<PAGE> 1
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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 JUNE 30, 1998 COMMISSION FILE NO. 0-23784
KELLEY PARTNERS 1994 DEVELOPMENT
DRILLING PROGRAM
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0419001
(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___
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KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
INDEX
<TABLE>
<Cable>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Balance Sheets as of December 31, 1997 and June 30, 1998 (unaudited) . . . . . . . . . . . . 2
Statements of Income for the three months and six months ended
June 30, 1997 and 1998 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows for the six months ended June 30, 1997 and 1998 (unaudited) . . . . 4
Notes to Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . 6
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ --
Accounts receivable - trade . . . . . . . . . . . . . . . . . . . . . . . . . . 59 21
Accounts receivable - affiliates . . . . . . . . . . . . . . . . . . . . . . . . 5,979 4,108
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,038 4,129
------------ ------------
Oil and gas properties, successful efforts method:
Properties subject to amortization . . . . . . . . . . . . . . . . . . . . . . 45,209 45,450
Less: Accumulated depreciation, depletion and amortization . . . . . . . . . (29,466) (31,044)
------------ ------------
Total oil and gas properties . . . . . . . . . . . . . . . . . . . . . . . . . . 15,743 14,406
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,781 $ 18,535
============ ============
LIABILITIES:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . $ 487 $ 191
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 487 191
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487 191
------------ ------------
PARTNERS' EQUITY:
LP Unitholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,172 1,010
GP Unitholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,280 16,609
Managing and Special General Partners' equity . . . . . . . . . . . . . . . . . 842 725
------------ ------------
Total partners' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,294 18,344
------------ ------------
Total liabilities and partners' equity . . . . . . . . . . . . . . . . . . . . . . $ 21,781 $ 18,535
============ ============
</TABLE>
See Notes to Financial Statements.
2
<PAGE> 4
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1997 1998 1997 1998
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales . . . . . . . . . . . . . . . . . . $ 3,821 $ 2,162 $ 8,928 $ 4,812
Interest income . . . . . . . . . . . . . . . . . . . 20 -- 135 --
-------- --------- --------- ---------
Total revenues . . . . . . . . . . . . . . . . . . . . 3,841 2,162 9,063 4,812
-------- --------- --------- --------
EXPENSES:
Lease operating expenses . . . . . . . . . . . . . . . 660 259 1,242 487
Severance taxes . . . . . . . . . . . . . . . . . . . 171 114 329 252
Exploration expenses . . . . . . . . . . . . . . . . . 123 -- 246 --
General and administrative expenses . . . . . . . . . 234 211 468 449
Depreciation, depletion and amortization . . . . . . . 1,308 717 2,453 1,578
-------- --------- --------- --------
Total expenses . . . . . . . . . . . . . . . . . . . . 2,496 1,301 4,738 2,766
-------- --------- --------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 1,345 $ 861 $ 4,325 $ 2,046
======== ========= ========= ========
Net income allocable to LP and GP unitholders . . . . . . $ 1,292 $ 827 $ 4,154 $ 1,965
======== ========= ========= ========
Net income allocable to Managing and
Special General Partners . . . . . . . . . . . . . . . $ 53 $ 34 $ 171 $ 81
======== ========= ========= ========
Net income per LP and GP unit . . . . . . . . . . . . . . $ .06 $ .04 $ .20 $ .09
======== ========= ========= ========
Average LP and GP units outstanding . . . . . . . . . . . 20,864 20,864 20,864 20,864
======== ========= ========= ========
</TABLE>
See Notes to Financial Statements.
