S-4

 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                 -------------
 
                                    FORM S-4
 
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
 
                                 -------------
 
                              AEI Resources, Inc.
             (Exact Name of Registrant as Specified in Its Charter)
 
                                 -------------
 
                                  61-13155723
                    (I.R.S. Employer Identification Number)
 
            1222                                             Delaware
(Primary Standard Industrial)                    (State of Other Jurisdiction of
 Classification Code Number)                      Incorporation or Organization)


                            1500 North Big Run Road
                            Ashland, Kentucky 41102
                                 (606) 928-3433
   (Address, including Zip Code and Telephone Number, including area code, of
                   Registrant's Principal Executive Offices)
 
                          Kevin Crutchfield, President
                            1500 North Big Run Road
                            Ashland, Kentucky 41102
                                 (606) 928-3433
   (Address, including Zip Code and Telephone Number, including area code, of
                               Agent for Service)
 
                                 -------------
 
                                With copies to:
           Alan K. MacDonald                        Paul E. Sullivan
       Brown, Todd & Heyburn PLLC                  Jeffrey L. Hallos
   400 West Market Street, 32nd Floor          Brown, Todd & Heyburn PLLC
    Louisville, Kentucky 40202-3363         2700 Lexington Financial Center
             (502) 589-5400                  Lexington, Kentucky 40507-1749
                                                     (606) 231-0000
 
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
 
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [_]
 
If this form is filed to registered additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
 
  If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
 
                        CALCULATION OF REGISTRATION FEE
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------


 Title of Each Class of      Amount    Proposed Maximum      Proposed           Amount
    Securities to be         to be      Offering Price  Maximum Aggregate         of
       Registered          Registered      Per Note     Offering Price (1) Registration Fee
- -------------------------------------------------------------------------------------------
                                                               
 11 1/2 Senior
  Subordinated Notes due
  2006                    $150,000,000       100%          150,000,000         $41,700
- -------------------------------------------------------------------------------------------
 Guarantees of 11 1/2
  Senior Subordinated
  Notes due 2006(2)       $150,000,000       100%          150,000,000          $0(3)

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
(1) Estimated solely for the purpose of calculating the registration fee.
(2) See inside facing page for table of additional Registration guarantors.
(3) Pursuant to Rule 457(n), no separate filing fee is required for the
guarantees.
 
  The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

 
                   TABLE OF ADDITIONAL REGISTRANT GUARANTORS
 


                                                                    Address, including zip
                                                                             code
                                                                     and telephone number
                              State or Other                            of Registrant
                              Jurisdiction of                            Guarantor's
       Exact Name of           Incorporation      IRS Employer       Principal Executive
    Registrant Guarantor      or Organization Identification Number        Offices
    --------------------      --------------- --------------------- ----------------------
                                                           
17 West Mining (f/k/a
 Martiki Coal Corporation)       Delaware          73-0961272       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Aceco, Inc.                      Kentucky          61-0855680       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Addington Mining, Inc.           Kentucky          61-0855680       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
AEI Coal Sales Company, Inc.     Kentucky          61-1331912       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
AEI Resources Holding, Inc.      Delaware          61-1331911       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Americoal Development
 Company                         Delaware          37-1302915       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Appalachian Realty Company       Kentucky          36-3336051       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Ayrshire Land Company            Delaware          06-1208946       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Beech Coal Company               Delaware          06-1187153       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Bellaire Trucking Company        Delaware          76-0012930       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Bentley Coal Company             New York          61-1128414       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Bluegrass Coal Development
 Company                         Delaware          76-0078312       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Bowie Resources Limited          Colorado          84-1287719       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Cannelton, Inc.                  Delaware          55-0711787       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Cannelton Industries, Inc.     West Virginia       55-0136145       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Cannelton Land Company           Delaware          55-0715858       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
Cannelton Sales Company          Delaware          55-0677801       1500 North Big Run Rd.
                                                                    Ashland, KY 41102
 
CC Coal Company                  Kentucky          61-7329892       1500 North Big Run Rd.
                                                                    Ashland, KY 41102


 


                                                         Address, including zip
                                                                  code
                                                          and telephone number
                   State or Other                            of Registrant
  Exact Name of    Jurisdiction of                            Guarantor's
   Registrant       Incorporation      IRS Employer       Principal Executive
    Guarantor      or Organization Identification Number        Offices
  -------------    --------------- --------------------- ----------------------
                                                
Coal Ventures
 Holding Company,
 Inc.                 Delaware          61-1328606       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Dunn Coal and
 Dock Company       West Virginia       55-0677800       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
East Kentucky
 Energy
 Corporation          Kentucky          54-0971896       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Employee Benefits
 Management, Inc.     Delaware          36-4168193       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Encoal
 Corporation          Delaware          76-0287726       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
EnerZ Corporation     Delaware          37-1362012       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Evergreen Mining
 Company            West Virginia       54-1206519       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Fairview Land
 Company              Delaware          37-1267975       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Franklin Coal
 Sales Company        Delaware          13-3121923       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Grassy Cove Coal
 Mining Company       Delaware          51-0274983       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Hayman Holdings,
 Inc.                 Kentucky          61-1313636       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Heritage Mining
 Company              Delaware          61-1286455       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Highland Coal,
 Inc.                 Kentucky          61-0923993       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Ikerd-Bandy Co.,
 Inc.                 Kentucky          61-0505276       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Kanawha
 Corporation          Delaware          84-1107027       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Kentucky Prince
 Mining Company       New York          61-1128412       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Kermit Coal
 Company            West Virginia       55-0515741       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Kindill Holding,
 Inc.                 Kentucky          31-1529620       1500 North Big Run Rd.
                                                         Ashland, KY 41102


 


                                                         Address, including zip
                                                                  code
                                                          and telephone number
                   State or Other                            of Registrant
  Exact Name of    Jurisdiction of                            Guarantor's
   Registrant       Incorporation      IRS Employer       Principal Executive
    Guarantor      or Organization Identification Number        Offices
  -------------    --------------- --------------------- ----------------------
                                                
Kindill Mining,
 Inc.                  Indiana          35-1962074       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Leslie Resources,
 Inc.                 Kentucky          61-1013125       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Leslie Resources
 Management, Inc.     Kentucky          61-1292388       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Meadowlark, Inc.       Indiana          35-0782260       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Mega Minerals,
 Inc.               West Virginia       55-0720327       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Mid-Vol Leasing,
 Inc.               West Virginia       55-0691054       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Midwest Coal
 Company              Delaware          84-1324803       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Midwest Coal
 Sales Company        Delaware          35-1599521       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Mining
 Technologies,
 Inc.                 Kentucky          61-1319730       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Mountain Coals
 Corporation          Delaware          63-0725639       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Mountain-Clay
 Incorporated
 d/b/a Mountain
 Clay, Inc.           Kentucky          61-0621350       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Mountaineer Coal
 Development
 Company            West Virginia       54-0989613       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
NuCoal LLC            Delaware          36-4143611       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Old Ben Coal
 Company              Delaware          34-1291413       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Phoenix Land
 Company              Delaware          37-1302916       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Premium Coal
 Development
 Company              Delaware          36-4186350       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Premium
 Processing, Inc.   West Virginia       55-0750451       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
Pro-Land, Inc.
 d/b/a Kem Coal
 Company              Kentucky          61-0727363       1500 North Big Run Rd.
                                                         Ashland, KY 41102
 
R. & F. Coal
 Company                Ohio            34-0832344       1500 North Big Run Rd.
                                                         Ashland, KY 41102


 


                                                                     Address, including zip
                                                                              code
                                                                      and telephone number
                               State or Other                            of Registrant
                               Jurisdiction of                            Guarantor's
        Exact Name of           Incorporation      IRS Employer       Principal Executive
    Registrant Guarantor       or Organization Identification Number        Offices
    --------------------       --------------- --------------------- ----------------------
                                                            
River Coal Company, Inc.          Kentucky          61-0567214       1500 North Big Run Rd.
                                                                     Ashland, KY 41102
 
Roaring Creek Coal Company        Delaware          35-1597000       1500 North Big Run Rd.
                                                                     Ashland, KY 41102
 
Shipyard River Coal Terminal
 Company                       South Carolina       54-1156890       1500 North Big Run Rd.
                                                                     Ashland, KY 41102
 
Skyline Coal Company              New York          61-1128411       1500 North Big Run Rd.
                                                                     Ashland, KY 41102
 
Straight Creek Coal Resources
 Company                          Kentucky          36-3317309       1500 North Big Run Rd.
                                                                     Ashland, KY 41102
 
Tennessee Mining, Inc.            Kentucky          62-1640672       1500 North Big Run Rd.
                                                                     Ashland, KY 41102
 
Turris Coal Company               Delaware          74-2121674       1500 North Big Run Rd.
                                                                     Ashland, KY 41102
 
West Virginia-Indiana Coal
 Holding Company, Inc.            Delaware          61-1328604       1500 North Big Run Rd.
                                                                     Ashland, KY 41102
 
Wyoming Coal Technology, Inc.      Wyoming          61-1336980       1500 North Big Run Rd.
                                                                     Ashland, KY 41102
 
Zeigler Coal Holding Company      Delaware          36-3344449       1500 North Big Run Rd.
                                                                     Ashland, KY 41102
 
Zeigler Environmental
 Services Company                 Delaware          36-4143610       1500 North Big Run Rd.
                                                                     Ashland, KY 41102
 
Zenergy, Inc.                     Delaware          35-1870468       1500 North Big Run Rd.
                                                                     Ashland, KY 41102


 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY +
+NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE     +
+SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN    +
+OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE +
+SECURITIES IN ANY STATE WHERE THE OFFER OR SELL IS NOT PERMITTED.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
               THIS PROSPECTUS, DATED       , 1999, IS SUBJECT TO
                           COMPLETION AND AMENDMENT.
 
PROSPECTUS
 
                       Offer to Exchange All Outstanding
 
                   11 1/2 Senior Subordinated Notes Due 2006
 
                                      for
 
                   11 1/2 Senior Subordinated Notes Due 2006
 
                                       of
 
                              AEI RESOURCES, INC.
 
We hereby offer, upon the terms and conditions described in this Prospectus, to
exchange all of our outstanding 11 1/2 Senior Subordinated Notes due 2006 ("Old
Notes") for our registered 11 1/2 Senior Subordinated Notes due 2006 ("New
Notes").
 
The terms of the New Notes are identical to the terms of the Old Notes, except
that the New Notes are registered under the Securities Act of 1933 and will not
contain any legend restricting their transfer.
 
Please consider the following:
 
  . You should carefully review the Risk Factors beginning on page    of this
    Prospectus.
 
  . Our offer to exchange Old Notes for New Notes will be open until
    p.m., New York City time, on            , 1999, unless we extend the
    offer.
 
  . You should also carefully review the procedures for tendering the Old
    Notes beginning on page     of this Prospectus.
 
  . If you fail to tender your Old Notes, you will continue to hold
    unregistered securities and your ability to transfer them could be
    adversely affected.
 
  . No public market currently exists for the Old Notes. We do not intend to
    list the New Notes on any securities exchange. Therefore, we do not
    anticipate that there will be an active public market for the New Notes.
 
Information about the Notes:
 
  . The Notes will mature on December 15, 2006.
 
  . The Notes bear interest at the rate of 11 1/2% per year. We will pay
    interest on the Notes semi-annually on June 15 and December 15 of each
    year beginning June 15, 1999.
 
  . The Notes are general, unsecured obligations of both Issuers. In priority
    of payment, the Notes rank subordinate to all our current and future
    indebtedness.
 
  . We have the option to redeem the Notes:
 
    . On or after December 15, 2002, at the redemption prices in this
      Prospectus.
 
    . Before December 15, 2002, at 100% of the principal amount, plus an
      applicable "make whole" premium.
 
    . On or before December 15, 2001, we may redeem up to 35% of the
      aggregate principal amount with the net cash proceeds from an equity
      offering at 111.50% of the principal amount.
 
  . The Notes are jointly and severally guaranteed on a senior subordinated
    basis by our parent company and our current and future domestic
    subsidiaries.
 
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
              THE DATE OF THIS PROSPECTUS IS              , 1999.

 
                      Where You Can Find More Information
 
We, together with our parent company and our current domestic subsidiaries,
have filed a Registration Statement on Form S-4 to register the New Notes to be
issued in exchange for the Old Notes with the Securities and Exchange
Commission (the "SEC"). This Prospectus is part of that Registration Statement.
As allowed by the SEC's rules, this Prospectus does not contain all of the
information you can find in the Registration Statement or the exhibits to the
Registration Statement.
 
You may read and copy the Registration Statement and exhibits at the SEC's
public reference rooms in Washington, D.C., New York, New York, and Chicago,
Illinois. Please call 1-800-SEC-0330 for further information on the public
reference rooms. Our Registration Statement is also available to the public
from commercial document retrieval services and at the Website maintained by
the SEC at http://www.sec.gov.
 
We have not authorized anyone to give you any information or to make any
representations about the transactions we discuss in this Prospectus other than
those contained herein or in the Registration Statement. If you are given any
information or representations about these matters that is not discussed in
this Prospectus or included in the Registration Statement, you must not rely on
that information.
 
This Prospectus is not an offer to sell or a solicitation of an offer to buy
securities anywhere or to anyone where or to whom we are not permitted to offer
or sell securities under applicable law.
 
The delivery of this Prospectus does not, under any circumstances, mean that
there has not been a change in our affairs since the date of this Prospectus.
It also does not mean that the information in this Prospectus or in the
Registration Statement is correct after this date.
 
           Cautionary Statement Regarding Forward-Looking Statements
 
This Prospectus contains certain forward-looking statements about our final
condition, results of operations, and business. You can find many of these
statements by looking for words such as "believes," "expects," "anticipates,"
"estimates," or similar expressions used in this Prospectus.
 
These forward-looking statements are subject to numerous assumptions, risks and
uncertainties. Factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by us in those forward-looking statements
include, among others, the following:
 
 .Our ability to pay interest and principal on a very large amount of debt;
 
 .Our ability to successfully integrate our recent acquisitions;
 
 .Our ability to achieve cost savings from integrating our recent acquisitions;
 
 .A significant decline in coal prices and any resulting impact on our operating
margins;
 
 .  Our ability to continue to obtain long-term sales contracts, due to the high
   level of competition in the coal industry; and
 
 .  Changes in governmental regulation of the coal industry, including among
   other things, employee health and safety, limitations on land use, and
   environmental matters.
 
Because forward-looking statements are subject to risks and uncertainties,
actual results differ materially from those expressed or implied by the
forward-looking statements. You are cautioned not to place undue reliance on
such statements, which speak only as of the date of this Prospectus.
 
We do not undertake any responsibility to release publicly any revisions to
these forward-looking statements to take into account events or circumstances
that occur after the date of this Prospectus. In addition, we don't undertake
any responsibility to update you on the occurrence of any unanticipated events
that may cause actual results to differ from those expressed or implied by the
forward-looking statements contained in this Prospectus.
 
                                       i

 
                               Market Share Data
 
Except as otherwise indicated, the market share data included in this
Prospectus are based upon estimates by our management, using third-party
sources where available. While management believes that its estimates are
reasonable, they have not been independently verified. Accordingly, we cannot
assure you that the market share data are accurate in all material respects.
 
                               Coal Reserve Data
 
The estimates of our proven and probable reserves are based on the following
reports: (i) the estimates proven and probable coal reserves of AEI Holding
Company, Inc., set forth herein, were reviewed and evaluated by Marshall Miller
& Associates ("Marshall Miller") in June 1997 and September 1997, and such
reserve estimates were updated in September 1998; (ii) the estimated proven and
probable coal reserves acquired in the Zeigler Acquisition (as defined) are
based on a reserve study prepared by Weir International Mining Consultants
("Weir") in 1994, as updated in May 1998; (iii) the estimated proven and
probable coal reserves acquired in the Cyprus Acquisition (as defined), as of
April 1998, set forth herein, have been reviewed and evaluated by Marshall
Miller as of such date; (iv) the estimated proven and probable reserves
acquired in the Crockett Acquisition (as defined) were reviewed and evaluated
by Stagg Engineering Services, Inc. ("SESI") in February 1998; (v) the
estimated proven and probable reserves acquired from The Battle Ridge Companies
were reviewed and evaluated by Marshall Miller in November 1997; (vi) the
estimated proven and probable reserves acquired in the Mid-Vol Acquisition (as
defined) were reviewed and evaluated by Marshall Miller in May 1998; and (vii)
the estimated proven and probable coal reserves acquired in the Kindill
Acquisition (as defined), as of November 1997, as updated in August 1998, set
forth herein, have been reviewed and evaluated by Norwest Mine Services
("Norwest"). While management believes that such estimates are reasonable, no
assurances can be given that such coal reserve data are accurate in all
material respects.
 
                           Trademarks and Tradenames
 
Addcar is a trademark which is federally registered in the United States
pursuant to applicable intellectual property laws and is the property of Mining
Technologies, Inc., an indirect subsidiary of AEI Resources, Inc.
 
 
                                       ii

 
 
                               PROSPECTUS SUMMARY
 
  This brief summary highlights selected information from the Prospectus. It
does not contain all of the information that is important to you. We urge you
to carefully read and review the entire Prospectus and the other documents to
which it refers to fully understand the terms of the New Notes and the exchange
offer.
 
  In this Prospectus, we use the term "Notes" to refer to the Old Notes and the
New Notes inclusively as to matters where their terms do not differ. We also
use the term "the Company" to refer to AEI Resources, Inc. and its combined
subsidiaries and predecessors, unless the context indicates otherwise.
 
                                  The Company
 
AEI Resources, Inc.
1500 North Big Run Road
Ashland, Kentucky 41102
(606) 928-3433
 
AEI Resources, Inc. is one of the largest coal producers in the United States.
We mine and market coal at our 49 mines in Kentucky, West Virginia, Tennessee,
Indiana, Illinois, Ohio and Colorado. Since October 1, 1997, we have grown
substantially by acquiring coal mining operations. These acquisitions, and our
subsequent sale of some of the assets we acquired in them, are described in
"The Company" beginning on page    and in the "Pro Forma Financial Information"
beginning on page     of this Prospectus. We would have been the fourth largest
steam coal company in the United States as measured by revenues for 1997 after
giving pro forma effect to these transactions. Our operational data presented
throughout this "Summary" section give pro forma effect to our transactions
since October 1, 1997.
 
AEI Resources, Inc. was organized in 1998 as the parent company for AEI Holding
Company, Inc. and the coal mining operations we have acquired since October 1,
1997. The chart on page    illustrates the ownership structure of the Company
and its affiliates.
 
Our primary customers are electric utility companies in the eastern United
States. We generated 74% of our revenues for the nine months ended September
30, 1998 under 51 long-term contracts to sell steam coal to electric utilities.
As of September 30, 1998, our long-term sales contracts had an average
remaining term of 5.4 years on a volume-weighted basis. We also sell steam coal
under short-term contracts and on the spot market and supply premium-quality,
mid- and low-volatility metallurgical coal to steel producers.
 
According to reserve studies, we have approximately 1.1 billion tons of proven
and probable coal reserves assigned to our mining projects. Of our assigned
reserves, approximately 36% is low-sulfur coal and an additional 37% is near
low-sulfur coal. In addition, we have 1.3 billion tons of reserves that have
not been assigned and are available for development.
 
Our acquisitions since October 1, 1997, have:
 
  .  Added coal operations that together produced 47.8 million tons of coal
     during the twelve months ended September 30, 1998;
 
  .  Given us a leading market position among the Central Appalachia and
     Illinois Basin coal producers;
 
  .  Significantly increased our low-sulfur coal reserves; and
 
  .  Enabled us to realize significant economies of scale in our coal mining
     operations.
 
                                       1

 
 
Our strategy is to improve our transportation, mining method and administrative
efficiency by continuing to integrate the operations we have acquired. We
believe this will help us to maintain and increase our base of long-term sales
contracts with electric utility customers. We believe we can improve our
efficiency by:
 
  .  Fulfilling our customers' coal purchases from several different mines,
     thereby decreasing transportation costs and production costs;
 
  .  Increasing productivity by applying more efficient, lower-costs mining
     methods; and
 
  .  Eliminating certain corporate overhead expenses through consolidation.
 
Other elements of our strategy include:
 
  .  Acquiring coal reserves or operations that complement our existing
     reserves and operations when opportunities to do so arise. We believe such
     acquisitions would enhance our market position among producers in the
     Central Appalachian and Illinois Basin coal regions;
 
  .  Expanding production of high Btu, low sulfur coal at our Colorado
     operations, which could increase our market share if demand for this kind
     of coal increases; and
 
  .  Increasing sales of higher-margin metallurgical coal by using more
     advanced mining methods to increase production and reduce costs.
 
Recent Developments
 
We have entered into a non-binding letter of intent, contemplating our purchase
of all of the issued and outstanding stock of Princess Beverly Coal Company. We
are currently reviewing legal, financial and operational information obtained
from Princess Beverly. We must resolve several key issues based on our
investigation before we would be able to complete the negotiation of the terms
of a binding transaction agreement.
 
                                       2

 
 

                               The Exchange Offer
Securities To Be Exchanged    
 ............................  On December 14, 1998, we issued $150.0 million
                              aggregate principal amount of Old Notes in a
                              transaction exempt from the registration
                              requirements of the Securities Act of 1933. The
                              New Notes are substantially identical in all
                              material respects to the Old Notes, except that
                              the New Notes will be freely transferrable by
                              their holders, with certain exceptions described
                              in "Description of New Notes" beginning on page.
 
The Exchange Offer..........  We are offering $1,000 principal amount of New
                              Notes in exchange for each $1,000 principal
                              amount of Old Notes.
 
                              We believe that, with the exceptions noted below,
                              a holder of New Notes received in exchange for
                              Old Notes may offer its New Notes for resale and
                              resell or otherwise transfer them without
                              compliance with the registration and prospectus
                              delivery requirements of the Securities Act, as
                              long as:
 
                                . the holder acquired its New Notes in the
                                   ordinary course of its business, and
 
                                . the holder has no arrangement with any person
                                   to engage in a distribution of New Notes.
 
                              Holders who can offer New Notes for resale,
                              resell or otherwise transfer New Notes only in
                              compliance with certain requirements of the
                              Securities Act include:
 
                                . any holder which is an affiliate of ours, and
 
                                . any broker-dealer who acquired Old Notes
                                   directly from us to resell pursuant to Rule
                                   144A or any other available exemption under
                                   the Securities Act.
 
                              We have based our belief on interpretations by
                              the staff of the SEC, as set forth in no-action
                              letters issued to parties unrelated to us. The
                              SEC staff has not specifically considered our
                              exchange offer. We cannot be sure that the SEC
                              staff would make a similar determination with
                              respect to our exchange offer as it has made in
                              other circumstances.
 
                              Each holder, other than a broker-dealer, must
                              acknowledge to us that it has not engaged in,
                              does not intend to engage in, and has no
                              arrangement or understanding to participate in a
                              distribution of New Notes.
 
                              Each broker-dealer that receives New Notes for
                              its own account in our exchange offer must
                              acknowledge to us that it will comply with the
                              prospectus delivery requirements of the
                              Securities Act in connection with any resale of
                              New Notes.
 
                              Broker-dealers who acquired Old Notes directly
                              from us and not as a result of market-making
                              activities or other trading activities may not
                              rely on the SEC staff's interpretations discussed
                              above or
 
                                       3

 
                              participate in the exchange offer and must comply
                              with the prospectus delivery requirements of the
                              Securities Act in order to resell the Old Notes.
 
Registration Rights          
Agreement...................  We issued the Old Notes in a private placement in
                              reliance on Section 4(2) of the Securities Act.
                              The Old Notes were immediately resold by the
                              initial purchaser in reliance on Rule 144A under
                              the Securities Act. In connection with the sale
                              of the Old Notes, we have agreed to use our
                              reasonable best efforts file a registration
                              statement for this exchange offer by January 18,
                              1999, and to cause the registration statement to
                              become effective by March 4, 1999. To the extent
                              we do not meet this schedule, we have agreed to
                              pay specified amounts of liquidated damages to
                              each holder of Old Notes, as described in
                              "Description of New Notes" beginning on page.
 
Expiration Date.............  The exchange offer will expire at 5:00 p.m., New
                              York City time, on            , 1999 or such
                              later date and time to which it is extended.
 
Withdrawal .................  A holder may withdraw its tender of Old Notes at
                              any time before 5:00 p.m., New York City time, on
                                           , 1999, or such later date and time
                              to which we extend the offer. If for any reason
                              we do not accept any Old Notes for exchange, the
                              Old Notes will be returned without expense to the
                              tendering holder as soon as practicable after the
                              expiration or termination of the exchange offer.
 
Interest On The New Notes
And The Old Notes ..........  Interest on the New Notes will accrue from the
                              date of the last periodic payment of interest on
                              the Old Notes, or, if no interest has been paid
                              on the Old Notes, from December 14, 1998.

Conditions To The Exchange    
Offer.......................  The exchange offer is subject to certain
                              customary conditions, certain of which may be
                              waived by us. See "The Exchange Offer--Certain
                              Conditions to Exchange Offer" on page.
 
Procedures For Tendering     
Old Notes...................  Each holder of the Old Notes wishing to accept
                              the exchange offer must complete, sign and date
                              the letter of transmittal that accompanies this
                              Prospectus in accordance with its instructions.
                              The holder must then mail or otherwise deliver
                              the letter of transmittal, together with the Old
                              Notes and any other required documentation, to
                              the exchange agent at the address on page.
                              Persons holding the Old Notes through the
                              Depository Trust Company ("DTC") and wishing to
                              accept the exchange offer must do so pursuant to
                              DTC's Automated Tender Offer Program, by which
                              each tendering participant will agree to be bound
                              by the letter of transmittal. By executing or
                              agreeing to be bound by the letter of
                              transmittal, each holder will represent to us and
                              the guarantors that, among other things:
 
                                . the New Notes are being acquired in the
                                  ordinary course of business of the recipient,
                                  whether or not such person is the registered
                                  holder of the Old Notes;
 
                                       4

 
 
                                . the holder is not engaging and does not
                                   intend to engage in a distribution of such
                                   New Notes;
 
                                . the holder does not have an arrangement or
                                   understanding with any person to participate
                                   in the distribution of such New Notes; and
 
                                . the holder is not our "affiliate," as defined
                                   under Rule 405 promulgated under the
                                   Securities Act, or an affiliate of our
                                   parent company or our subsidiaries who are
                                   guaranteeing the Notes.
 
                              The Registration Rights Agreement provides that
                              we must file a "shelf" registration statement for
                              a continuous offering of the Old Notes if we
                              determine that we cannot complete the exchange
                              offer as contemplated because of a change in
                              applicable law or SEC policy, or because any
                              holder of Old Notes notifies us before the 20th
                              day after we complete the exchange offer that:
 
                                . the holder is prohibited by law or SEC policy
                                   from participating in the exchange offer;
 
                                . the holder may not resell the New Notes
                                   acquired by it in the exchange offer to the
                                   public without delivering a prospectus and
                                   that this Prospectus is not appropriate or
                                   available for such resales; or
 
                                . the holder is a broker-dealer and owns Old
                                   Notes acquired directly from us or an
                                   affiliate of ours.
 
                              We will accept for exchange any and all Old Notes
                              that are properly tendered (and not withdrawn) in
                              the exchange offer prior to 5:00 p.m., New York
                              City time, on         , 1999. The New Notes
                              issued in our exchange offer will be delivered
                              promptly
                              following the expiration date. See "The Exchange
                              Offer."
 
Exchange Agent .............  IBJ Whitehall Bank and Trust Company is serving
                              as Exchange Agent in connection with this
                              exchange offer.
 
Federal Income Tax            The exchange of Old Notes for New Notes in this
Considerations..............  exchange offer should not constitute a sale or an
                              exchange for federal income tax purposes. See
                              "Certain Federal Income Tax Considerations."
 
Effect of Not Tendering ....  Old Notes that are not tendered will continue to
                              be subject to the existing transfer restrictions
                              after we complete the exchange offer. We will
                              have no further obligation to provide for the
                              registration under the Securities Act of such Old
                              Notes.
 
 
                                       5

 
 
                                 The New Notes
 
  The summary below describes the principal terms of the New Notes. Important
limitations and exceptions apply to certain of the terms and conditions
described below. The "Description of the New Notes" section beginning on page
 of this Prospectus contains a more detailed description of the terms and
conditions of the New Notes.
 
Issuers.....................  AEI Resources, Inc.
 
Securities Offered..........  $150,000,000 in aggregate principal amount of the
                              Company's 11 1/2% Senior Subordinated Notes due
                              2006.
 
Maturity Date...............  December 15, 2006.
 
Interest Rate...............  11 1/2% per year.
 
Interest Payment Dates......  June 15 and December 15 of each year, commencing
                              June 15, 1999.
 
Ranking.....................  The Notes are general, unsecured obligations of
                              ours. In priority of payment, the Notes rank
                              subordinate to all our current and future Senior
                              Indebtedness (as defined on page   . ) As of
                              September 30, 1998, on a pro forma basis, the
                              Company and its subsidiaries would have had
                              outstanding senior indebtedness of $949.0
                              million, plus an additional $73.5 million in
                              borrowings was available under our Senior Credit
                              Facility.
 
                              The Subordinated Notes will have equal priority
                              in payment with any future senior subordinated
                              indebtedness and will rank senior to all other
                              subordinated indebtedness.
 
Optional Redemption.........  We may choose to redeem the Notes:
 
                                . On or after December 15, 2002, at the
                                   redemption prices in this Prospectus, plus
                                   accrued and unpaid interest and Liquidated
                                   Damages (as defined on page   ), if any.
 
                                . Before December 15, 2002, at 100% of the face
                                   amount, plus an applicable Make Whole
                                   Premium (as defined on page     ), plus
                                   accrued and unpaid interest and Liquidated
                                   Damages.
 
                              On or before December 15, 2001, we can choose to
                              buy back up to 35% of the aggregate outstanding
                              face amount of the Notes with the net cash that
                              we or our parent company raise in a public or
                              private offering of equity securities. We may do
                              this so long as:
 
                                . We pay 111.5% of the face value of the Notes
                                   originally issued, plus accrued and unpaid
                                   interest and Liquidated Damages, if any;
 
                                . We buy back the Notes within 45 days of the
                                   completion of the public stock offering; and
 
                                       6

 
 
                                . At least $97.5 million of the principal
                                   amount of the Notes remains outstanding
                                   afterwards.
 
Change of Control...........  If a Change of Control occurs (as defined on page
                                ), we must give holders of the Notes an
                              opportunity to sell their Notes at 101% of their
                              face amount, plus accrued interest and Liquidated
                              Damages, if any.
 
                              We may not be able to pay you the required price
                              for the Notes you request us to purchase at the
                              time of a Change of Control because we may also
                              have to repay our senior credit facility and may
                              not have enough funds to pay all our senior debt
                              at that time.
 
Guarantees..................  Our payment obligations under the New Notes will
                              be jointly and severally guaranteed on a senior
                              unsecured basis by our parent company and each of
                              our current and future domestic subsidiaries
                              (with certain exceptions).
 
                              Holdings has no significant assets other than the
                              stock of the Company and may not have funds to
                              pay any obligations under its guarantee.
 
                              Each subsidiary guarantor's obligations under its
                              guarantee will be contractually subordinated to
                              its secured guarantee of all borrowing under our
                              Senior Credit Facility and to all of its other
                              debt defined as Senior Indebtedness. In addition,
                              the indenture governing the Notes restricts, but
                              does not prohibit, the subsidiary guarantors from
                              incurring additional secured debt.
 
Certain Covenants...........  The indenture governing the Notes contains
                              covenants limiting our ability (and the ability
                              of most of our subsidiaries) to:
 
                                . incur additional debt;
 
                                . pay dividends and make certain other
                              payments;
 
                                . incur certain liens;
 
                                . use the proceeds from sales of assets and
                              subsidiary stock;
 
                                . enter into transactions with affiliates;
 
                                . transfer or sell assets; and
 
                                . consolidate or merge with another person.
 
                              In addition, under certain circumstances, we must
                              give holders of the Notes an opportunity to sell
                              their Notes at 100% of their face amount, plus
                              accrued interest and Liquidated Damages, if any,
                              from the proceeds of certain sales of our assets
                              or assets of a subsidiary.
 
                              These covenants are subject to several important
                              limitations and exceptions and are more fully
                              described in "Description of the New Notes"--
                              Certain Covenants" beginning on page   .
 
                                       7

 
 
Use of Proceeds.............  The Company will not receive any cash proceeds
                              from the issuance of the New Notes in exchange
                              for Old Notes.
 
                                  Risk Factors
 
We urge you to carefully read the Risk Factors beginning on page   for a
discussion of factors you should consider before exchanging your Old Notes for
New Notes.
 
 
                                       8

 
                   SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
 
We have summarized below the unaudited combined pro forma financial information
of the Company for the year ending December 31, 1997 and for the nine months
ended September 30, 1998. The information should be read in conjunction with
the unaudited pro forma condensed financial statements included on pages
through      of this Prospectus and in conjunction with our historical
financial statements and related notes included on pages F-1 through F-    of
this Prospectus.
 
You should be aware that this pro forma information may not be indicative of
what actual results will be in the future or would have been for the periods
presented.
 


                                                      (Dollars in Millions,
                                                       Except Per Ton Data)
                                                    --------------------------
                                                           The Company
                                                    --------------------------
                                                                  Nine Months
                                                     Year Ended      Ended
                                                    December 31, September 30,
                                                        1997         1998
                                                    ------------ -------------
                                                           
Operating Data:
Revenues...........................................   $1,395.2     $1,031.7
Cost of operations.................................    1,120.8        820.4
Depreciation, depletion and amortization...........      172.0        130.7
Selling, general and administrative................       41.6         31.2
Writedowns and special items(1)....................       82.5          --
                                                      --------     --------
Income (loss) from operations......................      (21.7)        49.4
Interest expense...................................     (112.4)       (86.4)
Other income (expense), net(2).....................       18.5          8.5
                                                      --------     --------
Income (loss) before income taxes..................     (115.6)       (28.5)
Income tax provision (benefit).....................      (23.9)       (11.7)
                                                      --------     --------
Net income (loss) from continuing operations.......   $  (91.7)    $  (16.8)
                                                      --------     --------
Other Data:
Adjusted EBITDA(3).................................   $  249.7     $  187.4
Capital Expenditures...............................      114.0         55.1
Ratio of Adjusted EBITDA to cash interest
 expense(3)(4).....................................       2.7x         2.3x
Ratio of total debt to Adjusted EBITDA(3)..........         NA         6.3x
Operating Data:
Proven and probable reserves
 (at period end in millions of tons)...............      2,440        2,401
Coal sales (millions of tons)(5)...................       52.2         38.9
Average sales price per ton........................   $  25.62     $  25.87
Average cost per ton sold(6).......................      23.89        24.21
Balance Sheet Data (end of period):
Working capital....................................         NA     $  (38.8)
Total assets.......................................         NA      2,584.6
Total long-term debt (including current portion)...         NA      1,174.7
Stockholders' equity (deficit).....................         NA        (84.3)

 
                                       9

 
- --------
(1) In 1997, the Company's subsidiaries acquired from Cyprus Amax Coal Company
    in June 1998 recorded historical write downs and special items of $92.1
    million. Such write downs and special items consist of: (i) charges of
    $35.8 million for the anticipated closure of the Armstrong Creek mine
    (which includes a $9.6 million charge related to end-of-mine reclamation);
    (ii) $2.3 million charge to increase current reclamation accounts for the
    Chinook mine; (iii) charges of $6.9 million to writedown land assets and
    prepaid royalties to net realizable value; (iv) write downs of $33.5
    million in asset values at the Cyprus Subsidiaries' West Virginia mines;
    and (v) write downs of $13.6 million in asset values at the Cyprus
    Subsidiaries' Chinook mine that resulted from updated mine and business
    plans that reflected the views of the Cyprus Subsidiaries' management
    regarding the domestic market for mid- to high-sulfur coal and updated
    reserve information. The write downs and special items were partially
    offset by pro forma adjustments for changes to the reclamation expense of
    the recently acquired companies to conform to the Company's reclamation
    cost accounting policy ($9.6 million).
 
(2)Other income (expense), net reflects the inclusion of gain or loss on asset
sales and minority interest.
 
(3) Adjusted EBITDA as presented above and as used elsewhere in this Prospectus
    consists of earnings before interest, taxes, depletion, depreciation,
    amortization and other non-cash charges as adjusted to exclude certain
    unusual or nonrecurring charges, all in accordance with the term
    "Consolidated Cash Flow" as that term is used in the term "Fixed Charge
    Coverage Ratio" in the Indenture. See "Description of the Notes" for a
    complete presentation of the methodology employed in calculating Adjusted
    EBITDA. Adjusted EBITDA is presented because it is a widely accepted
    financial indicator of a company's ability to service indebtedness and
    because it is used in the Indenture to determine compliance with certain
    covenants. However, Adjusted EBITDA should not be considered as an
    alternative to income from operations or to cash flows from operating
    activities (as determined in accordance with generally accepted accounting
    principles) and should not be construed as an indication of a company's
    operating performance or as a measure of liquidity. See Note G to Unaudited
    Pro Forma Combined Income Statements in "Unaudited Pro Forma Combined
    Financial Statements" for Adjusted EBITDA calculations.
 
(4) Cash interest expense is calculated as interest expense plus capitalized
    interest less interest accreted on discounted notes and amortization of
    deferred financing costs.
 
(5) Coal sales do not give effect to sales from purchased coal tonnage, which
    was 1.9 million tons in the nine months ended September 30, 1998.
 
(6) Average cost per ton sold is calculated based on total coal operating costs
    included in the cost of operations, plus depreciation costs related to
    mining, divided by coal sold.
 
NA = Not Available
 
 
                                       10

 
                       SUMMARY HISTORICAL FINANCIAL DATA
 
We have summarized below consolidated financial data derived from the following
financial statements included in this Prospectus:
 
  .  Annual financial statements of AEI Holding Company, Inc., our
     predecessor company, as of December 31, 1996 and 1997, and for the three
     years in the period ended December 31, 1997, which have been audited.
 
  .  Unaudited interim financial statements of AEI Resources, Inc. and our
     predecessor company as of September 30, 1998 and for the nine-month
     periods ended September 30, 1997 and 1998.
 
  .  Audited financial statements of the predecessor to AEI Holding Company,
     Inc. for the ten-month period ended November 1, 1995.
 
The annual financial statements and the ten-month financial statements have
been audited by Arthur Andersen LLP, independent public accountants. The
unaudited financial statements include, in the opinion of our management, all
normal recurring adjustments necessary for a fair presentation of the results
for the unaudited interim periods. You should be aware that results for the
nine months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the entire year.
 
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages     through     and the historical financial statements and related notes
included on pages F-1 through F-132 of this Prospectus.
 
            AEI Resources Holding, Inc. (including its predecessors)
                   (Dollars in millions, except per ton data)
 


                                                                 Nine-Month
                                 For the Fiscal Year Ended      Period Ended
                                       December 31,             September 30,
                                 -----------------------------  --------------
                                 1995 (1)    1996      1997      1997    1998
                                 -------------------  --------  ------  ------
                                                                 (unaudited)
                                                         
Operating Data:
Revenues.......................   $  112.3  $  123.2  $  175.3  $124.1  $376.2
Cost of operations.............       94.5      97.1     145.2   100.7   309.5
Depreciation, depletion and
 amortization..................        6.0       6.9      10.8     6.9    28.2
Selling, general and
 administrative................        8.6       9.1      13.9     9.9    19.8
                                  --------  --------  --------  ------  ------
Income from operations.........        3.2      10.1       5.4     6.6    18.7
Interest expense...............       (2.0)     (5.5)     (9.2)   (5.3)  (29.8)
Other income (expense), net
 (2)...........................       (0.5)      0.5       0.4    (0.6)    2.5
                                  --------  --------  --------  ------  ------
Income (loss) before income tax
 provision.....................        0.7       5.1      (3.4)    0.7    (8.6)
Income tax provision (benefit)
 (3)...........................       (0.4)      --       17.5     1.4    (0.9)
                                  --------  --------  --------  ------  ------
Net income (loss) from
 continuing operations (4).....   $    1.1  $    5.1   $ (20.9) $ (0.7) $ (7.7)
                                  --------  --------  --------  ------  ------
Other Data:
Adjusted EBITDA (5)............   $    8.7  $   17.5  $   16.6  $ 12.9  $ 48.4
Cash flows from operating
 activities....................       11.1       4.8     (10.2)   (8.0)  (30.1)
Cash flows from investing
 activities....................      (11.0)    (12.5)    (38.3)  (18.2) (907.0)
Cash flows from financing
 activities....................        0.9       7.3     131.6    26.9   908.4
Capital expenditures...........       12.6      14.1      32.2    18.3    33.3
Ratio of Adjusted EBITDA to
 interest expense (5)..........        4.4x      3.2x      1.8x    2.4x    1.6x
Ratio of total debt to Adjusted
 EBITDA (5)....................        6.0x      3.7x     13.1x    7.1x   29.5x

 
                                       11

 
 
                                                        
Operating Data:
Proven and probable reserves (at
 period end,
 in millions of tons).................     NA      NA     166     168    2,446
Coal sales (millions of tons).........    3.3     4.2     6.5     4.6     14.8
Average sales price per ton........... $26.27  $24.84  $25.19  $24.43  $ 24.99
Average cost per ton sold(6)..........  24.20   21.32   22.08   22.00    22.30
Balance Sheet Data (end of period):
Working capital....................... $ (5.6) $(11.6) $ 85.1  $ 12.7  $ (36.0)
Total assets..........................   92.3   106.9   265.4   141.5  2,843.1
Total debt (including current
 portion).............................   52.4    64.1   217.0    91.6  1,425.8
Stockholders' equity (deficit)........   (4.7)    0.3   (18.1)   (0.2)   (69.8)


- --------
(1) The operations data for the year ended December 31, 1995 combine the
    audited results of operations for AEI Holding Company, Inc. (the
    predecessor to AEI Resources Holding, Inc.) for the period from January 1,
    1995 through December 31, 1995 (See page F-5 of this Prospectus) and the
    results of Addington Coal Operations (the predecessor to AEI Holding
    Company, Inc.) for the period from January 1, 1995 through November 1, 1995
    (See page F-38 of this Prospectus). The operations data for the year ended
    December 31, 1995 do not purport to represent what the Company's combined
    results of operations would have been if the predecessor businesses had
    actually been acquired as of January 1, 1995.
 
(2) Other income (expense), net reflects the inclusion of gain or loss on asset
    sales and minority interest.
 
(3) In April 1997, Bowie changed its tax reporting status from an S-corporation
    to a C-corporation, resulting in an initial deferred tax liability of $1.6
    million. In November 1997, the other subsidiaries of AEI Holding Company,
    Inc. likewise changed from S-corporations to C-corporations, resulting in
    an initial deferred tax liability of $18.0 million.
 
(4) Net income (loss) from continuing operations is prior to extraordinary
    items and accounting changes.
 
(5) Adjusted EBITDA as presented above and as used elsewhere in this Prospectus
    consists of earnings before interest, taxes, depletion, depreciation,
    amortization and other non-cash charges as adjusted to exclude certain
    unusual or nonrecurring charges, all in accordance with the term
    "Consolidated Cash Flow" as that term is used in the term "Fixed Charge
    Coverage Ratio" in the Indenture. See "Description of the Notes" for a
    complete presentation of the methodology employed in calculating Adjusted
    EBITDA. Adjusted EBITDA is presented because it is a widely accepted
    financial indicator of a company's ability to service indebtedness and
    because it is used in the Indenture to determine compliance with certain
    covenants. However, Adjusted EBITDA should not be considered as an
    alternative to income from operations or to cash flows from operating
    activities (as determined in accordance with generally accepted accounting
    principles) and should not be construed as an indication of a company's
    operating performance or as a measure of liquidity.
 
(6) Average cost per ton sold is calculated based on total coal operating costs
    included in cost of operations, plus depreciation costs related to mining,
    divided by coal sold.
 
                                       12

 
                                  RISK FACTORS
 
Before purchasing the Notes, a prospective investor should consider the
specific factors set forth below, as well as the other information set forth
elsewhere in this Prospectus.
 
This Prospectus includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act
of 1934 including, in particular, the statements about the Company's plans,
strategies and prospects under the headings "Prospectus Summary," "Unaudited
Pro Forma Combined Financial Statements," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "The Coal Industry,"
"Business" and "Government Regulation." Although we believe that our plans,
intentions and expectations reflected in or suggested by such forward-looking
statements are reasonable, we can give no assurance that such plans, intentions
or expectations will be achieved. Important factors that could cause actual
results to differ materially from the forward looking statements we make in
this Prospectus are set forth below and elsewhere in this Prospectus. All
forward-looking statements attributable to the Company or persons acting on our
behalf are expressly qualified in their entirety by the following cautionary
statements.
 
Substantial Leverage--Our substantial indebtedness could adversely affect the
financial health of our Company and prevent us from fulfilling our obligations
under the Notes.
 
Our Company has a significant amount of indebtedness. The following chart shows
certain important credit statistics.
 


                                                           At September 30, 1998
                                                           ---------------------
                                                                (unaudited)
                                                        
Total indebtedness........................................       $1,174.7
                                                                 --------
Stockholders' equity......................................       $  (84.3)
                                                                 --------
Debt to equity ratio......................................          N/A
                                                                 --------

 


                                  For the Year Ended For the Nine Months Ended
                                  December 31, 1997     September 30, 1998
                                  ------------------ -------------------------
                                                            (unaudited)
                                               
Excess of earnings to fixed
 charges (deficiency)............      $(117.6)               $(36.7)
                                       -------                ------

 
 
The Company's substantial indebtedness could have important consequences to
you. For example, it could:
 
  . make it more difficult for us to satisfy our obligations with respect to
    the Notes;
 
  .increase our vulnerability to general adverse economic and industry
  conditions;
 
  . limit our ability to fund future working capital, capital expenditures,
    research and development costs and other general corporate requirements;
 
  . require us to dedicate a substantial portion of our cash flow from
    operations to payments on our indebtedness, thereby reducing the
    availability of our cash flow to fund working capital, capital
    expenditures, research and development efforts and other general
    corporate purposes;
 
  . limit our ability to obtain additional financing to fund future
    acquisitions of coal producers or coal reserves;
 
  . limit our flexibility in planning for, or reacting to, changes in our
    business and the industry in which we operate;
 
  . place us at a competitive disadvantage compared to our competitors that
    have less debt; and
 
  . limit, along with the financial and other restrictive covenants in our
    indebtedness, among other things, our ability to borrow additional funds.
    And, failing to comply with those covenants could result in an event of
    default which, if not cured or waived, could have a material adverse
    effect on us.
 
                                       13

 
See "Capitalization," "Description of the Notes--Repurchase at Option of
Holder--Change of Control" and "Description of Other Indebtedness--The Senior
Credit Facility."
 
Subordination--Your right to receive payments on these Notes is junior to our
existing indebtedness and possibly all of our future borrowings. Although our
subsidiaries have guaranteed the Notes, their guarantees rank behind all of
their existing indebtedness and possibly behind all their future borrowings.
 
Our domestic subsidiary companies, through which we hold the assets used to
operate our coal mining businesses, guarantee our obligations on the Notes. The
Notes and these Subsidiary Guarantees rank behind all of our and our
subsidiaries' existing indebtedness (other than trade payables) and all of our
and their future borrowings (other than trade payables), except for any future
indebtedness that expressly ranks equal with, or is subordinated to, the Notes
and the Subsidiary Guarantees. As a result, upon any distribution to creditors
of ours or our subsidiaries in a bankruptcy or similar proceeding, the holders
of indebtedness comprising "Senior Indebtedness" (as defined on page    ) of
ours or our subsidiaries will have the right to be paid in full in cash before
any amounts will be paid with respect to these Notes or the Subsidiary
Guarantees.
 
In addition, all payments on the Notes and the Subsidiary Guarantees will be
blocked in the event of a payment default on Senior Indebtedness and may be
blocked for up to 179 of 360 consecutive days in the event of certain non-
payment defaults on senior debt.
 
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or our subsidiaries, holders of the Notes will
participate with trade creditors and all other holders of subordinated
indebtedness of ours or our subsidiaries in the assets remaining after we and
our subsidiaries have paid all of our Senior Indebtedness. However, because the
Indenture governing the Notes requires that amounts otherwise payable to
holders of the Notes in a bankruptcy or similar proceeding be paid instead to
holders of Senior Indebtedness, holders of the Notes may receive less, ratably,
than holders of trade payables in any such proceeding. In any of these cases,
our Company and its subsidiaries may not have sufficient funds to pay all of
our creditors and holders of Notes may receive less, ratably, than the holders
of Senior Indebtedness.
 
As of September 30, 1998, after giving effect to payments and borrowings after
that date, the Notes and the Subsidiary Guarantees would have been subordinated
to $949.0 million of Senior Indebtedness and $73.5 million would have been
available for borrowing as additional Senior Indebtedness under our credit
facility. The Indenture governing the Notes will allow us to borrow substantial
additional indebtedness, including Senior Indebtedness, in the future.
 
Our parent company also guarantees the Notes on a senior subordinated basis.
Its guarantee will be subordinated to any Senior Indebtedness our parent
company incurs in the future. Because our parent company has no significant
assets other than the capital stock of the Company, Note holders should not
rely on the guarantee of our parent company.
 
Additional Borrowings Available--Despite current indebtedness levels, we may
still be able to incur substantially more debt. This could further exacerbate
the risks described above.
 
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the Indenture do not fully prohibit us
or our subsidiaries from doing so. Our Senior Credit Facility will permit
additional borrowings by the Company of up to $73.5 million as of September 30,
1998 (after giving proforma effect to the borrowings to fund a subsequent
acquisition) and all of those borrowings would be senior to the Notes. If new
debt is added to our current debt levels, the related risks that we now face
could intensify.
 
See "Capitalization," "Selected Historical Consolidated Financial Data" and
"Description of the Notes--Repurchase at the Option of Holders--Change of
Control" and "Description of Other Indebtedness--The Senior Credit Facility."
 
                                       14

 
Ability to Service Debt--To service our indebtedness, we will require a
significant amount of cash. Our ability to generate cash depends on many
factors beyond our control.
 
Our ability to make payments on and to refinance our indebtedness, including
the Notes, and to fund planned capital expenditures and research and
development efforts will depend on our ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
 
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe our cash flow from operations, available
cash and available borrowings under the Senior Credit Facility, will be
adequate to meet our future liquidity needs for at least the next few years.
 
We cannot assure you, however, that our business will generate sufficient cash
flow from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule or at all, or that future borrowings
will be available under the Senior Credit Facility in amounts sufficient to
enable us to pay our indebtedness, including the Notes, or to fund our other
liquidity needs. We may need to refinance all or a portion of our indebtedness,
including the Notes, on or before maturity. We cannot assure you that we will
be able to refinance any of our indebtedness, including the Senior Credit
Facility and the Notes, on commercially reasonable terms or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity."
 
Secured Indebtedness--Any claims of holders of the Notes will be effectively
subordinated to claims of holders of any secured indebtedness of the Company or
our subsidiaries.
 
Holders of any secured indebtedness of the Company or our subsidiaries will
have claims that have priority over claims of the holders of the Notes with
respect to the assets securing such other indebtedness. The Company and our
subsidiaries are currently parties to the Senior Credit Facility. The Senior
Credit Facility is secured by liens on all of the capital stock of the Company
and our subsidiaries, as well as all present and future assets and properties
of the Company and our subsidiaries. The Notes will remain effectively
subordinated to all such secured indebtedness. In the event of any distribution
or payment of our assets in any bankruptcy, liquidation or distribution or
similar proceeding, holders of secured indebtedness will have a prior claim to
our assets that constitute their collateral. Holders of the Notes will
participate ratably with all holders of our unsecured indebtedness that is
deemed to be of the same class as the Notes. They may also be able to
participate with all of our other general creditors' based upon the respective
amounts owed to each holder or creditor, in any distribution of our remaining
assets. If any of these events occur, we cannot assure you that there would be
sufficient assets to pay amounts due on the Notes. As a result, holders of the
Notes may receive less, ratably, than holders of secured indebtedness.
 
As of September 30, 1998, on a pro forma basis after giving effect to payments
and borrowings after that date, the Company and its subsidiaries would have had
$749.0 million in aggregate amount of secured indebtedness (excluding the
guarantees of borrowings under the Senior Credit Facility), and $73.5 million
would have been available for additional borrowing under the Senior Credit
Facility.
 
Integration of Acquisitions--We may not be able to effectively integrate the
various businesses we have acquired.
 
Our business has been developed principally through the acquisition of
established coal businesses. Each of the businesses we have acquired since
October 1, 1997 operated independently before we acquired it. Our Unaudited Pro
Forma Combined Financial Statements in this Prospectus include the combined
operating results of these acquired businesses during periods before they were
under our control. Thus, the statements may not indicate what our results would
have been if we had operated the acquired businesses on a combined basis during
such periods. Our prospects should be considered in light of the numerous risks
commonly encountered
 
                                       15

 
in business combinations. We cannot assure you that our management group will
be able to effectively integrate the businesses we have acquired since October
1, 1997, or generate the cost savings and operating improvements we currently
anticipate. Our business, financial condition and results of operations
could be materially adversely affected if we are unable to retain the key
operational personnel that have contributed to our historical performance and
that of the businesses we have acquired. See "--Dependence on Key Management
and Control by Principal Shareholder."
 
While we intend to pursue acquisitions of additional coal reserves and other
coal companies, in the future, we have no present binding commitments or
agreements with respect to any such acquisitions. We may incur additional debt
and contingent liabilities to finance future acquisitions, either of which may
adversely effect our business, financial condition and results of operations.
Acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, technologies, services and products of the acquired
companies and the diversion of management's attention from other business
concerns. If we complete such an acquisition in the future, the acquisition may
adversely affect our business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity."
 
Ability to Achieve Anticipated Cost Savings and Synergies--We may not be able
to achieve our anticipated cost savings in the manner and on the schedule
currently anticipated.
 
Our management currently estimates that if we had completed all of our recent
acquisitions by January 1, 1997, we could have achieved cost savings of
approximately $71 million through integration of the businesses acquired. These
estimates were prepared solely by members of our management and are necessarily
based on a number of assumptions. These include our ability to implement
headcount reductions and long-term supply contract flexibility and our ability
to optimize production costs and implement more cost-effective mining
techniques. However, other matters may affect these estimates, including
general industry, business and economic conditions, many of which are beyond
our control. These forward-looking statements are based on estimates and
assumptions made by our management that, although believed to be reasonable,
are inherently uncertain and difficult to predict. We cannot assure you that
the cost savings anticipated in these forward-looking statements will be
achieved on the schedule currently anticipated or at all, nor can we assure you
that unforeseen costs and expenses or other factors will not offset any
estimated or actual cost savings. If we cannot achieve the anticipated cost
savings and synergies, we may encounter financing constraints in the future.
 
Reliance on Long-Term Coal Supply Contracts--Many of our long-term contracts
allow contract price renegotiation, contract termination and other provisions
that may adversely affect our operating margins.
 
We sell a substantial portion of our coal under long-term coal supply
contracts, which are significant to the stability and profitability of our
operations. The execution of a satisfactory long-term sales contract is
frequently the basis for our decision to develop coal reserves needed to
fulfill the contract. For the nine months ended September 30, 1998,
approximately 74% of our revenues came from coal sales under long-term sales
contracts. As of September 30, 1998, the Company had 51 long-term sales
contracts with a volume-weighted average term of approximately 5.4 years. As of
September 30, 1998, most of the Company's contracts provide for coal to be sold
at a price higher than the price at which such coal could be sold in the spot
market.
 
Most of our recently negotiated contracts with a term of more than three years
contain price reopeners. The reopeners usually occur midway through a contract
or every two to three years, depending upon the length of the contract.
Reopeners allow the contract price to be renegotiated in order to be in line
with the market price prevailing at the time. In some circumstances, the
utilities have an option to terminate the contract if prices have increased by
over 10% from the price at the commencement of the contract or if the parties
do not agree on a new price. We cannot assure you that our long-term contracts
will not terminate before their current terms expire or that the prices we
obtain for coal under such contracts will not decrease.
 
                                       16

 
Historically, long-term sales contracts were priced above the spot prices for
coal. However, in the past several years the price of new contracts has been
very competitive, with new contracts being priced at or near existing spot
rates. In addition, the length of the term of sales contracts has decreased
significantly over the last two decades as competition in the coal industry has
increased and, more recently, as the electricity generators have prepared
themselves for the Clean Air Act Amendments and the impending deregulation of
their industry. We believe that the average term of long-term sales contracts
was 20 years in the 1970s and 10 years in the 1980s, but then fell to one to
two years in the early 1990s. However, in the last three years, there has been
a return to longer term contracts of five to ten years in length. At the same
time, customers have insisted on price reopeners every two or three years,
providing them with the security of having coal under contract and knowing that
the price will not significantly exceed market. See "Business--Long-Term Coal
Contracts."
 
Our operating profit margins under our long-term coal supply contracts depend
on a variety of factors. These include production costs, transportation costs,
delivered coal qualities and quantities and various general macro-economic
indices, many of which are beyond our control. In addition, price adjustment,
price reopener and other provisions may reduce the insulation from short-term
coal price volatility provided by such contracts and may adversely impact our
operating profit margins. If any of our long-term sales contracts are modified
or terminated, we could be adversely affected to the extent that we cannot find
alternate customers at the same level of profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
We must sell coal from our Bowie Mine to TVA under a ten-year contract dated
July 1, 1998. Our costs to supply coal for the TVA contract will be higher if
we cannot lease certain reserves located on federal land in Colorado. We cannot
assure you that we will be successful in leasing such reserves. The failure to
do so could materially adversely impact the profitability of the Bowie Mine.
 
Highly Competitive Industry--The high level of competition in the coal industry
may make it difficult for us to continue to obtain long-term sales contracts,
making us vulnerable to changes in spot market coal prices.
 
The U.S. coal industry is highly competitive, with numerous producers in most
coal producing regions. We compete with other large producers and hundreds of
small producers in the United States and abroad. Many of our customers also
purchase coal from our competitors. The markets in which we sell our coal are
highly competitive and affected by factors beyond our control. Demand for coal
and the prices that we obtain for our coal are closely linked to coal
consumption patterns of the domestic electric utility industry, which has
accounted for approximately 87% of domestic coal consumption in recent years.
The demand for electricity, coal transportation costs, environmental and other
governmental regulation, technological developments and the location,
availability and price of competing sources of coal, alternative fuels such as
natural gas, oil and nuclear, and alternative energy sources such as
hydroelectric power all influence coal consumption by utilities. In addition,
during the mid-1970s and early 1980s, a growing coal market and increased
demand attracted new investors to the coal industry and spurred the development
of new mines and added production capacity throughout the industry. As a result
of the increased development of large surface mining operations, particularly
in the western United States, and more efficient mining equipment and
techniques, the industry has developed excess coal production capacity in the
United States. Competition resulting from excess capacity encourages producers
to reduce prices and to pass productivity gains through to customers. Moreover,
because of greater competition in the domestic electric utility industry and
increased pressure from customers and regulators to lower electricity prices,
public utilities are lowering fuel costs by buying higher percentages of spot
coal through a competitive bidding process and by only buying the amount of
coal necessary under existing contracts to meet their contractual requirements.
We cannot assure you that we will continue to be able to obtain long-term sales
contracts with reliable customers as existing contracts expire. If the
percentage of our revenues generated from long-term sales contracts decreases,
changes in spot market coal prices will have a greater impact on our results.
 
                                       17

 
Transportation--Any disruption in our transportation services or any
significant increase in transportation costs may adversely affect our business.
 
The U.S. coal industry depends on rail, trucking and barge transportation to
deliver shipments of coal to customers. In particular, we depend on railroads
at a significant number of our mines. If weather-related or other events
disrupt these transportation services, it could temporarily impair our ability
to supply coal to our customers and thus adversely affect our business and
operating results. In addition, transportation costs, including fuel costs,
represent a significant component of the total cost of supplying coal to
customers and can significantly affect a coal producer's competitive position
and profitability. Increases in our transportation costs, or changes in such
costs relative to transportation costs incurred by providers of competing coal
or of other fuels, could have an adverse effect on our business and operating
results.
 
Risks Inherent in Mining Operations--Mining operations are vulnerable to
weather and other conditions that are beyond our control.
 
Conditions beyond our control can increase or decrease the cost of mining at
particular mines for varying lengths of time. These conditions include weather
and natural disasters, such as heavy rains and flooding, unexpected maintenance
problems, variations in coal seam thickness, variations in the amount of rock
and soil overlying the coal deposit, variations in rock and other natural
materials and variations in geological and other conditions. Additionally, the
highwall mining process can be more sensitive to adverse geological conditions
which may diminish coal recovery, and in extreme cases, contribute to the loss
or damage of highwall mining equipment.
 
Government Regulation of the Mining Industry--Government regulations may impose
costly requirements on us.
 
The coal mining industry is subject to regulation by federal, state and local
authorities on matters such as employee health and safety, limitations on land
use, permitting and licensing requirements, air quality standards, water
pollution, plant and wildlife protection, reclamation and restoration of mining
properties after mining, the discharge of materials into the environment,
surface subsidence from underground mining and the effects that mining has on
groundwater quality and availability. Legislation mandating certain benefits
for current and retired coal miners also affects the industry. Mining
operations require numerous governmental permits and approvals. We may be
required to prepare and present to federal, state or local authorities data
pertaining to the impact that any proposed exploration for or production of
coal may have upon the environment. Compliance with these requirements may be
costly and time-consuming and may delay commencement or continuation of
exploration or production operations. New legislation and/or regulations and
orders may materially adversely affect our mining operations, our cost
structure and/or our customers' ability to use coal. New legislation, including
proposals related to the protection of the environment that would further
regulate and tax the coal industry, may also require us or our customers to
change operations significantly or incur increased costs. All of these factors
could have a material adverse effect on our business, financial condition and
results of operations. See "Government Regulation."
 
Reclamation and Mine Closure Accruals. The Federal Surface Mining Control and
Reclamation Act of 1977 ("SMCRA") and similar state statutes require us to
restore mine property in accordance with specified standards and an approved
reclamation plan, and require that we obtain and periodically renew permits for
mining operations. We accrue for the costs of final mine closure over the
estimated useful mining life of the property and for rectifying current mine
disturbance through reclamation prior to final mine closure. These costs relate
to reclaiming the pit and support acreage at surface mines and sealing portals
at deep mines. Other costs common to both types of mining are related to
reclaiming refuse and slurry ponds. We establish our final mine closure
reclamation liability based upon permit requirements and various estimates and
assumptions, principally associated with costs, facilities and disturbed
acreage. We review our entire environmental liability under SMCRA annually and
make necessary adjustments, including mine reclamation plan and permit changes
and revisions to costs and production levels to optimize mining and reclamation
efficiency. We record the
 
                                       18

 
economic impact of such adjustments to the cost of coal sales. We accrue the
entire reclamation liability for operating mines which we acquire and begin to
accrue for the cost of final mine closure at new mines when mining activities
begin. The accruals for end of mine reclamation costs and mine-closing costs
totaled approximately $363.4 million on the Company's pro forma balance sheet
as of September 30, 1998, of which $28.4 million is a current liability. The
amount included as an operating expense for such liability for the pro forma
nine-month period ended September 30, 1998 was $2.4 million, while the related
cash expense for such period was $13.6 million. Although our management
believes it is making adequate provisions for all expected reclamation and
other costs associated with mine closures, future operating results would be
adversely affected if such accruals were later determined to be insufficient.
 
Impact of Clean Air Act Amendments on Coal Consumption. The Federal Clean Air
Act, including the Clean Air Act Amendments of 1990, and corresponding state
laws that regulate emissions of materials into the air, affect coal mining
operations both directly and indirectly. Direct impacts on coal mining and
processing operations occur through Clean Air Act permitting requirements
and/or emissions control requirements relating to particulate matter (e.g.,
"fugitive dust"), including future regulation of fine particulate matter. In
July 1997, the U.S. Environmental Protection Agency ("EPA") adopted new, more
stringent standards for particulate matter and ozone. As a result, some states
must change their existing implementation plans to attain and maintain
compliance with the new standards. Because coal mining operations emit
particulate matter, our mining operations are likely to be affected directly
when the revisions to the new standards are implemented by the states. State
and federal regulations relating to implementation of the new standards may
restrict our ability to develop new mines or could require us to modify our
existing operations. The extent of the potential direct impact of the new
standards on the coal industry will depend on the policies and control
strategies associated with the state implementation process under the Clean Air
Act, but could have a material adverse effect on our business, financial
condition and results of operations.
 
The Clean Air Act indirectly affects coal mining operations by extensively
regulating the emissions by coal-fueled utility power plants. Reductions in SO2
emissions under the Clean Air Act Amendments will occur in two phases: (i)
Phase I began in 1995 and applies only to certain identified facilities and
(ii) Phase II is scheduled to begin in 2000 and will apply to all coal-fueled
utility power plants, including those subject to the 1995 restrictions. The
affected utilities have been and may be able to meet these requirements by,
among other methods, switching to lower sulfur coal or other low-sulfur fuels,
installing pollution control devices such as scrubbers, reducing electricity
generating levels or purchasing excess emission allowances from other
facilities. See "Government Regulation--Environmental Laws--Clean Air Act." We
cannot fully determine the effect of these developments on the Company at this
time. We believe that implementation of Phase II will likely tend to reduce the
price of higher sulfur coal, as additional coal-burning utility power plants
become subject to more restrictions. We expect this price effect to occur after
the large surplus of emission allowances which has accumulated in connection
with Phase I has been reduced, and before utilities can install sulfur-
reduction technologies to comply with Phase II. The extent to which this
expected price decrease will adversely affect the Company will depend upon
several factors, including our ability to secure long-term sales contracts for
our coal reserves with higher sulfur content. Moreover, if the price of
compliance coal rises as Phase II is implemented, scrubber compliance
strategies may become more attractive to utility customers, thereby lessening
the downward pressure on the price of high sulfur coal.
 
The Clean Air Act Amendments also indirectly affect coal mining operations by
requiring utilities that currently are major sources of nitrogen oxides in
moderate or higher ozone nonattainment areas to install reasonably available
control technology ("RACT") for nitrogen oxides, which are precursors of ozone.
In addition, we expect the stricter ozone standards, as discussed above, to be
implemented by EPA by 2003. In September 1998, EPA issued an implementation
plan (the "SIP call") that will require 22 eastern states to amend their state
implementation plans to make substantial reductions in nitrogen oxide
emissions. The SIP call includes state-by-state nitrogen oxide budgets and was
accompanied by two additional actions that EPA has proposed to implement if the
SIP call does not adequately address nitrogen oxide emissions. EPA expects that
 
                                       19

 
states subject to the SIP call will achieve the reductions by requiring power
plants to make substantial reductions in their nitrogen oxide emissions.
Installation of RACT and additional control measures required under the SIP
call will make it more costly to operate coal-fueled utility power plants and,
depending on the requirements of individual state attainment plans and the
development of revised new source performance standards, could make coal a less
attractive fuel alternative in the planning and building of utility power
plants in the future. Any reduction in coal's share of the capacity for power
generation could have a material adverse effect on our business, financial
condition and results of operations. We cannot predict how present or future
regulations will affect the coal industry in general and the Company in
particular. They may limit the ability of some of our customers to burn higher
sulfur coal unless our customers have or are willing to install scrubbers,
blend coal or bear the cost of acquiring emission credits that permit them to
burn higher sulfur coal. We have tried to mitigate the potential adverse
effects of the legislation's limitations on sulfur dioxide emissions through
the acquisition and development of super-compliance, compliance and low-sulfur
coal reserves. We cannot assure you, however, that the implementation of the
Clean Air Act, the new air quality standards or any other future regulatory
provisions will not materially adversely affect the Company.
 
Impact of the Framework Convention on Global Climate Change on the Coal
Industry. The United States and more than 160 other nations are signatories to
the 1992 Framework Convention on Global Climate Change which is intended to
limit or capture emissions of greenhouse gases, such as carbon dioxide. In 1997
the signatories to the Convention established the Kyoto Protocol, a binding set
of emissions targets for developed nations. The United States would be required
to reduce emissions to 93% of 1990 levels over a five-year budget period from
2008 through 2012. Although the United States has not ratified the Kyoto
Protocol and no comprehensive requirements focusing on greenhouse gas emissions
are in place, legislative or regulatory requirements to control greenhouse gas
emissions, if established, could reduce the use of coal if electric power
generators switch to lower carbon sources of fuel. It is unclear what impact,
if any, greenhouse gas restrictions may have on our operations. We cannot
guarantee you, however, that such restrictions, if established through
regulation or legislation, will not have a material adverse effect on our
business, financial condition and results of operations.
 
Black Lung and Workers' Compensation Obligations. Under federal law, each coal
mine operator must secure payment of federal black lung benefits to claimants
who are current and former employees and to a trust fund for the payment of
benefits and medical expenses to claimants who last worked in the coal industry
before July 1, 1973. Less than 7% of the miners currently seeking federal black
lung benefits are awarded such benefits by the federal government. The trust
fund is funded by an excise tax on production of up to $1.10 per ton for deep-
mined coal and up to $0.55 per ton for surface-mined coal, neither amount to
exceed 4.4% of the per ton sales price. We pass this tax on to the purchaser of
our coal under many of our long-term sales contracts.
 
If legislation similar to recently proposed but unenacted legislation
ultimately is enacted, the number of claimants who are awarded benefits could
significantly increase. We cannot assure you that such proposed legislation or
other proposed changes in black lung legislation will not have an adverse
effect on the Company.
 
The U.S. Department of Labor has proposed amendments to the regulations
implementing the federal black lung laws which, among other things, establish a
presumption in favor of a claimant's treating physician and limit a coal
operator's ability to introduce medical evidence regarding the claimant's
medical condition. If adopted, we cannot predict the extent to which the
amendments could have an adverse impact on the Company.
 
Additionally, we are required to compensate employees for work-related
injuries. Our workers' compensation liabilities (including black lung claims)
totaled approximately $119.8 million on the Company's pro forma balance sheet
as of September 30, 1998, $26.9 million of which is a current liability. The
amount that was included as an operating expense for such liability for the pro
forma nine-month period ended September 30, 1998 was $19.9 million, while the
related cash expense for such period was $21.4 million. See "Government
Regulation--Black Lung."
 
                                       20

 
Postretirement Benefits and Pension Plan Liabilities--If our actuarial
assumptions regarding our post-retirement benefit obligations do not
materialize, our cash expenditures and costs incurred could be higher than
anticipated.
 
We provide post-retirement health and life insurance benefits to eligible union
and union-free employees. We have calculated the total accumulated post-
retirement benefit obligation under SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("SFAS 106") and estimate that at
September 30, 1998, the pro forma present value of such future obligation was
approximately $388.8 million, $34.5 million of which is a current liability.
The amount that was included as an operating expense for such liability for the
pro forma nine-month period ended September 30, 1998 was $22.5 million, while
the related cash expense for such period was $12.1 million. We have estimated
these obligations based on assumptions described in the Notes to the financial
statements. If our actuarial assumptions do not materialize as expected, cash
expenditures and costs that we would incur could be materially higher than
those reflected in the Company's Unaudited Pro Forma Combined Financial
Statements.
 
Replacement and Recoverability of Reserves--Our business may be adversely
affected if we are unable to continue acquiring coal reserves that are
economically recoverable.
 
Our continued success depends, in part, upon our ability to find, develop or
acquire additional coal reserves that we can recover economically. Our proven
and probable reserves will generally decline as reserves are depleted, except
to the extent that we conduct successful exploration and development activities
or acquire properties containing proven and probable reserves. To increase
reserves and production, we must continue our development, exploration and
acquisition activities or undertake other replacement activities. Our current
strategy includes increasing our reserve base through acquisitions of
complementary properties and by continuing to exploit our existing properties.
We cannot assure you, however, that our planned development and exploration
projects and acquisition activities will increase our reserves significantly or
that we will have continuing success developing additional mines. For a
discussion of our reserves, see "Business--Coal Reserves." We conduct most of
our mining operations on properties we own or lease. Because we do not
thoroughly verify title to most of our leased properties and mineral rights
until we apply for a permit to mine the property, defects in title or
boundaries can adversely affect our right to mine certain of our reserves. In
addition, we cannot assure you that we can successfully negotiate new leases or
mining contracts for properties containing additional reserves or maintain our
leasehold interest in properties on which we do not begin mining operations
during the term of the lease. See "Business--Coal Reserves."
 
Intellectual Property--Although we do not consider it likely, any of our
patents may be challenged in the future.
 
Our intellectual property is patented, and these patents give us the exclusive
right to use our intellectual property for the life of the patent. However, we
cannot guarantee the validity and enforceability of any of our patents. The
validity of a patent is open to challenge on a number of grounds, including
lack of novelty and the failure to adequately describe the invention in the
patent claim. Our patents may be successfully challenged in the future,
although we do not consider this to be likely. Any loss of patent protection
could have a material adverse effect on the Company, as it might allow new
competitors to use our technology.
 
Price Fluctuations and Markets--Any significant decline in coal prices may
adversely affect our ability to meet our obligations.
 
Our results of operations depend upon the prices we receive for our coal.
Although we realized 74% of our coal sales in the nine-month period ended
September 30, 1998, under to long-term sales contracts, some of these contracts
include price adjustment provisions which permit an increase or decrease at
specified times in the contract price to reflect changes in certain price or
other economic indices, taxes and other charges. Additionally, some of our
long-term sales contracts contain price reopener provisions that allow contract
price to be adjusted upward or downward at specified times on the basis of
market factors. See "--Reliance on Long-Term Coal Supply Contracts." Any
significant decline in prices for coal could have a material adverse
 
                                       21

 
effect on our financial condition, results of operation and quantities of
reserves recoverable on an economic basis. Should the industry experience
significant price declines from current levels or other adverse market
conditions, we may not be able to generate sufficient cash flow from operations
to meet our obligations and make planned capital expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity" and "Government Regulation."
 
The availability of a ready market for our higher sulfur coal production also
depends on a number of other market factors, including the demand for and
supply of low-sulfur coal, and the availability of pollution credits. See "--
Government Regulation of the Mining Industry--Impact of Clean Air Act
Amendments on Coal Consumption."
 
Reliance on Estimates of Proven and Probable Reserves--Estimates on proven and
probable reserves may vary substantially from actual results and you should not
rely on these estimates unduly.
 
There are numerous uncertainties inherent in estimating quantities of proven
and probable reserves, including many factors beyond our control. Estimates of
economically proven and probable coal reserves and future net cash flows
necessarily depend upon a number of variable factors and assumptions. These
include historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies
and assumptions concerning future coal prices, future operating costs,
severance and excise taxes, development costs and reclamation costs, all of
which may in fact vary considerably from actual results. For these reasons,
estimates of the economically recoverable quantities of coal attributable to
any particular group of properties, classifications of such reserves based on
risk of recovery and estimates of future net cash flows expected from them
prepared by different engineers or by the same engineers at different times may
vary substantially. Actual production, revenues and expenditures with respect
to our reserves will likely vary from estimates, and such variances will likely
be material. As a result, prospective holders of the Notes should not place
undue reliance on the coal reserve data included herein. See "Business--Coal
Reserves."
 
Dependence on Key Management and Control by Principal Shareholder--We depend on
our key personnel and the loss of any of them may adversely affect us. In
addition, one principal shareholder can control the corporate and management
policies of the Company.
 
Our business is managed by a number of key personnel and the loss of any of
them could have a material adverse effect on us. In addition, as the Company's
business develops and expands, we believe that our future success will depend
greatly on its continued ability to attract and retain highly skilled and
qualified personnel. We cannot assure you that we will continue to employ key
personnel or that we will be able to attract and retain qualified personnel in
the future. Our failure to retain or attract such key personnel could have a
material adverse effect on us. See "Management."
 
Larry Addington beneficially owns 100% of the outstanding voting securities of
our parent company, which owns 100% of the common stock of the Company.
Accordingly, Mr. Addington is able to control the election of the Company's
directors and to determine the corporate and management policies of the
Company, including decisions relating to any mergers or acquisitions by the
Company, the sale of all or substantially all of the Company's assets and other
significant corporate transactions that could result in a Change of Control
under the Indenture. See "Security Ownership of Principal Stockholders and
Management."
 
Unionization of Labor Force--If we cannot extend existing collective bargaining
agreements before they expire, our unionized labor may go on strike. In
addition, our competitors who employ non-unionized employees may have a
competitive advantage over us.
 
Approximately 38% of the Company's coal employees and the mines at which those
employees work, which accounted for 34% of the Company's coal production in the
twelve-month period ended September 30, 1998,
 
                                       22

 
are represented by the United Mine Workers of America (the "UMWA"). We have
several collective bargaining agreements with the UMWA. We cannot assure you
that our unionized labor will not go on strike upon expiration of existing
contracts. See "Business--Employees." Certain of our competitors have union-
free work forces. Because of the increased risk of strikes and other work-
related stoppages in addition to higher labor costs which may be associated
with union operations in the coal industry, our union-free competitors may have
a competitive advantage in areas where they compete with our unionized
operations. If some or all of our current union-free operations were to become
unionized, we could incur an increased risk of work stoppages and higher labor
costs.
 
Surety Bonds--Federal and state laws require us to place and maintain Surety
Bonds in connection with certain obligations described below, and we cannot
assure you that the Surety Bond holders will continue to renew or refrain from
demanding additional collateral upon any renewal.
 
Federal and state laws require bonds to secure our obligations to reclaim lands
disturbed for mining, to pay federal and state workers' compensation benefits
and to satisfy other miscellaneous obligations (the "Surety Bonds"). On a pro
forma basis after giving effect to the Transactions, as of September 30, 1998,
we had outstanding Surety Bonds with third parties for post-mining reclamation
totaling $567.8 million and an additional $182.3 million are in place for
federal and state workers' compensation obligations and other miscellaneous
obligations. These Surety Bonds are typically renewable on a yearly basis. We
cannot assure you that the Surety Bond holders will continue to renew the
Surety Bonds or refrain from demanding additional collateral upon such
renewals. The failure to maintain, or the inability to acquire, sufficient
Surety Bonds, as required by state and federal law, would have a material
adverse effect on the Company and therefore create certain risks for holders of
Notes. Such failure could result from a variety of factors including the
following: (i) lack of availability, higher expense or unreasonable terms of
new Surety Bonds, (ii) restrictions on the demand for collateral by current and
future third-party Surety Bond holders due to the terms of the Indenture, the
Senior Note Indenture or the Senior Credit Facility; and (iii) the exercise by
third-party Surety Bond holders of their right to refuse to renew the surety.
 
Financing Change of Control Offer--We may not have the ability to raise the
funds necessary to finance the change of control offer required by the
Indentures.
 
If certain specific kinds of change of control events occur, we will be
required to offer to repurchase all outstanding Notes. However, we may not have
sufficient funds at the time of the change of control to make the required
repurchase of Exchange Notes, that restrictions in our Senior Credit Facility
will not allow such repurchases or that the repurchase will constitute an event
of default under the Senior Credit Facility. In addition, certain important
corporate events, such as leveraged recapitalizations that would increase the
level of our indebtedness, would not constitute a "Change of Control" under the
Indentures. See "Description of the Notes--Repurchase at the Option of
Holders--Change of Control."
 
Fraudulent Conveyance Matters--Federal and state statutes allow courts, under
specific circumstances, to void the Notes and the Guarantees and require
noteholders to return payments received from the Company or the Guarantors.
 
Under the federal bankruptcy law and comparable provisions of state fraudulent
transfer laws, the Notes and the Guarantees could be voided, or claims in
respect of the Notes and the Guarantees could be subordinated to all other
debts of the Company or any guarantor if, among other things, the Company or
such guarantor, at the time it incurred the indebtedness evidenced by the Notes
and the Guarantees:
 
  .  received less than reasonably equivalent value or fair consideration for
     the incurrence of such indebtedness; and
 
  .  was insolvent or rendered insolvent by reason of such incurrence; or
 
                                       23

 
  .  was engaged in a business or transaction for which the Company or such
     guarantor's remaining assets constituted unreasonably small capital; or
 
  .  intended to incur, or believed that we would incur, debts beyond our
     ability to pay such debts as they mature.
 
In addition, any payment by the Company or such guarantor pursuant to the Notes
or the Guarantees could be voided and required to be returned to the Company or
such guarantor, or to a fund for the benefit of the creditors of the Company or
such guarantor.
 
The measures of insolvency for purposes of these fraudulent transfer laws will
vary depending upon the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, the Company or a
guarantor would be considered insolvent if:
 
  .  the sum of our debts, including contingent liabilities, were greater
     than the fair saleable value of all of our assets, or
 
  .  if the present fair saleable value of our assets were less than the
     amount that would be required to pay our probable liability on our
     existing debts, including contingent liabilities, as they become
     absolute and mature, or
 
  .  we could not pay its debts as they become due.
 
On the basis of historical financial information, recent operating history and
other factors, we believe that we will not be insolvent, will not have
unreasonably small capital for the business in which we are engaged and will
not have incurred debts beyond our ability to pay such debts as they mature. We
cannot assure you, however, as to what standard a court would apply in making
such determinations or that a court would agree with our conclusions in this
regard.
 
No Prior Market for the Notes--You cannot be sure that an active trading market
will develop for the Notes.
 
There is no existing market for the Notes and we cannot assure you as to the
liquidity of any markets that may develop for the Notes, the ability of holders
of the Notes to sell their Notes, or the prices at which holders would be able
to sell their Notes. In addition, changes in the overall market for high yield
securities and changes in our financial performance or prospects or in the
prospects for companies in our industry generally may adversely affect the
liquidity of the trading market in the Notes, and the market price quoted for
the Notes. As a result, you cannot be sure that an active trading market will
develop for the Notes.
 
Impact of Year 2000 Issue--Although we believe that the Year 2000 Issue will
not pose significant operational problems for our business systems, any failure
to make needed conversions may adversely affect our operations. In addition, we
will need to monitor our customers and suppliers and we cannot guarantee that
the systems of other companies on which we rely will be timely converted.
 
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of our computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations and the ability to engage
in normal business activities. Based on our ongoing assessment of our business
information systems, we determined that our key business systems are
substantially compliant with year 2000 requirements. We are currently in the
process of deploying a new Company-wide management and accounting system which
is expected to be completed in March 1999. This system is year 2000 compliant
and is being installed due to additional functionality needed to meet the
growth of the Company. Non-information technology components could have an
impact on the Company. Management is currently in the process of reviewing all
non-information technology components including embedded technology, equipment
related hardware and software, as well as communication systems with such
review expected to be completed by March 1999. Any necessary upgrades or
replacements are expected to be completed by May 1999. We are not materially
reliant on third party systems (e.g. electronic data interchange) to conduct
business.
 
                                       24

 
We presently believe that the year 2000 issue will not pose significant
operational problems for our business systems. However, if any needed
modifications and conversions were not made, or were not completed timely, the
year 2000 issue would likely have a material impact on our operations. Our
total year 2000 project cost is not expected to be material, based on presently
available information. However, we cannot guarantee that the systems of other
companies on which our systems rely will be timely converted and would not have
an adverse effect on our systems. We have determined that we have no exposure
to contingencies related to the year 2000 issue for the majority of the
products we have sold. If any of our suppliers or customers do not, or if we do
not, successfully deal with the year 2000 issue, we could experience delays in
receiving or shipping coal and equipment that would increase costs and that
could cause us to lose revenues and even customers and could subject us to
claims for damages. Customer problems with the year 2000 issue could also
result in delays in our invoicing its customers or in our receiving payments
from them that would affect our liquidity. Problems with the year 2000 issue
could affect the activities of our customers to the point that their demand for
our products is reduced. The severity of these possible problems would depend
on the nature of the problem and how quickly it could be corrected or an
alternative implemented, which is unknown at this time. In the extreme such
problems could bring the Company to a standstill.
 
Based on our normal interaction with our customers and suppliers and the wide
attention the year 2000 issue has received, we believe that our suppliers and
customers will be prepared for the year 2000 issue. We cannot assure you,
however, that this will be so. In February 1999 we have requested written
assurances from all our major customers and suppliers as to their year 2000
compliance. Some risks of the year 2000 issue are beyond our control and that
of our suppliers and customers. For example, we do not believe that we can
develop a contingency plan which will protect us from a downturn in economic
activity caused by the possible ripple effect throughout the entire economy
that could be caused by problems of others with the year 2000 issue.
 
We will use both internal and external resources to test business systems for
year 2000 compliance. We anticipate completing our year 2000 testing by
December 1999, before any anticipated impact on our operating systems. For 1999
we have budgeted $0.1 million for assessment and testing of year 2000
compliance by outside service providers. Information technology costs
specifically for the year 2000 issue in excess of normal operations to cover
assessment, remediation and testing are not expected to exceed $0.5 million and
will be expensed as incurred. We have not yet seen any need for contingency
plans for the year 2000 issue, but this need will be continuously monitored as
we acquire more information.
 
The costs of the project and the date on which we believe we will complete the
year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including third party
modification plans and other factors. However, we cannot guarantee that these
estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the ability to locate and correct all relevant
computer codes, the ability to successfully integrate the business systems of
newly acquired entities and similar uncertainties. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Impact of year
2000 issue."
 
                                       25

 
                                  THE COMPANY
 
History
 
From 1982 to 1984, Larry Addington and his brothers, Robert and Bruce,
developed several coal and coal-related companies in eastern Kentucky and Ohio.
In 1984, ownership of these companies was consolidated into Addington
Resources, Inc. ("Addington Resources"), which became a public company in 1987.
From 1984 through 1995, Addington Resources expanded its coal operations and
developed various other business lines, including integrated waste disposal
operations, metal mining operations and citrus operations. In 1995,
Messrs. Addington resigned from the board of directors of Addington Resources
and shortly thereafter, purchased the coal mining operations of Addington
Resources through Addington Enterprises, Inc. ("Addington Enterprises"), their
wholly owned corporation. Those coal mining operations comprised the Company's
initial eastern Kentucky and Tennessee mining operations and coal reserves. The
Company acquired its Colorado mining operations and coal reserves through an
asset purchase from Cyprus Orchard Valley Coal Corporation ("Cyprus Orchard
Valley") in December 1994 and the purchase of an adjacent reserve tract from
Coors Energy Company ("Coors Energy") in January 1995.
 
Recent Acquisitions
 
Ikerd-Bandy Acquisition
 
The Company acquired all the outstanding capital stock of Ikerd-Bandy Coal,
Inc. ("Ikerd-Bandy") in October 1997 for $12.3 million (including $0.3 million
of related fees and expenses) (the "Ikerd-Bandy Acquisition"). The Ikerd-Bandy
Acquisition generated 1.0 million tons of production in the nine-month period
ended September 30, 1998 from approximately 30 million tons of proven and
probable reserves. At the time of the Ikerd-Bandy Acquisition, Ikerd-Bandy
owned and operated a storage facility, a preparation plant and a loadout
facility at each of two mines. The Ikerd-Bandy Acquisition (i) provided
reserves strategically located for shipment under the Company's TVA Kingston
contract; (ii) broadened the Company's market to include industrial customers;
and (iii) allowed the Company to build market share in southeastern Kentucky.
For the nine-month period ended September 30, 1998, Ikerd-Bandy generated
revenues of $22.0 million.
 
Leslie Resources Acquisition
 
On January 16, 1998, the Company acquired the stock of Leslie Resources, Inc.
and Leslie Resources Management, Inc. (collectively, "Leslie Resources") for
$11.3 million in cash (including $0.3 million of related fees and expenses) and
the assumption of approximately $10.8 million of debt (the "Leslie Resources
Acquisition"). Additionally, the Company agreed to pay the former owners of
Leslie Resources an $8.1 million promissory note. The Leslie Resources
Acquisition added five mines in Knott, Perry and Leslie counties in Kentucky,
which generated approximately 3.6 million tons of production in the nine-month
period ended September 30, 1998 from 46 million tons of proven and probable
reserves. The Leslie Resources Acquisition added significant uncommitted
production capacity to the Company, allowing it the opportunity to develop
strategies for entering contracts to be filled by production from the lower-
cost Leslie Resources mines. For the nine-month period ended September 30,
1998, Leslie Resources generated revenues of $65.8 million.
 
Crockett Acquisition
 
The Company acquired the assets and operations of Crockett Collieries Co.
("Crockett") on June 26, 1998 for $4.0 million (including $0.2 million of
related fees and expenses) (the "Crockett Acquisition"). The Crockett
Acquisition added 0.4 million tons of production in the nine-month period ended
September 30, 1998 from 14 million tons of proven and probable reserves and a
significant contract with the Tennessee Valley Authority ("TVA").
 
Cyprus Acquisition
 
The Company acquired all the outstanding capital stock of certain coal-
producing subsidiaries (the "Cyprus Subsidiaries") of Cyprus Amax Coal Company
("Cyprus Amax") in June 1998 for a purchase price of
 
                                       26

 
$98.0 million, plus a working capital adjustment (excluding $8.9 million of
related fees and expenses) (the "Cyprus Acquisition"). Additionally, as part of
the Cyprus Acquisition, the Company purchased certain mining equipment that had
previously been leased by the Cyprus Subsidiaries for $30.0 million, assumed a
$1.0 million debt obligation and agreed to pay Cyprus Amax a royalty on all
coal underlying real property held by the Cyprus Subsidiaries as of June 30,
1998. Such royalty payments will commence on June 1, 2002 and will be $0.50 per
ton in Indiana, Illinois, Ohio or California and $0.35 per ton in West
Virginia, Kentucky or Tennessee for coal mined from properties owned or
controlled by the Cyprus Subsidiaries at the closing of the Cyprus Acquisition.
In the event the Company or AEI Resources Holding, Inc. ("Holdings"), directly
or indirectly, receives an equity investment equal to or greater than $75.0
million, the Company will be required to pay Cyprus Amax $25.0 million (less
55% of any prior royalty payments) in satisfaction of the royalty obligation
(the "Royalty Buyout Obligation"). The Cyprus Acquisition added approximately
11.5 million tons of production in the nine-month period ended September 30,
1998, to the Company and increased its proven and probable reserves by 707
million tons. The Company believes that these mines provide the Company with a
very strong market position in the markets served by its mines in eastern
Kentucky. In addition, the West Virginia operations provided an entry to the
markets served by barge transportation from the Kanawha River in West Virginia.
Many of these markets are the same markets served by the Company's eastern
Kentucky mines, which transport coal through barge loading facilities on the
Big Sandy River in eastern Kentucky. Both the Kanawha River and the Big Sandy
River are navigable tributaries of the Ohio River, which accesses the largest
river-borne market for coal in the United States. The Indiana operations
acquired from Cyprus Amax provided strong earnings from the above-market
contracts and access to the scrubbed markets in Indiana. For the nine-month
period ended September 30, 1998, the Cyprus Subsidiaries generated revenues of
$299.2 million.
Battle Ridge Acquisition
 
The Company acquired certain assets of The Battle Ridge Companies ("Battle
Ridge") in July 1998 for a purchase price of approximately $6.6 million
(including $0.1 million of related fees and expenses) in a transaction
authorized by the U.S. Bankruptcy Court for the Southern District of West
Virginia (the "Battle Ridge Acquisition"). The primary assets included two
river dock facilities on the Kanawha River, one on the Big Sandy River and
twelve mineral leases covering approximately 32 million tons of proven and
probable coal reserves approximately half of which is compliance coal and the
remainder is low-sulfur coal. Battle Ridge produced 0.4 million tons of coal in
the nine-month period ended September 30, 1998. The Company believes that the
assets acquired from Battle Ridge complement the Company's West Virginia
operations acquired from Cyprus Amax.
 
Mid-Vol Acquisition
 
The Company acquired all the outstanding capital stock of Mid-Vol Leasing,
Inc., Mega Minerals, Inc. and Premium Processing, Inc. (collectively, "Mid-
Vol") in July 1998 for $20.2 million (including $0.2 million of related fees
and expenses) and a $15.0 million note (the "Mid-Vol Acquisition").
Additionally, the Company agreed to pay the former owners of Mid-Vol a
production payment on coal mined in the future from certain properties acquired
in the Mid-Vol Acquisition. Mid-Vol is a producer of high-quality mid- and low-
volatile coking coals, a coal product with a niche market. Mid-Vol added
approximately 0.8 million tons of production in the nine-month period ended
September 30, 1998, to the Company and increased proven and probable reserves
by 51.0 million tons. The Company believes that Mid-Vol's production tonnage
can be enhanced and costs reduced by using the Company's Addcar systems and the
Company's efficient tailored cast blasting and heavy dozer pushing mining
methods. For the nine-month period ended September 30, 1998, Mid-Vol generated
revenues of $21.3 million.
 
Kindill Acquisition
 
In September 1998, the Company acquired all of the outstanding capital stock of
Kindill Holding, Inc. and Hayman Holdings, Inc. (collectively, "Kindill") from
certain sellers, including Stephen Addington, Larry Addington's brother, for
$11.5 million, including $0.5 million of related fees and expenses, and the
assumption
 
                                       27

 
of $50.0 million of indebtedness (the "Kindill Acquisition"). See "Certain
Related Party Transactions." Rothschild, Inc. ("Rothschild") delivered in
connection with this acquisition an opinion to the Company that such
transaction was fair to the Company from a financial point of view. The Kindill
Acquisition generated approximately 3.5 million tons of production in the nine-
month period ended September 30, 1998, and added 183.0 million tons of proven
and probable reserves to the Company. The Kindill Acquisition provides the
Company an opportunity to move production for certain long-term sales contracts
to its lower-cost operations. The Company also believes that the Kindill
Acquisition complements the Company's Indiana operations acquired as part of
the Cyprus Acquisition. For the nine-month period ended September 30, 1998,
Kindill generated revenues of $55.2 million.
 
Zeigler Acquisition
 
The Company acquired all the outstanding capital stock of Zeigler Coal Holding
Company ("Zeigler") in September 1998 for $871.6 million, including the
assumption of $255.0 million of indebtedness and the payment of $16.6 million
of related fees and expenses, pursuant to a tender offer and merger transaction
(the "Zeigler Acquisition"). The Company sold Triton Coal Company ("Triton"),
which was acquired in the Zeigler Acquisition, for $275.0 million on December
14, 1998. The remaining Zeigler businesses (the "Retained Zeigler Businesses")
added approximately 12.4 million tons of production in the nine-month period
ended September 30, 1998, and 1.2 billion tons of proven and probable reserves
to the Company. In addition, the Retained Zeigler Businesses provided a strong
portfolio of long-term sales contracts, with over 84% of its sales in the nine-
month period ended September 30, 1998, made pursuant to long-term sales
contracts. Zeigler's operations in Kentucky added about 3.3 million tons of
annual production in the nine-month period ended September 30, 1998, to the
Company, making the Company the largest producer and marketer of coal in
eastern Kentucky as measured by production, further aiding the Company's
ability to optimize its mix of production and sales. The Company believes that
its position in West Virginia and in the Illinois Basin was improved
significantly by the Zeigler Acquisition. In addition, there were significant
duplications of structure in the combined companies, which the Company believes
will allow it to realize overhead expense savings by combining the management
of Zeigler and the Company. For the nine-month period ended September 30, 1998,
Zeigler's coal operations generated revenues of $392.4 million (net of $38.4
million related to Triton, $28.3 million related to R&F and $117.6 million
related to its other non-coal operations). See "--Recent Dispositions."
 
Prior to the consummation of the Zeigler Acquisition, Zeigler was the second
largest publicly traded coal company and ninth largest coal producer in the
United States, in each case measured by tons produced. Zeigler operated active
underground and surface coal mining complexes located in West Virginia,
Kentucky, Illinois, Ohio and Wyoming. Zeigler also had operations in non-coal
businesses, including energy trading and marketing, asset management, "clean
coal" technology, environmental services and property development, most of
which the Company has classified as assets held for sale.
 
Martiki Acquisition
 
On November 6, 1998, the Company acquired all of the capital stock of Martiki
Coal Corporation ("Martiki"), a subsidiary of MAPCO Coal Inc. ("MAPCO") for
$32.3 million (including $0.3 million of related fees and expenses) (the
"Martiki Acquisition"). Martiki added 2.2 million tons of strategically located
production in the nine-month period ended September 30, 1998, and 24.0 million
tons of proven and probable reserves. Martiki is a keystone acquisition in that
it allows consolidation of significant Addington Mining, Inc. ("Addington
Mining") and Zeigler reserve positions. The Martiki Acquisition includes a
1,000 ton per hour preparation plant and a high speed unit train loading
facility located on the Norfolk Southern Corporation ("Norfolk Southern") rail
line. For the nine-month period ended September 30, 1998, Martiki generated
revenues of $54.4 million.
 
MTI Acquisition
 
On January 2, 1998, the Company acquired certain facilities, equipment and
intellectual property (the "Highwall Mining Assets") through the purchase of a
substantial portion of the assets of the Mining Technologies Division of
Addington Enterprises for $51.0 million (the "MTI Acquisition"). Addington
 
                                       28

 
Enterprises is owned 80%, 10% and 10% by Larry Addington, Robert Addington and
Bruce Addington, respectively. Larry Addington is a director and Robert
Addington is a director and officer of the Company. Robert Addington and Bruce
Addington are employees of the Company. The Highwall Mining Assets are
currently held by Mining Technologies, Inc. ("MTI"), a wholly owned subsidiary
of the Company. The Company believes that significant opportunities for the
application of the Addcar highwall system exist as a result of the Cyprus,
Kindill, Zeigler, Leslie Resources, Crockett and Mid-Vol Acquisitions. The
Company believes that it will be able to reduce its mining costs significantly
and increase the amount of economically mineable reserves at many of these
operations. The Highwall Mining Assets included 13 patents, one registered
trademark in North America relating to the Addcar highwall mining system,
certain mobile mining equipment, spare parts, continuous mining machines and an
80,000 square foot manufacturing and warehousing facility. The issued patents
acquired from Addington Enterprises will expire between December 10, 2010 and
November 20, 2015, and the registered trademark acquired from Addington
Enterprises will expire September 28, 2013. The Highwall Mining Assets also
include the equipment and facility for manufacturing Addcar highwall mining
systems, as well as six existing, operable Addcar highwall mining systems.
 
Recent Dispositions
 
The Company recently sold (i) Triton Coal Company, LLC, the successor by merger
to Triton Coal Company, Inc. ("Triton"), which conducts operations in the
Powder River Basin (the "Triton Disposition"), (ii) certain dock facilities
(the "Dock Disposition,") and (iii) certain assets of its R&F Coal Company
subsidiary (the "R&F Disposition" and collectively with the Triton Disposition
and the Dock Disposition, the "Dispositions").
 
Triton Disposition
 
On December 14, 1998, the Company sold Triton for an aggregate cash purchase
price of $275.0 million in cash (the "Triton Disposition"). Prior to the
closing of the Triton Disposition, (i) all assets and liabilities related to
the North Rochelle Mine or the Buckskin Mine which were held by other
subsidiaries of the Company were transferred to Triton, and (ii) all assets and
liabilities of Triton which are not related to the North Rochelle Mine or the
Buckskin Mine were transferred to a subsidiary of the Company. As a result, the
Company retained Triton's assets and liabilities relating to its lignite
reserves in Texas and Arkansas and its coal reserves located in Montana. The
Company agreed to provide certain transition services to the purchaser of
Triton following the closing.
 
Dock Disposition
 
On December 18, 1998, the Company sold the coal transshipment terminal
facilities and related assets of (1) the Pier IX Terminal in Newport News,
Virginia, formerly owned and operated by Mountaineer Coal Development Company,
a subsidiary of the Company; and (2) the Shipyard River Terminal in Charleston,
South Carolina, formerly owned and operated by Shipyard River Coal Terminal
Company, also a subsidiary of the Company (collectively, the "Docks"). The
purchaser purchased all land, personal property, fixtures, and equipment used
in connection with the operation of the terminal facilities for an aggregate
cash purchase price of $35.0 million.
 
R&F Disposition
 
On December 21, 1998, the Company sold coal mining equipment, inventories, real
property, and a coal supply contract used in the operations of its R&F Coal
Company subsidiary for an aggregate purchase price of $7.6 million.
 
Other Assets Held for Sale
 
As part of the Zeigler Acquisition, the Company acquired certain assets, in
addition to the assets subject to the Dispositions, that are currently being
held for sale, including businesses related to fuel technology and power
marketing. The book value of these assets at September 30, 1998, was $15.0
million and they generated $103.5 million and $(3.4) million of revenue and
EBITDA, respectively, during the nine-month period ended September 30, 1998.
 
                                       29

 
Ownership Structure
 
Larry Addington owns approximately 85.5% of the outstanding capital stock of
Holdings (50% directly and 40% through Addington Enterprises) while 9.5% is
owned collectively by Robert and Bruce Addington through Addington Enterprises,
and approximately 5% is owned by Robert Addington individually. Holdings owns
100% of the common stock of the Company. The summary structure is as
follows: [options]
 
                 [FLOWCHART OF SUMMARY STRUCTURE APPEARS HERE]
 
The Company's principal executive office is located at 1500 North Big Run Road,
Ashland, Kentucky 41102, telephone: (606) 928-3433.
 
                                       30

 
                                 CAPITALIZATION
 
The following table sets forth, as of September 30, 1998, (i) the historical
capitalization of the Company and (ii) the pro forma combined capitalization of
the Company after giving effect to the Transactions (as defined on p.33). This
table should be read in conjunction with "Description of the Notes,"
"Description of Other Indebtedness," the Unaudited Pro Forma Combined Financial
Statements and the notes thereto and the Historical Consolidated Financial
Statements and the notes thereto appearing elsewhere in this Prospectus.
 


                                                           (unaudited)
                                                        September 30, 1998
                                                   ----------------------------
                                                   Historical (1) Pro Forma (1)
                                                   -------------- -------------
                                                      (Dollars in millions)
                                                            
Old Credit Facility...............................    $   19.6      $    --
Other short-term obligations (including current
 portion of
 long-term obligations)...........................       314.2          29.2
                                                      --------      --------
    Total short-term obligations..................       333.8          29.2
                                                      --------      --------
Long-term obligations (net of current portion):
  Bridge Facility.................................    $  300.0      $    --
  Senior Credit Facility..........................       400.0         560.0
  Revolving Credit Facility (2)...................         --           43.5
  Senior Notes due 2005...........................       200.0         200.0
  Zeigler IRBs....................................       145.8         145.8
  Senior Subordinated Notes due 2006..............         --          150.0
  Other long-term obligations.....................        46.2          46.2
                                                      --------      --------
    Total long-term obligations...................     1,092.0       1,145.5
                                                      --------      --------
Stockholders' equity (deficit)....................       (69.8)        (84.3)
                                                      --------      --------
    Total Capitalization..........................    $1,356.0      $1,090.4
                                                      ========      ========

- --------
(1) Reflects the consolidated balance sheet of the Company including AEI
    Holding Company, Inc., ("AEI Holding") the Company's predecessor, as of
    September 30, 1998.
(2) Up to approximately $73.5 million would have been available to the Company
    under the Revolving Credit Facility (as defined on p.   ) after giving
    effect to borrowings to finance the Martiki Acquisition and $183 million of
    outstanding letters of credit related to the Zeigler IRBs (as defined on p.
    158). See "Description of Other Indebtedness--The Senior Credit Facility,"
    "--Zeigler IRBs."
 
                                       31

 
               UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
 
The following Unaudited Pro Forma Combined Financial Statements of the Company
are based on the audited and unaudited financial statements of AEI Resources
Holdings, Inc. and its predecessors appearing elsewhere in this Prospectus as
adjusted to illustrate the estimated effects of the transactions that the
Company has completed since October 1, 1997 that are described under "The
Company" beginning on page    (the "Transactions"). The Transactions include,
among other things:
  .  The acquisitions of the following businesses (the "Recent Acquisitions")
     for which financial statements are included in this Prospectus:
    .  Martiki (November 1998)       .  The Cyprus Subsidiaries (June 1998)
    .  Zeigler (September 1998)      .  Leslie Resources (January 1998)
    .  Kindill (September 1998)      .  Ikerd Bandy (October 1997)
    .  Mid-Vol (July 1998)
  .The Dispositions;
  .  The issuance of $200 million principal amount of 10 1/2% Senior Notes
     Due 2005 by the Company and AEI Holding as co-issuers, in exchange for
     $200 million principal amount of 10% Senior Notes Due 2007 of AEI
     Holding (the "Senior Note Exchange");
  .  The sale of $150 million principal amount of the Company's 11 1/2%
     Senior Subordinated Notes Due 2006; and
  .  The restructuring of the Company's Senior Credit Facility and the
     related repayment of Company indebtedness.
 
The unaudited pro forma adjustments are based upon available information and
certain assumptions that the Company believes are reasonable. The Unaudited Pro
Forma Combined Financial Statements and accompanying notes should be read in
conjunction with the historical financial statements of the Company and other
financial information pertaining to the Company appearing elsewhere in this
Prospectus, including "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
 
The Unaudited Pro Forma Combined Financial Statements have been prepared to
give effect to the Transactions as if such transactions had occurred on January
1, 1997 for the statement of income for the year ended December 31, 1997 and
for the statement of income for the nine-month period ended September 30, 1998
(the "Unaudited Pro Forma Combined Income Statements") and on September 30,
1998 for the balance sheet (the "Unaudited Pro Forma Combined Balance Sheet,"
which, together with the Unaudited Pro Forma Combined Income Statements,
comprise the "Unaudited Pro Forma Combined Financial Statements").
 
The Unaudited Pro Forma Combined Financial Statements reflect the application
of the principles of purchase accounting to the Recent Acquisitions. The
allocation of the purchase price is based, in part, on preliminary information,
which is subject to adjustment upon obtaining complete appraisal, engineering,
actuarial and valuation information with respect to each acquisition and the
net assets acquired. Accordingly, the Company's pro forma adjustments presented
in this Prospectus are subject to change upon the completion of such valuation
information, and such changes may be material. Pending final disposition of
these items, the Company cannot presently determine the overall effect of the
ultimate adjustments in the accompanying pro forma statements.
 
In addition, the Unaudited Pro Forma Combined Income Statements do not reflect
a charge of $18.5 million ($12.9 million, net of taxes) relating to the write-
off of deferred financing fees upon retirement of the indebtedness incurred by
the Company and Holdings in connection with the acquisition of Zeigler.
Further, certain of the businesses acquired in the Recent Acquisitions followed
different accounting policies with respect to the expensing of overburden
removal costs. While the Company capitalizes such costs, certain of the
acquired entities expensed such costs as they were incurred. Because the
information needed to conform most of the acquirees' historical accounting to
the Company's accounting for overburden inventory is not available, no pro
forma adjustment has been recorded to the Unaudited Pro Forma Combined Income
Statements. As a result of these factors, the Unaudited Pro Forma Combined
Financial Statements may not be comparable to, or indicative of, the Company's
results of operations in future periods.
 
The Unaudited Pro Forma Combined Financial Statements do not purport to be
indicative of what the Company's financial position or results of operation
would actually have been had the Transactions been completed on such date or at
the beginning of the periods indicated or to project the Company's results of
operations for any future date.
 
                                       32

 
                   UNAUDITED PRO FORMA COMBINED BALANCE SHEET
 
                            As of September 30, 1998
                             (Dollars In Millions)
 


                                              R&F Coal    Pro Forma
                                    Martiki  Disposition Adjustments       As
                          Holdings  (Note A)  (Note B)    (Note C)      Adjusted
                          --------  -------- ----------- -----------    --------
                                                         
         ASSETS
Current Assets:
 Cash and cash
  equivalents and short-
  term investments......  $   55.0   $ --       $ 7.6      $  10.0 (1)  $   45.2
                                                              (5.1)(3)
                                                             (38.9)(5)
                                                              25.0 (6)
                                                             (19.6)(7)
                                                             (32.3)(8)
                                                              43.5 (11)
 Accounts receivable....     148.8     7.9        --          (7.9)(9)     148.8
 Inventories............     139.0     6.8       (1.8)         3.4 (10)    147.4
 Prepaid expenses and
  other.................      30.7     --         --           --           30.7
 Net assets held for
  sale..................     307.7     --         --        (275.0)(1)       2.7
                                                             (35.0)(2)
                                                               5.0 (5)
                          --------   -----      -----      -------      --------
 Total current assets...  $  681.2   $14.7      $ 5.8      $(326.9)     $  374.8
                          --------   -----      -----      -------      --------
Property, Plant and
 Equipment, including
 mineral reserves and
 mine development costs,
 net....................  $2,067.1   $25.5       (6.5)     $  11.3 (10) $2,097.3
Debt issuance costs.....      52.1     --         --           5.0 (3)      70.0
                                                             (18.5)(4)
                                                              31.4 (5)
Other assets............      42.8     2.1       (0.4)        (2.0)(9)      42.5
                          --------   -----      -----      -------      --------
 Total assets...........  $2,843.1   $42.3      $(1.1)     $(299.7)     $2,584.6
                          ========   =====      =====      =======      ========
    LIABILITIES AND
  STOCKHOLDERS' EQUITY
       (DEFICIT)
Current Liabilities:
 Accounts payable.......  $  123.2   $ 2.7      $ --        $ (2.7)(9)  $  123.2
 Current portion of
  long-term debt and
  lease obligations.....     333.8     --         --        (265.0)(1)      29.2
                                                             (35.0)(2)
                                                              15.0 (6)
                                                             (19.6)(7)
 Accrued expenses and
  other.................     260.2     1.9        0.9         (1.8)(9)     261.2
                          --------   -----      -----      -------      --------
 Total current
  liabilities...........     717.2     4.6        0.9       (309.1)        413.6
                          --------   -----      -----      -------      --------
Non-Current Liabilities:
 Long-term debt and
  lease obligations, net
  of current portion....   1,092.0     --         --          10.0 (6)   1,102.0
 Revolving line of
  credit................       --      --         --          43.5 (11)     43.5
 Employee benefits......     504.0     2.1                    (0.1)(9)     505.7
                                                              (0.3)(10)
 Reclamation and mine
  closure...............     324.3     4.5       (2.0)         8.2(10)     335.0
 Deferred taxes.........     210.9     --         --          (5.6)(4)     204.3
                                                              (1.0)(5)
 Other non-current
  liabilities...........      64.5     0.3        --           --           64.8
                          --------   -----      -----      -------      --------
 Total non-current
  liabilities...........   2,195.7     6.9       (2.0)        54.7       2,255.3
                          --------   -----      -----      -------      --------
 Total liabilities......   2,912.9    11.5       (1.1)      (254.4)      2,668.9
                          --------   -----      -----      -------      --------
Stockholders' equity
 (deficit)..............     (69.8)   30.8        --          (0.1)(3)     (84.3)
                                                             (12.9)(4)
                                                              (1.5)(5)
                                                             (30.8)(10)
                          --------   -----      -----      -------      --------
 Total liabilities and
  stockholders' equity
  (deficit).............  $2,843.1   $42.3      $(1.1)     $(299.7)     $2,584.6
                          ========   =====      =====      =======      ========

 
                                       33

 
Note A:
 
This column reflects the historical balance sheet of Martiki and is prior to
any adjustments for items described in Note C below. Martiki was acquired in a
stock purchase on November 6, 1998 for $32.3 million.
 
Note B:
 
This column reflects the elimination of R&F Coal Company's ("R&F") historical
balance sheet. R&F was sold on December 21, 1998 for $7.6 million. Also
included is $0.9 million of accrued disposal related costs.
 
Note C:
 
The pro forma adjustments include purchase accounting adjustments and financing
entries necessary to reflect the acquisition of Martiki and the related debt
financing transactions. The aggregate sources and uses for these transactions
were as follows (in millions):
 


           Sources
           -------
                            
Decrease in working capital..  $   17.4
Senior Credit Facility.......     575.0
Notes........................     150.0
Triton and Dock Disposition
 proceeds....................     310.0
Revolving Credit Facility....      43.5
                               --------
  Total......................  $1,095.9
                               ========



              Uses
              ----
                               
Retire Old AEI Credit Facility..  $   19.6
Senior Credit Facility..........     400.0
Repay Bridge Credit Facility....     600.0
Fees and expenses...............      44.3
Martiki acquisition.............      32.0
                                  --------
  Total.........................  $1,095.9
                                  ========

 
The following notes describe the pro forma adjustments:
 
1. Reflects the Triton Disposition and the use of the disposition proceeds to
   reduce indebtedness.
2. Reflects the Dock Disposition and the use of the disposition proceeds to
   reduce indebtedness.
3. Reflects expenses related to the consent solicitation in connection with the
   Senior Note Exchange, including $5.0 million paid to the holders of the Old
   Notes and $0.1 million of associated costs that will be written off as
   incurred.
4. Reflects the write off of unamortized loan costs from the extinguishment of
   the Bridge Credit Facility ($18.5 million net of $5.6 million tax benefit).
5. Reflects the payment of debt issuance costs related to the Notes and
   additional borrowings under the Senior Credit Facility (as defined on p.156)
   as well as selling/disposal costs related to the Triton Disposition.
6. Reflects the increase in long-term debt and reclassification of current
   portion following the retirement of the Bridge Credit Facility, the
   application of the proceeds from the Dispositions and the restructuring of
   the Senior Credit Facility.
7. Reflects the retirement of AEI's prior $25.0 million credit facility.
8. Reflects the purchase of Martiki for $32.0 million in cash and $0.3 million
   in acquisition costs.
9. Reflects the Martiki carve out adjustments for certain assets and
   liabilities to be retained by the seller.
10. Reflects purchase accounting adjustments for the purchase of Martiki. Such
    adjustments include the elimination of historical equity ($30.8 million),
    recording end of mine reclamation ($8.2 million) recording deferred
    overburden ($3.4 million) and recording the write up of property, plant and
    equipment ($11.0 million) to reflect their estimated fair market values.
11. Reflects borrowing under revolving line of credit ($43.5 million) to
    finance Martiki acquisition: ($32.3 million) and working capital ($11.2
    million).
 
