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process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates made by different engineers often vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimates, and such revisions may be material. Accordingly, reserve estimates are often different from the actual quantities of oil and gas that are ultimately recovered. Furthermore, the estimated future net revenue from proved reserves and the present value thereof are based upon certain assumptions, including prices, future production levels and cost, that may not prove correct. Predictions about prices and future production levels are subject to great uncertainty, and the foregoing uncertainties are 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 the Transition Period and fiscal 1997, revisions to the Company's proved reserves contributed to a $110 million and a $236 million impairment of the Company's oil and gas properties, respectively. The uncertainties inherent in estimating quantities of proved reserves can also adversely impact acquisitions of proved reserves, since reserve estimates are used to arrive at acquisition value. See "Results of Operations - Impairment of Oil and Gas Properties" in Item 7. See Item 1 and Note 11 of Notes to Consolidated Financial Statements included in Item 8 for a description of the Company's primary and other operating areas, production and other information regarding its oil and gas properties.

ITEM 3. LEGAL PROCEEDINGS The Company is subject to ordinary routine litigation incidental to its business. In addition, the following matters are pending.

Securities Litigation. On January 13, 1998, a consolidated class action complaint styled In re Chesapeake Energy Corporation Securities Litigation was filed in the U.S. District Court for the Western District of Oklahoma. It consolidated twelve pending purported class actions filed in August and September 1997. The action is brought on behalf of purchasers of the Company's common stock and common stock options between January 25, 1996 and June 27, 1997. The defendants are the Company and the following officers and directors: Aubrey K. McClendon, Tom L. Ward, Marcus C. Rowland, Shannon T. Self, Walter C. Wilson, Henry J. Hood, Steven C. Dixon, J. Mark Lester and Ronald A. Lefaive. The complaint alleges violations of Sections lO(b) and 20(a) of the Securities Exchange Act of 1934 and Rule lOb-5 thereunder. The plaintiffs assert that the defendants made material misrepresentations and failed to disclose material facts about the success of the Company's exploration and drilling activities in the Louisiana Trend. The complaint alleges the lack of disclosure artificially inflated the price of the Company's common stock during the period beginning January 25, 1996 and ending on 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 the Company's 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.

Bayard Drilling Technologies, Inc. The following purported class actions alleging violations of Sections 11, 12(a) (2) and 15 of the Securities Act of 1933 and (with respect to the cases filed in state court) Section 408 of 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 on November 4, 1997. Michael W. Kahn v. Bayard, et al. filed in the District Court for Oklahoma County, Oklahoma on January 14, 1998. 21

Profile for Chesapeake Energy

Transition Report 1997  

Transition Report 1997