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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 333-83634
KENTUCKY RIVER PROPERTIES LLC
(Exact name of registrant as specified in its charter)
Delaware To Be Applied For
(State or Other Jurisdiction (I.R.S. Employer
Of Incorporation or Organization) Identification Number)
200 West Vine Street Suite 8-K
Lexington, Kentucky 40507
(Address of Principal Executive (Zip Code)
Offices)
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. Yes[_] No [X]
The number of the Registrant's membership units outstanding as of August 5, 2002
was 1 unit.
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 2002 and December 31, 2001 ............. 3
Consolidated Condensed Statements of Income for the Six and Three Months Ended June 30,
2002 and 2001 ............................................................................... 4
Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2002 and
2001 ........................................................................................ 5
Notes to Consolidated Condensed Financial Statements ........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............................ 13
PART II. OTHER INFORMATION
Item 5. - Other Information ................................................................... 14
Item 6. - Exhibits and Reports on Form 8-K .................................................... 14
SIGNATURES ............................................................................................ 15
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.
KENTUCKY RIVER COAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
June 30, 2002 and December 31, 2001
(In thousands, except share and per share data)
June 30, December 31,
------------ -----------
Assets 2002 2001
------------ -----------
(unaudited)
Investments:
Trading securities $ -- 20,322
Available-for-sale securities 19,513 19,354
Held-to-maturity securities 11,730 20,552
Land and improvements 7,050 8,466
------------ -----------
Total investments 38,293 68,694
------------ -----------
Cash and cash equivalents 54,809 20,109
------------ -----------
Other assets:
Accounts receivable - trade 4,871 4,334
Accrued interest receivable 212 98
Income tax receivable 209 3,388
Investment in limited partnerships 2,574 2,574
Other receivables and prepaid expenses 100 10
------------ -----------
Total other assets 7,966 10,404
------------ -----------
Properties and equipment:
Land and revenue-producing properties 11,932 11,932
Oil and gas properties 2,980 2,731
Buildings and equipment 2,703 2,616
Less accumulated depletion and depreciation (11,304) (11,243)
------------ -----------
Properties and equipment, net 6,311 6,036
------------ -----------
$ 107,379 105,243
============ ===========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 400 713
Income taxes payable 609 1
Deferred income taxes 526 1,913
------------ -----------
Total liabilities 1,535 2,627
------------ -----------
Stockholders' equity:
Common stock, par value of $25 a share. Authorized 100,000
shares; issued and outstanding 61,905 and 61,276 shares
in 2002 and 2001, respectively 1,548 1,532
Additional paid-in capital 3,559 1,782
Accumulated other comprehensive income 416 1,386
Retained earnings 100,321 97,916
------------ -----------
Total stockholders' equity 105,844 102,616
Commitments and contingencies -- --
------------ -----------
$ 107,379 105,243
============ ===========
See accompanying notes to unaudited consolidated condensed financial statements.
3
KENTUCKY RIVER COAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Income
Six and Three Months ended June 30, 2002 and 2001
(In thousands, except share and per share data)
Six Months Ended June 30, Three Months Ended June 30,
--------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------ -------------- ------------
(unaudited) (unaudited)
Revenues:
Coal royalties $16,706 13,830 9,865 7,226
Rents and haulage 1,305 709 774 382
Oil and gas sales and royalties 647 2,363 443 1,232
------------- ------------ -------------- ------------
Total revenues 18,658 16,902 11,082 8,840
Operating costs and expenses:
Operating, general, and administrative 3,211 2,647 1,610 1,474
Oil and gas expenses 70 479 45 248
------------- ------------ -------------- ------------
Total operating costs and expenses 3,281 3,126 1,655 1,722
------------- ------------ -------------- ------------
Operating income 15,377 13,776 9,427 7,118
------------- ------------ -------------- ------------
Other income:
Unrealized gains (losses) on trading securities -- (3,807) -- 2,390
Gain (loss) on sales of securities, net 576 962 -- (69)
Interest and dividend income 1,518 1,003 1,137 469
Gain on sale of assets 850 342 850 342
Other 157 227 47 117
------------- ------------ -------------- ------------
Total other income (loss) 3,101 (1,273) 2,034 3,249
------------- ------------ -------------- ------------
Income before income taxes 18,478 12,503 11,461 10,367
Income taxes 6,478 4,219 4,056 3,568
------------- ------------ -------------- ------------
Net income $12,000 8,284 7,405 6,799
============= ============ ============== ============
Earnings per share:
Basic $194.41 132.94 119.62 110.37
============= ============ ============== ============
Diluted $194.28 132.83 119.62 110.27
============= ============ ============== ============
Weighted average number of common shares outstanding:
Basic 61,724 62,312 61,905 61,601
============= ============ ============== ============
Diluted 61,765 62,365 61,905 61,654
============= ============ ============== ============
See accompanying notes to unaudited consolidated condensed financial statements.
