James River Coal CO - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended		Commission File
March 31, 2005		Number 000-51129

JAMES RIVER COAL COMPANY

(Exact name of registrant as specified in its charter)

Virginia

54-1602012

(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer
Identification No.)

901 E. Byrd Street, Suite 1600

Richmond, Virginia

23219

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (804) 780-3000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES R NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Exchange Act Rule 12b-2).

YES o NO R

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

YES R NO o

The number of shares of the registrant’s Common Stock, par value $0.01 per share, outstanding as of May 6, 2004 was 14,740,694.

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FORM 10-Q INDEX


		Page

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of March 31, 2005 (Successor) and December 31, 2004 (Successor)	3

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 (Successor) and March 31, 2004 (Predecessor)	5

	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit) and Comprehensive Income (Loss) for the three Months ended March 31, 2005 (Successor), eight months ended December 31, 2004 (Successor) and four months ended April 30, 2004 (Predecessor)	6

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 (Successor), and March 31, 2004 (Predecessor)	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	30

Item 4.	Controls and Procedures	30

PART II	OTHER INFORMATION	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 6.	Exhibits	33

SIGNATURES

CERTIFICATIONS

-2-

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

JAMES RIVER COAL COMPANY
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets


	March 31, 2005			December 31, 2004

	(Unaudited)
Assets

Current assets:
Cash		$	1,724		3,879
Receivables:
Trade			37,496		23,871
Other			2,928		7,362

Total receivables			40,424		31,233

Inventories:
Coal			5,500		2,305
Materials and supplies			4,446		4,084

Total inventories			9,946		6,389

Prepaid royalties			3,731		4,358
Other current assets			4,310		6,337

Total current assets			60,135		52,196

Property, plant, and equipment, at cost:
Land			2,745		2,698
Mineral rights			162,577		162,577
Buildings, machinery and equipment			114,597		106,105
Mine development costs			11,428		5,729
Construction-in-progress			706		231

Total property, plant, and equipment			292,053		277,340
Less accumulated depreciation, depletion, and amortization			31,272		21,765

Property, plant and equipment, net			260,781		255,575
Restricted cash (note 1(c))			8,425		8,404
Other assets			11,792		11,651

Total assets		$	341,133		327,826

See accompanying notes to condensed consolidated financial statements.

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JAMES RIVER COAL COMPANY
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets


	March 31, 2005				December 31, 2004

	(Unaudited)
Liabilities and Shareholders’ Equity

Current liabilities:
Current maturities of long-term debt (note 3)		$	3,600			2,700
Current installments of obligations under capital leases			374			388
Accounts payable			25,043			15,116
Accrued salaries, wages, and employee benefits			3,235			2,093
Workers’ compensation benefits			12,090			12,090
Black lung benenfits			2,600			2,600
Accrued taxes			4,326			3,530
Other current liabilities			4,654			3,633

Total current liabilities			55,922			42,150

Long-term debt, less current maturities (note 3)			91,400			92,300
Other liabilities:
Noncurrent portion of workers’ compensation benefits			38,381			38,223
Noncurrent portion of black lung benefits			23,421			23,341
Pension obligations			15,206			15,744
Asset retirement obligations			15,129			14,939
Obligations under capital leases, excluding current installments			518			637
Deferred income taxes			34,569			34,615
Other			245			292

Total liabilities			274,791			262,241

Shareholders’ equity
Preferred Stock, $1.00 par value. Authorized 10,000,000 shares; none issued			-			-
Common stock, $.01 par value. Authorized 100,000,000 shares; issued and outstanding 14,740,694 and 14,715,694, respectively			147			147
Paid-in-capital			73,592			71,784
Deferred stock-based compensation			(8,900	)		(7,540	)
Retained earnings			1,460			1,151
Accumulated other comprehensive income			43			43

Total shareholders’ equity			66,342			65,585

Commitments and contingencies (note 5)
Total liabilities and shareholders’ equity		$	341,133			327,826

See accompanying notes to condensed consolidated financial statements.

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JAMES RIVER COAL COMPANY
AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)


	Successor				Predecessor

	Three Months				Three Months
	Ended 03/31/05				Ended 03/31/04

Revenues		$	97,875			80,858
Cost of sales:
Cost of coal sold			80,942			65,707
Depreciation, depletion, and amortization			9,478			9,272

Total cost of sales			90,420			74,979

Gross profit			7,455			5,879
Selling, general, and administrative expenses			5,035			3,561

Total operating income			2,420			2,318

Interest expense (note 3)			2,186			403
Interest income			(21	)		-
Miscellaneous income, net			(123	)		(53	)

Total other expense, net			2,042			350

Income before reorganization items and income tax expense			378			1,968
Reorganization items, net (note 6)			-			1,557

Income before income taxes			378			411

Income tax expense			69			-


Net income attributable to common shareholders		$	309			411

Earnings per common share (note 7)
Basic earnings per common share		$	0.02			24.33

Shares used to calculate basic earnings per share			13,800			17

Diluted earnings per common share		$	0.02			24.33

Shares used to calculate diluted earnings per share			14,752			17

See accompanying notes to condensed consolidated financial statements.

-5-

JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders’
Equity (Deficit) and Comprehensive Income (Loss)
Three Months ended March 31, 2005 (Successor), eight months ended December 31, 2004 (Successor) and
four months ended April 30, 2004 (Predecessor)
(in thousands)
(unaudited)

	Common stock		Paid-in- capital			Deferred stock- based Compensation			Retained earnings (accumulated deficit)			Subscribed shares			Accumulated other comprehensive income (loss)			Total

Predecessor Company

Balances, December 31, 2003		-		226			-			(107,989	)		(821	)		(15,017	)		(123,601	)

Net income		-		-			-			107,989			-			-			107,989
Minimum pension liability adjustment		-		-			-			-			-			(692	)		(692	)

Comprehensive income																			107,297


Application of fresh start accounting (note 2)
Cancellation of Predecessor common stock		-		(226	)		-			-			-			-			(226	)

Elimination of Predecessor accumulated other comprehensive loss and subscribed shares		-		-			-			-			821			15,709			16,530

Balances, April 30, 2004		-		-			-			-			-			-			-



Successor Company
Issuance of Successor common stock		138		63,153			-			-			-			-			63,291
Net income		-		-			-			1,976			-			-			1,976
Unrealized gain on marketable securities, net		-		-			-			-			-			43			43

Comprehensive Income																			2,019


Deferred compensation related to restricted stock awards		9		8,631			(8,640	)		-			-			-			-
Cost to register common stock		-		-			-			(825	)		-			-			(825	)
Amortization of deferred stock-based compensation		-		-			1,100			-			-			-			1,100

Balances, December 31, 2004		147		71,784			(7,540	)		1,151			-			43			65,585


Net income		-		-			-			309			-			-			309

Deferred compensation related to restricted stock awards		-		1,808			(1,808	)		-			-			-			-
Amortization of deferred stock-based compensation		-		-			448			-			-			-			448

Balances, March 31, 2005	$	147		73,592			(8,900	)		1,460			-			43			66,342

See accompanying notes to consolidated financial statements.

-6-

JAMES RIVER COAL COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


	Successor				Predecessor

	Three Months				Three Months
	Ended 03/31/05				Ended 03/31/04

Cash flows from operating activities:
Net income		$	309			411
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion, and amortization			9,478			9,271
Accretion of asset retirement obligations			325			299
Amortization of debt issue costs			103			-
Amortization of deferred stock-based compensation			448			-
Deferred income tax expense			(46	)		-
Gain on sale or disposal of property, plant, and equipment			6			14
Changes in operating assets and liabilities:
Receivables			(9,191	)		(10,776	)
Inventories			(3,557	)		(3,068	)
Prepaid royalties and other current assets			627			(1,193	)
Other assets			1,783			27
Accounts payable			9,927			(3,241	)
Accrued salaries, wages, and employee benefits			1,142			1,211
Accrued taxes			796			2,127
Other current liabilities			1,021			1,172
Workers’ compensation benefits			158			1,165
Black lung benefits			80			(391	)
Pension obligations			(538	)		28
Asset retirement obligation			(135	)		(131	)
Other liabilities			(47	)		4

Net cash provided by (used in) operating activities			12,689			(3,071	)

Cash flows from investing activities:
Additions to property, plant, and equipment			(14,690	)		(6,815	)
Proceeds from sale of equipment and property			-			40
Increase in restricted cash			(21	)		(21	)

Net cash used in investing activities			(14,711	)		(6,796	)

Cash flows from financing activities:
Proceeds from borrowings			-			6,400
Principal payments under capital lease obligations			(133	)		(101	)

Net cash provided by (used in) financing activities			(133	)		6,299

Decrease in cash			(2,155	)		(3,568	)

Cash at beginning of period			3,879			4,890

Cash at end of period		$	1,724			1,322

See accompanying notes to condensed consolidated financial statements.

-7-

JAMES RIVER COAL COMPANY
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


(1)	Summary of Significant Accounting Policies and Other Information

	*(a)*	*Description of Business and Principles of Consolidation*

		The Company mines, processes and sells bituminous, low sulfur, steam- and industrial-grade coal through five operating subsidiaries located throughout Eastern Kentucky. Substantially all coal sales and accounts receivable relate to the electric utility and industrial markets.

		The interim condensed consolidated financial statements include the accounts of James River Coal Company and its wholly owned subsidiaries. The interim condensed consolidated financial statements of James River Coal Company and subsidiaries (Company) as of and for the three months ended March 31, 2005, and the three months ended March 31, 2004 presented in this report are unaudited. All significant intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2004. The balances presented as of December 31, 2004 are derived from the Company’s audited consolidated financial statements.

		Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in order to prepare these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Significant estimates made by management include the valuation allowance for deferred tax assets, accrued reclamation costs and amounts accrued related to the Company’s workers’ compensation, black lung, health claim, and pension obligations. Actual results could differ from these estimates. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring accruals, which are necessary to present fairly the consolidated financial position of the Company and the consolidated results of its operations and cash flows for all periods presented.

	*(b)*	*Bankruptcy and Restructuring*

		On March 25, 2003, James River Coal Company and subsidiaries (the Company) filed a voluntary petition for relief under Chapter 11 with the United States Bankruptcy Court for the Middle District of Tennessee. On April 21, 2004 the United States Bankruptcy Court for the Middle District of Tennessee confirmed the Company’s Plan of Reorganization (the Plan). The Plan of Reorganization became effective May 6, 2004 (the Effective Date) which is the date on which the Company formally emerged from Chapter 11. Pursuant to the Plan, the Company’s unsecured creditors claims were discharged and terminated.

