Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the transition period from _______ to ________

Commission file number 333-83634

KENTUCKY RIVER PROPERTIES LLC
(Exact name of registrant as specified in its charter)

Registrant’s Telephone Number, Including Area Code:  (859) 254-8498

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.

The number of the Registrant’s membership units outstanding as of November 14, 2002 was 1 unit.

Table of Contents

TABLE OF CONTENTS

Explanatory Note

Kentucky River Properties LLC was formed on February 14, 2002 in connection with a proposed restructuring of Kentucky River Coal Corporation (the Company) to convert to S corporation status for federal income tax purposes.  Kentucky River Properties LLC holds only minimal assets, has conducted no operations except in connection with the restructuring and is currently a wholly-owned subsidiary of the Company.  Accordingly, no financial information for Kentucky River Properties LLC is included.  All financial information for Kentucky River Coal Corporation is provided in accordance with the requirements of Form 10-Q.  See “Item 5.  Other Information” for a description of the restructuring.

2

Table of Contents

PART I.  FINANCIAL INFORMATION

Item 1. – Financial Statements

KENTUCKY RIVER COAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
September 30, 2002 and December 31, 2001
(In thousands, except share and per share data)

See accompanying notes to unaudited consolidated condensed financial statements.

3

Table of Contents

KENTUCKY RIVER COAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Income
Nine and Three Months ended September 30, 2002 and 2001
(In thousands, except share and per share data)

See accompanying notes to unaudited consolidated condensed financial statements.

4

Table of Contents

KENTUCKY RIVER COAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Nine Months ended September 30, 2002 and 2001
(In thousands)

See accompanying notes to unaudited consolidated condensed financial statements.

5

Table of Contents

KENTUCKY RIVER COAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

September 30, 2002 and December 31, 2001

(In thousands, except share data)

(1)     Financial Statement Presentation

The unaudited consolidated condensed financial statements for the three months and nine months ended September 30, 2002 and 2001, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, these statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management of the Company, all adjustments necessary for a fair presentation have been included. The unaudited consolidated financial statements presented herein have been prepared in accordance with the accounting policies described with respect to the Company’s audited annual financial statements and should be read in accordance therewith. Complete audited annual consolidated financial statements were issued for the year ended December 31, 2001, and can be found in Kentucky River Properties LLC’s S-4 report filed with the Securities and Exchange Commission, declared effective June 10, 2002.  The results of operations for the nine-month period ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year.

(2) Organization

(a) Restructuring and Subsequent Events

On February 14, 2002, Kentucky River Coal Corporation (the Company) announced a proposed restructuring to convert to S corporation status for federal income tax purposes. On July 29, 2002 the restructuring was approved at a special meeting of the Company’s shareholders. The Company has elected to be treated as an S Corporation for federal income tax purposes beginning in January 2003.

On February 14, 2002, Kentucky River Properties LLC (the Registrant) was formed.  On March 1, 2002, the Registrant filed a registration statement with the Securities and Exchange Commission relating to the proposed corporate restructuring of the Company to convert to S Corporation status. On June 10, 2002, the registration statement, initially filed on March 1, 2002, became effective.

On July 29, 2002, at a special shareholders’ meeting, the shareholders of the Company approved the restructuring.  Pursuant to the restructuring, on July 31, 2002, each minority share of the Company was converted into the right to receive $4 in cash and a subscription right to subscribe for one Kentucky River Properties LLC membership unit at an exercise price of $4 per membership unit.  A minority share of the Company is a share held by a shareholder who did not qualify to become a shareholder of the S Corporation.  On July 31, 2002, the minority shares converted were 21,491 resulting in an obligation to minority shareholders of $85,964.  As of September 30, 2002, the obligation to minority shareholders was $1,291 for 491 minority shares outstanding.  On December 1, 2002, the subscription rights for Kentucky River Properties LLC membership units will become exercisable and will remain exercisable for a 30-day period.  The subscription rights will expire at 5:00 p.m., Eastern Time, on December 30, 2002.