4
KENTUCKY RIVER COAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Six Months ended June 30, 2002 and 2001
(In thousands)
Six Months Ended June 30,
-----------------------------
2002 2001
----------- -----------
(unaudited)
Cash flows from operating activities:
Net income $ 12,000 8,284
Adjustments to reconcile net income to net cash provided by
operating activities:
Unrealized losses on trading securities -- 3,807
Depreciation, depletion, and amortization 81 318
Gain on sales of securities, net (576) (962)
Gain on sale of land and improvements (842) (339)
Gain on sale of equipment (8) (3)
Deferred income taxes (905) (1,358)
Purchase of trading securities (97) (2,936)
Proceeds from sale of trading securities 19,466 2,993
Changes in assets and liabilities:
Increase in accounts receivable - trade (537) (361)
(Increase) decrease in accrued interest receivable (114) 119
Decrease (increase) in income tax receivable 3,179 (311)
Increase in other receivables and prepaid expenses (90) (284)
(Decrease) increase in accounts payable and accrued expenses (313) 153
Increase (decrease) in income taxes payable 608 (236)
----------- -----------
Net cash provided by operating activities 31,852 8,884
----------- -----------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 18,446 8,795
Proceeds from maturities of held-to-maturity securities 120,681 22,527
Purchases of securities:
Available-for-sale (18,527) (3,841)
Held-to-maturity (111,810) (20,749)
Purchases of properties and equipment (406) (118)
Proceeds from sale of properties and equipment 8 3
Proceeds from sale of land and improvements 2,297 815
Purchases of land and improvements (39) (47)
----------- -----------
Net cash provided by investing activities 10,650 7,385
----------- -----------
Cash flows from financing activities:
Dividends paid (9,595) (9,706)
Repurchase of common stock -- (5,656)
Proceeds from sale of common stock under stock plan 1,793 95
----------- -----------
Net cash used in financing activities (7,802) (15,267)
----------- -----------
Net increase in cash and cash equivalents 34,700 1,002
Cash and cash equivalents, beginning of period 20,109 4,483
----------- -----------
Cash and cash equivalents, end of period $ 54,809 5,485
=========== ===========
Cash paid during the period for income taxes $ 3,595 6,113
=========== ===========
See accompanying notes to unaudited consolidated condensed financial statements.
5
KENTUCKY RIVER COAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
June 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 six months ended June 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 six-month period ended June 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 plans to elect 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 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. 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 June 30, 2002, the Registrant's only asset was cash of $204
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.
(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. 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." 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. 121, "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.
6
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 11
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 Company.
(3) Securities
The change in net unrealized holding gains (losses) on trading securities that
has been included in net income is $0 and $(3,807) for the six months ended June
30, 2002 and 2001, respectively, and $0 and $2,390 for the three months ended
June 30, 2002 and 2001, respectively.
The amortized cost and approximate fair value of securities and the gross
unrealized gains and losses at June 30, 2002 and December 31, 2001 follow:
7
June 30, 2002
--------------------------------------
(Unaudited)
Unrealized
------------
Amortized cost Gains Losses Fair value
-------------- ----- ------ ----------
Available-for-sale securities--
Corporate equity securities ........ $ 872 698 -- 1,570
U.S. Treasury securities ........... 17,943 -- -- 17,943
-------- ----- --- ------
$18,815 698 -- 19,513
======== ===== === ======
Held-to-maturity securities--
U.S. Treasury securities ........... $11,730 5 -- 11,735
======== ===== === ======
December 31, 2001
--------------------------------------
Unrealized
------------
Amortized cost Gains Losses Fair value
-------------- ----- ------ ----------
Available-for-sale securities--
Corporate equity securities ........ $10,947 2,223 199 12,971
Corporate bonds .................... 5,503 130 4 5,629
U.S. Treasury securities ........... 754 -- -- 754
-------- ------ --- ------
$17,204 2,353 203 19,354
======== ====== === ======
Held-to-maturity securities--
U.S. Treasury securities ........... $20,552 163 3 20,712
======== ====== === ======
A summary of debt securities as of June 30, 2002, based on contractual
maturities follows. Expected maturities may differ from contractual maturities
because the issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized cost Fair value
-------------- ----------
Due within one year
U.S. Treasury securities ............... $29,673 29,678
Corporate bonds ........................ -- --
------- ------
29,673 29,678
Due after one year through five years
U.S. Treasury securities ............... -- --
Corporate bonds ........................ -- --
------- ------
-- --
------- ------
$29,673 29,678
======= ======
All held-to-maturity securities as of June 30, 2002, will mature on or before
July 31, 2002.