		The Company’s accompanying consolidated financial statements for the three months ended March 31, 2004, have been prepared in accordance with the American Institute of Certified Public Accountants’ Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7), which provides guidance for financial reporting by entities that have filed petitions under Bankruptcy. The consolidated financial statements after emergence are those of a new reporting entity (the Successor) and are not comparable to the consolidated financial statements of the pre-emergence Company (the Predecessor). A black line has been drawn in the financial statements to distinguish Predecessor and Successor financial information. See note 2 for additional information.

	*(c)*	*Restricted Cash*

		As of March 31, 2005 and December 31, 2004, $8,425 and $8,404 respectively, of the Company’s cash was restricted as to its use. Restrictions were imposed by the Company’s bank relating to a letter of credit issued to one of the Company’s insurers (see note 5).

	*(d)*	*Inventories*

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		Inventories of coal and materials and supplies are stated at the lower of cost or market. Cost is determined using the average cost for coal inventories and the first-in, first-out method for materials and supplies. Coal inventory costs include labor, supplies, equipment cost, depletion, royalties, black lung tax, reclamation tax and preparation plant cost. Coal is classified as inventory at the point in time that the coal is extracted and removed from the mine.

	*(e)*	*Reclamation Costs*

		Effective January 1, 2003, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 requires that asset retirement obligations be recorded as a liability based on fair value, which is calculated as the present value of the estimated future cash flows, in the period in which it is incurred. The estimate of ultimate reclamation liability and the expected period in which reclamation work will be performed is reviewed periodically by the Company’s management and engineers. In estimating future cash flows, the Company considers the estimated current cost of reclamation and applies inflation rates and a third party profit, as necessary. The third party profit is an estimate of the approximate markup that would be charged by contractors for work performed on behalf of the Company. When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Accretion expense is included in cost of produced coal. To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash paid, a gain or loss upon settlement is incurred. At March 31, 2005 and December 31, 2004, the Company had accrued $16,179 and $15,989, respectively, related to estimated mine reclamation costs.

	*(f)*	*Workers’ Compensation*

		The Company is liable for workers’ compensation benefits for traumatic injuries under state workers’ compensation laws in which it has operations. Subsequent to 2001, a portion of its workers’ compensation benefits are payable under a high-deductible, fully-insured workers’ compensation insurance policy. For claims incurred prior to 2002, the Company is self-insured, except for those claims incurred between 1979 and 1982, which are covered by a third party insurance company. Specific excess insurance with independent insurance carriers is in force to cover traumatic claims in excess of the self-insured limits.

		The Company accrues for workers’ compensation benefits by recognizing a liability when it is probable that the liability has been incurred and the cost can be reasonably estimated. To assist in the determination of this estimated liability, the Company utilizes the services of third party administrators who develop claim reserves from historical experience. These third parties provide information to independent actuaries, who after review and consultation with the Company with regards to actuarial assumptions, including discount rate, prepare an evaluation of the liabilities for workers’ compensation benefits.

	*(g)*	*Black Lung Benefits*

		The Company is responsible under the Federal Coal Mine Health and Safety Act of 1969, as amended, and various states’ statutes for the payment of medical and disability benefits to employees and their dependents resulting from occurrences of coal worker’s pneumoconiosis disease (black lung). The Company provides for federal and state black lung claims through a self-insurance program. The Company uses the service cost method to account for its self-insured black lung obligation. The liability measured under the service cost method represents the discounted future estimated cost for former employees either receiving or projected to receive benefits, and the portion of the projected liability relative to prior service for active employees projected to receive benefits.

		The periodic expense for black lung claims under the service cost method represents the service cost, which is the portion of the present value of benefits allocated to the current year, interest on the accumulated benefit obligation, and amortization of unrecognized actuarial gains and losses. The Company amortizes unrecognized actuarial gains and losses over the average remaining work life of the workforce.

		Annual actuarial studies are prepared by independent actuaries using certain assumptions to determine the liability. The calculation is based on assumptions regarding disability incidence, medical costs, mortality, death benefits, dependents, and interest rates. These assumptions are derived from actual Company experience and industry sources.

	*(h)*	Revenue Recognition

		Revenues include sales to customers of Company-produced coal and coal purchased from third parties. The Company recognizes revenue from the sale of Company-produced coal and coal purchased from third parties at the time delivery

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		occurs and title passes to the customer, which is either upon shipment or upon customer receipt of coal based on contractual terms. Also, the sales price must be determinable and collection reasonably assured.

	*(i)*	*Income Taxes*

		Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

	*(j)*	*Equity-Based Compensation Plan*

		The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost for stock appreciation rights and performance equity units is recorded based on the quoted market price of the Company’s stock at the end of the period. Stock-based compensation other than stock options is recorded to expense on a straight-line basis. The Company has implemented the disclosure-only provisions of FASB Statement No. 123 “Accounting for Stock-Based Compensation”. The Company has not recognized stock-based compensation expense related to stock options in any period as all options granted had an exercise price at least equal to the fair value of the underlying common stock on the date of the grant. If the Company had followed the fair value method under FASB Statement No. 123 for options outstanding the impact on the three months ended March 31, 2005 would have been less than $.01 per share. In performing the Statement No. 123 analysis for stock options, a risk free rate of 5% was assumed, expected volatility was zero, and no dividends were anticipated. The Company had no stock options outstanding as of March 31, 2004.

		If the Company had followed the fair value method under FASB Statement No. 123 to account for stock based compensation cost for restricted stock grants the amount of stock based compensation, net of related tax, which would have been recognized for each period and pro-forma net income for each period would have been as follows (in 000’s except per share amounts):

Three Months

March 31, 2005

Net Income, as reported

$

309

Add: Net stock-based employee compensation expense recorded for restricted and performance based stock grants

358

Deduct: Net stock-based employee compensation expense for restricted and performance based stock grants determined under Black-Scholes option pricing model

(289

)

Pro forma net income

$

378

Income per share:

Basic - as reported

$

0.02

Basic - pro forma

$

0.03

Diluted - as reported

$

0.02

Diluted - pro forma

$

0.03

The Financial Accounting Standards Board (“FASB”) has issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (FAS 123R), which requires all public companies to measure compensation cost in the income statement for all share-based payments (including employee stock options) at fair value. The

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		Company intends to adopt FAS 123R on January 1, 2006 using the modified-prospective method. The Company has not completed its assessment of the impact of the adoption of this statement on its financial statements.

(2)	Fresh Start Accounting

		The Company implemented fresh start accounting and reporting in accordance with SOP 90-7 on April 30, 2004, the end of the Company’s most recent fiscal month prior to the Effective Date. Fresh start accounting requires that the reorganization value of the reorganized debtors be allocated to their assets in conformity with FASB Statement No. 141, Business Combinations, for transactions reported under the purchase method. The enterprise value (value of the net assets and liabilities excluding cash, debt, and capital leases) of the reorganized company was estimated to range from $145 million to $165 million based on a third-party valuation prepared in connection with the bankruptcy proceedings. For purposes of applying fresh start accounting, an enterprise value for the reorganized company of $155 million was utilized.

		The effects of the Plan and the application of fresh-start accounting on the Company’s pre-confirmation consolidated balance sheet include adjustments to record the gain on the debt extinguished under the plan and adjustments to record the assets of the Company at their estimated fair value and the liabilities of the Company at their estimated present values. The reorganization value was derived from the enterprise value for the reorganized company as follows: (amounts in 000’s)

Estimated enterprise value of the reorganized company

$

155,000

Borrowings under credit facility

(6,400

)

Capital leases assumed

(1,396

)

Cash balance excluded from enterprise value

1,301

Administrative claims payable excluded from enterprise value

(10,214

)

138,291

Less: new secured debt issued to extinguish prepetition debt

75,000

Fair value of common shares issued to extinguish prepetition debt

$

63,291

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James River Coal Company
Reorganized Condensed Consolidated Balance Sheet
As of April 30, 2004
(amounts in 000’s)
(Unaudited)


				Fresh Start Adjustments

Assets	Predecessor Company 4/30/04			Debt Extinguishment			Reorganization Adjustments			Successor Company 4/30/04

Cash		$	1,301		-			-			1,301
Receivables			35,838		-			-			35,838
Inventories			11,930		-			1,079	(2)		13,009
Prepaid royalties			9,932		-			(362	) (2)		9,570
Other current assets			4,463		-			(347	) (2)		4,116


Total current assets			63,464		-			370			63,834

Land and mineral rights			223,004		-			(57,567	) (2)		165,437
Buildings, machinery, and equipment			236,901		-			(155,050	) (2)		81,851
Mine development costs			12,984		-			(12,984	) (2)		-
Construction-in-progress			974		-			-			974

			473,863		-			(225,601	)		248,262
Less accumulated depreciation, depletion, and amortization			219,604		-			(219,604	) (2)		-


Net property, plant, and equipment			254,259		-			(5,997	)		248,262

Restricted cash			8,348		-			-			8,348
Other long-term assets			6,518		(3,110	) (1)		(734	) (2)		2,674


Total assets		$	332,589		(3,110	)		(6,361	)		323,118

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James River Coal Company
Reorganized Condensed Consolidated Balance Sheet
As of April 30, 2004
(amounts in 000’s)
(Unaudited)


					Fresh Start Adjustments

Liabilities and Shareholders’ Equity (Deficit)	Predecessor Company 4/30/04				Debt Extinguishment			Reorganization Adjustments			Successor Company 4/30/04

Borrowings under DIP credit agreement		$	6,400			-			-			6,400
Current installments of obligations under capital leases			749			-			(272	) (3)		477
Accounts payable			26,293			-			-			26,293
Accrued salaries, wages and employee benefits			4,501			-			-			4,501
Workers’ compensation benefits			9,500			-			-			9,500
Black lung benefits			2,500			-			-			2,500
Accrued taxes			3,588			-			-			3,588
Other current liabilities			4,037			-			-			4,037

