shares that any such Person has the right to acquire, whether
such right is exercisable immediately or only after passage of time) of more
than 50% of the aggregate voting power of the Voting Stock of the Company;
provided, however, that the Permitted Holders beneficially own (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the Voting Stock of
the Company than such other Person and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors of the Company (for the purposes of this
definition, such other Person shall be deemed to beneficially own any Voting
Stock of a specified corporation held by a parent corporation, if such other
Person is the beneficial owner (as defined above), directly or indirectly, of
more than 35% of the voting power of the Voting Stock of such parent corporation
and the Permitted Holders beneficially own (as defined in this proviso),
directly or indirectly, in the aggregate a lesser percentage of the voting power
of the Voting Stock of such parent corporation and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors of such parent corporation); or
(iv) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the shareholders of the Company was approved by
a vote of 66 2/3% of the directors of the Company then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.
 
     "Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided, however, that there shall not be included in such Consolidated Net
Income: (a) any net income of any Person if such Person is not the Company or a
Restricted Subsidiary, except that (i) subject to the limitations contained in
clause (d) below, the Company's equity in the net income of any such Person for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash or cash equivalents actually distributed by such Person
during such period to the Company or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other distribution to
a Restricted Subsidiary, to the limitations contained in clause (c) below) and
(ii) the Company's equity in a net loss of any such Person (other than an
Unrestricted Subsidiary) for such period shall be included in determining such
Consolidated Net Income; (b) any net income (or loss) of any Person acquired by
the Company or a Subsidiary in a pooling of interests transaction for any period
prior to the date of such acquisition; (c) the net income of any Restricted
Subsidiary to the extent that the payment of dividends or the making of
distributions by such Restricted Subsidiary, directly or indirectly, to the
Company, is prohibited; (d) any gain (but not loss) realized upon the sale or
other disposition of any property, plant or equipment of the Company or any
Restricted Subsidiary (including pursuant to any Sale/Leaseback Transaction)
which is not sold or otherwise disposed of in the ordinary course of business
and any gain (but
 
                                       71
<PAGE>   79
 
not loss) realized upon the sale or other disposition of any Capital Stock of
any Person; (e) any gain (but not loss) from currency exchange transactions not
in the ordinary course of business consistent with past practice; (f) the
cumulative effect of a change in accounting principles; (g) to the extent
deducted in the calculation of net income, the non-cash charges associated with
the repayment of Indebtedness with the proceeds from the sale of the Senior
Notes and the prepayment of any of the Senior Notes; and (h) any writedowns of
non-current assets; provided, however, that any "ceiling limitation" writedowns
under SEC guidelines shall be treated as capitalized costs, as if such
writedowns had not occurred; and (i) any gain (but not loss) attributable to
extraordinary items.
 
     "Consolidated Tangible Net Worth" means, with respect to the Company and
its Restricted Subsidiaries, as at any date of determination, the sum of Capital
Stock (other than Disqualified Stock) and additional paid-in capital plus
retained earnings (or minus accumulated deficit) minus all intangible assets,
including, without limitation, organization costs, patents, trademarks,
copyrights, franchises, research and development costs, and any amount reflected
in treasury stock, of the Company and its Restricted Subsidiaries determined on
a consolidated basis in accordance with GAAP.
 
     "Currency Hedge Obligations" means, at any time as to the Company and its
Restricted Subsidiaries, the obligations of such Person at such time that were
incurred in the ordinary course of business pursuant to any foreign currency
exchange agreement, option or futures contract or other similar agreement or
arrangement designed to protect against or manage such Person's or any of its
Subsidiaries' exposure to fluctuations in foreign currency exchange rates.
 
     "Disinterested Director" means, with respect to an Affiliate Transaction or
series of related Affiliate Transactions, a member of the Board of Directors of
the Company who has no financial interest, and whose employer has no financial
interest, in such Affiliate Transaction or series of related Affiliate
Transactions.
 
     "Disqualified Stock" means any Capital Stock of the Company or any
Restricted Subsidiary of the Company which, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable), or upon
the happening of any event or with the passage of time, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the Maturity Date or which is exchangeable or convertible into debt
securities of the Company or any Restricted Subsidiary of the Company, except to
the extent that such exchange or conversion rights cannot be exercised prior to
the Maturity Date.
 
     "Dollar-Denominated Production Payments" mean production payment
obligations recorded as liabilities in accordance with generally accepted
accounting principles, together with all undertakings and obligations in
connection therewith.
 
     "Equity Offering" means any underwritten public offering of Capital Stock
(other than Disqualified Stock) of the Company pursuant to a registration
statement filed pursuant to the Securities Act or any private placement of
Capital Stock (other than Disqualified Stock) of the Company (other than to any
Person who, prior to such private placement, was an Affiliate of the Company)
which offering or placement is consummated after the Issue Date, excluding
Preferred Stock issued in the Preferred Stock Offering.
 
     "Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC hereunder.
 
     "Guarantee" means, individually and collectively, the guarantees given by
the Subsidiary Guarantors pursuant to Article Ten of the Indenture.
 
     "Holder" means a Person in whose name a Senior Note is registered on the
Registrar's books.
 
     "Indebtedness" means, without duplication, with respect to any Person, (a)
all obligations of such Person (i) in respect of borrowed money (whether or not
the recourse of the lender is to the whole of the assets of such Person or only
to a portion thereof), (ii) evidenced by bonds, notes, debentures or similar
instruments, (iii) representing the balance deferred and unpaid of the purchase
price of any property or services (other than accounts payable or other
obligations arising in the ordinary course of business), (iv) evidenced by
bankers' acceptances or similar instruments issued or accepted by banks, (v) for
the payment of money relating to a
                                       72
<PAGE>   80
 
Capitalized Lease Obligation, or (vi) evidenced by a letter of credit or a
reimbursement obligation of such Person with respect to any letter of credit;
(b) all net obligations of such Person in respect of Currency Hedge Obligations,
Interest Rate Hedge Agreements and Oil and Gas Hedging Contracts, except to the
extent such net obligations are taken into account in the determination of
future net revenues from proved oil and gas reserves for purposes of the
calculation of Adjusted Consolidated Net Tangible Assets; (c) all liabilities of
others of the kind described in the preceding clauses (a) or (b) that such
Person has guaranteed or that are otherwise its legal liability (including, with
respect to any Production Payment, any warranties or guaranties of production or
payment by such Person with respect to such Production Payment but excluding
other contractual obligations of such Person with respect to such Production
Payment); (d) Indebtedness (as otherwise defined in this definition) of another
Person secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person, the amount of such obligations being
deemed to be the lesser of (1) the full amount of such obligations so secured
and (2) the fair market value of such asset, as determined in good faith by the
Board of Directors of such Person, which determination shall be evidenced by a
resolution of such Board; (e) with respect to such Person, the liquidation
preference or any mandatory redemption payment obligations in respect of
Disqualified Stock; (f) the aggregate preference in respect of amounts payable
on the issued and outstanding shares of Preferred Stock of any of the Company's
Restricted Subsidiaries in the event of any voluntary or involuntary
liquidation, dissolution or winding up (excluding any such preference
attributable to such shares of preferred stock that are owned by such Person or
any of its Restricted Subsidiaries; provided, that if such Person is the
Company, such exclusion shall be for such preference attributable to such shares
of preferred stock that are owned by the Company or any of its Restricted
Subsidiaries); and (g) any and all deferrals, renewals, extensions, refinancings
and refundings (whether direct or indirect) of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (a), (b), (c), (d), (e) or (f) or this clause (g), whether or not
between or among the same parties. Subject to clause (c) of the preceding
sentence, neither Dollar-Denominated Production Payments nor Volumetric
Production Payments shall be deemed to be Indebtedness.
 
     "Interest Rate Hedging Agreements" means, with respect to the Company and
its Restricted Subsidiaries, the obligations of such Persons under (i) interest
rate swap agreements, interest rate cap agreements and interest rate collar
agreements and (ii) other agreements or arrangements designed to protect any
such Person or any of its Subsidiaries against fluctuations in interest rates.
 
     "Investment" of any Person means (i) all investments by such Person in any
other Person in the form of loans, advances or capital contributions, (ii) all
guarantees of Indebtedness or other obligations of any other Person by such
Person, (iii) all purchases (or other acquisitions for consideration) by such
Person of assets, Indebtedness, Capital Stock or other securities of any other
Person and (iv) all other items that would be classified as investments
(including, without limitation, purchases of assets outside the ordinary course
of business) or advances on a balance sheet of such Person prepared in
accordance with GAAP.
 
     "Issue Date" means the date on which the Senior Notes are originally
issued.
 
     "Lien" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, easement, restriction, covenant, right-of-way, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property of such Person, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to sell,
in each case securing obligations of such Person and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or equivalent
statute or statutes) of any jurisdiction).
 
     "Make-Whole Amount" with respect to a Senior Note means an amount equal to
the excess, if any, of (i) the present value of the remaining interest, premium
and principal payments due on such Senior Note as if such Senior Note were
redeemed on May 1, 2002, computed using a discount rate equal to the Treasury
Rate plus 50 basis points, over (ii) the outstanding principal amount of such
Senior Note. "Treasury Rate" is defined as the yield to maturity at the time of
the computation of United States Treasury securities with a constant maturity
(as compiled by and published in the most recent Federal Reserve Statistical
Release H.15(519), which has become publicly available at least two business
days prior to the date of the redemption
 
                                       73
<PAGE>   81
 
notice or, if such Statistical Release is no longer published, any publicly
available source of similar market data) most nearly equal to the then remaining
maturity of the Senior Notes assuming redemption of the Senior Notes on May 1,
2002; provided, however, that if the Make-Whole Average Life of such Senior Note
is not equal to the constant maturity of the United States Treasury security for
which a weekly average yield is given, the Treasury Rate shall be obtained by
linear interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such yields
are given, except that if the Make-Whole Average Life of such Senior Notes is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"Make-Whole Average Life" means the number of years (calculated to the nearest
one-twelfth of a year) between the date of redemption and May 1, 2002.
 
     "Make-Whole Price" means the greater of (i) the sum of the outstanding
principal amount and Make-Whole Amount of such Senior Note, and (ii) the
redemption price of such Senior Note on May 1, 2002, determined pursuant to the
Indenture.
 
     "Maturity Date" means May 1, 2005.
 
     "Net Available Proceeds" means, with respect to any Asset Sale or
Sale/Leaseback Transaction of any Person, cash proceeds received (including any
cash proceeds received by way of deferred payment of principal pursuant to a
note or installment receivable or otherwise, but only as and when received, and
excluding any other consideration until such time as such consideration is
converted into cash) therefrom, in each case net of all legal, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all federal, state or local taxes required to be accrued as a liability as a
consequence of such Asset Sale or Sale/Leaseback Transaction, and in each case
net of all Indebtedness which is secured by such assets, in accordance with the
terms of any Lien upon or with respect to such assets, or which must, by its
terms or in order to obtain a necessary consent to such Asset Sale or
Sale/Leaseback Transaction or by applicable law, be repaid out of the proceeds
from such Asset Sale or Sale/Leaseback Transaction and which is actually so
repaid.
 
     "Net Cash Proceeds" means, in the case of any sale by the Company of
securities pursuant to clauses (iii) (B) or (C) of the covenant captioned
"Limitation on Restricted Payments," the aggregate net cash proceeds received by
the Company, after payment of expenses, commissions, discounts and any other
transaction costs incurred in connection therewith.
 
     "Net Working Capital" means (i) all current assets of the Company and its
Restricted Subsidiaries, minus (ii) all current liabilities of the Company and
its Restricted Subsidiaries, except current liabilities included in
Indebtedness.
 
     "Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness of a Non-Recourse Subsidiary as to which (a) neither the Company
nor any other Subsidiary (other than a Non-Recourse Subsidiary) (i) provides
credit support, including any undertaking, agreement or instrument which would
constitute Indebtedness or (ii) is directly or indirectly liable for such
Indebtedness and (b) no default with respect to such Indebtedness (including any
rights which the holders thereof may have to take enforcement action against a
Non-Recourse Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any other Indebtedness (other than Non-Recourse Indebtedness) of the
Company or its Subsidiaries (other than a Non-Recourse Subsidiary) to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
 
     "Non-Recourse Subsidiary" means a Subsidiary or an Affiliate (i)
established for the purpose of acquiring or investing in property securing
Non-Recourse Indebtedness, (ii) substantially all of the assets of which consist
of property securing Non-Recourse Indebtedness, and (iii) which shall have been
designated as a Non-Recourse Subsidiary by a Board Resolution adopted by the
Board of Directors of the Company, as evidenced by an Officers' Certificate
delivered to the Trustee. The Company may redesignate any Non-Recourse
Subsidiary of the Company to be a Subsidiary other than a Non-Recourse
Subsidiary by a Board Resolution adopted by the Board of Directors of the
Company, as evidenced by an Officers' Certificate delivered to the Trustee, if,
after giving effect to such redesignation, the Company could borrow $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant captioned "Limitation
 
                                       74
<PAGE>   82
 
on Incurrence of Additional Indebtedness" (such redesignation being deemed an
incurrence of additional Indebtedness (other than Non-Recourse Indebtedness)).
 
     "Oil and Gas Business" means the business of the exploration for, and
exploitation, development, production, processing (but not refining), marketing,
storage and transportation of, hydrocarbons, and other related energy and
natural resource businesses (including oil and gas services businesses related
to the foregoing).
 
     "Oil and Gas Hedging Contracts" means any oil and gas purchase or hedging
agreement, and other agreement or arrangement, in each case, that is designed to
provide protection against price fluctuations of oil, gas or other commodities.
 
     "Oil and Gas Securities" means the Voting Stock of a Person primarily
engaged in the Oil and Gas Business, provided that such Voting Stock shall
constitute a majority of the Voting Stock of such Person in the event that such
Voting Stock is not registered under Section 12 of the Exchange Act.
 
     "Pari Passu Indebtedness" means any Indebtedness of the Company, whether
outstanding on the Issue Date or thereafter created, incurred or assumed, unless
such Indebtedness is contractually subordinate or junior in right of payment of
principal, premium and interest of Senior Notes.
 
     "Pari Passu Indebtedness of a Subsidiary Guarantor" means any Indebtedness
of such Subsidiary Guarantor, whether outstanding on the Issue Date or
thereafter created, incurred, or assumed unless such Indebtedness is
contractually subordinate or junior in right of payment of principal, premium
and interest to the Guarantees.
 
     "Permitted Business Investments" means (i) Investments in assets used in
the Oil and Gas Business; (ii) the acquisition of Oil and Gas Securities; (iii)
the entry into operating agreements, joint ventures, processing agreements,
farm-out agreements, development agreements, area of mutual interest agreements,
contracts for the sale, transportation or exchange of oil and natural gas,
unitization agreements, pooling arrangements, joint bidding agreements, service
contracts, partnership agreements (whether general or limited) or other similar
or customary agreements, transactions, properties, interests or arrangements,
and Investments and expenditures in connection therewith or pursuant thereto, in
each case made or entered into in the ordinary course of the Oil and Gas
Business, excluding, however, Investments in corporations; (iv) the acquisition
of working interests, royalty interests or mineral leases relating to oil and
gas properties; (v) Investments by the Company or any Wholly Owned Restricted
Subsidiary in any Person which, immediately prior to the making of such
Investment, is a Wholly Owned Restricted Subsidiary; (vi) Investments in the
Company by any Wholly Owned Restricted Subsidiary; (vii) Investments permitted
under the covenants captioned "Limitation on Sale of Assets" and "Limitation on
Sale/Leaseback Transactions"; (viii) Investments in any Person the consideration
for which consists of Qualified Stock and (ix) any other Investments in an
amount not to exceed 10% of Adjusted Consolidated Net Tangible Assets determined
as of the date of the making or incurrence of such Investment.
 
     "Permitted Company Refinancing Indebtedness" means Indebtedness of the
Company, the net proceeds of which are used to renew, extend, refinance, refund
or repurchase outstanding Indebtedness of the Company, provided that (i) if the
Indebtedness (including the Senior Notes) being renewed, extended, refinanced,
refunded or repurchased is pari passu with or subordinated in right of payment
to the Senior Notes, then such Indebtedness is pari passu or subordinated in
right of payment to, as the case may be, the Senior Notes at least to the same
extent as the Indebtedness being renewed, extended, refinanced, refunded or
repurchased, (ii) such Indebtedness is scheduled to mature no earlier than the
Indebtedness being renewed, extended, refinanced, refunded or repurchased, and
(iii) such Indebtedness has an Average Life at the time such Indebtedness is
incurred that is equal to or greater than the Average Life of the Indebtedness
being renewed, extended, refinanced, refunded or repurchased; provided, further,
that such Indebtedness (to the extent that such Indebtedness constitutes
Permitted Company Refinancing Indebtedness) is in an aggregate principal amount
(or, if such Indebtedness is issued at a price less than the principal amount
thereof, the aggregate amount of gross proceeds therefrom is) not in excess of
the aggregate principal amount then outstanding of the Indebtedness being
renewed, extended, refinanced, refunded or repurchased (or if the Indebtedness
being
 
                                       75
<PAGE>   83
 
renewed, extended, refinanced, refunded or repurchased was issued at a price
less than the principal amount thereof, then not in excess of the amount of
liability in respect thereof determined in accordance with GAAP).
 
     "Permitted Financial Investments" means the following kinds of instruments
if, in the case of instruments referred to in clauses (i)-(iv) below, on the
date of purchase or other acquisition of any such instrument by the Company or
any Subsidiary, the remaining term to maturity is not more than one year; (i)
readily marketable obligations issued or unconditionally guaranteed as to
principal of and interest thereon by the United States of America or by any
agency or authority controlled or supervised by and acting as an instrumentality
of the United States of America; (ii) repurchase obligations for instruments of
the type described in clause (i) for which delivery of the instrument is made
against payment; (iii) obligations (including, but not limited to, demand or
time deposits, bankers' acceptances and certificates of deposit) issued by a
depository institution or trust company incorporated or doing business under the
laws of the United States of America, any state thereof or the District of
Columbia or a branch or subsidiary of any such depository institution or trust
company operating outside the United States, provided, that such depository
institution or trust company has, at the time of the Company's or such
Subsidiary's investment therein or contractual commitment providing for such
investment, capital surplus or undivided profits (as of the date of such
institution's most recently published financial statements) in excess of
$500,000,000; (iv) commercial paper issued by any corporation, if such
commercial paper has, at the time of the Company's or any Subsidiary's
investment therein or contractual commitment providing for such investment,
credit ratings of A-1 (or higher) by Standard & Poor's Corporation and P-1 (or
higher) by Moody's Investors Services, Inc.; and (v) money market mutual or
similar funds having assets in excess of $500,000,000.
 
     "Permitted Holders" means Aubrey K. McClendon and Tom L. Ward and their
respective Affiliates.
 
     "Permitted Indebtedness" means (i) Indebtedness of the Company and its
Restricted Subsidiaries under a Bank Credit Facility as the same may be amended,
refinanced, or replaced, in a principal amount outstanding at any time not to
exceed the greater of (a) $300 million and (b) $100 million plus 20% of Adjusted
Consolidated Net Tangible Assets, less any Net Available Proceeds applied in
accordance with the covenant captioned "Limitation on Sale of Assets" to repay
or prepay such Indebtedness which repayment or prepayment results in a permanent
reduction in any revolving credit or other commitment relating thereto or the
maximum amount that may be borrowed thereunder; (ii) Indebtedness of the Company
and its Restricted Subsidiaries outstanding on the Issue Date; (iii) other
Indebtedness of the Company and its Restricted Subsidiaries in a principal
amount not to exceed $25 million at any one time outstanding; (iv) Non-Recourse
Indebtedness; (v) Indebtedness of the Company to any Wholly-Owned Restricted
Subsidiary of the Company and Indebtedness of any Restricted Subsidiary of the
Company to the Company or another Wholly Owned Restricted Subsidiary of the
Company; (vi) Permitted Company Refinancing Indebtedness; (vii) Permitted
Subsidiary Refinancing Indebtedness; (viii) obligations of the Company and its
Restricted Subsidiaries under Currency Hedge Obligations, Oil and Gas Hedging
Contracts or Interest Rate Hedging Agreements; (ix) Indebtedness under the
Senior Notes; and (x) Indebtedness of a Subsidiary pursuant to a Guarantee of
the Senior Notes in accordance with Article Ten of the Indenture.
 
     "Permitted Investments" means Permitted Business Investments and Permitted
Financial Investments.
 
     "Permitted Liens" means (i) Liens existing on the Issue Date; (ii) Liens
under a Bank Credit Facility; provided, however, such Liens are limited to
Proved Developed Properties of the Company and its Subsidiaries and such Liens
secure Indebtedness in an amount not in excess of that permitted to be incurred
in accordance with clause (i) of the definition of "Permitted Indebtedness";
(iii) Liens now or hereafter securing any obligations under Interest Rate
Hedging Agreements so long as the related Indebtedness (a) constitutes the
Existing Notes or the Senior Notes (or any Permitted Company Refinancing
Indebtedness in respect thereof) or (b) is, or is permitted to be under this
Indenture, secured by a Lien on the same property securing such interest rate
hedging obligations; (iv) Liens securing Permitted Company Refinancing
Indebtedness or Permitted Subsidiary Refinancing Indebtedness; provided, that
such Liens extend to or cover only the property or assets currently securing the
Indebtedness being refinanced; (v) Liens for taxes, assessments and governmental
charges not yet delinquent or being contested in good faith and for which
adequate reserves have been established to the extent required by GAAP; (vi)
mechanics', worker's, materialmen's, operators' or
 
                                       76
<PAGE>   84
 
similar Liens arising in the ordinary course of business; (vii) Liens in
connection with worker's compensation, unemployment insurance or other social
security, old age pension or public liability obligations; (viii) Liens,
deposits or pledges to secure the performance of bids, tenders, contracts (other
than contracts for the payment of money), leases, public or statutory
obligations, surety, stay, appeal, indemnity, performance or other similar
bonds, or other similar obligations arising in the ordinary course of business;
(ix) survey exceptions, encumbrances, easements or reservations of, or rights of
others for, rights of way, zoning or other restrictions as to the use of real
properties, and minor defects in title which, in the case of any of the
foregoing, were not incurred or created to secure the payment of borrowed money
or the deferred purchase price of property or services, and in the aggregate do
not materially adversely affect the value of such properties or materially
impair use for the purposes of which such properties are held by the Company or
any Restricted Subsidiaries; (x) Liens on, or related to, properties to secure
all or part of the costs incurred in the ordinary course of business of
exploration, drilling, development or operation thereof; (xi) Liens on pipeline
or pipeline facilities which arise out of operation of law; (xii) judgment and
attachment Liens not giving rise to an Event of Default or Liens created by or
existing from any litigation or legal proceeding that are currently being
contested in good faith by appropriate proceedings and for which adequate
reserves have been made; (xiii) (a) Liens upon any property of any Person
existing at the time of acquisition thereof by the Company or a Restricted
Subsidiary, (b) Liens upon any property of a Person existing at the time such
Person is merged or consolidated with the Company or any Restricted Subsidiary
or existing at the time of the sale or transfer of any such property of such
Person to the Company or any Restricted Subsidiary, or (c) Liens upon any
property of a Person existing at the time such Person becomes a Restricted
Subsidiary; provided, that in each case such Lien has not been created in
contemplation of such sale, merger, consolidation, transfer or acquisition, and
provided that in each such case no such Lien shall extend to or cover any
property of the Company or any Restricted Subsidiary other than the property
being acquired and improvements thereon; (xiv) Liens on deposits to secure
public or statutory obligations or in lieu of surety or appeal bonds entered
into in the ordinary course of business; (xv) Liens in favor of collecting or
payor banks having a right of setoff, revocation, refund or chargeback with
respect to money or instruments of the Company or any Subsidiary on deposit with
or in possession of such bank; (xvi) purchase money security interests granted
in connection with the acquisition of assets in the ordinary course of business
and consistent with past practices, provided, that (A) such Liens attach only to
the property so acquired with the purchase money indebtedness secured thereby
and (B) such Liens secure only Indebtedness that is not in excess of 100% of the
purchase price of such assets; (xvii) Liens reserved in oil and gas mineral
leases for bonus or rental payments and for compliance with the terms of such
leases; (xviii) Liens arising under partnership agreements, oil and gas leases,
farm-out agreements, division orders, contracts for the sale, purchase,
exchange, transportation or processing (but not refining) of oil, gas or other
hydrocarbons, unitization and pooling declarations and agreements, development
agreements, operating agreements, area of mutual interest agreements, and other
similar agreements which are customary in the Oil and Gas Business; (xix) Liens
securing obligations of the Company or any of its Restricted Subsidiaries under
Currency Hedge Obligations or Oil and Gas Hedging Contracts; and (xx) Liens to
secure Dollar-Denominated Production Payments and Volumetric Production
Payments.
 
     "Permitted Subsidiary Refinancing Indebtedness" means Indebtedness of any
Restricted Subsidiary, the net proceeds of which are used to renew, extend,
refinance, refund or repurchase outstanding Indebtedness of such Restricted
Subsidiary, provided that (i) if the Indebtedness (including the Guarantees)
being renewed, extended, refinanced, refunded or repurchased is pari passu with
or subordinated in right of payment to the Guarantees, then such Indebtedness is
pari passu with or subordinated in right of payment to, as the case may be, the
Guarantees at least to the same extent as the Indebtedness being renewed,
extended, refinanced, refunded or repurchased, (ii) such Indebtedness is
scheduled to mature no earlier than the Indebtedness being renewed, extended,
refinanced, refunded or repurchased, and (iii) such Indebtedness has an Average
Life at the time such Indebtedness is incurred that is equal to or greater than
the Average Life of the Indebtedness being renewed, extended, refinanced,
refunded or repurchased; provided, further, that such Indebtedness (to the
extent that such Indebtedness constitutes Permitted Subsidiary Refinancing
Indebtedness) is in an aggregate principal amount (or, if such Indebtedness is
issued at a price less than the principal amount thereof, the aggregate amount
of gross proceeds therefrom is) not in excess of the aggregate principal amount
then outstanding of the Indebtedness being renewed, extended, refinanced,
refunded or repurchased (or if the
 
                                       77
<PAGE>   85
 
Indebtedness being renewed, extended, refinanced, refunded or repurchased was
issued at a price less than the principal amount thereof, then not in excess of
the amount of liability in respect thereof determined in accordance with GAAP);
provided, however, that a Restricted Subsidiary shall not incur refinancing
Indebtedness to renew, extend, refinance, refund or repurchase outstanding
Indebtedness of the Company or another Subsidiary.
 
     "Person" means any individual, corporation, partnership, joint venture,
trust, estate, unincorporated organization or government or any agency or
political subdivision thereof.
 
     "Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
 
     "Proved Developed Properties" means working interests, royalty interests,
and other interests in oil, gas or mineral leases or other interests in oil, gas
or mineral properties to which reserves are attributed which may properly be
categorized as proved developed reserves under Regulation S-X under the
Securities Act; together with all contracts, agreements and contract rights
which cover, affect or otherwise relate to such interests; all hydrocarbons and
all payments of any type in lieu of production; all improvements, fixtures,
equipment, information, data and other property used in connection therewith or
in connection with the treating, handling, storing, processing, transporting or
marketing of such hydrocarbons; all insurance policies relating thereto or to
the operation thereof; all personal property related thereto; and all proceeds
thereof.
 
     "Reference Period" means, with respect to any Person, the period of four
consecutive fiscal quarters ending with the last full fiscal quarter for which
financial information is available immediately preceding any date upon which any
determination is to be made pursuant to the terms of the Senior Notes or the
Indenture.
 
     "Restricted Payment" means, with respect to any Person, any of the
following: (i) any dividend or other distribution in respect of such Person's
Capital Stock (other than (a) dividends or distributions payable solely in
Capital Stock (other than Disqualified Stock), (b) in the case of Restricted
Subsidiaries of the Company, dividends or distributions payable to the Company
or to a Restricted Subsidiary of the Company and (c) in the case of the Company,
cash dividends payable on the Preferred Stock); (ii) the purchase, redemption or
other acquisition or retirement for value of any Capital Stock, or any option,
warrant, or other right to acquire shares of Capital Stock, of the Company or
any of its Restricted Subsidiaries; (iii) the making of any principal payment
on, or the purchase, defeasance, repurchase, redemption or other acquisition or
retirement for value, prior to any scheduled maturity, scheduled repayment or
scheduled sinking fund payment, of any Indebtedness which is subordinated in
right of payment to the Senior Notes; and (iv) the making by such Person of any
Investment other than a Permitted Investment.
 
     "Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that, immediately
after giving effect to such designation, the Company could incur at least $1.00
in additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant captioned "Limitation on Incurrence of Additional Indebtedness." As of
the Issue Date, each of the Company's Subsidiaries other than Chesapeake Energy
Marketing, Inc. shall constitute a Restricted Subsidiary.
 
     "Sale/Leaseback Transaction" means with respect to the Company or any of
its Restricted Subsidiaries, any arrangement with any Person providing for the
leasing by the Company or any of its Restricted Subsidiaries of any principal
property, acquired or placed into service more than 180 days prior to such
arrangement, whereby such property has been or is to be sold or transferred by
the Company or any of its Restricted Subsidiaries to such Person.
 
     "Subordinated Indebtedness of a Subsidiary Guarantor" means any
Indebtedness of such Subsidiary Guarantor, whether outstanding on the Issue Date
or thereafter created, incurred or assumed, which is contractually subordinate
or junior in right of payment of principal, premium and interest to the
Guarantees.
 
     "Subordinated Indebtedness of the Company" means any Indebtedness of the
Company, whether outstanding on the Issue Date or thereafter created, incurred
or assumed, which is contractually subordinate or junior in right of payment of
principal, premium and interest to the Senior Notes.
 
                                       78
<PAGE>   86
 
     "Subsidiary" means any subsidiary of the Company. A "subsidiary" of any
Person means (i) a corporation a majority of whose Voting Stock is at the time,
directly or indirectly, owned by such Person, by one or more subsidiaries of
such Person or by such Person and one or more subsidiaries of such Person, (ii)
a partnership in which such Person or a subsidiary of such Person is, at the
date of determination, a general or limited partner of such partnership, but
only if such Person or its subsidiary is entitled to receive more than 50
percent of the assets of such partnership upon its dissolution, or (iii) any
other Person (other than a corporation or partnership) in which such Person,
directly or indirectly, at the date of determination thereof, has (x) at least a
majority ownership interest or (y) the power to elect or direct the election of
a majority of the directors or other governing body of such Person.
 
     "Subsidiary Guarantor" means (i) each of the Subsidiaries that becomes a
guarantor of a series of the Senior Notes in compliance with the provisions of
Article Ten of the Indenture relating to such series of Senior Notes and (ii)
each of the Subsidiaries executing a supplemental indenture in which such
Subsidiary agrees to be bound by the terms of such Indenture.
 