Proceeds from the sale of available-for-sale securities were $18,446 and $8,795
in the six months ended June 30, 2002 and 2001, respectively.
Gross realized gains on sales of available-for-sale securities were $1,952 and
$53 in the six months ended June 30, 2002 and 2001, respectively. Gross realized
losses on sales of available-for-sale securities were $441 and $30 in the three
months ended June 30, 2002 and 2001, respectively.
8
(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.
Six Months Three Months
Ended Ended
June 30, June 30,
--------------- -------------
2002 2001 2002 2001
------- ------- ------ ------
Net income attributable to shareholders for basic
and diluted earnings per share ....................... $12,000 8,284 7,405 6,799
======= ======= ====== ======
Weighted average number of common shares used in
basic earnings per share ............................. 61,724 62,312 61,905 61,601
Effect of dilutive securities--stock options ........... 41 53 -- 53
------- ------- ------ ------
Weighted number of common and dilutive potential
common shares used in diluted earnings per share ..... 61,765 62,365 61,905 61,654
======= ======= ====== ======
(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 six
months ended June 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:
Weighted
Number average
shares exercise price
------ --------------
Balance at December 31, 2000 .......... 662 $2,890
Granted ............................. 339 2,850
Expired ............................. (336) 2,925
Exercised ........................... (33) 2,890
---- ------
Balance at December 31, 2001 .......... 632 $2,850
Granted ............................. 0 0
Expired ............................. 3 2,930
Exercised ........................... 629 2,850
---- ------
Balance at June 30, 2002 .............. 0 $ 0
==== ======
At June 30, 2002 and June 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.
(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 has a term of five years and, as of June 30, 2002 and
December 31, 2001, $2,911 had been advanced to the limited partnership. The
balance at June 30, 2002 and December 31, 2001 of $2,554 is included in other
assets--investment in limited partnerships in the consolidated financial
statements.
9
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 June 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
Six Months Ended June 30, 2002 Compared With Six Months Ended June 30, 2001
Net Income. Net income was $12.0 million for the six months ended June 30, 2002,
as compared to $8.3 million for the six months ended June 30, 2001, an increase
of $3.7 million, or 45%. The increase in income from operations combined with
the increase in other income provided the increase in net income.
Revenues. Total revenues for the six months ended June 30, 2002, were $18.7
million compared to $16.9 million for the six months ended June 30, 2001, an
increase of $1.8 million, or 10%. 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 six months ended June 30, 2002, were $16.7 million
for 7.8 million tons compared to $13.8 million for 6.7 million tons for the six
months ended June 30, 2001, an increase of $2.9 million, or 21%, and 1.1 million
tons, or 16%. During 2002, minimum royalty of $3.5 million for 2.0 million tons
was received from a lessee for the previous four production years. This minimum
royalty was not recognized as revenue in prior periods as collectability was not
reasonably assured. Excluding this minimum royalty, royalty revenue and
production were $13.2 million for 5.8 million tons, down 5% and 13%,
respectively, for the six months ended June 30, 2002 compared to the same 2001
period. Further, excluding this minimum royalty, realization increased to $2.27
per ton for the six months ended June 30, 2002, up from $2.07 for the year ago
period, an increase of 10%. During the first six months of 2002, demand for coal
was soft as a result of the mild winter, and the utilities were working off
stockpiles that they had built up to avoid the shortages that occurred in the
winter of 2001. However, we expect production for the full year to be about even
with 2001. 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. The lag in
realization relative to changes in spot prices is ordinary. We expect
realization per ton for all of 2002 to be even with or slightly below that of
2001, as contract prices are typically adjusted on an annual basis, and coal
prices have declined significantly from their August 2001 peak.