Total current liabilities			57,568			-			(272	)		57,296

Long term debt			-			75,000	(1)		-			75,000

Noncurrent portion of workers’ compensation benefits			42,699			-			-			42,699
Noncurrent portion of black lung benefits			10,661			-			13,610	(4)		24,271
Pension obligations			14,267			-			3,363	(5)		17,630
Asset retirement obligations			13,963			-			-			13,963
Obligations under capital leases, excluding current installments			1,159			-			(240	) (3)		919
Deferred income taxes			-			-			27,391	(6)		27,391
Other long term liabilities			658			-			-			658


Total other liabilities			83,407			-			44,124			127,531

Liabilities subject to compromise			319,451			(319,451	) (1)		-			-


Total liabilities			460,426			(244,451	)		43,852			259,827

Common stock			-			138	(1)		-			138
Paid-in-capital			226			63,153	(1)		(226	) (7)		63,153
Retained earnings (accumulated deficit)			(111,533	)		178,050	(1)		(66,517	) (7)		-
Subscribed shares			(821	)		-			821	(7)		-
Accumulated other comprehensive income (loss)			(15,709	)		-			15,709	(7)		-


Total shareholders’ equity (deficit)			(127,837	)		241,341			(50,213	)		63,291


Total liabilities and shareholders’ equity		$	332,589			(3,110	)		(6,361	)		323,118

-13-

The following is a description of the fresh start adjustments for debt extinguishment and reorganization adjustments:

Extinguishment of Debt


(1)	Liabilities subject to compromise that were extinguished in bankruptcy consist of the following (amounts in 000’s):

Pre-petition bank loan agreement

$

207,807

Pre-petition senior note

37,953

Accrued and unpaid interest

12,234

Terminated interest rate swap

8,434

Total secured

266,428

Promissory notes

5,176

Redeemable preferred stock

8,500

Accounts payable and other

39,347

Total unsecured

53,023

Total liabilities subject to compromise

$

319,451

The Company issued new common shares, new secured debt, and transferred its interest in specified life insurance policies held in a rabbi trust to the creditors in full satisfaction of pre-petition claims. The gain on extinguishment of pre-petition claims is calculated as follows (amounts in 000’s):

Liabilities subject to compromise

$

319,451

Less: Assets of rabbi trust transferred to creditors

(3,110

)

Less: New secured debt issued in exchange for pre-petition debt

(75,000

)

Less: Fair value of common shares issued

(63,291

)

Gain on extinguishment of pre-petition claims

$

178,050

Reorganization Adjustments


(2)	In connection with the application of fresh start accounting, the Company made adjustments aggregating approximately $6.3 million to record its identifiable assets at fair value as follows: (amounts in 000’s):

Increase/(Decrease)

Coal inventories

$

1,079

Prepaid royalties

(362

)

Other current assets

(347

)

Land and mineral rights

(57,567

)

Buildings, machinery and equipment

(155,050

)

Mine development costs

(12,984

)

Less accumulated depreciation, depletion, and amortization

219,604

Other long-term assets

(734

)

Total fair value adjustments to identifiable assets

$

(6,361

)

(3)

Contractual terms of certain capital lease agreements were renegotiated during bankruptcy. Obligations under capital leases have been adjusted to reflect the revised terms.

(4)

The liability for black lung benefits has been adjusted to reflect the total discounted benefit obligation.

(5)

The pension liability has been adjusted to reflect the total discounted projected benefit obligation of the plan.

(6)

Deferred income taxes have been adjusted to reflect differences in the book and tax basis of the revalued assets and liabilities of the Company after application of fresh start accounting.

(7)

The equity of the predecessor company, including subscribed shares and accumulated other comprehensive loss, has been eliminated in fresh start accounting.

-14-


(3)	Long Term Debt and Interest Expense

		Long-term debt at March 31, 2005 is as follows (amounts in 000’s):

March 31, 2005

Senior secured credit facility:

Term loan component

$

20,000

Revolver component

-

Term credit facility

75,000

Total long-term debt

95,000

Less amounts classified as current

3,600

Total long-term debt, less current maturities

$

91,400

(a)

Senior Secured Credit Facility

Effective May 6, 2004, the Company closed a $50 million senior secured credit facility with Wells Fargo Foothill, Inc. (the Senior Secured Credit Facility). This facility was used to repay outstanding amounts and replace letters of credit previously issued under the $20 million debtor-in-possession facility to pay expenses associated with the exit from bankruptcy and to provide liquidity for general corporate purposes. The Senior Secured Credit Facility is comprised of a $30 million revolver component and a $20 million term component. The term loan was fully funded at closing. Borrowings under the revolver component bear interest at LIBOR + 2.5% or the Base Rate (as defined in the credit agreement) + 1.0%. Borrowings under the term component bear interest at LIBOR + 5.25% or the Base Rate + 3.85%. The term of the Senior Secured Credit Facility is five years. Principal payments on the term component of $900,000 per quarter commence on April 1, 2005 and continue through April 1, 2009, with the remaining principal balance due on May 6, 2009. Interest is payable in arrears, on the first day of each month on Base Rate borrowings while interest on LIBOR Rate borrowings is due on the last day of the LIBOR interest period. Advances under the Senior Secured Credit Facility are secured by a first priority lien on substantially all of the Company’s assets, and, except for the Term Credit Facility, the Company may not incur additional debt on the assets securing the Revolving Credit Facility. Advances under the revolver component may not exceed a borrowing base calculation derived as a percentage of eligible assets. The Senior Secured Credit Facility can be terminated with 90 days written notice by paying all outstanding principal, interest and making any prepayment premium payments due. The $30 million revolver component has a prepayment premium of 2.5% of the total revolver commitment for the first year, declining to 2.0% for the second year, 1.5% for the third year and 0.5% for the fourth year. There is not a prepayment premium for the fifth year of the revolver component of the Senior Secured Credit Facility. The $20 million term loan component has a prepayment premium of $200,000 (1.0%) if paid prior to April 30, 2007. There is no prepayment premium after April 30, 2007 for the term loan component.

(b)

Term Credit Facility

The Company also entered into a $75 million term credit facility with the Company’s pre-petition secured lenders (the Term Credit Facility) in partial satisfaction of its prepetition obligations, pursuant to the Plan of Reorganization. The term of the Term Credit Facility is seven years, and the repayment of the Term Credit Facility is secured by a second priority lien on substantially all of the Company’s assets. Except for the Senior Secured Credit Facility, the Company may not incur additional debt on the assets securing the Term Credit Facility. In addition, the Company may not incur any unsecured debt (other than normal trade payables) and may not incur more than $5 million of recourse debt (including the Senior Secured Credit Facility and the Term Credit Facility). There is no scheduled amortization of this facility for the first two years. The notes are payable over seven years with principal repayments of $1.5 million per quarter beginning June 30, 2006 and increasing to $2.5 million per quarter beginning June 30, 2008. All remaining principal and interest is due May 6, 2011. Borrowings under the Term Credit Facility may be prepaid without penalty.

(c)

Interest Expense and Other

-15-


		Until the date of filing of bankruptcy, the Company accrued interest. The Company determined that there was insufficient collateral to cover the interest portion of the scheduled payments on its prepetition debt obligations. As of the bankruptcy date the Company ceased accruing interest on all the prepetition secured debt obligations. If such interest had continued to be accrued, interest expense would have been approximately $5.7 million for the three months ended March 31, 2004. During the three months ended March 31, 2005 and 2004, the Company paid $2,087,000 and $147,000 in interest, respectively.

		The Senior Secured Credit Facility and the Term Credit Facility contain financial covenants including a fixed charge coverage, a minimum leverage, minimum consolidated tangible net worth, minimum Consolidated Total EBITDA (as defined in each of the credit facilities), and maximum annual limits on capital expenditures. The Company was in compliance with all of the financial covenants for the Senior Secured Credit Facility and the Term Credit Facility as of March 31, 2005. The Company’s debt covenants also prohibit payment of cash dividends.

(4)	Equity

	*(a)*	*Preferred Stock and Shareholder Rights Agreement*

		The Company has authorized 10,000,000 shares of preferred stock, $1.00 par value, the rights and preferences of which are established by the Board of the Directors. The Company has reserved 500,000 of these shares as Series A Preferred Stock for issuance under a shareholder rights agreement (the “Rights Agreement”).

		On May 25, 2004, the Company’s shareholders approved the Rights Agreement and declared a dividend of one preferred share purchase right (“Right”) for each two shares of common stock outstanding. Each Right entitles the registered holder to purchase from the Company one one-hundredth (1/100) of a share of our Series A Participating Cumulative Preferred Stock, par value $1.00 per share, at a price of $200 per one one-hundredth of a Series A preferred share. The Rights are not exercisable until a person or group of affiliated or associated persons (an “Acquiring Person”) have acquired or announced the intention to acquire 15% or more of the Company’s outstanding common stock.

		In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of the Company’s consolidated assets or earning power is sold after a person or group has become an Acquiring Person, each holder of a Right, other than the Rights beneficially owned by the Acquiring Person (which will thereafter be void), will receive, upon the exercise of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that any person becomes an Acquiring Person, each Right holder, other than the Acquiring Person (whose Rights will become void), will have the right to receive upon exercise that number of shares of common stock having a market value of two times the exercise price of the Right.

		The rights will expire May 25, 2014, unless that expiration date is extended. The Board of Directors may redeem the Rights at a price of $0.001 per Right at any time prior to the time that a person or group becomes an Acquiring Person.

	*(b)*	*Redeemable Preferred Stock (Predecessor Company)*

		The Company had 8,500 shares of Class C, nonvoting, mandatorily redeemable preferred stock outstanding. The preferred shares had a par value of $1,000 per share and a dividend rate of 8%.

		On July 1, 2003, the Company adopted Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which required that dividends on redeemable preferred stock be reported as a financing cost in our statement of operations. Accordingly, preferred dividends of $170,000 for the three months ended March 31, 2004, are included in interest expense in the condensed consolidated statements of operations.

		The preferred stock was cancelled on May 6, 2004 in accordance with the terms of the Plan of Reorganization.

-16-


(5)	Commitments and Contingencies

	The Company has established irrevocable letters of credit totaling $32.7 million as of March 31, 2005 to guarantee performance under certain contractual arrangements. The Company has letters of credit totaling $7.8 million that are collateralized by restricted cash (see note 1(c)). The remaining letters of credit totaling $24.9 million were issued under the Senior Secured Credit Facility and reduce the Company’s availability under the $30 million revolver component. The Company is charged a fee of 2.5% annually on letters of credit outstanding.

