August 13, 2007
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6,931
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$ 4.70
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General and Administrative Expense
. For the nine months ended September 30, 2007, our general and administrative expense was $7.3 million, compared to $6.4 million for the nine months ended September 30, 2006, an increase of $1.0 million, or 16%. The increase is primarily due to increased salaries caused by an increased number of employees.
Interest Income.
Interest income was $877,000 for the nine months ended September 30, 2007 compared to $238,000 for the first nine months of the previous year. The increase was due to higher cash balances resulting from proceeds held from the common stock offering which closed in February of 2007.
Interest Expense
. Our interest expense decreased by $631,000, to $12.6 million for the nine months ended September 30, 2007, compared to $13.2 million incurred for the first nine months of the previous year. Interest expense was higher during the nine months ended September 30, 2006 because we charged off $1.1 million of unamortized costs and paid $900,000 additional fees associated with our previous credit facility. The offsetting increase of $1.4 million is due to an $800,000 prepayment premium on the term loan portion of our credit facility during the third quarter and to additional borrowings on our revolving credit facility during the 2007 period.
Income Taxes
. For the nine months ended September 30, 2007, we recorded income tax expense of $480,000, on pre-tax income of $987,000. We also reduced income tax expense by $4.6 million to reverse a deferred tax provision and accrued interest relating to FIN 48. The deferred tax provision resulted from an uncertain tax position taken in our 2003 federal income tax return. For the nine months ended September 30, 2006, we recorded income tax expense of $2.9 million on pre-tax income of $6.9 million. Excluding the FIN 48 reversal, the effective tax rate was 49% for the nine months ended September 30, 2007 and 42% for the first nine months of 2006.
Net Income
. Our net income was $5.1 million for the nine months ended September 30, 2007, compared to net income of $4.0 million for the nine months ended September 30, 2006. The increase in our net income for the first nine months of 2007 resulted from decreased share-based compensation and a FIN 48 deferred tax provision reversal, offset by losses from derivatives and an increase in interest expense.
Liquidity and Capital Resources
As of September 30, 2007, we had cash and cash equivalents of $27.0 million, and $21.5 million was available under our revolving credit facility due to a $9.5 million reserve against availability to provide for retirement of RAM Energys 11 ½% senior notes due 2008. At September 30, 2007, we had $147.8 million of indebtedness outstanding, including $119.0 million under our credit facility, $28.4 million principal amount ($28.3 million net of the original issue discount) of indebtedness evidenced by RAM Energys 11½% senior notes due 2008, and $0.4 million in other indebtedness.
Credit Facility.
On April 5, 2006, RAM Energy entered into a Third Amended and Restated Loan Agreement with Guggenheim Corporate Funding, LLC, for itself and as Agent for a group of lenders. This new facility, which we refer to as the Guggenheim facility, amended, restated and replaced a prior credit facility known as the Foothill facility. Currently, we are not a party to, or a guarantor of obligations under, the Guggenheim facility. The Guggenheim facility includes a $150.0 million revolving credit facility and a $150.0 million term loan facility. Advances under the credit facility may be used to:
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repurchase all of RAM Energys outstanding 11½% senior notes due 2008 ($28.4 million principal amount); and
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fund general working capital purposes.
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The Guggenheim facility contains financial covenants requiring RAM Energy to maintain certain ratios, including a current ratio, a ratio of earnings before interest, taxes, depreciation and amortization, or EBITDA, to interest expense, a ratio of total indebtedness to EBITDA, and a ratio of asset value to total indebtedness. In addition, the Guggenheim facility contains other affirmative and negative covenants customary in lending transactions of this nature, including the maintenance by RAM Energy of derivative contracts on not less than 50% nor more than 85% of RAM Energys projected oil and natural gas production from its properties on a rolling 30-month period; provided that the derivative requirements will be waived for any quarter in which RAM Energys leverage ratio is less than 2.0 to 1.0. At September 30, 2007, RAM Energy was in compliance with all of its covenants in
the Guggenheim facility.
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On August 8, 2007 the Guggenheim facility was amended by transferring $40.0 million of the outstanding term facility to the revolving credit facility. The revolving facility borrowing base was increased to $100.0 million from $50.0 million. Interest rates were lowered from LIBOR plus 5.5% per annum on the term facility to LIBOR plus 5.0% per annum, and from LIBOR plus 2.0% per annum on the revolving facility to LIBOR plus a range of 1.25% to 2.0%, depending on usage. In addition, certain financial covenants were changed effective September 30, 2007. At September 30, 2007, $69.0 million was outstanding under the revolving credit facility and $50.0 million was outstanding under the term facility.
Proposed New Credit Facility.