3
<PAGE> 5
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1998
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,325 $ 2,046
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . . . . 2,453 1,578
Exploration expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable . . . . . . . . . . . . . . . . . . (705) 1,909
Decrease in accounts payable and accrued expenses . . . . . . . . . . . . . . (1,870) (296)
-------- --------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . 4,449 5,237
-------- --------
INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,169) (241)
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . (1,169) (241)
-------- --------
FINANCING ACTIVITIES:
Capital contributed by partners . . . . . . . . . . . . . . . . . . . . . . . . 5,819 --
Distributions to partners . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,124) (4,996)
-------- -------
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . (3,305) (4,996)
-------- -------
Decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . (25) --
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . 25 --
-------- --------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . $ -- $ --
======== ========
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 6
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
General. The accompanying unaudited interim financial statements of
Kelley Partners 1994 Development Drilling Program (the "Partnership") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission in accordance with generally accepted accounting principles for
interim financial information. These financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the results for the interim periods presented. The results of
operations for the periods ended June 30, 1998 are not necessarily indicative
of results to be expected for the full year. 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, 1997. These
unaudited interim financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Partnership's
1997 Annual Report on Form 10-K.
Changes in Presentation. Certain 1997 financial statement items have
been reclassified to conform to the 1998 presentation.
Comprehensive Income. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 is effective for
periods beginning after December 15, 1997. SFAS 130 establishes standards for
reporting and displaying comprehensive income and its components. The purpose
of reporting comprehensive income is to report a measure of all changes in
equity of an enterprise that results from recognized transactions and other
economic events of the period other than transactions with owners in their
capacity as owners. As of June 30, 1998, there are no adjustments ("Other
comprehensive income") to net income in deriving comprehensive income.
Derivative and Hedge Accounting. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities that require an entity to recognize all
derivatives as an asset or liability measured at its fair value. Depending on
the intended use of the derivative, changes in its fair value will be reported
in the period of change as either a component of earnings or a component of
other comprehensive income.
SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Earlier application of SFAS 133 is encouraged,
but not prior to the beginning of any fiscal quarter that begins after issuance
of the Statement. Retroactive application to periods prior to adoption is not
allowed. The Partnership has not quantified the impact of adoption on its
financial statements or the date it intends to adopt.
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In 1994, Kelley Partners 1994 Development Drilling Program (the
"Partnership") issued units of limited and general partner interests ("Units").
The Units represent 96.04% of the total interests in the Partnership. In
addition, the Partnership issued managing and special general partner interests
representing 3.96% of the total interests in the Partnership. Kelley Oil
Corporation, managing general partner of the Partnership ("Kelley Oil") and a
wholly owned subsidiary of Kelley Oil & Gas Corporation ("KOGC"), owns 91.85%
of the Units, together with its 3.94% managing general partnership interest.
RECENT DEVELOPMENTS
Drilling Operations. Since inception, the Partnership participated in
drilling 92 gross (29.31 net) wells, of which 88 gross (26.64 net) wells were
found productive and 4 gross (2.67 net) wells were dry. See "Liquidity and
Capital Resources" below.
Hedging Activities. KOGC periodically uses forward sales contracts,
natural gas price swap agreements, natural gas basis swap agreements and
options to reduce exposure to downward price fluctuations on its natural gas
production. KOGC's hedging activities also cover the gas production
attributable to the interest in such production of the public unitholders in
its subsidiary partnerships. The credit risk exposure from counterparty
nonperformance on natural gas forward sales contracts and derivative financial
instruments is generally the amount of unrealized gains under the contracts.
KOGC has not experienced counterparty nonperformance on these agreements and
does not anticipate any in future periods.
Through natural gas price swap agreements, approximately 43% and 37%
of the Partnership's natural gas production for the second quarter of 1998 and
first half of 1998, respectively, was affected by hedging transactions at an
average NYMEX quoted price of $2.26 per Mmbtu and $2.31 per Mmbtu, respectively,
before transaction and transportation costs. Hedging activities increased
Partnership revenues by approximately $19,000 and $95,000 in the second quarter
of 1998 and first half of 1998, respectively, as compared to estimated revenues
had no hedging activities been conducted. As of June 30, 1998, approximately
31% of the Partnership's anticipated natural gas production for the remainder
of 1998 had been hedged by natural gas price swap agreements at an average
NYMEX quoted price of $2.28 per Mmbtu before transaction and transportation
costs. Certain natural gas price swap agreements outstanding at June 30, 1998
grant the counterparty the option to double the contract volume at a specified
price. If this option is exercised on all contracts outstanding at June 30,
1998, approximately 49% of the Partnership's anticipated natural gas production
for July 1998 through December 1998 has been hedged by natural gas price swap
agreements at an average NYMEX quoted price of $2.30 per Mmbtu before
transaction and transportation costs. In addition, as of June 30, 1998,
outstanding natural gas basis swap agreements hedged approximately 28% of the
Partnership's anticipated natural gas production for July 1998 through
September 1998.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997. Oil and gas revenues of
$2,162,000 for the second quarter of 1998 decreased 43% compared to $3,821,000
in the corresponding quarter of 1997 primarily as a result of lower gas
production. Production of natural gas decreased 43% from 1,796,000 Mcf in the
second quarter of 1997 to 1,024,000 Mcf in the same period of 1998. Gas
production decreased due to natural depletion.
