10-Q 1 form10q630.txt UNITED STATES SECURITIES AND EXCHANGE COMMISION Washington, D.C. 20549 Form 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2001 Commission File Number 333-42641 RAM ENERGY, INC. LOGO RAM Energy, Inc. (Exact name of registrant as specified in its charter.) Delaware 52-1535102 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5100 East Skelly Drive, Suite 650 Tulsa, Oklahoma 74135 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (918) 663-2800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: 2,727,000 shares of common stock issued and outstanding FORM 10-Q TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION........................................... Consolidated Balance Sheets - December 31, 2000 and June 30, 2001 (unaudited)................................ Consolidated Statements of Operations - Three months and six months ended June 30, 2000 and 2001 (unaudited)...... Consolidated Statements of Cash Flows - Three months and six months ended June 30, 2000 and 2001 (unaudited)...... Notes to Consolidated Financial Statements (unaudited).......... Management's Discussion and Analysis of Financial Condition and Results of Operations...................... PART II. OTHER INFORMATION............................................... Other Information............................................... Exhibits and Reports on Form 8-K................................ SIGNATURES .............................................................. PART I. FINANCIAL INFORMATION RAM Energy, Inc. Consolidated Balance Sheets (Dollars in Thousands)

See accompanying notes. RAM Energy, Inc. Consolidated Statements of Operations (Unaudited) (Dollars in Thousands, Except for Per Share Amounts)

See accompanying notes. RAM Energy, Inc. Consolidated Statements of Cash Flows (Unaudited) (Dollars in Thousands)

See accompanying notes. RAM Energy, Inc. Notes to Unaudited Consolidated Financial Statements June 30, 2000 and 2001 1. Summary of Significant Accounting Policies, Organization, and Basis of Financial Statements The accompanying unaudited consolidated financial statements present the financial position at June 30, 2001 and the results of operations and cash flows of RAM Energy, Inc. (the Company) for the three-month and six-month periods ended June 30, 2000 and 2001. These financial statements include all adjustments, consisting of normal and recurring adjustments, which, in the opinion of management, were necessary for a fair presentation of the financial position and the results of operations for the indicated periods. The results of operations for the three and six months ended June 30, 2001, are not necessarily indicative of the results to be expected for the full year ending December 31, 2001. Certain reclassifications have been made to the prior period statements to conform with the current year presentation. Reference is made to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, for an expanded discussion of the Company's financial disclosures and accounting policies. Nature of Operations and Organization RAM Energy, Inc. operates exclusively in the upstream segment of the natural gas and oil industry with activities including the drilling, completion, and operation of natural gas and oil wells, and operation of gathering and disposal systems. The Company conducts the majority of its operations in the states of Oklahoma, Texas, and New Mexico. Additionally, the Company owns and operates a natural gas and oil gathering system and a saltwater disposal operation in north central Oklahoma (the Gathering System). The Gathering System purchases, transports, and markets natural gas and oil production and disposes of salt water from properties owned by the Company and other oil and gas companies. Principles of Consolidation The consolidated financial statements include the accounts of its majority or wholly owned subsidiaries. All significant intercompany transactions have been eliminated. Recently Issued Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (the FASB) issued SFAS No. 141, Business Combinations. SFAS No. 141 addresses financial accounting and reporting for business combinations. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001, and for all business combinations accounted for under the purchase method initiated before but completed after June 30, 2001. In addition, in June 2001 the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and applies to all goodwill and other intangibles recognized in the financial statements at that date. The adoption of these standards is not expected to have an impact on the Company's current financial position or results of operations. However, any business combinations initiated from this point forward will be impacted by these two standards. 2. Financial Instruments The carrying amounts reported in the balance sheets for cash and cash equivalents, trade receivables and payables, installment notes and capital leases, and variable rate long-term debt approximate their fair values. The carrying value of the Senior Notes exceeded the fair value at December 31, 2000 and June 30, 2001, by approximately $23.2 million and $7.2 million, respectively, based on quoted market prices. 