<PAGE>
============================================================================
- ----------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996 Commission File No. 0-20998
KELLEY PARTNERS 1992 DEVELOPMENT
DRILLING PROGRAM
(Exact name of registrant as specified in its charter)
Texas 76-0373428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 Jefferson St.
Suite 1100
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 652-5200
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
----- -----
- ----------------------------------------------------------------------------
============================================================================
<PAGE>
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Balance Sheets -- September 30, 1996 (unaudited) and
December 31, 1995.................................................. 2
Statements of Income (Loss) -- Three Months ended September 30,
1996 and 1995 (unaudited).......................................... 3
Statements of Income (Loss) -- Nine Months ended September 30,
1996 and 1995 (unaudited).......................................... 4
Statements of Cash Flows -- Nine Months ended September 30, 1996
and 1995 (unaudited)............................................... 5
Notes to Financial Statements....................................... 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 7
1
<PAGE>
PART I. FINANCIAL INFORMATION
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
BALANCE SHEETS
($ IN THOUSANDS)
SEPTEMBER 30 DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
ASSETS:
Cash and cash equivalents ...................... $ 43 14
Accounts receivable - trade .................... 107 171
Accounts receivable - affiliates................ 611 1,255
Other assets.................................... 14 21
-------- -------
Total current assets.......................... 775 1,461
-------- -------
Oil and gas properties, successful
efforts method:
Properties subject to amortization............ 45,460 45,230
Less: Accumulated depreciation,
depletion & amortization..................... (40,149) (38,967)
-------- -------
Total oil and gas properties.................. 5,311 6,263
-------- -------
TOTAL ASSETS.................................... $ 6,086 7,724
-------- -------
-------- -------
LIABILITIES:
Accounts payable and accrued expenses .......... $ 150 375
Accounts payable - affiliates .................. 360 2,943
-------- -------
Total current liabilities .................... 510 3,318
-------- -------
Notes payable .................................. 6,000 6,000
-------- -------
TOTAL LIABILITIES .............................. 6,510 9,318
-------- -------
PARTNERS' DEFICIT:
LP Unitholders' deficit ........................ (68) (183)
GP Unitholders' deficit ........................ (340) (1,349)
Managing and special general partners' deficit.. (16) (62)
-------- -------
TOTAL PARTNERS' DEFICIT......................... (424) (1,594)
-------- -------
TOTAL LIABILITIES AND PARTNERS' DEFICIT........... $ 6,086 7,724
-------- -------
-------- -------
See Notes to Financial Statements.
2
<PAGE>
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF INCOME (LOSS)
($ IN THOUSANDS EXCEPT PER UNIT DATA)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
---------- ----------
REVENUES:
Oil and gas sales.............................. $ 1,199 1,086
Interest income................................ --- 1
---------- ----------
Total revenues............................... 1,199 1,087
---------- ----------
COSTS AND EXPENSES:
Lease operating expenses....................... 129 223
Severance taxes................................ 52 69
Exploration costs.............................. (2) ---
General and administrative expenses............ 64 154
Interest expense............................... 203 203
Depreciation, depletion and amortization ...... 345 785
Impairment of oil and gas properties .......... --- 1,850
---------- ----------
Total expenses............................... 791 3,284
---------- ----------
NET INCOME (LOSS)................................ $ 408 (2,197)
---------- ----------
---------- ----------
NET INCOME (LOSS) ALLOCABLE TO LP UNITHOLDERS
AND GP UNITHOLDERS.............................. $ 392 (2,110)
---------- ----------
---------- ----------
NET INCOME (LOSS) ALLOCABLE TO MANAGING AND
INDIVIDUAL GENERAL PARTNERS..................... $ 16 (87)
---------- ----------
---------- ----------
NET INCOME (LOSS) PER LP AND GP UNIT............. $ .02 (.13)
---------- ----------
---------- ----------
Average LP and GP units outstanding.............. 16,033,009 16,033,009
---------- ----------
---------- ----------
See Notes to Financial Statements.