     "Unrestricted Subsidiary" means (a) any Subsidiary of an Unrestricted
Subsidiary or (b) any Subsidiary of the Company or of a Restricted Subsidiary
that is designated as an Unrestricted Subsidiary by a resolution adopted by the
Board of Directors in accordance with the requirements of the following
sentence. The Company may designate any Subsidiary of the Company or of a
Restricted Subsidiary (including a newly acquired or newly formed Subsidiary or
any Restricted Subsidiary of the Company), to be an Unrestricted Subsidiary by a
resolution of the Board of Directors of the Company, as evidenced by written
notice thereof delivered to the Trustee, if immediately after giving effect to
such designation, (i) the Company could incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the covenant captioned
"Limitation on Incurrence of Additional Indebtedness," (ii) the Company could
make an additional Restricted Payment of $1.00 pursuant to the first paragraph
of the covenant captioned "Limitation on Restricted Payments," (iii) such
Subsidiary does not own or hold any Capital Stock of, or any lien on any
property of, the Company or any Restricted Subsidiary and (iv) such Subsidiary
is not liable, directly or indirectly, with respect to any Indebtedness other
than Unrestricted Subsidiary Indebtedness.
 
     "Unrestricted Subsidiary Indebtedness" of any Person means Indebtedness of
such Person (a) as to which neither the Company nor any Restricted Subsidiary is
directly or indirectly liable (by virtue of the Company's or such Restricted
Subsidiary's being the primary obligor, or guarantor of, or otherwise liable in
any respect on, such Indebtedness), (b) which, with respect to Indebtedness
incurred after the Issue Date by the Company or any Restricted Subsidiary, upon
the occurrence of a default with respect thereto, does not result in, or permit
any holder of any Indebtedness of the Company or any Restricted Subsidiary to
declare a default on such Indebtedness of the Company or any Restricted
Subsidiary and (c) which is not secured by any assets of the Company or of any
Restricted Subsidiary.
 
     "U.S. Government Securities" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case under
clauses (i) or (ii) are not callable or redeemable at the option of the issuer
thereof.
 
     "U.S. Legal Tender" means such coin or currency of the United States as at
the time of payment shall be legal tender for the payment of public and private
debts.
 
     "Volumetric Production Payments" mean production payment obligations
recorded as deferred revenue in accordance with generally accepted accounting
principles, together with all undertakings and obligations in connection
therewith.
 
     "Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or only so long as no senior class of stock has voting
power by reason of contingency) to vote in the election of members of the Board
of Directors or other governing body of such person.
 
                                       79
<PAGE>   87
 
     "Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the
Capital Stock (other than directors' qualifying shares, if applicable) of which
is owned by the Company or another Wholly Owned Restricted Subsidiary.
 
EVENTS OF DEFAULT
 
     An Event of Default is defined in the Indenture as being: (i) default by
the Company or any Subsidiary Guarantor in the payment of principal of or
premium, if any, on the Senior Notes when due and payable at maturity, upon
repurchase pursuant to the covenants described under "Limitation on Sale of
Assets" or "Optional Redemption -- Change of Control," upon acceleration or
otherwise; (ii) default by the Company or any Subsidiary Guarantor for 30 days
in payment of any interest on the Senior Notes; (iii) default by the Company or
any Subsidiary Guarantor in the deposit of any optional redemption payment; (iv)
default on any other Indebtedness (other than Non-Recourse Indebtedness and
Unrestricted Subsidiary Indebtedness) of the Company, any Subsidiary Guarantor
or any other Subsidiary (other than a Non-Recourse Subsidiary or an Unrestricted
Subsidiary) if either (A) such default results in the acceleration of the
maturity of any such Indebtedness having a principal amount of $10.0 million or
more individually or, taken together with the principal amount of any other such
Indebtedness the maturity of which has been so accelerated, in the aggregate, or
(B) such default results from the failure to pay when due principal of, premium,
if any, or interest on, any such Indebtedness, after giving effect to any
applicable grace period (a "Payment Default"), having a principal amount of
$10.0 million or more individually or, taken together with the principal amount
of any other Indebtedness under which there has been a Payment Default, in the
aggregate; (v) default in the performance, or breach of, the covenants set forth
in the covenants captioned "Limitation on Restricted Payments" and "Limitations
on Mergers and Consolidations," or in the performance, or breach of, any other
covenant or agreement of the Company or any Subsidiary Guarantor in the
Indenture and failure to remedy such default within a period of 45 days after
written notice thereof from the Trustee or Holders of 25% of the principal
amount of the outstanding Senior Notes; (vi) the entry by a court of one or more
judgments or orders for the payment of money against the Company, any Subsidiary
Guarantor or any other Subsidiary (other than a Non-Recourse Subsidiary or an
Unrestricted Subsidiary, provided that neither the Company nor any Restricted
Subsidiary is liable, directly or indirectly, for such judgment or order) in an
aggregate amount in excess of $10.0 million (net of applicable insurance
coverage by a third party insurer which is acknowledged in writing by such
insurer) that has not been vacated, discharged, satisfied or stayed pending
appeal within 60 days from the entry thereof; (vii) the failure of a Guarantee
by a Subsidiary Guarantor to be in full force and effect, or the denial or
disaffirmance by such entity thereof; or (viii) certain events involving
bankruptcy, insolvency or reorganization of the Company or any Restricted
Subsidiary of the Company. The Indenture provides that the Trustee may withhold
notice to the Holders of the Senior Notes of any default (except in payment of
principal of, or premium, if any, or interest on the Senior Notes) if the
Trustee considers it in the interest of the Holders of the Senior Notes to do
so.
 
     The Indenture provides that if an Event of Default occurs and is continuing
with respect to the Indenture, the Trustee or the Holders of not less than 25%
in principal amount of the Senior Notes outstanding may declare the principal of
and premium, if any, and accrued but unpaid interest on all such Senior Notes to
be due and payable. Upon such a declaration, such principal premium, if any, and
interest will be due and payable immediately. If an Event of Default relating to
certain events of bankruptcy, insolvency or reorganization of the Company or any
Subsidiary of the Company occurs and is continuing, the principal of, and
premium, if any, and interest on all the Senior Notes will become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holders of the Senior Notes. The amount due and payable on
the acceleration of any Senior Note will be equal to 100% of the principal
amount of such Senior Note, plus accrued and unpaid interest to the date of
payment. Under certain circumstances, the Holders of a majority in principal
amount of the outstanding series of Senior Notes may rescind any such
acceleration with respect to such series of Senior Notes and its consequences.
 
     The Indenture provides that no Holder of a Senior Note may pursue any
remedy under the Indenture unless (i) the Trustee shall have received written
notice of a continuing Event of Default, (ii) the Trustee shall have received a
request from Holders of at least 25% in principal amount of the Senior Notes to
pursue
 
                                       80
<PAGE>   88
 
such remedy, (iii) the Trustee shall have been offered indemnity reasonably
satisfactory to it, (iv) the Trustee shall have failed to act for a period of 60
days after receipt of such notice, request and offer of indemnity and (v) no
direction inconsistent with such written request has been given to the Trustee
during such 60-day period by the Holders of a majority in principal amount of
the Senior Notes; provided, however, such provision does not affect the right of
a Holder of a Senior Note to sue for enforcement of any overdue payment thereon.
 
     The Holders of a majority in principal amount of the Senior Notes then
outstanding will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee
under the Indenture relating to the Senior Notes, subject to certain limitations
specified in the Indenture. The Indenture requires the annual filing by the
Company with the Trustee of a written statement as to compliance with the
covenants contained in such Indenture.
 
MODIFICATION AND WAIVER
 
     The Indenture provides that modifications and amendments to the Indenture
or the Senior Notes may be made by the Company, the Subsidiary Guarantors and
the Trustee with the consent of the Holders of a majority in principal amount of
Senior Notes then outstanding; provided that no such modification or amendment
may, without the consent of the Holder of each Senior Note then outstanding
affected thereby, (i) reduce the percentage of principal amount of Senior Notes
whose Holders must consent to an amendment, supplement or waiver; (ii) reduce
the rate or change the time for payment of interest, including default interest,
on any such Senior Note; (iii) reduce the principal amount of any such Senior
Note or change the Maturity Date of the Senior Notes; (iv) reduce the redemption
price, including premium, if any, payable upon redemption of any Senior Note or
change the time at which any Senior Note may or shall be redeemed; (v) reduce
the purchase price, including the premium, if any, payable upon the repurchase
of any Senior Note upon an Asset Sale or Change in Control, or change the time
at which any Senior Note may or shall be repurchased thereunder; (vi) make any
Senior Note payable in money other than that stated in the Senior Note; (vii)
impair the right to institute suit for the enforcement of any payment of
principal of, or premium, if any, or interest on, any Senior Note; (viii) make
any change in the percentage of principal amount of Senior Notes necessary to
waive compliance with certain provisions of the Indenture; or (ix) waive a
continuing Default or Event of Default in the payment of principal of, premium,
if any, or interest on the Senior Notes. The Indenture provides that
modifications and amendments of the Indenture may be made by the Company and the
Trustee without the consent of any holders of the Senior Notes in certain
limited circumstances, including (a) to cure any ambiguity, omission, defect or
inconsistency, (b) to provide for the assumption of the obligations of the
Company or any Subsidiary Guarantor under the Indenture upon the merger,
consolidation or sale or other disposition of all or substantially all of the
assets of the Company or such Subsidiary Guarantor, (c) to reflect the release
of any Subsidiary Guarantor from its Guarantee, or the addition of any
Subsidiary of the Company as a Subsidiary Guarantor, in the manner provided in
the Indenture, (d) to comply with any requirement of the SEC in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act of
1939 or (e) to make any change that would provide any additional benefit to the
Holders or that does not adversely affect the rights of any Holder of Senior
Notes in any material respect.
 
     The Indenture provides that the Holders of a majority in aggregate
principal amount of the Senior Notes then outstanding may waive any past default
under the Indenture, except a default in the payment of principal premium, if
any, or interest.
 
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
 
     The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Senior Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company will be deemed to
have paid and discharged the entire Indebtedness represented by the outstanding
Senior Notes, except for (i) the rights of Holders of Senior Notes to receive
payments in respect of the principal of, premium, if any, and interest on Senior
Notes when such payments are due, (ii) the Company's obligations with respect to
Senior Notes concerning the issuance of temporary Senior Notes, transfers and
exchanges of Senior Notes, replacement of mutilated, destroyed, lost or stolen
Senior Notes, the maintenance of an office or
                                       81
<PAGE>   89
 
agency where Senior Notes may be surrendered for transfer or exchange or
presented for payment, and duties of paying agents, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants described
under "-- Certain Covenants" ("Covenant Defeasance"), and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the Senior Notes. In the event Covenant Defeasance
occurs, certain events (not including non-payment) described under "-- Events of
Default" will no longer constitute an Event of Default with respect to the
Senior Notes.
 
     In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of Senior Notes, cash in U.S. Legal Tender, non-callable U.S.
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Senior Notes of such series on the Maturity Date or on the
applicable mandatory redemption date, as the case may be, of such principal or
installment of principal, premium, if any, or interest; (ii) in the case of
Legal Defeasance, the Company must deliver to the Trustee an opinion of counsel
reasonably acceptable to the Trustee confirming that (A) the Company has
received from or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Senior Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel reasonably acceptable to the Trustee to the effect that
the Holders of the related series of outstanding Senior Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Indenture or any other material
agreement or instrument to which the Company is a party or by which the Company
is bound; (vi) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the holders of Senior Notes over other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and (vii) the Company shall have delivered to the Trustee an
Officers' Certificate and an opinion of counsel each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
 
GOVERNING LAW
 
     The Indenture provides that it will be governed by, and construed in
accordance with, the laws of the State of New York, but without giving effect to
principles of conflicts of law to the extent that the application of the law of
another jurisdiction would be required thereby.
 
THE TRUSTEE
 
     United States Trust Company of New York is the Trustee under the Indenture.
Its address is 114 West 47th Street, New York, New York 10036-1532. The Company
has also appointed the Trustee as the initial Registrar, Transfer Agent and
Paying Agent under the Indenture.
 
     The Trustee is permitted to become an owner or pledgee of Senior Notes and
may otherwise deal with the Company or its Subsidiaries or Affiliates with the
same rights it would have if it were not Trustee. If, however,
 
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<PAGE>   90
 
the Trustee acquires any conflicting interest (as defined in the Trust Indenture
Act of 1939), it must eliminate such conflict or resign.
 
     The Indenture provides that in case an Event of Default shall occur (and be
continuing), the Trustee will be required to use the degree of care and skill of
a prudent person in the conduct of such person's own affairs. The Trustee will
be under no obligation to exercise any of its powers under the Indenture at the
request of any of the Holders of the Senior Notes, unless such Holders have
offered the Trustee indemnity reasonably satisfactory to it.
 
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
 
     The certificates evidencing the New Notes will initially be, and the
certificates evidencing the Old Notes are, represented by one or more permanent
global Senior Notes in definitive, fully registered form without interest
coupons (collectively, the "Global Notes"). Upon issuance, the Global Notes are
deposited with the Trustee, as custodian for DTC, in New York, New York, and
registered in the name of DTC or its nominee for credit to the accounts of DTC's
Direct and Indirect Participants (as defined below).
 
     The transfer of beneficial interests in any Global Notes are subject to the
applicable rules and procedures of DTC and its Direct or Indirect Participants,
which may change from time to time. The Global Notes may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee in certain limited circumstances. Beneficial interests in the
Global Notes may be exchanged for Senior Notes in certificated form in certain
limited circumstances. See "-- Transfers of Interests in Global Notes for
Certificated Notes."
 
     Initially, the Trustee will act as Paying Agent and Registrar. The Senior
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
 
  DEPOSITARY PROCEDURES
 
     DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Direct Participants. The Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities that clear through or maintain a direct or indirect,
custodial relationship with a Direct Participant (collectively, the "Indirect
Participants").
 
     DTC has advised the Company that, pursuant to DTC's procedures, (i) upon
deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Notes that have been allocated to them by the Initial
Purchasers, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes.
 
     Investors in the Global Notes may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations that are Direct Participants in DTC. All ownership interests in
any Global Notes may be subject to the procedures and requirements of DTC.
 
     The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form of securities that they
own. This may limit or curtail the ability to transfer beneficial interests in a
Global Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that are not Direct
 
                                       83
<PAGE>   91
 
Participants in DTC, or to otherwise take actions in respect of such interests,
may be affected by the lack of physical certificates evidencing such interests.
 
     EXCEPT AS DESCRIBED IN "-- TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE SENIOR NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY
OF SENIOR NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED
OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
 
     Under the terms of the Indenture, the Company, the Subsidiary Guarantors
and the Trustee will treat the persons in whose names the Senior Notes are
registered (including Senior Notes represented by Global Notes) as the owners
thereof for the purpose of receiving payments and for any and all other purposes
whatsoever. Payments in respect of the principal, premium, Liquidated Damages,
if any, and interest on Global Notes registered in the name of DTC or its
nominee will be payable by the Trustee to DTC or its nominee as the registered
holder under the Indenture. Consequently, neither the Company, the Subsidiary
Guarantors, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Direct Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Notes or for
maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (ii) any other matter relating to the
actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
 
     DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Senior Notes is to credit the accounts of the relevant Direct Participants with
such payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Senior Notes will be governed by standing instructions
and customary practices between them and will not be the responsibility of DTC,
the Trustee, the Company or the Subsidiary Guarantors. Neither the Company, the
Subsidiary Guarantors nor the Trustee will be liable for any delay by DTC or its
Direct Participants or Indirect Participants in identifying the beneficial
owners of the Senior Notes, and the Company and the Trustee may conclusively
rely on and will be protected in relying on instructions from DTC or its nominee
as the registered owner of the Senior Notes for all purposes.
 
     The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants who hold an interest through a
Direct Participant will be effected in accordance with the procedures of such
Direct Participant but generally will settle in immediately available funds.
 
     DTC has advised the Company that it will take any action permitted to be
taken by a holder of Senior Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Senior
Notes to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Senior Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for Senior Notes in certificated form, and to
distribute such certificated forms of Senior Notes to its Direct Participants.
See "-- Transfers of Interests in Global Notes for Certificated Notes."
 
     Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among Direct Participants, DTC is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Subsidiary
Guarantors or the Trustee shall have any responsibility for the performance by
DTC or its respective Direct and Indirect Participants of DTC's obligations
under the rules and procedures governing any of its operations.
 
                                       84
<PAGE>   92
 
     The information in this section concerning DTC and its book-entry systems
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
 
  TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
 
     An entire Global Note may be exchanged for definitive Senior Notes in
registered, certificated form without interest coupons ("Certificated Notes") if
(i) DTC (x) notifies the Company that it is unwilling or unable to continue as
depositary for the Global Notes or if at any time DTC ceases to be a clearing
agency registered under the Exchange Act, and the Company thereupon fails to
appoint a successor depositary within 30 days or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of
Certificated Notes or (iii) there shall have occurred and be continuing an Event
of Default with respect to the Senior Notes. In any such case, the Company will
notify the Trustee in writing that, upon surrender by the Direct and Indirect
Participants of their interests in such Global Note, Certificated Notes will be
issued to each person that such Direct and Indirect Participants and the DTC
identify as being the beneficial owner of the related Senior Notes.
 
     Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
 
     Neither the Company, the Subsidiary Guarantors nor the Trustee will be
liable for any delay by the holder of any Global Note or DTC in identifying the
beneficial owners of Senior Notes, and the Company and the Trustee may
conclusively rely on, and will be protected in relying on, instructions from the
holder of the Global Note or DTC for all purposes.
 
  SAME-DAY SETTLEMENT AND PAYMENT
 
     The Indenture requires that payments in respect of the Senior Notes
represented by the Global Notes (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available same day funds to the accounts specified by the holder of interests in
such Global Note. With respect to Certificated Notes, the Company will make all
payments of principal, premium, if any, interest and Liquidated Damages, if any,
by wire transfer of immediately available same-day funds to the accounts
specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address. The Company expects that
secondary trading in the Certificated Notes will also be settled in immediately
available funds.
 
            EXCHANGE OFFER; REGISTRATION RIGHTS; LIQUIDATED DAMAGES
 
     In the Registration Rights Agreement, the Company and Subsidiary Guarantors
agreed to file the Exchange Offer Registration Statement with the Commission by
June 21, 1998, and use their respective best efforts to have it declared
effective at the earliest possible time, but in no event later than October 19,
1998. The Company and the Subsidiary Guarantors also agreed to use their best
efforts to cause the Exchange Offer Registration Statement to be effective
continuously and to keep the Exchange Offer open for a period of not less than
30 days nor more than 60 days.
 
     If (i) the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) any Holder of Senior Notes which are Transfer Restricted
Securities notifies the Company prior to the 20th business day following the
consummation of the Exchange Offer that (a) it is prohibited by law or
Commission policy from participating in the Exchange Offer, (b) it may not
resell the New Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus, and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by it,
or (c) it is a broker-dealer and holds Senior
 
                                       85
<PAGE>   93
 
Notes acquired directly from the Company or any of the Company's affiliates, the
Company and the Subsidiary Guarantors will file with the Commission a
registration statement (the "Senior Note Shelf Registration Statement") to
register for public resale the Transfer Restricted Securities held by any such
Holder who provides the Company with certain information for inclusion in the
Senior Note Shelf Registration Statement.
 
     For the purposes of the Registration Rights Agreement, "Transfer Restricted
Securities" means each Old Note until the earliest to occur of the date on which
(i) such Old Note is exchanged in the Exchange Offer for a New Note which is
entitled to be resold to the public by the Holder thereof without complying with
the prospectus delivery requirements of the Securities Act, (ii) such Old Note
has been disposed of in accordance with the Senior Note Shelf Registration
Statement (and the purchasers thereof have been issued New Notes) or (iii) such
Old Note is distributed to the public pursuant to Rule 144 under the Securities
Act (and the purchasers thereof have been issued New Notes), and each New Note
until the date on which such New Note is disposed of by a broker-dealer pursuant
to the "Plan of Distribution" contained herein (including delivery of this
Prospectus).
 
     The Registration Rights Agreement provides that (i) if the Company or the
Subsidiary Guarantors fail to file the Exchange Offer Registration Statement
with the Commission on or prior to June 21, 1998, (ii) if the Exchange Offer
Registration Statement is not declared effective by the Commission on or prior
to October 19, 1998, (iii) if the Exchange Offer is not consummated on or before
the 60th business day after the Exchange Offer Registration Statement is
declared effective, (iv) if obligated to file the Senior Note Shelf Registration
Statement and the Company and the Subsidiary Guarantors fail to file the Senior
Note Shelf Registration Statement with the Commission on or prior to the 30th
day after such filing obligation arises, (v) if obligated to file a Senior Note
Shelf Registration Statement and the Senior Note Shelf Registration Statement is
not declared effective on or prior to the 180th day after the obligation to file
a Senior Note Shelf Registration Statement arises, or (vi) if the Exchange Offer
Registration Statement or the Senior Note Shelf Registration Statement, as the
case may be, is declared effective but thereafter ceases to be effective or
usable in connection with resales of the Transfer Restricted Securities without
being succeeded (a) within five business days by a post-effective amendment to
such Exchange Offer Registration Statement or Senior Note Shelf Registration
Statement, as applicable, that cures such failure and that is itself declared
effective within 10 days of filing such post-effective amendment to such
Exchange Offer Registration Statement or Senior Note Shelf Registration
Statement or (b) within 20 days by the filing of an Exchange Act report
incorporated by reference in such Exchange Offer Registration Statement or
Senior Note Shelf Registration Statement, as applicable, that cures such
failure, for such time of non-effectiveness or non-usability (each, a
"Registration Default"), the Company and the Subsidiary Guarantors agree to pay
to each Holder of Transfer Restricted Securities affected thereby liquidated
damages ("Liquidated Damages") in an amount equal to one-half of one percent
(0.5%) per annum of the principal amount of the Transfer Restricted Securities
held by such holder during the first 90-day period immediately following the
occurrence of the first such Registration Default, increasing by an additional
one-half of one percent (0.5%) per annum of the principal amount of such
Transfer Restricted Securities during each subsequent 90-day period, up to a
maximum amount of liquidated damages equal to two percent (2.0%) per annum of
the principal amount of such Transfer Restricted Securities. The Company and the
Subsidiary Guarantors are not required to pay Liquidated Damages for more than
one Registration Default at any given time. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease.
 
     All accrued Liquidated Damages will be paid by the Company or the
Subsidiary Guarantors to Holders entitled thereto in the manner provided for the
payment of interest in the Indenture on each interest payment date.
 
     The Company may require Holders covered by the Exchange Offer Registration
Statement or Senior Note Shelf Registration Statement, as applicable, to
temporarily suspend use of such Exchange Offer Registration Statement or Senior
Note Shelf Registration Statement to sell such securities for up to 60 days in
any twelve-month period if (i) the Company determines in good faith, as
evidenced by a resolution of its Board of Directors, that (a) sales under the
Exchange Offer Registration Statement or Senior Note Shelf Registration
Statement, as applicable, would require the disclosure of material information
which the Company has a bona fide business purpose for preserving as
confidential, or (b) such disclosure would impede
                                       86
<PAGE>   94
 
the Company's ability to consummate a material transaction; (ii) upon the
issuance by the Commission of any stop order suspending the effectiveness of the
Exchange Offer Registration Statement or Senior Note Shelf Registration
Statement, as applicable, under the Securities Act or of the suspension by any
state securities commission of the qualification of the Transfer Restricted
Securities for offering or sale in any jurisdiction, or the initiation of any
proceeding for any of the preceding purposes; or (iii) upon the discovery of any
fact or the happening of any event that makes any statement of a material fact
made in the Exchange Offer Registration Statement or Senior Note Shelf
Registration Statement, as applicable, the prospectus included in such Exchange
Offer Registration Statement or Senior Note Shelf Registration Statement, any
amendment or supplement thereto or any document incorporated by reference
therein untrue, or that requires the making of any additions to or changes in
such Exchange Offer Registration Statement or Senior Note Shelf Registration
Statement in order to make the statements therein not misleading, or that
requires the making of any additions to or changes in the prospectus included
therein to make such statements, in light of the circumstances under which they
were made, not misleading.
 
                     CERTAIN UNITED STATES TAX CONSEQUENCES
 
     The following summary describes certain United States federal income and
estate tax consequences resulting from the purchase, ownership and disposition
of Senior Notes as of the date hereof. It deals only with Senior Notes held as
capital assets. Further, this discussion does not address the situation of
persons who may be subject to special tax rules, such as persons who hold Senior
Notes as a hedge or as a position in a "straddle" for tax purposes, or persons
who have a "functional currency" other than the U.S. dollar. As used herein, the
term "Non-United States Holder" means any person or entity that is not a "United
States Holder." As used herein, a "United States Holder" means a beneficial
owner that is a citizen or resident of the United States, a corporation,
partnership (unless Treasury regulations provide otherwise) or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, an estate the income of which is subject to U.S. federal
income taxation regardless of its source or a trust if both (i) a court within
the United States is able to exercise primary supervision over the
administration of such trust and (ii) one or more United States persons have the
authority to control all substantial decisions of such trust. An individual may,
subject to certain exceptions, be deemed to be a resident (as opposed to a
non-resident alien) of the United States by virtue of being present in the
United States on at least 31 days in the calendar year and for an aggregate of
at least 183 days during a three-year period ending in the current calendar
year.
 
     The discussion set forth below is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations, rulings and
judicial decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax consequences
or foreign taxation not described herein. This summary does not purport to cover
all possible tax consequences associated with the purchase, ownership, and
disposition of Senior Notes, and is not intended as tax advice. Persons
considering the purchase, ownership or disposition of Senior Notes should
consult their own tax advisors concerning the federal income tax consequences in
light of their particular situations as well as any consequences arising under
the laws of any other taxing jurisdiction.
 
OPTIONAL REDEMPTION
 
     The Company, at its option, may purchase and redeem part or all of the
Senior Notes at any time for amounts which represent additional percentages of
the original principal amount of the Senior Notes, depending upon the year in
which any such option is exercised (the additional percentages decrease with the
passage of time). The Regulations provide that for purposes of calculating yield
and maturity, an issuer will be treated as exercising any such option if its
exercise would lower the yield of the debt instrument. A redemption of Senior
Notes at the optional redemption price, however, would increase the effective
yield of the debt instrument as calculated from the Issue Date. The Company does
not currently intend to exercise such options with respect to the Senior Notes
and no agreement or understanding exists, written or oral, between the Company
and any holder concerning the early redemption of a Senior Note. If the Company
exercises an option and redeems a Senior Note, the holder will recognize gain or
loss on the difference between the amount paid in redemption of such Senior Note
and the sum of the holder's then adjusted basis in the Senior Note
                                       87
<PAGE>   95
 
plus all accrued interest thereon, provided the note so redeemed is a capital
asset in the hands of the holder at the time of redemption.
 
MARKET DISCOUNT
 
     If a holder purchases a Senior Note, other than in connection with the
Notes Offering, for less than the "Senior Note Issue Price," the difference is
considered "market discount," unless such difference is "de minimis," i.e., less
than one-fourth of one percent of the Senior Note Issue Price multiplied by the
number of complete years to maturity (after the holder acquires the Senior
Note). The "Senior Note Issue Price" for a Senior Note will be its original
stated principal amount. Under market discount rules, any gain realized by the
holder on a taxable disposition of a Senior Note having "market discount," as
well as any partial principal payment made with respect to such Senior Note,
will be treated as ordinary income to the extent of the then "accrued market
discount" of the note. The rules concerning the calculation of "accrued market
discount" are set forth in the paragraph immediately below. In addition, a
holder of such Senior Note may be required to defer the deduction of all or a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry a Senior Note.
 
     Any market discount will accrue ratably from the date of acquisition to the
maturity date of the Senior Note, unless the holder elects, irrevocably, to
accrue market discount on a constant interest rate method. The constant interest
rate method generally accrues interest at times and in amounts equivalent to the
result which would have occurred had the market discount been original issue
discount computed from the holder's acquisition of the Senior Note through the
maturity date. The election to accrue market discount on a constant interest
rate method is irrevocable but may be made separately as to each Senior Note
held by the holder. Accrual of market discount will not cause the accrued
amounts to be included currently in a holder's taxable income, in the absence of
a disposition of, or principal payment on, the Senior Note. However, a holder
may elect to include market discount in income currently as it accrues on either
a ratable or constant interest rate method. In such event, interest expense
relating to the acquisition of a Senior Note which would otherwise be deferred
would be currently deductible to the extent otherwise permitted by the Code. The
election to include market discount in income currently, once made, applies to
all market discount obligations acquired by such holder on or after the first
day of the first taxable year to which the election applies, and may not be
revoked without the consent of the Internal Revenue Service ("IRS"). Accrued
market discount which is included in a holder's gross income will increase the
adjusted tax basis of the Senior Note in the hands of the holder.
 
ACQUISITION PREMIUM
 
     If a subsequent holder acquires a note for an amount which is greater than
the Senior Note Issue Price (the "amount payable at maturity"), such holder will
be considered to have purchased such Senior Note with "amortizable bond premium"
equal to the amount of such excess. The holder may elect to amortize the
premium, using a constant yield method employing six month compounding, over the
period from the acquisition date to the maturity date of the Senior Note. The
"amount payable at maturity" will be determined as of an earlier call date,
using the call price payable on such earlier date, if the combination of such
earlier date and call price will produce a smaller amortizable bond premium than
would result from using the scheduled maturity date and its amount payable. If
an earlier call date is used and the Senior Note is not called, the Senior Note
will be treated as having matured on such earlier call date and then as having
been reissued on such date for the amount so payable. Amortized amounts may be
offset only against interest paid with respect to the Senior Note and will
reduce the holder's adjusted tax basis in the note to the extent so used. Once
made, an election to amortize and offset interest on the Senior Note may only be
revoked with the consent of the IRS and will apply to all taxable debt
instruments held by the holder on the first day of the taxable year to which the
election relates and to all taxable debt instruments subsequently acquired by
the holder.
 
                                       88
<PAGE>   96
 
SALE, EXCHANGE, OR RETIREMENT OF NOTES
 
     Unless a nonrecognition provision applies, upon the sale, exchange or
retirement of a Senior Note (including any sale to the Company in connection
with the Company's option to purchase the Senior Note), a holder will recognize
taxable gain or loss equal to the difference between the amount realized on the
sale, exchange, or retirement (less any accrued interest, which will be taxable
as such) and the holder's adjusted tax basis in the Senior Note. Assuming that
no intention exists at the time of the original issuance to call the Senior
Notes prior to maturity, such gain or loss will be capital gain or loss, except
to the extent of any "accrued market discount," and will be long-term capital
gain or loss if, at the time of the sale, exchange, or retirement, the Note has
been held for more than one year. A holder's adjusted tax basis in a Senior Note
will equal the cost of the Senior Note to the holder, increased by the amount of
any accrued market discount which has been included in the holder's gross income
or, as the case may be, reduced by any amortized bond premium which the holder
has used to offset interest payments on the Senior Note, and further reduced by
any principal payments.
 