Interest income decreased 100% from $20,000 in the second quarter of
1997 to zero dollars in the current quarter. This was due to Kelley Oil funding
its subscription commitment in its entirety during the second quarter of 1997.
6
<PAGE> 8
Lease operating expenses and severance taxes were $373,000 in the
current quarter versus $831,000 in the second quarter of 1997. This 55%
decrease was due in part to lower workover expenses incurred in the current
quarter and the impact of lower current quarter production on lifting costs and
severance taxes. On a unit of production basis, these expenses decreased from
$0.45 per Mcfe in the second quarter of 1997 to $0.35 per Mcfe in the same
quarter of 1998.
The Partnership incurred exploration expenses in the second quarter of
1997 of $123,000 but did not incur any exploration expenses in the second
quarter of 1998 reflecting the cessation of exploratory activities.
General and administrative ("G&A") expenses of $211,000 in the current
quarter decreased 10% from $234,000 in the second quarter of 1997, reflecting
the Partnership's share of administration costs associated with development
operations of KOGC. On a unit of production basis, G&A expenses increased from
$0.13 per Mcfe in the second quarter of 1997 to $0.20 per Mcfe in the current
quarter.
Depreciation, depletion and amortization ("DD&A") expenses decreased
45% from $1,308,000 in the second quarter of 1997 to $717,000 in the current
quarter, primarily as a result of decreased production.
The Partnership recognized net income of $861,000 or $0.04 per Unit
for the second quarter of 1998 compared to second quarter 1997 net income of
$1,345,000 or $0.06 per Unit. The reasons for the variance between the second
quarter of 1998 and the second quarter of 1997 are described in the foregoing
discussion.
Six Months Ended June 30, 1998 and 1997. Oil and gas revenues of
$4,812,000 for the first six months of 1998 decreased 46% compared to
$8,928,000 in the corresponding period of 1997 primarily as a result of lower
gas production and prices. Production of natural gas decreased 41% from
3,829,000 Mcf in the first half of 1997 to 2,275,000 Mcf in the current period.
Natural gas prices decreased 10% to $2.03 per Mcf in the current period from
$2.25 per Mcf in the first six months of 1997.
Interest income decreased 100% from $135,000 in the first half of 1997
to zero dollars in the same period of 1998. This was due to Kelley Oil funding
its subscription commitment in its entirety during the second quarter of 1997.
Lease operating expenses and severance taxes were $739,000 in the
first half of 1998 versus $1,571,000 in the first half of 1997. This 53%
decrease was due in part to lower workover expenses incurred in the first half
of 1998 and the impact of lower first half 1998 production on lifting costs and
severance taxes. On a unit of production basis, these expenses decreased to
$0.32 per Mcfe in the current period from $0.40 per Mcfe in the same period of
1997.
The Partnership incurred exploration expenses in the first six months
of 1997 of $246,000 but did not incur any exploration expenses in the current
period reflecting the cessation of exploratory activities.
G&A expenses of $449,000 in the current period decreased 4% from
$468,000 in the first half of 1997, reflecting the Partnership's share of
administration costs associated with development operations of KOGC. On a
unit of production basis, these expenses increased from $0.12 per Mcfe in the
first six months of 1997 to $0.19 per Mcfe in the current period.