3
<PAGE>
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF INCOME (LOSS)
($ IN THOUSANDS EXCEPT PER UNIT DATA)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
---------- ----------
REVENUES:
Oil and gas sales............................... $ 3,721 4,294
Interest income................................. 3 3
---------- ----------
Total revenues................................ 3,724 4,297
---------- ----------
COSTS AND EXPENSES:
Lease operating expenses........................ 465 627
Severance taxes................................. 142 259
Exploration costs............................... (4) 6
General and administrative expenses............. 259 450
Interest expense................................ 608 470
Depreciation, depletion and amortization ....... 1,084 2,924
Impairment of oil and gas properties ........... --- 2,335
---------- ----------
Total expenses................................ 2,554 7,071
---------- ----------
NET INCOME (LOSS)................................. $ 1,170 (2,774)
---------- ----------
---------- ----------
NET INCOME (LOSS) ALLOCABLE TO LP UNITHOLDERS
AND GP UNITHOLDERS............................... $ 1,124 (2,664)
---------- ----------
---------- ----------
NET INCOME (LOSS) ALLOCABLE TO MANAGING AND
INDIVIDUAL GENERAL PARTNERS...................... $ 46 (110)
---------- ----------
---------- ----------
NET INCOME (LOSS) PER LP AND GP UNIT.............. $ .07 (.17)
---------- ----------
---------- ----------
Average LP and GP units outstanding............. 16,033,009 16,033,009
---------- ----------
---------- ----------
See Notes to Financial Statements.
4
<PAGE>
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
------- ------
OPERATING ACTIVITIES:
Net income (loss).............................. $ 1,170 (2,774)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, depletion and amortization..... 1,084 2,924
Impairment of oil and gas properties......... --- 2,335
Dry hole costs............................... --- 6
Changes in operating assets and liabilities:
Decrease in accounts receivable ............. 707 487
Decrease (increase) in prepaid and other
current assets.............................. 7 (14)
Decrease in accounts payable and accrued
expenses.................................... (2,808) (2,197)
------- ------
Net cash provided by operating activities...... 160 767
------- ------
INVESTING ACTIVITIES:
Purchase of property and equipment ............ (230) (959)
Sale of oil and gas properties ................ 99 380
Sale of other non-current assets .............. --- 130
------- ------
Net cash used in investing activities.......... (131) (449)
------- ------
FINANCING ACTIVITIES:
Proceeds from long term borrowings ............ --- ---
Capital contributed by partners................ --- ---
Distribution to partners ...................... --- (333)
------- ------
Net cash provided by (used in) financing
activities.................................... --- (333)
------- ------
Increase (decrease) in cash and cash equivalents. 29 (15)
Cash and cash equivalents, beginning of period... 14 32
------- ------
Cash and cash equivalents, end of period ........ $ 43 17
------- ------
------- ------
See Notes to Financial Statements.
5
<PAGE>
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
GENERAL. The accompanying financial statements of Kelley Partners
1992 Development Drilling Program (the "Partnership") have been prepared in
accordance with generally accepted accounting principles and, in the opinion
of management, reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair statement of the results for the interim
periods presented. The accounting policies followed by the Partnership are
set forth in Note 1 to the financial statements included in its Annual Report
on Form 10-K for the year ended December 31, 1995.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
In 1992, the Partnership issued a total of 16,033,009 units of limited
and general partner interests ("Units") at $3 per Unit for a total of
$48,099,027. The Units represents 96.04% of the total interests in the
Partnership and consist of 1,647,502 Units of limited partner interests ("LP
Units") and 14,385,507 Units of general partner interests ("GP Units"). In
addition, the Partnership issued managing and special general partner
interests on a pro rata basis for $1,983,258, representing 3.96% of the
total interests in the Partnership. Kelley Oil Corporation, managing general
partner of the Partnership ("Kelley Oil"), owns 83.72% of the Units, together
with its 3.94% managing general partnership interest.