Rents and haulage were $1.3 million for the six months ended June 30, 2002,
compared to $709,000 for the six months ended June 30, 2001, an increase of
$596,000. The increase was due to an increase in haulage tonnage to 3.5 million
tons for the six months ended June 30, 2002, from 1.7 million tons for the
year-ago period offset by a decrease in the realization to $.36 per ton in the
same 2002 period from $.41 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 2.2 million tons
with a realization of $.45 per ton, an increase of 500,000 tons, or 29%, and
$.04 per ton, or 10%. 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 $647,000 for the six months ended June 30,
2002, compared to $2.4 million for the six months ended June 30, 2001, a
decrease of $1.7 million, or 73%. The decrease is mainly attributable to the
sale of the majority of our oil and gas working interests during the fourth
quarter of 2001, effective as of June 30, 2001. A decrease in prices, especially
for natural gas, also had an effect in the decline. During the first six months
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. Accordingly, the full year comparison for 2002 should be stronger than
that of the first half, but oil and gas revenues are still expected to be less
than 50% of 2001 oil and gas revenues.
Income from operations was $15.4 million for the six months ended June 30, 2002,
compared to $13.8 million for the six months ended June 30, 2001, an increase of
$1.6 million, or 12%. The increase was due to the increase in coal royalty and
rents and haulage revenue offset by the decrease in income from oil and gas.
Operating Costs and Expenses. Aggregate operating costs and expenses for the six
months ended June 30, 2002, were $3.3 million compared to $3.1 million for the
six months ended June 30, 2001, an increase of $155,000, or 5%. 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.
10
Operating, general and administrative expenses were $3.2 million for the six
months ended June 30, 2002 compared to $2.6 million for the six months ended
June 30, 2001, an increase of $564,000, or 21%. The increase is attributable to
the expenses associated with our restructuring transaction.
Oil and gas expenses were $70,000 for the six months ended June 30, 2002,
compared to $479,000 for the six months ended June 30, 2001, a decrease of
$409,000, or 85%. This decrease resulted from the sale of the majority of our
oil and gas working interests effective as of June 30, 2001. We project the
trend in 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 $3.1 million for the six months ended June 30,
2002, compared to a loss of $1.3 million for the six months ended June 30, 2001,
an increase of $4.4 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 six
months ended June 30, 2002, because the trading securities portfolio was
liquidated during the first quarter 2002. By comparison, the net unrealized loss
for the six months ended June 30, 2001, was $3.8 million.
Gain on sale of securities decreased to $576,000 for the six months ended June
30, 2002, compared to $962,000 for the six months ended June 30, 2001, a
decrease of $386,000. During the six months ended June 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 projected 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. As of
July 31, 2002, the date of the merger of a wholly-owned subsidiary into the
Company as part of the restructuring, we have no trading or held-to-maturity
securities and $1.6 million in available-for-sale securities.
Interest and dividend income was $1.5 million for the six months ended June 30,
2002, compared to $1.0 million for the six months ended June 30, 2001. The
$515,000, or 51%, 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.
Gain on sale of assets was $850,000 for the six months ended June 30, 2002,
compared to $342,000 for the six months ended June 30, 2001, an increase of
$508,000. The increase was a result of our efforts to liquidate our investments,
including land and improvements, to fund the restructuring.
Other income, consisting mostly of sales of standing timber, was $157,000 for
the six months ended June 30, 2002, compared to $227,000 for the six months
ended June 30, 2001, a decrease of $70,000, or 31%. 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 $6.5 million (effective tax rate of 35%)
for the six months ended June 30, 2002, based on pretax income of $18.5 million
as compared with $4.2 million (effective tax rate of 34%) for the six months
ended June 30, 2001, based on pretax income of $12.5 million for the year
earlier period. The $2.3 million increase was primarily due to the tax effect of
the increase in other income, mostly securities gains.
Three Months Ended June 30, 2002 Compared With Three Months Ended June 30, 2001
Net Income. Net income was $7.4 million for the three months ended June 30,
2002, as compared to $6.8 million for the three months ended June 30, 2001, an
increase of $606,000, or 9%. The increase in income from operations more than
offset the decrease in other income.
Revenues. Total revenues were $11.0 million for the three months ended June 30,
2002, compared to $8.8 million for the three months ended June 30, 2001, an
increase of $2.2 million, or 25%. The increase is primarily attributable to the
combined effect of the increase in coal royalty and rents and haulage revenues
offset by the decline in oil and gas revenue resulting from the sale of most of
the oil and gas working interests late in 2001.
