<PAGE> 1
================================================================================
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, 2000 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
--- ---
================================================================================
<PAGE> 2
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements:
Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited) .............................. 2
Statements of Income for the three months and six months ended
June 30, 1999 and 2000 (unaudited).............................................................. 3
Statements of Cash Flows for the six months ended June 30, 1999 and 2000 (unaudited)............... 4
Notes to Financial Statements (unaudited).......................................................... 5
Item 2. Management"s Discussion and Analysis of Financial Condition and Results of Operations...... 6
Item 3. Quantitative and Qualitative Disclosure About Market Risk.................................. 8
PART II. OTHER INFORMATION.............................................................................. 9
Item 6. Exhibits and Reports on Form 8-K........................................................... 9
</TABLE>
<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,
1999 2000
------------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................................................. $ -- $ --
Accounts receivable - trade .......................................................... 16 12
Accounts receivable - affiliates ..................................................... 905 922
--------- -------
Total current assets ................................................................. 921 934
--------- -------
Oil and gas properties, successful efforts method:
Properties subject to amortization ................................................. 32,619 32,564
Less: Accumulated depreciation, depletion and amortization ........................ (27,132) (27,499)
--------- -------
Total oil and gas properties ......................................................... 5,487 5,065
--------- -------
Total assets............................................................................. $ 6,408 $ 5,999
========= =======
LIABILITIES:
Accounts payable and accrued expenses................................................. $ 121 $ 67
--------- -------
Total current liabilities ............................................................ 121 67
--------- -------
Total liabilities ....................................................................... 121 67
--------- -------
PARTNERS' EQUITY:
LP Unitholders' equity ............................................................... 346 327
GP Unitholders' equity ............................................................... 5,693 5,371
Managing and Special General Partners' equity ........................................ 248 234
--------- -------
Total partners' equity .................................................................. 6,287 5,932
--------- -------
Total liabilities and partners' equity.................................................. $ 6,408 $ 5,999
========= =======
</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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales.......................................... $ 874 $ 602 $ 2,101 $ 1,273
Gain on sale of properties ................................. 2,012 -- 2,012 --
------- ------- ------- -------
Total revenues ............................................. 2,886 602 4,113 1,273
------- ------- ------- -------
EXPENSES:
Lease operating expenses ................................... 160 128 333 191
Severance taxes ............................................ 45 15 108 37
Exploration expenses ....................................... -- -- -- --
General and administrative expenses ........................ 120 64 211 164
Depreciation, depletion and amortization ................... 252 164 625 368
------- ------- ------- -------
Total expenses ............................................. 577 371 1,277 760
------- ------- ------- -------
Net income.................................................... $ 2,309 $ 231 $ 2,836 $ 513
======= ======= ======= =======
Net income allocable to LP and GP unitholders................. $ 2,218 $ 222 $ 2,724 $ 493
======= ======= ======= =======
Net income allocable to Managing and
Special General Partners................................... $ 91 $ 9 $ 112 $ 20
======= ======= ======= =======
Net income per LP and GP unit................................. $ .11 $ .01 $ .13 $ .02
======= ======= ======= =======
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,
-------------------------
1999 2000
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................................... $ 2,836 $ 513
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of properties......................................................... (2,012) --
Depreciation, depletion and amortization........................................... 625 368
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable......................................... 1,695 (13)
Decrease in accounts payable and accrued expenses.................................. (32) (54)
-------- --------
Net cash provided by operating activities............................................ 3,112 814
-------- --------
INVESTING ACTIVITIES:
Capital expenditures................................................................. (70) 54
-------- --------
Net cash (used in) provided by investing activities.................................. (70) 54
-------- --------
FINANCING ACTIVITIES:
Capital contributed by partners...................................................... -- --
Distributions to partners............................................................ (3,042) (868)
-------- --------
Net cash used in financing activities................................................ (3,042) (868)
-------- --------
Decrease in cash and cash equivalents................................................... -- --
Cash and cash equivalents, beginning of period.......................................... -- --
-------- --------
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 - GENERAL, INDUSTRY CONDITIONS AND LIQUIDITY
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 solely of normal recurring adjustments) necessary for a
fair statement of the results for the interim periods presented. The results of
operations for the period ended June 30, 2000 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 2 to the financial statements included in
its Annual Report on Form 10-K for the year ended December 31, 1999. These
unaudited interim financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Partnership"s
1999 Annual Report on Form 10-K.
Changes in Presentation. Certain 1999 financial statement items have
been reclassified to conform to the 2000 presentation.