3. Long-Term Debt On August 14, 2001 the Company and Foothill Capital Corporation agreed to amend the Credit Facility. The amendment when effective will waive the requirement that after the Company makes its August 15, 2001 interest payment on its Senior Notes that the Company have an aggregate $2 million of availability under the Credit Facility and available cash on hand, and waives the requirement, through August 31, 2001, that the Company have hedging agreements in place covering at least 25% of its projected production for the ensuing six-month period. The Company fully expects to meet all of terms of its Credit Facility at future dates and as such has continued to classify the amounts drawn under the Credit Facility as long-term debt. 4. Related Party Transactions Effective April 2001, Carmen Acquisition Corp., an affiliate of Chesapeake Energy Corp. (Chesapeake), acquired 49.5% of the Company's outstanding stock from two of the Company's former shareholders. A substantial portion of the Company's gathering system purchases are from Chesapeake. For the six months ended June 30, 2000 and 2001, gathering system purchases from Chesapeake were $1.6 million and $3.5 million, respectively. In addition, at June 30, 2001, included in the Company's related party accounts receivable and accounts payable in the accompanying balance sheet, were accounts receivable from Chesapeake of $259,000 and accounts payable to Chesapeake of $376,000. 5. Comprehensive Income (Loss) Components of comprehensive income (loss) for the three-month and the six-month periods ended June 30, 2000 and 2001, are as follows:

6. Contingencies In 1996, the Company's predecessor sold a natural gas and oil property located in Louisiana state waters in Plaquemines Parish. The property included several uneconomical wells for which the Company estimated the plugging and abandonment (P&A) obligation to be approximately $1,020,000. The purchaser provided a letter of credit and a bond totaling $420,000 to ensure funding of a portion of the P&A obligation. The P&A obligation would revert to the Company in the event the purchaser does not complete the required P&A activities. As a result, in connection with the sale, the Company recorded a contingent liability of $600,000, which is included in the accompanying consolidated balance sheets. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General We are an independent natural gas and oil company engaged in the acquisition, exploration and development of natural gas and oil properties and the production of natural gas and oil. Our natural gas and oil properties are located primarily in the Mid-Continent Area, Permian Basin and onshore Gulf Coast. We also operate natural gas and oil gathering and saltwater disposal systems in Oklahoma. Historically, we have added reserves through acquisitions and development and in 1999 we expanded our strategy to include exploration. We intend to continue to pursue attractive natural gas and oil acquisitions and drilling opportunities. Any future acquisitions, major development and/or exploration activities will require additional financing which will be dependent upon financing arrangements, if any, available at the time. Our revenue, profitability and cash flow are directly impacted by prevailing prices for natural gas and oil and the volumes of natural gas and oil we produce. In addition, our proved reserves and the rates of our natural gas and oil production will decline as natural gas and oil are produced unless we are successful in acquiring additional producing properties or conducting successful development and exploration drilling activities. We have entered into fixed price swaps for our natural gas production for July and August 2001 on 620,000 Mmbtu that provide that we will receive an average price of $3.57 per Mmbtu. For September and October 2001 we have purchased options to sell an aggregate of 310,000 Mmbtu at a floor price of $2.75 per Mmbtu. Using expected natural gas production rates for the third and fourth quarters of 2001, this hedged volume represents approximately 30% of our natural gas production through that period. We use the full cost method of accounting for our investment in natural gas and oil properties. Under the full cost method of accounting, all of our costs of acquisition, exploration and development of natural gas and oil reserves are capitalized into a "full cost pool" as incurred, and costs included in the pool are amortized and charged to operations using the future recoverable units of production method based on the ratio of current production to total proved reserves, computed based on current prices and costs. Significant downward revisions of quantity estimates or declines in natural gas and oil prices that are not offset by other factors could result in a writedown for impairment of the carrying value of our natural gas and oil properties. Once incurred, a writedown of natural gas and oil properties is not reversible at a later date, even if our quantity estimates or natural gas or oil prices subsequently increase. Results of Operations Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 Operating Revenues. Our operating revenues increased by $2.3 million, or 24% for the three months ended June 30, 2001, compared to the year earlier period. The following table summarizes our natural gas and oil production volumes, average sales prices and period to period comparisons, including the effect on our operating revenues, for the periods indicated:

Natural gas and oil sales. Our natural gas and oil revenues were higher in the second quarter of 2001 as compared to the second quarter of 2000 with a 10% decrease in production, and a 23% increase in realized prices, both on an Mcfe basis. Average daily production was 23 MMcfe in the second quarter of 2001 compared to 26 MMcfe during the second quarter of 2000, a decrease of 10%. For the second quarter of 2001, our natural gas production decreased by 11% and oil production decreased 8% compared to the second quarter of 2000. The average realized sales price for natural gas was $3.34 per Mcf for the quarter ended June 30, 2001, an increase of 35% compared to $2.48 per Mcf for the same quarter in 2000. The average realized oil price for the quarter ended June 30, 2001 was $24.81 per Bbl, a 3% decrease compared to $25.66 per Bbl for the quarter ended June 30, 2000. Natural Gas and Oil Production Tax Expense. Our natural gas and oil production taxes for the quarter ended June 30, 2001 were $647,000, a decrease of $55,000, or 8%, from $702,000 for the second quarter ended June 30, 2000. On a per unit of production basis, our production tax expense increased from $0.30 per Mcfe for the second quarter of 2000 to $0.31 per Mcfe for the second quarter of 2001. Natural Gas and Oil Production Expense. Our natural gas and oil production expense for the quarter ended June 30, 2001 was $1.7 million, an increase of $432,000, or 35%, from the $1.2 million for the second quarter ended June 30, 2000. Natural gas and oil production expense was $0.80 per Mcfe for the second quarter of 2001, an increase of $0.27 per Mcfe, or 50%, from the $0.53 per Mcfe incurred for the second quarter of 2000. This increase was attributable to increased discretionary maintenance costs of $211,000, emergency repairs of two salt water disposal wells of $60,000 and settlements of disputes with outside operators of $161,000. Gathering System. Our gathering system revenue was $4.3 million for the three months ended June 2001, an increase of $1.6 million, or 59%, compared to the $2.7 million for the three months ended June 2000. By contract we are obligated to deliver 10,000 Mmbtu's per day to Miami Valley Resources. We purchase natural gas from wells connected to the system to satisfy our obligation to Miami Valley Resources. In addition, we purchase and re-sell oil and dispose of saltwater. Our third party purchases and system operating costs were $3.4 million for the second quarter of 2001, and our gathering system operating margin was $0.8 million. For the three months ended June 2000 purchases from third parties and operating costs totaled $2.2 million and our gathering system operating margin was $516,000. Amortization and Depreciation Expense. Our amortization and depreciation expense of $2.5 million for the second quarter of 2001 decreased $218,000, or 8%, compared to the $2.7 million for the same period in 2000. On a per unit of production basis, our amortization and depreciation expenses was $1.19 per Mcfe for the 2001 quarter, an increase of 3% compared to the $1.16 per Mcfe for the 2000 quarter. This decrease is due primarily to decreased production in the 2001 period. General & Administrative Expense. For the quarter ended June 30, 2001 our general and administrative expense was $1.0 million, an increase of $239,000, or 31%, as compared with $778,000 for the 2000 period. This increase resulted from contributions to the employee 401(k) plan and bonuses paid to certain employees. Interest Expense. Our interest expense decreased by $57,000 to $3.7 million for the three months ended June 30, 2001 compared to $3.8 million for the comparable period of 2000. This decrease was attributable to lower effective interest rates on marginally lower average outstanding balances during the 2001 period. Income Taxes. In connection with an acquisition in 1998, we recorded deferred income taxes related to the excess of financial bases of net assets acquired (principally properties and equipment) over their respective bases for income tax purposes. This net liability results in our providing for income taxes or credits after the date of this acquisition. Net Loss. Due to the factors described above, we realized a net loss of $0.8 million for the second quarter of 2001 compared to a net loss of $1.2 million for the second quarter of 2000. Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 Operating Revenues. Our operating revenues increased by $9.0 million, or 49% for the six months ended June 30, 2001, compared to the year earlier period. The following table summarizes our natural gas and oil production, average sales prices and period to period comparisons, including the effect on our operating revenues, for the periods indicated:

Natural gas and oil sales. Our natural gas and oil revenues were higher in the first six months of 2001 as compared to the same period of 2000 with a 54% increase in realized prices, offset by a 13% decrease in production, both on an Mcfe basis. Average daily production was 22.4 MMcfe in the first six months of 2001 compared to 25.7 MMcfe during the same period of 2000, a decrease of 13%. For the first half of 2001 our natural gas production decreased by 12% and oil production decreased 16% compared to the first half of 2000. The average realized sales price for our natural gas was $4.16 per Mcf for the first half of 2001, compared to $2.36 per Mcf for the same period in 2000, an increase of 76%. Our average realized oil price for the six months ended June 30, 2001 was $27.02 per Bbl, and for the six months ended June 30, 2000 was $25.00 per Bbl, an 8% increase. Natural Gas and Oil Production Tax Expense. Our natural gas and oil production taxes for the first six months of 2001 were $1.6 million, an increase of $551,000, or 52%, from the $1.1 million for the first six months of 2000. As a percentage of wellhead prices received, production taxes were 7.9% for the first six months of 2001 compared to 7.5% for the first six months of 2000. Natural Gas and Oil Production Expense. Our natural gas and oil production expense for the first half of 2000 was $3.0 million, an increase of $440,000, or 17%, from the $2.5 million for the same period