Coal royalty revenues were $9.8 million for 4.8 million tons for the three
months ended June 30, 2002, compared to $7.2 million for 3.3 million tons for
the three months ended June 30, 2001, an increase of $2.6 million, or 37%, and
1.5 million tons, or 45%. During the three months ended June 30, 2002, minimum
royalty of $3.5 million for 2.0 million tons was received from a lessee for the
previous four production years. This minimum royalty was not recognized in prior
periods as collectability was not reasonably assured. Excluding this minimum
royalty, royalty revenue and production were $6.4 million for 2.8 million tons
produced for the three months ended June 30, 2002, down $861,000, or 12%, and
500,000 tons, or 15%, compared to the year ago period. Further, excluding this
minimum, realization increased to $2.31 per ton for the three months ended June
30, 2002, as compared to $2.17 per ton for the three months ended June 30, 2001,
an increase of 6%. 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. The
lag in realization relative to changes in spot prices is ordinary. We expect
realization per ton for the remaining quarters of 2002 to be even with or
slightly below that of 2001, as contract prices are typically adjusted on an
annual basis, and coal prices have declined significantly from their August 2001
peak.
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Rents and haulage were $774,000 for the three months ended June 30, 2002,
compared to $382,000 for the three months ended June 30, 2001, an increase of
$392,000, or 103%. The increase was due to an increase in haulage tonnage to 2.4
million tons for the three months ended June 30, 2002, from 787,000 tons for the
three months June 30, 2001, offset by a decrease in the realization to $.32 per
ton from $.47 per ton for the same comparable periods. The primary reason for
the increase in haulage and decrease in realization is the collection of minimum
haulage of $269,000 for 1.3 million tons at a realization of $.21 per ton from a
lessee for the past four years minimum haulage not previously reported as
collectability was not reasonably assured. Excluding this minimum haulage,
haulage tonnage increased to 1.1 million tons at a realization of $.45 per ton
for the three months ended June 30, 2002, as compared to the year ago period, an
increase of 313,000 tons, or 40%, and a decrease of $.02 per ton, or 4%. 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 $443,000 for the three months ended
June 30, 2002, compared to $1.2 million for the three months ended June 30,
2001, a decrease of $789,000, 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 2001, effective as of June 30, 2001. A decrease in prices, especially
for natural gas, also had an effect. During the second quarter 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.
Income from operations was $9.4 million for the three months ended June 30,
2002, compared to $7.1 million for the three months ended June 30, 2001, an
increase of $2.3 million, or 32%. The increase was due to the increase in coal
royalty and rents and haulage income offset by the decrease in income from oil
and gas.
Operating Costs and Expenses. Aggregate operating costs and expenses for the
three months ended June 30, 2002, compared to the same prior year period, were
relatively flat at $1.7 million. Operating expenses were unchanged due to the
decrease of oil and gas expense offset by the increase in operating, general and
administrative expenses.
Operating, general and administrative expenses were $1.6 million for the three
months ended June 30, 2002, compared to $1.5 million for the three months ended
June 30, 2001, an increase of $136,000, or 9%. The increase is attributable to
the expenses associated with our restructuring transaction.
Oil and gas expenses were $45,000 for the three months ended June 30, 2002,
compared to $248,000 for the three months ended June 30, 2001, a decrease of
$203,000, or 82%. The decrease resulted from the sale of the majority of our
working interest production effective as of June 30, 2001. We project that the
trend in lower oil and gas operating expenses will continue and anticipate that
these expenses will fall by 80% 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 $2.0 million for the three months ended June 30,
2002, compared to $3.2 million for the three months ended June 30, 2001, a
decrease of $1.2 million, or 37%. The difference is mainly the result of a
decrease in unrealized gains on trading securities offset by an increase in
interest and dividend income and gain on sale of assets.
There was no gain or loss on sale of securities for the three months ended
June 30, 2002, compared to a loss of $69,000 for the three months ended June 30,
2001. Also, there was no unrealized gains on trading securities for the three
months ended June 30, 2002, compared to unrealized gains of $2.4 million for the
three months ended June 30, 2001. The lack of second 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 projected need for liquid assets to finance the restructuring. The
proceeds from the securities sales were invested in short-term U.S. treasury
bills.
Interest and dividend income was $1.1 million for the three months ended
June 30, 2002, compared to $469,000 for the three months ended June 30, 2001.
The increase was due to the first quarter 2002 movement of our investment
portfolio from equities to U.S. treasury bills as noted in the preceding
paragraph.