EFFECT OF CHANGE OF CONTROL
 
     Upon a Change of Control, the Company is required to offer to purchase all
outstanding Senior Notes for a price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the date of purchase. Under the
Treasury Regulations, such Change of Control redemption requirement will not
affect the yield or maturity date of the Senior Notes unless, based on all the
facts and circumstances as of the Issue Date, it is more likely than not that a
Change of Control giving rise to the redemption will occur. The Company will
take the position that no such Change of Control is more likely than not to
occur, and will therefore not treat the Change of Control redemption provisions
of the Senior Notes as affecting the calculation of the yield to maturity of any
Senior Note.
 
EXCHANGE OF SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER
 
     Because the New Notes will be identical in all material respects to the Old
Notes, an exchange of the securities pursuant to the Exchange Offer will be
treated, for federal income tax purposes, as a refinancing and will not produce
recognizable gain or loss to either the Company or a holder of an exchanged Old
Note. The holder will have an initial adjusted tax basis and a holding period in
the New Note equal to its adjusted tax basis and holding period in the exchanged
Old Note.
 
SPECIAL CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
 
     Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
 
          (a) no withholding of United States federal income tax will be
     required with respect to the payment by the Company or any paying agent of
     principal or interest on a Senior Note owned by a Non-United States Holder,
     provided the beneficial owner does not actually or constructively own 10%
     or more of the total combined voting power of all classes of stock of the
     Company entitled to vote within the meaning of section 871(h)(3) of the
     Code and the regulations thereunder, the beneficial owner is not a
     controlled foreign corporation that is related to the Company through stock
     ownership, the beneficial owner is not a bank whose receipt of interest on
     a Senior Note is described in section 881(c)(3)(A) of the Code and the
     beneficial owner satisfies the statement requirement (described generally
     below) set forth in section 871(h) and section 881(c) of the Code and the
     regulations thereunder, and
 
          (b) no withholding of United States federal income tax will be
     required with respect to any gain or income realized by a Non-United States
     Holder upon the sale, exchange, retirement or other disposition of a Senior
     Note; and
 
          (c) a Senior Note beneficially owned by an individual who at the time
     of death is a Non-United States Holder will generally not be subject to
     United States federal estate tax as a result of such individual's death,
     provided such individual does not actually or constructively own 10% or
     more of the
 
                                       89
<PAGE>   97
 
     total combined voting power of all classes of stock of the Company entitled
     to vote within the meaning of section 871(h)(3) of the Code.
 
     To satisfy the requirement referred to in (a) above, the beneficial owner
of such Senior Note, or a financial institution holding the Senior Note on
behalf of such owner, must provide, in accordance with specified procedures, a
paying agent of the Company with a statement to the effect that the beneficial
owner is not a United States person. Currently, these requirements will be met
if the beneficial owner provides his name and address, and certifies, under
penalties of perjury, that he is not a United States person (which certification
may be made on an IRS Form W-8 (or successor form)) or a financial institution
holding the Senior Note on behalf of the beneficial owner certifies, under
penalties of perjury, that such statement has been received by it and furnishes
a paying agent with a copy thereof. Under recently finalized Treasury
regulations (the "Final Regulations"), the statement requirement referred to in
(a) above may also be satisfied with other documentary evidence for interests
paid after December 31, 1998 with respect to an offshore account or through
certain foreign intermediaries.
 
     If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of interest made
to such Non-United States Holder will be subject to a 30% withholding tax unless
the beneficial owner of the Senior Note provides the Company or its paying
agent, as the case may be, with a properly executed (1) IRS Form 1001 (or
successor form) claiming an exemption from or reduced rate of, withholding under
the benefit of a tax treaty or (2) IRS Form 4224 (or successor form) stating
that interest paid on the Senior Note is not subject to withholding tax because
it is effectively connected with the beneficial owner's conduct of a trade or
business in the United States. Under the Final Regulations, Non-United States
Holders will generally be required to provide IRS Form W-8 in lieu of IRS Form
1001 and IRS Form 4224, although alternative documentation may be applicable in
certain situations.
 
     If a Non-United States Holder is engaged in a trade or business in the
United States and interest on the Senior Note is effectively connected with the
conduct of such trade or business, the Non-United States Holder, although exempt
from the withholding tax discussed above (provided the Non-United States Holder
files the appropriate certification with the Company or its agent), will be
subject to United States federal income tax on such interest on a net income
basis in the same manner as if it were a United States person. In addition, if
such holder is a foreign corporation, it may be subject to a branch profits tax
equal to 30% of its effectively connected earnings and profits for the taxable
year, subject to adjustments.
 
     Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Senior Note generally will not be subject to United States
federal income tax unless (i) such gain or income is effectively connected with
trade or business in the United States of the Non-United States Holder, or (ii)
in the case of a Non-United States Holder who is an individual, such individual
is present in the United States for 183 days or more in the taxable year of such
sale, exchange, retirement or other disposition, and certain other conditions
are met.
 
INFORMATION REPORTING AND BACKUP WITHHOLDING
 
     No information reporting or backup withholding tax (which is a withholding
tax imposed at the rate of 31% on certain payments to persons who fail to
furnish the information required under United States information reporting
requirements) will generally be required with respect to payments made outside
the United States to Non-United States Holders by the Company or any paying
agent to Non-United States Holders if a statement described in (a) under
"Non-United States Holders" has been received and the payor does not have actual
knowledge that the beneficial owner is a United States person.
 
     Payments of principal or interest, on a Senior Note paid to the beneficial
owner of a Senior Note by a United States office of a custodian, nominee or
agent, or the payment by the United States office of a broker of the proceeds of
sale of a Senior Note, will be subject to both backup withholding and
information reporting unless the beneficial owner provides the statement
referred to in (a) above and the payor does not have actual knowledge that the
beneficial owner is a United States person or otherwise establishes an
exemption.
 
                                       90
<PAGE>   98
 
     Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
 
                              PLAN OF DISTRIBUTION
 
     There has previously been only a limited secondary market and no public
market for the Old Notes. The Company intends to apply for the listing of the
Senior Notes on the New York Stock Exchange, and the Old Notes are eligible for
trading in the PORTAL market. The Company has been advised by the Initial
Purchasers that the Initial Purchasers currently intend to make a market in the
Senior Notes; however, no Initial Purchaser is obligated to do so and any market
making may be discontinued by any Initial Purchaser at any time. In addition,
such market making activity may be limited during the Exchange Offer. There can
be no assurance that an active market for the Old Notes or the New Notes will
develop.
 
     If a trading market develops for the Old Notes or the New Notes, future
trading prices of such securities will depend on many factors, including, among
other things, prevailing interest rates, the Company's results of operations and
the market for similar securities. Depending on such factors, such securities
may trade at a discount from their offering price.
 
     With respect to resale of New Notes, based on an interpretation by the
staff of the Commission set forth in no-action letters issued to third parties,
the Company believes that a holder (other than a person that is an affiliate of
the Company within the meaning of Rule 405 under the Securities Act or a
"broker" or "dealer" registered under the Exchange Act) who exchanges Old Notes
for New Notes in the ordinary course of business and who is not participating,
does not intend to participate, and has no arrangement or understanding with any
person to participate, in the distribution of the New Notes, will be allowed to
resell the New Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the New Notes a
prospectus that satisfies the requirements of Section 10 thereof. However, if
any holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such holder
cannot rely on the position of the staff of the Commission enunciated in Exxon
Capital Holdings Corporation (available May 13, 1988) or similar no-action
letters or any similar interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available.
 
     As contemplated by the above no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder in the ordinary course of business, (ii) the holder is
not engaging and does not intend to engage in the distribution of the New Notes,
and (iii) the holder acknowledges that if such holder participates in the New
Offer for the purpose of distributing the New Notes such holder must comply with
the registration and prospectus delivery requirements of the Securities Act and
cannot rely on the above no-action letters.
 
     Any broker or dealer registered under the Exchange Act (each a
"Broker-Dealer") who holds Old Notes that were acquired for its own account as a
result of market-making activities or other trading activities (other than Old
Notes acquired directly from the Company) may exchange such Old Notes for New
Notes pursuant to the Exchange Offer; however, such Broker-Dealer may be deemed
an underwriter within the meaning of the Securities Act and, therefore, must
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of the New Notes received by it in the Exchange
Offer, which prospectus delivery requirement may be satisfied by the delivery by
such Broker-Dealer of this Prospectus. The Company and the Subsidiary Guarantors
have agreed to cause the Exchange Offer Registration Statement, of which this
Prospectus is a part, to remain continuously effective for a period of one year
from the date it is first declared effective, and to make this Prospectus, as
amended or supplemented, available to any such Broker-Dealer for use in
connection with resales. Any Broker-Dealer participating in the Exchange Offer
will be required to acknowledge that it will deliver a prospectus in connection
with any resales of New Notes received by it in the Exchange Offer. The delivery
by a Broker-Dealer of a prospectus in connection with resales of New Notes shall
not be deemed to be an admission by such Broker-Dealer that it is an underwriter
within the meaning of
                                       91
<PAGE>   99
 
the Securities Act. The Company will not receive any proceeds from any sale of
New Notes by a Broker-Dealer.
 
                                 LEGAL MATTERS
 
     The legality of the New Notes offered hereby has been passed upon for the
Company by McAfee & Taft A Professional Corporation, Oklahoma City, Oklahoma.
 
                                    EXPERTS
 
     The Consolidated Financial Statements of the Company for the year ended
June 30, 1995, included and incorporated by reference in this Prospectus, have
been included and incorporated herein in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of that firm as
experts in accounting and auditing.
 
     The Consolidated Financial Statements of the Company as of June 30, 1996
and 1997 and December 31, 1997 and for each of the two years ended June 30, 1997
and the six months ended December 31, 1997, included and incorporated by
reference in this Prospectus, have been included and incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
 
     Effective July 1, 1996, Price Waterhouse LLP sold its Oklahoma City
practice to Coopers & Lybrand L.L.P. and resigned as the Company's independent
accountants.
 
     The Consolidated Financial Statements of Hugoton at December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
incorporated by reference in this Prospectus and Registration Statement, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon, and are incorporated herein in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
 
     Certain estimates of oil and gas reserves included and incorporated by
reference herein were based upon engineering studies prepared by Williamson
Petroleum Consultants, Inc., Porter Engineering Associates and Netherland,
Sewell & Associates, Inc., independent petroleum engineers. Such estimates are
included or incorporated herein in reliance on the authority of each such firm
as experts in such matters.
 
                                       92
<PAGE>   100
 
                                    GLOSSARY
 
     The terms defined below are used throughout this Prospectus.
 
     Bcf. Billion cubic feet of gas.
 
     Bcfe. Billion cubic feet of gas equivalent.
 
     Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
 
     Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
 
     Commercial Well; Commercially Productive Well. An oil and gas well which
produces oil and gas in sufficient quantities such that proceeds from the sale
of such production exceed production expenses and taxes.
 
     Developed Acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
 
     Development Well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
 
     Dry Hole; Dry Well. A well found to be incapable of producing either oil or
gas in sufficient quantities to justify completion as an oil or gas well.
 
     Exploratory Well. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir or to extend a known reservoir.
 
     Formation. A succession of sedimentary beds that were deposited under the
same general geologic conditions.
 
     Gross Acres or Gross Wells. The total acres or wells, as the case may be,
in which a working interest is owned.
 
     Horizontal Wells. Wells which are drilled at angles greater than 70 degrees
from vertical.
 
     MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
 
     MBoe. One thousand barrels of oil equivalent.
 
     MBtu. One thousand Btus.
 
     Mcf. One thousand cubic feet of gas.
 
     Mcfe. One thousand cubic feet of gas equivalent.
 
     MMBbl. One million barrels of crude oil or other liquid hydrocarbons.
 
     MMBtu. One million Btus.
 
     MMcf. One million cubic feet of gas.
 
     MMcfe. One million cubic feet of gas equivalent.
 
     Net Acres or Net Wells. The sum of the fractional working interests owned
in gross acres or gross wells.
 
     Present Value. When used with respect to oil and gas reserves, present
value means the estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and future
development costs, using prices and costs in effect at the determination date,
without giving effect to nonproperty related expenses such as general and
administrative expenses, debt service and future income tax expense or to
depreciation, depletion and amortization, discounted using an annual discount
rate of 10%.
 
                                       93
<PAGE>   101
 
     Productive Well. A well that is producing oil or gas or that is capable of
production.
 
     Proved Developed Reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
 
     Proved Reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
 
     Proved Undeveloped Location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
 
     Proved Undeveloped Reserves. Reserves that are expected to be recovered
from new wells drilled to a known reservoir on undrilled acreage or from
existing wells where a relatively major expenditure is required for
recompletion.
 
     Royalty Interest. An interest in an oil and gas property entitling the
owner to a share of oil or gas production free of costs of production.
 
     Undeveloped Acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
 
     Working Interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
 
                                       94
<PAGE>   102
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
<S>                                                           <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
  Reports of Independent Accountants........................  F-2
  Consolidated Balance Sheets at December 31, 1997 and June
     30, 1997 and 1996......................................  F-4
  Consolidated Statements of Operations for the Six Months
     Ended December 31, 1997 and the Years Ended June 30,
     1997, 1996 and 1995....................................  F-5
  Consolidated Statements of Cash Flows for the Six Months
     Ended December 31, 1997 and the Years Ended June 30,
     1997, 1996 and 1995....................................  F-6
  Consolidated Statements of Stockholders' Equity for the
     Six Months Ended December 31, 1997 and the Years Ended
     June 30, 1997, 1996 and 1995...........................  F-8
  Notes to Consolidated Financial Statements................  F-9
 
INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
  Consolidated Balance Sheets at March 31, 1998 (unaudited)
     and December 31, 1997..................................  F-40
  Consolidated Statements of Operations for the Three Months
     Ended March 31, 1998 and 1997 (unaudited)..............  F-41
  Consolidated Statements of Cash Flows for the Three Months
     Ended March 31, 1998 and 1997 (unaudited)..............  F-42
  Notes to Consolidated Financial Statements (unaudited)....  F-43
</TABLE>
 
                                       F-1
<PAGE>   103
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders
of Chesapeake Energy Corporation
 
     We have audited the accompanying consolidated balance sheets of Chesapeake
Energy Corporation and its subsidiaries as of December 31, 1997 and as of June
30, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the six months ended December 31, 1997
and the years ended June 30, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Chesapeake
Energy Corporation and its subsidiaries as of December 31, 1997 and as of June
30, 1997 and 1996, and the consolidated results of their operations and their
cash flows for the six months ended December 31, 1997 and the years ended June
30, 1997 and 1996 in conformity with generally accepted accounting principles.
 
                                            COOPERS & LYBRAND L.L.P.
 
Oklahoma City, Oklahoma
March 20, 1998
 
                                       F-2
<PAGE>   104
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders
of Chesapeake Energy Corporation
 
     In our opinion, the consolidated statements of operations, of cash flows
and of stockholders' equity for the year ended June 30, 1995 present fairly, in
all material respects, the results of operations and cash flows of Chesapeake
Energy Corporation and its subsidiaries for the year ended June 30, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Chesapeake
Energy Corporation and its subsidiaries for any period subsequent to June 30,
1995.
 
                                            PRICE WATERHOUSE LLP
 
Houston, Texas
September 20, 1995, except for the
fourth paragraph of Note 9 which is
as of October 9, 1997 and except for
the earnings per share information
as described in Note 1, which is as
of March 24, 1998
 
                                       F-3
<PAGE>   105
 
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                                    JUNE 30,
                                                              DECEMBER 31,    ---------------------
                                                                  1997          1997         1996
                                                                        ($ IN THOUSANDS)
<S>                                                           <C>             <C>          <C>
CURRENT ASSETS:
  Cash and cash equivalents.................................   $  123,860     $ 124,017    $ 51,638
  Short-term investments....................................       12,570       104,485          --
  Accounts receivable:
    Oil and gas sales.......................................       10,654        10,906      12,687
    Oil and gas marketing sales.............................       20,493        19,939       6,982
    Joint interest and other, net of allowances of $691,000,
      $387,000 and $340,000, respectively...................       38,781        25,311      27,661
    Related parties.........................................        4,246         7,401       2,884
  Inventory.................................................        5,493         4,854       5,163
  Other.....................................................        1,624           692       2,158
                                                               ----------     ---------    --------
         Total Current Assets...............................      217,721       297,605     109,173
                                                               ----------     ---------    --------
PROPERTY AND EQUIPMENT:
  Oil and gas properties, at cost based on full cost
    accounting:
    Evaluated oil and gas properties........................    1,095,363       865,516     363,213
    Unevaluated properties..................................      125,155       128,505     165,441
    Less: accumulated depreciation, depletion and
      amortization..........................................     (602,391)     (431,983)    (92,720)
                                                               ----------     ---------    --------
                                                                  618,127       562,038     435,934
  Other property and equipment..............................       67,633        50,379      18,162
  Less: accumulated depreciation and amortization...........       (6,573)       (5,051)     (2,922)
                                                               ----------     ---------    --------
         Total Property and Equipment.......................      679,187       607,366     451,174
                                                               ----------     ---------    --------
Other Assets................................................       55,876        44,097      11,988
                                                               ----------     ---------    --------
Total Assets................................................   $  952,784     $ 949,068    $572,335
                                                               ==========     =========    ========
                               LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Notes payable and current maturities of long-term debt....   $       --     $   1,380    $  6,755
  Accounts payable..........................................       81,775        86,817      54,514
  Accrued liabilities and other.............................       42,733        28,701      14,062
  Revenues and royalties due others.........................       28,972        29,428      33,503
                                                               ----------     ---------    --------
         Total Current Liabilities..........................      153,480       146,326     108,834
                                                               ----------     ---------    --------
Long-Term Debt, Net.........................................      508,992       508,950     268,431
                                                               ----------     ---------    --------
Revenues and Royalties Due Others...........................       10,106         6,903       5,118
                                                               ----------     ---------    --------
Deferred Income Taxes.......................................           --            --      12,185
                                                               ----------     ---------    --------
Contingencies and Commitments (Note 4)......................           --            --          --
                                                               ----------     ---------    --------
Stockholders' Equity:
  Preferred Stock, $.01 par value, 10,000,000 shares
    authorized; none issued.................................           --            --          --
  Common Stock, 250,000,000 shares authorized; par value of
    $.01, $.01 and $.05 at December 31, 1997, June 30, 1997
    and 1996, respectively; 74,298,061, 70,276,975 and
    60,159,826 shares issued and outstanding at December 31,
    1997, June 30, 1997 and 1996, respectively..............          743           703       3,008
  Paid-in capital...........................................      460,733       432,991     136,782
  Accumulated earnings (deficit)............................     (181,270)     (146,805)     37,977
                                                               ----------     ---------    --------
         Total Stockholders' Equity.........................      280,206       286,889     177,767
                                                               ----------     ---------    --------
         Total Liabilities and Stockholders' Equity.........   $  952,784     $ 949,068    $572,335
                                                               ==========     =========    ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-4
<PAGE>   106
 
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                  SIX MONTHS ENDED        YEAR ENDED JUNE 30,
                                                    DECEMBER 31,     ------------------------------
                                                        1997           1997        1996      1995
                                                       ($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                               <C>                <C>         <C>        <C>
Revenues:
  Oil and gas sales.............................      $ 95,657       $ 192,920   $110,849   $56,983
  Oil and gas marketing sales...................        58,241          76,172     28,428        --
  Oil and gas service operations................            --              --      6,314     8,836
  Interest and other............................        78,966          11,223      3,831     1,524
                                                      --------       ---------   --------   -------
          Total Revenues........................       232,864         280,315    149,422    67,343
                                                      --------       ---------   --------   -------
Costs and Expenses:
  Production expenses and taxes.................        10,094          15,107      8,303     4,256
  Oil and gas marketing expenses................        58,227          75,140     27,452        --
  Oil and gas service operations................            --              --      4,895     7,747
  Impairment of oil and gas properties..........       110,000         236,000         --        --
  Oil and gas depreciation, depletion and
     amortization...............................        60,408         103,264     50,899    25,410
  Depreciation and amortization of other
     assets.....................................         2,414           3,782      3,157     1,765
  General and administrative....................         5,847           8,802      4,828     3,578
  Interest and other............................        17,448          18,550     13,679     6,627
                                                      --------       ---------   --------   -------
          Total Costs and Expenses..............       264,438         460,645    113,213    49,383
                                                      --------       ---------   --------   -------
Income (Loss) Before Income Taxes and
  Extraordinary Item............................       (31,574)       (180,330)    36,209    17,960
Provision (Benefit) for Income Taxes............            --          (3,573)    12,854     6,299
                                                      --------       ---------   --------   -------
Income (Loss) Before Extraordinary Item.........       (31,574)       (176,757)    23,355    11,661
Extraordinary Item:
  Loss on early extinguishment of debt, net of
     applicable income tax of $3,804............            --          (6,620)        --        --
                                                      --------       ---------   --------   -------
Net Income (Loss)...............................      $(31,574)      $(183,377)  $ 23,355   $11,661
                                                      ========       =========   ========   =======
Earnings (Loss) Per Common Share:
  Earnings (Loss) Per Common Share-Basic
     Income (loss) before extraordinary item....      $  (0.45)      $   (2.69)  $   0.43   $  0.22
     Extraordinary item.........................            --           (0.10)        --        --
                                                      --------       ---------   --------   -------
          Net income (loss).....................      $  (0.45)      $   (2.79)  $   0.43   $  0.22
                                                      ========       =========   ========   =======
  Earnings (Loss) Per Common Share-Assuming
     Dilution
     Income (loss) before extraordinary item....      $  (0.45)      $   (2.69)  $   0.40   $  0.21
     Extraordinary item.........................            --           (0.10)        --        --
                                                      --------       ---------   --------   -------
          Net income (loss).....................      $  (0.45)      $   (2.79)  $   0.40   $  0.21
                                                      ========       =========   ========   =======
  Weighted Average Common and Common Equivalent
     Shares Outstanding (In 000's)
     Basic......................................        70,835          65,767     54,564    52,624
                                                      ========       =========   ========   =======
     Assuming Dilution..........................        70,835          65,767     58,342    55,872
                                                      ========       =========   ========   =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-5
<PAGE>   107
 
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                               SIX MONTHS
                                                                 ENDED                YEAR ENDED JUNE 30,
                                                              DECEMBER 31,    -----------------------------------
                                                                  1997          1997         1996         1995
                                                                               ($ IN THOUSANDS)
<S>                                                           <C>             <C>          <C>          <C>
Cash Flows from Operating Activities:
  Net Income (Loss).........................................   $ (31,574)     $(183,377)   $  23,355    $  11,661
  Adjustments to Reconcile Net Income (Loss) to Net Cash
    Provided by Operating Activities:
    Depreciation, depletion and amortization................      62,028        105,591       52,768       26,628
    Deferred taxes..........................................          --         (3,573)      12,854        6,299
    Amortization of loan costs..............................         794          1,455        1,288          548
    Amortization of bond discount...........................          41            217          563          567
    Bad debt expense........................................          40            299          114          308
    Gain on sale of Bayard stock............................     (73,840)            --           --           --
    Gain on sale of fixed assets............................        (209)        (1,593)      (2,511)        (108)
    Impairment of oil and gas assets........................     110,000        236,000           --           --
    Extraordinary loss......................................          --          6,620           --           --
    Equity in (earnings) losses from investments............         592           (499)          --           --
  Changes in Assets and Liabilities (Net of Assets and
    Liabilities Acquired from AnSon Production Corporation):
    (Increase) decrease in short-term investments...........      92,127       (102,858)         622           --
    (Increase) decrease in accounts receivable..............      (7,173)       (19,987)      (3,524)     (22,510)
    (Increase) decrease in inventory........................      (1,584)        (1,467)          78       (1,203)
    (Increase) decrease in other current assets.............      (1,519)         1,466       (1,525)         614
    Increase (decrease) in accounts payable, accrued
      liabilities and
      other.................................................     (11,044)        48,085       25,834       19,387
    Increase (decrease) in current and non-current revenues
      and royalties due others..............................         478         (2,290)      11,056       12,540
                                                               ---------      ---------    ---------    ---------
        Cash provided by operating activities...............     139,157         84,089      120,972       54,731
                                                               ---------      ---------    ---------    ---------
Cash Flows from Investing Activities:
  Exploration, development and acquisition of oil and gas
    properties..............................................    (189,755)      (468,462)    (342,045)    (117,831)
  Proceeds from sale of oil and gas equipment, leasehold and
    other...................................................       2,503          3,095        6,167       11,953
  Net proceeds from sale of Bayard stock....................      90,380             --           --           --
  Repayment of note receivable..............................      18,000             --           --           --
  Other proceeds from sales.................................          17          6,428          698        1,104
  Long term loans made to third parties.....................          --        (20,000)          --           --
  Investment in oil field service company...................        (200)        (3,048)          --           --
  Investment in gas marketing company, net of cash
    acquired................................................          --             --         (363)          --
  Other investments.........................................     (30,434)        (8,000)          --           --
  Other property and equipment additions....................     (27,015)       (33,867)      (8,846)      (7,929)
                                                               ---------      ---------    ---------    ---------
        Cash used in investing activities...................    (136,504)      (523,854)    (344,389)    (112,703)
                                                               ---------      ---------    ---------    ---------
Cash Flows from Financing Activities:
  Proceeds from issuance of common stock....................          --        288,091       99,498           --
  Proceeds from long-term borrowings........................          --        342,626      166,667      128,834
  Payments on long-term borrowings..........................          --       (119,581)     (48,634)     (32,370)
  Dividends paid on common stock............................      (2,810)            --           --           --
  Cash received from exercise of stock options..............         322          1,387        1,989          818
  Other financing...........................................        (322)          (379)          --           --
                                                               ---------      ---------    ---------    ---------
        Cash provided by (used in) financing activities.....      (2,810)       512,144      219,520       97,282
                                                               ---------      ---------    ---------    ---------
Net increase (decrease) in cash and cash equivalents........        (157)        72,379       (3,897)      39,310
Cash and cash equivalents, beginning of period..............     124,017         51,638       55,535       16,225
                                                               ---------      ---------    ---------    ---------
Cash and cash equivalents, end of period....................   $ 123,860      $ 124,017    $  51,638    $  55,535
                                                               =========      =========    =========    =========
Supplemental Disclosure of Cash Flow Information Cash
  Payments for:
  Interest, net of capitalized interest.....................   $  17,367      $  12,919    $  10,751    $   4,914
  Income taxes..............................................   $     500      $      --    $      --    $      --
</TABLE>
 
                                       F-6
<PAGE>   108
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
              CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                               SIX MONTHS
                                                                 ENDED                YEAR ENDED JUNE 30,
                                                              DECEMBER 31,    -----------------------------------
                                                                  1997          1997         1996         1995
                                                                               ($ IN THOUSANDS)
<S>                                                           <C>             <C>          <C>          <C>
Details of Acquisition of AnSon Production Corporation:
  Fair value of assets acquired.............................   $  43,000      $      --    $      --    $      --
  Accrued liability for estimated cash consideration........   $ (15,500)     $      --    $      --    $      --
  Stock issued..............................................   $ (27,500)     $      --    $      --    $      --
</TABLE>
 
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
     The Company had a financing arrangement with a vendor to supply certain oil
and gas equipment inventory. The total amounts owed at June 30, 1997, 1996 and
1995 were $1,380,000, $3,156,000 and $6,513,000, respectively. No cash
consideration is exchanged for inventory under this financing arrangement until
actual draws on the inventory are made.
 
     In fiscal 1997, 1996 and 1995, the Company recognized income tax benefits
of $4,808,000, $7,950,000 and $1,229,000, respectively, related to the
disposition of stock options by directors and employees of the Company. The tax
benefits were recorded as an adjustment to deferred income taxes and paid-in
capital.
 
     Proceeds from the issuance of $150 million of 7.875% Senior Notes and $150
million of 8.5% Senior Notes in March 1997 are net of $6.4 million in offering
fees and expenses which were deducted from the actual cash received.
 
     Proceeds from the issuances of $90 million of 10.5% Senior Notes in May
1995 and $120 million of 9.125% Senior Notes in April 1996 are net of $2.7
million and $3.9 million, respectively, in offering fees and expenses which were
deducted from the actual cash received.
 
     On December 22, 1997 the Company declared a dividend of $0.02 per common
share, or $1,486,000, which was paid on January 15, 1998. On June 13, 1997 the
Company declared a dividend of $0.02 per common share, or $1,405,000, which was
paid on July 15, 1997.
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-7
<PAGE>   109
 
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                SIX MONTHS ENDED        YEAR ENDED JUNE 30,
                                                  DECEMBER 31,     ------------------------------
                                                      1997           1997        1996      1995
                                                                          ($ IN THOUSANDS)
<S>                                             <C>                <C>         <C>        <C>
Common Stock:
  Balance, beginning of period................     $     703       $   3,008   $     58   $    51
  Issuance of 8,972,000 shares of common
     stock....................................            --              90         --        --
  Issuance of 5,989,500 shares of common
     stock....................................            --              --        299        --
  Exercise of stock options and warrants......             2              12         79         7
  Issuance of 3,792,724 shares of common stock
     to AnSon Production Corporation..........            38              --         --        --
  Change in par value.........................            --          (2,407)     2,572        --
                                                   ---------       ---------   --------   -------
  Balance, end of period......................           743             703      3,008        58
                                                   ---------       ---------   --------   -------
Common Stock Warrants:
  Balance, beginning of period................            --              --         --         5
  Exercise of Common Stock Warrants...........            --              --         --        (5)
                                                   ---------       ---------   --------   -------
  Balance, end of period......................            --              --         --        --
                                                   ---------       ---------   --------   -------
Paid-in Capital:
  Balance, beginning of period................       432,991         136,782     30,295    28,243
  Exercise of stock options and warrants......           320           1,375      1,910       823
  Issuance of common stock....................        27,459         301,593    105,516        --
  Offering expenses and other.................            --         (13,974)    (6,317)       --
  Cumulative exchange loss....................           (37)             --         --        --
  Tax benefit from exercise of stock
     options..................................            --           4,808      7,950     1,229
  Change in par value.........................            --           2,407     (2,572)       --
                                                   ---------       ---------   --------   -------
  Balance, end of period......................       460,733         432,991    136,782    30,295
                                                   ---------       ---------   --------   -------
Accumulated Earnings (Deficit):
  Balance, beginning of period................      (146,805)         37,977     14,622     2,961
  Net income (loss)...........................       (31,574)       (183,377)    23,355    11,661
  Dividends on common stock of $0.02 per
     share....................................        (2,891)         (1,405)        --        --
                                                   ---------       ---------   --------   -------
  Balance, end of period......................      (181,270)       (146,805)    37,977    14,622
                                                   ---------       ---------   --------   -------
          Total Stockholders' Equity..........     $ 280,206       $ 286,889   $177,767   $44,975
                                                   =========       =========   ========   =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-8
<PAGE>   110
 
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Description of Company
 
     The Company is a petroleum exploration and production company engaged in
the acquisition, exploration, and development of properties for the production
of crude oil and natural gas from underground reservoirs. The Company's
properties are located in Texas, Louisiana, Oklahoma, Montana, North Dakota, New
Mexico and Canada.
 