On August 2, 2002, the Company entered into a financing arrangement, pursuant to a March 2002 commitment letter, that permits the Company to borrow up to $20,000 at one month LIBOR plus 2.25%.  The Company must retain $1,000 in an account with its lender as a compensating balance.  As of September 30, 2002, the Company had borrowed $3,000 and had $17,000 available from this financing arrangement.  In addition, the Company, its lender and the Registrant entered into an assumption agreement providing for the assumption of the Company’s obligations under the financing arrangement by the Registrant when the Company transfers substantially all of its assets and liabilities to the Registrant, expected on or before November 30, 2002, as part of the restructuring.  As of September 30, 2002, the Registrant’s only asset was cash of $205 that was included in the consolidated financial statements of the Company.

(b) Business

The Company and its subsidiaries are primarily engaged in leasing mineral reserves and, to a lesser degree, participating in partnerships and joint ventures which explore for and develop oil and gas properties. The majority of the Company’s revenue-producing properties are located in Eastern Kentucky.

6

Table of Contents

(c) Consolidation Practice

The accompanying consolidated financial statements include the accounts of Kentucky River Coal Corporation and its wholly-owned subsidiaries, Kentucky River Properties LLC (the Registrant), KRCC Oil & Gas, LLC, Florida Kentucky Timberlands, Inc., The Kent-Mar Corporation, Timberlands, LLC, and Tennis Capital, Inc., prior to its merger into the Company on August 31, 2002. All significant intercompany accounts and transactions have been eliminated. On January 1, 2002, KRCC Oil and Gas, Inc. and Timberlands, Inc. were merged into KRCC Oil & Gas, LLC and Timberlands, LLC, respectively.

(d) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(2) Recently Adopted Accounting Pronouncements

Effective January 1, 2002, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.  The SFAS requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142.  SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.  The adoption of SFAS No. 142 did not have an effect on the consolidated financial statements of the Company.

Effective January 1, 2002, the Company adopted FASB SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that statement.

SFAS No. 144 also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, (Opinion No. 30) for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced management’s ability to provide information that helps financial statement users assess the effects of a disposal transaction on the ongoing operations of an entity. The adoption of SFAS No. 144 did not have an effect on the consolidated financial statements of the Company.

Effective May 15, 2002, Statement of Financial Accounting Standards No. 145, Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13, and Technical Corrections, updates, clarifies and simplifies existing accounting pronouncements. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for eleven certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of SFAS No. 145 related to SFAS No. 4 and SFAS No. 13 are effective for fiscal years beginning and transactions occurring after May 15, 2002, respectively. The adoption of SFAS No. 145 did not have an effect on the consolidated financial statements of the Company.

Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, requires the Company to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces Emerging Issues Task Force (“EITF”) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of SFAS No. 146 are to be applied prospectively to exit or disposal activities initiated after December 31, 2002.  It is anticipated that the financial impact of SFAS No. 146 will not have an effect on the consolidated financial statements of the Company.

(3) Securities

The change in net unrealized holding gains (losses) on trading securities that has been included in net income is $0 and $(7,703) for the nine months ended September 30, 2002 and 2001, respectively, and $0 and $(3,896) for the three months ended September 30, 2002 and 2001, respectively.

The amortized cost and approximate fair value of securities and the gross unrealized gains and losses at September 30, 2002 and December 31, 2001 follow:

7

Table of Contents

As of September 30, 2002, the Company held no debt securities with contractual maturities.

Proceeds from the sale of available-for-sale securities were $36,390 and $9,683 in the nine months ended September 30, 2002 and 2001, respectively.

Gross realized gains on sales of available-for-sale securities were $1,952 and $187 in the nine months ended September 30, 2002 and 2001, respectively. Gross realized losses on sales of available-for-sale securities were $441 and $30 in the three months ended September 30, 2002 and 2001, respectively.