Gain on sale of assets was $850,000 for the three months ended June 30, 2002,
compared to $342,000 for the three months ended June 30, 2001, an increase of
$508,000. The increase was a result of our efforts to liquidate our investments,
including land and improvements, to fund the restructuring.
Other income, consisting mostly of sales of standing timber, was $47,000 for the
three months ended June 30, 2002, compared to $117,000 for the three months
ended June 30, 2001, a decrease of $70,000, or 60%. 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 $4.1 million (effective tax rate of 35%)
for the three months ended June 30, 2002, based on pretax income of $11.5
million as compared to $3.6 million (effective tax rate of 34%) for the three
months ended June 30, 2001, based on pretax income of $10.4 million for the year
earlier period. The $488,000 increase was primarily due to the tax effect of the
increase in coal royalty income.
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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, if any, 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 six months ended June 30,
2002, was $31.9 million compared to $8.9 million for the comparable 2001 period.
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 six months ended June 30, 2002, was $13.1 million compared to
$6.0 million for the comparable period for 2001.
Net cash provided by investing activities for the six months ended June 30,
2002, was $10.6 million compared to $7.4 million for the comparable 2001 period.
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 six months ended June 30,
2002, was $1.9 million compared to $653,000 for the comparable 2001 period, an
increase of $1.2 million. This increase is attributable to an increase in the
sale of land and improvements in preparation for funding the restructuring.
Net cash used in financing activities for the six months ended June 30, 2002,
was $7.8 million compared to $15.3 million for the comparable 2001 period. The
decrease reflects the combined effect of prior year treasury stock purchases and
current year issuance of stock under employee stock options. There were no
treasury stock purchases during the six months ended June 30, 2002. During the
six months ended June 30, 2001, the Company purchased treasury stock for $5.7
million. Additionally, $1.8 million was received during the six months ended
June 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. Cash dividends
paid were relatively flat at $9.6 million for the six months ended June 30,
2002, compared to $9.7 million for the comparable 2001 period.
Capital Expenditures
For the six months ended June 30, 2002, capital expenditures were $445,000
compared to $165,000 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 were primarily made to support equipment and
facilities and acquire land.
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.
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 and held-to-maturity securities at June 30, 2002 consisted of
$1,570,000 in corporate equity securities and $29,673,000 in fixed maturity
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 June 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 $157,000.
At June 30, 2002 the market risk to our portfolio of fixed maturity securities
was primarily interest rate risk. 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. At June 30, 2002, a one
percent increase in interest rates would have decreased the value of our fixed
maturity securities by $296,700. As of July 31, 2002, all fixed maturity
securities have matured or were sold. Accordingly, we have no current exposure
to interest rate risk.
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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.
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.
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:
.. the ability of our lessees to produce sufficient quantities of coal on
an economic basis from our reserves,
.. the volatility of commodity prices for coal,
.. the financial condition of our primary lessees,
.. changes in fuel consumption patterns by electric power generators away
from the use of coal,
.. competition among producers in the coal industry,
.. ability of our lessees to enter into long-term supply contracts,
.. fluctuations in transportation costs and the availability or
reliability of transportation of coal mined from our properties,
.. labor relations and costs,
.. the extent to which the amount and quality of coal our lessees are able
to economically recover differs from estimated recoverable coal reserves,
.. the ability to replace or increase our reserves on satisfactory terms,
.. availability of cash from lessees to enable payment of distributions
comparable to historic levels,
.. changes in governmental regulation or enforcement practices, especially
with respect to mining environmental, health and safety matters, such
as emissions levels applicable to electric power generators and steel
manufacturers, and
.. economic and political conditions (including inflation and interest
rates).
Many of these factors are difficult to predict and are beyond the control of the
Company.
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
. each common share held by the majority shareholders remained
outstanding (the majority shareholders are the 70 shareholders that
(i) held the highest percentage of the Company's common shares as of
the close of business on July 22, 2002, (ii) were eligible to be S
corporation shareholders and (iii) who returned the required
documentation)
. each common share of the Company held by other shareholders was
converted into the right to receive $4,000 in cash and a subscription
right to subscribe for one Kentucky River Properties LLC membership
unit at an exercise price of $4,000 per membership unit.
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.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the three
months ended June 30, 2002.
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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 officer of the registrant.
KENTUCKY RIVER PROPERTIES LLC
(Registrant)
Date: August 14, 2002 /s/ Carroll R. Crouch
-------------------------------
(Signature)
Carroll R. Crouch
Secretary and Treasurer
(Principal Financial Officer)
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