     The Company has changed its fiscal year end from June 30 to December 31.
The Company's results of operations and cash flows for the six months ended
December 31, 1997 (the "Transition Period") are included in these consolidated
financial statements.
 
  Principles of Consolidation
 
     The accompanying consolidated financial statements of Chesapeake Energy
Corporation (the "Company") include the accounts of its wholly-owned
subsidiaries Chesapeake Operating, Inc. ("COI"), Chesapeake Exploration Limited
Partnership ("CEX"), a limited partnership, Chesapeake Louisiana, L.P. ("CLLP"),
a limited partnership, Chesapeake Gas Development Corporation ("CGDC"),
Chesapeake Energy Marketing, Inc. ("CEMI"), Chesapeake Canada Corporation
("CCC"), Chesapeake Energy Louisiana Corporation ("CELC"), Chesapeake
Acquisition Corporation ("CAC"), Lindsay Oil Field Supply, Inc. ("LOF"), Sander
Trucking Company, Inc. ("STCO") and subsidiaries of those entities. As of June
30, 1997, CGDC had been merged into CEX, and LOF and STCO had been dissolved.
All significant intercompany accounts and transactions have been eliminated.
Investments in companies and partnerships which give the Company significant
influence, but not control, over the investee are accounted for using the equity
method.
 
  Accounting Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
 
  Cash Equivalents
 
     For purposes of the consolidated financial statements, the Company
considers investments in all highly liquid debt instruments with maturities of
three months or less at date of purchase to be cash equivalents.
 
  Investments in Securities
 
     The Company invests in various equity securities and short-term debt
instruments including corporate bonds and auction preferreds, commercial paper
and government agency notes. The Company has classified all of its short-term
investments in equity and debt instruments as trading securities, which are
carried at fair value with unrealized holding gains and losses included in
earnings. At December 31, 1997, the Company had an unrealized holding loss of
$2.4 million included in interest and other revenue. At June 30, 1997, the
Company had an unrealized holding loss of $0.6 million included in interest and
other revenue. At June 30, 1996 the Company had no trading securities.
Investments in equity securities and limited partnerships that do not have
readily determinable fair values are stated at cost and are included in
noncurrent other assets. In determining realized gains and losses, the cost of
securities sold is based on the average cost method.
 
                                       F-9
<PAGE>   111
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Inventory
 
     Inventory consists primarily of tubular goods and other lease and well
equipment which the Company plans to utilize in its ongoing exploration and
development activities and is carried at the lower of cost or market using the
specific identification method.
 
  Oil and Gas Properties
 
     The Company follows the full cost method of accounting under which all
costs associated with property acquisition, exploration and development
activities are capitalized. The Company capitalizes internal costs that can be
directly identified with its acquisition, exploration and development activities
and does not include any costs related to production, general corporate overhead
or similar activities (see Note 11). Capitalized costs are amortized on a
composite unit-of-production method based on proved oil and gas reserves. The
Company's oil and gas reserves are estimated at least annually by independent
petroleum engineers and quarterly by the Company's internal engineers. The
average composite rates used for depreciation, depletion and amortization were
$1.57 per equivalent Mcf in the six months ended December 31, 1997 and $1.31,
$0.85 and $0.80 per equivalent Mcf in fiscal 1997, 1996 and 1995, respectively.
 
     Proceeds from the sale of properties are accounted for as reductions to
capitalized costs unless such sales involve a significant change in the
relationship between costs and the value of proved reserves or the underlying
value of unproved properties, in which case a gain or loss is recognized. The
costs of unproved properties are excluded from amortization until the properties
are evaluated. The Company reviews all of its unevaluated properties quarterly
to determine whether or not and to what extent proved reserves have been
assigned to the properties, and otherwise if impairment has occurred.
Unevaluated properties are grouped by major producing area where individual
property costs are not significant, and assessed individually when individual
costs are significant.
 
     The Company reviews the carrying value of its oil and gas properties under
the full cost accounting rules of the Securities and Exchange Commission on a
quarterly basis. Under these rules, capitalized costs, less accumulated
amortization and related deferred income taxes, shall not exceed an amount equal
to the sum of the present value of estimated future net revenues less estimated
future expenditures to be incurred in developing and producing the proved
reserves, less any related income tax effects. At December 31, 1997 capitalized
costs of oil and gas properties exceeded the estimated present value of future
net revenues from the Company's proved reserves, net of related income tax
considerations, resulting in a writedown in the carrying value of oil and gas
properties of $110 million. At June 30, 1997, capitalized costs of oil and gas
properties exceeded the estimated present value of future net revenues from the
Company's proved reserves, net of related income tax considerations, resulting
in a fourth quarter writedown in the carrying value of oil and gas properties of
$236 million.
 
  Other Property and Equipment
 
     Other property and equipment consists primarily of gas gathering and
processing facilities, vehicles, land, office buildings and equipment, and
software. Major renewals and betterments are capitalized while the costs of
repairs and maintenance are charged to expense as incurred. The costs of assets
retired or otherwise disposed of and the applicable accumulated depreciation are
removed from the accounts, and the resulting gain or loss is reflected in
operations. Other property and equipment costs are depreciated on both
straight-line and accelerated methods. Buildings are depreciated on a
straight-line basis over 31.5 years. All other property and equipment is
depreciated over the estimated useful lives of the assets, which range from five
to seven years.
 
                                      F-10
<PAGE>   112
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Capitalized Interest
 
     During the six months ended December 31, 1997 and fiscal 1997, 1996 and
1995, interest of approximately $5,087,000, $12,935,000, $6,428,000 and
$1,574,000 was capitalized on significant investments in unproved properties
that were not being currently depreciated, depleted, or amortized and on which
exploration activities were in progress.
 
  Service Operations
 
     Certain subsidiaries of the Company performed contract services on wells
the Company operated as well as for third parties until June 30, 1996. Oil and
gas service operations revenues and costs and expenses reflected in the
accompanying consolidated statements of operations include amounts derived from
certain of the contractual services provided. The Company's economic interest in
its oil and gas properties was not affected by the performance of these
contractual services and all intercompany profits have been eliminated.
 
     On June 30, 1996, Peak USA Energy Services, Ltd., a limited partnership
("Peak"), was formed by Peak Oilfield Services Company (a joint venture between
Cook Inlet Region, Inc. and Nabors Industries, Inc.) and the Company for the
purpose of purchasing the Company's oilfield service assets and providing rig
moving, transportation and related site construction services. The Company sold
its service company assets to Peak for $6.4 million and simultaneously invested
$2.5 million in exchange for a 33.3% partnership interest in Peak. This
transaction resulted in recognition of a $1.8 million pre-tax gain during the
fourth fiscal quarter of 1996 reported in Interest and other. A deferred gain
from the sale of service company assets of $0.9 million was recorded as a
reduction in the Company's investment in Peak and will be amortized to income
over the estimated useful lives of the Peak assets. The Company's investment in
Peak is accounted for using the equity method.
 
  Income Taxes
 
     The Company has adopted Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes ("SFAS 109"). SFAS 109 requires deferred tax
liabilities or assets to be recognized for the anticipated future tax effects of
temporary differences that arise as a result of the differences in the carrying
amounts and the tax bases of assets and liabilities.
 
  Net Income (Loss) Per Share
 
     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 requires presentation of "basic" and "diluted" earnings per share, as
defined, on the face of the statement of operations for all entities with
complex capital structures. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997 and requires restatement of
all prior period earnings per share amounts. The Company has adopted SFAS 128
and has restated all prior periods presented.
 
     SFAS 128 requires a reconciliation of the numerators and denominators of
the basic and diluted EPS computations. For the Transition Period and fiscal
1997 there was no difference between actual weighted average shares outstanding,
which are used in computing basic EPS and diluted weighted average shares, which
are used in computing diluted EPS. Options to purchase 8.3 million and 7.9
million shares of common stock at weighted average exercise prices of $5.49 and
$7.09 were outstanding during the Transition Period
 
                                      F-11
<PAGE>   113
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
and fiscal 1997 but were not included in the computation of diluted EPS because
the effect of these outstanding options would be antidilutive. A reconciliation
for fiscal 1996 and 1995 is as follows:
 
<TABLE>
<CAPTION>
                                                   INCOME          SHARES        PER-SHARE
                                                 (NUMERATOR)    (DENOMINATOR)     AMOUNT
<S>                                              <C>            <C>              <C>
For the Year Ended June 30, 1996:
Basic EPS
  Income available to common stockholders......    $23,355          54,564         $0.43
                                                                                   =====
Effect of Dilutive Securities
  Employee stock options.......................         --           3,778
                                                   -------         -------
Diluted EPS
  Income available to common stockholders and
     assumed conversions.......................    $23,355          58,342         $0.40
                                                   =======         =======         =====
For the Year Ended June 30, 1995:
Basic EPS
  Income available to common stockholders......    $11,661          52,624         $0.22
                                                                                   =====
Effect of Dilutive Securities
  Employee stock options.......................         --           3,248
                                                   -------         -------
Diluted EPS
  Income available to common stockholders and
     assumed conversions.......................    $11,661         $55,872         $0.21
                                                   =======         =======         =====
</TABLE>
 
  Gas Imbalances -- Revenue Recognition
 
     Revenues from the sale of oil and gas production are recognized when title
passes, net of royalties. The Company follows the "sales method" of accounting
for its gas revenue whereby the Company recognizes sales revenue on all gas sold
to its purchasers, regardless of whether the sales are proportionate to the
Company's ownership in the property. A liability is recognized only to the
extent that the Company has a net imbalance in excess of the remaining gas
reserves on the underlying properties. The Company's net imbalance positions at
December 31, 1997 and June 30, 1997 and 1996 were not material.
 
  Hedging
 
     The Company periodically uses certain instruments to hedge its exposure to
price fluctuations on oil and natural gas transactions. Recognized gains and
losses on hedge contracts are reported as a component of the related
transaction. Results for hedging transactions are reflected in oil and gas sales
to the extent related to the Company's oil and gas production, and in oil and
gas marketing sales to the extent related to the Company's marketing activities
(see Note 10).
 
  Debt Issue Costs
 
     Other assets include the costs associated with the issuance of the 10.5%
Senior Notes on May 25, 1995, the 9.125% Senior Notes on April 9, 1996, and the
7.875% and 8.5% Senior Notes on March 17, 1997 (see Note 2). The remaining
unamortized costs on these issuances of Senior Notes at December 31, 1997
totaled $11.6 million and are being amortized over the life of the Senior Notes.
 
  Stock Options
 
     In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation". As permitted by
SFAS 123, the Company has continued its
 
                                      F-12
<PAGE>   114
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
previous method of accounting for stock compensation and adopted the disclosure
requirements of this Statement in fiscal 1997.
 
  Reclassifications
 
     Certain reclassifications have been made to the consolidated financial
statements for the years ended June 30, 1997, 1996 and 1995 to conform to the
presentation used for the December 31, 1997 consolidated financial statements.
 
2. SENIOR NOTES
 
     On March 17, 1997, the Company issued $150 million principal amount of
7.875% Senior Notes due 2004 ("7.875% Senior Notes"). The 7.875% Senior Notes
are redeemable at the option of the Company at any time prior to March 15, 2004
at the make-whole prices determined in accordance with the indenture.
 
     On March 17, 1997, the Company issued $150 million principal amount of 8.5%
Senior Notes due 2012 ("8.5% Senior Notes"). The 8.5% Senior Notes are
redeemable at the option of the Company at any time prior to March 15, 2004 at
the make-whole prices determined in accordance with the indenture and, on or
after March 15, 2004 at the redemption price set forth therein.
 
     On April 9, 1996, the Company issued $120 million principal amount of
9.125% Senior Notes due 2006 ("9.125% Senior Notes"). The 9.125% Senior Notes
are redeemable at the option of the Company at any time prior to April 15, 2001
at the make-whole prices determined in accordance with the indenture and, on or
after April 15, 2001 at the redemption prices set forth therein. The Company may
also redeem at its option at any time on or prior to April 15, 1999 up to $42
million of the 9.125% Senior Notes at 109.125% of the principal amount thereof
with the proceeds of an equity offering.
 
     On May 25, 1995, the Company issued $90 million principal amount of 10.5%
Senior Notes due 2002 ("10.5% Senior Notes"). The 10.5% Senior Notes are
redeemable at the option of the Company at any time on or after June 1, 1999.
The Company may also redeem at its option at any time on or prior to June 1,
1998 up to $30 million of the 10.5% Senior Notes at 110% of the principal amount
thereof with the proceeds of an equity offering.
 
     The Company is a holding company and owns no operating assets and has no
significant operations independent of its subsidiaries. The Company's
obligations under the 10.5% Senior Notes, the 9.125% Senior Notes, the 7.875%
Senior Notes and the 8.5% Senior Notes have been fully and unconditionally
guaranteed, on a joint and several basis, by each of the Company's "Restricted
Subsidiaries" (as defined in the respective indentures governing the Senior
Notes) (collectively, the "Guarantor Subsidiaries"). Each of the Guarantor
Subsidiaries is a direct or indirect wholly-owned subsidiary of the Company.
 
     The 10.5%, 9.125%, 7.875% and 8.5% Senior Note Indentures contain certain
covenants, including covenants limiting the Company and the Guarantor
Subsidiaries with respect to asset sales; restricted payments; the incurrence of
additional indebtedness and the issuance of preferred stock; liens; sale and
leaseback transactions; lines of business; dividend and other payment
restrictions affecting Guarantor Subsidiaries; mergers or consolidations; and
transactions with affiliates. The Company is obligated to repurchase the 10.5%
and 9.125% Senior Notes in the event of a change of control or certain asset
sales.
 
     Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, the Company's subsidiaries which are not guarantors of
the Senior Notes (the "Non-Guarantor Subsidiaries") and the Company. Separate
audited financial statements of each Guarantor Subsidiary have not been provided
because management has determined that they are not material to investors.
 
                                      F-13
<PAGE>   115
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     As of and for the six months ended December 31, 1997, the Guarantor
Subsidiaries were COI, CEX, CLLP, CELC and CCC, and the Non-Guarantor
Subsidiaries were CEMI, CAC and subsidiaries of those companies. As of and for
the year ended June 30, 1997, the Guarantor Subsidiaries were COI, CEX, CLLP,
CELC, and CGDC, and the Non-Guarantor Subsidiaries were CEMI and CCC. Prior to
fiscal 1997, the Guarantor Subsidiaries were COI, CEX and two service company
subsidiaries the assets of which were sold effective June 30, 1996, and the
Non-Guarantor Subsidiaries were CGDC and CEMI (which was acquired in December
1995).
 
                                      F-14
<PAGE>   116
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
                     CONDENSED CONSOLIDATING BALANCE SHEET
                            AS OF DECEMBER 31, 1997
                                ($ IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                         NON-
                                       GUARANTOR      GUARANTOR
                                      SUBSIDIARIES   SUBSIDIARIES    COMPANY     ELIMINATIONS   CONSOLIDATED
<S>                                   <C>            <C>            <C>          <C>            <C>
Current Assets:
  Cash and cash equivalents.........   $     (589)     $ 13,999     $  110,450   $        --     $  123,860
  Short-term investments............           --            --         12,570            --         12,570
  Accounts receivable...............       57,476        22,882          1,524        (7,708)        74,174
  Inventory.........................        4,918           575             --            --          5,493
  Other.............................        1,613             1             10            --          1,624
                                       ----------      --------     ----------   -----------     ----------
          Total Current Assets......       63,418        37,457        124,554        (7,708)       217,721
                                       ----------      --------     ----------   -----------     ----------
Property and Equipment:
  Oil and gas properties............    1,056,118        39,245             --            --      1,095,363
  Unevaluated leasehold.............      125,155            --             --            --        125,155
  Other property and equipment......       51,868           343         15,422            --         67,633
  Less: accumulated depreciation,
     depletion and amortization.....     (593,359)      (14,650)          (955)           --       (608,964)
                                       ----------      --------     ----------   -----------     ----------
                                          639,782        24,938         14,467            --        679,187
                                       ----------      --------     ----------   -----------     ----------
Investments in Subsidiaries and
  Intercompany Advances.............       81,755        49,958        903,713    (1,035,426)            --
                                       ----------      --------     ----------   -----------     ----------
Other Assets........................       10,189         6,918         38,769            --         55,876
                                       ----------      --------     ----------   -----------     ----------
          Total Assets..............   $  795,144      $119,271     $1,081,503   $(1,043,134)    $  952,784
                                       ==========      ========     ==========   ===========     ==========
 
                                    LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
  Notes payable and current
     maturities of long-term debt...   $       --      $     --     $       --   $        --     $       --
  Accounts payable and other........      104,259        29,649         27,280        (7,708)       153,480
                                       ----------      --------     ----------   -----------     ----------
          Total Current
            Liabilities.............      104,259        29,649         27,280        (7,708)       153,480
                                       ----------      --------     ----------   -----------     ----------
Long-Term Debt......................           --            --        508,992            --        508,992
                                       ----------      --------     ----------   -----------     ----------
Revenues and Royalties Due Others...       10,106            --             --            --         10,106
                                       ----------      --------     ----------   -----------     ----------
Deferred Income Taxes...............           --            --             --            --             --
                                       ----------      --------     ----------   -----------     ----------
Intercompany Payables...............      853,958         2,959             --      (856,917)            --
                                       ----------      --------     ----------   -----------     ----------
Stockholders' Equity:
  Common Stock......................           10             3            733            (3)           743
  Other.............................     (173,189)       86,660        544,498      (178,506)       279,463
                                       ----------      --------     ----------   -----------     ----------
                                         (173,179)       86,663        545,231      (178,509)       280,206
                                       ----------      --------     ----------   -----------     ----------
          Total Liabilities and
            Stockholders' Equity....   $  795,144      $119,271     $1,081,503   $(1,043,134)    $  952,784
                                       ==========      ========     ==========   ===========     ==========
</TABLE>
 
                                      F-15
<PAGE>   117
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
                     CONDENSED CONSOLIDATING BALANCE SHEET
                              AS OF JUNE 30, 1997
                                ($ IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                             NON-
                                           GUARANTOR      GUARANTOR
                                          SUBSIDIARIES   SUBSIDIARIES   COMPANY    ELIMINATIONS   CONSOLIDATED
<S>                                       <C>            <C>            <C>        <C>            <C>
Current Assets:
  Cash and cash equivalents.............    $ (6,534)      $ 4,363      $126,188    $      --       $124,017
  Short-term investments................          --         4,324       100,161           --        104,485
  Accounts receivable...................      47,379        19,943         3,022       (6,787)        63,557
  Inventory.............................       4,795            59            --           --          4,854
  Other.................................         666            26            --           --            692
                                            --------       -------      --------    ---------       --------
          Total Current Assets..........      46,306        28,715       229,371       (6,787)       297,605
                                            --------       -------      --------    ---------       --------
Property and Equipment:
  Oil and gas properties................     865,485            31            --           --        865,516
  Unevaluated leasehold.................     128,519           (14)           --           --        128,505
  Other property and equipment..........      33,486         1,904        14,989           --         50,379
  Less: accumulated depreciation,
     depletion and amortization.........    (436,276)           --          (758)          --       (437,034)
                                            --------       -------      --------    ---------       --------
                                             591,214         1,921        14,231           --        607,366
                                            --------       -------      --------    ---------       --------
Investments in Subsidiaries and
  Intercompany Advances.................         817            --       680,439     (681,256)            --
                                            --------       -------      --------    ---------       --------
Other Assets............................       4,961           673        38,463           --         44,097
                                            --------       -------      --------    ---------       --------
          Total Assets..................    $643,298       $31,309      $962,504    $(688,043)      $949,068
                                            ========       =======      ========    =========       ========
 
                                     LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
  Notes payable and current maturities
     of long-term debt..................    $  1,380       $    --      $     --    $      --       $  1,380
  Accounts payable and other............     122,241        17,527        11,965       (6,787)       144,946
                                            --------       -------      --------    ---------       --------
          Total Current Liabilities.....     123,621        17,527        11,965       (6,787)       146,326
                                            --------       -------      --------    ---------       --------
Long-Term Debt..........................          --            --       508,950           --        508,950
                                            --------       -------      --------    ---------       --------
Revenues and Royalties Due Others.......       6,903            --            --           --          6,903
                                            --------       -------      --------    ---------       --------
Deferred Income Taxes...................          --            --            --           --             --
                                            --------       -------      --------    ---------       --------
Intercompany Payables...................     589,111         1,492            --     (590,603)            --
                                            --------       -------      --------    ---------       --------
Stockholders' Equity:
  Common Stock..........................          11             1           693           (2)           703
  Other.................................     (76,348)       12,289       440,896      (90,651)       286,186
                                            --------       -------      --------    ---------       --------
                                             (76,337)       12,290       441,589      (90,653)       286,889
                                            --------       -------      --------    ---------       --------
          Total Liabilities and
            Stockholders' Equity........    $643,298       $31,309      $962,504    $(688,043)      $949,068
                                            ========       =======      ========    =========       ========
</TABLE>
 
                                      F-16
<PAGE>   118
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
                     CONDENSED CONSOLIDATING BALANCE SHEET
                              AS OF JUNE 30, 1996
                                ($ IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                             NON-
                                           GUARANTOR      GUARANTOR
                                          SUBSIDIARIES   SUBSIDIARIES   COMPANY    ELIMINATIONS   CONSOLIDATED
<S>                                       <C>            <C>            <C>        <C>            <C>
Current Assets:
  Cash and cash equivalents.............   $    4,061      $ 2,751      $ 44,826    $      --       $ 51,638
  Accounts receivable...................       44,080        7,723            --       (1,589)        50,214
  Inventory.............................        4,947          216            --           --          5,163
  Other.................................        2,155            3            --           --          2,158
                                           ----------      -------      --------    ---------       --------
          Total Current Assets..........       55,243       10,693        44,826       (1,589)       109,173
                                           ----------      -------      --------    ---------       --------
Property and Equipment:
  Oil and gas properties................      338,610       24,603            --           --        363,213
  Unevaluated leasehold.................      165,441           --            --           --        165,441
  Other property and equipment..........        9,608           61         8,493           --         18,162
  Less: accumulated depreciation,
     depletion and amortization.........      (87,193)      (8,007)         (442)          --        (95,642)
                                           ----------      -------      --------    ---------       --------
                                              426,466       16,657         8,051           --        451,174
                                           ----------      -------      --------    ---------       --------
Investments in Subsidiaries and
  Intercompany Advances.................      519,386        8,132       382,388     (909,906)            --
                                           ----------      -------      --------    ---------       --------
Other Assets............................        2,310          940         8,738           --         11,988
                                           ----------      -------      --------    ---------       --------
          Total Assets..................   $1,003,405      $36,422      $444,003    $(911,495)      $572,335
                                           ==========      =======      ========    =========       ========
 
                                     LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
  Notes payable and current maturities
     of long-term debt..................   $    3,846      $ 2,880      $     29    $      --       $  6,755
  Accounts payable and other............       91,069        7,339         5,260       (1,589)       102,079
                                           ----------      -------      --------    ---------       --------
          Total Current Liabilities.....       94,915       10,219         5,289       (1,589)       108,834
                                           ----------      -------      --------    ---------       --------
Long-term Debt..........................        2,113       10,020       256,298           --        268,431
                                           ----------      -------      --------    ---------       --------
Revenues and Royalties Due Others.......        5,118           --            --           --          5,118
                                           ----------      -------      --------    ---------       --------
Deferred Income Taxes...................       23,950        1,335       (13,100)          --         12,185
                                           ----------      -------      --------    ---------       --------
Intercompany Payables...................      824,307        8,182        73,647     (906,136)            --
                                           ----------      -------      --------    ---------       --------
Stockholders' Equity:
  Common Stock..........................          117            2         2,891           (2)         3,008
  Other.................................       52,885        6,664       118,978       (3,768)       174,759
                                           ----------      -------      --------    ---------       --------
                                               53,002        6,666       121,869       (3,770)       177,767
                                           ----------      -------      --------    ---------       --------
          Total Liabilities and
            Stockholders' Equity........   $1,003,405      $36,422      $444,003    $(911,495)      $572,335
                                           ==========      =======      ========    =========       ========
</TABLE>
 
                                      F-17
<PAGE>   119
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                                ($ IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                          NON-
                                                        GUARANTOR      GUARANTOR
                                                       SUBSIDIARIES   SUBSIDIARIES   COMPANY    ELIMINATIONS   CONSOLIDATED
<S>                                                    <C>            <C>            <C>        <C>            <C>
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997:
Revenues:
  Oil and gas sales..................................   $  93,384       $  1,199     $     --    $   1,074      $  95,657
  Oil and gas marketing sales........................          --        101,689           --      (43,448)        58,241
  Interest and other.................................         515            192      110,751      (32,492)        78,966
                                                        ---------       --------     --------    ---------      ---------
         Total Revenues..............................      93,899        103,080      110,751      (74,866)       232,864
                                                        ---------       --------     --------    ---------      ---------
Costs and Expenses:
  Production expenses and taxes......................       9,905            189           --           --         10,094
  Oil and gas marketing expenses.....................          --        100,601           --      (42,374)        58,227
  Impairment of oil and gas properties...............      96,000         14,000           --           --        110,000
  Oil and gas depreciation, depletion and
    amortization.....................................      59,758            650           --           --         60,408
  Other depreciation and amortization................       1,383             40          991           --          2,414
  General and administrative.........................       4,598          1,132          117           --          5,847
  Interest...........................................      27,481             39       22,420      (32,492)        17,448
                                                        ---------       --------     --------    ---------      ---------
         Total Costs & Expenses......................     199,125        116,651       23,528      (74,866)       264,438
                                                        ---------       --------     --------    ---------      ---------
Income (loss) Before Income Taxes and Extraordinary
  Item...............................................    (105,226)       (13,571)      87,223           --        (31,574)
Income Tax Expense (Benefit).........................          --             --           --           --             --
                                                        ---------       --------     --------    ---------      ---------
Net Income (loss) Before Extraordinary Item..........   $(105,226)      $(13,571)    $ 87,223    $      --      $ (31,574)
                                                        =========       ========     ========    =========      =========
FOR THE YEAR ENDED JUNE 30, 1997:
Revenues:
  Oil and gas sales..................................   $ 191,303       $     --     $     --    $   1,617      $ 192,920
  Oil and gas marketing sales........................          --        145,942           --      (69,770)        76,172
  Interest and other.................................         778            749       49,224      (39,528)        11,223
                                                        ---------       --------     --------    ---------      ---------
         Total Revenues..............................     192,081        146,691       49,224     (107,681)       280,315
                                                        ---------       --------     --------    ---------      ---------
Costs and Expenses:
  Production expenses and taxes......................      15,107             --           --           --         15,107
  Oil and gas marketing expenses.....................          --        143,293           --      (68,153)        75,140
  Impairment of oil and gas properties...............     236,000             --           --           --        236,000
  Oil and gas depreciation, depletion and
    amortization.....................................     103,264             --           --           --        103,264
  Other depreciation and amortization................       2,152             80        1,550           --          3,782
  General and administrative.........................       6,313            921        1,568           --          8,802
  Interest...........................................      37,644             10       20,424      (39,528)        18,550
                                                        ---------       --------     --------    ---------      ---------
         Total Costs & Expenses......................     400,480        144,304       23,542     (107,681)       460,645
                                                        ---------       --------     --------    ---------      ---------
Income (loss) Before Income Taxes and Extraordinary
  Item...............................................    (208,399)         2,387       25,682           --       (180,330)
Income Tax Expense (Benefit).........................      (4,129)            47          509           --         (3,573)
                                                        ---------       --------     --------    ---------      ---------
Net Income (loss) Before Extraordinary Item..........    (204,270)         2,340       25,173           --       (176,757)
                                                        ---------       --------     --------    ---------      ---------
Extraordinary Item:
  Loss on early extinguishment of debt, net of
    applicable income tax............................        (769)            --       (5,851)          --         (6,620)
                                                        ---------       --------     --------    ---------      ---------
Net Income (loss)....................................   $(205,039)      $  2,340     $ 19,322    $      --      $(183,377)
                                                        =========       ========     ========    =========      =========
</TABLE>
 
                                      F-18
<PAGE>   120
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
        CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS -- (CONTINUED)
                                ($ IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                          NON-
                                                        GUARANTOR      GUARANTOR
                                                       SUBSIDIARIES   SUBSIDIARIES   COMPANY    ELIMINATIONS   CONSOLIDATED
<S>                                                    <C>            <C>            <C>        <C>            <C>
FOR THE YEAR ENDED JUNE 30, 1996:
Revenues:
  Oil and gas sales..................................   $ 103,712       $  6,884     $     --    $     253      $ 110,849
  Gas marketing sales................................          --         34,973           --       (6,545)        28,428
  Oil and gas service operations.....................       6,314             --           --           --          6,314
  Interest and other.................................       1,917            238        1,676           --          3,831
                                                        ---------       --------     --------    ---------      ---------
                                                          111,943         42,095        1,676       (6,292)       149,422
                                                        ---------       --------     --------    ---------      ---------
Costs and Expenses:
  Production expenses and taxes......................       7,557            746           --           --          8,303
  Gas marketing expenses.............................          --         33,744           --       (6,292)        27,452
  Oil and gas service operations.....................       4,895             --           --           --          4,895
  Oil and gas depreciation, depletion and
    amortization.....................................      48,333          2,566           --           --         50,899
  Other depreciation and amortization................       1,924             73        1,160           --          3,157
  General and administrative.........................       3,683            496          649           --          4,828
  Interest and other.................................         508            711       12,460           --         13,679
                                                        ---------       --------     --------    ---------      ---------
                                                           66,900         38,336       14,269       (6,292)       113,213
                                                        ---------       --------     --------    ---------      ---------
  Income (loss) before income taxes..................      45,043          3,759      (12,593)          --         36,209
  Income tax expense (benefit).......................      15,990          1,335       (4,471)          --         12,854
                                                        ---------       --------     --------    ---------      ---------
         Net income (loss)...........................   $  29,053       $  2,424     $ (8,122)   $      --      $  23,355
                                                        =========       ========     ========    =========      =========
FOR THE YEAR ENDED JUNE 30, 1995:
Revenues:
  Oil and gas sales..................................   $  55,417       $  1,566     $     --    $      --      $  56,983
  Oil and gas service operations.....................       8,836             --           --           --          8,836
  Interest and other.................................       1,394             --          130           --          1,524
                                                        ---------       --------     --------    ---------      ---------
                                                           65,647          1,566          130           --         67,343
                                                        ---------       --------     --------    ---------      ---------
Costs and Expenses:
  Production expenses and taxes......................       4,045            211           --           --          4,256
  Oil and gas service operations.....................       7,747             --           --           --          7,747
  Oil and gas depreciation, depletion and
    amortization.....................................      24,775            635           --           --         25,410
  Other depreciation and amortization................       1,245              5          515           --          1,765
  General and administrative.........................       2,620             58          900           --          3,578
  Interest and other.................................         570            184        5,873           --          6,627
                                                        ---------       --------     --------    ---------      ---------
                                                           41,002          1,093        7,288           --         49,383
                                                        ---------       --------     --------    ---------      ---------
  Income (loss) before income taxes..................      24,645            473       (7,158)          --         17,960
  Income tax expense (benefit).......................       8,639            165       (2,505)          --          6,299
                                                        ---------       --------     --------    ---------      ---------
         Net Income (loss)...........................   $  16,006       $    308     $ (4,653)   $      --      $  11,661
                                                        =========       ========     ========    =========      =========
</TABLE>
 