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")
which was amended in June 1999 by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133." SFAS No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000, and
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. Retroactive application to periods prior to adoption is not allowed. The
Partnership has not quantified the impact of adoption on its financial
statements.
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 Contour Energy Co. (formerly Kelley Oil & Gas
Corporation) ("Contour"), 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. Contour periodically uses forward sales contracts,
swap agreements, natural gas basis swap agreements, collars and options to
reduce exposure to downward price fluctuations on its natural gas and crude oil
production. Contour"s hedging activities also cover the production attributable
to the interest of the public unitholders in its subsidiary partnerships. The
credit risk exposure from counterparty nonperformance on forward sales contracts
and derivative financial instruments is generally the amount of unrealized gains
under the contracts. Contour has not experienced counterparty nonperformance on
these agreements and does not anticipate any in future periods.
Through natural gas price swap agreements, approximately 52%, 56%,
60% and 52% of the Partnership"s natural gas production for the second quarter
of 1999, the second quarter of 2000, the first half of 1999 and the first half
of 2000, respectively, was affected by hedging transactions at average NYMEX
quoted prices of $2.11 per Mmbtu, $2.60 per Mmbtu, $2.21 per Mmbtu and $2.54 per
Mmbtu, respectively, before transaction and transportation costs. Through crude
oil price swap agreements, the Partnership hedged approximately 73% and 70% of
its crude oil production for the three and six months ended June 30, 2000,
respectively, at average NYMEX quoted prices of $27.65 per bbl and $26.38 per
bbl, respectively, before transaction and transportation costs. No crude oil was
hedged in the three and six month period ended June 30, 1999. Hedging activities
increased Partnership revenues by approximately $34,000 and $277,000 in the
second quarter of 1999 and first half of 1999, respectively, as compared to
estimated revenues had no hedging activities been conducted. Hedging activities
decreased Partnership revenues by approximately $99,000 and $78,000 in the
second quarter of 2000 and first half of 2000, respectively, as compared to
estimated revenues had no hedging activities been conducted. As of June 30,
2000, approximately 39% of the Partnership"s anticipated natural gas production
for the remainder of 2000 had been hedged by natural gas price swap agreements
at an average NYMEX quoted price of $2.60 per Mmbtu before transaction and
transportation costs. As of June 30, 2000, approximately 15% of the
Partnership's anticipated crude oil production for the remainder of 2000 has
been hedged by crude oil price swap agreements at an average NYMEX quoted price
of $25.40 per bbl before transaction and transportation costs. As of June 30,
2000, approximately 50% of the Partnership's natural gas production for the July
- December 2000 period had been hedged in the form of collars at a floor of
$4.00/Mmbtu and a ceiling of $4.98/Mmbtu. Since June 30, 2000, the Partnership
has executed two collars on approximately 50% of its expected natural gas
production for the calendar year 2001. The terms of the first collar include a
ceiling of $5.00/Mmbtu and a floor of $3.55/Mmbtu at closing NYMEX prices above
$3.00/Mmbtu. However, at prices below $3.00/Mmbtu, the floor moves to NYMEX
price plus $0.55 /Mmbtu. The terms of the second collar include a ceiling of
$5.00/Mmbtu and a floor of $3.75/Mmbtu at closing NYMEX prices above
$3.09/Mmbtu. However, at prices below $3.09/Mmbtu, the floor moves to NYMEX
price plus $0.66 /Mmbtu.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999. Oil and gas revenues of
$602,000 for the second quarter of 2000 decreased 31% compared to $874,000 in
the corresponding quarter of 1999 primarily as a result of lower gas production.
Production of natural gas decreased 53% from 444,000 Mcf in the second quarter
of 1999 to 207,000 Mcf in the same period
6
<PAGE> 8
of 2000. Gas production decreased due to the sale of properties to Phillips
Petroleum Company and natural depletion. In the second quarter of 1999, the
Partnership conveyed its interest in the West Bryceland and Sailes fields to
Phillips Petroleum Company. This transaction resulted in a second quarter 1999
gain on sale of properties of $2,012,000, see Liquidity and Capital Resources
for further discussion.