in 2001. Natural gas and oil production expense was $0.73 per Mcfe for the first half of 2001, an increase of $0.19 per Mcfe, or 35%, from the $0.54 per Mcfe incurred for the first half of 2000. This increase was attributable to increased discretionary maintenance costs of $211,000, emergency repairs of two salt water disposal wells of $60,000 and settlements of disputes with outside operators of $161,000 incurred during the second quarter of 2001. Gathering System. Our gathering system revenue was $10.2 million for the six months ended June 2001, an increase of $4.8 million, or 90%, compared to the six months ended June 2000. By contract we are obligated to deliver 10,000 Mmbtu's per day to Miami Valley Resources. We purchase natural gas from wells connected to the system to satisfy that our obligation to Miami Valley Resources. In addition, we purchase and re-sell oil and dispose of saltwater. Our third party purchases and system operating costs were $8.0 million for the first half of 2001, and our gathering system operating margin was $2.2 million For the first half of 2000 our purchases from third parties and operating costs totaled $4.3 million and our gathering system operating margin was $1.1 million. Amortization and Depreciation Expense. Our amortization and depreciation expense of $4.9 million for the first half of 2001 decreased $734,000, or 13%, compared to $5.7 million for the same period in 2000, and was $1.22 per Mcfe for both the six months ended June 30, 2001, and six months ended June 30, 2000. Contract Termination and Severance Payments. During the first half of 2000 we incurred $337,000 of contract termination and severance payments related to the closing of our Midland, Texas operations office and our Oklahoma City accounting office. Accounting services formerly performed by our Oklahoma City office were outsourced. General & Administrative Expense. For the six months ended June 30, 2001, our general and administrative expense was $2.0 million, an increase of $219,000, or 13%, compared to the $1.7 million incurred for the same period in 2000. This increase resulted from contributions to the employee 401(k) plan and bonuses paid to certain employees which occurred during the second quarter of 2001. Interest Expense. Our interest expense decreased by $228,000 to $7.3 million for the six months ended June 30, 2001 compared to $7.6 million for the comparable period of 2000. This decrease during the 2001 period was attributable to marginally lower average outstanding indebtedness and lower effective interest rates. Income Taxes. In connection with an acquisition in 1998, we recorded deferred income taxes related to the excess of financial bases of net assets acquired (principally properties and equipment) over their respective bases for income tax purposes. Such net liability results in our providing for income taxes or credits after the date of the acquisition. Net Loss. Due to the factors described above, we realized net income of $454,000 for the six months ended June 30, 2001, compared to a net loss of $2.9 million in the first half of 2000. Liquidity and Capital Resources As of June 30, 2001 we had cash and cash equivalents of $2.4 million and were fully drawn under the credit facility discussed below. Funding for our business activities has historically been provided by operating cash flow and reserve-based bank borrowings. From time to time we engage in discussions relating to potential acquisitions of natural gas and oil properties or companies engaged in the natural gas and oil business. We have no present agreement, commitment or understanding with respect to any such acquisitions. Any future acquisitions, major development and/or exploration activities will require additional financing which will be dependent upon financing arrangements, if any, available at the time. As of June 30, 2001 we had $129.6 million ($130.6 million excluding the original issue discount) of indebtedness outstanding in addition to trade payables and other liabilities incurred in the ordinary course of business. This included $103 million of indebtedness under our 11 1/2% senior notes due 2008 issued in February 1998, $27.4 million of advances under our credit facility, and $0.2 million of other indebtedness. At June 30, 2001, due to covenants contained in the indenture governing our senior notes we could not incur any additional indebtedness for borrowed money. On May 9, 2001 we filed a registration statement with the Securities and Exchange Commission pursuant to which we plan to sell $75 million of our common stock in an underwritten public offering. If we successfully conclude this offering we intend to use the proceeds of the offering to pay down our credit facility and for general corporate purposes. We may also use a portion of the proceeds to purchase our outstanding 11 1/2% senior notes that may, from time to time, become available for purchase. Senior Notes. We have outstanding $103.0 million aggregate principal amount of unsecured, unsubordinated senior notes, which mature in February 2008. The notes were issued under an indenture with United States Trust Company of New York, as Trustee. The notes bear interest at an annual rate of 11 1/2%, payable semi-annually on each February 15 and August 15. Credit Facility. We have a $30.0 million secured credit facility that is subject to borrowing base restrictions and financial covenant limitations contained in the indenture governing our senior notes. On August 14, 2001 the Company and Foothill Capital Corporation agreed to amend the Credit Facility. The amendment when effective will waive the requirement