<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 MARCH 31, 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>
Balance Sheets as of December 31, 1999 and March 31, 2000 (unaudited)................................. 2
Statements of Income for the three months ended March 31, 1999 (unaudited) and 2000 (unaudited)....... 3
Statements of Cash Flows for the three months ended March 31, 1999 (unaudited) and 2000 (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................................................................................. 8
</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, MARCH 31,
1999 2000
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................................................ $ -- $ --
Accounts receivable - trade.......................................................... 16 17
Accounts receivable - affiliates..................................................... 905 955
--------- ---------
Total current assets................................................................. 921 972
--------- ---------
Oil and gas properties, successful efforts method:
Properties subject to amortization................................................. 32,619 32,555
Less: Accumulated depreciation, depletion & amortization.......................... (27,132) (27,336)
--------- ---------
Total oil and gas properties......................................................... 5,487 5,219
--------- ---------
Total assets....................................................................... $ 6,408 $ 6,191
========= =========
LIABILITIES:
Accounts payable and accrued expenses................................................ $ 121 $ 56
--------- ---------
Total current liabilities............................................................ 121 56
--------- ---------
Total liabilities.................................................................. 121 56
--------- ---------
PARTNERS' EQUITY:
LP Unitholders' equity............................................................... 346 338
GP Unitholders' equity............................................................... 5,693 5,555
Managing and Special General Partners' equity........................................ 248 242
--------- ---------
Total partners' equity............................................................... 6,287 6,135
--------- ---------
Total liabilities and partners' equity............................................. $ 6,408 $ 6,191
========= =========
</TABLE>
See Notes to Financial Statements (unaudited).
2
<PAGE> 4
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 2000
--------- ---------
<S> <C> <C>
OPERATING REVENUES:
Oil and gas sales.................................................................... $ 1,227 $ 671
Interest income...................................................................... -- --
--------- ---------
Total revenues....................................................................... 1,227 671
--------- ---------
COSTS AND EXPENSES:
Lease operating expenses............................................................. 173 63
Severance taxes...................................................................... 63 22
Exploration expenses................................................................. -- --
General and administrative expenses.................................................. 91 100
Depreciation, depletion and amortization............................................. 373 204
--------- ---------
Total expenses....................................................................... 700 389
--------- ---------
Net income.............................................................................. $ 527 $ 282
========= =========
Net income allocable to LP and GP Unitholders........................................... $ 506 $ 271
========= =========
Net income allocable to Managing and
Special General Partners............................................................. $ 21 $ 11
========= =========
Net income per LP and GP unit........................................................... $ .02 $ .01
========= =========
Average LP and GP units outstanding..................................................... 20,864 20,864
========= =========
</TABLE>
See Notes to Financial Statements (unaudited).
3
<PAGE> 5
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 2000
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................................... $ 527 $ 282
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization........................................... 373 204
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable......................................... 220 (51)
Decrease in accounts payable and accrued expenses.................................. (35) (65)
--------- ----------
Net cash provided by operating activities............................................ 1,085 370
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures................................................................. 2 64
--------- ---------
Net cash provided by investing activities............................................ 2 64
--------- ---------
FINANCING ACTIVITIES:
Distributions to partners............................................................ (1,087) (434)
--------- ---------
Net cash used in financing activities................................................ (1,087) (434)
--------- ---------
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 (unaudited).
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 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 March 31, 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
1998 Annual Report on Form 10-K.
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. ("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 has periodically used forward sales
contracts, natural gas and crude oil swap agreements, natural gas basis swap
agreements and options to reduce exposure to downward price fluctuations on its
natural gas and crude oil production. Contour'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. Contour has not experienced counterparty nonperformance on
these agreements and does not anticipate any in future periods.
Through natural gas price swap agreements, approximately 66% and 49%
of the Partnership's natural gas production for the three months ended March 31,
1999 and March 31, 2000, respectively, was affected by hedging transactions at
average NYMEX quoted prices of $2.27 per Mmbtu and $2.48 per Mmbtu before
transaction and transportation costs. As of March 31, 2000, approximately 45% 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. Through
crude oil price swap agreements, the Partnership hedged approximately 67% of its
crude oil production for the three months ended March 31, 2000, at an average
NYMEX quoted price of $25.09 per bbl, before transaction and transportation
costs. No crude oil was hedged in the three months ended March 31, 1999. As of
March 31, 2000, approximately 35% of the Partnership's anticipated crude oil
production for the remainder of 2000 had been hedged by crude oil price swap
agreements at an average NYMEX quoted price of $27.00 per bbl, before
transaction and transportation costs. Hedging activities increased Partnership
revenues by approximately $243,000 and $12,000 in the three months ended March
31, 1999 and the three months ended March 31, 2000, respectively, as compared to
estimated revenues had no hedging activities been conducted. At March 31, 2000,
the unrealized loss on the Partnership's existing hedging instruments for future
production months in 2000 approximated $103,000.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999. Oil and gas revenues of
$671,000 for the first quarter of 2000 decreased 45% compared to $1,227,000 in
the corresponding quarter of 1999 primarily as a result of lower natural gas and
crude oil production partially offset by higher natural gas and oil prices.