                                       34

 
                 UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
 
                  For the nine months ended September 30, 1998
                             (Dollars In Millions)
 


                                      Cyprus
                                   Subsidiaries  Zeigler      Other      R&F Coal    Pro Forma
                                    (1/1-6/30)  (1/1-8/31) Acquisitions Disposition Adjustments       As
                          Holdings   (Note A)    (Note B)    (Note C)    (Note D)    (Note E)      Adjusted
                          -------- ------------ ---------- ------------ ----------- -----------    --------
                                                                              
Operating Data:
Revenues................   $376.2     $201.8      $533.4      $118.7      $(28.3)     $ (7.8)(1)   $1,031.7
                                                                                        (5.2)(2)
                                                                                        (1.1)(3)
                                                                                      (156.0)(4)
Costs and expenses:
 Cost of operations.....    309.5      180.5       438.2       106.4       (20.8)       (7.8)(1)      820.4
                                                                                        (4.6)(2)
                                                                                      (153.2)(4)
                                                                                        (0.2)(5)
                                                                                       (11.4)(6)
                                                                                        (1.0)(7)
                                                                                        (4.4)(8)
                                                                                        (0.9)(9)
                                                                                        (7.4)(14)
                                                                                        (2.5)(17)
 Depreciation, depletion
  and amortization......     28.2       18.7        43.5        11.7        (2.8)       37.3 (10)     130.7
                                                                                        (5.9)(4)
 Selling, general and
  administrative........     19.8        6.7         9.2         5.0         --         (9.1)(14)      31.2
                                                                                        (0.4)(16)
 Write-downs and special
  items.................      --         --         21.2         --          --        (21.2)(16)       --
                           ------     ------      ------      ------      ------      ------       --------
 Total costs and
  expenses..............    357.5      205.9       512.1       123.1       (23.6)     (192.7)         982.3
                           ------     ------      ------      ------      ------      ------       --------
 Income (loss) from
  operations............     18.7       (4.1)       21.3        (4.4)       (4.7)       22.6           49.4
Interest and other
 income (expense)
 Interest expense.......    (29.8)      (0.2)       (8.0)       (3.7)        --        (37.5)(11)     (86.4)
                                                                                        (3.7)(12)
                                                                                        (3.5)(8)
 Gain (loss) on sale of
  assets................      1.2        0.9         0.7        (0.1)        0.6        (0.2)(4)        3.1
 Other, net.............      1.3       (0.1)        4.5         0.7        (0.9)       (0.1)(4)        5.4
                           ------     ------      ------      ------      ------      ------       --------
                            (27.3)       0.6        (2.8)       (3.1)       (0.3)      (45.0)         (77.9)
                           ------     ------      ------      ------      ------      ------       --------
 Income (loss) before
  income taxes..........     (8.6)      (3.5)       18.5        (7.5)       (5.0)      (22.4)         (28.5)
Income tax provision
 (benefit)..............     (0.9)       --          2.8        (3.9)       (0.8)       (9.6)(13)     (11.7)
                                                                                         0.7 (4)
                           ------     ------      ------      ------      ------      ------       --------
 Net Income (loss) from
  continuing operations
  (Note F)..............   $ (7.7)    $ (3.5)     $ 15.7      $ (3.6)     $ (4.2)     $(13.5)      $  (16.8)
                           ======     ======      ======      ======      ======      ======       ========
Other Data:
Adjusted EBITDA (Note
 G).....................   $ 48.4      $15.4       $69.0        $7.7      $ (7.8)     $ 54.7         $187.4
Capital expenditures....     33.3        3.3        73.4         1.0        (0.4)      (55.5)          55.1
Cash interest expense
 (Note H)...............     37.6        0.2         6.0         3.7         --         34.8           82.3
Ratio of Adjusted EBITDA
 to cash interest
 expense................      1.3x      77.0x       11.5x        2.1x        --          1.6x           2.3x
Ratio of earnings to
 fixed charges (Note
 I).....................        *          *         2.4x          *         --            *              *

 
                                       35

 
                 UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
 
                      For the year ended December 31, 1997
                             (Dollars In Millions)
 


                                      Cyprus                Other      R&F Coal    Pro Forma
                                   Subsidiaries Zeigler  Acquisitions Disposition Adjustments       As
                          Holdings   (Note A)   (Note B)   (Note C)    (Note D)    (Note E)      Adjusted
                          -------- ------------ -------- ------------ ----------- -----------    --------
                                                                            
Operating Data:
Revenues................   $175.3    $ 422.9     $800.8     $288.5      $(43.0)     $  (7.2)(1)  $1,395.2
                                                                                       (5.2)(2)
                                                                                       (0.4)(3)
                                                                                     (236.5)(4)
Costs and expenses:
 Cost of operations.....    145.2      377.9      641.3      253.0       (31.3)        (7.2)(1)   1,120.8
                                                                                       (4.6)(2)
                                                                                       (2.5)(5)
                                                                                        8.2 (6)
                                                                                        4.1 (7)
                                                                                       (6.3)(8)
                                                                                       (3.5)(9)
                                                                                     (242.9)(4)
                                                                                      (10.6)(14)
 Depreciation, depletion
  and amortization......     10.8       41.9       57.9       19.9        (2.8)        52.9 (10)    172.0
                                                                                       (8.6)(4)
 Selling, general and
  administrative........     13.9       16.4       15.6        9.3         --         (13.6)(14)     41.6
 Write downs and special
  items.................      --        92.1        --         --          --          (9.6)(6)      82.5
                           ------    -------     ------     ------      ------      -------      --------
  Total costs and
   expenses.............    169.9      528.3      714.8      282.2       (34.1)      (244.2)      1,416.9
                           ------    -------     ------     ------      ------      -------      --------
 Income (loss) from
  operations............      5.4     (105.4)      86.0        6.3        (8.9)        (5.1)        (21.7)
 Interest and other
  income (expense)......
 Interest expense.......     (9.2)      (0.6)     (24.9)      (2.9)        --         (60.7)(11)   (112.4)
                                                                                       (7.6)(12)
                                                                                       (4.9)(8)
                                                                                        0.5 (9)
                                                                                       (2.1)(15)
 Gain (loss) on sale of
  assets................      0.3        6.8        --         2.4        (0.6)         --            8.9
 Other, net.............      0.1        0.1        7.9        2.0        (0.5)         --            9.6
                           ------    -------     ------     ------      ------      -------      --------
                             (8.8)       6.3      (17.0)       1.5        (1.1)       (74.8)        (93.9)
                           ------    -------     ------     ------      ------      -------      --------
 Income (loss) before
  income taxes..........     (3.4)     (99.1)      69.0        7.8       (10.0)       (79.9)       (115.6)
Income tax provision
 (benefit)..............     17.5        --        10.4       (0.4)       (1.5)       (51.4)(13)    (23.9)
                                                                                        1.5 (4)
                           ------    -------     ------     ------      ------      -------      --------
 Net Income (loss) from
  continuing operations
  (Note F)..............   $(20.9)   $ (99.1)    $ 58.6     $  8.2      $ (8.5)     $ (30.0)     $  (91.7)
                           ======    =======     ======     ======      ======      =======      ========
Other Data:
Adjusted EBITDA (Note
 G).....................   $ 16.6    $  33.9     $150.6     $ 30.6      $(12.8)     $  30.8      $  249.7
Capital expenditures....     32.2       24.5       74.4       10.5        (0.9)       (26.7)        114.0
Cash interest expense
 (Note H)...............      9.4        0.5       20.3        2.9         --          58.6          91.7
Ratio of Adjusted EBITDA
 to cash interest
 expense................      1.8x      67.8x       7.4x      10.6x        --           0.5x          2.7x
Ratio of earnings to
 fixed charges (Note
 I).....................        *          *        3.4x       3.1x        --             *             *

 
                                       36

 
             NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
 
   For the nine and twelve months ended September 30, 1998 and the year ended
                               December 31, 1997
                             (Dollars in Millions)
 
Note A:
 
This column reflects the historical results of operations of the Cyprus
Subsidiaries for the periods indicated and is prior to any adjustments for
certain seller retained activities and other items described in Note D below.
 
Note B:
 
This column reflects the historical results of operations of Zeigler and is
prior to any adjustments for the net assets held for sale and other items
described in Note D below.
 
Note C:
 
This column reflects the pre-acquisition actual combined historical results of
operations for each of (i) Martiki, Kindill and Mid-Vol for the nine months
ended September 30, 1998, and (ii) Martiki, Kindill, Mid-Vol, Leslie Resources
and Ikerd-Bandy for the year ended December 31, 1997. Set forth on the
following pages is a presentation of the combination of the preacquisition
results of operations for the entities.
 
                                       37

 
       UNAUDITED PRO FORMA COMBINED INCOME STATEMENT--Other Acquisitions
 
                  For the nine months ended September 30, 1998
                             (Dollars In Millions)
 


                                          Other Acquisitions
                                     -----------------------------
                                              Kindill    Mid-Vol   Total Other
                                     Martiki (1/1-8/31) (1/1-6/30) Acquisitions
                                     ------- ---------- ---------- ------------
                                                       
Operating Data:
Revenues............................  $54.4    $49.0      $15.3       $118.7
Costs and expenses:
  Cost of operations................   51.7     42.6       12.1        106.4
  Depreciation, depletion and
   amortization.....................    8.6      3.0        0.1         11.7
  Selling, general and
   administrative...................    2.4      2.4        0.2          5.0
                                      -----    -----      -----       ------
    Total costs and expenses........   62.7     48.0       12.4        123.1
                                      -----    -----      -----       ------
  Income (loss) from operations.....   (8.3)     1.0        2.9         (4.4)
Interest and other income
 (expense)..........................
  Interest expense..................    --      (3.7)       --          (3.7)
  Gain (loss) on sale of assets.....    --      (0.1)       --          (0.1)
  Other, net........................    0.1      0.6        --           0.7
                                      -----    -----      -----       ------
                                        0.1     (3.2)       --          (3.1)
                                      -----    -----      -----       ------
  Income (loss) before income
   taxes............................   (8.2)    (2.2)       2.9         (7.5)
Income tax provision (benefit)......   (3.0)    (0.9)       --          (3.9)
                                      -----    -----      -----       ------
  Net Income (loss) from continuing
   operations
   (Note E).........................  $(5.2)   $(1.3)     $ 2.9       $ (3.6)
                                      =====    =====      =====       ======
Other Data:
Adjusted EBITDA (Note F)............  $ 0.4    $ 4.1      $ 3.2       $  7.7
Capital expenditures................    --       1.0        --           1.0
Cash interest expense (Note G)......    --       3.7        --           3.7

 
                                       38

 
       UNAUDITED PRO FORMA COMBINED INCOME STATEMENT--Other Acquisitions
 
                      For the year ended December 31, 1997
                             (Dollars In Millions)
 


                                       Other Acquisitions
                         -----------------------------------------------
                                                         For Nine Months
                                                           1/1 to 9/30   Total Other
                         Martiki Kindill Mid-Vol Leslie    Ikerd-Bandy   Acquisitions
                         ------- ------- ------- ------  --------------- ------------
                                                       
Operating Data:
Revenues................  $73.9   $58.7   $34.5  $88.0        $33.4         $288.5
Costs and expenses:
  Cost of operations....   67.3    49.5    25.0   80.0         31.2          253.0
  Depreciation,
   depletion and
   amortization.........    9.7     5.1     0.3    3.3          1.5           19.9
  Selling, general and
   administrative.......    3.0     2.0     0.5    3.0          0.8            9.3
                          -----   -----   -----  -----        -----         ------
    Total costs and
     expenses...........   80.0    56.6    25.8   86.3         33.5          282.2
                          -----   -----   -----  -----        -----         ------
  Income (loss) from
   operations...........   (6.1)    2.1     8.7    1.7         (0.1)           6.3
Interest and other
 income (expense)
  Interest expense......    --     (1.6)   (0.1)  (0.9)        (0.3)          (2.9)
  Gain (Loss) on sale of
   assets...............    --      --      --     2.3          0.1            2.4
  Other, net............    0.5     1.0     0.1    0.4          --             2.0
                          -----   -----   -----  -----        -----         ------
                            0.5    (0.6)    --     1.8         (0.2)           1.5
                          -----   -----   -----  -----        -----         ------
  Income (loss) before
   income taxes.........   (5.6)    1.5     8.7    3.5         (0.3)           7.8
Income tax provision
 (benefit)..............   (1.9)    0.5     --     1.0          --            (0.4)
                          -----   -----   -----  -----        -----         ------
    Net Income (loss)
     from continuing
     operations (Note
     E).................  $(3.7)  $ 1.0   $ 8.7  $ 2.5        $(0.3)        $  8.2
                          =====   =====   =====  =====        =====         ======
Other Data:
Adjusted EBITDA (Note
 F).....................  $ 4.1   $ 8.2   $ 9.1  $ 7.7        $ 1.5         $ 30.6
Capital expenditures....    1.1     4.6     0.1    4.3          0.4           10.5
Cash interest expense
 (Note G)...............    --      1.6     0.1    0.9          0.3            2.9

 
                                       39

 
Note D:
 
This column reflects the elimination of R&F's historical results of operations.
R&F was sold on December 21, 1998 for $7.6 million.
 
Note E:
 
Pro forma adjustments include purchase accounting, accounting policy conformity
and financing entries necessary to reflect the pre-acquisition periods for the
following acquisitions: Martiki (November 1998), Zeigler (September 1998),
Kindill (September 1998), Mid-Vol (July 1998), the Cyprus Subsidiaries (June
1998), Leslie Resources (January 1998) and Ikerd Bandy (October 1997) as well
as the debt related financing transactions. The following notes describe the
pro forma adjustments.
 
 1. Reflects the elimination of intercompany transactions involving contract
    mining and purchased coal among the Company and the acquired companies.
 
 2. Reflects the elimination of Cyprus Amax's retained activities, which
    consist primarily of the resale of purchased coal by the Cyprus
    Subsidiaries under a coal sales contract retained by Cyprus Amax.
 
 3. Reflects the elimination of amortized gain on a sale-leaseback transaction
    and deferred income related to a sales contract amendment where such
    proceeds were retained by Cyprus Amax.
 
 4. Reflects the elimination of revenues and direct expenses related to certain
    assets of Zeigler that are currently held for sale or subject to the
    Dispositions (i.e. Triton, the Docks, energy trading, and fuel technology).
 
 5. Reflects the decrease in operating expenses resulting from inventory
    adjustments to conform to the Company's inventory accounting policies. The
    Company defers the cost of removing overburden above coal seams, while the
    acquired companies expensed such cost as incurred. The information to
    reflect this accounting policy conformity item is not known for all periods
    for all acquired companies as the engineering estimates to perform the
    necessary calculations are not available. However, the following entries
    have been reflected based on the available information (NA = not
    available):
 


                                               Nine Months        Year Ended
                                            September 30, 1998 December 31, 1997
                                            ------------------ -----------------
                                                         
   Leslie Resources........................          NA              $0.7
   Ikerd-Bandy.............................          NA               1.8
   Cyprus Subsidiaries.....................        $0.2                NA
                                                   ----              ----
     Total.................................        $0.2              $2.5
                                                   ====              ====

 
 6. Reflects adjustments for changes to end-of-mine reclamation expense to
    conform to the Company's reclamation cost accounting policy. The Company
    records end of mine reclamation at the date of acquisition. Operating
    expenses of the acquired companies have been adjusted to eliminate the
    provision for end-of-mine reclamation expense.
 
 7. Reflects adjustments for changes in employee benefits expense resulting
    from the purchase accounting treatment of the Zeigler, Kindill and Cyprus
    Acquisitions. Operating expenses of these acquired companies have been
    adjusted to eliminate the expense impact of the amortization of
    unrecognized prior service costs and unrecognized net gains and losses in
    connection with defined benefit plans because the Company will not have any
    such unrecognized costs or gains and losses under purchase accounting.
 
 8. Reflects adjustments for change in accounting for liabilities under the
    Coal Retiree Health Benefit Act of 1992. The acquired companies expensed
    such costs on a pay as you go method and the Company records the present
    value of these obligations as a liability at the date of purchase.
    Operating expenses of the acquired companies have been adjusted to
    eliminate the cash payment and record the interest accretion.
 
 9. Reflects the elimination of operating lease and interest expense on assets
    controlled by Cyprus Amax and leased to the Cyprus Subsidiaries pursuant to
    operating and capital leases. The Company separately purchased these assets
    in connection with the Cyprus Acquisition and their depreciation is
    reflected in Note (E) 10.
 
                                       40

 
10. Reflects the increase in depreciation, depletion, and amortization expense
    from purchase accounting entries.
 
 
11. Reflects increased interest expense on the following indebtedness:
 


                                              Nine Months        Year Ended
                                           September 30, 1998 December 31, 1997
                                           ------------------ -----------------
                                                        
   $150 million Notes (at 11.5%).........        $12.9              $17.3
   $575 million Senior Credit Facility
    (at 8.47%)...........................         36.5               48.7
   Incremental interest increase in $200
    million Senior Notes (from 10% to
    10.5%)...............................          0.8                1.0
   Revolving line of credit ($43.5
    million at 8.63%)....................          2.8                3.8
   Senior Credit Facility Revolver Fees..          0.7                0.9
   Less interest on retired debt.........        (16.2)             (11.0)
                                                 -----              -----
     Total...............................        $37.5              $60.7
                                                 =====              =====

 
12. Reflects the increase in amortization expense resulting from the increase
    in deferred financing costs in conjunction with the Offering, offset by
    finance cost amortization on retired debt.
 
13. Reflects pro forma tax expense (benefit) estimated at 30% of pretax income
    (loss) for entities for which income tax expense (benefit) has not been
    determined historically (AEI Resources, Mid-Vol and Ikerd-Bandy during
    their S-Corporation periods and the Cyprus Subsidiaries) as well as the pro
    forma adjustments.
 
14. Reflects the reduction in operating expenses from the Cyprus and Zeigler
    Acquisitions. Such reduction resulted from non-acquired employees and
    related costs as well as costs associated with terminated redundant
    administrative employees and closed administrative offices.
 
15. Represents interest expense for pre-acquisition periods for Ikerd-Bandy and
    Leslie Resources.
 
16. Reflects the elimination of stock options and retention and special bonuses
    related to the Zeigler Acquisition.
 
17. Reflects the reduction in cost of operations for bonus paid to officer of
    Company for consummation of financing transactions and acquisitions.
 
Note F:
 
  Net Income (loss) from continuing operations is prior to any extraordinary
items.
 
Note G:
 
  Adjusted EBITDA as presented above and as used elsewhere in this Prospectus
  consists of earnings before interest, taxes, depletion, depreciation,
  amortization and other non-cash charges as adjusted to exclude certain
  unusual or nonrecurring charges, all in accordance with the term
  "Consolidated Cash Flow" as that term is used in the term "Fixed Charge
  Coverage Ratio" in the Indenture governing the Notes (the "Indenture"). See
  "Description of the Notes" for a complete presentation of the methodology
  employed in calculating Adjusted EBITDA. Adjusted EBITDA is presented
  because it is a widely accepted financial indicator of a company's ability
  to service indebtedness and because it is used in the Indenture to
  determine compliance with certain covenants. However, Adjusted EBITDA
  should not be considered as an alternative to income from operations or to
  cash flows from operating activities (as determined in accordance with
  generally accepted accounting principles) and should not be construed as an
  indication of a company's operating performance or as a measure of
  liquidity.
 
                                       41

 
Adjusted EBITDA is calculated as follows for each period:
 
                                    
Nine months ended September 30, 1998:




                                      Cyprus                Other      R&F Coal    Pro Forma     As
                          Holdings Subsidiaries Zeigler  Acquisitions Disposition Adjustments Adjusted
                          -------- ------------ -------  ------------ ----------- ----------- --------
                                                                         
Net Income (loss) from
 continuing operations..   $ (7.7)    $ (3.5)   $ 15.7      $(3.6)      $ (4.2)     $(13.5)    $(16.8)
Exclude gain or loss on
 asset sale.............     (1.0)       --        --          --          --           --       (1.0)
Less net income of
 equity method investees
 in excess of cash
 dividends..............      --         --        --         (0.2)        --           --       (0.2)
Plus provision for
 taxes..................     (0.9)       --        2.8        (3.9)       (0.8)        (8.9)    (11.7)
Plus interest expense...     29.8        0.2       8.0         3.7         --          44.7      86.4
Plus depreciation,
 depletion and
 amortization...........     28.2       18.7      43.5        11.7        (2.8)        31.4     130.7
Less EBITDA of
 unrestricted subs......      --         --       (1.0)        --          --           1.0       --
                           ------     ------    ------      ------      ------      -------    ------
Adjusted EBITDA.........   $ 48.4     $ 15.4    $ 69.0      $  7.7      $ (7.8)     $  54.7    $187.4
                           ======     ======    ======      ======      ======      =======    ======
Year ended December 31, 1997:

                                      Cyprus                Other      R&F Coal    Pro Forma     As
                          Holdings Subsidiaries Zeigler  Acquisitions Disposition Adjustments Adjusted
                          -------- ------------ -------  ------------ ----------- ----------- --------
                                                                         
Net Income (loss) from
 continuing operations..   $(20.9)    $(99.1)   $ 58.6      $  8.2      $ (8.5)     $(30.0)    $(91.7)
Exclude gain or loss on
 asset sale.............      --         --        --          --          --           --        --
Less net income of
 Restricted Subsidiaries
 to extent dividends are
 legally restricted.....      --        (1.6)      --          --          --           --       (1.6)
Plus provision for
 taxes..................     17.5        --       10.4       (0.4)        (1.5)       (49.9)    (23.9)
Plus interest expense...      9.2        0.6      24.9         2.9         --          74.8     112.4
Plus depreciation,
 depletion and
 amortization...........     10.8       41.9      57.9        19.9        (2.8)        44.3     172.0
Plus other noncash
 expenses...............      --        92.1       --          --          --          (9.6)     82.5
Less EBITDA of
 unrestricted subs......      --         --       (1.2)        --          --           1.2       --
                           ------     ------    ------      ------      ------      -------    ------
Adjusted EBITDA.........   $ 16.6     $ 33.9    $150.6      $ 30.6      $(12.8)     $  30.8    $249.7
                           ======     ======    ======      ======      ======      =======    ======

 
Note H:
 
  Cash interest expense is calculated as interest expense plus capitalized
  interest less interest accreted on discounted notes and amortization of
  deferred financing costs.
 
Note I:
 
  In calculating the ratio of earnings to fixed charges, earnings consist of
  income before income tax provision plus fixed charges (excluding
  capitalized interest). Fixed charges consist of interest incurred (which
  includes amortization of deferred financing cost) whether expensed or
  capitalized and one-third of rental expense, deemed representative of that
  portion of rental expense estimated to be attributable to interest. The
  Company's pro forma earnings were inadequate to cover fixed charges for the
  pro forma periods of the nine months ended September 30, 1998 and fiscal
  1997 by $36.7 million and $117.6 million, respectively.
 
                                       42

 
                SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
 
The selected consolidated financial data below as of and for the years ended
December 31, 1995, 1996 and 1997, have been derived from the Consolidated
Annual Financial Statements of AEI Holding, the Company's predecessor entity,
which have been audited by Arthur Andersen LLP, independent public accountants,
and are included elsewhere in this Prospectus. The selected consolidated
financial data as of and for the years ended December 31, 1993 and 1994 have
been derived from the unaudited Consolidated Financial Statements of the
Company's predecessor business and are not included elsewhere herein. The
selected financial data as of and for the nine-month periods ended September
30, 1997 and 1998, have been derived from AEI Holding's Unaudited Consolidated
Financial Statements for those periods included elsewhere in the Prospectus,
and include, in the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the results
for the unaudited interim periods. Results for the nine months ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the entire year. The information presented below is qualified in its entirety
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company and related notes included elsewhere in
this Prospectus.
 
            AEI Resources Holding, Inc. (including its predecessors)
                   (Dollars in millions, except per ton data)
 


                                                                          Nine-Month
                                                                         Period Ended
                           For the Fiscal Year Ended December 31,        September 30,
                          --------------------------------------------  ----------------
                           1993     1994    1995(1)    1996     1997     1997     1998
                          -------  -------  -----------------  -------  ------  --------
                                                           
Operating Revenues and
 Expenses:                                                                (unaudited)
Revenues................  $ 107.7  $ 103.1  $ 112.3   $ 123.2  $ 175.3  $124.1  $  376.2
Cost of operations......    101.3     91.5     94.5      97.1    145.2   100.7     309.5
Depreciation, depletion
 and amortization.......      8.1      4.4      6.0       6.9     10.8     6.9      28.2
Selling, general and
 administrative.........      9.1      7.0      8.6       9.1     13.9     9.9      19.8
                          -------  -------  -------   -------  -------  ------  --------
Income from operations..    (10.8)     0.2      3.2      10.1      5.4     6.6      18.7
Interest expense........     (6.8)    (0.3)    (2.0)     (5.5)    (9.2)   (5.3)    (29.8)
Other income (expense),
 net(2).................      2.7      0.3     (0.5)      0.5      0.4    (0.6)      2.5
                          -------  -------  -------   -------  -------  ------  --------
Income (loss) before
 income tax provision
 and extraordinary
 item...................    (14.9)     0.2      0.7       5.1     (3.4)    0.7      (8.6)
Income tax provision
 (benefit)(3)...........     (4.7)     --      (0.4)      --      17.5     1.4      (0.9)
                          -------  -------  -------   -------  -------  ------  --------
Net Income (loss) before
 extraordinary item(4)..    (10.2)     0.2      1.1       5.1    (20.9)   (0.7)     (7.7)
Extraordinary loss from
 extinguishment of
 debt...................      --       --       --        --      (1.3)    --       (3.0)
                          -------  -------  -------   -------  -------  ------  --------
Net Income (loss).......  $ (10.2) $   0.2  $   1.1   $   5.1  $ (22.2) $ (0.7) $  (10.7)
                          -------  -------  -------   -------  -------  ------  --------
Other Data:
Adjusted EBITDA(5)......  $   --   $   4.9  $   8.7   $  17.5  $  16.6  $ 12.9  $   48.4
Cash flows from
 operating activities...       NA       NA     11.1       4.8    (10.2)   (8.0)    (30.1)
Cash flows from
 investing activities...       NA       NA    (11.0)    (12.5)   (38.3)  (18.2)   (907.0)
Cash flows from
 financing activities...       NA       NA      0.9       7.3    131.6    26.9     908.4
Capital expenditures....      8.7     11.5     12.6      14.1     32.2    18.3      33.3
Ratio of Adjusted EBITDA
 to interest
 expense(5).............      --      16.3x     4.4x      3.2x     1.8x    2.4x      1.6x
Ratio of total debt to
 Adjusted EBITDA(5).....      --       1.1x     6.0x      3.7x    13.1x    7.1x     29.5x
Ratio of earnings to
 fixed charges(6).......       *       1.0x     1.1x      1.6x      *      1.1x       *
Operating Data:
Proven and probable
 reserves (at period
 end, in million of
 tons)..................       NA       NA       NA        NA      166     168     2,446
Coal sales (millions of
 tons)..................      3.7      3.5      3.3       4.2      6.5     4.6      14.8
Average sales price per
 ton....................  $ 26.27  $ 26.61  $ 26.27   $ 24.84  $ 25.19  $24.43  $  24.99
Average cost per ton
 sold(7)................    29.04    25.22    24.20     21.32    22.08   22.00     22.30
Balance Sheet Data (end
 of period):
Working capital.........  $  (7.7) $  (2.6) $  (5.6)  $ (11.6) $  85.1  $ 12.7  $  (36.0)
Total assets............     56.2     69.7     92.3     106.9    265.4   141.5   2,843.1
Total debt (including
 current portion).......      0.5      5.6     52.4      64.1    217.0    91.6   1,425.8
Stockholders' equity
 (deficit)..............     30.2     31.1     (4.7)      0.3    (18.1)   (0.2)    (69.8)

NA=Not available.
 
                                       43

 
- --------
(1) The operations data for the year ended December 31, 1995 combine the
    audited results of operations for AEI Holding Company, Inc. (AEI Resources
    Holding, Inc.'s predecessor) for the period from January 1, 1995, through
    December 31, 1995 (see page F-5 of this Prospectus), and the results of
    Addington Coal Operations (the predecessor to AEI Holding Company, Inc.)
    for the period from January 1, 1995, through November 1, 1995 (see page F-
    38 of this Prospectus). The operations data for the year ended December 31,
    1995 do not purport to represent what the Company's combined results of
    operations would have been if the predecessor businesses had actually been
    acquired as of January 1, 1995.
(2) Other income (expense), net reflects the inclusion of gain or loss on asset
    sales and minority interest.
(3) In April 1997, Bowie Resources Limited ("Bowie") changed its tax reporting
    status from an S-corporation to a C-corporation, resulting in an initial
    deferred tax liability of $1.6 million. In November 1997, the other
    subsidiaries of AEI Holding likewise changed from S-corporations to C-
    corporations, resulting in an initial deferred tax liability of $18.0
    million.
(4) Net income (loss) from continuing operations is prior to any extraordinary
    items.
(5) Adjusted EBITDA as presented above and as used elsewhere in this Prospectus
    consists of earnings before interest, taxes, depletion, depreciation,
    amortization and other non-cash charges as adjusted to exclude certain
    unusual or nonrecurring charges, all in accordance with the term
    "Consolidated Cash Flow" as that term is used in the term "Fixed Charge
    Coverage Ratio" in the Indenture. See "Description of the Notes" for a
    complete presentation of the methodology employed in calculating Adjusted
    EBITDA. Adjusted EBITDA is presented because it is a widely accepted
    financial indicator of a company's ability to service indebtedness and
    because it is used in the Indenture to determine compliance with certain
    covenants. However, Adjusted EBITDA should not be considered as an
    alternative to income from operations or to cash flows from operating
    activities (as determined in accordance with generally accepted accounting
    principles) and should not be construed as an indication of a company's
    operating performance or as a measure of liquidity.
(6) In calculating the ratio of earnings to fixed charges, earnings consist of
    income before income tax provision plus fixed charges (excluding
    capitalized interest). Fixed charges consist of interest incurred (which
    includes amortization of deferred financing costs) whether expensed or
    capitalized and one-third of rental expense, deemed representative of that
    portion of rental expense estimated to be attributable to interest.
    Earnings were inadequate to cover fixed charges for 1993, 1997, and the
    nine months ended September 30, 1998 by $14.9 million, $3.8 million and
    $14.7 million, respectively.
(7) Average cost per ton sold is calculated based on total coal operating costs
    included in cost of operations, plus depreciation costs related to mining,
    divided by coal sold.
 
                                       44

 
The selected consolidated financial data below as of and for the years ended
December 31, 1996 and 1997, and for the three years in the period ended
December 31, 1997, have been derived from the Consolidated Annual Financial
Statements of Zeigler which have been audited by Deloitte & Touche LLP,
independent auditors, and are included elsewhere in this Prospectus. The
selected consolidated financial data as of August 31, 1998 and for the eight-
month periods ended August 31, 1997 and 1998, have been derived from Zeigler's
Unaudited Consolidated Financial Statements for those periods included
elsewhere in the Prospectus and include, in the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the results for the unaudited interim periods. Results for the
eight months ended August 31, 1998 are not necessarily indicative of the
results that may be expected for the entire year. The information presented
below is qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of Zeigler and related
notes included elsewhere in this Prospectus. Ziegler was acquired on September
2, 1998, and the following presents the respective preacquisition periods.
 
                                    Zeigler
                   (Dollars in millions, except per ton data)
 


                               For the Year Ended          Eight Months Ended
                                  December 31,                 August 31,
                          -------------------------------  --------------------
                            1995       1996       1997       1997       1998
                          ---------  ---------  ---------  ---------  ---------
                                                       
Operating Data:
Revenues................  $   783.1  $   731.6  $   800.8  $   524.3  $   533.4
Cost of operations(1)...      613.2      559.6      641.3      423.5      438.2
Depreciation, depletion
 and amortization(1)....       68.6       60.1       57.9       38.1       43.5
Selling, general and
 administrative(1)......       20.3       20.9       15.6       17.2        9.2
Writedowns and special
 items(2)...............      114.7        --         --         --        21.2
                          ---------  ---------  ---------  ---------  ---------
Income from operations..      (33.7)      91.0       86.0       45.5       21.3
Interest (expense)(3)...      (27.9)     (23.8)     (24.9)     (15.2)      (8.0)
Other income (expense),
 net....................       45.9        2.1        7.9        3.8        5.2
                          ---------  ---------  ---------  ---------  ---------
Income (loss) before
 income taxes...........      (15.7)      69.3       69.0       34.1       18.5
Income tax provision
 (benefit)..............       (4.5)      11.3       10.4        6.2        2.8
                          ---------  ---------  ---------  ---------  ---------
Net income (loss) from
 continuing
 operations(4)..........  $   (11.2) $    58.0  $    58.6  $    27.9  $    15.7
                          ---------  ---------  ---------  ---------  ---------
Other Data:
Adjusted EBITDA(5)......  $   184.3  $   142.8  $   150.6  $    85.5  $    69.0
Cash flows from
 operating activities...      160.3      131.9       79.8       18.1       44.1
Cash flows from
 investing activities...      (51.8)     (30.5)     (70.7)     (19.3)     (40.1)
Cash flows from
 financing activities...     (111.0)      (6.1)     (14.1)     (10.4)     (92.2)
Capital expenditures....       56.3       31.4       74.4       29.5       73.4
Ratio of Adjusted EBITDA
 to interest
 expense(5).............        6.6x       6.0x       6.0x       5.6x       8.6x
Ratio of total debt to
 Adjusted EBITDA(5).....        1.9x       2.4x       2.3x       3.4x       3.6x
Ratio of earnings to
 fixed charges(6).......          *        3.6x       3.4x       2.9x       2.4x
Operating Data:
Coal sales (million of
 tons)..................       36.9       34.6       33.1       21.8       23.0
Average sales price per
 ton....................  $   20.48  $   20.21  $   18.22  $   18.02  $   17.81
Average cost per ton
 sold(7)................      18.61      17.74      15.22      15.06      15.28
Balance Sheet Data (end
 of period):
Working capital.........  $    29.8  $    84.9  $    22.2  $   241.2  $    (5.1)
Total assets............    1,025.2    1,050.6    1,077.4    1,248.4    1,018.7
Total debt (including
 current portion).......      344.8      344.8      344.1      289.9      245.6
Stockholders' equity....       81.5      132.6      177.7      149.0      199.3

 
                                       45

 
- --------
(1) Depreciation, depletion and amortization is included in cost of operations
    and selling, general and administrative per the audited financials (set
    forth elsewhere herein). It is segregated here to conform with the
    presentation of the Company and the Cyprus Subsidiaries.
(2) Reflects acceleration of the accruals related to mine closing costs and
    pretax writedowns in certain asset carrying values, primarily in connection
    with the idling, closing, and projected closing of certain mines earlier
    than previously forecast.
(3) Interest expense is reported net of interest income per the audited
    financials (see F-Section). It is segregated here to conform with the
    presentation of the financial statements of the Company.
(4) Net income (loss) from continuing operations is prior to any extraordinary
    items.
(5) Adjusted EBITDA as presented above and as used elsewhere in this Prospectus
    consists of earnings before interest, taxes, depletion, depreciation,
    amortization and other non-cash charges as adjusted to exclude certain
    unusual or nonrecurring charges, all in accordance with the term
    "Consolidated Cash Flow" as that term is used in the term "Fixed Charge
    Coverage Ratio" in the Indenture. See "Description of the Notes" for a
    complete presentation of the methodology employed in calculating Adjusted
    EBITDA. Adjusted EBITDA is presented because it is a widely accepted
    financial indicator of a company's ability to service indebtedness and
    because it is used in the Indenture to determine compliance with certain
    covenants. However, Adjusted EBITDA should not be considered as an
    alternative to income from operations or to cash flows from operating
    activities (as determined in accordance with generally accepted accounting
    principles) and should not be construed as an indication of a company's
    operating performance or as a measure of liquidity.
(6) In calculating the ratio of earnings to fixed charges, earnings consist of
    income before income tax provision plus fixed charges (excluding
    capitalized interest). Fixed charges consist of interest incurred (which
    includes amortization of deferred financing costs) whether expensed or
    capitalized and one-third of rental expense, deemed representative of that
    portion of rental expense estimated to be attributable to interest.
    Earnings were inadequate to cover fixed charges for 1995 by $15.7 million.
(7) Average cost per ton sold is calculated based on total coal operating costs
    included in cost of operations, plus depreciation costs related to mining,
    divided by coal sold.
 
                                       46

 
The selected combined financial data below as of December 31, 1996 and 1997,
and for the three years in the period ending December 31, 1997, have been
derived from the Combined Annual Financial Statements of the Cyprus
Subsidiaries which have been audited by PricewaterhouseCoopers, LLP,
independent public accountants, and are included elsewhere in this Prospectus.
The selected financial data as of June 30, 1998 and for the six-month periods
ended June 30, 1997 and 1998, have been derived from the Cyprus Subsidiaries'
Unaudited Combined Financial Statements for those periods included elsewhere in
the Prospectus and include, in the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the results for the unaudited interim periods. Results for the six months
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the entire year. The information presented below is qualified in
its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Combined Financial Statements of the Cyprus Subsidiaries and related notes
included elsewhere in this Prospectus. The Cyprus Subsidiaries were acquired on
June 29, 1998 and following presents the respective preacquisition periods.
 
                            The Cyprus Subsidiaries
                   (Dollars in millions, except per ton data)
 


                                     For the Year Ended     Six Months Ended
                                        December 31,            June 30,
                                    ----------------------  ------------------
                                     1995    1996    1997     1997      1998
                                    ------  ------  ------  --------  --------
                                                       
Operating Data:
Revenues..........................  $426.7  $412.2  $422.9  $  193.8  $  201.8
Cost of operations................   342.9   360.3   377.9     165.8     180.5
Depreciation, depletion and
 amortization.....................    40.2    39.6    41.9      20.9      18.7
Selling, general and
 administrative...................    15.9    14.6    16.4       8.3       6.7
Writedowns and special items (1)..    98.1     1.8    92.1       1.1       --
                                    ------  ------  ------  --------  --------
Income (loss) from operations.....   (70.4)   (4.1) (105.4)     (2.3)     (4.1)
Interest (expense)................    (1.2)   (0.8)   (0.6)     (0.3)     (0.2)
Other income (expense), net (2)...     2.3     3.4     6.9       0.2       0.8
                                    ------  ------  ------  --------  --------
Income (loss) before income
 taxes............................   (69.3)   (1.5)  (99.1)     (2.4)     (3.5)
Income tax provision (benefit)
 (3)..............................     --      --      --        --        --
                                    ------  ------  ------  --------  --------
Net income (loss) from continuing
 operations.......................  $(69.3) $ (1.5) $(99.1) $   (2.4) $   (3.5)
                                    ------  ------  ------  --------  --------
Other Data:
Adjusted EBITDA (4)...............  $ 70.3  $ 40.6  $ 33.9  $   18.3  $   15.4
Cash flows from operating
 activities.......................    57.5    29.6     9.3     (12.3)     (4.8)
Cash flows from investing
 activities.......................   (18.4)  (31.2)  (15.7)    (13.4)     (2.2)
Cash flows from financing
 activities.......................   (40.0)    2.8     7.1      24.5       3.3
Capital Expenditures..............    16.7    35.0    24.5      15.0       3.3
Ratio of Adjusted EBITDA to
 interest expense (4).............    58.6x   50.8x   56.5x     61.0x     77.0x
Ratio of total debt to Adjusted
 EBITDA (4).......................     0.2x    0.3x    0.3x      0.6x      0.5x
Ratio of earnings to fixed charges
 (5)..............................       *       *       *         *         *
Operating Data:
Coal sales (million of tons)......    13.3    14.8    15.8       7.2       7.6
Average sales price per ton.......  $27.88  $24.31  $24.31  $  24.35  $  24.45
Average cost per ton sold (6).....   23.85   23.18   21.77     22.69     23.01
Balance Sheet Data:
Working capital...................  $ 32.9  $ 24.7  $ 28.5  $   48.1  $   32.0
Total assets......................   393.9   379.4   299.9     389.2     275.2
Total debt (including current
 portion).........................    12.5    11.0     9.1      11.0       7.3
Parent Investment.................   141.2   144.0    53.8     166.2      55.5

 
                                       47

 
- --------
(1) In 1995 and 1996, write downs and special items consist of the write down
    of mining properties (due to weak demand, transportation and coal quality
    disadvantages, and impending long-term contract expirations, among other
    factors) in accordance with SFAS 121, and the write down of supplies
    inventory to their net realizable value. In 1997, the Cyprus Subsidiaries
    recorded write downs and special items of $92.1 million. Such write downs
    and special items consist of: (i) charges of $35.8 million for the
    anticipated closure of the Armstrong Creek mine (which includes a $9.6
    million charge related to end-of-mine reclamation); (ii) $2.3 million
    charge to increase current reclamation accruals for the Chinook mine; (iii)
    charges of $6.9 million to write down land assets and prepaid royalties to
    net realizable value; and (iv) write downs of $33.5 million and $13.6
    million in asset values at the Cyprus Subsidiaries' West Virginia and
    Chinook mines, respectively, that resulted from updated mine and business
    plans that reflected the views of the Cyprus Subsidiaries' management
    regarding the domestic market for mid- to high-sulfur coal and updated
    reserve information.
(2) Other income (expense), net reflects the inclusion of minority interest and
    gain or loss on asset sales. In the audited financials (set forth elsewhere
    herein) gain on asset sales is included in revenues. It is included here to
    conform with the presentation of the financial statements of the Company.
(3) No income tax provision (benefit) has been allocated by Cyprus Amax to the
    Cyprus Subsidiaries.
(4) Adjusted EBITDA as presented above and as used elsewhere in this Prospectus
    consists of earnings before interest, taxes, depletion, depreciation,
    amortization and other non-cash charges as adjusted to exclude certain
    unusual or nonrecurring charges, including the writedowns and special
    charges taken in 1995, all in accordance with the term "Consolidated Cash
    Flow" as that term is used in the term "Fixed Charge Coverage Ratio" in the
    Indenture. See "Description of the Notes" for a complete presentation of
    the methodology employed in calculating Adjusted EBITDA. Adjusted EBITDA is
    presented because it is a widely accepted financial indicator of a
    company's ability to service indebtedness and because it is used in the
    Indenture to determine compliance with certain covenants. However, Adjusted
    EBITDA should not be considered as an alternative to income from operations
    or to cash flows from operating activities (as determined in accordance
    with generally accepted accounting principles) and should not be construed
    as an indication of a company's operating performance or as a measure of
    liquidity.
(5) In calculating the ratio of earnings to fixed charges, earnings consist of
    income before income tax provision plus fixed charges (excluding
    capitalized interest). Fixed charges consist of interest incurred (which
    includes amortization of deferred financing costs) whether expensed or
    capitalized and one-third of rental expense, deemed representative of that
    portion of rental expense estimated to be attributable to interest.
    Earnings were inadequate to cover fixed charges for 1995, 1996, 1997, the
    six months ended June 30, 1997, and the six months ended June 30, 1998 by
    $69.2 million, $1.5 million, $99.1 million, $2.4 million and $3.5 million,
    respectively.
(6) Average cost per ton sold is calculated based on total coal operating costs
    included in cost of operations, plus depreciation costs related to mining,
    divided by coal sold.
 
                                       48

 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with
"Selected Historical Consolidated Financial Data" and the audited Consolidated
Financial Statements of the Company and the notes thereto included elsewhere in
this Prospectus.
 
General
 
The Company derives its revenues primarily from the sale of coal to electric
utilities and other industrial users under long-term sales contracts. The
Company sells a substantial portion of its coal under long-term sales contracts
and sells the remainder on the spot market. See "Business--Long-Term Coal
Contracts." Sales pursuant to long-term sales contracts would have accounted
for 74% of the Company's pro forma net sales during the nine-month period ended
September 30, 1998, with the remainder being accounted for by sales pursuant to
short-term contracts and on the spot market.
 
The principal components of the Company's expenses are costs relating to the
production and transportation of its coal, including labor expenses, royalty
and lease payments, reclamation expenditures and rail, barge and trucking
costs. Other expenses include depletion, depreciation, amortization, selling,
general and administrative and interest expenses.
 
Addington Enterprises commenced operations in November 1995 through the
acquisition of the coal mining operations of Addington Resources, which
operations comprised the Company's initial eastern Kentucky and Tennessee
mining operations and coal reserves. Bowie's operations, which comprise the
Company's Colorado operations, were acquired by purchase from Cyprus Orchard
Valley in 1994 and Coors Energy in January 1995. The acquisition by the Company
of Bowie and Addington Enterprises' coal mining operations is accounted for as
a transfer of net assets under common control with accounting similar to that
of a pooling-of-interests where the historical cost basis of the assets and
liabilities are carried over. Because the assets acquired pursuant to the MTI
Acquisition were acquired from a party under common control with the Company,
MTI's results of operations are included in the Company's historical financial
statements.
 
Certain Factors Affecting Current and Future Operating Results
 
The Company's current and future operating results will likely be affected by
the following events and factors:
 
Certain Contract Revenues. Under certain long-term sales contracts, in relation
to contract revenues from coal sales, the Company has been receiving additional
periodic payments with such payments included in revenues as coal shipments
occur, pursuant to contract terms. Such proceeds have amounted to $15.0 million
and $29.3 million in fiscal 1997 and the nine-month period ended September 30,
1998, respectively. The contracts call for $4.6 million and $44.3 million of
additional payments to be paid to the Company in the three-month period ended
December 31, 1998 and fiscal 1999, respectively. The contracts call for $91.0
million of additional payments over the following four years.
 
Recent Acquisitions. In connection with the Recent Acquisitions, the Company
expects to incur certain one-time acquisition charges aggregating approximately
$20.0 million. (Approximately $15.0 million has been paid as of September 30,
1998). The costs relate primarily to severance plan obligations and change of
control provisions contained in employment agreements assumed by the Company in
connection with the Zeigler Acquisition. The Company will also write off $18.5
million of deferred financing costs related to the bridge financing for the
Zeigler Acquisition. Other integration costs are expected to include closing
redundant facilities and relocating certain business processes of the
businesses acquired in the Recent Acquisitions.
 
Increased Interest Costs. As a result of increased indebtedness incurred by the
Company in connection with the Recent Acquisitions, the Company's interest
expense will increase substantially from 1998 to 1999. Interest costs will
increase further if the Company acquires additional coal companies or coal
reserves.
 
 
                                       49

 
Reclamation and Mine Accruals. Annually, the Company reviews its entire
reclamation liability and makes necessary adjustments, including mine plan and
permit changes and revisions to production levels to optimize mining
reclamation and efficiency. The financial impact of any such adjustment is
recorded to cost of coal sales. Although the Company's management believes it
is making adequate provisions for all expected reclamation and other costs
associated with mine closures, future operating results would be adversely
affected if such accruals were later determined to be insufficient.
 
Anticipated Cost Savings and Synergies
 
The unaudited Pro Forma Combined Financial Statements do not include the effect
of certain cost savings and synergies the Company believes are possible to
achieve as a result of the Transactions. On a pro forma basis, the Company
expects that it would have generated approximately $71 million in additional
cost savings over the twelve-month period ended December 31, 1997. Potential
cost-savings and synergies from these items include approximately $17 million
related to overhead and closure of unneeded offices, approximately $13 million
related to certain personnel reductions and benefit plan consolidations, and
approximately $41 million related to mining and material sourcing synergies.
The reduction in overhead and closure of unneeded offices are expected to
result from reduction in costs due to duplication of corporate management and
regional offices at Zeigler. The benefit plans of the various existing and
acquired companies will be consolidated into a company-wide plan. The mining
synergies are expected to include (i) sourcing coal supply contracts from lower
cost mines, (ii) mine plan changes at the Marrowbone and Armstrong Creek Mines,
and (iii) materials sourcing activities as the Company becomes a larger volume
customer of its suppliers. However, there can be no assurances that the Company
will be able to achieve such cost savings or synergies or, even if it is able
to achieve such cost savings or synergies, that it will be able to do so within
the time period currently anticipated. In the event such anticipated cost
savings and synergies are not achieved, the Company may encounter financing
constraints in its future operations. See "Risk Factors--Ability to Achieve
Anticipated Cost Savings and Synergies."
 
Results of Operations
 
AEI Resources Holding, Inc., (including the Company's predecessor)
 
The following table sets forth, for the periods indicated, certain operating
and other data of AEI Resources Holding, Inc., including the Company's
predecessor (AEI Holding Company, Inc.) presented as a percent of revenues.
 


                                                         Nine Months Ended
                                                    ---------------------------
                                  Fiscal Year
                               -------------------  September 30, September 30,
                               1995   1996   1997       1997          1998
                               -----  -----  -----  ------------- -------------
                                                   
Operating Data:
Revenues.....................  100.0% 100.0% 100.0%     100.0%        100.0%
Cost of operations...........   84.1   78.8   82.8       81.1          82.2
Depreciation, depletion and
 amortization................    5.3    5.6    6.2        5.6           7.5
Selling, general and
 administrative..............    7.7    7.4    7.9        8.0           5.3
                               -----  -----  -----      -----         -----
Income from operations.......    2.9    8.2    3.1        5.3           5.0
Interest expense.............   (1.8)  (4.5)  (5.2)      (4.2)         (8.0)
Other income (expense), net..   (0.4)   0.4    0.2       (0.5)          0.7
                               -----  -----  -----      -----         -----
Income (loss) before income
 tax provision (benefit) ....    0.7    4.1   (1.9)       0.6          (2.3)
                               -----  -----  -----      -----         -----

 
                                       50

 
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
 
Due to the completion of the Recent Acquisitions, the changes in results of
operations discussed below may not be illustrative of operations if the Company
had operated the businesses acquired in the Recent Acquisitions from January 1,
1998.
 
Revenues. Revenues were $376.2 million for the nine months ended September 30,
1998, compared to $124.1 million for the nine months ended September 30, 1997,
an increase of $252.1 million or 203%. The increase in revenues is attributable
to mining revenues from recently acquired businesses included in the results of
operations in the nine-months ended September 30, 1998, and not in the results
of operations in the nine-months ended September 30, 1997, including $22.0
million from Ikerd-Bandy generated by 0.8 million tons of production (nine
months); $65.2 million from Leslie Resources generated by 2.8 million tons of
production (nine months); $97.4 million from the Cyprus Subsidiaries generated
by 5.1 million tons of production (three months); $6.0 million from Mid-Vol
generated by 0.2 million tons of production (three months); $42.9 million from
Zeigler generated by 1.4 million tons of production (one month); and $6.2
million from Kindill generated by 0.3 million tons of production (one month).
Revenues exclusive of the acquirees increased from $124.1 million to $138.0
million ($13.9 million or 11%). The increase is due to increased tonnage
delivery (4.6 million tons to 5.4 million tons or 17%) offset by a decrease in
revenue per ton ($24.43 to $23.13 or 5%).
 
Cost of Operations. The cost of operations totaled $309.5 million for the nine
months ended September 30, 1998 compared to $100.7 million for the nine months
ended September 30, 1997, an increase of $208.8 million or 207%. The increase
is primarily attributable to acquirees included in 1998 and not in 1997
including Ikerd-Bandy ($16.7 million for nine months), Leslie Resources ($67.0
million for nine months), the Cyprus Subsidiaries ($82.5 for three months),
Mid-Vol ($1.6 million for three months), Zeigler ($28.7 million for one month)
and Kindill ($6.5 million for one month). Cost of operations exclusive of the
acquirees increased from $100.7 million to $105.9 million ($5.2 million or 5%).
This increase is due to increased sales offset by a 2% decrease in average cost
per ton sold (from $22.00 to $21.46).
 
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the nine months ended September 30, 1998 totaled $28.2 million
compared to $6.9 million for the nine months ended September 30, 1997, an
increase of $21.3 million or 309%. The increase in depreciation, depletion and
amortization resulted primarily from: (i) increase depreciation from the
acquired property and equipment for: Ikerd-Bandy ($1.2 million for nine
months), Leslie Resources ($3.1 million for nine months), the Cyprus
Subsidiaries ($6.4 million for three months), Zeigler ($6.9 million for one
month) and Kindill ($0.6 million for one month) and (ii) additional
depreciation and amortization from 1997 and 1998 capital expenditures.
 
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses for the nine months ended September 30, 1998 were $19.8
million compared to $9.9 million for the nine months ended September 30, 1997,
an increase of $9.9 million or 100%. The increase in such expenses primarily
resulted from acquirees included in 1998 and not in 1997 including Ikerd-Bandy
($0.5 million for nine months), Leslie Resources ($1.0 million for nine
months), the Cyprus Subsidiaries ($1.8 million for three months), Mid-Vol ($0.1
million for three months), Zeigler ($0.6 million for one month) and Kindill
($0.3 million for one month). Other increases related to expanding management
and administrative functions to support the anticipated growth.
 
Interest Expense. Interest expense for the nine months ended September 30, 1998
was $29.8 million compared to $5.3 million for the nine months ended September
30, 1997, an increase of $24.5 million or 462%. The increase resulted primarily
from interest associated with: (i) increased debt levels (including the $200
million of Old Notes, the bridge financing for the Cyprus Acquisition (the
"Cyprus Bridge Facility") ($160 million), the Bridge Facility ($600 million),
and the Senior Credit Facility ($400 million, a portion of the proceeds
refinanced the Cyprus Bridge Facility)) and (ii) the related amortization of
debt financing costs.
 
Other Income (Expense), Net. Other income (expense) increased due to additional
gains of $2.5 million on asset sales, caused primarily by the sale of an
aircraft, and an increase in interest income resulting from the investment of
excess proceeds from the Old Notes.
 
                                       51

 
Provision for Income Taxes. There was a $0.9 million benefit for income taxes
for the nine months ended September 30, 1998 as compared to $1.4 million
expense for the nine months ended September 30, 1997. During the nine months
ended September 30, 1997, the Company operated primarily under S Corporation
tax status. During April 1997, Bowie experienced a change in tax status from an
S corporation to a C corporation. In connection with this change in tax status,
an income tax provision to record deferred taxes was recorded in the amount of
$1.6 million. For 1998, a deferred tax benefit was not recorded due to
uncertainties in realization, until after the acquisition of Zeigler and
Kindill and the establishment of a deferred tax liability in September, 1998.
The 1998 income tax benefit relates to post-August losses.
 
Extraordinary Loss From Debt Refinancing. For the nine months ended September
30, 1998, the Company incurred an extraordinary loss of $3.0 million compared
to no such loss for the nine months ended September 30, 1997. During the nine
months ended September 30, 1998, the Company restructured its old $25 million
credit facility and extinguished the Cyprus Bridge Facility. All unamortized
debt issuance costs associated with the retired facilities were written off.
 
Net Loss (Income). For the nine months ended September 30, 1998, the Company
had a net loss of $10.7 million compared to a net loss of $0.7 million for the
nine months ended September 30, 1997, an increase of $10.0 million. The
increase primarily was due to increased depreciation associated with the
acquisitions and increased interest expense associated with financing the
acquisitions.
 
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
Revenues. Revenues were $175.3 million for the year ended December 31, 1997,
compared to $123.2 million for the year ended December 31, 1996, an increase of
$52.1 million or 42%. The increase in revenues is attributable to a 56%
increase in coal mining revenues (up $59.2 million from $104.8 million to
$164.0 million), partially offset by a 49% decrease in equipment sales, rental
and repair (down $7.9 million from $16.0 million to $8.1 million). Coal sales
tonnage increased 55% from 4.2 million tons for the year ended December 31,
1996 to 6.5 million tons for the year ended December 31, 1997. This increased
volume resulted primarily from increased sales from the eastern Kentucky
operations. Revenue per ton also increased $0.35 or 1% (from $24.84 for the
year ended December 31, 1996 to $25.19 for the year ended December 31, 1997).
This increase in revenues per ton is attributable to the expiration of lower
priced contracts and the inclusion of new higher priced contracts. Equipment
sales, rental and repair declined in 1997 from 1996 due to (i) revenues from
highwall miner equipment repair and sales to Mining Technologies Australia, Pty
Ltd ("MTA"). (an Australian entity formerly majority owned by Larry Addington)
in 1996 exceeding 1997 revenues by $3.2 million due to decreased operations in
Australia in 1997 and (ii) rental of four separate highwall miner systems from
MTI and Bowie (totaling $5.4 million in revenue) during 1996 which were instead
deployed to internal jobs in 1997.
 
Cost of Operations. The cost of operations totaled $145.2 million for the year
ended December 31, 1997 compared to $97.1 million for the year ended December
31, 1996, an increase of $48.1 million or 50%. The increase was primarily due
to the increase in tons produced from 4.2 million in 1996 to 6.3 million in
1997. The average cost per ton sold for the Company was $22.08 per ton for the
year ended December 31, 1997 compared to $21.32 per ton for the year ended
December 31, 1996, an increase of $0.76 per ton or 4%. This increase was
attributable primarily to an increase in adverse mining conditions.
 
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the year ended December 31, 1997 totaled $10.8 million
compared to $6.9 million for the year ended December 31, 1996, an increase of
$3.9 million or 57%, which is consistent with the increase in cost of
operations. The increase in depreciation, depletion and amortization primarily
resulted from the use of an Addcar highwall mining system and the amortization
of mine development costs.
 
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1997 were $13.9 million
compared to $9.1 million for the year ended December 31, 1996, an
 
                                       52

 
increase of $4.8 million or 53%. The increase in such expenses primarily
resulted from increased costs associated with organizational growth, the 1997
employee bonus and other selling related costs.
 
Interest Expense. Interest expense for the year ended December 31, 1997 was
$9.2 million compared to $5.5 million for the year ended December 31, 1996, an
increase of $3.7 million or 67%. This increase resulted primarily from interest
associated with the Old Notes and increased stockholder loans used to fund the
development of the Company's operations.
 
Provision for Income Taxes. The provision for income taxes for the year ended
December 31, 1997 was $17.5 million compared to no provision for the year ended
December 31, 1996. The increase in the provision for income taxes is due
primarily to the provision for deferred income taxes resulting from the change
in tax status from an S corporation to a C corporation.
 
Net Income (Loss). For the year ended December 31, 1997, the Company had a net
loss of $20.9 million compared to net income of $5.1 million for the year ended
December 31, 1996, a decrease of $26.0 million or 510%. The decrease primarily
resulted from increased tax expenses caused by the change in tax status from an
S corporation to a C corporation in 1997 and the increase in selling, general
and administrative and interest expense.
 
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
 
Revenues. Revenues were $123.2 million for 1996 compared to $112.3 million for
1995, an increase of $10.9 million or 10%. The increase in revenues is
attributable to a 150% increase in equipment sales, rental and repair (up $9.6
million from $6.4 million to $16.0 million) and a 335% increase in coal mining
revenues (up $80.7 million from $24.1 million to $104.8 million). Equipment
sales, rental and repairs increased in 1996 due to (i) revenues from highwall
miner equipment repair and sales to MTA in 1996 exceeding 1995 revenues by $9.7
million as operations in Australia accelerated in 1996, (ii) equipment rental
income in 1996 exceeded 1995 revenues by $3.6 million due to equipment deployed
to internal jobs in 1995 being leased to third parties in 1996 offset by a $6.0
million sale of an Addcar highwall mining system in 1995 for which there was no
comparable sale in 1996. Coal mining revenue increase is due to a 27% increase
in tonnage sold (up 0.9 million tons from 3.3 million tons to 4.2 million tons)
offset by a 5% decrease in revenue per ton (down $1.43 from $26.27 to $24.84).
Tonnage increased due to opening new mines while the revenue per ton decrease
is due to the expiration of higher than average contracts and the inclusion of
lower priced contracts.
 
Cost of Operations. The cost of operations totaled $97.1 million for 1996
compared to $94.5 million for 1995, an increase of $2.6 million or 3%. The
increase primarily resulted from an increase in total production from 3.3
million tons in 1995 to 4.2 million tons in 1996 partially offset by a decrease
in average cost per ton sold of $2.88 or 12% (from $24.20 in 1995 to $21.32 in
1996). The cost per ton decrease is due to the use of Addcar highwall mining
systems. The cost of operations also declined in 1996 as a result of decreased
contract mining and increased equipment leasing.
 
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for 1996 totaled $6.9 million compared to $6.0 million for 1995,
an increase of $0.9 million or 15%. The increase in depreciation, depletion and
amortization primarily resulted from an increase in amortization associated
with additional equipment purchased for the Company's Colorado mining
operations.
 
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1996 were $9.1 million compared to $8.6 million for
1995, an increase of $0.5 million or 6%. The increase in selling, general and
administrative expenses was attributable to expanded operations.
 
Interest Expense. Interest expense for 1996 was $5.5 million compared to $2.0
million for 1995, an increase of $3.5 million or 175%. The primary reason for
the increase was the incurrence of debt by Addington Enterprises in connection
with the purchase of the subsidiaries from Addington Resources.
 
                                       53

 
Provision for Income Taxes. There was no income tax provision for 1996 compared
to a benefit of $0.4 million for 1995, a decrease in the benefit of $0.4
million due to a change in the corporate tax status.
 
Net Income. For 1996, the Company had net income of $5.1 million compared to
net income of $1.1 million for 1995, an increase of $4.0 million or 364%. The
increase primarily resulted from a higher margin on coal sales, increased
equipment sales and increased equipment rental partially offset by higher
depreciation and interest expense in 1996.
 
Zeigler
 
The following table sets forth, for the pre-acquisition periods indicated,
certain operating and other data of Zeigler presented as a percent of revenues.


                                                          Eight Months Ended
                                                         ---------------------
                                       Fiscal Year
                                    -------------------  August 31, August 31,
                                    1995   1996   1997      1997       1998
                                    -----  -----  -----  ---------- ----------
                                                     
Operating Data:
Revenues........................... 100.0% 100.0% 100.0%   100.0%     100.0%
Cost of operations.................  78.3   76.5   80.1     80.8       82.1
Depreciation, depletion and
 amortization......................   8.8    8.2    7.2      7.2        8.2
Selling, general and
 administrative....................   2.6    2.9    2.0      3.3        1.7
Writedowns and special items.......  14.6    --     --       --         4.0
                                    -----  -----  -----    -----      -----
Income (loss) from operations......  (4.3)  12.4   10.7      8.7        4.0
Interest expense...................  (3.6)  (3.2)  (3.1)    (2.9)      (1.5)
Other income (expense), net........   5.9    0.3    1.0      0.7        1.0
                                    -----  -----  -----    -----      -----
Income (loss) before income tax
 provision (benefit)...............  (2.0)   9.5    8.6      6.5        3.5
                                    -----  -----  -----    -----      -----

 
 
                                       54

 
Eight Months Ended August 31, 1998 Compared to Eight Months Ended August 31,
1997
 
Because the Zeigler Acquisition was consummated on September 2, 1998, the
results of operations for September 1998 are included in the Company's results
of operations.
 
Revenues. Revenues were $533.4 million for the eight months ended August 31,
1998, compared to $524.3 million for the eight months ended August 31, 1997, an
increase of $9.1 million or 2%. The increase in revenues resulted primarily
from increased coal revenues of $16.7 million, partially offset by lower energy
trading revenue of $6.2 million reflecting a management decision to reduce
electricity and gas trading during the second quarter of 1998. Increased coal
sales primarily resulted from higher volumes at Pike County from the start-up
of the new Matrix Mining operations ($19.4 million), and increased revenues of
$5.3 million at Evergreen mine due to higher production, partially offset by
decreased revenues of $7.6 million in the Midwest due to the expiration of a
contract and lower spot volume primarily due to the closure of Old Ben Coal
Company's ("Old Ben") Spartan mine in the fourth quarter of 1997.
 
Cost of Operations. The cost of operations totaled $438.2 million for the eight
months ended August 31, 1998 compared to $423.5 million for the eight months
ended August 31, 1997, an increase of $14.7 million or 4%. The increase
primarily reflects a $13.0 million increase related to 1997 revisions in mine
closing estimates and employee benefit obligations, higher production costs at
Marrowbone due to lower yield caused by continued geologic problems ($6.4
million) and higher expenses associated with the increased sales volumes at
Pike County and Evergreen mine as discussed above. These increases were
partially offset by $7.6 million of lower energy trading expense as discussed
above, and $3.9 million of lower expense associated with Zeigler's clean coal
demonstration plant.
 
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the eight months ended August 31, 1998 totaled $43.5 million
compared to $38.1 million for the eight months ended August 31,
1997, an increase of $5.4 million or 14%. The increase in depreciation,
depletion and amortization primarily resulted from depreciation in 1998 for the
full nine-month period on 1997 capital expenditures and a revision in certain
asset lives.
 
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the eight months ended August 31, 1998 were $9.2
million compared to $17.2 million for the eight months ended August 31, 1997, a
decrease of $8.0 million or 47%. The decrease in such expenses primarily
resulted from lower incentive compensation and consulting costs.
 
Write Downs and Special Items. Write downs and special items of $21.2 million
for the eight months ended August 31, 1998 consist of charges related to the
sale of Zeigler to the Company, including professional sales fees, and
retention and special bonuses.
 
Interest Expense. Interest expense for the eight months ended August 31, 1998
was $8.0 million compared to $15.2 million for the eight months ended August
31, 1997, a decrease of $7.2 million or 47%. This decrease reflects the
prepayment in January 1998 of Zeigler's 8.61% senior secured notes.
 
Other Income (Expense), Net. In the second quarter of 1998, Zeigler received a
$5.2 million distribution of surplus funds from Old Ben's investment in a
reciprocal insurance association. The distribution was offset by a decrease in
interest income due to decreased levels of excess cash.
 
Provision for Income Taxes. The provision for income taxes for the eight months
ended August 31, 1998 was $2.8 million compared to $6.2 million for the eight
months ended August 31, 1997. The decrease in the provision for income taxes is
due to a decrease of pretax income of $15.6 million or 46%.
 
Net Income. For the eight months ended August 31, 1998, Zeigler had net income
of $15.7 million compared to net income of $27.9 million for the eight months
ended August 31, 1997, a decrease of $12.2 million or
 
                                       55

 
44%. The decrease is due of $18.0 million of expense associated with the sale
of the Company in September 1998, the 1997 nonrecurring benefits from changes
in mine closing estimates, employee benefit obligations, and lost cost claims
totaling $14.4 million, and higher production costs at Marrowbone of $5.4
million. These items were partially offset by lower selling, general and
administrative expenses of $3.9 million, higher margins from purchased coal of
$4.2 million, lower expense at Zeigler's clean coal demonstration plant of $3.7
million, lower interest expense of $3.6 million, distribution of surplus funds
from an investment in a reciprocal insurance association of $3.2 million,
improved productivity at Pike County of $2.9 million and lower property taxes
at Old Ben of $1.6 million.
 
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
Revenues. Revenues were $800.8 million for the year ended December 31, 1997,
compared to $731.6 million for the year ended December 31, 1996, an increase of
$69.2 million or 10%. EnerZ Corporation's ("EnerZ") energy trading and
marketing activities commenced in January 1997. Approximately 80% of EnerZ's
fiscal 1997 revenues of $166.5 million were generated from electricity
transactions with the remainder attributable to natural gas trading. Coal sales
declined $95.0 million in fiscal 1997 compared to 1996, of which $80.2 million
reflected the 1996 closures of Old Ben Mine #24 and Old Ben Mine #26, $30.5
million reflected the 1996 closure of Old Ben Mine #20, and $20.4 million
reflected the 1996 expiration of Triton's contract with Western Farmers
Electric Cooperative ("WFEC"). These decreases were partially offset by a $14.3
million increase in revenues related to the reactivation of Old Ben Mine #11
and other small sales increases. Other revenues include throughput fees of
$19.3 million at Zeigler's two east coast transloading terminals; farm, timber,
coal trucking, and ash disposal income; royalty and rental income from land and
mineral interests; and gains from sales of surplus properties. The fiscal 1997
revenue decline was mainly due to lower revenue from third-party coal leases
and timber sales.
 
Cost of Operations. The cost of operations totaled $641.3 million for the year
ended December 31, 1997 compared to $559.6 million for the year ended December
31, 1996, an increase of $81.7 million or 15%. The increase was primarily due
to higher trading costs of $173.2 million reflecting the first year of
operations for EnerZ, a $16.3 million 1996 curtailment gain resulting from a
reduction in Zeigler's recorded obligation to provide retiree medical benefits
to certain former midwestern mining employees as a result of their re-
employment or termination prior to vesting, and higher costs for operating the
Encoal Corporation ("Encoal") plant after the 1996 expiration of Department of
Energy co-funding. Partially offsetting these increases was a decrease in cost
of coal sales primarily reflecting the impact of 1996 mine closings and
reductions in certain recorded liabilities. During 1997, Zeigler also reduced
accrued mine closing costs by approximately $23.4 million, including decreases
in the Old Ben reclamation obligations and contingent claims liabilities. In
addition, actuarially-based liability reductions reducing cost of operations
included $8.2 million for accrued pneumoconiosis benefits, $3.2 million for
postemployment benefits and $2.4 million for postretirement benefits. Various
other estimated liabilities were reevaluated and reduced cost of operations in
total by $4.5 million.
 
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the year ended December 31, 1997 totaled $57.9 million
compared to $60.1 million for the year ended December 31, 1996, a decrease of
$2.2 million or 4%. The decrease in depreciation, depletion and amortization
primarily resulted from the 1995 closing of Old Ben Mine #1 and the 1996
closing of Old Ben Mine #24.
 
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1997 were $15.6 million
compared to $20.9 million for the year ended December 31, 1996, a decrease of
$5.3 million or 25%. Lower 1997 expenses were mainly the result of lower stock
appreciation unit and compensation-related charges and the timing of other
expenses.
 
Interest Expense. Interest expense for the year ended December 31, 1997 was
$24.9 million compared to $23.8 million for the year ended December 31, 1996, a
decrease of $1.1 million or 5%. The higher expense in fiscal 1997 primarily
resulted from increased average borrowings.
 
 
                                       56

 
Other Income (Expense), Net. Other Income (expense), net for the year ended
December 31, 1997 was $7.9 million compared to $2.1 million for the year ended
December 31, 1996, an increase of $5.8 million or 276%. The increase primarily
reflects higher interest income earned due to larger cash investments.
 
Provision for Income Taxes. The provision for income taxes for the year ended
December 31, 1997 was $10.4 million compared to $11.3 million for the year
ended December 31, 1996. The decrease in the provision for income taxes is due
to the slightly lower pretax income and lower tax rate. Zeigler's effective tax
rate was 15.0% in 1997 versus 16.3% in 1996. The 1997 rate improvement was
mainly due to the benefits of tax loss carryforwards. The valuation allowance
on deferred tax assets decreased $10.5 million from 1996 to 1997. This
valuation allowance primarily relates to alternative minimum tax ("AMT") credit
carryforwards. Although management believes that it is unlikely to realize all
of its AMT credit carryforward under existing law and company structure, AMT
credit carryforward is recognized to reduce the deferred tax liability from the
amount of regular tax on temporary differences to the amount of tentative
minimum tax on AMT temporary differences.
 
Net Income. For the year ended December 31, 1997, Zeigler had net income of
$58.6 million compared to $58.0 million for the year ended December 31, 1996,
an increase of $0.6 million or 1%. The increase primarily resulted from a $9.0
million positive change in customer claims expense representing reversal in
1997 of a $4.5 million contingent claims liability accrued in 1996, reduced
1997 estimates of Old Ben reclamation liabilities totaling $8.2 million, a $6.2
million actuarially-based reduction in the accrued liability for black lung
benefits, an unusually large $8.2 million increase in accrued workers'
compensation expense in 1996, and a $3.9 million reduction in net interest
expense. These factors were substantially offset after taxes by a $16.4 million
reduction in net earnings attributable to the 1996 closings of Old Ben Mine #24
and Old Ben Mine #26, a $16.3 million nonrecurring gain in 1996 on curtailment
of postretirement benefits, a $6.8 million net earnings decrease related to the
December 1996 expiration of Triton's contract with WFEC, a $5.6 million net
loss at EnerZ, and a $4.2 million increase in the net loss at Zeigler's
technology unit.
 
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
 
Revenues. Revenues were $731.6 million for the year ended December 31, 1996,
compared to $783.1 million for the year ended December 31, 1995, a decrease of
$51.5 million or 7%. A $56.5 million decline in 1996 coal sales compared to
1995 was largely due to a $42.7 million decrease related to the three mine
closures described above and the 1995 closure of Old Ben Mine #1, and $13.6
million was related to price reductions on two major long-term coal supply
contracts. These decreases were partially offset by payments totaling $45.5
million in 1995 in connection with the settlement of litigation concerning a
contract with Southern Indiana Gas and Electric Company. Other revenues include
throughput fees at Zeigler's two east coast transloading terminals; farm,
timber, coal trucking, and ash disposal income; royalty and rental income from
land and mineral interests; and gains from sales of surplus properties.
 
Cost of Operations. The cost of operations totaled $559.6 million for the year
ended December 31, 1996 compared to $613.2 million for the year ended December
31, 1995, a decrease of $53.6 million or 8.7%. The decrease primarily resulted
from a decrease in cost of coal sales from 1995 to 1996 which principally
reflects significantly reduced sales from the closed mines and savings from
idling Wolf Creek and outsourcing coal formerly supplied by the idled mine.
Cost of operations also decreased in 1996 due to a $16.3 million gain on
curtailment of postretirement benefits representing a reduction in Zeigler's
recorded obligation to provide retiree medical benefits to certain former
midwestern mining employees as a result of their re-employment or termination
prior to vesting. Partially offsetting these decreases was a $23.3 million 1995
reduction in accrued pneumoconiosis benefits based on updated actuarial
estimates that recognized positive trends in claims experience.
 
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the year ended December 31, 1996 totaled $60.1 million
compared to $68.6 million for the year ended December 31, 1995, a
 
                                       57

 
decrease of $8.5 million or 12%. The decrease in depreciation, depletion and
amortization primarily resulted from the 1996 mine closings of Old Ben Mine #24
and #26 in Illinois and Old Ben Mine #20 in West Virginia, and the 1995 closing
of Old Ben Mine #1 in Indiana.
 
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1996 were $20.9 million
compared to $20.3 million for the year ended December 31, 1995, an increase of
$0.6 million or 3%. The increase in such expenses primarily resulted from
expanded business development activities.
 
Interest Expense. Net interest expense for the year ended December 31, 1996 was
$23.8 million compared to $27.9 million for the year ended December 31, 1995, a
decrease of $4.1 million or 15%. This decrease resulted primarily from lower
average borrowings.
 
Provision for Income Taxes. The provision for income taxes for the year ended
December 31, 1996 was $11.3 million compared to a benefit of $4.5 million for
the year ended December 31, 1995. Higher pretax income was responsible for the
increase in income taxes from 1995 to 1996. Zeigler's effective tax rate was
16.3% in 1996 as compared to 28.6% in 1995. The 1996 rate improvement was
mainly due to the benefits of tax loss carryforwards.
 
The valuation allowance on the deferred tax asset decreased $8.9 million from
1995 to 1996, mainly because of reduced deductible temporary differences
(mostly reclamation liabilities), use of net operating loss carryforwards, and
a partially offsetting increase in AMT credit carryforwards.
 
Net Income. For the year ended December 31, 1996, Zeigler had net income of
$58.0 million compared to a loss of $11.2 million for the year ended December
31, 1995, an increase of $69.2 million or 618%. The increase primarily resulted
from nonrecurring provisions in 1995 for asset impairments and accelerated mine
closings of $114.7 million, lower 1996 mining costs and higher productivity of
$18.8 million, and the 1996 $16.3 million curtailment gain on postretirement
benefits. These increases were partially offset by nonrecurring 1995 proceeds
from a contract settlement of $45.5 million, a 1996 reduction in the
pneumoconiosis benefit obligation of $23.3 million, and lower sales volume and
sales prices mainly related to the 1996 mine closings of $11.3 million.
 
The Cyprus Subsidiaries
 
The following table sets forth, for the preacquisition periods indicated,
certain operating and other data of the Cyprus Subsidiaries presented as a
percent of revenues.
 


                                                             Six Months Ended
                                           Fiscal Year       -----------------
                                        -------------------  June 30, June 30,
                                        1995   1996   1997     1997     1998
                                        -----  -----  -----  -------- --------
                                                       
Operating Data:
Revenues............................... 100.0% 100.0% 100.0%  100.0%   100.0%
Cost of operations.....................  80.4   87.4   89.4    85.6     89.4
Depreciation, depletion and
 amortization..........................   9.4    9.6    9.9    10.8      9.3
Selling, general and administrative....   3.7    3.5    3.8     4.3      3.3
Writedowns and special items...........  23.0    0.5   21.8     0.5      --
                                        -----  -----  -----   -----    -----
Income (loss) from operations.......... (16.5)  (1.0) (24.9)   (1.2)    (2.0)
Interest expense.......................  (0.3)  (0.2)  (0.1)   (0.2)    (0.1)
Other income (expense), net............   0.6    0.8    1.6     0.2      0.4
                                        -----  -----  -----   -----    -----
Income (loss) before income tax
 provision (benefits).................. (16.2)  (0.4) (23.4)   (1.2)    (1.7)
                                        -----  -----  -----   -----    -----

 
 
                                       58

 
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
 
Because the Cyprus Acquisition was consummated on June 29, 1998, the results of
operations for the three-month period ended September 30, 1998, are included in
the Company's results of operations.
 
Revenues. Revenues were $201.8 million for the six months ended June 30, 1998,
compared to $193.8 million for the six months ended June 30, 1997, an increase
of $8.0 million or 4%. The increase in revenues resulted primarily from
increased sales from the Straight Creek deep mine, which began mining
operations in July 1997, and the Straight Creek surface mine, which were
partially offset by reduced sales from other mines. The increased sales were
the result of a new contract for 1.2 million tons per year.
 
Cost of Operations. The cost of operations totaled $180.5 million for the six
months ended June 30, 1998 compared to $165.8 million for the six months ended
June 30, 1997, an increase of $14.7 million or 9%. The increase was primarily
due to increased coal production to provide for the increased coal sales and
increased production costs of approximately $1.50 per ton at the Cyprus
Subsidiaries' West Virginia mines, which were primarily due to operating
inefficiencies arising from adverse weather conditions and reduced production
volumes.
 
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the six months ended June 30, 1998 totaled $18.7 million
compared to $20.9 million for the six months ended June 30, 1997, a decrease of
$2.2 million or 11%. The decrease was primarily the result of the write down of
assets at the Armstrong Creek mine in December 1997 when the mine's economic
life was shortened.
 
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 1998 were $6.7
million compared to $8.3 million for the six months ended June 30, 1997, a
decrease of $1.6 million or 19%. The decrease in such expenses primarily
resulted from a decrease in consulting and other third party administrative
charges.
 
Interest Expense. Interest expense for the six months ended June 30, 1998 was
$0.2 million compared to $0.3 million for the six months ended June 30, 1997, a
decrease of $0.1 million or 33%. This decrease was primarily the result of
decreased capital lease obligations.
 
Pre-tax Net Income. For the six months ended June 30, 1998, the Cyprus
Subsidiaries had a pre-tax net loss of $3.5 million compared to a pre-tax net
loss of $2.4 million for the six months ended June 30, 1997, an increase of
$1.1 million or 46%. The increase primarily resulted from the increased
production costs at the West Virginia mines which were partially offset by
decreases in depreciation, depletion and amortization and selling, general and
administrative expenses.
 
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
Revenues. Revenues were $422.9 million for the year ended December 31, 1997,
compared to $412.2 million for the year ended December 31, 1996, an increase of
$10.7 million or 3%. The increase in revenues resulted primarily from increased
coal sales from the Cyprus Subsidiaries' Kentucky mines. The increased sales
were the result of shipments under new contracts providing for 2.2 million tons
per year.
 
Cost of Operations. The cost of operations totaled $377.9 million for the year
ended December 31, 1997 compared to $360.3 million for the year ended December
31, 1996, an increase of $17.6 million or 5%. The increase was primarily due to
the increase in production coupled with increased production costs of
approximately $2.50 per ton and $2.00 per ton at the Cyprus Subsidiaries'
Kentucky and Tennessee mines, respectively, which were primarily due to roof
control problems at the Straight Creek deep mine and increased stripping ratios
at the Skyline mine.
 
 
                                       59

 
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the year ended December 31, 1997 totaled $41.9 million
compared to $39.6 million for the year ended December 31, 1996, an increase of
$2.3 million or 6%. The increase in depreciation, depletion and amortization
primarily resulted from accelerated depletion of the Cyprus Subsidiaries' West
Virginia coal reserves due to the economic lives of the West Virginia mines
being shortened and increased amortization of purchase price allocated to
various coal contracts acquired in a previous merger, which resulted from
increased sales under such contracts.
 
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1997 were $16.4 million
compared to $14.6 million for the year ended December 31, 1996, an increase of
$1.8 million or 12%. The increase in such expenses primarily resulted from
increased administrative costs driven by increased sales.
 
Interest Expense. Interest expense for the year ended December 31, 1997 was
$0.6 million compared to $0.8 million for the year ended December 31, 1996, a
decrease of $0.2 million or 25%. This decrease was primarily the result of
decreased capital lease obligations.
 
Pre-tax Net Income. For the year ended December 31, 1997, the Cyprus
Subsidiaries had a pre-tax net loss of $99.1 million compared to a pre-tax net
loss of $1.5 million for the year ended December 31, 1996, a decrease of
$97.6 million. The decrease primarily resulted from the special charge of $92.1
million taken in 1997, which provided for the shortened economic lives of the
Armstrong Creek and Chinook mines and the write down of a portion of the
purchase price allocated to the coal contracts acquired in a previous merger,
the increased production costs at the Kentucky and Tennessee mines and
increased depreciation, depletion and amortization, selling, general and
administrative expenses.
 
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
 
Revenues. Revenues were $412.2 million for the year ended December 31, 1996,
compared to $426.7 million for the year ended December 31, 1995, a decrease of
$14.5 million or 4%. The decrease in revenues resulted primarily from the
expiration in 1995 of a contract which provided for annual shipments of 2.8
million tons and a reduction for a contract which provided for annual shipments
of 1.5 million tons in 1995 in return for an increase in contract tonnage of
0.5 million tons per year.
 
Cost of Operations. The cost of operations totaled $360.3 million for the year
ended December 31, 1996 compared to $342.9 million for the year ended December
31, 1995, an increase of $17.4 million or 5%. The increase was primarily due to
increased coal production, the increased coal sales and increased production
costs of approximately $1.50 per ton at the Armstrong Creek and Stockton mines,
which was due to an increase in equipment leasing costs and increased
preparation plants costs, related to repairs and upgrades. Those increases were
partially offset by decreased production costs of approximately $1.00 per ton
at the Star Fire mine and the closure of the Lost Mountain mine.
 
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the year ended December 31, 1996 totaled $39.6 million
compared to $40.2 million for the year ended December 31, 1995, a decrease of
$0.6 million or 2%. The decrease in depreciation, depletion and amortization
primarily resulted from the shutdown of the Lost Mountain mine in 1995, which
was partially offset by increased amortization of purchase price allocated to
various coal contracts acquired in a previous merger, which resulted from
increased sales volume under such contracts.
 
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1996 were $14.6 million
compared to $15.9 million for the year ended December 31, 1995, a decrease of
$1.3 million or 8%. The decrease is attributable to decreased administrative
costs driven by decreased sales.
 
Interest Expense. Interest expense for the year ended December 31, 1996 was
$0.8 million compared to $1.2 million for the year ended December 31, 1995, a
decrease of $0.4 million or 33%. This decrease resulted primarily from
decreased capital lease obligations.
 
                                       60

 
Pre-tax Net Loss. For the year ended December 31, 1996, the Cyprus Subsidiaries
had a pre-tax net loss of $1.5 million compared to a pre-tax loss of $69.2
million for the year ended December 31, 1995, a decrease of $67.7 million. The
improvement was primarily attributable to the absence of the $98.1 million
special charge recorded in 1995, decreased production costs at the Star Fire
mine and decreased interest, depreciation, depletion, amortization, selling,
general and administrative expenses. The absence of the $98.1 million special
charge and the decrease in other expenses were partially offset by the
expiration of a long-term sales contract, the reduction of a long-term sales
contract price and the increased production costs at the Armstrong Creek and
Stockton mines.
 
Liquidity
 
Historical
 
Cash flow from operations was $11.1 million, $4.8 million, ($10.2 million) and
($30.1 million) for the years ended December 31, 1995, 1996 and 1997 and the
nine-month period ended September 30, 1998 (cash flows from operations includes
adjustments for non-cash items of $4.7 million for 1995 relating to the
predecessor's non-cash property additions and reclamation accrual adjustments).
During the year ended December 31, 1997, AEI Holding had a net loss of $22.2
million compared to net income of $5.1 million for the year ended December 31,
1996 and net income of $1.1 million for the year ended December 31, 1995.
During the year ended December 31, 1995, cash flow from operations was
increased due to a decrease in accounts receivable of $3.3 million, a decrease
in other non-current assets of $2.8 million, and an increase in accrued
expenses and other of $4.3 million, which was more than offset by an increase
in inventories of $2.3 million, an increase in prepaid expenses and other of
$2.2 million and a decrease in other non-current liabilities of $1.6 million.
During the year ended December 31, 1996, cash flow from operations was
decreased by an increase in accounts receivable of $6.1 million, an increase in
inventories of $3.1 million, a decrease in other non-current liabilities of
$5.7 million which was partially offset by an increase in accounts payable of
$9.5 million and depreciation of $6.9 million. During the year ended December
31, 1997, cash flow from operations was decreased due to an increase in
accounts receivable of $8.0 million, an increase in inventories of $6.2
million, an increase in other non-current assets of $2.2 million and a decrease
in other non-current liabilities of $2.7 million which was more than offset by
a provision for deferred income tax of $16.6 million, prepayment penalties on
debt refinancing of $1.6 million, depreciation of $10.8 million and an increase
in accounts payable of $4.2 million.
 
Cash flow used in operations was ($8.0 million) for the nine months ended
September 30, 1997 compared to ($30.1 million) for the nine months ended
September 30, 1998. For the nine months ended September 30, 1998 net loss was
$10.7 million which included $28.2 million in non-cash depreciation, depletion
and amortization. Cash flow from operations decreased due to an increase in
inventories of $6.6 million, as the Company increased coal reserves, a decrease
in accrued expenses and other of $35.4 million, an increase in prepaid expenses
and other of $4.6 million and a decrease in other non-current liabilities of
$3.7 million.
 
For the nine months ended September 30, 1997 net loss was $0.7 million which
included $6.9 million in non-cash depreciation, depletion and amortization.
Cash flow from operations decreased due to an increase in receivables of $11.3
million, an increase in inventories of $6.5 million and a decrease in other
non-current liabilities of $3.2 million. Cash flow from operations increased
due to an increase in accounts payable of $4.9 million and an increase in
accrued expenses and other of $3.4 million.
 
At various times during the first nine months of 1998, events of default
existed under the prior $25 million credit facility of AEI Holding as a result
of non-compliance with certain financial covenants contained therein and under
the Indenture governing the Notes retired in the Senior Note Exchange (the "Old
Indenture") as a result of cross default provisions. In addition, a default
existed under the Old Credit Facility and the Old Indenture because AEI Holding
failed to timely provide certain required notices, reports and certificates.
AEI Holding has remedied its non-compliance by obtaining a waiver and amendment
to the Old Credit Facility, providing the required information and curing the
other defaults under the Old Indenture.
 
                                       61

 
Pro Forma
 
The Company has substantial indebtedness and significant debt service
obligations. As of September 30, 1998, on a pro forma basis after giving effect
to the Transactions, the Company would have had total long-term indebtedness,
including current maturities, aggregating $1,127.8 million. Such borrowing was
more than offset by cash on the balance sheet as of the date of such borrowing.
The Indenture will permit the Company to incur substantial additional
indebtedness in the future, including secured indebtedness, subject to certain
limitations. Such limitations will include certain covenants that, among other
things: (i) limit the incurrence by the Company of additional indebtedness and
the issuance of certain preferred stock; (ii) restrict the ability of the
Company to make dividends and other restricted payments (including
investments); (iii) limit transactions by the Company with affiliates; (iv)
limit the ability of the Company to make asset sales; (v) limit the ability of
the Company to incur certain liens; (vi) limit the ability of the Company to
consolidate or merge with or into, or to transfer all or substantially all of
its assets to, another person and (vii) limit the ability of the Company to
engage in other lines of business. The Senior Credit Facility will contain
additional and more restrictive covenants as compared to the Indenture and will
require the Company to maintain specified financial ratios and satisfy certain
tests relating to its financial condition. See "Capitalization," "Description
of the Notes--Certain Covenants," "Description of Other Indebtedness--The New
Senior Notes" and "--The Senior Credit Facility."
 
The Company may continue to engage in evaluating potential strategic
acquisitions. The Company expects that funding for any such future acquisitions
may come from a variety of sources, depending on the size and nature of such
acquisition. Potential sources of capital include cash generated from
operations, proceeds from the Offering, borrowings under the Senior Credit
Facility, or other external debt or equity financings. There can be no
assurance that such additional capital sources will be available to the Company
on commercially reasonable terms or at all.
 
In connection with the Offering, the Company expects to amend and restate the
Senior Credit Facility, which will provide for aggregate borrowings of up to
$875.0 million. As of September 30, 1998, on a pro forma basis after giving
effect to outstanding letters of credit, the Company would have had
approximately $73.5 million of borrowings available under the Revolving Credit
Facility (after giving effect to approximately $183.0 million of outstanding
letters of credit and borrowings to fund the Martiki Acquisition). Interest
rates on the revolving loans under the Senior Credit Facility will be based, at
the Company's option, on the Base Rate (as defined therein) or LIBOR (as
defined therein). The Revolving Credit Facility will mature five years after
the Closing Date (as defined therein). The Senior Credit Facility will contain
certain restrictions and limitations, including financial covenants that will
require the Company to maintain and achieve certain levels of financial
performance and limit the payment of cash dividends and similar restricted
payments. See "Description of Other Indebtedness--The Senior Credit Facility."
 
The Company made capital expenditures of $79.1 million, $89.5 million, and
$113.8 million for the years ended December 31, 1995, 1996 and 1997,
respectively, and $55.5 million for the nine months ended September 30, 1998.
The Company estimates that for the year ending December 31, 1998, it will make
capital expenditures of $80.2 million, of which $42.1 million will be for
replacement capital expenditures and $38.1 million will be for expanding
capacity and developing new mines. The Company currently anticipates a total of
$108.0 million of capital expenditures in the year ending December 31, 1999,
$38.0 million for replacement of and improvements to equipment and facilities,
$22.0 million for expansion at Mid-Vol, $38.0 million for expansion at Bowie,
$6.0 million for the manufacture of an additional Addcar highwall mining system
and $4.0 million for expansion at Zeigler's facilities.
 
Since the Senior Note Exchange, the Company's principal liquidity requirements
have been for debt service requirements under the Notes, the Subordinated Notes
the Senior Credit Facility, other outstanding indebtedness, and for working
capital needs and capital expenditures, including future acquisitions. The
 
                                       62

 
Company's ability to make scheduled payments of principal of, or to pay the
interest or Liquidated Damages, if any, on, or to refinance, their indebtedness
(including each issue of the Notes and the New Senior Notes), or to fund
planned capital expenditures will depend on its future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond their control. Based
upon the current level of operations and anticipated cost savings and operating
improvements, the Company believes that cash flow from operations and available
cash, together with available borrowings under the Senior Credit Facility, will
be adequate to meet the Company's liquidity needs for the reasonably
foreseeable future. However, the Senior Credit Facility and the New Senior
Notes will mature prior to the maturity of the Notes. The Company will likely
need to refinance such indebtedness upon or prior to their respective
maturities as well as all or a portion of the principal of the Notes on or
prior to maturity. There can be no assurance that the Company's business will
generate sufficient cash flow from operations, that anticipated cost savings
and operating improvements will be realized or that future borrowings will be
available under the Senior Credit Facility in an amount sufficient to enable
the Company to service its indebtedness, including the Notes and the New Senior
Notes, or to fund its other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all. See "Risk Factors."
 
Hedging Policy
 
The Company has not historically purchased or sold coal future contracts or
engaged in financial hedging transactions to any material extent, although it
may do so in the future. A subsidiary of Zeigler was actively engaged in
financial hedging transactions through June 2, 1998, however, that subsidiary
is currently being held for sale. The Company may from time to time enter into
contracts to supply coal to utilities or other customers prior to acquiring the
coal reserves necessary to meet all of its obligations under these contracts
but it does not expect this practice to impact its results of operations
materially in the near term. See "Risk Factors--Reliance on Long-Term Coal
Supply Contracts."
 
Inflation
 
Due to the capital-intensive nature of the Company's activities, inflation may
have an impact on the development or acquisition of mining operations, or the
future costs of final mine reclamation and the satisfaction of other long-term
liabilities, such as health care or pneumoconiosis (black lung) benefits.
However, inflation in the United States has not had a significant effect on the
Company's operations in recent years.
 
Recent Accounting Pronouncements
 
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued which
establishes new rules for the reporting and display of comprehensive income and
its components. This statement had no impact on the Company as the Company
currently has no transactions which give rise to differences between Net Income
and Comprehensive Income.
 
Also in June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information" ("SFAS 131") was issued which establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This statement supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." The new standard becomes
effective for the Company's 1998 fiscal year-end and requires comparative
information from earlier years be restated to conform to requirements of this
standard. The Company is evaluating the requirements of SFAS No.131 and the
effects, if any, on the Company's current reporting and disclosures.
 
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" was issued which improves and standardizes
disclosures by eliminating certain existing reporting requirements and adding
new disclosures. The statement addresses disclosure issues only and does not
change the measurement of recognition provisions specified in previous
statements. The statement supersedes SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Accounting for Settlements and Curtailments of
 
                                       63

 
Defined Benefit Pension Plans and for Termination Benefits" and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." The
Company intends to adopt this statement for its 1998 fiscal year-end.
 
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133") was issued which establishes accounting and reporting
standards for derivative instruments and for hedging activities. This Statement
amends FASB Statement No. 52, Foreign Currency Translation, to permit special
accounting for a hedge of a foreign currency forecasted transaction with a
derivative. It supersedes FASB Statements No. 80, Accounting for Future
Contracts, No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, and No. 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments. It amends FASB Statement No. 107, Disclosures
about Fair Value of Financial Instruments, to include in Statement No. 107 the
disclosure provisions about concentrations of credit risk from FASB Statement
No. 105. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is evaluating the requirements of
SFAS No. 133 and the effect, if any, on the Company's current reporting and
disclosures.
 
Effective January 1, 1999, the Company will adopt Statement of Position (SOP)
98-5 Reporting on the Costs of Start-Up Activities. The new statement requires
that the costs of start-up activities be expensed as incurred. The Company has
not yet evaluated the impact of this statement on the results of operations or
financial position.
 
Impact of Year 2000 Issue
 
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations and the ability to
engage in normal business activities. Based on the Company's ongoing assessment
of its business information systems, the Company determined that its key
business systems are substantially compliant with year 2000 requirements. The
Company is currently in the process of deploying a new company wide management
and accounting system which is expected to be functional in March 1998. This
system is year 2000 compliant and is being installed due to additional
functionality needed due to the growth of the Company. Non-information
technology components could have an impact on the Company. Management is
currently in the process of reviewing all non-information technology components
including embedded technology, equipment related hardware and software, as well
as communication systems with such review expected to be completed by March
1999. Any necessary upgrades or replacements are expected to be completed by
May 1999. The Company is not materially reliant on third party systems (e.g.
electronic data interchange) to conduct business.
 
The Company presently believes that the year 2000 issue will not pose
significant operational problems for its business systems. However, if any
needed modifications and conversions were not made, or were not completed
timely, the year 2000 issue would likely have a material impact on the
operations of the Company. The Company's total year 2000 project cost is not
expected to be material, based on presently available information. However,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted and would not have an adverse
effect on the Company's systems. The Company has determined it has no exposure
to contingencies related to the year 2000 issue for the majority of the
products it has sold. If any of the Company's suppliers or customers do not, or
if the Company itself does not, successfully deal with the year 2000 issue, the
Company could experience delays in receiving or shipping coal and equipment
that would increase its costs and that could cause the Company to lose revenues
and even customers and could subject the Company to claims for damages.
Customer problems with the year 2000 issue could also result in delays in the
Company invoicing its customers or in the Company receiving payments from them
that would affect the Company's liquidity. Problems with the year 2000 issue
could affect the activities of
 
                                       64

 
the Company's customers to the point that their demand for the Company's
products is reduced. The severity of these possible problems would depend on
the nature of the problem and how quickly it could be corrected or an
alternative implemented, which is unknown at this time. In the extreme such
problems could bring the Company to a standstill.
 
The Company, based on its normal interaction with its customers and suppliers
and the wide attention the year 2000 issue has received, believes that its
suppliers and customers will be prepared for the year 2000 issue. There can,
however, be no assurance that this will be so. In February 1999 the Company has
requested from all our major customers and suppliers written assurances as to
their year 2000 compliance. Some risks of the year 2000 issue are beyond the
control of the Company and its suppliers and customers. For example, the
Company does not believe that it can develop a contingency plan which will
protect the Company from a downturn in economic activity caused by the possible
ripple effect throughout the entire economy that could be caused by problems of
others with the year 2000 issue.
 
The Company will utilize both internal and external resources to test its
business systems for year 2000 compliance. The Company anticipates completing
its year 2000 testing within one year, which is prior to any anticipated impact
on its operating systems. For 1999 the Company has budgeted $0.1 million for
assessment and testing of year 2000 compliance by outside service providers.
Information technology costs specifically for the year 2000 issue in excess of
normal operations to cover assessment, remediation and testing are not expected
to exceed $0.5 million and will be expensed as incurred. The Company has not
yet seen any need for contingency plans for the year 2000 issue, but this need
will be continuously monitored as the Company acquires more information.
 
The costs of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the ability to locate and
correct all relevant computer codes, the ability to successfully integrate the
business systems of newly acquired entities and similar uncertainties. See
"Risk Factors--Impact of Year 2000 Issue."
 
                                       65

 
                               THE COAL INDUSTRY
 
General
 
According to data compiled by the Energy Information Administration of the U.S.
Department of Energy, U.S. coal production totaled 1.09 billion tons in 1997, a
2.8% increase from the 1.06 billion tons produced in 1996 and a record high.
The increase in 1997 coal production levels was driven by: (i) the lower cost
of generating electricity with coal compared to oil; (ii) decreased reliance on
nuclear powered generation; (iii) volatile natural gas prices; and (iv) strong
economic growth. Total U.S. coal consumption reached 1.06 billion tons in 1997,
a 2.1% increase from 1996. Approximately 89.0% of the coal consumed in the
United States is used by utilities for the generation of electricity, and coal
continues to be the principal energy source for U.S. utilities, with its share
of total electricity generation rising from 56.0% in 1996 to 57.0% in 1997, as
compared with 20.1% from nuclear, 10.8% from hydroelectric and 9.1% from gas-
fired facilities in 1997. In the last three years, coal prices under long-term
sales contracts have generally remained steady; however, spot market coal
prices have experienced greater fluctuation due to seasonal variations in
supply and demand caused by weather. Despite the increased consumption and the
many inefficient mines that have closed in the last 10 years, coal mining
companies with improving productivity have filled the increasing demand without
price increases. Increased competition in the generation of electricity is
forcing utility buyers to purchase coal more selectively. This heightened
fiscal responsibility has led to lower stockpiles, increased spot market
activity and shorter contract terms, which may create greater price volatility
than has been experienced in the past.
 
According to statistics compiled by the federal government, the number of
operating mines has declined 47.3% from 1987 through 1997, even though
production during that same time has increased 21.2%. Productivity gains have
contributed to the stability of coal prices in recent years. Recently there has
been significant consolidation of coal producers in the United States. The 10
largest coal producers in 1987 accounted for 36.4% of total domestic coal
production. After giving pro forma effect to the Recent Acquisitions, the 10
largest coal companies accounted for 62% of total domestic coal production in
1997.
 
According to a recent report by Energy Ventures Analysis, Inc. ("EVA"), the
demand for steam coal and the demand for coal by electric utilities in the
United States generally is expected to increase steadily over the next 13
years. In addition, clean air concerns and legislation have increased
consumption of low-sulfur products mined in Central Appalachia and the western
United States. The following table highlights the increases in coal demand as
projected by EVA:
 


                                                     Coal Demand Forecast
                                                 -------------------------------
                                                 1995   1997   2000  2005  2010
                                                 -----  -----  ----- ----- -----
                                                     (in millions of tons)
                                                     ---------------------
                                                            
Domestic
 Utility........................................   828    885    979 1,057 1,112
 Metallurgical..................................    33     32     30    29    27
 Industrial/Other...............................    81     77     78    81    79
                                                 -----  -----  ----- ----- -----
    Total Domestic..............................   942    994  1,087 1,167 1,218
Export
 Steam..........................................    40     31     31    30    31
 Metallurgical..................................    50     52     45    40    36
                                                 -----  -----  ----- ----- -----
    Total Export................................    90     83     76    70    67
                                                 -----  -----  ----- ----- -----
Total Demand.................................... 1,032  1,077  1,163 1,237 1,285
Consumers Stock Change..........................    (2)   (16)   --    --    --
                                                 -----  -----  ----- ----- -----
Total Consumption............................... 1,030  1,061  1,163 1,237 1,285
                                                 -----  -----  ----- ----- -----

 
Coal Types
 
In general, coal is classified by Btu content and sulfur content. In ascending
order of heat values, the four basic types of coal are lignite, subbituminous,
bituminous and anthracite. Coal of all geological composition is characterized
by end use as steam coal. Certain bituminous coals may be classified as
metallurgical coal.
 
                                       66

 
  Lignite Coal. Lignite coal is a brownish-black coal with a Btu content that
  generally ranges from 3,500 to 8,300 Btus per pound. Major lignite
  operations are located in Texas, North Dakota, Montana and Louisiana.
  Lignite coal is used almost exclusively in power plants located adjacent to
  such mines because any transportation costs, coupled with the mining costs,
  would exceed the price a customer would pay for such low-Btu coal.
 
  Subbituminous Coal. Subbituminous coal is a black coal with a Btu content
  that ranges from approximately 8,300 to 11,500 Btus per pound. Most
  subbituminous reserves are located in Montana, Wyoming, Colorado, New
  Mexico, Washington and Alaska. Subbituminous coal is used almost
  exclusively by electric utilities and some industrial consumers.
 
  Bituminous Coal. Bituminous coal is a "soft" black coal with a Btu content
  that ranges from 10,500 to 14,000 Btus per pound. This coal is located
  primarily in Appalachia, the Midwest, Colorado and Utah, and is the type
  most commonly used for electric power generation in the United States.
  Bituminous coal is used for utility and industrial steam purposes, and as a
  feedstock for metallurgical purposes, which is used in steel production.
  Coal used in metallurgical processes has higher expansion/contraction
  characteristics than steam coal.
 
  Anthracite Coal. Anthracite coal is a "hard" coal with a Btu content that
  can be as high as 15,000 Btus per pound. Anthracite deposits are located
  primarily in the eastern region of Pennsylvania, and are used primarily for
  utility, industrial and home heating purposes.
 
Coal Qualities
 
Steam Coal
 
The primary factors considered in determining the value and marketability of
steam coal are the Btu content, the sulfur content and the percentage of ash
(small particles of inert material), moisture and volatile matter. The Btu
content provides the basis for satisfying the heating requirements of boilers.
Coal having a lower Btu content frequently must be blended with coal having a
higher Btu content to allow the consumer to utilize the coal efficiently in its
operations. Due to the restrictive environmental regulations regarding sulfur
dioxide emissions, coal is commonly described with reference to its sulfur
content. Coal that emits no more than 1.6 pounds of SO/2//MMBtu when burned is
considered low-sulfur coal. Coal that emits no more than 1.2 pounds of
SO/2//MMBtu is considered compliance coal. Coal that emits no more than 0.8
pounds of SO/2//MMBtu is called super-compliance coal. Super-compliance and
compliance coal exceed the current requirements of Phase I of the Clean Air Act
Amendments of 1990 (the "Clean Air Act Amendments") and meet or exceeds the
prospective requirements of Phase II of that legislation. Since super-
compliance and compliance coal exceed the Phase I requirements, consumers using
such coal can either earn sulfur emission credits, which can be sold to other
coal consumers, or blend the coal with higher sulfur coal to lower the overall
sulfur emissions without having to install expensive sulfur-reduction
technology (e.g., scrubbers, etc.). Super-compliance coal is desirable because
utilities can burn it without blending and earn sulfur emission credits or
blend it with higher-sulfur non-compliance coal even under Phase II of the
Clean Air Act Amendments. Generally, coal with 2.5 pounds or less of SO/2/ /MM
Btu is near low-sulfur and can be burned without scrubbing, by utilizing
blending with super-compliance coal or purchasing reasonable quantities of
emission credits to comply with Phase II of the Clean Air Amendments.
 
The non-combustible nature of ash diminishes the heating value of the coal
(i.e., the higher the percentage of ash, the lower the heating value). For
electric utilities, the percentage of ash is important not only for its effect
on heating value, but also because it affects the amount of combustion by-
products. Electric utilities typically require coal with an ash content ranging
from 6% to 15%, depending on individual power plant specifications. Ash
standards for metallurgical coal are more stringent than ash standards for
steam coal, typically requiring less than 8% ash. The percentage of moisture is
important because the higher the moisture, the lower the heating value or Btus
per pound. Also, if the percentage of moisture is too high, customers may
experience handling problems with the coal. Moisture concerns are principally
related to coal from the Powder River Basin. Volatile matter is the percentage
of combustible matter which is easily vaporized in the combustion process, and
is important for electric utilities because power plant boilers are designed to
burn coal having a particular volatile matter. Most utility power plants are
designed to burn medium- to high-volatile coal.
 
                                       67

 
Metallurgical Coal
 
Sulfur content, ash content, volatility, carbon content and certain other
coking characteristics are especially important for determining the value and
marketability of metallurgical coal. Metallurgical coal is fed into a coke oven
where it is heated in an oxygen deficient environment, producing a high carbon
content, porous coke which is used to fuel blast furnaces. It is important in
the coking process to create a stable and high strength coke. This is done by
the careful blending of low volatile and high volatile met coals to create the
proper coke characteristics. The lower the volatile characteristics and
percentage of ash in coal, the higher the yield and carbon content of the coke.
However, too much low volatility coal may cause coke to stick in the coke oven
if it is an expanding coal.
 
Coal Regions
 
The majority of U.S. coal production is generated from six regions: Northern
Appalachia, Central Appalachia, Southern Appalachia, the Illinois Basin, the
Rocky Mountains, and the Powder River Basin. The geographic areas that comprise
the six regions and characteristics of the coal in those regions are as
follows:
 
  Northern Appalachia. Northern Appalachia consists of northern West
  Virginia, Pennsylvania and Ohio. This coal is generally high in Btu content
  (12,000-13,000 Btus per pound of coal). However, the sulfur content in this
  coal (1.5%-2.5%) generally does not meet the Phase II standards of the
  Clean Air Act Amendments.
 
  Central Appalachia. Central Appalachia consists of southern West Virginia,
  eastern Kentucky and Virginia. The coal in this region is generally low in
  sulfur (0.7%-1.5%) and high in Btu content (12,000-13,500 Btus per pound of
  coal). The majority of this coal complies with Phase I of the Clean Air Act
  Amendments and, after the implementation of Phase II of that legislation,
  this coal is expected to be in high demand. Central Appalachia sources
  provide most of the U.S.'s overseas export coal.
 
  Southern Appalachia. Southern Appalachia consists of Tennessee and Alabama.
  Coal from this region also has a low sulfur content (0.7%-1.5%), which is
  generally acceptable for Phase I of the Clean Air Act Amendments, and a
  high Btu content (12,000-13,000 Btus per pound of coal). While productivity
  is impaired by the region's highly variable thin seams, readily accessible
  waterways and proximity to southern utility plants help to reduce delivery
  costs of coal from this region to utility customers.
 
  The Illinois Basin. The Illinois Basin consists of western Kentucky,
  Illinois and Indiana. Coal from this region varies in Btu content (10,000-
  12,000 Btus per pound of coal) and has a high sulfur content (2.5%-3.5%).
  Although there are exceptions, generally no unwashed Illinois Basin coal
  satisfies the Phase I or Phase II standards of the Clean Air Act
  Amendments. However, Illinois Basin coal is burned in plants equipped with
  scrubbers, blended with low-sulfur coal or burned by plants with SO/2/
  emission credits.
 
  The Rocky Mountains. The Rocky Mountain region consists of Utah and
  Colorado. The coal in this region is low in sulfur content (0.4%-0.5%) and
  varies in Btu content (10,500-12,800 Btus per pound of coal). This coal
  complies with Phase I and Phase II of the Clean Air Act Amendments. A
  portion of U.S. coal exports come from this region.
 
  The Powder River Basin. The Powder River Basin consists mainly of
  northeastern Wyoming and southeastern Montana. This coal is very low in
  sulfur content (0.25% to 0.65%), low in Btu content (8,000-9,200 Btus per
  pound of coal) and very high in moisture content (20%-35%). All of this
  coal complies with Phase I and Phase II of the Clean Air Act Amendments,
  but many utilities cannot burn it without derating their plants, unless it
  is blended with higher Btu coal.
 
Mining Methods
 
Coal is mined using either surface or underground methods. The method utilized
depends upon several factors, including the proximity of the target coal seam
to the earth's surface, and the geology of the surrounding area. Surface
techniques generally are employed when there are favorable stripping ratios,
and underground techniques are used for deeper seams. In 1996, surface mining
accounted for approximately 62% of total U.S. coal production, with underground
mining accounting for the balance of production. Surface mining generally
 
                                       68

 
is less expensive and has a higher recovery percentage than underground mining,
with surface mining typically resulting in the recovery of 80% to 90%, and
underground mining resulting in the recovery of 50% to 60%, of the total coal
from a particular deposit.
 
Surface Mining Methods
 
Mountaintop Removal Mining. Mountaintop removal mining is a surface mining
method in which all material above the coal seam is removed prior to removal of
the coal, leaving a relatively level plateau in place of the hilltop after
mining. A more complete recovery of the coal is accomplished through this
method; however, its feasibility depends on the amount of overlying material in
relation to the coal to be removed.
 
Area Mining. Area mining is essentially a large-scale moving trench. The
initial overburden is removed from a trench which progresses forward over the
coal seam. As the trench moves forward, the stripped overburden is moved to the
back side of the trench. Area mining is usually performed with draglines, truck
and shovel units and large dozers.
 
Contour Mining. Contour mining is a surface mining method conducted on coal
seams where mountaintop removal is not feasible because of the high overburden
ratios. Mining proceeds laterally around a hillside, at essentially the same
elevation, assuming the seam is fairly flat. The contour cut in a coal seam
provides a flat surface that can be used to facilitate highwall mining or the
less efficient auger mining (both discussed below). This is a common surface
mining method in the steeper slopes of the Appalachian coalfields.
 
Auger Mining. Auger mining is a surface mining method in which miners remain
outside of the mine and a large, corkscrew-like machine (the "auger") bores
into the side of a hill and extracts coal by "twisting" it out. This method is
less efficient than highwall mining, but is used by many of the Company's
competitors. Auger mining generally permits the extraction of coal to depths of
only 300 feet or less.
 
Highwall Mining. Highwall mining is an innovative mining method that uses the
patented Addcar highwall mining system developed by Addington Resources under
the guidance of Larry Addington. The Addcar mining system bores into the face
of a coal seam using a continuous miner and transports coal to the mine opening
using cascading conveyor belts with wheels on a series of cars connected to the
continuous miner. The Addcar mining system is remote-controlled by an employee
in a climate-controlled enclosure on the launch vehicle (a mobile structure
containing power supply, operating controls, and alignment sensors for remotely
controlling the underground portion of the Addcar system), which is located at
the mine entrance on the surface. Trench, box, open-pit or contour cuts allow
the highwall mining equipment to be utilized as the primary production machine
for projects requiring large volumes of coal production. The Addcar system
allows the Company to reduce operating costs and extract coal profitably from
reserves that would otherwise have been uneconomical to mine. The Addcar system
allows the Company to drive down stripping ratios, causing the extraction cost
per ton to decrease significantly.
 
Deep Mining Methods
 
Room and Pillar Mining. Room and pillar mining is a method of deep mining which
uses remote-controlled continuous miners that cut a network of interconnected
20-foot wide passages as high as the coal seam. Roof bolters stabilize the mine
roof and pillars are left to provide overall roof support. Significant
technological advances have enabled this mining method to be the most common
method of deep mining. Room and pillar mining is used as a primary recovery
method in smaller mines and for developing a network of panels for longwall
mining.
 
Longwall Mining. Longwall mining is a deep mining method that uses powerful
hydraulic jacks, varying from four feet to 12 feet in height, to support the
roof of the mine while mobile shearing machines extract the coal. High capacity
chain conveyors then move the coal to a high capacity mine belt system for
delivery to the surface. The longwall machine generally cuts blocks of coal,
referred to as longwall panels, that have a width of approximately 900 feet and
a length ranging from 9,000 to 11,000 feet. Longwall mining is a low-cost,
high-output method of deep mining that results in the recovery of approximately
60% of coal reserves. In addition,
 
                                       69

 
longwall mining is a much faster method of mining coal than room and pillar
mining. After a longwall panel is cut, the longwall machine must be
disassembled and moved to the next panel location, a process which generally
takes one to two weeks.
 
Coal Preparation and Blending
 
Depending on coal quality and customer requirements, raw coal may be shipped
directly from the mine to the customer. Generally, raw coal from mountaintop
removal, contour and strip mines can be shipped in this manner. However, most
raw coal is not of adequate quality to be shipped directly to the customer, and
must be processed in a preparation plant. Preparation plants separate the coal
from the impurities. Processing the coal in a preparation plant upgrades the
quality and heating value of the coal by removing or reducing sulfur and ash-
producing materials, but entails additional expense and results in some loss of
coal. Coal blending or mixing of various sulfur and ash contents is often
performed at a preparation plant or loading facility to meet the specific
combustion and environmental needs of customers. Coal blending is important for
increasing profits because blending minimizes the cost of meeting the quality
requirements of specific customer contracts, thereby optimizing contract
revenue.
 
Customers
 
Over the last 10 years, coal consumption in the United States has generally
experienced steady annual growth, reaching a record level of 1.06 billion tons
in 1997. This steady growth in coal consumption is attributable to similar
growth in the demand for electricity over the same period, as the electric
utility industry accounts for 87% of domestic coal consumption. In 1997, coal-
fired utilities generated approximately 57% of the nation's electricity,
followed by nuclear (20.1%), hydroelectric (10.8%) and gas-fired (9.1%)
utilities. According to EVA and other industry sources, over the next several
years, electricity usage is expected to increase at an average annual rate of
1.4% to 1.9%. Because coal is one of the least expensive and most abundant
resources for the production of electricity, and imports of coal historically
have not exceeded 1.0% of domestic coal consumption, domestically produced coal
is expected to continue to play a significant role in the production of
electricity in the future.
 
 
                                       70

 
                       Electricity Generation Fuel Type
                                     1997

                           [PIE CHART APPEARS HERE]

                              Coal       (57.0%)
                              Nuclear    (20.1%)
                              Hydro      (10.8%)
                              Gas         (9.1%)
                              Other*      (3.0%) 
 
Electricity can be generated less expensively using coal than natural gas, oil
or nuclear energy. The delivered cost of coal for utilities averaged
$1.273/MMBtu in 1997 compared to $2.761/MMBtu for natural gas and $2.879/MMBtu
for oil. Although the cash operating costs of nuclear and hydroelectric energy
are less expensive than coal, no new nuclear plant permits have been issued
since 1978, and many existing plants are near the end of their useful lives.
Additionally, the availability of hydroelectricity is limited. Oil and all
other petroleum by-products accounted for less than 2.5% of all utility fuel
consumption in both 1990 and 1997. The table below illustrates the relative
cost advantage of coal over certain other power generation sources:
 
                       Average Total Generating Costs(1)
 


                                                                 1990(2) 1997(3)
                                                                 ------- -------
                                                                   
   Coal......................................................... $20.06  $17.24
   Nuclear......................................................  22.36   18.98
   Hydroelectricity.............................................   3.04    5.86
   Natural Gas..................................................  28.84   35.12

- --------
(1) Average annual generating costs per Mwh produced for all U.S. power plants;
    costs are all-in and include the cost of fuel, depreciation of plant, and
    overhead and maintenance.
(2) Source: RDI Power Data 1996. FERC Form 1 Data.
(3) Source: Monthly operating data from RDI, 1998 from FERC reports.
 
                                       71

 
Utility Deregulation
 
Since 1935, domestic electric utilities have operated in a regulated
environment, with prices and return on investment being determined by state
utility and power commissions. In April 1996, the Federal Energy Regulatory
Commission ("FERC") established rules providing for open access to electricity
transmission systems, thereby initiating consumer choice in electricity
purchasing and encouraging competition in the generation of electricity. It is
anticipated that the FERC rules will create a national market for the sale of
wholesale electricity where competition will primarily focus on price. Within
the electric utility industry, the low-cost producers of electricity should
benefit most due to the increased focus on price. Among the eastern states,
Kentucky, South Carolina, West Virginia, Indiana, Virginia, Ohio and Georgia
are in the top half of low cost electricity producers. Competition will likely
benefit the coal industry generally because coal is a relatively low-cost
source of electricity generation. Within the coal industry, companies with
customers that are low-cost producers and have excess capacity are likely to
see the greatest increase in coal demand. The Company's primary customers are
low-cost electricity producers located in the eastern half of the United
States.
 
The Company's primary marketing focus is on states east of the Mississippi
River. The following table highlights the states east of the Mississippi River
where the Company sells significant quantities of coal. The Company currently
sells coal to utility customers who generally have low industrial electricity
prices. Since utilities are currently regulated, the Company believes that the
sales price of their electricity is a reasonable proxy for the relative
generation costs within those states. Management believes that the Company is
positioned as a low cost coal supplier to those utilities which are relatively
low cost and that those low cost utilities will benefit from deregulation.
Consequently, management believes that the Company is well positioned to
benefit from electric utility deregulation.
 


                         1996 Industrial
Eastern States            Electric Rate
- --------------           ---------------
                         (cents per kWh)
                      
Kentucky*...............      2.92
Wisconsin...............      3.66
South Carolina*.........      3.89
Alabama.................      3.90
West Virginia*..........      3.91
Indiana*................      3.93
Virginia*...............      3.99
Maryland................      4.15
Ohio*...................      4.21
Georgia*................      4.29
Mississippi.............      4.41
Tennessee*..............      4.52
Delaware................      4.68
North Carolina*.........      4.79
Michigan................      5.08
Florida.................      5.11
Illinois*...............      5.24
New York................      5.62
Pennsylvania............      5.93
Maine...................      6.26
Vermont.................      7.58
Connecticut.............      7.86
New Jersey..............      8.15
Massachusetts...........      8.43
Rhode Island............      8.51
New Hampshire...........      9.16



                         1996 Industrial
Western States            Electric Rate
- --------------           ---------------
                         (cents per kWh)
                      
Idaho...................      2.68
Washington..............      2.85
Montana.................      3.30
Oregon..................      3.41
Wyoming.................      3.45
Nebraska................      3.68
Utah....................      3.70
Oklahoma................      3.78
Iowa....................      3.91
Texas...................      4.03
Minnesota...............      4.26
Louisiana...............      4.32
Colorado................      4.35
New Mexico..............      4.35
Missouri................      4.44
North Dakota............      4.44
South Dakota............      4.45
Arkansas................      4.47
Kansas..................      4.70
Nevada..................      4.90
Arizona.................      5.19
California..............      6.97

- --------
An asterisk indicates States where the Company has significant customers.
SOURCE: Department of Energy/Energy Information Administration, Electric Sales
and Revenue, 1996.
 
                                       72

 
Environmental Laws
 
Various federal, state and local environmental laws have had, and will continue
to have, a significant effect on the domestic coal industry. These laws govern
matters such as employee health and safety, limitations on land use, permitting
and licensing requirements, air quality standards, water pollution, plant and
wildlife protection, reclamation and restoration of mining properties after
mining is completed, discharge of materials into the environment, surface
subsidence from underground mining and the effects of mining on groundwater
quality and availability. In addition, the electric utility industry is subject
to extensive regulation regarding the environmental impact of electricity
generation activities which could affect demand for coal. New legislation or
regulations could be adopted that may have a significant impact on coal mining
operations or the ability of coal customers to use coal. See "Risk Factors--
Government Regulation of the Mining Industry" and "Government Regulation--
Environmental Laws."
 