that after the Company makes its August 15, 2001 interest payment on its Senior Notes that the Company have an aggregate $2 million of availability under the Credit Facility and available cash on hand, and waives the requirement, through August 31, 2001, that the Company have hedging agreements in place covering at least 25% of its projected production for the ensuing six-month period. The following is a summary of the provisions of the credit facility, which we consider to be material, but does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the definitive loan documentation. o The credit facility is a $30.0 million, senior secured revolving credit facility due December 2003. o Borrowings under the credit facility bear interest at the greater of prime plus 2.0% per annum or 8.0% per annum. o The credit facility contains a number of covenants including, among others, covenants limiting our ability to incur debt, make loans, create liens, pay dividends, make guarantees and investments, change our business, engage in transactions with affiliates, sell assets, enter into restrictive agreements, engage in sale leaseback transactions or new business and engage in mergers and acquisitions. The credit facility contains other usual and customary negative and affirmative covenants. o Borrowings under the credit facility are secured by liens on substantially all of our natural gas and oil properties and other assets. The amount of credit available at any time under our credit facility may not exceed the borrowing base which is subject to redetermination at least semi-annually and which is based, in part, on changing expectations of future prices. Because of restrictions contained in the indenture governing our senior notes, at June 30, 2001 our maximum borrowing ability under our credit facility was $27.4 million. Net Cash Provided or Used in Operating Activities. For the three months ended June 30, 2001, net cash provided by our operating activities was $2.9 million compared to $3.8 million provided by our operating activities during the comparable period in 2000. For the first half of 2001 net cash provided by operating activities was $6.2 million compared to $3.2 million for the first half of 2000. Net Cash Provided or Used in Investing Activities. For the three months ended June 30, 2001, net cash used by us in our investing activities was $2.8 million, consisting primarily of payments for natural gas and oil properties and equipment. This compares with $1.7 million used in investing activities in 2000. For the first half of 2001 net cash used by us in our investing activities was $5.3 million, consisting primarily of payments for natural gas and oil properties and equipment. This compares to $1.3 million used in investing activities for the first half of 2000, involving sales of natural gas and oil operating rights for $1.7 million, offset by $3.0 million of capital expenditures. At current prices and without additional financing, we have budgeted $12.3 million for capital expenditures for the year 2001. We expect to use cash flow from operations and cash balances to fund these expenditures. Net Cash Provided or Used in Financing Activities. For the three months ended June 30, 2001, net cash provided by our financing activities was $221,000, consisting of loan draws on our credit facility of $665,000 and repayments of $446,000. For the first half of 2001 net cash provided by our financing activities was $2.0 million, consisting of loan draws on our credit facility $2.5 million and repayments of $508,000. Item 3. Quantitative and Qualitative Disclosure about Market Risk The carrying amounts reported in the balance sheets for cash and cash equivalents, trade receivables and payable, installment notes and capital leases, and variable rate long-term debt approximate their fair values The carrying value of our senior notes exceeded their fair value at December 31, 2000 by approximately $23.2 million and at June 30, 2001 by approximately $7.2 million based on quoted market prices. Forward-Looking Statements This document contains forward-looking statements under the meaning of the federal securities laws. All statements other than statements of historical facts are based on, or express, our expectations about future events, including statements regarding such matters as: - the drilling of wells; - the development of proved undeveloped reserves; - the amount, nature and timing of other capital expenditures; - the timing and amount of future production; - future cash flow and liquidity; - future operating costs and other expenses; - future natural gas and oil prices; - budgets; and - future property acquisitions. There are many factors that could cause our forward-looking statements to be incorrect, including the effect of economic conditions generally, the results of financing efforts, natural gas and oil price volatility, market demand, and other risks normally associated with the business of natural gas and oil drilling, production and marketing. Our forward-looking statements speak only as of the date made and we make no commitment to update these statements to reflect events or circumstances that may occur after this date. PART II. OTHER INFORMATION Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed as a part of this report:

(b) Reports on Form 8K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RAM ENERGY, INC. (Registrant) Date: August 14, 2001 By: LARRY E. LEE Larry E. Lee President and Chief Executive Officer By: JOHN M. LONGMIRE John M. Longmire Senior Vice President and Chief Financial Officer, Treasurer and Secretary EXHIBIT INDEX

RAM ENERGY INC/OK 10-Q