RECENT DEVELOPMENTS
DRILLING OPERATIONS. Since inception, the Partnership participated in
drilling 39 gross (15.23 net) wells, of which 30 gross (11.07 net) wells were
found productive and 9 gross (4.16 net) wells were dry. All of the
Partnership's productive wells were on line by the end of 1994. During 1995
and 1996, 3 gross (.92 net) Partnership wells were plugged when production
declined to noncommercial levels, and one of the Partnership's wells was
included in a divestiture of nonstrategic properties. In addition,
recompletion and workover operations have been conducted on several wells.
See "Liquidity and Capital Resources" below.
HEDGING ACTIVITIES. Kelley Oil & Gas Corporation, the parent company of
Kelley Oil ("KOGC"), and its subsidiaries (collectively, the "Kelley
Group"), periodically use forward sales contracts, natural gas swap
agreements and options to reduce exposure to downward price fluctuations on
natural gas production of the Kelley Group, including the Partnership. The
swap agreements generally provide for the Kelley Group to receive or make
counterparty payments on the differential between a fixed price and a
variable indexed price for natural gas. Gains and losses realized by the
Partnership from hedging activities are included in oil and gas revenues.
Through a combination of natural gas swap agreements, forward sales contracts
and options, 69.4% of the Kelley Group's natural gas production for the third
quarter of 1996 was affected by hedging transactions at an average Nymex
quoted price of $2.17 per MMBtu, before transaction and transportation costs
on gas delivered under forward sales contracts. Approximately 57.6% of the
Kelley Group's anticipated natural gas production for the balance of 1996 has
been hedged by natural gas swap agreements, forward sales contracts and
options at an average Nymex quoted price of $2.25 per MMBtu, before
transaction and transportation costs.
RESULTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995. Oil and gas revenues of
$1,199,000 for the third quarter of 1996 increased 10.4% compared to
$1,086,000 in the corresponding quarter of 1995 as a result of higher oil
and gas prices. During the current quarter, production of natural gas
decreased 23.5% from 578,000 Mcf in the third quarter of 1995 to 443,000 Mcf,
while the average price of natural gas increased 55.2% from $1.54 per Mcf in
the third quarter of 1995 to $2.39 per Mcf in the current quarter.
Production of crude oil in the current quarter totaled 6,886 barrels, with an
average sales price of $20.37 per barrel compared to 9,598 barrels at $18.96
per barrel in the same quarter last year, representing a volume decrease of
28.3% and a price increase of 7.4%.
Lease operating expenses and severance taxes were $181,000 in the
current quarter versus $292,000 in the third quarter of 1995, a decrease of
38.0%, reflecting lower production levels and reduced workover costs. On a
unit of production basis, these expenses decreased to $.37 per Mcfe in the
third quarter of 1996 from $.46 per Mcfe in the same quarter of 1995.
7
<PAGE>
In the third quarter of 1996, the Partnership recovered previously
expensed exploration costs of $2,000, while no exploration costs were
expensed or recovered in the same quarter of 1995.
General and administrative expenses of $64,000 in the current quarter
decreased 58.4% from $154,000 in the third quarter of 1995, reflecting a
reduction in the Partnership's share of administration costs associated with
development operations of the Kelley Group. On a unit of production basis,
these expenses decreased from $.24 per Mcfe in the third quarter of 1995 to
$.13 per Mcfe in the current quarter.
In the third quarters of both 1996 and 1995, the Partnership incurred
interest expenses of $203,000 on a loan advanced in August 1994 to fund part
of its drilling expenses in excess of contributed capital. See "Liquidity
and Capital Resources" below.
Depreciation, depletion and amortization ("DD&A") decreased 56.1% from
$785,000 in the third quarter of 1995 to $345,000 in the current quarter due
to lower production levels and lower depletion rates following noncash
impairment charges aggregating $8.7 million recognized in the fourth quarter
of 1995 against the carrying value of the Partnership's oil and gas
properties under the Financial Accounting Standards Board's Statement No.