                                       73

 
                                    BUSINESS
 
Overview
 
The Company is one of the largest coal producers in the United States. After
giving pro forma effect to the Transactions, for 1997 the Company would have
been (i) the fourth largest steam coal company in the United States as measured
by revenues, (ii) the second largest steam coal producer in the Central
Appalachian coal region as measured by production, (iii) the largest steam coal
producer in eastern Kentucky as measured by production, and (iv) among the top
25% of coal producers in productivity in eastern Kentucky as measured by tons
per manhour. By integrating the businesses acquired in the Recent Acquisitions,
the Company intends to strengthen its market position while realizing the
benefits of consolidation. The Company believes that the Recent Acquisitions
provide the Company with an opportunity to reduce costs by (i) allowing the
Company to source its customers' coal purchases from multiple mines, thereby
decreasing transportation costs and production costs (ii) increasing
productivity by applying more efficient, lower-cost mining methods and (iii)
eliminating certain corporate overhead expenses by integrating the businesses
acquired in the Recent Acquisitions.
 
The Company mines and markets primarily steam coal at its 49 mines in Kentucky,
West Virginia, Tennessee, Indiana, Illinois, Ohio and Colorado. According to
the reserve studies prepared by Marshall Miller, SESI, Weir, and Norwest, on a
pro forma basis, the Company would have approximately 1.1 billion tons of
proven and probable coal reserves assigned to mining projects. Management
believes that approximately 0.4 billion tons, or 36%, of the Company's assigned
coal reserves constitute low-sulfur coal. A total of 0.8 billion tons, or 73%,
of the Company's reserves are Near Low-Sulfur Coal. Near Low-Sulfur Coal means
coal with less than 2.5 pounds of So/2/ per million Btus. In addition, 1.3
billion tons of unassigned reserves increase the Company reserve total to 2.4
billion tons.
 
The Company's primary customers are low-cost electric utility companies located
in the eastern half of the United States. After giving pro forma effect to the
Transactions for the nine-month period ended September 30, 1998, the Company
generated 74% of its revenues under 51 long-term sales contracts (contracts
having an original term of more than one year) for sale of steam coal to
domestic electric utilities. As of September 30, 1998, on a pro forma basis,
the Company's portfolio of long-term sales contracts had a volume-weighted
average remaining term of 5.4 years (excluding option periods). The remainder
of the Company's steam coal is sold under short-term sales contracts and on the
spot market. By realizing the transportation, mining method and corporate
efficiencies of the Recent Acquisitions, the Company believes that it is well-
positioned to maintain and increase its base of long-term sales contracts with
these customers. The Company also supplies premium-quality, mid- and low-
volatility metallurgical coal to certain integrated steel producers. After
giving pro forma effect to the Transactions, for the nine months ended
September 30, 1998, the Company sold 41.4 million tons of steam coal and 0.7
million tons of metallurgical coal and generated $1.03 billion of revenues and
$187.4 million of Adjusted EBITDA.
 
The Company believes that it is well-positioned to benefit from the growth in
demand for coal anticipated by EVA. According to data compiled by the Energy
Information Administration of the U.S. Department of Energy, total U.S. coal
production reached 1.09 billion tons in 1997, an increase of 2.8% from 1996.
Electric utilities accounted for more than 87% of domestic coal consumption in
1997, and coal-fired facilities generated approximately 57% of the nation's
electricity in 1997. The increase in coal production levels has been driven by:
(i) the lower cost of generating electricity with coal compared to oil, natural
gas and nuclear power; (ii) decreased reliance on nuclear powered electricity
generation; (iii) volatile natural gas prices; and (iv) strong economic growth,
although there can be no assurance as to future demand. Based on studies by
Hill and Associates, Resource Data International and EVA, the Company believes
that the demand for coal will continue to increase among low-cost producers of
electricity with excess capacity in Kentucky, Tennessee, Indiana, Ohio, South
Carolina and West Virginia.
 
                                       74

 
Competitive Strengths
 
The Company believes that it possesses the following competitive strengths:
 
  Regional Market Focus. The Company has focused its recent growth on the
  Central Appalachian and Illinois Basin coal regions. With its 46 mines in
  those regions, the Company can provide its principal customers with
  multiple delivery sources, reduce transportation expense for both the
  Company and its customers and maximize production at lower-cost mines.
  After giving pro forma effect to the Transactions, the Company believes it
  would have been the second and third largest steam coal producer in the
  Central Appalachian and Illinois Basin coal regions, respectively, in 1997.
  Approximately 51% of the Company's reserves in the Central Appalachian coal
  region are comprised primarily of low-sulfur and compliance coal, which the
  Company believes will give it a competitive advantage because of the more
  stringent air quality requirements under Phase II of the Clean Air Act
  Amendments. These amendments are currently scheduled to go into effect in
  2000. The majority of the Company's higher sulfur coal reserves are located
  in the Illinois Basin. After giving pro forma effect to the Transactions,
  78% of the Company's production from the Illinois Basin in the twelve-month
  period ended September 30, 1998 would have been sold under long-term sales
  contracts to electric utilities that operate "scrubbed" facilities.
 
  Portfolio of Long-Term Sales Contracts. As of September 30, 1998, after
  giving pro forma effect to the Transactions, the Company had 51 long-term
  sales contracts with utilities, such as the TVA, Carolina Power & Light
  ("CP&L"), Georgia Power, American Electric Power ("AEP"), Cincinnati Gas &
  Electric and Dayton Power & Light, as well as with industrial customers.
  The Company's pro forma portfolio of long-term contracts had a volume-
  weighted average remaining term of approximately 5.4 years (excluding
  option periods) as of that date. After giving pro forma effect to the
  Transactions, during the nine-month period ended September 30, 1998, the
  Company generated more than 74% of its revenues from long-term sales
  contracts, with the remainder being derived from sales pursuant to short-
  term contracts and on the spot market.
 
  Low-Cost Operations. The Company believes its production costs are below
  those of its primary competitors. The Company attributes its ability to
  maintain low-cost operations to: (i) its patented Addcar highwall mining
  system, which allows the Company to recover coal at a lower cost (up to 30%
  less cost), or mine coal otherwise unprofitable due to its high stripping
  ratios; (ii) its substantial use of mountaintop removal mining; (iii) its
  tailored cast blasting techniques reduce the cost of overburden removal;
  (iv) the close proximity of its coal reserves to customers and the
  resulting transportation efficiencies; and (v) maximization of blending raw
  coals to minimize costs and optimize revenues. The Company believes it can
  apply these competitive advantages to many of the properties acquired in
  the Recent Acquisitions.
 
  Successful Integration of Acquisitions. Since November 1995, the Company
  expanded its operations through a series of acquisitions, growing from
  annual production of approximately 3 million tons in fiscal 1995 to
  approximately 53 million tons during the twelve months ended September 30,
  1998 on a pro forma basis. The Company has demonstrated its ability to
  integrate acquired properties and companies successfully. This success is
  attributable to: (i) reducing operating costs through the implementation of
  better mining methods, including use of the Addcar highwall mining system;
  (ii) shifting production to lower-cost operations; and (iii) reducing
  corporate overhead expense through headcount reduction. The Company
  believes that similar opportunities exist to improve the operating
  performance of its more recently acquired businesses.
 
  Addcar Highwall Mining System. The Company's patented Addcar highwall
  mining system gives the Company both a proprietary low-cost mining method
  and a source of revenue from the lease of Addcar systems to non-competing
  third parties. The Addcar system allows the Company to drive down effective
  stripping ratios, resulting in a significant decrease in the extraction
  cost per ton of coal. In addition, the Addcar system allows the Company to
  reduce operating costs and to extract coal profitably from reserves that
  may otherwise have been uneconomical to mine. The Company plans to expand
  its use of the Addcar highwall mining system to the businesses acquired in
  the Recent Acquisitions.
 
                                       75

 
  Experienced Management. The Company's senior management team has an average
  of 20 years of experience in the coal industry. This management team has a
  proven record of developing innovative, low-cost operations, maintaining
  strong customer relationships and making strategic, opportunistic
  acquisitions.
 
Business Strategy
 
The Company has adopted a business strategy of consolidating regionally. This
involves integrating the businesses acquired in the Recent Acquisitions and
acquiring complementary reserves while continuing to focus on its existing
customer base. To implement this strategy, the Company will seek to:
 
  Continue Reducing Costs. The Company continues to focus on cost reductions
  at its current and recently acquired operations. By increasing production
  at the Company's most efficient mines and shifting production to sites that
  are nearest to its customers' facilities, the Company believes that it can
  improve its operating margins. The Company will concentrate its cost
  reduction efforts on maximizing the benefits of low-cost mining methods,
  reducing transportation costs by sourcing coal from multiple mines and
  eliminating certain redundant corporate expenses. The Company believes that
  prudent capital investment in new production technologies, such as the
  Addcar highwall mining system, will further enable it to increase
  productivity. The regional focus on production and reserves will allow the
  Company to shift production for some long-term sales contracts to mines
  closer to the customer, thereby allowing the Company to eliminate
  incremental transportation costs. Streamlining of the Company's selling and
  administrative functions will further reduce expenses.
 
  Expand Use of Addcar Systems. The Company believes its Addcar highwall
  mining systems provide it with significant competitive advantages. The
  Company intends to expand the use of the Addcar systems to its recently
  acquired reserves to reduce operating costs and to mine coal reserves that
  its competitors cannot economically mine. For example, the Company plans to
  use the Addcar systems in its West Virginia and eastern Kentucky
  operations, which the Company believes will allow it to increase coal
  production and reduce costs. The Company is leasing three Addcar systems to
  a third party and negotiates the leasing of additional Addcar systems from
  time to time. The Company intends to increase its revenue stream from the
  Addcar system by pursuing additional leasing opportunities.
 
  Focus on Key Electric Utility Customers. The Company intends to focus on
  maintaining and increasing its portfolio of long-term sales contracts with
  customers. Except for certain customers served by the Company's Rocky
  Mountain mine, all of such customers are located in the eastern half of the
  United States. More than 35% of the Company's pro forma sales for the nine-
  month period ended September 30, 1998, were made to operating divisions of
  the TVA, AEP, the Southern Company and CP&L. Through the Recent
  Acquisitions, the Company has increased the number of its electric utility
  customers and expanded the volume of coal sold to these customers.
 
  Focus on Complementary Acquisitions. The Recent Acquisitions enhanced the
  Company's position as a leader in low-cost coal production in the Central
  Appalachian and Illinois Basin coal regions. The Company will seek to
  enhance its regional market position by making complementary acquisitions
  on an opportunistic basis. In the Central Appalachian region, the Company
  plans to expand its low-cost operations further by acquiring complementary
  coal reserves or operations.
 
  Develop Growth Opportunities. The Company believes that its metallurgical
  coal business acquired in the Mid-Vol Acquisition and its super-compliance,
  high Btu coal operations at its Colorado mine present niche opportunities
  for incremental revenue growth. The Company believes that Mid-Vol's
  metallurgical coal production can be enhanced and costs reduced by using
  more advanced mining methods, thereby maximizing sales at this high-margin
  operation. In addition, in order to provide its key customers with super-
  compliance coals that can be blended with the Company's eastern coals to
  produce a very low-sulfur-burn, the Company has developed its reserves in
  Colorado. The Company believes that expanding its low-cost operations in
  Colorado will position it to capture a greater share of the coal market as
  demand for high-Btu, compliance coal increases.
 
 
                                       76

 
Coal Production
 
The Company currently conducts mining operations at a total of 32 surface mines
and 17 deep mines in five regions: Northern Appalachia, Central Appalachia,
Southern Appalachia, the Illinois Basin and the Rocky Mountains. Historically,
approximately 69% of the Company's production has originated from its surface
mines, and the remaining production has originated from its deep mines. The
following table presents each mining region's production, in millions of tons,
for each of the years 1996 and 1997:
 


                                                              1996       1997
                                                           ---------- ----------
                                                           (in millions of tons)
                                                                
Mining Region
  Northern Appalachia.....................................      142.4      149.5
  Central Appalachia......................................      277.3      287.9
  Southern Appalachia.....................................       24.9       24.3
  Illinois Basin..........................................      112.6      110.7
  Rocky Mountains.........................................       70.6       72.7
                                                           ---------- ----------
    Total.................................................      627.8      645.1
                                                           ========== ==========

 
The Company uses mountaintop removal mining wherever possible because it
results in the recovery of more tons of coal per acre and facilitates the
permitting of larger projects, allowing for mining activities over a longer
period of time than would be the case using other mining methods. The Company
also uses other surface mining techniques, including contour mining, to the
extent practicable. The Company currently conducts its highwall mining through
the use of six Addcar highwall mining systems. The Company believes the Addcar
systems allow it to mine coal more cost-effectively than traditional mining
methods in areas where such systems are operable.
 
As part of its strategy to expand its low-cost operations, the Company is
developing longwall panels at its Bowie mine for installation of a longwall
mining system in the fourth quarter of 1999. The longwall mining system will
provide a low-cost, high-volume source of high-quality coal production that
will allow the Company to support a newly acquired TVA contract and to acquire
additional long-term sales contracts. [Disclose that this can't be done without
new lease?]
 
 
                                       77

 
Mining Operations
 
The following table sets forth (in millions of tons) estimated proven and
probable coal reserves for the Company's mining operations as of September 30,
1998, and is derived from reserve studies prepared by Marshall Miller, SESI,
Weir and Norwest.


                                Number Proven and             Average
                                  of    Probable    Average   Percent  Mining
       Mining Operation         Mines   Reserves  Btu Content Sulfur  Method(2)
       ----------------         ------ ---------- ----------- ------- ---------
                                                 (in millions
                                                   of tons)
                                                       
I. NORTHERN APPALACHIA
Evergreen mine.................    1        23      12,300      0.9%     SM
Unassigned Reserves(1).........   --       152
                                 ---     -----
  Subtotal.....................    1       175
II. CENTRAL APPALACHIA
Kentucky
Addington Mining...............    4        52      12,300      0.9      SM*
Crockett.......................    1        14      12,000      1.6      DM
Ikerd-Bandy....................    2        30      12,500      1.1      SM*
Leslie Resources...............    5        46      12,000      1.1      SM
Pike County Coal ..............    7        50      12,700      1.1     DM/SM
Pine Mountain..................    2         8      12,800      1.2      DM
Star Fire......................    1        44      12,800      1.1      SM*
Cyprus Arcland HWM.............    0        20      12,000      1.4    SM/HWM
Wolf Creek.....................    0        17      12,500      1.1      DM
Straight Creek.................    4         7      12,800      1.0     DM/SM
Martiki........................    1        24      12,500      1.0      SM
West Virginia
Battle Ridge...................    2        32      12,300      0.7      SM
Kanawha River Operations.......    4        18      12,300      0.9     DM/SM
Marrowbone.....................    3        25      12,000      0.6     DM/SM
Zeigler Heritage...............    0        54          --      0.6    HWM/SM
Mid-Vol........................    3        51          --      0.6      SM
Unassigned Reserves(1).........   --        55
                                 ---     -----
  Subtotal.....................  39      547
III. SOUTHERN APPALACHIA
Skyline........................    1        12      12,300      1.0      SM
Unassigned Reserves(1).........   --        49      12,200      2.2    DM/SM*
                                 ---     -----
  Subtotal.....................    1        61
IV. ILLINOIS BASIN
Illinois
Elkhart Mine...................    1        70      10,500      3.2      DM
Mine #11.......................    1        17      11,075      3.1      DM
Indiana
Chinook........................    1         7      10,750      3.8      SM
Kindill #1.....................    1        33      11,500      3.8     DM/SM
Kindill #2.....................    1        21      11,600      3.8      SM
Kindill #3.....................    1        45      10,800      1.2      SM
Sycamore.......................    1         8      10,900      2.0      SM
Unassigned Reserves(1).........   --       962
                                 ---     -----
  Subtotal.....................    7     1,163

 
 
                                       78

 


                             Number  Proven and              Average
                               of     Probable     Average   Percent  Mining
      Mining Operation       Mines    Reserves   Btu Content Sulfur  Method(2)
      ----------------       ------ ------------ ----------- ------- ---------
                                    (in millions
                                      of tons)
                                                      
V. ROCKY MOUNTAINS
Bowie.......................    1         63       12,800      0.4      DM
VI. OTHER UNASSIGNED
 RESERVES(1)
Milam ......................    0        242        6,700      1.0      SM
Other Unassigned
 Reserves(1)................    0        150
                              ---      -----
Total Other Unassigned
 Reserves...................    0        392
                              ---      -----
VII. TOTAL RESERVES.........   49      2,401
                              ===      =====

- --------
(1) Assigned Proven and Probable Reserves are those reserves to be mined by
    currently active mining programs. Unassigned Reserves are those reserves
    which are not yet developed.
(2) DM = Deep Mining and SM = Surface Mining. An asterisk indicates locations
    where Addcar highwall mining systems are currently being used.
 
Potential investors should be aware that reserve studies are estimates based on
an evaluation of available data, and actual reserves may vary substantially
from the estimates. Estimated minimum recoverable reserves are comprised of
coal that is considered to be merchantable and economically recoverable by
using mining practices and techniques prevalent in the coal industry at the
time of the reserve study and based upon then-current prevailing market prices
for coal. The Company uses the mining method that it believes will be most
profitable with respect to particular reserves. The Company believes its
current reserves exceed its contractual requirements. Although the reserves
shown in the table above include a variety of qualities of coal, the Company
presently blends coal of different qualities to meet contract specifications.
The Company has blended coal to meet contract specifications for many years.
See "Risk Factors--Reliance on Estimates of Proven and Probable Reserves."
 
The following discussion provides a description of the operating
characteristics of the principal mines and reserves of each of the Company's
mining units.
 
Northern Appalachia Region
 
This region includes all of the Company's mining operations in Ohio and
northern West Virginia. The Company owns and operates 1 surface mine in this
region which produced 2.0 million tons of coal in the twelve-month period ended
September 30, 1998, or approximately 1% of the total coal production in the
region. As of September 30, 1998, the Company had 124 union-free employees in
this region. In the twelve-month period ended September 30, 1998, the Company's
coal production in this region accounted for approximately 4% of the total coal
produced by the Company.
 
Evergreen
 
The Evergreen mine is located in Webster County, West Virginia. The Company
uses the mountaintop removal method to mine five seams of coal at this mine.
Production from this mine in the twelve-month period ended September 30, 1998
was approximately 2.0 million tons, which had an average sulfur content of
0.9%, an average ash content of 12.7% and an average Btu content of 12,300. The
Company employs 124 union-free employees at this mine. Transportation of coal
from this mine is by rail to the Company's loadout. The Company estimates this
mine contains 23 million tons of proven and probable reserves. The Company owns
and operates a preparation plant and a unit train loading facility in
connection with this mine.
 
 
                                       79

 
Central Appalachia Region
 
This region includes all of the Company's mining operations in southern West
Virginia, and eastern Kentucky. The Company owns and operates 39 surface and
deep mines in this region which produced 37.2 million tons of coal in the
twelve-month period ended September 30, 1998, or approximately 13% of the total
coal production in the region. As of September 30, 1998, the Company had 1,017
union and 1,553 union-free employees in this region. In the twelve-month period
ended September 30, 1998, the Company's coal production in this region
accounted for approximately 72% of the total coal produced by the Company.
 
Kentucky
 
Addington Mining
 
Addington Mining's four mines are located in Pike and Breathitt Counties in
eastern Kentucky. The Company uses the mountaintop removal method along with
its patented Addcar highwall mining system to mine four seams of coal at these
mines. Production from these mines in the twelve-month period ended September
30, 1998, was approximately 4.6 million tons, which had an average sulfur
content of 0.9%, an average ash content of 10% and an average Btu content of
12,300. The Company employs 391 union-free employees at these mines. Coal from
these mines is trucked to river and rail loadout facilities. The Company
estimates these mines contain approximately 52 million tons of proven and
probable reserves. The Company owns and operates a storage facility, a
preparation plant and a unit train loadout facility in connection with these
mines.
 
Crockett
 
Crockett's mine is located in Bell County, Kentucky. The Company uses room and
pillar mining to mine 1 seam of coal at this mine. Production from this mine in
the twelve-month period ended September 30, 1998, was approximately 0.5 million
tons, which had an average sulfur content of 1.6%, an average ash content of 8%
and an average Btu content of 12,800. The Company employs 19 union-free
employees at this mine. Transportation of coal from this mine is by truck to a
preparation plant. The Company estimates this mine contains 14 million tons of
proven and probable reserves. The Company owns and operates a preparation plant
and a unit train loading facility in connection with this mine.
 
Ikerd-Bandy
 
Ikerd-Bandy's two mines are located in Perry and Bell counties in eastern
Kentucky. The Company uses surface and highwall mining methods to mine 6 seams
of coal at these mines. Production from these mines in the twelve-month period
ended September 30, 1998, was approximately 1.3 million tons, which had an
average sulfur content of 1.1%, an average ash content of 10% and an average
Btu content of 12,500. The Company employs 104 union-free employees at these
mines. Transportation of coal from these mines is by rail either to a barge or
directly to the customer. The Company estimates these mines contain 30 million
tons of proven and probable reserves. The Company owns and operates a storage
facility, a preparation plant and a loadout facility at each of these mines.
 
Leslie Resources
 
The Leslie Resources mines are located in Perry, Knott and Leslie Counties in
eastern Kentucky. The Company uses mountaintop removal mining and contour
mining to mine 12 seams of coal at these mines. Production from these mines in
the twelve-month period ended September 30, 1998, was approximately 4.7 million
tons, which had an average sulfur content of 1.1%, an average ash content of
12% and an average Btu content of 12,000. The Company employs 446 union-free
employees at these mines. Transportation of coal from these mines is by truck
to barge loadout on the Big Sandy River and a unit train loading facility. The
Company estimates these mines contain 46 million tons of proven and probable
reserves. The Company owns and operates a preparation plant, a coal blending
facility and a unit train loading facility in connection with these mines.
 
 
                                       80

 
Pike County Coal--Clark Elkhorn
 
The Company operates the Ratcliffe Elkhorn #111 and Sunset #2 mines at its Pike
County Coal--Clark Elkhorn operations located in Pike County, Kentucky. The
Company uses the mountaintop removal method to mine 8 to 10 seams of coal at
these mines. Production from these mines in the twelve-month period ended
September 30, 1998, was approximately 1.7 million tons, which had an average
sulfur content of 1.1%, an average ash content of 9.0% and an average Btu
content of 12,700. The Company employs 131 union-free employees at these mines.
Transportation of coal from these mines is by truck to barge loading facilities
located on the Big Sandy River to one of two nearby processing and loading
facilities. The Company estimates these mines contain 16 million tons of proven
and probable reserves.
 
Pike County Coal--Knott County
 
The Company owns and operates the Holly Bush mine and the Brimstone mine at its
Knott County operations located in eastern Knott County, Kentucky. The Company
uses the room and pillar method to mine two seams of coal at these mines.
Production from these mines in the twelve-month period ended September 30,
1998, was approximately 1.3 million tons, which had an average sulfur content
of 1.1%, an average ash content of 9% and an average Btu content of 12,700. The
Company employs 135 union-free employees at these mines. Transportation of coal
from these mines is by truck to the Bates Branch processing complex. The
Company estimates these mines contain 15 million tons of proven and probable
reserves. The Company owns and operates a preparation plant, a coal blending
facility and a unit train loading facility in connection with these mines.
 
Pike County Coal--Matrix Coal
 
The Company owns and operates the Shop Branch mine and Tuscarora mine at its
Pike County Coal--Matrix Coal operations located in Pike County, Kentucky. The
Company uses the mountaintop removal mining method to mine three seams of coal
at the Shop Branch mine and room and pillar mining to mine one seam of coal at
Tuscarora. Production from these mines in the twelve-month period ended
September 30, 1998, was approximately 1.4 million tons, which had an average
sulfur content of 1.1%, an average ash content of 9% and an average Btu content
of 12,700. The Company employs 42 union-free employees at these mines.
Transportation of coal from these mines is by truck to either the Big Sandy
River docks or a rail loadout. The Company estimates these mines contain 19
million tons of proven and probable reserves. The Company owns and operates a
preparation plant in connection with these mines.
 
Pine Mountain
 
The Pine Mountain mines are located in Bell and Harlan Counties, Kentucky. The
Company uses the room and pillar mining method to mine two seams of coal at
these mines. Production from these mines in the twelve-month period ended
September 30, 1998, was approximately 1.7 million tons, which had an average
sulfur content of 1.2%, an average ash content of 8% and an average Btu content
of 12,800. The Company employs 15 union-free employees at these mines.
Transportation of coal from these mines is by truck to a unit train loading
facility. The Company estimates these mines contain 8 million tons of proven
and probable reserves. The Company owns and operates a preparation plant and a
truck loading facility in connection with these mines.
 
Star Fire
 
The Star Fire mine is located near Perry and Knott Counties in eastern
Kentucky. The Company uses mountaintop removal, highwall mining and contour
mining to mine five seams of coal at this mine. Production from this mine in
the twelve-month period ended September 30, 1998, was approximately 3.1 million
tons, which had an average sulfur content of 1.1%, an average ash content of
13% and an average Btu content of 11,800. The Company employs 88 union and
20 union-free employees at this mine. Transportation of coal from this mine is
by rail. The Company estimates this mine contains 44 million tons of proven and
probable reserves. The Company owns and operates a preparation plant, a coal
blending facility and a unit train loading facility in connection with this
mine.
 
                                       81

 
Straight Creek
 
The Straight Creek mines are located in Bell County, Kentucky. The Company uses
room and pillar mining and mountaintop removal mining to mine four seams of
coal at these mines. Production from these mines in the twelve-month period
ended September 30, 1998, was approximately 2.2 million tons, which had an
average sulfur content of 1.0%, an average ash content of 8% and an average Btu
content of 12,800. The Company employs 35 union-free employees at these mines.
Transportation of coal from these mines is by truck to a unit train loading
facility. The Company estimates these mines contain 7 million tons of proven
and probable reserves. The Company owns and operates a preparation plant, a
coal blending facility and a unit train loading facility in connection with
these mines.
 
Martiki
 
The Martiki mine is located in Martin County, Kentucky. The Company uses
mountain top removal and contour mining to produce coal from three seams.
Production from this mine totaled 3.0 million tons for the twelve-month period
ended September 30, 1998. Coal quality averaged 1.0% sulfur, 10% ash and 12,500
Btus per pound. Martiki has 24 million tons of proven and probable reserves.
The workforce is currently being restructured but the Company expects to have
about 125 union-free employees at this mine. The Company owns and operates a
1000 ton per hour preparation plant and a unit train loading facility.
 
West Virginia
 
Battle Ridge
 
The Company owns the former the Battle Ridge mines located in Kanawha and Boone
Counties, West Virginia. The Company uses the mountaintop method to mine 11
seams of coal. Production from these mines in the twelve-month period ended
September 30, 1998, was approximately 0.7 million tons, which had an average
sulfur content of 0.8%, an average ash content of 13% and an average Btu
content of 12,200. These mines are currently idle. The Company anticipates
restarting the operations in the first quarter of 1999. Transportation from
these mines is by truck. The Company estimates these mines contain 32 million
tons of proven and probable reserves. The Company owns two river dock
facilities on the Kanawha River and one on the Big Sandy River.
 
Kanawha River Operations
 
The Company owns and operates the Dunn, Armstrong Creek, Stockton and Cannelton
#165 mines at its Kanawha River operations. These mines are located in Kanawha
County, West Virginia. The Company uses the mountaintop removal method to mine
10 seams of coal at Dunn and Armstrong Creek, and room and pillar mining at
Stockton and Cannelton #165 to mine one seam of coal. Production from these
mines in the twelve-month period ended September 30, 1998, was approximately
5.9 million tons, which had an average sulfur content of 0.9%, an average ash
content of 11% and an average Btu content of 12,300. The Company employs 514
union and 73 union-free employees at these mines. Transportation of coal from
these mines is by truck and conveyor to the coal blending yard. The Company
estimates these mines contain 18 million tons of proven and probable reserves.
The Company owns and operates a preparation plant in connection with these
mines.
 
Marrowbone Operations
 
The Company owns and operates the Marrowbone Creek mine, the Northern Mingo #2
mine and the Triad mine at its Marrowbone operations located in Mingo County,
West Virginia. The Company uses the room and pillar method to mine one seam of
coal at the Marrowbone Creek mine and the Northern Mingo #2 mine, and the
mountaintop removal mining method to mine three seams of coal at the Triad
mine. Production from these mines in the twelve-month period ended September
30, 1998, was approximately 4.1 million tons, which had an average sulfur
content of 0.6%, an average ash content of 12% and an average Btu content of
12,000. The Company employs 415 union and 91 union-free employees at these
mines. Transportation of coal from these
 
                                       82

 
mines is by conveyor or truck to a preparation plant. The Company estimates
these mines contain 25 million tons of proven and probable reserves. The
Company owns and operates the Tug Valley processing plant and a unit train
loading facility in connection with these mines.
 
Mid-Vol
 
The Mid-Vol mines are located in McDowell County, West Virginia. The Company
uses mountaintop removal and contour mining to mine 5 seams of coal at these
mines. Production from these mines in the twelve-month period ended September
30, 1998, was approximately 1.1 million tons, which had an average sulfur
content of 0.6%, an average ash content of 5%. The Company employs 47 union-
free employees at these mines. Transportation of coal from these mines is by
truck to rail on the Norfolk Southern rail line. The Company estimates these
mines contains 51 million tons of proven and probable reserves. The Company
owns and operates a preparation plant, a coal blending facility and a rail
loading facility in connection with these mines.
 
Southern Appalachia Region
 
This region includes all of the Company's mining operations in eastern
Tennessee. The Company owns and operated two surface mines in this region, one
of which was closed in August of 1998, which produced approximately 1.0 million
tons of coal in the twelve-month period ended September 30, 1998, or
approximately 4% of the total coal production in the region. As of September
30, 1998, the Company had 85 union-free employees in this region. In the
twelve-month period ended September 30, 1998, the Company's coal production in
this region accounted for approximately 3% of the total coal produced by the
Company.
 
Cumberland
 
The Cumberland mine is located in Campbell County, Tennessee. The Company used
surface, highwall and deep mining methods to mine one seam of coal at this
mine. Production from this mine in the twelve-month period ended September 30,
1998, was approximately 0.5 million tons, which had an average sulfur content
of 2.2%, an average ash content of 17% and an average Btu content of 12,200.
The Company employs 19 union-free employees at this mine. Transportation of
coal from this mine is by truck directly to the customer. The Company estimates
this mine contains 49 million tons of proven and probable reserves. The mine
was closed in August of 1998.
 
Skyline
 
The Skyline mine is located in Sequatchie County in eastern Tennessee. The
Company uses the area mining method to mine one seam of coal at this mine.
Production from this mine in the twelve-month period ended September 30, 1998,
was approximately 0.5 million tons, which had an average sulfur content of
1.0%, an average ash content of 14% and an average Btu content of 12,300. The
Company employs 66 union-free employees at this mine. Transportation of coal
from this mine is by truck directly to the customers. The Company estimates
this mine contains 12 million tons of proven and probable reserves. The Company
owns and operates a coal blending yard at this mine.
 
Illinois Basin Region
 
This region includes all of the Company's mining operations in Illinois and
Indiana. The Company owns and operates 7 surface and deep mines in this region
which produced 11.2 million tons of coal in the twelve-month period ended
September 30, 1998, or approximately 10% of the total coal production in the
region. As of September 30, 1998, the Company had 717 union and 428 union-free
employees in this region. In the twelve-month period ended September 30, 1998,
the Company's coal production in this region accounted for approximately 19% of
the total coal produced by the Company.
 
                                       83

 
Illinois
 
Elkhart Mine
 
The Elkhart mine is located approximately 20 miles northeast of Springfield,
Illinois. The Company uses the room and pillar mining method to mine one seam
of coal at this mine. Production from this mine in the twelve-month period
ended September 30, 1998, was approximately 2.3 million tons, which had an
average sulfur content of 3.2%, an average ash content of 9.0% and an average
Btu content of 10,500. The Company employs 245 union-free employees at this
mine. Transportation of coal from this mine is by truck directly to the
customers. The Company estimates this mine contains 70 million tons of proven
and probable reserves. The Company owns and operates a preparation plant in
connection with this mine.
 
Mine #11
 
Mine No. 11 is located in Randolph County, Illinois. The Company uses the room
and pillar mining method to mine one seam of coal at this mine. Production from
this mine in the twelve-month period ended September 30, 1998, was
approximately 2.4 million tons, which had an average sulfur content of 3.1%, an
average ash content of 9.5% and an average Btu content of 11,075. The Company
employs 214 union and 56 union-free employees at this mine. Transportation of
coal from this mine is by truck or rail. The Company estimates this mine
contains 17 million tons of proven and probable reserves. The Company owns and
operates a preparation plant and a unit train loading facility in connection
with this mine.
 
Indiana
 
Chinook
 
The Chinook mine is located in Clay and Vigo Counties. The Company uses the
area mining method to mine three seams of coal at this mine. Production from
this mine in the twelve-month period ended September 30, 1998, was
approximately 1.6 million tons, which had an average sulfur content of 3.8%, an
average ash content of 10% and an average Btu content of 11,000. The Company
employs 131 union and 27 union-free employees at this mine. Transportation of
coal from this mine is by rail. The Company estimates this mine contains 7
million tons of proven and probable reserves. The Company owns and operates a
preparation plant and a unit train loading facility in connection with this
mine.
 
Kindill #1
 
The Kindill #1 mine is located in Davies County, Indiana. The Company uses the
area mining method to mine one seam of coal at this mine. Production from this
mine in the twelve-month period ended September 30, 1998, was approximately 1.8
million tons, which had an average sulfur content of 3.9%, an average ash
content of 8% and an average Btu content of 11,500. The Company employs 129
union and 39 union-free employees at this mine. Transportation of coal from
this mine is by rail. The Company estimates this mine contains 33 million tons
of proven and probable reserves. The Company owns and operates a preparation
plant and a unit train loading facility in connection with this mine.
 
Kindill #2
 
The Kindill #2 mine is located in Davies County, Indiana. The Company uses the
area mining method to mine one seam of coal at this mine. Production from this
mine in the twelve-month period ended September 30, 1998, was approximately 0.8
million tons. The Company employs 99 union and 23 union-free employees at this
mine. Transportation of coal from this mine is by rail. The Company estimates
this mine contains 21 million tons of proven and probable reserves. The Company
owns and operates a preparation plant and a unit train loading facility in
connection with this mine.
 
Kindill #3
 
The Kindill #3 mine is located in Sullivan County, Indiana. The Company uses
the area mining method to mine three seams of coal at this mine. Production
from this mine in the twelve-month period ended September 30,
 
                                       84

 
1998, was approximately 1.7 million tons, which had an average sulfur content
of 1.2%, an average ash content of 8% and an average Btu content of 10,900. The
Company employs 107 union and 20 union-free employees at this mine.
Transportation of coal from this mine is by rail. The Company estimates this
mine contains 45 million tons of proven and probable reserves. The Company owns
and operates a preparation plant and a unit train loading facility in
connection with this mine.
 
Sycamore
 
The Sycamore mine is located in Knox County, Indiana. The Company uses the area
mining method to mine three seams of coal at this mine. Production from this
mine in the twelve-month period ended September 30, 1998, was approximately 0.6
million tons, which had an average sulfur content of 2.4%, an average ash
content of 12% and an average Btu content of 11,000. The Company employs 44
union and 11 union-free employees at this mine. Transportation of coal from
this mine is by truck. The Company estimates this mine contains 8 million tons
of proven and probable reserves. The Company owns and operates a preparation
plant and a coal blending facility in connection with this mine.
 
Rocky Mountain Region
 
This region includes all of the Company's mining operation in Colorado. The
Company owns and operates one deep mine in this region which produced
approximately 1.0 million tons of coal in the twelve-month period ended
September 30, 1998, or approximately 1% of the total coal production in the
region. The Company has 136 union-free employees in this region. In the twelve-
month period ended September 30, 1998, the Company's coal production in this
region accounted for approximately 2% of the total coal produced by the
Company.
 
Bowie
 
The Bowie mine is located in Delta County, Colorado. The Company uses the room
and pillar mining method to mine one seam of coal at this mine. Production from
Bowie in the twelve-month period ended September 30, 1998, was approximately
1.0 million tons, which had an average sulfur content of 0.4%, an average ash
content of 8% and an average Btu content of 12,800. The Company employs 136
union-free employees at Bowie. Transportation of coal from Bowie is by rail.
The Company estimates Bowie contains 63 million tons of proven and probable
reserves. The Company owns and operates a unit train loading facility at Bowie.
 
Bowie has filed for a lease for Federal lands adjacent to its current reserves.
The U.S. Department of the Interior's Bureau of Land Management ("BLM") is
planning to prepare an environmental impact statement to study the effects of
existing and potential coal development in this area. This study is expected to
be completed by August 2000. At such time, the BLM will determine whether the
Federal lands are suitable for mining. If the BLM determines that the land is
suitable for mining, the BLM should grant the lease within 90 days. If the
Company receives the new lease, the Company plans to increase production at
Bowie by installing a longwall mining system. These additional reserves are
critical for the installation of a longwall mining system at Bowie. The Company
believes that if the BLM determines that the land is suitable for mining, it
will be awarded the lease because the Company's current reserves are more
strategic for this reserve than any other potential competitor. [This schedule
will not impede the timely installation of a longwall mining system in Bowie.]
In the [unlikely] event that the Company is not successful in obtaining this
lease, the Company believes it can still meet its contractual commitments.
[disclose that decision to award lease was vacated?]
 
Coal Reserves
 
Existing Reserves
 
The vast majority of the Company's reserves are bituminous and subbituminous
coal. According to studies of reserves assigned to existing operations,
prepared by Marshall Miller, SESI, Weir and Norwest, approximately 6% of the
Company's coal reserves is super compliance coal, approximately 24% of such
reserves meets compliance coal requirements, and approximately 33% meet or
exceed low-sulfur coal. 75% of the Company's reserves are Near Low-Sulfur Coal
or lower. This high percentage of super compliance, compliance, low sulfur and
near low sulfur gives the Company a competitive advantage for the long term as
more stringent air quality requirements under Phase II of the Clean Air Act
Amendments are implemented. According to EVA, 94% of the utilities that
 
                                       85

 
will be affected by Phase II and that have made a decision on their compliance
strategy have indicated they will switch to compliance coal, whereas only 5% of
those utilities have indicated they will use scrubbers.
 
A substantial part of the reserves currently available to the Company are
represented by leases which expire after a term, usually less than five years,
and, in most cases, less than two years. Most of the leases contain an option
to renew on the part of the Company, with exercise of the option usually
subject to the condition that mining shall have commenced on (or, as specified
in some leases, near) the leased property. Most of the leases require the
payment of an advance royalty or delay rental (payments to keep the lease in
force if mining has not commenced) on a periodic basis during each year if
mining has not begun on the property. After mining commences, the leases
generally require the payment of a royalty based on the tonnage mined and sold.
 
The Company believes that it has conducted mining activities and made payments
to obtain renewal rights with regard to leased properties covering reserves
which, when added to reserves owned in fee by the Company, are sufficient to
satisfy its current requirements under long-term sales contracts. However, the
availability of reserves on other leased property at the present time does not
assure the Company that the reserves will be available at the time the Company
may wish to mine such reserves. Moreover, the availability of reserves on
leased property is often subject to uncertainties relating to such matters as
the title of the lessor to the coal and precise boundaries.
 
The extent to which the Company's coal reserves will be mined will depend upon
factors over which it has no control, such as future economic conditions, the
price and demand for coal of the quality and type controlled by the Company,
the price and supply of alternative fuels and future mining practices and
regulation. The ability of the Company to mine in areas covered by the reserve
studies depends upon the ability of the Company to maintain control of the
reserves (other than the properties owned in fee) through extensions or
renewals of the leases or other agreements and the ability of the Company to
obtain new leases or agreements for other reserves.
 
Because of the short-term nature of its leases and the expense involved, the
Company does not have all titles to the leases reviewed by qualified title
examiners. Title examinations, however, are performed by qualified title
examiners on properties owned by the Company. As to properties the Company
leases, a limited title investigation and, to the extent possible, a
determination of the precise boundaries of a property is made in most cases
only as a part of the process of securing a mining permit shortly before
commencement of mining operations. Title to property is verified prior to the
time the Company begins mining operations. The Company believes that its
practices of investigating title and determining boundaries, to the properties
it owns, leases or otherwise controls are consistent with customary industry
practices in the region in which the reserves are located and that such
practices are adequate to enable it to acquire the right to mine such
properties.
 
In Colorado, the Company currently is a party to multiple federal leases of
coal reserves with the BLM and has applied for an additional federal coal lease
at the Bowie mine. The BLM is planning to prepare an environmental impact
statement, which will take approximately 12 to 18 months, to study the effects
of existing and potential coal developments in this area. The Company's failure
to obtain such coal base is likely to have a material adverse effect on Bowie's
prospects, but the Company believes that such failure would not have a material
adverse effect on the business of the Company and its subsidiaries, taken as a
whole. As discussed in more detail in "Government Regulation--Regulations
Affecting Coal Mining Operations," the U.S. Government is the largest owner of
coal reserves in the nation, and a majority of its reserves are located in the
western United States. Approval from the BLM (which exercises primary authority
over the U.S. government's reserves) typically takes approximately one year
after a complete application has been submitted.
 
Acquisition of Additional Reserves
 
The Company intends to continue expanding its coal reserves by acquiring
reserves that will allow it to: (i) minimize production and delivery costs;
(ii) improve its reserves of low-sulfur, compliance and super-compliance coal;
(iii) utilize its technological advantages; (iv) increase market share in a
geographic area; and (v) satisfy the quality requirements of its existing and
future coal contracts. To maintain its position as a low-cost operator, the
Company will continue to focus on acquiring reserves that are suitable for low-
cost mining
 
                                       86

 
methods and are located in close proximity to its customers, existing
operations or efficient transportation facilities. The Company will continue to
add to its low-sulfur and compliance coal reserves because it believes these
reserves are more likely to yield a premium as environmental regulations become
more stringent. The Company will seek to utilize the competitive advantage that
it has in the Addcar systems by acquiring, at below-market rates, reserves that
its competitors cannot economically mine. The Company will also seek to
increase its market share in geographic areas in which it currently has
operations by acquiring additional coal reserves in those areas. Further
reserve acquisitions will be made as necessary to insure the Company can meet
the coal quality requirements under its current and future contracts.
 
Coal Transportation
 
The Company's coal is transported to its customers by rail, barge and truck.
Depending on the proximity of the customer to the mine and the transportation
available for delivering coal to that customer, transportation costs can range
from 10% to 90% of the mine cost of a customer's coal. The Company generally
pays truck charges to deliver coal to a barge or rail loadout facility, and
customers typically pay the transportation costs from the loadout facilities to
the customer's plant. Consequently, the availability and cost of transportation
constitute important factors for the marketability of coal.
 
In 1997, approximately 75% of the Company's tonnage traveled by rail on Norfolk
Southern, CSX Corporation and Union Pacific Railroad Company trains, with the
remaining 25% traveling by truck to either the customer's plant or designated
barge loading facility. The practices of and rates set by the railroad serving
a particular mine might affect, either adversely or favorably, the Company's
marketing efforts with respect to coal produced from the relevant mine. See
"Risk Factors--Transportation." Approximately 50% of the Company's production
has access to alternative transportation sources.
 
Mining Permits and Approvals
 
Before commencing mining on a particular property, the Company must obtain
mining permits and approval by state regulatory authorities of a reclamation
plan for restoring upon the completion of mining the mined property to its
prior condition, productive use or other permitted condition. The Company
typically commences actions to obtain permits between 18 and 24 months before
the Company plans to mine a specific area. In the Company's experience, permits
generally are approved within 12 months after a completed application is
submitted. The Company has not experienced difficulties in obtaining mining
permits in the areas where its reserves are currently located, and has already
begun the process involved in obtaining such permits. However, there can be no
assurances that the Company will not experience difficulty in the future in
obtaining mining permits in any area where its reserves are located.
 
In conjunction with mining the property, the Company reclaims and restores the
mined areas by grading, shaping and preparing the soil for seeding. Upon
completion of mining, reclamation generally is completed by seeding with
grasses or planting trees for use as pasture or timberland, as specified in the
approved reclamation plan. The Company believes it has all material permits
required to carry on its mining operations and believes that it is in
compliance in all material respects with applicable regulations relating to
reclamation. Over the past 10 years, the Company has received several
reclamation awards, including (i) the Kentucky Outstanding Reclamation Award,
(ii) the Ohio Greening of the Lands Award, (iii) the Kentucky Department for
Surface Mining Reclamation & Enforcement Reclamation Award and (iv) the
Governor's Conference on the Environment Outstanding Reclamation Award. In
addition, the Company was nominated for the Kentucky Natural Resources and
Environmental Protection Cabinet's 1997 Mining Reclamation (Eastern Kentucky)
Award.
 
Long-Term Coal Contracts
 
General
 
The Company has a large portfolio of long-term sales contracts. For the nine-
month period ended September 30, 1998, 74% of the Company's revenues were made
under long-term sales contracts. As of September 30, 1998,
 
                                       87

 
the Company had long-term sales contracts for more than 208.4 million tons of
coal. At September 30, 1998, the Company's long-term sales contracts had terms
ranging from one to 12 years, with an average volume-weighted remaining term of
5.4 years. Typically, customers enter into long-term sales contracts to secure
reliable sources of coal at predictable prices, while the Company seeks stable
sources of revenue to support the investments required to open, expand,
maintain or improve productivity at mines needed to supply such contracts. Such
contracts are negotiated in the ordinary course of business.
 
Contract Terms
 
The terms of long-term sales contracts result from bidding and extensive
negotiations with customers. Consequently, the terms of such contracts
typically vary significantly in many respects, including price adjustment
features, price reopener terms, coal quality requirements, quantity parameters,
flexibility and adjustment mechanics, permitted sources of supply, treatment of
environmental constraints, options to extend and force majeure, termination and
assignment provisions.
 
Price reopeners are present in most of the recently negotiated contracts over
three years in duration and usually occur midway through a contract or every
two to three years, depending upon the length of the contract. Reopeners allow
the contract price to be renegotiated in order to be in line with the market
price prevailing at the time. In some circumstances, the utilities have an
option to terminate the contract if prices have increased by over 10% from the
price at the commencement of the contract or if the parties do not agree on a
new price.
 
Base prices are set at the start of a contract and are then adjusted at
intervals for changes due to inflation and, in many cases, changes in costs
such as taxes, reclamation fees, black lung charges and royalties. The
inflation adjustments are measured by public indices, the most common of which
is the implicit price deflator for the gross domestic product as published by
the U.S. Department of Commerce. The base price is then adjusted to a
negotiated market price when there is a price reopener.
 
Quality and volumes for the coal are stipulated in long-term sales contracts,
although buyers normally have the option to vary volume by up to 10% if
necessary. Variations to the quality and volumes of coal may lead to
adjustments in the contract price. Long-term sales contracts typically
stipulate procedures for quality control, sampling and weighing.
 
Contract provisions in some cases set out how coal volumes will be made up upon
the occurrence of an event of force majeure, including such events as strikes,
adverse mining conditions or serious transportation problems. More recent
contracts stipulate that this tonnage can be made up by mutual agreement or at
the discretion of the buyer. Buyers often insert similar clauses covering
changes in environmental laws. The Company has negotiated the right to supply
coal that complies with any new environmental requirements rather than allowing
the contract to terminate if the customer claims that the coal type supplied
previously may no longer be used. Long-term sales contracts typically contain
termination clauses if either party fails to comply with the terms and
conditions of the contract.
 
In certain contracts, the Company has a right of substitution, allowing it to
provide coal from different mines as long as it is of a certain specified
quality and will be sold at the same delivered cost.
 
The terms set out above are common to most contracts. There are certain
contracting terms that differ between a standard "eastern U.S." contract and a
standard "western U.S." contract. One difference relates to the sampling
locations: in the eastern U.S. region, approximately 50% of customers require
that the coal is sampled and weighed at the destination, whereas in the western
United States all samples are taken at source. Also, historically, the duration
of contracts has been shorter in eastern U.S. regions; they are now more of a
similar length, although a larger percentage of eastern U.S. coal is purchased
on the spot market compared to western U.S. coal. Traditionally, the eastern
U.S. market is a short-term market as there are a larger number of smaller
mining operations in the eastern U.S. coal market and customers can therefore
negotiate new contracts more frequently in order to obtain a better price. This
has also led to a larger number of spot market transactions in eastern U.S.
 
                                       88

 
regions. Western U.S. contracts normally stipulate that certain production
taxes and coal royalties are reimbursed in full by the buyer rather than being
a pricing component within the contract. These items are a significant portion
of the western U.S. coal price while they are a less material portion of the
eastern U.S. coal price.
 
Historically, long-term sales contracts were priced above the spot prices for
coal. However, in the past several years the price of coal has been very
competitive, with new contracts being priced at or near existing spot rates.
 
The term of sales contracts has decreased significantly over the last two
decades as competition in the coal industry has increased and, more recently,
as the electricity generators have prepared themselves for the Clean Air Act
Amendments and the impending deregulation of their industry. The Company
believes that the average term of long-term sales contracts was 20 years in the
1970s and 10 years in the 1980s but it decreased to two to five years in the
early 1990s. However, in the last three years, there has been a return to
longer term contracts of five to ten years in duration, but customers have
insisted on price reopeners every two or three years, which provide them with
the security of having coal under contract and knowing that the price will not
significantly exceed market. The Company's portfolio of utility coal sales is
more heavily weighted towards contract sales. These long-term sales contracts
tend to limit the Company's exposure to any fluctuation in spot market prices
and the uncertainty of marketing its production capacity.
 
Contract Expirations
 
As of September 30, 1998, on a pro forma basis, the Company's long-term sales
contracts had an average volume-weighted remaining term of 5.4 years. As the
Company's long-term sales contracts expire, the Company intends to negotiate
new contracts in order to maintain its high percentage of volume sold through
long-term sales contracts. When a coal company's contracts expire without being
replaced, that company is exposed to the risk of having to sell coal into the
spot market, which may be subject to lower and more volatile prices.
 
The total sales commitments corresponding to such contracts are approximately
208.4 million tons of coal, assuming all the contracts run through to their
expiration date. This tonnage commitment may vary depending on future
performance, buyer contractual elections and other contractual provisions.
 
The Company's profits could decline as its major contracts are repriced from
the existing prices to market rates at the contract reopener or expiration
dates. The Company believes that its volume of coal sales will remain unchanged
and that it will enter into new coal sales contracts as current contracts
expire. The challenge for the Company is to negotiate prices at above-spot
rates to lessen the potential loss of profits. No assurance can be given that
the Company will be successful in carrying out this strategy.
 
Highwall Mining Business
 
MTI
 
On January 2, 1998, the Company acquired the Highwall Mining Assets through the
MTI Acquisition. The Highwall Mining Assets are currently held by MTI, a wholly
owned subsidiary of the Company. The Highwall Mining Assets included 13 U.S.
patents, one registered trademark in North America relating to the Addcar
highwall mining system, certain mobile mining equipment, spare parts,
continuous mining machines and an 80,000 square foot manufacturing and
warehousing facility. The issued patents acquired from Addington Enterprises
will expire between December 10, 2010 and November 20, 2015, and the registered
trademark acquired from Addington Enterprises will expire September 28, 2013.
The Highwall Mining Assets also include the equipment and facility for
manufacturing Addcar highwall mining systems, as well as six existing, operable
Addcar highwall mining systems. The Company operates or leases seven Addcar
highwall mining systems and will build additional systems as required.
 
Addcar System Description
 
The Addcar highwall mining system is an innovative efficient mining system,
capable of producing more than 300,000 tons of raw coal per month. This equates
to more than twenty miles of tunnel or 7 million cubic feet of
 
                                       89

 
excavation in a single month. The system is often deployed at reserves which
can not be economically mined with surface methods.
 
The main elements of the Addcar system are: (i) a continuous miner, (ii)
conveyor cars (the Addcars), (iii) a launch vehicle, (iv) an elevating
stacker/conveyor, and (v) a wheel-loader with a forklift attachment.
 
The continuous miner is located at the front of the Addcar system, and its
primary role is to mine coal and convey it to the first Addcar. The miner forms
a rectangular opening in the coal seam at the highwall and continues to cut a
roadway into the seam, approximately 10 feet wide. The cutting end of the miner
is hydraulically raised and lowered as it rotates, allowing the machine to mine
a variety of seam thicknesses and follow the contours of the seam. A gathering
head loads the cut coal onto a chain conveyor, and the coal is passed on to the
first Addcar.
 
The Addcars form a modular conveyor system that transports the coal to the
surface. The cars are added individually behind the miner (as it cuts into the
seam) in a manner which does not interrupt the flow of coal. The continuous
nature of this operation is a key feature of the Addcar system, which, in the
Company's view, adds significantly to its overall productivity and efficiency.
The mined coal is transferred from one car to the next until it is delivered to
the launch vehicle on the surface. Each Addcar weighs approximately 12 tons,
and is approximately 40 feet long.
 
The launch vehicle is a two-deck steel structure, which is located on the floor
of the pit at the base of the highwall. The launch vehicle serves as a stable
work platform, propulsion unit, and utility supply center for the equipment in
the highwall entry. It contains an electric powered distribution center, a
control cabin where a person operates the entire system by remote control, two
separate hydraulic power systems, and cable and hose reels for electrical
power, coaxial cable, dust suppression, water, and, when required, either inert
gas or compressed air, for ventilation at the cutting face.
 
The elevating stacker/conveyor receives the coal from the belt on the launch
vehicle, and pours it into a pile, from where it can be loaded by the wheel-
loader into trucks, or onto a conveyor. The stacker/conveyor is wheel-mounted
and easy to move with the launch vehicle.
 
The highwall mining system weighs over 450 tons and has more than 2,000
horsepower.
 
The wheel-loader transports the Addcars by removing the bucket and adding a
forklift attachment. The wheel-loader operator positions the forklift under the
Addcars and transports them to and from the launch vehicle during the mining
cycle.
 
The Highwall Mining Process
 
The highwall mining process can be segregated into the following steps:
 
Step One: Geological Analysis. Prior to commencing mining, substantial analysis
of each coal seam is required. Such analysis includes geological surveys and,
in some instances, test mining. The mine operator also may be able to provide
details of the seam geology based on such operator's mining experience and
previous exploration.
 
Step Two: Geotechnical Design. Before mining commences, a coal extraction
pattern for the target mine must be designed. The primary design parameters
include the thickness of the seam, the strength of the coal, the thickness of
the overburden, the nature of the intermediate roof and the identification and
configuration of any joints and weaknesses in roof and floor strata.
 
Step Three: Positioning the Launch Vehicle. To start the mining cycle, the
launch vehicle is moved into position in accordance with the survey stations
established prior to mining.
 
                                       90

 
Step Four: Initiating Mining. The miner starts cutting with only the lead
Addcar behind it. The launch vehicle assists the mining by applying continuous
hydraulic pressure to the continuous miner.
 
Step Five: Adding Addcars. As the miner and Addcars move forward, the loader
collects and places another Addcar on the work platform, holding it in position
while it is connected to the cable. The newly added Addcar is then lowered into
position and secured. This process is completed without halting the continuous
flow of coal.
 
Step Six: On-Line Maintenance. While each Addcar is on the launch vehicle, the
mining crew has access to it for about 15 minutes until it moves into the
entry. This time period gives the crew an opportunity to service the Addcar and
check its functions before it goes underground. Each 1,200-foot entry will take
approximately 12 hours to complete.
 
Step Seven: Remote Operation. The remote control system is connected by coaxial
cable to a receiver on the miner. The coaxial cable carries signals from a
diagnostics package which monitors equipment performance, methane and other gas
levels, and other mining parameters. The cable also provides a visual link for
the operator through 3 video cameras mounted in strategic locations on the
miner and the first Addcar.
 
Step Eight: System Retreat. When the highwall mining entry has been completed,
removal of the Addcar system involves a simple reverse operation. The
combination of the miner pushing from the front and the hydraulic cylinders
pulling from the rear allows efficient recovery of the Addcar system so that it
can be relocated quickly and mining can resume without significant delay.
 
Step Nine: General Maintenance. After the Addcar system has been removed from
the mine, routine maintenance is performed while the system is being relocated
to the next entry. Under normal circumstances, the time interval between the
withdrawal from one entry and the commencement of mining in the next entry is
between 45 and 60 minutes.
 
Step Ten: Relocation. Once maintenance is complete, a hydraulic skid propulsion
system on the launch vehicle assists the system in relocating quickly and
efficiently to the next entry.
 
Manufacturing Facilities
 
The Company's manufacturing facilities are located in Ashland, Kentucky. The
facilities include the fabrication shop, where launch vehicles and continuous
miners are constructed, and the car shop, where Addcars are manufactured.
Skilled subcontractors perform machining, heat treating, electric motor repair,
and other aspects of manufacturing and repairing of the Addcar systems at the
fabrication shop. The car shop has a complete set of jigs, which have been
built for the efficient manufacture of Addcars. These jigs significantly reduce
the cost associated with the manufacturing process, while improving the quality
control of the finished product. Both the fabrication shop and the car shop
also perform major repairs and rebuilds on a routine basis. The rebuilds range
from minor repairs on Addcars as part of routine maintenance, to a fullscale
overhaul of a continuous miner or launch vehicle. The Company has capacity to
manufacture eight Addcar systems per year to accommodate expanding its highwall
mining operations and lease, sell or license Addcar systems to other coal
companies.
 
Non-Coal Businesses
 
Zeigler Non-Coal Businesses
 
In addition to its coal operations, Zeigler also operated several non-coal
businesses including a technology segment, a power segment, an environmental
services segment, an import/export services segment and a property development
segment. Most of these businesses are being classified by the Company as assets
held for sale. The power segment has not executed a power contract since June
2, 1998. Zeigler's technology segment, headed by its wholly owned subsidiary,
Encoal, focuses on producing two new clean burning, high heating fuels from
subbituminous coal. Both fuels are developed by a process known as "liquids
from coal," which is
 
                                       91

 
owned by the TEK-KOL Partnership ("TEK-KOL"). Zeigler's power segment, operated
through Zenergy, Inc. and EnerZ, has been in the process of securing the assets
of Cajun Electric Power Co-operative, Inc., a low cost power generator
currently in bankruptcy. EnerZ is an energy marketing company. The
environmental services segment provides Zeigler with its own in-house support
for mining construction activities as well as reclamation of closed mines. The
asset management segment is responsible for managing Zeigler's two
import/export terminals on the east coast. The terminals provide Zeigler with
the opportunity to transport coal from one mode of transportation to another.
Zeigler is currently restructuring its product base so as to maximize the
facilities' output capacity. The property development segment focuses on
Zeigler's expertise in land management through the development of real estate
trust quality assets.
 
Administrative Offices
 
The Company maintains administrative offices in Ashland, Kentucky; Hazard,
Kentucky; Pineville, Kentucky; Charleston, West Virginia; Owensboro, Kentucky;
Evansville, Indiana; and Lexington, Kentucky. The Company is currently
evaluating elimination of certain duplicative or unnecessary administrative
facilities.
 
Certain Liabilities
 
The Company's long-term liabilities for pensions, retiree health care, work-
related injuries and illnesses, and mine reclamation reflect the Company's
commitment to its employees and to environmental stewardship. The total amount
of these liabilities reflects the size, diversity and changing nature of the
Company. The majority of these liabilities relate to the purchase of operating
subsidiaries, which results in a greater number of employees and mines today in
the Company following the Recent Acquisitions.
 
All U.S. coal companies are subject to laws and regulations governing mine
reclamation and other environmental liabilities for work-related injuries and
illnesses. In addition, labor contracts with the UMWA include long-term
benefits, notably health care coverage for retirees and their dependents. These
obligations fall into four principal categories: reclamation, workers'
compensation (including black lung), pensions and retiree health care.
 
Reclamation. All coal mining companies must return the land on which they mine
to its original state or to an alternative productive use, as applicable.
Reclamation liabilities primarily represent the future costs to restore the
lands as required by SMCRA. Short-term ongoing reclamation activities are
undertaken as areas are disturbed in the mining process. Long-term reclamation
and mine closing costs are projected and, upon commencement of mining, accrued
for during the mine life. The end of mine reclamation and mine-closing costs
accruals totaled approximately $363.4 million on the Company's pro forma
balance sheet as of September 30, 1998, of which $28.4 million is a current
liability. The amount that is included as an operating expense for the pro
forma nine-month period ended September 30, 1998, was $2.4 million, while the
related cash expense for such liability was $13.6 million. See "Risk Factors--
Government Regulation of the Mining Industry."
 
Workers' Compensation. These liabilities represent the actuarial estimates for
compensable, work-related injuries (traumatic claims) and occupational disease,
primarily black lung disease (pneumoconiosis). The Federal Black Lung Revenue
Act of 1977 requires employers to pay black lung awards to former employees who
filed claims after July 1, 1973. Prior claims are paid from the federal black
lung trust fund, which is supported by an excise tax on all U.S. coal
production. On a pro forma basis, these liabilities will be discounted at
7.25%. These liabilities totaled approximately $119.8 million on the Company's
pro forma balance sheet as of September 30, 1998, $26.9 million of which is a
current liability. The amount that was included as an operating expense for the
pro forma nine-month period ended September 30, 1998, was $19.9 million, while
the related cash expense for such liability was $21.4 million.
 
Pension Related Provisions. These costs represent the unfunded actuarially-
estimated cost of paying pension benefits to current active employees when they
retire. Provisions for active employees reflect their service to
 
                                       92

 
date and additional amounts are provided so that the total liability is accrued
when the employee actually retires. Annual contributions to the pension plans
are determined by consulting actuaries based on ERISA minimum funding
standards. On a pro forma basis, these liabilities will be discounted at 7.25%.
The pension liability totaled approximately $1.5 million on the Company's pro
forma balance sheet as of September 30, 1998, none of which is current. The
amount that was included as an operating expense for the pro forma nine-month
period ended September 30, 1997, was $1.5 million, with no related cash expense
for such benefits.
 
Post Employment Benefits. These liabilities represent actuarial estimates of
various benefits to be provided to former or inactive employees after
employment but before retirement. Examples of such benefits are severance
benefits and disability-related benefits. Consistent with SFAS 112, the Company
shall accrue postemployment benefits over the working life of the employee if
(1) the obligation relates to services already rendered; (2) employee's rights
to those benefits accumulate; (3) compensation payments are probable; and (4)
the amount can be reasonably estimated. If only the payments are probable (3)
and amount is reasonably estimated (4), the Company shall accrue the obligation
when the triggering event occurs.
 
On a pro forma basis, these liabilities are discounted at an average rate of
7.25%. These liabilities totaled approximately $16.0 million on the Company's
pro forma balance sheet as of September 30, 1998, $2.0 million of which is a
current liability. The amount that was included as an operation expense for the
pro forma nine-month period ended September 30, 1998 was $3.3 million while the
related cash expense for such liability was $1.9 million.
 
Retiree Health Care. Consistent with SFAS 106, the Company records a liability
representing the estimated cost of providing retiree health care benefits to
current retirees and active employees who will retire in the future. Provisions
for active employees represent the amount recognized to date, based on their
service to date; additional amounts are provided periodically so that the total
liability is accrued when the employee retires. On a pro forma basis, these
liabilities are discounted at 7.25%.
 
A second category of retiree health care obligations represents the liability
for future contributions to the Combined Fund (as defined). This multi-employer
fund provides health care benefits to a closed group of former employees who
retired prior to 1977; no new retirees will be added to this group unless the
Social Security Administration assigns new retirees to the Company. The
liability is subject to increases or decreases in per capita health care costs,
offset by the mortality curve in this aging population of beneficiaries. See
"Government Regulation." As a result of the Apfel decision (discussed below),
companies that are signatories to the UMWA Wage Agreement after 1974 may bear a
greater portion of liability to ensure that the Combined Fund is fully funded.
The Company's premiums paid to Combined Fund are relatively small, (the Company
paid premiums of $3.4 million, in the nine months ended September 30, 1998).
The Company does not expect that any increase in its contributions to the UMWA
Combined Fund will have a material adverse effect on the Company's financial
condition or results of operations.
 
The retiree health care liabilities totaled approximately $388.8 million on the
Company's pro forma balance sheet as of September 30, 1998, $34.5 million of
which is a current liability. The amount that was included as an operating
expense in the pro forma nine-month period ended September 30, 1998 was $22.5
million, while the related cash expense for such liability was $12.1 million.
Obligations to the Combined Fund totaled $48.0 million on the Company's pro
forma balance sheet as of September 30, 1998, of which $5.0 million is a
current liability. That amount was included in operating expense for the pro
forma nine-month period ended September 30, 1998 and was $2.3 million, while
the related cash expense for such liability was $3.4 million.
 
The active management of these liabilities is a key focus of senior executives.
While variances have occurred within a category of liability, cash expenses as
a whole for these liabilities has approximated the amounts charged to earnings.
Provisions for these liabilities reflect standard U.S. coal industry accounting
practices. These costs are borne by the operating subsidiaries from which the
obligations arose.
 
                                       93

 
Legal Proceedings
 
By letters to the Company dated January 12, 1995, January 12, 1996, and January
13, 1997, Pittston Acquisition Company ("PAC"), an indirect wholly-owned
subsidiary of [Pittston], made claims for indemnification from the Company
under the terms of the Pittston Agreement (as defined). See "Certain Related
Party Transactions--Indemnification." The claimed indemnification covers a
number of items, including allegedly delinquent taxes and fees, allegedly
assumed liabilities, alleged failure to transfer specific licenses, assets and
permits and alleged non-compliance with certain agreements and applicable laws
and permits. Addington Enterprises is in the process of investigating and
negotiating the claims with PAC. Many of the claims have been resolved without
any payment by or liability to the Company. To the Company's knowledge, no
lawsuit has been filed or otherwise threatened by PAC against the Company. The
Company intends to defend these claims vigorously, and at this time it is not
possible to predict the outcome of the claims. However, even if PAC
successfully pursued such claims, the Company believes that the liability
arising from such claims would not have a material adverse effect on the
business of the Company and its subsidiaries, taken as a whole.
 
In 1996, Cyprus Amax was sued in the Circuit Court of Perry County, Kentucky,
with the plaintiffs alleging competing claims to approximately 1,425 acres of
property in eastern Kentucky upon which the Company conducts coal mining
activities and claiming damages of approximately $400.0 million. Based on a
prior federal appellate court decision related to a similar claim of different
plaintiffs based on the same alleged source of claim rights, the Company
believes that it is likely to prevail. The Company believes that an adverse
result would not require the Company to pay significant damages and would not
likely have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
 
In addition, the Company is named as a defendant in various actions in the
ordinary course of its business. These actions generally involve such matters
as property boundaries, mining rights, blasting damage, personal injury and
royalty payments. The Company believes these proceedings are incidental to its
business and are not likely to result in materially adverse judgments.
 
Employees
 
As of September 30, 1998, after giving effect to the Recent Acquisitions, the
Company had a total of 4,573 employees, 4,197 of whom worked in coal
production, 376 of whom worked in the management of its coal business.
 
Approximately 38% of the Company's coal employees are affiliated with unions.
Relations with union labor are extremely important to the viability of the
Company. Union labor is represented by the UMWA and falls under separate wage
agreements negotiated with the UMWA or under the National Bituminous Coal Wage
Agreement ("NBCWA"). The Company has several collective bargaining agreements
with the UMWA. Certain of the Company's subsidiaries with operations in Indiana
and West Virginia, which employ 645 union employees, are currently operating
under expired collective bargaining agreements that have been mutually extended
until December 15, 1998 by the Company and the UMWA while they negotiate new
agreements. These agreements also contain rolling provisions requiring two
weeks notification prior to any termination. There can be no assurance that the
Company's unionized labor will not go on strike upon expiration of existing
contracts.
 
                                       94

 
                             GOVERNMENT REGULATION
 
Overview
 
The U.S. coal mining industry is subject to regulation by federal, state and
local authorities on matters such as employee health and safety, limitations on
land use, permitting and licensing requirements, air quality standards, water
pollution, plant and wildlife protection, reclamation and restoration of mining
properties after mining is completed, the discharge of materials into the
environment, surface subsidence from underground mining and the effects of
mining on groundwater quality and availability. In addition, the industry is
affected by significant legislation mandating certain benefits for current and
retired coal miners. Numerous federal, state and local governmental permits and
approvals are required for mining operations. The Company believes that all
permits currently required to conduct its present mining operations have been
obtained. The Company believes that, upon the filing of the required
information with the appropriate regulatory agencies, it will not encounter
substantial difficulty obtaining or renewing necessary permits in the future.
The Company may be required to prepare and present to federal, state and local
authorities data pertaining to the effect or impact that a proposed exploration
for or production of coal may have on the environment. Such requirements could
prove costly and time consuming, and could delay commencement or continuation
of exploration or production operations. Future legislation and administrative
regulations may emphasize the protection of the environment and, as a
consequence, the activities of the Company may be more closely regulated. Such
legislation and regulations, as well as future interpretations and more
rigorous enforcement of existing laws, may require substantial increases in
equipment and operating costs to the Company and delays, interruptions or
termination of operations, the extent of which cannot be predicted. In
addition, as discussed below, the electric utility industry is subject to
extensive regulation regarding the environmental impact of its electricity
generation activities, which could affect demand for coal. See "Risk Factors--
Governmental Regulation of the Mining Industry."
 
The Company endeavors to conduct mining operations in compliance with all
applicable federal, state and local laws and regulations. However, because of
extensive and comprehensive regulatory requirements, violations during mining
operations occur from time to time in the industry. None of the violations to
date or the monetary penalties assessed upon the Company has been material, and
the Company believes that is in substantial compliance with all applicable laws
and regulations.
 
Environmental Laws
 
The Company is subject to various federal, state and local environmental laws.
These laws require approval of many aspects of coal mining operations, and both
federal and state inspectors regularly visit the Company's mines and other
facilities to ensure compliance.
 
The Federal Surface Mining Control and Reclamation Act. SMCRA, which is
administered by the Office of Surface Mining Reclamation and Enforcement
("OSM"), establishes mining and reclamation standards for all aspects of
surface mining as well as many aspects of deep mining. SMCRA and similar state
statutes, among other things, require that mined property be restored in
accordance with specified standards and an approved reclamation plan. In
addition, the Abandoned Mine Lands Act, which is part of SMCRA, imposes a tax
on all current mining operations the proceeds of which are used to restore
mines closed before 1977. The maximum tax is $0.35 per ton on surface-mined
coal and $0.15 per ton on deep-mined coal.
 
SMCRA also requires that comprehensive environmental protection and reclamation
standards be met during the course of and upon completion of mining activities.
For example, SMCRA requires the Company to restore a surface mine to
approximate original contour as contemporaneously as practicable with surface
coal mining operations. The mine operator must submit a bond or otherwise
secure the performance of these reclamation obligations. The issuance and
renewal of permits for surface mining operations must be obtained from OSM or,
where state regulatory agencies have adopted federally approved state programs
under SMCRA, the appropriate state regulatory authority. The Company accrues
for the liability associated with all end of mine reclamation on
 
                                       95

 
a ratable basis as the coal reserve is being mined. The estimated cost of
reclamation, and the corresponding accrual on the Company's financial
statements, is restated annually. The earliest a reclamation bond can be
released is five years after reclamation to the approximate original contour or
to a productive use, as applicable, has been achieved.
 
Most states in which the Company's active mining operations are located have
achieved primary jurisdiction for SMCRA enforcement through approved state
programs. These state programs have established reclamation and environmental
standards for coal mining operations that generally correspond to, and may not
be less stringent than, those found in SMCRA. Each state is charged with
enforcing its state laws and with enforcing, subject to federal oversight, the
provisions of SMCRA in its jurisdiction. The Company currently has posted more
than $524.4 million in reclamation bonds. Because much of the reclamation
process occurs contemporaneously with mining activities in accordance with the
approved reclamation plan, the estimated reclamation cost to immediately cease
mining operations substantially exceeds the recorded reclamation accrual.
 
SMCRA requires the issuance and periodic renewal of permits to conduct mining
operations. Although the Company does not anticipate significant permit
issuance or renewal problems, there can be no assurance that the Company's
permits will be renewed or granted in the future or that permit issues will not
adversely affect operations. Under previous SMCRA regulations, responsibility
for any coal operator currently in violation of SMCRA could be imputed to other
companies deemed, according to regulations, to "own or control" the coal
operation. Sanctions included being blocked from receiving new permits and
rescission or suspension of existing permits. Because of a recent federal court
action invalidating these SMCRA ownership and control regulations, the scope
and potential impact of the "ownership and control" requirements on the Company
are unclear. OSM has responded to the court action by promulgating interim
regulations that more narrowly apply the ownership and control standards to
coal companies. Although the federal action should have by analogy a
precedential effect on state regulations dealing with "ownership and control,"
which are in many instances similar to the invalidated federal regulation, it
is not certain what impact the federal court decision will have on these state
regulations.
 
Clean Air Act. The Federal Clean Air Act, including the Clean Air Act
Amendments, and corresponding state laws that regulate the emissions of
materials into the air, affect coal mining operations both directly and
indirectly. Direct impacts on coal mining and processing operations may occur
through Clean Air Act permitting requirements and/or emissions control
requirements relating to particulate matter (e.g., "fugitive dust") including
future regulation of fine particulate matter measuring 2.5 micrometers in
diameter or smaller. In July 1997, the U.S. Environmental Protection Agency
("EPA") adopted new, more stringent National Ambient Air Quality Standards
("NAAQS") for particulate matter and ozone. As a result, some states will be
required to change their existing implementation plans to attain and maintain
compliance with the new NAAQS. Because coal mining operations emit particulate
matter, the Company's mining operations and utility customers are likely to be
directly affected when the revisions to the NAAQS are implemented by the
states. State and federal regulations relating to implementation of the new
NAAQS may restrict the Company's ability to develop new mines or could require
the Company to modify its existing operations. The extent of the potential
direct impact of the new NAAQS on the coal industry will depend on the policies
and control strategies associated with the state implementation process under
the Clean Air Act, but could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
The Clean Air Act indirectly affects coal mining operations by extensively
regulating the air emissions of sulfur dioxide (believed to be a cause of "acid
rain") and other compounds including nitrogen oxide emitted by coal-fueled
utility power plants. Title IV of the Clean Air Act Amendments places limits on
SO/2/ emissions (in the form of baseline emission standards) from electric
power generation plants. Reduction in such emission limits occurred in Phase I
in 1995 and additional reductions in such emission limits will occur in Phase
II in 2000 and will apply to all coal-fueled utility power plants, including
those subject to the 1995 restrictions. The
 
                                       96

 
affected utilities have been and may be able to meet these requirements by,
among other ways, switching to low-sulfur fuels, installing pollution control
devices such as scrubbers, reducing electricity generating levels or purchasing
or trading emission allowances. Specific emission sources will receive these
emission allowances, which utilities and industrial concerns can trade or sell
to allow other units to emit higher levels of SO/2/. The effect of these
provisions of the Clean Air Act Amendments on the Company cannot be completely
ascertained at this time. The Company believes that implementation of Phase II
will likely exert a downward pressure on the price of higher sulfur coal, as
additional coal-fueled utility power plants become subject to the restrictions
of Title IV. This price effect is expected to result after the large surplus of
emission allowances which has accumulated in connection with Phase I has been
reduced, and before the utilities electing to comply with Phase II by
installing sulfur-reduction technologies are able to implement such a
compliance strategy.
 
The Clean Air Act Amendments also require that utilities that currently are
major sources of nitrogen oxides in moderate or higher ozone nonattainment
areas install reasonably available control technology ("RACT") for nitrogen
oxides, which are precursors of ozone. In addition, stricter ozone standards,
as discussed above, are expected to be implemented by the EPA by 2003. The
Ozone Transport Assessment Group ("OTAG"), formed to make recommendations to
the EPA for addressing ozone problems in the eastern United States, submitted
its final recommendations to the EPA in June 1997. In September 1998, EPA
announced an implementation plan (the "SIP call") that will require 22 eastern
states to amend their state implementation plans for substantial reductions in
nitrogen oxide emissions. The SIP call includes state-by-state nitrogen oxide
budgets and was accompanied by two additional actions that EPA has proposed to
implement if the SIP call does not adequately address nitrogen oxide emissions.
Installation of RACT and additional control measures required under the
proposal will make it more costly to operate coal-fueled utility power plants
and, depending on requirements of individual state attainment plans and the
development of revised new source performance standards, could make coal a less
attractive fuel alternative in the planning and building of utility power
plants in the future.
 
The Clean Air Act Amendments also require a study of utility power plant
emissions of certain toxic substances, including mercury, and direct the EPA to
regulate these substances, if warranted. In a recent report, the EPA indicated
that although it plans to study the issue further, it does not plan to propose
regulations in the near future. However, future federal or state regulatory or
legislative activity may seek to reduce mercury emissions and such
requirements, if enacted, could result in reduced use of coal if utilities
switch to other sources of fuel.
 
In addition, air emissions of SO/2/, particulate matter ("PM"), nitrogen oxide
also are subject to Clean Air Act Amendment regulations that protect visibility
in Class I Federal areas, such as national parks and wilderness areas.
Currently, these regulations address visibility impairment reasonably
attributable to a single source or small group of sources in 35 states and one
territory. In July 1997, EPA proposed regulations that would expand the
applicability of the regional haze program to all states, including those that
may not have any Class I areas, and that would establish presumptive reasonable
progress targets to be met by states. If these proposed regional haze
regulations are finalized, some states may be required to change their existing
implementation plans to achieve compliance. Although the proposed regulations
do not identify specific sources as potential contributors to visibility
impairment, coal-fueled utilities are a source of these substances. Depending
on the requirements of the final rule and individual state implementation
plans, efforts to reduce SO/2/, PM, and nitrogen oxide emissions may make it
more costly to operate coal-fueled utility power plants. Existing strategies
for other air quality programs, such as those previously discussed, may provide
visibility improvements, thereby limiting the potential adverse effects of any
final regulations on the Company.
 
Clean Water Act. The Federal Water Pollution Control Act (the "Clean Water
Act") affects coal mining operations by: (i) imposing effluent discharge
restrictions on pollutants discharged into water; (ii) imposing regular
monitoring and reporting requirements; (iii) requiring the issuance and renewal
of permits for the discharge of pollutants into waters; and (iv) imposing
performance standards as a requirement for the issuance of permits. In
addition, states in which the Company conducts mining operations have enacted
legislation regulating the water pollution effects of coal mining operations.
Each state is charged with enforcing its state laws and with enforcing, subject
to federal oversight, the Clean Water Act in its jurisdiction.
 
                                       97

 
Various state and federal initiatives and activities are underway regarding
the environmental impacts of valley fills associated with surface mining
activities, including mountaintop removal mining. Valley fills currently are
permitted under provisions of the Clean Water Act that authorize the discharge
of fill material into navigable waters. Citizen suits against permitting
authorities have been filed in federal court in both Pennsylvania and West
Virginia alleging that valley fill permits violate the anti-degradation
provisions of the Clean Water Act and therefore should not be issued pursuant
to those provisions. In addition, various task forces and agencies at the
state and federal level are currently exploring environmental issues
associated with valley fills in general, as well as environmental issues
associated with mountaintop removal mining in particular. The Company cannot
predict the outcome of the pending litigation or whether legislation and/or
regulations, if enacted, regarding valley fills or mountaintop removal mining
could have a material adverse effect on the Company.
 
Resource Conservation and Recovery Act. The Federal Resource Conservation and
Recovery Act ("RCRA") and similar state laws affect coal mining operations by
imposing requirements for the treatment, storage and disposal of hazardous
wastes. Although coal mining wastes covered by SMCRA permits are exempted from
regulation under RCRA, the Company cannot predict whether this exclusion will
continue.
 
Federal and State Superfund Statutes. The Federal Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") and similar state laws
affect coal mining operations by creating investigation and remediation
obligations for releases of hazardous substances which may endanger public
health or the environment and providing for natural resource damages. Under
CERCLA, joint and several liability may be imposed on waste generators, past
and present site owners and operators, as well as others, regardless of fault
or the legality of the disposal activity at the time it occurred. Waste
substances generated by coal production and processing are generally not
considered hazardous substances covered by CERCLA. Products used by coal
companies in operations, such as certain chemicals, and the disposal of such
products, however, are governed by the statute. Although the Company does not
currently anticipate material liabilities or costs associated with CERCLA or
similar state laws, there can be no assurance that material liabilities or
costs related to CERCLA or similar state laws will not be incurred in the
future.
 
Global Climate Change. The United States and over 160 other nations are
signatories to the 1992 Framework Convention on Global Climate Change (the
"Convention"), which is intended to limit or capture emissions of greenhouse
gases such as carbon dioxide. In December 1997 in Kyoto, Japan, the
signatories to the Convention established a binding set of emissions targets
for developed nations (the "Kyoto Protocol"). The specific limits under the
terms of the Kyoto Protocol vary from country to country, but under the terms
of the Kyoto Protocol the United States would be required to reduce emissions
to 93% of 1990 levels over a five-year budget period from 2008 through 2012.
Although the United States has not ratified the Kyoto Protocol and no
comprehensive requirements focusing on greenhouse gas emissions are in place,
such restrictions, whether through ratification of the Kyoto Protocol or other
efforts to stabilize or reduce greenhouse gas emissions, could adversely
impact the price and demand for coal. According to the Department of Energy's
Annual Energy Outlook for 1998, coal accounts for 34% of the man-made
greenhouse gas emissions in the United States, and efforts to control
greenhouse gas emissions could result in reduced use of coal if electric
generators switch to lower carbon sources of fuel.
 
Mine Health and Safety
 
Stringent health and safety standards have been imposed by federal legislation
since the Federal Coal Mine Health and Safety Act of 1969 was adopted. That
legislation resulted in increased operating costs and reduced productivity.
The Federal Mine Health and Safety Act of 1977 significantly expanded the
enforcement of health and safety standards and imposed health and safety
standards on all aspects of mining operations.
 
All of the states in which the Company conducts coal mining operations have
programs for mine health and safety regulation and enforcement. In
combination, federal and state health and safety regulation in the coal mining
industry is perhaps the most comprehensive and pervasive system for protection
of employee health and safety affecting any segment of U.S. industry. Together
with the federal requirements, these programs provide extensive and
comprehensive requirements for protection of employee safety and health.
 
                                      98

 
Black Lung
 
Under the Black Lung provisions of the Federal Coal Mine Health and Safety Act
of 1969, the Black Lung Benefits Revenue Act of 1977 and the Black Lung
Benefits Reform Act of 1977, as amended in 1981, and provisions of state
workers' compensation acts, each coal mine operator is required to secure
payment of federal black lung benefits to claimants who are current and former
employees and to a federal trust fund for the payment of benefits and medical
expenses to claimants who last worked in the coal industry prior to July 1,
1973. On a program-wide basis, less than 15% of the miners currently seeking
federal black lung benefits are awarded such benefits by the federal
government. The trust fund is funded by an excise tax on production of up to
$1.10 per ton for deep-minded coal and up to $0.55 per ton for surface-mined
coal, neither amount to exceed 4.4% of the sales price. This tax is passed on
to the purchaser under many of the Company's coal sales agreements.
 
Legislation seeking to increase the federal black lung approval rate has been
introduced repeatedly since 1980 in the Senate and the House of
Representatives. The last such bill died when Congress adjourned in 1997. It is
expected that similar legislation will be introduced in future sessions of
Congress. Black lung claims may also be filed under the provisions of workers
compensation laws in states in which a company operates. Currently, Kentucky,
the state with the most costly black lung provisions, has seen a significant
decrease in claims awards since a 1996 law reformed the state workers'
compensation system. However, future changes in Kentucky's workers'
compensation statutes could result in a return to higher levels of claims.
 
In 1997, the U.S. Department of Labor (the "DOL") issued proposed amendments to
the regulations implementing the federal black lung laws which, among other
things, establish a presumption in favor of a claimant's treating physician and
limit a coal operator's ability to introduce medical evidence regarding the
claimant's medical condition. If adopted, the amendments could have an adverse
impact on the Company, the extent of which cannot be accurately predicted. The
House subcommittee with oversight authority for the Federal Black Lung Program
has included in the current budget bill provisions that prohibit the DOL from
implementing these regulations until the DOL addresses issues related to the
cost impact of the regulations.
 
The Coal Industry Retiree Health Benefit Act of 1992
 
The Coal Industry Retiree Health Benefit Act of 1992 (the "Coal Act") was
enacted to provide for the funding of health benefits for certain UMWA
retirees. The Coal Act merged previously established UMWA benefit plans into a
newly created fund called the "Combined Fund," into which "signatory operators"
and "related persons" are obligated to pay annual premiums for beneficiaries.
The Coal Act also created a second benefit fund (the "1992 Fund") for miners
who retired between July 21, 1992 and September 30, 1994 and whose former
employers are no longer in business. Companies which are signatories to the
NBCWA labor agreements must pay premiums to the Combined Fund and the 1992
Fund. The Social Security Administration assigns retired miners and their
beneficiaries to the coal companies with which they were formerly employed or
related for purposes of assessing the premium. The Supreme Court's recent
decision in Eastern Enterprises v. Apfel, 1998 WL 332966 (U.S.), held that the
assessment of premiums under the Coal Act against those coal companies that
were only signatories to the UMWA wage agreements prior to 1974 is an
unconstitutional taking under the Fifth Amendment.
 
The Company is currently required to pay premiums to both the Combined Fund and
the 1992 Fund. The possibility exists that the Company will be assessed for a
greater number of miners than could be reasonably foreseen, or that higher
premiums will be assessed for the Combined Fund and the 1992 Fund.
 
Federal Land Policy
 
The U.S. government is the largest owner of coal reserves in the nation. Its
authority is exercised through several agencies, but primarily through the BLM.
The majority of these reserves are located in the western United States. Some
are on lands on which the Company has conducted surface coal mining operations
since 1995 and on which it will mine in the future.
 
                                       99

 
The federal government's authority over public lands exceeds the rights of any
private owner of coal. The federal government possesses both the customary
property rights of a private owner and the rights of the sovereign over the
management of public lands. Although the relevant statutes and regulations,
including the Mineral Leasing Act of 1920, as amended by the Federal Coal
Leasing Amendments Act of 1976, the Federal Land Policy Management Act of 1977
and SMCRA, are well-established, they create a complex and cumbersome process
for a lease applicant. The consequence is that an opponent of federal coal
leasing has numerous opportunities to delay the issuance of a federal coal
lease.
 
Penalties
 
Under certain circumstances, substantial fines and penalties, including
revocation of mining permits, may be imposed under the laws described above.
Monetary sanctions and, in severe circumstances, criminal sanctions may be
imposed for failure to comply with these laws. Regulations also provide that a
mining permit can be refused or revoked if an officer, director or a
shareholder with a 10% or greater interest in the entity is affiliated with
another entity which has outstanding permit violations. Although the Company
has been cited for violations, the Company and its subsidiaries have never had
a permit suspended or revoked because of any violation by the Company, its
subsidiaries or any affiliates of the Company, and the penalties assessed for
such violations have not been material, with most violations being abated
without any penalty being assessed.
 
Compliance with Regulatory Requirements
 
The Company endeavors to conduct its mining operations in compliance with all
applicable federal, state and local laws and regulations and believes that it
is currently in substantial compliance with all such laws and regulations.
However, because of the extensive and comprehensive regulatory requirements,
minor, inadvertent violations during mining operations are not unusual, and
although the Company has no intention to commit and seeks to prevent the
occurrence of any infractions, the Company may have violations in the future.
The Company believes its compliance record compares favorably with that of
other coal mining companies.
 
Because of the extensive nature of the Company's land holdings, it has not
undertaken an investigation of environmental conditions on most of its land
holdings which might subject the Company to liability under existing
environmental laws. From time to time during the course of normal operations
there have been discharges of hazardous materials onto the Company's lands. The
Company is not aware of other adverse environmental conditions on its lands
which might subject the Company to material liability under existing
environmental laws.
 
In addition to environmental liability at its own properties, the Company is
potentially liable for environmental conditions on properties transferred to
PAC under the Pittston Agreement. Under the Pittston Agreement, Addington
Holding Company, Inc. ("Addington Holding") transferred to PAC certain mining
properties and indemnified PAC for certain liabilities, including certain
environmental liabilities, associated with the transferred properties. The
Company agreed to assume the liabilities of Addington Holding under this
indemnification when the Company purchased its current operating properties
from Addington Holding in 1995. PAC has notified the Company of various
environmental conditions existing on the transferred properties for which it
claims indemnification. The Company has contested the applicability of the
indemnification to many of these conditions; however, it is possible that the
Company may incur liability as a result of these conditions. See "Certain
Related Party Transactions--Indemnification." The Company does not believe such
liability would have a material adverse effect on the business of the Company
and its subsidiaries, taken as a whole.
 
The Company believes that its continued compliance with regulatory standards
will not substantially affect its ability to compete with similarly-situated
coal mining companies. The cost of compliance, however, does increase the cost
of mining coal and to this extent makes coal less competitive with alternative
fuels. While the Company is not aware of any pending or proposed legislation or
regulatory action that relates to environmental issues that materially affect
the Company, except as discussed above, the possibility exists that new
legislation may be enacted or new regulations adopted which will have the
effect of materially increasing the cost of mining coal.
 
                                      100

 
                                   MANAGEMENT
 
Directors and Executive Officers
 
The following information is furnished with respect to the directors and
executive officers of the Company.
 


Name                     Age Position with the Company
- ----                     --- -------------------------
                       
Larry Addington.........  62 Chairman of the Board, Director
Don Brown...............  53 Vice Chairman
Kevin Crutchfield.......  37 President, Chief Operating Officer
John Baum...............  44 Chief Financial Officer
Keith Sieber............  47 Vice President--Western Operations
Robert Addington........  58 Senior Vice President--Eastern Operations, Director
Bernie Mason............  50 Senior Vice President--Technical Services, Land and
                             Business Development
Marc Merritt............  45 Senior Vice President--Sales & Marketing
Vic Grubb...............  39 Treasurer/Controller
John Lynch..............  50 Vice President--Supply/Maintenance, Secretary
Stonie Barker...........  72 Director
Robert Anderson.........  72 Director
Stephen Addington.......  32 Director

 
Larry Addington, Robert Anderson, Robert Addington, Stonie Barker and Stephen
Addington are the directors of the Company. All directors hold office until the
next annual meeting of stockholders and until their successors are elected and
qualified. Officers serve at the discretion of the Board of Directors. All
officers spend substantially full time working for the Company or its
subsidiaries.
 
Larry Addington, Chairman of the Board since the formation of the Company, has
substantial experience in the operation of coal mining ventures. His first
mining company, Addington Brothers Mining Company ("Addington Brothers
Mining"), began mining coal in eastern Kentucky in 1972 and was sold to Ashland
Oil, Inc. in 1976. In 1978, Larry Addington formed Pyramid Mining, Inc. which
mined coal in western Kentucky and was sold to First Mississippi Corporation in
1981. In 1984, Larry Addington formed Addington Resources, which became a
public company in 1987, and which primarily conducted coal mining and
integrated solid waste disposal operations. Larry Addington continues to hold
an interest in Republic Industries, Inc. ("Republic"), which acquired Addington
Resources in 1995, but has no involvement in the management of Republic. Larry
Addington has been Chairman of the Board of the Company since its organization
and was the founder of each of the corporate entities controlled by the
Company. Larry Addington is the brother of Robert Addington and Stephen
Addington. See "The Company" for more details.
 
Don Brown, Vice Chairman of the Company since January 1999, has worked in the
coal industry since 1968, and has extensive experience in all phases of coal
mining operations. From 1987 to 1993, Mr. Brown served as President of Cyprus
Coal Company ("Cyprus Coal"). From 1993 to 1995, Mr. Brown served as President
of Cyprus Amax, and directed that company's increase in annual production from
10 million tons of coal to over 80 million tons of coal, making it the second
largest coal company in the United States. From 1995 until September 1997,
Mr. Brown was Chief Executive Officer of International Executive Services LLC,
a coal mining consulting business, and Chief Executive Officer of Beaver Brook
Coal Company, LLC, a coal leasing and exploration company. From September 1997
until January 1999, Mr. Brown served as President and Chief Executive Officer
of the Company.
 
Kevin Crutchfield, Chief Operating Officer of the Company since July 1, 1998,
and President of the Company since January 1999, has worked in the coal
industry since 1981. From 1993 to 1995, he worked for Pittston Coal Company and
its subsidiaries as a Vice President. From 1995 until his employment by the
Company, he served in various capacities for Cyprus Amax, including President
and Chairman of Cyprus Australia Coal Company ("Cyprus Australia"), where he
directed operations employing 1,600 workers and producing 16 million tons of
coal per year.
 
                                      101

 
John Baum, Chief Financial Officer of the Company since November 1997, has been
involved in the coal industry since 1981. From 1991 through April 1993, Mr.
Baum served as Vice President of Business Development for Cyprus Coal. From May
1993 until June 1995, Mr. Baum was employed by Cyprus Australia as Deputy
Chairman and Chief Financial Officer of its Australian operations. From June
1996 until his employment by the Company, he was a general consultant with J.E.
Baum & Associates.
 
Keith Sieber, Vice President--Western Operations of the Company since November
1997, has worked in the coal industry since 1972. From 1992 until his
employment by the Company, he was employed as a Vice President by Cyprus Amax.
Mr. Sieber was responsible for the operations of Twentymile mine when it set a
world record for monthly coal production by a longwall mine (944,443 tons).
 
Robert Addington, Senior Vice President--Eastern Operations of the Company
since 1970, has worked in the coal industry since 1970. With Larry Addington
and Bruce Addington, he founded Addington Brothers Mining, which was sold to
Ashland Oil in 1976. He served as an officer and director of Addington
Resources from 1986 until 1995. Since 1995, he has been employed by the Company
or its predecessor.
 
Bernie Mason, Senior Vice President--Technical Services and Business
Development of the Company since January 1999, has worked in the coal industry
since 1978. From 1986 until his employment by the Company, Mr. Mason worked as
a manager and geologist for various Addington-related entities.
 
Marc Merritt, Senior Vice President--Sales and Marketing of the Company since
January 1998, has worked in the coal industry since 1977. From 1986 until 1994,
he was a sales manager for Addington, Inc., and from 1994 until 1997, he was
the Executive Vice President--Coal Sales for Pittston Coal Sales Corp. From
1997 until his employment by the Company, he was President of M&M Management,
Inc., a coal industry consulting company.
 
Vic Grubb, Treasurer/Controller has worked in the coal industry since 1989.
From 1989 to 1995, he was an accountant with Addington Resources, and since
1995 he has been the Chief Financial Officer of Addington Enterprises.
 
John Lynch, Vice President--Supply/Maintenance and Secretary of the Company
since September 1997 and has worked in the coal industry since 1983. From 1983
until his employment by the Company, he worked as a manager and an equipment
purchaser for various Addington-affiliated companies. He has been the Vice
President and Secretary of Addington Enterprises since 1987.
 
Stonie Barker, director of the Company since November, 1997, has worked in the
coal industry since 1951. He has served as President, Chief Executive Officer
and Chairman of the Board of Island Creek Coal Company and Executive Vice
President of Occidental Petroleum Corporation. Since 1984, Mr. Barker has
served as President of the Executive Energy Company, a coal industry consulting
group. He is also a director of Kaiser Steel Corporation.
 
Robert Anderson, director of the Company since August, 1998, has worked in the
coal industry since 1953. He has served in various senior executive capacities,
including as President of ANDALEX Resources, Inc. ("ANDALEX") from 1990 until
1994 and Vice Chairman of the Board of Directors of ANDALEX from 1990 until
1995. From 1995 until 1996, he served as Chief Executive Officer and from 1995
until October 1998 he served as Chairman of the Board of Directors of
Centennial Resources, Inc. ("Centennial"). On October 13, 1998, Centennial
filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code in
the U.S. Bankruptcy Court, District of Delaware.
 
Stephen Addington, director of the Company since its formation, has worked in
the coal industry since 1991. He was a Regional Manager of Addington Resources
from 1990 until 1992. From 1992 until 1995, he was the Vice President of
Operations for Addington Environmental, Inc. Since 1995 he has been a Division
Manager of Tennessee Mining, Inc. and a consultant to Kindill Mining, Inc.,
positions he continues to hold.
 
                                      102

 
Directors of the Company who are also officers or shareholders of the Company
or Holdings receive no compensation for their services as directors. Non-
management directors are paid a base salary of $25,000 per year for services as
directors, plus an additional $2,000 per meeting actually attended and $500 for
each committee meeting actually attended which was not held in conjunction with
a Board of Directors meeting.
 
Limitation on Liability of Directors
 
Pursuant to the Certificates of Incorporation of the Company, no director shall
be personally liable to the Company or its stockholders for monetary damages
for breach of his fiduciary duty as a director, except for a breach of the
director's duty of loyalty, for acts and omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, for
transactions from which a director derived an improper personal benefit or for
unlawful payment of dividends or stock purchases or redemptions pursuant to
Section 174 of the Delaware General Corporation Law. This provision offers
persons who serve on the board of directors of the Company protection against
awards of monetary damages for negligence in the performance of their duties.
It does not affect the availability of equitable remedies such as an injunction
or rescission based upon a director's breach of the duty of care.
 
Executive Compensation
 
The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities for the year ended December 31, 1998,for (i) the Chief Executive
Officer of the Company, and (ii) each of the four other most highly compensated
executive officers of the Company who received in excess of $100,000, (the
"Named Executive Officers") determined as of December 31, 1998.
 
                           Summary Compensation Table
 


                                          Annual Compensation (1)        Long-Term Compensation Awards
                                      -------------------------------- ----------------------------------
                                                                                     Securities
        Name and                                          Other Annual  Restricted   Underlying    LTIP      All Other
   Principal Position     Fiscal Year  Salary  Bonus (2)  Compensation Stock Awards Options/SARs Payments Compensation (3)
   ------------------     ----------- -------- ---------- ------------ ------------ ------------ -------- ----------------
                                                                                  
Don Brown...............     1998     $524,200 $2,501,000     --           --           --         --         $57,959
 President and Chief
  Executive Officer
John Baum...............     1998     $201,881 $1,451,000     --           --           --         --             --
 Chief Financial Officer
Kevin Crutchfield.......     1998     $183,312 $  700,350     --           --           --         --         $ 7,497
 Chief Operating Officer
James Morris............     1998     $138,524 $  250,500     --           --           --         --             --
 Senior Vice President--
  Technical Service,
  Land & Business
  Development
Talmadge Mosley.........     1998     $ 34,711 $  300,000     --           --           --         --             --
 Vice President--
  Underground Mining
  Operations, Eastern
  United States

- --------
(1) Perquisites and other personal benefits paid in 1998 for the Named
    Executive Officers aggregated less than the lesser of $50,000 and 10% of
    the total annual salary and bonus set forth in the columns entitled
    "Salary" and "Bonus" for each Named Executive Officer.
(2) The Company accrued discretionary cash bonuses in 1998 for extraordinary
    services provided by certain key employees in connection with the
    restructuring of the Company and its predecessors.
(3) Represents payment of moving expenses.
 
                                      103

 
Employment Contracts
 
Don Brown has an amended and restated employment agreement with the Company,
dated as of June 30, 1998, which expires on October 1, 1999, and automatically
renews for one-year periods unless either party gives notice not to renew. Mr.
Brown is employed as Vice Chairman at an annual base salary of $600,000, with
such annual merit increases and bonus compensation as the Company may decide.
Mr. Brown is also entitled to participate in any employee benefit plan
sponsored by the Company and has received options to purchase 6,600 shares of
the stock of Holdings pursuant to the Stock Option Plan (as defined). Pursuant
to the employment agreement, the Company paid Mr. Brown $1.5 million for
services rendered in connection with the acquisition of Zeigler, and $1.0
million for services rendered in connection with the Offering and the Senior
Credit Facility. During the term of Mr. Brown's employment, the Company will
provide him with a house in Ashland, Kentucky. The Company also provided Mr.
Brown a $150,000 bridge loan, which was repaid upon the sale of his prior
residence, and paid Mr. Brown's moving expenses and the real estate commission
on the sale of such residence. Mr. Brown receives a life insurance policy in
the amount of $500,000, a company car and four weeks of paid vacation per year.
In the event that Mr. Brown's employment with the Company is terminated at any
time prior to October 1, 1999, other than due to death, disability or for
cause, the Company must continue to pay him the compensation remaining over the
term of his contract.
 
Don Brown has a Stock Option Purchase Agreement with the Company dated as of
June 30, 1998. The agreement provides that, if Mr. Brown remains in the
Company's employment through October 1, 1999, Mr. Brown may cause the Company
to purchase his stock options, and the Company may cause Mr. Brown to sell to
the Company such stock options, for a purchase price of $2.5 million. This
Agreement is triggered upon the termination of Mr. Brown's employment and
expires ninety (90) days thereafter.
 
Don Brown has a bonus agreement with the Company, dated as of June 30, 1998,
which provides that in the event that the Company completes certain asset
acquisitions within nine (9) months from the date of the agreement, Mr. Brown
shall be paid bonuses of up to $2.0 million. Pursuant to this bonus agreement,
Mr. Brown was paid $2.5 million for services rendered in connection with the
Triton Disposition.
 
Kevin Crutchfield has an employment agreement with the Company, dated as of
June 26, 1998 and amended on January 29, 1999, which expires on July 20, 2003.
Mr. Crutchfield is employed as the President Chief Operating Officer of the
Company at an annual base salary of $500,000, with such annual merit increases
and bonus compensation as the Company may decide. In the event that the Company
employs Mr. Crutchfield in any position other than President and Chief
Operation Officer, his annual base salary will be reduced to $350,000. The
Company paid Mr. Crutchfield a sign-on bonus of $700,000 upon his commencement
of work. Mr. Crutchfield is also entitled to participate in any incentive,
savings, retirement, welfare, fringe or employee benefit plan sponsored by the
Company. Mr. Crutchfield received options to purchase 2,284 shares of the stock
of Holdings pursuant to the Stock Option Plan. Under certain circumstances, if
Mr. Crutchfield remains employed with the Company through the first anniversary
of a change of control (as defined in the employment agreement), Mr.
Crutchfield will receive an additional bonus equal to the sum of his annual
base salary plus the greater of the "Annual Bonus" and the "Recent Average
Bonus" (each as defined in the employment agreement). The Company paid Mr.
Crutchfield's moving expenses from Sydney, Australia. Mr. Crutchfield receives
a life insurance policy in the amount of $1,000,000, a disability policy for
the amount of the maximum insurable interest permitted, a company car and four
weeks of paid vacation per year. Following the second year of Mr. Crutchfield's
employment, in the event that the Company terminates his employment prior to
July 20, 2003, other than for death, disability or cause, the Company shall
continue to pay Mr. Crutchfield his then existing annual base salary, and any
bonuses that would otherwise have been paid if he had remained employed, for
one year from the date of termination of employment or such shorter period as
may remain under the term of the employment agreement. Following the third year
of employment, Mr. Crutchfield may terminate his employment for good reason (as
defined in the employment agreement) and the Company shall continue to pay Mr.
Crutchfield his then existing annual base salary, and any bonuses that would
otherwise have been paid if he had remained employed, for one year from the
date of termination of employment or such shorter period as may remain under
the term of the employment agreement.
 
                                      104

 
Keith Sieber has an employment agreement with the Company, dated as of November
1, 1997 and amended on February 5, 1998 which expires on October 31, 2000. Mr.
Sieber is employed as Senior Vice President--Western Operations at an annual
base salary of $235,000, with such annual merit increases and bonus
compensation as the Company may decide. Mr. Sieber is also entitled to
participate in any employee benefit plan sponsored by the Company and has
received options to purchase 2,200 shares of the stock of Holdings pursuant to
the Stock Option Plan (as defined on p. 108). For the initial year of his
employment, the Company must lease an apartment in Grand Junction, Colorado for
Mr. Sieber, and loan Mr. Sieber $10,300 per month until the earlier of the one-
year anniversary of his employment or the sale of his existing residence. The
balance of such loan is currently $92,700. During the term of his employment,
Mr. Sieber receives a company car, a life insurance policy in the amount of
$500,000, and four weeks of paid vacation per year. In the event that Mr.
Sieber's employment with the Company is terminated at any time prior to October
31, 2000, other than due to death, disability or cause, the Company must
continue to pay him the compensation remaining over the term of his contract.
 
John Baum has an amended and restated employment agreement with the Company,
dated as of December 22, 1998, which may be terminated by the Company upon
giving written notice. Mr. Baum is employed as the Chief Financial Officer at
an annual base salary of $190,000, with such annual merit increases and bonus
compensation as the Company may decide. Mr. Baum is also entitled to
participate in any employee benefit plan sponsored by the Company, and receives
a company car.
 
The company will pay Mr. Baum $250,000 if Mr. Baum assists the Company in
connection with a supplemental bond offering on or before February 28, 1999.
The Company paid Mr. Baum $1.0 million in consideration of the modification of
his prior employment agreement and the cancellation of his options to purchase
1,760 shares of the stock of Holdings pursuant to the Stock Option Plan.
 
Marc R. Merritt has an employment agreement with the Company, dated as of
January 1, 1998, which expires on January 15, 2001. Mr. Merritt is employed as
Senior Vice-President of Sales and Marketing at an annual base salary of
$165,000, with such annual merit increases and bonus compensation as the
Company may decide. Mr. Merritt is also entitled to participate in any employee
benefit plan sponsored by the Company, and has received options to purchase
1,702 shares of the stock of Holdings pursuant to the Stock Option Plan. The
Company paid Mr. Merritt's moving expenses and the real estate commission on
the sale of his residence located at Abbington, Virginia. Mr. Merritt receives
a life insurance policy in the amount of $500,000, a company car and four weeks
of paid vacation per year. In the event that Mr. Merritt's employment with the
Company is terminated at any time prior to January 15, 2001, other than due to
death, disability or cause, the Company must continue to pay him the remaining
compensation over the term of his contract.
 
Deferred Compensation
 
Stock Option Plan
 
Holdings has adopted the AEI Resources Holding, Inc. Stock Option Plan (the
"Stock Option Plan"), which provides for the issuance to certain key employees
of or advisors to Holdings, its Subsidiaries or its Parent (both as defined
therein) (the "Optionees") of options (the "Options") for up to 75,000 shares
of Common Stock (as defined therein) of Holdings outstanding from time to time,
subject to adjustment to reflect certain events such as stock dividends, stock
split-ups, subdivisions or consolidations of share or other events which
necessitate a similar adjustment. The Stock Option Plan is intended to, among
other things, increase the profitability and growth of Holdings and its
Subsidiaries, motivate key employees to contribute to the success of Holdings
and its Subsidiaries and provide competitive compensation while obtaining the
benefits of tax deferral.
 
The Board of Directors of Holdings or a committee appointed by the Board of
Directors (the "Committee") will administer the Stock Option Plan. The
Committee has the authority to determine the awards made to Optionees (each, a
"Grant"). Such Grants are subject to various limitations and conditions
specified in the Stock Option Plan (including certain legal restrictions).
 
                                      105

 
All key employees of or advisors to Holdings or a Subsidiary or Parent are
eligible for Grants. The Committee has the authority to designate the employees
and advisors to whom Options are to be granted and will specify the number of
shares of Common Stock subject to each Grant.
 
The Committee has the authority to make such amendments to any terms and
conditions applicable to outstanding Grants as are consistent with the Stock
Option Plan, except that no such amendment shall become effective without prior
approval of the Optionees if such approval is necessary. No such amendment
shall, without an Optionee's consent, adversely affect any rights of such
Optionee under the Grant outstanding at the time such amendment is made.
Holdings shall comply with any tax or regulatory requirement or rule of any
exchange or system upon which the stock may be listed.
 
Stock Option Agreements
 
The exercise price of any Options granted under the Stock Option Plan is
determined by the Committee and set forth in a Stock Option Agreement (the
"Stock Option Agreement"), but cannot be less than the fair market value of
Common Stock on the date the Option is granted (the "Grant Date"); provided,
however, that the exercise price cannot be less than 110% of the fair market
value if the Optionee receives an incentive stock option and owns more than 10%
of the total combined voting power of Holdings, any Subsidiary or any Parent.
In addition, such Options are exercisable based upon a date set forth in each
Optionee's Stock Option Agreement. Any vesting period for an Option may be
subject to acceleration upon a Change in Control (as defined in the Stock
Option Plan). The exercise period for an Option may be shortened due to a
Termination of Employment (as defined in the Stock Option Plan). No Option can
be exercised more than 10 years from the Grant Date; provided, however, that no
Option can be exercised more than five years from the Grant Date if the
Optionee receives an incentive stock option and owns more than 10% of the total
combined voting power of Holdings, any Subsidiary or any Parent.
 
                                      106

 
                       CERTAIN RELATED PARTY TRANSACTIONS
 
General
 
Holdings is closely held and has entered into transactions and loans with
related individuals and entities. As provided in the Indenture, all future
related party transactions or loans must be for a bona fide business purpose on
terms at least as favorable as those obtainable from an unaffiliated party
unless otherwise authorized under the Indenture. In addition, all such
transactions or loans will be approved or ratified by a majority of the
independent and disinterested directors of the Company. In situations where
there will be an ongoing relationship with related parties for the purchase of
services or products, a majority of the independent and disinterested directors
will be required to approve continuation or initiation of the relationship and
will periodically review such transactions to assure that they meet the
aforementioned standard. See "Description of the Notes--Certain Covenants--
Transactions with Affiliates" and "Description of Other Indebtedness--The New
Senior Notes" for a further description of the procedure for review and
approval of transactions with affiliates.
 
Arrangements Involving Affiliates
 
TASK Trucking Company ("TASK"), which is owned by Austin Dickerson, Larry
Addington's brother-in-law, provides trucking brokerage services to the
Company, for which TASK receives compensation per ton hauled. The Company paid
TASK gross payments of $9.8 million, $12.9 million and $18.2 million for
trucking services in 1995, 1996 and 1997, respectively, and $13.8 million for
the nine-month period ended September 30, 1998. Based upon the Company's annual
review of prices charged by competing trucking companies, the Company believes
that the price charged for such trucking services was not greater than the
prices generally charged by non-affiliated entities in the area.
 
The Company has a service agreement dated October 22, 1997 with Mining
Machinery, Inc. ("MMI"), of which John Lynch and Larry Addington own more than
10% and more than 86% of the capital stock, respectively. The service agreement
expires November 30, 2007, but may be terminated earlier upon written notice by
MMI. Under this agreement, MMI repairs and maintains some of the Company's
mining equipment. In 1997, the Company paid MMI $5.8 million, and for the nine-
month period ended September 30, 1998, the Company paid MMI $6.7 million for
repairs and maintenance. Based upon the Company's annual review of prices
charged by competing equipment repair and maintenance companies, the Company
believes that the price charged for such repair and maintenance services is not
greater than prices generally charged by non-affiliated entities in the area.
 
The Company has several month-to-month equipment leases with MMI, whereby MMI
leases mining equipment. In 1997, the Company paid MMI $3.8 million, and for
the nine-month period ended September 30, 1998, the Company paid MMI $2.5
million pursuant to such equipment leases. Based on the Company's annual review
of prices charged by competing equipment leasing companies, the Company
believes that the price charged for such leases is not greater than prices
generally charged by non-affiliated entities in the area.
 
In connection with the Kindill Acquisition, Stephen Addington received
approximately $3.6 million. Rothschild, issued an opinion in connection with
the Kindill Acquisition which stated that the transaction was fair to the
Company from a financial point of view.
 
For the years ended December 31, 1996 and December 31, 1997, the Company paid
Bruce Addington, Larry Addington's brother, approximately $230,000 and
$232,000, respectively, for services rendered as an employee of the Company.
Bruce Addington assists in managing Addington Mining's operations in eastern
Kentucky.
 
On August 4, 1998, Holdings and the Company entered into a Tax Allocation
Agreement providing for the filing of consolidated income tax returns by the
consolidated group of corporations of which Holdings and the Company are
members, and the allocation among the members of such consolidated group of the
tax liabilities or credits arising from such consolidated filings.
 
                                      107

 
Pursuant to a Technology Sharing Agreement, dated as of April 29, 1998, between
MTI and Addington Enterprises, MTI and Addington Enterprises agreed to share
with each other certain technology and technological developments relating to
highwall mining. The Company has not acquired, and currently does not intend to
acquire from Addington Enterprises, the foreign patent rights for Addcar
highwall mining systems, which are in effect in Australia, China, France,
Germany, Spain, the United Kingdom, India, Indonesia, Poland, Russia and South
Africa.
 
Pursuant to a Manufacture and Service Agreement, dated as of November 12, 1998,
between MTI and Addington Enterprises, MTI agreed to manufacture Addcar
highwall mining systems for Addington Enterprises on a cost plus ten percent
basis.
 
Indemnification
 
Pursuant to a Stock Purchase Agreement, dated September 24, 1993 (the "Pittston
Agreement"), between Addington Holding and PAC, PAC acquired all of the issued
and outstanding stock of certain subsidiaries of Addington Holding for $157
million. Pursuant to a Guaranty Agreement, dated September 24, 1993, Addington
Resources, the sole shareholder of Addington Holding, guaranteed the
obligations of Addington Holding and its subsidiaries under the Pittston
Agreement. Addington Enterprises assumed Addington Resources' indemnity
obligations to PAC when Addington Enterprises purchased the stock of the
Addington Resources' subsidiaries engaged in coal mining operations. The
Company assumed those obligations when it acquired substantially all of
Addington Enterprises' coal assets in November, 1997. Although the Company
believes that it has significant defenses to any indemnity claims that PAC may
assert, the Company further believes that even if PAC successfully pursued
indemnity claims raised in its prior correspondence with the Company, that the
aggregate liabilities for such claims would not have a material adverse effect
on the business of the Company and its subsidiaries taken as a whole.
 
                                      108

 
                          DESCRIPTION OF CAPITAL STOCK
 
The following description of the capital stock of the Company, Holdings and AEI
Holding (the "AEI Common Shares") does not purport to be complete and is
subject in all respects to applicable Delaware law and to the provisions of
each company's Certificate of Incorporation. The AEI Common Shares of each
company have substantially identical rights, preferences and limitations.
 
Each AEI Common share has one vote on all matters presented to the
stockholders. Each AEI Common Share is entitled to receive such dividends or
other distributions as may be declared by the Board of Directors from funds
legally available for payment of dividends. The declaration and payment of
dividends are restricted by certain covenants in the Indenture and the Senior
Credit Facility. Each AEI Common Share is not redeemable and has no preemptive,
conversion or cumulative voting rights. In the event of a liquidation,
dissolution or winding-up of the Company, Holdings or AEI Holding, the holders
of such company's AEI Common Shares are entitled to share equally and ratably
in the assets of such company, if any, remaining after the payment of all debts
and liabilities of such company (including the New Notes). There is no
established public trading market for the AEI Common Shares.
 
AEI Resources, Inc.
 
The authorized capital stock of AEI Resources, Inc. consists of 150,000 shares
of common stock, par value $0.01 per share (the "Company Common Stock"). As of
February 8, 1999, 52,802 of the authorized shares of Company Common Stock were
issued and outstanding.
 
AEI Resources Holding, Inc.
 
The authorized capital stock of AEI Resources Holding, Inc. Consists of 150,000
shares of common stock, par value $0.01 per share (the "Holdings Common
Stock"). As of February 8, 1999, 55,802 of the authorized shares of Holdings
Common Stock were issued and outstanding.
 
AEI Holding Company, Inc.
 
The authorized capital stock of the AEI Holding Company, Inc. consists of
120,000 shares of common stock, par value $0.01 per share (the "AEI Holding
Common Stock"). As of February 8, 1999, 52,800 of the authorized shares of AEI
Holding Common Stock were issued and outstanding.
 
 
                                      109

 
          SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
 
The following table sets forth certain information concerning ownership of the
common stock of Holdings as of the consummation of the Offering by each
director, each person who is known to Holdings to be the beneficial owner of
more than 5% of its common stock, all Named Executive Officers and all
directors and officers of Holdings as a group. Each stockholder listed below
has sole voting and dispositive power with respect to the shares listed next to
his name. Holdings owns all of the issued and outstanding capital stock of the
Company as of the consummation of the Offering.
 


                                                              Percentage of
Name and Address                              Percentage of       Class
of Beneficial Owner              Shares Owned     Class     Beneficially Owned
- -------------------              ------------ ------------- ------------------
                                                   
Larry Addington (1).............    26,402        47.5%            100%
  1500 North Big Run Road
  Ashland, Kentucky 41101
Addington Enterprises, Inc.
 (2)............................    26,402        47.5%            100%
  1500 North Big Run Road
  Ashland, Kentucky 41101
Named Executive Officers (3)....     3,100           5%            100%
All executive officers and
 directors as a group
 (13 persons) (4)...............    29,502        52.5%            100%

- --------
(1) Larry Addington's beneficial ownership includes 38% beneficial ownership
    through Addington Enterprises and 9.5% beneficial ownership attributed
    based on Robert Addington's and Bruce Addington's interest in Addington
    Enterprises, and 5% beneficial ownership is attributed based on shares
    owned by Robert Addington..
(2) Addington Enterprises is owned 80%, 10% and 10% by Larry Addington, Robert
    Addington and Bruce Addington, respectively.
(3) The 3,100 shares are owned by Robert Addington. Beneficial ownership
    includes Robert Addington's 4.8% beneficial ownership through Addington
    Enterprises and 90.2% beneficial ownership attributed through Bruce
    Addington's interest in Addington Enterprises and Larry Addington's direct
    ownership and his interest in Addington Enterprises.
(4) Beneficial ownership is attributable to the beneficial ownership of Larry
    Addington and Robert Addington set forth above.
 
Reports to Noteholders
 
The Indenture provides that the Company will furnish the holders of the Notes
with annual reports containing audited financial statements and quarterly
reports containing unaudited financial information for the first three quarters
of each fiscal year.
 