Lease operating expenses and severance taxes were $143,000 in the
current quarter versus $205,000 in the second quarter of 1999. This 30% decrease
was primarily due to the sale of properties in the second quarter of 1999. On a
unit of production basis, these expenses increased from $0.44 per Mcfe in the
second quarter of 1999 to $0.68 per Mcfe in the same quarter of 2000.
General and administrative ("G&A") expenses of $64,000 in the current
quarter decreased 47% from $120,000 in the second quarter of 1999, reflecting
the Partnership"s share of administration costs associated with operations of
Contour. On a unit of production basis, G&A expenses increased from $0.26 per
Mcfe in the second quarter of 1999 to $0.30 per Mcfe in the current quarter.
Depreciation, depletion and amortization ("DD&A") expenses decreased
35% from $252,000 in the second quarter of 1999 to $164,000 in the current
quarter, primarily as a result of decreased production related to the sale of
properties in the second quarter of 1999.
The Partnership recognized net income of $231,000 or $0.01 per Unit for
the second quarter of 2000 compared to second quarter 1999 net income of
$2,309,000 or $0.11 per Unit. The reasons for the variance between the second
quarter of 2000 and the second quarter of 1999 are described in the foregoing
discussion.
Six Months Ended June 30, 2000 and 1999. Oil and gas revenues of
$1,273,000 for the first six months of 2000 decreased 39% compared to $2,101,000
in the corresponding period of 1999 as a result of lower gas production
partially offset by higher prices. Production of natural gas decreased 58% from
1,113,000 Mcf in the first half of 1999 to 464,000 Mcf in the current period
primarily due to the sale of properties in the first half of 1999 to Phillips
Petroleum Company, see below. Natural gas prices increased 42% to $2.69 per Mcf
in the current period from $1.90 per Mcf in the first six months of 1999. In the
second quarter of 1999, the Partnership conveyed its interest in the West
Bryceland and Sailes fields to Phillips Petroleum Company. This transaction
resulted in a second quarter 1999 gain on sale of properties of $2,012,000, see
Liquidity and Capital Resources for further discussion.
Lease operating expenses and severance taxes were $228,000 in the first
half of 2000 versus $441,000 in the first half of 1999. This 48% decrease was
primarily due to the sale of properties in the first half of 1999. On a unit of
production basis, these expenses increased to $0.48 per Mcfe in the current
period from $0.39 per Mcfe in the same period of 1999.
G&A expenses of $164,000 in the current period decreased 22% from
$211,000 in the first half of 1999, reflecting the Partnership"s share of
administration costs associated with operations of Contour. On a unit of
production basis, these expenses increased from $0.18 per Mcfe in the first six
months of 1999 to $0.34 per Mcfe in the current period.
DD&A expense decreased 41% from $625,000 in the first half of 1999 to
$368,000 in the current period, primarily as a result of decreased current
period production related to the sale of properties in the first half of 1999.
The Partnership recognized net income of $513,000 or $0.02 per Unit for
the first six months of 2000 compared to net income of $2,836,000 or $0.13 per
Unit for the first half of 1999. The reasons for the variance between the first
half of 2000 and the first half of 1999 are described in the foregoing
discussion.
The results of operations for the quarter and six months ended June 30,
2000 are not necessarily indicative of the Partnership"s operating results to be
expected for the full year.
7
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Net cash provided by the Partnership"s operating activities
during the first six months of 2000, as reflected on its statement of cash
flows, totaled $814,000. During the period, funds provided by investing
activities were comprised of net reductions to capital expenditures of $54,000.
For the first six months of 2000, funds used in financing activities consisted
of cash distributions to partners of $868,000. As a result of these activities,
the Partnership"s cash and cash equivalents remained unchanged from December 31,
1999.
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 2000, the Partnership made
quarterly distributions of $0.02 per Unit, (aggregating $868,000) as compared to
distributions of $0.05 and $0.09 per Unit in March and May 1999, respectively
(aggregating $3,042,000). 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.
Accounting Pronouncements. 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")
which was amended in June 1999 by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133." SFAS No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000, and
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. Retroactive application to periods prior to adoption is not allowed. The
Partnership has not quantified the impact of adoption on its financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See discussion in Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Hedging Activities.
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, 1999.
8
<PAGE> 10
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.
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 2000.
9
<PAGE> 11
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 11, 2000 By: /s/ Rick G. Lester
-------------------------------
Rick G. Lester
Chief Financial Officer
(Duly Authorized Officer)
(Principal Accounting Officer)
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