                                      F-19
<PAGE>   121
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                                ($ IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                      NON-
                                                    GUARANTOR      GUARANTOR
                                                   SUBSIDIARIES   SUBSIDIARIES    COMPANY    ELIMINATIONS   CONSOLIDATED
<S>                                                <C>            <C>            <C>         <C>            <C>
FOR THE SIX MONTHS ENDED
  DECEMBER 31, 1997:
Cash Flows from Operating Activities.............   $  28,598       $(10,842)    $ 121,401     $     --      $ 139,157
                                                    ---------       --------     ---------     --------      ---------
Cash Flows from Investing Activities
  Oil and gas properties.........................    (189,772)            17            --           --       (189,755)
  Proceeds from sale of assets...................       2,520             --            --           --          2,520
  Investment in service operations...............        (200)            --            --           --           (200)
  Other investments..............................     (26,472)            --        99,380           --         72,908
  Other additions................................     (22,864)         1,340          (453)          --        (21,977)
                                                    ---------       --------     ---------     --------      ---------
                                                     (236,788)         1,357        98,927           --       (136,504)
                                                    ---------       --------     ---------     --------      ---------
Cash Flows from Financing Activities:
  Dividends paid on common stock.................          --             --        (2,810)          --         (2,810)
  Exercise of stock options......................          --             --           322           --            322
  Other financing................................          --           (322)           --           --           (322)
  Intercompany advances, net.....................     214,135         19,443      (233,578)          --             --
                                                    ---------       --------     ---------     --------      ---------
                                                      214,135         19,121      (236,066)          --         (2,810)
                                                    ---------       --------     ---------     --------      ---------
Net increase (decrease) in cash and cash
  equivalents....................................       5,945          9,636       (15,738)          --           (157)
Cash, beginning of period........................      (6,534)         4,363       126,188           --        124,017
                                                    ---------       --------     ---------     --------      ---------
Cash, end of period..............................   $    (589)      $ 13,999     $ 110,450     $     --      $ 123,860
                                                    =========       ========     =========     ========      =========
FOR THE YEAR ENDED JUNE 30, 1997:
Cash Flows from Operating Activities.............   $ 165,850       $(11,008)    $ (70,753)    $     --      $  84,089
                                                    ---------       --------     ---------     --------      ---------
Cash Flows from Investing Activities
  Oil and gas properties.........................    (468,519)            57            --           --       (468,462)
  Proceeds from sale of assets...................       9,523             --            --           --          9,523
  Investment in service operations...............      (3,048)            --            --           --         (3,048)
  Long-term loans to third parties...............      (2,000)            --       (18,000)          --        (20,000)
  Other investments..............................          --             --        (8,000)          --         (8,000)
  Other additions................................     (24,318)        (1,999)       (7,550)          --        (33,867)
                                                    ---------       --------     ---------     --------      ---------
                                                     (488,362)        (1,942)      (33,550)          --       (523,854)
                                                    ---------       --------     ---------     --------      ---------
Cash Flows from Financing Activities:
  Proceeds from borrowings.......................      50,000             --       292,626           --        342,626
  Payments on borrowings.........................    (118,901)            --          (680)          --       (119,581)
  Exercise of stock options......................          --             --         1,387           --          1,387
  Issuance of common stock.......................          --             --       288,091           --        288,091
  Other financing................................          --             --          (379)          --           (379)
  Intercompany advances, net.....................     380,735         14,645      (395,380)          --             --
                                                    ---------       --------     ---------     --------      ---------
                                                      311,834         14,645       185,665           --        512,144
                                                    ---------       --------     ---------     --------      ---------
Net increase (decrease) in cash and cash
  equivalents....................................     (10,678)         1,695        81,362           --         72,379
Cash, beginning of period........................       4,144          2,668        44,826           --         51,638
                                                    ---------       --------     ---------     --------      ---------
Cash, end of period..............................   $  (6,534)      $  4,363     $ 126,188     $     --      $ 124,017
                                                    =========       ========     =========     ========      =========
</TABLE>
 
                                      F-20
<PAGE>   122
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                            CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS -- (CONTINUED)
                                                    ($ IN THOUSANDS)
                                                                      Non-
                                                    GUARANTOR      GUARANTOR
                                                   SUBSIDIARIES   SUBSIDIARIES    COMPANY    ELIMINATIONS   CONSOLIDATED
<S>                                                <C>            <C>            <C>         <C>            <C>
FOR THE YEAR ENDED JUNE 30, 1996:
Cash Flows from Operating Activities.............   $ 126,868       $  4,204     $ (10,100)    $     --      $ 120,972
                                                    ---------       --------     ---------     --------      ---------
Cash Flows from Investing Activities
  Oil and gas properties.........................    (341,246)        (6,099)           --        5,300       (342,045)
  Proceeds from sales............................      12,165             --            --       (5,300)         6,865
  Investment in gas marketing company............          --            266          (629)          --           (363)
  Other additions................................      (4,683)          (109)       (4,054)          --         (8,846)
                                                    ---------       --------     ---------     --------      ---------
                                                     (333,764)        (5,942)       (4,683)          --       (344,389)
                                                    ---------       --------     ---------     --------      ---------
Cash Flows from Financing Activities:
  Proceeds from borrowings.......................      40,350         10,300       116,017           --        166,667
  Payments on borrowings.........................     (45,397)        (3,200)          (37)          --        (48,634)
  Exercise of stock options......................          --             --         1,989           --          1,989
  Issuance of common stock.......................          --             --        99,498           --         99,498
  Intercompany advances, net.....................     162,777         (2,616)     (160,161)          --             --
                                                    ---------       --------     ---------     --------      ---------
                                                      157,730          4,484        57,306           --        219,520
                                                    ---------       --------     ---------     --------      ---------
Net increase (decrease) in cash and cash
  equivalents....................................     (49,166)         2,746        42,523           --         (3,897)
Cash, beginning of period........................      53,227              5         2,303           --         55,535
                                                    ---------       --------     ---------     --------      ---------
Cash, end of period..............................   $   4,061       $  2,751     $  44,826     $     --      $  51,638
                                                    =========       ========     =========     ========      =========
FOR THE YEAR ENDED JUNE 30, 1995:
Cash Flows from Operating Activities.............   $  60,049       $    305     $  (4,692)    $   (931)     $  54,731
                                                    ---------       --------     ---------     --------      ---------
Cash Flows from Investing Activities:
  Oil and gas properties.........................    (113,722)        (4,109)           --           --       (117,831)
  Proceeds from sales............................      24,557             --            --      (11,500)        13,057
  Purchase of oil and gas properties.............          --        (11,500)           --       11,500             --
  Other additions................................      (7,929)            --            --           --         (7,929)
                                                    ---------       --------     ---------     --------      ---------
                                                      (97,094)       (15,609)           --           --       (112,703)
                                                    ---------       --------     ---------     --------      ---------
Cash Flows from Financing Activities:
  Proceeds from borrowings.......................      30,034         11,500        87,300           --        128,834
  Payments on borrowings.........................     (32,032)          (700)          362           --        (32,370)
  Intercompany advances, net.....................      78,324          4,509       (83,764)         931             --
  Other financing................................          --             --           818           --            818
                                                    ---------       --------     ---------     --------      ---------
                                                       76,326         15,309         4,716          931         97,282
                                                    ---------       --------     ---------     --------      ---------
Net increase (decrease) in cash and cash
  equivalents....................................      39,281              5            24           --         39,310
Cash, beginning of period........................      13,946             --         2,279           --         16,225
                                                    ---------       --------     ---------     --------      ---------
Cash, end of period..............................   $  53,227       $      5     $   2,303     $     --      $  55,535
                                                    =========       ========     =========     ========      =========
</TABLE>
 
                                      F-21
<PAGE>   123
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. NOTES PAYABLE AND LONG-TERM DEBT
 
Notes payable and long-term debt consist of the following:
 
<TABLE>
<CAPTION>
                                                                         JUNE 30,
                                                   DECEMBER 31,    --------------------
                                                       1997          1997        1996
                                                             ($ IN THOUSANDS)
<S>                                                <C>             <C>         <C>
7.875% Senior Notes (see Note 2).................    $150,000      $150,000    $     --
Discount on 7.875% Senior Notes..................        (106)         (115)         --
8.5% Senior Notes (see Note 2)...................     150,000       150,000          --
Discount on 8.5% Senior Notes....................        (833)         (862)         --
9.125% Senior Notes (see Note 2).................     120,000       120,000     120,000
Discount on 9.125% Senior Notes..................         (69)          (73)        (81)
10.5% Senior Notes (see Note 2)..................      90,000        90,000      90,000
12% Senior Notes.................................          --            --      47,500
Discount on 12% Senior Notes.....................          --            --      (1,772)
Term note payable to Union Bank collateralized by
  CGDC, not guaranteed by the Company, variable
  interest at Union Bank's base rate (8.25% per
  annum at June 30, 1996), or at Eurodollar rate
  +1.875% collateralized by CGDC's producing oil
  and gas properties, payable in monthly
  installments through November 2002.............          --            --      12,900
Note payable to a vendor, collateralized by oil
  and gas tubulars, payments due 60 days from
  shipment of the tubulars.......................          --         1,380       3,156
Note payable to a bank, variable interest at a
  referenced base rate +1.75% (10% per annum at
  June 30, 1996), collateralized by office
  buildings, payments due in monthly installments
  through May 1998...............................          --            --         680
Notes payable to various entities to acquire oil
  service equipment, interest varies from 7% to
  11% per annum, collateralized by equipment.....          --            --       1,212
Other collateralized.............................          --            --       1,469
Other unsecured..................................          --            --         122
                                                     --------      --------    --------
Total notes payable and long-term debt...........     508,992       510,330     275,186
Less -- Current maturities.......................          --        (1,380)     (6,755)
                                                     --------      --------    --------
          Notes payable and long-term debt, net
            of current maturities................    $508,992      $508,950    $268,431
                                                     ========      ========    ========
</TABLE>
 
                                      F-22
<PAGE>   124
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The aggregate scheduled maturities of notes payable and long-term debt for
the next five fiscal years ending December 31, 2002 and thereafter were as
follows as of December 31, 1997 (in thousands of dollars):
 
<TABLE>
<S>                                                         <C>
1998......................................................  $     --
1999......................................................        --
2000......................................................        --
2001......................................................        --
2002......................................................    90,000
After 2002................................................   418,992
                                                            --------
                                                            $508,992
                                                            ========
</TABLE>
 
     In January 1998, the Company arranged a $500 million revolving credit
facility with a group of commercial banks. The facility has an initial committed
borrowing base of $200 million ($168 million until the acquisition of DLB Oil &
Gas, Inc. (see footnote 14) is consummated), of which $120 million was used to
pay off bank debt assumed in the acquisition of Hugoton Energy Corporation (see
footnote 14) on March 10, 1998 and the remainder is anticipated to be used for
other acquisitions. The borrowing base can be expanded as other acquisitions
create collateral value. Borrowings under the facility are secured by CAC's
pledge of its subsidiaries' capital stock and bear interest currently at a rate
equal to the Eurodollar rate plus 1.5%.
 
     During the quarter ended December 31, 1996, the Company exercised its
covenant defeasance rights with respect to all of its outstanding $47.5 million
of 12% Senior Notes due 2001. A combination of cash and non-callable U.S.
Government Securities in the amount of $55.0 million was irrevocably deposited
in trust to satisfy the Company's obligations, including accrued but unpaid
interest through the date of defeasance of $1.3 million.
 
4. CONTINGENCIES AND COMMITMENTS
 
     The Company and certain of its officers and directors are defendants in a
consolidated class action suit alleging violations of the Securities Exchange
Act of 1934. The plaintiffs assert that the defendants made material
misrepresentations and failed to disclose material facts about the success of
the Company's exploration efforts in the Louisiana Trend. As a result, the
complaint alleges the price of the Company's common stock was artificially
inflated from January 25, 1996 until June 27, 1997, when the Company issued a
press release announcing disappointing drilling results in the Louisiana Trend
and a full-cost ceiling writedown to be reflected in its June 30, 1997 financial
statements. The plaintiffs further allege that certain of the named individual
defendants sold common stock during the class period when they knew or should
have known adverse nonpublic information. The plaintiffs seek a determination
that the suit is a proper class action and damages in an unspecified amount,
together with interest and costs of litigation, including attorneys' fees. The
Company and the individual defendants believe that these claims are without
merit, and intend to defend against them vigorously. No estimate of loss or
range of estimate of loss, if any, can be made at this time.
 
     Various purported class actions alleging violations of the Securities Act
of 1933 and the Oklahoma Securities Act have been filed against the Company and
others on behalf of investors who purchased common stock of Bayard Drilling
Technologies, Inc. ("Bayard") in its initial public offering in November 1997.
Total proceeds of the offering were $254 million, of which the Company received
net proceeds of $90.2 million. Plaintiffs allege that the Company, a major
customer of Bayard's drilling services and the owner of 30.1% of Bayard's common
stock outstanding prior to the offering, was a controlling person of Bayard.
Plaintiffs assert that the Bayard prospectus contained material omissions and
misstatements relating to (i) the Company's financial "hardships" and their
significance on Bayard's business, (ii) increased costs associated with Bayard's
growth strategy and (iii) undisclosed pending related-party transactions between
Bayard and third parties
 
                                      F-23
<PAGE>   125
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
other than the Company. The alleged defective disclosures are claimed to have
resulted in a decline in Bayard's share price following the public offering.
Each plaintiff seeks a determination that the suit is a proper class action and
damages in an unspecified amount or rescission, together with interest and costs
of litigation, including attorneys' fees. The Company believes that these
actions are without merit and intends to defend against them vigorously. No
estimate of loss or range of estimate of loss, if any, can be made at this time.
 
     In October 1996, Union Pacific Resources Company ("UPRC") sued the Company
alleging infringement of a patent for a drilling method, tortious interference
with confidentiality contracts between UPRC and certain of its former employees
and misappropriation of proprietary information of UPRC. UPRC's claims against
the Company are based on services provided to the Company by a third party
vendor controlled by former UPRC employees. UPRC is seeking injunctive relief,
damages of an unspecified amount, including actual, enhanced, consequential and
punitive damages, interest, costs and attorneys' fees. The Company believes that
it has meritorious defenses to UPRC's allegations and has requested the court to
declare the UPRC patent invalid. The Company has also filed a motion to construe
UPRC's patent claims and various motions for summary judgment. No estimate of a
probable loss or range of estimate of a probable loss, if any, can be made at
this time; however, in reports filed in the proceeding, experts for UPRC claim
that damages could be as much as $18 million while Company experts state that
the amount should not exceed $25,000, in each case based on a reasonable
royalty.
 
     The Company is currently involved in various other routine disputes
incidental to its business operations. While it is not possible to determine the
ultimate disposition of these matters, management, after consultation with legal
counsel, is of the opinion that the final resolution of all such currently
pending or threatened litigation is not likely to have a material adverse effect
on the consolidated financial position or results of operations of the Company.
 
     The Company has employment contracts with its two principal shareholders
and its chief financial officer and various other senior management personnel
which provide for annual base salaries, bonus compensation and various benefits.
The contracts provide for the continuation of salary and benefits for the
respective terms of the agreements in the event of termination of employment
without cause. These agreements expire at various times from June 30, 1998
through June 30, 2000.
 
     Due to the nature of the oil and gas business, the Company and its
subsidiaries are exposed to possible environmental risks. The Company has
implemented various policies and procedures to avoid environmental contamination
and risks from environmental contamination. The Company is not aware of any
potential material environmental issues or claims.
 
     As of December 31, 1997, the Company had guaranteed $1.8 million of debt
owed by Peak.
 
     On December 16, 1997, the Company acquired AnSon Production Corporation
("AnSon"), a privately owned oil and gas producer based in Oklahoma City.
Consideration for this acquisition was approximately $43 million consisting of
the issuance of 3,792,724 shares of Chesapeake's common stock and cash
consideration in accordance with the terms of the merger agreement. The Company
has accrued $15.5 million as the estimated cash payment which will be made
during 1998.
 
     The Company is in the process of acquiring various proved oil and gas
reserves through mergers or through purchases of oil and gas properties. Upon
the closing of each of these acquisitions, the Company will issue either cash or
a combination of cash and Chesapeake common stock as consideration for the
assets and liabilities being acquired. See Note 14 -- Subsequent Events and
Pending Transactions.
 
                                      F-24
<PAGE>   126
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
5. INCOME TAXES
 
     The components of the income tax provision (benefit) for each of the
periods are as follows:
 
<TABLE>
<CAPTION>
                                       SIX MONTHS ENDED         YEAR ENDED JUNE 30,
                                         DECEMBER 31,      -----------------------------
                                             1997           1997       1996       1995
                                                       ($ IN THOUSANDS)
<S>                                    <C>                 <C>        <C>        <C>
Current..............................        $--           $    --    $    --    $    --
Deferred.............................         --            (3,573)    12,854      6,299
                                             ---           -------    -------    -------
          Total......................        $--           $(3,573)   $12,854    $ 6,299
                                             ===           =======    =======    =======
</TABLE>
 
     The effective income tax expense (benefit) differed from the computed
"expected" federal income tax expense (benefit) on earnings before income taxes
for the following reasons:
 
<TABLE>
<CAPTION>
                                       SIX MONTHS ENDING         YEAR ENDED JUNE 30,
                                         DECEMBER 31,       -----------------------------
                                             1997             1997       1996       1995
                                                        ($ IN THOUSANDS)
<S>                                    <C>                  <C>         <C>        <C>
Computed "expected" income tax
  provision (benefit)................      $(11,051)        $(63,116)   $12,673    $6,286
Tax percentage depletion.............           (48)            (294)      (238)     (144)
Valuation allowance..................        13,818           64,116         --        --
State income taxes and other.........        (2,719)          (4,279)       419       157
                                           --------         --------    -------    ------
                                           $     --         $ (3,573)   $12,854    $6,299
                                           ========         ========    =======    ======
</TABLE>
 
     Deferred income taxes are provided to reflect temporary differences in the
basis of net assets for income tax and financial reporting purposes. The tax
effected temporary differences and tax loss carryforwards which comprise
deferred taxes are as follows:
 
<TABLE>
<CAPTION>
                                    SIX MONTHS ENDED          YEAR ENDED JUNE 30,
                                      DECEMBER 31,      --------------------------------
                                          1997            1997        1996        1995
                                                      ($ IN THOUSANDS)
<S>                                 <C>                 <C>         <C>         <C>
Deferred tax liabilities:
Acquisition, exploration and
  development costs and related
  depreciation, depletion and
  amortization....................      $(49,657)       $(49,831)   $(63,725)   $(31,220)
Deferred tax assets:
Net operating loss
  carryforwards...................       126,485         112,889      50,776      23,414
Percentage depletion
  carryforward....................         1,106           1,058         764         526
                                        --------        --------    --------    --------
                                         127,591         113,947      51,540      23,940
                                        --------        --------    --------    --------
Net deferred tax asset
  (liability).....................        77,934          64,116     (12,185)     (7,280)
Less: Valuation allowance.........       (77,934)        (64,116)         --          --
                                        --------        --------    --------    --------
          Total deferred tax asset
            (liability)...........      $     --        $     --    $(12,185)   $ (7,280)
                                        ========        ========    ========    ========
</TABLE>
 
     SFAS 109 requires that the Company record a valuation allowance when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. In the Transition Period and the fourth quarter of fiscal 1997,
the Company recorded a $110 million writedown and a $236 million writedown,
respectively, related to the impairment of oil and gas properties. The
writedowns and significant tax net operating loss carryforwards (caused
primarily by expensing intangible drilling costs for tax purposes) resulted
                                      F-25
<PAGE>   127
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
in a net deferred tax asset at December 31, 1997 and June 30, 1997. Management
believes it is more likely than not that the Company will generate future tax
net operating losses for at least the next five years, based in part on the
Company's continued drilling efforts. Therefore, the Company has recorded a
valuation allowance equal to the net deferred tax asset.
 
     At December 31, 1997, the Company had regular tax net operating loss
carryforwards of approximately $337 million and alternative minimum tax net
operating loss carryforwards of approximately $83 million. These loss
carryforward amounts will expire during the years 2007 through 2012. The Company
also had a percentage depletion carryforward of approximately $2.9 million at
December 31, 1997, which is available to offset future federal income taxes
payable and has no expiration date.
 
     In accordance with certain provisions of the Tax Reform Act of 1986, a
change of greater than 50% of the beneficial ownership of the Company within a
three-year period (an "Ownership Change") would place an annual limitation on
the Company's ability to utilize its existing tax carryforwards. Under
regulations issued by the Internal Revenue Service, the Company has had an
Ownership Change. However, management believes this will not result in a
significant limitation of the utilization of the tax carryforwards.
 
6. RELATED PARTY TRANSACTIONS
 
     Certain directors, shareholders and employees of the Company have acquired
working interests in certain of the Company's oil and gas properties. The owners
of such working interests are required to pay their proportionate share of all
costs. As of December 31, 1997 and June 30, 1997, 1996 and 1995, the Company had
accounts receivable from such parties of $4.2 million, $7.4 million, $2.9
million and $4.4 million, respectively.
 
     During the six months ended December 31, 1997 and during fiscal 1997, 1996
and 1995, the Company incurred legal expenses of $388,000, $207,000, $347,000
and $516,000, respectively, for legal services provided by a law firm of which a
director is a member.
 
7. EMPLOYEE BENEFIT PLANS
 
     The Company maintains the Chesapeake Energy Corporation Savings and
Incentive Stock Bonus Plan, a 401(k) profit sharing plan. Eligible employees may
make voluntary contributions to the plan which are matched by the Company for up
to 10% of the employee's annual salary with the Company's common stock. The
amount of employee contribution is limited as specified in the plan. The Company
may, at its discretion, make additional contributions to the plan. The Company
contributed $418,000, $603,000, $187,000 and $95,000 to the plan during the six
months ended December 31, 1997 and the fiscal years ended June 30, 1997, 1996
and 1995, respectively.
 
                                      F-26
<PAGE>   128
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
8. MAJOR CUSTOMERS
 
     Sales to individual customers constituting 10% or more of total oil and gas
sales were as follows:
 
<TABLE>
<CAPTION>
                                                                                 PERCENT OF OIL
                                                                 AMOUNT           AND GAS SALES
              SIX MONTHS ENDED DECEMBER 31,                 ($ IN THOUSANDS)
<S>   <C>  <C>                                              <C>                 <C>
1997  --   Aquila Southwest Pipeline Corporation..........      $20,138                21%
           Koch Oil Company...............................      $18,594                19%
           GPM Gas Corporation............................      $12,610                13%
 
FISCAL YEAR ENDED JUNE 30,
 
1997  --   Aquila Southwest Pipeline Corporation..........      $53,885                28%
           Koch Oil Company...............................      $29,580                15%
           GPM Gas Corporation............................      $27,682                14%
1996  --   Aquila Southwest Pipeline Corporation..........      $41,900                38%
           GPM Gas Corporation............................      $28,700                26%
           Wickford Energy Marketing, L.C.................      $18,500                17%
1995  --   Aquila Southwest Pipeline Corporation..........      $18,548                33%
           Wickford Energy Marketing, L.C.................      $15,704                28%
           GPM Gas Corporation............................      $11,686                21%
</TABLE>
 
     Management believes that the loss of any of the above customers would not
have a material impact on the Company's results of operations or its financial
position.
 
9. STOCKHOLDERS' EQUITY AND STOCK BASED COMPENSATION
 
     On December 16, 1997, Chesapeake acquired AnSon, a privately owned oil and
gas producer based in Oklahoma City. Consideration for this acquisition was
approximately $43 million consisting of the issuance of 3,792,724 shares of
Chesapeake common stock and cash consideration in accordance with the terms of
the merger agreement.
 
     On December 2, 1996, the Company completed a public offering of 8,972,000
shares of Common Stock at a price of $33.63 per share, resulting in net proceeds
to the Company of approximately $288.1 million.
 
     On April 12, 1996, the Company completed a public offering of 5,989,500
shares of Common Stock at a price of $17.67 per share, resulting in net proceeds
to the Company of approximately $99.4 million.
 
     A 2-for-1 stock split of the Common Stock in December 1994, and in December
1996, and a 3-for-2 stock split of the Common Stock in December 1995 and in June
1996 have been given retroactive effect in these financial statements.
 
STOCK OPTION PLANS
 
     Under the Company's 1992 Incentive Stock Option Plan (the "ISO Plan"),
options to purchase Common Stock may be granted only to employees of the Company
and its subsidiaries. Subject to any adjustment as provided by the ISO Plan, the
aggregate number of shares which may be issued and sold may not exceed 3,762,000
shares. The maximum period for exercise of an option may not be more than 10
years (or five years for an optionee who owns more than 10% of the Common Stock)
from the date of grant, and the exercise price may not be less than the fair
market value of the shares underlying the options on the date of grant (or 110%
of such value for an optionee who owns more than 10% of the Common Stock).
Options granted become exercisable at dates determined by the Stock Option
Committee of the Board of Directors. No options could be granted under the ISO
Plan after December 16, 1994.
 
                                      F-27
<PAGE>   129
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Under the Company's 1992 Nonstatutory Stock Option Plan (the "NSO Plan"),
non-qualified options to purchase Common Stock may be granted only to directors
and consultants of the Company. Subject to any adjustment as provided by the NSO
Plan, the aggregate number of shares which may be issued and sold may not exceed
3,132,000 shares. The maximum period for exercise of an option may not be more
than 10 years from the date of grant, and the exercise price may not be less
than the fair market value of the shares underlying the options on the date of
grant. Options granted become exercisable at dates determined by the Stock
Option Committee of the Board of Directors. No options can be granted under the
NSO Plan after December 10, 2002.
 
     Under the Company's 1994 Stock Option Plan (the "1994 Plan"), and its 1996
Stock Option Plan (the "1996 Plan"), incentive and nonqualified stock options to
purchase Common Stock may be granted to employees and consultants of the Company
and its subsidiaries. Subject to any adjustment as provided by the respective
plans, the aggregate number of shares which may be issued and sold may not
exceed 4,886,910 shares under the 1994 Plan and 6,000,000 shares under the 1996
Plan. The maximum period for exercise of an option may not be more than 10 years
from the date of grant and the exercise price may not be less than 75% of the
fair market value of the shares underlying the options on the date of grant.
Options granted become exercisable at dates determined by the Stock Option
Committee of the Board of Directors. No options can be granted under the 1994
Plan after December 16, 2004 or under the 1996 Plan after October 14, 2006.
 
     The Company has elected to follow APB No. 25, Accounting for Stock Issued
to Employees and related interpretations in accounting for its employee stock
options. Under APB No. 25, compensation expense is recognized for the difference
between the option price and market value on the measurement date. No
compensation expense has been recognized because the exercise price of the stock
options equaled the market price of the underlying stock on the date of grant.
 
     Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its employee stock options under the fair value method of the statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the six months ended December 31, 1997 and fiscal 1997 and 1996,
respectively: interest rates (zero-coupon U.S. government issues with a
remaining life equal to the expected term of the options) of 6.45%, 6.74% and
6.21%; dividend yields of 0.9%, 0.9% and 0.9%; volatility factors of the
expected market price of the Company's common stock of .67, .60 and .60; and
weighted-average expected life of the options of four years.
 