                               THE EXCHANGE OFFER
 
  The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $200,000,000
aggregate principal amount of New Notes for a like aggregate principal amount
of Old Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the Old Notes.
 
  As of the date of this Prospectus, $200,000,000 aggregate principal amount of
the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about        1999, to all holders of Old
Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions set
forth under "Conditions to the Exchange Offer" below. The Company currently
expects that each of the conditions will be satisfied and that no waivers will
be necessary.
 
                                      110

 
Purpose and Effect of Exchange Offer
 
  The Old Notes were issued by the Company in exchange for $200.0 aggregate
principal amount of debt securities of AEI Holding. As a condition to the
exchange, the Company and the Guarantors have entered into the Registration
Rights Agreement with the trustee for the Old Notes. Pursuant to the
Registration Rights Agreement, the Company agreed to file with the SEC a
registration statement under the Securities Act of 1933 (the "Securities Act")
with respect to the Notes as soon as reasonably practicable, to use all
reasonable commercial efforts to cause such registration statement to become
effective under the Securities Act at the earliest possible time, and, upon
effectiveness of such registration statement, to commence the Exchange Offer
and offer to eligible holders of Old Notes the opportunity to exchange their
Old Notes for a like principal amount of New Notes.
 
  Holders of Old Notes acquired directly from the Company, affiliates of the
Company and persons participating in, or having any arrangement or
understanding with any person to participate in a distribution of the Old Notes
will be ineligible, under SEC policy, to participate in the Exchange Offer, and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale of the Old Notes.
 
  The Company agreed, pursuant to Registration Rights Agreements, that if
notified by a holder of Transfer Restricted Securities within 20 business days
of the consummation of the Exchange Offer that such holder is prohibited by
applicable law or SEC policy from participating in the Exchange Offer, or that
such holder may not resell the New Notes acquired by it in the Exchange Offer
to the public without delivering a prospectus or that such holder is a broker-
dealer and holds Old Notes acquired directly from the Company or one of its
affiliates, it would file a shelf registration statement, pursuant to Rule 415
under the Securities Act, registering for resale any Transfer Restricted
Securities, subject to the satisfaction by such holder of certain other
conditions. "Transfer Restricted Securities" means each of the Old Notes until
the earliest to occur of (a) the date on which such Old Note is exchanged in
the Exchange Offer and entitled to be resold to the public by the holder
thereof without complying with the prospectus delivery requirements of the
Securities Act, (b) the date on which such Old Note has been disposed of in
accordance with a Shelf Registration Statement or a Registration Statement, (c)
the date on which such Old Note is distributed to the public pursuant to Rule
144 under the Securities Act and (d) following the exchange by a broker-dealer
in the Exchange Offer of an Old Note for an Exchange Note, the date on which
such Exchange Note is disposed of pursuant to the "Plan of Distribution"
section set forth herein. A copy of the Registration Rights Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
 
  This Registration Statement covers the offer of the New Notes pursuant to the
Exchange Offer made hereby and resales by broker-dealers that acquired Old
Notes for their own accounts as a result of market-making and other trading
activities. Such resales of Transfer Restricted Securities made in reliance
upon the registration thereof under the Securities Act may be made only
pursuant to the "Plan of Distribution" set forth in this Prospectus or other
prospectus, if any, filed as an amendment to the Registration Statement. To be
eligible to effect resales of Transfer Restricted Securities pursuant to
registration of the Old Notes for resale by holders ineligible to participate
in the Exchange Offer, a holder of Transfer Restricted Securities must (i)
notify the Company within 20 business days of the consummation of the Exchange
Offer that it has determined that it is not permitted by law or any policy of
the SEC to participate in the Exchange Offer made hereby or that such holder
may not resell the New Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and that this Prospectus is inappropriate or
unavailable for such resales by such holder or that such holder is a broker-
dealer and holds Old Notes acquired directly from the Company or one of its
affiliates and (ii) provide to the Company, within 20 business days following
the Company's request therefor, such information as the Company may reasonably
request for use in preparation of the Shelf Registration Statement. In the
event that any holders of Transfer Restricted Securities comply with the
foregoing requirements, and supply any additional information reasonably
requested by the Company within 20 business
 
                                      111

 
days following such request, the Company will file, as promptly as is
practicable, a Shelf Registration Statement containing an appropriate resale
prospectus and will use its reasonable efforts to cause such Shelf Registration
Statement to become effective under the Securities Act and to remain
continuously effective thereunder for a period of two years, or such shorter
period as will terminate when all Transfer Restricted Securities covered by
such Shelf Registration Statement have been sold pursuant thereto.
 
  The Exchange Offer is being made by the Company to satisfy its obligations
with respect to the Registration Rights Agreement. The term "holder," with
respect to the Exchange Offer, means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by DTC. Other than pursuant to the Registration
Rights Agreement, the Company is not required to file any registration
statement to register any outstanding Old Notes. Holders of Old Notes who do
not tender their Old Notes or whose Old Notes are tendered but not accepted
would have to rely on exemptions from registration requirements under the
securities laws, including the Securities Act, if they wish to sell their Old
Notes.
 
  The Company is making the Exchange Offer in reliance on the position of the
SEC as set forth in certain interpretive letters addressed to third parties in
other transactions. However, the Company has not sought its own interpretive
letter and there can be no assurance that the SEC would make a similar
determination with respect to the Exchange Offer as it has in such interpretive
letters to third parties. Based on these interpretations by the SEC, the
Company believes that the Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by a holder (other than any holder who is a broker-dealer or an
"affiliate" of the Company within the meaning of Rule 405 of the Securities
Act) without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Notes are acquired in
the ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such Notes. See "-- Resale of Notes." Each broker-dealer that receives Notes
for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Notes. See "Plan of Distribution."
 
Consequences of Failure to Exchange
 
  Following the completion of the exchange offer (except as set forth in the
second paragraph under "--Purpose and Effect" above), holders of Old Notes not
tendered will not have any further registration rights and those Old Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for a holder's Old Notes could be adversely affected
upon completion of the exchange offer if the holder does not participate in the
exchange offer.
 
Terms of The Exchange Offer
 
  Upon the terms and subject to the conditions set forth in this Prospectus and
in the letter of transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
    , 1999, or such date and time to which we extend the offer. The Company
will issue $1,000 principal amount of New Notes in exchange for each $1,000
principal amount of outstanding Old Notes accepted in the exchange offer.
Holders may tender some or all of their Old Notes pursuant to the exchange
offer. However, Old Notes may be tendered only in integral multiples of $1,000
in principal amount.
 
  The form and terms of the New Notes are substantially the same as the form
and terms of the Old Notes except that the New Notes have been registered under
the Securities Act and will not bear legends restricting their transfer. The
New Notes will evidence the same debt as the Old Notes and will be issued
pursuant to, and entitled to the benefits of, the Indenture pursuant to which
the Old Notes were issued.
 
 
                                      112

 
  As of     , 1999, Old Notes representing $200.0 million aggregate principal
amount were outstanding and there was one registered holder, a nominee of the
DTC. This Prospectus, together with the letter of transmittal, is being sent to
such registered holder and to others believed to have beneficial interests in
the Old Notes. The Company intends to conduct the exchange offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the SEC promulgated thereunder.
 
  The Company shall be deemed to have accepted validly tendered Old Notes when,
as, and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purpose of receiving the New Notes from the Company. If any tendered Old Notes
are not accepted for exchange because of an invalid tender, the occurrence of
certain other events set forth herein or otherwise, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after     , 1999, unless the exchange offer
is extended.
 
  Holders who tender Old Notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the exchange offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the exchange offer. See
"--Fees and Expenses."
 
Expiration Date; Extensions; Amendments
 
  The expiration date shall be 5:00 p.m., New York City time, on     , 1999,
unless the Company, in its sole discretion, extends the exchange offer, in
which case the expiration date shall mean the latest date and time to which the
exchange offer is extended. In order to extend the exchange offer, the Company
will notify the Exchange Agent and each registered holder of any extension by
oral or written notice prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date. The Company
reserves the right, in its sole discretion, (i) to delay accepting any Old
Notes, to extend the exchange offer or, if any of the conditions set forth
under "--Conditions to Exchange Offer" shall not have been satisfied, to
terminate the exchange offer, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent, or (ii) to amend the terms of
the exchange offer in any manner. In the event that the Company makes a
material or fundamental change to the terms of the exchange offer, the Company
will file a post-effective amendment to the Registration Statement.
 
Procedures for Tendering
 
  Only a holder of Old Notes may tender the Old Notes in the exchange offer.
Except as set forth under "--Book Entry Transfer," to tender in the exchange
offer a holder must complete, sign, and date the Letter of Transmittal, or a
copy thereof, have the signatures thereon guaranteed if required by the Letter
of Transmittal, and mail or otherwise deliver the Letter of Transmittal or copy
to the Exchange Agent prior to the expiration date. In addition, (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal prior to the expiration date, (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if that procedure is available, into the Exchange Agent's account at DTC
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
expiration date or (iii) the holder must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the letter of
transmittal and other required documents must be received by the Exchange Agent
at the address set forth under "--Exchange Agent" prior to the expiration date.
 
  The tender by a holder that is not withdrawn before the expiration date will
constitute an agreement between that holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the letter of
transmittal.
 
                                      113

 
  THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
 
  Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company, or other nominee and who wishes to
tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing the letter of transmittal and delivering the owner's
Old Notes, either make appropriate arrangements to register ownership of the
Old Notes in the beneficial owner's name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
 
  Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined) unless Old
Notes tendered pursuant thereto are tendered (i) by a registered holder who has
not completed the box entitled "Special Registration Instruction" or "Special
Delivery Instructions" on the letter of transmittal or (ii) for the account of
an Eligible Institution. If signatures on a letter of transmittal or a notice
of withdrawal, as the case may be, are required to be guaranteed, the guarantee
must be by any eligible guarantor institution that is a member of or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an
"Eligible Institution").
 
  If the letter of transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, the Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by the registered holder
as that registered holder's name appears on the Old Notes.
 
  If the letter of transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the letter of
transmittal unless waived by the Company.
 
  All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the exchange offer (including the instructions in the letter of
transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends
to notify holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent, nor any other person shall
incur any liability for failure to give such notification. Tenders of Old Notes
will not be deemed to have been made until such defects or irregularities have
been cured or waived.
 
  Any Old Notes received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived
will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the letter of transmittal, as soon as practicable
following , 1999, unless the exchange offer is extended.
 
                                      114

 
  In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding after the
expiration date or, as set forth under "-- Conditions to the Exchange Offer,"
to terminate the exchange offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions, or
otherwise. The terms of any such purchases or offers could differ from the
terms of the exchange offer.
 
  By tendering, each holder will represent to the Company and the Guarantors
that, among other things, (i) the New Notes acquired pursuant to the exchange
offer are being obtained in the ordinary course of business of the person
receiving such New Notes, whether or not such person is the registered holder,
(ii) the holder is not engaging in and does not intend to engage in a
distribution of such New Notes, (iii) the holder does not have an arrangement
or understanding with any person to participate in the distribution of such New
Notes and (iv) the holder is not an "affiliate," as defined under Rule 405 of
the Securities Act, of the Company and the Guarantors.
 
  In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the exchange offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the Book-
Entry Transfer Facility, a properly completed and duly executed letter of
transmittal (or, with respect to the DTC and its participants, electronic
instructions in which the tendering holder acknowledges its receipt of and
agreement to be bound by the letter of transmittal), and all other required
documents. If any tendered Old Notes are not accepted for any reason set forth
in the terms and conditions of the exchange offer or if Old Notes are submitted
for a greater principal amount than the holder desires to exchange, such
unaccepted or non-exchanged Old Notes will be returned without expense to the
tendering Holder thereof (or, in the case of Old Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described below, such
nonexchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration
or termination of the exchange offer.
 
  Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution."
 
Book-Entry Transfer
 
The Exchange Agent will make a request to establish an account with respect to
the Old Notes at the Book-Entry Transfer Facility for purposes of the exchange
offer within two business days after the date of this Prospectus, and any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes being tendered by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the letter of transmittal or copy thereof, with any
required signature guarantees and any other required documents, must, in any
case other than as set forth in the following paragraph, be transmitted to and
received by the Exchange Agent at the address set forth under "--Exchange
Agent" on or prior to the expiration date or the guaranteed delivery procedures
described below must be complied with.
 
  DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the exchange offer through
ATOP, participants in DTC must send electronic instructions to DTC through
DTC's communication system in lieu of sending a signed, hard copy letter of
transmittal. DTC is obligated to communicate those electronic instructions to
the Exchange Agent. To tender Old Notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the character by which the participant acknowledges its receipt of and
agrees to be bound by the letter of transmittal.
 
                                      115

 
Guaranteed Delivery Procedures
 
  If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the expiration date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the expiration date, the
Exchange Agent receives from such Eligible Institution a properly completed and
duly executed letter of transmittal (or a facsimile thereof) and notice of
guaranteed delivery, substantially in the form provided by the Company (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of Old Notes and the amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within three New York Stock Exchange, Inc. ("NYSE") trading days after the date
of execution of the notice of guaranteed delivery, the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, will be deposited by the Eligible Institution
with the Exchange Agent and (iii) the certificates for all physically tendered
Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, are received by the Exchange Agent within three NYSE trading days
after the date of execution of the notice of guaranteed delivery.
 
Withdrawal Rights
 
  Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the expiration date.
 
  For a withdrawal of a tender of Old Notes to be effective, a written or (for
DTC participants) electronic ATOP transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth under "--Exchange
Agent" prior to 5:00 p.m., New York City time, on the expiration date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to
be withdrawn (including the certificate number or numbers and principal amount
of such Old Notes), (iii) be signed by the holder in the same manner as the
original signature on the letter of transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee register the transfer of
such Old Notes into the name of the person withdrawing the tender, and (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form, and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the exchange offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender, or termination of the
exchange offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures under " --Procedures for Tendering" at any time on or prior
to the expiration date.
 
Conditions to the Exchange Offer
 
  Notwithstanding any other provision of the exchange offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the exchange offer if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, the Company determines that the exchange offer
violates applicable law, any applicable interpretation of the staff of the SEC
or any order of any governmental agency or court of competent jurisdiction.
 
  The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may
be asserted at any time and from time to time.
 
                                      116

 
  In addition, the Company will not accept for exchange any Old Notes tendered,
and no New Notes will be issued in exchange for any such Old Notes, if at such
time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended. In any such event the Company is required to use every reasonable
effort to obtain the withdrawal of any stop order at the earliest possible
time.
 
Exchange Agent
 
IBJ Whitehall Bank & Trust Company has been appointed as the Exchange Agent for
the Exchange Offer. All executed Letters of Transmittal should be directed to
the Exchange Agent at one of the addresses set forth below:
 


  By Hand/Overnight Courier:                       By Mail:
                                   
  IBJ Whitehall Bank & Trust Company  IBJ Whitehall Bank & Trust Company
  One State Street                    Post Office Box 84
  New York, NY 10004                  Bowling Green Station
  Attn: Securities Processing Window, New York, NY 10274-0084
  Subcellar One (SC-1)                Attn: Reorganization Operations

 
  By Facsimile
 
  IBJ Whitehall Bank & Trust Company
  Attn: Reorganization Operations
  Facsimile No. (212) 858-2611, with a
  confirmation by telephone to:
  Telephone No. (212) 858-2103
 
  Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
 
  DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF TRANSMITTAL,
OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER OTHER THAN THE
ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE A VALID
DELIVERY.
 
Fees and Expenses
 
  The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the exchange offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
 
  The estimated cash expenses to be incurred in connection with the exchange
offer will be paid by the Company and are estimated in the aggregate to be
$700,000, which includes fees and expenses of the Exchange Agent, accounting,
legal, printing, and related fees and expenses.
 
Transfer Taxes
 
  Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the exchange offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
 
 
                                      117

 
Accounting Treatment
 
  The Notes will be recorded at the carrying value of the Old Notes as
reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of Notes for Old Notes. Expenses incurred in
connection with the issuance of the Notes will be amortized over the remaining
term of the Notes.
 
Certain Federal Income Tax Consequences of the Exchange Offer
 
  The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations,
judicial authority and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service (the "IRS") will not take a
contrary view, and no ruling from the IRS has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conditions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to holders. Certain holders of the Old Notes
(including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules not
discussed below.
 
  The issuance of the Notes to holders of the Old Notes pursuant to the terms
set forth in this Prospectus will not constitute an exchange for federal income
tax purposes. Consequently, no gain or loss would be recognized by holders of
the Old Notes upon receipt of the Notes, and ownership of the Notes will be
considered a continuation of ownership of the Old Notes. For purposes of
determining gain or loss upon the subsequent sale or exchange of the Notes, a
holder's basis in the Notes should be the same as such holder's basis in the
Old Notes exchanged therefor. A holder's holding period for the Notes should
include the holder's holding period for the Old Notes exchanged therefor. The
issue price, original issue discount inclusion and other tax characteristics of
the Notes should be identical to the issue price, original issue discount
inclusion and other tax characteristics of the Old Notes exchanged therefor.
 
  HOLDERS OF OLD NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES OF EXCHANGING SUCH HOLDERS' OLD NOTES FOR NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
 
                                      118

 
                     DESCRIPTION OF THE SUBORDINATED NOTES
 
General
 
The Notes will be issued pursuant to an Indenture (the "Indenture") between the
Company and State Street Bank and Trust Company, as trustee (the "Trustee"), in
a private transaction that is not subject to the registration requirements of
the Securities Act. See "Notice to Investors." The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The Notes are
subject to all such terms, and Holders of Notes are referred to the Notes
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture does not purport to be
complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
proposed form of Indenture and Registration Rights Agreement are available as
set forth below under "--Additional Information." The definitions of certain
terms used in the following summary are set forth below under "--Certain
Definitions." For purposes of this summary, the term "Company" refers only to
AEI Resources, Inc. and not to any of its Subsidiaries.
 
The Notes will be general unsecured obligations of the Company and will rank
junior to, and be subordinated in right of payment to, all existing and future
Senior Indebtedness of the Company (including the Senior Credit Facilities),
pari passu in right of payment with all current and future senior subordinated
Indebtedness of the Company (except as to secured Indebtedness) and will rank
senior in right of payment to all Subordinated Indebtedness (as defined) of the
Company. As of September 30, 1998, on a pro forma basis after giving effect to
the Transactions, the Company would have had $905.5 of Senior Indebtedness
outstanding. See "Risk Factors--Subordination."
 
Except as described in "Change of Control," the Indenture does not contain any
provision that would provide protection to the holders of the Notes against a
sudden and dramatic decline in credit quality resulting from a takeover,
recapitalization or similar restructuring of the Company. If a Change of
Control were to occur, there can be no assurance that the Company would have
adequate funds to repurchase the Notes as required by the Indenture and/or that
the lenders under the Credit Facilities would permit such repurchase or that
the repurchase would not constitute an event of default under the Credit
Facilities or the Senior Notes. See "--Covenants--Change of Control" and
"Description of Other Indebtedness--The Senior Credit Facility--Events of
Default" and "--The New Senior Notes."
 
As of the date of the closing of the Transactions, all of the Company's
Subsidiaries will be Restricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not
be subject to many of the restrictive covenants set forth in the Indenture.
 
Principal, Maturity and Interest
 
The Notes offered hereby will be limited in aggregate principal amount to
$225.0 million and will mature on December 15, 2006, of which $150.0 million
will be issued upon the consummation of the Offering. The Indenture provides
for the issuance of up to $75.0 million in aggregate principal amount of
additional Notes having identical terms and conditions to the Notes offered
hereby (the "Additional Notes"), subject to compliance with the covenants
contained in the Indenture. Additional Notes may be issued from time to time
after the consummation of the Offering, subject to the provisions of the
Indenture described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock.
 
Interest on the Notes will accrue at the rate of 11 1/2% per annum and will be
payable semi-annually in arrears on June 15 and December 15, commencing on June
15, 1999, to Holders of record on the immediately preceding June 1 and December
1, respectively. Additional Notes may be issued from time to time after the
Offering, subject to the provisions of the Indenture described below under the
caption "--Certain Covenants--
 
                                      119

 
Incurrence of Indebtedness and Issuance of Preferred Stock." Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of original issuance. Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest and Liquidated Damages on the Notes
will be payable at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the Company,
payment of interest and Liquidated Damages, if any, may be made by check mailed
to the Holders of the Notes at their respective addresses set forth in the
register of Holders of Notes; provided that all payments of principal, premium,
interest and Liquidated Damages with respect to Notes the Holders of which have
given wire transfer instructions to the Company will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof.
 
Until otherwise designated by the Company, the Company's office or agency in
New York will be the office of the Trustee maintained for such purpose. The
Notes will be issued in denominations of $1,000 and integral multiples thereof.
 
Subordination of the Notes
 
The payment of the principal of and interest or Liquidated Damages on the Notes
is subordinated in right of payment, to the extent and in the manner provided
in the Indenture, to the prior payment in full in cash of all Senior
Indebtedness, which shall include, for all purposes described in this
"Subordination of the Notes" heading, the cash collateralization in full of all
outstanding letters of credit constituting Senior Indebtedness.
 
Upon any payment or distribution of assets or securities of the Company of any
kind or character, whether in cash, property or securities (excluding any
payment or distribution of Permitted Junior Securities and excluding any
payment (a "Defeasance Trust Payment") from the trust described under "Legal
Defeasance and Covenant Defeasance" (a "Defeasance Trust")), upon any
dissolution or winding-up or total liquidation or reorganization of the
Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all Senior Indebtedness shall first be paid
in full in cash before the Holders of the Notes or the Trustee on behalf of
such Holders shall be entitled to receive any payment by the Company of the
principal of or interest or Liquidated Damages on the Notes, or any payment by
the Company to acquire any of the Notes for cash, property or securities, or
any distribution by the Company with respect to the Notes of any cash, property
or securities (excluding any payment or distribution of Permitted Junior
Securities and excluding any Defeasance Trust Payment). Before any payment may
be made by, or on behalf of, the Company of the principal of or interest or
Liquidated Damages on the Notes upon any such dissolution or winding-up or
total liquidation or reorganization, any payment or distribution of assets or
securities of the Company of any kind or character, whether in cash, property
or securities (excluding any payment or distribution of Permitted Junior
Securities and excluding any Defeasance Trust Payment), to which the Holders of
the Notes or the Trustee on their behalf would be entitled, but for the
subordination provisions of the Indenture, shall be made by the Company or by
any receiver, trustee in bankruptcy, liquidation trustee, agent or other Person
making such payment or distribution, directly to the holders of the Senior
Indebtedness (pro rata to such holders on the basis of the respective amounts
of Senior Indebtedness held by such holders) or their representatives or to the
trustee or trustees or agent or agents under any agreement or indenture
pursuant to which any of such Senior Indebtedness may have been issued, as
their respective interests may appear, to the extent necessary to pay all such
Senior Indebtedness in full in cash after giving effect to any prior or
concurrent payment, distribution or provision therefor to or for the holders of
such Senior Indebtedness. In the event that, notwithstanding the foregoing, the
Trustee or any holder of Notes receives any payment or distribution of assets
of the Company of any kind, whether in cash, property or securities, including,
without limitation, by way of set-off or otherwise, in respect of the Notes
before all Senior Indebtedness of the Company is paid in full in cash, then
such payment or distribution will be held by the recipient in trust for the
benefit of holders of Senior Indebtedness and will be immediately paid over or
delivered to the holders of Senior Indebtedness or their representative or
representatives to the extent necessary to make payment in full in cash of all
Senior Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution, or provision therefor, to or for the holders of Senior
Indebtedness.
 
                                      120

 
No direct or indirect payment (excluding any payment or distribution of
Permitted Junior Securities and excluding any Defeasance Trust Payment, but
including the establishment of a Defeasance Trust) by or on behalf of the
Company of principal of or interest or Liquidated Damages on the Notes, or for
or on account of the purchase, redemption or other acquisition of the Notes by
or on behalf of the Company, whether pursuant to the terms of the Notes, upon
acceleration, pursuant to a Change of Control Offer (as defined herein), an
Asset Sale Offer (as defined herein) or otherwise, will be made (including,
without limitation, by way of set-off) if, at the time of such payment, there
exists a default in the payment of all or any portion of the obligations on any
Designated Senior Indebtedness, whether at maturity, on account of mandatory
redemption or prepayment, acceleration or otherwise, and such default shall not
have been cured or waived or the benefits of this sentence waived by or on
behalf of the holders of such Designated Senior Indebtedness. In addition,
during the continuance of any non-payment event of default with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may be
immediately accelerated, and upon receipt by the Trustee of written notice (a
"Payment Blockage Notice") from the holder or holders of such Designated Senior
Indebtedness or the trustee or agent acting on behalf of the holders of such
Designated Senior Indebtedness, then, unless and until such event of default
has been cured or waived or has ceased to exist or such Designated Senior
Indebtedness has been discharged or repaid in full in cash or the benefits of
these provisions have been waived by the holders of such Designated Senior
Indebtedness, no direct or indirect payment (excluding any payment or
distribution of Permitted Junior Securities and excluding any Defeasance Trust
Payment but including the establishment of the Defeasance Trust) will be made
(including, without limitation, by way of set-off) by or on behalf of the
Company of principal of or interest or Liquidated Damages on the Notes, or for
or on account of the purchase, redemption or other acquisition of the Notes by
or on behalf of the Company, to such Holders, during a period (a "Payment
Blockage Period") commencing on the date of receipt of such notice by the
Trustee and ending 179 days thereafter. Notwithstanding anything in the
subordination provisions of the Indenture or the Notes to the contrary, (x) in
no event will a Payment Blockage Period extend beyond 179 days from the date
the Payment Blockage Notice in respect thereof was given, and (y) not more than
one Payment Blockage Period may be commenced with respect to the Notes during
any period of 360 consecutive days. No event of default that existed or was
continuing on the date of commencement of any Payment Blockage Period with
respect to the Designated Senior Indebtedness initiating such Payment Blockage
Period (to the extent the holder of Designated Senior Indebtedness, or trustee
or agent, giving notice commencing such Payment Blockage Period had knowledge
of such existing or continuing event of default) may be, or be made, the basis
for the commencement of any other Payment Blockage Period by the holder or
holders of such Designated Senior Indebtedness or the trustee or agent acting
on behalf of such Designated Senior Indebtedness whether or not within a period
of 360 consecutive days, unless such event of default has been cured or waived
for a period of not less than 90 consecutive days.
 
The failure to make any payment or distribution for or on account of the Notes
by reason of the provisions of the Indenture described under this
"Subordination of the Notes" heading will not be construed as preventing the
occurrence of any Event of Default in respect of the Notes. See "Events of
Default" below.
 
By reason of the subordination provisions described above, in the event of
insolvency of the Company, funds which would otherwise be payable to Holders of
the Notes will be paid to the holders of Senior Indebtedness to the extent
necessary to pay the Senior Indebtedness in full in cash, and the Company may
be unable to meet fully its obligations with respect to the Notes.
 
At the time of issuance of the Notes, loans outstanding under the Senior Credit
Facilities and the Senior Notes are expected to be the only outstanding Senior
Indebtedness. Subject to the restrictions set forth in the Indenture, in the
future the Company may issue additional Senior Indebtedness to refinance
existing Indebtedness or for other corporate purposes.
 
Subsidiary Guarantees
 
The Company's payment obligations under the Notes will be jointly and severally
guaranteed on a senior subordinated unsecured basis (the "Subsidiary
Guarantees") by the Guarantors and Holdings. The obligations
 
                                      121

 
of each Guarantor and Holdings under its Guarantee will be limited to the
maximum amount that would not constitute a fraudulent conveyance under
applicable law. See "Risk Factors--Fraudulent Conveyance Matters."
Notwithstanding the foregoing, no Subsidiary of the Company will be required to
endorse a Subsidiary Guarantee unless such Subsidiary is required to, and does,
simultaneously execute a Guarantee of the Senior Credit Facilities.
 
The Notes will not be guaranteed by Yankeetown Dock Corporation or any of its
direct and indirect Subsidiaries or by any Foreign Subsidiaries of the Company.
The aggregate net assets, earnings and equity of the Guarantors and the Company
are substantially equivalent to the net assets, earnings and equity of the
Company on a consolidated basis. The claims of creditors (including trade
creditors) of any Non-Guarantor Subsidiary will generally have priority as to
the assets of such Subsidiaries over the claims of the holders of the Notes.
 
The Indenture will provide that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person) another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes, the Indenture and the Registration Rights Agreement;
(ii) immediately after giving effect to such transaction, no Default or Event
of Default exists; and (iii) the Company would be permitted by virtue of the
Company's pro forma Fixed Charge Coverage Ratio, immediately after giving
effect to such transaction, to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock."
 
The Indenture will provide that in the event of (a) a sale or other disposition
of all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, (b) a sale or other disposition of all of the capital stock of any
Guarantor or (c) the designation of a Guarantor as an Unrestricted Subsidiary
in accordance with the terms of the Indenture, then such Guarantor (in the
event of a sale or other disposition, by way of such a merger, consolidation or
otherwise, of all of the capital stock of such Guarantor) or the corporation
acquiring the property (in the event of a sale or other disposition of all of
the assets of such Guarantor) will be released and relieved of any obligations
under its Subsidiary Guarantee; provided that the Net Proceeds of any such sale
or other disposition are applied in accordance with the applicable provisions
of the Indenture and any such designation of a Guarantor as an Unrestricted
Subsidiary complies with all applicable covenants. See "Repurchase at the
Option of Holders--Asset Sales."
 
Optional Redemption
 
The Notes will be subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages thereon
to the applicable redemption date, if redeemed during the twelve-month period
beginning on each December 15 of the years indicated below:
 


      Year                                                            Percentage
      ----                                                            ----------
                                                                   
      2002...........................................................  105.750%
      2003...........................................................  103.833
      2004...........................................................  101.917
      2005 and thereafter............................................  100.000%

 
 
                                      122

 
In addition, prior to December 15, 2002, the Notes will be redeemable at a
price equal to 100% of the principal amount thereof plus an applicable Make
Whole Premium, plus, to the extent not included in the Make Whole Premium,
accrued and unpaid interest and Liquidated Damages, if any, to the date of
redemption.
 
For purposes of the foregoing, the "Make Whole Premium" means, with respect to
a Note, an amount equal to the greater of (A) the redemption price of such Note
on December 15, 2002 and (B) the excess of, if any, (1) the present value of
the remaining interest, premium, if any, and principal payments due on such
Note as if such Note were redeemed on December 15, 2002, computed using a
discount rate equal to the Treasury Rate plus 100 basis points, over (2) the
outstanding principal amount of such Note.
 
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled by, and
published in, the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
date fixed for redemption of the Notes (or, if such Statistical Release is no
longer published, any publicly available source of similar market data)) most
nearly equal to the then remaining Weighted Average Life to Maturity of the
Notes; provided, however, that if the Weighted Average Life to Maturity of the
Notes is not equal to the constant maturity of a United States Treasury
security for which a weekly average yield is given, the Treasury Rate shall be
obtained by linear interpolation (calculated to the nearest one-twelfth of a
year) from the weekly average yields of United States Treasury securities for
which such yields are given, except that if Weighted Average Life to Maturity
of the Notes is less than one year, the weekly average yield on actually traded
United States Treasury securities adjusted to a constant maturity of one year
shall be used.
Notwithstanding the foregoing, at any time on or before December 15, 2001, the
Company may on any one or more occasions redeem up to 35% of the aggregate
principal amount of Notes ever issued under the Indenture at a redemption price
equal to 111.5% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the redemption date, with
the net cash proceeds of an initial public offering of common stock of the
Company or Holdings (to the extent that the net proceeds therefrom are
contributed to the Company as common equity capital); provided that at least
65% of the aggregate principal amount of Notes issued on the date of the
Indenture remains outstanding immediately after the occurrence of such
redemption (excluding Notes held by Holdings or the Company and their
Subsidiaries) and provided, further, that such redemption shall occur within 45
days of the date of the closing of such initial public offering.
 
Selection and Notice
 
If less than all of the Notes are to be redeemed or purchased in an offer to
purchase at any time, selection of Notes for redemption or purchase will be
made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed, or, if the
Notes are not so listed, on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided that no Notes of $1,000 or
less shall be redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of Notes to be redeemed at its registered address. Notices of
redemption may not be conditional. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Note. Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
 
Mandatory Redemption
 
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
 
                                      123

 
Repurchase at the Option of Holders
 
Change of Control
 
Upon the occurrence of a Change of Control, each Holder of Notes will have the
right to require the Company to repurchase all or any part (equal to $1,000 or
an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase (the
"Change of Control Payment"). Within ten days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
 
On the Change of Control Payment Date, the Company will, to the extent lawful,
(1) accept for payment all Notes or portions thereof properly tendered pursuant
to the Change of Control Offer, (2) deposit with the Paying Agent an amount
equal to the Change of Control Payment in respect of all Notes or portions
thereof so tendered and (3) deliver or cause to be delivered to the Trustee the
Notes so accepted together with an Officers' Certificate stating the aggregate
principal amount of Notes or portions thereof being purchased by the Company.
The Paying Agent will promptly mail to each Holder of Notes so tendered the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
 
The Change of Control provisions described above will be applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture will not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
 
The Company's Senior Indebtedness, including the Senior Credit Facility and the
Senior Notes, contains prohibitions of certain events that would constitute a
Change of Control. In addition, the exercise by the Holders of Notes of their
right to require the Company to repurchase the Notes could cause a default
under such other Senior Indebtedness, even if the Change of Control itself does
not, due to the financial effect of such repurchases on the Company. Finally,
the Company's ability to pay cash to the Holders of Notes upon a repurchase may
be limited by the Company's then existing financial resources. See "Risk
Factors--Financing Change of Control Offer."
 
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
 
The definition of Change of Control set forth under "--Certain Definitions"
includes a phrase relating to the sale, lease, transfer, conveyance or other
disposition of "all or substantially all" of the assets of the Company and its
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of Notes to require the Company to repurchase such Notes as a result of
a sale, lease, transfer, conveyance or other disposition of less than all of
the assets of the Company and its Subsidiaries taken as a whole to another
Person or group may be uncertain.
 
                                      124

 
Asset Sales
 
The Indenture will provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value as determined in good faith by the Company (evidenced by a resolution of
the Board of Directors set forth in an Officers' Certificate delivered to the
Trustee with respect to any Asset Sale determined to have a value greater than
$25.0 million) of the assets or Equity Interests issued or sold or otherwise
disposed of and (ii) except in the case of Assets Held for Sale, at least 75%
of the consideration therefor received by the Company or such Subsidiary is in
the form of cash, Cash Equivalents or Marketable Securities; provided that the
following amounts shall be deemed to be cash: (w) any liabilities (as shown on
the Company's or such Restricted Subsidiary's most recent balance sheet), of
the Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases the Company or such Restricted
Subsidiary from further liability, (x) any securities, notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are contemporaneously (subject to ordinary settlement periods)
converted by the Company or such Restricted Subsidiary into cash (to the extent
of the cash received), (y) any Designated Noncash Consideration received by the
Company or any of its Restricted Subsidiaries in such Asset Sale; provided that
the aggregate fair market value (as determined above) of such Designated
Noncash Consideration, taken together with the fair market value at the time of
receipt of all other Designated Noncash Consideration received pursuant to this
clause (y) less the amount of Net Proceeds previously realized in cash from
prior Designated Noncash Consideration is less than 5% of Total Assets at the
time of the receipt of such Designated Noncash Consideration (with the fair
market value of each item of Designated Noncash Consideration being measured at
the time received and without giving effect to subsequent changes in value) and
(z) Additional Assets received in an exchange of assets transaction.
 
Within 360 days after the receipt of any cash Net Proceeds from an Asset Sale,
the Company or such Restricted Subsidiary, at its option, may apply such cash
Net Proceeds, at its option, (a) to repay Indebtedness of the Company or any
Restricted Subsidiary that is not subordinated in right of payment to the Notes
or to repay debt under one or more Credit Facilities and, if such debt is
revolving debt, to effect a corresponding commitment reduction thereunder, (b)
to the acquisition of all or a portion of the assets of, or a majority of the
Voting Stock of, another Permitted Business, the making of a capital
expenditure or the acquisition of other assets or Investments that are used or
useful in a Permitted Business or (c) to an Investment in Additional Assets.
Any cash Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $15.0
million, the Company will be required to make an offer to all Holders of Notes
and all holders of other Indebtedness that ranks pari passu with the Notes
containing provisions similar to those set forth in the Indenture with respect
to offers to purchase or redeem with the proceeds of sales of assets (an "Asset
Sale Offer") to purchase the maximum principal amount of Notes and such other
Indebtedness that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the date
of purchase, in accordance with the procedures set forth in the Indenture and
such other Indebtedness. To the extent that any Excess Proceeds remain after
consummation of an Asset Sale Offer, the Company may use such Excess Proceeds
for any purpose not otherwise prohibited by the Indenture. If the aggregate
principal amount of Notes and such other Indebtedness tendered into such Asset
Sale Offer surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes and such other Indebtedness to be
purchased on a pro rata basis. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be reset at zero.
 
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Certain Covenants
 
Restricted Payments
 
The Indenture will provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company or any of its Restricted Subsidiaries) or to the direct
or indirect holders of the Company's or any of its Restricted Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company); (ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company or any direct or
indirect parent of the Company; (iii) make any payment on or with respect to,
or purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Notes or any Subsidiary Guarantee,
except a payment of interest or principal at Stated Maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
 
  (a) no Default or Event of Default shall have occurred and be continuing or
  would occur as a consequence thereof; and
 
  (b) the Company would, at the time of such Restricted Payment and after
  giving pro forma effect thereto as if such Restricted Payment had been made
  at the beginning of the applicable four-quarter period, have been permitted
  to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
  Charge Coverage Ratio test set forth in the first paragraph of the covenant
  described below under caption "Incurrence of Indebtedness and Issuance of
  Preferred Stock;" and
 
  (c) such Restricted Payment, together with the aggregate amount of all
  other Restricted Payments made by the Company and its Subsidiaries after
  the date of the Indenture (excluding Restricted Payments permitted by
  clauses (ii), (iii), (iv), (v), (vii), (viii) and (ix) of the next
  succeeding paragraph), is less than the sum, without duplication, of (i)
  50% of the Consolidated Net Income of the Company for the period (taken as
  one accounting period) from the date of the Indenture to the end of the
  Company's most recently ended fiscal quarter for which internal financial
  statements are available at the time of such Restricted Payment (or, if
  such Consolidated Net Income for such period is a deficit, less 100% of
  such deficit), plus (ii) 100% of the aggregate net cash proceeds received
  by the Company since the date of the Indenture as a contribution to its
  common equity capital or from the issue or sale of Equity Interests of the
  Company (other than Disqualified Stock) or from the issue or sale of
  Disqualified Stock or debt securities of the Company that have been
  converted into such Equity Interests (other than Equity Interests (or
  Disqualified Stock or convertible debt securities) sold to a Subsidiary of
  the Company), plus (iii) to the extent that any Restricted Investment that
  reduced the amount available for Restricted Payments under this clause (c)
  is sold for cash or otherwise liquidated or repaid for cash or any dividend
  or payment is received by the Company or a Restricted Subsidiary after the
  date of the closing of the Acquisitions in respect of such Investment, 100%
  of the amount of Net Proceeds or dividends or payments (including the fair
  market value of property) received in connection therewith, up to the
  amount of the Restricted Investment that reduced this clause (c), and
  thereafter 50% of the amount of Net Proceeds or dividends or payments
  (including the fair market value of property) received in connection
  therewith (except that the amount of dividends or payments received in
  respect of payments of Obligations in respect of such Investments, such as
  taxes, shall not increase the amounts under this clause (c)), plus (iv) to
  the extent that any Unrestricted Subsidiary of the Company is redesignated
  as a Restricted Subsidiary after the date of the Indenture, 100% of the
  fair market value of the Company's Investment in such Subsidiary as of the
  date of such redesignation up to the amount of the Restricted Investments
  made in such Subsidiary that reduced this clause (c) and 50% of the excess
  of the fair market value of the Company's Investment in such Subsidiary
 
                                      126

 
  as of the date of such redesignation over (1) the amount of the Restricted
  Investment that reduced this clause (c) and (2) any amounts that increased
  the amount available as a Permitted Investment provided that with respect
  to any redesignation pursuant to this clause (iv) the Company shall deliver
  to the Trustee (I) in the case of any such redesignation involving
  aggregate fair market value greater than $2.0 million, a resolution of the
  Board of Directors set forth in an Officers' Certificate certifying such
  value or (II) in the case of any such redesignation involving aggregate
  fair market value greater than $10.0 million, an independent appraisal or
  valuation opinion issued by an accounting, appraisal or investment banking
  firm of national standing; provided that any amounts that increase this
  clause (c) shall not duplicatively increase amounts available as Permitted
  Investments.
 
  The foregoing provisions will not prohibit:
 
  (i) the payment of any dividend within 60 days after the date of
  declaration thereof, if at said date of declaration such payment would have
  complied with the provisions of the Indenture;
 
  (ii) the redemption, repurchase, retirement, defeasance or other
  acquisition of any subordinated Indebtedness or Equity Interests of the
  Company in exchange for, or out of the net cash proceeds of the
  substantially concurrent sale (other than to a Restricted Subsidiary of the
  Company) of, other Equity Interests of the Company (other than any
  Disqualified Stock); provided that the amount of any such net cash proceeds
  that are utilized for any such redemption, repurchase, retirement,
  defeasance or other acquisition shall be excluded from clause (c)(ii) of
  the preceding paragraph;
 
  (iii) the defeasance, redemption, repurchase or other acquisition of
  subordinated Indebtedness with the net cash proceeds from an incurrence of
  Permitted Refinancing Indebtedness;
 
  (iv) dividends or distributions by a Restricted Subsidiary of the Company
  so long as, in the case of any dividend or distribution payable on or in
  respect of any class or series of securities issued by a Restricted
  Subsidiary, the Company or a Restricted Subsidiary receives at least its
  pro rata share of such dividend or distribution in accordance with its
  Equity Interests in such class or series of securities;
 
  (v) Investments in Unrestricted Subsidiaries having an aggregate fair
  market value not to exceed the amount, at the time of such Investment,
  substantially concurrently contributed in cash or Cash Equivalents to the
  common equity capital of the Company after the date of the closing of the
  Acquisitions; provided that any such amount contributed shall be excluded
  from the calculation made pursuant to clause (c) of the preceding
  paragraph;
 
  (vi) the payment of dividends on the Company's Common Stock, following the
  first public offering of the Company's Common Stock after the date of the
  closing of the Acquisitions, of up to 6% per annum of the net proceeds
  received by the Company in such public offering, other than public
  offerings with respect to the Company's Common Stock registered on Form S-
  8;
 
  (vii) the repurchase, redemption or other acquisition or retirement for
  value of any Equity Interests of the Company or any Restricted Subsidiary
  of the Company held by any present or former employee or director of the
  Company (or any of its Restricted Subsidiaries), other than Equity
  Interests held by the Principals or any of their Related Parties, pursuant
  to any management equity subscription agreement or stock option agreement
  or any other management or employee benefit plan; provided that (A) the
  aggregate price paid for all such repurchased, redeemed, acquired or
  retired Equity Interests shall not exceed $2.0 million in any calendar year
  (with unused amounts in any calendar year being carried over to succeeding
  calendar years subject to a maximum (without giving effect to the following
  proviso) of $5.0 million in any calendar year); provided further that such
  amount in any calendar year may be increased by an amount not to exceed (x)
  the cash proceeds from the sale of Equity Interests (not including
  Disqualified Stock) of the Company or a Restricted Subsidiary to members of
  management and directors of the Company and its Subsidiaries that occurs
  after the date of the Indenture, plus (y) the cash proceeds of key-man life
  insurance policies received by the Company and its Restricted Subsidiaries
  after the date of the Indenture, less (z) the amount of any Restricted
  Payments previously made pursuant to clauses (x) and (y) of this
  subparagraph (vii) and (B) no Default or Event of Default shall have
  occurred and be continuing
 
                                      127

 
  immediately after such transaction; and, provided further, that
  cancellation of Indebtedness owing to the Company from members of
  management of the Company or any of its Restricted Subsidiaries (other than
  the Principals or any of their Related Parties) in connection with a
  repurchase of Equity Interests of the Company or a Restricted Subsidiary
  pursuant to any employment agreement or arrangement or any stock option or
  similar plan will not be deemed to constitute a Restricted Payment for
  purposes of this covenant or any other provision of the Indenture.
 
  (viii) repurchases of Equity Interests deemed to occur upon exercise of
  stock options if such Equity Interests represent a portion of the exercise
  price of such options; and
 
  (ix) the payment of dividends or distributions to Holdings (I) pursuant to
  a tax allocation agreement in effect on the date of the Indenture, in
  amounts required by Holdings to pay income taxes; (II) in amounts required
  by Holdings to pay administrative expenses not to exceed $500,000 in any
  calendar year; and (III) in order to permit Holdings to repay Indebtedness
  under the Senior Credit Agreement, dated September 2, 1998, among Holdings,
  Warburg Dillon Read LLC, as Arranger and Syndication Agent, UBS AG,
  Stamford Branch, as Administrative Agent, and the lenders party thereto.
 
As of the date of the Indenture, all of the Company's Subsidiaries will be
Restricted Subsidiaries. The Board of Directors may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the
extent repaid in cash) in the Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will reduce the amount
available for Restricted Payments under the first paragraph of this covenant.
All such outstanding Investments will be deemed to constitute Investments in an
amount equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary.
 
If, at any time, any Unrestricted Subsidiary would fail to meet the
requirements in the definition of "Unrestricted Subsidiary" as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date
under the covenant described under the caption "--Incurrence of Indebtedness
and Issuance of Preferred Stock," the Company shall be in default of such
covenant). The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock," calculated on a
pro forma basis as if such designation had occurred at the beginning of the
four-quarter reference period, and (ii) no Default or Event of Default would be
in existence following such designation.
 
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment or any adjustment made
pursuant to clause (c) of the first paragraph of this covenant shall be
determined by the Board of Directors whose resolution with respect thereto
shall be delivered to the Trustee, such determination to be based upon an
opinion or appraisal issued by an accounting, appraisal or investment banking
firm of national standing if such fair market value exceeds $10.0 million. Not
later than the date of making any Restricted Payment, the Company shall deliver
to the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed.
 
If any Restricted Investment is sold or otherwise liquidated or repaid or any
dividend or payment is received by the Company or a Restricted Subsidiary and
such amounts may be credited to clause (c) of the first paragraph
 
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of this covenant, then such amounts will be credited only to the extent of
amounts not otherwise included in Consolidated Net Income and that do not
otherwise increase the amount available as a Permitted Investment.
 
Incurrence of Indebtedness and Issuance of Preferred Stock
 
The Indenture will provide that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred stock;
provided, however, that the Company may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock and the Guarantors may incur
Indebtedness or issue Disqualified Stock or preferred stock if the Fixed Charge
Coverage Ratio for the Company's most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred or such Disqualified
Stock or preferred stock is issued would have been at least 2.0 to 1.0,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or
the Disqualified Stock or preferred stock had been issued, as the case may be,
at the beginning of such four-quarter period.
 
 
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
 
  (i) the incurrence by the Company of Indebtedness under Credit Facilities
  (and the Guarantee thereof by the Guarantors); provided that the aggregate
  principal amount of all Indebtedness outstanding under this clause (i)
  after giving effect to such incurrence does not exceed an amount equal to
  $875.0 million (with letters of credit being deemed to have a principal
  amount equal to the maximum potential liability of the Company and its
  Restricted Subsidiaries thereunder) less the amount of proceeds of Asset
  Sales applied to repay any such term Indebtedness or revolving Indebtedness
  if such repayment of revolving Indebtedness resulted in a corresponding
  commitment reduction (excluding any such payments to the extent refinanced
  at the time of repayment);
 
  (ii) the incurrence by the Company and its Subsidiaries of Existing
  Indebtedness, the Senior Notes and the Guarantees thereof;
 
  (iii) (A) the guarantee by the Company or any of the Guarantors of
  Indebtedness of the Company or a Restricted Subsidiary of the Company or
  (B) the incurrence of Indebtedness of a Restricted Subsidiary to the extent
  that such Indebtedness is supported by a letter of credit, in each case
  that was permitted to be incurred by another provision of this covenant;
 
  (iv) the incurrence by the Company or any of its Restricted Subsidiaries of
  Indebtedness (including Capital Lease Obligations) to finance the
  acquisition (including by direct purchase, by lease or indirectly by the
  acquisition of the Capital Stock of a Person that becomes a Restricted
  Subsidiary as a result of such acquisition) or improvement of assets or
  property (real or personal) in an aggregate principal amount which, when
  aggregated with the principal amount of all other Indebtedness then
  outstanding pursuant to this clause (iv) and including all Permitted
  Refinancing Indebtedness incurred to refund, refinance or replace any
  Indebtedness incurred pursuant to this clause (iv), does not exceed an
  amount equal to 5% of Total Assets at the time of such incurrence;
 
  (v) the incurrence by the Company or any of its Restricted Subsidiaries of
  Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
  which are used to refund, refinance or replace Indebtedness (other than
  intercompany Indebtedness) that was permitted by the Indenture to be
  incurred under the first paragraph hereof or clauses (ii), (iii) or (iv) of
  this paragraph;
 
  (vi) the incurrence by the Company or any of its Restricted Subsidiaries of
  intercompany Indebtedness between or among the Company and any of its
  Restricted Subsidiaries; provided, however, that (i) if the
 
                                      129

 
  Company is the obligor on such Indebtedness, such Indebtedness is expressly
  subordinated to the prior payment in full in cash of all Obligations with
  respect to the Notes and (ii)(A) any subsequent issuance or transfer of
  Equity Interests that results in any such Indebtedness being held by a
  Person other than the Company or a Restricted Subsidiary thereof and (B)
  any sale or other transfer of any such Indebtedness to a Person that is not
  either the Company or a Restricted Subsidiary thereof shall be deemed, in
  each case, to constitute an incurrence of such Indebtedness by the Company
  or such Restricted Subsidiary, as the case may be, that was not permitted
  by this clause (vi);
 
  (vii) the incurrence by the Company or any of its Restricted Subsidiaries
  of Hedging Obligations that are incurred in the ordinary course of business
  for the purpose of risk management and not for the purpose of speculation;
 
  (viii) the incurrence by the Company's Unrestricted Subsidiaries of Non-
  Recourse Debt, provided, however, that if any such Indebtedness ceases to
  be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
  deemed to constitute an incurrence of Indebtedness by a Restricted
  Subsidiary of the Company that was not permitted by this clause (viii), and
  the issuance of preferred stock by Unrestricted Subsidiaries;
 
  (ix) the incurrence of Indebtedness solely in respect of performance,
  surety and similar bonds or completion or performance guarantees
  (including, without limitation, performance guarantees pursuant to coal
  supply agreements or equipment leases and including letters of credit
  issued in support of such performance, surety and similar bonds), to the
  extent that such incurrence does not result in the incurrence of any
  obligation for the payment of borrowed money to others;
 
  (x) the incurrence of Indebtedness arising from agreements of the Company
  or a Restricted Subsidiary providing for indemnification, adjustment of
  purchase price or similar obligations, in each case, incurred or assumed in
  connection with the disposition of any business, assets or a Subsidiary;
  provided, however, that (i) such Indebtedness is not reflected on the
  balance sheet of the Company or any Restricted Subsidiary (contingent
  obligations referred to in a footnote to financial statements and not
  otherwise reflected on the balance sheet will not be deemed to be reflected
  on such balance sheet for purposes of this clause (i)) and (ii) the maximum
  assumable liability in respect of all such Indebtedness shall at no time
  exceed the gross proceeds including noncash proceeds (the fair market value
  of such noncash proceeds being measured at the time received and without
  giving effect to any subsequent changes in value) actually received by the
  Company and its Restricted Subsidiaries in connection with such
  disposition; and
 
  (xi) the incurrence by the Company or any of its Restricted Subsidiaries of
  additional Indebtedness in an aggregate principal amount (or accreted
  value, as applicable) at any time outstanding, including all Permitted
  Refinancing Indebtedness incurred to refund, refinance or replace any
  Indebtedness incurred pursuant to this clause (xi), not to exceed the
  greater of (i)(x) $25.0 million and (y) 1% of Total Assets if incurred on
  or prior to December 15, 2000 or (ii)(x) $50.0 million and (y) 2% of Total
  Assets if incurred thereafter.
 
The Indenture will also provide that the Company will not incur, and will not
permit its Restricted Subsidiaries to incur, any Indebtedness (including
Permitted Indebtedness) that is contractually subordinated in right of payment
to any other Indebtedness of the Company or such Restricted Subsidiary unless
such Indebtedness is also contractually subordinated in right of payment to the
Notes or the Subsidiary Guarantees, as the case may be, on substantially
identical terms; provided, however, that no Indebtedness of the Company or any
Restricted Subsidiary shall be deemed to be contractually subordinated in right
of payment to any other Indebtedness of the Company or any Restricted
Subsidiary solely by virtue of being unsecured.
 
For purposes of determining compliance with this covenant, in the event that an
item of Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (xi) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall,
in its sole discretion, classify or reclassify such item of Indebtedness in any
manner that complies with this covenant. Accrual of interest, accretion or
amortization of original issue discount, the payment of interest on any
Indebtedness in the
 
                                      130

 
form of additional Indebtedness with the same terms, and the payment of
dividends on Disqualified Stock in the form of additional shares of the same
class of Disqualified Stock, will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Stock for purposes of this
covenant; provided, in each such case, that the amount thereof is included in
Fixed Charges of the Company as accrued.
 
Limitation on Layering
 
The Company shall not, directly or indirectly, incur any Indebtedness that by
its terms would expressly rank senior in right of payment to the Notes and
expressly rank subordinate in right of payment to any other Indebtedness of the
Company.
 
The Company shall not permit any Guarantor to, and no Guarantor shall, directly
or indirectly, incur any Indebtedness that by its terms would expressly rank
senior in right of payment to the Guarantee of such Guarantor and expressly
rank subordinate in right of payment to any Guarantor Senior Indebtedness of
such Guarantor.
 
Liens
 
The Indenture will provide that the Company will not and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or otherwise cause or suffer to exist or become effective any Lien of any kind
(other than Permitted Liens) upon any of their property or assets, now owned or
hereafter acquired, unless all payments due under the Indenture and the Notes
are secured on an equal and ratable basis with the obligations so secured until
such time as such obligations are no longer secured by a Lien.
 
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
 
The Indenture will provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation
in, or measured by, its profits, or (b) pay any Indebtedness owed to the
Company or any of its Restricted Subsidiaries, (ii) make loans or advances to
the Company or any of its Restricted Subsidiaries or (iii) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries.
However, the foregoing restrictions will not apply to encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indenture, (b) the Senior Credit Facilities as in
effect as of the date of the Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive, taken as a whole, with respect to such
dividend and other payment restrictions than those contained in the Senior
Credit Facilities as in effect on the date of the Indenture, (c) the Senior
Note Indenture, the Indenture, the Senior Notes and the Notes, (d) applicable
law or any applicable rule, regulation or order, (e) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided
that, in the case of Indebtedness, such Indebtedness was permitted by the terms
of the Indenture to be incurred, (f) customary non-assignment provisions in
leases and other agreements entered into in the ordinary course of business and
consistent with past practices, (g) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (h) any
agreement for the sale of a Restricted Subsidiary that restricts distributions
by that Restricted Subsidiary pending its sale, (i) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive,
taken as a whole, than those contained in the agreements governing the
 
                                      131

 
Indebtedness being refinanced, (j) secured Indebtedness otherwise permitted to
be incurred pursuant to the provisions of the covenant described above under
the caption "--Liens" that limits solely the right of the debtor to dispose of
the assets securing such Indebtedness, (k) provisions with respect to the
disposition or distribution of assets or property in joint venture agreements
and other similar agreements entered into in the ordinary course of business,
(l) restrictions on cash or other deposits or net worth imposed by customers or
lessors under contracts or leases entered into in the ordinary course of
business and (m) any encumbrances or restrictions imposed by any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of the contracts, instruments or obligations
referred to in clauses (a) through (l) above, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are, in the good faith judgment of the Company's
Board of Directors, not materially more restrictive in the aggregate with
respect to such dividend and other payment restrictions than those (considered
as a whole) contained in the dividend or other payment restrictions prior to
such amendment, modification, restatement, renewal, increase, supplement,
refunding, replacement or refinancing.
 
Merger, Consolidation, or Sale of Assets
 
The Indenture will provide that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Registration Rights Agreement, the Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
the Company with or into a Wholly Owned Restricted Subsidiary of the Company,
immediately after giving pro forma effect to such transaction, as if such
transaction had occurred at the beginning of the applicable four-quarter
period, (A) the entity surviving such consolidation or merger would be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock" or (B) the Fixed Charge Coverage Ratio for the
Company or the entity or Person formed by or surviving any such consolidation
or merger (if other than the Company), or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made would,
immediately after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, not be less
than such Fixed Charge Coverage Ratio for the Company and its Restricted
Subsidiaries immediately prior to such transaction. The Indenture will also
provide that the Company may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. The provisions of this covenant will not be
applicable to a sale, assignment, transfer, conveyance or other disposition of
assets between or among the Company and its Restricted Subsidiaries.
 
Notwithstanding the foregoing clause (iv), (i) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (ii) the Company may merge with an Affiliate that has
no significant assets or liabilities and was formed solely for the purpose of
changing the jurisdiction of organization of the Company in another State of
the United States or the form of organization of the Company so long as the
amount of Indebtedness of the Company and its Restricted Subsidiaries is not
increased thereby and provided that the successor assumes all the obligations
of the Company under the Registration Rights Agreement, the Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee.
 
                                      132

 
Transactions with Affiliates
 
The Indenture will provide that the Company will not, and will not permit any
of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are materially no less
favorable to the Company or the relevant Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Subsidiary
with an unrelated Person and (ii) the Company delivers to the Trustee (a) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $2.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $10.0 million, an opinion as to the
fairness to the Holders of such Affiliate Transaction from a financial point of
view issued by an accounting, appraisal or investment banking firm of national
standing. Notwithstanding the foregoing, the following items shall not be
deemed to be Affiliate Transactions: (i) transactions entered into pursuant to
the terms of (a) the Haulage and Delivery Agreement, (b) the MMI Service
Agreement, (c) the MMI Leases, (d) the Bowie Sales Agency Agreement, (e) the
Manufacture and Service Agreement and (f) the Technology Sharing Agreement,
each as in effect on the date of the Indenture or as thereafter amended,
provided any such amendment does not materially and adversely affect the rights
of the Holders of the Subordinated Notes under the Indenture, (ii) any
employment agreement or arrangement entered into by the Company or any of its
Subsidiaries or any employee benefit plan available to employees of the Company
and its Subsidiaries generally, in each case in the ordinary course of business
and consistent with the past practice of the Company or such Subsidiary,
(iii) transactions between or among the Company and/or its Subsidiaries, (iv)
payment of reasonable directors fees to Persons who are not otherwise
Affiliates of the Company, (v) Restricted Payments that are permitted by the
provisions of the Indenture described above under the caption
"--Restricted Payments" or pursuant to the definition of Permitted Investments,
(vi) indemnification payments made to officers, directors and employees of the
Company or any Restricted Subsidiary pursuant to charter, bylaw, statutory or
contractual provisions, and (vii) transactions pursuant to the terms of the
Transaction Documents in effect on the dates of the closings of the
Acquisitions.
 
Limitation on Issuances and Sales of Equity Interests in Wholly Owned
Subsidiaries
 
The Indenture will provide that the Company (i) will not, and will not permit
any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey,
sell, lease or otherwise dispose of any Equity Interests in a Wholly Owned
Restricted Subsidiary of the Company to any Person (other than the Company or a
Wholly Owned Subsidiary of the Company), unless (1) such transfer, conveyance,
sale, lease or other disposition is of all the Equity Interests in such Wholly
Owned Restricted Subsidiary and (2) the cash Net Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with the
covenant described above under the caption "Repurchase at the Option of
Holders--Asset Sales," and (ii) will not permit any Wholly Owned Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Restricted
Subsidiary of the Company.
 
Additional Subsidiary Guarantees
 
The Indenture will provide that if the Company or any of its Domestic
Subsidiaries shall acquire or create another Domestic Subsidiary after the date
of the Indenture and such Domestic Subsidiary provides a guarantee of the
Senior Credit Facilities, then such newly acquired or created Domestic
Subsidiary shall execute a supplemental indenture in form and substance
satisfactory to the Trustee providing that such Domestic Subsidiary shall
become a Guarantor under the Indenture, provided, however, this covenant shall
not apply to
 
                                      133

 
any Domestic Subsidiary that has been properly designated as an Unrestricted
Subsidiary in accordance with the Indenture for so long as it continues to
constitute an Unrestricted Subsidiary.
 
Business Activities
 
The Company will not, and will not permit any Restricted Subsidiary to, engage
in any business other than Permitted Businesses, except to such extent as would
not be material to the Company and its Restricted Subsidiaries taken as a
whole.
 
Payments for Consent
 
The Indenture will provide that neither the Company nor any of its Restricted
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Subordinated Notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indenture or the
Subordinated Notes unless such consideration is offered to be paid or is paid
to all Holders of the Subordinated Notes that consent, waive or agree to amend
in the time frame set forth in the solicitation documents relating to such
consent, waiver or agreement.
 
Reports
 
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Subordinated Notes are
outstanding, the Company will furnish to the Holders of Subordinated Notes (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that describes the
financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of the Company) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K if the Company were required to file such
reports, in each case within the time periods specified in the Commission's
rules and regulations. In addition, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available
to securities analysts and prospective investors upon request. In addition, the
Company and the Guarantors have agreed that, for so long as any Subordinated
Notes remain outstanding, they will furnish to the Holders and to securities
analysts and prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
 
Events of Default and Remedies
 
The Indenture will provide that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Subordinated Notes; (ii)
default in payment when due of the principal of or premium, if any, on the
Subordinated Notes; (iii) failure by the Company or any of its Subsidiaries to
make the offer required or to purchase any of the Subordinated Notes as
required under the provisions described under the captions "--Repurchase at the
Option of Holders--Change of Control" or "--Repurchase at the Option of
Holders--Asset Sales;" (iv) failure by the Company or any of its Subsidiaries
for 30 days after notice to comply with the provisions of the covenants
entitled "-- Certain Covenants--Restricted Payments" or "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock" or failure by the
Company or any of its Subsidiaries for 60 days after notice to comply with any
of its other agreements in the Indenture or the Subordinated Notes; (v) default
under any
 
                                      134

 
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the date of the
Indenture, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $25.0 million or more; (vi) failure
by the Company or any of its Restricted Subsidiaries or any group of Restricted
Subsidiaries that, taken as a whole, would be a Significant Subsidiary to pay
final judgments aggregating in excess of $25.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days; (vii) except as permitted
by the Indenture, any Subsidiary Guarantee shall be held in any judicial
proceeding to be unenforceable or invalid or shall cease for any reason to be
in full force and effect or any Guarantor, or any Person acting on behalf of
any Guarantor, shall deny or disaffirm its obligations under its Subsidiary
Guarantee; and (viii) certain events of bankruptcy or insolvency with respect
to the Company, any of its Significant Subsidiaries that are Restricted
Subsidiaries or any group of Restricted Subsidiaries that, taken as a whole,
would be a Significant Subsidiary.
 
If any Event of Default occurs and is continuing, the Trustee or the Holders of
at least 25% in principal amount of the then outstanding Subordinated Notes may
declare all the Subordinated Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary that is a Restricted Subsidiary or any group of
Restricted Subsidiaries that, taken together, would constitute a Significant
Subsidiary, all outstanding Subordinated Notes will become due and payable
without further action or notice. Holders of the Subordinated Notes may not
enforce the Indenture or the Subordinated Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Subordinated Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Subordinated Notes notice of any continuing Default or Event of Default (except
a Default or Event of Default relating to the payment of principal or interest)
if it determines that withholding notice is in their interest.
 
In the case of any Event of Default occurring by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had to
pay if the Company then had elected to redeem the Subordinated Notes pursuant
to the optional redemption provisions of the Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted by
law upon the acceleration of the Subordinated Notes. If an Event of Default
occurs prior to December 15, 2002 by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of the Company with the intention of
avoiding paying the premium upon redemption of the Subordinated Notes prior to
December 15, 2002, then the premium specified in the event of an optional
redemption using the net cash proceeds of an Equity Offering shall also become
immediately due and payable to the extent permitted by law upon the
acceleration of the Subordinated Notes.
 
The Holders of a majority in aggregate principal amount of the Subordinated
Notes then outstanding by notice to the Trustee may on behalf of the Holders of
all of the Subordinated Notes waive any existing Default or Event of Default
and its consequences under the Subordinated Notes Indenture except a continuing
Default or Event of Default in the payment of interest on, or the principal of,
the Subordinated Notes.
 
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
 
 
                                      135

 
No Personal Liability of Directors, Officers, Employees and Stockholders
 
No director, officer, employee, incorporator or stockholder of the Company or
any Person controlling such Person, as such, shall have any liability for any
obligations of the Company under the Subordinated Notes, the Subsidiary
Guarantees, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Subordinated
Notes by accepting a Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Subordinated
Notes. Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
 
Legal Defeasance and Covenant Defeasance
 
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Subordinated Notes
("Legal Defeasance") except for (i) the rights of Holders of outstanding
Subordinated Notes to receive payments in respect of the principal of, premium,
if any, and interest and Liquidated Damages, if any, on such Subordinated Notes
when such payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Subordinated Notes concerning issuing temporary
Subordinated Notes, registration of Subordinated Notes, mutilated, destroyed,
lost or stolen Subordinated Notes and the maintenance of an office or agency
for payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustee and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Subordinated Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Subordinated Notes.
 
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Subordinated Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages, if any, on the outstanding Subordinated Notes on the stated
maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the Subordinated Notes are being defeased to
maturity or to a particular redemption date; (ii) in the case of Legal
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Subordinated Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Subordinated Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such deposit) or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the effective date of such
defeasance (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which
 
                                      136

 
the Company or any of its Subsidiaries is bound; (vi) the Company must have
delivered to the Trustee, at or prior to the effective date of such defeasance,
an opinion of counsel to the effect that at the effective date of such
defeasance, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Subordinated Notes over the other creditors
of the Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
 
Transfer and Exchange
 
A Holder may transfer or exchange Subordinated Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Note selected for redemption. Also, the Company is not required to transfer
or exchange any Note for a period of 15 days before a selection of Subordinated
Notes to be redeemed.
 
The registered Holder of a Note will be treated as the owner of it for all
purposes.
 
Amendment, Supplement and Waiver
 
Except as provided in the next two succeeding paragraphs, the Indenture, the
Subordinated Notes or the Guarantees of the Subordinated Notes by Holdings and
the Subsidiary Guarantors may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the Subordinated
Notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for,
Subordinated Notes), and any existing default or compliance with any provision
of the Indenture, the Subordinated Notes or the Guarantees of the Subordinated
Notes by Holdings and the Subsidiary Guarantors may be waived with the consent
of the Holders of a majority in principal amount of the then outstanding
Subordinated Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for,
Subordinated Notes).
 
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Subordinated Notes held by a non-consenting Holder): (i)
reduce the principal amount of Subordinated Notes whose Holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Note or alter the provisions with respect to the
redemption of the Subordinated Notes (other than provisions relating to the
covenants described above under the caption "--Repurchase at the Option of
Holders"), (iii) reduce the rate of or change the time for payment of interest
on any Note, (iv) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Subordinated Notes (except
a rescission of acceleration of the Subordinated Notes by the Holders of at
least a majority in aggregate principal amount of the Subordinated Notes and a
waiver of the payment default that resulted from such acceleration), (v) make
any Note payable in money other than that stated in the Subordinated Notes,
(vi) make any change in the provisions of the Indenture relating to waivers of
past Defaults or the rights of Holders of Subordinated Notes to receive
payments of principal of or premium, if any, or interest on the Subordinated
Notes, (vii) waive a redemption payment with respect to any Note (other than a
payment required by one of the covenants described above under the caption "--
Repurchase at the Option of Holders"), (viii) make any change in the foregoing
amendment and waiver provisions or (ix) release any Guarantor and/or Holdings
from any of its obligations under its Guarantee of the Subordinated Notes or
the Indenture, except in accordance with the terms of the Indenture.
 
Notwithstanding the foregoing, without the consent of any Holder of
Subordinated Notes, the Company and the Trustee may amend or supplement the
Indenture or the Subordinated Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Subordinated Notes in addition to
or in place of certificated
 
                                      137

 
Subordinated Notes, to provide for the assumption of the Company's obligations
to Holders of Subordinated Notes in the case of a merger or consolidation or
sale of all or substantially all of the Company's assets, to make any change
that would provide any additional rights or benefits to the Holders of
Subordinated Notes or that does not adversely affect the legal rights under the
Indenture of any such Holder, to comply with requirements of the Commission in
order to effect or maintain the qualification of the Indenture under the Trust
Indenture Act, to provide for the issuance of Additional Subordinated Notes in
accordance with the limitations set forth in the Indenture as of the date
hereof or to allow any Guarantor and/or Holdings to execute a supplemental
Indenture and/or a Guarantee with respect to the Subordinated Notes.
 
Concerning the Trustee
 
The Indenture contains certain limitations on the rights of the Trustee, should
it become a creditor of the Company, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
 
The Holders of a majority in principal amount of the then outstanding
Subordinated Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required,
in the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Subordinated Notes, unless such Holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
 
Book-Entry, Delivery and Form
 
Except as set forth below, New Notes will be issued in registered, global form
in minimum denominations of $1,000 and integral multiples of $1,000 in excess
thereof. Senior Notes will be issued at the closing of the Exchange Offer (the
"Closing").
 
New Notes initially will be represented by one or more New Notes in registered,
global form without interest coupons (collectively, the "Global New Notes").
The Global New Notes will be deposited upon issuance with the [Exchange Note]
Trustee as custodian for DTC, in New York, New York, and registered in the name
of DTC or its nominee, in each case for credit to an account of a direct or
indirect participant in DTC as described below.
 
Except as set forth below, the Global New Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global New Notes may not be exchanged for
New Notes in certificated form except in the limited circumstances described
below. See "--Exchange of Book-Entry New Notes for Certificated New Notes."
Except in the limited circumstances described below, owners of beneficial
interests in the Global New Notes will not be entitled to receive physical
delivery of Certificated New Notes (as defined below).
 
Initially, the Exchange Note Trustee will act as Paying Agent and Registrar.
The Senior Notes may be presented for registration of transfer and exchange at
the offices of the Registrar.
 
Depository Procedures
 
The following description of the operations and procedures of DTC are provided
solely as a matter of convenience. These operations and procedures are solely
within the control of DTC and are subject to changes by them from time to time.
The Company takes no responsibility for these operations and procedures and
urges investors to contact the system or its participants directly to discuss
these matters.
 
                                      138

 
DTC has advised the Company that DTC is a limited-purpose trust company created
to hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers
and dealers (including the [Dealer Manager], banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or the Indirect Participants. The
ownership interests in, and transfers of ownership interests in, each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
 
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global New Notes, DTC will credit the accounts of
Participants designated by the Dealer Manager with portions of the principal
amount of the Global New Notes and (ii) ownership of such interests in the
Global New Notes will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interest in the Global New Notes).
 
All interests in a Global Exchange Note may be subject to the procedures and
requirements of DTC. The laws of some states require that certain persons take
physical delivery in definitive form of securities that they own. Consequently,
the ability to transfer beneficial interests in a Global Exchange Note to such
persons will be limited to that extent. Because DTC can act only on behalf of
Participants, which in turn act on behalf of Indirect Participants and certain
banks, the ability of a person having beneficial interests in a Global Exchange
Note to pledge such interests to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests.
 
Except as described below, owners of interests in the Global New Notes will not
have Senior Notes registered in their names, will not receive physical delivery
of Senior Notes in certificated form and will not be considered the registered
owners or "Holders" thereof under the Exchange Note Indenture for any purpose.
 
Payments in respect of the principal of, and premium, if any, and interest on a
Global Exchange Note registered in the name of DTC or its nominee will be
payable to DTC in its capacity as the registered Holder under the Exchange Note
Indenture. Under the terms of the Exchange Indenture, the Company and the
Exchange Note Trustee will treat the persons in whose names the Senior Notes,
including the Global New Notes, are registered as the owners thereof for the
purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Company, the Exchange Note Trustee nor
any agent of the Company or the Exchange Note Trustee has or will have any
responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interests in the Global New Notes, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership
interests in the Global New Notes or (ii) any other matter relating to the
actions and practices of DTC or any of its Participants or Indirect
Participants. DTC has advised the Company that its current practice, upon
receipt of any payment in respect of securities such as the Senior Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interests in
the relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Senior
Notes will be governed by standing instructions and customary practices and
will be the responsibility of the Participants or the Indirect Participants and
will not be the responsibility of DTC, the Exchange Note Trustee or the
Company. Neither the Company nor the Exchange Note Trustee will be liable for
any delay by DTC or any of its Participants in identifying the beneficial
owners of the Senior Notes, and the Company and the Exchange Note Trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
 
                                      139

 
Interests in the Global New Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in
all cases to the rules and procedures of DTC and its Participants. See "--Same
Day Settlement and Payment."
 
Transfers between Participants in DTC will be effected in accordance with DTC's
procedures, and will be settled in same day funds.
 
DTC has advised the Company that it will take any action permitted to be taken
by a Holder of Senior Notes only at the direction of one or more Participants
to whose account DTC has credited the interests in the Global New Notes and
only in respect of such portion of the aggregate principal amount of the Senior
Notes as to which such Participant or Participants has or have given such
direction. However, if there is an Event of Default under the Senior Notes, DTC
reserves the right to exchange the Global New Notes for legended Senior Notes
in certificated form, and to distribute such Senior Notes to its Participants.
 
Exchange of Book-Entry Senior Notes for Certificated Senior Notes
 
A Global Exchange Note is exchangeable for definitive Senior Notes in
registered certificated form ("Certificated Senior Notes") if (i) DTC (x)
notifies the Company that it is unwilling or unable to continue as depositary
for the Global New Notes and the Company thereupon fails to appoint a successor
depositary or (y) has ceased to be a clearing agency registered under the
Exchange Act, (ii) the Company, at its option, notifies the Exchange Note
Trustee in writing that it elects to cause the issuance of the Certificated
Senior Notes or (iii) there shall have occurred and be continuing a Default or
Event of Default with respect to the Senior Notes. In addition, beneficial
interests in a Global Exchange Note may be exchanged for Certificated Senior
Notes upon request but only upon prior written notice given to the Exchange
Note Trustee by or on behalf of DTC in accordance with the Exchange Note
Indenture. In all cases, Certificated Senior Notes delivered in exchange for
any Global Exchange Note or beneficial interests therein will be registered in
the names, and issued in any approved denominations, requested by or on behalf
of the depositary (in accordance with its customary procedures).
 
Exchange of Certificated Senior Notes for Book-Entry Senior Notes
 
Senior Notes issued in certificated form may not be exchanged for beneficial
interests in any Global Exchange Note unless the transferor first delivers to
the Exchange Note Trustee a written certificate (in the form provided in the
Exchange Note Indenture) to the effect that such transfer will comply with the
appropriate transfer restrictions applicable to such Senior Notes.
 
Same Day Settlement and Payment
 
The Exchange Note Indenture will require that payments in respect of the Senior
Notes represented by the Global New Notes (including principal, premium, if
any, interest be made by wire transfer of immediately available funds to the
accounts specified by the Global Exchange Note Holder. With respect to Senior
Notes in certificated form, the Company will make all payments of principal,
premium, if any, interest by wire transfer of immediately available funds to
the accounts specified by the Holders thereof or, if no such account is
specified, by mailing a check to each such Holder's registered address. The
Senior Notes represented by the Global New Notes are expected and to trade in
DTC's Same-Day Funds Settlement System, and any permitted secondary market
trading activity in such Senior Notes will, therefore, be required by DTC to be
settled in immediately available funds. The Company expects that secondary
trading in any certificated Senior Notes will also be settled in immediately
available funds.
 
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Exchange Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Cedel participant, during the securities settlement
processing day (which
 
                                      140

 
must be a business day for Euroclear and Cedel) immediately following the
settlement date of DTC. DTC has advised the Company that cash received in
Euroclear or Cedel as a result of sales of interests in a Global Exchange Note
by or through a Euroclear or Cedel participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedel cash account only as of the business day for
Euroclear or Cedel following DTC's settlement date.
 
Registration Rights; Liquidated Damages
 
The Company and the Initial Purchaser entered into the Registration Rights
Agreement on the Closing Date. Pursuant to the Registration Rights Agreement,
the Company agreed to file with the SEC the Exchange Offer Registration
Statement on the appropriate form under the Securities Act with respect to the
New Notes. Upon the effectiveness of the Exchange Offer Registration Statement,
the Company will offer to the Holders of Transfer Restricted Securities
pursuant to the Exchange Offer who are able to make certain representations the
opportunity to exchange their Transfer Restricted Securities for New Notes. If
(i) the Company is not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or SEC policy or (ii) any Holder of
Transfer Restricted Securities notifies the Company within the specified period
that (A) it is prohibited by law or SEC policy from participating in the
Exchange Offer or (B) that it may not resell the New Notes acquired by it in
the Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (C) that it is a broker-dealer and
owns Old Notes acquired directly from the Company or an affiliate of the
Company, the Company will file with the SEC a Shelf Registration Statement to
cover resales of the Old Notes by the Holders thereof who satisfy certain
conditions relating to the provision of information in connection with the
Shelf Registration Statement. The Company will use its reasonable best efforts
to cause the applicable registration statement to be declared effective as
promptly as possible by the SEC. For purposes of the foregoing, "Transfer
Restricted Securities" means each Old Note until (i) the date on which such Old
Note has been exchanged by a person other than a broker-dealer for a New Note
in the Exchange Offer, (ii) following the exchange by a broker-dealer in the
Exchange Offer of an Old Note for a New Note, the date on which such New Note
is sold to a purchaser who receives from such broker-dealer on or prior to the
date of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Old Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iv) the date on which such Old Note
is distributed to the public pursuant to Rule 144 under the Securities Act.
 
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the SEC on or prior to 45 days after
the Closing Date, (ii) the Company will use its reasonable best efforts to have
the Exchange Offer Registration Statement declared effective by the SEC on or
prior to 90 days after the Closing Date, (iii) unless the Exchange Offer would
not be permitted by applicable law or SEC policy, the Company will commence the
Exchange Offer and use its reasonable best efforts to issue on or prior to 45
days after the date on which the Exchange Offer Registration Statement was
declared effective by the SEC, New Notes in exchange for all Old Notes tendered
prior thereto in the Exchange Offer and (iv) if obligated to file the Shelf
Registration Statement, the Company will use its reasonable best efforts to
file the Shelf Registration Statement with the SEC on or prior to 30 days after
such filing obligation arises (and in any event within 75 days after the
Closing Date) and to cause the Shelf Registration to be declared effective by
the SEC on or prior to 45 days after such obligation arises. If (a) the Company
fails to file any of the Registration Statements required by the Registration
Rights Agreement on or before the date specified for such filing, (b) any of
such Registration Statements is not declared effective by the SEC on or prior
to the date specified for such effectiveness (the "Effectiveness Target Date"),
or (c) the Company fails to consummate the Exchange Offer within 45 days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods
 
                                      141

 
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), then the Company will
pay Liquidated Damages to each Holder of Old Notes, with respect to the first
90-day period immediately following the occurrence of the such Registration
Default in an amount equal to $0.05 per week per $1,000 principal amount of Old
Notes held by such Holder. The amount of the Liquidated Damages will increase
by an additional $0.05 per week per $1,000 principal amount of Old Notes with
respect to each subsequent 90-day period until all Registration Defaults have
been cured, up to a maximum amount of Liquidated Damages for all Registration
Defaults of $0.50 per week per $1,000 principal amount of Old Notes. All
accrued Liquidated Damages will be paid by the Company on each Damages Payment
Date to the Global Note Holder by wire transfer of immediately available funds
or by federal funds check and to Holders of Certificated Securities by wire
transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified. Following the
cure of all Registration Defaults, the accrual of Liquidated Damages will
cease.
 
Holders of Old Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Old Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
 
Certain Definitions
 
Set forth below are certain defined terms used in the Indenture. Reference is
made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
 
"Acquired Debt" means, with respect to any specified Person, (i) Indebtedness
of any other Person existing at the time such other Person is merged with or
into or became a Subsidiary of such specified Person, including, without
limitation, Indebtedness incurred in connection with, or in contemplation of,
such other Person merging with or into or becoming a Subsidiary of such
specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset
acquired by such specified Person.
 
"Acquisitions" means the acquisition by the Company of: (i) all of the
outstanding capital stock of Zeigler Coal Holding Company, (ii) all of the
outstanding capital stock of certain subsidiaries of Cyprus Amax Coal Company
and certain mining equipment used by such subsidiaries together with an
agreement to pay Cyprus Amax Coal Company or its affiliate certain royalties,
(iii) all of the outstanding capital stock of Mid-Vol Leasing, Inc., Mega
Minerals, Inc. and Premium Processing, Inc. together with an agreement to pay
the former owners of Mid-Vol Leasing, Inc. certain royalties, (iv) all of the
outstanding capital stock of Kindill and Heyman Holding, Inc., (v) certain of
the assets of The Battle Ridge Companies, (vi) the stock of Leslie Resources,
Inc. and Leslie Resources Management, Inc., (vii) certain facilities, equipment
and intellectual property through the purchase of a substantial portion of the
assets of the Mining Technologies Division of Addington Enterprises, Inc.,
(viii) all of the outstanding capital stock of Martiki Coal Corporation and
(ix) all of the outstanding capital stock of Ikerd-Bandy Co., Inc.
 
"Additional Assets" means (i) any property or assets (other than Capital Stock,
Indebtedness or rights to receive payments over a period greater than 180 days,
other than with respect to coal supply contract restructurings) that are usable
by the Company or a Restricted Subsidiary in a Permitted Business or (ii) the
Capital Stock of a Person that is at the time, or becomes, a Restricted
Subsidiary as a result of the acquisition of such Capital Stock by the Company
or another Restricted Subsidiary.
 
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under
 
                                      142

 
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
 
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of any
assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of coal or rights to acquire coal or sales of
mining equipment and related parts and services, in each case, in the ordinary
course of business (provided that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole will be governed by the provisions of
the Indenture described above under the caption "--Change of Control" and/or
the provisions described above under the caption "--Merger, Consolidation or
Sale of Assets" and not by the provisions of the Asset Sale covenant), and (ii)
the issue or sale by the Company or any of its Restricted Subsidiaries of
Equity Interests of any of the Company's Restricted Subsidiaries, in the case
of either clause (i) or (ii), whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of $2.0
million or (b) for Net Proceeds in excess of $2.0 million. Notwithstanding the
foregoing, the following items shall not be deemed to be Asset Sales: (i) a
transfer of assets by the Company to a Guarantor Restricted Subsidiary or by a
Guarantor Restricted Subsidiary to the Company or to another Restricted
Subsidiary, (ii) an issuance of Equity Interests by a Restricted Subsidiary to
the Company or to another Restricted Subsidiary, (iii) a Restricted Payment
that is permitted by, or an Investment that is not prohibited by, the covenant
described above under the caption "--Certain Covenants--Restricted Payments,"
(iv) a disposition of Cash Equivalents or obsolete equipment, (v) foreclosures
on assets, (vi) the sale or discount, in each case without recourse, of
accounts receivable arising in the ordinary course of business, but only in
connection with the compromise or collection thereof, (vii) the factoring of
accounts receivable arising in the ordinary course of business pursuant to
arrangements customary in the industry and (viii) the sale or disposition by
the Company or a Restricted Subsidiary of its Equity Interest in, or all or
substantially all of the assets of, an Unrestricted Subsidiary.
 
"Assets Held for Sale" means (i) assets of the Company that are reported on the
pro forma financial statements of the Company contained in the Offering
Memorandum as assets held for sale in accordance with GAAP and (ii) the office
building in Fairview Heights, Illinois.
 
"Board of Directors" means the board of directors of AEI Resources, Inc. or any
authorized committee of the Board of Directors.
 
"Capital Lease Obligation" means, at the time any determination thereof is to
be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance
with GAAP.
 
"Capital Stock" means (i) in the case of a corporation, corporate stock, (ii)
in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
 
"Cash Equivalents" means (a) securities with maturities of one year or less
from the date of acquisition issued or fully guaranteed or insured by the U.S.
Government or any agency thereof, (b) certificates of deposit and time deposits
with maturities of one year or less from the date of acquisition and overnight
bank deposits of any lender under the Senior Credit Facilities or of any
commercial bank having capital and surplus in excess of $500.0 million and a
Thompson Bank Watch Rating of "B" or better, except that up to $10.0 million of
such certificates of deposit, time deposits and overnight deposits may be of or
with the Kentucky Bank and Trust Company at any one time, (c) repurchase
obligations of any lender under the Senior Credit Facilities or of any
commercial bank satisfying the requirements of clause (b) of this definition,
having a term of not more than 90 days with respect to securities issued or
fully guaranteed or insured by the United States Government,
 
                                      143

 
(d) commercial paper of a domestic issuer rated at least A-2 by Standard and
Poor's Rating Group ("S&P") or P-2 by Moody's Investors Service, Inc.
("Moody's"), or carrying an equivalent rating by a nationally recognized rating
agency if both of S&P and Moody's cease publishing ratings of investments, (e)
securities with maturities of one year or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the
United States, by any political subdivision or taxing authority of any such
state, commonwealth or territory or by any foreign government, the securities
of which state, commonwealth, territory, political subdivision, taxing
authority or foreign government (as the case may be) are rated at least A by
S&P or A by Moody's, (f) securities with maturities of one year or less from
the date of acquisition backed by standby letters of credit issued by any
lender under the Senior Credit Facilities or any commercial bank satisfying the
requirements of clause (b) of this definition or (g) shares of money market
mutual or similar funds which invest exclusively in assets satisfying the
requirements of clauses (a) through (f) of this definition.
 
"Change of Control" means the occurrence of any of the following: (i) the sale,
lease, transfer, conveyance or other disposition (other than by way of merger
or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than a Principal or a Related Party of a Principal, (ii) the
adoption of a plan relating to the liquidation or dissolution of the Company,
(iii) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any "person" (as defined
above), other than the Principals and their Related Parties or (prior to the
establishment of a Public Market) a Permitted Group, becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
currently exercisable or is exercisable only upon the occurrence of a
subsequent condition), directly or indirectly, of more than 50% of the Voting
Stock of the Company (measured by voting power rather than number of shares),
or (iv) the Company consolidates with, or merges with or into, any Person, or
any Person consolidates with, or merges with or into, the Company, in any such
event pursuant to a transaction in which any of the outstanding Voting Stock of
the Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where the Voting Stock of the Company
outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person constituting a majority of the outstanding shares of such
Voting Stock of such surviving or transferee Person (immediately after giving
effect to such issuance). For purposes of this definition, any transfer of an
equity interest of an entity that was formed for the purpose of acquiring
Voting Stock of the Company will be deemed to be a transfer of such portion of
such Voting Stock as corresponds to the portion of the equity of such entity
that has been so transferred.
 
"Consolidated Cash Flow" means, with respect to any Person for any period, the
Consolidated Net Income of such Person for such period plus (i) provision for
taxes based on income or profits of such Person and its Restricted Subsidiaries
for such period, to the extent that such provision for taxes was included in
computing such Consolidated Net Income, plus (ii) consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
amortization of debt issuance costs, deferred financing fees and original issue
discount, noncash interest payments, the interest component of any deferred
payment obligations (other than employee benefit obligations), the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iii) depreciation, depletion,
amortization (including amortization of goodwill and other intangibles) and
other noncash charges and expenses (including, without limitation, writedowns
and impairment of property, plant and equipment and intangibles and other long-
lived assets) (excluding any such noncash expense for periods after the date of
the Indenture to the extent that it represents an accrual of or reserve for
cash expenses in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of such Person and its Restricted Subsidiaries
for such period to the extent that such depreciation, depletion, amortization
and other noncash expenses were deducted in computing
 
                                      144

 
such Consolidated Net Income, plus (iv) unusual or nonrecurring charges
incurred either (A) prior to the date of the Indenture or (B) within twelve
months thereafter and in connection with any of the transactions contemplated
by the Transaction Documents, in each case to the extent deducted in computing
such Consolidated Net Income minus (v) noncash items increasing such
Consolidated Net Income for such period (other than accruals in accordance with
GAAP), plus (vi) noncash items decreasing such Consolidated Net Income for such
period (other than accruals in accordance with GAAP), in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation, depletion and amortization and other noncash expenses of,
a Restricted Subsidiary that is not a Guarantor shall be added to Consolidated
Net Income to compute Consolidated Cash Flow only to the extent that a
corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Restricted Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
 
"Consolidated Net Income" means, with respect to any Person for any period, the
aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income of any Person that is not a Subsidiary or that is
accounted for by the equity method of accounting shall be included only to the
extent of the amount of dividends or distributions paid in cash to the referent
Person or a Restricted Subsidiary thereof, (ii) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary of
that Net Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Restricted Subsidiary or its stockholders, (iii) the Net Income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded, (iv) the cumulative effect of a
change in accounting principles shall be excluded, (v) the Net Income (or loss)
of any Unrestricted Subsidiary shall be excluded, whether or not distributed to
the Company or one of its Restricted Subsidiaries, (vi) any non-cash expense
related to employee equity participation programs or stock option or similar
plans shall be disregarded, and (vii) losses of Tek-Kol prior to the date of
the Indenture shall be disregarded.
 
"Credit Facilities" means, with respect to the Company or any of its Restricted
Subsidiaries, one or more debt facilities (including, without limitation, the
Senior Credit Facilities) or commercial paper facilities with banks or other
institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time.
 
"Default" means any event that is or with the passage of time or the giving of
notice or both would be an Event of Default.
 
"Designated Noncash Consideration" means the fair market value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of the Company, less the amount of cash or Cash Equivalents
received in connection with a sale of such Designated Noncash Consideration.
 
"Designated Senior Indebtedness" means (i) any Indebtedness outstanding under
the Senior Credit Facility and (ii) any Indebtedness outstanding under the
Senior Subordinated Notes Indenture.
 
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
 
                                      145

 
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Subordinated Notes mature; provided, however, that any Capital Stock
that would constitute Disqualified Stock solely because the holders thereof
have the right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "--Certain Covenants--Restricted Payments."
 
"Domestic Subsidiary" means a Restricted Subsidiary that is (i) formed under
the laws of the United States of America or a state or territory thereof or
(ii) as of the date of determination, treated as a domestic entity or a
partnership or a division of a domestic entity for United States federal income
tax purposes.
 
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
 
"Equity Offering" means any public or private sale of equity securities
(excluding Disqualified Stock) of the Company or Holdings (to the extent that
the net proceeds therefrom are contributed to the Company as common equity
capital), other than any private sales to an Affiliate of the Company.
 
"Existing Indebtedness" means Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the Senior Credit Facilities, the
Senior Subordinated Notes, the Notes and related Guarantees) in existence on
the date of the Indenture, including, without duplication, outstanding letters
of credit which support such Indebtedness, until such amounts are repaid.
 
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs and
original issue discount, noncash interest payments, the interest component of
any deferred payment obligations (other than employee benefit obligations), the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
letters of credit or bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations, but excluding amortization of debt issuance
costs) and (ii) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period, and (iii) any interest
expense on the portion of Indebtedness of another Person that is Guaranteed by
such Person or one of its Restricted Subsidiaries or secured by a Lien on
assets of such Person or one of its Restricted Subsidiaries (whether or not
such Guarantee or Lien is called upon) and (iv) the product of (a) all dividend
payments, whether or not in cash, on any series of preferred stock of such
Person or any of its Restricted Subsidiaries, other than dividend payments on
Equity Interests payable solely in Equity Interests of the Company (other than
Disqualified Stock) or to the Company or a Restricted Subsidiary of the
Company, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the effective combined federal, state and
local tax rate of such Person for such period, expressed as a decimal, in each
case, for the Company and its Restricted Subsidiaries on a consolidated basis
and in accordance with GAAP.
 
"Fixed Charge Coverage Ratio" means with respect to any Person and its
Restricted Subsidiaries for any period, the ratio of the Consolidated Cash Flow
of such Person and its Restricted Subsidiaries for such period to the Fixed
Charges of such Person and its Restricted Subsidiaries for such period. In the
event that the referent Person or any of its Restricted Subsidiaries incurs,
assumes, Guarantees or redeems any Indebtedness (other than revolving credit
borrowings) or issues or redeems preferred stock subsequent to the commencement
of the period for which the Fixed Charge Coverage Ratio is being calculated but
prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock, as if the same had occurred at the beginning of
the applicable four-quarter reference period. In addition, for purposes of
making
 
                                      146

 
the computation referred to above, (i) acquisitions that have been made by the
Company or any of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be given pro forma effect as if they had
occurred on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period shall be calculated without giving effect
to clause (iii) of the proviso set forth in the definition of Consolidated Net
Income, (ii) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date or held for sale as of the date of
the Indenture, shall be excluded and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
 
"Foreign Subsidiaries" means Subsidiaries of the Company that are not Domestic
Subsidiaries.
 
"GAAP" means generally accepted accounting principles set forth in the opinions
and pronouncements of the Accounting Principles Board of the American Institute
of Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
 
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
 
"Guarantor Senior Indebtedness" means, with respect to any Guarantor, at any
date, (a) all Obligations, if any, of such Guarantor under the Credit
Facilities; (b) all Obligations of such Guarantor under Hedging Obligations
(including Post-Petition Interest); (c) all Obligations of such Guarantor under
stand-by letters of credit; and (d) all other Indebtedness of such Guarantor
for borrowed money, including principal, premium, if any, and interest
(including Post-Petition Interest) on such Indebtedness unless the instrument
under which such Indebtedness of such Guarantor for money borrowed is incurred
expressly provides that such Indebtedness for money borrowed is not senior or
superior in right of payment to such Guarantor's Subsidiary Guarantee, and all
renewals, extensions, modifications, amendments or refinancings thereof.
Notwithstanding the foregoing, Guarantor Senior Indebtedness shall not include
(a) to the extent that it may constitute Indebtedness, any Obligation for
federal, state, local or other taxes; (b) any Indebtedness among or between
such Guarantor and any Subsidiary of such Guarantor; (c) to the extent that it
may constitute Indebtedness, any Obligation in respect of any trade payable
incurred for the purchase of goods or materials, or for services obtained, in
the ordinary course of business; (d) Indebtedness evidenced by such Guarantor's
Subsidiary Guarantee; (e) Indebtedness of such Guarantor that is expressly
subordinate or junior in right of payment to any other Indebtedness of such
Guarantor; (f) to the extent that it may constitute Indebtedness, any
obligation owing under leases (other than Capital Lease Obligations); and (g)
any obligation that by operation of law is subordinate to any general unsecured
obligations of such Guarantor.
 
"Guarantors" means each of (i) the Company's Domestic Subsidiaries at the date
of the closing of the Acquisitions, other than Yankeetown Dock Corporation and
the respective Subsidiaries of Yankeetown Dock Corporation at the date of the
Indenture and (ii) any other subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the Indenture, and their respective
successors and assigns.
 
"Haulage and Delivery Agreement" means that certain agreement dated as of
October 22, 1997 between the Company and TASK, as the same may be extended or
renewed from time to time without alteration of the material terms thereof.
 
                                      147

 
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange, interest rate or commodity swap
agreements, currency exchange, interest rate or commodity cap agreements and
currency exchange, interest rate or commodity collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in currency exchange, interest rates or commodity prices, in each case for the
purpose of risk management and not for speculation.
 
"Holdings" means AEI Resources Holding, Inc., a Delaware corporation and the
100% parent of the Company.
 
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations, if
and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person (whether or not such Indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person, but excluding
from the definition of "Indebtedness," any of the foregoing that constitutes
(1) an accrued expense, (2) trade payables, (3) Obligations in respect of
reclamation, workers' compensation, including black lung, pensions and retiree
health care, in each case to the extent not overdue for more than 90 days and
(4) agreements to make royalty payments, including minimum royalty payments,
that are entered into in connection with the acquisition of assets to be used
in a Permitted Business and which comprise part of the purchase price of the
assets acquired. The amount of any Indebtedness outstanding as of any date
shall be (i) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount, and (ii) the principal amount thereof, together
with any interest thereon that is more than 30 days past due, in the case of
any other Indebtedness.
 
"Indenture" means the indenture dated as of December 14, 1998, between the
Company and State Street Bank and Trust Company, as trustee governing the
Subordinated Notes, as amended or supplemented from time to time.
 
"Insolvency or Liquidation Proceeding" means, with respect to any Person, any
liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
 
"Investments" means, with respect to any Person, all investments by such Person
in other Persons (including Affiliates) in the form of direct or indirect loans
(including guarantees of any portion of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of the Company,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain Covenants--Restricted Payments."
 
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
 
                                      148

 
"Manufacture and Service Agreement" means that certain agreement dated as of
November 12, 1998 between Addington Enterprises or its affiliate and MTI, as
the same may be extended or renewed from time to time without alteration of the
material terms thereof.
 
"Marketable Securities" means, with respect to any Asset Sale, any readily
marketable equity securities that are (i) traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market; and (ii)
issued by a corporation having a total equity market capitalization of not less
than $250.0 million; provided that the excess of (A) the aggregate amount of
securities of any one such corporation held by the Company and any Restricted
Subsidiary over (B) ten times the average daily trading volume of such
securities during the 20 immediately preceding trading days shall be deemed not
to be Marketable Securities; as determined on the date of the contract relating
to such Asset Sale.
 
"MMI Service Agreement" means that certain agreement dated as of October 22,
1997 between MMI and the Company, as the same may be extended or renewed from
time to time without alteration of the material terms thereof.
 
"MMI Leases" means all equipment leases between the Company and its
Subsidiaries and MMI in existence as of the date of the Indenture; provided
that MMI Leases shall not include any extension, renewal, exercise of option or
modification of any equipment lease between the Company and its Subsidiaries
and MMI.
 
"Net Income" means, with respect to any Person, the net income or loss of such
Person, determined in accordance with GAAP and before any reduction in respect
of preferred stock dividends, excluding, however, (i) any gain or loss,
together with any related provision for or benefit related to taxes on such
gain or loss, realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback transactions)
or (b) the disposition of any securities by such Person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries and (ii) any extraordinary or
nonrecurring item, together with any related provision or benefit for taxes on
such extraordinary or nonrecurring item.
 
"Net Proceeds" means the aggregate proceeds (cash or property) received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any noncash consideration received in any Asset Sale) or the
sale or disposition of any Investment, net of the direct costs relating to such
Asset Sale, sale or disposition (including, without limitation, legal,
accounting and investment banking fees, and sales commissions), and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), and any reserve for adjustment in
respect of the sale price of such asset or assets established in accordance
with GAAP.
 
"Non-Guarantor Subsidiaries" means (i) Yankeetown Dock Corporation and its
direct and indirect Subsidiaries, (ii) the Company's future Unrestricted
Subsidiaries and (iii) the Company's current and future Foreign Subsidiaries.
 
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor
any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness) other than a pledge of the Equity Interests of any Unrestricted
Subsidiaries, (b) is directly or indirectly liable (as a guarantor or
otherwise) other than by virtue of a pledge of the Equity Interests of any
Unrestricted Subsidiaries, or (c) constitutes the lender; and (ii) no default
with respect to which (including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness
(other than the Subordinated Notes being offered hereby) of the Company or any
of its Restricted Subsidiaries to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its stated
maturity.
 
"Obligations" means any principal, premium (if any), interest, penalties, fees,
charges, expenses, indemnifications, reimbursement obligations, damages,
Guarantees and other liabilities and amounts payable under the documentation
governing any Indebtedness or in respect thereto.
 
"Permitted Business" means coal production, coal mining, coal brokering, coal
transportation, mine development, energy related businesses, coal, natural gas,
petroleum or other fossil fuel exploration, production,
 
                                      149

 
marketing, transportation and distribution and other related businesses and
activities of the Company and its Subsidiaries as of the date of the Indenture
and any business or activity that is reasonably similar to any of the foregoing
or a reasonable extension, development or expansion thereof or ancillary to any
of the foregoing.
 
"Permitted Group" means any group of investors that is deemed to be a "person"
(as such term is used in Section 13(d)(3) of the Exchange Act) by virtue of any
agreement or arrangement among two or more Persons, provided that no single
Person (together with its Affiliates), other than the Principals and their
Related Parties, is the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has
the right to acquire, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition, and beneficial
ownership shall be determined without regard to such agreement or arrangement),
directly or indirectly, of (A) more than 50% of the Voting Stock of the Company
that is "beneficially owned" (as defined above) by such group of investors and
(B) more of the Voting Stock of the Company than is at the time "beneficially
owned" (as defined above) by the Principals and their Related Parties in the
aggregate (Voting Stock, in each case, measured by voting power rather than
number of shares).
 
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Restricted Subsidiary of the Company
in a Person, if as a result of such Investment (i) such Person becomes a
Restricted Subsidiary of the Company or (ii) such Person, in one transaction or
a series of related transactions, is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary of the Company; (d) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of the Company; (e) any Investment existing on
the date of the Indenture (an "Existing Investment") and any Investment that
replaces, refinances or refunds an Existing Investment, provided that the new
Investment is in an amount that does not exceed the amount replaced, refinanced
or refunded and is made in the same Person as the Investment replaced,
refinanced or refunded; (f) advances to employees not in excess of $5.0 million
outstanding at any one time; (g) Hedging Obligations permitted under clause
(vii) of "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock;" (h) loans and advances to officers, directors and employees
for business-related travel expenses, moving expenses and other similar
expenses, in each case incurred in the ordinary course of business; (i) any
Investment in a Permitted Business (whether or not an Investment in an
Unrestricted Subsidiary) having an aggregate fair market value that, when taken
together with all other Investments made pursuant to this clause (i), does not
exceed in aggregate amount the sum of (1) 5% of Total Assets at the time of
such Investment (with the fair market value of each Investment being measured
at the time made and without giving effect to subsequent changes in value) plus
(2) 100% of the Net Proceeds from the sale or disposition of any Investment
previously made pursuant to this clause (i) or 100% of the amount of any
dividend, distribution or payment from any such Investment, net of income taxes
paid or payable in respect thereof, in each case up to the amount of the
Investment that was made pursuant to this clause (i) and 50% of the amount of
such Net Proceeds or 50% of such dividends, distributions or payments, in each
case received in excess of the amount of the Investments made pursuant to this
clause (i); (j) guarantees (including Guarantees) of Indebtedness permitted
under "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock;" (k) any Investment acquired by the Company or any of its
Restricted Subsidiaries (A) in exchange for any other Investment or accounts
receivable held by the Company or any such Restricted Subsidiary in connection
with or as a result of a bankruptcy, workout, reorganization or
recapitalization of the issuer of such other Investment or accounts receivable
or (B) as a result of the transfer of title with respect to any secured
Investment in default as a result of a foreclosure by the Company or any of its
Restricted Subsidiaries with respect to such secured Investment; (l) that
portion of any Investment by the Company or a Restricted Subsidiary in a
Permitted Business to the extent that the Company or such Restricted Subsidiary
will receive in a substantially concurrent transaction an amount in cash equal
to the amount of such Investment (or the fair market value of such Investment),
net of any obligation to pay taxes or other amounts in respect of the receipt
of such cash; and (m) any Investment made by the Company or any Restricted
Subsidiary in an Unrestricted Subsidiary with the proceeds of any equity
contribution to or sale of Equity Interest by the Company or any
 
                                      150

 
Restricted Subsidiary, provided that such proceeds shall not increase the
amount available pursuant to clause (c) of the first paragraph of the covenant
described above under "--Certain Covenants--Restricted Payments;" provided that
the receipt of such cash does not carry any obligation by the Company or such
Restricted Subsidiary to repay or return such cash; provided, however, that
with respect to any Investment, the Company may, in its sole discretion,
allocate all or any portion of any Investment to one or more of the above
clauses so that the entire Investment would be a Permitted Investment.
 
"Permitted Junior Securities" means any securities of the Company or any other
Person that are (i) equity securities without covenants or (ii) subordinated in
right of payment to all Senior Indebtedness that may at the time be
outstanding, to substantially the same extent as, or to a greater extent than,
the Subordinated Notes are subordinated as provided in the Indenture, in any
event pursuant to a court order so providing and as to which (a) the rate of
interest on such securities shall not exceed the effective rate of interest on
the Subordinated Notes on the date of the Indenture, (b) such securities shall
not be entitled to the benefits of covenants or defaults materially more
beneficial to the holders of such securities than those in effect with respect
to the Subordinated Notes on the date of the Indenture and (c) such securities
shall not provide for amortization (including sinking fund and mandatory
prepayment provisions) commencing prior to the date six months following the
final scheduled maturity date of the Senior Indebtedness (as modified by the
plan of reorganization of readjustment pursuant to which such securities are
issued).
 
"Permitted Liens" means (i) Liens securing Indebtedness under Credit Facilities
that was permitted by the terms of the Indenture to be incurred; (ii) Liens in
favor of the Company; (iii) Liens on property of a Person existing at the time
such Person is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iv) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company, provided that such
Liens were in existence prior to the contemplation of such acquisition; (v)
Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (vi) Liens incurred or deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance or other kinds of social security; (vii) Liens existing
on the date of the Indenture; (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(ix) Liens on assets of Guarantors to secure Guarantor Senior Indebtedness of
such Guarantors that was permitted by the Indenture to be incurred; (x) Liens
incurred in the ordinary course of business of the Company or any Restricted
Subsidiary of the Company with respect to obligations that (a) are not incurred
in connection with the borrowing of money or the obtaining of advances or
credit (other than trade credit in the ordinary course of business) and (b) do
not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company
or such Restricted Subsidiary; (xi) Liens on assets of Foreign Subsidiaries to
secure Indebtedness that was permitted by the Indenture to be incurred;
(xii) statutory liens of landlords, mechanics, suppliers, vendors,
warehousemen, carriers or other like Liens arising in the ordinary course of
business; (xiii) judgment Liens not giving rise to an Event of Default so long
as any appropriate legal proceeding that may have been duly initiated for the
review of such judgment shall not have been finally terminated or the period
within which such legal proceeding may be initiated shall not have expired;
(xiv) easements, rights-of-way, zoning and similar restrictions and other
similar encumbrances or title defects incurred or imposed, as applicable, in
the ordinary course of business and consistent with industry practices which,
in the aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto (as such
property is used by the Company or its Subsidiaries) or interfere with the
ordinary conduct of the business of the Company or such Subsidiaries; provided,
however, that any such Liens are not incurred in connection with any borrowing
of money or any commitment to loan any money or to extend any credit; (xv)
Liens to secure Indebtedness (including Capital Lease Obligations) permitted by
clause (iv) of the second paragraph of the covenant entitled
 
                                      151

 
"Incurrence of Indebtedness and Issuance of Preferred Stock" and other purchase
money Liens to finance property or assets of the Company or any Restricted
Subsidiary acquired in the ordinary course of business; provided that such
Liens are only secured by such property or assets so acquired or improved
(including, in the case of the acquisition of Capital Stock of a Person who
becomes a Restricted Subsidiary, Liens on the assets of the Person whose
Capital Stock was so acquired); (xvi) Liens securing Indebtedness under Hedging
Obligations, provided that such Liens are only secured by property or assets
that secure the Indebtedness subject to the Hedging Obligation; (xvii) Liens to
secure Indebtedness permitted by clause (xi) of the second paragraph of the
covenant entitled "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock;" and (xviii) Liens on the Equity Interests of Unrestricted
Subsidiaries securing obligations of Unrestricted Subsidiaries not otherwise
prohibited by the Indenture.
 
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Restricted Subsidiaries (other than
intercompany Indebtedness); provided that: (i) the principal amount (or
accreted value, if applicable) of such Permitted Refinancing Indebtedness does
not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest and premium, if any, on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Subordinated Notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
Subordinated Notes on terms at least as favorable to the Holders of
Subordinated Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by
the Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
 
"Post-Petition Interest" means, with respect to any Indebtedness of any Person,
all interest accrued or accruing on such Indebtedness after the commencement of
any Insolvency or Liquidation Proceeding against such Person in accordance with
and at the contract rate (including, without limitation, any rate applicable
upon default) specified in the agreement or instrument creating, evidencing or
governing such Indebtedness, whether or not, pursuant to applicable law or
otherwise, the claim for such interest is allowed as a claim in such Insolvency
or Liquidation Proceeding.
 
"Principals" means Larry Addington, Bruce Addington and Robert Addington.
 
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
 
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering has
been consummated and (ii) at least 35% of the total issued and outstanding
common stock of the Company immediately prior to the consummation of such
Public Equity Offering has been distributed by means of an effective
registration statement under the Securities Act.
 
"Related Party" with respect to any Principal means (A) any controlling
stockholder of such Principal, any Subsidiary of such Principal or, in the case
of an individual, any spouse or immediate family member of such Principal or
(B) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding a more than 50%
controlling interest of which consist of such Principal and/or such other
Persons referred to in the immediately preceding clause (A).
 
"Restricted Investment" means an Investment other than a Permitted Investment.
 
                                      152

 
"Restricted Subsidiary" of a Person means any Subsidiary of the referent Person
that is not an Unrestricted Subsidiary.
 
"Senior Credit Facilities" means that certain Senior Credit Agreement, dated as
of September 2, 1998, by and among the Company, the Guarantors, Warburg Dillon
Read LLC, as Arranger and Syndication Agent, UBS AG, Stamford Branch, as
Administrative Agent, and the other lenders party thereto, including any
related notes, guarantees, collateral documents, letters of credit, instruments
and agreements executed in connection therewith (and any appendices, exhibits
or schedules to any of the foregoing), and in each case as amended, modified,
supplemented, restated, renewed, refunded, replaced, restructured, repaid or
refinanced from time to time (whether with the original agents and lenders or
other agents and lenders or otherwise, and whether provided under the original
credit agreement or other credit agreements or otherwise).
 
"Senior Indebtedness" means, at any date, (a) all Obligations of the Company
under the Credit Facilities; (b) all Indebtedness outstanding under the Senior
Subordinated Notes Indenture; (c) all Obligations of the Company under Hedging
Obligations (including Post-Petition Interest); (d) all Obligations of the
Company under stand-by letters of credit; and (e) all other Indebtedness of the
Company for borrowed money, including principal, premium, if any, and interest
(including Post-Petition Interest) on such Indebtedness, unless the instrument
under which such Indebtedness of the Company for money borrowed is incurred
expressly provides that such Indebtedness for money borrowed is not senior or
superior in right of payment to the Subordinated Notes, and all renewals,
extensions, modifications, amendments or refinancings thereof. Notwithstanding
the foregoing, Senior Debt shall not include (a) to the extent that it may
constitute Indebtedness, any Obligation for federal, state, local or other
taxes; (b) any Indebtedness among or between the Company and any Subsidiary of
the Company, unless and for so long as such Indebtedness has been pledged to
secure Obligations under the Credit Facilities; (c) to the extent that it may
constitute Indebtedness, any Obligation in respect of any trade payable
incurred for the purchase of goods or materials, or for services obtained, in
the ordinary course of business; (d) Indebtedness evidenced by the Subordinated
Notes and the Guarantees; (e) Indebtedness of the Company that is expressly
subordinate or junior in right of payment to any other Indebtedness of the
Company; (f) to the extent that it may constitute Indebtedness, any obligation
owing under leases (other than Capital Lease Obligations) or management
agreements; and (g) any obligation that by operation of law is subordinate to
any general unsecured obligations of the Company.
 
"Senior Subordinated Notes" means up to $200,000,000 in aggregate principal
amount of Senior Subordinated Notes issued by the Company pursuant to the
Senior Subordinated Notes Indenture.
 
"Senior Subordinated Notes Indenture" means the indenture dated December 14,
1998, between the Company and IBJ Schroder Bank & Trust Company, as Trustee,
governing the Senior Subordinated Notes.
 
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
 
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
 
"Subordinated Indebtedness" means any Indebtedness of the Company which is
expressly subordinated in right of payment to the Subordinated Notes.
 
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that
 
                                      153

 
Person (or a combination thereof) and (ii) any partnership (a) the sole general
partner or the managing general partner of which is such Person or a Subsidiary
of such Person or (b) the only general partners of which are such Person or of
one or more Subsidiaries of such Person (or any combination thereof).
 
"Subsidiary Guarantees" mean the guarantees endorsed on the Subordinated Notes
by the Guarantors.
 
"Technology Sharing Agreement" means that certain agreement dated as of April
29, 1998 between the Company and Addington Enterprises, Inc., as the same may
be extended or renewed from time to time without alteration of the material
terms thereof.
 
"Total Assets" means the total assets of the Company and its Restricted
Subsidiaries on a consolidated basis determined in accordance with GAAP, as
shown on the most recently available consolidated balance sheet of the Company
and its Restricted Subsidiaries.
 
"Transaction Documents" means the documents related to (i) the Acquisitions,
(ii) the Senior Credit Facilities and (iii) the offering of the Senior
Subordinated Notes and the Subordinated Notes.
 
"Unrestricted Subsidiary" means any Subsidiary that is designated by the Board
of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but
only to the extent that such Person: (a) has no Indebtedness other than Non-
Recourse Debt; (b) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (c) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any obligation (x) to subscribe for additional
Equity Interests in Unrestricted Subsidiaries or (y) to maintain or preserve
such Person's net worth; and (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any
of its Restricted Subsidiaries; provided, however, that the Company and its
Restricted Subsidiaries may guarantee the performance of Unrestricted
Subsidiaries in the ordinary course of business except for guarantees of
Obligations in respect of borrowed money. Any such designation by the Board of
Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above under
the caption "Certain Covenants--Restricted Payments."
 
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
 
"Weighted Average Life to Maturity" means, when applied to any Indebtedness at
any date, the number of years obtained by dividing (i) the sum of the products
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such
date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
 
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
 
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all
of the outstanding Capital Stock or other ownership interests of which (other
than directors' qualifying shares) shall at the time be owned by such Person or
by one or more Wholly Owned Subsidiaries of such Person and one or more Wholly
Owned Subsidiaries of such Person.
 
                                      154

 
                       DESCRIPTION OF OTHER INDEBTEDNESS
 
The Senior Credit Facility
 
General
 
The Company has entered into a Senior Credit Agreement dated as of September 2,
1998 and amended and restated as of December 14, 1998 with UBS AG, Stamford
Branch ("UBS"), an affiliate of the Initial Purchaser, pursuant to which UBS
and a syndicate of financial institutions (the "Lenders") provided the Company
with (i) a $575.0 million senior secured term loan facility consisting of (a) a
Term Loan A Facility in an aggregate principal amount of $325.0 million and (b)
a Term Loan B Facility in an aggregate amount of $250.0 million (collectively
the "Term Loan Facility") and (ii) a $300.0 million senior secured Revolving
Credit Facility (the "Revolving Credit Facility" and, together with the Term
Loan Facility, the "Senior Credit Facility"). The Revolving Credit Facility
includes a $225.0 million sublimit for the issuance of letters of credit.
 
Security
 
Indebtedness of the Company under the Senior Credit Facility is secured by a
perfected first priority security interest in (i) all of the capital stock of
the Company and its Subsidiaries; (ii) all of the capital stock of each of the
entities comprising the businesses acquired in the Recent Acquisitions; and
(iii) substantially all accounts receivable, inventory, property, plant and
equipment, intangibles, contract rights, other personal property and real
property of the Company, its Subsidiaries and the businesses acquired in the
Recent Acquisitions. Holdings and each of the Company's Subsidiaries has
guaranteed the Senior Credit Facility.
 
Interest
 
Indebtedness of the Company under the Senior Credit Facility shall bear
interest, at the option of the Company, at a rate as follows: LIBOR plus the
Applicable LIBOR Spread or ABR plus the Applicable ABR Spread. LIBOR borrowings
may have interest periods of one, two, three or six months at the election of
the Company. The "Applicable LIBOR Spread" will initially be (i) under the
Revolving Credit Facility, 3.00% per annum; (ii) under the Term Loan A
Facility, 3.00% per annum; and (iii) under the Term Loan B Facility, 3.50% per
annum. Thereafter, the Applicable LIBOR Spread will be determined pursuant to a
grid-based test adjusted in accordance with the financial performance of the
Company. The "Applicable ABR Spread" initially will be (i) under the Revolving
Credit Facility, 2.00% per annum; (ii) under the Term Loan A Facility, 2.00%
per annum; and (iii) under the Term Loan B Facility, 2.50% per annum.
Thereafter, the Applicable ABR Spread will be described pursuant to a grid-
based test adjusted in accordance with the financial performance of the
Company. "ABR" (Alternate Base Rate) is the higher of the Prime Rate of the
reference bank set forth in the Senior Credit Facility documentation and the
Federal Funds effective rate plus 0.5%.
 
Maturity
 
The Term Loan Facility matures on September 30, 2005. The Revolving Credit
Facility matures on December 31, 2003.
 
Fees
 
The Company has agreed to pay the Lenders unused commitment fees of 0.50% per
annum on the undrawn committed amount under the Revolving Credit Facility,
payable quarterly in cash.
 
The Company has agreed to pay the issuing bank per annum letter of credit fees
equal to the Applicable LIBOR Spread on the undrawn face amounts of outstanding
letters of credit, payable quarterly in arrears. Fronting fees of 0.25% will be
payable to the issuing bank along with customary issuance and administrative
fees.
 