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

(6)	Reorganization Items, Net

	Reorganization items, net, consists of the following (amounts in 000’s):

Predecessor
Company
Three Months
Ended 03/31/04

Professional fees and administrative expenses

$

1,607

Interest income

(50

)

$

1,557

(7)

Earnings Per Share

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding restricted common stock subject to continuing vesting requirements. Diluted earnings per share is calculated based on the weighted average number of common shares outstanding during the period and, when dilutive, potential common shares from the exercise of stock options and restricted common stock subject to continuing vesting requirements, pursuant to the treasury stock method.

The following table provides a reconciliation of the number of shares used to calculate basic and diluted earnings per share:

Successor
Company
Three Months
Ended 3/31/05

Predecessor
Company
Three Months
Ended 3/31/04

Weighted average number of common shares outstanding:

Basic

13,799,994

16,890

Effect of dilutive instruments

951,678

-

Diluted

14,751,672

16,890

On May 6, 2004 the Company emerged from bankruptcy under a joint plan of reorganization. On that date the Company cancelled all existing equity securities and issued 13,799,994 shares of new common stock, which were distributed pro-rata to the pre-petition secured creditors.

-17-


(8)	Pension Expense

	The components of net periodic benefit cost are as follows (amounts in 000’s):

Successor
Company
Three Months
Ended 3/31/05

Predecessor
Company
Three Months
Ended 3/31/04

Service cost

$

527

459

Interest cost

793

723

Expected return on plan assets

(761

)

(608

)

Amortization of prior service cost

—

97

Recognized actuarial loss

—

255

Net periodic benefit cost

$

559

926

(9)

Pneumoconiosis (Black Lung) Benefits

The expense for black lung benefits consists of the following (amounts in 000’s):

Successor Company
Three Months
Ended 3/31/05

Predecessor
Company
Three Months
Ended 3/31/04

Service cost

$

74

74

Interest cost

340

188

Amortization of actuarial loss

54

262

Total expense

$

468

524

(10)

Definitive Agreement to Acquire Triad Mining, Inc.

In March 2005, the Company signed a definitive agreement to acquire Triad Mining Inc. (“Triad”) for approximately $75 million, consisting of $64 million in cash and $11 million of Company common stock. Triad operates six surface mines and one underground mine in Southern Indiana.

-18-

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the Condensed Consolidated Financial Statements and accompanying notes contained herein.

Overview

We mine, process and sell bituminous, low sulfur, steam- and industrial-grade coal through five operating subsidiaries (“mining complexes”) located throughout Eastern Kentucky. Our five mining complexes include 18 mines and seven preparation plants, five of which have integrated rail loadout facilities and two of which use a common loadout facility at a separate location. For the three months ended March 31, 2005, we generated approximately 76% of our revenues from several long-term contracts with electrical utilities, including 32% derived from our largest customer, Georgia Power Company. Of the remaining revenues, 22% were generated by industrial accounts and 2% were generated from fees from the handling and marketing of coal-based synfuel product.

As compared to the prior year, we experienced a significant increase in mining costs during the first three months of 2005. The increased costs were primarily due to higher sales related costs and an increase in roof support and mining bit costs due to an increase in steel costs. We continue to focus on reducing our operating costs at each mine and improving miner productivity.

Reserves

Marshall Miller & Associates, Inc. (“MM&A”) prepared a detailed study of our reserves as of March 31, 2004 based on all of our geologic information, including our updated drilling and mining data. The coal reserve study conducted by MM&A was planned and performed to obtain reasonable assurance of our subject demonstrated reserves. In connection with the study, MM&A prepared reserve maps and had certified professional geologists develop estimates based on data supplied by us and using standards accepted by government and industry. MM&A completed their report in June 2004.

Reserves for these purposes are defined by SEC Industry Guide 7 as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. The reserve estimates were prepared using industry-standard methodology to provide reasonable assurance that the reserves are recoverable, considering technical, economic and legal limitations. Although MM&A has reviewed our reserves and found them to be reasonable (notwithstanding unforeseen geological, market, labor or regulatory issues that may affect the operations), by assignment, MM&A has not performed an economic feasibility study for our reserves. In accordance with standard industry practice, we have performed our own economic feasibility analysis for our assigned reserves. It is not generally considered to be practical, however, nor is it standard industry practice, to perform a feasibility study for a company’s entire reserve portfolio. In addition, MM&A did not independently verify our control of our properties, and has relied solely on property information supplied by us. Reserve acreage, average seam thickness, average seam density and average mine and wash recovery percentages were verified by MM&A to prepare a reserve tonnage estimate for each reserve. There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal reserves as discussed below under “– Critical Accounting Estimates – Coal Reserves”.

Based on the MM&A reserve study and the foregoing assumptions and qualifications, and after giving effect to our operations from March 31, 2004 through March 31, 2005, we estimate that, as of March 31, 2005, we controlled approximately 221.6 million tons of proven and probable coal reserves. The following table provides additional information regarding changes to our reserves since March 31, 2004 (in millions of tons):

Three Months
Ended
March 31, 2005

Nine Months
Ended
December 31, 2004

Proven and Probable Reserves beginning of period (1)

207.4

207.2

Coal Extracted

(2.2

)

(6.3

)

Acquisitions (2)

15.4

3.7

Adjustments (3)

1.0

2.8

Proven and Probable Reserves end of period

221.6

207.4

1) Calculated in the same manner, and based on the same assumptions and qualifications, as described above. Proven reserves have the highest degree of geologic assurance and are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings, or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspections, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. Probable reserves have a moderate

-19-


	degree of geologic assurance and are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. This reserve information reflects recoverable tonnage on an as-received basis with 5.5% moisture.

	(2) Represents estimated reserves on properties acquired during the relevant period. The Company calculated the reserves in the same manner, and based on the same assumptions and qualifications, as described above, but such estimates were not covered by the MM&A report.

	(3) Represents changes in reserves due to additional information obtained from exploration activities, production activities or discovery of new geologic information. The Company calculated the reserves in the same manner, and based on the same assumptions and qualifications, as described above, but such estimates were not covered by the MM&A report.

Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (FAS 123R), which requires all public companies to measure compensation cost in the income statement for all share-based payments (including employee stock options) at fair value for fiscal years beginning after June 15, 2005. We intend to adopt FAS 123R on January 1, 2006 using the modified-prospective method. We have not completed our assessment of the impact of the adoption of this statement on our financial statements. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption to the extent non qualified stock options are exercised.

Key Performance Indicators

We manage our business through several key performance metrics that provide a summary of information in the areas of sales, operations, and general/administrative costs.

In the sales area, our long-term metrics are the volume-weighted average remaining term of our contracts and our open contract position for the next several years. During periods of high prices, such as the current period, we may seek to lengthen the average remaining term of our contracts and reduce the open tonnage for future periods. In the short-term, we closely monitor the Average Selling Price per Ton (ASP), and the mix between our spot sales and contract sales.

In the operations area, we monitor the volume of coal that is produced by each of our principal sources, including company mines, contract mines, and purchased coal sources. For our company mines, we focus on both operating costs and operating productivity. Our operating costs are measured by our operating costs per ton produced. We measure our operating productivity by Linear Feet (of mine advance) Per Man Hour (LFPMH). LFPMH gives us a good indication of labor productivity across a number of different mines.

In the selling, general and administrative area, we closely monitor the gross dollars spent per mine operation and in support functions. We also regularly measure our performance against our internally-prepared budgets.

Trends In Our Business

We expect the current strong pricing environment for coal to weaken somewhat during the next one to two years. This is due to increased incremental production that has historically come into the markets during periods of strong pricing. We believe that the impact of this potentially increased production will be offset by the need of utilities to rebuild diminished coal inventories resulting from service difficulties that the major railroads experienced in 2004. According to the Energy Information Administration (EIA), coal stockpiles at utilities are currently below normal levels. Any effort by the utilities to rebuild their inventory positions should absorb a portion of any increased coal production. Any recurrence of the difficulties with rail transportation experienced during 2004 may also have an impact on increased production and market pricing. If marginal increases in the production of coal cannot be delivered to the utility customers by rail in a timely manner, the depressing effect of the increased production on market prices will be reduced. In addition, any new coal production would likely require additional permits, labor and equipment, which are currently difficult and time consuming to obtain.

Although the current pricing environment for U.S. coal is strong, coal prices are subject to change based on a number of factors beyond our control, including:


	•	the supply of domestic and foreign coal;

-20-


	•	the demand for electricity;
	•	the demand for steel and the continued financial viability of the domestic and foreign steel industries;
	•	the cost of transporting coal to the customer;
	•	domestic and foreign governmental regulations and taxes;
	•	air emission standards and other environmental requirements for coal-fired power plants; and
	•	the price and availability of alternative fuels for electricity generation.

As discussed above, our costs of production have recently increased. We expect the higher costs to continue for the next several years, due to a highly competitive market for a limited supply of skilled mining personnel and higher costs in worldwide commodity markets. We are actively recruiting and training new personnel to staff our mines. However, we expect the strong market pricing for coal to increase turnover of existing personnel and potentially lead to higher costs for employees that we retain. Our costs have also increased for steel and other commodities used in our mining operations. We believe these increases are the result of economic development in the Pacific Rim (notably China) and an expanding economy in the United States. We do not anticipate a change in these circumstances during the next one to two years.

Plan of Reorganization

In March 2003, we and all of our subsidiaries filed voluntary petitions with the United States Bankruptcy Court for the Middle District of Tennessee for reorganization under Chapter 11. In January 2004, we filed a Plan of Reorganization for the Chapter 11 cases. The plan was subsequently accepted by the required percentage of creditors entitled to vote on the plan and was confirmed by the bankruptcy court in April 2004.

On May 6, 2004, after securing a new senior secured line of credit and term loan facility, our Plan of Reorganization became effective, and we emerged from Chapter 11 bankruptcy proceedings. Our implementation of fresh start accounting pursuant to SOP 90-7 resulted in material changes to our consolidated financial statements, including the valuation of our assets and liabilities at fair value in accordance with principles of purchase accounting, and the valuation of our equity based on a valuation of our business prepared by our independent financial advisors.

As a result of the reorganization transactions and the implementation of fresh start accounting, our results of operations after our emergence from bankruptcy are those of a new reporting entity (the “Successor Company”), and are not comparable to the results of operations of the pre-emergence Company (the “Predecessor Company”) for prior periods described in this management’s discussion and analysis and reported in our condensed consolidated financial statements.