     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 the 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 estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
 
                                      F-28
<PAGE>   130
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company's pro forma information follows:
 
<TABLE>
<CAPTION>
                                                 SIX MONTHS ENDED      YEAR ENDED JUNE 30,
                                                    DECEMBER 31       ----------------------
                                                       1997              1997         1996
                                                 ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                              <C>                  <C>           <C>
Net Income (Loss)
  As reported..................................      $(31,574)        $(183,377)    $23,355
  Pro forma....................................       (35,084)         (190,160)     22,081
Earnings (Loss) per Share
  As reported..................................      $  (0.45)        $   (2.79)    $  0.40
  Pro forma....................................         (0.50)            (2.89)       0.38
</TABLE>
 
     For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period, which is four
years. Because the Company's stock options vest over four years and additional
awards are typically made each year, the above pro forma disclosures are not
likely to be representative of the effects on pro forma net income for future
years. A summary of the Company's stock option activity and related information
follows:
 
<TABLE>
<CAPTION>
                                                             SIX MONTHS ENDED DECEMBER 31,
                                                                         1997
                                                             -----------------------------
                                                                            WEIGHTED-AVG.
                                                               OPTIONS      EXERCISE PRICE
<S>                                                          <C>            <C>
Outstanding Beginning of Period............................   7,903,659         $ 7.09
  Granted..................................................   3,362,207           8.29
  Exercised................................................    (219,349)          3.13
  Forfeited................................................  (2,716,136)         13.87
Outstanding End of Period..................................   8,330,381           5.49
Exercisable End of Period..................................   3,838,869
Shares Authorized for Future Grants........................   4,585,973
Fair Value of Options Granted During the Period............                     $ 4.98
</TABLE>
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED JUNE 30,
                       ---------------------------------------------------------------------------------------
                                  1997                          1996                          1995
                       ---------------------------   ---------------------------   ---------------------------
                                    WEIGHTED-AVG.                 WEIGHTED-AVG.                 WEIGHTED-AVG.
                        OPTIONS     EXERCISE PRICE    OPTIONS     EXERCISE PRICE    OPTIONS     EXERCISE PRICE
<S>                    <C>          <C>              <C>          <C>              <C>          <C>
Outstanding Beginning
  of Year............   7,602,884       $ 4.66        6,828,592       $1.97         5,033,340       $0.72
  Granted............   3,564,884        19.35        2,426,850        9.98         3,185,550        3.38
  Exercised..........  (1,197,998)        1.95       (1,574,046)       1.31        (1,288,732)       0.67
  Forfeited..........  (2,066,111)       22.26          (78,512)       2.61          (101,566)       0.92
                       ----------       ------       ----------       -----        ----------       -----
Outstanding End of
  Year...............   7,903,659         7.09        7,602,884        4.66         6,828,592        1.97
                       ----------       ------       ----------       -----        ----------       -----
Exercisable End of
  Year...............   3,323,824                     2,974,386                     2,489,742
Shares Authorized for
  Future Grants......   5,212,056                       713,826                     3,102,982
Fair Value of Options
  Granted During the
  Year...............                   $ 7.51                        $4.84                           N/A
</TABLE>
 
                                      F-29
<PAGE>   131
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table summarizes information about stock options outstanding
at December 31, 1997:
 
<TABLE>
<CAPTION>
                                          OPTIONS OUTSTANDING                     OPTIONS EXERCISABLE
                            -----------------------------------------------   ----------------------------
                              NUMBER       WEIGHTED-AVG.                        NUMBER
         RANGE OF           OUTSTANDING      REMAINING       WEIGHTED-AVG.    EXERCISABLE   WEIGHTED-AVG.
     EXERCISE PRICES         12/31/97     CONTRACTUAL LIFE   EXERCISE PRICE    12/31/97     EXERCISE PRICE
<S>                         <C>           <C>                <C>              <C>           <C>
$0.56 - $ 0.71............   1,010,675          5.04             $ 0.61        1,010,675        $ 0.61
$0.78 - $ 1.33............     562,500          4.47             $ 1.12          562,500        $ 1.12
$2.25 - $ 2.25............   1,048,207          6.80             $ 2.25          687,982        $ 2.25
$2.43 - $ 4.92............     408,689          6.92             $ 3.15          394,159        $ 3.08
$4.92 - $ 4.92............     963,378          7.32             $ 4.92          382,618        $ 4.92
$5.67 - $ 5.67............   1,138,724          7.67             $ 5.67          479,061        $ 5.67
$6.47 - $ 6.47............     180,000          7.78             $ 6.47          180,000        $ 6.47
$7.31 - $ 7.31............     997,606          9.64             $ 7.31                0        $ 0.00
$8.04 - $ 8.04............     136,790          4.64             $ 8.04                0        $ 0.00
$8.75 - $30.63............   1,883,812          9.45             $10.67          141,874        $24.80
                             ---------          ----             ------        ---------        ------
$0.56 - $30.63............   8,330,381          7.54             $ 5.49        3,838,869        $ 3.46
                             ---------          ----             ------        ---------        ------
</TABLE>
 
     The exercise of certain stock options results in state and federal income
tax benefits to the Company related to the difference between the market price
of the Common Stock at the date of disposition (or sale) and the option price.
During the six months ended December 31, 1997 and fiscal 1997, 1996 and 1995,
$0, $4,808,000, $7,950,000 and $1,229,000, respectively, were recorded as
adjustments to additional paid-in capital and deferred income taxes with respect
to such tax benefits.
 
10. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
 
     The Company has only limited involvement with derivative financial
instruments, as defined in Statement of Financial Accounting Standards No. 119
"Disclosure About Derivative Financial Instruments and Fair Value of Financial
Instruments", and does not use them for trading purposes. The Company's
objective is to hedge a portion of its exposure to price volatility from
producing crude oil and natural gas. These arrangements may expose the Company
to credit risk from its counterparties and to basis risk. The Company does not
expect that the counterparties will fail to meet their obligations given their
high credit ratings.
 
HEDGING ACTIVITIES
 
     Periodically the Company utilizes hedging strategies to hedge the price of
a portion of its future oil and gas production. These strategies include (1)
swap arrangements that establish an index-related price above which the Company
pays the counterparty and below which the Company is paid by the counterparty,
(2) the purchase of index-related puts that provide for a "floor" price below
which the counterparty pays the Company the amount by which the price of the
commodity is below the contracted floor, (3) the sale of index-related calls
that provide for a "ceiling" price above which the Company pays the counterparty
the amount by which the price of the commodity is above the contracted ceiling,
and (4) basis protection swaps, which are arrangements that guarantee the price
differential of oil or gas from a specified delivery point or points. Results
from hedging transactions are reflected in oil and gas sales to the extent
related to the Company's oil and gas production. The Company only enters into
hedging transactions related to the Company's oil and gas production volumes or
CEMI physical purchase or sale commitments.
 
                                      F-30
<PAGE>   132
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     As of December 31, 1997, the Company had the following oil swap
arrangements for periods after December 1997:
 
<TABLE>
<CAPTION>
                                                                         NYMEX-INDEX
                                                              VOLUME     STRIKE PRICE
                           MONTHS                             (BBLS)      (PER BBL)
<S>                                                           <C>        <C>
January through June 1998...................................  724,000       $19.82
</TABLE>
 
     The Company entered into oil swap arrangements to cancel the effect of the
swaps at a price of $18.85 per Bbl.
 
     As of December 31, 1997, the Company had the following gas swap
arrangements for periods after December 1997:
 
<TABLE>
<CAPTION>
                                                                    HOUSTON SHIP CHANNEL
                                                         VOLUME      INDEX STRIKE PRICE
                        MONTHS                           (MMBTU)        (PER MMBTU)
<S>                                                      <C>        <C>
April 1998.............................................  600,000           $2.300
May 1998...............................................  620,000           $2.215
</TABLE>
 
     The Company received $1.3 million as a premium for calls sold for January
and February 1998 volumes of 2,480,000 MMBtu and 2,240,000 MMBtu, respectively.
The January calls expired on December 31, 1997, the February calls expired on
January 31, 1998, and the associated premiums will be recognized as income
during the corresponding months of production.
 
     The Company has also entered into the following collar transactions:
 
<TABLE>
<CAPTION>
                                                                  NYMEX           NYMEX
                                                   VOLUME      DEFINED HIGH    DEFINED LOW
                     MONTHS                        (MMBTU)     STRIKE PRICE    STRIKE PRICE
<S>                                               <C>          <C>             <C>
March 1998......................................  1,240,000       2.693           $2.33
April 1998......................................  1,200,000       2.483           $2.11
</TABLE>
 
     These transactions require that the Company pay the counterparty if the
NYMEX price exceeds the defined high strike price and that the counterparty pay
the Company if the NYMEX price is less than the defined low strike price.
 
     The Company entered into a curve lock for 4.9 Bcf of gas which allows the
Company the option to hedge April 1999 through November 1999 gas based upon a
negative $0.285 differential to December 1998 gas any time between the strike
date and December 1998. A curve lock is a commodity swap arrangement that
establishes, or hedges, a price differential between one commodity contract
period and another. In markets where the forward curve is typically negatively
sloped (prompt prices exceed deferred prices), an upward sloping price curve
allows hedgers to lock in a deferred forward sale at a higher premium to a more
prompt swap by a curve lock.
 
     Gains or losses on crude oil and natural gas hedging transactions are
recognized as price adjustments in the month of related production. The Company
estimates that had all of the crude oil and natural gas swap agreements in
effect for production periods beginning on or after January 1, 1998 terminated
on December 31, 1997, based on the closing prices for NYMEX futures contracts as
of that date, the Company would have received a net amount of approximately $1.1
million from the counterparty which would have represented the "fair value" at
that date. These agreements were not terminated.
 
     Periodically, CEMI enters into various hedging transactions designed to
hedge against physical purchase commitments made by CEMI. Gains or losses on
these transactions are recorded as adjustments to Oil and
 
                                      F-31
<PAGE>   133
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Gas Marketing Sales in the consolidated statements of operations and are not
considered by management to be material.
 
CONCENTRATION OF CREDIT RISK
 
     Other financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, short-term
investments in debt instruments and trade receivables. The Company's accounts
receivable are primarily from purchasers of oil and natural gas products and
exploration and production companies which own interests in properties operated
by the Company. The industry concentration has the potential to impact the
Company's overall exposure to credit risk, either positively or negatively, in
that the customers may be similarly affected by changes in economic, industry or
other conditions. The Company generally requires letters of credit for
receivables from customers which are judged to have sub-standard credit, unless
the credit risk can otherwise be mitigated. The cash and investments in debt
securities are with major banks or institutions with high credit ratings.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments". The estimated fair value amounts have been determined by
the Company using available market information and valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. The use of different market assumptions or valuation
methodologies may have a material effect on the estimated fair value amounts.
 
     The carrying values of items comprising current assets and current
liabilities approximate fair values due to the short-term maturities of these
instruments. See Note 15 for the fair value of financial instruments included in
noncurrent other assets at December 31, 1997. The Company estimates the fair
value of its long-term, fixed-rate debt using quoted market prices. The
Company's carrying amount for such debt at December 31, 1997 and June 30, 1997
and 1996 was $509.0 million, $508.9 million and $255.6 million, respectively,
compared to approximate fair values of $517.0 million, $514.1 million and $261.2
million, respectively. The carrying value of other long-term debt approximates
its fair value as interest rates are primarily variable, based on prevailing
market rates.
 
11. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
 
NET CAPITALIZED COSTS
 
     Evaluated and unevaluated capitalized costs related to the Company's oil
and gas producing activities are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                        JUNE 30,
                                                  DECEMBER 31,    ---------------------
                                                      1997          1997         1996
                                                            ($ IN THOUSANDS)
<S>                                               <C>             <C>          <C>
Oil and gas properties:
  Proved........................................   $1,095,363     $ 865,516    $363,213
  Unproved......................................      125,155       128,505     165,441
                                                   ----------     ---------    --------
          Total.................................    1,220,518       994,021     528,654
Less accumulated depreciation, depletion and
  amortization..................................     (602,391)     (431,983)    (92,720)
                                                   ----------     ---------    --------
Net capitalized costs...........................   $  618,127     $ 562,038    $435,934
                                                   ==========     =========    ========
</TABLE>
 
                                      F-32
<PAGE>   134
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Unproved properties not subject to amortization at December 31, 1997, June
30, 1997 and 1996 consisted mainly of lease acquisition costs. The Company
capitalized approximately $5,087,000, $12,935,000 and $6,428,000 of interest
during the six months ended December 31, 1997 and the years ended June 30, 1997
and 1996 on significant investments in unproved properties that were not yet
included in the amortization base of the full-cost pool. The Company will
continue to evaluate its unevaluated properties; however, the timing of the
ultimate evaluation and disposition of the properties has not been determined.
 
COSTS INCURRED IN OIL AND GAS ACQUISITION, EXPLORATION AND DEVELOPMENT
 
     Costs incurred in oil and gas property acquisition, exploration and
development activities which have been capitalized are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                  SIX MONTHS ENDED                  JUNE 30,
                                    DECEMBER 31,     --------------------------------------
                                        1997           1997           1996           1995
                                                                ($ IN THOUSANDS)
<S>                               <C>                <C>        <C>                <C>
Development costs...............      $120,628       $187,736       $138,188       $ 78,679
Exploration costs...............        40,534        136,473         39,410         14,129
Acquisition costs:
  Unproved properties...........        25,516        140,348        138,188         24,437
  Proved properties.............        39,245             --         24,560             --
Capitalized internal costs......         2,435          3,905          1,699            586
Proceeds from sale of leasehold,
  equipment and other...........        (1,861)        (3,095)        (6,167)       (11,953)
                                      --------       --------       --------       --------
          Total.................      $226,497       $465,367       $335,878       $105,878
                                      ========       ========       ========       ========
</TABLE>
 
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
 
     The Company's results of operations from oil and gas producing activities
are presented below for the six months ended December 31, 1997 and for the years
ended June 30, 1997, 1996 and 1995, respectively. The following table includes
revenues and expenses associated directly with the Company's oil and gas
producing activities. It does not include any allocation of the Company's
interest costs and, therefore, is not necessarily indicative of the contribution
to consolidated net operating results of the Company's oil and gas operations.
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                 SIX MONTHS ENDED                  JUNE 30,
                                   DECEMBER 31,     ---------------------------------------
                                       1997           1997            1996           1995
                                                                ($ IN THOUSANDS)
<S>                              <C>                <C>         <C>                <C>
Oil and gas sales..............     $  95,657       $ 192,920       $110,849       $ 56,983
Production costs(a)............       (10,094)        (15,107)        (8,303)        (4,256)
Impairment of oil and gas
  properties...................      (110,000)       (236,000)            --             --
Depletion and depreciation.....       (60,408)       (103,264)       (50,899)       (25,410)
Imputed income tax (provision)
  benefit(b)...................        31,817          60,544        (18,335)        (9,561)
                                    ---------       ---------       --------       --------
Results of operations from oil
  and gas producing
  activities...................     $ (53,028)      $(100,907)      $ 33,312       $ 17,756
                                    =========       =========       ========       ========
</TABLE>
 
---------------
 
(a)  Production costs include lease operating expenses and production taxes.
 
(b)  The imputed income tax provision is hypothetical (at the statutory rate)
     and determined without regard to the Company's deduction for general and
     administrative expenses, interest costs and other income tax credits and
     deductions.
 
                                      F-33
<PAGE>   135
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Capitalized costs, less accumulated amortization and related deferred
income taxes, can not exceed an amount equal to the sum of the present value
(discounted at 10%) of estimated future net revenues less estimated future
expenditures to be incurred in developing and producing the proved reserves,
less any related income tax effects. At December 31, 1997, capitalized costs of
oil and gas properties exceeded the estimated present value of future net
revenues for the Company's proved reserves, net of related income tax
considerations, resulting in a writedown in the carrying value of oil and gas
properties of $110 million. At June 30, 1997, capitalized costs of oil and gas
properties also exceeded the estimated present value of future net revenues for
the Company's proved reserves, net of related income tax considerations,
resulting in a writedown in the carrying value of oil and gas properties of $236
million.
 
OIL AND GAS RESERVE QUANTITIES (UNAUDITED)
 
     The reserve information presented below is based upon reports prepared by
independent petroleum engineers and the Company's petroleum engineers. As of
December 31, 1997, Williamson Petroleum Consultants ("Williamson"), Porter
Engineering Associates, Netherland, Sewell & Associates, Inc. and internal
reservoir engineers evaluated approximately 46%, 48%, 4% and 2% of total proved
oil and gas reserves, respectively. As of June 30, 1997, 1996 and 1995, the
reserves evaluated by Williamson constituted approximately 50%, 99% and 99% of
total proved reserves, respectively, with the remaining reserves being evaluated
internally. The reserves evaluated internally in fiscal 1997 were subsequently
evaluated by Williamson with a variance of approximately 4% of total proved
reserves. The information is presented in accordance with regulations prescribed
by the Securities and Exchange Commission. The Company emphasizes that reserve
estimates are inherently imprecise. The Company's reserve estimates were
generally based upon extrapolation of historical production trends, analogy to
similar properties and volumetric calculations. Accordingly, these estimates are
expected to change, and such changes could be material and occur in the near
term as future information becomes available.
 
     Proved oil and gas reserves represent the estimated quantities of crude
oil, natural gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are those expected to be recovered through
existing wells with existing equipment and operating methods. As of December 31,
1997, all of the Company's oil and gas reserves were located in the United
States.
 
     Presented below is a summary of changes in estimated reserves of the
Company for the six months ended December 31, 1997 and for the years 1997, 1996
and 1995:
 
<TABLE>
<CAPTION>
                                                                          JUNE 30,
                                  DECEMBER 31,     -------------------------------------------------------
                                      1997               1997                1996               1995
                                ----------------   -----------------   ----------------   ----------------
                                 OIL       GAS      OIL       GAS       OIL       GAS      OIL       GAS
                                (MBBL)   (MMCF)    (MBBL)    (MMCF)    (MBBL)   (MMCF)    (MBBL)   (MMCF)
<S>                             <C>      <C>       <C>      <C>        <C>      <C>       <C>      <C>
Proved reserves, beginning of
  period......................  17,373   298,766   12,258    351,224    5,116   211,808    4,154   117,066
Extensions, discoveries and
  other additions.............   5,573    68,813   13,874    147,485    8,781   158,052    2,549   138,372
Revisions of previous
  estimate....................  (3,428)  (24,189)  (5,989)  (137,938)    (669)   12,987     (448)  (18,516)
Production....................  (1,857)  (27,327)  (2,770)   (62,005)  (1,413)  (51,710)  (1,139)  (25,114)
Sale of reserves-in-place.....      --        --       --         --       --        --       --        --
Purchase of
  reserves-in-place...........     565    23,055       --         --      443    20,087       --        --
                                ------   -------   ------   --------   ------   -------   ------   -------
Proved reserves, end of
  period......................  18,226   339,118   17,373    298,766   12,258   351,224    5,116   211,808
                                ======   =======   ======   ========   ======   =======   ======   =======
Proved developed reserves, end
  of period...................  10,087   178,082    7,324    151,879    3,648   144,721    1,973    77,764
                                ======   =======   ======   ========   ======   =======   ======   =======
</TABLE>
 
                                      F-34
<PAGE>   136
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     For the six months ended December 31, 1997 the Company recorded revisions
to the June 30, 1997 reserve estimates of approximately 3,428 MBbl and 24,189
MMcf, or approximately 45 Bcfe. The reserve revisions are primarily attributable
to lower than expected results from development drilling and production which
eliminated certain previously established proven reserves.
 
     On December 16, 1997, Chesapeake acquired AnSon, a privately owned oil and
gas producer, based in Oklahoma City. Consideration for this acquisition was
approximately $43 million. The Company estimates that it acquired approximately
26.4 Bcfe in connection with this acquisition.
 
     For the fiscal year ended June 30, 1997, the Company recorded revisions to
the previous year's reserve estimates of approximately 5,989 MBbl and 137,938
MMcf, or approximately 174 Bcfe. The reserve revisions are primarily
attributable to the decrease in oil and gas prices between periods, higher
drilling and completion costs, and unfavorable developmental drilling and
production results during fiscal 1997. Specifically, the Company recorded
aggregate downward adjustments to proved reserves of 159 Bcfe for the Knox,
Giddings and Louisiana Trend areas.
 
     On April 30, 1996, the Company purchased interests in certain producing and
non-producing oil and gas properties, including approximately 14,000 net acres
of unevaluated leasehold, from Amerada Hess Corporation for $37.8 million. The
properties are located in the Knox and Golden Trend fields of southern Oklahoma,
most of which are operated by the Company. In fiscal 1996 the reserves acquired
from Amerada Hess Corporation were included in both "Extensions, discoveries and
other additions" and "Purchase of reserves in-place". The fiscal 1996
presentation has been restated in the current year to remove the acquired
reserves from "Extensions, discoveries and other additions" with a corresponding
offset to "Revisions of previous estimate". This revision resulted in no net
change to total oil and gas reserves.
 
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
 
     Statement of Financial Accounting Standards No. 69 ("SFAS 69") prescribes
guidelines for computing a standardized measure of future net cash flows and
changes therein relating to estimated proved reserves. The Company has followed
these guidelines which are briefly discussed below.
 
     Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated quantities of
oil and gas to be produced. Estimates are made of quantities of proved reserves
and the future periods during which they are expected to be produced based on
year-end economic conditions. Estimated future income taxes are computed using
current statutory income tax rates including consideration for the current tax
basis of the properties and related carryforwards, giving effect to permanent
differences and tax credits. The resulting future net cash flows are reduced to
present value amounts by applying a 10% annual discount factor.
 
     Since December 31, 1997 oil and gas prices have declined, with oil prices
reaching ten-year lows in March 1998. In addition, the Company has completed
several acquisitions based on expectations of higher oil and gas prices than
those currently being received. Based on NYMEX oil prices of $16.50 per Bbl and
NYMEX gas prices of $2.35 per Mcf in effect on March 25, 1998, and estimates of
the Company's proved reserves as of December 31, 1997 (pro forma for the
acquisitions completed during the quarter ended March 31, 1998), the Company
estimates it will incur an additional full cost ceiling writedown of between
$175 and $200 million as of March 31, 1998. If this occurs, the Company will
incur a substantial loss for the first quarter of 1998 which would further
reduce shareholders' equity.
 
     The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect the Company's expectations of actual revenue to be derived
from those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process, as discussed previously, are equally
applicable to the standardized measure computations since these estimates are
the basis for the valuation process.
                                      F-35
<PAGE>   137
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following summary sets forth the Company's future net cash flows
relating to proved oil and gas reserves based on the standardized measure
prescribed in SFAS 69:
 
<TABLE>
<CAPTION>
                                                                  JUNE 30,
                                     DECEMBER 31,    -----------------------------------
                                         1997          1997          1996         1995
                                                      ($ IN THOUSANDS)
<S>                                  <C>             <C>          <C>           <C>
Future cash inflows................   $1,100,807     $ 954,839    $1,101,642    $427,377
Future production costs............     (223,030)     (190,604)     (168,974)    (75,927)
Future development costs...........     (158,387)     (152,281)     (137,068)    (76,543)
Future income tax provision........     (108,027)     (104,183)     (135,543)    (51,789)
                                      ----------     ---------    ----------    --------
Future net cash flows..............      611,363       507,771       660,057     223,118
Less effect of a 10% discount
  factor...........................     (181,253)      (92,273)     (198,646)    (63,207)
                                      ----------     ---------    ----------    --------
Standardized measure of discounted
  future net cash flows............   $  430,110     $ 415,498    $  461,411    $159,911
                                      ==========     =========    ==========    ========
</TABLE>
 
     The principal sources of change in the standardized measure of discounted
future net cash flows are as follows:
 
<TABLE>
<CAPTION>
                                                                   JUNE 30,
                                      DECEMBER 31,    ----------------------------------
                                          1997          1997         1996         1995
                                                       ($ IN THOUSANDS)
<S>                                   <C>             <C>          <C>          <C>
Standardized measure, beginning of
  period............................    $415,498      $ 461,411    $ 159,911    $118,608
Sales of oil and gas produced, net
  of production costs...............     (85,563)      (177,813)    (102,546)    (52,727)
Net changes in prices and production
  costs.............................      26,106        (99,234)      88,729     (24,807)
Extensions and discoveries, net of
  production and development
  costs.............................      92,597        287,068      275,916     108,644
Changes in future development
  costs.............................      (7,422)       (12,831)     (11,201)      3,406
Development costs incurred during
  the period that reduced future
  development costs.................      47,703         46,888       43,409      23,678
Revisions of previous quantity
  estimates.........................     (62,655)      (199,738)      12,728     (21,595)
Purchase of reserves-in-place.......      25,236             --       29,641          --
Accretion of discount...............      43,739         54,702       18,814      14,126
Net change in income taxes..........     (14,510)        63,719      (57,382)     (5,586)
Changes in production rates and
  other.............................     (50,619)        (8,674)       3,392      (3,836)
                                        --------      ---------    ---------    --------
Standardized measure, end of
  period............................    $430,110      $ 415,498    $ 461,411    $159,911
                                        ========      =========    =========    ========
</TABLE>
 
                                      F-36
<PAGE>   138
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
12. TRANSITION PERIOD COMPARATIVE DATA
 
     The following table presents certain financial information for the six
months ended December 31, 1997 and 1996, respectively:
 
<TABLE>
<CAPTION>
                                                                 SIX MONTHS ENDED
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1997         1996
                                                                   (UNAUDITED)
                                                                 ($ IN THOUSANDS,
                                                              EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>
Revenues....................................................  $232,864     $122,702
Gross profit (loss)(1)......................................  $(93,092)    $ 42,946
Income (loss) before income taxes and extraordinary item....  $(31,574)    $ 39,246
Income taxes................................................        --       14,325
                                                              --------     --------
Income (loss) before extraordinary item.....................   (31,574)      24,921
Extraordinary item..........................................        --       (6,443)
                                                              --------     --------
Net income (loss)...........................................  $(31,574)    $ 18,478
                                                              ========     ========
Earnings per share -- basic
  Income (loss) before extraordinary item...................  $  (0.45)    $   0.40
  Extraordinary item........................................        --        (0.10)
                                                              --------     --------
          Net income (loss).................................  $  (0.45)    $   0.30
                                                              ========     ========
Earnings per share -- assuming dilution
  Income (loss) before extraordinary item...................  $  (0.45)    $   0.38
  Extraordinary item........................................        --        (0.10)
                                                              --------     --------
          Net income (loss).................................  $  (0.45)    $   0.28
                                                              ========     ========
Weighted average common shares outstanding (in 000's)
  Basic.....................................................    70,835       61,985
  Assuming dilution.........................................    70,835       66,300
</TABLE>
 
---------------
 
(1)  Total revenue excluding interest and other income, less total costs and
     expenses excluding interest and other expense.
 
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
 
     Summarized unaudited quarterly financial data for the six months ended
December 31, 1997 and fiscal 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                                     QUARTER ENDED
                                                             -----------------------------
                                                             SEPTEMBER 30,    DECEMBER 31,
                                                                 1997             1997
                                                                   ($ IN THOUSANDS,
                                                                EXCEPT PER SHARE DATA)
<S>                                                          <C>              <C>
Net sales..................................................     $72,532        $  81,366
Gross profit (loss)(a).....................................       8,210         (101,302)
Net Income (loss)..........................................       5,513          (37,087)
Net Income (loss) per share:
  Basic....................................................         .08             (.52)
  Diluted..................................................         .08             (.52)
</TABLE>
 
                                      F-37
<PAGE>   139
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                  QUARTER ENDED
                                              ------------------------------------------------------
                                              SEPTEMBER 30,    DECEMBER 31,    MARCH 31,    JUNE 30,
                                                  1996             1996          1997         1997
                                                     ($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>              <C>             <C>          <C>
Net sales...................................     $48,937         $71,249        $79,809     $ 69,097
Gross profit (loss)(1)......................      14,889          28,057         25,737     (241,686)
Income (loss) before extraordinary item.....       8,204          16,717         16,105     (217,783)
Net income (loss)...........................       8,204          10,274         15,928     (217,783)
Income (loss) per share before extraordinary
  item:
  Basic.....................................         .14             .26            .23        (3.12)
  Diluted...................................         .13             .25            .22        (3.12)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                   QUARTER ENDED
                                               ------------------------------------------------------
                                               SEPTEMBER 30,    DECEMBER 31,    MARCH 31,    JUNE 30,
                                                   1996             1996          1997         1997
                                                      ($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                            <C>              <C>             <C>          <C>
Net sales....................................     $21,988         $31,766        $44,145     $47,692
Gross profit(a)..............................       6,368          11,368         14,741      13,580
Net income...................................       2,915           5,459          7,623       7,358
Net income per share:
  Basic......................................         .06             .10            .14         .12
  Diluted....................................         .05             .10            .13         .12
</TABLE>
 
---------------
 
(1) Total revenue excluding interest and other income, less total costs and
    expenses excluding interest and other expense.
 
     Capitalized costs, less accumulated amortization and related deferred
income taxes, cannot exceed an amount equal to the sum of the present value of
estimated future net revenues less estimated future expenditures to be incurred
in developing and producing the proved reserves, less any related income tax
effects. At December 31, 1997 and at June 30, 1997, capitalized costs of oil and
gas properties exceeded the estimated present value of future net revenues for
the Company's proved reserves, net of related income tax considerations,
resulting in writedowns in the carrying value of oil and gas properties of $110
million and $236 million, respectively.
 
14. SUBSEQUENT EVENTS AND PENDING TRANSACTIONS
 
     On October 22, 1997, the Company entered into an agreement to acquire by
merger the Mid-Continent operations of DLB Oil & Gas, Inc. The Company will pay
$17.5 million cash and will issue a total of five million shares of the
Company's common stock as merger consideration to the shareholders of DLB. The
closing of the DLB acquisition is expected to occur in late April 1998 and is
subject to approval by DLB shareholders and other customary conditions. Certain
shareholders of DLB, who collectively own approximately 77.7% of outstanding DLB
common stock, have granted the Company an irrevocable proxy to vote such shares
(or have executed a written consent) in favor of the merger.
 
     On November 12, 1997, the Company entered into an agreement to acquire
Hugoton Energy Corporation which was consummated on March 10, 1998. Each share
of Hugoton common stock was converted into the right to receive 1.3 shares of
Chesapeake common stock, requiring the Company to issue approximately 25.8
million shares of Chesapeake common stock (based on 19.8 million shares of
Hugoton common stock outstanding as of February 6, 1998, which amount excludes
shares issuable upon exercise of outstanding Hugoton options).
 
     On January 30, 1998, the Company entered into an alliance with Ranger Oil
Limited to jointly develop a 3.2 million acre area of mutual interest in the
Helmet, Midwinter, and Peggo areas of northeastern British
 
                                      F-38
<PAGE>   140
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Columbia. In addition, the Company paid Ranger approximately $48 million. The
transaction closed in January 1998 with an effective date of December 1, 1997.
 
     In February 1998, the Company closed the purchase of the Mid-Continent
properties of privately owned EnerVest Management Company, L.L.C. for $38
million.
 
     On March 5, 1998, the Company entered into a definitive agreement to
acquire 100% of the stock of MC Panhandle Corp., a wholly owned subsidiary of
Occidental Petroleum Corporation. The Company has agreed to pay $105 million in
cash for the estimated proved reserves in the West Panhandle Field in Carson,
Gray, Hutchinson and Moore Counties of the Texas Panhandle. The effective date
of the transaction is January 1, 1998 with closing scheduled for May 29, 1998.
 
15. ACQUISITIONS
 
     On December 5, 1997, Chesapeake purchased from Pan East Petroleum
Corporation ("Pan East"), a publicly-traded Canadian exploration and production
company, 19.9% of Pan East's common stock for $22 million. The purpose of
Chesapeake's investment is to assist Pan East in financing its share of the
exploration, development and acquisition activities under a joint venture
whereby Chesapeake has the right to participate as a non-operator with up to a
50% interest in all drilling activities and acquisitions made by Pan East during
the two years ending December 31, 1999. The Company will account for its
investment in Pan East using the equity method. Based upon the closing price of
Pan East's common stock at December 31, 1997, the market value of Chesapeake's
investment in Pan East was $12.6 million.
 
     On December 16, 1997, the Company acquired AnSon, a privately owned oil and
gas producer based in Oklahoma City. Consideration for this acquisition was
approximately $43 million consisting of the issuance of 3,792,724 shares of
Chesapeake's common stock and cash consideration in accordance with the terms of
the merger agreement. The Company has accrued $15.5 million as the estimated
cash payment which will be made during 1998.
 