 
                                      155

 
Covenants
 
The Senior Credit Facility contains certain customary covenants including,
without limitation, restrictions on the ability of the Company and its
Subsidiaries to (i) incur additional indebtedness, pay certain dividends and
make certain other restricted payments and investments; (ii) make acquisitions
or dispose of assets; (iii) create liens; (iv) engage in transactions with
affiliates; (v) issue disqualified capital stock; (vi) merge, consolidate or
transfer substantially all of their respective assets, and (vii) make capital
expenditures. In addition, the Company is required to maintain compliance with
certain financial tests, including a maximum leverage ratio of 4.00, decreasing
over time to 2.75 in December 2001, a minimum interest coverage ratio of 2.50,
increasing over time to 3.50 in December 2001 and thereafter, and a minimum net
worth of negative $125.0 million plus 50% of consolidated net income from
October 1, 1998 plus 100% of the proceeds of equity issuances and capital
contributions.
 
Events of Default
 
The Senior Credit Facility contains customary events of default including,
without limitation: (i) the non-payment of principal, interest, fees or other
amounts when due under the loans issued under the Senior Credit Facility; (ii)
certain changes in control and ownership of the Company; (iii) cross defaults
to certain other indebtedness; (iv) certain events of bankruptcy and
insolvency; (v) judgment defaults; and (vi) failure of any guaranty or security
agreement supporting the Credit Facility to be in full force and effect.
 
Optional and Mandatory Prepayment and Commitment Reductions
 
The Company may prepay and reduce in whole or in part the Senior Credit
Facility at any time without penalty, subject to reimbursement of the Lender's
breakage costs and payments of any and all accrued interest.
 
The Company will be required, subject to certain exceptions, to prepay the
Senior Credit Facility with (i) 75.0% of annual excess cash flow, reduced to
50.0% in any fiscal year where the year-end leverage ratio is less than 3.0:1,
(ii) 100.0% of the net proceeds of asset sales and other asset dispositions by
the Company, (iii) 100.0% of the net proceeds of the issuance or incurrence of
debt or sale lease-back by the Company, and (iv) 50.0% of the net proceeds from
any issuance of equity securities. "Excess cash flow" is defined to mean (A)
the sum of operating cash flow, net decrease in working capital and cash
received from any life insurance or "key man policies" minus (B) the sum of
cash interest expense, capital lease expense, principal payments on
indebtedness, capital expenditures, income taxes and certain dividends, cash
paid for acquisitions to the extent funded from internally generated funds, and
net increases in working capital. Mandatory prepayments will be applied pro
rata among the outstanding amounts of the Term Loans. Any excess amount to be
applied against the Term Loans over the then outstanding amount of the Term
Loans shall be applied to the Revolving Credit Facility.
 
Loans made pursuant to the Revolving Credit Facility (the "Revolving Credit
Loans") will be prepaid to the extent the aggregate extensions of credit under
the Revolving Credit Facility exceed the commitments then in effect. Any excess
amount to be applied against the Revolving Credit Loans over the then
outstanding amount of such Revolving Credit Loans will be applied to cash
collateralize outstanding Letters of Credit.
 
The Senior Subordinated Credit Facility
 
The Company has entered into a Senior Subordinated Credit Agreement, dated as
of September 2, 1998 (the "Bridge Credit Facility") with UBS, pursuant to which
UBS and a syndicate of financial institutions provided the Company with a
$500.0 million secured loan facility. The outstanding principal balance under
the Bridge Credit Facility is approximately $10.0 million. Pursuant to the
Senior Credit Facility, the Company is permitted to repay the Bridge Credit
Facility with the proceeds of the disposition of certain assets (as defined in
the Senior Credit Facility). In the event that the Company does not repay the
Bridge Credit Facility on or before March 31, 1999, UBS is entitled to receive
2.5% of the common stock of Holdings.
 
 
                                      156

 
Surety Bonds
 
Federal and state laws require surety bonds to secure the Company's obligations
to reclaim lands disturbed for mining, to pay federal and state workers'
compensation and to satisfy other miscellaneous obligations. The amount of
these bonds varies constantly, depending upon, among other things, the amount
of acreage disturbed, the degree to which each property has been reclaimed and
the number of persons employed by the Company. Under federal law, partial bond
release for reclamation bonds is provided as mined lands (i) are backfilled and
graded to approximate original contour, (ii) are re-vegetated and (iii) achieve
pre-mining vegetative productivity levels on a sustained basis for a period of
five to ten years.
 
As of September 30, 1998, the Company (inclusive of Triton) had outstanding
surety bonds with third parties for post-mining reclamation totaling $524.4
million. Surety bonds valued at an additional $123.3 million are in place for
federal and state workers' compensation obligations and other miscellaneous
obligations.
 
Zeigler IRBs
 
Charleston County, South Carolina
 
On August 21, 1997, Charleston County, South Carolina, issued $30.8 million of
Industrial Revenue Refunding Bonds, Series 1997, due August 1, 2028 (the
"Charleston Bonds"). The Charleston Bonds will be paid from: (i) revenues
derived from or in connection with a Loan Agreement between Charleston County,
South Carolina, and Zeigler, dated as of August 1, 1997; and (ii) funds drawn
under an irrevocable letter of credit issued on behalf of Zeigler by UBS. The
letter of credit provides for drawings up to (i) an amount sufficient to pay
the principal of the Charleston Bonds when due at maturity (not to exceed $30.8
million), plus (ii) an amount equal to up to forty-five (45) days' interest
accrued on the Charleston Bonds (not to exceed 10% per annum). The Charleston
Bonds bear interest at daily, weekly, flexible or term rate as designated by
the Company, with such rate determined by the remarketing agent at the rate of
interest that would cause them to have a market value as of the date of
determination equal to 100% of their principal amount, provided that, as long
as a letter of credit is in place, such interest rate shall not exceed 10% per
annum. The Charleston Bonds are subject to various optional and mandatory
tender and redemption provisions upon the occurrence of certain events.
 
Peninsula Ports Authority of Virginia
 
On August 20, 1997, the Peninsula Ports Authority of Virginia (the "Port
Authority") issued $115.0 million of Port Facility Refunding Revenue Bonds
(Zeigler Coal Project), Series 1997, due May 1, 2022 (the "Port Authority Bonds
and together with the Charleston Bonds, the "Zeigler Bonds"). The Port
Authority Bonds will be paid from: (i) revenues derived from or in connection
with a Financing Agreement between the Port Authority and Zeigler, dated as of
August 1, 1997; and (ii) funds drawn under an irrevocable letter of credit
issued on behalf of Zeigler by UBS. The letter of credit provides for drawings
up to (i) an amount sufficient to pay the principal of the Port Authority Bonds
when due at maturity (not to exceed $115.0 million), plus (ii) an amount equal
to up to forty-five (45) days' interest accrued on the Port Authority Bonds
(not to exceed 10% per annum). The Port Authority Bonds bear interest at daily,
weekly, flexible or term rate as designated by the Company, with such rate
determined by the remarketing agent at the rate of interest that would cause
the Port Authority Bonds to have a market value as of the date of determination
equal to 100% of their principal amount, provided that, as long as a letter of
credit is in place, such interest rate shall not exceed 10% per annum. The Port
Authority Bonds are not secured by a mortgage or a security interest in any
property of the Company or it Subsidiaries. The Port Authority Bonds are
subject to various optional and mandatory tender and redemption provisions upon
the occurrence of certain events.
 
The Senior Notes
 
The Senior Notes are unsecured senior obligations of the Company and will
mature on December 15, 2005.
 
Interest on the Senior Notes will accrue at a fixed rate of 10 1/2% and be
payable semiannually in arrears on each June 15 and December 15, commencing on
December 15, 1998. The Senior Notes are guaranteed on a senior unsecured basis
by the Guarantors.
 
The Senior Notes are redeemable, at the Company's option, in whole or in part,
at any time on or after December 15, 2002 at specified redemption prices,
together with accrued and unpaid interest and Liquidated
 
                                      157

 
Damages, if any, to the date of redemption. In addition, prior to December 15,
2002, the Senior Notes are redeemable at a price equal to 100% of the principal
amount thereof plus an applicable "Make Whole Premium" (as defined in the
Senior Note Indenture), plus, to the extent not included in the Make Whole
Premium, accrued and unpaid interest and Liquidated Damages, if any, to the
date of redemption. Upon the occurrence of a Change of Control (as defined in
the Senior Note Indenture), the Company is required to make an offer to
repurchase the Senior Notes at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to
the date of repurchase.
 
The Senior Note Indenture contains restrictive covenants that, among other
things, limit the ability of the Company and its subsidiaries to: dispose of
assets; engage in mergers and consolidations; engage in certain transactions
with subsidiaries and affiliates; incur or guarantee additional indebtedness;
pay dividends or make other payments or investments; and limit the ability of
subsidiaries to make certain distributions.
 
Defaults under the Senior Note Indenture include (i) failure to pay interest on
the Senior Notes within 30 days after such payments are due; (ii) failure to
repay principal when due at its maturity date, upon optional redemption, upon
required repurchase, upon acceleration or otherwise; (iii) failure to comply
for 30 days after notice with the Company's repurchase obligations upon the
occurrence of a Change of Control and failure to comply for 60 days after
notice with the other covenants contained in the Senior Note Indenture; (iv)
the default by the Company or any Significant Subsidiary (as defined in the
Senior Note Indenture) in respect of any indebtedness above specified levels;
(v) certain events of bankruptcy; (vi) certain judgments against the Company or
any Significant Subsidiary; (vii) any Guarantee (as defined in the Senior Note
Indenture) ceasing to be in full force and effect (except as contemplated by
the terms thereof); and (viii) the denial or disaffirmation by any Guarantor
(as defined in the Senior Note Indenture) of its obligations under the
applicable indenture or any Guarantee, which denial or disaffirmation continues
for 10 days.
 
                                      158

 
                    CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
 
The following is a general discussion of certain U.S. federal income and estate
tax consequences of the acquisition, ownership and disposition of Notes by an
initial beneficial owner of Notes that, for U.S. federal income tax purposes,
is not a "U.S. person" (a "Non-U.S. Holder"). This discussion is based upon the
U.S. federal tax law now in effect, which is subject to change, possibly
retroactively.
 
When we use the term "U.S. person," we generally mean a holder of Notes who
(for U.S. Federal income tax purposes):
 
  .  is a citizen or resident of the United States;
 
  .  is a corporation or partnership (including entities treated as
     corporations or partnerships for federal income tax purposes) created or
     organized in or under the laws of the United States or any state thereof
     or the District of Columbia, unless, in the case of a partnership,
     Treasury Regulations provide otherwise;
 
  .  is an estate, the income of which is subject to U.S. Federal income
     taxation regardless of its source; or
 
  .  is a trust whose administration is subject to the primary supervision of
     a U.S. court and which has one or more U.S. persons who have the
     authority to control all substantial decisions of the trust.
 
The tax treatment applicable to each holder of the Notes may vary depending
upon the particular situation of such holder. U.S. persons acquiring the Notes
are subject to different rules than those discussed below. In addition, certain
other holders (including insurance companies, tax exempt organizations,
financial institutions and broker-dealers) may be subject to special rules not
discussed below. We advise you to consult with your own tax advisor regarding
the tax consequences to you of the acquisition, ownership and sale of the
Notes, including the federal, state, local, foreign, and other tax consequences
of such acquisition, ownership and sale and of potential changes in applicable
tax laws.
 
Interest
 
Interest paid by the Company to a Non-U.S. Holder will not be subject to U.S.
federal income or withholding tax if such interest is not effectively connected
with the conduct of a trade or business within the United States by such Non-
U.S. Holder and if such Non-U.S. Holder:
 
  .  does not actually or constructively own 10% of the total combined voting
     power of all classes of stock of the Company;
 
  .  is not a "controlled foreign corporation" (within the meaning of the
     U.S. Internal Revenue Code of 1986, as amended (the "Code")), with
     respect to which the Company is a "related person" (within the meaning
     of the Code); and
 
  .  certifies, under penalties of perjury, that it is not a U.S. person and
     provides its name and address in an appropriate form (currently Internal
     Revenue Service Form W-8) to the Company or its paying agent (or, a
     security clearing organization, bank or other financial institution that
     holds the Notes on your behalf in the ordinary course of its trade or
     business certifies on your behalf that it has received such
     certification from you and provides a copy to the Company or its agent).
 
If you are not qualified for an exemption under these rules, interest paid to
you on the Notes may be subject to withholding tax at the rate of 30% (or any
lower applicable treaty rate). The payment of interest effectively connected
with your U.S. trade or business, however, would not be subject to a 30%
withholding tax so long as you provide the Company or its agent an adequate
certification (currently Internal Revenue Service Form 4224), but such interest
would be subject to U.S. federal income tax on a net basis at the rates
applicable to U.S. persons generally (and, if you are a corporation, may also
be subject to a 30% branch profits tax).
 
                                      159

 
Gain on Disposition
 
If you are a Non-U.S. Holder you will generally not be subject to U.S. federal
income tax on gain recognized on a sale, redemption or other disposition of a
Note unless any of the following is true:
 
  .  your investment in the Notes is effectively connected with a U.S. trade
     or business that is conducted by you;
 
  .  if you are a Non-U.S. Holder who is a nonresident alien individual and
     you hold the Note as a capital asset, you are present in the United
     States for 183 or more days in the taxable year within which such sale,
     redemption or other disposition takes place and certain other
     requirements are met; or
 
  .  you are subject to provisions of U.S. tax law applicable to certain U.S.
     expatriates.
 
If you have a U.S. trade or business and the investment in the Notes is
effectively connected with such U.S. trade or business, the payment of the
sales proceeds with respect to the Notes would be subject to U.S. federal
income tax on a net basis at the rates applicable to U.S. persons generally
(and, if you are a corporation, may also be subject to a 30% branch profits
tax).
 
Federal Estate Taxes
 
If interest on the Notes is exempt from withholding of U.S. federal income tax
under the rules described above, the Notes will not be included in the estate
of a deceased Non-U.S. Holder for U.S. federal estate tax purposes.
 
Information Reporting and Backup Withholding
 
The Company will, where required, report to the holders of Notes and the
Internal Revenue Service the amount of any interest paid on the Notes in each
calendar year and the amounts of tax withheld, if any, from those payments.
 
In the case of payments of interest to Non-U.S. Holders, temporary Treasury
regulations provide that the 31% backup withholding tax and certain information
reporting requirements will not apply to payments for which the requisite
certification, as described above, has been received or an exemption has
otherwise been established; provided that neither the Company nor its payment
agent has actual knowledge that the holder is a U.S. person or that the
conditions of any other exemption are not in fact satisfied. Under temporary
Treasury regulations, these information reporting and backup withholding
requirements will apply, however, to the gross proceeds paid to a Non-U.S.
Holder on the disposition of the Notes by or through a U.S. office of a United
States or foreign broker, unless the holder certifies to the broker under
penalties of perjury as to its name, address and status as a foreign person or
the holder otherwise establishes an exemption. As a general matter, information
reporting and backup withholding will not apply to a payment of the proceeds of
a disposition of the Notes by or through a foreign office of a foreign broker.
Information reporting (but not backup withholding) will apply, however, to a
payment of the proceeds of a sale of Notes by a foreign office of a broker
that:
 
  .  is a U.S. person;
 
  .  derives 50% or more of its gross income for certain periods from the
     conduct of a trade or business in the United States; or
 
  .  is a "controlled foreign corporation" within the meaning of the Code.
 
Even if a broker meets one of these three conditions, information reporting
will not apply if the broker has documentary evidence in its records that the
holder is not a U.S. person and certain other conditions are met.
 
                                      160

 
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-U.S.
Holder's U.S. federal income tax liability provided that the required
information is furnished to the Internal Revenue Service.
 
You should be aware that the Treasury Department promulgated revised final
regulations regarding the withholding and information reporting rules discussed
above. In general, the final regulations do not significantly change the
substantive withholding and information reporting requirements but unify
current certification procedures and forms. The final regulations are generally
effective for payments made after December 31, 1999, subject to certain
transition rules. We strongly urge prospective Non-U.S. Holders to consult
their own tax advisors for information on the impact, if any, of the new final
regulations.
 
                              PLAN OF DISTRIBUTION
 
Any broker-dealer who holds Transfer Restricted Securities that were acquired
for the account of such broker-dealer as a result of market-making activities
or other trading activities (other than Transfer Restricted Securities acquired
directly from the Company or any of its affiliates) may exchange such Transfer
Restricted Securities pursuant to the Exchange Offer. Each broker-dealer that
receives Notes for its own account pursuant to the Exchange Offer (each, a
"Participating Broker-Dealer") must acknowledge that it will deliver a
prospectus in connection with any resale of such Notes. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of Notes received in
exchange for Old Notes where such Old Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities (other than directly from the Company or any of its affiliates). To
the extent any Participating Broker-Dealer notifies the Company, or causes the
Company to be notified in writing that such Participating Broker-Dealer is a
Restricted Broker-Dealer, the Company has agreed that for a period of one year
from the date on which the Exchange Offer is consummated or such shorter period
as will end when all Transfer Restricted Securities covered by the Exchange
Offer Registration Statement have been sold pursuant thereto, it will make this
Prospectus, as amended or supplemented, available to any Restricted Broker-
Dealer for use in connection with any resale of Notes, and will promptly send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any such Restricted Broker-Dealer that requests such documents at
any time during such period.
 
This Prospectus may not be used for resales of Notes by any affiliate of the
Company, or any person with respect to Old Notes that were acquired directly
from the Company or any of its affiliates, any person that is participating or
intends to participate in a distribution of the Notes, or any person that has
any understanding or arrangement of participate in a distribution of Notes.
 
The Company will not receive any proceeds from any sale of Notes by broker-
dealers. Notes received by broker-dealers for their own account pursuant to the
Exchange Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Notes, or a combination of such methods of resale, at prevailing
market prices at the time of resale, at prices related to such prevailing
market prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such Notes. Any broker-dealer that resells Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act, and any
profit on any such resale of Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that, by acknowledging that it
will deliver any be delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
 
                                      161

 
The Company has agreed to pay all expenses incident to the Exchange Offer
(other than commissions and concessions of any broker-dealers), subject to
certain prescribed limitations, and will indemnify the holders of the Old
Notes against certain liabilities, including certain liabilities that may
arise under the Securities Act.
 
By its acceptance of the Exchange Offer, any broker-dealer that receives Notes
pursuant to the Exchange Offer hereby agrees to notify the Company prior to
using the Prospectus in connection with the sale or transfer of Notes, and
acknowledges and agrees that, upon receipt of notice from the Company of the
happening of any event which makes any statement in the Prospectus untrue in
any material respect or which requires the making of any changes in the
Prospectus in order to make the statements therein not misleading or which may
impose upon the Company disclosure obligations that may have a material
adverse effect on the Company (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Company has notified such broker-dealer that delivery of
the Prospectus may resume and has furnished copies of any amendment or
supplement to the Prospectus to such broker-dealer.
 
The Notes will constitute a new issue of securities with no established
trading market. The Company does not intend to list the Notes on any national
securities exchange or to seek approval for quotation through any automated
quotation system. The Company has been advised by the Initial Purchaser that
following completion of the Exchange Offer, the Initial Purchaser may make a
market in the Notes. In addition, the Initial Purchaser may bid for, and
purchase, the Notes on the open market. These activities may stabilize or
maintain the market price of the Notes above independent market levels. The
Initial Purchaser is not obligated to make a market for, bid for or purchase
the Notes, and any market-making activities with respect to the Notes may be
discontinued at any time without notice. Accordingly, no assurance can be
given that an active public or other market will develop for the Notes or as
to the liquidity of or the trading market for the Notes. If a trading market
does not develop or is not maintained, holders of the Notes may experience
difficulty in reselling the Notes or may be unable to sell them at all. If a
market for the Notes develops, any such market may cease to continue at any
time. If a public trading market develops for the Notes, future trading prices
of the Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's results of operations and the market
for similar securities and other factors, including the financial condition of
the Company.
 
                                      162

 
                                 LEGAL MATTERS
 
Certain legal matters relating to the Exchange Offer will be passed upon for
the Company by Latham & Watkins, New York, New York, and Brown, Todd & Heyburn
PLLC, Lexington, Kentucky.
 
                                   ENGINEERS
 
The information appearing in this Prospectus concerning estimates of the
Company's proven and probable coal reserves was prepared by Marshall Miller,
SESI, Weir and Norwest and has been included herein upon the authority of those
firms as experts.
 
                                      163

 
                             AVAILABLE INFORMATION
 
The Company has filed with the SEC a Registration Statement on Form S-4
(together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Notes being offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement. For further information with respect to the
Company and the Notes, reference is made to the Registration Statement.
Statements contained in this prospectus and to the contents of any contract or
other document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions in such exhibit, to which
reference is hereby made. The Registration Statement can be inspected and
copied at the Public Reference Section of the SEC located at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
regional public reference facilities maintained by the SEC located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and
Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material, including copies of all or any portion of the Registration
Statement, can be obtained from the Public Reference Section of the SEC at
prescribed rates. Such material may also be accessed electronically by means
of the SEC's home page on the Internet (http://www.sec.gov).
 
From and after the effective date of the Registration Statement of which the
Prospectus is a part, so long as the New Notes are outstanding, the Company
will be required to file periodic reports and other information with the SEC
pursuant to certain provisions of the Exchange Act. During such period, the
Company will furnish to the holders of the New Notes copies of all periodic
reports filed by the Company with the SEC.
 
                                      164

 
                         INDEX TO FINANCIAL STATEMENTS
 


                                                                           Page
                                                                           ----
                                                                        
AEI Resources Holding, Inc. and Predecessor (AEI Holding Company, Inc.)
 Consolidated Financial Statements
  Report of Arthur Andersen LLP, Independent Public Accountants........... F-3
  Consolidated Balance Sheets as of December 31, 1996 and 1997 and
   September 30, 1998 (unaudited)......................................... F-4
  Consolidated Statements of Operations for the years ended December 31,
   1995, 1996 and 1997 and the nine months ended September 30, 1997 and
   1998 (unaudited)....................................................... F-5
  Consolidated Statements of Stockholders' Equity (Deficit) for the years
   ended December 31, 1995, 1996 and 1997 and the nine months ended
   September 30, 1998 (unaudited) ........................................ F-6
  Consolidated Statements of Cash Flows for the years ended December 31,
   1995, 1996 and 1997 and the nine months ended September 30, 1997 and
   1998 (unaudited)....................................................... F-7
  Notes to Consolidated Financial Statements.............................. F-8
Addington Coal Operations (the Predecessor Business to AEI Holding
 Company, Inc.) Combined Financial Statements
  Report of Arthur Andersen LLP, Independent Public Accountants........... F-37
  Combined Statement of Operating Revenues and Expenses for the ten months
   ended
   November 1, 1995....................................................... F-38
  Combined Statement of Parent Investment for the ten months ended
   November 1, 1995....................................................... F-39
  Combined Statement of Cash Flows for the ten months ended November 1,
   1995................................................................... F-40
  Notes to Combined Financial Statements.................................. F-41
Zeigler Coal Holding Company
  Report of Deloitte & Touche LLP, Independent Auditors................... F-46
  Consolidated Balance Sheets as of December 31, 1996 and 1997 and June
   30, 1998 (unaudited) .................................................. F-47
  Consolidated Statements of Operations for the years ended December 31,
   1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998
   (unaudited)............................................................ F-49
  Consolidated Statements of Cash Flows for the years ended December 31,
   1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998
   (unaudited)............................................................ F-50
  Consolidated Statements of Shareholders' Equity for the years ended
   December 31, 1995, 1996 and 1997 and the six months ended June 30, 1998
   (unaudited)............................................................ F-51
  Notes to Consolidated Financial Statements.............................. F-52
The Cyprus Subsidiaries
  Report of PricewaterhouseCoopers LLP, Independent Accountants........... F-67
  Combined Statements of Assets, Liabilities and Parent Investment as of
   December 31, 1996 and 1997 and June 30, 1998 (unaudited)............... F-68
  Combined Statements of Operating Revenues and Expenses for the years
   ended December 31, 1995, 1996 and 1997 and the six months ended June
   30, 1997 and 1998 (unaudited).......................................... F-69
  Combined Statements of Parent Investment for the years ended December
   31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998
   (unaudited) ........................................................... F-70
  Combined Statements of Cash Flows for the years ended December 31, 1995,
   1996 and 1997 and the six months ended June 30, 1997 and 1998
   (unaudited)............................................................ F-71
  Notes to Combined Financial Statements.................................. F-72
Leslie Resources Financial Statements
  Report of Arthur Andersen LLP, Independent Public Accountants........... F-82
  Report of Faesy, Schmitt & Company, PSC, Independent Public
   Accountants............................................................ F-83
  Combined Balance Sheets as of December 31, 1996 and 1997................ F-84
  Combined Statements of Operations and Retained Earnings for the years
   ended December 31, 1996 and 1997....................................... F-85

 
                                      F-1

 


                                                                          Page
                                                                          -----
                                                                       
  Combined Statements of Cash Flows for the years ended December 31, 1996
   and 1997..............................................................  F-97
  Notes to Combined Financial Statements.................................  F-98
Mid-Vol Leasing, Inc. and Affiliates
  Report of Arthur Andersen LLP, Independent Public Accountants..........  F-96
  Combined Balance Sheets as of December 31, 1996 and 1997 and June 30,
   1998 (unaudited)......................................................  F-97
  Combined Statements of Operations and Retained Earnings for the years
   ended December 31, 1995, 1996 and 1997 and the six months ended June
   30, 1997 and 1998 (unaudited).........................................  F-98
  Combined Statements of Cash Flows for the years ended December 31,
   1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998
   (unaudited)...........................................................  F-99
  Notes to Combined Financial Statements................................. F-100
Kindill Holding, Inc.
  Report of Deloitte & Touche LLP, Independent Auditors.................. F-108
  Consolidated Balance Sheets as of December 31, 1996 and 1997 and June
   30, 1998 (unaudited).................................................. F-109
  Consolidated Statements of Income for the years ended December 31, 1996
   and 1997 and the six months ended June 30, 1997 and 1998 (unaudited).. F-110
  Consolidated Statements of Stockholders' Equity for the years ended
   December 31, 1996 and 1997 and the six months ended June 30, 1998
   (unaudited)........................................................... F-111
  Consolidated Statements of Cash Flows for the years ended December 31,
   1996 and 1997 and the six months ended June 30, 1997 and 1998
   (unaudited) .......................................................... F-112
  Notes to Consolidated Financial Statements............................. F-113
Martiki Coal Corporation
  Report of Deloitte & Touche LLP, Independent Auditors.................. F-121
  Balance Sheets as of December 31, 1997 and September 30, 1998.......... F-122
  Statements of Operations for the seven months ended July 31, 1996
   (predecessor), the five months ended December 31, 1996, the year ended
   December 31, 1997 and the nine months ended September 30, 1998
   (successor)........................................................... F-123
  Statements of Stockholders Equity for the seven months ended July 31,
   1996 (predecessor), the five months ended December 31, 1996, the year
   ended December 31, 1997 and the nine months ended September 30, 1998
   (successor)........................................................... F-124
  Statements of Cash Flows for the seven months ended July 31, 1996
   (predecessor), the five months ended December 31, 1996, the year ended
   December 31, 1997 and the nine months ended September 30, 1998
   (successor)........................................................... F-125
  Notes to Financial Statements.......................................... F-126

 
                                      F-2

 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Shareholders of
AEI Resources Holding, Inc.:
 
We have audited the accompanying consolidated balance sheets of AEI Resources
Holding, Inc. (see Note 1), as of December 31, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AEI Resources
Holding, Inc. (see Note 1) as of December 31, 1996 and 1997 and the results of
its operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
 
                                            Arthur Andersen LLP
 
Louisville, Kentucky
March 20, 1998 (except with
respect to the matters
discussed in Notes 1a and 17c,
as to which date is December
14, 1998)
 
                                      F-3

 
              AEI RESOURCES HOLDING, INC. AND PREDECESSOR (NOTE 1)
 
                          CONSOLIDATED BALANCE SHEETS
            As of December 31, 1996 and 1997 and September 30, 1998
 


                                                December 31,
                                              ------------------  September 30,
                                                1996      1997        1998
                                              --------  --------  -------------
                                                                   (Unaudited)
                                                      (In Thousands)
                                                         
                   ASSETS
Current Assets:
  Cash and cash equivalents.................. $    453  $ 83,616   $   54,891
  Short-term investments.....................      --        401          108
  Accounts receivable (including amounts due
   from related parties of $4,814, $7,951 and
   $2,094, respectively).....................   18,941    29,939      148,881
  Inventories................................   14,336    22,658      138,985
  Prepaid expenses and other.................    4,908     6,562       30,683
  Assets held for sale.......................      --        --       307,692
                                              --------  --------   ----------
    Total current assets.....................   38,638   143,176      681,240
                                              --------  --------   ----------
Property, Plant and Equipment, at cost,
 including mineral reserves and mine
 development and contract costs..............   76,654   129,685    2,111,074
  Less--accumulated depreciation and
   amortization..............................  (10,284)  (23,027)     (43,984)
                                              --------  --------   ----------
                                                66,370   106,658    2,067,090
                                              --------  --------   ----------
Debt issuance costs, net.....................      214    12,713       52,088
Advance royalties............................      968     2,179       31,184
Other non-current assets, net................      740       667       11,615
                                              --------  --------   ----------
    Total assets............................. $106,930  $265,393   $2,843,217
                                              ========  ========   ==========
    LIABILITIES AND STOCKHOLDERS' EQUITY
                  (DEFICIT)
Current Liabilities:
  Accounts payable (including amounts due to
   related parties of $6,094, $3,301 and
   $3,108, respectively)..................... $ 20,640  $ 30,410   $  123,221
  Revolving line of credit...................    8,584       --           --
  Current portion of long-term debt
   (including amounts due to related parties
   of $32, $-- and $--, respectively)........    5,778     1,903      329,058
  Current portion of capital leases..........    5,937     5,705        4,739
  Current portion of reclamation and mine
   closure costs.............................    2,000     2,100       26,322
  Deferred income taxes......................      --      5,199       24,162
  Retiree and employee benefits..............      --        --        56,544
  Accrued expenses and other.................    7,250    12,802      153,192
                                              --------  --------   ----------
    Total current liabilities................   50,189    58,119      717,238
                                              --------  --------   ----------
Non-Current Liabilities:
  Long-term debt and related obligations,
   less current portion (including amounts
   due to related parties of $8,683, $-- and
   $--, respectively)........................   35,474   204,539    1,091,792
  Capital leases, less current portion.......    8,372     4,822          288
  Reclamation and mine closure costs, less
   current portion...........................    9,111     9,431      324,327
  Deferred income taxes......................      --      5,933      210,926
  Employee benefits..........................    1,678        46      503,952
  Other non-current liabilities..............    1,781       577       64,517
                                              --------  --------   ----------
    Total non-current liabilities............   56,416   225,348    2,195,802
                                              --------  --------   ----------
    Total liabilities........................  106,605   283,467    2,913,040
                                              --------  --------   ----------
Commitments and Contingencies (see notes)
Stockholders' Equity (Deficit):
  Common stock...............................      --          1            1
  Additional capital.........................    2,418     7,193          --
  Retained earnings (deficit)................   (2,093)  (25,268)     (69,824)
                                              --------  --------   ----------
    Total stockholders' equity (deficit).....      325   (18,074)     (69,823)
                                              --------  --------   ----------
    Total liabilities and stockholders'
     equity (deficit)........................ $106,930  $265,393   $2,843,217
                                              ========  ========   ==========

 
  The accompanying notes to consolidated financial statements are an integral
                         part of these balance sheets.
 
                                      F-4

 
              AEI RESOURCES HOLDING, INC. AND PREDECESSOR (NOTE 1)
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              For the Years Ended December 31, 1995, 1996 and 1997
               and Nine Months Ended September 30, 1997 and 1998
 


                                                             Nine Months Ended
                                                               September 30,
                                                             ------------------
                            1995      1996         1997        1997      1998
                           -------  --------  -------------- --------  --------
                                                                (Unaudited)
                                              (In Thousands)
                                                        
Revenues:
  Coal mining............  $24,068  $104,804     $163,980    $114,270  $367,438
  Equipment sales, rental
   and repair (including
   amounts from related
   parties of $90,
   $14,333, $6,634 and
   $5,677 and $112,
   respectively).........    6,376    16,033        8,086       6,358     2,145
  Other (including
   amounts from related
   parties of $467, $607,
   $2,381, $2,432 and
   $347, respectively)...    1,250     2,363        3,188       3,453     6,581
                           -------  --------     --------    --------  --------
    Total revenues.......   31,694   123,200      175,254     124,081   376,164
                           -------  --------     --------    --------  --------
Costs and expenses:
  Cost of operations
   (including amounts to
   related parties of
   $1,396, $19,866,
   $25,575, $17,918 and
   $14,711,
   respectively).........   25,396    97,101      145,203     100,736   309,482
  Depreciation, depletion
   and amortization......    1,401     6,945       10,755       6,910    28,207
  Selling, general and
   administrative........    2,178     9,025       13,870       9,890    19,794
                           -------  --------     --------    --------  --------
    Total costs and
     expenses............   28,975   113,071      169,828     117,536   357,483
                           -------  --------     --------    --------  --------
    Income from
     operations..........    2,719    10,129        5,426       6,545    18,681
Interest and other income
 (expense):
  Interest expense
   (including amounts to
   related parties of $--
   , $427, $1,382, $1,276
   and $--,
   respectively).........   (1,043)   (5,527)      (9,192)     (5,265)  (29,845)
  Gain on sale of
   assets................      114       305          338          25     1,233
  Other, net.............       17        97           59        (611)    1,286
                           -------  --------     --------    --------  --------
                              (912)   (5,125)      (8,795)     (5,851)  (27,326)
                           -------  --------     --------    --------  --------
    Income (loss) before
     minority interest,
     income taxes and
     extraordinary item..    1,807     5,004       (3,369)        694    (8,645)
Less--Minority interest..       59       (59)         --          --        --
                           -------  --------     --------    --------  --------
    Income (loss) before
     income taxes and
     extraordinary item..    1,748     5,063       (3,369)        694    (8,645)
Income tax provision.....      --        --        17,516       1,398      (935)
                           -------  --------     --------    --------  --------
    Income (loss) before
     extraordinary item..    1,748     5,063      (20,885)       (704)   (7,710)
Extraordinary loss from
 extinguishment of debt
 (net of
 $--, $--, $869, $-- and
 $1,302 tax benefit,
 respectively)...........      --        --        (1,303)        --     (3,039)
                           -------  --------     --------    --------  --------
    Net income (loss)....  $ 1,748  $  5,063     $(22,188)   $   (704) $(10,749)
                           =======  ========     ========    ========  ========
Unaudited pro forma
 information (Note 20):
  Income (loss) before
   income taxes and
   extraordinary item....  $ 1,748  $  5,063     $ (3,369)   $    694
  Unaudited pro forma
   income tax expense
   (benefit).............      664     1,924       (1,280)        719
  Extraordinary item, net
   of tax benefit........      --        --        (1,303)        --
                           -------  --------     --------    --------
  Unaudited pro forma net
   income (loss).........  $ 1,084  $  3,139     $ (3,392)   $    (25)
                           =======  ========     ========    ========

 
  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.
 
                                      F-5

 
              AEI RESOURCES HOLDING, INC. AND PREDECESSOR (NOTE 1)
 
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
   For the Years Ended December 31, 1995, 1996 and 1997and Nine Months Ended
                               September 30, 1998
 


                                   Common Stock  Retained
                                   -------------  Earnings  Additional
                                   Shares Amount (Deficit)   Capital    Total
                                   ------ ------ ---------  ---------- --------
                                          (Dollar amounts in thousands)
                                                        
Balance at January 1, 1995........    --   $--   $    --     $   200   $    200
  1995 net income.................    --    --        528      1,220      1,748
  Owners' distribution, net.......    --    --        --      (6,679)    (6,679)
                                   ------  ----  --------    -------   --------
Balance at January 1, 1996........    --    --        528     (5,259)    (4,731)
  1996 net income (loss)..........    --    --     (2,621)     7,684      5,063
  Owners' distribution, net.......    --    --        --          (7)        (7)
                                   ------  ----  --------    -------   --------
Balance at January 1, 1997........    --    --     (2,093)     2,418        325
  Issued 2 shares of $.01 par
   value common stock on October
   20, 1997.......................      2   --        --         --         --
  Issued 98 shares of $.01 par
   value common stock on November
   12, 1997.......................     98   --        --         --         --
  Deferred tax benefit............    --    --        --       5,515      5,515
  Stock split of 528 to 1 on
   December 9, 1997............... 52,700     1       --          (1)       --
  1997 net income (loss)..........    --    --    (23,175)       987    (22,188)
  Owners' distribution, net.......    --    --        --      (1,726)    (1,726)
                                   ------  ----  --------    -------   --------
Balance at December 31, 1997...... 52,800     1   (25,268)     7,193    (18,074)
  Issued 2 shares of $.01 par
   value common stock on May 28,
   1998 (unaudited)...............      2   --        --         --         --
  Issued 2 shares of $.01 par
   value common stock on July 27,
   1998 (unaudited)...............      2   --        --         --         --
  Nine months ended September 30,
   1998 net loss (unaudited)......    --    --    (10,749)       --     (10,749)
  Charge to equity (unaudited)....    --    --    (43,807)    (7,193)   (51,000)
  Deferred tax benefit
   (unaudited)....................    --    --     10,000        --      10,000
                                   ------  ----  --------    -------   --------
Balance at September 30, 1998
 (unaudited)...................... 52,804  $  1  $(69,824)   $   --    $(69,823)
                                   ======  ====  ========    =======   ========

 
 
 
  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.
 
                                      F-6

 
              AEI RESOURCES HOLDING, INC. AND PREDECESSOR (NOTE 1)
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the Years Ended December 31, 1995, 1996 and 1997
               and Nine Months Ended September 30, 1997 and 1998
 


                                    December 31,             September 30,
                              ---------------------------  -------------------
                               1995      1996      1997      1997      1998
                              -------  --------  --------  --------  ---------
                                                              (Unaudited)
                                             (In Thousands)
                                                      
Cash Flows From Operating
 Activities:
 Net income (loss)........... $ 1,748  $  5,063  $(22,188) $   (704) $ (10,749)
 Adjustments to reconcile net
  income (loss) to net cash
  provided by (used in)
  operating activities
  Depreciation, depletion and
   amortization..............   1,401     6,945    10,755     6,910     28,207
  Amortization of finance
   costs included in interest
   expense...................       6        65       198        24      3,556
  Prepayment penalties on
   debt refinancing..........     --        --      1,600       --         --
  Loan cost write-offs from
   debt refinancing..........     --        --        572       --       4,341
  Provision for deferred
   income taxes..............     --        --     16,647       --         --
  Gain on sale of assets.....    (114)     (305)     (338)      (25)    (1,233)
 Changes in assets and
  liabilities:
  (Increase) decrease in:
   Short-term investments....     --        --       (401)      --         293
   Receivables...............   1,046    (6,079)   (7,951)  (11,287)       171
   Inventories...............  (2,212)   (3,050)   (6,173)   (6,517)    (6,565)
   Prepaid expenses and
    other....................    (962)   (1,408)     (835)     (409)    (4,616)
   Other non-current assets..    (561)     (372)   (2,177)   (1,071)      (150)
 Increase (decrease) in:
  Accounts payable...........  (1,693)    9,518     4,191     4,905     (2,007)
  Accrued expenses and
   other.....................     816        66    (1,354)    3,355    (35,419)
  Deferred taxes.............     --        --        --        --      (2,237)
  Other non-current
   liabilities...............   1,186    (5,669)   (2,726)   (3,189)    (3,666)
                              -------  --------  --------  --------  ---------
    Total adjustments........  (1,087)     (289)   12,008    (7,304)   (19,325)
                              -------  --------  --------  --------  ---------
    Net cash provided by
     (used in) operating
     activities..............     661     4,774   (10,180)   (8,008)   (30,074)
                              -------  --------  --------  --------  ---------
Cash Flows From Investing
 Activities:
 Net proceeds from sale of
  assets.....................     400     1,589       549       144      3,270
 Additions to property, plant
  and equipment and mine
  development and contract
  costs......................  (6,477)  (14,092)  (32,214)  (18,340)   (33,257)
 Acquisition of coal-mining
  companies including debt
  retirement, net of cash
  received...................     --        --     (6,625)      --    (877,027)
                              -------  --------  --------  --------  ---------
    Net cash used in
     investing activities....  (6,077)  (12,503)  (38,290)  (18,196)  (907,014)
                              -------  --------  --------  --------  ---------
Cash Flows From Financing
 Activities:
 Borrowings on long-term
  debt.......................   3,173     3,629   265,327    12,045  1,160,000
 Repayments on long-term
  debt.......................    (436)   (4,150)  (98,243)   (7,219)  (167,506)
 Net borrowings (payments) on
  revolving line of credit...   4,326     4,258    (8,584)    5,061     19,641
 Net borrowings from
  (repayments to)
  stockholders...............   1,133     7,315    (8,715)   20,407        --
 Repayments on capital
  leases.....................    (410)   (3,617)   (3,782)   (2,804)    (5,500)
 Payments for debt issuance
  costs......................     --        --    (12,673)     (302)   (47,272)
 Prepayment penalties on debt
  refinancing................     --        --     (1,600)      --         --
 Charge to equity for MTI
  purchase...................     --        --        --        --     (51,000)
 Other changes in owners'
  equity (deficit), net......  (1,536)      (87)      (97)     (321)       --
                              -------  --------  --------  --------  ---------
    Net cash provided by
     financing activities....   6,250     7,348   131,633    26,867    908,363
                              -------  --------  --------  --------  ---------
    Net increase (decrease)
     in cash and cash
     equivalents.............     834      (381)   83,163       663    (28,725)
                              -------  --------  --------  --------  ---------
Cash and Cash Equivalents,
 beginning of period.........     --        834       453       453     83,616
                              -------  --------  --------  --------  ---------
Cash and Cash Equivalents,
 end of period............... $   834  $    453  $ 83,616  $  1,116  $  54,891
                              =======  ========  ========  ========  =========

 
  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.
 
                                      F-7

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            December 31, 1995, 1996 and 1997 and September 30, 1998
                             (Dollars in thousands)
 
1. ORGANIZATIONAL TRANSACTIONS AND BASIS OF PRESENTATION
 
a. Recent 1998 Events
 
During May 1998, the owners of AEI Holding Company, Inc. (AEI HoldCo.) (Larry
Addington and Addington Enterprises (AEI)) established a new company, Coal
Ventures, Inc. (CVI--a Delaware company) and in June 1998 transferred their
shares of AEI HoldCo. to CVI in exchange for similar proportionate CVI shares
thereby making CVI the owner of AEI HoldCo. On June 25, 1998, CVI increased
their authorized common shares to 150,000. On June 29, 1998, pursuant to a May
28, 1998 stock purchase and sale agreement with Cyprus Amax Coal Company
(Cyprus), CVI acquired various Cyprus Subsidiaries, a coal mining business with
operations in Kentucky, West Virginia, Indiana and Tennessee. The purchase
price was $98,000 plus a working capital adjustment as well as payments for
purchased and leased equipment and a royalty owed to Cyprus for future
production. This acquisition was accounted for as a purchase.
 
On July 10, 1998, CVI acquired the capital stock of Mid-Vol Leasing, Inc., Mega
Minerals, Inc. and Premium Processing, Inc. (collectively, Mid-Vol), a coal
mining business with operations in West Virginia for the purchase price of
$35,000 plus a working capital adjustment as well as production royalty
payments. This acquisition was accounted for as a purchase.
 
During August 1998, CVI changed its name to AEI Resources, Inc. (Resources) and
on August 5, 1998 (via a subsidiary) submitted a cash tender offer to acquire
all of the common stock of Zeigler Coal Holding, Inc. (Zeigler), a diversified
publicly held coal mining and energy business with operations primarily in
Kentucky, West Virginia, Ohio, Illinois, and Wyoming. The cash purchase price
for the stock was approximately $600,000, and Resources assumed approximately
$255,000 of Zeigler's debt. This acquisition closed on September 2, 1998 and
was accounted for as a purchase. Also during August 1998, the owners of
Resources established a new Company, AEI Resources Holding, Inc. (ARHI)
(collectively, the Company) and transferred their shares of Resources to ARHI
in exchange for similar proportionate ARHI shares thereby making ARHI the owner
of Resources.
 
On September 2, 1998, the Company acquired the Capital Stock of Kindill
Holding, Inc. (Kindill) (a related party) for the cash purchase price of
$11,000 plus assumption of approximately $50,000 of Kindill's debt. Kindill is
a coal mining business with operations in Indiana. This acquisition was
accounted for as a purchase.
 
On September 2, 1998, the Company reacquired the 22.5% minority interest in
Bowie Resources, Ltd. (See Note 12) for the purchase price of $11,500. This
acquisition was accounted for as a purchase.
 
On November 6, 1998, the Company acquired the Capital Stock of Martiki Coal
Corporation (Martiki), a subsidiary of MAPCO Coal, Inc. for the cash purchase
price of $32,000. Martiki is a coal mining business with operations in eastern
Kentucky. This acquisition was accounted for as a purchase.
 
Refer to Note 17c for descriptions of financing transactions related to these
acquisitions.
 
b. 1997 Organizational Transactions
 
The accompanying annual consolidated financial statements of Resources have
been prepared pursuant to two agreements: the Shareholder Exchange Agreement
dated October 20, 1997 (Exchange Agreement) and the Asset Purchase Agreement
dated December 18, 1997 (MTI Agreement). See basis of presentation in Note 1c.
 
The Exchange Agreement is between AEI HoldCo., a Delaware corporation formed on
September 19, 1997 (as Transferee/Buyer), and Addington Enterprises, Inc.
(AEI), a Kentucky corporation (as Transferor) and Larry Addington (as
Transferor), and Harold Sergent (as Seller) for their 77.5% ownership interest
in Bowie Resources, Limited (BRL), a Colorado corporation. The Exchange
Agreement was consummated on
 
                                      F-8

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 12, 1997, whereby AEI HoldCo. issued 98 common shares (par value $.01)
as consideration for: (1) AEI's coal mining operations and certain corporate
net assets and (2) Larry Addington's (69.8%) ownership interest in BRL.
Additionally, AEI HoldCo. purchased Harold Sergent's 7.7% ownership interest in
BRL for $2,000. AEI is owned by Larry Addington (80%), Robert Addington (10%)
and Bruce Addington (10%), who are brothers. The coal mining businesses
transferred by AEI included the net assets of its Addington Mining and
corporate divisions as well as its wholly-owned subsidiaries, Tennessee Mining,
Inc. and Ikerd-Bandy Co., Inc. AEI retained certain non-coal mining properties
as well as technology related assets which were disposed in the MTI agreement
(see below).
 
The Exchange Agreement was prepared in connection with, and its consummation
was contingent upon, the closing of the $200,000 Senior Notes Indenture (Senior
Notes) of AEI HoldCo. (Note 7a). The Senior Notes were offered in a private
placement and AEI HoldCo. has agreed to file a registration statement (under
the US Securities Act) relating to an exchange offer for the Senior Notes which
would provide for their resale. NationsBanc Montgomery Securities, Inc. was the
initial purchaser of the Senior Notes, with such initial purchase occurring on
November 12, 1997.
 
The MTI Agreement is between Mining Technologies, Inc., a newly formed
subsidiary of AEI HoldCo. (as purchaser) and AEI (as seller) for AEI's
ownership interest in its North American (N.A.) mining technologies division.
The purchase price of $51,000 (cash) was delivered at closing on January 2,
1998. The net assets acquired include mining equipment (primarily Highwall
Mining Systems), contract mining agreements, and the intellectual property for
the N.A. Highwall Mining Systems (patents, trademarks, etc.). AEI retained
ownership of the non-N.A. intellectual property.
 
The Exchange and MTI transactions described above were treated for accounting
purposes as a transfer of entities and net assets under common control with
accounting similar to that of a pooling of interests. Accordingly, the
historical cost basis of the underlying assets and liabilities transferred
(from AEI and BRL) were carried over from the transferring entity to AEI
HoldCo. Due to common control, the MTI cash purchase price of $51,000 paid by
AEI HoldCo. to AEI was recorded as a charge to equity when paid in January
1998. In connection with the Senior Notes offering, $2,000 of loan proceeds
were used by AEI HoldCo. to acquire 7.7% of BRL common stock from Harold
Sergent. This purchase was accounted for as an acquisition of minority interest
using purchase accounting.
 
After the consummation of the Exchange Agreement and MTI Agreement, AEI HoldCo.
is owned by AEI (50%) and Larry Addington (50%). In addition, Addington Mining,
Inc. (AMI), Tennessee Mining Inc. (TMI), Ikerd-Bandy Co., Inc. (IB) and Mining
Technologies, Inc. (MTI) are wholly-owned subsidiaries of AEI HoldCo. while BRL
is 77.5% owned by AEI HoldCo. and 22.5% owned by Mitsui Matsushima (Note 12).
 
c. Basis of Presentation
 
The accompanying financial statements include those of AEI Resources, Inc.
which includes AEI HoldCo. and the Cyprus Subsidiaries acquired on June 29,
1998 (see Note 1a). AEI HoldCo. consists of its predecessor operations which
include the mining technologies division of Addington Enterprises, Inc. that
was acquired by AEI HoldCo. on January 2, 1998 (the "MTI Transaction"). The
predecessor operations of AEI HoldCo. also include AEI and its coal mining
divisions and subsidiaries (AMI, TMI and IB), plus Bowie Resources, Limited.
The mining technologies division of AEI included herein excludes the non-North
American intellectual property. The accompanying annual financial statements
represent the historical accounts of the businesses transferred and sold to AEI
HoldCo. pursuant to the Exchange and MTI Agreements, all of which were under
the common control of Larry Addington. The accompanying September 30, 1998
financial statements also include the purchase accounting and post acquisition
operations of the following significant acquisitions since their date of
acquisition: Leslie Resources (January 1998), Cyprus Subsidiaries (June 1998),
Mid-Vol (July 1998), Zeigler (September 1998) and Kindill (September 1998).
 
                                      F-9

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
The mining operations of AEI HoldCo. commenced in early 1995 following the BRL
acquisition (see Note 3a) and increased significantly in November 1995
following the AEI acquisition (see Note 3b). The accompanying consolidated
financial statements include the relevant financial results (AEI HoldCo.
predecessor operations) of AEI and BRL since their acquisitions under the
control of Larry Addington. Significant "intercompany" transactions and
accounts have been eliminated in combination.
 
Various allocations and carve-out adjustments have been made in the preparation
of the accompanying consolidated financial statements. Such allocations have
been recorded to segregate the historical accounts to reflect the businesses
transferred. Management believes that the method used for allocations and
carve-out adjustments is reasonable.
 
As of December 31, 1995 and 1996, AEI HoldCo. owned 90.1% of BRL, and 9.9% is
considered minority interest. As of December 31, 1997 AEI HoldCo. owned 77.5%
of BRL and 22.5% is considered minority interest (see Note 12). No minority
interest is recorded in the accompanying balance sheets as of December 31, 1996
or 1997 or September 30, 1998 due to BRL having deficit equity.
 
d. Interim Financial Information
 
The interim financial statements as of September 30, 1998 and for the nine
months ended September 30, 1997 and 1998 are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, the unaudited
interim financial statements contain all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation. The
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL
 
a. Management's Use of Estimates
 
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
 
b. Company Environment and Risk Factors
 
The Company's principal business activities consist of surface and deep mining
and marketing of bituminous coal, performance of contract mining for third
parties, construction and licensing of mining equipment, as well as leasing and
repairing mining equipment. These operations are primarily located in Kentucky,
Indiana, West Virginia, Tennessee and Colorado.
 
The Company, in the course of its business activities, is exposed to a number
of risks including: the possibility of the termination or alteration of coal
sales contracts, fluctuating market conditions of coal and transportation
costs, competitive industry and over capacity, changing government regulations,
unexpected maintenance and equipment failure, employee benefits cost control,
misestimates of proven and probable coal reserves, satisfactory labor
relations, loss of key employees, satisfactory resolution of the year 2000
issue and the ability of the Company to obtain financing, necessary mining
permits and control of adequate recoverable mineral reserves. In addition,
adverse uncontrollable (wet) weather and geological conditions tend to increase
mining costs, sometimes substantially. Precipitation is generally highest at
most of the Company's mining operations in early spring and late fall.
 
                                      F-10

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
The Company is exposed to risks associated with a highly leveraged
organization. Such risks include: increased vulnerability to adverse economic
and industry conditions, limited ability to fund future working capital,
capital expenditures, business acquisitions or other corporate requirements,
possible liquidity problems as well as financing and credit constraints.
Management believes it has adequate financing resources (including cash
equivalents, cash generated from operations and additional borrowings) to meet
its needs in 1998.
 
The Company's current business plans include significant growth in its coal
mining operations, primarily through acquisitions. The Company faces numerous
risks in the successful identification, consummation and post-acquisition
integration of such acquisitions.
 
c. Inventories
 
Inventories are stated at average cost, which approximates first-in, first-out
(FIFO) cost, and does not exceed market. Components of inventories consist of
coal, deferred overburden and supplies and parts (Note 4). Coal inventories
represent coal contained in stockpiles and exposed in the pit. Deferred
overburden represents the costs to remove the earthen matter (i.e., overburden)
covering the coal seam in surface mining. Costs to remove overburden are
accumulated and deferred on a pro-rata basis as overburden is removed and
eventually charged to cost of operations when the coal is sold. The calculation
of deferred overburden requires significant estimates and assumptions,
principally involving engineering estimates of overburden removal and coal seam
characteristics.
 
d. Advance Royalty Payments (included in Prepaid Expenses and Other and Other
Non-Current Assets)
 
The Company is required, under certain royalty lease agreements, to make
minimum royalty payments whether or not mining activity is being performed on
the leased property. These minimum payments are recoupable once mining begins
on the leased property. The Company capitalizes these minimum royalty payments
and amortizes the deferred costs once mining activities begin or expenses the
deferred costs when the Company has ceased mining or has made a decision not to
mine on such property. Included in prepaid expenses and other is $1,529 and
$3,491 for 1996 and 1997, respectively, relating to advanced royalties.
Included in other non-current assets is $973 and $2,179 for 1996 and 1997,
respectively, relating to advanced royalties.
 
In 1997, TMI, a subsidiary of AEI HoldCo., paid $2,000 to Addington Resources,
Inc. (ARI) for full settlement of royalties due under an option agreement dated
August 4, 1995 (see Note 3b). The difference between the settlement amount and
royalties previously recognized is recorded as an advanced royalty. At December
31, 1997, $1,086 is included as an advanced royalty in prepaid expenses and
other related to this settlement.
 
e. Depreciation, Depletion and Amortization
 
Property, plant and equipment are recorded at cost, including construction
overhead and interest, where applicable. Expenditures for major renewals and
betterments are capitalized while expenditures for maintenance and repairs are
expensed as incurred. Depreciation, depletion and amortization are provided
using either the straight-line or units of production method with estimated
useful lives under the straight-line method comprising substantially the
following ranges:
 


                                                                         Years
                                                                        --------
                                                                     
   Buildings........................................................... 10 to 45
   Mining and other equipment and related facilities...................  2 to 20
   Transportation equipment............................................   2 to 7
   Furniture and fixtures..............................................  3 to 10

 
                                      F-11

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Mineral reserves and mine development costs (included in property, plant and
equipment) are amortized using the units-of-production method, based on
estimated recoverable reserves. Coal sales contract related costs are amortized
as tons are delivered, based on contracted tonnage requirements.
 
Financing costs (included in other non-current assets amounting to $214 and
$12,713 for 1996 and 1997, respectively) are being amortized using the
effective interest method, over the life of the related debt, or using the
straight-line method, over the life of the related debt, if the result
approximates the effective interest method.
 
f. Restricted Cash (Included in Other Non-Current Assets)
 
The Company pays amounts as required by various royalty agreements. Certain of
these agreements have been disputed by third parties, requiring that cash be
paid into an escrow account until the rightful recipient is determined.
Included in other non-current assets is $161 and $93 for 1996 and 1997,
respectively, relating to restricted cash.
 
g. Coal Mine Reclamation and Mine Closure Costs
 
The Company estimates its future cost requirements for reclamation of land
where it has conducted surface and deep mining operations, based on its
interpretation of the technical standards of regulations enacted by the U.S.
Office of Surface Mining, as well as state regulations.
 
The Company accrues for the cost of final mine closure and related exit costs
over the estimated useful mining life of the developed property or, if
purchased, at the date of acquisition. These costs relate to reclaiming the pit
and support acreage at surface mines and sealing portals at deep mines. Other
costs common to both types of mining are related to reclaiming refuse and
slurry ponds as well as holding period and related termination/exit costs. The
Company accrues for current mine disturbance which will be reclaimed prior to
final mine closure. The establishment of the final mine closure reclamation
liability and the current disturbance is based upon permit requirements and
requires various estimates and assumptions, principally associated with cost
and production levels. Annually, the Company reviews its entire reclamation
liability and makes necessary adjustments, including mine plan and permit
changes and revisions to cost and production levels to optimize mining and
reclamation efficiency. The economic impact of such adjustments is recorded to
cost of coal sales. Although the Company's management believes it is making
adequate provisions for all expected reclamation and other costs associated
with mine closures, future operating results would be adversely affected if
such accruals were later determined to be insufficient.
 
h. Income Taxes
 
For 1995 and 1996 and part of 1997 (see below), AEI and BRL were S corporations
under the Internal Revenue Code and similar state statutes. As a result, AEI
and BRL were not subject to income taxes and their taxable income or loss was
reported in the stockholders' individual tax returns. Accordingly, the
historical net income (loss) presented in the accompanying financial statements
during the S corporation periods is exclusive of an income tax provision (See
Notes 11 and 20).
 
As discussed in Note 12, in April 1997, BRL's shareholders entered into an
agreement to sell collectively 22.5% of their shares of BRL common stock. Upon
consummation of this agreement, BRL's S corporation status was terminated. Upon
such termination, BRL was required to record deferred taxes for differences in
book and tax bases in assets and liabilities. The net deferred tax liability in
April 1997 was $1,600 and was recorded as an increase to income tax provision.
 
As discussed in Note 1, in connection with the consummation of the Exchange
Agreement in November 1997, the mining businesses transferred from AEI (as an S
corporation) required that deferred taxes be recorded by
 
                                      F-12

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
AEI HoldCo. (as a C corporation). The net deferred tax liability in November
1997 was $17,963 and was recorded as an increase to income tax provision.
 
The provision for income taxes includes the change in tax status matters as
described above plus federal, state and local income taxes currently payable
and those deferred because of temporary differences between financial statement
and tax basis of assets and liabilities. The Company records income taxes under
the liability method. Under this method, deferred income taxes are recognized
for the estimated future tax effects of differences between the tax basis of
assets and liabilities and their financial reporting amounts as well as net
operating loss carryforwards and tax credits based on enacted tax laws.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
 
i. Revenue Recognition
 
Most of the Company's revenues have been generated under long-term coal sales
contracts with electric utilities or other coal-related organizations,
primarily in the eastern United States. Revenues are recognized on coal sales
in accordance with the sales agreement, which is usually when the coal is
shipped to the customer and title is passed. The Company also rents and sells
equipment and provides repair and contract mining services, and the revenue
from such rental, sale and service is recognized when earned. Revenue from the
construction of mining equipment is recognized on a percentage of completion
basis. The Company grants credit to its customers based on their
creditworthiness and generally does not secure collateral for its receivables.
No allowance for doubtful accounts is recorded for 1996 or 1997 as management
does not believe it is necessary. Historically, accounts receivable write-offs
have been insignificant.
 
Included in 1995 revenues is $6,000 related to a sale of equipment purchased
for immediate resale. A gross profit on sale of approximately $2,800 was
realized.
 
j. Stockholders' Equity (Deficit)
 
The historical owners' equity accounts (retained earnings (deficit) and
additional capital) for legal entities (BRL) which have been carried over from
the transferor (Note 1b) have remained unchanged as presented within the
accompanying consolidated statements of stockholders' equity (deficit).
 
The businesses transferred from AEI have operated as divisions and,
accordingly, the historical equity account changes (earnings and losses and
owners' contributions and distributions) have been presented within additional
capital in the accompanying consolidated statements of stockholders' equity
(deficit) until November 12, 1997 at which time AEI HoldCo. became a legal
entity.
 
The common stock activity through December 31, 1997, represents that of AEI
HoldCo. The 2 shares of $.01 par value common stock issued on October 20, 1997
represent the initial organizational shares. On November 12, 1997 in
conjunction with the consummation of the Exchange Agreement (see Note 1), AEI
HoldCo. issued 98 additional shares of $.01 par value common stock bringing the
total issued and outstanding shares to 100. On December 9, 1997, AEI HoldCo.
increased authorized common shares from 1,000 to 100,000 and declared a 528 to
1 stock split bringing the issued and outstanding shares to 52,800. The
consolidated operations of AEI HoldCo. after the consummation of the Exchange
Agreement (Note 1) on November 12, 1997, are included in retained earnings
(deficit) in the accompanying consolidated statements of stockholders' equity
(deficit).
 
As described in Notes 2h and 11, in connection with the consummation of the
Exchange Agreement on November 12, 1997, the mining businesses transferred from
AEI required that deferred taxes be recorded by AEI HoldCo. Because a portion
of the mining assets transferred from AEI were stepped up for tax purposes,
 
                                      F-13

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
but not book (similar to a taxable pooling), the resulting deferred tax benefit
of approximately $5,500 was recorded with a corresponding increase in
additional capital.
 
As discussed in Note 1, on January 2, 1998, AEI HoldCo. made a payment of
$51,000 for the purchase of MTI which was recorded as a charge to equity in
January 1998. In addition, as described in Note 11, a deferred tax benefit of
approximately $10,000 was recorded in connection with this MTI transaction with
a corresponding increase to equity.
 
The following unaudited pro forma information gives effect to the equity
adjustments recorded in connection with the MTI transaction ($51,000 payment
and $10,000 deferred tax benefit) as if it had occurred on December 31, 1997:
 


                                  As Reported Pro Forma Adjustments Pro Forma
                                  ----------- --------------------- ---------
                                                           
   Stockholders' equity
    (deficit)....................  $(18,074)        $(51,000)       $(59,074)
                                                      10,000

 
k. Asset Impairment
 
If facts and circumstances suggest that a long-lived asset may be impaired, the
carrying value is reviewed. If this review indicates that the value of the
asset will not be recoverable, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, then the carrying
value of the asset is reduced to its estimated fair value.
 
l. Reclassifications
 
Certain reclassifications of prior year amounts were made to conform with the
current year presentation with no effect on previously reported net income
(loss) or stockholders' equity (deficit).
 
m. Statements of Cash Flows
 
For purposes of the statements of cash flows, the Company considers investments
having maturities of three months or less at the time of the purchase to be
cash equivalents.
 
Supplemental disclosure:
 


                                                                Nine Months
                                            December 31     Ended September 30,
                                         ------------------ --------------------
                                         1995  1996   1997    1997       1998
                                         ---- ------ ------ --------- ----------
                                                                (unaudited)
                                                       
   Cash paid for interest, net of
    capitalized interest of $243, $246,
    $467, $150 and $6,118,
    respectively.......................  $791 $5,357 $7,193 $   4,826 $   14,159
   Income taxes paid...................   --     --     --        --         645

 
Two capital lease transactions aggregating $6,587 in new debt and increases to
property, plant and equipment have been excluded from the 1995 Statement of
Cash Flows. The 1997 Statement of Cash Flows is exclusive of non-cash deferred
tax asset and equity increase of $5,515, non-cash property additions of $2,253,
non-cash capitalized loan fees of $238, non-cash transfers of inventory items
to development costs of $1,062 and settlement of a note (included in other
assets) for property and mine development work valued at $1,220.
 
The impact of the acquisition of ARI's mining and technology business as
described in Note 3b, at a net cost of $24,780 has been excluded from the 1995
Statement of Cash Flows. In addition, the distribution to owners of non-coal
mining properties of $5,220 has been excluded from the 1995 Statement of Cash
Flows.
 
                                      F-14

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
3. ACQUISITIONS
 
a. Bowie Resources, Limited
 
Bowie Resources, Limited (BRL) was incorporated on November 4, 1994 and
purchased the Bowie #1 mine from Cyprus Orchard Valley Coal Corporation on
December 22, 1994 for $200 plus assumption of reclamation liabilities estimated
at $4,200. Mining activities as well as revenue and expense reporting commenced
during 1995. On January 6, 1995, BRL purchased the Bowie #2 mine from Coors
Energy Company for $1,100 and minimum royalty amounts payable from 1997 to
2014. These transactions have been accounted for as a purchase in the
accompanying financial statements. The incorporation of BRL on November 4, 1994
represents the commencement of coal mining business under the common control of
Larry Addington which were transferred to AEI HoldCo. pursuant to the Exchange
Agreement.
 
b. Addington Enterprises, Inc.
 
On September 22, 1995, in a related party transaction, AEI entered into a stock
purchase agreement with Addington Resources, Inc. (ARI) whereby AEI agreed to
purchase all the issued and outstanding shares of common stock of ARI's coal
mining and technology subsidiaries. In addition, pursuant to an option
agreement dated August 4, 1995, AEI agreed to purchase from ARI all the issued
and outstanding stock of the ARI subsidiary, TMI, in exchange for a royalty AEI
will pay to ARI based on tons of coal delivered under a certain coal sales
contract (see Note 2d). The stockholders of AEI had formerly been executive
officers and minority owners of ARI.
 
These agreements were consummated on November 2, 1995, at which time AEI
approved and adopted a plan of merger which provided for the merger, in
addition to other dormant subsidiaries, of AMI, MTI and TMI into AEI and the
cancellation of the subsidiaries' common stock.
 
These transactions to acquire the coal mining and technology businesses from
ARI have been accounted for as a purchase in the accompanying financial
statements. Total coal mining assets and liabilities acquired were $52,614 and
$40,235, respectively, at a cost of $12,379. Total technology assets and
liabilities acquired were $20,275 and $7,874, respectively, at a cost of
$12,401.
 
Pursuant to the stock purchase agreement with ARI, AEI assumed certain
liabilities and contingencies of the acquired subsidiaries that are reflected
in the net assets acquired and accompanying notes. Further, AEI has granted
indemnification for performance guarantees made by ARI in connection with the
sale of certain ARI coal-related subsidiaries in previous years as well as
guarantees relating to certain mineral lease royalty obligations and workers'
compensation benefits. The Company believes no significant obligation will
result relating to the ARI indemnification. The obligations of AEI under the
above agreement were transferred to AEI HoldCo. pursuant to the Exchange
Agreement.
 
The retention of non-coal mining properties has been accounted for as a
distribution of net assets to owners of $5,220 effective November 2, 1995.
Accordingly, the accompanying financial statements exclude such balances and
activities related to non-coal mining properties.
 
c. Purchase of Ikerd-Bandy Co., Inc.
 
In October 1997, AEI acquired all of the outstanding capital stock of Ikerd-
Bandy Co., Inc., a coal mining company with operations in eastern Kentucky, for
the purchase price of approximately $12,300 (including $4,700 in debt and $300
in related fees and expenses). This transaction has been accounted for as a
purchase and the operations of Ikerd-Bandy have been included with those of the
Company since the date of acquisition.
 
 
                                      F-15

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
The following unaudited pro forma information for the periods shown below gives
effect to the acquisition of Ikerd-Bandy as if it had occurred at the beginning
of each period:
 


                                                            1996        1997
                                                         (unaudited) (unaudited)
                                                         ----------- -----------
                                                               
   Revenues.............................................  $162,217    $208,661
   Income (loss) before extraordinary items.............     3,375     (20,245)
   Net income (loss)....................................     3,375     (21,548)

 
The unaudited pro forma information assumes that the Company owned the
outstanding shares of Ikerd-Bandy at the beginning of the periods presented and
includes adjustments for depreciation, depletion and amortization, interest
expense and an inventory adjustment to conform to the Company's accounting
policies. The unaudited pro forma financial data is presented for information
purposes only and is not necessarily indicative of the results of operations
that actually would have been achieved had the acquisition been consummated at
the beginning of these periods, and is not intended to be a projection of
future results.
 
4. INVENTORIES
 
As of December 31, 1996 and 1997 and September 30, 1998 inventories consisted
of the following:
 


                                                                   September 30,
                                                                       1998
                                                    1996    1997    (Unaudited)
                                                   ------- ------- -------------
                                                          
   Coal........................................... $ 1,920 $ 3,995   $ 51,424
   Deferred overburden............................   4,796  10,768     50,850
   Supplies and parts.............................   7,620   7,895     36,711
                                                   ------- -------   --------
                                                   $14,336 $22,658   $138,985
                                                   ======= =======   ========

 
5. PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment, including mineral reserves and mine development
and contract costs, at December 31, 1996 and 1997 are summarized by major
classification as follows:
 


                                                             1996      1997
                                                           --------  --------
                                                               
   Land................................................... $  1,570  $  1,670
   Mining and other equipment and related facilities......   50,194    58,923
   Mine development and contract costs....................   10,511    24,177
   Mineral reserves.......................................    6,045    15,992
   Transportation equipment...............................    2,958     4,001
   Furniture and fixtures.................................      462       201
   Mine development in process............................    2,277    22,150
   Construction work in process...........................    2,637     2,571
                                                           --------  --------
                                                             76,654   129,685
   Less accumulated depreciation, depletion and
    amortization..........................................  (10,284)  (23,027)
                                                           --------  --------
   Net property, plant and equipment...................... $ 66,370  $106,658
                                                           ========  ========

 
Included in property, plant and equipment is $4,914 for 1996 and $24,721 for
1997 related to development and construction projects for which depreciation,
depletion and amortization have not yet commenced. During the development
phase, mining revenues are recorded as a reduction in development costs. The
Company reviews the realization of these projects on a periodic basis.
 
                                      F-16

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
6. ACCRUED EXPENSES AND OTHER
 
Accrued expenses as of December 31, 1996 and 1997 and September 30, 1998
consisted of the following:
 


                                                                   September 30,
                                                     1996   1997       1998
                                                    ------ ------- -------------
                                                                    (unaudited)
                                                          
   Payroll, Bonus and Vacation..................... $1,690 $ 5,385   $ 41,808
   Retiree and Employee Benefits...................
   Interest........................................    702   2,701     18,509
   Royalties.......................................  1,107   1,081     13,189
   Property Taxes..................................    950   1,386      5,194
   Production and Sales Taxes......................    817   1,182      7,831
   Workers Compensation (Including Black Lung)
    and Insurance..................................    711     484      7,306
   Other...........................................  1,273     583     59,355
                                                    ------ -------   --------
                                                    $7,250 $12,802   $153,192
                                                    ====== =======   ========

 
7. DEBT
 
a. Issuance of Senior Notes, Bridge Financing, New Credit Facility and Debt
Extinguishment
 
As discussed in Note 1, in November 1997, AEI HoldCo. issued an Offering
Memorandum to obtain $200,000 in debt in the form of 10 percent Senior Notes,
maturing in 2007, in a private placement. The Senior Notes Indenture was
consummated on November 12, 1997. Virtually all of the AEI HoldCo.'s
outstanding long-term debt as well as bridge financing (see below) at November
12, 1997 was retired with proceeds from the Senior Notes. Other uses of Senior
Note proceeds included the following: debt issuance costs, debt retirement
costs, acquisition of MTI (Note 1), acquisition of BRL 7.7% minority interest
(Note 1) and acquisition of Leslie Resources (Note 17a).
 
Upon a change in control (as defined), AEI HoldCo. will be required to make an
offer to purchase all outstanding Senior Notes at 101% of the principal amount.
The Senior Notes will be unconditionally guaranteed by each of AEI HoldCo.'s
current and future subsidiaries, other than BRL (Note 19). In addition to
containing various financial covenants, the Indenture will restrict, among
other things, additional indebtedness, issuance of preferred stock, dividend
payments, sale of subsidiaries and affiliate transactions.
 
During October 1997, in anticipation of closing of the Senior Notes Indenture,
AEI HoldCo. entered into a $50,000 secured bridge financing arrangement with
NationsBank of Texas, N.A. The bridge financing was used to refinance existing
term loans and lines of credit as well as for the acquisition of Ikerd-Bandy
Co., Inc. discussed in Note 3c. This bridge note had a term of 90 days and was
assigned to AEI HoldCo. as part of the Exchange Agreement (Note 1). The bridge
note was repaid by AEI HoldCo. with the proceeds obtained through the Senior
Notes.
 
If the registration statement for the exchange offer is not filed or declared
effective within the time periods allotted in the Senior Notes Offering
Memorandum dated November 6, 1997 (such effective date being March 31, 1998),
AEI HoldCo. will be required to pay liquidated damages to Senior Notes holders
at a weekly rate of 5c per one thousand dollars outstanding (aggregating to $10
per week) for the first 90 days and increasing 5c each 90 days thereafter until
capping at a rate of 50c per one thousand dollars outstanding. AEI HoldCo. has
filed an initial registration statement with the Securities and Exchange
Commission on January 29, 1998; however, it is uncertain when this filing will
become effective.
 
                                      F-17

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
AEI HoldCo. has entered into a Loan and Security Agreement (the "New Credit
Agreement") with NationsBank of Texas, N.A., as administrative agent, and other
lending institutions (the "Lenders"), which provides the Company with a $50,000
credit facility (the "New Credit Facility"), guaranteed by the subsidiaries of
AEI HoldCo. (excluding BRL). The New Credit Facility includes a $5,000 sub-
limit for the issuance of standby letters of credit. Consummation of the New
Credit Agreement was simultaneous with that of the Senior Notes Indenture. In
addition to containing various financial covenants, the New Credit Facility
will restrict, among other things, additional indebtedness, sale of assets,
business combinations, debt prepayments, dividends and affiliate transactions.
In connection with financing the acquisition of MTI (Note 1), on January 2,
1998, AEI HoldCo. borrowed $25,000 on the New Credit Facility. Interest
payments on outstanding principal balances are due quarterly. The interest rate
is variable based on the prime rate, the federal funds rate, default versus
non-default status on the New Credit Facility and AEI HoldCo.'s net debt to
EBITDA ratio (9.25% for the initial interest payment) as of December 31, 1997
and June 30, 1998. AEI HoldCo. was not in compliance with certain of the
covenants of the New Credit Agreement, however, management does not believe it
will result in a material adverse impact to the financial position or liquidity
of AEI HoldCo.
 
Indebtedness of AEI HoldCo. under the New Credit Facility is secured by all of
the capital stock of AEI HoldCo., 77.5% of the capital stock of BRL and all the
capital stock of each of the subsidiaries of AEI HoldCo., other than BRL. The
Lenders also receive a security interest in all other present and future assets
and properties of the Company and its subsidiaries, except for BRL. In the
event that BRL receives any proceeds under the New Credit Facility, such BRL
Loans shall be evidenced by a promissory note executed by BRL in favor of the
Company in a form acceptable to the Lenders and shall be secured by liens on
all of the present and future assets of BRL. The BRL Note and such liens shall
be pledged to the Lenders. The Senior Notes are effectively subordinated to the
borrowings outstanding under the New Credit Facility. The New Credit Facility
matures in 2002.
 
Upon early extinguishment of the Company's previously outstanding credit
facility and bridge financing, the Company expensed in November 1997
approximately $1,600 of prepayment penalties and bridge financing costs and
$571 of deferred debt issuance costs. In connection with the financing
transactions described above, the Company has paid a fee of $4,375 to a related
party.
 
b. Long-Term Debt
 
Long-Term debt as of December 31, 1996 and 1997 consisted of the following:
 


                                                                1996     1997
                                                               ------- --------
                                                                 
   Senior Notes, unsecured, bearing interest at 10% with
    interest payable semi-annually beginning May 1998,
    maturing November 2007 (Note 7a).........................  $   --  $200,000
   Notes payable to former owners of Ikerd-Bandy (Note 3c),
    unsecured, discounted at 10% with monthly payments of $83
    through March 2004.......................................      --     4,647
   Payable to credit corporation, with monthly principal and
    interest payments of $264, bearing interest at 5.05%, due
    December 1998............................................    1,564    1,173
   Aggregate borrowings, (including $8,715 and $--,
    respectively, due to related parties) secured and
    unsecured, bearing interest from 5.57% to 12%, all
    retired in November 1997 with proceeds from $200,000
    Senior Notes maturing in 2007............................   39,513      --
   Other, unsecured, bearing interest from 9% to 10%, due
    through 2003.............................................      175      622
                                                               ------- --------
     Total...................................................   41,252  206,442
     Less Current Portion....................................    5,778    1,903
                                                               ------- --------
                                                               $35,474 $204,539
                                                               ======= ========

 
 
                                      F-18

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Principal maturities of long-term debt as of December 31, 1997 are as follows:
 


   Year Ended December 31,
   -----------------------
                                                                    
   1998............................................................... $  1,903
   1999...............................................................      722
   2000...............................................................      787
   2001...............................................................      858
   2002...............................................................      937
   Thereafter.........................................................  201,235
                                                                       --------
                                                                       $206,442
                                                                       ========

 
c. Revolving Line of Credit
 
During 1996 and through October 1997, the Company operated under a financing
agreement with a bank which included a revolving line of credit up to $15,000
based on eligible accounts receivable and coal inventory and a term note
maturing October 2003 and secured by substantially all of the Company's assets.
As of December 31, 1996, $8,584 was outstanding under this line of credit,
$3,584 of which was at the prime-driven rate (8.75%), and $5,000, of which was
at the LIBOR-driven rate (8.25%). As of December 31, 1996, $28,198 was
outstanding under the term note bearing interest of 8.801%. During October
1997, this line of credit and term note were retired with proceeds from a
bridge financing arrangement provided by NationsBank of Texas, N.A. (Note 7a).
 
d. Letters of Credit
 
As of December 31, 1997 the Company had letters of credit amounting to $384 to
cover certain self-insured insurance claims.
 
See Note 17c for 1998 debt financing transactions.
 
8. COMMITMENTS AND CONTINGENCIES
 
a. Coal Sales Contracts
 
As of December 31, 1997, the Company had commitments to deliver scheduled base
quantities of coal annually to seven customers. The contracts expire in 1998,
2002, 2003, 2004 and 2005, with the Company contracted to supply a minimum of
approximately 37.3 million tons of coal over the remaining lives of the
contracts at prices which are at or above market. Certain of the contracts have
sales price adjustment provisions, subject to certain limitations and
adjustments, based on changes in specified production costs. Larry Addington
has guaranteed the Company's obligations under one of the coal sales contracts.
 
b. Leases
 
Lease Cost
 
The Company has various operating and capital leases for mining, transportation
and other equipment. Lease expense for the years ended December 31, 1995, 1996
and 1997 was approximately $800, $6,000 and $9,600 (net of amount capitalized
in mine development cost of $1,800 in 1997), respectively. Property under
capital leases included in property, plant, and equipment in the accompanying
balance sheets at December 31, 1996 and 1997 was approximately $21,200, and
$21,400, respectively, less accumulated depreciation of approximately $2,780,
and $5,810, respectively. Depreciation of assets under capital leases is
included in depreciation expense.
 
                                      F-19

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
The Company also leases coal reserves under agreements that call for royalties
to be paid as the coal is mined. Total royalty expense for the years ended
December 31, 1995, 1996 and 1997 was approximately $1,900, $11,200, and
$13,600, respectively. Certain agreements require minimum annual royalties to
be paid regardless of the amount of coal mined during the year. However, such
agreements are generally cancelable at the Company's discretion. The assets of
the Bowie #2 mine are held as collateral for one of these agreements.
 
Approximate future minimum lease and royalty payments are as follows:
 


                                                               Operating Capital
   Year Ended December 31,                           Royalties  Leases   Leases
   -----------------------                           --------- --------- -------
                                                                
   1998.............................................  $5,409    $12,316  $6,438
   1999.............................................   3,480     10,663   3,005
   2000.............................................   3,155      9,670     397
   2001.............................................   2,372      8,012     397
   2002.............................................   2,421      3,090   1,632
   Thereafter.......................................  22,533      1,150     --
                                                                         ------
   Total minimum lease payments.....................                     11,869
   Less--amount representing interest...............                      1,342
                                                                         ------
   Present value of minimum lease payments..........                     10,527
   Less--current portion............................                      5,705
                                                                         ------
                                                                         $4,822
                                                                         ======

 
Lease Income
 
During 1996, the Company leased mining equipment to related and non-related
parties. Approximately $3,970 and $1,700, respectively, for 1996 from these
leases is included in revenues. The leases expired during 1996.
 
c. Legal Matters
 
The Company is named as defendant in various actions in the ordinary course of
its business. These actions generally involve disputes related to contract
performance, property boundaries, mining rights, blasting damages, personal
injuries and royalty payments, as well as other civil actions that could result
in additional litigation or other adversary proceedings.
 
On June 14, 1996, Robert C. Billips, d/b/a Peter Fork Mining Company, sued the
Company in the Circuit Court of Pike County, Kentucky, claiming the Company
breached a lease with Billips in Pike County, Kentucky, caused Billips to lose
business opportunities, and committed waste on Billips' property. The Company
has admitted that it entered into a lease with Billips, but denies that it
breached the lease, caused a loss of business opportunities, or committed
waste. Instead, the Company claims that it mined all minable and merchantable
coal (as defined in the lease) on the leased property, and, therefore, had no
further obligations under the lease. Legal discovery is underway and a trial
date has been set for September 1998. The Company intends to defend the claims
vigorously, and, at this time, it is not possible to predict the likely outcome
of the claims.
 
Through December 31, 1997, TMI is in arrears in delivering coal under a certain
coal supply contract with TVA. TMI intends to prospectively ship all tons for
which it is currently in arrears. TMI does not believe the ultimate outcome of
this matter will result in a material adverse impact upon the financial
position of the Company.
 
While the final resolution of any matter may have an impact on the Company's
financial results for a particular reporting period, management believes that
the ultimate disposition of these matters will not have a materially adverse
effect upon the financial position of the Company.
 
                                      F-20

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
d. Commissions
 
On January 30, 1997 (and amended on February 5, 1997), the Company entered into
a five year Sales and Agency Agreement, whereby the Company pays a 20c per ton
commission on two separate coal sales contracts. Additionally, the Company pays
a 25c per ton commission on a third coal sales contract. The costs are expensed
as the coal is delivered.
 
e. Contract Mining Agreements
 
In May 1997, the Company entered into a contract mining agreement with Martiki
Coal Corporation. The Company provides mining services to Martiki for $13.00
per ton, and continues for the lesser of three years or until all mineable coal
is removed. This contract has no minimum tonnage requirements and may be
terminated by either party.
 
Effective November 1997, the Company entered into an agreement with Mid-Vol
Leasing, Inc. (Note 17c) whereby the Company would surface mine all mineable
coal from certain properties owned by Mid-Vol Leasing. The Company is to
produce and deliver 50,000 to 60,000 tons a month (pending mining conditions
but at a minimum 120,000 tons over any three consecutive months) for a base
rate of $23.00 per ton. The Company is responsible for all costs of mining
including haulage to the loadout facility and reclamation of mined properties.
 
f. Environmental Matters
 
Based upon current knowledge, the Company believes that it is in material
compliance with environmental laws and regulations as currently promulgated
(also, see Note 2g). However, the exact nature of environmental control
problems, if any, which the Company may encounter in the future cannot be
predicted, primarily because of the increasing number, complexity and changing
character of environmental requirements that may be enacted by federal and
state authorities.
 
g. Performance Bonds
 
The Company has outstanding performance bonds of approximately $75,000 as of
December 31, 1997, to secure workers' compensation, reclamation and other
performance commitments.
 
h. Bonus
 
During 1997 the Company had an informal bonus arrangement in place for certain
of its employees whereby a cash bonus, determined in the sole discretion of the
Company, was to be paid near year-end. The Company has paid approximately
$2,000 in December 1997 and had accrued approximately $2,800 at December 31,
1997.
 
i. Employment Agreements
 
During 1997 and continuing through early 1998, the Company has entered into
employment agreements with individuals for various officer positions. These
agreements expire through February 2001 and contain termination benefits and
other matters.
 
                                      F-21

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
9. MAJOR CUSTOMERS
 
The Company had sales to the following major customers that in any period
exceeded 10% of revenues:
 


                                1995                      1996                           1997
                         ------------------- ------------------------------ ------------------------------
                                  Percentage          Percentage  Year End           Percentage  Year End
                                   of Total            of Total  Receivable           of Total  Receivable
                         Revenues  Revenues  Revenues  Revenues   Balance   Revenues  Revenues   Balance
                         -------- ---------- -------- ---------- ---------- -------- ---------- ----------
                                                                        
American Eagle..........  $4,156      13%    $27,019      22%      $2,350   $20,776      12%      $1,411
Cinergy.................      NA       NA     22,547      18%         593    23,464      13%       4,055
TVA.....................   3,648      12%     21,577      18%       6,603    60,457      34%       7,687
Coors...................   7,902      25%         NA       NA          NA        NA       NA          NA
Cyprus--Amax............   6,000      19%         NA       NA          NA        NA       NA          NA
Georgia Power...........      NA       NA         NA       NA          NA    19,593      11%       2,427

 
10. WORKERS' COMPENSATION AND BLACK LUNG
 
The operations of the Company are subject to the Federal Coal Mine Health and
Safety Act of 1969, as amended, and the related state workers' compensation
laws. These laws provide for the payment of benefits to disabled workers and
their dependents, including lifetime benefits for pneumoconiosis (black lung).
 
In connection with the acquisition described in Note 3a, the Company entered
into an insurance policy to cover workers compensation and black lung claims.
The Company is not obligated for pre-acquisition claims.
 
In connection with the acquisition described in Note 3b, the Company entered
into an insurance policy to cover any post-acquisition workers' compensation
and black lung claims. This policy, however, does not cover pre-existing claims
and claims incurred prior to November 2, 1995 and yet to be reported. The
estimated undiscounted obligations for these acquired self-insured claims are
included in accrued expenses and other (Note 6) and long term employee benefits
in the accompanying combined balance sheets.
 
11. INCOME TAXES
 
As discussed in Note 2h, during April 1997 BRL initially recorded a net
deferred tax liability of $1,600 in connection with its change in tax status.
In addition, during November 1997, the mining businesses transferred from AEI
initially recorded a net deferred tax liability of $17,963 in connection with
its change in tax status. Also as described in Note 2j, a portion of the mining
business assets transferred from AEI were stepped up for tax purposes, but not
book (similar to a taxable pooling). Therefore, the resulting deferred tax
benefit of approximately $5,500 was recorded with a corresponding increase in
equity. Presented below are income tax disclosures as of and for the year ended
December 31, 1997. Prior to 1997, the business operated as an S corporation,
and no corporate income taxes were recorded.
 
Income tax expense in 1997 is entirely deferred (no current payable) with
federal tax expense calculated as 34% and state tax expense calculated as 4%
(net of federal benefits and apportionment factors) of pretax loss during the C
corporation periods plus the effect of the change in tax status as discussed
above.
 
                                      F-22

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
The following table presents the difference between the actual tax provision
and the amounts obtained by applying the statutory U.S. federal income tax rate
of 34% to the 1997 loss before income taxes.
 


                                                                      Amount
                                                                      -------
                                                                   
   Federal provision computed at statutory rate...................... $(1,145)
   State income tax (net of federal tax benefits and apportionment
    factors) computed at statutory rate..............................    (135)
   Change in tax status..............................................  19,563
   Federal and state tax effect on S corporation period earnings.....    (679)
   Other.............................................................     (88)
                                                                      -------
                                                                      $17,516
                                                                      =======

 
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1997 are summarized as follows:
 
                                                                   
   Deferred Tax Assets:
     Net operating loss carryforwards................................... $9,353
     Accrued reclamation and other......................................  4,560
     Other..............................................................    681
                                                                         ------
       Total Deferred Tax Assets........................................ 14,594
                                                                         ------
   Deferred Tax Liabilities:
     Mine development costs............................................. 15,591
     Plant and equipment................................................  1,903
     Inventories........................................................  3,587
     Advanced royalties and other prepaids..............................  2,241
     Mineral reserves...................................................  1,752
     Other..............................................................    652
                                                                         ------
       Total Deferred Tax Liabilities................................... 25,726
                                                                         ------
       Net Deferred Tax Liability....................................... 11,132
       Less current liability...........................................  5,199
                                                                         ------
       Long-term liability.............................................. $5,933
                                                                         ======

   
 
BRL has carryforwards for net operating losses (NOL) of $14,689 and may only be
used by BRL, and if not used will expire in 2012. AEI HoldCo. has NOL
carryforwards of $8,692 which, if not used, will expire in 2017. NOL
carryforwards may also be limited under certain ownership changes.
 
Upon consummation in January 1998 of the MTI Agreement described in Note 1, the
technology business transferred from AEI (as an S corporation) required that a
deferred tax asset of $150 be recorded with a corresponding decrease in income
tax provision for the change in tax status. In addition, because the tax basis
of the MTI net assets transferred were stepped up for tax purposes, but not
book (similar to a taxable pooling), the resulting deferred tax benefit of
approximately $10,000 was recorded in January 1998 with a corresponding
increase in equity.
 
12. BOWIE RESOURCES, LTD.
 
In April 1997, BRL's shareholders (Larry Addington (90%) and Harold Sergent
(10%)) entered into an agreement to sell collectively 22.5% of their shares of
BRL common stock to Mitsui Matasushima (Mitsui).
 
                                      F-23

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
In connection with the Mitsui transaction, the Company entered into a
Shareholders Agreement with Mitsui which includes BRL stock transfer and lien
restrictions, right of first refusal on share trades and a reciprocal put
clause. The reciprocal put would be triggered in the event of a Board of
Directors impasse (as defined) and provides for conditions whereby the Company
may be required to purchase from Mitsui their BRL shares or sell to Mitsui the
Company's BRL shares based on the fair market value of the shares. The Mitsui
transaction also contained a Marketing Agreement between BRL and Mitsui whereby
Mitsui received the exclusive right to market BRL coal within Japan and market
up to 22.5% of excess available BRL production.
 
In November 1997, in connection with the Offering Memorandum described in Note
1, the Company purchased a 7.7% ownership interest in BRL from Harold Sergent
for $2,000, bringing the Company's total interest in BRL to 77.5%. See Note 1a.
 
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The book values of cash and cash equivalents, accounts receivables and accounts
payable are considered to be representative of their respective fair values
because of the immediate short-term maturity of these financial instruments.
The book value of the Company's debt instruments approximate fair value given
the refinancing in November, 1997.
 
14. RELATED PARTY TRANSACTIONS AND BALANCES
 
The Company has dealt with certain companies or individuals which are related
parties either by having stockholders in common or because they are controlled
by stockholders/officers of the Company or by relatives of
stockholders/officers of the Company. In addition to related party transactions
and balances described elsewhere, the following related party transactions and
balances are summarized and approximated as follows below:
 


                                                          1995   1996    1997
                                                         ------ ------- -------
                                                               
   Revenues, costs and expenses:
     Equipment Sales.................................... $  --  $ 7,010 $ 5,502
     Repair and Maintenance Income......................    --    2,954     781
     Property sales.....................................    --      --      145
     Equipment Rental Income............................     90   4,369     336
     Management Fee Income..............................     24     165     199
     Flight fee income..................................    443     442     590
     Cancellation fee income............................    --      --    1,592
     Trucking expense...................................  1,396  13,521  18,308
     Repair and maintenance expense.....................    --    4,916   4,791
     Equipment rental expense...........................    --    1,429   2,016
     Consultant fees....................................    --      180     135
     Interest expense...................................    --      427   1,382
     Commission expense.................................    185      91      31
     Administrative and miscellaneous expense...........     18      58     294
   Assets:
     Accounts receivable................................  2,804   4,814   7,951
   Liabilities:
     Accounts payable...................................    --    6,094   3,301
     Interest payable...................................    --      393     --
     Commission payable.................................     33      19     --

 
                                      F-24

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
The Company leases mining equipment and aircraft as well as constructs, repairs
and sells equipment to related parties. The Company employs related parties for
trucking, consulting, equipment rental and repair and other administrative
services. In addition, BRL has guaranteed certain contractual obligations of a
related party. Equipment sales (listed above) are primarily to a related party
in Australia (majority-owned by Larry Addington) that performs contract mining
using the Highwall Miner.
 
In 1997, the Company earned $1,592 in fees when a related party cancelled a
mining arrangement with the Company.
 
15. NEW ACCOUNTING STANDARDS
 
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of (SFAS No. 121). The new
standard requires that long-lived assets and certain identified intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing such
impairment reviews, companies are required to estimate the sum of future cash
flows from an asset and compare such amount to the asset's carrying amount. Any
excess of carrying amount over expected cash flows will result in a possible
write-down of an asset to its fair value. Adopting SFAS No. 121 had no impact
on the Company's financial position or results of operations.
 
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, (SFAS No. 130) became effective during 1998. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in financial statements. Comprehensive income generally represents
all changes in shareholders' equity except those resulting from investments by
or distributions to shareholders. Implementation of SFAS No. 130 has no impact
on the Company as the Company does not currently have any transactions which
give rise to differences between net income and comprehensive income.
 
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information, (SFAS No. 131) will be implemented in
the financial statements for the year ended December 31, 1998. SFAS No. 131
requires publicly-held companies to report financial and descriptive
information about operating segments in financial statements issued to
shareholders for interim and annual periods. SFAS No. 131 also requires
additional disclosures with respect to products and services, geographic areas
of operation and major customers. The adoption of this SFAS is not expected to
have a material impact on the financial statements of the Company.
 
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" was issued which improves and standardizes
disclosures by eliminating certain existing reporting requirements and adding
new disclosures. The statement addresses disclosure issues only and does not
change the measurement of recognition provisions specified in previous
statements. The statement supersedes SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits" and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." The
Company intends to adopt this statement for its 1998 fiscal year-end.
 
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133") was issued which establishes accounting and reporting
standards for derivative instruments and for hedging activities. This Statement
amends FASB Statement No. 52, Foreign Currency Translation, to permit special
accounting for a hedge of a foreign currency forecasted transaction with a
derivative. It supersedes FASB Statements No. 80, Accounting for Future
Contracts, No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, and No. 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments. It amends
 
                                      F-25

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
to include in Statement No. 107 the disclosure provisions about concentrations
of credit risk from FASB Statement No. 105. This Statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company is
evaluating the requirements of SFAS No. 133 and the effect, if any, on the
Company's current reporting and disclosures.
 
Effective January 1, 1999, the Company will adopt Statement of Position (SOP)
98-5 Reporting on the Costs of Start-Up Activities. The new statement requires
that the costs of start-up activities be expensed as incurred. The Company has
not yet evaluated the impact of this statement on its results of operations or
financial position.
 
16. DEFINED CONTRIBUTION PLAN
 
The Company has a qualifying 401(k) savings plan covering substantially all
employees. Under the plan, the Company is not required to make any
contributions and no contributions were made for the years ended December 31,
1995, 1996 or 1997.
 
17. EVENTS SUBSEQUENT TO DECEMBER 31, 1997
 
a. Purchase of Leslie Resources
 
In December 1997, AEI HoldCo. reached an agreement to acquire the stock of
Leslie Resources, Inc. and Leslie Resources Management, Inc., (collectively,
Leslie Resources) a coal mining business with operations in eastern Kentucky,
for the purchase price of $22,100 (including $10,800 in debt and $300 in
related fees and expenses). This agreement was consummated in January 1998 and
was accounted for as a purchase.
 
b. Stock Options
 
Subsequent to year-end, AEI HoldCo. increased authorized shares of AEI HoldCo.
to 104,000 and approved a stock option plan (the "Plan") whereby up to 75,000
common shares of AEI HoldCo. may be offered to various employees and advisors.
The rights and obligations of AEI HoldCo. under its stock option plan were
assumed by Resources upon its acquisition of all the outstanding capital stock
of AEI HoldCo. on June 26, 1998 (Note 1a), and were assumed by AEI Resources
Holding, Inc. ("ARHI") upon its acquisition of all the outstanding capital
stock of Resources on August 4, 1998. As of September 30, 1998, there were
options outstanding under the Plan for approximately 73,000 shares of capital
stock of ARHI. Approximately 41% of these options are fully exercisable within
120 days after the option grant date with the remaining 59% being exercisable
over the course of the next ten years unless vesting is accelerated pursuant to
the terms of the option. The option exercise price is based on fair value and
its exercise will contain various restrictions. The Company will account for
its stock options under APB 25 with disclosures pursuant to SFAS No. 123.
 
c. Debt Financing
 
The Company has funded the acquisitions of Cyprus Subsidiaries, Mid-Vol,
Kindill and Zeigler (see Note 1a) with short-term (bridge) financing arranged
by UBS AG, an affiliate of Warburg Dillon Read LLC. The financing facility for
the Cyprus Subsidiaries and Mid-Vol acquisitions was for $200,000 (of which
$160,000 was drawn as of June 30, 1998), maturing June 29, 1999, bearing
interest of LIBOR plus 4.0% and is secured by the net assets of the acquirees.
The bridge financing facility for the Zeigler acquisition closed on
September 2, 1998 and was for $600,000, consisting of a $100,000 senior
unsecured bridge loan to ARHI, bearing interest calculated as LIBOR (reset
monthly) plus 7.0% (increasing 0.50% each 90 days) not to exceed 18.0% per
annum and a $500,000 senior subordinated bridge loan to Resources, bearing
interest calculated as LIBOR (reset monthly) plus 4.75% (increasing 0.50% each
90 days) not to exceed 16.0% per annum, each maturing at the earlier of the
closing date of any permanent financing or within one year following the
closing of the bridge refinancing
 
                                      F-26

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
at which time the bridge loan will convert to a term loan. The financing
facility for the Zeigler acquisition is secured by the assets of Zeigler.
Additionally, on September 2, 1998 the Company closed a $400,000 term loan
(part of the Senior Credit Facility) with UBS AG. The proceeds from the Senior
Credit Facility were used in part to retire the Cyprus/Mid-Vol financing
bridge.
 
On December 14, 1998 Resources issued $150,000 of Senior Subordinated Notes,
due 2006 bearing interest at 11.5% payable semi-annually in arrears. Warburg
Dillon Reed LLC was the initial purchaser of the senior subordinated notes.
Additionally, on December 14, 1998 the Company restructured, and increased
borrowing under the Senior Credit Facility by $175,000. Proceeds from the
Senior Subordinated Notes ($150,000) and the Senior Credit Facility ($175,000)
were used to pay fees and partially retire the $600,000 bridge financing
facility for the Zeigler acquisition.
 
Also on December 14, 1998 the Company sold all issued and outstanding stock of
its subsidiary, Triton Coal Company for $275,000 (the Triton Disposition).
Prior to the closing of the Triton Disposition, all assets and liabilities of
Triton which were not related to the North Rochelle Mine or the Buckskin Mine
were transferred to another subsidiary of the Company. As a result, the Company
retained Triton's assets and liabilities relating to its lignite reserves in
Texas and Arkansas. The Company has agreed to provide certain transition
services to the purchaser of Triton following the closing. Net proceeds from
the Triton Disposition were used to partially retire the remaining amount due
on the bridge financing facility for the Zeigler acquisition.
 
The Senior Credit Facility term loan and revolver (collectively the "Credit
Facility") are with UBS AG (an affiliate of Warburg Dillon Read LLC), as
administrative agent and other lending institutions (lenders). The credit
facility consists of a Term Loan A Facility of $325,000 (5 years at LIBOR +
3%), a Term Loan B Facility of $250,000 (6 years at LIBOR + 3.5%) (the "term
loan facilities") and a $300,000 senior secured revolving credit facility with
interest at LIBOR + 3%, payable over 5 years. The Credit Facility is
collateralized primarily by capital stock of the Company and its subsidiaries,
including the capital stock of the acquired entities comprising the Acquired
Business, as defined, along with all accounts receivable, inventory and other
personal and real property of the Company. The Credit Facility also contains
various financial covenants which, among other things, limits additional
indebtedness, dividend and other payments and affiliate transactions as well as
meeting certain financial ratios (including, but not limited to interest
coverage, minimum net worth, maximum capital expenditures and maximum debt to
EBITDA, as defined). In addition, the credit facilities are required to be
prepaid with either 75% of annual Excess Cash Flow, as defined, proceeds from
the incurrence of additional debt, proceeds from asset sales or dispositions
above certain defined thresholds or 50% of the net proceeds from the issuance
of equity securities.
 
In addition, as part of the financing reorganization on December 14, 1998, the
10% Senior Notes of AEI HoldCo. due November 2007 (Note 7a) were exchanged for
10.5% Senior Notes due November 2005 of Resources and AEI HoldCo. as co-
issuers. Additionally, the old indenture was modified to eliminate
substantially all of the covenants and certain related definitions and events
of default.
 
On November 6, 1998 Resources borrowed $43,500 under the senior secured
revolving credit facility which was used to fund the Martiki acquisition
($32,000) and for working capital needs ($11,500).
 
                                      F-27

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
As of September 30, 1998, long-term debt (excluding capital leases) consisted
of the following:
 


                                                          Actual     Pro forma
                                                        ----------  -----------
                                                                    (Unaudited)
                                                              
Zeigler acquisition bridge facility.................... $  600,000  $      --
Senior Subordinated Notes due 2006.....................        --      150,000
Senior Credit Facility:
 Term Loan A...........................................    150,000     325,000
 Term Loan B...........................................    250,000     250,000
 Revolving Credit Facility.............................        --       43,500
10%/10.5% Senior Notes (Note 7a).......................    200,000     200,000
Zeigler Industrial Revenue Bonds--Peninsula Ports
 Authority of Virginia ($115,000) due 2022 and
 Charleston County, South Carolina ($30,800) due 2028..    145,800     145,800
AEI HoldCo. Credit Facility (Note 7a)..................     19,600         --
Aggregate Notes payable to sellers of Cyprus
 Subsidiaries ($25,641), Mid-Vol ($15,000), Leslie
 Resources ($9,094) & Ikerd-Bandy ($4,715) ............     54,450      54,450
Other..................................................      1,000       1,000
                                                        ----------  ----------
  Total................................................  1,420,850   1,169,750
  Less--current portion................................   (329,058)    (24,458)
                                                        ----------  ----------
  Long-term debt....................................... $1,091,792  $1,145,292
                                                        ==========  ==========

 
The Pro forma entries reflect the December 14, 1998 transactions to paydown the
bridge facility via issuance of the Senior Subordinated Notes, increase in the
Term A Senior Credit Facility, and proceeds from the Triton disposition.
Additionally, the pro formas reflect borrowing under the Revolving Credit
Facility which was primarily used to fund the Martiki acquisition (see Note 1a)
and the paydown of the AEI HoldCo. Credit Facility.
 
                                      F-28

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
18. SEGMENT DATA
 
The Company operates in three principal industry segments--coal mining,
equipment sales, rental and repair and other. Included in the segment "other"
is the Company's railcar earnings, royalty fee and management fee income.
Operating earnings for each segment includes all costs and expenses directly
related to the segment before financing charges and corporate allocations.
Corporate items principally represent general and administrative costs.
Identifiable assets are those used in the operations of each business segment.
Corporate assets consist primarily of cash and unamortized financing costs.
Information about the Company's operations for each segment is as follows:
 
Financial Data by Business Segment
 


                                                             September 30,
                                                           ------------------
                               1995      1996      1997      1997      1998
                              -------  --------  --------  --------  --------
                                                              (Unaudited)
                                                      
Revenues:
  Coal mining................ $24,068  $104,804  $163,980  $114,270  $367,438
  Equipment sales, rental and
   repair....................   6,376    16,033     8,086     6,358     2,145
  Other......................   1,250     2,363     3,188     3,453     6,581
                              -------  --------  --------  --------  --------
                               31,694   123,200   175,254   124,081   376,164
                              -------  --------  --------  --------  --------
Income (loss) before income
 taxes and
 extraordinary item:
  Coal mining................     475     9,193    15,761    12,320    29,780
  Equipment sales, rental and
   repair....................   3,176     6,670       794     2,198     1,273
  Other......................     308     4,057      (370)    1,974     1,542
                              -------  --------  --------  --------  --------
    Operating earnings.......   3,959    19,920    16,185    16,492    32,595
  Corporate expenses.........  (1,514)  (10,273)  (10,090)  (10,533)  (11,395)
  Interest expenses..........  (1,043)   (5,527)   (9,192)   (5,265)  (29,845)
  Unallocated................     405       884      (272)      --        --
                              -------  --------  --------  --------  --------
                                1,807     5,004    (3,369)      694    (8,645)
                              -------  --------  --------  --------  --------
Identifiable assets:
  Coal mining................            90,070   147,216
  Equipment sales, rental and
   repair....................             6,228    14,031
  Other......................               438       611
  Corporate assets...........            10,194   103,535
                                       --------  --------
                                        106,930   265,393
                                       --------  --------
Capital expenditures:
  Coal mining................   3,277    11,103    28,969
  Equipment sales, rental and
   repair....................   3,200     2,642     3,196
  Other......................     --        347        49
                              -------  --------  --------
                                6,477    14,092    32,214
                              -------  --------  --------
Depreciation, depletion and
 amortization:
  Coal mining................   1,006     6,217     9,858
  Equipment sales, rental and
   repair....................     395       578       640
  Other......................     --        150       257
                              -------  --------  --------
                                1,401     6,945    10,755
                              -------  --------  --------

 
                                      F-29

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
19. SUBSIDIARY GUARANTEES
 
The following tables summarize the financial position, operating results and
cash flows for the Company and Predecessor regarding its guarantor and non-
guarantor subsidiaries for the AEI HoldCo. 10% Senior Notes (Note 7) as of
December 31, 1996 and 1997 and September 30, 1998 and for the three years in
the period ended December 31, 1997 and nine months ended September 30, 1997 and
1998. Each of the Guarantor subsidiaries is a wholly-owned subsidiary of AEI
HoldCo. and each has fully and unconditionally guaranteed the Senior Notes
(Note 7) on a joint and several basis. Separate financial statements and other
disclosures concerning the Guarantor subsidiaries are not presented because the
Company has determined that they are not material to investors. BRL is the only
non-guarantor subsidiary. AEI Holding Company, Inc. was organized in September
1997 and commenced operations on November 12, 1997. AEI Resources, Inc. was
organized in June 1998.
 


                                           AEI Holding Company, Inc.
                                     -------------------------------------
                             AEI
                          Resources,      AEI                      Non-
                          Inc. (Non-    Holding     Guarantor   Guarantor   Combining
                          Guarantor) Company, Inc. Subsidiaries Subsidiary Adjustments  Total
                          ---------- ------------- ------------ ---------- ----------- --------
                                                                     
December 31, 1995:
Operating Results
 (1995):
Revenues................     $--         $--         $14,516     $17,178     $   --    $ 31,694
Costs and expenses......      --          --          12,670      16,305         --      28,975
                             ----        ----        -------     -------     -------   --------
 Income from
  operations............      --          --           1,846         873         --       2,719
Interest and other
 income (expense).......      --          --            (626)       (286)        --        (912)
                             ----        ----        -------     -------     -------   --------
Income before minority
 interest...............      --          --           1,220         587         --       1,807
Less--Minority
 interest...............      --          --             --          --           59         59
                             ----        ----        -------     -------     -------   --------
Net income (loss).......     $--         $--         $ 1,220     $   587     $   (59)  $  1,748
                             ====        ====        =======     =======     =======   ========
Cash Flows (1995):
Cash flows from
 operating activities:
Net income (loss).......     $--         $--         $ 1,220     $   587     $   (59)  $  1,748
Total adjustments to
 reconcile net income
 (loss) to net cash
 provided by (used in)
 operating activities...      --          --          (2,193)      1,047          59     (1,087)
                             ----        ----        -------     -------     -------   --------
Net cash provided by
 (used in) operating
 activities.............      --          --            (973)      1,634         --         661
Net cash used in
 investing activities...      --          --          (3,126)     (2,951)        --      (6,077)
Net cash provided by
 financing activities...      --          --           4,510       1,740         --       6,250
                             ----        ----        -------     -------     -------   --------
Net increase in cash and
 cash equivalents.......      --          --             411         423         --         834
Cash and cash
 equivalents, beginning
 of year................      --          --             --          --          --         --
                             ----        ----        -------     -------     -------   --------
Cash and cash
 equivalents, end of
 year...................     $--         $--         $   411     $   423     $   --    $    834
                             ====        ====        =======     =======     =======   ========
December 31, 1996:
Balance Sheet:
Total current assets....     $--         $--         $35,707     $ 3,106     $  (175)  $ 38,638
Properties, net.........      --          --          50,387       8,488       7,495     66,370
Other assets............      --          --           1,614       7,803      (7,495)     1,922
                             ----        ----        -------     -------     -------   --------
 Total assets...........     $--         $--         $87,708     $19,397     $  (175)  $106,930
                             ====        ====        =======     =======     =======   ========
Total current
 liabilities including
 current portion of
 long-term debt and
 capital leases.........     $--         $--         $45,244     $ 5,120     $  (175)  $ 50,189
Long-Term debt and
 capital leases, less
 current Portion........      --          --          30,916      12,930         --      43,846
Other liabilities.......      --          --           8,330       4,240         --      12,570
                             ----        ----        -------     -------     -------   --------
 Total liabilities......      --          --          84,490      22,290        (175)   106,605
                             ----        ----        -------     -------     -------   --------
Total stockholders'
 equity (deficit).......      --          --           3,218      (2,893)        --         325
                             ----        ----        -------     -------     -------   --------
Total liabilities and
 shareholders' equity
 (deficit)..............     $--         $--         $87,708     $19,397     $  (175)  $106,930
                             ====        ====        =======     =======     =======   ========

 
 
                                      F-30

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 


                                          AEI Holding Company, Inc.
                                    -------------------------------------
                             AEI
                          Resources
                            (Non-        AEI                      Non-
                          Guarantor    Holding     Guarantor   Guarantor   Combining
                          Entities) Company, Inc. Subsidiaries Subsidiary Adjustments  Total
                          --------- ------------- ------------ ---------- ----------- --------
                                                                    
Operating Results
 (1996):
Revenues................    $--       $    --       $109,165    $15,357    $ (1,322)  $123,200
Costs and expenses......     --            --         96,981     17,412      (1,322)   113,071
                            ----      --------      --------    -------    --------   --------
 Income (loss) from
  operations............     --            --         12,184     (2,055)        --      10,129
Interest and other
 income (expense).......     --            --         (4,500)      (625)        --      (5,125)
                            ----      --------      --------    -------    --------   --------
 Income (loss) before
  minority interest.....     --            --          7,684     (2,680)        --       5,004
Less-Minority interest..     --            --            --         --          (59)       (59)
                            ----      --------      --------    -------    --------   --------
 Net income (loss)......    $--       $    --       $  7,684    $(2,680)   $     59   $  5,063
                            ====      ========      ========    =======    ========   ========
Cash Flows (1996):
Cash flows from
 operating activities:
Net income (loss).......    $--       $    --       $  7,684    $(2,680)   $     59   $  5,063
Total adjustments to
 reconcile net income
 (loss) to net cash used
 in operating
 activities.............     --            --             84       (314)        (59)      (289)
                            ----      --------      --------    -------    --------   --------
Net cash provided by
 (used in) operating
 activities.............     --            --          7,768     (2,994)        --       4,774
Net cash used in
 investing activities...     --            --        (10,577)    (1,926)        --     (12,503)
Net cash provided by
 financing activities...     --            --          2,801      4,547         --       7,348
                            ----      --------      --------    -------    --------   --------
Net decrease in cash and
 cash equivalents.......     --            --             (8)      (373)        --        (381)
Cash and cash
 equivalents, beginning
 of year................     --            --            411        423         --         834
                            ----      --------      --------    -------    --------   --------
Cash and cash
 equivalents, end of
 year...................    $--       $    --       $    403    $    50    $    --    $    453
                            ====      ========      ========    =======    ========   ========
December 31, 1997:
Balance Sheet:
Total current assets....    $--       $ 93,022      $ 55,900    $ 4,063    $ (9,809)  $143,176
Properties, net.........     --          2,464        75,682     28,512         --     106,658
Other assets............     --         71,290         7,115      5,952     (68,798)    15,559
                            ----      --------      --------    -------    --------   --------
 Total assets...........    $--       $166,776      $138,697    $38,527    $(78,607)  $265,393
                            ====      ========      ========    =======    ========   ========
Total current
 liabilities including
 current portion of
 long-term debt and
 capital leases.........    $--       $ 13,525      $ 47,980    $ 6,423    $ (9,809)  $ 58,119
Long-Term debt and
 capital leases, less
 current Portion........     --        202,314         7,047     27,170     (27,170)   209,361
Other liabilities.......     --            604        22,770     10,530     (17,917)    15,987
                            ----      --------      --------    -------    --------   --------
 Total liabilities......     --        216,443        77,797     44,123     (54,896)   283,467
                            ----      --------      --------    -------    --------   --------
Total Stockholders'
 equity (deficit).......     --        (49,667)       60,900     (5,596)    (23,711)   (18,074)
                            ----      --------      --------    -------    --------   --------
Total liabilities and
 owners' equity
 (deficit)..............    $--       $166,776      $138,697    $38,527    $(78,607)  $265,393
                            ====      ========      ========    =======    ========   ========
Operating Results
 (1997):
Revenues................    $--       $     83      $158,160    $17,563    $   (552)  $175,254
Costs and expenses......     --          4,314       147,389     18,677        (552)   169,828
                            ----      --------      --------    -------    --------   --------
 Income (loss) from
  operations............     --         (4,231)       10,771     (1,114)        --       5,426
Interest and other
 income (expense).......     --           (582)       (7,291)      (922)        --      (8,795)
                            ----      --------      --------    -------    --------   --------
 Income (loss) before
  income taxes and
  extraordinary item....     --         (4,813)        3,480     (2,036)        --      (3,369)
Income tax provision
 (benefit)..............     --           (799)       17,845        470         --      17,516
                            ----      --------      --------    -------    --------   --------
 Income (loss) before
  extraordinary item....     --         (4,014)      (14,365)    (2,506)        --     (20,885)
Extraordinary loss from
 extinguishment of debt
 (net of tax benefit)...     --         (1,040)          --        (263)        --      (1,303)
                            ----      --------      --------    -------    --------   --------
 Net income (loss)......    $--       $ (5,054)     $(14,365)   $(2,769)   $    --    $(22,188)
                            ====      ========      ========    =======    ========   ========

 
 
                                      F-31

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


                             AEI            AEI Holding Company, Inc.
                          Resources   -------------------------------------
                            (Non-          AEI                      Non-
                          Guarantor      Holding     Guarantor   Guarantor   Combining
                          Entities)   Company, Inc. Subsidiaries Subsidiary Adjustments   Total
                          ----------  ------------- ------------ ---------- ----------- ----------
                                                                      
Cash Flows (1997):
Cash flows from
 operating activities:
Net income (loss).......  $      --     $ (5,054)     $(14,365)   $(2,769)   $     --   $  (22,188)
Total adjustments to
 reconcile net income
 (loss) to net cash
 provided by (used in)
 operating activities...         --       (1,004)       12,411        601          --       12,008
                          ----------    --------      --------    -------    ---------  ----------
Net cash used in
 operating activities...         --       (6,058)       (1,954)    (2,168)         --      (10,180)
Net cash used in
 investing activities...         --         (223)      (22,039)   (16,028)         --      (38,290)
Net cash provided by
 financing activities...         --       87,577        25,449     18,607          --      131,633
                          ----------    --------      --------    -------    ---------  ----------
Net increase (decrease)
 in cash and cash
 equivalents............         --       81,296         1,456        411          --       83,163
Cash and cash
 equivalents, beginning
 of period..............         --          --            403         50          --          453
                          ----------    --------      --------    -------    ---------  ----------
Cash and cash
 equivalents, end of
 period.................  $      --     $ 81,296      $  1,859    $   461    $     --   $   83,616
                          ==========    ========      ========    =======    =========  ==========
September 30, 1998
 (unaudited):
Balance Sheet:
Total current assets....  $  584,239    $ 26,194      $ 86,761    $ 6,215    $ (22,169) $  681,240
Properties, net.........   1,913,480         852       116,380     36,378          --    2,067,090
Other assets............      24,081     146,979        10,834      6,076      (93,083)     94,887
                          ----------    --------      --------    -------    ---------  ----------
 Total assets...........  $2,521,800    $174,025      $213,975    $48,669    $(115,252) $2,843,217
                          ==========    ========      ========    =======    =========  ==========
Total current
 liabilities, including
 current portion of
 long-term debt and
 capital leases.........  $  631,297    $ 29,529      $ 71,276    $ 7,305    $ (22,169) $  717,238
Long-term debt and
 capital leases, less
 current portion........     883,399     200,000         8,681     40,102      (40,102)  1,092,080
Other liabilities.......   1,076,927          85        33,599     10,722      (17,611)  1,103,722
                          ----------    --------      --------    -------    ---------  ----------
 Total liabilities......   2,591,623     229,614       113,556     58,129      (79,882)  2,913,040
Total shareholders'
 equity (deficit).......     (69,823)    (55,589)      100,419     (9,460)     (35,370)    (69,823)
                          ----------    --------      --------    -------    ---------  ----------
Total liabilities and
 shareholders' equity
 (deficit)..............  $2,521,800    $174,025      $213,975    $48,669    $(115,252) $2,843,217
                          ==========    ========      ========    =======    =========  ==========
Operating Results
 (September 30, 1998)
 (unaudited):
Revenues................  $  157,285    $    478      $205,252    $20,093    $  (6,944) $  376,164
Costs and expenses......     143,542      10,141       187,028     23,716       (6,944)    357,483
                          ----------    --------      --------    -------    ---------  ----------
 Income (loss) from
  operations............      13,743      (9,663)       18,224     (3,623)         --       18,681
Interest and other
 income (expense).......     (12,527)    (12,916)       (1,641)      (242)         --      (27,326)
                          ----------    --------      --------    -------    ---------  ----------
 Income (loss) before
  income taxes..........       1,216     (22,579)       16,583     (3,865)         --       (8,645)
Income tax provision
 (benefit)..............        (749)       (186)          --         --           --         (935)
                          ----------    --------      --------    -------    ---------  ----------
 Income(loss) before
  extraordinary item....       1,965     (22,393)       16,583     (3,865)         --       (7,710)
Extraordinary loss from
 debt restructure.......      (2,422)       (617)          --         --           --       (3,039)
                          ----------    --------      --------    -------    ---------  ----------
 Net Income (loss)......  $     (457)   $(23,010)     $ 16,583    $(3,865)   $     --   $  (10,749)
                          ==========    ========      ========    =======    =========  ==========
Cash Flows (September
 30, 1998) (unaudited):
Cash Flows from
 Operating Activities:
Net income (loss).......  $     (457)   $(23,010)     $ 16,583    $(3,865)   $     --   $  (10,749)
Total adjustments to
 reconcile net income
 (loss) to net cash
 provided by (used in)
 operating activities...      (9,578)     (4,116)       (7,290)     1,659          --      (19,325)
                          ----------    --------      --------    -------    ---------  ----------
Net cash provided by
 (used in) operating
 activities.............     (10,035)    (27,126)        9,293     (2,206)         --      (30,074)
Net cash used in
 investing activities...    (874,238)    (64,766)       43,054    (11,064)         --     (907,014)
Net cash provided by
 financing activities...     928,784      19,274       (52,627)    12,932          --      908,363
                          ----------    --------      --------    -------    ---------  ----------
 Net increase (decrease)
  in cash and cash
  equivalents...........      44,511     (72,618)         (280)      (338)         --      (28,725)
Cash and Cash
 Equivalents, beginning
 of period..............         --       81,296         1,859        461          --       83,616
                          ----------    --------      --------    -------    ---------  ----------
Cash and Cash
 Equivalents, end of
 period.................  $   44,511    $  8,678      $  1,579    $   123    $     --   $   54,891
                          ==========    ========      ========    =======    =========  ==========

 
 
                                      F-32

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 


                                        AEI Holding Company, Inc.
                                   -----------------------------------
                            AEI
                         Resources
                           (Non-   AEI Holding                 Non-
                         Guarantor  Company,    Guarantor   Guarantor   Combining
                         Entities)    Inc.     Subsidiaries Subsidiary Adjustments  Total
                         --------- ----------- ------------ ---------- ----------- --------
                                                                 
September 30, 1997
 (unaudited):
Operating Results:
Revenues................   $--        $--        $110,710    $13,376      $ (5)    $124,081
Costs and expenses......    --         --         103,570     13,971        (5)     117,536
                           ----       ----       --------    -------      ----     --------
 Income (loss) from
  operations............    --         --           7,140       (595)      --         6,545
Interest and other
 income (expenses) .....    --         --          (5,250)      (601)      --        (5,851)
                           ----       ----       --------    -------      ----     --------
 Income (loss) before
  income taxes..........    --         --           1,890     (1,196)      --           694
 Income tax provision...    --         --             --       1,398       --         1,398
                           ----       ----       --------    -------      ----     --------
 Net income (loss)......   $--        $--        $  1,890    $(2,594)     $--      $   (704)
                           ====       ====       ========    =======      ====     ========
Cash Flows (September
 30, 1997) (unaudited):
Cash Flows from
 Operating Activities:
Net income (loss).......   $--        $--        $  1,890    $(2,594)     $--      $   (704)
Total adjustments to
 reconcile net income
 (loss) to net cash
 provided by (used in)
 operating activities...    --         --          (8,981)     1,677       --        (7,304)
                           ----       ----       --------    -------      ----     --------
Net cash provided by
 (used in) operating
 activities.............    --         --          (7,091)      (917)      --        (8,008)
Net cash used in
 investing activities...    --         --         (11,685)    (6,511)      --       (18,196)
Net cash provided by
 financing activities...    --         --          18,768      8,099       --        26,867
                           ----       ----       --------    -------      ----     --------
Net increase (decrease)
 in cash and cash
 equivalents............    --         --              (8)       671       --           663
Cash and Cash
 Equivalents, beginning
 of period..............    --         --             403         50       --           453
                           ----       ----       --------    -------      ----     --------
Cash and Cash
 Equivalents, end of
 period.................   $--        $--        $    395    $   721      $--      $  1,116
                           ====       ====       ========    =======      ====     ========

 
20. UNAUDITED PRO FORMA INFORMATION
 
A pro forma adjustment has been made to historical net income (loss) to reflect
a provision for federal, state and local income taxes during the respective S
corporation periods (see Note 2h) using a combined effective rate of 38%.
 