8

Table of Contents

(4) Earnings Per Share

The following data details the amounts used in computing earnings per share from continuing operations and the effect on income and the weighted average number of shares of dilutive potential common stock.

(5) Benefit Plans

In 1980, the Company adopted a stock option plan (the Plan) for eligible employees. The Plan provides for granting of stock options to purchase shares of common stock at an exercise price equal to the fair value of the stock on the day the option is granted. Options may be exercised for a two-year period beginning on the date of grant.

The fair value of each option is estimated on the date of grant using the minimum value method (excluding a volatility assumption) with the following weighted average assumptions: 2002--no options were granted during the nine months ended September 30; 2001--expected dividend yield 7.31%, risk-free interest rate of 3.21%, and an expected life of 2 years.

Stock option activity during the periods indicated is as follows:

At September 30, 2002 and September 30, 2001, the number of options exercisable was 0 and 632, respectively, and the weighted average exercise price of these options was $0 and $2,850, respectively.

9

Table of Contents

(6) Commitments and Contingencies

In 1996, the Company committed to fund $3,000 in capital contributions to a limited partnership formed for the purpose of investing in various companies. The commitment period had a term of five years and, as of September 30, 2002 and December 31, 2001, $2,911 had been advanced to the limited partnership. The balance at September 30, 2002 and December 31, 2001 of $2,554 is included in other assets--investment in limited partnerships in the consolidated financial statements.

In 2001, the Company committed to fund $2,000 in capital contributions to another limited partnership formed for the purpose of investing in various companies. The commitment period has a term of five years and, as of September 30, 2002 and December 31, 2001, $20 had been advanced to the limited partnership and is included in other assets--investment in limited partnerships in the consolidated financial statements.

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Nine Months Ended September 30, 2002 Compared With Nine Months Ended September 30, 2001

Net Income. Net income was $15.8 million for the nine months ended September 30, 2002, as compared to $10.1 million for the nine months ended September 30, 2001, an increase of $5.7 million, or 56%. The increase is attributable to the increase in other income offset by the related increase in income taxes.

Revenues. Total revenues for the nine months ended September 30, 2002, were $24.8 million compared to $24.6 million for the nine months ended September 30, 2001, an increase of $214,000, or 1%. The increase is primarily attributable to the combined effect of the increase in coal royalty revenues offset by the decline in oil and gas revenues resulting from the sale of most of our oil and gas wells late in 2001.

Coal royalty revenues for the nine months ended September 30, 2002, were $22.1 million for 10.1 million tons compared to $20.2 million for 9.4 million tons for the nine months ended September 30, 2001, an increase of $1.9 million, or 9%, and 700,000 tons, or 7%. During 2002, minimum royalties of $3.5 million for 2.0 million tons were received from a lessee for the previous four production years.  These minimum royalties were not recognized as revenue in prior periods as collectability was not reasonably assured.  Excluding this minimum royalty, royalty revenue and production were $18.6 million for 8.1 million tons, down 8% and 14%, respectively, for the nine months ended September 30, 2002 compared to the same 2001 period. Excluding this minimum royalty, realization increased to $2.28 per ton for the nine months ended September 30, 2002, up from $2.14 for the year ago period, an increase of 7%.  Demand for coal was soft early in 2002 as a result of the mild winter, and the utilities were working off stockpiles they had built up to avoid the shortages that occurred in the winter of 2001.  More recently, the unusually warm summer caused the stockpiles to shrink, which should have resulted in higher demand for coal in the fourth quarter of 2002.  However, the increase in demand has not been as great as anticipated during the third quarter 2002 and the first part of the fourth quarter 2002.  While we expect production from our properties to improve for the fourth quarter of 2002, production for the full year (excluding the minimum tonnages noted above) is likely to be down by approximately 8% to 12% compared to the 2001 year.  The higher realization per ton occurred despite sharply lower spot coal prices in early first half of 2002 relative to the same period in 2001, indicating that our lessees were able to increase some of the prices in their sales contracts during the period of higher prices in 2000 and 2001. We expect realization per ton for all of 2002 will be slightly above that of 2001.  The realization per ton in the fourth quarter of 2001 was higher than the average realization for the nine months ended September 30, 2002.  Absent changes in the market, the realization per ton for the fourth quarter 2002 is likely to be below that of the fourth quarter 2001.