121, Accounting for the Impairment of Long-Lived Assets ("FAS 121"). On a
unit of production basis, DD&A decreased to $.71 per Mcfe in the third
quarter of 1996 from $1.23 per Mcfe in the same quarter last year.
The Partnership recognized net income of $408,000 or $.02 per Unit for
the third quarter of 1996, reflecting the foregoing developments. For the
third quarter of 1995, the Partnership recognized a net loss of $2,197,000 or
$.13 per Unit, primarily reflecting higher production costs and DD&A.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995. Oil and gas revenues of
$3,721,000 for the first nine months of 1996 decreased 13.3% compared to
$4,294,000 in the corresponding period of 1995, reflecting lower production
volumes partially offset by higher prices. During the current period,
production of natural gas decreased 32.7% from 2,114,000 Mcf in the first
nine months of 1995 to 1,422,000 Mcf, while the average price of natural gas
increased 32.9% from $1.73 per Mcf in the first nine months of 1995 to $2.30
per Mcf in the current period. Production of crude oil in the current period
totaled 21,435 barrels, with an average sales price of $21.00 per barrel
compared to 31,262 barrels at $18.16 per barrel in the same period last year,
representing a volume decrease of 31.4% and a price increase of 15.7%.
Lease operating expenses and severance taxes were $607,000 in the current
period versus $886,000 in the first nine months of 1995, a decrease of 31.5%,
reflecting lower production levels and reduced workover costs. On a unit of
production basis, these expenses remained constant at $.39 per Mcfe in the
first three quarters of 1996 and 1995.
In the first nine months of 1996, the Partnership recovered previously
expensed exploration costs of $4,000, while $6,000 of exploration costs were
expensed in the same period of 1995.
General and administrative expenses of $259,000 in the current period
decreased 42.4% from $450,000 in the first nine months of 1995, reflecting a
reduction in the Partnership's share of administration costs associated with
development operations of the Kelley Group. On a unit of production basis,
these expenses decreased to $.17 per Mcfe in the first three quarters of 1996
from $.20 per Mcfe in the year-earlier period.
In the nine months ended September 30, 1996 and 1995, the Partnership
incurred interest expenses of $608,000 and $470,000, respectively. The
increase in interest expense for the first nine months of 1996 resulted from
a higher interest rate compared to the first nine months of 1995. See
"Liquidity and Capital Resources" below.
DD&A decreased 62.9% from $2,924,000 in the first nine months of 1995 to
$1,084,000 in the current period due to lower production levels and lower
depletion rates following noncash impairment charges aggregating $8.7 million
recognized in the fourth quarter of 1995 against the carrying value of the
Partnership's oil and gas
8
<PAGE>
properties under FAS 121. On a unit of production basis, DD&A decreased to
$.70 per Mcfe in the first three quarters of 1996 from $1.27 per Mcfe in the
same period last year.
The Partnership recognized net income of $1,170,000 or $.07 per Unit for
the first nine months of 1996, reflecting the foregoing developments. For
the corresponding period of 1995, the Partnership recognized a net loss of
$2,774,000 or $.17 per Unit, primarily reflecting lower product prices, a
successful efforts impairment charge of $2,335,000 through September 30, 1995
and higher DD&A.
The results of operations for the quarter and nine months ended September
30, 1996 are not necessarily indicative of the Partnership's operating
results to be expected for the full year.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Net cash provided by the Partnership's operating activities
during the first nine months of 1996, as reflected on its statement of cash
flows, totaled $160,000. During the period, funds were used in investing
activities comprised primarily of property and equipment expenditures of
$230,000 for development of the Partnership's oil and gas properties,
partially offset by $99,000 from the sale of non-current assets. As a result
of these activities, the Partnership's cash and cash equivalents increased to
$43,000 at September 30, 1996 from $14,000 at December 31, 1995.