Production of natural gas decreased 62% from 668,000 Mcf in the first quarter of
1999 to 257,000 Mcf in the same period of 2000 due to the sale of properties to
Phillips Petroleum Company ("Phillips") in the second quarter of 1999 and due to
natural depletion. In the second quarter of 1999, the Partnership conveyed its
interest in the West Bryceland and Sailes fields to Phillips ("Phillips
Transaction"). Natural gas prices of $1.78 per Mcf in the first quarter of 1999
increased 42% to $2.53 in the corresponding quarter of 2000. Production of crude
oil in the current quarter totaled 1,397 barrels, with an average sales price of
$27.61 per barrel compared to 1,880 barrels at $11.25 per barrel in the same
quarter last year, representing a volume decrease of 26% and a price increase of
145%.
6
<PAGE> 8
Lease operating expenses and severance taxes were $85,000 in the
current quarter versus $236,000 in the first quarter of 1999. This 64% decrease
was due to lower severance taxes and reductions in other operating expenses due
to lower production, which was primarily related to the Phillips Transaction. On
a unit of production basis, these expenses decreased from $0.34 per Mcfe in the
first quarter of 1999 to $0.32 per Mcfe in the same quarter of 2000.
The Partnership did not incur exploration expenses in the first quarter
of either 2000 or 1999 reflecting the cessation of exploratory activities.
General and administrative expenses of $100,000 in the current quarter
increased 10% from $91,000 in the first quarter 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 $0.14 per
Mcfe in the first quarter of 1999 to $0.38 per Mcfe in the current quarter.
Depreciation, depletion and amortization ("DD&A") expense decreased 45%
from $373,000 in the first quarter of 1999 to $204,000 in the current quarter,
as a result of decreased production related to the Phillips Transaction.
The Partnership recognized net income of $282,000 or $0.01 per Unit for
the first quarter of 2000 compared to first quarter 1999 net income of $527,000
or $0.02 per Unit. The reasons for the variance between the first quarter of
2000 and the first quarter of 1999 are described in the foregoing discussion.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Net cash provided by the Partnership's operating activities
during the first three months of 2000, as reflected on its statement of cash
flows, totaled $370,000. During the period, funds provided by investing
activities were comprised of net reductions to capital expenditures of $64,000.
For the first three months of 2000, cash distributions to partners totaled
$434,000. 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 1998. 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 2000, the Partnership made a
quarterly distribution of $0.02 per Unit (aggregating $434,000) as compared to a
distribution of $0.05 per Unit (aggregating $1,087,000) in the first quarter of
1999. The Partnership intends to continue making quarterly distributions
consistent with its cash distribution policy.
Year 2000. Contour, on behalf of the Partnership, conducted reviews and
evaluations in response to Year 2000 issues. These issues involved the potential
disruption to systems, processes, and business practices that may have occurred
if system hardware and software utilized by Contour, its vendors, and customers
had been unable to process year 2000 data. Neither Contour nor the Partnership
incurred any disruptions due to year 2000 issues.
The foregoing statements are intended to be and are hereby designated
"Year 2000 Readiness Disclosures" within the meaning of the Year 2000
Information and Readiness Act.
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,
7
<PAGE> 9
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 7A. 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,
oil and natural gas prices, uncertainty of reserve estimates, rates and timing
of future production of oil and natural 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.
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 5. 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
first quarter of 2000.
8
<PAGE> 10
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: May 15, 2000 By: /s/ RICK G. LESTER
-----------------------
Rick G. Lester
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
9
<PAGE> 11
INDEX TO EXHIBITS
EXHIBIT
NUMBER: EXHIBIT
------- -------
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 972
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 972
<PP&E> 32,555
<DEPRECIATION> 27,336
<TOTAL-ASSETS> 6,191
<CURRENT-LIABILITIES> 56
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 6,135
<TOTAL-LIABILITY-AND-EQUITY> 6,191
<SALES> 671
<TOTAL-REVENUES> 671
<CGS> 0
<TOTAL-COSTS> 85
<OTHER-EXPENSES> 304
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 282
<INCOME-TAX> 0
<INCOME-CONTINUING> 282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 282
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