Rents and haulage were $1.8 million for the nine months ended September 30, 2002, compared to $1.3 million for the nine months ended September 30, 2001, an increase of $570,000, or 45%. The increase was due to an increase in haulage tonnage to 4.5 million tons for the nine months ended September 30, 2002, from 2.8 million tons for the year-ago period offset by a decrease in the realization to $.40 per ton in the same 2002 period from $.44 per ton for the year-ago period. The increase in haulage revenue and tonnage as well as the decrease in haulage realization is due primarily to minimum haulage of $269,000 for 1.3 million tons recognized in 2002 from a lessee for the past four years minimum haulage requirements. This revenue was not recognized in prior periods as collectability was not reasonably assured. Excluding this minimum haulage, haulage tonnage was 3.2 million tons with a realization of $.48 per ton, an increase of 400,000 tons, or 14%, and $.04 per ton, or 9%. Since haulage revenues are generated by the processing by our lessees of coal belonging to others, the tonnage fluctuates depending on the extent to which our lessees are mining inside or outside our property boundaries. Haulage is based in part on a percentage of the sales price, so like royalties, the realization is a function of price.

Oil and gas sales and royalties were $920,000 for the nine months ended September 30, 2002, compared to $3.1 million for the nine months ended September 30, 2001, a decrease of $2.2 million, or 71%. The decrease is mainly attributable to the sale of the majority of our oil and gas working interests during the fourth quarter of 2001 which was effective as of June 30, 2001. A decrease in prices, especially for natural gas, also had an effect in the decline. During 2002, six gross, or three net, new working interest gas wells came on-line and began contributing nominally to oil and gas revenue.  We anticipate continuing to participate in gas drilling efforts during the remainder of the year at a modest rate.  Accordingly, the full year comparison for 2002 should be stronger than that of the nine months of 2002, but oil and gas revenues are still expected to be less than 50% of 2001 oil and gas revenues.

10

Table of Contents

Operating Costs and Expenses. Aggregate operating costs and expenses for the nine months ended September 30, 2002, were $4.7 million compared to $4.5 million for the nine months ended September 30, 2001, an increase of $200,000, or 4%. The increase in operating expenses relates to the increase in operating, general and administrative expenses offset by the decrease in oil and gas operating expenses.

Income from operations remained flat at $20.1 million for the nine months ended September 30, 2002 and 2001, respectively.  Income from operations was unchanged due to the increase in coal royalty and rents and haulage revenue offset by the decrease in oil and gas revenue.

Operating, general and administrative expenses were $4.6 million for the nine months ended September 30, 2002 compared to $3.8 million for the nine months ended September 30, 2001, an increase of $800,000, or 21%. The increase is attributable to the expenses associated with our restructuring transaction.

Oil and gas expenses were $96,000 for the nine months ended September 30, 2002, compared to $701,000 for the nine months ended September 30, 2001, a decrease of $605,000, or 86%. This decrease resulted from the sale of the majority of our oil and gas working interests during the fourth quarter of 2001which was effective as of June 30, 2001. We project the trend in our lower oil and gas operating expenses will continue and anticipate that these expenses will fall by 80% in 2002 as a result of this sale. Our royalty interests bear no operating expenses other than severance taxes, so following the sale of the working interests, oil and gas expenses should decline disproportionately more than oil and gas revenues for the year 2002.

Other Income. Other income was $3.5 million for the nine months ended September 30, 2002, compared to a loss of $4.9 million for the nine months ended September 30, 2001, an increase of $8.4 million. The difference is primarily the result of the change in unrealized security gains and losses.