                                      F-39
<PAGE>   141
 
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                              MARCH 31,     DECEMBER 31,
                                                                 1998           1997
                                                                   ($ IN THOUSANDS)
<S>                                                           <C>           <C>
Current Assets:
  Cash and cash equivalents.................................  $   31,945     $  123,860
  Restricted cash...........................................       2,001             --
  Short-term investments....................................       5,876         12,570
  Accounts receivable:
     Oil and gas sales......................................      11,553         10,654
     Oil and gas marketing sales............................      16,592         20,493
     Joint interest and other, net of allowance for doubtful
      accounts of $961,000 and $691,000.....................      26,773         38,781
     Related parties........................................       5,502          4,246
  Inventory.................................................       5,217          5,493
  Other.....................................................       5,053          1,624
                                                              ----------     ----------
          Total Current Assets..............................     110,512        217,721
                                                              ----------     ----------
Property and Equipment:
  Oil and gas properties, at cost based on full cost
     accounting:
  Evaluated oil and gas properties..........................   1,564,941      1,095,363
  Unevaluated properties....................................     144,403        125,155
  Less: accumulated depreciation, depletion and
     amortization...........................................    (883,734)      (602,391)
                                                              ----------     ----------
                                                                 825,610        618,127
  Other property and equipment..............................      78,068         67,633
  Less: accumulated depreciation and amortization...........      (7,528)        (6,573)
                                                              ----------     ----------
          Total Property and Equipment......................     896,150        679,187
                                                              ----------     ----------
Other Assets................................................      58,673         55,876
                                                              ----------     ----------
          Total Assets......................................  $1,065,335     $  952,784
                                                              ==========     ==========
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable..........................................  $  100,135     $   81,775
  Accrued liabilities and other.............................      53,519         42,733
  Revenues and royalties due others.........................      26,020         28,972
                                                              ----------     ----------
          Total Current Liabilities.........................     179,674        153,480
                                                              ----------     ----------
Long-Term Debt, Net.........................................     654,013        508,992
                                                              ----------     ----------
Revenues and Royalties Due Others...........................      10,551         10,106
                                                              ----------     ----------
Deferred Income Taxes.......................................          --             --
                                                              ----------     ----------
Stockholders' Equity:
  Preferred Stock, $.01 par value, 10,000,000 shares
     authorized; none issued................................          --             --
  Common Stock, 250,000,000 shares authorized; $.01 par
     value; 100,102,270 and 74,298,061 shares issued and
     outstanding at March 31, 1998, and December 31, 1997,
     respectively...........................................       1,001            743
  Paid-in capital...........................................     659,868        460,733
  Accumulated deficit.......................................    (439,772)      (181,270)
                                                              ----------     ----------
          Total Stockholders' Equity........................     221,097        280,206
                                                              ----------     ----------
          Total Liabilities and Stockholders' Equity........  $1,065,335     $  952,784
                                                              ==========     ==========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-40
<PAGE>   142
 
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                                   MARCH 31,
                                                              --------------------
                                                                1998        1997
<S>                                                           <C>          <C>
Revenues:
  Oil and gas sales.........................................  $  50,241    $57,399
  Oil and gas marketing sales...............................     26,524     22,410
  Interest and other........................................        224      3,277
                                                              ---------    -------
          Total revenues....................................     76,989     83,086
                                                              ---------    -------
Costs and Expenses:
  Production expenses.......................................      7,894      3,158
  Production taxes..........................................      1,544      1,150
  Oil and gas marketing expenses............................     26,261     21,747
  Impairment of oil and gas properties......................    250,000         --
  Oil and gas depreciation, depletion and amortization......     31,342     24,663
  Depreciation and amortization of other assets.............      1,380        873
  General and administrative................................      4,380      2,481
  Interest..................................................     10,688      3,654
                                                              ---------    -------
          Total costs and expenses..........................    333,489     57,726
                                                              ---------    -------
Income (Loss) Before Income Tax and Extraordinary Item......   (256,500)    25,360
                                                              ---------    -------
Income Tax Expense:
  Current...................................................         --         --
  Deferred..................................................         --      9,255
                                                              ---------    -------
          Total income tax expense..........................         --      9,255
                                                              ---------    -------
Income (Loss) Before Extraordinary Item.....................   (256,500)    16,105
Extraordinary Item:
  Loss on early extinguishment of debt, net of applicable
     income tax of $101.....................................         --       (177)
                                                              ---------    -------
          Net Income (loss).................................  $(256,500)   $15,928
                                                              =========    =======
Earnings Per Common Share (Basic)
  Income (loss) before extraordinary item...................  $   (3.19)   $   .23
  Extraordinary item........................................         --         --
                                                              ---------    -------
  Net income (loss).........................................  $   (3.19)   $   .23
                                                              =========    =======
Earnings Per Common Share (Assuming Dilution)
  Income (loss) before extraordinary item...................  $   (3.19)   $   .22
  Extraordinary item........................................         --         --
                                                              ---------    -------
  Net income (loss).........................................  $   (3.19)   $   .22
                                                              =========    =======
Weighted Average Common and Common Equivalent Shares
  Outstanding
  Basic.....................................................     80,330     69,534
                                                              =========    =======
  Assuming dilution.........................................     80,330     73,493
                                                              =========    =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-41
<PAGE>   143
 
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                                    MARCH 31,
                                                              ----------------------
                                                                1998         1997
                                                                 ($ IN THOUSANDS)
<S>                                                           <C>          <C>
Cash Flows From Operating Activities:
  Net income (loss).........................................  $(256,500)   $  15,928
  Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
     Depreciation, depletion and amortization...............     32,326       25,236
     Impairment of oil and gas assets.......................    250,000           --
     Deferred taxes.........................................         --        9,154
     Investments in securities, net.........................         --       34,777
     Amortization of loan costs.............................        396          300
     Amortization of bond discount..........................         21            5
     Loss on sale of fixed assets and other.................        368           18
     Extraordinary loss before income tax benefit...........         --          278
     Equity in (earnings) losses of equity investees........         22          (91)
     Bad debt expense.......................................        604           88
     Changes in current assets and liabilities..............     21,948      (46,007)
                                                              ---------    ---------
          Cash provided by operating activities.............     49,185       39,686
                                                              ---------    ---------
Cash Flows From Investing Activities:
  Exploration, development and acquisition of oil and gas
     properties.............................................   (149,002)    (158,245)
  Proceeds from sale of assets..............................        220        2,850
  Repayment of long-term loan...............................      2,000           --
  Additions to other property and equipment.................    (19,684)      (4,712)
                                                              ---------    ---------
          Cash used in investing activities.................   (166,466)    (160,107)
                                                              ---------    ---------
Cash Flows From Financing Activities:
  Proceeds from long-term borrowings........................    145,000      292,626
  Payments on long-term borrowings..........................   (120,000)     (12,664)
  Cash received from exercise of stock options..............         61          625
  Other financing...........................................        305          (95)
                                                              ---------    ---------
          Cash provided by financing activities.............     25,366      280,492
                                                              ---------    ---------
Net Increase (Decrease) in Cash and Cash Equivalents........    (91,915)     160,071
Cash and Cash Equivalents, Beginning of Period..............    123,860      140,739
                                                              ---------    ---------
Cash and Cash Equivalents, End of Period....................  $  31,945    $ 300,810
                                                              =========    =========
Details of Acquisition of Hugoton Energy Corporation:
  Fair value of assets acquired.............................  $ 336,517    $      --
  Liabilities acquired......................................  $(128,146)   $      --
  Stock issued..............................................  $(206,321)   $      --
  Fair value of Hugoton stock options converted into
     Chesapeake stock options...............................  $  (2,050)   $      --
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-42
<PAGE>   144
 
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1998
                                  (UNAUDITED)
 
1. ACCOUNTING PRINCIPLES
 
     The accompanying unaudited consolidated financial statements of Chesapeake
Energy Corporation and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q as prescribed by the Securities
and Exchange Commission. All material adjustments (consisting solely of normal
recurring adjustments) which, in the opinion of management, are necessary for a
fair presentation of the results for the interim periods have been reflected.
The results for the three months ended March 31, 1998 are not necessarily
indicative of the results to be expected for the full fiscal year.
 
     The Company has changed its fiscal year end from June 30 to December 31.
This Form 10-Q relates to the three months ended March 31, 1998 (the "Current
Quarter") and March 31, 1997 (the "Prior Quarter").
 
2. RECENT ACQUISITIONS
 
     On December 16, 1997, the Company acquired AnSon Production Corporation
("AnSon"), a privately owned oil and gas producer based in Oklahoma City.
Consideration for the acquisition was approximately $43 million, which included
the issuance of 3,792,724 shares of Chesapeake's common stock and the payment of
$24.8 million on May 7, 1998, pursuant to a make-whole provision.
 
     On January 30, 1998, the Company entered into a 40/60 alliance with Ranger
Oil Limited to jointly develop a 3.2 million acre area of mutual interest in the
Helmet area of northeastern British Columbia. As part of the transaction, the
Company paid approximately $48 million for proved oil and gas reserves,
undeveloped leasehold and a 40% interest in Ranger's infrastructure in the area.
 
     On February 6, 1998, the Company purchased the Mid-Continent properties of
EnerVest Management Company, L.L.C. for $38 million.
 
     On March 10, 1998, the Company acquired Hugoton Energy Corporation
("Hugoton") pursuant to a merger by issuing approximately 25.8 million shares of
the Company's common stock in exchange for 100% of Hugoton's common stock. See
Consolidated Statements of Cash Flows.
 
     On April 22, 1998, the Company issued $230 million (4.6 million shares) of
its 7% Cumulative Convertible Preferred Stock, $50 per share liquidation
preference, and $500 million of its 9.625% Series A Senior Notes due 2005. Net
proceeds from these offerings were approximately $711 million.
 
     On April 27, 1998, the Company acquired from Gothic Energy Corporation
certain proved oil and gas reserves for $20 million, purchased $50 million of
Gothic 12% preferred stock, acquired ten-year warrants to purchase 15% of
Gothic's currently outstanding common stock for $0.01 per share, acquired a 50%
interest in Gothic's undeveloped leasehold acreage and entered into a five-year
drilling and acquisitions participation agreement.
 
     On April 27, 1998, Chesapeake acquired the British Columbia properties of
Sunoma Energy Corporation for $33 million.
 
     On April 28, 1998 the Company acquired by merger the Mid-Continent
operations of DLB Oil & Gas, Inc. for $17.5 million in cash, 5,000,000 shares of
the Company's common stock, and the assumption of $90 million in outstanding
debt and working capital obligations.
 
     On April 30, 1998, the Company acquired 100% of the stock of MC Panhandle
Corp., a wholly-owned subsidiary of Occidental Petroleum Corporation, by paying
approximately $95 million, net of working capital adjustments.
 
     Effective April 30, 1998, the Company purchased all of its outstanding
10.5% Senior Notes due 2002. Of the $90,000,000 aggregate principal amount,
$89,830,000 was acquired pursuant to the Company's offer to purchase, which
commenced April 1, 1998, and the remaining $170,000 was acquired on the same
terms after the tender period. The cost to acquire the 10.5% Senior Notes was
approximately $99,000,000. The early
 
                                      F-43
<PAGE>   145
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
retirement of these notes will result in an extraordinary charge of
approximately $12 million during the quarter ended June 30, 1998.
 
3. LEGAL PROCEEDINGS
 
     The Company and certain of its officers and directors are defendants in a
consolidated class action suit alleging violations of the Securities Exchange
Act of 1934. The plaintiffs assert that the defendants made material
misrepresentations and failed to disclose material facts about the success of
the Company's exploration efforts in the Louisiana Trend. As a result, the
complaint alleges the price of the Company's common stock was artificially
inflated from January 25, 1996 until June 27, 1997, when the Company issued a
press release announcing disappointing drilling results in the Louisiana Trend
and a full-cost ceiling writedown to be reflected in its June 30, 1997 financial
statements. The plaintiffs further allege that certain of the named individual
defendants sold common stock during the class period when they knew or should
have known adverse nonpublic information. The plaintiffs seek a determination
that the suit is a proper class action and damages in an unspecified amount,
together with interest and costs of litigation, including attorneys' fees. The
Company and the individual defendants believe that these claims are without
merit, and intend to defend against them vigorously. No estimate of loss or
range of estimate of loss, if any, can be made at this time.
 
     Various purported class actions alleging violations of the Securities Act
of 1933 and the Oklahoma Securities Act have been filed against the Company and
others on behalf of investors who purchased common stock of Bayard Drilling
Technologies, Inc. ("Bayard") in its initial public offering in November 1997.
In May 1998, the plaintiffs in the two cases pursuing state claims dismissed
their state court suits and became co-lead plaintiffs in the remaining federal
case. Total proceeds of the offering were $254 million, of which the Company
received net proceeds of $90.2 million. Plaintiffs allege that the Company, a
major customer of Bayard's drilling services and the owner of 30.1% of Bayard's
common stock outstanding prior to the offering, was a controlling person of
Bayard. Plaintiffs assert that the Bayard prospectus contained material
omissions and misstatements relating to (i) the Company's financial "hardships"
and their significance on Bayard's business, (ii) increased costs associated
with Bayard's growth strategy, and (iii) undisclosed pending related-party
transactions between Bayard and third parties other than the Company. The
alleged defective disclosures are claimed to have resulted in a decline in
Bayard's share price following the public offering. The plaintiffs seek a
determination that the suit is a proper class action and damages in an
unspecified amount or rescission, together with interest and costs of
litigation, including attorney's fees. The Company believes that the claims are
without merit and intends to defend against them vigorously. No estimate of loss
or range of estimate of loss, if any, can be made at this time.
 
     In October 1996, Union Pacific Resources Company ("UPRC") sued the Company
alleging infringement of a patent for a drilling method, tortious interference
with confidentiality contracts between UPRC and certain of its former employees
and misappropriation of proprietary information of UPRC. UPRC's claims against
the Company are based on services provided to the Company by a third party
vendor controlled by former UPRC employees. UPRC is seeking injunctive relief,
damages of an unspecified amount, including actual, enhanced, consequential and
punitive damages, interest, costs and attorneys' fees. The Company believes that
it has meritorious defenses to UPRC's allegations and has requested the court to
declare the UPRC patent invalid. The Company has also filed a motion to construe
UPRC's patent claims and various motions for summary judgment. No estimate of
loss or range of estimate of loss, if any, can be made at this time; however, in
reports filed in the proceeding, experts for UPRC claim that damages could be as
much as $18 million while Company experts state that the amount should not
exceed $25,000, in each case based on a reasonable royalty.
 
     The Company is currently involved in various other routine disputes
incidental to its business operations. While it is not possible to determine the
ultimate disposition of these matters, management, after consultation with legal
counsel, is of the opinion that the final resolution of all such currently
pending or threatened
 
                                      F-44
<PAGE>   146
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
litigation is not likely to have a material adverse effect on the consolidated
financial position or results of operations of the Company.
 
4. IMPAIRMENT OF OIL AND GAS PROPERTIES
 
     The Company incurred an impairment of oil and gas properties charge of $250
million in the Current Quarter. This writedown was caused by several factors,
including the effects of accounting for the Hugoton acquisition using the
purchase accounting method, oil prices declining from $17.62 at December 31,
1997 to $13.92 at March 31, 1998, gas prices declining from $2.29 at December
31, 1997 to $2.01 at March 31, 1998 and higher drilling and completion costs
compared to previous estimates. Additionally, lower oil and gas prices at March
31, 1998 and higher drilling costs caused downward revisions in the Company's
proved reserves as certain proved undeveloped reserves previously estimated by
the Company were rendered uneconomic and therefore excluded by the Company from
its proved reserves.
 
     The primary reason for the impairment charge was the completion of the
acquisition in March 1998 of Hugoton, which was accounted for using the purchase
method. The purchase price, which was established in November 1997 when the
acquisition was announced (based on a Chesapeake common stock price of $8.00 per
share), was allocated almost entirely to Hugoton's evaluated oil and gas
properties. Based upon reserve estimates as of March 31, 1998, the portion of
the purchase price which was allocated to evaluated oil and gas properties
exceeded the associated discounted future net revenues from Hugoton's estimated
proved reserves by approximately $150 million.
 
5. NET INCOME (LOSS) PER SHARE
 
     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 requires presentation of "basic" and "diluted" earnings per share, as
defined, on the face of the statement of operations for all entities with
complex capital structures. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997 and requires restatement of
all prior period earnings per share amounts. The Company has adopted SFAS 128
and has restated all prior periods presented.
 
     SFAS 128 requires a reconciliation of the numerators and denominators of
the basic and diluted EPS computations. For the Current Quarter there was no
difference between actual weighted average shares outstanding, which are used in
computing basic EPS and diluted weighted average shares, which are used in
computing diluted EPS. Options to purchase 10.2 million shares of common stock
at a weighted average exercise price of $5.69 were outstanding during the
Current Quarter but were not included in the computation of diluted EPS because
the effect of these outstanding options would be antidilutive. A reconciliation
for the Prior Quarter is as follows:
 
<TABLE>
<CAPTION>
                                                             INCOME          SHARE       PER-SHARE
                                                           (NUMERATOR)   (DENOMINATOR)    AMOUNT
<S>                                                        <C>           <C>             <C>
For the Quarter Ended March 31, 1997:
  Basic EPS
     Income available to common stockholders.............    $15,928        69,534         $0.23
                                                                                           =====
  Effect of Dilutive Securities
     Employee stock options..............................         --         3,959
                                                             -------        ------
  Diluted EPS
     Income available to common stockholders and assumed
       conversions.......................................    $15,928        73,493         $0.22
                                                             =======        ======         =====
</TABLE>
 
                                      F-45
<PAGE>   147
                 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. SENIOR NOTES
 
  10.5% Notes
 
     The Company had outstanding at March 31, 1998, $90 million in aggregate
principal amount of 10.5% Senior Notes due 2002. The 10.5% Notes were senior,
unsecured obligations of the Company and were fully and unconditionally
guaranteed, jointly and severally, by Guarantor Subsidiaries (as defined below).
All outstanding 10.5% Notes were acquired by the Company effective April 30,
1998. See Note 2.
 
  9.125% Notes
 
     The Company has outstanding $120 million in aggregate principal amount of
9.125% Senior Notes which mature April 15, 2006. The 9.125% Notes bear interest
at an annual rate of 9.125%, payable semiannually on each April 15 and October
15. The 9.125% Notes are senior, unsecured obligations of the Company and are
fully and unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
 
  7.875% Notes
 
     The Company has outstanding $150 million in aggregate principal amount of
7.875% Senior Notes which mature March 15, 2004. The 7.875% Notes bear interest
at the rate of 7.875%, payable semiannually on each March 15 and September 15.
The 7.875% Notes are senior, unsecured obligations of the Company and are fully
and unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
 
  8.5% Notes
 
     The Company has outstanding $150 million in aggregate principal amount of
8.5% Senior Notes which mature March 15, 2012. The 8.5% Notes bear interest at
the rate of 8.5%, payable semiannually on each March 15 and September 15. The
8.5% Notes are senior, unsecured obligations of the Company and are fully and
unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
 
     The Company is a holding company and owns no operating assets and has no
significant operations independent of its subsidiaries. The Company's
obligations under its Senior Notes have been fully and unconditionally
guaranteed, on a joint and several basis, by each of the Company's "Restricted
Subsidiaries" (as defined in the respective indentures governing the Senior
Notes) (collectively, the "Guarantor Subsidiaries"). Each of the Guarantor
Subsidiaries is a direct or indirect wholly-owned subsidiary of the Company.
 
     The Senior Note Indentures contain certain covenants, including covenants
limiting the Company and the Guarantor Subsidiaries with respect to asset sales,
restricted payments, the incurrence of additional indebtedness and the issuance
of preferred stock, liens, sale and leaseback transactions, lines of business,
dividend and other payment restrictions affecting Guarantor Subsidiaries,
mergers or consolidations, and transactions with affiliates. The Company is
obligated to repurchase the 9.125% Senior Notes in the event of a change of
control or certain asset sales.
 
     Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, the Company's subsidiaries which are not guarantors of
the Senior Notes (the "Non-Guarantor Subsidiaries") and the Company. Separate
financial statements of each Guarantor Subsidiary have not been provided because
management has determined that they are not material to investors.
 
     As of and for the three months ended March 31, 1998, the Non-Guarantor
Subsidiaries were Chesapeake Energy Marketing, Inc., Chesapeake Acquisition
Corporation and subsidiaries of those companies. As of and for the three months
ended March 31, 1997, the Non-Guarantor Subsidiaries were Chesapeake Energy
Marketing, Inc. and Chesapeake Canada Corporation. For both periods, the
remaining subsidiaries of the Company were Guarantor Subsidiaries.
 
                                      F-46
<PAGE>   148
 
                     CONDENSED CONSOLIDATING BALANCE SHEET
                              AS OF MARCH 31, 1998
                                ($ IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                          GUARANTOR     NON-GUARANTOR    COMPANY
                                         SUBSIDIARIES   SUBSIDIARIES     (PARENT)    ELIMINATIONS   CONSOLIDATED
<S>                                      <C>            <C>             <C>          <C>            <C>
Current Assets:
  Cash and cash equivalents............   $  (15,466)     $   9,148     $   40,264   $        --     $   33,946
  Short-term investments...............           --             --          5,876            --          5,876
  Accounts receivable, net.............       40,931         26,224              2        (6,737)        60,420
  Inventory............................        5,143             74             --            --          5,217
  Other................................        4,771            277              5            --          5,053
                                          ----------      ---------     ----------   -----------     ----------
         Total Current Assets..........       35,379         35,723         46,147        (6,737)       110,512
                                          ----------      ---------     ----------   -----------     ----------
Property and Equipment:
  Oil and gas properties...............    1,165,645        399,296             --            --      1,564,941
  Unevaluated leasehold................      130,106         14,297             --            --        144,403
  Other property and equipment.........       58,251          3,402         16,415            --         78,068
  Less: accumulated depreciation,
    depletion and amortization.........     (703,750)      (186,454)        (1,058)           --       (891,262)
                                          ----------      ---------     ----------   -----------     ----------
         Total Property & Equipment....      650,252        230,541         15,357            --        896,150
                                          ----------      ---------     ----------   -----------     ----------
Investments in Subsidiaries and
  Intercompany Advances................       81,755        274,529      1,214,222    (1,570,506)            --
                                          ----------      ---------     ----------   -----------     ----------
Other Assets...........................        4,418          9,283         44,972            --         58,673
                                          ----------      ---------     ----------   -----------     ----------
         Total Assets..................   $  771,804      $ 550,076     $1,320,698   $(1,577,243)    $1,065,335
                                          ==========      =========     ==========   ===========     ==========
 
                                      LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
  Notes payable and current maturities
    of long-term debt..................   $       --      $      --     $       --   $        --     $       --
  Accounts payable and other...........      119,679         30,677         36,250        (6,932)       179,674
                                          ----------      ---------     ----------   -----------     ----------
         Total Current Liabilities.....      119,679         30,677         36,250        (6,932)       179,674
                                          ----------      ---------     ----------   -----------     ----------
Long-Term Debt.........................           --        120,000        534,013            --        654,013
Revenues Payable.......................  10,106.....            445             --            --         10,551
Deferred Income Taxes..................           --             --             --            --             --
Intercompany Payables..................  911,684....         47,175             --      (958,859)            --
Stockholders' Equity:
  Common Stock.........................           10              4            991            (4)         1,001
  Other................................     (269,675)       351,775        749,444      (611,448)       220,096
                                          ----------      ---------     ----------   -----------     ----------
         Total Stockholders' Equity....     (269,665)       351,779        750,435      (611,452)       221,097
                                          ----------      ---------     ----------   -----------     ----------
         Total Liabilities and
           Stockholders' Equity........   $  771,804      $ 550,076     $1,320,698   $(1,577,243)    $1,065,335
                                          ==========      =========     ==========   ===========     ==========
</TABLE>
 
                                      F-47
<PAGE>   149
 
                     CONDENSED CONSOLIDATING BALANCE SHEET
                            AS OF DECEMBER 31, 1997
                                ($ IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                          GUARANTOR     NON-GUARANTOR    COMPANY
                                         SUBSIDIARIES   SUBSIDIARIES     (PARENT)    ELIMINATIONS   CONSOLIDATED
<S>                                      <C>            <C>             <C>          <C>            <C>
Current Assets:
  Cash and cash equivalents............   $     (589)     $ 13,999      $  110,450   $        --     $  123,860
  Short-term investments...............           --            --          12,570            --         12,570
  Accounts receivable, net.............       57,476        22,882           1,524        (7,708)        74,174
  Inventory............................        4,918           575              --            --          5,493
  Other................................        1,613             1              10            --          1,624
                                          ----------      --------      ----------   -----------     ----------
         Total Current Assets..........       63,418        37,457         124,554        (7,708)       217,721
                                          ----------      --------      ----------   -----------     ----------
Property and Equipment:
  Oil and gas properties...............    1,056,118        39,245              --            --      1,095,363
  Unevaluated leasehold................      125,155            --              --            --        125,155
  Other property and equipment.........       51,868           343          15,422            --         67,633
  Less: accumulated depreciation,
    depletion and amortization.........     (593,359)      (14,650)           (955)           --       (608,964)
                                          ----------      --------      ----------   -----------     ----------
         Total Property & Equipment....      639,782        24,938          14,467            --        679,187
                                          ----------      --------      ----------   -----------     ----------
Investments in Subsidiaries and
  Intercompany Advances................       81,755        49,958         903,713    (1,035,426)            --
                                          ----------      --------      ----------   -----------     ----------
Other Assets...........................       10,189         6,918          38,769            --         55,876
                                          ----------      --------      ----------   -----------     ----------
         Total Assets..................   $  795,144      $119,271      $1,081,503   $(1,043,134)    $  952,784
                                          ==========      ========      ==========   ===========     ==========
 
                                      LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
  Notes payable and current maturities
    of long-term debt..................   $       --      $     --      $       --   $        --     $       --
  Accounts payable and other...........      104,259        29,649          27,280        (7,708)       153,480
                                          ----------      --------      ----------   -----------     ----------
         Total Current Liabilities.....      104,259        29,649          27,280        (7,708)       153,480
                                          ----------      --------      ----------   -----------     ----------
Long-Term Debt.........................           --            --         508,992            --        508,992
Revenues Payable.......................       10,106            --              --            --         10,106
Deferred Income Taxes..................           --            --              --            --             --
Intercompany Payables..................      853,958         2,959              --      (856,917)            --
Stockholders' Equity:
  Common Stock.........................           10             3             733            (3)           743
  Other................................     (173,189)       86,660         544,498      (178,506)       279,463
                                          ----------      --------      ----------   -----------     ----------
         Total Stockholders' Equity....     (173,179)       86,663         545,231      (178,509)       280,206
                                          ----------      --------      ----------   -----------     ----------
         Total Liabilities and
           Stockholders' Equity........   $  795,144      $119,271      $1,081,503   $(1,043,134)    $  952,784
                                          ==========      ========      ==========   ===========     ==========
</TABLE>
 
                                      F-48
<PAGE>   150
 
                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                                ($ IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                            GUARANTOR     NON-GUARANTOR   COMPANY
                                           SUBSIDIARIES   SUBSIDIARIES    (PARENT)   ELIMINATIONS   CONSOLIDATED
<S>                                        <C>            <C>             <C>        <C>            <C>
FOR THE THREE MONTHS ENDED
  MARCH 31, 1998
Revenues:
  Oil and gas sales......................    $ 41,803       $   7,812     $    --      $    626      $  50,241
  Oil and gas marketing sales............          --          47,725          --       (21,201)        26,524
  Interest and other.....................         (28)            142      20,035       (19,925)           224
                                             --------       ---------     -------      --------      ---------
          Total Revenues.................      41,775          55,679      20,035       (40,500)        76,989
                                             --------       ---------     -------      --------      ---------
Costs and Expenses:
  Production expenses and taxes..........       6,901           2,537          --            --          9,438
  Oil and gas marketing expenses.........          --          46,836          --       (20,575)        26,261
  Impairment of oil and gas properties...      83,500         166,500          --            --        250,000
  Oil and gas depreciation, depletion and
     amortization........................      26,121           5,221          --            --         31,342
  Other depreciation and amortization....         806              77         497            --          1,380
  General and administrative.............       3,755             593          32            --          4,380
  Interest...............................      17,482           1,741      11,390       (19,925)        10,688
                                             --------       ---------     -------      --------      ---------
          Total Costs & Expenses.........     138,565         223,505      11,919       (40,500)       333,489
                                             --------       ---------     -------      --------      ---------
Income (Loss) Before Income Taxes and
  Extraordinary Item.....................     (96,790)       (167,826)      8,116            --       (256,500)
Income Tax Expense (Benefit).............          --              --          --            --             --
                                             --------       ---------     -------      --------      ---------
Net Income (Loss) Before Extraordinary
  Item...................................     (96,790)       (167,826)      8,116            --       (256,500)
                                             --------       ---------     -------      --------      ---------
Extraordinary Item:
  Loss on early extinguishment of debt,
     net of applicable income tax........          --              --          --            --             --
                                             --------       ---------     -------      --------      ---------
          Net Income (Loss)..............    $(96,790)      $(167,826)    $ 8,116      $     --      $(256,500)
                                             ========       =========     =======      ========      =========
FOR THE THREE MONTHS ENDED
  MARCH 31, 1997
Revenues:
  Oil and gas sales......................    $ 56,795       $      --     $    --      $    604      $  57,399
  Gas marketing sales....................          --          45,568          --       (23,158)        22,410
  Interest and other.....................         177             197       2,903            --          3,277
                                             --------       ---------     -------      --------      ---------
          Total revenues.................      56,972          45,765       2,903       (22,554)        83,086
                                             --------       ---------     -------      --------      ---------
Costs and Expenses:
  Production expenses and taxes..........       4,308              --          --            --          4,308
  Gas marketing expenses.................          --          44,301          --       (22,554)        21,747
  Oil and gas depreciation...............      24,663              --          --            --         24,663
  Other depreciation and amortization....         508              20         345            --            873
  General and administrative.............       1,757             235         489            --          2,481
  Interest...............................         172              --       3,482            --          3,654
                                             --------       ---------     -------      --------      ---------
          Total Costs & Expenses.........      31,408          44,556       4,316       (22,554)        57,726
                                             --------       ---------     -------      --------      ---------
Income (Loss) Before Income Tax..........      25,564           1,209      (1,413)           --         25,360
Income Tax Expense.......................       9,330             441        (516)           --          9,255
                                             --------       ---------     -------      --------      ---------
          Net Income (Loss) Before
            Extraordinary Item...........      16,234             768        (897)           --         16,105
                                             --------       ---------     -------      --------      ---------
Extraordinary Item:
  Loss on early extinguishment of debt,
     net of applicable income tax........        (179)             --           2            --           (177)
                                             --------       ---------     -------      --------      ---------
          Net Income (Loss)..............    $ 16,055       $     768     $  (895)     $     --      $  15,928
                                             ========       =========     =======      ========      =========
</TABLE>
 