DD&A expense decreased 36% from $2,453,000 in the first half of 1997
to $1,578,000 in the current period, primarily as a result of decreased current
period production partially offset by higher current period depletion rates.
The Partnership recognized net income of $2,046,000 or $0.09 per Unit
for the first six months of 1998 compared to net income of $4,325,000 or $0.20
per Unit for the first half of 1997. The reasons for the variance between the
first half of 1998 and the first half of 1997 are described in the foregoing
discussion.
7
<PAGE> 9
The results of operations for the quarter and six months ended June
30, 1998 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 six months of 1998, as reflected on its statement
of cash flows, totaled $5,237,000. During the period, funds used in investing
activities were comprised primarily of capital expenditures of $241,000 for
development of the Partnership's oil and gas properties. For the first six
months of 1998, funds used in financing activities consisted of cash
distributions to partners of $4,996,000. As a result of these activities, the
Partnership's cash and cash equivalents remained unchanged from December 31,
1997.
Capital Resources. The capitalization of the Partnership was
completed in 1997. Cash flows from operations are expected to be adequate to
meet the Partnership's capital expenditures and working capital needs.
Distribution Policy. The Partnership maintains a policy of
distributing cash which is not required for the conduct of Partnership business
to Unitholders on a quarterly basis. In March and May 1998, the Partnership
made quarterly distributions of $0.11 and $0.12 per Unit, respectively,
(aggregating $4,996,000) as compared to distributions of $0.22 and $0.20 per
Unit in March and June 1997, respectively (aggregating $9,124,000). The
Partnership intends to continue making quarterly distributions consistent with
its cash distribution policy.
Inflation and Changing Prices. Oil and natural gas prices, as with
most commodities, are highly volatile, have fluctuated during recent years and
generally have not followed the same pattern as inflation.
FORWARD-LOOKING STATEMENTS
Statements contained in this Report and other materials filed or to be
filed by the Partnership with the Securities and Exchange Commission (as well
as information included in oral or other written statements made or to be made
by the Partnership or its representatives) that are forward-looking in nature
are intended to be "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, relating to matters such as
anticipated operating and financial performance, business prospects,
developments and results of the Partnership. Actual performance, prospects,
developments and results may differ materially from any or all anticipated
results due to economic conditions and other risks, uncertainties and
circumstances partly or totally outside the control of the Partnership,
including rates of inflation, natural gas prices, uncertainty of reserve
estimates, rates and timing of future production of oil and gas, exploratory
and development activities, acquisition risks, changes in the level and timing
of future costs and expenses related to drilling and operating activities and
those risk factors described on pages 9 and 10 of the Partnership's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
Words such as "anticipated," "expect," "estimate," "project" and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements include the risk factors described in the
Partnership's Form 10-K mentioned above.
8
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on form 8-K
(a) Exhibits:
EXHIBIT
NUMBER: EXHIBIT
------- -------
27 Financial Data Schedule (included only in the
electronic filing of this document).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
second quarter of 1998.
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 1994
DEVELOPMENT DRILLING PROGRAM
By: KELLEY OIL CORPORATION
Managing General Partner
Date: August 14, 1998 By: /s/ KENNETH R. BICKETT
--------------------------------------------
Kenneth R. Bickett
Controller
(Duly Authorized Officer)
(Principal Accounting Officer)
9
<PAGE> 11
EXHIBIT INDEX
Exhibits:
Exhibit
Numbers: Exhibits
-------- --------
27 Financial Data Schedule (included only in the electronic
filing of this document).
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,129
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,129
<PP&E> 45,450
<DEPRECIATION> 31,044
<TOTAL-ASSETS> 18,535
<CURRENT-LIABILITIES> 191
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 18,344
<TOTAL-LIABILITY-AND-EQUITY> 18,535
<SALES> 4,812
<TOTAL-REVENUES> 4,812
<CGS> 0
<TOTAL-COSTS> 739
<OTHER-EXPENSES> 2,027
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,046
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,046
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,046
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