There was no net unrealized gain or loss on trading securities for the nine months ended September 30, 2002, because the trading securities portfolio was liquidated during the first quarter 2002. By comparison, the net unrealized loss for the nine months ended September 30, 2001, was $7.7 million.

Gain on sale of securities decreased to $576,000 for the nine months ended September 30, 2002, compared to $688,000 for the nine months ended September 30, 2001, a decrease of $112,000, or 16%. During the nine months ended September 30, 2002, our trading securities portfolio was entirely liquidated and our available-for-sale securities portfolio was mostly liquidated, in order to reduce the Company’s exposure to near-term market volatility in light of the need for liquid assets to finance the restructuring. The proceeds from the securities sales were invested in short-term U.S. treasury bills.  As those short-term U.S. treasury bills matured or were sold the proceeds were retained as cash.

Interest and dividend income was $1.7 million for the nine months ended September 30, 2002, compared to $1.4 million for the nine months ended September 30, 2001. The $287,000, or 20%, increase was primarily due to the liquidation of our trading securities portfolio from which the proceeds were invested in short-term U.S. Treasury bills.   As these U.S. Treasury bills matured or were sold the proceeds were retained as cash.  Accordingly, we expect interest and dividend income to decline during the fourth quarter 2002.

Gain on sale of land and improvements was $842,000 for the nine months ended September 30, 2002, compared to $339,000 for the nine months ended September 30, 2001, an increase of $503,000, or 148%.  Variations in gains on sale of land and improvements result from the irregular nature, in both size and timing, of such sales.

Other income, consisting mostly of sales of standing timber, was $321,000 for the nine months ended September 30, 2002, compared to $383,000 for the nine months ended September 30, 2001, a decrease of $62,000, or 16%.  Timber revenues fluctuate significantly from year to year, depending on a number of factors, including marketing conditions, weather, species mix and the level of harvesting in advance of surface mining operations.

Income Taxes. Income tax expense was $7.7 million (effective tax rate of 33%) for the nine months ended September 30, 2002, based on pretax income of $23.6 million as compared with $5.1 million (effective tax rate of 34%) for the nine months ended September 30, 2001, based on pretax income of $15.2 million for the year earlier period. The $2.6 million, or 51%, increase was primarily due to the election of the S Corporation status in the third quarter effective January 1, 2003 and the corresponding tax effect of oil and gas drilling costs as well as the tax effect of unrealized losses on trading securities from the September 30, 2001 reporting period.

Three Months Ended September 30, 2002 Compared With Three Months Ended September 30, 2001

Net Income. Net income was $3.8 million for the three months ended September 30, 2002, as compared to $1.8 million for the three months ended September 30, 2001, an increase of $2.0 million, or 111%. The increase in other income more than offset the decrease in income from operations.

Revenues. Total revenues were $6.2 million for the three months ended September 30, 2002, compared to $7.7 million for the three months ended September 30, 2001, a decrease of $1.5 million, or 19%. The decrease is primarily attributable to the combined effect of the decrease in coal royalty and the decline in oil and gas revenue resulting from the sale of most of the oil and gas working interests late in the fourth quarter of 2001.

11

Table of Contents

Coal royalty revenues were $5.3 million for 2.3 million tons for the three months ended September 30, 2002, compared to $6.4 million for 2.8 million tons for the three months ended September 30, 2001, a decrease of $1.1 million, or 17%, and 500,000 tons, or 18%. During the three months ended September 30, 2002, demand for coal remained lower than that of the prior year period as the utilities continued to deplete their coal stockpiles despite increased demand for utilities during the warm summer months.  Realization remained unchanged at $2.30 per ton for the three months ended September 30, 2002 and 2001. 

Rents and haulage were $541,000 for the three months ended September 30, 2002, compared to $567,000 for the three months ended September 30, 2001, a decrease of $26,000, or 5%. The decrease was due to a decrease in haulage tonnage to 960,000 tons for the three months ended September 30, 2002, from 1.1 million tons for the three months September 30, 2001, offset by an increase in the realization to $.55 per ton from $.50 per ton for the same comparable periods. Since haulage revenues are generated by the processing by our lessees of coal belonging to others, the tonnage fluctuates depending on the extent to which our lessees are mining inside or outside our property boundaries. Haulage is based in part on a percentage of the sales price, so like royalties, the realization is a function of price.