                                      F-49
<PAGE>   151
 
                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                                ($ IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                        GUARANTOR     NON-GUARANTOR    COMPANY
                                       SUBSIDIARIES   SUBSIDIARIES    (PARENT)    ELIMINATIONS   CONSOLIDATED
<S>                                    <C>            <C>             <C>         <C>            <C>
FOR THE THREE MONTHS ENDED
  MARCH 31, 1998
Cash Flows From Operating
  Activities:........................   $(128,409)      $ 161,162     $  16,432     $     --      $  49,185
Cash Flows From Investing Activities:
  Oil and gas properties.............    (114,698)          4,938            --           --       (109,760)
  Proceeds from sale of assets.......         220              --            --           --            220
  Investment in service operations...          --         (39,242)           --           --        (39,242)
  Other additions....................     (19,538)          2,313          (459)          --        (17,684)
                                        ---------       ---------     ---------     --------      ---------
                                         (134,016)        (31,991)         (459)          --       (166,466)
                                        ---------       ---------     ---------     --------      ---------
Cash Flows From Financing Activities:
  Proceeds from borrowings...........          --              --       145,000           --        145,000
  Payments on borrowings.............          --              --      (120,000)          --       (120,000)
  Cash received from exercise of
     stock options...................          --              --            --           --             --
  Cash received from issuance of
     common stock....................          --              --            61           --             61
  Other financing....................          --             305            --           --            305
  Intercompany advances, net.........     245,547        (134,327)     (111,220)          --             --
                                        ---------       ---------     ---------     --------      ---------
                                          245,547        (134,022)      (86,159)          --         25,366
                                        ---------       ---------     ---------     --------      ---------
Net increase (decrease) in cash......     (16,878)         (4,851)      (70,186)          --        (91,915)
Cash, beginning of period............        (589)         13,999       110,450           --        123,860
                                        ---------       ---------     ---------     --------      ---------
Cash, end of period..................   $ (17,467)      $   9,148     $  40,264     $     --      $  31,945
                                        =========       =========     =========     ========      =========
FOR THE THREE MONTHS ENDED
  MARCH 31, 1997
Cash Flows From Operating
  Activities:........................   $  70,762       $   2,085     $ (33,161)    $     --      $  39,686
Cash Flows From Investing Activities:
  Oil and gas properties.............    (158,280)             35            --           --       (158,245)
  Proceeds from sales................       2,850              --            --           --          2,850
  Investment in gas marketing
     company.........................          --              --            --           --             --
  Other additions....................        (859)             --        (3,853)          --         (4,712)
                                        ---------       ---------     ---------     --------      ---------
                                         (156,289)             35        (3,853)          --       (160,107)
                                        ---------       ---------     ---------     --------      ---------
Cash Flows From Financing Activities:
  Proceeds from long-term
     borrowings......................          --              --       292,626           --        292,626
  Payments on borrowings.............     (67,569)          1,710        53,195           --        (12,664)
  Cash received from exercise of
     stock options...................          --              --           625           --            625
  Other financing....................          --              --           (95)          --            (95)
  Intercompany advances, net.........     134,385          (3,350)     (131,035)          --             --
                                        ---------       ---------     ---------     --------      ---------
                                           66,816          (1,640)      215,316           --        280,492
                                        ---------       ---------     ---------     --------      ---------
Net increase (decrease) in cash and
  cash equivalents...................     (18,711)            480       178,302           --        160,071
Cash, beginning of period............       4,782           6,182       129,775           --        140,739
                                        ---------       ---------     ---------     --------      ---------
Cash, end of period..................   $ (13,929)      $   6,662     $ 308,077     $     --      $ 300,810
                                        =========       =========     =========     ========      =========
</TABLE>
 
                                      F-50
<PAGE>   152
 
             ======================================================
 
     ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
 
                        By Registered or Certified Mail
 
                    UNITED STATES TRUST COMPANY OF NEW YORK
                         P.O. BOX 844 -- COOPER STATION
                            NEW YORK, NEW YORK 10276
                      ATTENTION: CORPORATE TRUST SERVICES
 
                                    By Hand
 
                    UNITED STATES TRUST COMPANY OF NEW YORK
                           111 BROADWAY, LOWER LEVEL
                            NEW YORK, NEW YORK 10006
                      ATTENTION: CORPORATE TRUST SERVICES
 
                              By Overnight Courier
 
                    UNITED STATES TRUST COMPANY OF NEW YORK
                           770 BROADWAY -- 13TH FLOOR
                            NEW YORK, NEW YORK 10003
                ATTENTION: CORPORATE TRUST OPERATIONS DEPARTMENT
 
                                  By Facsimile
 
                    UNITED STATES TRUST COMPANY OF NEW YORK
                                 (212) 420-6152
                      CONFIRM BY TELEPHONE: (800) 548-6565
 
(Originals of all documents submitted by facsimile should be sent promptly by
hand, overnight delivery, or registered or certified mail.)
     NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL
NOR BOTH TOGETHER CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH THE PROSPECTUS RELATES OR
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR THE LETTER OF TRANSMITTAL OR BOTH TOGETHER NOR
ANY EXCHANGE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREIN OR THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
 
             ======================================================
             ======================================================
 
                                  $500,000,000
                             9 5/8% SERIES B SENIOR
                                 NOTES DUE 2005
 
                               CHESAPEAKE ENERGY
                                  CORPORATION
                            ------------------------
                                   PROSPECTUS
                            ------------------------
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                        PAGE
<S>                                     <C>
Available Information.................     i
Incorporation of Certain Documents by
  Reference...........................     i
Forward-Looking Statements............    ii
Prospectus Summary....................     1
Risk Factors..........................    14
The Company...........................    22
The Exchange Offer....................    27
Use of Proceeds.......................    34
Capitalization........................    35
Selected Consolidated Financial
  Data................................    36
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.......................    37
Management............................    51
Description of Other Indebtedness and
  Preferred Stock.....................    55
Description of Senior Notes...........    62
Exchange Offer; Registration Rights;
  Liquidated Damages..................    85
Certain United States Tax
  Consequences........................    87
Plan of Distribution..................    91
Legal Matters.........................    92
Experts...............................    92
Glossary..............................    93
Index to Financial Statements.........   F-1
</TABLE>
 
                            ------------------------
 
                                           , 1998
 
             ======================================================
<PAGE>   153
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     As permitted by the Oklahoma General Corporation Act under which the
Company is incorporated, the Company's Certificate of Incorporation provides for
indemnification of each of the Company's officers and directors against (a)
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with any
action, suit or proceeding brought by reason of his being or having been a
director, officer, employee or agent of the Company, or of any other
corporation, partnership, joint venture, or other enterprise at the request of
the Company, other than an action by or in the right of the Company, provided
that he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interest of the Company, and with respect to any
criminal action, he had no reasonable cause to believe that his conduct was
unlawful and (b) expenses, including attorneys' fees, actually and reasonably
incurred by him in connection with the defense or settlement of any action or
suit by or in the right of the Company brought by reason of his being or having
been a director, officer, employee or agent of the Company, or any other
corporation, partnership, joint venture, or other enterprise at the request of
the Company, provided that he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of the Company, except
that no indemnification shall be made in respect of any claim, issue or matter
as to which he shall have been adjudged liable to the Company, unless and only
to the extent that the court in which such action was decided has determined
that the person is fairly and reasonably entitled to indemnity for such expenses
which the court deems proper. The Company's bylaws provide for similar
indemnification. These provisions may be sufficiently broad to indemnify such
persons for liabilities arising under the Securities Act of 1933, as amended.
 
     The Company has entered into indemnity agreements with each of its
directors and executive officers. Under each indemnity agreement, the Company
will pay on behalf of the indemnitee, and his executors, administrators and
heirs, any amount which he is or becomes legally obligated to pay because of (i)
any claim or claims from time to time threatened or made against him by any
person because of any act or omission or neglect or breach of duty, including
any actual or alleged error or misstatement or misleading statement, which he
commits or suffers while acting in his capacity as a director and/or officer of
the Company or an affiliate or (ii) being a party, or being threatened to be
made a party, to any threatened, pending or contemplated action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was an officer, director, employee or agent of the
Company or an affiliate or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. The payments which the Company will be
obligated to make thereunder shall include, inter alia, damages, charges,
judgments, fines, penalties, settlements and costs, cost of investigation and
cost of defense of legal, equitable or criminal actions, claims or proceedings
and appeals therefrom, and costs of attachment, supersedeas, bail, surety or
other bonds. The Company also provides liability insurance for each of its
directors and executive officers.
 
                                      II-1
<PAGE>   154
 
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     (a) Exhibits
 
<TABLE>
<CAPTION>
    EXHIBIT NUMBERS                              DESCRIPTION
<C>                      <S>
            3.1          -- Registrant's Certificate of Incorporation. Incorporated
                            herein by reference to Exhibit 3.1 to Registrant's
                            quarterly report on Form 10-Q for the quarter ended March
                            31, 1998.
            3.2          -- Registrant's Bylaws. Incorporated herein by reference to
                            Exhibit 3.2 to Registrant's registration statement on
                            Form 8-B (No. 001-137200).
            4.1          -- Indenture dated as of March 15, 1997 among the
                            Registrant, as issuer, its subsidiaries signatory
                            thereto, as Subsidiary Guarantors, and United States
                            Trust Company of New York, as Trustee, with respect to
                            7 7/8% Senior Notes due 2004. Incorporated herein by
                            reference to Exhibit 4.1 to Registrant's registration
                            statement on Form S-4 (No. 333-24995). First Supplemental
                            Indenture dated December 17, 1997 and Second Supplemental
                            Indenture dated February 16, 1998. Incorporated herein by
                            reference to Exhibit 4.1.1 to Registrant's transition
                            report on Form 10-K for the six months ended December 31,
                            1997. Second [Third] Supplemental Indenture dated April
                            22, 1998. Incorporated herein by reference to Exhibit
                            4.1.1 to Registrant's registration statement on Form S-3
                            (No. 333-57235).
            4.2          -- Indenture dated as of March 15, 1997 among the
                            Registrant, as issuer, its subsidiaries signatory
                            thereto, as Subsidiary Guarantors, and United States
                            Trust Company of New York, as Trustee, with respect to
                            8 1/2% Senior Notes due 2012. Incorporated herein by
                            reference to Exhibit 4.1.3 to Registrant's registration
                            statement on Form S-4 (No. 333-24995). First Supplemental
                            Indenture dated December 17, 1997 an Second Supplemental
                            Indenture dated February 16, 1998. Incorporated herein by
                            reference to Exhibit 4.2.1 to Registrant's transition
                            report on Form 10-K for the six months ended December 31,
                            1997. Second [Third] Supplemental Indenture dated April
                            22, 1998. Incorporated herein by reference to Exhibit
                            4.2.1 to Registrant's registration statement on Form S-3
                            (No. 333-57235).
            4.3          -- Indenture dated as of April 1, 1998 among the Registrant,
                            as issuer, its subsidiaries signatory thereto, as
                            Subsidiary Guarantors, and United States Trust Company of
                            New York, as Trustee, with respect to 9 5/8% Senior Notes
                            due 2005. Incorporated herein by reference to Exhibit 4.3
                            to Registrant's quarterly report on Form 10-Q for the
                            quarter ended March 31, 1998.
            4.3.1        -- Form of 9 5/8% Senior Notes due 2005 (included in Exhibit
                            4.3 as Exhibit A)
            4.4          -- Indenture dated as of April 1, 1996 among the Registrant,
                            its subsidiaries signatory thereto, as Subsidiary
                            Guarantors, and United States Trust Company of New York,
                            as Trustee, with respect to 9 1/8% Senior Notes due 2006.
                            Incorporated herein by reference to Exhibit 4.6 to
                            Registrant's registration statement on Form S-3 (No.
                            333-1588). First Supplemental Indenture dated December
                            30, 1996 and Second Supplemental Indenture dated December
                            17, 1997. Incorporated herein by reference to Exhibit
                            4.4.1 to Registrant's transition report on Form 10-K for
                            the six months ended December 31, 1997. Third
                            Supplemental Indenture dated April 22, 1998. Incorporated
                            herein by reference to Exhibit 4.4.1 to Registrant's
                            registration statement on Form S-3 (No. 333-57235).
            4.5          -- Agreement to furnish copies of unfiled long-term debt
                            instruments. Incorporated herein by reference to
                            Registrant's transition report on Form 10-K for the six
                            months ended December 31, 1998.
</TABLE>
 
                                      II-2
<PAGE>   155
 
<TABLE>
<CAPTION>
    EXHIBIT NUMBERS                              DESCRIPTION
<C>                      <S>
            4.6          -- Registration Rights Agreement as of April 22, 1998 among
                            the Registrant, its subsidiaries signatory thereto and
                            Donaldson, Lufkin & Jenrette Securities Corporation,
                            Bear, Stearns & Co. Inc., Lehman Brothers Inc., J.P.
                            Morgan Securities Inc. and Morgan Stanley & Co.
                            Incorporated, with respect to 9 5/8% Senior Notes.
                            Incorporated herein by reference to Exhibit 4.12 to
                            Registrant's quarterly report on Form 10-Q for the
                            quarter ended March 31, 1998.
            4.7          -- Registration Rights Agreement as of April 22, 1998 among
                            the Registrant and Donaldson, Lufkin & Jenrette
                            Securities Corporation, Morgan Stanley & Co.
                            Incorporated, Bear, Stearns & Co. Inc., Lehman Brothers
                            Inc. and J.P. Morgan Securities, Inc., with respect to 7%
                            Cumulative Convertible Preferred Stock. Incorporated
                            herein by reference to Exhibit 4.11 to Registrant's
                            quarterly report on Form 10-Q for the quarter ended March
                            31, 1998.
            4.8          -- Stock Registration Agreement dated May 21, 1992 between
                            the Registrant and various lenders, as amended by First
                            Amendment thereto dated May 26, 1992. Incorporated herein
                            by reference to Exhibits 10.26.1 and 10.26.2 to
                            Registrant's registration statement on Form S-1 (No.
                            33-55600).
            4.9          -- Registration Rights Agreement dated as of March 10, 1998
                            between the Registrant and certain former shareholders of
                            Hugoton Energy Corporation. Incorporated herein by
                            reference to Exhibit 4.11 to Registrant's registration
                            statement on Form S-4 (No. 333-48735).
            4.10         -- Registration Rights Agreement dated as of December 16,
                            1997 between the Registrant and AnSon Partners Limited
                            Partnership. Incorporated herein by reference to Exhibit
                            4.12 to Registrant's registration statement on Form S-4
                            (No. 333-48735).
            4.11         -- Registration Rights Agreement dated as of October 22,
                            1997 between the Registrant and Charles E. Davidson, as
                            amended by Amendment No. 1 thereto dated December 23,
                            1997. Incorporated herein by reference to Exhibits 4.9
                            and 4.10 to Registrant's registration statement on Form
                            S-4 (No. 333-48735).
            5**          -- Opinion of McAfee & Taft A Professional Corporation
           12*           -- Statement Re Computation of Ratios
           23.1*         -- Consent of Coopers & Lybrand L.L.P.
           23.2*         -- Consent of Price Waterhouse LLP
           23.3*         -- Consent of Ernst & Young LLP
           23.4*         -- Consent of Williamson Petroleum Consultants, Inc.
           23.5*         -- Consent of Netherland, Sewell & Associates, Inc.
           23.6*         -- Consent of Porter Engineering Associates
           23.7*         -- Consent of McAfee & Taft A Professional Corporation
                            (included as part of its opinion filed as Exhibit 5)
           24*           -- Powers of Attorney
           25*           -- Statement of Eligibility of Trustee on Form T-1 with
                            respect to 9 5/8% Senior Notes due 2005
           99.1*         -- Form of Letter of Transmittal
           99.2*         -- Form of Notice of Guaranteed Delivery
           99.3*         -- Letter to Brokers, etc.
</TABLE>
 
                                      II-3
<PAGE>   156
 
<TABLE>
<CAPTION>
    EXHIBIT NUMBERS                              DESCRIPTION
<C>                      <S>
           99.4*         -- Letter from Brokers, etc. to Clients and Instruction to
                            Registered Holder from Beneficial Owner
           99.5*         -- Guidelines for Certification of Taxpayer Identification
                            Number on Substitute Form W-9
</TABLE>
 
---------------
 
 * Filed herewith.
 
** To be filed by Amendment.
 
     (b) Financial Statement Schedules
 
     None
 
ITEM 22. UNDERTAKINGS
 
     The undersigned Registrant hereby undertakes:
 
     (1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
 
          (i) To include any prospectus required by Section 10(a)(3) of the
     Securities Act of 1933;
 
          (ii) To reflect in the prospectus any facts or events arising after
     the effective date of the Registration Statement (or the most recent
     post-effective amendment thereof) which, individually or in the aggregate,
     represent a fundamental change in the information set forth in the
     Registration Statement;
 
          (iii) To include any material information with respect to the plan of
     distribution not previously disclosed in the Registration Statement or any
     material change to such information in the Registration Statement.
 
     Provided, however, that paragraphs (1)(i) and (1)(ii) above do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
 
     (2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
 
     (3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
 
     The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
 
     The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
 
                                      II-4
<PAGE>   157
 
     The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
 
     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registration pursuant to the provisions described under Item 20, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
 
                                      II-5
<PAGE>   158
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Oklahoma City, State of
Oklahoma, on the 18th day of June, 1998.
 
                                            CHESAPEAKE ENERGY CORPORATION
 
                                            By:   /s/ AUBREY K. MCCLENDON
                                              ----------------------------------
                                                     Aubrey K. McClendon,
                                               Chairman of the Board and Chief
                                                       Executive Officer
 
     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on June 18, 1998.
 
<TABLE>
<C>                                                    <S>
               /s/ AUBREY K. MCCLENDON                 Chairman of the Board and Chief Executive
-----------------------------------------------------    Officer (Principal Executive Officer)
                 Aubrey K. McClendon
 
                   /s/ TOM L. WARD                     President, Chief Operating Officer and
-----------------------------------------------------    Director
                     Tom L. Ward
 
                /s/ MARCUS C. ROWLAND                  Executive Vice President and Chief Financial
-----------------------------------------------------    Officer (Principal Financial Officer)
                  Marcus C. Rowland
 
                /s/ RONALD A. LEFAIVE                  Senior Vice President -- Accounting,
-----------------------------------------------------    Controller and Chief Accounting Officer
                  Ronald A. Lefaive                      (Principal Accounting Officer)
 
                /s/ E.F. HEIZER, JR.                   Director
-----------------------------------------------------
                  E.F. Heizer, Jr.
 
                 /s/ BREENE M. KERR                    Director
-----------------------------------------------------
                   Breene M. Kerr
 
                 /s/ SHANNON T. SELF                   Director
-----------------------------------------------------
                   Shannon T. Self
 
             /s/ FREDERICK B. WHITTEMORE               Director
-----------------------------------------------------
               Frederick B. Whittemore
 
                /s/ WALTER C. WILSON                   Director
-----------------------------------------------------
                  Walter C. Wilson
</TABLE>
 
                                      II-6
<PAGE>   159
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the registrants
listed below have duly caused this registration statement to be signed on their
behalf by the undersigned, thereunto duly authorized, in the City of Oklahoma
City, State of Oklahoma, on the 18th day of June, 1998.
 
                                            CHESAPEAKE OPERATING, INC.
 
                                            By    /s/ MARCUS C. ROWLAND
                                             -----------------------------------
                                                     Marcus C. Rowland,
                                                  Executive Vice President
 
                                            THE AMES COMPANY, INC.
                                            CHESAPEAKE ACQUISITION
                                             CORPORATION
                                            CHESAPEAKE CANADA CORPORATION
                                            CHESAPEAKE ENERGY LOUISIANA
                                             CORPORATION
                                            CHESAPEAKE GOTHIC CORP.
                                            CHESAPEAKE MID-CONTINENT CORP.
                                            SUNOMA ENERGY CORP.
 
                                            For each of the above:
 
                                            By    /s/ MARCUS C. ROWLAND
                                             -----------------------------------
                                                      Marcus C. Rowland
                                                       Vice President
 
                                            CHESAPEAKE EXPLORATION LIMITED
                                             PARTNERSHIP
                                            CHESAPEAKE LOUISIANA, L.P.
                                            CHESAPEAKE PANHANDLE LIMITED
                                             PARTNERSHIP
 
                                            For each of the above:
 
                                            By  CHESAPEAKE OPERATING, INC.
                                              General Partner
 
                                            By    /s/ MARCUS C. ROWLAND
                                             -----------------------------------
                                                      Marcus C. Rowland
                                                  Executive Vice President
 
                                      II-7
<PAGE>   160
 
     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on June 18, 1998 with respect to the following registrants:
 
                                            THE AMES COMPANY, INC.
                                            CHESAPEAKE ACQUISITION
                                             CORPORATION
                                            CHESAPEAKE GOTHIC CORP.
                                            CHESAPEAKE MID-CONTINENT CORP.
 
                                                 /s/ AUBREY K. MCCLENDON
                                            ------------------------------------
                                                    Aubrey K. McClendon,
                                                   President and Director
                                               (Principal Executive Officer)
 
                                                     /s/ TOM L. WARD
                                            ------------------------------------
                                                        Tom L. Ward,
                                                Vice President and Director
 
                                                  /s/ MARCUS C. ROWLAND
                                            ------------------------------------
                                                     Marcus C. Rowland,
                                                       Vice President
                                            (Principal Financial and Accounting
                                                          Officer)
 
     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on June 18, 1998 with respect to CHESAPEAKE CANADA
CORPORATION and SUNOMA ENERGY CORP.:
 
                                                 /s/ AUBREY K. MCCLENDON
                                            ------------------------------------
                                                    Aubrey K. McClendon,
                                                Chairman of the Board, Chief
                                               Executive Officer and Director
                                               (Principal Executive Officer)
 
                                                     /s/ TOM L. WARD
                                            ------------------------------------
                                                        Tom L. Ward,
                                               President and Chief Operating
                                                          Officer
 
                                                  /s/ MARCUS C. ROWLAND
                                            ------------------------------------
                                                     Marcus C. Rowland,
                                              Vice President, Chief Financial
                                                   Officer and Treasurer
                                            (Principal Financial and Accounting
                                                          Officer)
 
                                                   /s/ BROCK W. GIBSON
                                            ------------------------------------
                                                      Brock W. Gibson,
                                                          Director
 
                                      II-8
<PAGE>   161
 
     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on June 18, 1998 with respect to CHESAPEAKE ENERGY
LOUISIANA CORPORATION:
 
                                                 /s/ AUBREY K. MCCLENDON
                                            ------------------------------------
                                                    Aubrey K. McClendon,
                                                Chairman of the Board, Chief
                                               Executive Officer and Director
                                               (Principal Executive Officer)
 
                                                     /s/ TOM L. WARD
                                            ------------------------------------
                                                        Tom L. Ward,
                                               President and Chief Operating
                                                          Officer
 
                                                  /s/ MARCUS C. ROWLAND
                                            ------------------------------------
                                                     Marcus C. Rowland,
                                             Vice President and Chief Financial
                                              Officer (Principal Financial and
                                                    Accounting Officer)
 
     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on June 18, 1998 with respect to CHESAPEAKE OPERATING,
INC.:
 
                                                 /s/ AUBREY K. MCCLENDON
                                            ------------------------------------
                                                    Aubrey K. McClendon,
                                                Chairman of the Board, Chief
                                                   Executive Officer and
                                               Director (Principal Executive
                                                          Officer)
 
                                                     /s/ TOM L. WARD
                                            ------------------------------------
                                                        Tom L. Ward,
                                             President, Chief Operating Officer
                                                        and Director
 
                                                  /s/ MARCUS C. ROWLAND
                                            ------------------------------------
                                                     Marcus C. Rowland,
                                             Executive Vice President and Chief
                                                     Financial Officer
                                            (Principal Financial and Accounting
                                                          officer)
 
                                      II-9
<PAGE>   162
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
    EXHIBIT NUMBERS                              DESCRIPTION
<C>                      <S>
             3.1         -- Registrant's Certificate of Incorporation. Incorporated
                            herein by reference to Exhibit 3.1 to Registrant's
                            quarterly report on Form 10-Q for the quarter ended March
                            31, 1998.
             3.2         -- Registrant's Bylaws. Incorporated herein by reference to
                            Exhibit 3.2 to Registrant's registration statement on
                            Form 8-B (No. 001-137200).
             4.1         -- Indenture dated as of March 15, 1997 among the
                            Registrant, as issuer, its subsidiaries signatory
                            thereto, as Subsidiary Guarantors, and United States
                            Trust Company of New York, as Trustee, with respect to
                            7 7/8% Senior Notes due 2004. Incorporated herein by
                            reference to Exhibit 4.1 to Registrant's registration
                            statement on Form S-4 (No. 333-24995). First Supplemental
                            Indenture dated December 17, 1997 and Second Supplemental
                            Indenture dated February 16, 1998. Incorporated herein by
                            reference to Exhibit 4.1.1 to Registrant's transition
                            report on Form 10-K for the six months ended December 31,
                            1997. Second [Third] Supplemental Indenture dated April
                            22, 1998. Incorporated herein by reference to Exhibit
                            4.1.1 to Registrant's registration statement on Form S-3
                            (No. 333-57235).
             4.2         -- Indenture dated as of March 15, 1997 among the
                            Registrant, as issuer, its subsidiaries signatory
                            thereto, as Subsidiary Guarantors, and United States
                            Trust Company of New York, as Trustee, with respect to
                            8 1/2% Senior Notes due 2012. Incorporated herein by
                            reference to Exhibit 4.1.3 to Registrant's registration
                            statement on Form S-4 (No. 333-24995). First Supplemental
                            Indenture dated December 17, 1997 an Second Supplemental
                            Indenture dated February 16, 1998. Incorporated herein by
                            reference to Exhibit 4.2.1 to Registrant's transition
                            report on Form 10-K for the six months ended December 31,
                            1997. Second [Third] Supplemental Indenture dated April
                            22, 1998. Incorporated herein by reference to Exhibit
                            4.2.1 to Registrant's registration statement on Form S-3
                            (No. 333-57235).
             4.3         -- Indenture dated as of April 1, 1998 among the Registrant,
                            as issuer, its subsidiaries signatory thereto, as
                            Subsidiary Guarantors, and United States Trust Company of
                            New York, as Trustee, with respect to 9 5/8% Senior Notes
                            due 2005. Incorporated herein by reference to Exhibit 4.3
                            to Registrant's quarterly report on Form 10-Q for the
                            quarter ended March 31, 1998.
             4.3.1       -- Form of 9 5/8% Senior Notes due 2005 (included in Exhibit
                            4.3 as Exhibit A)
             4.4         -- Indenture dated as of April 1, 1996 among the Registrant,
                            its subsidiaries signatory thereto, as Subsidiary
                            Guarantors, and United States Trust Company of New York,
                            as Trustee, with respect to 9 1/8% Senior Notes due 2006.
                            Incorporated herein by reference to Exhibit 4.6 to
                            Registrant's registration statement on Form S-3 (No.
                            333-1588). First Supplemental Indenture dated December
                            30, 1996 and Second Supplemental Indenture dated December
                            17, 1997. Incorporated herein by reference to Exhibit
                            4.4.1 to Registrant's transition report on Form 10-K for
                            the six months ended December 31, 1997. Third
                            Supplemental Indenture dated April 22, 1998. Incorporated
                            herein by reference to Exhibit 4.4.1 to Registrant's
                            registration statement on Form S-3 (No. 333-57235).
             4.5         -- Agreement to furnish copies of unfiled long-term debt
                            instruments. Incorporated herein by reference to
                            Registrant's transition report on Form 10-K for the six
                            months ended December 31, 1998.
</TABLE>
<PAGE>   163
 
<TABLE>
<CAPTION>
    EXHIBIT NUMBERS                              DESCRIPTION
<C>                      <S>
             4.6         -- Registration Rights Agreement as of April 22, 1998 among
                            the Registrant, its subsidiaries signatory thereto and
                            Donaldson, Lufkin & Jenrette Securities Corporation,
                            Bear, Stearns & Co. Inc., Lehman Brothers Inc., J.P.
                            Morgan Securities Inc. and Morgan Stanley & Co.
                            Incorporated, with respect to 9 5/8% Senior Notes.
                            Incorporated herein by reference to Exhibit 4.12 to
                            Registrant's quarterly report on Form 10-Q for the
                            quarter ended March 31, 1998.
             4.7         -- Registration Rights Agreement as of April 22, 1998 among
                            the Registrant and Donaldson, Lufkin & Jenrette
                            Securities Corporation, Morgan Stanley & Co.
                            Incorporated, Bear, Stearns & Co. Inc., Lehman Brothers
                            Inc. and J.P. Morgan Securities, Inc., with respect to 7%
                            Cumulative Convertible Preferred Stock. Incorporated
                            herein by reference to Exhibit 4.11 to Registrant's
                            quarterly report on Form 10-Q for the quarter ended March
                            31, 1998.
             4.8         -- Stock Registration Agreement dated May 21, 1992 between
                            the Registrant and various lenders, as amended by First
                            Amendment thereto dated May 26, 1992. Incorporated herein
                            by reference to Exhibits 10.26.1 and 10.26.2 to
                            Registrant's registration statement on Form S-1 (No.
                            33-55600).
             4.9         -- Registration Rights Agreement dated as of March 10, 1998
                            between the Registrant and certain former shareholders of
                            Hugoton Energy Corporation. Incorporated herein by
                            reference to Exhibit 4.11 to Registrant's registration
                            statement on Form S-4 (No. 333-48735).
             4.10        -- Registration Rights Agreement dated as of December 16,
                            1997 between the Registrant and AnSon Partners Limited
                            Partnership. Incorporated herein by reference to Exhibit
                            4.12 to Registrant's registration statement on Form S-4
                            (No. 333-48735).
             4.11        -- Registration Rights Agreement dated as of October 22,
                            1997 between the Registrant and Charles E. Davidson, as
                            amended by Amendment No. 1 thereto dated December 23,
                            1997. Incorporated herein by reference to Exhibits 4.9
                            and 4.10 to Registrant's registration statement on Form
                            S-4 (No. 333-48735).
             5**         -- Opinion of McAfee & Taft A Professional Corporation
            12*          -- Statement Re Computation of Ratios
            23.1*        -- Consent of Coopers & Lybrand L.L.P.
            23.2*        -- Consent of Price Waterhouse LLP
            23.3*        -- Consent of Ernst & Young LLP
            23.4*        -- Consent of Williamson Petroleum Consultants, Inc.
            23.5*        -- Consent of Netherland, Sewell & Associates, Inc.
            23.6*        -- Consent of Porter Engineering Associates
            23.7*        -- Consent of McAfee & Taft A Professional Corporation
                            (included as part of its opinion filed as Exhibit 5)
            24*          -- Powers of Attorney
            25*          -- Statement of Eligibility of Trustee on Form T-1 with
                            respect to 9 5/8% Senior Notes due 2005
            99.1*        -- Form of Letter of Transmittal
            99.2*        -- Form of Notice of Guaranteed Delivery
            99.3*        -- Letter to Brokers, etc.
</TABLE>
<PAGE>   164
 
<TABLE>
<CAPTION>
    EXHIBIT NUMBERS                              DESCRIPTION
<C>                      <S>
            99.4*        -- Letter from Brokers, etc. to Clients and Instruction to
                            Registered Holder from Beneficial Owner
            99.5*        -- Guidelines for Certification of Taxpayer Identification
                            Number on Substitute Form W-9
</TABLE>
 
---------------
 
 * Filed herewith.
 
** To be filed by amendment.