Our interim condensed consolidated financial statements for the three months ended March 31, 2005 and 2004 presented in this report are unaudited. The financial statements for the three months ended March 31, 2004 include the effects of our bankruptcy proceedings. These include the classification of certain expenses, and gains and losses as reorganization items, and other matters described in the notes to our condensed consolidated financial statements.

Recent Developments

Definitive Agreement to Acquire Triad Mining, Inc.

In March 2005, we signed a definitive agreement to acquire Triad Mining, Inc. (“Triad”), for $75.0 million, consisting of $64.0 million in cash and $11.0 million of our common stock. The final closing of the Triad acquisition is subject to various conditions. The cash portion of the purchase price will be increased or decreased based on changes in Triad’s net working capital, less agreed upon distributions, between December 31, 2004 and the closing date.

Triad operates six surface mines and one underground mine in Southern Indiana, and in 2004 produced approximately 3.4 million tons of coal. Of the 3.4 million tons produced, approximately 87% came from surface mines, while the remaining 13% came from underground mines. In 2004, Triad generated revenues of approximately $81.6 million. As of February 1, 2005, based upon an independent reserve report, we believe that Triad controlled approximately 17.6 million tons of proven and probable coal reserves.

Financing Developments

We recently filed a Registration Statement with the Securities and Exchange Commission for a proposed offering of 1,500,000 shares of our common stock and a concurrent offering of $150 million of senior notes due 2012. The underwriters also have an option to purchase an additional 525,000 shares of our common stock to cover any over-allotments. We also intend to enter into a proposed new $100 million senior secured credit facility. If completed as planned, we would expect to have $25 million of availability under the new senior secured credit facility. The proposed new senior secured credit facility is contingent upon completion of the Triad

-21-

acquisition. The concurrent offerings of common stock and notes are not conditioned upon each other. We cannot assure you that we will be able to complete either or both of the concurrent offerings or enter into our proposed new senior secured credit facility.

Results of Operations

Three Months Ended March 31, 2005 Compared with the Three Months Ended March 31, 2004

The following compares the three months ended operating results for the Predecessor Company with that of the Successor Company. However, as a result of the reorganization transaction and the implementation of fresh start accounting, the results of operations of the Successor Company and the Predecessor Company are not comparable.

The following table shows selected operating results for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 (amounts in 000’s):


	Three Months Ended March 31,

	2005			2004		Change

Volume (tons)			2,228		2,287		(3	%)
Revenues
Coal sales		$	96,401		79,239		22	%
Synfuel handling			1,474		1,619		(9	%)
Cost of coal sold			80,942		65,707		23	%
Depreciation, depletion and amortization			9,478		9,272		2	%
Gross profit			7,455		5,879		27	%
Selling, general and administrative expenses			5,035		3,561		41	%

Volume and revenues

For the three months ended March 31, we shipped 2.2 million tons of coal in 2005 and 2.3 million tons in 2004. We experienced a reduction during the three months ended March 31, 2005 of 102,000 tons from contract mining operations as compared to the three months ended March 31, 2004. This reduction was primarily due to delays in the commencement of operations at one of our contract surface mines and delays in obtaining production equipment. That contract surface mine began producing coal in April 2005 and is expected to reach normalized production levels during the second quarter of 2005.

Coal sales revenue for the three months ended March 31, increased from $79.2 million in 2004 to $96.4 million in 2005. This increase was due to an increase in the average sales price per ton for sales under long-term contracts and spot sales. For the three months ended March 31, 2005, we sold 1.9 million tons of coal under long-term contracts (87% of total sales volume) at an average selling price of $40.46 per ton. For the three months ended March 31, 2004, we sold 1.9 million tons of coal (82% of total sales volume) under long-term contracts at an average selling price of $33.51 per ton. The increase in average selling price from contract sales from 2004 to 2005 was due to the renegotiation of below-market contract prices as part of our bankruptcy proceedings. For the three months ended March 31, 2005, we sold 296,000 tons of coal (13% of total sales volume) to the spot market at an average selling price of $61.63 per ton. For the three months ended March 31, 2004, we sold approximately 405,000 tons (18% of total sales volume) to the spot market at an average selling price of $39.92 per ton.

Operating costs

For the three months ended March 31, the cost of coal sold, excluding depreciation, depletion and amortization, increased from $65.7 million in 2004 to $80.9 million in 2005. Our cost per ton of coal sold increased from $28.70 per ton in the 2004 period to $36.33 per ton in the 2005 period. This $7.63 increase in cost per ton of coal sold was due to several factors. Sales related costs (primarily royalties and severance taxes) increased by $1.30 per ton as a result of increased sales prices. Labor and benefit costs increased by $1.24 per ton in the 2005 period due to a wage increase to all production employees, effective January 1, 2005. The competitive job market in the coal industry necessitated this increase. Variable costs increased by $3.41 per ton, primarily due to a per ton increase in roof support materials and mining bits costs due to the increase in worldwide steel prices. Trucking costs increased by $1.16 per ton in the 2005 period due to tonnage restrictions and higher fuel costs.

For the three months ended March 31, depreciation, depletion and amortization, increased from $9.3 million in 2004 to $9.5 million in 2005. On a per ton basis, depreciation, depletion and amortization was $4.05 for the three months ended March 31, 2004 and $4.25 for the three months ended March 31, 2005. These results are not comparable due to the impact of fresh start accounting on our asset base.

-22-

Selling, general and administrative expenses increased from $3.6 million for the three months ended March 31, 2004 to $5.0 million for the months ended March 31, 2005. This increase was primarily due to $447,000 charges in 2005 for stock related compensation, a $256,000 increase in salaries, a $261,000 increase in other administrative costs associated with being a public company and a $213,000 increase in bank fees for our asset backed credit facilities.

Income taxes

Our effective tax rate for the three months ended March 31, 2005 was 18.3%. Our effective income tax rate is impacted by percentage depletion. Percentage depletion is an income tax deduction that is limited to a percentage of taxable income from each of our mining properties. Because percentage depletion can be deducted in excess of cost depletion, it creates a permanent difference and directly impacts the effective tax rate. Fluctuations in the effective tax rate may occur due to the varying levels of profitability (and thus, taxable income and percentage depletion) at each of our mine locations.

Liquidity and Capital Resources

Although our cash from operations has changed significantly in the periods discussed below, we do not believe that those periods are comparable due to our emergence from bankruptcy. We experienced unusual swings in working capital leading up to and entering bankruptcy. We also were able to renegotiate our coal contracts due to the bankruptcy, which increased our revenues. We believe that our liquidity going forward will be generated primarily by our gross profit on coal sales. The gross profit will be driven primarily by the price of coal and our operating costs. Our capital expenditure payments for existing operations are expected to be paid out of the cash generated by the gross profit.

As of March 31, 2005, we had available liquidity of approximately $6.8 million. This consisted of unrestricted cash on hand of approximately $1.7 million and availability under the revolver component of our Senior Secured Credit Facility of approximately $5.1 million.

After the refinancing of our existing debt as described above under “– Recent Developments – Financing Developments,” we expect to have availability under our proposed new senior secured credit facility of approximately $25 million.

Excluding the proposed financings discussed above, our primary source of cash will be sales of coal to our utility and industrial customers. The price of coal received can change dramatically based on supply and demand and will directly affect this source of cash. Our primary uses of cash include the payment of ordinary mining expenses to mine coal, capital expenditures and benefit payments. Ordinary mining expenses are driven by the cost of supplies, including steel prices and diesel fuel. Benefit payments include payments for workers’ compensation and black lung benefits paid over the lives of our employees. We are required to pay these when due, and are not required to set aside cash for these payments. We have posted surety bonds with state regulatory departments to guarantee these payments and have secured letters of credit as further security for these obligations. Recently, surety bond costs have increased, while the market terms of surety bonds have generally become less favorable. To the extent that surety bonds become unavailable, we would seek to secure obligations with letters of credit, cash deposits, or other suitable forms of collateral. The benefit payments for workers’ compensation and black lung benefits will be paid as the claims are submitted over the lives of our employees.

Excluding the other proposed financings discussed above, we expect that our secondary source of cash will be the revolver component of our proposed new senior secured credit facility. We believe that cash on hand, cash generated from our operating activities, and availability under the revolver component of our proposed new senior secured credit facility will be sufficient to meet our working capital needs, to fund our capital expenditures for existing operations and to meet our debt service obligations for the next twelve months, excluding the Triad acquisition. Nevertheless, there are many factors beyond our control, including general economic and coal market conditions, that could have a material adverse impact on our ability to meet our liquidity needs.

In the event that the sources of cash described above are not sufficient to meet our future cash requirements, we will need to reduce certain planned expenditures or seek additional financing, or both. If debt financing is not available on favorable terms, we may seek to raise funds through the issuance of our equity securities. If such actions are not sufficient, we may need to limit our growth or reduce or curtail some of our operations to levels consistent with the constraints imposed by our available cash flow, or both. Our ability to seek additional debt or equity financing may be limited by our existing and any future financing arrangements and/or economic and financial conditions. In particular, our Senior Secured Credit Facility restricts, and our proposed senior notes and new senior secured credit facility, if completed, will restrict our ability to incur additional indebtedness. We cannot provide assurance that any reductions in our planned expenditures or in our expansion and personnel would be sufficient to cover shortfalls in available cash or that additional debt or equity financing would be available on terms acceptable to us, if at all.

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Other than ordinary course of business expenses and capital expenditures for existing mines during the next several years and the proposed Triad acquisition, our only large expected use of cash will be the development of a new mine at our McCoy Elkhorn complex discussed below. We expect to invest approximately $23 million in additional expenditures during 2005 in the development of the new McCoy Elkhorn mine and the related preparation plant upgrade. We expect that such expenditures will be funded through cash on hand, cash generated by operations and from the revolver component of our Senior Secured Credit Facility or our proposed new senior secured credit facility.