Oil and gas sales and royalties were $273,000 for the three months ended September 30, 2002, compared to $768,000 for the three months ended September 30, 2001, a decrease of $495,000, or 64%. The decrease is mainly attributable to the sale of the majority of our oil and gas working interests during the fourth quarter of 2001which was effective as of June 30, 2001. During the second and third quarters of 2002 several new working interest gas wells came on line and began contributing nominally to oil and gas revenue.  We anticipate continuing to participate in gas drilling efforts during the remainder of the year at a modest rate.

Operating Costs and Expenses. Aggregate operating costs and expenses for the three months ended September 30, 2002, compared to the same prior year period, were relatively flat at $1.4 million. Operating expenses were unchanged due to the decrease of oil and gas expense offset by the increase in operating, general and administrative expenses.

Income from operations was $4.7 million for the three months ended September 30, 2002, compared to $6.3 million for the three months ended September 30, 2001, a decrease of $1.6 million, or 25%. The decrease was due to the decrease in coal royalty and the decrease in oil and gas income.

Operating, general and administrative expenses were $1.4 million for the three months ended September 30, 2002, compared to $1.2 million for the three months ended September 30, 2001, an increase of $222,000, or 19%. The increase is primarily attributable to the expenses associated with our restructuring transaction.

Oil and gas expenses were $26,000 for the three months ended September 30, 2002, compared to $222,000 for the three months ended September 30, 2001, a decrease of $196,000, or 88%. The decrease resulted from the sale of the majority of our working interest production during the fourth quarter of 2001 which was effective as of June 30, 2001. We project that the trend in lower oil and gas operating expenses will continue in 2002 and anticipate that these expenses will level out at an approximate 80% reduction for the year 2002 as compared to the prior year as a result of this sale. Our royalty interests bear no operating expenses other than severance taxes, so following the sale of the working interests, oil and gas expenses should decline disproportionately more than oil and gas revenues for the year 2002.

Other Income. Other income was $350,000 for the three months ended September 30, 2002, compared to a loss of $3.6 million for the three months ended September 30, 2001, an increase of $3.9 million, or 110%.  The difference is the result of the decrease in unrealized losses on trading securities offset by a decrease in interest and dividend income.

There were no unrealized losses on trading securities for the three months ended September 30, 2002, compared to unrealized losses of $3.9 million for the three months ended September 30, 2001. Also, there was no gain or loss on sale of securities for the three months ended September 30, 2002, compared to a loss of $274,000 for the three months ended September 30, 2001.  The lack of third quarter 2002 investment activity was a result of the first quarter 2002 liquidation of the trading securities portfolio and most of the available-for-sale securities portfolio in light of the need for liquid assets to finance the restructuring. The proceeds from the securities sales were invested in short-term U.S. treasury bills.  As those investments matured or were sold, the proceeds were retained as cash.

Interest and dividend income was $201,000 for the three months ended September 30, 2002, compared to $429,000 for the three months ended September 30, 2001. The $228,000, or 53%, decrease was due to the 2002 liquidation of our investment portfolio to fund the restructuring.

Other income, consisting mostly of sales of standing timber, was relatively flat at $156,000 for the three months ended September 30, 2002, compared to $153,000 for the three months ended September 30, 2001, an increase of $3,000, or 2%. Timber revenues have the potential to fluctuate significantly from year to year, depending on a number of factors, including marketing conditions, weather, species mix and the level of harvesting in advance of surface mining operations.