In connection with the Ascent merger transaction, we have been advised by Guggenheim that Guggenheim has received commitment letters representing $170.0 million of commitments in respect of a new $175.0 million revolving credit facility, and more than $200.0 million in commitments in respect of a new $200.0 million term loan, in connection with a proposed $500.0 million credit facility to be entered into between us and the designated lenders effective as of the closing of the Ascent merger. The commitments are subject only to satisfactory documentation and, in one case, the absence of material adverse changes in our business or financial condition prior to closing. The entire amount of the $200.0 million term loan will be advanced at closing. The borrowing base under the revolving credit facility at the closing will be $175.0
million, a portion of which will be advanced at the closing of the Ascent merger as needed. Borrowings under the new facility will be used to refinance RAM Energys existing indebtedness, fund the cash requirements in connection with the closing of the merger, and for working capital and other general corporate purposes. Funds advanced under the revolving credit facility may be paid down and re-borrowed during the four-year term of the revolver, and will bear interest at LIBOR plus a margin ranging from 1.25% to 2.0% based on a percentage of usage. The term loan will provide for payments of interest only during its five-year term, with the interest rate being LIBOR plus 7.5%. Guggenheim will also serve as arranger and administrative agent for the lenders under the new facility.
Advances under the new facility will be secured by liens on substantially all of our properties and assets and those of our subsidiaries, including Ascent and its subsidiaries. The loan agreement will contain representations, warranties and covenants customary in transactions of this nature, including financial covenants relating to current ratio, minimum interest coverage ratio, maximum leverage ratio and a required ratio of asset value to total indebtedness. We will be required to maintain commodity hedges with respect to not less than 50%, but not more than 85%, of our projected monthly production volumes on a rolling 30-month basis, until the leverage ratio is less than or equal to 2.0 to 1.0. Approximately $28.4 million of availability under the revolving credit facility will be reserved for payment of RAM Energys outstanding 11 ½% senior notes, which become due and
payable on February 15, 2008, and $40.0 million will be allocated for development of our undeveloped properties.
Senior Notes.
On February 24, 1998, RAM Energy issued $115.0 million principal amount of its 11½% senior notes which mature February 15, 2008. Currently, we are not a party to, or a guarantor of, the senior notes or of any obligations under the indenture covering the senior notes. At September 30, 2007, RAM Energy had outstanding $28.4 million aggregate principal amount of its senior notes. The notes bear interest at an annual rate of 11½%, payable semi-annually on each February 15 and August 15. Pursuant to a Second Supplemental Indenture executed in November 2002, substantially all of the restrictive covenants and certain events of default contained in the original indenture were eliminated.
Cash Flow From Operating Activities
. Our cash flow from operating activities is comprised of three main items: net income (loss), adjustments to reconcile net income to cash provided (used) before changes in working capital, and changes in working capital. For the nine months ended September 30, 2007, our net income was $5.1 million, as compared with net income of $4.0 million for the nine months ended September 30, 2006. Adjustments (primarily non-cash items such as depreciation and amortization, unrealized gain or loss on derivatives, share-based compensation and deferred income taxes) were $10.9 million for the nine months ended September 30, 2007 compared to $11.8 million for the first nine months of 2006, a decrease of $900,000. Share-based compensation and deferred income taxes offset by changes in depreciation and unrealized loss on derivatives
caused most of this decrease. Working capital changes for the nine months ended September 30, 2007 were a negative $3.3 million compared with positive changes of $9.5 million for the nine months ended September 30, 2006. For the nine months ended September 30, 2007, in total, net cash provided by operating activities was $12.7 million compared to $25.3 million of net cash provided by operations for the first nine months of the previous year.
Cash Flow From Investing Activities
. For the nine months ended September 30, 2007, net cash used in our investing activities consisted of $34.1 million in payments for oil and gas properties and equipment and $650,000 in payments for other property and equipment, offset by $81,000 in proceeds from sales of oil and gas properties. For the nine months ended September 30, 2006, net cash used in our investing activities was $18.3 million, consisting of $21.5 million in payments for oil and gas properties and $726,000 for other property and equipment additions, offset by $3.6 million in proceeds from sales of oil and gas properties and $366,000 in proceeds from sales of other property and equipment.
Cash Flow From Financing Activities
. For the nine months ended September 30, 2007, net cash provided by our financing activities was $42.2 million, compared to net cash provided of $552,000 for the nine months ended September 30, 2006. The cash
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provided in the first three quarters of 2007 included $27.4 million in net proceeds from a common stock offering and $16.2 million in borrowings on our revolving credit facility, partially offset by a $1.4 million net debt decrease.
Capital Commitments
During the nine months ended September 30, 2007, we had capital expenditures of $34.1 million relating to our oil and gas operations, of which $7.4 million was allocated to drilling new development wells, $6.6 million was for exploratory costs, $18.7 million was for proved property acquisitions and $1.4 was for acquisitions of unproved properties. We have budgeted an aggregate of $36.3 million for capital expenditures relating to our oil and gas operations for the year 2007. However, the amount and timing of our capital expenditures may vary depending on the rate at which we expand and develop our oil and natural gas properties. We may require additional financing for future acquisitions and to refinance our debt before or at its final maturities.