CAPITAL RESOURCES. The partners' deficit at September 30, 1996 was
reduced to $424,000. The Partnership has completed its development stage.
Accordingly, cash flow from operations should be adequate to meet its
expected capital and general working capital needs. As of September 30,
1996, the Partnership was fully capitalized with contributions aggregating
$50,082,285.
The Partnership incurred drilling and recompletion expenses aggregating
$15,338,000 in excess of its contributed capital (the "Drilling
Overexpenditures"), including $2,300,000 of geological and geophysical
expenses payable to Kelley Oil (the "G&G Reimbursement Obligation"). In
August 1994, one of the credit facilities maintained by Kelley Oil was
modified to add the Partnership as a borrower, and $6,000,000 was advanced to
the Partnership to fund part of its Drilling Overexpenditures. The
Partnership's bank debt was subsequently replaced by a $6,000,000 loan from
Kelley Oil (the "Initial Loan") funded with borrowings by Kelley Oil under a
credit facility obtained in February 1995 (the "Prior Credit Facility").
The Partnership has paid interest on the Initial Loan at the same rate
charged to Kelley Oil under the Prior Credit Facility and, following the
repayment of borrowings under that facility with proceeds from the issuance
of KOGC's 13 1/2% Senior Notes in June 1995, at the same rate payable under the
Senior Notes, resulting in an effective interest rate of 11.2% on the Initial
Loan during 1995 and 13.5% during the first nine months of 1996.
DISTRIBUTION POLICY. The Partnership maintains a policy of distributing
the maximum amount of its net available cash to Unitholders on a quarterly
basis. For these purposes, net available cash generally represents the net
operating cash flow of the Partnership after deducting working capital
requirements. To meet its financial obligations for the Drilling
Overexpenditures, the Partnership suspended distributions commencing in
October 1994 and reinstated a quarterly distribution for only one quarter in
1995. During 1995, the Partnership's operating cash flow in excess of
distributions was applied to pay interest on the Initial Loan and to reduce
unfunded payables for third party Drilling Overexpenditures. While the
$6,000,000 Initial Loan remains outstanding, the balance of the Drilling
Overexpenditures had been reduced from Partnership cash flow to $360,000 as
of September 30, 1996. By continuing to reduce its debt from operating cash
flow, the Partnership expects to retire this obligation during the fourth
quarter of 1996 and begin repayment of the Initial Loan in 1997.
9
<PAGE>
Net available cash per Unit from operations for the nine months ended
September 30, 1996 and 1995 was determined as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1995
----- ----
Net income (loss) per Unit ..................... $ .07 (.17)
Depreciation, depletion and amortization
charges per Unit............................... .06 .18
Impairment of oil and gas properties per Unit... --- .14
----- ----
Net available cash per Unit for reduction
of debt...................................... $ .13 .15
----- ----
----- ----
10
<PAGE>
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.
KELLEY PARTNERS 1992
DEVELOPMENT DRILLING PROGRAM
By: KELLEY OIL CORPORATION
Managing General Partner
Date: November 14, 1996 By: /s/ William C. Rankin
------------------------------------
William C. Rankin
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer)
(Principal Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 718
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 775
<PP&E> 45,460
<DEPRECIATION> 40,149
<TOTAL-ASSETS> 6,086
<CURRENT-LIABILITIES> 510
<BONDS> 6,000
0
0
<COMMON> 0
<OTHER-SE> (424)
<TOTAL-LIABILITY-AND-EQUITY> 6,086
<SALES> 3,721
<TOTAL-REVENUES> 3,724
<CGS> 0
<TOTAL-COSTS> 603
<OTHER-EXPENSES> 1,343
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 608
<INCOME-PRETAX> 1,170
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,170
<EPS-PRIMARY> .07
<EPS-DILUTED> 0
</TABLE>