12

Table of Contents

Income Taxes. Income tax expense was $1.2 million (effective tax rate of 24%) for the three months ended September 30, 2002, based on pretax income of $5.1 million as compared to $899,000 (effective tax rate of 33%) for the three months ended September 30, 2001, based on pretax income of $2.7 million for the year earlier period.The $336,000, or 37%, increase and reduced effective tax rate were primarily due to the election of the S Corporation status in the third quarter effective January 1, 2003 and the corresponding tax effect of oil and gas drilling costs as well as the tax effect of unrealized losses on trading securities from the September 30, 2001 reporting period.

Liquidity and Capital Resources

Historically, we have generally satisfied our working capital requirements and funded our capital expenditures with cash generated from operations. We believe that cash generated from operations for at least the next several years will be sufficient to meet our working capital requirements, anticipated capital expenditures and debt payments resulting from debt incurred to finance the restructuring. Our ability to satisfy our debt service obligations, to fund planned capital expenditures, to make acquisitions and to pay distributions to our investors will depend upon our future operating performance, which will be affected by prevailing economic conditions in the coal industry, and financial, business and other factors, some of which are beyond our control.

Cash Flows

Net cash provided by operating activities for the nine months ended September 30, 2002, was $36.6 million compared to $14.1 million for the nine months ended September 30, 2001. The increase in cash provided by operating activities was due to the liquidation of our trading securities portfolio in preparation for funding the restructuring. Excluding securities transactions, net cash provided by operating activities for the nine months ended September 30, 2002, was $17.8 million compared to $6.3 million for the comparable period for 2001.

Net cash provided by investing activities for the nine months ended September 30, 2002, was $39.8 million compared to $3.9 million for the nine months ended September 30, 2001. The increase in cash provided by investing activities is due mainly to the increase in net purchase and sale transactions of available-for-sale and held-to-maturity securities. Excluding the purchases and sales of securities, net cash provided by investing activities for the nine months ended September 30, 2002, was $1.3 million compared to $590,000 for the comparable 2001 period, an increase of $752,000.  This increase is attributable to an increase in the sale of land and improvements in preparation for funding the restructuring offset by the purchase of properties and equipment consisting primarily of oil and gas wells costs.

Net cash used in financing activities for the nine months ended September 30, 2002, was $92.4 million compared to $17.7 million for the nine months ended September 30, 2001. The increase reflects the combined effect of the increase in the repurchase of common stock, the increase in the issuance of stock under employee stock options, and proceeds from financing arrangements. During the nine months ended September 30, 2002, payments were made for minority shares of stock in accordance with the restructuring.  Additionally, $1.8 million was received during the nine months ended September 30, 2002, from the sale of common shares under the employee stock plan. The same prior year period had employee stock plan sales of $95,000.  Proceeds from the financing arrangement entered into in August 2002 were $3 million.  Cash dividends paid were decreased at $11.2 million for the nine months ended September 30, 2002, compared to $12.1 million for the comparable 2001 period reflecting the reduction in the number of shareholders paid in the September 2002 dividend.

Capital Expenditures

For the nine months ended September 30, 2002, capital expenditures were $963,000 compared to $302,000 for the comparable 2001 period.  For each of these periods, we used cash generated from operations to fund capital expenditures. Our capital expenditures in each year included those made to support equipment and facilities and acquire land.   Additionally, in 2002, capital expenditures were made for eleven gross, or five net, new gas wells drilled of which six gross, or three net, wells are on-line.

We anticipate that our average annual maintenance capital expenditures will be less than $1.0 million. Total capital expenditures, though, may increase, as we seek acquisitions of coal reserves and other strategic assets. Currently, we expect capital expenditures to be funded by cash generated by operations.

CAUTIONARY STATEMENTS

In this report we present “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. The statements include those identified by such words as “may,” “will,” “expect,” “anticipate,” “believe,” “plan,” “project,” “should,” and other similar terminology. These forward-looking statements reflect our current expectations regarding future events and operating and financial performance and are based upon data available at the time of the statements. Although the Company believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance the forward-looking statements included herein will prove to be accurate. Actual results involve risks and uncertainties, including both those specific to the Company and those specific to the industry, and could differ materially from expectations.  Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to:

13

Table of Contents

Many of these factors are difficult to predict and are beyond the control of the Company.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices. We are primarily exposed to equity price, interest rate and coal price risks. The following is a discussion of our primary market risk exposures and how those exposures are managed.