21. INTERIM EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
 
a. Acquisition Pro forma Data
 
As described in Notes 1 & 17, the Company closed the following significant
acquisitions during 1998: Leslie Resources--January 1998, Cyprus Subsidiaries--
June 1998, Mid-Vol--July 1998, Kindill--September 1998, Zeigler--September 1998
and Martiki--November 1998. In addition, as discussed in Note 3, the Company
acquired Ikerd-Bandy in October 1997.
 
The following unaudited pro forma information for the nine months ended
September 30, 1998 and the year ended December 31, 1997, shown below, gives
effect to the acquisitions of Ikerd-Bandy, Leslie Resources, Cyprus
Subsidiaries, Mid-Vol, Kindill, Zeigler and Martiki as if they had occurred on
January 1, 1997. The operations of such acquirees have been included within the
Company from their respective acquisition dates through September 30, 1998.
 
                                      F-33

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 


                                          December 31, 1997 September 30, 1998
                                          ----------------- ------------------
                                                      (unaudited)
                                                      
   Revenues..............................    1,395,200          1,031,700
   Income (loss) before extraordinary
    items................................      (92,600)           (17,400)
   Net Loss..............................      (93,900)           (20,400)

 
The unaudited pro forma information assumes that The Company owned the
outstanding shares of Ikerd-Bandy, Leslie Resources, Cyprus Subsidiaries, Mid-
Vol, Kindill, Zeigler and Martiki at the beginning of 1997 and includes
adjustments for depreciation, depletion and amortization, interest expense and
adjustments to conform to the Company's accounting policies. The unaudited pro
forma financial data is presented for information purposes only and is not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisitions been consummated on January 1, 1997, and is
not intended to be a projection of future results.
 
The purchase accounting entries recorded from the aforementioned acquisitions
are preliminary and are expected to be finalized in 1998 for Ikerd-Bandy and
Leslie Resources and 1999 for Cyprus Subsidiaries, Mid-Vol, Kindill, Zeigler
and Martiki.
 
b. Addcar(TM) Highwall Mining System Lease Agreement
 
Effective May 1998, AEI HoldCo. entered into an agreement with Independence
Coal Company, Inc. (Independence) whereby AEI HoldCo. (as lessor) shall lease
an Addcar(TM) Highwall Mining System to Independence (as lessee) for a term of
24 months from initial set up or until all mineable coal from the lessee's
Twilight mine is recovered, for $220 per month subject to various terms and
conditions.
 
Additionally, effective September, 1998 AEI HoldCo. leased to Independence a
second Addcar(TM) Highwall Mining System and agreed to lease a third System in
January, 1999. Each lease is for 2 years and requires a $4,125 prepaid rental
payment upon delivery, and at the lessee's option each may be extended for a
third year with a rental prepayment of $1,547. Additionally, a monthly rental
payment of $37 for each system is payable by the lessee. Payment terms are
subject to various terms and conditions.
 
c. Debt Extinguishments
 
On June 29, 1998, the Company replaced its New Credit Facility (Note 7a),
receiving relief for all prior covenant violations. The current Credit Facility
has various covenants, including an interest coverage ratio, which has an
initial measurement date of September 30, 1998. As of September 30, 1998, the
Company is in compliance with the new covenants. Upon this change in debt
structure, the Company expensed as an extraordinary item in June 1998
approximately $617 of deferred debt issuance costs.
 
On September 2, 1998, in connection with the borrowing under the Senior Credit
Facility Term Loan (Note 17c), the Cyrus/Mid-Vol financing bridge was retired.
The Company expensed as an extraordinary item in September 1998 approximately
$3,724 of deferred debt issuance costs related to this bridge financing.
 
d. Litigation Settlement
 
In August, 1998 the Company settled with Robert C. Billips, d/b/a Peter Fork
Mining Company (Note 8c) for an initial cash payment of $150 and payments over
the next 49 years estimated at a present value of $250. The Company has
sufficient contingency accruals to cover the settlement.
 
e. Acquiree Litigation
 
In connection with the acquisition of the Cyprus Subsidiaries (Note 1) the
Company became potentially liable under a suit filed in the Circuit Court of
Perry County, Kentucky in 1996 by Joseph D. Weddington and Kentucky Land &
Exploration Company ("Kentucky Land"). Kentucky Land has asserted claims to
approximately 1,425 acres of property upon which the Company mines coal. Based
on a prior federal appellate
 
                                      F-34

 
                  AEI RESOURCES HOLDING, INC. AND PREDECESSOR
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
court decision, the Company believes that it is likely to prevail. The Company
does not believe the ultimate outcome of this matter will result in a material
adverse effect on the financial position of the Company and its Subsidiaries,
taken as a whole.
 
In October, 1998 Cyprus Amax Coal Company filed a complaint against the Company
alleging that under the terms of the purchase agreement, the Company is
responsible for certain long-term disability coverage to current and former
employees of the acquired Cyprus Subsidiaries. The Company contends that the
obligations in question were retained by the seller and intends to defend the
claims vigorously. At this time, it is not possible to determine the likely
outcome of the claim, but the Company does not believe the ultimate outcome of
this matter will result in a material effect on the financial position of the
Company and its Subsidiaries taken as a whole.
 
The acquirees have been named as defendant in various actions in the ordinary
course of business. These actions generally involve disputes relating to
contract performance, mining activities and related matters as well as other
civil actions. While the final resolution of any matter may have an impact on
the Company's financial results for a particular reporting period, management
believes that the ultimate disposition of these matters will not have a
materially adverse effect upon the financial position of the Company.
 
f. Sales Commitment and Contingency
 
Under a ten-year contract dated July 1, 1998, the Company is required to sell
coal from its Bowie #2 mine to TVA. The Company cannot satisfy the delivery
requirements in full if it is unable to lease certain reserves located on
federal land in Colorado. The failure to do so could materially adversely
impact the profitability of the Bowie #2 mine.
 
g. Net Assets Held for Sale
 
At the time of the Zeigler acquisition, the Company identified various items
which it would resell including the Wyoming coal mines and non coal mining
activities. Net assets held for sale in the accompanying financial statements
includes net assets related to the Triton Disposition (see Note 17c), the Pier
IX Terminal in Newport News, Virginia, the Shipyard River Terminal in
Charleston, South Carolina, and items related to power marketing and fuel
technology.
 
On December 18, 1998, the Company sold the Pier IX and Shipyard River Terminals
and related assets (the "Pier Disposition") for an aggregate purchase price of
$35,000.
 
Through an energy trading subsidiary, Zeigler began entering into power and gas
forward contracts and options for trading purposes in 1997. These forward
contracts and options were recorded at their estimated fair market values by
the Company at the date of purchase. At September 30, 1998, open net contract
and option positions were not material and did not represent significant credit
related exposure.
 
h. Employee Benefits Management, Inc.
 
Employee Benefits Management, Inc. (EBMI), a renamed Subsidiary of the Company,
was recapitalized on December 8, 1998 in the State of Delaware whereby it
authorized 1,000 shares of Class A stock and 176 shares of Class B stock. The
Class A stock was issued on December 8, 1998 to AEI (1 share) and to Fairview
Land Company (999 shares) (a wholly owned subsidiary of the Company). Fairview
also contributed $1,700 cash to EBMI.
 
The Class B shares were issued on December 18, 1998 to seven subsidiaries of
the Company. In exchange for the Class B shares, the seven subsidiaries
contributed an aggregate of $357,384 in intercompany subordinated debt
securities to EBMI. Such debt securities are payable in full in December 2008
by Bluegrass Coal Development (another wholly owned subsidiary) with interest
payable quarterly at 7.25%. Additionally, the seven subsidiaries contributed
$357,084 in vested post retirement benefit obligations (SFAS 106 obligations)
to EBMI.
 
                                      F-35

 
On December 29, 1998 the seven subsidiaries holding Class B shares of EBMI
aggregately sold their shares to Employers Risk Services, Inc. (ERSI) (an
unrelated party) for $300. ERSI will assist in managing the SFAS 106
obligations of EBMI.
 
All voting rights of EBMI are vested solely in the holders of the Class A
Common Stock, except that the holders of the Class B Common Stock shall be
entitled as a class to elect one of the six directors of EBMI.
 
The Class B Shares can be put to EBMI after July 1, 2007 for the lesser of 15%
of EBMI's net worth or $7,000. EBMI has the right to call the Class B Shares
after January 1, 2008 for the lesser of 15.75% of EBMI's net worth or $7,350.
 
i. R & F Coal Company Disposition
 
On December 21, 1998, R & F Coal Company (R & F), a subsidiary of the Company,
sold coal mining assets including inventories , property, equipment and a coal
supply contract for approximately $7,600.
 
j. Energy Resources, LLC
 
In January 1999, the Company acquired 95% of Energy Resources, LLC from the
Harold Sergent family for $3.0 million. The acquisition was accounted for as a
purchase.
 
                                      F-36

 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Owners of
Addington Coal Operations (the Predecessor Business):
 
We have audited the accompanying combined statements of operating revenues and
expenses, parent investment and cash flows of Addington Coal Operations (the
Predecessor Business, as described in Note 1) for the ten-month period ended
November 1, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis
for our opinion.
 
The accompanying combined statements of the predecessor business have been
prepared to reflect the coal mining & technology operations of the businesses
acquired by Addington Enterprises, Inc., which is the Predecessor Business of
AEI Holding Company, Inc. following the consummation of the shareholder
exchange agreement and asset purchase agreement (as described in Note 1) and
are not intended to be a complete presentation of an existing entity's
financial position or results of operations.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operating revenues and expenses and cash
flows of Addington Coal Operations (the Predecessor Business) for the ten-month
period ended November 1, 1995 in conformity with generally accepted accounting
principles.
 
                                          Arthur Andersen LLP
 
Louisville, Kentucky
 February 29, 1996 (except with respect to the matter discussed
 in Note 1, as to which the date is January 2, 1998)
 
                                      F-37

 
              ADDINGTON COAL OPERATIONS (THE PREDECESSOR BUSINESS)
 
         COMBINED STATEMENT OF OPERATING REVENUES AND EXPENSES (NOTE 1)
                   For the Ten Months Ended November 1, 1995
 


                                                                      1995
                                                                 --------------
                                                                 (in thousands)
                                                              
Revenues........................................................    $80,569
Costs and expenses:
  Cost of operations............................................     69,051
  Depreciation, depletion and amortization......................      4,624
  Selling, general and administrative...........................      6,427
                                                                    -------
    Total costs and expenses....................................     80,102
                                                                    -------
    Income from operations......................................        467
Interest and other income (expense):
  Interest expense..............................................       (982)
  Gain (loss) on sale of assets.................................       (541)
  Other, net....................................................        (14)
                                                                    -------
                                                                     (1,537)
                                                                    -------
    Excess (deficit) of operating revenues over expenses before
     income taxes...............................................     (1,070)
Income tax provision (benefit)..................................       (407)
                                                                    -------
    Excess (deficit) of operating revenues over expenses........    $  (663)
                                                                    =======

 
 
The accompanying notes to combined financial statements are an integral part of
                                this statement.
 
                                      F-38

 
              ADDINGTON COAL OPERATIONS (THE PREDECESSOR BUSINESS)
 
                COMBINED STATEMENT OF PARENT INVESTMENT (NOTE 1)
                   For the Ten Months Ended November 1, 1995
 


                                                                      Amount
                                                                  --------------
                                                                  (in thousands)
                                                               
Balance at January 1, 1995.......................................    $31,141
  (Deficit) of operating revenues over expenses..................       (663)
  Other changes in parent investment, net........................     (4,314)
                                                                     -------
Balance at November 1, 1995......................................    $26,164
                                                                     =======

 
 
 
The accompanying notes to combined financial statements are an integral part of
                                this statement.
 
                                      F-39

 
              ADDINGTON COAL OPERATIONS (THE PREDECESSOR BUSINESS)
 
                   COMBINED STATEMENT OF CASH FLOWS (NOTE 1)
                   For The Ten Months Ended November 1, 1995
 


                                                                      1995
                                                                 --------------
                                                                 (in thousands)
                                                              
Cash Flows From Operating Activities:
  Excess (deficit) of operating revenues over expenses..........     $ (663)
  Adjustments to reconcile excess (deficit) of operating
   revenues over
   expenses to net cash provided by (used in) operating
    activities:
   Depreciation, depletion and amortization.....................      4,624
   (Gain) loss on sale of assets................................        541
  Changes in assets and liabilities:
   (Increase) decrease in:
   Receivables..................................................      2,208
   Inventories..................................................        (70)
   Prepaid expenses and other...................................     (1,264)
   Other non-current assets.....................................      3,385
  Increase (decrease) in:
   Accounts payable.............................................      1,011
   Accrued expenses and other...................................      3,448
   Other non-current liabilities................................     (2,758)
                                                                     ------
    Total adjustments...........................................     11,125
                                                                     ------
    Net cash provided by operating activities...................     10,462
                                                                     ------
Cash Flows From Investing Activities:
  Net proceeds from sale of assets..............................      1,170
  Additions to property, plant and equipment and mine
   development costs............................................     (6,081)
                                                                     ------
    Net cash used in investing activities.......................     (4,911)
                                                                     ------
Cash Flows From Financing Activities:
  Borrowings on long-term debt..................................      2,279
  Repayments on long-term debt..................................     (1,390)
  Net payments on revolving line of credit......................     (3,116)
  Proceeds from capital lease borrowings........................      4,752
  Repayments on capital leases..................................       (744)
  Payments for debt issuance costs..............................       (216)
  Other changes in parent investment, net.......................     (6,950)
                                                                     ------
    Net cash provided by used in financing activities...........     (5,385)
                                                                     ------
    Net increase in cash and cash equivalents...................        166
                                                                     ------
Cash and Cash Equivalents, beginning of period..................        218
                                                                     ------
Cash and Cash Equivalents, end of period........................     $  384
                                                                     ======

 
The accompanying notes to combined financial statements are an integral part of
                                this statement.
 
                                      F-40

 
              ADDINGTON COAL OPERATIONS (THE PREDECESSOR BUSINESS)
 
                     NOTES TO COMBINED FINANCIAL STATEMENTS
                                November 1, 1995
                             (Dollars In Thousands)
                                  (Unaudited)
 
1. BASIS OF PRESENTATION AND ACQUISITION
 
The accompanying combined financial statements of Addington Coal Operations
(the Predecessor Business or the Company) have been prepared to reflect the
coal mining and North American (N.A.) technology operations acquired by
Addington Enterprises, Inc. (AEI) from Addington Resources, Inc. (ARI) on
November 2, 1995. Accordingly, the accompanying combined financial statements
for the ten months ended November 1, 1995 reflect such coal mining and N.A.
technology operations while under the ownership and control of ARI. Significant
"intercompany" transactions and accounts have been eliminated in combination.
 
On November 12, 1997, AEI (as Transferor) consummated a shareholder exchange
agreement (Exchange Agreement) with AEI Holding Company, Inc. (AEI HoldCo. --
as Transferee) and Larry Addington (as Transferor) and Harold Sergent (as
Seller) for their 77.5% interest in Bowie Resources, Limited (BRL) (an entity
under common control). The Exchange Agreement called for AEI HoldCo. to issue
98 common shares (par value $.01) as consideration for: (1) AEI's coal mining
operations and certain corporate net assets and (2) Larry Addington's (69.8%)
ownership interest in BRL. AEI HoldCo. also purchased for $2,000 Harold
Sergent's 7.7% ownership interest in BRL. AEI is owned by Larry Addington
(80%), Robert Addington (10%) and Bruce Addington (10%), who are brothers. The
coal mining businesses transferred by AEI included the net assets of its
Addington Mining and corporate divisions as well as its wholly-owned
subsidiary, Tennessee Mining, Inc. AEI retained certain non-coal mining
properties and technology related assets which were disposed in the MTI
Agreement (see below).
 
The Exchange Agreement was prepared in connection with, and its consummation
was contingent upon, the closing of the $200,000 Senior Notes Indenture (Senior
Notes) of AEI HoldCo. which occurred on November 12, 1997. AEI HoldCo. issued
an Offering Memorandum dated November 6, 1997, to obtain $200,000 in 10 percent
Senior Notes, maturing in 2007, in a private placement. In addition, on
November 6, 1997, AEI HoldCo. entered into a Purchase Agreement which was
consummated on November 12, 1997 with NationsBanc Montgomery Securities, Inc.
related to the Senior Notes. After the consummation of the Exchange Agreement
and MTI agreement, AEI HoldCo. is owned by AEI (50%) and Larry Addington (50%).
In addition, Addington Mining, Inc. (AMI), Tennessee Mining Inc. (TMI) and
Mining Technologies, Inc. (MTI) are wholly-owned subsidiaries of AEI HoldCo.
while BRL is 77.5% owned by AEI HoldCo. and 22.5% owned by Mitsui Matsushima.
 
The MTI Agreement is between Mining Technologies, Inc., a newly formed
subsidiary of AEI HoldCo. (as purchaser) and AEI (as seller) for AEI's
ownership interest in its N.A., mining technologies division. The purchase
price of $51,000 (cash) was delivered at closing on January 2, 1998. The net
assets acquired include mining equipment (primarily Highwall Mining Systems),
coal mining contracts, and the intellectual property for the N.A. Highwall
Mining System (patents, trademarks, etc). AEI retained ownership of the non-
N.A. intellectual property.
 
Due to the significance (using total revenues and assets) of AEI's transferred
business to the aggregate of AEI HoldCo. management has determined for
financial reporting purposes the predecessor of AEI HoldCo. is AEI. AEI's
predecessor is ARI's coal mining and N.A. technology operations. Accordingly,
the accompanying combined financial statements have been prepared to reflect
the 1995 preacquisition (November 2, 1995) mining and N.A. technology
operations of AEI's predecessor and are not intended to be a complete
presentation of an existing entity's financial position or results of
operations. They do not reflect the activities from the non-coal mining
properties.
 
                                      F-41

 
              ADDINGTON COAL OPERATIONS (THE PREDECESSOR BUSINESS)
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
 
Various allocations and carve-out adjustments have been made in the preparation
of the accompanying financial statements. Such allocations have been recorded
to segregate the historical accounts to reflect the business acquired by AEI.
Management believes that the method used for allocations and carve-out
adjustments is reasonable.
 
Acquisition by AEI
 
On September 22, 1995, in a related party transaction, AEI entered into a stock
purchase agreement with Addington Resources, Inc. (ARI) whereby AEI agreed to
purchase all the issued and outstanding shares of common stock of ARI's coal
mining and technology subsidiaries. In addition, pursuant to an option
agreement dated August 4, 1995, AEI agreed to purchase from ARI all the issued
and outstanding stock of the ARI subsidiary, TMI, in exchange for a royalty AEI
will pay to ARI based on tons of coal delivered under a certain coal sales
contract. The stockholders of AEI had formerly been executive officers and
minority owners of ARI.
 
These agreements were consummated on November 2, 1995, at which time AEI
approved and adopted a plan of merger which provided for the merger of AMI, MTI
and TMI into AEI and the cancellation of the subsidiaries' common stock.
 
Pursuant to the stock purchase agreement with ARI, AEI assumed certain
liabilities and contingencies of the acquired subsidiaries that are reflected
in the net assets acquired and accompanying notes. Further, AEI has granted
indemnification for performance guarantees made by ARI in connection with the
sale of certain ARI coal-related subsidiaries in previous years as well as
guarantees relating to certain mineral lease royalty obligations and workers'
compensation benefits. The Company believes no significant obligation will
result relating to the ARI indemnification. The obligations of AEI under the
above agreement will be transferred to AEI HoldCo. pursuant to the Exchange
Agreement.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL
 
a. Management's Use of Estimates
 
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
 
b. Company Environment and Risk Factors
 
The Company's principal business activities consist of surface mining and
marketing of bituminous coal, performance of contract mining for third parties
and construction, repair and licensing of mining equipment. These operations
are primarily located in Kentucky and Tennessee.
 
The Company, in the course of its business activities, is exposed to a number
of risks including: the possibility of the termination or alteration of coal
sales contracts, fluctuating market conditions of coal and transportation
costs, competitive industry and over-capacity, changing government regulations,
unexpected maintenance and equipment failure, employee benefits cost control,
misestimates of proven and probable coal reserves, satisfactory labor
relations, loss of key employees, satisfactory resolution of the Year 2000
issue and the ability of the Company to obtain necessary mining permits and
control adequate recoverable mineral reserves. In addition, adverse
uncontrollable (wet) weather and geological conditions tend to increase mining
costs, sometimes substantially. Precipitation is generally highest in early
spring and late fall.
 
                                      F-42

 
              ADDINGTON COAL OPERATIONS (THE PREDECESSOR BUSINESS)
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
c. Depreciation and Amortization
 
Property, plant and equipment are recorded at cost, including construction
overhead and interest, where applicable. Expenditures for major renewals and
betterments are capitalized while expenditures for maintenance and repairs are
expensed as incurred. Depreciation and amortization are provided using either
the straight-line or units of production method with estimated useful lives
under the straight-line method comprising substantially the following ranges:
 


                                                                         Years
                                                                        --------
                                                                     
      Buildings........................................................ 10 to 45
      Mining and other equipment and related facilities................  2 to 20
      Transportation equipment.........................................   2 to 7
      Furniture and fixtures...........................................   3 to 7

 
Mineral reserves and mine development costs are amortized using the units-of-
production method, based on estimated recoverable reserves.
 
Financing costs are being amortized using the straight-line method, over the
life of the related debt, which approximates the effective interest method.
 
d. Income Taxes
 
Deferred income taxes are recorded based upon temporary differences between the
financial statement and tax bases of assets and liabilities and net operating
loss carryforwards and tax credits available for income tax purposes.
 
Income tax provision (benefit) for the 1995 period represents 38% of pretax
earnings as allocated by the parent. There are no significant differences
between the statutory and effective tax rates.
 
e. Revenue Recognition
 
Most of the Company's revenues have been generated under long-term coal sales
contracts with electric utilities or other coal-related organizations,
primarily in the eastern United States. Revenues are recognized on coal sales
in accordance with the sales agreement, which is usually when the coal is
shipped to the customer and title passes. The Company also rents equipment and
provides repair services and the revenue from such rental and service is
recognized when earned. Revenue from the construction of mining equipment is
recognized on a percentage of completion basis.
 
The Company grants credit to its customers based on their creditworthiness and
generally does not secure collateral for its receivables.
 
f. Parent Investment
 
Parent Investment is comprised of the relevant ARI (and affiliates) equity,
loan and trade account balances with the Company.
 
g. Statement of Cash Flows
 
For purposes of the statement of cash flows, the Company considers investments
having maturities of three months or less at the time of the purchase to be
cash equivalents.
 
 
                                      F-43

 
              ADDINGTON COAL OPERATIONS (THE PREDECESSOR BUSINESS)
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Supplemental disclosure:
 


                                                                      Ten Months
                                                                         1995
                                                                      ----------
                                                                   
      Cash paid for interest.........................................   $1,126
      Interest capitalized...........................................      142
      Non cash distribution of equipment to affiliates...............    1,218
      Non cash property additions....................................    4,671

 
Income taxes for the 1995 period were allocated by the parent and not
specifically paid by the Company. The above non-cash transactions have been
excluded from the accompanying 1995 Combined Statement of Cash Flows.
 
3. COMMITMENTS AND CONTINGENCIES
 
a. Coal Sales Contracts
 
As of November 1, 1995, the Company had commitments to deliver scheduled base
quantities of coal annually to four customers. The contracts expire in 1996,
1997, 2004 and 2005, with the Company contracted to supply a minimum of
approximately 28.7 million tons of coal over the remaining lives of the
contracts at prices which are at or above market. Certain of the contracts have
sales price adjustment provisions, subject to certain limitations and
adjustments, based on changes in specified production costs.
 
b. Leases
 
The Company has various operating and capital leases for mining, transportation
and other equipment. Lease expense for the ten-month period ended November 1,
1995 was approximately $5,692. Depreciation of assets under capital leases is
included in depreciation expense.
 
The Company also leases reserves under agreements that call for royalties to be
paid as the coal is mined. Total royalty expense for the ten months ended
November 1, 1995 was $7,607. Certain agreements require minimum annual
royalties to be paid regardless of the amount of coal mined during the year.
However, such agreements are generally cancelable at the Company's discretion.
 
Approximate future minimum operating lease and royalty payments are as follows:
 


                                                             Operating
                                                              Leases   Royalties
                                                             --------- ---------
                                                                 
      2 months ended December 31, 1995.....................   $  640    $1,395
      Year ended December 31, 1996.........................    3,489     2,542
      Year ended December 31, 1997.........................    2,235     1,862
      Year ended December 31, 1998.........................      606     1,296
      Year ended December 31, 1999.........................      158       798
      Year ended December 31, 2000.........................       27       500
      Thereafter...........................................        8       260
                                                              ------    ------
      Total minimum lease and royalty payments.............   $7,163    $8,653
                                                              ======    ======

 
                                      F-44

 
              ADDINGTON COAL OPERATIONS (THE PREDECESSOR BUSINESS)
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
c. Legal Matters
 
The Company is named as defendant in various actions in the ordinary course of
its business. These actions generally involve disputes related to contract
performance, property boundaries, mining rights, blasting damages, personal
injuries and royalty payments, as well as other civil actions that could result
in additional litigation or other adversary proceedings. Certain plaintiffs
seek amounts from the Company which are material to the financial statements.
 
While the final resolution of any matter may have an impact on the Company's
financial results for a particular reporting period, management believes that
the ultimate disposition of these matters will not have a materially adverse
effect upon the financial position of the Company.
 
4. MAJOR CUSTOMERS
 
The Company has sales to the following major customers that exceed 10% of
revenues. These revenues and each customer's relative percentage of total
receivables are summarized below:
 


                                                      Percentage of
                                       Percentage  of     Total
                              Revenues Total Revenues  Receivables
                              -------- -------------- -------------
                                             
     Ten Months Ending
      November 1, 1995:
      Customer A............. $25,968        32%            19%
      Customer B.............  16,169        20             16
      Customer C.............   9,857        12              6

 
5. RELATED PARTY TRANSACTIONS
 
The Company has dealt with certain companies or individuals which are related
parties either by having stockholders in common or because they are controlled
by stockholders/officers of the Company or by relatives of
stockholders/officers of the Company. The Company leases mining equipment from
affiliates and pays trucking, flight fees and building space rentals to related
parties. In addition to related party transactions and balances described
elsewhere, the following related party transactions are summarized and
approximated as follows:
 


                                                                      Ten Months
                                                                         1995
                                                                      ----------
                                                                   
      Revenues, costs and expenses:
       Equipment rental income......................................    $1,645
       Flight fee expense...........................................       315
       Building rental expense......................................        92
       Trucking expense.............................................     2,774
       Management fee...............................................        194

 
                                      F-45

 
                          INDEPENDENT AUDITORS' REPORT
 
To Zeigler Coal Holding Company:
 
We have audited the accompanying consolidated balance sheets of Zeigler Coal
Holding Company and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, cash flows and shareholders'
equity for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries
at December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
 
Deloitte & Touche LLP
 
St. Louis, Missouri
February 5, 1998
 
 
                                      F-46

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                (Amounts in thousands, except per share amount)
 


                                                December 31,         June 30,
                                            ----------------------  -----------
                                               1996        1997        1998
                                            ----------  ----------  -----------
                                                                    (Unaudited)
                                                           
ASSETS
CURRENT ASSETS:
  Cash and equivalents..................... $  108,321  $  103,254   $  15,027
  Receivables:
    Trade accounts receivable (net of
     allowances of $2,840, $1,891 and
     $2,064)...............................     51,122      72,533      55,528
    Other receivables......................      3,974       3,677       3,589
                                            ----------  ----------   ---------
      Total receivables, net...............     55,096      76,210      59,117
                                            ----------  ----------   ---------
  Inventories:
    Coal finished goods....................     12,525       9,287       9,660
    Coal work in process...................      8,744      12,932      15,162
    Mine supplies..........................     20,093      18,937      18,145
                                            ----------  ----------   ---------
      Total inventories....................     41,362      41,156      42,967
  Deferred income taxes (Note 3)...........      9,747       9,583       9,513
  Other current assets.....................      3,426       3,541       5,333
                                            ----------  ----------   ---------
      Total current assets.................    217,952     233,744     131,957
                                            ----------  ----------   ---------
PROPERTY, PLANT AND EQUIPMENT:
  Land and mineral rights..................    674,583     679,995     676,036
  Prepaid royalties........................     21,705      20,173      20,267
  Plant and equipment......................    493,962     540,566     576,155
                                            ----------  ----------   ---------
      Total at cost........................  1,190,250   1,240,734   1,272,458
  Less--Accumulated depreciation, depletion
   and amortization........................   (371,380)   (412,528)   (433,783)
                                            ----------  ----------   ---------
      Property, plant and equipment, net...    818,870     828,206     838,675
                                            ----------  ----------   ---------
OTHER ASSETS:
  Prepaid pension expense (Note 6).........      7,056       4,836       3,857
  Deferred financing costs, net............      1,835       2,329       1,194
  Other long-term assets...................      4,912       8,289       9,217
                                            ----------  ----------   ---------
      Total other assets...................     13,803      15,454      14,268
                                            ----------  ----------   ---------
TOTAL ASSETS............................... $1,050,625  $1,077,404   $ 984,900
                                            ==========  ==========   =========

 
                See notes to consolidated financial statements.
 
                                      F-47

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
                    CONSOLIDATED BALANCE SHEETS--(Continued)
                (Amounts in thousands, except per share amount)
 


                                                  December 31,
                                              ---------------------   June 30,
                                                 1996       1997        1998
                                              ---------- ----------  -----------
                                                                     (Unaudited)
                                                            
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
 Current maturities of long-term debt (Note
  4)........................................  $      --  $   68,342   $    --
 Accounts payable--trade....................      38,895     64,970     48,366
 Other taxes payable........................      22,057     22,527     20,249
 Accrued payroll and related benefits.......      23,807     20,103     18,488
 Other accrued expenses (Note 6)............      48,263     35,598     32,714
                                              ---------- ----------   --------
    Total current liabilities...............     133,022    211,540    119,817
LONG-TERM DEBT (Notes 4 and 5)..............     344,770    275,800    255,800
ACCRUED POSTRETIREMENT BENEFIT
 OBLIGATIONS (Note 7).......................     245,385    253,700    257,893
ACCRUED PNEUMOCONIOSIS BENEFITS (Note 8)....      46,256     36,156     35,294
ACCRUED MINE CLOSING COSTS (Note 10)........      75,663     55,957     54,978
DEFERRED INCOME TAXES (Note 3)..............      13,033     20,527     21,629
OTHER LONG-TERM LIABILITIES:
 Accrued workers' compensation..............      36,617     29,459     27,766
 Accrued postemployment benefits............      18,095     14,619     14,408
 Other......................................       5,178      1,906      2,637
                                              ---------- ----------   --------
    Total other long-term liabilities.......      59,890     45,984     44,811
                                              ---------- ----------   --------
COMMITMENTS AND CONTINGENCIES (Notes 15 and
 16)
    Total liabilities.......................     918,019    899,664    790,222
                                              ---------- ----------   --------
SHAREHOLDERS' EQUITY:
 Preferred stock (Note 12)..................         --         --         --
 Common stock--$0.01 par value per share--
  50,000 shares authorized; 28,377 issued
  and outstanding as of December 31, 1996,
  28,441 shares issued and 28,197 shares
  outstanding as of December 31, 1997, and
  28,467 shares issued and 28,223 shares
  outstanding as of June 30, 1998...........         284        284        285
 Capital in excess of par value.............      72,191     73,120     73,458
 Retained earnings (Note 4).................      60,131    110,284    126,883
                                              ---------- ----------   --------
                                                 132,606    183,688    200,626
 Less cost of common stock in treasury--no
  shares at December 31, 1996, 244 shares at
  December 31, 1997 and June 30, 1998.......         --      (5,948)    (5,948)
                                              ---------- ----------   --------
    Total shareholders' equity..............     132,606    177,740    194,678
                                              ---------- ----------   --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..  $1,050,625 $1,077,404   $984,900
                                              ========== ==========   ========

 
                See notes to consolidated financial statements.
 
                                      F-48

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (Amounts in thousands, except per share amounts)
 


                           Year Ended December 31,      Six Months Ended June 30,
                         -----------------------------  --------------------------
                           1995       1996      1997        1997          1998
                         ---------  --------  --------  ------------  ------------
                                                               (Unaudited)
                                                       
REVENUES:
  Coal sales (Notes 13
   and 16).............. $ 754,975  $698,523  $603,553  $    293,843  $    298,590
  Energy trading
   revenues.............       --        --    166,474        37,878        74,709
  Other revenues........    28,128    33,101    30,729        16,334        15,299
                         ---------  --------  --------  ------------  ------------
    Total revenues......   783,103   731,624   800,756       348,055       388,598
                         ---------  --------  --------  ------------  ------------
COSTS AND EXPENSES:
  Cost of coal sales....   686,232   613,166   503,946       246,258       259,991
  Energy trading costs..       --        --    173,230        39,558        76,851
  Selling, general and
   administrative
   expenses.............    20,740    21,271    16,017        10,159         6,057
  Other costs and
   expenses.............    18,487    22,514    29,823        15,321        11,387
  Gain on curtailment of
   postretirement
   benefits (Note 7)....       --    (16,295)      --            --            --
  Reduction in accrued
   pneumoconiosis
   benefits (Note 8)....   (23,299)      --     (8,244)       (5,725)          --
  Provision for asset
   impairments and
   accelerated mine
   closings (Note 10)...   114,662       --        --            --            --
                         ---------  --------  --------  ------------  ------------
    Total costs and
     expenses...........   816,822   640,656   714,772       305,571       354,286
                         ---------  --------  --------  ------------  ------------
OTHER INCOME:
  Proceeds from contract
   settlement...........    45,500       --        --            --            --
  Distribution of funds
   in reciprocal
   insurance
   association..........       --        --        --            --          3,766
                         ---------  --------  --------  ------------  ------------
OPERATING EARNINGS......    11,781    90,968    85,984        42,484        38,078
NET INTEREST EXPENSE....    27,478    21,704    16,997         8,637         5,763
                         ---------  --------  --------  ------------  ------------
EARNINGS (LOSS) BEFORE
 INCOME TAXES AND
 EXTRAORDINARY ITEM.....   (15,697)   69,264    68,987        33,847        32,315
INCOME TAXES (BENEFIT)
 (Note 3)...............    (4,484)   11,300    10,348         6,090         4,847
                         ---------  --------  --------  ------------  ------------
EARNINGS (LOSS) BEFORE
 EXTRAORDINARY ITEM.....   (11,213)   57,964    58,639        27,757        27,468
EXTRAORDINARY ITEM......       --        --        --            --         (6,637)
                         ---------  --------  --------  ------------  ------------
NET EARNINGS (LOSS)..... $ (11,213) $ 57,964  $ 58,639  $     27,757  $     20,831
                         =========  ========  ========  ============  ============
WEIGHTED AVERAGE SHARES
 OUTSTANDING:
  Basic.................    28,356    28,362    28,261        28,342        28,207
  Diluted...............    28,356    28,483    28,646        28,795        28,365

 
                See notes to consolidated financial statements.
 
                                      F-49

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)
 


                            Year Ended December 31,       Six Months Ended June 30,
                          ------------------------------  ---------------------------
                            1995       1996      1997         1997          1998
                          ---------  --------  ---------  ------------  -------------
                                                         
OPERATING ACTIVITIES:                                            (Unaudited)
 Net earnings (loss)....  $ (11,213) $ 57,964  $  58,639  $     27,757  $      20,831
                          ---------  --------  ---------  ------------  -------------
 Adjustments for
  differences between
  net earnings (loss)
  and cash flows from
  operating activities:
 Extraordinary item.....        --        --         --            --           1,045
 Depreciation, depletion
  and other
  amortization..........     68,576    60,134     57,912        28,764         32,384
 Amortization of
  deferred financing
  costs.................        838       838        790           420            100
 Postretirement
  benefits..............      3,318   (10,454)     8,315         3,110          4,193
 Gain on sales of
  property, plant and
  equipment.............     (1,462)   (5,062)    (5,066)       (2,760)        (1,575)
 Prepaid pension costs..      2,943     2,499      2,220         1,784            979
 Pneumoconiosis
  benefits..............    (23,754)   (3,168)   (10,100)       (7,106)          (862)
 Postemployment
  benefits..............      3,485       811     (3,476)           (4)          (211)
 Workers' compensation..      8,905     5,851     (7,158)       (2,510)        (1,693)
 Mine closing costs.....     (9,654)   (6,539)   (17,810)      (10,154)          (979)
 Provision for asset
  impairments and
  accelerated mine
  closings..............    114,662       --         --            --             --
 Stock appreciation
  units.................      2,492   (10,172)    (4,195)       (3,494)          (142)
 Deferred income taxes..    (16,984)   13,885      7,658         4,006          1,172
 Other noncash items....     (1,489)   (4,892)    (5,143)       (3,783)        (1,403)
 Changes in working
  capital components:
  (Increase) decrease in
   receivables..........     15,502    16,660    (21,164)      (16,539)        17,093
  (Increase) decrease in
   inventories..........      7,809     8,584         71        (4,872)        (1,811)
  (Increase) decrease in
   other current
   assets...............      2,353      (441)      (117)       (2,754)        (1,792)
  Increase (decrease) in
   accounts payable--
   trade................     (7,365)   (7,292)    26,075        11,092        (16,604)
  Increase (decrease) in
   deferred revenue.....        --      3,746      7,455        (2,481)        (5,047)
  Increase (decrease) in
   accrued expenses and
   other current
   liabilities..........      1,323     8,922    (15,145)       (2,400)        (1,591)
                          ---------  --------  ---------  ------------  -------------
  (Increase) decrease in
   working capital......     19,622    30,179     (2,825)      (17,954)        (9,752)
                          ---------  --------  ---------  ------------  -------------
  Total adjustments to
   net earnings (loss)..    171,498    73,910     21,122        (9,681)        23,256
                          ---------  --------  ---------  ------------  -------------
  Net cash provided by
   operating
   activities...........    160,285   131,874     79,761        18,076         44,087
                          ---------  --------  ---------  ------------  -------------
INVESTING ACTIVITIES:
 Additions to property,
  plant and equipment...    (56,334)  (31,427)   (74,426)      (20,606)       (45,630)
 Cash paid for sale of
  Indiana assets........        --     (7,000)    (4,000)       (4,000)           --
 Proceeds from sales of
  property, plant and
  equipment.............      4,545     7,890      7,745         5,327          5,548
                          ---------  --------  ---------  ------------  -------------
 Net cash used in
  investing activities..    (51,789)  (30,537)   (70,681)      (19,279)       (40,082)
                          ---------  --------  ---------  ------------  -------------
FINANCING ACTIVITIES:
 Proceeds from debt
  refinancing...........        --        --     145,800           --             --
 Net repayments of long-
  term debt.............   (105,288)      --    (146,428)         (628)      (198,342)
 Net borrowings under
  credit agreement......        --        --         --            --         110,000
 Proceeds from common
  stock issued under
  stock option plan.....        --        247        929           482            339
 Payment of dividends...     (5,672)   (6,382)    (8,484)       (4,258)        (4,229)
 Purchase of treasury
  stock.................        --        --      (5,998)       (5,998)           --
 Sale of treasury
  stock.................        --        --          34            34            --
                          ---------  --------  ---------  ------------  -------------
  Net cash used in
   financing
   activities...........   (110,960)   (6,135)   (14,147)      (10,368)       (92,232)
                          ---------  --------  ---------  ------------  -------------
NET INCREASE (DECREASE)
 IN CASH AND
 EQUIVALENTS............     (2,464)   95,202     (5,067)      (11,571)       (88,227)
 CASH AND EQUIVALENTS,
  BEGINNING.............     15,583    13,119    108,321       108,321        103,254
                          ---------  --------  ---------  ------------  -------------
 CASH AND EQUIVALENTS,
  ENDING................  $  13,119  $108,321  $ 103,254  $     96,750  $      15,027
                          =========  ========  =========  ============  =============
SUPPLEMENTAL DISCLOSURES
 OF CASH FLOW
 INFORMATION:
 Cash paid (received)
  during period for:
 Interest, net of amount
  capitalized...........  $  27,372  $ 22,804  $  16,085  $      8,142  $       6,670
 Income taxes, net of
  refunds...............     10,549    (2,997)     5,231         4,900            208

 
                See notes to consolidated financial statements.
 
                                      F-50

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                (Amounts in thousands, except per share amounts)
 


                                                                        Total
                                        Capital in                      Share-
                                 Common Excess of  Retained  Treasury  holders'
                                 Stock  Par Value  Earnings   Stock     Equity
                                 ------ ---------- --------  --------  --------
                                                        
BALANCE, JANUARY 1, 1995........  $283   $71,945   $ 26,143  $   --    $ 98,371
  Net loss......................   --        --     (11,213)     --     (11,213)
  Cash dividends declared ($.20
   per share)...................   --        --      (5,672)     --      (5,672)
                                  ----   -------   --------  -------   --------
BALANCE, DECEMBER 31, 1995......   283    71,945      9,258      --      81,486
  Issuance of 22 shares of
   common stock under stock
   option plan (Note 9).........     1       246        --       --         247
  Net income....................   --        --      57,964      --      57,964
  Cash dividends declared ($.25
   per share)...................   --        --      (7,091)     --      (7,091)
                                  ----   -------   --------  -------   --------
BALANCE, DECEMBER 31, 1996......   284    72,191     60,131      --     132,606
  Issuance of 66 shares of
   common stock under stock
   option plan (Note 9).........   --        929        --       --         929
  Purchase of 246 shares of
   common stock.................   --        --         --    (5,998)    (5,998)
  Issuance of 2 shares of
   treasury stock at less than
   cost.........................   --        --         (16)      50         34
  Net income....................   --        --      58,639      --      58,639
  Cash dividends declared ($.30
   per share)...................   --        --      (8,470)     --      (8,470)
                                  ----   -------   --------  -------   --------
BALANCE, DECEMBER 31, 1997......   284    73,120    110,284   (5,948)   177,740
                                  ----   -------   --------  -------   --------
  Issuance of 26 shares of com-
   mon stock under stock option
   plan (unaudited).............     1       338        --       --         339
  Net income (unaudited)........   --        --      20,831      --      20,831
  Cash dividends declared ($.15
   per share)
   (unaudited) .................   --        --      (4,232)     --      (4,232)
                                  ----   -------   --------  -------   --------
BALANCE, JUNE 30, 1998 (unau-
 dited).........................  $285   $73,458   $126,883  $(5,948)  $194,678
                                  ====   =======   ========  =======   ========

 
 
                See notes to consolidated financial statements.
 
                                      F-51

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                 YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
           (Amounts in thousands, except share and per share amounts)
 
1. Summary of Significant Accounting Policies
 
Principles of Consolidation--The consolidated financial statements include the
accounts of Zeigler Coal Holding Company and Subsidiaries (Zeigler or the
"Company"), all of which are wholly-owned. All material intercompany
transactions and accounts have been eliminated in consolidation.
 
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the balance sheet date,
and the reported amounts of revenues and expenses during the year. Actual
results could differ from those estimates.
 
Interim Financial Information--The interim financial statements as of June 30,
1998 and for the six months ended June 30, 1997 and 1998 are unaudited and have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, the unaudited
interim financial statements contain all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation. The
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
 
Cash and Equivalents--Cash and equivalents include cash on deposit and highly
liquid investments with a maturity of three months or less.
 
Inventories--Coal inventory is valued using the average cost method and is
stated at the lower of cost or market. Coal inventory costs include labor,
equipment costs and operating overhead. Coal work in process includes partially
uncovered coal and unprocessed coal. Mine supply inventory is valued using the
average cost method and is stated at the lower of cost or market.
 
Property, Plant and Equipment--Additions and betterments are capitalized at
cost. Maintenance and repair costs are expensed as incurred. Depreciation of
plant and equipment is computed principally by the straight-line method over
the expected useful lives of the assets.
 
Mine development costs and the net amount of associated interest cost are
capitalized. Exploration costs are expensed as incurred. Depletion of mineral
rights and capitalized mine development costs is provided on the basis of
tonnage mined in relation to total estimated recoverable tonnage.
 
Zeigler pays royalties to certain landowners and holders of mineral interests
for the rights to perform certain mining activities. Amounts advanced to
landowners, which are recoupable against future production, are capitalized; as
the coal is mined, these prepayments are offset against earned royalties and
included in the cost of coal sales.
 
Deferred Financing Costs--The costs of issuing and restructuring long-term debt
are capitalized and amortized using the effective interest method over the term
of the related debt.
 
Income Taxes--Zeigler accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Under SFAS No. 109, deferred taxes are established for the temporary
differences between the financial reporting basis and the tax basis of
Zeigler's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled.
 
 
                                      F-52

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Postretirement Benefits Other Than Pensions---As prescribed by SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, Zeigler
accrues, based on annual independent actuarial valuations, for the expected
costs of providing postretirement benefits other than pensions, primarily
medical benefits, during an employee's actual working career until vested.
 
Pneumoconiosis Benefits--Certain Zeigler subsidiaries are liable under the
Federal Black Lung Benefits Act of 1972, as amended, to pay pneumoconiosis
(black lung) benefits to eligible employees, former employees and their
dependents for claims filed after June 30, 1973. These subsidiaries are also
liable under certain state statutes for black lung claims. Zeigler acts as
self-insurer for most federal and state black lung benefits. The remaining
portion of black lung claims are covered by state insurance funds into which
Zeigler pays premiums.
 
The accrual for self-insured pneumoconiosis benefits is adjusted to equal the
present value of future claim payments, determined as of the beginning of the
year, based on outside actuarial valuations performed annually.
 
Postemployment Benefits--Zeigler provides certain postemployment benefits,
primarily long-term disability and medical benefits, to former and inactive
employees and their dependents during the time period following employment but
before retirement. The Company accrues the discounted present value of expected
future benefits, determined as of the beginning of the year, based on annual
outside actuarial valuations.
 
Reclamation and Mine Closing Costs--Zeigler provides for the estimated costs of
future mine closings over the expected lives of active mines. Those costs
relate to sealing portals at deep mines and to reclaiming the final pit and
support acreage at surface mines. Other costs common to both types of mining
are related to removing or covering refuse piles and slurry (or settling) ponds
and dismantling preparation plants and other facilities. The regular provision
for future mine closing costs is calculated under the units-of-production
method based on a per ton charge determined by dividing estimated unrecorded
closing costs by estimated remaining recoverable tons. These estimates are
updated annually and the accrual rate is adjusted on a prospective basis
accordingly. The cost of restoring land and water resources affected by normal
ongoing surface mining operations is expensed as incurred.
 
Asset Impairments and Accelerated Mine Closing Accruals--In certain situations,
expected mine lives are shortened because of changes to planned operations.
When that occurs, and it is determined that the mine's underlying costs are not
recoverable in the future, reclamation and mine closing obligations are
accelerated and the mine closing accrual is increased accordingly. Also, to the
extent that it is determined that asset carrying values will not be recoverable
during a shorter mine life, a provision for such impairment is recognized. The
Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, in 1995. SFAS No. 121
expanded the Company's criteria for loss recognition, and provides methods for
both determining when an impairment has occurred and for measuring the amount
of the impairment. SFAS No. 121 requires that projected future cash flows from
use and disposition of all the Company's assets be compared with the carrying
amounts of those assets. When the sum of projected cash flows is less than the
carrying amount, impairment losses are recognized.
 
Revenue Recognition--Coal sales are recognized at contract prices at the time
title transfers to the customer. Coal sales are reduced and an allowance is
established for pricing disputes. Revenue at the import/export terminals is
recognized at the time of throughput.
 
Energy Trading Revenues and Costs--Energy trading revenues and costs represent
revenues and costs derived from the trading of power and gas forward and future
contracts and options. These forward and future contracts and options are
marked-to-market with gains and losses recognized currently. Revenue and cost
on forward and future contracts is recognized on settlement date.
 
                                      F-53

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Other Revenues, Costs and Expenses--Other revenues represent amounts primarily
related to the terminals, coal leases to third parties, farming, timber, gains
on sales of surplus assets, and oil and gas royalties. Costs and expenses
related to other revenues and those related to Zeigler's clean coal plant are
included in other costs and expenses.
 
Stock-Based Compensation--In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which
required adoption in 1996. The new standard defines a fair value method of
accounting for stock options and similar equity instruments. Pursuant to the
new standard, companies are encouraged, but not required, to adopt the fair
value method of accounting for employee stock-based transactions. Companies are
also permitted to continue to account for such transactions under Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, but are required to disclose in a note to the financial statements
pro forma net income and earnings per share as if the Company had applied the
new method of accounting. The accounting requirements of the new method are
effective for all employee awards granted after the beginning of the fiscal
year of adoption. The Company has elected to continue to account for such
transactions under APB No. 25.
 
Reclassifications--Certain amounts in the 1995, 1996, and 1997 financial
statements and notes have been reclassified to conform with the 1998
presentation.
 
2. Description of Business
 
Zeigler is engaged principally in the mining of coal for sale primarily to
electric utilities in the United States. In addition, during 1997, the Company
began power and gas trading through its new energy trading and marketing
subsidiary, EnerZ Corporation.
 
3. Income Taxes
 
Income tax expense (benefit) is comprised of the following:
 


                                                      Year Ended December 31,
                                                      --------------------------
                                                        1995     1996     1997
                                                      --------  -------  -------
                                                                
   Current:
     Federal......................................... $ 10,521  $(2,179) $ 2,228
     State...........................................    1,979     (408)     462
   Deferred:
     Federal.........................................  (14,862)  12,151    6,701
     State...........................................   (2,122)   1,736      957
                                                      --------  -------  -------
       Total......................................... $ (4,484) $11,300  $10,348
                                                      ========  =======  =======

 
 
                                      F-54

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate of 35% to earnings before income taxes due to
the following:
 


                                                     Year Ended December 31,
                                                    ---------------------------
                                                      1995     1996      1997
                                                    --------  -------  --------
                                                              
   Computed tax at federal statutory rate.......... $ (5,494) $24,246  $ 24,145
   State tax--net of federal benefits..............   (4,758)   2,162     2,242
   Percentage depletion............................  (10,469)  (8,164)   (8,893)
   Change in valuation allowance...................   14,113   (8,889)  (10,542)
   Other--net......................................    2,124    1,945     3,396
                                                    --------  -------  --------
   Income tax expense (benefit) provided........... $ (4,484) $11,300  $ 10,348
                                                    ========  =======  ========

 
The components of the net deferred tax liability are as follows:
 


                                                             December 31,
                                                           ------------------
                                                             1996      1997
                                                           --------  --------
                                                               
   Deferred tax liabilities related to:
     Property and equipment............................... $127,798  $143,366
     Land and mineral rights..............................   31,666    32,659
     Other................................................   11,592     8,772
                                                           --------  --------
       Total deferred tax liability.......................  171,056   184,797
                                                           --------  --------
   Deferred tax assets related to:
     Accrued mine closing costs...........................   23,730    22,383
     Accrued pneumoconiosis benefits......................   18,344    14,462
     Accrued workers' compensation costs..................   14,647    11,784
     Accrued postretirement benefits......................   98,154   101,480
     Other................................................   21,812    20,727
     Alternative minimum tax credit carryforwards.........   32,419    33,811
                                                           --------  --------
       Total deferred tax asset before valuation
        allowance.........................................  209,106   204,647
       Less--Valuation allowance..........................  (41,336)  (30,794)
                                                           --------  --------
       Total deferred tax asset...........................  167,770   173,853
                                                           --------  --------
   Net deferred tax liability............................. $ (3,286) $(10,944)
                                                           ========  ========
   Shown as:
     Current deferred tax asset........................... $  9,747  $  9,583
     Noncurrent deferred tax liability....................  (13,033)  (20,527)

 
Zeigler also has an AMT credit carryforward of $32,419 and $33,811 at December
31, 1996 and 1997, respectively, available to be used in future periods.
Although management believes that it is unlikely to realize all of its AMT
credit carryforward under existing law and company structure, AMT credit
carryforward is recognized to reduce the deferred tax liability from the amount
of regular tax on temporary differences to the amount of tentative minimum tax
on AMT temporary differences.
 
                                      F-55

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
4. Long-Term Debt
 
Long-term debt consists of the following:
 


                                                               December 31,
                                                            -------------------
                                                              1996      1997
                                                            --------- ---------
                                                                
8.61% senior secured notes................................. $ 198,970 $ 198,342
Industrial revenue bonds...................................   145,800   145,800
                                                            --------- ---------
    Total..................................................   344,770   344,142
Less current maturities....................................       --     68,342
                                                            --------- ---------
    Long-term debt......................................... $ 344,770 $ 275,800
                                                            ========= =========

 
8.61% Senior Secured Notes--The 8.61% Senior Secured Notes are payable to a
group of insurance companies and other financial institutions under Note
Purchase Agreements dated as of November 16, 1992. Interest on the notes is
payable semiannually. Annual principal payments begin on November 15, 1998 at
the rate of 20% of the original outstanding amount of $400,000. The notes
require Zeigler to offer to make mandatory prepayments in the event Zeigler
generates excess cash flow, as defined in the Note Purchase Agreements, or
makes asset sales above specified levels. The amount of excess cash flow that
must be offered as a prepayment to the Noteholders is based upon the percentage
of debt due to the Noteholders divided by the total indebtedness to both the
Noteholders and the lenders under the Credit Agreement described in the fourth
following paragraph. The Noteholders were offered a prepayment of $25,050 in
1997 based on free cash flow, as defined, for 1996, of which $628 of the
prepayments were accepted by the Noteholders.
 
The notes are collateralized by a first mortgage on substantially all of
Zeigler's assets. The collateral is shared pari passu with the lenders involved
with the Credit Agreement. The notes may be prepaid at Zeigler's discretion;
however, the Noteholders are entitled to receive a prepayment premium that
protects the yield to the Noteholders over the remainder of the term of notes.
In effect, this yield maintenance premium is the net present value of the
reduced yield to the Noteholders over the remaining scheduled term of the Notes
based upon an assumed reinvestment rate of 50 basis points (0.5%) over the then
available yield for U.S. Treasury securities with a maturity equal to that of
the Senior Secured Notes. No yield maintenance premium is payable on mandatory
prepayments out of excess cash flow.
 
On January 5, 1998, Zeigler prepaid $198,342 to the Noteholders, using $68,342
of cash and borrowing $130,000 under a new Credit Agreement's revolving credit
facility (see below). A related yield maintenance premium of $7,604 was also
paid to the Noteholders as required by the Note Purchase Agreement.
Accordingly, Zeigler will recognize an extraordinary loss of $8,849 ($6,637 net
of taxes) in the first quarter of 1998, consisting of the yield maintenance
premium and the write-off of deferred financing costs related to the early
extinguishment of debt.
 
Industrial Revenue Bonds--In August 1997, the Company completed the refunding
of its industrial revenue bonds. The industrial revenue bonds are floating rate
obligations issued by the Peninsula Ports Authority of Virginia ($115,000) and
Charleston County, South Carolina ($30,800). Both obligations are backed by
letters of credit issued under the Company's revolving credit facility. These
refundings served to extend the maturities of the industrial revenue bonds and
to release Shell Oil Company from its guarantees of the underlying obligations.
The principal of the obligation by the Peninsula Ports Authority of Virginia is
due in one lump-sum payment on May 1, 2022, and the principal of the obligation
by Charleston County, South Carolina is due in one lump-sum payment on August
1, 2028. Interest on these obligations is payable monthly. The weighted average
interest rate for these borrowings was 3.38% and 3.66% as of December 31, 1996
and 1997, respectively.
 
 
                                      F-56

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Credit Agreement--On October 19, 1994, Zeigler amended and restated its Credit
Agreement dated November 16, 1992, as previously amended and restated on March
15, 1994. The Credit Agreement provides for a $200,000 revolving credit
facility, with a three year term, and can be used for both loans and letters of
credit. As of December 31, 1997, Zeigler had used $186,107 out of the total
$200,000 revolving credit facility for outstanding letters of credit. The
provisions of the Credit Agreement require a commitment fee to be paid on the
unused portion of the revolving credit facility. Interest is paid based on
floating rates which fluctuate based on the prime rate, or the London Interbank
Offer Rate (LIBOR) plus various increments. The interest rate was 6.42% at
December 31, 1997. The Credit Agreement is collateralized by a first mortgage
on substantially all of Zeigler's assets. The collateral is shared pari passu
with the holders of the Senior Secured Notes.
 
In April 1997, the Company executed a new Credit Agreement (the "New Credit
Agreement") with certain financial institutions, which provides for senior
unsecured revolving credit and letter of credit facilities aggregating
$700,000. Interest on the revolving credit facility is paid in arrears based on
rates which fluctuate based on the prime rate or a certain Interbank Offer
Rate, as the Company may elect. Amounts outstanding under the New Credit
Agreement are not secured. The New Credit Agreement and the facilities
thereunder terminate five years from the initial advance. The New Credit
Agreement requires the Company to maintain a minimum net worth and maximum
long-term debt to EBITDA ratio, and contains other customary covenants and
events of default. The New Credit Agreement, which replaces the Amended and
Restated Credit Agreement dated October 19, 1994, became effective on January
5, 1998, in conjunction with the payment of the Company's outstanding Senior
Secured Notes.
 
Maturities--At December 31, 1997, aggregate scheduled maturities of all long-
term debt for each year through 2002 are as follows:
 
                                                              
      1998............................................................ $  68,342
      1999............................................................       --
      2000............................................................       --
      2001............................................................       --
      2002............................................................       --
      Thereafter......................................................   275,800
                                                                       ---------
      Total........................................................... $ 344,142
                                                                       =========

      
 
5. Financial Instruments
 
The fair value of Zeigler's long-term debt has been calculated based on quoted
market prices for similar issues or current rates offered to Zeigler for debt
of the remaining maturities. Long-term debt has an estimated fair value of
$349,451 and $351,746 compared to the carrying amount of $344,770 and $344,142
at December 31, 1996 and 1997, respectively. The carrying amount of all other
financial instruments, including cash and equivalents, accounts receivable and
accounts payable approximates fair value due to the short-term nature of these
instruments.
 
Through its energy trading subsidiary, the Company began entering into power
and gas forward contracts and options for trading purposes in 1997. These
forward contracts and options were marked-to-market with any gains and losses
recognized currently. At December 31, 1997, open net contract and option
positions were not material and did not represent significant credit related
exposure.
 
 
                                      F-57

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
6. Pension and Savings Plans
 
Salaried Pension Plan--Zeigler has a non-contributory pension plan covering
substantially all employees other than those who are members of the United Mine
Workers of America ("UMWA"). The plan is a cash balance retirement plan which
provides benefits based upon the employee's length of credited service and
compensation during each year of employment. Zeigler's funding policy is to
make, as a minimum contribution, the equivalent of the minimum payment required
by the Employee Retirement Income Security Act of 1974. The Company contributed
$123 in 1997 to the pension plan. There were no minimum contributions required
in 1995 and 1996.
 
The pension cost components for the year ended December 31, are as follows:
 


                                                   1995      1996      1997
                                                 --------  --------  --------
                                                            
   Service cost (for benefits earned during the
    year)......................................  $  3,566  $  3,543  $  3,186
   Interest cost on projected benefit
    obligations................................     7,636     7,321     7,285
   Actual return on plan assets................   (20,889)  (14,043)  (11,709)
   Net amortization and deferral...............    12,630     5,678     3,581
                                                 --------  --------  --------
     Total.....................................  $  2,943  $  2,499  $  2,343
                                                 ========  ========  ========

 
A reconciliation of the plan's status to amounts recognized in Zeigler's
balance sheets as of December 31, are as follows:
 


                                                             1996      1997
                                                           --------  --------
                                                               
   Plan assets at fair value.............................. $105,897  $108,081
                                                           --------  --------
   Actuarial present value of plan benefits:
     Vested...............................................   84,305    89,679
     Nonvested............................................    3,390     3,932
                                                           --------  --------
     Accumulated benefit obligation.......................   87,695    93,611
     Additional obligation for future salary increases....    7,190     6,497
                                                           --------  --------
       Projected benefit obligation.......................   94,885   100,108
                                                           --------  --------
   Excess of plan assets over projected benefit
    obligation............................................   11,012     7,973
   Unrecognized net transition asset......................     (548)     (480)
   Unrecognized prior service cost........................      264       242
   Unrecognized net gain..................................   (3,672)   (2,899)
                                                           --------  --------
   Prepaid pension expense................................ $  7,056  $  4,836
                                                           ========  ========

 
The unrecognized net transition asset, representing the excess of the fair
value of plan assets over the projected benefit obligation at the date of
adoption, is being amortized over the average expected future service periods
of employees.
 
Assumptions used in developing the projected benefit obligation as of December
31, are as follows:
 


                                                                     1996  1997
                                                                     ----- -----
                                                                     
   Discount rate.................................................... 7.75% 7.25%
   Rate of compensation increase.................................... 4.00% 4.00%
   Rate of return on plan assets.................................... 9.50% 9.50%

 
Plan assets consist principally of common stocks and U.S. government and
corporate obligations.
 
                                      F-58

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
UMWA Pension Plan--Old Ben Coal Company ("Old Ben"), a wholly-owned subsidiary,
and Marrowbone Development Company, a division of Mountaineer Coal Development
Company, an indirect subsidiary, are required under their respective contracts
with the UMWA to pay amounts based on hours worked to the UMWA Pension Plan and
Trust, a multi-employer pension plan covering all employees who are members of
the UMWA. The accompanying consolidated statements of operations include
$2,778, $2,102, and $1,578, of expense in 1995, 1996 and 1997, respectively,
applicable to the plan. The National Bituminous Coal Wage Agreement of 1998
("NBCWA") authorizes the Bituminous Coal Operators Association to increase the
rate of contributions from employers to assure payment of benefits. The union
contract requires all currently participating employers to guarantee benefits
jointly, but not severally, with all other currently participating employers.
It is not practical to determine each subsidiaries' allocable share of the
plan's net assets and accumulated benefits.
 
401(k) Plans--Zeigler and certain subsidiaries sponsor savings and long-term
investment plans for substantially all employees other than employees covered
by the contract with the UMWA. One of the plans will match 50% of the voluntary
contributions up to a maximum contribution of 3% of a participant's salary with
an additional matching contribution subject to certain performance criteria.
The expense under these plans was $1,036, $1,391, and $1,276, in 1995, 1996 and
1997, respectively.
 
Stock Appreciation Units--Zeigler has a long-term incentive plan which entitles
certain officers and key employees to receive a cash award for an amount equal
to the excess of the fair market value of Zeigler's common stock on the date
the unit matures over the base price at the date of grant of the award. The
plan permits an aggregate of 1,635,200 such stock appreciation units of which
284,320 and 73,600 were outstanding at December 31, 1996 and 1997,
respectively. The vesting period ranges from three to five years. During 1997,
210,080 stock appreciation units matured. Costs and expenses include
approximately $3,178, $2,917, and $141, of charges in connection with this plan
for 1995, 1996 and 1997, respectively. Outstanding stock appreciation units
with maturities less than one year are included as a component of other accrued
expenses.
 
7. Postretirement Benefits Other Than Pensions
 
UMWA Combined Benefit Fund--Zeigler provides healthcare benefits to eligible
retirees and their dependents. Retirees who were members of the UMWA and who
retired on or before December 31, 1975 received these benefits from multi-
employer benefit plans. Old Ben contributed to these funds based on the number
of its retirees in one of the funds and based on hours worked by current UMWA
members for the other fund. Current and projected operating deficits of these
trusts led to the passage of the Coal Industry Retiree Health Benefit Act of
1992 (the "Act"). The Act established a new multi-employer benefit trust that
will provide healthcare and life insurance benefits to all beneficiaries of the
earlier trusts who were receiving benefits as of July 20, 1992. The Act
provides for the assignment of beneficiaries to their former employers and any
unassigned beneficiaries to employers based on a formula. The expense under
these plans, which is recognized as contributions are made, amounted to $3,527,
$2,968, and $3,431, in 1995, 1996 and 1997, respectively. Based upon an
independent actuarial valuation, Zeigler estimates the amount of its obligation
under the new plan to be approximately $21,637 as of December 31, 1997.
 
 
                                      F-59

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Zeigler Benefit Plans--Net postretirement healthcare cost for the year ended
December 31, includes the following:
 


                                                        1995     1996     1997
                                                       -------  -------  -------
                                                                
   Service cost....................................... $ 5,027  $ 4,562  $ 4,270
   Interest cost......................................  17,842   17,123   18,436
   Amortization of prior service cost.................  (9,208)  (4,608)  (1,176)
   Amortization of unrecognized gain..................    (327)    (573)    (126)
                                                       -------  -------  -------
     Net periodic postretirement benefit cost......... $13,334  $16,504  $21,404
                                                       =======  =======  =======

 
A reconciliation of the plan's status to amounts recognized in Zeigler's
balance sheets as of December 31, follows:
 


                                                               1996      1997
                                                             --------  --------
                                                                 
   Accumulated postretirement benefit obligation:
     Retirees............................................... $135,044  $146,388
     Fully eligible active employees........................   53,477    61,974
     Other active employees.................................   52,760    61,899
                                                             --------  --------
       Total................................................  241,281   270,261
   Unrecognized net (loss) gain.............................    4,909   (17,379)
   Unrecognized prior service cost (benefit)................     (805)      818
                                                             --------  --------
   Accumulated postretirement benefit obligation............ $245,385  $253,700
                                                             ========  ========

 
In 1996, as a result of the re-employment or termination prior to vesting of
certain Midwestern employees, the Company recorded a $16,295 gain related to
the curtailment of its postretirement benefit plan.
 
The discount rate used to determine the accumulated postretirement benefit
obligation was 7.5% and 7.25% at January 1, 1997 and December 31, 1997,
respectively. The assumed healthcare cost trend rates used in determining the
net expense for 1997 are shown in the following table. Healthcare cost trends
were assumed to decline from 1997 levels to an ultimate ongoing level over five
years as follows:
 


                                                                   1997  Ultimate
                                                                   Rate    Rate
                                                                   ----  --------
                                                                   
       Pre-65..................................................... 8.0%    5.0%
       Post-65.................................................... 6.5%    5.0%
       Medicare offset............................................ 6.0%    5.0%

 
The expense and liability estimates can fluctuate by significant amounts based
upon the assumptions used by the actuaries. If the healthcare cost trend rates
were increased by one percent in each year, the accumulated postretirement
benefit obligation would be 14 percent higher as of December 31, 1997. The
effect of this change on the 1997 expense accrual would be an increase of 14
percent.
 
8. Pneumoconiosis Benefits
 
The actuarially determined liability for pneumoconiosis (black lung) benefits
is based on a 6% discount rate and various other assumptions including
incidence of claims, benefit escalation, terminations and life expectancy. The
annual black lung expense is comprised of the net change in the beginning
accrual balance, a charge for interest on the unfunded accrual balance plus the
premiums paid to the state insurance funds. The January 1, 1995 and January 1,
1997 actuarial studies reduced the estimated pneumoconiosis liability by
$23,299 and $8,244, respectively, as compared to the previous study. The lower
estimates resulted primarily from favorable claims experience and reduced
projected future claims.
 
                                      F-60

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
The cost of black lung benefits charged to operations for Zeigler and its
subsidiaries, excluding the changes in estimated liability mentioned above, was
$2,967, $157, and $2,280 in 1995, 1996 and 1997, respectively.
 
9. Stock Option Plan
 
In February 1994, Zeigler's Board of Directors and shareholders adopted a Stock
Option Plan (the "Option Plan"). A total of 2,560,000 shares of Common Stock
are reserved for issuance upon exercise of options granted under the Option
Plan. The Option Plan is administered by the Compensation Committee of the
Board of Directors which determines the terms of the options granted including
the exercise price, number of shares subject to the option and exercisability.
 
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its plan. The Company
has adopted the disclosure-only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation cost has been recognized
for the stock option plan.
 
The following summarizes the stock option transactions under the Option Plan
for the three years ended December 31, 1997:
 


                                   Number of                  Weighted Average
                                    Shares     Option Prices   Exercise Price
                                   ---------  --------------- ----------------
                                                     
Options outstanding at December
 31, 1994......................... 1,096,800  $11.13 to 16.05      $14.27
  Granted.........................    19,000   10.75 to 12.88       12.54
  Canceled........................   (29,800)  11.13 to 16.05       15.22
                                   ---------
Options outstanding at December
 31, 1995......................... 1,086,000   10.75 to 16.05       14.22
  Granted.........................   688,000   14.00 to 20.00       15.86
  Exercised.......................   (21,530)  11.13 to 16.05       11.42
  Canceled........................  (153,320)  11.13 to 16.05       14.50
                                   ---------
Options outstanding at December
 31, 1996......................... 1,599,150   10.75 to 20.00       14.93
  Granted.........................   434,000   23.38 to 26.25       25.52
  Exercised.......................   (65,710)  10.75 to 16.05       14.68
  Canceled........................  (210,280)  10.75 to 26.25       20.19
                                   ---------
Options outstanding at December
 31, 1997......................... 1,757,160   11.13 to 26.25       16.93
                                   =========

 
The outstanding stock options at December 31, 1995, 1996 and 1997 have a
weighted average remaining contractual life of 8.51, 8.28, and 7.64 years,
respectively. The number of stock option shares exercisable at December 31,
1995, 1996, and 1997 were 213,400, 362,710, and 717,464, respectively.
 
Generally, stock options are granted at prices which are equal to the market
value of the stock on the date of grant, have a maximum term of ten years, and
vest in equal annual increments over five years. The weighted average fair
value at date of grant for options granted during 1995, 1996, and 1997 was
$3.96, $5.76, and $10.66 per option, respectively. The fair value of options at
date of grant was estimated using the Black-Scholes model with the following
weighted average assumptions:
 


                                                            1995   1996   1997
                                                            -----  -----  -----
                                                                 
   Expected life (years)...................................     7      7      7
   Risk-free interest rate.................................  6.18%  6.26%  5.52%
   Volatility.............................................. 29.90% 29.90% 34.98%
   Dividend yield..........................................  2.52%  1.94%  1.18%

 
                                      F-61

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
As previously discussed, the Company accounts for the Option Plan in accordance
with APB No. 25 under which no compensation expense has been recognized for
stock option awards. Had compensation cost for the Company's stock option plan
been determined on the fair value at the grant date for awards for the three
year period ended December 31, 1997 consistent with the provisions of SFAS No.
123, the Company's net earnings (loss) and earnings (loss) per share would have
been reduced to the pro forma amounts indicated below:
 


                                                        1995     1996    1997
                                                      --------  ------- -------
                                                               
   Net earnings (loss)--as reported.................. $(11,213) $57,964 $58,639
   Net earnings (loss)--pro forma....................  (11,217)  57,611  57,590
   Earnings (loss) per share--as reported
     Basic........................................... $   (.40) $  2.04 $  2.07
     Diluted.........................................     (.40)    2.04    2.05
   Earnings (loss) per share--pro forma
     Basic........................................... $   (.40) $  2.03 $  2.04
     Diluted.........................................     (.40)    2.02    2.01

 
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
 
10. Asset Impairments and Accelerated Mine Closing Costs
 
The following summarizes the components of asset impairments and accelerated
mine closing costs:
 


                                                      Year Ended December 31,
                                                     -------------------------
                                                       1995     1996    1997
                                                     --------- ------- -------
                                                              
   Regular accruals for future mine closings........ $   9,440 $ 6,875 $ 6,403
                                                     ========= ======= =======
   Impairments and accelerated accruals:
     Write-down of assets........................... $  84,513 $   --  $   --
     End of mine closing and reclamation
      liabilities...................................    28,024     --      --
     Other liabilities..............................     2,125     --      --
                                                     --------- ------- -------
   Total impairments and accelerated accruals....... $ 114,662 $   --  $   --
                                                     ========= ======= =======

 
In July 1995, the Company closed Old Ben Mine #1 in Indiana after termination
of its supply contract with Southern Indiana Gas and Electric Company.
Accordingly, the carrying value of the mine and other related assets that
supported the contract were reduced to their estimated net realizable values,
which resulted in asset write-downs of $15,762. In addition, a provision for
accelerated mine closing costs of $16,500 was recorded, based on the amount of
estimated closing costs that would have been expensed during the full term of
the contract.
 
In the fourth quarter of 1995, the Company recorded asset impairments and
accelerated accruals totaling $82,400 in connection with the idling, closing
and projected closing of certain mines. Of that amount, $49,100 relates to Old
Ben's operations in southern Illinois. Old Ben idled one mine in Randolph
County, Illinois on December 31, 1995, and made plans to close two other mines
in Franklin County, Illinois later in 1996, mainly due to a sharp reduction in
demand for the Illinois Basin's high-sulfur coal. Management did not expect the
high-sulfur market to improve significantly in the foreseeable future. The
remaining $33,300 fourth quarter charge was associated with the indefinite
idling of Wolf Creek's underground mine in eastern Kentucky on October 1, 1995.
That amount consists of asset write-downs totaling $26,000 and increased
reclamation liabilities of $7,300. Operations were suspended at the mine
chiefly due to the new sourcing flexibility negotiated in the amended contract
with Carolina Power & Light Company which allows the Company to supply the
contract with coal purchased from lower-cost producers. The ongoing high costs
at the Wolf Creek mine were mainly attributable to unfavorable geology and
declining productivity.
 
                                      F-62

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
11. Sale of Indiana Assets
 
On February 12, 1996, the Company closed the sale of the majority of its assets
in Indiana to Kindill Mining, Inc. ("Kindill"). These assets had a combined
book value of $13,400 and included Old Ben Mine #1 and Old Ben Mine #2, along
with various other coal properties and interests. The Company also agreed to
make cash payments to Kindill of $7,000 in 1996 and $4,000 in 1997. In
exchange, Kindill assumed the associated reclamation liabilities, estimated at
approximately $23,400. This sale was completed on April 30, 1996, after Kindill
secured the required mining permits. The sale of these assets did not have a
material effect on current income.
 
12. Preferred Stock
 
Zeigler is authorized to issue 1,000,000 shares of preferred stock, $0.01 par
value, with such issuance to be in one or more classes or series. The Board of
Directors is authorized to determine the designations, preferences,
qualifications, limitations and restrictions of any class or series with
respect to, among other things, the rate and nature of dividends, the price and
terms, the amount payable in the event of liquidation, the terms and conditions
for conversion or exchange into any other class or series of the stock or other
securities and voting rights.
 
13. Significant Customers
 
Coal sales include transactions involving both produced and purchased coal. Two
customers accounted for 18% and 13% of coal sales in 1995, 18% and 14% of coal
sales in 1996, and 29% and 16% of coal sales in 1997.
 
14. Related Party Transactions
 
Shell Oil Company, a former indirect shareholder, provides guarantees for
certain letters of credit and surety bonds of Zeigler. Zeigler reimburses Shell
for its costs in providing these guarantees.
 
15. Commitments and Contingencies (Also see Note 16--Legal Proceedings)
 
Zeigler and its subsidiaries have operating lease commitments expiring at
various dates, primarily for equipment. Minimum rental obligations under these
leases at December 31, 1997 are summarized by fiscal year as follows:
 
                                                                    
   1998.................................................................. $5,095
   1999..................................................................  1,172
   2000..................................................................    623
   2001..................................................................    284
   2002..................................................................     20
   Thereafter............................................................    --
                                                                          ------
       Total............................................................. $7,194
                                                                          ======

   
 
Rental expense relating to operating leases amounted to $9,733, $7,834, and
$7,626 in 1995, 1996 and 1997, respectively. As of December 31, 1997, Zeigler
and its subsidiaries had $192,571 of surety bonds issued by an insurance
company to secure self-insured workers' compensation and pneumoconiosis claims,
reclamation and other performance commitments. Of that amount, $23,061 was
backed by guarantees of Shell (see Note 14). Letters of credit of $246,161 were
outstanding at December 31, 1997, of which amount $60,053 was also guaranteed
by Shell.
 
                                      F-63

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
In 1997, upon completion of planned development, the Company idled Encoal
Corporation's clean coal demonstration plant in Wyoming. In 1998, marketing of
the LFC technology, both domestically and internationally, will continue as
well as the evaluation of options regarding Encoal. The net book value of
Encoal Corporation's assets and the Company's related investment in clean coal
technology was $6.7 million as of December 31, 1997.
 
16. Legal Proceedings
 
Cajun Electric Power Cooperative--On December 21, 1994, Cajun Electric Power
Cooperative Inc. ("Cajun") filed with the U.S. Bankruptcy Court for the Middle
District of Louisiana (the "Bankruptcy Court") for voluntary reorganization
under Chapter 11 of the U.S. Bankruptcy Code. Triton Coal Company ("Triton")
has a requirements contract (the "Triton Contract") with Cajun through Western
Fuels Association, Inc., with a term extending through the life of Big Cajun
Plant No. 2. During 1997, Triton shipped 5.8 million tons of coal to Cajun
(representing 3.0% of the Company's total consolidated revenues), while 1996
shipments to Cajun totaled 5.0 million tons. To date during the bankruptcy,
Triton has continued to ship coal to Cajun and Cajun has continued to pay for
such coal. The price for coal sold under the Triton Contract is at or near the
market price for this coal. The Triton Contract provides for a price reopener
effective January 1, 1998. The parties were unable to reach agreement on the
price to be effective January 1, 1998 and are attempting to resolve that matter
through the procedure set forth in the Triton Contract.
 
An Appellate Court affirmed a District Court's ruling that a court-appointed
trustee will manage Cajun's affairs during the bankruptcy. At this time, it
appears likely that the trustee will reject the Triton Contract. In the event
that the contract is rejected, it may be necessary for Triton to find other
markets for this coal, possibly including sales to the new operator of Cajun's
coal fired units.
 
Louisiana Generating LLC (an affiliate of the Company, Southern Energy, Inc.
and NRG Energy, Inc.) has executed an Amended and Restated Asset Purchase and
Reorganization Agreement to purchase substantially all of Cajun's non-nuclear
assets. This Agreement is incorporated in the trustee's plan of reorganization,
which is subject to Bankruptcy Court approval (including evaluation of
competing plans of reorganization) and a number of other conditions. As a
result of Louisiana Generating's entering into this Agreement, Western Fuels
Association, Inc. has formally requested certain assurances regarding Triton's
performance under the Triton Contract and informed the Company that it reserves
the right to assert certain claims against Triton if the trustee rejects the
Triton Contract.
 
Entergy-Gulf States Utilities, Inc.--Entergy-Gulf States, Inc. ("GSU") owns 42%
of Unit 3 at the Big Cajun II coal-fired power station. Pursuant to the Triton
Contract, Triton supplies the coal requirements of all three units at Big Cajun
II. Two of the three plans for reorganization of Cajun pending before the
Bankruptcy Court call for the rejection of the Triton Contract. Triton and
Western Fuels Association, Inc. maintain that Unit 3 is a joint venture between
GSU and Cajun, that joint ventures are partnerships under Louisiana law and
that, as Cajun's partner and as a direct beneficiary of the coal provided by
Triton, GSU is liable for some or all of their damages in the event that the
Triton Contract is rejected. On January 13, 1997, GSU requested a judgment from
the Bankruptcy Court declaring that Cajun is the sole principal under the
Triton Contract and that GSU has no liability to Western Fuels Association,
Inc. or Triton in the event the Triton Contract is rejected. In February 1997,
Western Fuels Association, Inc. and Triton filed a counterclaim asking for a
declaration from the Bankruptcy Court that GSU is liable to them for damages if
the Triton Contract is rejected. On September 3, 1997, the Bankruptcy Court
granted GSU a summary judgment. Western Fuels Association, Inc. and Triton have
appealed this judgment.
 
                                      F-64

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
On August 21, 1997, GSU filed additional claims against the Company, Triton and
Western Fuels Association, Inc. In these claims, GSU alleged that these parties
violated the Sherman Antitrust Act and Louisiana Fair Trade Statutes in the
course of settlement discussions between the parties. The Company believes that
these allegations have no merit and a Motion to Dismiss these claims is
pending.
 
If the Triton Contract is rejected by the Bankruptcy Court, Triton will suffer
damages for breach of contract, for which its only remedies will be a claim
against GSU (as described above) and/or a claim in Cajun's bankruptcy
proceeding as a creditor of Cajun, and Triton will have to find other markets
for this coal, possibly including sales to the new operator of Cajun's coal-
fired units. Triton is currently in negotiations with alternative customers for
this coal. Triton has executed an agreement with Louisiana Generating pursuant
to which Triton will supply coal to Big Cajun II in the event Cajun's court-
appointed trustee's plan of reorganization is confirmed by the Bankruptcy Court
and Louisiana Generating completes the purchase of Cajun's non-nuclear assets.
Triton, Western Fuels Association, Inc., and the Trustee have also executed an
agreement which provides that if Louisiana Generating is successful in
purchasing the Cajun assets and the Triton Contract is rejected, Triton will
release any and all claims in Cajun's bankruptcy and will receive approximately
$4,000.
 
Janet Saad-Cook et al. v. Zeigler Coal Holding Company and R. & F. Coal
Company--In March, 1995, plaintiff filed a lawsuit against the Company and its
subsidiary, R. & F. Coal Company. The complaint includes several causes of
action based on alleged actions of the defendant companies involving fraud,
deceit, misrepresentation, and tortuous breach of contract with respect to two
coal mining leases made among the plaintiffs and R. & F. Coal Company. The
plaintiffs' complaint has since been amended to add Bluegrass Coal Development
Company as a named defendant, to eliminate the allegations that the defendants'
behavior violated the U.S. Racketeer Influenced and Corrupt Organizations Act
and to include additional causes of action involving trespass and breach of
lease. The defendant companies have denied the allegations in the complaint,
believe they have meritorious defenses to plaintiffs' claims, and intend to
defend vigorously against the claims. The Company believes that Shell Oil
Company is obligated to indemnify the Company against any loss (over certain
minimum amounts) that the Company may incur as a result of plaintiff s' claims
in the litigation and has given Shell notice thereof in accordance with the
terms of the purchase agreement under which the Company acquired Shell Mining
companies. The Company believes that ultimate resolution of the claims in the
lawsuit will have no material adverse effect on the Company's consolidated
results of operations or financial position.
 
Other--Various lawsuits and claims, including those involving ordinary routine
matters incidental to its business, to which the Company and its subsidiaries
are a party, are pending, or have been asserted, against the Company. Although
the outcome of these matters cannot be predicted with certainty, management
believes that their disposition will not have materially adverse effects on the
Company's consolidated results of operations or financial position.
 
17. Segment Reporting
 
The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, beginning with the Company's fourth quarter of 1997.
The Company has two reportable segments: coal and energy. The coal segment is
engaged in the mining of coal for utilities in the United States. The energy
segment is principally responsible for the trading and marketing of electricity
and natural gas within the U.S. These reportable segments are separately
managed strategic business units that offer different products and services,
and whose performance is evaluated based on earnings from operations before
interest, taxes and extraordinary items, not including nonrecurring gains and
losses. The accounting policies of the segments are the same as those described
in Note 1. There were no sales or transfers between segments in 1995, 1996, or
 
                                      F-65

 
                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
1997 and in the first half of 1998. The "Other" category below consists of five
operating segments that did not meet the quantitative thresholds for
determining reporting segments. These segments consist primarily of amounts
related to two import/export terminals, a clean coal plant in Wyoming, the
Company's environmental subsidiary, coal leases to third parties, farming,
timber, gains on sales of surplus assets, oil and gas royalties, and selling,
general and administrative costs.
 


                                                                     (unaudited)
                          For the Year Ended December 31,     Six Months Ended June 30,
                          ----------------------------------  --------------------------
                             1995        1996        1997         1997          1998
                          ----------  ----------  ----------  ------------  ------------
                                                             
Revenues:
  Coal..................  $  754,975  $  698,523  $  603,553  $    293,843  $    298,590
  Energy................         --          --      166,474        37,878        74,709
  Other.................      28,128      33,101      30,729        16,334        15,299
                          ----------  ----------  ----------  ------------  ------------
    Total...............  $  783,103  $  731,624  $  800,756  $    348,055  $    388,598
Operating Earnings:
  Coal..................  $   68,743  $   85,357  $   99,607  $     53,310  $     38,599
  Energy................         --          --       (6,756)       (1,680)       (2,142)
  Other.................     (11,099)    (10,684)    (15,111)       (9,146)        1,621
  Nonrecurring gains/
   (losses).............     (45,863)     16,295       8,244           --            --
                          ----------  ----------  ----------  ------------  ------------
    Total...............  $   11,781  $   90,968  $   85,984  $     42,484  $     38,078
Depreciation, Depletion,
 and Amortization:
  Coal..................  $   64,382  $   55,649  $   53,259  $     26,442  $     30,072
  Energy................         --          --           35           --             38
  Other.................       4,194       4,485       4,618         2,322         2,274
                          ----------  ----------  ----------  ------------  ------------
    Total...............  $   68,576  $   60,134  $   57,912  $     28,764  $     32,384
Capital Expenditures:
  Coal..................  $   46,496  $   24,671  $   65,768  $     19,127  $     45,102
  Energy................         --          --          398           314           151
  Other.................       9,838       6,756       8,260         1,165           377
                          ----------  ----------  ----------  ------------  ------------
    Total...............  $   56,334  $   31,427  $   74,426  $     20,606  $     45,630
Assets:
  Coal..................  $  901,916  $  885,724  $  890,030                $    890,978
  Energy................         --       10,000      18,030                      14,999
  Other.................     123,325     154,901     169,344                      78,923
                          ----------  ----------  ----------                ------------
    Total...............  $1,025,241  $1,050,625  $1,077,404                $    984,900

 
18. Sale of Company
 
On December 3, 1997, the Company announced that it was retaining an investment
banking firm to explore various strategic alternatives to maximize value for
shareholders, including the possible sale of the entire Company. In connection
therewith, the Board of Directors adopted a change-in-control severance plan
and retention bonus plan for all salaried employees as well as special
incentives for certain key employees. The Company subsequently retained the
investment banking firm Credit Suisse First Boston and prepared materials for
interested parties. On September 2, 1998, the Company was acquired by, and
became the successor by merger to, Zeigler Acquisition Corporation, a wholly
owned subsidiary of AEI Resources, Inc.
 
                                      F-66

 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors of
AEI Resources, Inc.
 
We have audited the accompanying combined statements of assets, liabilities and
parent investment of the Cyprus Eastern Coal Operations (as defined in Note 1)
at December 31, 1997 and 1996, and the related combined statement of operating
revenues and expenses, of cash flows, and of parent investment for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the management of Cyprus Amax Coal Company (parent of
Cyprus Eastern Coal Operations). Our responsibility is to express an opinion on
these financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 and are not intended to be a complete
presentation of the Cyprus Eastern Coal Operations financial position or
results of operations.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined assets, liabilities and parent investment
of the Cyprus Eastern Coal Operations, as described in Note 1, at December 31,
1997 and 1996, and their combined operating revenues and expenses and their
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
 
                                          PricewaterhouseCoopers LLP
 
Denver, Colorado
August 31, 1998
 
                                      F-67

 
                         CYPRUS EASTERN COAL OPERATIONS
 
   COMBINED STATEMENTS OF ASSETS, LIABILITIES AND PARENT INVESTMENT (NOTE 1)
 


                                                    December 31,
                                                  -----------------  June 30,
                                                    1996     1997      1998
                                                  -------- -------- -----------
                                                                    (Unaudited)
                                                         (In thousands)
                                                           
                     ASSETS
Current Assets
  Cash and Cash Equivalents...................... $  6,657 $  7,391  $  3,709
  Accounts Receivable............................   45,360   52,157    44,674
  Inventories....................................   20,616   20,065    23,355
  Prepaid Expenses and Other.....................   10,151    8,203     8,809
                                                  -------- --------  --------
    Total Current Assets.........................   82,784   87,816    80,547
                                                  -------- --------  --------
Properties--At Cost, Net.........................  278,695  193,407   177,776
Other Noncurrent Assets..........................   17,956   18,720    16,902
                                                  -------- --------  --------
Total Assets..................................... $379,435 $299,943  $275,225
                                                  ======== ========  ========
        LIABILITIES AND PARENT INVESTMENT
Current Liabilities
  Current Portion of Capital Leases.............. $  1,883 $  2,329  $  3,347
  Accounts Payable...............................   21,657   10,474     7,603
  Accrued Payroll and Benefits...................   15,671   17,442    17,728
  Accrued Royalties and Interest.................    3,127    3,638     3,605
  Accrued Closure, Reclamation, and
   Environmental.................................    6,083    6,159     3,561
  Other Accrued Liabilities......................    3,627   12,350     5,609
  Taxes Payable Other Than Income Taxes..........    6,056    6,904     7,117
                                                  -------- --------  --------
    Total Current Liabilities....................   58,104   59,296    48,570
Noncurrent Liabilities and Deferred Credits
  Long-Term Debt.................................    1,000    1,000     1,000
  Capital Lease Obligations, Less Current
   Portion.......................................    8,135    5,806     2,922
  Deferred Employee and Retiree Benefits.........   98,737   97,489    89,383
  Deferred Closure, Reclamation, and
   Environmental.................................   57,980   69,534    71,251
  Other..........................................   10,284   11,819     6,400
                                                  -------- --------  --------
    Total Noncurrent Liabilities and Deferred
     Credits.....................................  176,136  185,648   170,956
Commitments and Contingencies (Note 11)..........      --       --        --
Minority Interest................................    1,182    1,172       227
                                                  -------- --------  --------
Parent Investment................................  144,013   53,827    55,472
                                                  -------- --------  --------
Total Liabilities and Parent Investment.......... $379,435 $299,943  $275,225
                                                  ======== ========  ========

 
        The accompanying notes are an integral part of these statements.
 
                                      F-68

 
                         CYPRUS EASTERN COAL OPERATIONS
 
        COMBINED STATEMENTS OF OPERATING REVENUES AND EXPENSES (NOTE 1)
 


                              For the Year Ended
                                 December 31,           Six Months Ended June 30,
                          ----------------------------  --------------------------
                            1995      1996      1997        1997          1998
                          --------  --------  --------  ------------  ------------
                                                               (Unaudited)
                                             (In thousands)
                                                       
Revenues................  $428,545  $415,663  $429,756  $    193,923  $    202,658
Costs and Expenses
  Cost of Operations....   342,886   360,301   377,925       165,822       180,464
  Depreciation,
   Depletion, and
   Amortization.........    40,215    39,599    41,840        20,910        18,691
  Selling, General and
   Administrative.......    15,907    14,605    16,460         8,282         6,743
  Write-Downs and
   Special Charges......    98,051     1,819    92,134         1,141           --
                          --------  --------  --------  ------------  ------------
Total Costs and
 Expenses...............   497,059   416,324   528,359       196,155       205,898
                          --------  --------  --------  ------------  ------------
Loss From Operations....   (68,514)     (661)  (98,603)       (2,232)       (3,240)
Other Income (Expense)
  Interest Income.......       598        63        83            38            32
  Interest Expense......    (1,243)     (755)     (639)         (293)         (216)
  Other income..........       --        --        --             82           --
                          --------  --------  --------  ------------  ------------
Net Loss Before Minority
 Interest and Income
 Taxes..................   (69,159)   (1,353)  (99,159)       (2,405)       (3,424)
  Minority Interest.....       (53)      (99)       10             4           (51)
                          --------  --------  --------  ------------  ------------
Net Loss Before Income
 Taxes..................  $(69,212) $ (1,452) $(99,149) $     (2,401) $     (3,475)
                          ========  ========  ========  ============  ============

 
 
 
        The accompanying notes are an integral part of these statements.
 
                                      F-69

 
                         CYPRUS EASTERN COAL OPERATIONS
 
                    COMBINED STATEMENTS OF PARENT INVESTMENT
 


                                   For The Year Ended           Six Months
                                      December 31,            Ended June 30,
                               ----------------------------  -----------------
                                 1995      1996      1997      1997     1998
                               --------  --------  --------  --------  -------
                                                               (Unaudited)
                                             (In thousands)
                                                        
Balance at beginning of
 period......................  $250,382  $141,205  $144,013  $144,013  $53,827
Loss Before Income Taxes.....   (69,212)   (1,452)  (99,149)   (2,401)  (3,475)
Changes in Parent Investment,
 net.........................   (39,965)    4,260     8,963    24,547    5,120
                               --------  --------  --------  --------  -------
Balance at end of period.....  $141,205  $144,013  $ 53,827  $166,159  $55,472
                               ========  ========  ========  ========  =======

 
 
 
        The accompanying notes are an integral part of these statements.
 
                                      F-70

 
                         CYPRUS EASTERN COAL OPERATIONS
 
                       COMBINED STATEMENTS OF CASH FLOWS
 


                                  For The Year Ended           Six Months
                                     December 31,            Ended June 30,
                               ---------------------------  ------------------
                                 1995     1996      1997      1997      1998
                               --------  -------  --------  --------  --------
                                                               (Unaudited)
                                             (In thousands)
                                                       
Cash Flows from Operating
 Activities
 Net Loss Before Income
  Taxes....................... $(69,212) $(1,452) $(99,149) $ (2,401) $ (3,475)
 Adjustments to Reconcile Loss
  Before Income Taxes to Net
  Cash Provided by Operating
  Activities:
  Depreciation, Depletion, and
   Amortization...............   40,215   39,599    41,840    20,910    18,691
  Write-Downs and Special
   Charges....................   98,051    1,819    92,134     1,141       --
  Minority Interest...........       53       99       (10)       28      (945)
  Gain on Sales of Assets.....   (1,808)  (3,416)   (6,798)     (128)     (890)
 Changes in Assets and
  Liabilities Net of Effects
  from Businesses Sold and
  Write-Downs and Special
  Charges:
  (Increase) Decrease in
   Receivables................    6,217    1,342    (7,097)   (4,208)    7,483
  (Increase) Decrease in
   Inventories................      (54)  10,547      (465)  (16,236)   (3,290)
  Decrease (Increase) in
   Prepaid Expenses and
   Other......................   (1,852)  (1,320)    1,844     1,390      (606)
  Decrease in Current
   Liabilities................   (7,222)  (3,469)   (7,727)   (8,456)  (11,743)
  (Increase) Decrease in Other
   Assets.....................    4,787   (1,707)   (1,675)     (333)    1,818
  Decrease in Other
   Liabilities................  (11,650) (12,463)   (3,565)   (3,974)  (11,810)
                               --------  -------  --------  --------  --------
Net Cash (Used for) Provided
 by Operating Activities......   57,525   29,579     9,332   (12,267)   (4,767)
                               --------  -------  --------  --------  --------
Cash Flows from Investing
 Activities
 Capital Expenditures.........  (16,706) (35,000)  (24,509)  (14,955)   (3,274)
 Payments Related to
  Liabilities of Disposed Mine
  Assets (Note 4).............   (3,750)     --        --        --        --
 Proceeds from Sales of
  Assets......................    2,024    3,751     8,831     1,557     1,105
                               --------  -------  --------  --------  --------
Net Cash Used for Investing
 Activities...................  (18,432) (31,249)  (15,678)  (13,398)   (2,169)
Cash Flows from Financing
 Activities
 Payments on Capital Lease
  Obligations.................      --    (1,454)   (1,883)      --     (1,866)
 Changes in Parent Investment,
  net.........................  (39,965)   4,260     8,963    24,547     5,120
                               --------  -------  --------  --------  --------
Net Cash (Used for) Provided
 by Financing Activities......  (39,965)   2,806     7,080    24,547     3,254
                               --------  -------  --------  --------  --------
Net Increase (Decrease) in
 Cash and Cash Equivalents....     (872)   1,136       734    (1,118)   (3,682)
Cash and Cash Equivalents at
 Beginning of Year............    6,393    5,521     6,657     6,657     7,391
                               --------  -------  --------  --------  --------
Cash and Cash Equivalents at
 End of Year.................. $  5,521  $ 6,657  $  7,391  $  5,539  $  3,709
                               ========  =======  ========  ========  ========

 
        The accompanying notes are an integral part of these statements.
 
                                      F-71

 
                         CYPRUS EASTERN COAL OPERATIONS
 
                     NOTES TO COMBINED FINANCIAL STATEMENTS
                                 (In Thousands)
 
NOTE 1. ACQUISITION AND BASIS OF PRESENTATION
 
Acquisition--In accordance with a stock purchase and sale agreement (the
Agreement) dated May 28, 1998, between a subsidiary of Cyprus Amax Minerals
Company (Cyprus or the Parent) and AEI Holding Company, Inc. (AEI), Cyprus
agreed to sell to AEI the stock of certain of its coal mining subsidiaries
(collectively referred to as Cyprus Eastern Coal Operations or the Company) as
follows:
 
  .Amax Coal Company, a Delaware corporation
  .Amax Coal Sales Company, a Delaware corporation
  .Ayrshire Land Company, a Delaware corporation
  .Beech Coal Company, a Delaware corporation
  .Bentley Coal Company, a partnership organized under the laws of the State
  of New York
  .Cannelton, Inc., a Delaware corporation
  .Cannelton Industries, Inc., a West Virginia corporation
  .Cannelton Land Company, a Delaware corporation
  .Cannelton Sales Company, a Delaware corporation
  .Cyprus Cumberland Coal Corporation, a Kentucky corporation
  .Cyprus Kanawha Corporation, a Delaware corporation
  .Cyprus Mountain Coals Corporation, a Delaware corporation
  .Cyprus Southern Realty Corporation, a Kentucky corporation
  .Dunn Coal and Dock Company, a West Virginia corporation
  .Grassy Cove Coal Mining Company, a Delaware corporation
  .Kentucky Prince Mining Company, a partnership organized under the laws of
  the State of New York
  .Meadowlark, Inc., an Indiana corporation
  .Roaring Creek Coal Company, a Delaware corporation
  .Skyline Coal Company, a partnership organized under the laws of the State
  of New York
  .Yankeetown Dock Corporation, an Indiana corporation
 
All of the subsidiaries listed above are wholly-owned, except for Yankeetown
Dock Corporation, which is 60%-owned. The Company represents the majority of
Cyprus's coal mining operations in Indiana, Kentucky, West Virginia and
Tennessee. Included in the businesses to be acquired are coal producing
properties (7 surface mining and 4 underground mining operations) and related
coal reserves, coal wash plants, tipples, land, buildings, machinery and
equipment, coal sales contracts and certain other liabilities and working
capital items. Excluded from the accompanying financial statements are certain
mines previously included in the subsidiaries to be sold, which will be
retained by Cyprus.
 
As consideration for the acquisition, AEI will pay to Cyprus approximately
$93,000 in cash. The Agreement also includes a clause stating that AEI will pay
to Cyprus a royalty per ton produced by the Company after June 1, 2002 in
amounts ranging from thirty-five cents to fifty cents per ton (the Royalty
Agreement). In addition, in the event the Company's undeveloped reserves are
not mined, then an additional minimum undeveloped reserve royalty (Undeveloped
Reserve Royalty Agreement) is due, beginning December 31, 2002, with a total
minimum due of $4,000 by December 31, 2006. If AEI has a sale transaction, as
defined, that produces aggregate proceeds greater than $75,000, then AEI will
pay a one-time royalty buyout to terminate the Royalty Agreement and the
Undeveloped Reserve Royalty Agreement (payment up to $25,000, as defined),
otherwise the royalty agreement will continue until the aggregate proceeds of
the royalty payments and undeveloped royalty payments total $45,455. Further,
as defined in the agreement, Cyprus will retain certain
 
                                      F-72

 
                         CYPRUS EASTERN COAL OPERATIONS
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
assets and will indemnify AEI for certain obligations of the Company that exist
as of the closing date, including, among others, certain post-retirement
medical obligations, certain pension assets, certain workers compensation
obligations, black lung trust assets, certain black lung obligations and
certain disability obligations.
 
The Company's mining operations mine, clean, market, and sell coal to electric
utilities and industrial users. The Company's coal is primarily sold to
domestic electric utilities under both term contracts, with an initial term of
at least one year, and spot sales orders. New sales are predominantly one to
three year term contracts and spot orders. As of December 31, 1997, the Company
had 11 operating mines of which 7 were governed by union contracts. As of
December 31, 1997, union representation accounts for approximately 76% percent
of the Company's employees and 74% percent of production. The contract with the
United Mine Workers of America, which covers all the union coal operations
except the Kentucky operations and Sycamore mine, expires in August of 1998.
The union contracts covering employees of the Kentucky and Sycamore operations
expire in June of 1999 and April of 1999, respectively.
 
Basis of Presentation--The accompanying combined financial statements of the
Company contain the historical accounts of the subsidiaries included under the
Agreement and include certain assets and liabilities that will be retained by
Cyprus as described above. In addition various direct and indirect expense
allocations from Cyprus have been recorded in the financial statements of the
Company. Such allocations were based primarily on actual and estimated usages
and include expenses related to executive management, accounting, treasury,
land administration, environmental management, investor relations, legal and
information and technology services. Management believes its method for expense
allocations is reasonable.
 
Certain carve-out adjustments have been made to segregate the historical
accounts of the Company from those of Cyprus. In addition, certain expenses and
related assets and liabilities incurred by Cyprus on behalf of the Company have
been excluded from the Company's statements of operations. Among the expenses
excluded is interest expense on parent long-term debt and provisions related to
income taxes. These exclusions result in a financial statement presentation
that is not complete in accordance generally accepted accounting principles.
All significant intercompany accounts and transactions have been eliminated in
combination.
 
Interim Financial Information--The interim financial statements as of June 30,
1998 and for the six months ended June 30, 1997 and 1998 are unaudited and have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, the unaudited
interim financial statements contain all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation. The
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
 
Company Environment and Risks--The Company's principal business activities
consist of surface and deep mining and marketing of bituminous coal located in
Indiana, Kentucky, Tennessee and West Virginia. The Company, in the course of
its business activities, is exposed to a number of risks including: the
possibility of the termination of sales contracts, fluctuating market
conditions for coal and transportation services, competitive industry and over
capacity, changing government regulations, labor disruption, loss of key
employees and the ability of the Company to obtain necessary mining permits and
control adequate recoverable mineral reserves. In addition, adverse weather and
geological conditions could significantly impact operations and mining costs.
Precipitation is generally highest at the Company's mining operations in early
spring and late fall.
 
In the past, the Company has operated under the ownership of Cyprus Amax, which
may have resulted in operating results or financial position of the Company
significantly different from those that would have been obtained if the Company
were autonomous.
 
                                      F-73

 
                         CYPRUS EASTERN COAL OPERATIONS
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Use of Estimates--The preparation of financial statements 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. The more significant areas requiring the use of
management estimates relate to mineral reserves; reclamation and environmental
obligations; postemployment, postretirement, and other employee benefit
liabilities; future cash flows associated with assets; and useful lives for
depreciation, depletion, and amortization. Actual results could differ from
those estimates.
 
Cash Equivalents and Statements of Cash Flows--The Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents. Overdrafts representing outstanding checks in excess of
funds on deposit are classified as accounts payable.
 
The Combined Statements of Cash Flows provide information about changes in cash
and cash equivalents. All interest payments were paid by the Parent and thus
such payments are presented in Changes in Parent Investment, net on the
accompanying statements.
 
See Notes 3 and 4 for additional supplemental information on non-cash investing
activities.
 
Inventories--Coal inventories are carried at the lower of current market or
average production cost. Materials and supplies inventories are carried at
average cost less allowance for obsolete and surplus items.
 
Advanced Royalties--The Company is required, under certain royalty lease
agreements, to make minimum royalty payments whether or not mining activity is
being performed on the leased property. These minimum payments are recoupable
once mining begins on the leased property. The Company capitalizes these
minimum royalty payments and expenses the prepaid balances as they are offset
against production royalties once mining activities begin or expenses the
prepaid balances when the Company has ceased mining or has made a decision not
to mine on such property. Included in the accompanying Combined Statements of
Assets, Liabilities and Parent Investment at December 31, 1996 and 1997, the
advanced royalties included in Prepaid Expenses was $970 and $1,019,
respectively, and the advanced royalties included in Other Noncurrent Assets
was $7,010 and $10,722, respectively.
 
Properties--Costs for mineral rights and certain tangible assets, and mine
development costs incurred to expand capacity of operating mines or develop
mine areas substantially in advance of current production are capitalized and
charged to operations generally on the units-of-production method. Mobile
mining equipment and most other assets are depreciated on a straight-line basis
over their estimated useful lives. Interest costs for the construction or
development of significant long-term assets are capitalized and amortized over
the related assets' estimated useful lives or the life of the mine, whichever
is shorter. Gains or losses upon retirement or replacement of equipment and
facilities are credited or charged to income. Expenditures for betterments are
capitalized. Ongoing maintenance and repairs are expensed as incurred;
expenditures for renewals in excess of defined limits (generally $250) are
deferred and charged to expense over the period benefited. Included in Coal
Properties are values assigned to coal reserves at certain of the Company's
mines as a result of the Amax acquisition. The affected mines are Chinook and
Sycamore in Indiana and Stockton, Dunn and Mine 155 in West Virginia. These
values are being cost depleted on a unit-of-production basis over the
recoverable reserves at each mine.
 
Impairment of Long-Lived Assets--The Company follows Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121
prescribes that an impairment loss is recognized in the event that facts and
circumstances
 
                                      F-74

 
                         CYPRUS EASTERN COAL OPERATIONS
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
indicate that the carrying amount of an asset may not be recoverable and an
estimate of future undiscounted cash flows is less than the carrying amount of
the asset. Impairment is recorded based on an estimate of future discounted
cash flows. The implementation impact of SFAS No. 121 is discussed in Note 3.
 
Reclamation and Environmental Costs--Minimum standards for mine reclamation
have been established by various governmental agencies and affect certain
operations of the Company. Reclamation is performed and expensed on an ongoing
basis as mining operations are performed. Reclamation costs and other shutdown
expenses related to the period after mine closure are accrued and charged
against income on a units-of-production basis over the life of the mine. The
Company is subject to various environmental regulations. Environmental
liabilities are accrued on an ongoing basis when such losses are probable and
reasonably estimable and reflect management's best estimates of future
obligations. Costs of future expenditures for reclamation and environmental
remediation obligations are not discounted to their present value.
 
Revenue Recognition--Revenues are recognized on coal sales when title passes,
in accordance with the sales agreement, which usually occurs when the coal is
shipped to the customer.
 
Income Taxes--As previously noted, income tax accounts have not been "pushed
down" to the Company as such accounts are maintained by Cyprus on a
consolidated basis. Therefore, no income tax benefit (provision) nor deferred
income tax balances are recorded in the accompanying statements.
 
NOTE 3.  WRITE-DOWNS AND SPECIAL CHARGES
 
Write-Downs and Special Charges reported in the accompanying Combined
Statements of Operating Revenues and Expenses consist of the following:
 
In 1995, coal reserves were reduced and the Company wrote down certain of its
mining properties by $98,051 in response to weak demand and lower prices,
ongoing transportation and coal quality disadvantages compared to other
regions, the impending expiration of certain long-term contracts in 1995 and
1998 and the adoption of revised mining plans. Included in the charge was
$86,800 of write-downs related to the Kentucky mining operations, $2,220 for
West Virginia, and $9,031 related to the Indiana properties. The write-downs
were calculated in accordance with SFAS No. 121.
 
In 1996, the Company recorded a one-time special charge of $1,819 related to
the write-down of Midwest materials and supplies inventories to net realizable
value.
 
In 1997, a $92,134 charge was recorded. This included a $35,767 charge for the
anticipated closure of the Armstrong Creek mine, reclamation adjustments of
$2,332 at the Chinook mine and other asset adjustments and accruals of $6,935.
Additionally, asset impairment charges of $33,500 and $13,600, were recorded at
the West Virginia steam coal properties and the Chinook mine, respectively, due
to updated mine and business plans that reflected the current views of the
domestic markets for mid- to high-sulfur coal and updated reserve information.
These impairments were calculated in accordance with SFAS No. 121.
 
NOTE 4.  DIVESTITURE OF MINNEHAHA MINE
 
In the fourth quarter of 1995, the Company sold a majority of the assets of one
of its Indiana mines, Minnehaha. The Company paid $3,750 and conveyed title to
the assets in exchange for the purchaser's assumption of reclamation and mine
closure liabilities that were recorded at $8,235. The transaction resulted in
no gain or loss. In 1995, the mine had sales and an operating loss of
approximately $8,863 and $6,895 (including write-offs and special charges of
$7,067). The mine also had total assets of approximately $8,346 as of the date
of divestiture.
 
                                      F-75

 
                         CYPRUS EASTERN COAL OPERATIONS
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
NOTE 5.  INVENTORIES
 
Inventories detailed by component are summarized below:
 


                                               At December 31
                                               --------------- At June 30,
                                                1996    1997      1998
                                               ------- ------- ----------- 
                                                               (Unaudited)
                                                               -----------
                                                               
   In-Process Inventories..................... $ 7,692 $ 9,698   $10,640
   Finished Goods.............................   6,751   6,128     8,413
   Materials and Supplies.....................   6,173   4,239     4,302
                                               ------- -------   -------
   Total Inventories.......................... $20,616 $20,065   $23,355
                                               ======= =======   =======

 
NOTE 6.  PROPERTIES
 
Properties consist of the following at December 31, 1996 and 1997:
 


                                                               At December 31
                                                              -----------------
                                                                1996     1997
                                                              -------- --------
                                                                 
Coal Properties.............................................  $248,023 $184,588
Property, Plant and Equipment...............................   330,121  344,179
                                                              -------- --------
Total Properties............................................   578,144  528,767
Less: Accumulated Depreciation, Depletion, Amortization, and
 Write-downs................................................   299,449  335,360
                                                              -------- --------
Net Properties..............................................  $278,695 $193,407
                                                              ======== ========

 
NOTE 7.  EMPLOYEE BENEFIT PLANS
 
Pension Plans--The Company (through a Cyprus plan) participates in a number of
defined benefit pension plans covering most of its employees. Benefits are
based on either the employee's compensation prior to retirement or stated
amounts for each year of service with the Company. The Company makes annual
contributions to these plans in accordance with the requirements of the
Employee Retirement Income Security Act of 1974 (ERISA). Plan assets consist of
cash and cash equivalents, equity and fixed income securities, and real estate.
 
Net annual pension cost includes the following components:
 


                                                      Year ended December 31
                                                      -------------------------
                                                       1995     1996     1997
                                                      -------  -------  -------
                                                               
Service Cost......................................... $   870  $ 1,074  $ 1,129
Interest Cost........................................   2,112    2,141    4,277
Actual Gain on Plan Assets...........................  (4,401)  (3,916)  (4,925)
Amortization and Deferred Gain.......................   2,693    1,877      626
                                                      -------  -------  -------
                                                      $ 1,274  $ 1,176  $ 1,107
                                                      =======  =======  =======

 
                                      F-76

 
                         CYPRUS EASTERN COAL OPERATIONS
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
The following table sets forth the funded status of the plans:
 


                                                              At December 31
                                                              ---------------
                                                               1996    1997
                                                              ------- -------
                                                                
Accumulated Benefit Obligation............................... $27,001 $34,198
                                                              ------- -------
Projected Benefit Obligation.................................  28,813  36,363
Plan Assets at Fair Value....................................  30,630  34,852
                                                              ------- -------
Plan Assets Greater Than (Less Than) Projected Benefit Obli-
 gation......................................................   1,817  (1,511)
Unrecognized Net Gain (Loss).................................     689    (491)
Unrecognized Prior Service Cost..............................   1,080     934
Unrecognized Transition Credit...............................   1,972   5,519
                                                              ------- -------
Prepaid Pension Cost......................................... $ 5,558 $ 4,451
                                                              ======= =======

 
Prepaid pension cost is included in Prepaid Expenses on the Combined Statements
of Assets, Liabilities and Parent Investment at December 31, 1996 and 1997,
respectively.
 
The significant actuarial assumptions at December 31 were as follows:
 


                                                               1995  1996  1997
                                                               ----  ----  ----
                                                                  
   Rate of Increase in Future Compensation Levels............. 5.25% 5.75% 5.00%
   Expected Long-Term Rate of Return on Assets................ 9.00% 9.00% 9.00%
   Discount Rate.............................................. 7.25% 7.75% 7.25%

 
Net periodic pension cost is determined using the assumptions as of the
beginning of the year, and the funded status is determined using the
assumptions as of the end of the year.
 
Substantially all domestic employees not covered under the plans administered
by the Company are covered under multi-employer defined benefit plans
administered by the United Mine Workers of America. Contributions by the
Company to these multi-employer plans, which are expensed when paid, are based
primarily upon hours worked and amounted to $965, $977 and $1,212 in 1995, 1996
and 1997.
 
Postretirement Benefits Other Than Pensions--In addition to the Company's
defined benefit pension plans, the Company has plans that provide
postretirement medical benefits and life insurance benefits. The medical plans
provide benefits for most employees who reach normal, or in certain cases,
early retirement age while employed by the Company. The postretirement medical
plans are contributory, with annual adjustments to retiree contributions, and
contain certain other cost-sharing features such as deductibles and
coinsurance.
 
Net periodic postretirement benefit cost consists of the following components:
 


                                                           1995    1996   1997
                                                          ------  ------ ------
                                                                
   Service Cost.......................................... $1,296  $1,490 $1,526
   Interest Cost.........................................  6,070   5,385  5,405
   Net Amortization and Deferral.........................   (404)     16   (688)
                                                          ------  ------ ------
   Net Periodic Postretirement Benefit Cost.............. $6,962  $6,891 $6,243
                                                          ======  ====== ======

 
                                      F-77

 
                         CYPRUS EASTERN COAL OPERATIONS
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
The following table sets forth the plans' combined status:
 


                                                             At December 31,
                                                            ------------------
                                                              1996      1997
                                                            --------  --------
                                                                
Accumulated Postretirement Benefit Obligation:
  Retirees................................................. $ 52,103  $ 48,807
  Active...................................................   17,983    20,770
                                                            --------  --------
Total Accumulated Postretirement Benefit Obligation........   70,086    69,577
Plan Assets at Fair Value..................................      --        --
Accumulated Postretirement Benefit Obligation.............. $(70,086) $(69,577)
                                                            --------  --------
Unrecognized Prior Service Cost............................   (1,200)   (1,400)
Unrecognized Net Gain......................................  (21,428)  (20,677)
                                                            --------  --------
Accrued Postretirement Benefit Cost........................ $(92,714) $(91,654)
                                                            ========  ========

 
The accumulated postretirement benefit obligation at December 31, 1996 and
1997, consisted of a current liability of $7,000 included in Accrued Payroll
and Benefits each year, and a long-term liability of $85,714 and $84,655,
respectively, included in Deferred Employee and Retiree Benefits.
 
The weighted average annual rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) for medical benefits is 7.0
percent for 1998 and is assumed to decrease gradually (one-half of one percent
per year) to 4.25 percent by the year 2003 and remain at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage point in
each year would increase the accumulated postretirement benefit obligation for
the medical plans as of December 31, 1997, by $3,700 and the aggregate of the
service cost and interest cost components of net periodic postretirement
benefit cost for 1997 by $470.
 
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation as of December 31, 1995, 1996, and 1997, was
7.25 percent, 7.75 percent, and 7.25 percent, respectively. The change in the
discount rate and a reduction in the assumed health care cost trend rate
resulted in a $1,100 unrecognized net gain as of December 31, 1997.
 
In addition, health care and life insurance benefits of certain retirees are
covered by multi-employer benefit trusts established by the United Mine Workers
of America and the Bituminous Coal Operators Association, Inc. Current and
projected operating deficits of these trusts led to the passage of the Coal
Industry Retiree Health Benefit Act of 1992 (the "Act"). The Act established a
new multi-employer benefit trust called the United Mine Workers of America
Combined Benefit Fund (the "Fund") that will provide health and life insurance
benefits to all beneficiaries of the earlier trusts who were receiving benefits
as of July 20, 1992. The Act provides for the assignment of beneficiaries to
former employers and the allocation of any unassigned beneficiaries to
enterprises using a formula included in the legislation. It also established a
second trust fund known as the 1992 Plan that covers beneficiaries whose
employers cease providing benefits. The Company has chosen to account for its
obligation under the Act on a cash basis in accordance with established
accounting guidance. The 1995, 1996, and 1997 contributions to the Funds were
$2,136, $1,923, and $2,060, respectively. Based upon independent actuarial
valuation, the Company estimates the present value of its obligations under the
Act to be approximately $21,676 as of December 31, 1997.
 
The Company is liable under the federal Mine Safety and Health Act of 1977, as
amended, to provide for pneumoconiosis (black lung) benefits to eligible
employees, former employees, and dependents with respect to claims filed by
such persons on or after July 1, 1973. The Company is also liable under various
states' statutes for black lung benefits. The Company currently provides for
federal and state claims principally through self-
 
                                      F-78

 
                         CYPRUS EASTERN COAL OPERATIONS
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
insurance programs. Benefits and related expenses are paid from a dedicated
trust fund qualified under Section 501(C) (21) of the Internal Revenue Code.
The assets of the trust fund exceed the actuarial present value of black lung
benefits at December 31, 1996 and 1997.
 
Total future black lung obligations of the Company as of December 31, 1996 and
1997 approximated $19,000 and $20,000, respectively. These amounts were
actuarially determined using the following key assumptions: discount rate of
8%, black lung benefit cost escalation rate of 3.5%. The existence of the trust
assets results in a net liability of $172 and $70 in 1996 and 1997,
respectively, which is included in Deferred Employee and Retiree Benefits.
 
The Company also has a number of postemployment plans covering severance,
disability income, and continuation of health and life insurance for disabled
employees. At December 31, 1996 and 1997, the accumulated postemployment
benefit liability consisted of a current amount of $538 and $496, respectively,
which is included in Accrued Payroll and Benefits, and $4,722 and $4,143,
respectively, which is included in Deferred Employee and Retiree Benefits.
 
NOTE 8. DEBT
 
The Company's long-term debt consists of a $1,000 note securing an Industrial
Revenue Bond issued by Perry County, Kentucky, the proceeds of which were used
to construct facilities at the Company's mine site. The note is due on May 1,
2013, with interest payable semiannually based upon a floating rate, as defined
(5.10% at December 31, 1996 and 1997).
 
NOTE 9. LEASES AND MINERAL ROYALTY OBLIGATIONS
 
The Company leases mineral interests and various other types of properties,
including draglines, shovels, offices, computers, and miscellaneous equipment.
Certain of the Company's mineral leases require minimum annual royalty
payments, whereas others provide only for royalties based on production.
 
Summarized below as of December 31, 1997, are future minimum rentals and
royalties under non-cancelable leases:
 


                                                    Operating  Mineral  Capital
                                                     Leases   Royalties Leases
                                                    --------- --------- -------
                                                               
   1998............................................  $ 9,343   $ 2,530  $ 2,796
   1999............................................    5,855     3,082    4,883
   2000............................................    4,767     3,046    1,282
   2001............................................    2,372     2,932      --
   2002............................................    1,193     2,932      --
   After 2002......................................    2,624     6,525      --
                                                     -------   -------  -------
     Total Payments................................  $26,154   $21,047    8,961
                                                     =======   =======  -------
   Less Imputed Interest...........................                        (827)
                                                                        -------
   Present Value of Lease Payments.................                       8,134
   Less Current Portion............................                      (2,329)
                                                                        -------
   Capital Lease Obligations.......................                     $ 5,805
                                                                        =======

 
                                      F-79

 
                         CYPRUS EASTERN COAL OPERATIONS
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
Rentals and mineral royalties charged to expense were as follows:
 


                                                          1995    1996    1997
                                                         ------- ------- -------
                                                                
   Rental Expense....................................... $11,927 $14,791 $13,022
   Mineral Royalties.................................... $18,516 $18,880 $16,593

 
Other Noncurrent Liabilities includes $2,104 and $1,722 at December 31, 1996
and 1997, respectively, which represents deferred gains on mining equipment
that was sold and leased-back by the Company in 1986 and 1994. The 1986 lease
is accounted for as an operating lease; the 1994 lease is accounted for as a
capital lease. These gains are being recognized as revenue over the terms of
the respective leases that expire in 2000 and 2003. The future minimum lease
commitments, operating lease expense and capital lease obligations for these
two leases are included in the above disclosures. See below for subsequent
modifications of these lease agreements.
 
Certain of the operating and capital leases discussed above are included in
lease agreements entered into by other subsidiaries of Cyprus. As part of the
stock purchase and sale agreement, AEI entered into various agreements to
sublease and purchase equipment subject to these leases. According to the
sublease agreement and the first purchase agreement, AEI is required to make
semi-annual lease payments of $1,485 through July 2000, at which time AEI will
purchase the equipment through semi-annual installments of $1,485 from January
2001 through January 2002. The second purchase agreement requires semi-annual
installments of $1,977 through January 2002, and the third purchase agreement
requires monthly installments of $249 from July 1998 through December 1998 and
monthly installments of $67 from January 1999 through December 1999. The
sublease and purchase agreements are secured by the equipment and any monies to
become due under insurance policies, up to the amount of the obligations. In
addition, a $3,500 equipment surety bond secures and guarantees the
obligations.
 
NOTE 10. PARENT INVESTMENT AND RELATED PARTY TRANSACTIONS
 
Parent investment is comprised of the Company's equity (see Note 1) and
advances to and from Cyprus at December 31, 1996 and 1997. The Company had
sales to a subsidiary of Cyprus not included in the acquisition of $1,856 and
$2,982 in 1996 and 1997, respectively.
 
Certain obligations of the Company have been guaranteed by the Parent. Such
obligations include, among others, obligations for the following: workers
compensation claims, lease agreements, industrial revenue bonds and coal supply
agreements.
 
NOTE 11. COMMITMENTS AND CONTINGENCIES
 
Coal Sales Contracts--As of December 31, 1997, the Company had commitments to
deliver scheduled base quantities of coal annually to 34 customers. The
contracts expire between January 1, 1998 and December 31, 2003, with the
Company contracted to supply a minimum of approximately 42 million tons over
the remaining lives of the contracts at prices ranging from $14.21 to $37.00
per ton. Certain contracts have sale price adjustment provisions, as defined,
over the life of the contracts.
 
Environmental Remedial Action--The Company's past and present operations
include activities which are subject to extensive federal and state
environmental regulations. Based upon current knowledge, the Company believes
it is in material compliance with environmental laws and regulations as
currently promulgated. The extent of environmental control problems which the
Company may encounter in the future cannot be predicted, primarily because of
the increasing number, complexity and changing character of environmental
requirements that may be enacted by federal and state authorities.
 
                                      F-80

 
                         CYPRUS EASTERN COAL OPERATIONS
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
Mine Closure Costs--At December 31, 1997, the Company's accruals for deferred
closure, shutdown, and reclamation totaled approximately $75,700. Reclamation
is an ongoing activity and a cost associated with the Company's mining
operations. Accruals for closure and final reclamation liabilities are
established on a life of mine basis. The Company's reclamation reserve
component is largely a result of reclamation obligations incurred for grading,
replacing soils, and revegetation of mined areas as required by provisions and
permits pursuant to the Surface Mining Control and Reclamation Act. Total
reclamation and mine closure costs for the Company at the end of current mine
lives are estimated at approximately $120,000.
 
Legal Proceedings--The Company is a party to numerous claims and lawsuits with
respect to various matters. The Company provides for costs related to
contingencies when a loss is probable and the amount is reasonably estimable.
The Company estimates that the amount of probable aggregate loss, included in
current accrued liabilities, is approximately $3,100 at December 31, 1997.
 
The Company is named as defendant in various other actions occurring in the
ordinary course of its operations for which an estimation of the likelihood of
probable outcome is not possible. These actions generally involve disputes as
to property boundaries, contract performance, mining rights, royalty payments,
blasting damages, personal injuries and other civil actions which could result
in additional litigation or other adversary proceedings. While the final
resolution of any matter may have an impact on the Company's financial results
for a particular period, management believes the ultimate disposition of these
matters will not have a material adverse effect upon the financial position of
the Company.
 
Subsequent to December 31, 1997, $2,959 of the accrued legal contingencies were
settled for an amount equal to the Company's recorded estimate.
 
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The book value of cash and cash equivalents, trade receivables and trade
payables are considered to be representative of their respective fair values
because of the immediate or short-term maturity of these financial instruments.
The fair value of the Company's debt instruments approximated the book value
because the instruments bear interest at a variable rate and re-price
frequently.
 
NOTE 13. MAJOR CUSTOMERS
 
The Company had sales to the following major customers:
 


                                                               1995  1996  1997
                                                               ----  ----  ----
                                                                  
   Tennessee Valley Authority.................................  7.5% 12.0% 15.8%
   Dayton Power and Light..................................... 13.4  12.2  13.0
   Hoosier Energy.............................................  7.9  10.2  12.1
   American Electric Power....................................  7.5  11.8  11.6
   Georgia Power.............................................. 23.2   5.8   5.8
                                                               ----  ----  ----
     Total.................................................... 59.5% 52.0% 58.3%
                                                               ====  ====  ====

 
                                      F-81

 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors of
Leslie Resources, Inc. and Leslie Resources Management, Inc.:
 
We have audited the accompanying combined balance sheet of Leslie Resources,
Inc. and Leslie Resources Management, Inc. as of December 31, 1997, and the
related combined statements of operations and retained earnings and cash flows
for the year then ended. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit. The combined
balance sheet of Leslie Resources, Inc. and Leslie Resources Management, Inc.
as of December 31, 1996, and the related combined statements of operations and
retained earnings and cash flows for the year then ended, were audited by other
auditors whose report dated June 24, 1997, expressed an unqualified opinion on
those statements.
 
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Leslie Resources,
Inc. and Leslie Resources Management, Inc. as of December 31, 1997 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
 
                                              Arthur Andersen LLP
Louisville, Kentucky
March 20, 1998
 
                                      F-82

 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors of
 Leslie Resources, Inc. and
 Leslie Resources Management, Inc. and its Subsidiaries
 Hazard, Kentucky:
 
We have audited the accompanying combined balance sheet of Leslie Resources,
Inc. and Leslie Resources Management, Inc. and its subsidiaries as of December
31, 1996, and the related statements of operations and retained earnings and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
In our opinion, the accompanying financial statements present fairly, in all
material respects, the combined financial position of Leslie Resources, Inc.
and Leslie Resources Management, Inc. and its subsidiaries as of December 31,
1996 and the results of their operations and cash flows for the year then ended
in conformity with generally accepted accounting principles.
 
                                          Faesy, Schmitt & Company, PSC
 
Frankfort, Kentucky
 June 24, 1997 (except as to the matter discussed
 in Note 17 as to which the date is January 15, 1998)
 
                                      F-83

 
          LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC.
 
                             COMBINED BALANCE SHEET
                        As of December 31, 1996 and 1997
 


                                                               1996     1997
                                                              -------  -------
                                                              (In Thousands)
                                                                 
                           ASSETS
Current Assets:
  Cash and cash equivalents.................................. $ 2,907  $ 3,623
  Restricted cash............................................     300      300
  Accounts receivable........................................   4,646    6,644
  Other receivables..........................................     352      428
  Inventories................................................     794    1,224
  Property held for resale...................................     --     3,195
  Current portion of advance royalties.......................     237      150
  Prepaid expenses and other.................................     242      307
                                                              -------  -------
    Total current assets.....................................   9,478   15,871
                                                              -------  -------
Property, plant and equipment, at cost, including mineral
 reserves and mine development costs, net of accumulated
 depreciation of $14,528 and $14,807 for 1996 and 1997,
 respectively................................................  12,067    8,097
Other non-Current Assets:
  Advance royalties, less current portion....................   1,006      892
  Investment in security.....................................   2,000    2,000
  Deferred tax assets........................................     --       297
  Other non-current assets...................................      12      298
                                                              -------  -------
    Total other non-current assets...........................   3,018    3,487
                                                              -------  -------
    Total assets............................................. $24,563  $27,455
                                                              =======  =======
            LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
  Accounts payable........................................... $ 6,213  $ 7,397
  Current portion of accrued royalties.......................   1,638    2,043
  Income taxes payable.......................................      12      942
  Revolving lines of credit..................................     901    1,895
  Current portion of long-term debt..........................   3,806    5,964
  Current portion of reclamation and mine closure costs......     --       343
  Accrued expenses and other.................................   1,228    1,540
                                                              -------  -------
    Total current liabilities................................  13,798   20,124
                                                              -------  -------
Non-Current Liabilities:
  Long-term debt, less current portion.......................   6,046    2,922
  Accrued royalties, less current portion....................   4,141    3,179
  Accrued reclamation and mine closure costs, less current
   portion...................................................     425    1,064
                                                              -------  -------
    Total non-current liabilities............................  10,612    7,165
                                                              -------  -------
Commitments and Contingencies (see notes)
Stockholder's Equity:
  Common stock...............................................       2        2
  Less: cost of treasury stock...............................  (4,252)  (4,252)
Retained earnings............................................   4,403    4,416
                                                              -------  -------
    Total stockholder's equity...............................     153      166
                                                              -------  -------
    Total liabilities and stockholder's equity............... $24,563  $27,455
                                                              =======  =======

 
The accompanying notes to combined financial statements are an integral part of
                             these balance sheets.
 
                                      F-84

 
          LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC.
 
            COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                 For The Years Ended December 31, 1996 and 1997
 


                                                                1996     1997
                                                               -------  -------
                                                               (In Thousands)
                                                                  
Revenues...................................................... $68,740  $87,994
Costs and expenses:
  Cost of operations..........................................  59,372   80,003
  Depreciation, depletion and amortization....................   3,172    3,288
  Selling, general and administrative.........................   2,733    2,978
                                                               -------  -------
    Total costs and expenses..................................  65,277   86,269
                                                               -------  -------
      Income from operations..................................   3,463    1,725
Other income (expense):
  Interest expense............................................  (1,088)    (888)
  Gain on sale of assets......................................      44    2,257
  Interest and dividend income................................     279      201
  Other, net..................................................    (556)     162
                                                               -------  -------
    Other income (expense)....................................  (1,321)   1,732
                                                               -------  -------
      Income before income taxes..............................   2,142    3,457
Income tax expense............................................      12      959
                                                               -------  -------
      Net income..............................................   2,130    2,498
Beginning retained earnings...................................   4,327    4,403
  Plus deferred tax benefits from tax basis step-up...........     --       297
  Less dividends paid.........................................  (2,054)  (2,782)
                                                               -------  -------
Ending retained earnings...................................... $ 4,403  $ 4,416
                                                               =======  =======

 
 
The accompanying notes to combined financial statements are an integral part of
                             these balance sheets.
 
                                      F-85

 
          LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC.
 
                       COMBINED STATEMENTS OF CASH FLOWS
                 For The Years Ended December 31, 1996 and 1997
 


                                                           1996     1997
                                                          -------  -------
                                                            (In Thousands)
                                                                   
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..............................................  $ 2,130  $ 2,498
Adjustments to reconcile net income to net cash provided
 by operating activities:
  Depreciation, depletion and amortization..............    3,172    3,288
  Equipment used for repairs............................       76      --
  Gain on sale of assets................................      (44)  (2,257)
Changes in assets and liabilities:
  (Increase) decrease in:
    Receivables.........................................   (2,321)  (2,074)
    Inventories.........................................     (360)    (430)
    Advance royalties...................................      413      201
    Prepaids and other..................................       23      (65)
    Other non-current assets............................      --      (286)
  Increase (decrease) in:
    Accounts payable....................................    1,938    1,184
    Income taxes payable................................       12      930
    Accrued reclamation and mine closure costs..........      163      982
    Accrued royalties...................................      (16)    (557)
    Accrued expenses and other..........................      196      312
                                                          -------  -------
      Net cash provided by operating activities.........    5,382    3,726
                                                          -------  -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property, plant and equipment and mine
 development costs......................................   (1,910)  (4,341)
Proceeds from sale of assets............................      495    3,805
Loans from affiliates...................................      700      --
                                                          -------  -------
      Net cash used in investing activities.............     (715)    (536)
                                                          -------  -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on revolving lines of credit.............   (2,018)     994
Proceeds from debt......................................    6,940    6,017
Repayments on long-term debt............................   (3,966)  (6,983)
Distributions to shareholder............................   (2,054)  (2,502)
Purchase of treasury stock..............................   (3,903)     --
                                                          -------  -------
      Net cash used in financing activities.............   (5,001)  (2,474)
                                                          -------  -------
      Net increase (decrease) in cash and cash
       equivalents......................................     (334)     716
CASH AND CASH EQUIVALENTS, beginning of period..........    3,241    2,907
                                                          -------  -------
CASH AND CASH EQUIVALENTS, end of period................  $ 2,907  $ 3,623
                                                          =======  =======

 
The accompanying notes to combined financial statements are an integral part of
                               these statements.
 
                                      F-86

 
          LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC.
 
                     NOTES TO COMBINED FINANCIAL STATEMENTS
                           December 31, 1996 and 1997
                             (Dollars in thousands)
 
1. DESCRIPTION OF BUSINESS
 
Leslie Resources, Inc. (a Kentucky corporation) and Leslie Resources
Management, Inc. (a Kentucky corporation) (collectively the Company) and its
subsidiaries are owned by Greg Wells and engage in coal mining activities using
the surface mining method. Coal mining and the operation of loading facilities
are conducted in four counties in Southeast Kentucky. The Company's sales are
predominantly to utility and industrial users of coal.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
a. Basis of Presentation
 
The accompanying combined financial statements include those of Leslie
Resources, Inc. (an S corporation) and Leslie Resources Management, Inc. (a C
corporation) and its subsidiaries because of common ownership. All significant
intercompany transactions and balances have been eliminated in combination.
 
b. Principles of Consolidation
 
The accompanying combined financial statements include the consolidated
accounts of Leslie Resources Management, Inc. and its subsidiaries. All
material intercompany transactions have been eliminated in its consolidation.
 
c. Use of Estimates
 
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
 
d. Statements of Cash Flows
 
For purposes of the statements of cash flows, the Company considers investments
having maturities of three months or less at the time of purchase to be cash
equivalents.
 
Supplemental disclosure:
 


                                                                     1996  1997
                                                                    ------ ----
                                                                     
   Cash paid for interest.......................................... $1,070 $796
   Cash paid for income taxes......................................    --    29

 
The 1997 statement of cash flows excludes non-cash dividends of property with a
book value of $280 distributed to the sole shareholder and a deferred tax asset
and equity increase of $297.
 
e. Inventories
 
Inventories consist of coal that is available for sale at various loading
facilities, and is stated at an average cost using direct operating costs of
mining coal, which is less than market.
 
 
                                      F-87

 
          LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC.
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
f. Advance Royalties
 
Recoupable advance royalties obtained in the 1995 purchase of the subsidiary
companies of Leslie Resources Management, Inc. had a higher recoupable amount
than the portion of the purchase price that was allocated to them in purchase
accounting (a valuation allowance was established). As these advance royalties
become recoupable, the expense recognized is partially offset by a reduction in
the valuation allowance.
 
Other recoupable royalties the Company has paid in the normal course of
operations are expensed as the coal is mined or the royalty no longer becomes
recoupable.
 
g. Property, Plant and Equipment
 
Property, plant and equipment are stated at cost. The Company provides for
depreciation of the depreciable assets by using accelerated and other methods
with useful lives that range from 5 to 31 years. Depreciation expense was
$3,041 and $3,172 for 1996 and 1997, respectively.
 
h. Depletion
 
Cost depletion is calculated on a per ton basis to allocate the cost of mineral
reserves against the related coal sales. Cost depletion expense was $52 and $59
for 1996 and 1997, respectively.
 
i. Mine Development Costs
 
Mine development costs are amortized over the expected life of the respective
mine sites which range from 5 to 10 years. Amortization expense was $79 and $57
for 1996 and 1997, respectively.
 
j. Revenue Recognition
 
The Company's revenues have been generated under coal sales contracts with
electric utilities or other coal-related organizations, primarily in the
eastern United States. Revenues are recognized on coal sales in accordance with
the sales agreement, which is usually when the coal is shipped to the customer
and title is passed. The Company grants credit to its customers based on their
creditworthiness and generally does not secure collateral for its receivables.
No allowance for doubtful accounts is recorded for 1996 or 1997, as management
does not believe it is necessary. Historically, accounts receivable write-offs
have been insignificant.
 
k. Asset Impairment
 
If facts and circumstances suggest that a long-lived asset may be impaired, the
carrying value is reviewed. If this review indicates that the value of the
asset will not be recoverable, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, then the carrying
value of the asset is reduced to its estimated fair value.
 
l. Reclassifications
 
Certain prior year amounts have been reclassified to conform with current year
presentation with no effect on previously reported net income or shareholder's
equity.
 
3. CONCENTRATION OF CREDIT RISK
 
The Company maintains its cash in bank deposits at financial institutions. The
balances, at times, may exceed federally insured limits. The Company exceeded
the insured limit by $2,911 and $3,651 for 1996 and 1997, respectively.
 
                                      F-88

 
          LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC.
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
4. PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment, including mineral reserves and mine development
costs at December 31, 1996 and 1997, are summarized by major classifications as
follows:
 


                                                                 1996    1997
                                                                ------- -------
                                                                  
   Land........................................................ $   303 $   --
   Machinery & equipment.......................................  23,715  20,227
   Buildings...................................................   1,489   1,589
   Mine development costs......................................     585     585
   Mineral reserves............................................     503     503
                                                                ------- -------
                                                                 26,595  22,904
   Less accumulated depreciation, depletion and amortization...  14,528  14,807
                                                                ------- -------
   Net property, plant and equipment........................... $12,067 $ 8,097
                                                                ======= =======

 
5. INVESTMENT IN SECURITY
 
Included in other long-term assets, at December 31, 1996 and 1997, is 800
shares of preferred stock in Reclamation Surety Holding Company, Inc. (RSHC)
purchased for $2,000. A subsidiary of RSHC, Cumberland Surety Insurance
Company, provides the Company insurance coverage for reclamation bonds (see
Note 9), and the purchase of this preferred stock was required in lieu of the
Company placing $2,000 in an escrow collateral account. This preferred stock
pays a dividend of 6% annually. The Company and RSHC both have options to
redeem this stock after January 1, 1998. The Company also has an option to
convert to common shares of RSHC after January 1, 1998. Under present bonding
arrangements, an option to redeem this stock would result in similar funds
being placed into an escrow collateral account.
 
6. DEBT
 
a. Revolving Lines of Credit
 
The Company has the following outstanding balances under lines of credit at
December 31:
 


                                                                     1996  1997
                                                                     ---- ------
                                                                    
   Citizens National Bank & Trust, bearing interest of 5.65%. Total
    of $300 available, secured by three certificates of deposit
    totaling $300..................................................  $150 $  200
   Bank of Whitesburg, bearing interest of 9.25% and 9.50%,
    respectively, secured by certain accounts receivable...........   354  1,695
   Citizens National Bank & Trust, bearing interest of 9.50%,
    secured by certain accounts receivable.........................   397    --
                                                                     ---- ------
                                                                     $901 $1,895
                                                                     ==== ======

 
                                      F-89

 
          LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC.
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
b. Long-Term Debt
 
Long-term debt consists of the following:
 


                                                                   1996   1997
                                                                  ------ ------
                                                                   
   Fixed assets financed with 21 and 12 different notes to
    banks, finance companies and vendors for 1996 and 1997,
    respectively. For 1996, interest rates ranged from 8.19% to
    10.50% with a weighted-average rate of 8.98%. For 1997
    interest rates ranged from 8.19% to 10.11% with a weighted-
    average rate of 8.93%, maturing through August 2001. Each
    note is secured by one or more pieces of equipment..........  $3,429 $1,964
   Note payable to GE Capital Corporation, bearing interest of
    9.25%, payable in monthly installments of $94 principle and
    interest for 60 months, maturing May 2001, secured by
    equipment...................................................   3,840  3,130
   Note payable to GE Capital Corporation, bearing interest of
    9.25%, payable in monthly installments of $48 principle and
    interest for 36 months, secured by equipment, retired in
    1997........................................................   1,273    --
   Note payable to Caterpillar Finance, bearing interest of
    8.44%, payable in monthly installments of $49 principle and
    interest, secured by equipment (settled in 1998, see
    Note 17)....................................................     --   2,301
   Note payable to Caterpillar Finance, bearing interest of
    10.25%, payable in monthly installments of $41 principle and
    interest, secured by equipment (settled in 1998, see
    Note 17)....................................................   1,310    941
   Note payable to Whayne Supply Company, bearing interest of
    8.76%, payable in monthly installments of $18 principle and
    interest, secured by equipment (settled in 1998, see
    Note 17)....................................................     --     550
                                                                  ------ ------
     Totals.....................................................   9,852  8,886
     Less: Current Portion......................................   3,806  5,964
                                                                  ------ ------
     Long-term Debt.............................................  $6,046 $2,922
                                                                  ====== ======

 
Principal payments required for long-term debt after December 31, 1997 are as
follows:
 
                                                                    
   Year ended December 31:
     1998................................................................ $5,964
     1999................................................................  1,216
     2000................................................................  1,309
     2001................................................................    397
                                                                          ------
                                                                          $8,886
                                                                          ======

   
 
In connection with the GE Capital Corporation note maturing in May 2001, the
Company is required to maintain, at the end of each fiscal year, adequate, as
defined, debt service coverage.
 
7. ACCRUED ROYALTIES DUE TO TRANSCO
 
As part of the 1995 purchase of the subsidiary companies by Leslie Resources
Management, Inc., the Company recorded a liability for minimum royalties due to
Transco Coal Company. The liability is reduced as coal is
 
                                      F-90

 
          LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC.
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
mined, and as of December 31, 1996 and 1997, a liability of $981 and $399,
respectively, remained. The 1997 amount is included in current portion of
accrued royalties and based on mining plans is expected to be paid in 1998.
 
8. OVERRIDE ROYALTY OBLIGATION DUE TO TRANSCO
 
As part of the 1995 purchase of the subsidiary companies by Leslie Resources
Management, Inc., the Company is obligated to pay to Transco Coal Company 75c
for each ton of coal mined from the Ball Creek Property until all reserves are
mined. In 1996 and 1997, $27 and $438 were paid, respectively. Payments are
required monthly as the coal is mined or, at the Company's option, this
obligation can be canceled at any time by paying Transco an amount that, when
aggregated with previously paid amounts, totals a discounted $4,000 (discounted
from the date of the purchase (November 20, 1995) to each payment date at 15%).
At the date of purchase from Transco Coal, the Company recorded as an accrual
$4,000 for what it estimated as the aggregate amount to be paid under this
obligation.
 
Beginning in the calendar year 1997, this royalty payment requires minimum
annual payments of $150; however, the aggregate payments of the two preceding
years in excess of the yearly minimum may be used in meeting the $150 annual
minimum.
 
The Company projects to mine 480,000 tons from the Ball Creek Property in 1998.
As of December 31, 1997, $360 is included in current portion of accrued
royalties and $3,175 is included in long-term accrued royalties related to this
obligation.
 
9. ACCRUED RECLAMATION AND MINE CLOSURE COSTS
 
Although the majority of the reclamation process is performed contemporaneously
with mining, the Company will incur additional reclamation costs when a
particular mine site closes, currently estimated at approximately $7,000 for
all sites. The Company accrues on a per ton basis the expected remaining
reclamation and mine closure costs. As of December 31, 1997, an aggregate of
$1,407 has been accrued for reclamation and mine closure costs. These
reclamation and mine closure costs, when mining is completed, represent the
estimated costs to reclaim the land at the end of the mining process, as well
as other required activities. However, the Company is contingently liable to
reclaim the land whenever the mining process stops and these costs could exceed
the accrued amounts.
 
According to Kentucky law, the Company is required to post reclamation bonds to
assure the reclamation work is completed. Outstanding reclamation bonds totaled
$43,676 and $42,712 at December 31, 1996 and 1997, respectively. The Company
pays an insurance bonding premium monthly. In addition, as Note 5 explains, the
Company purchased $2,000 in preferred stock in lieu of having an escrow
collateral account for 1996 and 1997. Beginning in January 1997, the Company
was required to fund an escrow collateral account. As of December 31, 1997,
$284 had been paid into the escrow account (included in other long-term assets)
with total future obligations totaling $1,216 at a rate of $20 per month.
 
10. INCOME TAXES
 
Leslie Resources, Inc. elected to be taxed as a Sub-chapter S corporation,
effective for the tax year beginning January 1, 1989, whereby its taxable
income is reported by its stockholders. Accordingly, there was no income tax
reported at the corporate level for 1996 or 1997. Dividends have been paid to
stockholders at various times during the years and totaled $2,054 and $2,782 in
1996 and 1997, respectively.
 
                                      F-91

 
          LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC.
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
Leslie Resources Management, Inc. and its subsidiaries are C corporations, and
therefore incur income taxes at the corporate level. Income tax disclosures for
the C corporation group follows:
 
Income tax expense (benefit) is comprised of the following:
 


                                                                    Year Ended
                                                                   December 31,
                                                                   -------------
                                                                    1996   1997
                                                                   ------ ------
                                                                    
   Current:
     Federal...................................................... $   12 $  814
     State........................................................    --     145
                                                                   ------ ------
       Total...................................................... $   12 $  959
                                                                   ====== ======

 
The following accounts for the difference between the actual tax provision and
the amounts obtained by applying the statutory U.S. federal income tax rate of
34% to the 1997 income before taxes:
 


                                                                1996    1997
                                                                -----  ------
                                                                 
   Federal provision computed at statutory rate................ $ 728  $1,175
   State income tax (net of federal tax benefits and
    apportionment factors).....................................    86     138
   Federal and state tax effect on S corporation earnings......  (791)   (445)
   Other.......................................................   (11)     91
                                                                -----  ------
                                                                $  12  $  959
                                                                =====  ======

 
During 1997, certain assets (machinery and equipment) were transferred from the
S corporation to the C corporation. These assets were stepped up for tax
purposes, but not book. The deferred tax benefit of $297 was recorded with a
corresponding increase in equity.
 
11. COMMITMENTS AND CONTINGENCIES
 
a. Coal Sales Contracts
 
As of December 31, 1997, the Company had commitments to deliver base quantities
of coal to four customers. Three contracts expire in 1998, and one expires in
2000 with the Company contracted to supply a minimum of approximately 2.7
million tons over the remaining lives of the contracts at prices which are at
or above market.
 
b. Commissions
 
The Company has an agreement to pay a 10c per ton commission on all tonnage
delivered on a coal contract expiring in 2000. Additionally, beginning in 1998
the Company will pay a $15 per month commission for sales made under various
contracts.
 
c. Contract Mining Agreements
 
The Company has an agreement with a contract miner to mine at two job sites at
a cost to the Company of $13.00 and $14.00 per ton mined, respectively. The
contract has no minimum tonnage requirements and is cancelable by either party.
 
                                      F-92

 
          LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC.
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
d. Aminex
 
As part of the 1995 purchase of the subsidiary companies by Leslie Resources
Management, Inc., the Company is contingently liable under a February 14, 1979
agreement to pay a portion of its "coal proceeds" (as defined) related to
certain leases on specified properties to a group of partnerships in bankruptcy
that were previously owners of these certain leases. This potential contingent
liability exists until January 1, 2004. The computation and definition of "coal
proceeds" under this agreement is different than net income according to
generally accepted accounting principles. Any prior year deficiencies in
calculating "coal proceeds" is carried forward to future years for application
to positive amounts. According to the most recent audit report for the period
ended June 1, 1996, there exists a deficiency of $2,361 that the Company may
carry forward to future years. Due to this deficiency carry forward, no
liability for this Aminex agreement has been recorded, nor is any liability
expected in the near future.
 
e. Litigation
 
The Company is named as defendant in various actions in the ordinary course of
its business. These actions generally involve disputes related to contract
performance, property boundaries, mining rights, blasting damages, personal
injuries and royalty payments, as well as other civil actions that could result
in additional litigation or other adversary proceedings.
 
While the final resolution of any matter may have an impact on the Company's
financial results for a particular reporting period, management believes that
the ultimate disposition of these matters will not have a materially adverse
effect upon the financial position of the Company.
 
f. Leases
 
The Company has various operating leases for mining equipment and rental of
tipples from a related party (see Note 15b). Rental expense for the years ended
December 31, 1996 and 1997 was approximately $320 and $370, respectively.
 
The Company also leases coal reserves under agreements that call for royalties
to be paid as the coal is mined. Total royalty expense for the years ended
December 31, 1996 and 1997 was approximately $7,000 and $8,700, respectively.
Certain agreements require minimum annual royalties to be paid regardless of
the amount of coal mined during the year. However, such agreements are
generally cancelable at the Company's discretion. These minimum royalties are
recoverable against future royalty payments due on subsequent coal sales and
are expensed as the related coal is mined.
 
Approximate future minimum rental and royalty payments for subsequent years
are:
 


                                                                  Rental Royalty
                                                                  ------ -------
                                                                   
   Year ended December 31:
     1998........................................................  $ 60  $ 4,480
     1999........................................................    40    4,830
     2000........................................................   --     4,830
     2001........................................................   --     4,830
     2002........................................................   --     4,010
     Thereafter..................................................   --    12,825

 
                                      F-93

 
          LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC.
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
12. MAJOR CUSTOMERS
 
The Company had sales to the following major customers that in any period
exceeded 10% of revenues:
 


                                        1996                        1997
                             --------------------------- ---------------------------
                                               Year-End                    Year-End
                                     Percent  Receivable         Percent  Receivable
                              Sales  of Sales  Balance    Sales  of Sales  Balance
                             ------- -------- ---------- ------- -------- ----------
                                                        
   Tennessee Valley
    Authority..............  $10,224   14.9%    $1,458   $20,987   23.9%    $3,211
   Twin Energy.............   18,280   26.6%       368    17,033   19.4%       585
   James River Coal Service
    Co.....................    7,802   11.4%       487     9,032   10.3%       324
   Gabbard Coal Sales......    7,896   11.5%       --        --     --         --

 
13. STOCKHOLDER'S EQUITY
 
Stockholder's equity consists of:
 


                                                                  1996   1997
                                                                 ------ ------
                                                                  
   Common Stock:
     Leslie Resources, Inc.--
       No par value, 1,000 shares authorized, 100 shares issued
        and 20 shares outstanding............................... $    1 $    1
     Leslie Resources Management, Inc.--
       No par value, 1,000 shares authorized, 25 shares issued
        and outstanding.........................................      1      1
                                                                 ------ ------
                                                                      2      2
                                                                 ------ ------
   Treasury Stock:
     Leslie Resources, Inc
       20 shares purchased at a cost of.........................    349    349
       60 shares purchased at a cost of.........................  3,903  3,903
                                                                 ------ ------
                                                                  4,252  4,252
                                                                 ------ ------
   Retained Earnings:
     Leslie Resources, Inc......................................  4,355  2,744
     Leslie Resources Management, Inc...........................     48  1,672
                                                                 ------ ------
                                                                  4,403  4,416
                                                                 ------ ------
         Total Stockholder's Equity............................. $  153 $  166
                                                                 ====== ======

 
14. TREASURY STOCK
 
In November 1995, Leslie Resources, Inc. signed an option agreement with three
of its stockholders to purchase all the shares of their common stock for
$3,903, which was exercised in March 1996. After this transaction, only one
stockholder, Greg Wells, owns all the outstanding shares of Leslie Resources,
Inc. In 1990 Leslie Resources, Inc. purchased 20 shares from a previous
stockholder for $349.
 
Greg Wells is the only stockholder of Leslie Resources Management, Inc. and its
subsidiaries, and no treasury stock has ever been purchased.
 
                                      F-94

 
          LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC.
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
15. RELATED PARTY TRANSACTIONS
 
As indicated in Note 2b, all material related party transactions among the
combining Companies have been eliminated. Other related corporations with
common ownership with the Company which had transactions are:
 
    (a) Resource Trucking, Inc. was paid $681 and $884 in 1996 and 1997,
  respectively, for contract trucking and equipment rental. These services
  are continually provided to the Company on a month to month basis.
 
    (b) Mountain Properties, Inc. was paid $432 and $1,494 for coal
  royalties, rents and wheelage and $307 and $299 for tipple lease in 1996
  and 1997, respectively. The Company has leases for varying lengths of time
  with Mountain Properties, Inc. for future rental and royalty obligations.
  Approximate minimum payments are included in Note 11f.
 
No material receivables or payables with these related companies exist at
December 31, 1996 or 1997.
 
16. NEW ACCOUNTING STANDARDS
 
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of (SFAS No. 121). The new
standard requires that long-lived assets and certain identified intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing such
impairment reviews, companies are required to estimate the sum of future cash
flows from an asset and compare such amount to the asset's carrying amount. Any
excess of carrying amount over expected cash flows will result in a possible
write-down of an asset to its fair value. Adopting SFAS No. 121 had no impact
on the Company's financial position or results of operations.
 
The Company will implement Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, (SFAS No. 130) during 1998. SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components in financial statements. Comprehensive income generally
represents all changes in shareholders' equity except those resulting from
investments by or distributions to shareholders. Such changes are not
significant to the Company.
 
Effective January 1, 1999, the Company will adopt Statement of Position (SOP)
98-5, Reporting on the Costs of Start-up Activities. The new statement requires
that the costs of start-up activities be expensed as incurred. The Company has
not yet evaluated the impact of this statement on the results of operations or
financial position.
 
17. SUBSEQUENT EVENTS
 
In December 1997, the shareholder agreed to sell all of the stock of the
Company to AEI Holding Company, Inc., the closing of which took place January
15, 1998.
 
Prior to January 15, 1998, the Company committed to sell, and subsequently
sold, property classified as held for resale to Caterpillar Finance for
settlement of three notes (see Note 6b). The property sold is leased back from
Caterpillar Finance under operating leases.
 
                                      F-95

 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To AEI Resources, Inc. and
Mid-Vol Leasing, Inc.
and Affiliates:
 
We have audited the accompanying combined balance sheets of Mid-Vol Leasing,
Inc. and Affiliates (Mid-Vol Leasing, Inc., Mega Minerals, Inc. and Premium
Processing, Inc., see Note 1) as of December 31, 1996 and 1997, and the related
combined statements of operations and retained earnings and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Mid-Vol Leasing, Inc.
and Affiliates as of December 31, 1996 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
 
                                              Arthur Andersen LLP
Louisville, Kentucky
April 23, 1998
 
                                      F-96

 
                 MID-VOL LEASING, INC. AND AFFILIATES (NOTE 1)
 
                            COMBINED BALANCE SHEETS
               as of December 31, 1996 and 1997 and June 30, 1998
                                 (In Thousands)
 


                                                      December 31,
                                                     --------------  June 30,
                                                      1996   1997      1998
                                                     ------ ------- -----------
                                                                    (Unaudited)
                                                           
                       ASSETS
Current Assets:
  Cash and cash equivalents......................... $1,607 $   693   $   574
  Restricted cash...................................    106     --        --
  Accounts receivable...............................    943   6,417     3,869
  Due from affiliates...............................    572   2,432         4
  Inventories.......................................  2,840     712     4,078
  Prepaid expenses and other........................    624     147       425
                                                     ------ -------   -------
    Total current assets............................  6,692  10,401     8,950
                                                     ------ -------   -------
Property, plant and equipment, at cost, including
 mineral reserves, net of accumulated depreciation,
 depletion and amortization of $1,494, $1,833 and
 $2,005, respectively...............................  3,118   2,860     2,691
Other non-current assets............................    180     180       164
                                                     ------ -------   -------
    Total assets.................................... $9,990 $13,441   $11,805
                                                     ====== =======   =======
        LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable.................................. $  329 $   704   $   632
  Due to affiliates.................................  2,710       5       363
  Note payable......................................    400     --        750
  Current portion of long-term debt.................    565     551       168
  Construction contract.............................    --      100     2,000
  Accrued expenses and other........................    216     589       341
                                                     ------ -------   -------
    Total current liabilities.......................  4,220   1,949     4,254
                                                     ------ -------   -------
Non-Current Liabilities:
  Long-term debt and related obligations, less
   current portion..................................  1,185     666       205
  Other non-current liabilities.....................    190     174       --
                                                     ------ -------   -------
    Total non-current liabilities...................  1,375     840       205
                                                     ------ -------   -------
Commitments and Contingencies (see notes)
Stockholders' Equity:
  Common stock......................................      3       3         3
  Retained earnings.................................  4,392  10,649     7,343
                                                     ------ -------   -------
    Total stockholders' equity......................  4,395  10,652     7,346
                                                     ------ -------   -------
    Total liabilities and stockholders' equity...... $9,990 $13,441   $11,805
                                                     ====== =======   =======

 
The accompanying notes to combined financial statements are an integral part of
                             these balance sheets.
 
                                      F-97

 
                 MID-VOL LEASING, INC. AND AFFILIATES (NOTE 1)
 
            COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
              For The Years Ended December 31, 1995, 1996 and 1997
                And The Six Months Ended June 30, 1997 and 1998
                                 (In Thousands)
 


                                                            Six Months Ended
                                      December 31,              June 30,
                                 -------------------------  ------------------
                                  1995     1996     1997      1997      1998
                                 -------  -------  -------  --------  --------
                                                               (Unaudited)
                                                       
Revenues........................ $12,489  $17,862  $34,471  $ 18,301  $ 15,324
Costs and expenses:
  Cost of operations............  11,774   15,868   25,021    15,218    12,041
  Depreciation, depletion and
   amortization.................     321      301      329       167       173
  Selling, general and
   administrative...............      59      148      466        99       218
                                 -------  -------  -------  --------  --------
    Total costs and expenses....  12,154   16,317   25,816    15,484    12,432
                                 -------  -------  -------  --------  --------
      Income from operations....     335    1,545    8,655     2,817     2,892
Other income (expense):
  Gain on sale of assets........     --       --        18        18       --
  Interest income...............      86       88      112        58        43
  Interest expense..............    (184)    (129)     (97)      (50)       (7)
  Other, net....................       2        9       (3)      --        --
                                 -------  -------  -------  --------  --------
      Other income (expense)....     (96)     (32)      30        26        36
                                 -------  -------  -------  --------  --------
      Income before income
       taxes....................     239    1,513    8,685     2,843     2,928
Income tax expense (Note 6).....     --       --         5         3         1
                                 -------  -------  -------  --------  --------
      Net income................     239    1,513    8,680  $  2,840  $  2,927
Beginning retained earnings.....   5,500    4,189    4,392     4,392    10,649
    Less dividends paid.........  (1,550)  (1,310)  (2,423)     (566)   (6,233)
                                 -------  -------  -------  --------  --------
Ending retained earnings........ $ 4,189  $ 4,392  $10,649  $  6,666  $  7,343
                                 =======  =======  =======  ========  ========

 
 
The accompanying notes to combined financial statements are an integral part of
                               these statements.
 
                                      F-98

 
                 MID-VOL LEASING, INC. AND AFFILIATES (NOTE 1)
 
                       COMBINED STATEMENTS OF CASH FLOWS
  For The Years Ended December 31, 1995, 1996 and 1997 And For The Six Months
                          Ended June 30, 1997 and 1998
                                 (In Thousands)
 


                                                            Six Months Ended
                                      December 31,              June 30,
                                 -------------------------  ------------------
                                  1995     1996     1997      1997      1998
                                 -------  -------  -------  --------  --------
                                                               (Unaudited)
                                                       
CASH FLOWS FROM OPERATING
 ACTIVITIES:
 Net income..................... $   239  $ 1,514  $ 8,680  $  2,840  $  2,927
 Adjustments to reconcile net
  income to net cash provided by
  (used in) operating
  activities:
  Depreciation, depletion and
   amortization.................     321      301      329       167       173
  Gain on sale of assets........     --       --       (18)      (18)      --
Changes in assets and
 liabilities:
  (Increase) decrease in:
   Receivables..................   1,686     (614)  (5,474)   (2,829)    2,549
   Due from affiliates..........   1,120     (562)  (1,860)      (88)    2,428
   Inventories..................  (1,151)    (879)   2,128     2,479    (3,366)
   Prepaids and other...........     (57)    (572)     478       201      (278)
   Other noncurrent assets......     --       --       --        --         16
  Increase (decrease) in:
   Accounts payable.............      43      256      375       153       (72)
   Due to affiliate.............    (194)   2,352   (2,704)     (691)      357
   Accrued expenses and other...     (90)      48      373       288      (248)
   Other non-current
    liabilities.................     157      (17)     (17)      --       (174)
                                 -------  -------  -------  --------  --------
    Net adjustments.............   1,835      313   (6,390)     (338)    1,385
                                 -------  -------  -------  --------  --------
    Net cash provided by
     operating activities.......   2,074    1,827    2,290     2,502     4,312
                                 -------  -------  -------  --------  --------
CASH FLOWS FROM INVESTING
 ACTIVITIES:
 Restricted cash................       7        7      106       --        --
 Additions of property, plant
  and equipment.................     (59)     --       (74)      --        --
 Proceeds from sale of assets...       7       11       20       --          3
 Proceeds from construction
  contract......................     --       --       100        18     1,900
                                 -------  -------  -------  --------  --------
    Net cash provided by (used
     in) investing activities...     (45)      18      152        18     1,903
                                 -------  -------  -------  --------  --------
CASH FLOWS FROM FINANCING
 ACTIVITIES:
 Proceeds from issuance of
  debt..........................     300      100      --        --        750
 Repayments on long-term debt
  and note payable..............    (647)    (619)    (932)     (278)     (844)
 Distributions to shareholders..  (1,550)  (1,310)  (2,424)     (566)   (6,240)
                                 -------  -------  -------  --------  --------
    Net cash used in financing
     activities.................  (1,897)  (1,829)  (3,356)     (844)   (6,334)
                                 -------  -------  -------  --------  --------
    Net increase (decrease) in
     cash and cash equivalents..     132       16     (914)    1,676      (119)
CASH AND CASH EQUIVALENTS,
 beginning of period............   1,459    1,591    1,607     1,607       693
                                 -------  -------  -------  --------  --------
CASH AND CASH EQUIVALENTS, end
 of period...................... $ 1,591  $ 1,607  $   693  $  3,283  $    574
                                 =======  =======  =======  ========  ========

 
The accompanying notes to combined financial statements are an integral part of
                               these statements.
 
                                      F-99

 
                      MID-VOL LEASING, INC. AND AFFILIATES
 
                     NOTES TO COMBINED FINANCIAL STATEMENTS
                      December 31, 1995, 1996 and 1997 and
                       June 30, 1997 and 1998 (Unaudited)
                             (Dollars in Thousands)
 
1. DESCRIPTION OF BUSINESS
 
Mid-Vol Leasing, Inc. and Affiliates consists of Mid-Vol Leasing, Inc. (a West
Virginia S corporation), Mega Minerals, Inc. (a West Virginia S corporation)
and Premium Processing, Inc. (a West Virginia C corporation), collectively
referred to as "the Company".
 
Mid-Vol Leasing, Inc. (MVL) engages in the brokering of coal with sales
predominantly to international coal brokering firms. MVL uses contract miners
(including a related party, see Note 7b) to mine the coal. Coal mining and the
operation of the loading facilities are conducted in McDowell County in
southern West Virginia.
 
Mega Minerals, Inc. (MMI) leases land for coal mining purposes primarily to
MVL. Premium Processing, Inc. (PPI) exclusively provides labor to operate MVL's
load out facilities.
 
Richard Preservati owns 81% of MVL and MMI and 9% of PPI. Tim Boggess, Richard
Preservati's son-in-law, owns 75% of PPI. The remaining shares of each of the
three companies are owned by Richard Preservati's wife, Nancy, and their three
children, Richard Preservati II, Nicholas Preservati and Gina Boggess.
 
See Note 12b regarding sale to Coal Ventures, Inc.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
a. Method of Accounting and Basis of Presentation
 
The accompanying combined financial statements include those of Mid-Vol
Leasing, Inc., Mega Minerals, Inc. and Premium Processing, Inc. because of
common ownership and control. All significant intercompany transactions and
balances have been eliminated in the combination.
 
The Company's books and records are maintained on an income tax basis of
accounting which differs from and is a comprehensive basis of accounting other
than generally accepted accounting principles. Adjustments have been made to
the income tax records via "memorandum" entries in order for the financial
statements to be prepared in accordance with generally accepted accounting
principles.
 
b. Interim Financial Information
 
The interim financial statements as of June 30, 1998 and for the six months
ended June 30, 1997 and 1998 are unaudited and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the Company's management, the unaudited interim financial
statements contain all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
fiscal year.
 
c. Use of Estimates
 
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
 
                                     F-100

 
                      MID-VOL LEASING, INC. AND AFFILIATES
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
d. Statements of Cash Flows
 
For purposes of the statements of cash flows, the Company considers investments
having maturities of three months or less at the time of purchase to be cash
equivalents.
 
  Supplemental disclosure:
 


                                                                 (Unaudited)
                                                                 Six Months
                                                 December 31,  Ended June 30,
                                                -------------- ---------------
                                                1995 1996 1997  1997    1998
                                                ---- ---- ---- ------- -------
                                                        
Cash paid for interest......................... $184 $129 $97  $    50 $    29

 
Not included in the statement of cash flows for 1995 is an addition to
property, plant and equipment of $500 which was financed through a $400 note in
1995 and a $100 option payment in 1993. Additionally in 1995, a line of credit
of $800 was refinanced into a long-term note of $800, which has been excluded
from the 1995 statement of cash flows.
 
e. Restricted Cash
 
In accordance with a 1989 coal mining sublease agreement with USX Corporation
(USX), the Company was required to maintain $100 in escrow for the purpose of
satisfying any obligations owed to USX. During 1997, this requirement was
released.
 
f. Inventories
 
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market. All inventories consists of stock piled coal.
 
g. Advance Royalties (included in prepaid expenses and other)
 
The Company is required under certain royalty lease agreements to make minimum
royalty payments whether or not mining activity is being performed on the
leased property. These minimum payments are recoupable once mining begins on
the leased property. The Company capitalizes these minimum royalty payments and
expenses them once mining activities begin. As of December 31, 1996 and 1997,
the Company had advance royalties of $56 and $49, respectively.
 
h. Property, Plant and Equipment
 
Property, plant and equipment are stated at cost. The Company provides for
depreciation of the depreciable assets by using accelerated methods with useful
lives that range from 7 to 15 years. Depreciation expense was $229, $199 and
$177 for 1995, 1996 and 1997, respectively.
 
i. Depletion
 
Cost depletion is calculated on a per ton basis to allocate the cost of mineral
reserves against the related coal sales. Cost depletion expense was $93, $101
and $152 for 1995, 1996 and 1997, respectively.
 
j. Revenue Recognition
 
The Company's revenues have primarily been generated under coal sales contracts
with coal brokerage firms, primarily internationally based. All sales are
consummated in US dollars, and revenues are recognized at the time the train
cars are loaded as all sales agreements are FOB mine site. The Company grants
credit to its
 
                                     F-101

 
                      MID-VOL LEASING, INC. AND AFFILIATES
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
customers based on their creditworthiness and generally does not secure
collateral for its receivables. No allowance for doubtful accounts is recorded
for 1996 and 1997, as management does not believe it is necessary.
Historically, accounts receivable write-offs have been insignificant.
 
k. SFAS No. 121
 
Effective January 1, 1996, for purposes of this presentation in accordance with
generally accepted accounting principles, the Company adopted Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of (SFAS No. 121). The
new standard requires that long-lived assets and certain identified intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing such
impairment review, companies are required to estimate the sum of future cash
flows from an asset and compare such amount to the asset's carrying amount. Any
excess of carrying amount over expected cash flows will result in a possible
write-down of an asset to its fair value. Adopting SFAS No. 121 had no impact
on the Company's financial position or results of operations.
 
l. New Accounting Standard
 
Effective January 1, 1999, for purposes of this presentation in accordance with
generally accepted accounting principles, the Company will adopt Statement of
Position (SOP) 98-5 Reporting on the Costs of Start-Up Activities. The new
statement requires that the costs of start-up activities be expensed as
incurred. The Company has not yet evaluated the impact of this statement on the
results of operations or financial position.
 
m. Reclassifications
 
Certain reclassifications of prior year amounts were made to conform with the
current year presentation with no effect on previously reported net income
(loss) or stockholders' equity.
 
3. PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment, including mineral reserves at December 31, 1996
and 1997, are summarized by major classifications as follows:
 


                                                                 1996    1997
                                                                ------  ------
                                                                  
   Machinery & equipment....................................... $2,019  $2,100
   Mineral reserves............................................  2,593   2,593
                                                                ------  ------
                                                                 4,612   4,693
   Less accumulated depreciation, depletion and amortization... (1,494) (1,833)
                                                                ------  ------
   Net property, plant and equipment........................... $3,118  $2,860
                                                                ======  ======

 
                                     F-102

 
                      MID-VOL LEASING, INC. AND AFFILIATES
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
4. DEBT
 
a. Long-Term Debt
 
Long-term debt consists of the following:
 


                                                                  1996   1997
                                                                 ------  -----
                                                                   
   Note payable to Consolidation Coal Company, imputed interest
    at 5.24%, payable in quarterly installments of $100,000
    principal and interest for 22 quarters, maturing November
    1999, secured by letter of credit..........................  $1,155  $ 787
   Note payable to One Valley Bank, bearing interest at 7.75%,
    payable in monthly installments of $14,296 principal and
    interest for 66 months, maturing August 2000, secured by
    equipment and guaranteed by owner..........................  $  570  $ 430
   Note payable to One Valley Bank, bearing interest at 7%,
    payable in monthly installments of $12 principal and inter-
    est for 36 months, maturing February 1997, secured by
    equipment and guaranteed by owner..........................      25    --
                                                                 ------  -----
     Totals....................................................   1,750  1,217
     Less: Current portion                                         (565)  (551)
                                                                 ------  -----
     Long-term debt............................................  $1,185  $ 666
                                                                 ======  =====

 
  Principal payments required for long-term debt after December 31, 1997 are as
follows:
 
                                                                    
   Year ended December 31:
     1998................................................................ $  551
     1999................................................................    550
     2000................................................................    116
                                                                          ------
                                                                          $1,217
                                                                          ======

   
 
b. Note payable
 
As of December 31, 1996, the Company had a $400 note payable to One Valley
Bank, bearing interest at 5.29%, payable on demand principal and interest for
180 days. This note was paid in 1997.
 
c. Letters of Credit
 
MVL has a letter of credit, secured by affiliate equipment, amounting to $800
to cover certain debt obligations.
 
d. Guarantor
 
As of December 31, 1997, MVL guarantees an affiliates' term loans of
approximately $1.4 million that mature on January 15, 2001. Subsequent to year-
end, MVL was released from its guarantor obligations (see Note 12a).
 
5. RECLAMATION COSTS
 
Under current federal and state surface mine laws, the Company is required to
reclaim land where surface mining operations are conducted. As the Company
obtained the permits relating to the surface mining of its controlled reserves,
they have the ultimate responsibility for ensuring that reclamation is
completed. Under agreements entered into by the Company with its contract
miners, such contract miners are contractually
 
                                     F-103

 
                      MID-VOL LEASING, INC. AND AFFILIATES
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
responsible for reclamation. In the event that the contract miners do not
perform the required reclamation, the Company would become liable for this
reclamation. The Company assesses the financial stability of the contract
miners before entering into agreements. The Company may require contract miners
to maintain $250 in escrow to be released upon completion of reclamation. If
the contract miner obtains its own bonding, the escrow requirement is waived.
No additional amounts for reclamation have been provided in the accompanying
financial statements as the Company does not believe it will be required to
perform such activities. As of December 31, 1997, the Company had approximately
$2.8 million in mining bonds.
 
6. INCOME TAXES
 
MVL and MMI have elected to be recognized as S corporations under the Internal
Revenue Code and similar state statutes. As a result, both entities are not
subject to income taxes and their taxable income or loss is reported in the
stockholders' individual tax returns.
 
PPI (organized in 1996) has elected to be recognized as a C corporation under
the Internal Revenue Code and similar state statutes. During 1996 and 1997, PPI
had no temporary differences between financial statement and tax bases of
assets and liabilities. Accordingly, the income tax provision for 1997 is
entirely current with no deferred portion. There are no significant differences
between the statutory tax rate and effective tax rate for PPI earnings.
 
7. COMMITMENTS AND CONTINGENCIES
 
a. Coal Sales Contracts
 
As of December 31, 1997, MVL had commitments to deliver base quantities of coal
to two customers. One contract expires at the end of 1998, with MVL contracted
to supply a minimum of approximately 60,000 tons of coal over the remaining
life of this contract at prices which are at or above market. MVL also has a
contract with CoalArbed, which extends through June 30, 1999 (see Note 9). MVL
is to supply a minimum of approximately 600,000 tons of coal at prices which
are at or above market.
 
b. Contract Mining Agreements
 
As of December 31, 1997, MVL had commitments to purchase quantities of coal
from three contract miners (including one affiliate) under various agreements.
In 1998, MVL is committed to purchase approximately 1,000,000 tons of coal at
cost which will not exceed the ultimate sales prices.
 
Included in the aforementioned tonnage purchase commitment is approximately
360,000 tons of coal to be purchased from a party related by common ownership,
Extra Energy, Inc. (EEI). MVL has used EEI as a contract miner since 1993.
Prior to January 1, 1998, EEI's per ton selling price to MVL was equal to EEI's
cost per ton to mine the coal, exclusive of any profit or cost of capital. As
of December 31, 1995, 1996 and 1997, EEI's price per ton was $28.20, $34.60 and
$16.00, respectively. Beginning January 1, 1998, EEI's sales price to MVL was
set at $23.00 per ton. These rates exclude additional mining costs such as
production taxes and royalty fees.
 
c. Litigation
 
The Company is named as defendant in two pending civil actions that relate to
an on-the-job accident. While the final resolution of any matter may have an
impact on the Company's financial results for a particular reporting period,
management believes that the ultimate disposition of these matters will not
have a materially adverse effect upon the financial position of the Company.
 
                                     F-104

 
                      MID-VOL LEASING, INC. AND AFFILIATES
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
d. Leases
 
Lease Cost
 
The Company leases equipment from a related party. Lease expense for the years
ended December 31, 1995, 1996 and 1997 was $254, $243 and $619, respectively.
MMI and MVL also lease coal reserves under agreements that call for royalties
to be paid as the coal is mined. Total royalty expense for the periods ending
December 31, 1995, 1996 and 1997 was $259, $398 and $1,062, respectively.
 
Approximate future minimum lease and royalty payments are as follows:
 


                                                                       Operating
   Year ended December 31:                                   Royalties  Leases
   -----------------------                                   --------- ---------
                                                                 
     1998...................................................    $53     $2,312
     1999...................................................     53      2,312
     2000...................................................     53      1,884
     2001...................................................     32
     2002...................................................     31
     Thereafter.............................................     30

 
Subsequent to year-end, the leases relating to royalties were amended (see Note
11b).
 
Lease Income
 
MMI leases certain coal reserve rights. During 1995, 1996 and 1997, MMI
recognized royalty income of $139, $198 and $353, respectively. The Company has
two lease agreements extending through 2001 and 2008, which call for minimum
annual payments to be received of $10 and $7, respectively.
 
8. STOCKHOLDERS' EQUITY
 
Stockholders' equity consists of:
 


                                                  December 31,
                                              ---------------------  June 30,
                                               1995   1996   1997      1998
                                              ------ ------ ------- -----------
                                                                    (Unaudited)
                                                        
Common Stock:
  Mid-Vol Leasing, Inc.--$10.00 par value,
   100 shares authorized, 100 shares issued
   and outstanding........................... $    1 $    1 $     1   $    1
  Mega Minerals, Inc.--$10.00 par value, 100
   shares authorized, 100 shares issued and
   outstanding...............................      1      1       1        1
  Premium Processing, Inc.--$10.00 par value,
   100 shares authorized, 100 shares issued
   and outstanding...........................    --       1       1        1
                                              ------ ------ -------   ------
                                                   2      3       3        3
                                              ------ ------ -------   ------
Retained Earnings:
  Mid-Vol Leasing, Inc.......................  3,326  3,133   9,286    5,840
  Mega Minerals, Inc.........................    862  1,250   1,355    1,499
  Premium Processing, Inc....................    --       9       8        4
                                              ------ ------ -------   ------
                                               4,188  4,392  10,649    7,343
                                              ------ ------ -------   ------
    Total Stockholders' Equity............... $4,190 $4,395 $10,652   $7,346
                                              ====== ====== =======   ======

 
                                     F-105

 
                      MID-VOL LEASING, INC. AND AFFILIATES
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
9. MAJOR CUSTOMERS
 
The Company had sales to the following major customers that in any period
exceeded 10% of revenues:
 


                               1995                   1996                         1997
                         ---------------- ---------------------------- -----------------------------
                                                            Year-End                      Year-End
                                 Percent          Percent   Receivable          Percent   Receivable
                         Sales   of Sales Sales   of Sales   Balance    Sales   of Sales   Balance
                         ------ --------- ------ --------- ----------- ------- --------- -----------
                                                                 
CoalArbed............... $3,315     27%   $9,614     54%      $455     $24,469     71%     $4,554
Consol.................. $3,101     25%       NA     NA         NA          NA     NA          NA
Metcoal.................     NA     NA    $3,093     17%      $ 89          NA     NA          NA
Rheinbraun.............. $1,986     16%   $2,235     13%       --           NA     NA          NA
National Fuel Corp...... $1,251     10%       NA     NA         NA          NA     NA          NA

 
10. RELATED PARTY TRANSACTIONS
 
As indicated in Note 2, all material related party transactions among the
combining Companies have been eliminated. Transactions with other corporations
related via common ownership were as follows:
 


                                                December 31,        June 30,
                                            --------------------- -------------
                                             1995   1996   1997    1997   1998
                                            ------ ------ ------- ------ ------
                                                                   (unaudited)
                                                          
   Revenues and expenses:
     Royalty income........................ $  --  $  --  $     2 $  --  $   13
     Contract mining costs.................  9,653  9,282  13,029  7,209  5,396
     Purchased coal........................    986    --      --     --     --
     Loading...............................     26     33      35     17    --
     Equipment rental......................    254    243     619    140    620
     Administrative services...............     12     38      73     30     49
     Maintenance and repair................    122    --      --     --     --

 
11. SUBSEQUENT EVENTS
 
a. Pace Carbon West Virginia Synthetic Fuels #3, L.L.C. Refuse Plant
 
In January 1998, MVL (as Lessor) and Pace Carbon West Virginia Synthetic Fuels
#3, L.L.C. (Pace) entered into a sub-lease agreement pertaining to 7 acres at
the Dan's Branch Location. The agreement runs through June 30, 2008, with Pace
paying $7 per year in rent to MVL.
 
Pace is constructing a coal palletizing plant on the leased property. Pace
plans to blend refuse type material with low quality coal to produce coal
briquettes, which will be sold to utilities.
 
As of December 31, 1997, Pace had advanced to MVL $100 towards the construction
of a beltway (conveyor). In March 1998, Pace advanced MVL an additional $1,900.
The beltway will run to MVL's Eckman loadout facility. MVL and Pace will both
have access to the beltway with MVL gaining ownership upon its completion. If
MVL cannot construct the beltway for $2,000 but can complete for up to $3,000,
Pace will loan MVL up to $1,000 at 8% interest. If MVL cannot complete the
project for the $3,000, the parties will decide who will fund the additional
amount. If the belt is determined to be not economically feasible (prior to
beginning construction), MVL is obligated to use the $2,000 advanced from Pace
to improve the haul roads at the Dan's Branch location. The Company estimates
construction costs of approximately $3,700. Due to the conveyor project not
being economically feasible, the Company plans on using the $2,000 towards
improving the haul roads.
 
                                     F-106

 
                      MID-VOL LEASING, INC. AND AFFILIATES
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
 
 
b. Amendment to Pocahontas Land Corporation (Pocahontas) Leases
 
On April 1, 1998, MVL and MMI amended their individual leases with Pocahontas,
bringing all leases under the same terms. All leases extend through December
31, 2012, with renewal periods of 15 years. The Company will pay Pocahontas a
royalty rate of 3.25% on the average gross selling price per ton, beginning
April 1, 1998 through March 31, 2000; thereafter, the royalty rate increases to
3.50%. The advance minimum annual payment will be $185 payable in quarterly
payments of $46, effective January 1, 1998.
 
c. Potential Acquisition by AEI Holding Company, Inc.
 
In March 1998, the shareholders signed a letter of intent to sell all of the
stock of MVL, MMI and PPI to AEI Holding Company, Inc.
 
12. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
 
a. Release from Obligations
 
Subsequent to April 23, 1998, MVL was released from its guarantor obligation
(see Note 4d). Additionally, MVL was released from its operating lease
obligations (see Note 7d).
 
b. Purchase Agreement
 
On July 10, 1998, the shareholders entered into a stock purchase agreement and
immediately sold all their shares to Coal Ventures, Inc. (CVI), which is an
entity related to AEI Holding Company, Inc. CVI subsequently change its name to
AEI Resources, Inc. (Resources). The purchase price was $35,000 plus a working
capital adjustment as well as production royalty payments.
 
c. Debt Retirement
 
In July 1998 the Company paid off its remaining debt with company cash and net
proceeds from the $750 short-term note payable. Subsequently, the Company's
major shareholder retired the $750 note payable.
 
 
                                     F-107

 
                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Stockholders
Kindill Holding, Inc.
Owensboro, Kentucky
 
We have audited the accompanying consolidated balance sheets of Kindill
Holding, Inc. (Company) as of December 31, 1996 and 1997, and the related
statements of income, stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1996 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
 
Deloitte & Touche LLP
 
Louisville, Kentucky
April 3, 1998
(May 15, 1998 as to note 6 and August 17, 1998 as to note 16)
 
 
                                     F-108

 
                              KINDILL HOLDING, INC
 
                          CONSOLIDATED BALANCE SHEETS
 


                                           December 31,      June 30,
                                          ----------------  -----------
                                           1996     1997       1998
                                          -------  -------  -----------
                                                            (Unaudited)
                                                            
                 ASSETS                         (In thousands)
CURRENT ASSETS:
  Cash, and cash equivalents............. $   102  $ 6,901   $  2,713
  Accounts receivable:
   Trade, less allowance for doubtful
    accounts of $119 (1996)..............   5,945    4,888      4,625
   Escrow receivable related to
    acquisition..........................   3,888      --         --
   Insurance claim.......................   1,161      --         --
  Coal inventory.........................     718    1,964      3,291
  Other..................................   1,176    1,574      1,396
                                          -------  -------   --------
    Total current assets.................  12,990   15,327     12,025
PROPERTY, PLANT, AND EQUIPMENT, net......  76,409   79,131     86,413
OTHER ASSETS.............................   1,773    3,311      2,558
                                          -------  -------   --------
TOTAL.................................... $91,172  $97,769   $100,996
                                          =======  =======   ========
  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable....................... $ 6,561  $ 6,167   $  4,702
  Accrued expenses:
   Accrued payroll.......................   1,464    1,374      1,345
   Accrued interest......................      80      952        --
   Other.................................   2,821    3,584      4,389
  Payable to a relative of a stockholder
   of the Parent.........................  11,193      --         --
  Current maturities of long-term debt...   5,309    4,000      4,000
  Current portion of accrued reclamation
   liability.............................  13,000    8,000      5,000
                                          -------  -------   --------
    Total current liabilities............  40,428   24,077     19,436
LONG-TERM DEBT...........................   5,750   33,330     39,000
ACCRUED RECLAMATION LIABILITY............  17,999   10,026      9,290
ACCRUED POSTRETIREMENT BENEFIT
 OBLIGATION..............................  20,937   23,587     25,037
DEFERRED INCOME TAXES....................   2,014    1,697      2,899
COMMITMENTS AND CONTINGENCIES............     --       --         --
                                          -------  -------   --------
    Total liabilities....................  87,128   92,717     95,662
                                          -------  -------   --------
STOCKHOLDERS' EQUITY:
  Common stock, no par value: authorized
   30,000 shares; issued and outstanding
   10,000 shares.........................      13       13         13
  Note receivable from sale of common
   stock.................................      (8)      (8)        (8)
  Retained earnings......................   4,039    5,047      5,329
                                          -------  -------   --------
    Total stockholders' equity...........   4,044    5,052      5,334
                                          -------  -------   --------
TOTAL.................................... $91,172  $97,769   $100,996
                                          =======  =======   ========

 
                See notes to consolidated financial statements.
 
                                     F-109

 
                              KINDILL HOLDING, INC
 
                       CONSOLIDATED STATEMENTS OF INCOME
 


                                             Years Ended       Six Months
                                            December 31,     Ended June 30,
                                           ----------------  ----------------
                                            1996     1997     1997     1998
                                           -------  -------  -------  -------
                                                               (Unaudited)
                                                   (In thousands)
                                                          
COAL SALES................................ $62,860  $58,761  $28,803  $36,867
COST OF COAL SOLD.........................  54,786   54,624   26,590   32,659
                                           -------  -------  -------  -------
GROSS PROFIT..............................   8,074    4,137    2,213    4,208
SELLING, GENERAL AND ADMINISTRATIVE
 EXPENSES.................................   3,435    2,019    1,111    1,337
                                           -------  -------  -------  -------
INCOME FROM OPERATIONS....................   4,639    2,118    1,102    2,871
                                           -------  -------  -------  -------
OTHER INCOME (EXPENSE):
  Investment income.......................     363      340      110      233
  Rental income...........................     100      159      122       54
  Income from insurance claim.............   1,161      176      400      --
  Other income............................     147      303       76       31
  Interest expense........................    (429)  (1,562)    (416)  (2,720)
                                           -------  -------  -------  -------
    Other income (expense), net...........   1,342     (584)     292   (2,402)
                                           -------  -------  -------  -------
INCOME BEFORE INCOME TAX EXPENSE..........   5,981    1,534    1,394      469
INCOME TAX EXPENSE........................   1,942      526      488      187
                                           -------  -------  -------  -------
NET INCOME................................ $ 4,039  $ 1,008  $   906  $   282
                                           =======  =======  =======  =======
NET INCOME PER COMMON SHARE (BASIC AND
 DILUTED)................................. $   404  $   101       91  $    28
                                           =======  =======  =======  =======

 
 
                See notes to consolidated financial statements.
 
                                     F-110

 
                             KINDILL HOLDING, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
   Years Ended December 31, 1996 and 1997 and Six Months Ended June 30, 1998
 


                                                Note Receivable
                                         Common  From Sales of  Retained
                                         Stock   Common Stock   Earnings Total
                                         ------ --------------- -------- ------
                                                     (In thousands)
                                                             
BALANCES AT
  JANUARY 1, 1996.......................  $13         $(8)       $  --   $    5
  Net income............................  --          --          4,039   4,039
                                          ---         ---        ------  ------
BALANCES AT
  DECEMBER 31, 1996.....................   13          (8)        4,039   4,044
  Net income............................  --          --          1,008   1,008
                                          ---         ---        ------  ------
BALANCES AT
  DECEMBER 31, 1997.....................   13          (8)        5,047   5,052
  Net income (Unaudited)................  --          --            282     282
                                          ---         ---        ------  ------
BALANCE AT
  JUNE 30, 1998 (Unaudited).............  $13         $(8)       $5,329  $5,334
                                          ===         ===        ======  ======

 
 
                See notes to consolidated financial statements.
 
                                     F-111

 
                              KINDILL HOLDING, INC
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 


                         Years Ended December 31,    Six Months Ended June 30,
                         --------------------------  --------------------------
                             1996          1997          1997          1998
                         ------------  ------------  ------------  ------------
                                                       
                                                            (Unaudited)
                                           (In thousands)
CASH FLOWS FROM
 OPERATING ACTIVITIES:
 Net income............. $      4,039  $      1,009  $        906  $        282
 Adjustments to
  reconcile net income
  to net cash provided
  by (used in) operating
  activities:
  Depreciation,
   depletion and
   amortization.........        4,249         5,123         1,962         1,961
  Gain on sales of
   property, plant and
   equipment............           (1)          (37)          --           (131)
  Deferred income
   taxes................        1,627          (278)          488           187
  Changes in assets and
   liabilities (net of
   effects
   of acquisitions):
   Accounts receivable..        1,007         6,105         6,478           263
   Coal inventory.......         (718)       (1,246)         (713)       (1,327)
   Other current assets
    and other assets....         (166)       (5,324)        1,088           930
   Accounts payable.....        6,561          (394)         (720)       (1,465)
   Accrued expenses.....       11,939         1,546        (1,320)          839
   Accrued reclamation
    liability...........      (28,501)      (12,973)       (4,435)       (3,736)
   Accrued
    postretirement
    benefit obligation..        2,302         2,650           804         1,450
                         ------------  ------------  ------------  ------------
    Net cash provided by
     (used in) operating
     activities.........        2,338        (3,819)        4,538          (747)
                         ------------  ------------  ------------  ------------
CASH FLOWS FROM
 INVESTING ACTIVITIES:
 Expenditures for
  purchases of property,
  plant and equipment...      (16,037)       (4,624)        (806)        (9,330)
 Proceeds from
  (Expenditures for)
  sales of property,
  plant and equipment...            7           165         (110)           218
 Cash received from
  acquisitions..........        2,735           --            --            --
 Payable to a relative
  of a stockholder of
  the Parent............          --        (11,193)          --            --
                         ------------  ------------  ------------  ------------
    Net cash used in
     investing
     activities.........      (13,295)      (15,652)        (916)        (9,112)
                         ------------  ------------  ------------  ------------
CASH FLOWS FROM
 FINANCING ACTIVITIES:
 Proceeds from issuance
  of long-term debt.....       31,262        81,223           --          7,171
 Principal payments on
  long-term debt........      (20,203)      (54,953)      (3,239)        (1,500)
                         ------------  ------------  ------------  ------------
    Net cash provided by
     (used in) financing
     activities.........       11,059        26,270       (3,239)         5,671
                         ------------  ------------  ------------  ------------
NET INCREASE (DECREASE)
 IN CASH AND CASH
 EQUIVALENTS............          102         6,799           383        (4,188)
CASH AND CASH
 EQUIVALENTS, BEGINNING
 OF PERIOD..............          --            102           102         6,901
                         ------------  ------------  ------------  ------------
CASH AND CASH
 EQUIVALENTS, END OF
 PERIOD................. $        102  $      6,901  $        485  $      2,713
                         ============  ============  ============  ============
CASH PAID DURING THE
 PERIOD FOR INTEREST.... $        349  $        690  $        436  $      3,144
                         ============  ============  ============  ============

 
                See notes to consolidated financial statements.
 
                                     F-112

 
                             KINDILL HOLDING, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            As of and for the Years Ended December 31, 1996 and 1997
                             (Dollars In Thousands)
 
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
   POLICIES
 
Description of Business--Kindill Holding, Inc., (Company) is primarily engaged
in the extraction and processing of coal in Southern Indiana. The principal
market for the Company's coal is electric utilities located in Southern Indiana
and Western Kentucky. Coal sales are made under long-term contracts and on the
spot market, and are made on an unsecured basis. A substantial portion of the
Company's labor force is under a contract with the United Mine Workers of
America (UMWA).
 
Basis of Presentation--The consolidated financial statements include the
accounts of Kindill Holding, Inc. and its subsidiary. All significant
intercompany transactions and balances have been eliminated. Any information as
of June 30, 1998 and for the six months ended June 30, 1997 and 1998 is
unaudited; however, in the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of
these interim periods have been included. The result for its interim periods
ended June 30, 1997 and 1998, are not necessarily indicative of the results to
be obtained for the full year.
 
Acquisitions--On December 6, 1995 and February 12, 1996, the Company acquired
certain assets, primarily mineral reserves and mining machinery and equipment
of approximately $79,019, assumed certain liabilities, primarily reclamation
and postretirement benefit obligation of approximately $81,754, and received
cash of $2,735. Liabilities assumed also include a payable to a relative of a
stockholder of the Parent for fees related to the acquisitions of approximately
$16,600. The purchase method was used to account for the acquisitions.
 
Cash and Cash Equivalents--Cash and cash equivalents include cash on deposit
and highly liquid investments with original maturities of three months or less.
 
Inventories--Coal inventory is stated at the lower of costs (first-in, first-
out method) or market. Coal inventory costs primarily include labor, equipment,
drilling, blasting and stripping costs. Expenditures for mine supply inventory,
which totaled approximately $11,130 and $10,804 in 1996 and 1997, respectively,
are charged to expense when incurred.
 
Property, Plant and Equipment--Property, plant and equipment are stated at
cost. Depreciation is determined using principally the straight-line method
over the estimated useful lives of the related assets. Expenditures for mineral
rights are capitalized. Mineral rights costs are depleted or amortized using
the units of production method. Expenditures for maintenance and repair costs
which totaled approximately $8,270 and $9,013 in 1996 and 1997, respectively,
are charged to expense when incurred.
 
Deferred Financing Costs--The cost of issuing long-term debt is capitalized and
amortized using the effective interest method over the term of the related
debt.
 
Advanced Royalties--Advanced, or recoupable, royalties represent prepayments on
leases for the rights to mine minerals. These royalties are charged to expense
based on the units of production method or charged to operations when the
Company has ceased mining or has made the decision not to mine such property.
 
Asset Impairment--In certain situations, expected mine lives are shortened
because of changes to planned operations. To the extent that it is determined
that asset carrying values will not be recoverable during the shorter mine
life, a provision for such impairment is recognized. In addition, the Company
elected to adopt Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of in 1996. SFAS No. 121 expanded the Company's criteria for loss
recognition, and provides methods for both determining when an impairment has
occurred and for measuring the amount of the impairment. SFAS No. 121 requires
that projected future cash flows from use and disposition of all the Company's
assets be compared with the carrying amounts of those assets. When the sum of
projected cash flows is less than the carrying amount, impairment losses are to
be recognized. There are no asset impairments at December 31, 1996 and 1997.
 
                                     F-113

 
                             KINDILL HOLDING, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Accrued Reclamation Liability--The Company is required to reclaim land on which
mining operations are conducted. An estimated reclamation liability associated
with acquired properties is recognized on the purchase date. The costs of
normal ongoing surface mining reclamation are charged to cost of sales as
incurred. Reclamation costs primarily include reclaiming the final pit and
support acreage at surface mines, removing or covering refuse piles and slurry
(or settling) ponds and dismantling preparation plants and other facilities.
 
Accrued Postretirement Benefit Obligation--As prescribed by SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other than Pensions, the
Company accrues, based on annual independent actuarial valuation, for expected
costs of providing postretirement benefits other than pensions, primarily
medical benefits, during an employee's actual working career.
 
Income Taxes--The Company accounts for income taxes in accordance with SFAS No.
109, Accounting for Income Taxes. Under SFAS No. 109, deferred taxes are
established for temporary differences between financial reporting basis and the
tax basis of the Company's assets and liabilities at enacted tax rates expected
to be in effect when such amounts are realized or settled.
 
Revenue Recognition--Coal sales are recognized at contract prices as the time
title transfers to the customer.
 
Net Income Per Common Shares--The Company adopted SFAS No. 128, Earnings Per
Share, which requires the Company to present its basic net income per common
share. Net income per common share is determined by dividing the weighted
average number of common shares outstanding during the year into net income.
 
Rate Ceiling Agreement--The Company centered into a rate ceiling agreement to
reduce the impact of changes in interest rates on $21,000 of its floating rate
debt for the period from October 2, 1997 through September 30, 2000. The rate
available under the agreement caps the 10.25% rate under a term note at 12.25%.
Net cash amounts paid or received under the agreement, if any, are accrued and
recognized as an adjustment to interest expense. There were no amounts paid or
received under the agreement in 1997.
 
Use of Estimates--Financial statements prepared in conformity with a generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
 
2. FINANCIAL INSTRUMENTS
 
The Company is a party to financial instruments with off-balance sheet risk. No
losses are anticipated due to nonperformance by the counterparties relating to
financial instruments. Pursuant to SFAS No. 107, Disclosures about Fair Value
of Financial Instruments, the Company is required to disclose the fair value of
financial instruments where practicable. The carrying amounts of cash
equivalents, accounts receivable and accounts payable reflected on the balance
sheets approximate the fair value of these instruments due to the short
duration to maturity. The fair value of long-term debt is based on the interest
rates available to the Company for debt with similar terms and maturities. The
fair value of the rate ceiling agreement is based on the quoted market price as
provided by the financial institution which is the counterparty to the
agreement.
 
                                     F-114

 
                             KINDILL HOLDING, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
The fair value of the Company's long-term debt and rate ceiling agreement as of
December 31 is as follows:
 


                                                    1996             1997
                                              ---------------- ----------------
                                              Carrying  Fair   Carrying  Fair
                                               Value    Value   Value    Value
                                              -------- ------- -------- -------
                                                            
   Long-term debt............................ $11,059  $11,059 $37,330  $37,330
   Rate ceiling agreement....................                           $    14

 
3. OTHER CURRENT ASSETS
 
Other current assets consist of the following:
 


                                                                   1996   1997
                                                                  ------ ------
                                                                   
   Advanced royalties, current portion........................... $  370 $  210
   Deferred income taxes.........................................    386    347
   Prepaid insurance.............................................    210    530
   Other.........................................................    210    487
                                                                  ------ ------
   Total......................................................... $1,176 $1,574
                                                                  ====== ======

 
4. PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consist of the following:
 


                                                                  Useful Lives
                                                   1996    1997     (Years)
                                                  ------- ------- ------------
                                                         
   Land.......................................... $ 2,733 $ 3,128
   Mining machinery and equipment................  33,066  33,531     5-12
   Mineral reserves..............................  34,136  39,819
   Buildings, preparation plans, loading
    facilities and improvements..................   9,483   9,956     5-15
   Vehicles......................................     993   1,289        5
   Office equipment, furniture and fixtures......     159     323        5
                                                  ------- -------
       Total.....................................  80,570  88,046
   Less accumulated depreciation, depletion and
    amortization.................................   4,161   8,915
                                                  ------- -------
   Net........................................... $76,409 $79,131
                                                  ======= =======

 
5. OTHER ASSETS
 
Other assets consist of the following:
 


                                                                 1996   1997
                                                                ------ ------
                                                                 
   Deferred loan financing costs, less current portion, net of
    accumulated amortization of $350 (1997)....................        $1,465
   Advanced royalties.......................................... $  866  1,024
   Other.......................................................    907    822
                                                                ------ ------
   Total....................................................... $1,773 $3,311
                                                                ====== ======

 
                                     F-115

 
                             KINDILL HOLDING, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
6. LONG-TERM DEBT
 
Long-term debt consists of the following:
 


                                                                 1996    1997
                                                                ------- -------
                                                                  
   Term notes payable, secured by substantially all assets,
    interest at prime (8.5% at December 31, 1997) plus 1.75%
    and 2.25%, payable in installments through March 2005, plus
    interest notes as described below..........................         $37,330
   Interest notes, less deferred interest as described below...
   Term note payable........................................... $ 7,500
   Revolving credit commitment (weighted average interest
    rate of 8.4%)..............................................   3,559
                                                                ------- -------
       Total...................................................  11,059  37,330
   Less current maturities.....................................   5,309   4,000
                                                                ------- -------
   Long-term maturities........................................ $ 5,750 $33,330
                                                                ======= =======

 
Annual principal payments on long-term debt are as follows:
 


                                                                          1997
                                                                         -------
                                                                      
   1998.............................................................     $ 4,000
   1999.............................................................       5,333
   2000.............................................................       5,333
   2001.............................................................       5,333
   2002.............................................................       5,333
   Thereafter.......................................................      11,998
                                                                         -------
   Total............................................................     $37,330
                                                                         =======

 
At December 31, 1997, the Company has interest notes of $8,000 for additional
interest payable to the term note lenders. The interest notes are secured by
substantially all assets, bear interest at prime (8.5% at December 31, 1997)
plus 2%, and are payable in installments through March 2005. The cost related
to these notes has been recorded as a contra account to long-term debt and is
being amortized using the effective interest method over the period of the term
notes. The Company can prepay the interest notes, for $5,000 at any time on or
prior to December 31, 1998, for $6,000 at any time on or prior to June 30,
1999, or for $7,000 at any time on or prior to December 31, 1999. At present,
Company management intends to pay the interest notes in installments through
March 2005. However, if the Company prepays the term and additional interest
notes, interest will be adjusted to include the amount of the interest
prepayment not yet recognized under the effective interest method. The
approximate amount of the interest that would be adjusted to include the amount
of interest prepayment not yet recognized under the effective interest method
is $2,933 in 1998 if prepaid on December 31, 1998, is $2,362 in 1998 and $647
in 1999 if prepaid on June 30, 1999, or is $2,044 in 1998 and 1999 if prepaid
on December 31, 1999.
 
Loan agreements related to the term notes require the Company to maintain
certain minimum financial ratios and also contain certain restrictive
provisions, including, among others, restrictions on selling or transferring
assets, incurring additional indebtedness, making distributions without prior
consent of the lenders, leasing of real or personal property and purchasing
fixed assets. The Company was not in compliance with its interest coverage
ratio covenant and, on May 15, 1998, received a waiver from the term note
lenders.
 
                                     F-116

 
                             KINDILL HOLDING, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
7. ACCRUED POSTRETIREMENT BENEFIT OBLIGATION
 
Pursuant to Article XX, Health and Retirement Benefits, of the National
Bituminous Coal Wage Agreement of 1993 (NBCWA), the Company is required to
provide for postretirement benefits other than pensions to eligible
beneficiaries covered by the NBCWA. The net postretirement healthcare cost for
1996 and 1997 includes the following:
 


                                                                   1996   1997
                                                                  ------ ------
                                                                   
   Service cost.................................................. $  310 $  187
   Interest cost.................................................  2,125  2,233
   Amortization of unrecognized loss.............................    406    277
                                                                  ------ ------
   Net periodic postretirement benefit cost...................... $2,841 $2,697
                                                                  ====== ======

 
A reconciliation of the plan's status to amounts recognized in the Company's
balance sheets at December 31, follows:
 


                                                                 1996    1997
                                                                ------- -------
                                                                  
   Accumulated postretirement benefit obligation:
     Retirees..................................................         $ 3,139
     Fully eligible active employees........................... $23,502  23,500
     Other active employees....................................   4,735   2,979
                                                                ------- -------
       Total...................................................  28,237  29,618
     Unrecognized net loss.....................................   7,300   6,031
                                                                ------- -------
   Accumulated postretirement benefit obligation............... $20,937 $23,587
                                                                ======= =======

 
The discount rate used to determine the accumulated postretirement benefit
obligation was 7% at December 31, 1996 and 1997. The assumed healthcare cost
trend rates used in determining the net expense for 1997 are shown in the
following table. Healthcare cost trends were assumed to decline from 1997
levels to an ultimate ongoing level over four years as follows:
 


                                                                   1997  Ultimate
                                                                   Rate    Rate
                                                                   ----  --------
                                                                   
   Pre-65......................................................... 7.4%      5%
   Post-65........................................................ 6.2%      5%
   Medicare offset................................................ 5.8%      5%

 
The expense and liability estimates can fluctuate by significant amounts based
upon the assumptions used by actuaries. If the healthcare cost trend rate was
increased by 1% in each year, the accumulated postretirement benefit obligation
would be approximately $5,670 higher as of December 31, 1997. The effect of
this change on the 1997 expense would be an increase of approximately $440.
 
8. INCOME TAXES
 
Income tax expense consists of the following:
 


                                                                    1996  1997
                                                                   ------ -----
                                                                    
   Current........................................................ $  315 $ 804
   Deferred expense (benefit).....................................  1,627  (278)
                                                                   ------ -----
   Income tax expense............................................. $1,942 $ 526
                                                                   ====== =====

 
 
                                     F-117

 
                             KINDILL HOLDING, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income tax expense does not differ materially from the amount computed by
applying the statutory federal income tax rate of 34% to income before income
taxes.
 
The components of deferred tax assets and liabilities are as follows:
 


                                                                1996    1997
                                                               ------- -------
                                                                 
   Current deferred tax assets:
     Accrued liabilities, primarily accrued vacation.......... $   300 $   281
     Deferred rent............................................      46      66
     Allowance for doubtful accounts..........................      40
                                                               ------- -------
   Total current deferred tax assets.......................... $   386 $   347
                                                               ------- -------
   Non-current deferred tax assets:
     Postretirement benefits.................................. $ 7,119 $ 7,989
     Reclamation..............................................   6,129   6,129
                                                               ------- -------
   Total non-current deferred tax assets......................  13,248  14,118
                                                               ------- -------
   Non-current deferred tax liabilities:
     Differences between assigned values and tax bases of
      minerals acquired.......................................   6,148   6,439
     Differences between assigned values and tax bases of
      fixed assets acquired...................................   9,114   9,376
                                                               ------- -------
   Total non-current deferred tax liabilities.................  15,262  15,815
                                                               ------- -------
   Net non-current deferred tax liabilities................... $ 2,014 $ 1,697
                                                               ======= =======

 
9. RELATED PARTY TRANSACTIONS
 
The following summarizes expenses incurred during 1996 and 1997 and for the six
months ended June 30, 1998 and amounts payable at December 31, 1996 and 1997
and June 30, 1998 to related parties:
 


                                    1996             1997        June 30, 1998
                              ---------------- ---------------- ----------------
                              Expenses Payable Expenses Payable Expenses Payable
                              -------- ------- -------- ------- -------- -------
                                                                  (Unaudited)
                                                       
  Payable to a relative of a
   stockholder..............           $11,200
  Equipment rentals and
   other operational costs
   paid to a company owned
   by a relative of a
   stockholder..............   $7,444    1,646  $8,680   $996    $5,558    $71
  Sales commissions paid to
   a company owned by a
   relative of a
   stockholder..............    1,048      117
  Consulting fees paid to a
   former stockholder.......    1,435               75
  Consulting fees paid to a
   stockholder..............                       131               30
                               ------  -------  ------   ----    ------    ---
  Total.....................   $9,927  $12,963  $8,886   $996    $5,588    $71
                               ======  =======  ======   ====    ======    ===

 
 
                                     F-118

 
                             KINDILL HOLDING, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
10. COAL SUPPLY CONTRACTS
 
The Company has commitments to deliver scheduled base quantities of coal
annually to various customers, which require the Company to supply a minimum
supply of coal over the remaining lives of the contracts at prices as defined
under the contracts. The annual requirements of tons to be delivered under coal
supply contracts are as follows:
 


                                                                       Tons
                                                                  --------------
                                                                  (In Thousands)
                                                               
   1998..........................................................      2,040
   1999..........................................................      1,260
   2000..........................................................      1,260
   2001..........................................................      1,260
   2002..........................................................      1,260
   Thereafter....................................................      3,960
                                                                      ------
   Total.........................................................     11,040
                                                                      ======

 
11. LEASES
 
The Company has certain noncancelable royalty and equipment operating lease
agreements with terms in excess of one year. The annual minimum commitments are
as follows:
 


                                                       Royalty Equipment  Total
                                                       ------- --------- -------
                                                                
   1998...............................................  $ 69    $ 2,848  $ 2,917
   1999...............................................    69      2,848    2,917
   2000...............................................    69      2,848    2,917
   2001...............................................    69      2,848    2,917
   2002...............................................    69      2,848    2,917
   2003 and Thereafter................................   367      2,848    3,215
                                                        ----    -------  -------
   Total..............................................  $712    $17,088  $17,800
                                                        ====    =======  =======

 
Royalty and lease expense for 1996 and 1997 was approximately $8,950 and
$4,100, respectively.
 
12. BENEFIT TRUST AND PLANS
 
The Company is required under their contract with the UMWA to pay amounts based
on hours worked to the UMWA Pension Plan and Trust, a multi-employer pension
plan covering all employees who are members of the UMWA. The accompanying
statements of income include approximately $540 and $466 of expense in 1996 and
1997, respectively, applicable to the plan. The NBCWA authorizes the
Bituminious Coal Operators Association to increase the rate of contributions
from employers to assure payment of benefits. The union contract requires all
currently participating employers to guarantee benefits jointly, but not
severally, with all other currently participating employers.
 
The Company has a defined contribution savings plan under the provisions of
Sec. 401(k) of the Internal Revenue Code that provides retirement benefits to
substantially all employees other than employees covered by the contract with
the UMWA. The Company's contribution is discretionary. The Company did not make
any contributions in 1996 or 1997.
 
                                     F-119

 
                             KINDILL HOLDING, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
13. SELF-INSURED EMPLOYEE HEALTH AND DISABILITY BENEFITS
 
The Company maintains self-insurance programs for that portion of
nonadministrative employees' workers' compensation costs not covered by the
Company's stop loss insurance policy. During 1996 and 1997, the maximum cash
outlays were $250 in annual claims for each accident and aggregate annual
claims of $750 and $500, respectively. Workers' compensation costs charged to
expense in 1996 and 1997 were approximately $185 and $132, respectively.
 
Effective August 1, 1997, the Company began a self-insurance program for that
portion of employees' health care costs not covered by the Company's stop loss
insurance policy, which sets the maximum cash outlays for annual claims for
each employee or employee's dependent up to $35 and individual lifetime maximum
of $1,000 at December 31, 1997. Health care costs charged to expense in 1997
were approximately $63.
 
14. NET INCOME PER COMMON SHARE
 
The following are reconciliations of the numerators and denominators used for
the determination of net income per common share for the years ended December
31, 1996 and 1997.
 


                                                                   1996   1997
                                                                   
Numerator:
 Net income...................................................... $4,039 $1,008
Denominator:
 Weighted-average number of common shares outstanding............     10     10
                                                                  ------ ------
Net income per common share...................................... $  404 $  101
                                                                  ------ ------

 
15. MAJOR CUSTOMERS
 
The Company has sales to the following major customers that exceed 10% of
revenues. These revenues and each customer's relative percentage of total trade
receivables are summarized below:
 


                                                Percentage of    Percentage of
                                       Revenues Total Revenues Total Receivables
                                       -------- -------------- -----------------
                                                      
As of and for the year ending
 December 31, 1996
  Customer A.......................... $11,068       17.6%           19.9%
  Customer B..........................   9,977       15.9%           13.4%
  Customer C..........................   9,415       15.0%            0.0%
  Customer D..........................   9,048       14.4%           27.2%
  Customer E..........................   7,705       12.3%           19.1%
As of and for the year ending
 December 31, 1997
  Customer A.......................... $24,471       41.6%           18.5%
  Customer B..........................   6,661       11.3%           13.6%

 
16. SUBSEQUENT EVENT
 
On August 17, 1998 the stockholders of the Company agreed to sell all of the
outstanding common stock of the Company to West Virginia--Indiana Coal Holding
Company, Inc. for approximately $11,000.
 
 
                                     F-120

 
INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors of AEI Resources, Inc.:
 
We have audited the accompanying balance sheets of Martiki Coal Corporation (a
wholly-owned subsidiary of MAPCO Coal, Inc.) as of December 31, 1997, and
September 30, 1998, and the related statements of operations, stockholder's
equity, and cash flows for the seven months ended July 31, 1996 (predecessor),
and for the five months ended December 31, 1996, the year ended December 31,
1997, and the nine months ended September 30, 1998 (successor). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Martiki Coal Corporation at December 31,
1997, and September 30, 1998, and the results of its operations and its cash
flows for the seven months ended July 31, 1996 (predecessor), and for the five
months ended December 31, 1996, the year ended December 31 1997, and the nine
months ended September 30, 1998 (successor), in conformity with generally
accepted accounting principles.
 
As discussed in Note 1, effective August 1, 1996, Martiki Coal Corporation's
parent became a wholly owned subsidiary of Alliance Coal Corporation in a
business combination accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on fair values. Accordingly, the predecessor
financial statements for the seven months ended July 31, 1996, are not
necessarily comparable to the successor financial statements subsequent to
August 1, 1996.
 
DELOITTE & TOUCHE LLP
 
Tulsa, Oklahoma
January 7, 1999
 
                                     F-121

 
                            MARTIKI COAL CORPORATION
                (A Wholly-Owned Subsidiary of MAPCO Coal, Inc.)
 
                                 BALANCE SHEETS
 
                    December 31, 1997 and September 30, 1998
                (Amounts in Thousands, Except Per Share Amount)
 


                                                               1997     1998
                           ASSETS                             -------  -------
                                                                 
CURRENT ASSETS:
  Accounts receivable........................................ $ 9,095  $ 7,914
  Inventory..................................................   8,732    6,801
  Prepaid expenses and other current assets..................      99       --
                                                              -------  -------
    Total current assets.....................................  17,926   14,715
PROPERTY, PLANT AND EQUIPMENT--Net...........................  34,238   25,557
DEFERRED INCOME TAXES--Net...................................   1,137    2,022
OTHER ASSETS.................................................      47       47
                                                              -------  -------
TOTAL........................................................ $53,348  $42,341
                                                              =======  =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
  Accounts payable........................................... $ 3,863  $ 2,746
  Accrued expenses...........................................   2,246    1,881
  Due to Parent..............................................   1,688    1,236
                                                              -------  -------
    Total current liabilities................................   7,797    5,863
RECLAMATION AND MINE CLOSING.................................   4,268    4,465
ACCRUED PNEUMOCONIOSIS BENEFITS..............................   1,534    1,553
WORKERS COMPENSATION AND OTHER LONG-TERM LIABILITIES.........     773      770
                                                              -------  -------
    Total liabilities........................................  14,372   12,651
                                                              -------  -------
STOCKHOLDER'S EQUITY:
  Common stock, $3,000 par value per share--authorized,
   issued,
   and outstanding, 1 share..................................       3        3
  Additional paid-in capital.................................  39,360   35,315
  Accumulated deficit........................................    (387)  (5,628)
                                                              -------  -------
    Total stockholder's equity...............................  38,976   29,690
                                                              -------  -------
TOTAL........................................................ $53,348  $42,341
                                                              =======  =======

 
                       See notes to financial statements.
 
                                     F-122

 
                            MARTIKI COAL CORPORATION
 
                (A Wholly-Owned Subsidiary of MAPCO Coal, Inc.)
 
                            STATEMENTS OF OPERATIONS
 
  Seven Months Ended July 31, 1996 (Predecessor) and for the Five Months Ended
     December 31, 1996, Year Ended December 31, 1997, and Nine Months Ended
                         September 30, 1998 (Successor)
                             (Amounts in Thousands)
 


                                                                     Predecessor                  Successor
                                                                     ----------- ---------------------------------------
                                                                      July 31,   December 31, December 31, September 30,
                                                                        1996         1996         1997         1998
                                                                     ----------- ------------ ------------ -------------
                                                                                                          
REVENUES............................................................   $52,589     $42,730      $73,857       $54,371
                                                                       -------     -------      -------       -------
OPERATING EXPENSES:
  Cost of operations................................................    43,649      31,285       67,333        51,648
  Depreciation and amortization.....................................     5,299       7,167        9,702         8,621
  General and administrative........................................     1,231         932        2,963         2,434
                                                                       -------     -------      -------       -------
    Total operating expenses........................................    50,179      39,384       79,998        62,703
                                                                       =======     =======      =======       =======
INCOME (LOSS) FROM OPERATIONS.......................................     2,410       3,346       (6,141)       (8,332)
OTHER INCOME........................................................       126         119          559            93
                                                                       -------     -------      -------       -------
INCOME (LOSS) BEFORE INCOME TAXES...................................     2,536       3,465       (5,582)       (8,239)
INCOME TAX EXPENSE (BENEFIT)........................................       358         183       (1,913)       (2,998)
                                                                       -------     -------      -------       -------
NET INCOME (LOSS)...................................................   $ 2,178     $ 3,282      $(3,669)      $(5,241)
- --------------------------------------------------
                                                                       =======     =======      =======       =======

 
 
                       See notes to financial statements.
 
                                     F-123

 
                            MARTIKI COAL CORPORATION
                (A Wholly-Owned Subsidiary of MAPCO Coal, Inc.)
 
                            STATEMENTS OF OPERATIONS
 
  Seven Months Ended July 31, 1996 (Predecessor) and for the Five Months Ended
     December 31, 1996, Year Ended December 31, 1997, and Nine Months Ended
                         September 30, 1998 (Successor)
                             (Amounts in Thousands)
 


                                                            Retained    Total
                                               Additional   Earnings    Stock-
                                        Common  Paid-In   (Accumulated holder's
                                        Stock   Capital     Deficit)    Equity
                                        ------ ---------- ------------ --------
                                                           
PREDECESSOR BALANCE, JANUARY 1, 1996...  $  3   $31,062     $ 16,111   $47,176
  Net income...........................   --        --         2,178     2,178
                                         ----   -------     --------   -------
PREDECESSOR BALANCE, JULY 31, 1996.....     3    31,062       18,289    49,354
  Purchase price allocation in business
   combination (Note 1)................   --     15,798      (18,289)   (2,491)
                                         ----   -------     --------   -------
SUCCESSOR BALANCE, AUGUST 1, 1996......     3    46,860          --     46,863
  Net income...........................   --        --         3,282     3,282
  Capital contributed..................   --      2,040          --      2,040
                                         ----   -------     --------   -------
BALANCE, DECEMBER 31, 1996.............     3    48,900        3,282    52,185
  Net loss.............................   --        --        (3,669)   (3,669)
  Return of capital....................   --     (9,540)         --     (9,540)
                                         ----   -------     --------   -------
BALANCE, DECEMBER 31, 1997.............     3    39,360         (387)   38,976
  Net loss.............................   --        --        (5,241)   (5,241)
  Return of capital....................   --     (4,045)         --     (4,045)
                                         ----   -------     --------   -------
BALANCE, SEPTEMBER 30, 1998............  $  3   $35,315     $ (5,628)  $29,690
                                         ====   =======     ========   =======

 
 
 
 
                       See notes to financial statements.
 
 
                                     F-124

 
                            MARTIKI COAL CORPORATION
                (A Wholly-Owned Subsidiary of MAPCO Coal, Inc.)
 
                            STATEMENTS OF CASH FLOWS
 
  Seven Months Ended July 31, 1996 (Predecessor) And For The Five Months Ended
     December 31, 1996, Year Ended December 31, 1997, And Nine Months Ended
                         September 30, 1998 (Successor)
                             (Amounts in Thousands)
 


                                                                          Predecessor                Successor
                                                                          ----------- ---------------------------------------
                                                                           July 31,   December 31, December 31, September 30,
                                                                             1996         1996         1997         1998
                                                                                                    
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)......................................................   $ 2,178     $ 3,282      $(3,669)      $(5,241)
  Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
  Depreciation and amortization..........................................     5,299       7,167        9,702         8,621
  Deferred income taxes..................................................     1,915      (2,067)      (1,407)         (885)
  Gain on sale of property and equipment.................................        (1)         --           (2)           (4)
  Changes in operating assets and liabilities:
   (Increase) decrease in accounts receivable............................     2,323      (8,096)       6,499         1,181
   (Increase) decrease in inventory......................................    (1,765)       (775)      (1,741)        1,931
   (Increase) decrease in prepaid expenses and other current assets......       (32)         10          (99)           99
   (Increase) decrease in other assets...................................       251         (38)          31            --
   Increase (decrease) in accounts payable...............................     1,398      (3,103)         150        (1,117)
   Increase (decrease) in accrued expenses...............................      (269)        756           18          (365)
   Increase (decrease) in due to Parent..................................    (6,372)      1,113          574          (452)
   Increase (decrease) in accrued pneumoconiosis benefits................        45         (42)          76            19
   Increase in reclamation and mine closing..............................        96          89          259           197
   Increase (decrease) in workers compensation and other long-term
    liabilities..........................................................       269         236           67            (3)
                                                                            -------     -------      -------       -------
    Net cash provided by (used in) operating activities..................     5,335      (1,468)      10,458         3,981
                                                                            -------     -------      -------       -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property, plant and equipment..............................    (5,399)       (572)      (1,138)           --
  Proceeds from sale of property, plant and equipment....................        64          --          220            64
                                                                            -------     -------      -------       -------
    Net cash provided by (used in) investing activities..................    (5,335)       (572)        (918)           64
                                                                            -------     -------      -------       -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Capital contributed by Parent..........................................        --       2,040           --            --
  Return of capital to Parent............................................        --          --       (9,540)       (4,045)
                                                                            -------     -------      -------       -------
    Net cash provided by (used in) financing activities..................        --       2,040       (9,540)       (4,045)
                                                                            -------     -------      -------       -------
NET CHANGE IN CASH AND CASH EQUIVALENTS AND BALANCE AT END OF PERIOD.....   $    --     $    --      $    --       $    --
                                                                            =======     =======      =======       =======
SUPPLEMENTAL CASH FLOW INFORMATION:
 Income taxes paid (refunded) through Parent (Note 2)....................   $(1,557)    $ 2,250      $  (506)      $(2,113)
- --------------------------------------------------
                                                                            =======     =======      =======       =======

 
                       See notes to financial statements.
 
                                     F-125

 
                            MARTIKI COAL CORPORATION
                (A Wholly-Owned Subsidiary of MAPCO Coal, Inc.)
 
                         NOTES TO FINANCIAL STATEMENTS
 
     Seven Months Ended July 31, 1996 (Predecessor) and for the Five Months
     Ended December 31, 1996, Year Ended December 31, 1997 and Nine Months
                      Ended September 30, 1998 (Successor)
 
1. ORGANIZATION AND BASIS OF PRESENTATION
 
Organization--Martiki Coal Corporation (the "Company") produces and markets
coal from a surface mine complex located in Kentucky. Coal is sold primarily to
electric utilities located in the eastern United States. The Company is a
wholly-owned subsidiary of MAPCO Coal, Inc., that, since August 1, 1996, has
been a wholly-owned subsidiary of Alliance Coal Corporation ("Alliance") and
represents the successor company ("Successor"). Prior to August 1, 1996, MAPCO
Coal, Inc. was a wholly-owned subsidiary of MAPCO Inc. ("MAPCO") and represents
the predecessor company ("Predecessor").
 
Basis of Presentation--The accompanying financial statements present the
assets, liabilities, revenues and expenses related to the Company. Effective
August 1, 1996, pursuant to a stock purchase agreement by and between Alliance
and MAPCO, Alliance acquired all of the outstanding stock of MAPCO Coal, Inc.
The allocation of the acquisition costs among the acquired assets and assumed
liabilities was based on fair values using appraisals, actuarial valuations,
and management estimates using the purchase method of accounting for business
combinations. Operating results prior to August 1, 1996 for the Predecessor are
presented on a historical cost basis and are not necessarily comparable to
operating results subsequent to August 1, 1996 for the Successor primarily due
to depreciation and amortization.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Estimates in the Financial Statements--The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
 
Fair Value of Financial Instruments--The carrying amounts for accounts
receivable, accounts payable and amounts due from Parent approximate fair value
because of the short maturity of those instruments.
 
Cash Management--The Company participated in the cash management program of
Alliance subsequent to August 1, 1996 and MAPCO prior to August 1, 1996. All
cash transactions for the Company, including current income taxes attributable
to the Company, were processed by Alliance and MAPCO's treasury function during
the respective periods and reflected through Due to Parent.
 
Inventories--Inventories are stated at the lower of cost or market. Coal and
supplies inventories are determined on an average cost basis.
 
Property, Plant, and Equipment--Property, plant, and equipment were presented
at fair value at August 1, 1996 and at historical cost prior to that date.
Additions and replacements constituting improvements are capitalized.
Maintenance, repairs, and minor replacements are expensed as incurred.
Depreciation and amortization is computed principally on the straight-line
method based upon the estimated useful lives of the assets or the estimated
life of the mine (6 years at revaluation date of August 1, 1996), whichever is
less. Depreciable lives for mining equipment and processing facilities range
from 3 to 6 years. Depreciable lives for land and land improvements range from
6 to 10 years. Depreciable lives for buildings, office equipment and
improvements are 6 years. Gains or losses arising from retirements are included
in current operations.
 
                                     F-126

 
                            MARTIKI COAL CORPORATION
                 A Wholly-Owned Subsidiary of MAPCO Coal Inc.)
 
                   NOTES TO FINANCIAL STATEMENTS--(Continued)
 
The Company reviews the carrying value of property, plant and equipment for
impairment whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable based upon estimated future cash flows.
As of September 30, 1998, the Company had not recorded any impairments.
 
Advance Royalties--Advance royalties are included in Other Assets and represent
rights to coal mineral leases acquired through advance royalty payments.
Management assesses the recoverability of royalty prepayments based on
estimated future production and capitalizes these amounts accordingly. As
mining occurs on those leases, the royalty prepayments are included in the cost
of mined coal. Royalty prepayments estimated to be nonrecoverable are expensed.
 
Coal Supply Agreement--A portion of the acquisition costs ($3.2 million) at
August 1, 1996 was allocated to a coal supply agreement which was amortized to
expense during the five months ended December 31, 1996 due to the expiration of
the coal supply agreement on December 31, 1996.
 
Reclamation and Mine Closing Costs--Estimates for the cost of future mine
reclamation and closing procedures are recorded on a present value basis.
Accruals for estimated future reclamation and mine closing costs are subject to
potential changes in conditions, such as regulatory requirements, that affect
these estimates. Ongoing reclamation costs are expensed as incurred.
 
Workers' Compensation and Pneumoconiosis ("Black Lung") Benefits--The Company
is self-insured for workers' compensation benefits, including black lung
benefits. The Company accrues a workers' compensation liability for the
estimated present value of current and future workers' compensation benefits
based on actuarial valuations. These estimates are subject to potential changes
in benefit development factors that affect management's projections of the
ultimate benefits liability.
 
Income Taxes--The Company uses the asset and liability method of accounting for
income taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial and tax reporting purposes. For the predecessor, the Company's
operations were included in the consolidated U.S. income tax return of MAPCO.
For the successor, the Company's operations have been included in the
consolidated U.S. income tax return of Alliance. Accordingly, income tax
balances will ultimately be settled through the intercompany account with the
Parent. The Company files a separate state income tax return in Kentucky. For
purposes of preparing the financial statements, federal and state income taxes
are determined as if the Company filed separate income tax returns.
 
Revenue Recognition--Revenues are recognized when coal is shipped from the
mine.
 
Return of Capital--By way of directive from Alliance, $9,540,000 and $4,045,000
of capital was returned to Alliance on December 31, 1997 and September 30,
1998, respectively.
 
New Accounting Standards - Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"), requires publicly-held companies to report financial and descriptive
information about operating segments in financial statements issued to
shareholders for interim and annual periods. SFAS No. 131 also requires
additional disclosures with respect to products and services, geographic areas
of operation, and major customers. The Company adopted SFAS No. 131 effective
January 1998. The Company has no reportable segments due to its operations
consisting solely of producing and marketing coal, and the Company has
disclosed major customer sales information (Note 10) and geographic areas of
operation (Note 1) in accordance with SFAS No. 131.
 
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). The statement
 
                                     F-127

 
                            MARTIKI COAL CORPORATION
                 A Wholly-Owned Subsidiary of MAPCO Coal Inc.)
 
                   NOTES TO FINANCIAL STATEMENTS--(Continued)
 
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company has not determined the impact on
its financial statements that may result from adoption of SFAS No. 133, which
is required no later than January 1, 2000.
 
3. INVENTORIES
 
Inventories consist of the following (in thousands):
 


                                                      December 31, September 30,
                                                          1997         1998
                                                      ------------ -------------
                                                             
   Coal..............................................    $5,815       $4,031
   Supplies..........................................     2,917        2,770
                                                         ------       ------
                                                         $8,732       $6,801
                                                         ======       ======

 
4. PROPERTY, PLANT, AND EQUIPMENT
 
Property, plant, and equipment consist of the following (in thousands):
 


                                                     December 31, September 30,
                                                         1997         1998
                                                     ------------ -------------
                                                            
   Mining equipment and processing facilities.......   $44,703       $44,533
   Land and land improvements.......................     2,605         2,610
   Buildings, office equipment and improvements.....       587           587
                                                       -------       -------
                                                        47,895        47,730
   Less accumulated depreciation and amortization...   (13,657)      (22,173)
                                                       -------       -------
                                                       $34,238       $25,557
                                                       =======       =======

 
5. INCOME TAXES
 
The Company recognizes a deferred tax asset for the future tax benefits
attributable to deductible temporary differences to the extent that realization
of such benefits is more likely than not. Realization of these future tax
benefits is dependent on the Company's ability to generate future taxable
income. Management believes that future taxable income will be sufficient to
recognize a portion of the tax benefits and has established a valuation
allowance for the remaining portion. There can be no assurance, however, that
the Company will generate sufficient taxable income in the future.
 
The Company has approximately $1,305,000 and $6,715,000 of net operating loss
carryforwards ("NOLs") as of December 31, 1997 and September 30, 1998,
respectively, that expire during 2012 and 2013. The Company has established a
100% valuation allowance for the tax benefit of these NOLs due to the
uncertainty of realizing these benefits on future consolidated tax returns for
Alliance.
 
                                     F-128

 
                            MARTIKI COAL CORPORATION
                 A Wholly-Owned Subsidiary of MAPCO Coal Inc.)
 
                   NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
The tax effects of significant items comprising the Company's net deferred tax
asset are as follows (in thousands):
 


                                                                   Nine Months
                                                      Year Ended      Ended
                                                     December 31, September 30,
                                                         1997         1998
                                                     ------------ -------------
                                                            
DEFERRED TAX ASSETS:
  Coal supply agreements............................    $2,166       $2,039
  Accrued reclamation and mine closing..............     1,707        1,786
  Accrued workers' compensation and pneumoconiosis
   benefits.........................................       818          816
  Accrued expenses not currently deductible.........       329          342
  Net operating loss carryforwards..................       522        2,686
                                                        ------       ------
                                                         5,542        7,669
  Valuation allowance...............................    (1,409)      (3,626)
                                                        ------       ------
  Deferred tax asset................................     4,133        4,043
                                                        ------       ------
DEFERRED TAX LIABILITIES:
  Differences between book and tax basis of
   property, plant and equipment....................     2,906        2,021
  Other.............................................        90          --
                                                        ------       ------
  Deferred tax liability............................     2,996        2,021
                                                        ------       ------
NET DEFERRED TAX ASSET..............................    $1,137       $2,022
                                                        ======       ======

 
Income (loss) before income taxes is derived from domestic operations.
Significant components of income tax expense (benefit) are as follows (in
thousands):
 


                                                                         Predecessor                 Successor
                                                                         ------------ ---------------------------------------
                                                                         Seven Months Five Months                Nine Months
                                                                            Ended        Ended      Year Ended      Ended
                                                                           July 31,   December 31, December 31, September 30,
                                                                             1996         1996         1997         1998
                                                                         ------------ ------------ ------------ -------------
                                                                                                    
CURRENT:
  Federal...............................................................   $(1,362)      $2,012      $  (457)      $(1,893)
  State.................................................................      (195)         238          (49)         (220)
                                                                           -------       ------      -------       -------
  Total.................................................................    (1,557)       2,250         (506)       (2,113)
                                                                           -------       ------      -------       -------
DEFERRED:
  Federal...............................................................     1,676       (1,809)      (1,230)         (776)
  State.................................................................       239         (258)        (177)         (109)
                                                                           -------       ------      -------       -------
  Total.................................................................     1,915       (2,067)      (1,407)         (885)
                                                                           -------       ------      -------       -------
INCOME TAX EXPENSE (BENEFIT)............................................   $   358       $  183      $(1,913)      $(2,998)
                                                                           =======       ======      =======       =======

 
                                     F-129

 
                            MARTIKI COAL CORPORATION
                 A Wholly-Owned Subsidiary of MAPCO Coal Inc.)
 
                   NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
Income tax expense (benefit) differs from the amount computed by applying the
statutory federal income tax rate of 35% to income (loss) before income taxes
due to the following (in thousands):
 


                                                                         Predecessor                 Successor
                                                                         ------------ ---------------------------------------
                                                                         Seven Months Five Months      Year      Nine Months
                                                                            Ended        Ended        Ended         Ended
                                                                           July 31,   December 31, December 31, September 30,
                                                                             1996         1996         1997         1998
                                                                         ------------ ------------ ------------ -------------
                                                                                                    
Computed tax at federal statutory rate..................................     $888        $1,213      $(1,954)      $(2,884)
Increase (decrease) resulting from:
Excess of tax over book depletion.......................................     (577)       (1,190)         --            --
Change in valuation allowance...........................................      --            --            50            50
State income taxes, net of Federal benefit..............................     (128)          157          (32)         (169)
Other...................................................................      175             3           23             5
                                                                             ----        ------      -------       -------
Actual income tax expense (benefit).....................................     $358        $  183      $(1,913)      $(2,998)
- --------------------------------------------------
                                                                             ====        ======      =======       =======

 
6. EMPLOYEE BENEFIT PLANS
 
Defined Contribution Plans--Prior to August 1, 1996, the Company's employees
participated in a defined contribution profit sharing and savings plan
sponsored by MAPCO which covered substantially all full-time employees. The
plan provisions were similar to the provisions of the plan sponsored by
Alliance discussed below.
 
The Company's employees currently participate in a defined contribution profit
sharing and savings plan sponsored by Alliance which covers substantially all
full-time employees. Plan participants may elect to make voluntary
contributions to this plan up to a specified amount of their compensation.
Alliance makes contributions based on matching 75% of employee contributions up
to 3% of their annual compensation. Additionally, Alliance contributes a
defined percentage of eligible earnings for employees not covered by the
defined benefit plan described below. The Company's expense for the profit
sharing and savings plans allocated by MAPCO and Alliance was approximately
$40,000 for the seven months ended July 31, 1996, $20,000 for the five months
ended December 31, 1996, $78,000 for the year ended December 31, 1997, and
$55,000 for the nine months ended September 30, 1998.
 
Defined Benefit Plans--Prior to August 1, 1996, the Company participated in
MAPCO's defined benefit plan which covered substantially all employees at the
mining operations. Effective January 1, 1997, Alliance established a defined
benefit plan covering substantially all employees at its mining operations,
including those employed by the Company. Total accrued pension expense
(benefit) included in the Company's operating expenses was allocated to the
Company by MAPCO and Alliance, respectively, based on its proportional number
of employees participating in the plans. The allocated net pension expense
(benefit) included in operating expenses for the seven months ended July 31,
1996, the year ended December 31, 1997, and the nine months ended September 30,
1998 was approximately $(116,000), $239,000, and $192,000, respectively. The
allocated pension expense (benefit) were settled through Due to Parent. The
Company did not participate in a defined benefit plan during the five months
ended December 31, 1996.
 
7. RECLAMATION AND MINE CLOSING COSTS
 
The Company is governed by state statutes and the Federal Surface Mining
Control and Reclamation Act of 1977 which establish reclamation and mine
closing standards. These regulations, among other requirements, require
restoration of property in accordance with specified standards and an approved
reclamation plan. The
 
                                     F-130

 
                            MARTIKI COAL CORPORATION
                 A Wholly-Owned Subsidiary of MAPCO Coal Inc.)
 
                   NOTES TO FINANCIAL STATEMENTS--(Continued)
 
Company has estimated the costs and timing of future reclamation and mine
closing costs and recorded those estimates on a present value basis using a 6%
discount rate.
 
8. PNEUMOCONIOSIS ("BLACK LUNG") BENEFITS
 
The Company is liable under state statutes and the Federal Coal Mine Health and
Safety Act of 1969, as amended, to pay black lung benefits to eligible
employees and former employees and their dependents. The Company provides self-
insurance accruals, determined by independent actuaries, at the present value
of the actuarially computed present and future liabilities for such benefits.
The actuarial studies utilize a 6% discount rate and various assumptions as to
the frequency of future claims, inflation, employee turnover, and life
expectancies.
 
The cost of black lung benefits charged to operations for the seven months
ended July 31, 1996, the five months ended December 31, 1996, the year ended
December 31, 1997, and the nine months ended September 30, 1998 was
approximately $57,000, $30,000, $92,000, and $69,000, respectively.
 
9. COMMITMENTS AND CONTINGENCIES
 
General Litigation--The Company is involved in various lawsuits, claims, and
regulatory proceedings incidental to its business. In the opinion of
management, the outcome of such matters will not have a material adverse effect
on the Company's business, financial position, or results of operations.
 
10. MAJOR CUSTOMERS
 
The Company has significant long-term coal supply agreements at sales prices
above current spot market prices. The contracts contain price adjustment
provisions designed to reflect changes in market conditions, labor, and other
production costs and, when the coal is sold other than FOB shipping point,
changes in railroad and/or barge freight rates. Sales to major customers which
exceed ten percent of total revenues are as follows (in thousands):
 


                            Predecessor                 Successor
                            ------------ ---------------------------------------
                            Seven Months  Five Month                Nine Months
                               Ended        Ended      Year Ended      Ended
                              July 31,   December 31, December 31, September 30,
                                1996         1996         1997         1998
                            ------------ ------------ ------------ -------------
                                                       
Customer A.................   $15,073      $18,621      $   --        $   --
Customer B.................    23,446       16,988       51,614        29,682
Customer C.................       --           --         9,585        13,645

 
The coal supply agreements with customers B and C expired in December 1998 and
January 1998, respectively. The coal supply agreement with customer A expired
at the end of 1996.
 
11. DUE TO PARENT
 
The Company was charged for certain corporate services rendered by MAPCO for
the seven months ended July 31, 1996 and by Alliance for the periods subsequent
to August 1, 1996. The expenses allocated to the Company primarily related to
executive management, accounting, treasury, land administration, environmental
management, legal and information and technology services. These allocations
were primarily based on the
 
                                     F-131

 
                            MARTIKI COAL CORPORATION
                 A Wholly-Owned Subsidiary of MAPCO Coal Inc.)
 
                   NOTES TO FINANCIAL STATEMENTS--(Continued)
 
relative size of the direct mining operating costs incurred by the respective
mine locations of MAPCO Coal Inc., including the Company. The allocations of
general and administrative expenses were approximately $1,231,000, $932,000,
$2,963,000 and $2,434,000 for the seven months ended July 31, 1996, the five
months ended December 31, 1996, year ended December 31, 1997 and the nine
months ended September 30, 1998. Management is of the opinion that the
allocations used are reasonable and appropriate and reasonably approximate
costs that would be incurred and paid to unrelated parties for similar
services.
 
12. SUBSEQUENT EVENT
 
On November 6, 1998, pursuant to a stock purchase agreement, AEI acquired all
of the outstanding common stock of the Company for $32 million.
 
                                  * * * * * *
 
                                     F-132

 
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- -------------------------------------------------------------------------------
 
 We have not authorized anyone to give you any information or to make any rep-
resentations about the transactions we discuss in this Prospectus other than
those contained herein or in the documents we incorporate herein by reference.
If you are given any information or representations about these matters that
is not discussed or incorporated in this Prospectus, you must not rely on that
information. This Prospectus is not an offer to sell or a solicitation of an
offer to buy securities anywhere or to anyone where or to whom we are not per-
mitted to offer or sell securities under applicable law. The delivery of this
Prospectus offered hereby does not, under any circumstances, mean that there
has not been a change in affairs since the date hereof. It also does not mean
that the information in this Prospectus or in the documents we incorporate by
reference is correct after this date.
 
                               ----------------
 
                               TABLE OF CONTENTS
 
                                                                       Page
                                                                       ----
 
                                 [TOC TO COME]
 
                               ----------------
 
 Until            , 1999, all dealers effecting transactions in the New Notes,
whether or not participating in this Distribution, may be required to deliver
a Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold allot-
ments or subscriptions.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
 Offer to Exchange All Outstanding 11 1/2% Senior Subordinated Notes Due 2006
                For 11 1/2% Senior Subordinated Notes Due 2006
 
 
                              AEI RESOURCES, INC.
 
                               ----------------
 
                                  PROSPECTUS
 
                               ----------------
 
                                          , 1999
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
Item 20. Indemnification of Directors and Officers.
 
  Section 145 of the Delaware General Corporation Law (the "DGCL") authorizes
indemnification of directors, officers, employees, and agents of the Company,
allows the advancement of costs of defending against litigation, and permits
companies incorporated in Delaware to purchase insurance on behalf of
directors, officers, employees, and agents against liabilities whether or not
in the circumstances such companies would have the power to indemnify against
such liabilities under the provisions of the statute.
 
  The Company's Certificate of Incorporation provides that no director will be
personally liable to the Company for monetary damages for any breach of
fiduciary duty by such director as a director. However, a director will be
liable, to the extent provided by applicable law, (i) for any breach of a
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) as provided in Section 174 of the DGCL, or (iv)
for any transaction from which a director derived an improper personal benefit.
 
  The Company's Certificate of Incorporation and Bylaws also require the
Company, to the extent permitted by the DGCL and any other applicable law, to
indemnify and advance expenses to directors and executive officers with respect
to all threatened, pending or completed actions, suits or proceedings in which
the director or executive officer was, is, or is threatened to be made a named
defendant or respondent because he is or was a director or executive officer of
the Company. The Certificate of Incorporation obligates the Company to
indemnify and advance expenses to the executive officer or director only in
connection with proceedings arising from the person's conduct in his official
capacity with the Company to the extent permitted by the DGCL, as amended from
time to time.
 
  The Company's Bylaws allow it to purchase and maintain insurance on behalf of
a person who is or was a director, officer, employee, fiduciary or agent of the
Company, or was, at the Company's request, serving in a similar capacity for
another entity. The Company currently maintains insurance covering its
executive officers and directors.
 
  Insofar as indemnification by the Company for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors and executive officers of the Company pursuant to the foregoing
provisions, the Company has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
 
Item 21. Exhibits and Financial Statement Schedules.
 
  (a) Exhibits.
 
  The exhibits to the Registration Statement are listed in the Exhibit Index
which precedes the exhibits to this Registration Statement and is hereby
incorporated herein by reference.
 
  (b) Financial Statement Schedules.
 
  The financial statement schedules (1) are listed in the Exhibit Index which
immediately precedes the exhibits to this Registration Statement and is hereby
incorporated herein by reference, or (2) have been omitted because the
information required to be set forth therein is not applicable or is shown in
the financial statements or notes thereto.
 
                                      II-1

 
Item 22. Undertakings.
 
  The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed to be underwriters, in addition to the information
called for by the other items of the applicable form.
 
  The Registrant undertakes that every prospectus (i) that is filed pursuant to
the immediately preceding undertaking or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
 
  Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
 
  The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
 
  The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the Registration Statement when it became effective.
 
                                      II-2

 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, February 8, 1999.
 
                                          AEI Resources, Inc.
 
                                                  /s/ Kevin Crutchfield
                                          By: _________________________________
                                                     Kevin Crutchfield
                                               President and Chief Operating
                                                          Officer
 
                               POWER OF ATTORNEY
 
  We, the undersigned directors and officers of AEI Resources, Inc. do hereby
constitute and appoint William H. Haselhoff, Vic Grubb and John Lynch, or any
one of them, our true and lawful attorneys and agents, to do any and all acts
and things in our name and on our behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or either of them,
may deem necessary or advisable to enable the Company to comply with the
Securities Act and any rules, regulations and requirements of the Securities
and Exchange Commission, in connection with this Registration Statement,
including specifically, but without limitation, power and authority to sign for
us or any of us in our names in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto and we do hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
 


              Signature                          Title                   Date
              ---------                          -----                   ----
 
                                                            
        /s/ Kevin Crutchfield          President and Chief         February 8, 1999
______________________________________  Operating Officer
          Kevin Crutchfield             (Principal Executive)
 
            /s/ John Baum              Chief Financial Officer     February 8, 1999
______________________________________  (Principal Financial and
              John Baum                 Accounting Officer)
 
         /s/ Larry Addington           Chairman of the Board and   February 8, 1999
______________________________________  Director
           Larry Addington
 
         /s/ Robert Addington          Vice President/Eastern      February 8, 1999
______________________________________  Operations and Director
           Robert Addington
 
          /s/ Stonie Barker            Director                    February 8, 1999
______________________________________
            Stonie Barker
 
        /s/ Stephen Addington          Director                    February 8, 1999
______________________________________
          Stephen Addington
 
           /s/ Bob Anderson            Director                    February 8, 1999
______________________________________
             Bob Anderson
 

 
 
                                      II-3

 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, February   , 1999.
 
                                          AEI Holding Company, Inc.
 
                                                  /s/ Kevin Crutchfield
                                          By: _________________________________
                                                     Kevin Crutchfield
                                               President and Chief Operating
                                                          Officer
 
                               POWER OF ATTORNEY
 
  We, the undersigned directors and officers of AEI Holding Company, Inc. do
hereby constitute and appoint William H. Haselhoff, Vic Grubb and John Lynch,
or any one of them, our true and lawful attorneys and agents, to do any and all
acts and things in our name and on our behalf in our capacities as directors
and officers and to execute any and all instruments for us and in our names in
the capacities indicated below, which said attorneys and agents, or either of
them, may deem necessary or advisable to enable the Company to comply with the
Securities Act and any rules, regulations and requirements of the Securities
and Exchange Commission, in connection with this Registration Statement,
including specifically, but without limitation, power and authority to sign for
us or any of us in our names in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto and we do hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
 


              Signature                          Title                   Date
              ---------                          -----                   ----
 
                                                            
        /s/ Kevin Crutchfield          President and Chief         February   , 1999
______________________________________  Operating Officer
          Kevin Crutchfield             (Principal Executive
                                        Officer)
            /s/ John Baum              Chief Financial Officer     February   , 1999
______________________________________  (Principal Financial and
              John Baum                 Accounting Officer)
         /s/ Robert Addington          Senior Vice President--     February   , 1999
______________________________________  Eastern Operations and a
           Robert Addington             Director
         /s/ Larry Addington           Chairman of the Board and   February   , 1999
______________________________________  a Director
           Larry Addington
         /s/ Donald P. Brown           Vice Chairman and a         February   , 1999
______________________________________  Director
           Donald P. Brown
          /s/ Stonie Barker            Director                    February   , 1999
______________________________________
            Stonie Barker
           /s/ Bob Anderson            Director                    February   , 1999
______________________________________
             Bob Anderson

 
 
                                     II- 4

 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, February 8, 1999.
 
                                          AEI Resources Holding, Inc.
 
                                                   /s/ Donald P. Brown
                                          By: _________________________________
                                                     Donald P. Brown
                                                        President
 
                               POWER OF ATTORNEY
 
  We, the undersigned directors and officers of AEI Resources Holding, Inc. do
hereby constitute and appoint William H. Haselhoff, Vic Grubb and John Lynch,
or any one of them, our true and lawful attorneys and agents, to do any and all
acts and things in our name and on our behalf in our capacities as directors
and officers and to execute any and all instruments for us and in our names in
the capacities indicated below, which said attorneys and agents, or either of
them, may deem necessary or advisable to enable the Company to comply with the
Securities Act and any rules, regulations and requirements of the Securities
and Exchange Commission, in connection with this Registration Statement,
including specifically, but without limitation, power and authority to sign for
us or any of us in our names in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto and we do hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
 


              Signature                          Title                   Date
              ---------                          -----                   ----
 
                                                            
         /s/ Donald P. Brown           President and Vice          February 8, 1999
______________________________________  Chairman (Principal
           Donald P. Brown              Executive Officer)
 
            /s/ John Baum              Chief Financial Officer     February 8, 1999
______________________________________  (Principal Financial and
              John Baum                 Accounting Officer)
 
         /s/ Larry Addington           Chairman of the Board of    February 8, 1999
______________________________________  Directors and Director
           Larry Addington
 
         /s/ Robert Addington          Director                    February 8, 1999
______________________________________
           Robert Addington
 
          /s/ Stonie Barker            Director                    February 8, 1999
______________________________________
            Stonie Barker
 
        /s/ Stephen Addington          Director                    February 8, 1999
______________________________________
          Stephen Addington
 
           /s/ Bob Anderson            Director                    February 8, 1999
______________________________________
             Bob Anderson
 

 
 
                                      II-5

 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Act, each of the Co-
Registrants listed on Attachment A hereto has duly caused this Registration
Statement, or amendment thereto, to be signed on its behalf by the undersigned,
thereunto duly authorized, February 8, 1999.
 
                                          The Co-Registrants Listed on
                                          Attachment A Hereto
 
                                                  /s/ Kevin Crutchfield
                                          By: _________________________________
                                                    Kevin Crutchfield
                                                        President
 
                               POWER OF ATTORNEY
 
  We, the undersigned directors and officers of the Co-Registrants listed on
Attachment A hereto do hereby constitute and appoint William H. Haselhoff, Vic
Grubb and John Lynch, or any one of them, our true and lawful attorneys and
agents, to do any and all acts and things in our name and on our behalf in our
capacities as directors and officers and to execute any and all instruments for
us and in our names in the capacities indicated below, which said attorneys and
agents, or either of them, may deem necessary or advisable to enable the
Company to comply with the Securities Act and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Registration Statement, including specifically, but without limitation, power
and authority to sign for us or any of us in our names in the capacities
indicated below, any and all amendments (including post-effective amendments)
hereto and we do hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
 


              Signature                          Title                   Date
              ---------                          -----                   ----
 
                                                            
        /s/ Kevin Crutchfield          President (Principal        February 8, 1999
______________________________________  Executive Officer)
          Kevin Crutchfield
 
            /s/ John Baum              Chief Financial Officer     February 8, 1999
______________________________________  (Principal Financial and
              John Baum                 Accounting Officer)
 
         /s/ Larry Addington           Director                    February 8, 1999
______________________________________
   Larry Addington
 
 
 
                                      II-6

 
                                  ATTACHMENT A
 
Aceco, Inc.
Addington Mining, Inc.
Highland Coal, Inc.
Ikerd-Bandy Co., Inc.
Leslie Resources, Inc.
Leslie Resources Management, Inc.
Mining Technologies, Inc.
Mountain--Clay Incorporated
Pro-Land, Inc. d/b/a Kem Coal Company
River Coal Company, Inc.
Coal Ventures Holding Company, Inc.
17 West Mining, Inc.
Appalachian Realty Company
Ayrshire Land Company
CC Coal Company
Grassy Cove Coal Mining
Meadowlark, Inc.
Mega Minerals, Inc.
Mid-Vol Leasing, Inc.
Midwest Coal Sales Company
Premium Processing, Inc.
Roaring Creek Coal Company
Straight Creek Coal Resources Coal Company
Zeigler Coal Holding Company
American Development Company
Bellaire Trucking Company
Bluegrass Coal Development Company
East Kentucky Energy Corporation
Employee Benefits Management, Inc.
Encoal Corporation
EnerZ Corporation
Evergreen Mining Company
Fairview Land Company
Franklin Coal Sales Company
Heritage Mining Company
Phoenix Land Company
Premium Coal Development Company
R&F Coal Company
Sheppard River Coal Terminal Company
Turris Coal Company
Wyoming Coal Technology, Inc.
Zeigler Environmental Services Company
Zenergy, Inc.
AEI Coal Sales Company, Inc.
 
                                      II-7

 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, February 8, 1999.
 
                                          Bowie Resources Limited
 
                                                    /s/ Keith Sieber
                                          By: _________________________________
                                                      Keith Sieber
                                                        President
 
                               POWER OF ATTORNEY
 
  We, the undersigned directors and officers of Bowie Resources Limited do
hereby constitute and appoint William H. Haselhoff, Vic Grubb and John Lynch,
or any one of them, our true and lawful attorneys and agents, to do any and all
acts and things in our name and on our behalf in our capacities as directors
and officers and to execute any and all instruments for us and in our names in
the capacities indicated below, which said attorneys and agents, or either of
them, may deem necessary or advisable to enable the Company to comply with the
Securities Act and any rules, regulations and requirements of the Securities
and Exchange Commission, in connection with this Registration Statement,
including specifically, but without limitation, power and authority to sign for
us or any of us in our names in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto and we do hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
 


              Signature                          Title                   Date
              ---------                          -----                   ----
 
                                                            
           /s/ Keith Sieber            President (Principal        February 8, 1999
______________________________________  Executive Officer)
             Keith Sieber
 
            /s/ John Baum              Chief Financial Officer     February 8, 1999
______________________________________  (Principal Financial and
              John Baum                 Accounting Officer)
 
         /s/ Larry Addington           Director                    February 8, 1999
______________________________________
   Larry Addington
 
 
 
                                      II-8

 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, February 8, 1999.
 
                                          Tennessee Mining, Inc.
 
                                                    /s/ Bernie Mason
                                          By: _________________________________
                                                      Bernie Mason
                                                        President
 
                               POWER OF ATTORNEY
 
  We, the undersigned directors and officers of Tennessee Mining, Inc., do
hereby constitute and appoint William H. Haselhoff, Vic Grubb and John Lynch,
or any one of them, our true and lawful attorneys and agents, to do any and all
acts and things in our name and on our behalf in our capacities as directors
and officers and to execute any and all instruments for us and in our names in
the capacities indicated below, which said attorneys and agents, or either of
them, may deem necessary or advisable to enable the Company to comply with the
Securities Act and any rules, regulations and requirements of the Securities
and Exchange Commission, in connection with this Registration Statement,
including specifically, but without limitation, power and authority to sign for
us or any of us in our names in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto and we do hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
 


              Signature                          Title                   Date
              ---------                          -----                   ----
 
                                                            
           /s/ Bernie Mason            President (Principal        February 8, 1999
______________________________________  Executive Officer)
             Bernie Mason
 
            /s/ John Baum              Chief Financial Officer     February 8, 1999
______________________________________  (Principal Financial and
              John Baum                 Accounting Officer)
 
         /s/ Larry Addington           Director                    February 8, 1999
______________________________________
   Larry Addington
 
 
 
                                      II-9

 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, February 8, 1999.
 
                                          Bentley Coal Company
                                          Kentucky Prince Mining Company
                                          Skyline Coal Company
 
                                          By: Grassy Cove Coal Mining Company,
                                             Roaring Creek Coal Company,
                                               each as General Partner of each
                                               of the entities listed above.
 
                                             /s/ Kevin Crutchfield
                                          By: _________________________________
                                            Name: Kevin Crutchfield
                                            Title: President
 
                               POWER OF ATTORNEY
 
  We, the undersigned directors and officers of Bentley Coal Company, do hereby
constitute and appoint William H. Haselhoff, Vic Grubb and John Lynch, or any
one of them, our true and lawful attorneys and agents, to do any and all acts
and things in our name and on our behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or either of them,
may deem necessary or advisable to enable the Company to comply with the
Securities Act and any rules, regulations and requirements of the Securities
and Exchange Commission, in connection with this Registration Statement,
including specifically, but without limitation, power and authority to sign for
us or any of us in our names in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto and we do hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
 


              Signature                          Title                   Date
              ---------                          -----                   ----
 
                                                            
        /s/ Kevin Crutchfield          President (Principal        February 8, 1999
______________________________________  Executive Officer)
          Kevin Crutchfield
 
            /s/ John Baum              Chief Financial Officer     February 8, 1999
______________________________________  (Principal Financial and
      John Baum                 Accounting Officer)
 
 
 
                                     II-10

 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, February 8, 1999.
 
                                          Kermit Coal Company
 
                                                    /s/ James Morris
                                          By: _________________________________
                                                      James Morris
                                                        President
 
                               POWER OF ATTORNEY
 
  We, the undersigned directors and officers of Kermit Coal Company, Inc. do
hereby constitute and appoint William H. Haselhoff, Vic Grubb and John Lynch,
or any one of them, our true and lawful attorneys and agents, to do any and all
acts and things in our name and on our behalf in our capacities as directors
and officers and to execute any and all instruments for us and in our names in
the capacities indicated below, which said attorneys and agents, or either of
them, may deem necessary or advisable to enable the Company to comply with the
Securities Act and any rules, regulations and requirements of the Securities
and Exchange Commission, in connection with this Registration Statement,
including specifically, but without limitation, power and authority to sign for
us or any of us in our names in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto and we do hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
 


              Signature                          Title                   Date
              ---------                          -----                   ----
 
                                                            
           /s/ James Morris            President (Principal        February 8, 1999
______________________________________  Executive Officer)
             James Morris
 
            /s/ John Baum              Chief Financial Officer     February 8, 1999
______________________________________  (Principal Financial and
              John Baum                 Accounting Officer)
 
           /s/ James Morris            Director                    February 8, 1999
______________________________________
     James Morris
 
 
 
                                     II-11

 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, February 8, 1999.
 
                                          Nu Coal LLC
 
                                          By: American Development Company,
                                             Encoal Corporation
                                               each as a Member
 
                                                  /s/ Kevin Crutchfield
                                          By: _________________________________
                                                   Kevin Crutchifield
                                                        President
 
                               POWER OF ATTORNEY
 
  We, the undersigned directors and officers of Nu Coal LLC, do hereby
constitute and appoint William H. Haselhoff, Vic Grubb and John Lynch, or any
one of them, our true and lawful attorneys and agents, to do any and all acts
and things in our name and on our behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or either of them,
may deem necessary or advisable to enable the Company to comply with the
Securities Act and any rules, regulations and requirements of the Securities
and Exchange Commission, in connection with this Registration Statement,
including specifically, but without limitation, power and authority to sign for
us or any of us in our names in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto and we do hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
 


              Signature                          Title                   Date
              ---------                          -----                   ----
 
                                                            
        /s/ Kevin Crutchfield          President (Principal        February 8, 1999
______________________________________  Executive Officer)
          Kevin Crutchfield
 
            /s/ John Baum              Chief Financial Officer     February 8, 1999
______________________________________  (Principal Financial and
      John Baum                 Accounting Officer)
 
 
 
                                     II-12

 
                                  SIGNATURES
 
  Pursuant to the requirements of the Securities Act, each of the Co-
Registrants listed on Attachment B hereto has duly caused this Registration
Statement, or amendment thereto, to be signed on its behalf by the
undersigned, thereunto duly authorized, February 8, 1999.
 
                                          The Co-Registrants Listed on
                                          Attachment B Hereto
 
                                                   /s/ James Campbell
                                          By: _________________________________
                                                     James Campbell
                                                        President
 
                               POWER OF ATTORNEY
 
  We, the undersigned directors and officers of the Co-Registrants listed on
Attachment B hereto do hereby constitute and appoint William H. Haselhoff, Vic
Grubb and John Lynch, or any one of them, our true and lawful attorneys and
agents, to do any and all acts and things in our name and on our behalf in our
capacities as directors and officers and to execute any and all instruments
for us and in our names in the capacities indicated below, which said
attorneys and agents, or either of them, may deem necessary or advisable to
enable the Company to comply with the Securities Act and any rules,
regulations and requirements of the Securities and Exchange Commission, in
connection with this Registration Statement, including specifically, but
without limitation, power and authority to sign for us or any of us in our
names in the capacities indicated below, any and all amendments (including
post-effective amendments) hereto and we do hereby ratify and confirm all that
said attorneys and agents, or either of them, shall do or cause to be done by
virtue hereof.
 
  Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated:
 


              Signature                          Title                   Date
              ---------                          -----                   ----
 
                                                            
          /s/ James Campbell           President (Principal        February 8, 1999
______________________________________  Executive Officer)
            James Campbell
 
       /s/ William H. Haselhoff        Secretary and Treasurer     February 8, 1999
______________________________________  (Principal Financial and
         William H. Haselhoff           Accounting Officer)
 
          /s/ James Campbell           Director                    February 8, 1999
______________________________________
    James Campbell
 
 
 
                                     II-13

 
                                  ATTACHMENT B
 
West Virginia--Indiana Coal Holding Company, Inc.
Cannelton, Inc.
Cannelton Industries, Inc.
Cannelton Land Company
Cannelton Sales Company
Dunn Coal & Dock Company
Kanawha Corporation
Mountain Coal Corporation
Moutaineer Coal Development
 
                                     II-14

 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Act, each of the Co-
Registrants listed on Attachment C hereto has duly caused this Registration
Statement, or amendment thereto, to be signed on its behalf by the undersigned,
thereunto duly authorized, February 8, 1999.
 
                                          The Co-Registrants Listed on
                                          Attachment C Hereto
 
                                                   /s/ James R. Morris
                                          By: _________________________________
                                                     James R. Morris
                                                        President
 
                               POWER OF ATTORNEY
 
  We, the undersigned directors and officers of the Co-Registrants listed on
Attachment C hereto do hereby constitute and appoint William H. Haselhoff, Vic
Grubb and John Lynch, or any one of them, our true and lawful attorneys and
agents, to do any and all acts and things in our name and on our behalf in our
capacities as directors and officers and to execute any and all instruments for
us and in our names in the capacities indicated below, which said attorneys and
agents, or either of them, may deem necessary or advisable to enable the
Company to comply with the Securities Act and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Registration Statement, including specifically, but without limitation, power
and authority to sign for us or any of us in our names in the capacities
indicated below, any and all amendments (including post-effective amendments)
hereto and we do hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
 


              Signature                          Title                   Date
              ---------                          -----                   ----
 
                                                            
         /s/ James R. Morris           President (Principal        February 8, 1999
______________________________________  Executive Officer)
           James R. Morris
 
       /s/ William H. Haselhoff        Secretary and Treasurer     February 8, 1999
______________________________________  (Principal Financial and
         William H. Haselhoff           Accounting Officer)
 
         /s/ James R. Morris           Director                    February 8, 1999
______________________________________
   James R. Morris
 
 
 
                                     II-15

 
                                  ATTACHMENT C
 
Beech Coal Company
Hayman Holdings, Inc.
Kindill Holding, Inc.
Kindill Mining, Inc.
Midwest Coal Company
Old Ben Coal Company
 
                                     II-16

 
                                 EXHIBIT INDEX
 
                            DESCRIPTION OF DOCUMENT
 
      
 2.1**    CC Coal Company Purchase of the Crockett Assets from Addington
           Enterprises, Inc. dated as of June 26, 1998.
 2.2*     AEI Resources, Inc. Purchase of Shares of Certain Subsidiaries of
           Cyprus Amax Coal Company dated as of June 29, 1998.
 2.3**    Stock Purchase Agreement dated as of July 10, 1998 among Coal
           Ventures, Inc. and the shareholders of each of Mid-Vol, Inc., Mega
           Minerals, Inc. and Premium Processing, Inc.
 2.4*     Agreement and Plan of Merger by and among AEI Resources, Inc.,
           Zeigler Acquisition Corporation and Zeigler Coal Holding Company
           dated as of August 3, 1998, is incorporated by reference to Schedule
           14D-1 of Zeigler Acquisition Corporation, AEI Resources, Inc. and
           Larry Addington with respect to Zeigler Coal Holding Company filed
           August 5, 1998.
 2.5**    AEI Resources, Inc. Purchase of Stock of Bowie Resources, Limited
           from Mitsui Matsushima America, Inc. dated as of September 2, 1998.
 2.6*     Stock Purchase Agreement dated as of September 2, 1998, among West
           Virginia--Indiana Coal Holding Company, Inc. and the Shareholders of
           Kindill Holding, Inc.
 2.7*     Stock Purchase Agreement, dated as of September 2, 1998 among West
           Virginia-Indiana Coal Holding Company, Inc. and the Shareholders of
           Hayman Holdings, Inc.
 2.8*     Purchase and Sale Agreement by and among Kinder Morgan Energy
           Partners, L.P., Kinder Morgan Operating L.P. "C," Mountaineer Coal
           Development Company, Shipyard River Coal Terminal Company and
           Zeigler Coal Holding Company dated as of December 9, 1998.
 2.9*     Stock Purchase Agreement dated as of December 29, 1998 among Old Ben
           Coal Company, Kanawha Corporation, Kindill Mining, Inc., Beech Coal
           Company, Dunn Coal & Dock Company, Mountain Coals Corporation and
           Mountaineer Coal Development Company and Employers Risk Services,
           Inc.
 2.10*    Stock Purchase Agreement among MAPCO Coal Inc. and Coal Ventures
           Holding Company, Inc.
 3.1(a)*  Certificate of Incorporation of AEI Resources, Inc.
 3.1(b)*  Bylaws of AEI Resources, Inc.
 3.2(a)** Certificate of Incorporation of AEI Resources Holding, Inc.
 3.2(b)** Bylaws of AEI Resources Holding, Inc.
 3.3(a)** Articles of Incorporation of Bowie Resources, Limited.
 3.3(b)*  Bylaws of Bowie Resources, Limited.
 3.4(a)*  Amended and Restated Articles of Incorporation of Ikerd-Bandy
           Company, Inc.
 3.4(b)*  Amended and Restated Bylaws of Ikerd-Bandy Co., Inc.
 3.5(a)*  Articles of Incorporation of Tennessee Mining, Inc.
 3.5(b)*  Bylaws of Tennessee Mining, Inc.
 3.6(a)** Articles of Incorporation of Addington Mining, Inc.
 3.6(b)** Bylaws of Addington Mining, Inc.
 3.7(a)** Articles of Incorporation of Mining Technologies, Inc.
 3.7(b)** Bylaws of Mining Technologies, Inc.
 3.8(a)*  Amended and Restated Articles of Incorporation of Leslie Resources,
           Inc.
 3.8(b)*  Amended and Restated Bylaws of Leslie Resources, Inc.
 3.9(a)*  Amended and Restated Articles of Incorporation of Leslie Resources
           Management, Inc.
 3.9(b)*  Amended and Restated Bylaws of Leslie Resources Management, Inc.
 3.10(a)* Amended and Restated Articles of Incorporation of Pro-Land, Inc.,
           d/b/a Kem Coal Company.
 3.10(b)  Amended and Restated Bylaws of Pro-land, Inc. d/b/a Kem Coal Company.
 3.11(a)* Amended and Restated Articles of Incorporation of Aceco, Inc.
 3.11(b)* Amended and Restated Bylaws of Aceco, Inc.
 3.12(a)* Amended and Restated Articles of Incorporation of Mountain-Clay, Inc.
           d/b/a Mountain Clay, Inc.
 3.12(b)* Amended and Restated Bylaws of Mountain-Clay, Inc. d/b/a Mountain
           Clay, Inc.

 

 
       
 3.13(a)*  Amended and Restated Articles of Incorporation of Highland Coal,
            Inc.
 3.13(b)*  Amended and Restated Bylaws of Highland Coal, Inc.
 3.14(a)*  Amended and Restated Articles of Incorporation of River Coal
            Company, Inc.
 3.14(b)*  Amended and Restated Bylaws of River Coal Company, Inc.
 3.15(a)** Certificate of Incorporation of 17 West Mining, Inc.
 3.15(b)** Amended and Restated Bylaws of 17 West Mining, Inc.
 3.16(a)** Articles of Incorporation of AEI Coal Sales Company, Inc.
 3.16(b)** Amended and Restated Bylaws of AEI Coal Sales Company, Inc.
 3.17(a)** Articles of Incorporation of Americoal Development Company.
 3.17(b)** Bylaws of Americoal Development Company.
 3.18(a)*  Articles of Incorporation of Appalachian Realty Company.
 3.18(b)** Amended and Restated Bylaws of Appalachian Realty Company.
 3.19(a)** Articles of Incorporation of Ayrshire Land Company.
 3.19(b)** Amended and Restated Bylaws of Ayrshire Land Company.
 3.20(a)** Certificate of Incorporation of Bellaire Trucking Company.
 3.20(b)** Amended and Restated Bylaws of Bellaire Trucking Company.
 3.21(a)*  Articles of Incorporation of Bluegrass Coal Development Company.
 3.21(b)*  Amended and Restated Bylaws of Bluegrass Coal Development Company.
 3.22(a)** Articles of Incorporation of CC Coal Company.
 3.22(b)** Bylaws of CC Coal Company.
 3.23(a)** Certificate of Incorporation of Coal Ventures Holding Company, Inc.
 3.23(b)** Bylaws of Coal Ventures Holding Company, Inc.
 3.24(a)*  Articles of Incorporation of East Kentucky Energy Corporation.
 3.24(b)** Amended and Restated Bylaws of East Kentucky Energy Corporation.
 3.25(a)*  Articles of Incorporation of Employee Benefits Management, Inc.
 3.25(b)*  Bylaws of Employee Benefits Management, Inc.
 3.26(a)** Certificate of Incorporation of Encoal Corporation.
 3.26(b)** Amended and Restated Bylaws of Encoal Corporation.
 3.27(a)** Certificate of Incorporation of Enerz Corporation.
 3.27(b)** Amended and Restated Bylaws of Enerz Corporation.
 3.28(a)** Articles of Incorporation of Evergreen Mining Company.
 3.28(b)** Amended and Restated Bylaws of Evergreen Mining Company.
 3.29(a)** Articles of Incorporation of Fairview Land Company.
 3.29(b)** Amended and Restated Bylaws of Fairview Land Company.
 3.30(a)*  Articles of Incorporation of Franklin Coal Sales Company.
 3.30(b)** Amended and Restated Bylaws of Franklin Coal Sales Company.
 3.31(a)** Certificate of Incorporation of Grassy Cove Coal Mining Company.
 3.31(b)** Bylaws of Grassy Cove Coal Mining Company.
 3.32(a)** Certificate of Incorporation of Heritage Mining Company.
 3.32(b)** Amended and Restated Bylaws of Heritage Mining Company.
 3.33(a)*  Articles of Incorporation of Kermit Coal Company.
 3.33(b)** Amended and Restated Bylaws of Kermit Coal Company.
 3.34(a)*  Articles of Incorporation of Meadowlark, Inc.
 3.34(b)** Amended Bylaws of Meadowlark, Inc.
 3.35(a)** Articles of Incorporation of Mega Minerals, Inc.
 3.35(b)** Amended and Restated Bylaws of Mega Minerals, Inc.
 3.36(a)** Certificate of Incorporation of Midwest Coal Sales Company.
 3.36(b)** Amended and Restated Bylaws of Midwest Coal Sales Company.
 3.37(a)** Articles of Incorporation of Mid-Vol Leasing, Inc.
 3.37(b)** Amended and Restated Bylaws of Mid-Vol Leasing, Inc.
 3.38(a)** Certificate of Incorporation of Phoenix Land Company.
 3.38(b)** Amended and Restated Bylaws of Phoenix Land Company.

 
 
                                       2

 
       
 3.39(a)*  Articles of Incorporation of Premium Processing, Inc.
 3.39(b)** Bylaws of Premium Processing, Inc.
 3.40(a)** Certificate of Incorporation of Premium Coal Development Company.
 3.40(b)** Amended and Restated Bylaws of Premium Coal Development Company.
 3.41(a)*  Articles of Incorporation of R. & F. Coal Company.
 3.41(b)*  Bylaws of R. & F. Coal Company.
 3.42(a)*  Skyline Coal Corporation Partnership Agreement dated as of January
            1, 1998 between Roaring Creek Coal Company and Grassy Cove Coal
            Mining Company
 3.42(b)*  Kentucky Prince Mining Company dated as of January 1, 1998 between
            Roaring Creek Coal Company and Grassy Cove Coal Mining Company
 3.42(c)*  Bently Coal Company Partnership Agreement dated as of January 1,
            1998 between Roaring Creek Coal Company and Grassy Cove Coal Mining
            Company
 3.43(a)*  Articles of Incorporation of Shipyard River Coal Terminal Company.
 3.43(b)** Amended and Restated Amended and Restated Bylaws of Shipyard River
            Coal Terminal Company.
 3.44(a)*  Articles of Incorporation of Straight Creek Coal Resources Company.
 3.44(b)** Amended and Restated Amended and Restated Bylaws of Straight Creek
            Coal Resources Company.
 3.45(a)*  Articles of Incorporation of Turris Coal Company.
 3.45(b)** Amended and Restated Bylaws of Turris Coal Company.
 3.46(a)** Articles of Incorporation of Wyoming Coal Technology Inc.
 3.46(b)** Bylaws of Wyoming Coal Technology Inc.
 3.47(a)*  Restated Certificate of Incorporation of Zeigler Coal Holding
            Company.
 3.47(b)*  Bylaws of Zeigler Coal Holding Company.
 3.48(a)*  Certificate of Incorporation of Zeigler Environmental Services
            Company.
 3.48(b)** Amended and Restated Bylaws of Zeigler Environmental Services
            Company.
 3.49(a)*  Articles of Incorporation of Zenergy, Inc.
 3.49(b)** Amended and Restated Bylaws of Zenergy, Inc.
 3.50(a)** Articles of Incorporation of Beech Coal Company.
 3.50(b)** Amended and Restated Bylaws of Beech Coal Company.
 3.51(a)*  Certificate of Incorporation of Cannelton, Inc.
 3.51(b)** Amended and Restated Bylaws of Cannelton, Inc.
 3.52(a)*  Articles of Incorporation of Cannelton Industries, Inc.
 3.52(b)** Amended and Restated Bylaws of Cannelton Industries, Inc.
 3.53(a)** Articles of Incorporation of Cannelton Land Company.
 3.53(b)** Amended and Restated Bylaws of Cannelton Land Company.
 3.54(a)** Articles of Incorporation of Cannelton Sales Company .
 3.54(b)** Bylaws of Cannelton Sales Company.
 3.55(a)*  Articles of Incorporation of Dunn Coal & Dock Company.
 3.55(b)** Amended and Restated Bylaws of Dunn Coal & Dock Company.
 3.56(a)*  Articles of Incorporation of Hayman Holdings, Inc.
 3.56(b)** Amended and Restated Bylaws of Hayman Holdings, Inc.
 3.57(a)** Articles of Incorporation of Kanawha Corporation.
 3.57(b)** Amended and Restated Bylaws of Kanawha Corporation.
 3.58(a)*  Articles of Incorporation of Kindill Holding, Inc.
 3.58(b)*  Amended and Restated Bylaws of Kindill Holding, Inc.
 3.59(a)** Articles of Incorporation of Kindill Mining, Inc.
 3.59(b)*  Amended and Restated Bylaws of Kindill Mining, Inc.
 3.60(a)*  Articles of Incorporation of Midwest Coal Company.
 3.60(b)*  Amended and Restated Bylaws of Midwest Coal Company.
 3.61(a)*  Articles of Incorporation of Mountaineer Coal Development Company.
 3.61(b)** Amended and Restated Bylaws of Mountaineer Coal Development Company.
 3.62(a)*  Certificate of Incorporation of Mountain Coals Corporation.
 3.62(b)** Amended and Restated Bylaws of Mountain Coals Corporation.

 
 
                                       3

 
       
 3.63(a)** Certificate of Incorporation of Old Ben Coal Company.
 3.63(b)** Amended and Restated Bylaws of Old Ben Coal Company.
 3.64(a)*  Articles of Incorporation of West Virginia-Indiana Coal Holding
            Company, Inc.
 3.64(b)** Bylaws of West Virginia-Indiana Coal Holding Company, Inc.
 3.65(a)** Certificate of Incorporation of AEI Holding Company, Inc.
 3.65(b)** Amended & Restated Bylaws of AEI Holding Company, Inc.
 3.66(a)*  Articles of Formation of NuCoal, LLC
 3.66(b)*  Limited Liability Company Agreement of NuCoal, LLC
 3.67(a)*  Certificate of Incorporation of Zeigler Property Development
            Corporation
 3.67(b)*  Amended and Restated Bylaws of Zeigler Property Development
            Corporation
 4.1(a)**  Registration Rights Agreement dated as of December 14, 1998 by and
            among AEI Resources, Inc. and AEI Resources Holding, Inc., as
            Issuers, the Subsidiary Guarantors, and Warburg Dillon Read LLC as
            Dealer Manager, $200,000,000 10 1/2% Senior Notes Due 2005.
 4.1(b)**  $200,000,000 10 1/2% Senior Notes Due 2005 Indenture dated as of
            December 14, 1998 among AEI Resources, Inc. and AEI Resources
            Holding, Inc. as the Issuers, the Guarantors and IBJ Schroder Bank
            & Trust Company, as Trustee.
 4.1(c)**  Cross reference of Trust Indenture Act to Senior Notes Indenture.
 4.2(a)**  Registration Rights Agreement dated as of December 14, 1998 by and
            among AEI Resources, Inc., as Issuer, the named Subsidiary
            Guarantors, as Guarantors and Warburg Dillon Read LLC, $150,000,000
            11 1/2% Senior Subordinated Notes 2006.
 4.2(b)**  Up to $225,000,000 11 1/2% Senior Subordinated Notes Due 2006
            Indenture dated as of December 14, 1998, among the AEI Resources,
            Inc., the Issuers, the Guarantors and State Street Bank & Trust
            Company, as Trustee.
 4.2(c)**  Cross reference of Trust Indenture Act to Senior Subordinated Notes
            Indenture .
 4.3**     Form of Notes (included in Exhibits 4.1(b) and 4.2(b) above).
 4.4*      AEI Resources, Inc., as Borrower and the Guarantors, $500,000,000
            Amended and Restated Senior Subordinated Credit Agreement dated as
            of September 2, 1998 Amended and Restated as of December 14, 1998,
            Warburg Dillon Read LLC, as Arranger and Syndication Agent, and UBS
            AG, Stamford Branch as Administrative Agent
 4.5*      Amended and Restated Credit Agreement dated as of September 2, 1998,
            amended and restated as of December 14, 1998, among AEI Resources,
            Inc., as Borrower, the Guarantors party hereto Warburg, Dillon,
            Read LLC as Arranger and Syndication Agent, and UBS AG, Stamford
            Branch, as Administrative Agent.
 5.1*      Opinion of Latham & Watkins regarding the validity of the Exchange
            Notes
 10.1*     Stock Purchase Agreement dated as of September 24, 1993, between
            Addington Holding, Inc. and Pittston Acquisition Company.
 10.2*     Indemnity Agreement dated as of January 14, 1994 among Addington
            Resources, Inc., Addington Holding Company, Inc., Pittston Minerals
            Group, Inc. and Pittston Acquisition Company.
 10.3*     Amended and Restated Stock Purchase Agreement effective as of
            December 18, 1997, among AEI Holding Company, Inc., Addington
            Enterprises, Inc. and Greg Wells
 10.4*     Promissory Note dated January 15, 1998 in the amount of
            $8,050,000.00 payable to the order of Greg Wells.
 10.5*     Employment and Consulting Agreement dated as of January 15, 1997
            between Leslie Resources, Inc., AEI Holding Company, Inc. and Greg
            Wells.
 10.6*     Asset Purchase Agreement dated as of December 18, 1997 between
            Mining Technologies, Inc. and Addington Enterprises, Inc.
 10.7*     Assignment of Contracts dated as of January 2, 1998 between
            Addington Enterprises, Inc. and Mining Technologies, Inc.
 10.8*     Bill of Sale, Conveyance and Assignment dated January 2, 1998
            between Mining Technologies, Inc. and Addington Enterprises, Inc.
 10.9*     Guaranty Agreement dated as of January 2, 1998 between AEI Holding
            Company, Inc. and Addington Enterprises, Inc.

 
 
                                       4

 
      
10.10*   Non-Competition Agreement dated as of January 2, 1998 among Mining Technologies, Inc., Addington
          Enterprises, Inc. and Larry Addington.
10.11*   Stock Purchase Agreement dated as of October 17, 1997, among Addington Enterprises, Inc., James J.
          Kocian, Bert I. Koenig and William N. Rich.
10.12*   Promissory Note dated October 17, 1997 in the amount of $2,600,000.00 payable to the order of Bert
          I. Koenig.
10.13*   Promissory Note dated October 17, 1997 in the amount of $2,600,000.00 payable to the order of James
          J. Kocian.
10.14*   Promissory Note dated October 17, 1997 in the amount of $1,300,000.00 payable to the order of
          William N. Rich.
10.15*   Agreement dated November 6, 1997 between Task Trucking, Inc. and AEI Holding Company, Inc.
10.16*   Service Agreement dated October 22, 1997 between Mining Machinery, Inc. and AEI Holding Company,
          Inc.
10.17*   AEI Holding Company, Inc. Stock Option Plan.
10.18*   Form of Stock Option Agreement for the AEI Holding Company, Inc., Stock Option Plan.
12.1*    Statements Regarding Computation of Ratios.
21.1*    Subsidiaries of Registrant.
23.1     Consent of Arthur Andersen LLP.
23.2(a)  Consent of Deloitte & Touche LLP. (Zeigler Coal Holding Company)
23.2(b)  Consent of Deloitte & Touche LLP (Kindill Holding, Inc.)
23.2(c)  Consent of Deloitte & Touche LLP (Martiki Coal Corporation)
23.3     Consent of PriceWaterhouseCoopers LLP.
23.4     Consent of Faesy, Schmitt & Company, PSC.
23.5     Consent of Marshall Miller & Associates.
23.6     Consent of Weir International Mining Consultants.
23.7     Consent of Stagg Engineering Services, Inc.
23.8     Consent of Norwest Mine Services.
23.9*    Consent of Latham & Watkins (included as part of its opinion filed as Exhibit 5.1 hereto).
25.1**   Statement of Eligibility of IBJ Whitehall Bank & Trust Company on Form T-1.
25.2**   Statement of Eligibility of State Street Bank and Trust Company on Form T-1.
27.1*    Financial Data Schedules (for SEC Use Only).
99.1     Form of Letter of Transmittal.
99.2*    Form of Notice of Guaranteed Delivery.
99.3*    Form of Letter to Securities Dealers, Commercial Banks, Trust Companies and Other Nominees.
99.4*    Form of Letter to Clients.
99.5*    Guidelines for Certification of Taxpayer Identification Number on Form W-9.


- --------
 * To be filed by Amendment
** Incorporated by reference to the identically numbered exhibit to the
   Registration Statement on Form S-4 for 10 1/2% Senior Notes by AEI
   Resources, Inc. and AEI Holding Company, Inc., as co-issuers
 
                                       5

EX-4.1(C)

 
                       CROSS-REFERENCE SHEET
                       ---------------------


Trust Indenture Act Section                Indenture Section
- ---------------------------                -----------------
 
   Section 310(a)(1)                         Section 7.10       
   Section 310(a)(2)                         Section 7.10         
   Section 310(a)(3)                         N/A                 
   Section 310(a)(4)                         N/A                 
   Section 310(a)(5)                         Section 7.10        
   Section 310(b)                            Section 7.10        
   Section 310(c)                            N/A                 
   Section 311(a)                            Section 7.11        
   Section 311(b)                            Section 7.11        
   Section 311(c)                            N/A                 
   Section 312(a)                            Section 2.05        
   Section 312(b)                            Section 12.03       
   Section 312(c)                            Section 12.03       
   Section 313(a)                            Section 7.06        
   Section 313(b)(1)                         N/A                 
   Section 313(b)(2)                         Section 7.06        
   Section 313(c)                            Section 7.06        
   Section 313(d)                            Section 7.06        
   Section 314(a)                            Section 4.03        
   Section 314(b)                            N/A                 
   Section 314(c)                            Section 12.04       
   Section 314(d)                            N/A                 
   Section 314(e)                            Section 12.05       
   Section 314(f)                            N/A                 
   Section 315(a)                            Section 7.01(b)     
   Section 315(b)                            Section 7.05        
   Section 315(c)                            Section 7.01(a)     
   Section 315(d)                            Section 7.01(c)     
   Section 315(e)                            Section 6.11        
   Section 316(a)(1)                         Sections 6.04, 6.05 
   Section 316(a)(2)                         N/A                 
   Section 316(b)                            Section 6.07        
   Section 316(c)                            N/A                 
   Section 317(a)(1)                         Section 6.08        
   Section 317(a)(2)                         Section 6.09        
   Section 317(b)                            Section 2.04        
   Section 318(a)                            Section 12.01        

EX-23.1

 
                                                                    Exhibit 23.1

                   Consent of Independent Public Accountants


As independent public accountants, we hereby consent to the use of our reports 
(and to all references to our Firm) included in or made a part of this 
registration statement on Form S-4 for $150 million of 11.5% Senior Subordinated
Notes due 2006.

                                                     /s/ Arthur Andersen LLP
   
                                                     Arthur Andersen LLP


Louisville, Kentucky
February 8, 1999

EX-23.2(A)

 
                                                                 EXHIBIT 23.2(a)


INDEPENDENT AUDITOR'S CONSENT


We consent to the use in this Registration Statement of AEI Resources, Inc. on 
Form S-4 of our report dated February 5, 1998 relating to the consolidated 
financial statements of Zeigler Coal Holding Company, appearing in the 
Prospectus, which is part of this Registration Statement.

We also consent to the reference to us under headings "Selected Historical 
Consolidated Financial Data" and "Experts" in such Prospectus.


                                        /s/ Deloitte & Touche LLP

February 11, 1999

EX-23.2(B)

 
 
                                                                 EXHIBIT 23.2(B)


INDEPENDENT AUDITOR'S CONSENT


We consent to the use in this Registration Statement of AEI Resources, Inc. and 
AEI Holding Company, Inc. on Form S-4 of our report dated April 3, 1998 (May 15,
1998 as to Note 6 and August 17, 1998 as to Note 16), appearing in the
Prospectus, which is part of this Registration Statement.

We also consent to the reference to us under the headings "Experts" in such
Prospectus.


                                        /s/ Deloitte & Touche LLP

Louisville, Kentucky
February 12, 1999

EX-23.2(C)

 
                                                                   EXHIBIT 23.2C


INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Registration Statement of AEI Resources, Inc. and 
subsidiaries on Form S-4 of our report dated January 7, 1999 relating to the 
financial statements of Martiki Coal Corporation which expresses an unqualified 
opinion and includes an explanatory paragraph relating to the non-comparability 
of predecessor and successor financial statements due to the business 
combination on August 1, 1996 and the resulting application of purchase 
accounting, appearing in the Prospectus, which is part of this Registration 
Statement.

We also consent to the reference to us under the heading "Selected Financial 
Data" in such Prospectus.


/s/ Deloitte & Touche LLP

Tulsa, Oklahoma
February 11, 1999

EX-23.3

 
                                                                    EXHIBIT 23.3


PricewaterhouseCoopers [LOGO]
- --------------------------------------------------------------------------------


                                                      PricewaterhouseCoopers LLP
                                                      950 Seventeenth Street
                                                      Suite 2500
                                                      Denver CO 60202
                                                      Telephone (303) 893 8100

February 10, 1999

To the Board of Directors of AEI Resources, Inc.


We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of AEI Resources, Inc. relating to the
registration of $150 million in Senior Subordinated Notes Due 2006 of our report
dated August 31, 1998, relating to the Cyprus Eastern Coal Operations combined
statements of assets, liabilities and parent investment at December 31, 1997 and
1996 and the combined statements of operating expenses of cash flows and of
parent investment for each of the years in the three-year period ended December
31, 1997 which appear in such Prospectus. We also consent to the references to
us under the heading "Experts" in such Prospectus.

/s/ PricewaterhouseCoopers LLP

EX-23.4

 
                                                                   EXHIBIT 23.4


                   Consent of Independent Public Accountants

As independent public accountants, we hereby consent to the use of our reports 
(and to all references to our Firm) included in or made part of this 
registration statement.


/s/ FAESY,SCHMITT & COMPANY, PSC
- --------------------------------
Faesy Schmitt & Company, PSC
Frankfort, Kentucky
January 8, 1999

EX-23.5

 
                                                                    EXHIBIT 23.5




                    CONSENT OF MARSHALL MILLER & ASSOCIATES


     We hereby consent to:  (1) the reference to us under the captions "Coal
Reserve Data" and "Engineers"; and (2) the use of information from or based on:
(a) our reserve report of July 1997, as amended, with respect to the
demonstrated coal reserves of Leslie Resources, Inc. and Leslie Resources
Management, Inc. and its subsidiaries, as such report was updated in September
1998; (b) our reserve report of September 1997, as amended, with respect to the
demonstrated coal reserves of AEI Holding Company, Inc. and its subsidiaries, as
such report was updated in September 1998;  (c) our reserve report of April
1998, with respect to the demonstrated coal reserves of the various subsidiaries
of Cyprus Amax Coal Company acquired by AEI Resources, Inc. ("AEI") on June 29,
1998; (d) our reserve report of November 1997, with respect to the demonstrated
coal reserves acquired by CC Coal Company, an indirect subsidiary of AEI, from
The Battle Ridge Companies on July 24, 1998; and (e) our reserve report of May
1998, with respect to the demonstrated coal reserves of Mid Vol Leasing, Inc.,
Mega Minerals, Inc. and Premium Processing, Inc., which were acquired by AEI on
July 10, 1998, all of which are included in the prospectus of the AEI for the
registration of US$150,000,000 of AEI's 11 1/2% Senior Subordinated Notes due
2006, which prospectus is part of the registration statement to which this
consent is an exhibit.

     We further wish to advise that Marshall Miller & Associates was not
employed on a contingent basis and that at the time of preparation of our
report, as well as at present, neither Marshall Miller & Associates nor any of
its employees had or now has a substantial interest in AEI or any of its
subsidiaries.

Respectfully submitted,


Marshall Miller & Associates


By:   /s/ K. Scott Keim
      _______________________

Name:     K. Scott Keim
      _______________________

Title:    President
      _______________________

Date:     February 8, 1999

EX-23.6

 
                                                                    EXHIBIT 23.6


                CONSENT OF WEIR INTENATIONAL MINING CONSULTANTS


     We hereby consent to: (1) the reference to us under the captions "Coal
Reserve Data" and "Engineers"; and (2) the use of information from or based on:
our 1994 reserve report, as updated in May 1998, with respect to the
demonstrated coal reserves of Zeigler Coal Holding Company, Inc. and its
subsidiaries, which were acquired by Zeigler Acquisition Corporation, a
subsidiary of AEI Resources, Inc.("AEI"), on September 2, 1998, all of which are
included in the prospectus of AEI for the registration of US$150,000,000 of
AEI's 111/2% Senior Subordinated Notes due 2006, which prospectus is part of the
registration statement to which this consent is an exhibit.

     We further wish to advise that Weir International Mining Consultants was
not employed on a contingent basis and that at the time of preparation of our
report, as well as at present, neither Weir International Mining Consultants nor
any of its employees had or now has a substantial interest in AEI or any of its
subsidiaries.

Respectfully submitted,


Weir International Mining Consultants


By:    /s/ Dennis N. Kostic
       _______________________

Name:  Dennis N. Kostic
       _______________________

Title: President
       _______________________

Date:     February 8, 1999

EX-23.7

 
                                                                    EXHIBIT 23.7



                  CONSENT OF STAGG ENGINEERING SERVICES INC.

We herEby consent to: (1) the reference to us under the captions "Coal Reserves
Data" and "Engineers ; and (2) the use of information from or based on our
reserve report of February 1998, with respect to the demonstrated coal reserves
acquired by CC Coal Company an indirect subsidiary of AEI Resources, Inc
("AEI"), from Addington Enterprises, Inc. (which previously acquired such assets
from Great Western Coal (Kentucky), Inc. d/b/a Crockett Collieries (Kentucky),
Inc. and Harely Land Company) on June 26, 1998, all of which are included in the
prospectus of AEI for the registration of US$150,000,000 of AEI's 11 1/2% Senior
Subordinated Notes due 2006, which prospectus is part of the registration
statement to which this consent is an exhibit.


     We further wish to advise that Stagg Engineering Services, Inc, was not
employed on a contingent basis and that at the time of preparation of our
report, as well as at present, neither Stagg Engineering Services, nor any of
its employees had or now has a substantial interest in AEI or any of its
subsidiaries.

Respectfully submitted,


Stagg Engineering Services, Inc.


By:   /s/ Alan K. Stagg
      _______________________

Name:     Alan K. Stagg
      _______________________

Title:    President
      _______________________

Date:     February 8, 1999

EX-23.8

 
                                                                    EXHIBIT 23.8



                      CONSENT OF NORWEST MINE SERVICES  

We hereby consent to: (1) the reference to us under the captions "Coal Reserve
Data" and "Engineers"; and (2) the use of information from or based on our
reserve report November 1997, as updated in August 1998,with respect to the
demonstrated coal reserves of Kindill Holding, Inc. and its subsidiaries which
were acquired by West Viginia-Indiana Coal Holding Company, Inc., a susidiary of
AEI Resources, Inc. ("AEI), September 2, 1998, all of which are included in the
prospectus of AEI for the registration of US$150,000,000 of AEI's 11 1/2% Senior
Subordinated Notes due 2006, which prospectus is part of the registration
statement to which this consent is an exhibit

     We further wish to advise that Norwest Mine Services  was not
employed on a contingent basis and that at the time of preparation of our
report, as well as at present, neither Norwest Mine Services nor any of
its employees had or now has a substantial interest in AEI or any of its
subsidiaries.

Respectfully submitted,


Norwest Mine Services


By:   /s/ Thomas G. Durham
      _______________________

Name:  Thomas G. Durham, P.E.
      _______________________

Title: Vice President
      _______________________

Date:     February 8, 1999

EX-25.1

                                                                    EXHIBIT 25.1
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549


                                   FORM T-1
                                   _________

                      STATEMENT OF ELIGIBILITY UNDER THE
                       TRUST INDENTURE ACT OF 1939 OF A
                   CORPORATION DESIGNATED TO ACT AS TRUSTEE

               Check if an Application to Determine Eligibility
                  of a Trustee Pursuant to Section 305(b)(2)


                      STATE STREET BANK AND TRUST COMPANY
              (Exact name of trustee as specified in its charter)

            Massachusetts                                         04-1867445
   (Jurisdiction of incorporation or                          (I.R.S. Employer
organization if not a U.S. national bank)                    Identification No.)

              225 Franklin Street, Boston, Massachusetts        02110
               (Address of principal executive offices)       (Zip Code)

  Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel
               225 Franklin Street, Boston, Massachusetts  02110
                                (617) 654-3253
           (Name, address and telephone number of agent for service)


                              AEI RESOURCES, INC.
              (Exact name of obligor as specified in its charter)

           DELAWARE                                              61-1325837
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

                  1500 NORTH BIG RUN ROAD, ASHLAND, KY  41102
             (Address of principal executive offices)  (Zip Code)


                             (TYPE OF SECURITIES)

          11-1/2% Senior Subordinated Notes due 2006, Series A and B

 
                  *TABLE OF ADDITIONAL REGISTRANT GUARANTORS



- ----------------------------------------------------------------------------------------------------------------- 
                                                                                          Address, including      
                                                                                                 Zip              
                                              State or Other                              Code and Telephone      
                                             Jurisdiction of          IRS Employer        Number of Registrant    
        Exact Name                           Incorporation or       Identification       Guarantor's Principal    
   of Registrant Guarantor                     Organization             Number             Executive Offices      
- -----------------------------------------------------------------------------------------------------------------  
                                                                              
17 West Mining (f/k/a Martiki Coal            Delaware                                1500 North Big Run Rd.
Corporation)                                                                          Ashland, KY 41102
- -----------------------------------------------------------------------------------------------------------------
Aceco, Inc.                                    Kentucky             61-0855680        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Addington Mining, Inc.                         Kentucky             61-0855680        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
AEI Coal Sales Company, Inc.                   Kentucky             61-1331912        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
AEI Holding Company, Inc.                      Delaware             61-1325837        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
AEI Resources Holding, Inc.                    Delaware             61-1331911        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Americoal Development Company                  Delaware             37-1302915        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Appalachian Realty Company                     Kentucky             36-3336051        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Ayrshire Land Company                          Delaware             06-1208946        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Beech Coal Company                             Delaware             06-1187153        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Bellaire Trucking Company                      Delaware             76-0012930        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Bentley Coal Company                           New York                               1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Bluegrass Coal Development Company             Delaware             76-0078312        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Bowie Resources Limited                        Colorado             84-1287719        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Cannelton, Inc.                                Delaware             55-0711787        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Cannelton Industries, Inc.                     West Virginia        55-0136145        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Cannelton Land Company                         Delaware             55-0715858        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Cannelton Sales Company                        Delaware             55-0677801        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
 

 
 
 
- ----------------------------------------------------------------------------------------------------------------- 
                                                                                          Address, including      
                                                                                                 Zip              
                                              State or Other                              Code and Telephone       
                                             Jurisdiction of          IRS Employer        Number of Registrant    
        Exact Name                           Incorporation or       Identification       Guarantor's Principal    
   of Registrant Guarantor                     Organization             Number             Executive Offices       
- -----------------------------------------------------------------------------------------------------------------  
                                                                                 
CC Coal Company                                Kentucky                               1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- --------------------------------------------------------------------------------------------------------------- 
Coal Ventures Holding Company, Inc.            Delaware             61-1328606        1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Dunn Coal and Dock Company                     West Virginia       55-0677800         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
East Kentucky Energy Corporation               Kentucky            54-0971896         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Employee Benefits Management, Inc.             Delaware            36-4168193         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Encoal Corporation                             Delaware            76-0287726         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
EnerZ Corporation                              Delaware            37-1362012         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Evergreen Mining Company                       West Virginia       54-1206519         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Fairview Land Company                          Delaware            37-1267975         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Franklin Coal Sales Company                    Delaware            13-3121923         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Grassy Cove Coal Mining Company                Delaware            51-0274983         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Hayman Holdings, Inc.                          Kentucky                               1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Heritage Mining Company                        Delaware            61-1286455         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Highland Coal, Inc.                            Kentucky                               1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Ikerd-Bandy Co., Inc.                          Kentucky            61-0505276         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Kanawha Corporation                            Delaware            84-1107027         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Kentucky Prince Mining Company                 New York                               1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Kermit Coal Company                            West Virginia       55-0515741         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Kindill Holding, Inc.                          Kentucky                               1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Kindill Mining, Inc.                           Indiana             35-1962074         1500 North Big Run Rd.
                                                                                      Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
 
 

 
 
 
- ----------------------------------------------------------------------------------------------------------------- 
                                                                                          Address, including      
                                                                                                 Zip               
                                              State or Other                              Code and Telephone       
                                             Jurisdiction of          IRS Employer        Number of Registrant    
        Exact Name                           Incorporation or       Identification       Guarantor's Principal     
   of Registrant Guarantor                     Organization             Number             Executive Offices       
- -----------------------------------------------------------------------------------------------------------------  
                                                                                
Leslie Resources, Inc.                         Kentucky            61-1013125        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Leslie Resources Management, Inc.              Kentucky            61-1292388        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Meadowlark, Inc.                               Indiana             35-0782260        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Mega Minerals, Inc.                            West Virginia       55-0720327        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Mid-Vol Leasing, Inc.                          West Virginia       55-0691054        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Midwest Coal Company                           Delaware            84-1324803        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Midwest Coal Sales Company                     Delaware            35-1599521        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Mining Technologies, Inc.                      Kentucky            61-1319730        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Mountain Coals Corporation                     Delaware            63-0725639        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Mountain-Clay Incorporated d/b/a Mountain      Kentucky            61-0621350        1500 North Big Run Rd.
Clay, Inc.                                                                           Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Mountaineer Coal Development Company           West Virginia       54-0989613        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
NuCoal LLC                                     Delaware            36-4143611
- ---------------------------------------------------------------------------------------------------------------- 
Old Ben Coal Company                           Delaware            34-1291413        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Phoenix Land Company                           Delaware            37-1302916        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Premium Coal Development Company               Delaware            36-4186350        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Premium Processing, Inc.                       West Virginia       55-0750451        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Pro-Land, Inc. d/b/a Kem Coal Company          Kentucky            61-0727363        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
R. &. F. Coal Company                          Ohio                34-0832344        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
River Coal Company, Inc.                       Kentucky            61-0567214        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Roaring Creek Coal Company                     Delaware            35-1597000        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
 

 
 
- ----------------------------------------------------------------------------------------------------------------- 
                                                                                          Address, including      
                                                                                                 Zip              
                                              State or Other                              Code and Telephone       
                                             Jurisdiction of          IRS Employer        Number of Registrant    
        Exact Name                           Incorporation or       Identification       Guarantor's Principal    
   of Registrant Guarantor                     Organization             Number             Executive Offices       
- -----------------------------------------------------------------------------------------------------------------  
                                                                              
Shipyard River Coal Terminal Company           South Carolina      54-1156890        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Skyline Coal Company                           New York                              1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Straight Creek Coal Resources Company          Kentucky            36-3317309        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Tennessee Mining, Inc.                         Kentucky            62-1640672        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Turris Coal Company                            Delaware            74-2121674        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
West Virginia-Indiana Coal Holding Company,    Delaware                              1500 North Big Run Rd.
 Inc.                                                                                Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Wyoming Coal Technology, Inc.                  Wyoming             61-1336980        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Zeigler Coal Holding Company                   Delaware            36-3344449        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Zeigler Environmental Services Company         Delaware            36-4143610        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 
Zenergy, Inc.                                  Delaware            35-1870468        1500 North Big Run Rd.
                                                                                     Ashland, KY 41102
- ---------------------------------------------------------------------------------------------------------------- 


 
                                    GENERAL

Item 1.  General Information.

         Furnish the following information as to the trustee:

         (a) Name and address of each examining or supervisory authority to
             which it is subject.

                  Department of Banking and Insurance of The Commonwealth of
                  Massachusetts, 100 Cambridge Street, Boston, Massachusetts.

                  Board of Governors of the Federal Reserve System, Washington,
                  D.C., Federal Deposit Insurance Corporation, Washington, D.C.

         (b) Whether it is authorized to exercise corporate trust powers.

                  Trustee is authorized to exercise corporate trust powers.

Item 2.  Affiliations with Obligor.

         If the Obligor is an affiliate of the trustee, describe each such
         affiliation.

                  The obligor is not an affiliate of the trustee or of its
                  parent, State Street Corporation.

                  (See note on page 2.)

Item 3. through Item 15.   Not applicable.

Item 16. List of Exhibits.

         List below all exhibits filed as part of this statement of eligibility.

         1. A copy of the articles of association of the trustee as now in
         effect.

                  A copy of the Articles of Association of the trustee, as now
                  in effect, is on file with the Securities and Exchange
                  Commission as Exhibit 1 to Amendment No. 1 to the Statement of
                  Eligibility and Qualification of Trustee (Form T-1) filed with
                  the Registration Statement of Morse Shoe, Inc. (File No.
                  22-17940) and is incorporated herein by reference thereto.

         2. A copy of the certificate of authority of the trustee to commence
         business, if not contained in the articles of association.

                  A copy of a Statement from the Commissioner of Banks of
                  Massachusetts that no certificate of authority for the trustee
                  to commence business was necessary or issued is on file with
                  the Securities and Exchange Commission as Exhibit 2 to
                  Amendment No. 1 to the Statement of Eligibility and
                  Qualification of Trustee (Form T-1) filed with the
                  Registration Statement of Morse Shoe, Inc. (File No. 22-17940)
                  and is incorporated herein by reference thereto.

         3. A copy of the authorization of the trustee to exercise corporate
         trust powers, if such authorization is not contained in the documents
         specified in paragraph (1) or (2), above.

                  A copy of the authorization of the trustee to exercise
                  corporate trust powers is on file with the Securities and
                  Exchange Commission as Exhibit 3 to Amendment No. 1 to the
                  Statement of Eligibility and Qualification of Trustee (Form
                  T-1) filed with the Registration Statement of Morse Shoe, Inc.
                  (File No. 22-17940) and is incorporated herein by reference
                  thereto.

         4. A copy of the existing by-laws of the trustee, or instruments
         corresponding thereto.

                  A copy of the by-laws of the trustee, as now in effect, is on
                  file with the Securities and Exchange Commission as Exhibit 4
                  to the Statement of Eligibility and Qualification of Trustee
                  (Form T-1) filed with the Registration Statement of Eastern
                  Edison Company (File No. 33-37823) and is incorporated herein
                  by reference thereto.

 
                                       1

 
         5. A copy of each indenture referred to in Item 4. if the obligor is in
default.

                  Not applicable.

         6. The consents of United States institutional trustees required by
Section 321(b) of the Act.

                  The consent of the trustee required by Section 321(b) of the
                  Act is annexed hereto as Exhibit 6 and made a part hereof.

         7. A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining authority.

                  A copy of the latest report of condition of the trustee
                  published pursuant to law or the requirements of its
                  supervising or examining authority is annexed hereto as
                  Exhibit 7 and made a part hereof.


                                     NOTES

         In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.

         The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.



                                   SIGNATURE


         Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation
organized and existing under the laws of The Commonwealth of Massachusetts, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Boston and The
Commonwealth of Massachusetts, on the February 8, 1999.


                              STATE STREET BANK AND TRUST COMPANY


                              By:  /s/ Susan T. Keller
                                 ---------------------------------
                              NAME Susan T. Keller
                              TITLE Vice President

 
                                        2

 
                                   EXHIBIT 6


                            CONSENT OF THE TRUSTEE

         Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the proposed issuance by AEI
Resources, Inc. of its Senior Subordinated Notes, we hereby consent that reports
of examination by Federal, State, Territorial or District authorities may be
furnished by such authorities to the Securities and Exchange Commission upon
request therefor.

                             STATE STREET BANK AND TRUST COMPANY


                             By: /s/ Susan T. Keller
                                -------------------------------------
                             NAME Susan T. Keller
                             TITLE Vice President


Dated:  February 8, 1999

 
                                       3

                                   EXHIBIT 7

Consolidated Report of Condition of State Street Bank and Trust Company,
Massachusetts and foreign and domestic subsidiaries, a state banking institution
organized and operating under the banking laws of this commonwealth and a member
of the Federal Reserve System, at the close of business September 30, 1998,
                                                        ------------------
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act and in accordance
with a call made by the Commissioner of Banks under General Laws, Chapter 172,
Section 22(a).
                                                                         
 
                                                                                                                    
                                                                                                                        Thousands of
ASSETS                                                                                                                  Dollars
                                                                                                                      
Cash and balances due from depository institutions:
         Noninterest-bearing balances and currency and coin ..............................................                 2,008,956
         Interest-bearing balances .......................................................................                12,286,877
Securities ...............................................................................................                 9,654,241
Federal funds sold and securities purchased
         under agreements to resell in domestic offices
         of the bank and its Edge subsidiary .............................................................                10,922,779
Loans and lease financing receivables:
         Loans and leases, net of unearned income ........................................................                 7,457,235
         Allowance for loan and lease losses .............................................................                    82,851
         Allocated transfer risk reserve .................................................................                         0
         Loans and leases, net of unearned income and allowances .........................................                 7,374,384
Assets held in trading accounts ..........................................................................                 1,898,804
Premises and fixed assets ................................................................................                   513,372
Other real estate owned ..................................................................................                       100
Investments in unconsolidated subsidiaries ...............................................................                       484
Customers' liability to this bank on acceptances outstanding .............................................                    48,563
Intangible assets ........................................................................................                   220,613
Other assets .............................................................................................                 1,333,210
                                                                                                                          ==========
Total assets .............................................................................................                46,262,383
                                                                                                                          ==========
LIABILITIES                                                                                                      


Deposits:
         In domestic offices .............................................................................                 9,557,938
                  Noninterest-bearing ....................................................................                 7,158,356
                  Interest-bearing .......................................................................                 2,399,582
         In foreign offices and Edge subsidiary ..........................................................                18,451,054
                  Noninterest-bearing ....................................................................                   429,797
                  Interest-bearing .......................................................................                18,021,257
Federal funds purchased and securities sold under
         agreements to repurchase in domestic offices of
         the bank and of its Edge subsidiary .............................................................                12,023,438
Demand notes issued to the U.S. Treasury .................................................................                   451,424
         Trading liabilities .............................................................................                 1,582,933
Other borrowed money .....................................................................................                   323,782
Subordinated notes and debentures ........................................................................                         0
Bank's liability on acceptances executed and outstanding .................................................                    48,563
Other liabilities ........................................................................................                 1,226,129

Total liabilities ........................................................................................                43,665,261
                                                                                                                          ==========
EQUITY CAPITAL
Perpetual preferred stock and related surplus ............................................................                         0
Common stock .............................................................................................                    29,931
Surplus ..................................................................................................                   462,782
Undivided profits and capital reserves/Net unrealized holding gains (losses) .............................                 2,080,148
         Net unrealized holding gains (losses) on available-for-sale securities ..........................                    27,376
Cumulative foreign currency translation adjustments ......................................................                   (3,115)
Total equity capital .....................................................................................                 2,597,122
                                                                                                                         ===========

 

 
 
 
                                                                                                                        
Total liabilities and equity capital .....................................................................                46,262,383
                                                                                                                          ==========

 
                                       4


I, Rex S. Schuette, Senior Vice President and Comptroller of the above named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.

                                            Rex S. Schuette


We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.

                                            David A. Spina
                                            Marshall N. Carter
                                            Truman S. Casner

EX-99.1

 
                                                                    EXHIBIT 99.1


                             LETTER OF TRANSMITTAL

                              AEI RESOURCES, INC.
                                      AND
                           AEI HOLDING COMPANY, INC.
                     OFFER TO EXCHANGE $150,000,000 OF ITS
                  11 1/2% SENIOR SUBORDINATED NOTES DUE 2006
                       WHICH HAVE BEEN REGISTERED UNDER
                         THE SECURITIES  ACT OF 1933,
                      FOR $150,000,000 OF ITS OUTSTANDING
                  11 1/2% SENIOR SUBORDINATED NOTES DUE 2006
            PURSUANT TO THE PROSPECTUS DATED _______________, 1999

- --------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON ___________, 1999 (THE "EXPIRATION DATE"), UNLESS THE OFFER IS
EXTENDED.
- --------------------------------------------------------------------------------

                 The Exchange Agent for the Exchange Offer is:
                      IBJ WHITEHALL BANK & TRUST COMPANY

                                                         
         By Mail:                  By Hand/Overnight Courier:           By Facsimile:

       IBJ Whitehall                    IBJ Whitehall                   IBJ Whitehall
   Bank & Trust Company             Bank & Trust Company            Bank & Trust Company
        P.O. Box 84                   One State Street                    Attention:
   Bowling Green Station             New York, NY 10004           Reorganization Operations
  New York, NY 10274-0084                 Attention:                    Facsimile Number:
        Attention:                 Securities Processing Window          (212) 858-2611
  Reorganization Operations            Subcellar One (SC-1)           Confirmation Number:
                                                                         (212) 858-2103
 

 
                         For Further Information Call:
                                (212) 858-2103

     DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.  THE
INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY
BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.

     CAPITALIZED TERMS USED BUT NOT DEFINED HEREIN SHALL HAVE THE SAME MEANING
GIVEN THEM IN THE PROSPECTUS (AS DEFINED BELOW).

     The undersigned acknowledges receipt of the Prospectus, dated ___________,
1999 (as the same may be amended or supplemented from time to time, the
"Prospectus"), of AEI Resources, Inc. (the "Company"), and this Letter of
Transmittal, which together constitute the Company's offer (the "Exchange
Offer") to exchange an aggregate of up to $150,000,000 principal amount of 11
1/2% Senior Subordinated Notes, due 2006 (the "New Notes") of the Company which
have been registered under the Securities Act of 1933 (the "Securities Act") for
an identical face amount of the issued and outstanding 11 1/2% Senior
Subordinated Notes, due 2006 (the "Old Notes") of the Company.  The terms of the
New Notes are identical in all material respects (including principal amount,
interest rate and maturity) to the terms of the Old Notes for which they may be
exchanged pursuant to the Exchange Offer, except that the New Notes will have
been registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof.

     Unless the context requires otherwise, the term "holder" for purposes of
this Letter of Transmittal means any person in whose name Old Notes are
registered or any other person who has obtained a properly completed bond power
and any other required documents from the registered holder.

 
     The Exchange Offer is being made pursuant to the Registration Rights
Agreement dated as of December 14, 1998 (the "Registration Rights Agreement"),
and all Old Notes validly tendered will be accepted for exchange.  Any Old Notes
not tendered will remain outstanding and continue to accrue interest, but
generally will not retain any rights under the Registration Rights Agreement.
Holders electing to have Old Notes exchanged pursuant to the Exchange Offer will
be required to surrender such Old Notes, together with this Letter of
Transmittal, to the Exchange Agent at the address specified herein prior to 5:00
p.m., New York City time, on the Expiration Date.  Holders will be entitled to
withdraw their election at any time prior to 5:00 p.m., New York City time, on
the Expiration Date by sending to the Exchange Agent at the address specified
herein a facsimile transmission or letter setting forth the name of such holder,
the principal amount of Old Notes delivered for exchange and a statement that
such holder is withdrawing the election to have such Old Notes exchanged.

     This Letter of Transmittal is to be used either if certificates
representing Old Notes (the "Certificates") are to be forwarded herewith or if
delivery of Old Notes is to be made by book-entry transfer to an account
maintained by the Exchange Agent at The Depository Trust Company ("DTC"),
pursuant to the procedures set forth in "The Exchange Offer -- Procedures for
Tendering" in the Prospectus.

     Holders of Old Notes whose Certificates are not immediately available, or
who cannot deliver their Certificates and all other required documents to the
Exchange Agent on or prior to the Expiration Date, or who cannot complete the
procedures for book-entry transfer on a timely basis must tender their Old Notes
according to the guaranteed delivery procedures set forth in "The Exchange Offer
- -- Procedures for Tendering" in the Prospectus.

     DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.

     THE PROSPECTUS, THIS LETTER OF TRANSMITTAL AND THE INSTRUCTIONS CONTAINED
HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.

     NOTE:  SIGNATURES MUST BE PROVIDED BELOW.  PLEASE READ THE ACCOMPANYING
INSTRUCTIONS CAREFULLY.

     The undersigned has completed the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.

ALL TENDERING HOLDERS COMPLETE THIS BOX


- -------------------------------------------------------------------------------------------------------------
                 DESCRIPTION OF OLD NOTES TENDERED HEREWITH
- -------------------------------------------------------------------------------------------------------------
Name(s) and Address(es)                                   Aggregate Principal
of Registered Holder(s)            Certificate            Amount Represented          Principal Amount
   (Please fill in)                 Number(s)                by Old Notes                Tendered*
- -------------------------------------------------------------------------------------------------------------
                                                                             
- -------------------------------------------------------------------------------------------------------------
 
- -------------------------------------------------------------------------------------------------------------
 
- -------------------------------------------------------------------------------------------------------------
 
- -------------------------------------------------------------------------------------------------------------
 
- -------------------------------------------------------------------------------------------------------------
 
- -------------------------------------------------------------------------------------------------------------
 
- -------------------------------------------------------------------------------------------------------------
 

                                      -2-

 
                                                                            
- -------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------- 
                                   Total
- -------------------------------------------------------------------------------------------------------------
 

*  Unless otherwise indicated, the holder will be deemed to have tendered the
   full aggregate principal amount represented by the Old Notes. See
   Instruction 2. Old Notes may be tendered in whole or in part in
   integral multiples of $1,000, provided that, if any Old Notes are tendered
   for exchange in part, the untendered principal amount thereof must be
   an integral multiple of $1,000.
- -----------------------------------------------------------------------------
    


[ ]  CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
     MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE
     THE FOLLOWING:

     Name of Tendering Institution:____________________________________________

     DTC Account Number:_______________________________________________________

     Transaction Code Number:__________________________________________________

[ ]  CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
     TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
     DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:

     Name of Registered Holder(s):_____________________________________________

     Window Ticket Number (if any):____________________________________________

     Date of Execution of Notice of Guaranteed Delivery:_______________________

     Name of Institution which Guaranteed Delivery:____________________________

     IF GUARANTEED DELIVERY IS TO BE MADE BY BOOK-ENTRY TRANSFER:

     Name of Tendering Institution:_____________________________________________

     DTC Account Number:________________________________________________________

     Transaction Code Number:___________________________________________________

[ ]  CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
     AND NON-EXCHANGED OLD NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT
     NUMBER SET FORTH ABOVE.

[ ]  CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS
     OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES AND
     WISH TO RECEIVE ADDITIONAL COPIES OF THE PROSPECTUS AND ANY AMENDMENTS OR
     SUPPLEMENTS THERETO.

     Name:______________________________________________________________________

     Address:___________________________________________________________________

     Number of Copies:___________________

                                      -3-

 
              PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY

Ladies and Gentlemen:

     Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the above described aggregate
principal amount of Old Notes in exchange for a like aggregate principal amount
of New Notes.

     Subject to and effective upon the acceptance for exchange of all or any
portion of the Old Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby exchanges, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Old Notes as are being
tendered herewith.  The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent as its agent and attorney-in-fact (with full knowledge that
the Exchange Agent is also acting as agent of the Company in connection with the
Exchange Offer) with respect to the tendered Old Notes, with full power and
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), subject only to the right of withdrawal described in
the Prospectus, to: (i) deliver Certificates for Old Notes to the Company
together with all accompanying evidences of transfer and authenticity to, or
upon the order of, the Company, upon receipt by the Exchange Agent, as the
undersigned's agent, of the New Notes to be issued in exchange for such Old
Notes; (ii) present Certificates for such Old Notes for transfer, and to
transfer the Old Notes on the books of the Company; and (iii) receive for the
account of the Company all benefits and otherwise exercise all rights of
beneficial ownership of such Old Notes, all in accordance with the terms and
conditions of the Exchange Offer.

     THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS
FULL POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE OLD
NOTES TENDERED HEREBY AND TO ACQUIRE NEW NOTES UPON THE EXCHANGE OF SUCH
TENDERED OLD NOTES, AND THAT, WHEN THE OLD NOTES ARE ACCEPTED FOR EXCHANGE, THE
COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND
CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE OLD
NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES.  THE
UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS
DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE TO
COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE OLD NOTES TENDERED HEREBY,
AND THE UNDERSIGNED WILL COMPLETE ITS  OBLIGATIONS UNDER THE REGISTRATION RIGHTS
AGREEMENT.  THE UNDERSIGNED HAS READ AND AGREES TO ALL OF THE TERMS OF THE
EXCHANGE OFFER.

     The name(s) and address(es) of the registered holder(s) of the Old Notes
tendered hereby should be printed above, if they are not already set forth
above, as they appear on the Certificates representing such Old Notes.  The Old
Notes, along with Certificate number(s), that the undersigned wishes to tender
should be indicated in the appropriate boxes above.

     The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer -- Conditions to the Exchange
Offer."  The undersigned recognizes that, as a result of these conditions (which
may be waived, in whole or in part, by the Company), as more particularly set
forth in the Prospectus, the Company may not be required to exchange any of the
Old Notes tendered hereby.  If any tendered Old Notes are not exchanged pursuant
to the Exchange Offer for any reason, or if Certificates are submitted for more
Old Notes than are tendered or accepted for exchange, Certificates for such non-
exchanged or non-tendered Old Notes will be returned (or, in the case of Old
Notes tendered by book-entry transfer, such Old Notes will be credited to an
account maintained at DTC), without expense to the tendering holder, as soon as
practicable following the expiration or termination of the Exchange Offer.

     The undersigned understands that tenders of Old Notes pursuant to any one
of the procedures described in "The Exchange Offer -- Procedures for Tendering"
in the Prospectus and in the instructions attached hereto will, upon the

                                      -4-

 
Company's acceptance for exchange of such tendered Old Notes, constitute a
binding agreement among the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer.

     Unless otherwise indicated herein under the section entitled "Special
Issuance Instructions" below, the undersigned hereby directs that:  (i) the New
Notes be issued in the name(s) of the undersigned or, in the case of a book-
entry transfer of Old Notes, that such New Notes be credited to the account
indicated above maintained at DTC; and (ii) if applicable, substitute
Certificates representing Old Notes not exchanged or not accepted for exchange
be issued to the undersigned or, in the case of a book-entry transfer of Old
Notes, be credited to the account indicated above maintained at DTC.  Similarly,
unless otherwise indicated under "Special Delivery Instructions," the
undersigned hereby directs that the New Notes or any Old Notes tendered herewith
but not accepted be delivered to the undersigned at the address shown below the
undersigned's signature or, in the case of a book-entry transfer of Old Notes,
that such New Notes or Old Notes be credited to the account indicated above
maintained at DTC.

     BY TENDERING OLD NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (A) NEITHER THE UNDERSIGNED NOR
ANY PERSON RECEIVING NEW NOTES IS AN AFFILIATE OF THE COMPANY WITHIN THE MEANING
OF RULE 405 OF THE SECURITIES ACT (AN "AFFILIATE"), (B) THE NEW NOTES TO BE
RECEIVED PURSUANT TO THE EXCHANGE OFFER ARE BEING ACQUIRED IN THE ORDINARY
COURSE OF BUSINESS OF THE PERSON RECEIVING SUCH NEW NOTES, WHETHER OR NOT SUCH
PERSON IS THE UNDERSIGNED, (C) NEITHER THE UNDERSIGNED NOR ANY SUCH OTHER PERSON
HAS ANY ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN A
DISTRIBUTION, WITHIN THE MEANING OF THE SECURITIES ACT, (A "DISTRIBUTION") OF
NEW NOTES TO BE RECEIVED IN THE EXCHANGE OFFER, AND (D) IF THE UNDERSIGNED IS
NOT A BROKER-DEALER OR IS A BROKER-DEALER BUT WILL NOT RECEIVE NEW NOTES FOR ITS
OWN ACCOUNT IN EXCHANGE FOR OLD NOTES, NEITHER THE UNDERSIGNED NOR ANY SUCH
OTHER PERSON IS ENGAGED IN, OR INTENDS TO ENGAGE IN, A DISTRIBUTION OF SUCH NEW
NOTES.  BY TENDERING OLD NOTES PURSUANT TO THE EXCHANGE OFFER AND EXECUTING THIS
LETTER OF TRANSMITTAL, A HOLDER OF OLD NOTES WHICH IS A BROKER-DEALER REPRESENTS
AND AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY THE STAFF OF
THE DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE COMMISSION TO
THIRD PARTIES, THAT (X) SUCH OLD NOTES HELD BY THE BROKER-DEALER ARE HELD ONLY
AS A NOMINEE, OR (Y) SUCH OLD NOTES WERE ACQUIRED BY SUCH BROKER-DEALER FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES
AND IT WILL DELIVER THE PROSPECTUS (AS AMENDED OR SUPPLEMENTED FROM TIME TO
TIME) IN CONNECTION WITH ANY RESALE OF SUCH NEW NOTES (PROVIDED THAT, BY SO
ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH BROKER-DEALER WILL NOT BE
DEEMED TO ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES
ACT).

     THE UNDERSIGNED ACKNOWLEDGES THAT THIS EXCHANGE OFFER IS BEING MADE BY THE
COMPANY BASED UPON THE COMPANY'S UNDERSTANDING OF AN INTERPRETATION BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), AS SET FORTH IN NO-ACTION
LETTERS ISSUED TO THIRD PARTIES, THAT THE NEW NOTES ISSUED IN EXCHANGE FOR OLD
NOTES TO HOLDERS THEREOF (OTHER THAN TO HOLDERS THAT ARE AFFILIATES OF THE
COMPANY) MAY BE OFFERED FOR RESALE, RESOLD AND OTHERWISE TRANSFERRED WITHOUT
COMPLIANCE WITH THE REGISTRATION AND PROSPECTUS DELIVERY PROVISIONS OF THE
SECURITIES ACT, PROVIDED THAT  (A) SUCH HOLDERS ARE NOT AFFILIATES OF THE
COMPANY, (B) SUCH NEW NOTES ARE ACQUIRED IN THE ORDINARY COURSE OF SUCH HOLDERS'
BUSINESS, AND (C) SUCH HOLDERS ARE NOT ENGAGED IN, AND DO NOT INTEND TO ENGAGE
IN, A DISTRIBUTION OF SUCH NEW NOTES AND HAVE NO ARRANGEMENT OR UNDERSTANDING
WITH ANY PERSON TO PARTICIPATE IN THE DISTRIBUTION OF SUCH NEW NOTES.  HOWEVER,
THE COMMISSION HAS NOT CONSIDERED THE EXCHANGE OFFER IN THE CONTEXT OF A NO-
ACTION LETTER AND THERE CAN BE NO ASSURANCE THAT THE COMMISSION WOULD MAKE A
SIMILAR DETERMINATION WITH RESPECT TO THE EXCHANGE OFFER AS IN OTHER
CIRCUMSTANCES.  IF A HOLDER OF OLD NOTES IS AN AFFILIATE OF THE COMPANY, OR IS
ENGAGED IN OR INTENDS TO ENGAGE IN A DISTRIBUTION OF THE NEW NOTES OR HAS ANY
ARRANGEMENT OR UNDERSTANDING WITH RESPECT TO THE DISTRIBUTION 

                                      -5-

 
OF THE NEW NOTES TO BE ACQUIRED PURSUANT TO THE EXCHANGE OFFER, SUCH HOLDER
COULD NOT RELY ON THE APPLICABLE INTERPRETATIONS OF THE COMMISSION AND MUST
COMPLY WITH THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE
SECURITIES ACT IN CONNECTION WITH ANY SECONDARY RESALE TRANSACTION.

     THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM TIME
TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER (AS DEFINED BELOW) IN
CONNECTION WITH RESALES OF NEW NOTES RECEIVED IN EXCHANGE FOR OLD NOTES, WHERE
SUCH OLD NOTES WERE ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN
ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES, FOR A PERIOD
ENDING ONE YEAR FROM THE DATE ON WHICH THE EXCHANGE OFFER IS CONSUMMATED OR, IF
EARLIER, WHEN ALL SUCH NEW NOTES HAVE BEEN DISPOSED OF BY SUCH PARTICIPATING
BROKER-DEALER.  IN THAT REGARD, EACH BROKER-DEALER WHO RECEIVES NEW NOTES IN THE
EXCHANGE OFFER IN EXCHANGE FOR OLD NOTES ACQUIRED FOR ITS OWN ACCOUNT AS A
RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A "PARTICIPATING BROKER-
DEALER"), BY TENDERING SUCH OLD NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL,
AGREES THAT, UPON RECEIPT OF NOTICE FROM THE COMPANY OF THE OCCURRENCE OF ANY
EVENT OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT CONTAINED OR
INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY MATERIAL RESPECT OR
WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A MATERIAL FACT NECESSARY IN ORDER
TO MAKE THE STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE THEREIN, IN LIGHT
OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING OR OF THE
OCCURRENCE OF CERTAIN OTHER EVENTS SPECIFIED IN THE REGISTRATION RIGHTS
AGREEMENT, SUCH PARTICIPATING BROKER-DEALER WILL SUSPEND THE SALE OF NEW NOTES
PURSUANT TO THE PROSPECTUS UNTIL (A) THE COMPANY HAS AMENDED OR SUPPLEMENTED THE
PROSPECTUS TO CORRECT SUCH MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF
THE AMENDED OR SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR (B)
THE COMPANY HAS GIVEN NOTICE THAT THE SALE OF THE NEW NOTES MAY BE RESUMED, AS
THE CASE MAY BE.  IF THE COMPANY GIVES SUCH NOTICE TO SUSPEND THE SALE OF THE
NEW NOTES, IT SHALL EXTEND THE ONE-YEAR PERIOD REFERRED TO ABOVE DURING WHICH
PARTICIPATING BROKER-DEALERS ARE ENTITLED TO USE THE PROSPECTUS IN CONNECTION
WITH THE RESALE OF NEW NOTES BY THE NUMBER OF DAYS DURING THE PERIOD FROM AND
INCLUDING THE DATE OF THE GIVING OF SUCH NOTICE TO AND INCLUDING THE DATE WHEN
PARTICIPATING BROKER-DEALERS SHALL HAVE RECEIVED COPIES OF THE SUPPLEMENTED OR
AMENDED PROSPECTUS NECESSARY TO PERMIT RESALES OF THE NEW NOTES OR TO AND
INCLUDING THE DATE ON WHICH THE COMPANY HAS GIVEN NOTICE THAT THE SALE OF NEW
NOTES MAY BE RESUMED, AS THE CASE MAY BE.

     Holders of Old Notes whose Old Notes are accepted for exchange will not
receive accumulated interest on such Old Notes for any period from and after the
last date to which interest has been paid or duly provided for (the "Interest
Payment Date") on such Old Notes prior to the original issue date of the New
Notes or, if no such interest has been paid or duly provided for, will not
receive any accumulated interest on such Old Notes, and the undersigned waives
the right to receive any interest on such Old Notes accumulated, from and after
such Interest Payment Date or, if no such interest has been paid or duly
provided for, from June 15, 1999.

     All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned.  Except as
stated in the Prospectus, this tender is irrevocable.

     THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES
TENDERED HEREWITH" ABOVE AND BY SIGNING THIS LETTER, WILL BE DEEMED TO HAVE
TENDERED THE OLD NOTES AS SET FORTH IN SUCH BOX.  HOLDER(S) SIGN HERE (SEE
INSTRUCTIONS 2, 5 AND 6) (PLEASE COMPLETE SUBSTITUTE FORM W-9 ON PAGE 9) (NOTE:
SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2):

                                      -6-

 
     This Letter of Transmittal must be signed by a registered holder(s) exactly
as its name(s) appear(s) on the Certificate(s) for the Old Notes hereby tendered
or on a security position listing, or by any person(s) authorized to become the
registered holder(s) by endorsements and documents transmitted herewith
(including such opinions of counsel, certifications and other information as may
be required by the Company or the Exchange Agent for the Old Notes to comply
with the restrictions on transfer applicable to the Old Notes).  If signature is
by an attorney-in-fact, executor, administrator, trustee, guardian, officer of a
corporation or another acting in a fiduciary capacity or representative
capacity, please set forth the signer's full title.  See Instruction 5.

________________________________________________________________________________

________________________________________________________________________________
                          (SIGNATURE(S) OF HOLDER(S))


Date: ______________________________________, 1999

Name(s):________________________________________________________________________

________________________________________________________________________________
                                (PLEASE PRINT)

Capacity (full title):__________________________________________________________

Address:________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________
                              (INCLUDE ZIP CODE)

Area Code and Telephone Number:_________________________________________________


Tax Identification or Social Security Number(s):________________________________


GUARANTEE OF SIGNATURE(S) ( IF REQUIRED) (SEE INSTRUCTIONS 2 AND 5):


________________________________________________________________________________
                            (AUTHORIZED SIGNATURE)

Name:
    ____________________________________________________________________________
                                (PLEASE PRINT)

Date:________________________, 1999

Name of Firm: __________________________________________________________________


Capacity (full title):__________________________________________________________


Address:________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________
                              (INCLUDE ZIP CODE)

Area Code and Telephone Number:_________________________________________________


                                      -7-

 
Tax Identification or Social Security Number(s):________________________________

SPECIAL REGISTRATION INSTRUCTIONS: (SEE INSTRUCTIONS 1, 5 AND 6):

To be completed ONLY if Old Notes that are not tendered or New Notes are to be
issued in the name of someone other than the registered holder(s) of the Old
Notes whose name(s) appear(s) above.


Issue

[ ]    Old Notes not tendered to:


[ ]    New Notes, to:


Address:________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________
                              (INCLUDE ZIP CODE)

Area Code and Telephone Number:_________________________________________________

Tax Identification or Social Security Number(s):________________________________


SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5 AND 6):

To be completed ONLY if Old Notes that are not tendered or New Notes are to be
sent to someone other than the registered holder(s) of the Old Notes whose
name(s) appear(s) above, or such registered holder(s) at an address other than
that shown above.

Mail

[ ]    Old Notes not tendered to:

[ ]    New Notes, to:


Address:________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________
                              (INCLUDE ZIP CODE)

Area Code and Telephone Number:_________________________________________________

Tax Identification or Social Security Number(s):________________________________

                                      -8-

 
     TO BE COMPLETED BY ALL TENDERING SECURITY HOLDERS (SEE INSTRUCTION 9)




- -------------------------------------------------------------------------------------------------------------------------------
                          PAYOR'S NAME:  IBJ WHITEHALL BANK & TRUST COMPANY, AS PAYING AGENT
- -------------------------------------------------------------------------------------------------------------------------------
                                         
SUBSTITUTE                                 Part 1 -- PLEASE PROVIDE YOUR TIN               _________________________
                                           ON THE LINE AT RIGHT AND CERTIFY                 Social Security Number
Form W-9                                   BY SIGNING AND DATING BELOW
                                                                                                     OR
                                                                                         __________________________
Department of the Treasury                                                             Employer Identification Number
Internal Revenue Service                  
                                           -----------------------------------------------------------------------------------
                                           Part 2 -- Certification -- Under penalties of perjury, I certify that:                 
                                           (1)  the number shown on this form is my correct taxpayer identification number        
                                                (or I am waiting for a number to be issued to me);                                 
Payor's Request for                        (2)  I am not subject to backup withholding either because (i) I am exempt from        
Taxpayer Identification Number                  backup withholding, (ii) I have not been notified by the Internal Revenue    
(TIN) and Certification                         Service ("IRS") that I am subject to backup withholding as a result of a failure 
                                                to report all interest or dividends, or (iii) the IRS has notified me that I am no
                                                longer subject to backup withholding; and                       
                                           (3)  any other information provided on this form is true and correct. 
                                           -------------------------------------------------------------------------------------
                                           Certification Instructions -- You must cross         Part 3 --
                                           out item (2) in Part 2 above if you have been        Awaiting TIN [ ]
                                           notified by the IRS that you are subject to
                                           backup withholding because of underreporting
                                           interest or dividends on your tax return and you
                                           have not been notified by the IRS that you are
                                           no longer subject to backup withholding
 
                                           ______________________________________
                                           Signature
                                           Name:________________________________
                                                       (Please Print)
                                           Date:____________________________, 1999
- --------------------------------------------------------------------------------------------------------------------------------



NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN CIRCUMSTANCES
      RESULT IN BACKUP WITHHOLDING OF 31% OF ANY AMOUNTS PAID TO YOU PURSUANT TO
      THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR
      CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9"
      FOR ADD DETAILS.

      YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART
      3 OF SUBSTITUTE FORM W-9.

- --------------------------------------------------------------------------------
            CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER


 I certify under penalties of perjury that a taxpayer identification number has
 not been issued to me, and either (i) I have mailed or delivered an application
 to receive a taxpayer identification number to the appropriate Internal Revenue
 Service Center or Social Security Administration Office or (ii) I intend to
 mail or deliver an application in the near future. I understand that if I do
 not provide a taxpayer identification number by the time of payment, 31% of all
 payments made to me on account of the New Notes shall be retained until I
 provide a taxpayer identification number to the Exchange Agent and that, if I
 do not provide my taxpayer identification number within 60 days, such retained
 amounts shall be remitted to the Internal Revenue Service as backup withholding
 and 31% of all reportable payments made to me thereafter will be withheld and
 remitted to the Internal Revenue Service until I provide a taxpayer
 identification number.

                                                   
__________________________________________________  Date:_________________________, 1999
Signature
Name:_____________________________________________
                 (Please Print)
- ---------------------------------------------------------------------------------
 


 
                                 INSTRUCTIONS
                         FORMING PART OF THE TERMS AND
                       CONDITIONS OF THE EXCHANGE OFFER

  1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES.  This Letter of Transmittal is to be completed either if (a)
Certificates are to be forwarded herewith or (b) tenders are to be made pursuant
to the procedures for tender by book-entry transfer set forth in "The Exchange
Offer -- Procedures for Tendering" in the Prospectus.  Certificates, or timely
book-entry confirmation of a book-entry transfer of such Old Notes into the
Exchange Agent's account at DTC, as well as this Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth
herein on or prior to 5:00 p.m., New York City time, on the Expiration Date.
The term "book-entry confirmation" means a timely written confirmation from DTC
of book-entry transfer of Old Notes into the Exchange Agent's account at DTC.
Old Notes may be tendered in whole or in part in integral multiples of $1,000,
provided that, if any Old Notes are tendered for exchange in part, the
untendered principal amount thereof must be an integral multiple of $1,000.

  Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available,  (ii) who cannot deliver their Old Notes, this Letter of
Transmittal and all other required documents to the Exchange Agent on or prior
to 5:00 p.m., New York City time, on  the Expiration Date, or (iii) who cannot
complete the procedures for delivery by book-entry transfer on a timely basis,
may tender their Old Notes by properly completing and duly executing a Notice of
Guaranteed Delivery pursuant to the guaranteed delivery procedures set forth in
"The Exchange Offer -- Procedures for Tendering" in the Prospectus.  Pursuant to
such procedures: (a) such tender must be made by or through an Eligible
Institution (as defined below); (b) a properly completed and duly executed
Notice of Guaranteed Delivery, substantially in the form made available by the
Company, must be received by the Exchange Agent on or prior to 5:00 p.m., New
York City time, on the Expiration Date; and (c) the Certificates (or a book-
entry confirmation) representing all tendered Old Notes, in proper form for
transfer, together with this Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guarantees and
any other documents required by this Letter of Transmittal, must be received by
the Exchange Agent within three business days after the Expiration Date, all as
provided in "The Exchange Offer -- Procedures for Tendering" in the Prospectus.

  The Notice of Guaranteed Delivery (the "Notice") may be delivered by hand or
transmitted by facsimile or mail to the Exchange Agent, and must include a
guarantee by an Eligible Institution in the form set forth in such Notice.  For
Old Notes to be properly tendered pursuant to the guaranteed delivery procedure,
the Exchange Agent must receive a Notice of Guaranteed Delivery on or prior to
5:00 p.m., New York City time, on the Expiration Date.  As used herein and in
the Prospectus, "Eligible Institution" means a firm or other entity identified
in Rule 17Ad-15 under the Exchange Act as "an eligible guarantor institution,"
including (as such terms are defined therein) (i) a bank; (ii) a broker, dealer,
municipal securities broker or dealer or government securities broker or dealer;
(iii) a credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association.  THE METHOD OF DELIVERY OF OLD
NOTES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
OPTION AND SOLE RISK OF THE TENDERING HOLDER AND THE DELIVERY WILL BE DEEMED
MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT.  INSTEAD OF DELIVERY BY
MAIL, OVERNIGHT DELIVERY SERVICE IS RECOMMENDED.  IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.

  The Company will not accept any alternative, conditional or contingent
tenders.  Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.

  2. GUARANTEE OF SIGNATURES.  No signature guarantee on this Letter of
Transmittal is required if:

     (i) This Letter of Transmittal is signed by the registered holder (which
  term, for purposes of this document, shall include any participant in DTC
  whose name appears on a security position listing as the owner of the Old
  Notes) of Old Notes tendered herewith, unless such holder(s) has completed
  either the section entitled "Special Registration Instructions" or the section
  entitled "Special Delivery Instructions" above; or

                                     -10-

 
     (ii) Such Old Notes are tendered for the account of a firm that is an
  Eligible Institution.

  In all other cases, an Eligible Institution must guarantee the signature(s) on
this Letter of Transmittal.  See Instruction 5.

  3. INADEQUATE SPACE.  If the space provided in the box captioned "Description
of Old Notes Tendered Herewith" is inadequate, the Certificate number(s) and/or
the principal amount of Old Notes and any other required information should be
listed on a separate signed schedule which is attached to this Letter of
Transmittal.

  4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS.  Tenders of Old Notes will be
accepted only in integral multiples of $1,000, provided that if any Old Notes
are tendered for exchange in part, the untendered principal amount thereof must
be an integral multiple of $1,000.  If less than all the Old Notes evidenced by
any Certificate submitted are to be tendered, fill in the principal amount of
Old Notes which are to be tendered in the column entitled "Principal Amount
Tendered."  In such case, new Certificate(s) for the remainder of the Old Notes
that were evidenced by the old Certificate(s) will be sent only to the holder of
the Old Notes, as soon as practicable after the Expiration Date, unless the
appropriate boxes on this Letter of Transmittal are completed.  All Old Notes
represented by Certificates delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.

  Except as otherwise provided herein, tenders of Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.  In
order for a withdrawal to be effective on or prior to that time, a written or
(for DTC participants) electronic ATOP transmission of such notice of withdrawal
must be timely received by the Exchange Agent at one of its addresses set forth
above on or prior to 5:00 p.m., New York City time, on the Expiration Date.  Any
such notice of withdrawal must:  (i) specify the name of the person having
deposited the Old Notes to be withdrawn (the "Depositor"); (ii) identify the Old
Notes to be withdrawn (including the Certificate number(s) and principal amount
of such Old Notes); (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes in the name of the person
withdrawing the tender; and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor.  If Old Notes
have been tendered pursuant to the procedures for book-entry transfer set forth
in "The Exchange Offer -- Procedures for Tendering Old Notes," the notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawal of Old Notes.  Withdrawals of tenders of Old Notes may not
be rescinded.  Old Notes properly withdrawn will not be deemed validly tendered
for purposes of the Exchange Offer, but may be retendered at any subsequent time
on or prior to 5:00 p.m., New York City time, on the Expiration Date by
following any of the procedures described in the Prospectus under "The Exchange
Offer -- Procedures for Tendering Old Notes."

  All questions as to the validity, form and eligibility (including time of
receipt) of such notices of withdrawal will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
The Company, any affiliates or assigns of the Company, the Exchange Agent, or
any other person shall not be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure to
give any such notification.  Any Old Notes which have been tendered but which
are not accepted for exchange will be returned to the holder thereof without
cost to such holder as soon as practicable after withdrawal, rejection of tender
or termination of the Exchange Offer.

  5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS.  If this
Letter of Transmittal is signed by the registered holder(s) of the Old Notes
tendered hereby, the signature(s) must correspond exactly with the name(s) as
written on the face of the Certificate(s) without alteration, enlargement or any
change whatsoever.  If any of the Old Notes tendered hereby are owned of record
by two or more joint owners, all such owners must sign this Letter of
Transmittal.  If any tendered Old Notes are registered in different name(s) on
several Certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.  If this Letter of Transmittal or any
Certificates or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing and must submit proper evidence satisfactory to the Company, in its sole
discretion, of each such person's authority to so act.

                                     -11-

 
  When this Letter of Transmittal is signed by the registered holder(s) of the
Old Notes listed and transmitted hereby, no endorsement(s) of Certificate(s) or
separate bond power(s) are required, unless Old Notes not tendered or New Notes
are to be issued in the name of a person other than the registered holder(s).
Signature(s) on such Certificate(s) or bond power(s) must be guaranteed by an
Eligible Institution.

  If the Old Notes not tendered or the New Notes are to be issued in the name of
a person other than, or delivered to an address other than that of, the
registered holder(s) appearing on the note register for the Old Notes, the
signature in this Letter of Transmittal must be guaranteed by an Eligible
Institution.

  If this Letter of Transmittal is signed by a person other than the registered
holder(s) of the Old Notes listed, the Certificates must be endorsed or
accompanied by appropriate bond powers, signed exactly as the name or names of
the registered owner(s) appear(s) on the Certificates, and also must be
accompanied by such opinions of counsel, certifications and other information as
the Company or the Exchange Agent may require in accordance with the
restrictions on transfer applicable to the Old Notes.  Signatures on such
Certificates or bond powers must be guaranteed by an Eligible Institution.

  6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS.  If Old Notes not tendered
or New Notes are to be issued in the name of a person other than the registered
holder(s), or if New Notes are to be sent to someone other than the registered
holder(s) or to an address other than the address shown above for the registered
holder(s), the appropriate boxes on this Letter of Transmittal should be
completed.  Certificates for Old Notes not exchanged will be returned by mail
or, if tendered by book-entry transfer, by crediting the account indicated above
maintained at DTC, unless the appropriate boxes on this Letter of Transmittal
are completed.  See Instruction 4.

  7. IRREGULARITIES.  The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes, which
determination shall be final and binding on all parties.  The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance of which, or exchange for, may, in the view of
counsel to the Company, be unlawful.  The Company also reserves the absolute
right, subject to applicable law, to waive any of the conditions of the Exchange
Offer set forth in the Prospectus under "The Exchange Offer -- Certain
Conditions to the Exchange Offer," or any conditions or irregularity in any
tender of Old Notes of any particular holder whether or not similar conditions
or irregularities are waived in the case of other holders.  The Company's
interpretation of the terms and conditions of the Exchange Offer (including this
Letter of Transmittal and the instructions hereto) will be final and binding.
No tender of Old Notes will be deemed to have been validly made until all
irregularities with respect to such tender have been cured or waived.  The
Company, any affiliates or assigns of the Company, the Exchange Agent, or any
other person shall not be under any duty to give notification of any
irregularities in tenders or incur any liability for failure to give such
notification.

  8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES.  Questions and
requests for assistance may be directed to the Exchange Agent at its address and
telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, the Notice of Guaranteed Delivery and the
Letter of Transmittal may be obtained from the Exchange Agent or from your
broker, dealer, commercial bank, trust company or other nominee.

  9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9.  Under U.S. Federal income tax
law, a holder whose tendered Old Notes are accepted for exchange is required to
provide the Exchange Agent with such holder's correct taxpayer identification
number ("TIN") on the Substitute Form W-9 above.  If the Exchange Agent is not
provided with the correct TIN, the Internal Revenue Service (the "IRS") may
subject the holder or other payee to a $50 penalty.  In addition, payments to
such holders or other payees with respect to Old Notes exchanged pursuant to the
Exchange Offer may be subject to 31% backup withholding.

  The box in Part 3 of the Substitute Form W-9 may be checked if the tendering
holder has not been issued a TIN and has applied for a TIN or intends to apply
for a TIN in the near future.  If the box in Part 3 is checked, the holder or
other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number above in order to avoid backup withholding.
Notwithstanding that the box in Part 3 is checked and the Certificate of
Awaiting Taxpayer Identification Number is completed, the Exchange Agent will
withhold 31% of all payments made prior to the time a 

                                     -12-

 
properly certified TIN is provided to the Exchange Agent. The Exchange Agent
will retain such amounts withheld during the 60-day period following the date of
the Substitute Form W-9. If the holder furnishes the Exchange Agent with its TIN
within 60 days after the date of the Substitute Form W-9, the amounts retained
during the 60 day period will be remitted to the holder and no further amounts
shall be retained or withheld from payments made to the holder thereafter. If,
however, the holder has not provided the Exchange Agent with its TIN within such
60 day period, amounts withheld will be remitted to the IRS as backup
withholding. In addition, 31% of all payments made thereafter will be withheld
and remitted to the IRS until a correct TIN is provided.

  The holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered holder of
the Old Notes or of the last transferee appearing on the transfers attached to,
or endorsed on, the Old Notes.  If the Old Notes are registered in more than one
name or are not in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.

  Certain holders (including, among others, corporations, financial institutions
and certain foreign persons) may not be subject to these backup withholding and
reporting requirements.  Such holders should nevertheless complete the attached
Substitute Form W-9 above, and write "exempt" on the face thereof, to avoid
possible erroneous backup withholding.  A foreign person may qualify as an
exempt recipient by submitting a properly completed IRS Form W-8, signed under
penalties of perjury, attesting to that holder's exempt status.  Please consult
the enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for additional guidance on which holders are exempt from
backup withholding.  By completing the Substitute Form W-9, the tendering holder
certifies that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of a
failure to report all interest or dividends, or (ii) the Internal Revenue
Service has notified the holder that such holder is no longer subject to backup
withholding.  The Substitute Form W-9 must be signed, even if the holder is
exempt from backup withholding.

  Backup withholding is not an additional U.S. Federal income tax.  Rather, the
U.S. Federal income tax liability of a person subject to backup withholding will
be reduced by the amount of tax withheld.  If withholding results in an
overpayment of taxes, a refund may be obtained.

  The Company reserves the right in its sole discretion to take whatever steps
are necessary to comply with its obligation regarding backup withholding.

  10.     WAIVER OF CONDITIONS.  The Company reserves the absolute right to
waive satisfaction of any or all conditions enumerated in the Prospectus.

  11.     NO CONDITIONAL TENDERS.  No alternative, conditional, irregular or
contingent tenders will be accepted.  All tendering holders of Old Notes, by
execution and delivery of this Letter of Transmittal, shall waive any right to
receive notice of the acceptance of their Old Notes for exchange.

  12.     LOST, DESTROYED OR STOLEN CERTIFICATES.  If any Certificate(s)
representing Old Notes has been lost, destroyed or stolen, the holder should
promptly notify the Exchange Agent.  The holder will then be instructed as to
the steps that must be taken in order to replace the Certificate(s).  This
Letter of Transmittal and related documents cannot be processed until the
procedures for replacing lost, destroyed or stolen Certificate(s) have been
followed.

  13.     SECURITY TRANSFER TAXES.  Holders who tender their Old Notes for
exchange will not be obligated to pay any transfer taxes in connection
therewith.  If, however, New Notes are to be delivered to, or are to be issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if a transfer tax is imposed for any reason other than the exchange
of Old Notes in connection with the Exchange Offer, then the amount of any such
transfer tax (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.

                                     -13-

 
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO 5:00
P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.

                                     -14-