The following chart reflects the components of our debt as March 31, 2005 (amounts in 000’s):


Senior Secured Credit Facility
Term loan component	$	20,000
Revolver component		-
Term Credit Facility		75,000

Total long term debt		95,000
Less amounts classified as current		3,600

Total long term debt, less current maturities	$	91,400

Effective May 6, 2004, we closed a $50 million senior secured credit facility with Wells Fargo Foothill, Inc. (the “Senior Secured Credit Facility”). This facility was used to repay outstanding amounts and replace letters of credit under our $20.0 million debtor-in-possession facility, to fund expenses associated with our exit from bankruptcy and to provide liquidity for general corporate purposes. The Senior Secured Credit Facility is comprised of a $30 million revolver component and a $20 million term component. The term loan was fully funded at closing. Borrowings under the revolver component bear interest at LIBOR + 2.5% or the Base Rate (as defined in the credit agreement) + 1.0%. Borrowings under the term component bear interest at LIBOR + 5.25% or the Base Rate + 3.85%. The term of the Senior Secured Credit Facility is five years. Principal payments on the term component of $900,000 per quarter commence on April 1, 2005 and continue through April 1, 2009, with the remaining principal balance due on May 6, 2009. Interest is payable in arrears, on the first day of each month on Base Rate borrowings while interest on LIBOR Rate borrowings is due on the last day of the LIBOR interest period. Advances under the Senior Secured Credit Facility are secured by a first priority lien on substantially all of our assets, and, except for the Term Credit Facility, we may not incur additional debt on the assets securing the Senior Secured Credit Facility. Advances under the revolver component may not exceed a borrowing base calculation derived as a percentage of eligible assets. The Senior Secured Credit Facility can be terminated with 90 days written notice by paying all outstanding principal, interest and making any prepayment premium payments due. The $30 million revolver component has a prepayment premium of 2.5% of the total revolver commitment for the first year, declining to 2.0% for the second year, 1.5% for the third year and 0.5% for the fourth year. There is not a prepayment premium for the fifth year of the facility. The $20 million term loan component has a prepayment premium of $200,000 (1.0%) if paid prior to April 30, 2007. There is no prepayment premium after April 30, 2007.

We also entered into a $75 million restructured term credit facility with our pre-petition secured lenders (the “Term Credit Facility”) in partial satisfaction of our prepetition obligations, pursuant to the Plan of Reorganization. The term of the Term Credit Facility is seven years, and our repayment of the Term Credit Facility is secured by a second priority lien on substantially all of our assets. Except for the Senior Secured Credit Facility, we may not incur additional debt on the assets securing the Term Credit Facility. In addition, we may not incur any unsecured debt (other than normal trade payables) and may not incur more than $5 million of recourse debt (including the Senior Secured Credit Facility and the Term Credit Facility). The Term Credit Facility provides for an annual interest rate of 9%. There is no scheduled amortization of this facility for the first two years. The notes are payable over seven years with principal repayments of $1.5 million per quarter beginning June 30, 2006 and increasing to $2.5 million per quarter beginning June 30, 2008. All remaining principal and interest is due May 6, 2011. Borrowings under the Term Credit Facility may be prepaid without penalty.

The Senior Secured Credit Facility and the Term Credit Facility contain financial covenants for fixed charge coverage, total leverage, minimum consolidated tangible net worth, minimum Consolidated Total EBITDA (as defined in each of the credit facilities), and maximum capital expenditures. We were in compliance with all of the financial covenants for the Senior Secured Credit Facility and the Term Credit Facility as of March 31, 2005.

As described above, we have recently filed a registration statement with the Securities and Exchange Commission for a planned offering of 1,500,000 shares of our common stock and a concurrent offering of $150 million senior notes due 2012. The underwriters also have an option to purchase an additional 525,000 of our common stock to cover any over-allotments. If we complete these

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transactions, we would expect to use the net proceeds to complete the Triad acquisition and to refinance all amounts outstanding under the Senior Secured Credit Facility and Term Credit Facility. We also expect to enter into a proposed new senior secured credit facility. After giving effect to these transactions, our total debt and interest expense will increase significantly. The concurrent offerings of common stock and notes are not conditioned upon each other. We cannot assure you that we will be able to complete either or both of the concurrent offerings or enter into our proposed new senior secured credit facility.

Net cash provided by or used in operating activities reflects net income or loss adjusted for non-cash charges and changes in net working capital (including non-current operating assets and liabilities). Net cash provided by operating activities was $12.7 million for the three months ended March 31, 2005, and net cash used by operating activities was $3.1 million for the three months ended March 31, 2005. For the three months ended March 31, 2004, the Company’s net income, as adjusted for non cash charges, was offset by a $2.1 million increase in cash from operations due to changes in our working capital. This change in net working capital was primarily caused by changes in accounts receivable due to increased sales and an increase in accounts payable due to timing and increased capital expenditures.

Net cash used by investing activities increased $6.8 to $14.7 million for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. The increase was primarily due to additional capital expenditures for the three months ended March 31, 2005 on Mine 15 of $5.5 million. The remaining capital expenditures primarily consisted of new and replacement mine equipment and various projects to improve the efficiency of our mining operations.

Net cash provided by or used in financing activities primarily reflects changes in short- and long-term financing. Net cash provided by financing activities was $0.1 million for the three months ended March 31, 2005 and net cash used in financing activities was $6.3 million for the three months ended March 31, 2004. During the three months ended March 31, 2004, we borrowed $6.4 million under its Debtor in Possession Loan.

Certain Risks

For a discussion of certain risk factors that may impact our business, refer to “Critical Accounting Estimates and Assumptions” within this Form 10-Q and to the “Risk Factors” discussed in our registration statement on Form S-1 as initially filed with the Securities and Exchange Commission on April 19, 2005, as amended.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements, including guarantees, operating leases, indemnifications, and financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. Liabilities related to these arrangements are not reflected in our consolidated balance sheets, and, except for the operating leases, we do not expect any material impact on our cash flow, results of operations or financial condition from these off-balance sheet arrangements.

We use surety bonds to secure reclamation, workers’ compensation and other miscellaneous obligations. At March 31, 2005, we had $69.4 million of outstanding surety bonds with third parties. These bonds were in place to secure obligations as follows: post-mining reclamation bonds of $26.6 million, workers’ compensation bonds of $40.3 million, wage payment, collection bonds, and other miscellaneous obligation bonds of $2.5 million. Recently, surety bond costs have increased, while the market terms of surety bonds have generally become less favorable. To the extent that surety bonds become unavailable, we would seek to secure obligations with letters of credit, cash deposits, or other suitable forms of collateral.

We also use bank letters of credit to secure our obligations for workers’ compensation programs, various insurance contracts and other obligations. At March 31, 2005, we had $32.7 million of letters of credit outstanding, including $7.8 million of letters of credit outstanding collateralized by $8.4 million of cash deposited in restricted, interest-bearing accounts pledged to issuing banks.

Critical Accounting Estimates

Overview

Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Generally accepted accounting principles require estimates and judgments that affect reported amounts for assets, liabilities, revenues and expenses. The estimates and judgments we make in connection with our consolidated financial statements are based on historical experience and various other factors we believe are reasonable under the circumstances. Note 1 of

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the notes to the condensed consolidated financial statements lists and describes our significant accounting policies. The following critical accounting policies have a material effect on amounts reported in our consolidated financial statements.

Workers’ Compensation

Our most significant long-term obligation is the obligation to provide workers’ compensation benefits. We are liable under various state statutes for providing workers’ compensation benefits. To fulfill these obligations, we have used self-insurance programs with varying excess insurance levels, and, since June 7, 2002, a high-deductible, fully insured program. The high-deductible, fully insured program is comparable to a self-insured program where the excess insurance threshold equals the deductible level.

We accrue for the present value of certain workers’ compensation obligations as calculated by an independent actuary based upon assumptions for work-related injury and illness rates, discount rates and future trends for medical care costs. The discount rate is based on interest rates on bonds with maturities similar to the estimated future cash flows. The discount rate used to calculate the present value of these future obligations was 5.25% at December 31, 2004. Significant changes to interest rates result in substantial volatility to our consolidated financial statements. If we were to decrease our estimate of the discount rate from 5.25% to 4.25%, all other things being equal, the present value of our workers’ compensation obligation would increase by approximately $3.5 million. A change in the law, through either legislation or judicial action, could cause these assumptions to change. If the estimates do not materialize as anticipated, our actual costs and cash expenditures could differ materially from that currently estimated. Our estimated workers’ compensation liability as of March 31, 2005 was $50.5 million.

Coal Miners’ Pneumoconiosis

We are required under the Federal Mine Safety and Health Act of 1977, as amended, as well as various state statutes, to provide pneumoconiosis (black lung) benefits to eligible current and former employees and their dependents. We provide these benefits through self-insurance programs and, for those claims incurred with last exposure after June 6, 2002, a high-deductible, fully insured program.

An independent actuary has calculated the estimated pneumoconiosis liability based on assumptions regarding disability incidence, medical costs, mortality, death benefits, dependents and interest rates. The discount rate is based on interest rates on bonds with maturities similar to the estimated future cash flows. The discount rate used to calculate the present value of these future obligations was 5.25% at December 31, 2004. Significant changes to interest rates result in substantial volatility to our consolidated financial statements. If we were to decrease our estimate of the discount rate from 5.25% to 4.25%, all other things being equal, the present value of our black lung obligation would increase by approximately $3.3 million. A change in the law, through either legislation or judicial action, could cause these assumptions to change. If these estimates prove inaccurate, the actual costs and cash expenditures could vary materially from the amount currently estimated. Our estimated pneumoconiosis liability as of March 31, 2005 was $26.0 million.

Defined Benefit Pension

The estimated cost and benefits of our non-contributory defined benefit pension plans are determined by independent actuaries, who, with our review and approval, use various actuarial assumptions, including discount rate, future rate of increase in compensation levels and expected long-term rate of return on pension plan assets. In estimating the discount rate, we look to rates of return on high-quality, fixed-income investments. At December 31, 2004, the discount rate used to determine the obligation was 5.5%. Significant changes to interest rates result in substantial volatility to our consolidated financial statements. If we were to decrease our estimate of the discount rate from 5.5% to 4.5%, all other things being equal, the present value of our pension liability would increase by approximately $11.0 million. The rate of increase in compensation levels is determined based upon our long-term plans for such increases. The rate of increase in compensation levels used was 4.0% for the year ended December 31, 2004. The expected long-term rate of return on pension plan assets is based on long-term historical return information and future estimates of long-term investment returns for the target asset allocation of investments that comprise plan assets. The expected long-term rate of return on plan assets used to determine expense in each period was 8.0% for of the year ended December 31, 2004. Significant changes to these rates would introduce substantial volatility to our pension expense. Our pension obligation as of March 31, 2005 was $15.2 million.

Reclamation and Mine Closure Obligation

The SMCRA establishes operational, reclamation and closure standards for all aspects of surface mining as well as many aspects of underground mining. Our total reclamation and mine-closing liabilities are based upon permit requirements and our engineering estimates related to these requirements. Statement No. 143 requires that asset retirement obligations be recorded as a liability based on fair value, which is calculated as the present value of the estimated future cash flows. Our management and engineers periodically review the estimate of ultimate reclamation liability and the expected period in which reclamation work will be performed. In estimating future cash flows, we considered the estimated current cost of reclamation and applied inflation rates and a third party

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profit, as necessary. The third party profit is an estimate of the approximate markup that would be charged by contractors for work performed on our behalf. The discount rate is based on interest rates of bonds with maturities similar to the estimated future cash flow. The estimated liability can change significantly if actual costs vary from assumptions or if governmental regulations change significantly. The actual costs could be different due to several reasons, including the possibility that our estimates could be incorrect, in which case our liabilities would differ. If we perform the reclamation work using our personnel rather than hiring a third party, as assumed under Statement No. 143, then the costs should be lower. If governmental regulations change, then the costs of reclamation will be impacted. Statement No. 143 recognizes that the recorded liability will be different than the final cost of the reclamation and addresses the settlement of the liability. When the obligation is settled, and there is a difference between the recorded liability and the amount of cash paid to settle the obligation, a gain or loss upon settlement is included in earnings. Our asset retirement obligation as of March 31, 2005 was $16.2 million.

Contingencies

We are the subject of, or a party to, various suits and pending or threatened litigation involving governmental agencies or private interests. We have accrued the probable and reasonably estimable costs for the resolution of these claims based upon management’s best estimate of potential results, assuming a combination of litigation and settlement strategies. Unless otherwise noted, management does not believe that the outcome or timing of current legal or environmental matters will have a material impact on our financial condition, results of operations or cash flows. See the notes to the condensed consolidated financial statements for further discussion on our contingencies.

Income Taxes

We account for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes (“Statement No. 109”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Statement No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized. In evaluating the need for a valuation allowance, we take into account various factors, including the expected level of future taxable income. We have also considered, but not relied upon, tax planning strategies in determining the deferred tax asset that will ultimately be realized. If actual results differ from the assumptions made in the evaluation of the amount of our valuation allowance, we record a change in valuation allowance through income tax expense in the period such determination is made.

At December 31, 2004, we had a net deferred tax liability of $34.6 million, which consisted of a total gross deferred tax asset of $107.4 million, a valuation allowance of approximately $61.1 million and a gross deferred tax liability of $80.9 million. The valuation allowance, which includes approximately $14.6 million that was recorded as part of our fresh start entries, provides a reserve for our net operating loss and alternate minimum tax credit carryforwards.

Coal Reserves

There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal reserves. Many of these uncertainties are beyond our control. As a result, estimates of economically recoverable coal reserves are by their nature uncertain. Information about our reserves consists of estimates based on engineering, economic and geological data assembled by our staff and analyzed by Marshall Miller & Associates, Inc. A number of sources of information were used to determine accurate recoverable reserves estimates, including:


	•	currently available geological, mining and property control data and maps;

	•	our own operational experience and that of our consultants;

	•	historical production from similar areas with similar conditions;

	•	previously completed geological and reserve studies;

	•	the assumed effects of regulations and taxes by governmental agencies; and

	•	assumptions governing future prices and future operating costs.

Reserve estimates will change from time to time to reflect, among other factors:

	•	mining activities;

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	•	new engineering and geological data;

	•	acquisition or divestiture of reserve holdings; and

	•	modification of mining plans or mining methods.

Each of these factors may in fact vary considerably from the assumptions used in estimating reserves. For these reasons, estimates of the economically recoverable quantities of coal attributable to a particular group of properties, and classifications of these reserves based on risk of recovery and estimates of future net cash flows, may vary substantially. Actual production, revenue and expenditures with respect to reserves will likely vary from estimates, and these variances could be material. In particular, a variance in reserve estimates could have a material adverse impact on our annual expense for depreciation, depletion and amortization and our annual calculation for potential impairment. For a further discussion of our coal reserves, see “– Reserves.”

Other Supplemental Information

Labor and Turnover

Recruiting, hiring and retaining skilled mine production personnel has become challenging during the past several years. This is due to the aging of the industry workforce and the availability of other suitable positions for potential employees. The current strong market prices have also contributed to a higher level of turnover as competing coal mining companies attempt to increase production.

Based on average employment of production personnel, our gross turnover has been approximately 18.3% during the twelve months ended March 31, 2005. Our net turnover during this period, after considering employees that have left and been rehired, is approximately 7.9%. We believe that our retention of employees is equal to, or better, than other coal mining companies in our operating area.

We are actively working to improve our results in this area including the development of safety and incentive plans that we believe will further reduce our employee turnover and improve employee relations.

Sales Commitments

As of March 31, 2005, we had the following contractual commitments (including long term and short term contracts) to ship coal at a fixed and known price during the period indicated:


	Nine Months Ending December 31, 2005				2006				2007

	Average Price Per Ton		Tons		Average Price Per Ton		Tons		Average Price Per Ton		Tons


Total Sales Commitments	$	41.87		6,665,600	$	40.21		4,694,000	$	38.37		1,630,000

Project Development

We undertake projects to add and replace production, improve productivity and efficiency, and add reserves. Currently, we have several projects underway, including the development of Mine 15 at our McCoy Elkhorn complex, and several projects under consideration, including certain projects described below.

Mine 15 Project

The Mine 15 project involves construction of a mine at our McCoy Elkhorn complex to access what we estimate to be approximately 14 million tons of controlled reserves in the Glamorgan, or Millard, seam. Included in the Mine 15 project are construction of a slope and shaft along with related surface facilities and an upgrade to the adjacent Bevins Branch preparation plant. During 2004, capital expenditures for the Mine 15 project were $3.7 million. We expect the total budget cost for this project to increase modestly from the original budget of $22 million due to higher costs of steel and cement. The excavation has progressed to the point that both the slope and the shaft have now reached the coal seam. The fabrication and installation of the remaining mine infrastructure is expected to be completed before December 31, 2005, and the mine is expected to have very limited production beginning in the fourth quarter of 2005, before ramping up to full annualized production levels of approximately 1.4 to 1.5 million tons by the end of 2006. Due to the

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flexibility of shipping locations in all of the Company’s non-synfuel coal supply agreements, all coal from Mine 15 is considered uncommitted and unpriced.

Test results for coal samples taken from Mine 15 indicate that the coal can be sold as a high quality utility steam coal with average heat content of 13,000 Btu and average sulfur content of less than 1%, during the initial years of mining. We may also use the coal to blend with higher sulfur coal at the McCoy Elkhorn complex. Depending on market conditions, and in certain limited circumstances, we may also sell the coal as a low quality metallurgical coal for blending purposes by other suppliers. We have not determined the percentage of coal that will be allocated to each end-market. We continue to negotiate with mineral owners to add additional contiguous reserves to the project.

Potential Surface Mining Projects

Our operations and engineering teams have identified 41 surface mining projects that merit further review. We currently control more than 75% of these reserves. Sixteen of these projects have current state mine permits, and the Army Corps of Engineers permitting process has already begun on these properties. Our management team expects six projects from this list to be presented for board consideration and potential near-term development.

Potential Preparation Plant Projects

Our operations and engineering teams have developed a list of projects intended to improve the yield of existing preparation plants. These projects are concentrated in the screening and separation areas of the plants. Our management team expects to present the project analysis for board consideration during the second quarter of 2005. If approved, and we proceed, these projects will likely be completed during the first quarter of 2006.

FORWARD-LOOKING INFORMATION

From time to time, we make certain comments and disclosures in reports and statements, including this report, or statements made by our officers, which may be forward-looking in nature. Examples include statements related to our future outlook, anticipated capital expenditures, future cash flows and borrowings, and sources of funding. These forward-looking statements could also involve, among other things, statements regarding our intent, belief or expectation with respect to:


	•	our cash flows, results of operation or financial condition;

	•	the consummation of acquisition, disposition or financing transactions and the effect thereof on our business;

	•	governmental policies and regulatory actions;

	•	legal and administrative proceedings, settlements, investigations and claims;

	•	weather conditions or catastrophic weather-related damage;

	•	our production capabilities;

	•	availability of transportation;

	•	market demand for coal, electricity and steel;

	•	competition;

	•	our relationships with, and other conditions affecting, our customers;

	•	employee workforce factors;

	•	our assumptions concerning economically recoverable coal reserve estimates;

	•	future economic or capital market conditions;

	•	our plans and objectives for future operations and expansion or consolidation; and

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	•	the closing or successful integration of the Triad acquisition.

Any forward-looking statements are subject to the risks and uncertainties that could cause actual cash flows, results of operations, financial condition, cost reductions, acquisitions, dispositions, financing transactions, operations, expansion, consolidation and other events to differ materially from those expressed or implied in such forward-looking statements. Any forward-looking statements are also subject to a number of assumptions regarding, among other things, future economic, competitive and market conditions generally. These assumptions would be based on facts and conditions as they exist at the time such statements are made as well as predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond our control.

We wish to caution readers that forward-looking statements, including disclosures which use words such as “believe,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project,” or their negatives, and similar statements, are subject to certain risks and uncertainties which could cause actual results to differ materially from expectations. These risks and uncertainties include, but are not limited to, the following: a change in the demand for coal by electric utility customers; the loss of one or more of our largest customers; inability to secure new coal supply agreements or to extend existing coal supply agreements at market prices; failure to exploit additional coal reserves, including contiguous reserves to those currently held by Triad; inability to sell the coal from Mine 15 into the metallurgical coal market; failure to diversify our operations; increased capital expenditures; encountering difficult mining conditions; increased compliance costs; bottlenecks or other difficulties in transporting coal to our customers; lack of availability of financing sources; the effects of regulation and competition; additional turnover of employees and independent contractors; the risk that the Company is unable to close the Triad acquisition or to successfully integrate the Triad business; and the risk factors detailed in our Form S-1 registration statement filed with the Securities and Exchange Commission on April 19, 2005, as amended, which factors are incorporated herein by reference.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our $75 million Term Credit Facility has a fixed interest rate and is not sensitive to changes in the general level of interest rates. Our Senior Secured Credit Facility has floating interest rates based on LIBOR or the Base Rate as defined in the credit agreement. We expect that our proposed new senior secured credit facility also will have floating interest rates.

As of March 31, 2005, we had $20 million outstanding under the term component of the Senior Secured Credit Facility. We do not expect to use interest rate swaps to manage this risk. A 100 basis point (1.0%) increase in the average interest rate for our floating rate borrowings would increase our annual interest expense by approximately $0.2 million.

We manage our commodity price risk through the use of long-term coal supply agreements, which we define as contracts with a term of one year or more, rather than through the use of derivative instruments. We believe that the percentage of our sales pursuant to long-term contracts was approximately 80% for the three months ended March 31, 2005.

All of our transactions are denominated in U.S. dollars, and, as a result, we do not have material exposure to currency exchange-rate risks.

We are not engaged in any foreign currency exchange rate or commodity price-hedging transactions and we have no trading market risk.


ITEM 4.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the fiscal quarter covered by this Form 10-Q, we evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures are effective as of the end of such fiscal quarter. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

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Changes in Internal Controls Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the three months ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Beginning with our annual report for the year ending December 31, 2005, Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require us to include an internal control report of management with our annual report on Form 10-K. That report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year and will also include our independent auditors’ evaluation of management’s assessment and the effectiveness of our internal control over financial reporting. We cannot assure you that we will be able to complete the work necessary for our management to issue its management report in a timely manner, or that we will be able to complete any work required for our management to be able to conclude that our internal control over financial reporting is effective. If we fail to timely remedy any deficiencies, significant deficiencies or additional material weaknesses that we or our auditors may identify, we may be unable to accurately report our financial results, detect fraud or comply with the requirements of Section 404. In addition, we can give no assurance that our independent auditors will agree with our management’s assessment or conclude that our internal control over financial reporting is effective.

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PART II
OTHER INFORMATION


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period covered by this report, we issued common stock to the following persons or classes of persons, in reliance upon the exemption contained in Section 4(2) of the Securities Act of 1933, as follows:

Recipient		No. Shares		Date of Issuance		Consideration
Operating and senior management		25,000		January 10, 2005		Services rendered


ITEM 6.	EXHIBITS

The following exhibits are filed herewith:


		Exhibit


	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	31.1

	Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	31.2

	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	32.1

	Certification of Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	32.2

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	James River Coal Company

	By:	/s/ Peter T. Socha

		Peter T. Socha
		Chairman, President and
		Chief Executive Officer

	By:	/s/ Samuel M. Hopkins II

		Samuel M. Hopkins, II
		Vice President and
		Chief Accounting Officer

May 11, 2005

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Virginia		54-1602012
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

901 E. Byrd Street, Suite 1600
Richmond, Virginia		23219
(Address of principal executive offices)		(Zip Code)


	Three Months
	March 31, 2005

Net Income, as reported		$	309
Add: Net stock-based employee compensation expense recorded for restricted and performance based stock grants			358
Deduct: Net stock-based employee compensation expense for restricted and performance based stock grants determined under Black-Scholes option pricing model			(289	)


Pro forma net income		$	378


Income per share:
Basic - as reported		$	0.02

Basic - pro forma		$	0.03


Diluted - as reported		$	0.02

Diluted - pro forma		$	0.03


Estimated enterprise value of the reorganized company	$	155,000
Borrowings under credit facility		(6,400	)
Capital leases assumed		(1,396	)
Cash balance excluded from enterprise value		1,301
Administrative claims payable excluded from enterprise value		(10,214	)

		138,291
Less: new secured debt issued to extinguish prepetition debt		75,000

Fair value of common shares issued to extinguish prepetition debt	$	63,291


Pre-petition bank loan agreement	$	207,807
Pre-petition senior note		37,953
Accrued and unpaid interest		12,234
Terminated interest rate swap		8,434

Total secured		266,428

Promissory notes		5,176
Redeemable preferred stock		8,500
Accounts payable and other		39,347

Total unsecured		53,023


Total liabilities subject to compromise	$	319,451


Liabilities subject to compromise	$	319,451
Less: Assets of rabbi trust transferred to creditors		(3,110	)
Less: New secured debt issued in exchange for pre-petition debt		(75,000	)
Less: Fair value of common shares issued		(63,291	)

Gain on extinguishment of pre-petition claims	$	178,050


	Increase/(Decrease)

Coal inventories		$	1,079
Prepaid royalties			(362	)
Other current assets			(347	)
Land and mineral rights			(57,567	)
Buildings, machinery and equipment			(155,050	)
Mine development costs			(12,984	)
Less accumulated depreciation, depletion, and amortization			219,604
Other long-term assets			(734	)

Total fair value adjustments to identifiable assets		$	(6,361	)


(3)	Contractual terms of certain capital lease agreements were renegotiated during bankruptcy. Obligations under capital leases have been adjusted to reflect the revised terms.

(4)	The liability for black lung benefits has been adjusted to reflect the total discounted benefit obligation.

(5)	The pension liability has been adjusted to reflect the total discounted projected benefit obligation of the plan.

(6)	Deferred income taxes have been adjusted to reflect differences in the book and tax basis of the revalued assets and liabilities of the Company after application of fresh start accounting.

(7)	The equity of the predecessor company, including subscribed shares and accumulated other comprehensive loss, has been eliminated in fresh start accounting.


	March 31, 2005

Senior secured credit facility:
Term loan component	$	20,000
Revolver component		-

Term credit facility		75,000


Total long-term debt		95,000

Less amounts classified as current		3,600


Total long-term debt, less current maturities	$	91,400


	*(a)*	*Senior Secured Credit Facility*

		Effective May 6, 2004, the Company closed a $50 million senior secured credit facility with Wells Fargo Foothill, Inc. (the Senior Secured Credit Facility). This facility was used to repay outstanding amounts and replace letters of credit previously issued under the $20 million debtor-in-possession facility to pay expenses associated with the exit from bankruptcy and to provide liquidity for general corporate purposes. The Senior Secured Credit Facility is comprised of a $30 million revolver component and a $20 million term component. The term loan was fully funded at closing. Borrowings under the revolver component bear interest at LIBOR + 2.5% or the Base Rate (as defined in the credit agreement) + 1.0%. Borrowings under the term component bear interest at LIBOR + 5.25% or the Base Rate + 3.85%. The term of the Senior Secured Credit Facility is five years. Principal payments on the term component of $900,000 per quarter commence on April 1, 2005 and continue through April 1, 2009, with the remaining principal balance due on May 6, 2009. Interest is payable in arrears, on the first day of each month on Base Rate borrowings while interest on LIBOR Rate borrowings is due on the last day of the LIBOR interest period. Advances under the Senior Secured Credit Facility are secured by a first priority lien on substantially all of the Company’s assets, and, except for the Term Credit Facility, the Company may not incur additional debt on the assets securing the Revolving Credit Facility. Advances under the revolver component may not exceed a borrowing base calculation derived as a percentage of eligible assets. The Senior Secured Credit Facility can be terminated with 90 days written notice by paying all outstanding principal, interest and making any prepayment premium payments due. The $30 million revolver component has a prepayment premium of 2.5% of the total revolver commitment for the first year, declining to 2.0% for the second year, 1.5% for the third year and 0.5% for the fourth year. There is not a prepayment premium for the fifth year of the revolver component of the Senior Secured Credit Facility. The $20 million term loan component has a prepayment premium of $200,000 (1.0%) if paid prior to April 30, 2007. There is no prepayment premium after April 30, 2007 for the term loan component.

	*(b)*	*Term Credit Facility*

		The Company also entered into a $75 million term credit facility with the Company’s pre-petition secured lenders (the Term Credit Facility) in partial satisfaction of its prepetition obligations, pursuant to the Plan of Reorganization. The term of the Term Credit Facility is seven years, and the repayment of the Term Credit Facility is secured by a second priority lien on substantially all of the Company’s assets. Except for the Senior Secured Credit Facility, the Company may not incur additional debt on the assets securing the Term Credit Facility. In addition, the Company may not incur any unsecured debt (other than normal trade payables) and may not incur more than $5 million of recourse debt (including the Senior Secured Credit Facility and the Term Credit Facility). There is no scheduled amortization of this facility for the first two years. The notes are payable over seven years with principal repayments of $1.5 million per quarter beginning June 30, 2006 and increasing to $2.5 million per quarter beginning June 30, 2008. All remaining principal and interest is due May 6, 2011. Borrowings under the Term Credit Facility may be prepaid without penalty.

	*(c)*	*Interest Expense and Other*


	Predecessor Company Three Months Ended 03/31/04


Professional fees and administrative expenses		$	1,607
Interest income			(50	)


		$	1,557


(7)	Earnings Per Share

	Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding restricted common stock subject to continuing vesting requirements. Diluted earnings per share is calculated based on the weighted average number of common shares outstanding during the period and, when dilutive, potential common shares from the exercise of stock options and restricted common stock subject to continuing vesting requirements, pursuant to the treasury stock method.

	The following table provides a reconciliation of the number of shares used to calculate basic and diluted earnings per share:


	Successor Company Three Months Ended 3/31/05		Predecessor Company Three Months Ended 3/31/04


Weighted average number of common shares outstanding:
Basic		13,799,994		16,890
Effect of dilutive instruments		951,678		-

Diluted		14,751,672		16,890


	Successor Company Three Months Ended 3/31/05				Predecessor Company Three Months Ended 3/31/04


Service cost		$	527			459
Interest cost			793			723
Expected return on plan assets			(761	)		(608	)
Amortization of prior service cost			—			97
Recognized actuarial loss			—			255

Net periodic benefit cost		$	559			926


(9)	Pneumoconiosis (Black Lung) Benefits

	The expense for black lung benefits consists of the following (amounts in 000’s):


(10)	Definitive Agreement to Acquire Triad Mining, Inc.

	In March 2005, the Company signed a definitive agreement to acquire Triad Mining Inc. (“Triad”) for approximately $75 million, consisting of $64 million in cash and $11 million of Company common stock. Triad operates six surface mines and one underground mine in Southern Indiana.


	Three Months Ended March 31, 2005			Nine Months Ended December 31, 2004

Proven and Probable Reserves beginning of period (1)		207.4			207.2
Coal Extracted		(2.2	)		(6.3	)
Acquisitions (2)		15.4			3.7
Adjustments (3)		1.0			2.8

Proven and Probable Reserves end of period		221.6			207.4