Our market risk sensitive instruments are primarily U.S. Treasury securities and corporate equity securities. U.S. Treasury securities are classified as available-for-sale and held-to-maturity, depending on our intention and ability to hold the securities until maturity, and are subject to interest rate risk. Corporate equity securities are classified as available-for-sale securities and are subject to price risk.

Available-for-sale securities at September 30, 2002 consisted of $1,537,000 in corporate equity securities. Corporate equity securities that are managed internally are classified as available-for-sale. They are purchased because they represent a better risk/reward opportunity than cash equivalents or other short-term fixed-income securities for capital we do not expect to use in our primary business for the intermediate term, roughly three to five years. We employ a buy-and-hold strategy and, consequently, do not monitor day-to-day market conditions. At September 30, 2002, a hypothetical 10% decrease in the value of our corporate equity securities classified as available-for-sale would have decreased the value of these securities by $153,700.

At September 30, 2002, we held no fixed maturity securities.  However, we may own fixed maturity securities from time to time.  The portfolio risk associated with these securities is primarily interest rate risk.  In the event we own such securities, we are subject to interest rate risk to the degree that our fixed maturity securities re-price with changes in interest rates.  We manage interest rate risk by investing in fixed maturity securities with a short duration, usually less than one year.  Our pricing model makes various estimates at each level of interest rate change regarding cash flows from interest collections and principal repayments.  We have no current exposure to interest rate risk.

Debt we incur to finance the restructuring will bear variable interest.  Unless interest rates increase significantly in the future, our exposure to interest rate market risk should be minimal.   At September 30, 2002, we have drawn $3,000,000 on the financing arrangement entered into on August, 2002.  The effective interest rate at September 30, 2002, was 4.07%.

Our coal price exposure risk has not materially changed from the discussion contained under “Coal Industry Overview--Coal Prices” in Kentucky River Properties LLC’s registration statement on Form S-4 report filed with the Securities and Exchange Commission.

14

Table of Contents

Item 4. Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the Company’s disclosure controls and procedures within 90 days of the filing of this report, and have concluded that the Company’s disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed is recorded, processed, summarized, and reported in a timely manner.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the Chief Executive Officer and Chief Financial Officer’s evaluation, nor were there any significant deficiencies or material weaknesses in the controls which required corrective action.

PART II. OTHER INFORMATION AND SIGNATURES

Item 5. - Other Information

Kentucky River Properties LLC was formed on February 14, 2002 in connection with the proposed restructuring of Kentucky River Coal Corporation (the “Company”) to convert to S corporation status for federal income tax purposes. The shareholders of the Company approved the restructuring at a special meeting on July 29, 2002.  As part of the restructuring, a wholly-owned subsidiary of the Company merged into the Company on July 31, 2002 and

On or before November 30, 2002, the Company will transfer to Kentucky River Properties LLC all of its assets and liabilities, except for membership units in Kentucky River Properties LLC, and Kentucky River Properties LLC will become the operating company for the current business of the Company.

On December 1, 2002, the subscription rights for Kentucky River Properties LLC membership units will become exercisable and will remain exercisable for a 30-day period.  The subscription rights will expire at 5:00 p.m., Eastern Time, on December 30, 2002.

Item 6. – Exhibits and Reports on Form 8-K

(a)  Exhibits

(b)  Reports on Form 8-K. No reports on Form 8-K were filed during the three months ended September 30, 2002.

15

Table of Contents

SIGNATURES

Pursuant to the requirement 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.

16

Table of Contents

CERTIFICATION

I, Fred N. Parker, certify that:

17

Table of Contents

CERTIFICATION

I, Carroll R. Crouch, certify that: