SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.





FORM
10-K





ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934








For
      the fiscal year ended
            Commission
      File NumberDecember
      31, 2008
            000-51129




JAMES
RIVER COAL COMPANY


(Exact
name of registrant as specified in its charter)




Virginia
            
            54-1602012(State
      or other jurisdiction
            
            (I.R.S.
      Employerof
      incorporation or organization)
            
            Identification
      No.)901
      E. Byrd Street, Suite 1600Richmond,
      Virginia
            
            23219(Address
      of principal executive offices)
            
            (Zip
      Code)





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





Securities
      registered pursuant to Section 12(b) of the Act:
            Common Stock, par value $0.01 per shareSeries A Participating Cumulative PreferredStock Purchase RightsName
      of each exchange on which registered:
            The Nasdaq Global Select
    MarketSecurities
      registered pursuant to Section 12(g) of the Act:
            None





Indicate by a check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.


Yes    o             No    ý





Indicate by a check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act.


Yes    o             No    ý





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    ý             No    o





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.


o





Indicate by a check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company.  See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.




Large
      accelerated filer  ý
              Accelerated
      filer  o
              Non-accelerated
      filer  o
              Smaller
      Reporting Company o











Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


Yes    o             No    ý





The aggregate market value of the
common stock held by non-affiliates of the registrant, based upon the closing
sale price of Common Stock, par value $0.01 per share, on June 30, 2008 as
reported on the Nasdaq Global Market, was approximately $1,090,000,000
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 10% of the registrant’s Common Stock).





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    ý             No    o


The number of shares of the
registrant’s Common Stock, par value $.01 per share, outstanding as of
February 15, 2009 was 27,393,493.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Proxy Statement for the registrant’s 2009Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission (the
“SEC”), are incorporated by reference into Part III of this Annual Report on
Form 10-K.











JAMES
RIVER COAL COMPANY





TABLE
OF CONTENTS


FORM
      10-K ANNUAL REPORTPART
      IItem 1.
            Business
            2Item 1A.
            Risk Factors
            16Item 1B.
            Unresolved Staff Comments
            30Item 2.
            Properties
            30Item 3.
            Legal Proceedings
            31Item 4.
            Submission of Matters to a Vote of Security
      Holders
            31PART
      IIItem 5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and
      Issuer Purchases of Equity Securities
            32Item 6.
            Selected Financial Data
            33Item 7.
            Management’s Discussion and
      Analysis of Financial Condition and
      Results ofOperation
            37Item 7A.
            Quantitative and Qualitative Disclosures about Market
      Risk
            54Item 8.
            Financial Statements and Supplementary
    Data
            54Item 9.
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            54Item 9A.
            Controls and Procedures
            55Item 9B.
            Other Information
            55PART
      IIIItem 10.
            Directors, Executive Officers and Corporate
      Governance
            56Item 11.
            Executive Compensation
            56Item 12.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            56Item 13.
            Certain Relationships and Related Transactions, and
      Director Independence
            56Item 14.
            Principal Accounting Fees and Services
            56PART
      IVItem 15.
            Exhibits, Financial Statement Schedules
            57







i






PART
I







Available
Information




The
Company’s website address is http://www.jamesrivercoal.com. The Company makes
available free of charge through its website its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to those reports as soon as reasonably practicable after filing or furnishing
the material to the SEC.   You may read and copy documents the
Company files at the SEC’s public reference room at 100 F Street, NE,
Washington, D.C., 20549.   Please call the SEC at 1-800-SEC-0330
for information on the public reference room.   The SEC maintains
a website that contains annual, quarterly and current reports, proxy statements
and other information that issuers (including the Company) file electronically
with the SEC.   The SEC’s website is http://www.sec.gov.
























1


Item
1.       Business





General
Business





Overview





We mine,
process and sell bituminous, steam- and industrial-grade coal through six
operating subsidiaries (“mining complexes”) located throughout eastern Kentucky
and in southern Indiana.  As of December 31, 2008, our six mining complexesincluded 17 underground mines, 14 surface minesand ten preparation plants,fiveof which have
integrated rail loadout facilities and three of which use a common loadout facility at a separate
location.  As of December
31, 2008, we believe that we controlled approximately 277.1 million tons of
proven and probable coal reserves.At
current production levels, we believe these reserves would support greater than
24years of production.





In 2008,
we produced 11.1 million tons of coal(including
0.2million tons of coal produced in our mines that are operated by contract mine
operators)andwe purchased another
0.2 million tons for resale.  Of the 10.9 million tons we produced
from Company-operated mines, approximately 66% came from underground mines,
while the remaining 34% came from surface mines.In 2008, we generated revenues of $568.5million and had a net loss of
$96.0million.  Approximately 81% of our 2008 revenues were generated from
coal sales to electric utility companies and 19% came from coal sales to
industrial and other companies.  In 2008, Georgia Power Company and South
Carolina Public Service Authority were our largest customers, representing
approximately36% and 12% of our revenues,
respectively.  No other customer accounted for more than 10% of our
revenues.





The coal
that we sell is obtained from three sources:  our Company-operated
mines, mines that are operated by independent contract mine operators, and other
third parties from whom we purchase coal for resale.  Contract mining
and coal purchased from other third parties provide flexibility to increase or
decrease production based on market conditions.  The table below
reflects the amount and percentage of coal obtained from those sources in
2008:





Tons
      (000)
            
            Percentage
      of total
              coal
      obtained by the
              CompanyCoal
      produced from Company-operated mines
            10,872
            
            95.8%Coal
      obtained from mines operated by independent contractors
            240
            
            2.1%Coal
      purchased from other third parties
            243
            
            2.1%11,355
            
            100%





Mining Methods





Our Company-operated and contractor mines produce coal
using different mining methods.  These methods areroom and pillar underground miningandcontour and
point removal surface mining.These methods are described in more detail
below.





Room and Pillar.  In the underground room and pillar method
of mining, continuous mining machines cut five to nine entries into the coal
seam and connect them by driving crosscuts, leaving a series of rectangular
pillars, or columns of coal, to help support the mine roof and control the flow
of air.  Generally, openings are driven 20 feet wide and the pillars
are 40 to 100 feet wide.  As mining advances, a grid-like pattern of
entries and pillars is formed.  When mining advances to the end of a
panel, or section of the mine, retreat mining may begin.  In retreat
mining, as much coal as is feasible is mined from the pillars that were created
in advancing the panel, allowing the roof to cave.  When retreat
mining is completed to the mouth of the panel, the mined panel is
abandoned.





The coal face is cut with continuous mining machines and
the coal is transported from the continuous mining machine to the mine conveyor
belts using either a continuous haulage system, shuttle cars or ram
cars.  The mine conveyor system consists of a series of conveyor
belts, which transport the coal from the active face areas to the
surface.  Once on the surface, the coal is transported to the
preparation plants where it is processed to remove any
impurities.  The coal is then transported to the clean coal stockpiles
or silos from which it is loaded for shipment to our
customers.  Reserve recovery, a measure of the percentage of the total
coal in place that is ultimately produced, using this method of mining typically
dependson the shape of the reserve, the amount of low-cover
areas, and the geological characteristics of the reserve
body.





2


Surface Mining.  Surface mining is used when coal is found
close to the surface.This method involves the removal of
overburden (earth and rock covering the coal) with heavy earth-moving equipment
and explosives, loading out the coal, replacing the overburden and topsoil after
the coal has been excavated and reestablishing vegetation and plant life and
making other improvements that have local community and environmental benefit.
Overburden is typically removed at our mines by either hydraulic shovels or
front-end loaders which place the overburden into large trucks.





In the
Central Appalachia Region (CAPP), we use the contour and highwall surface mining
methods.  Contour and highwall mining is used where removal of all the
overburden overlying a coal seam is either uneconomical or impossible due to
property control or other issues.  With contour mining, a contour cut
is taken along the outcrop of the seam and the coal is removed from the exposed
pit.  Highwall mining can then take place where the seam is exposed in
the highwall.  A highwall miner resembles an underground continuous
miner.  The highwall miner cuts entries into the coal seam up to 10
feet wide and up to 900 feet deep.  The coal is transported to the
surface through the augers and loaded into trucks using a loader.  The
contour area is then reclaimed by returning overburden to the pit and restoring
the mountainside to its approximate original contour.  Reserve
recovery using this method of mining is typically approximately
70%.





As of December 31, 2008, we had 14 surface mines
includingtwocontract operated surface mines.





Underground
Mine Characteristics





Underground
mines are characterized as either “drift” mines or “below drainage”
mines.  Drift mines are mines that are developed into the coal seam at
a point where the seam intersects the surface.  The area where the
seam intersects the surface is commonly known as the
“outcrop.”  Multiple entries are developed into the coal seam and are
used as airways for mine ventilation, passageways for miners and supplies, and
entries for conveyor belts that transport coal from the active production areas
of the mine to the surface.





In below
drainage mines, the coal seam does not intersect the surface in the vicinity of
the mining area.  Therefore, the coal seam must be accessed through
excavated passageways from the surface.  These passageways typically
consist of vertical shafts and angled slopes.  The shafts are
constructed with diameters ranging from 12 to 24 feet and are used as airways
for mine ventilation and passageways for miners and supplies via
elevators.  The slopes, when used to house conveyor belts to transport
the mined coal from the active production areas of the mine to the surface, are
typically driven at an angle of less than 17 degrees from the
horizontal.  In addition, the slopes provide passageways for miners
and supplies, and airways for mine ventilation.





As of
December 31, 2008, we had 15 Company-operated underground mines in operation, of
which 12 were drift mines, and the remaining three were below-drainage
mines.  We also had 2 contract operated underground
mines.





Mining
Operations





Our coal
production is conducted through five mining complexes in the Central Appalachia
Region and one mining complex in the Midwest Region.  We generally do
not own the land on which we conduct our mining operations.  Rather,
our coal reserves are controlled pursuant to leases from third party
landowners.  We believe that greater than 95% and 90% of our coal
reserves in the Central Appalachia Region and Midwest Region, respectively, are
controlled pursuant to leases from third party landowners.  These
leases typically convey mining rights to the coal producer in exchange for a per
ton fee or royalty payment of a percentage of the gross sales price to the
lessor.  The average royalties for coal reserves from our producing
properties were approximately 8.6% and 2.8% of produced coal revenue for the
year ended December 31, 2008 in the Central Appalachia Region and the Midwest
Region, respectively.





All of
our operations are located on or near public highways and receive electrical
power from commercially available sources.  Existing facilities and
equipment are maintained in good working condition and are continuously updated
through capital expenditure investments.


3





The
following table provides summary information on our mining complexes as of
December 31, 2008:








Number
      and Type of Mines
            
            Quality
      of Shipments for the
              year
      ended 2008Mining
      Complex
            Underground
            
            Surface (S)
              and
              Highwall
              (HW)
            
            Total
            Tons
      Shipped (000’s)
            Average
              Sulfur
              Content
            
            Average
              Ash
              Content
            
            Average
              BTU
              ContentCentral
      AppalachiaBell
      County Coal Corporation
            2
            
            -
            
            2
            760
            1.6
            
            9.3
            
            12,771Bledsoe
      Coal Corporation
            4
            
            1S/1HW (1)
            
            5
            2,266
            1.4
            
            11.2
            
            12,254Blue
      Diamond Coal Corporation
            3
            
            2S/1HW
      (1)
            
            5
            1,903
            0.9
            
            9.0
            
            12,807Leeco,
      Inc.
            1
            
            2S
      /1HW (1)
            
            3
            1,253
            0.8
            
            10.3
            
            12,715McCoy
      Elkhorn Coal Corporation
            6
            
            2S
            
            8
            2,088
            1.6
            
            9.2
            
            12,723MidwestTriad
      Mining, Inc
            1
            
            7S
            
            8
            3,105
            2.8
            
            8.8
            
            11,284




(1) Highwall Miner operated
in conjunction with surface mining.





The
following summarizes additional information concerning each of our six mining
complexes:





Bell County.  The
Bell County complex is located in Bell County in eastern Kentucky, and consists
of two Company-operated underground mines.  We use room and pillar
mining to mine the Buckeye Springs and Garmedia seams of coal.  Coal
is processed at our preparation plant and loaded into railcars via an integrated
four-hour unit train loadout that is
serviced by both the CSX and Norfolk Southern railroads.  As of
December 31, 2008, we employed 124 mining and support personnel at this
complex.





Bledsoe.  The
Bledsoe complex is located in Leslie and Harlan counties in eastern Kentucky,
and consists of four Company-operated underground mines and one Company-operated
surface mine with a contractor operated highwall miner.  We use room
and pillar mining to mine the Hazard #4 seam of coal at this complex for our
underground mine, and our surface mines use the contour method and/or the
highwall mining method to mine Hazard Seams #7, #10, #11 and
#12.  Coal is processed at one of two preparation plants and loaded
into railcars at a separate location via a four-hour unit train loadout on the
CSX railroad.  As of December 31, 2008, we employed 358 mining and
support personnel at this complex.





Blue Diamond.  The
Blue Diamond complex is located in Leslie, Perry and Letcher counties in eastern
Kentucky, and consists of three Company-operated underground mines, one
Company-operated surface mines and one contractor-operated surface mine with a
contractor operated highwall miner.  Our Company-operated underground
mines use room and pillar mining to mine the Hazard #4.  The surface
mines use the contour method and/or the highwall mining method to mine the #9,
#5A, and #7 seams and our contract mine operator uses the same method to mine the Leatherwood
seam.  Coal is processed at our preparation plant, and loaded into
railcars via an integrated four-hour unit train loadout on the CSX
railroad.  As of December 31, 2008, we employed 299 mining and support
personnel at this complex.





Leeco.  The Leeco
complex is located in Knott and Perry counties in eastern Kentucky, and consists
of one Company-operated underground mine and two Company-operated surface mine,
one of which is operated with a highwall miner.  Our underground mine
uses room and pillar mining to mine the Amburgy seam of coal and our surface
mine uses the contour and highwall mining methods to mine the Hazard #8 and #9
seams.  Coal is processed at our preparation plant and loaded into
railcars via an integrated four-hour unit train loadout on the CSX
railroad.  As of December 31, 2008, we employed 254 mining and support
personnel at this complex.


4





McCoy Elkhorn.  The
McCoy Elkhorn complex is located in Pike and Floyd counties in eastern Kentucky,
and consists of five Company-operated underground mines, one contractor operated
underground mine, one Company-operated surface mine and one contractor operated
surface mine.  We use room and pillar mining to mine the Millard,
Elkhorn #2, Elkhorn #3, and Pond Creek seams of coal.  Coal is
processed at one of our two preparation plants and loaded into railcars via
integrated four-hour unit train loadouts on the CSX railroad.  As of
December 31, 2008, we employed 367 mining and support personnel at this
complex.





Triad.  The Triad
complex is located in Pike and Knox counties in southern Indiana and consists of
seven surface mines and one underground mine, all of which we operate.
 We use room and pillar mining to mine the Springfield seam of coal, and
use the surface mine  method to mine multiple seams, including the
Danville, Millersburg, Hymera, Bucktown and Springfield seams.  Coal is
processed at one of three active preparation plants and loaded into trucks for
delivery to the customer or by rail at our Switz City loadout.  The Switz
City loadout is serviced by Indiana Railroad and the Indiana Southern
Railroad.  As of December 31, 2008, we employed approximately 282
mining and support personnel at this complex.





Contract
mining represented approximately 2.1% of our coal production in the year ended
December 31, 2008. Each mining complex monitors its contract mining operations
and provides geological and engineering assistance to the contract mine
operators.  The contract mine operators generally provide their own
equipment and operate the mines using their employees.  Independent
contract mine operators are paid a fixed rate for each ton of saleable
product.  We are primarily responsible for the reclamation activities
involved with all contractor-operated mines.  Contractors that operate
surface mines, however, typically are contractually obligated to perform, on our
behalf, the reclamation activities associated with the mines they
operate.  Our relationships with contract mine operators typically can
be cancelled by either party without penalty by giving between 30 and 60 days
notice.





Reserves





We have
an ongoing mineral development drilling and exploration program on our coal
properties.  The purpose of the drilling and exploration program is to
assist us with planning our mining activities and to better assess our coal
reserves.  In April 2004, we asked Marshall Miller & Associates,
Inc. (“MM&A”) to prepare a detailed study of our reserves in Central
Appalachia as of March 31, 2004 based on all of our geologic information,
including our updated drilling and mining data.  For the Triad
properties MM&A also prepared a detailed study of Triad’s reserves as of
February 1, 2005 for the reserves obtained in the acquisition of Triad and as of
April 11, 2006 for 15.8 million tons of reserves acquired in the second quarter
of 2006.   We have used MM&A’s March 31, 2004 study
as the basis for our current internal estimate of our Central Appalachia
reserves and MM&A’s February 1, 2005 and April 11, 2006 studies as the
basis for our current internal estimate of our Midwest reserves (collectively
the “MM&A studies”).





The coal
reserve studies conducted by MM&A were planned and performed to obtain
reasonable assurance of our subject demonstrated (proven plus probable)
reserves.  In connection with the studies, 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.





After
reviewing the maps and information we supplied, MM&A prepared an independent
mapping and estimate of our demonstrated reserves using methodology outlined in
U.S. Geological Survey Circular 891 and SEC Industry Guide
7.  MM&A developed reserve estimation criteria to assure that the
basic geologic characteristics of the reserves (e.g., minimum coal thickness
and wash recovery, interval between deep mineable seams, mineable area tonnage
for economic extraction, etc.) are in reasonable conformity with present and
recent mine operation capabilities on our various properties.





MM&A
has not conducted a coal reserve study on our December 31, 2008 reserve
estimate.  We continue to have an ongoing mineral development drilling
and exploration program on our coal properties and plan to update our third
party reserve study from time to time.  Any future negative changes in
our reserves could have a material adverse impact on our depreciation, depletion
and amortization expense.  A material adverse impact could also lead
to a charge for impairment of the value of our coal property
assets.





As of
December 31, 2008,we
estimated that we controlled approximately 235.1 million tons of proven
and probable coal reserves in Central Appalachia and 42.0 millions tons of
proven and probable coal reserves in the Midwest.


5





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 have been
prepared using industry-standard methodology to provide reasonable assurance
that the reserves are recoverable, considering technical, economic and legal
limitations.  Although the MM&A studies found our reserves to be
reasonable (notwithstanding unforeseen geological, market, labor or regulatory
issues that may affect the operations), MM&A’s did not include an economic
feasibility study of our reserves.  In accordance with standard industry
practice, we have performed our own economic feasibility analysis for our
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 in
“Critical Accounting Estimates – Coal Reserves”.





The
following table provides information on our mining complexes.  Except
as noted, the reserve and quality information is based on the MM&A
studies:






Proven
      & Probable Reserves
              (1)
              (millions
      of tons)
            
            
            
            
            
            Approximate
      Overall
              Reserve
      Quality
              (2),
      (3)Mining Complex
            
            As
      of
              Most
              Recent
      MM&A Studies (3)
            
            
            As
      of
              December
      31,
              2008 (4)
            
            
            Estimated
              Years
      of
              Reserve
      Life
              Based
      on 2008
              Production
      Levels
            
            
            Ash
              Content
      (%)
            
            
            Sulfur
              Content
              (%)
            
            
            Heat
      Value
              (Btu/lb.)Central
      AppalachiaBell
      County
            
            
            12.5
            
            
            
            10.7
            
            
            
            17.1
            
            
            
            5.1
            
            
            
            1.0
            
            
            
            13,500Bledsoe
            
            
            59.1
            
            
            
            55.6
            
            
            
            25.0
            
            
            
            7.8
            
            
            
            1.2
            
            
            
            13,000Blue
      Diamond
            
            
            66.2
            
            
            
            79.9
            
            
            
            43.2
            
            
            
            4.7
            
            
            
            1.1
            
            
            
            13,700Leeco
            
            
            35.7
            
            
            
            54.2
            
            
            
            43.9
            
            
            
            7.0
            
            
            
            1.2
            
            
            
            13,200McCoy
      Elkhorn
            
            
            33.8
            
            
            
            34.7
            
            
            
            17.0
            
            
            
            5.7
            
            
            
            1.6
            
            
            
            13,300Total/Average
            
            
            207.3
            
            
            
            235.1
            
            
            
            29.2
            
            
            
            6.3
            
            
            
            1.3
            
            
            
            13,300MidwestTriad
            
            
            33.4
            
            
            
            42.0
            
            
            
            13.5
            
            
            
            8.8
            
            
            
            3.2
            
            
            
            12,000





(1)
            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 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.


6





(2)
            Ash
      and sulfur content is expressed as the percent by weight of those
      constituents in the coal sample compared to the total weight of the sample
      being tested.  Heat value is expressed as Btu per pound in the
      coal based on laboratory testing of coal samples.  The samples
      are typically obtained from exploratory core borings placed at strategic
      locations within the coal reserve area.  Approximately 82% of
      the reserve tons have representative samples (degree of representation
      varies from area to area) and 18% of the reserve tons have no
      site-specific samples (and are therefore not included in the overall
      quality estimate).  The samples are sent to accredited
      laboratories for testing under protocols established by the American
      Society of Testing and Materials (ASTM).  The estimated overall
      quality values are derived by a multiple step process, including: a) for
      each mine or reserve area, an arithmetic average quality (dry basis) was
      prepared to represent the coal tons within the area, based on samples from
      the area; b) the overall quality of reserves for each mine complex was
      determined by performing a tonnage-weighted average of the average quality
      of all mine and reserve areas within the division; and c) the resulting
      dry basis overall quality was converted to wet product basis to reflect
      its anticipated moisture content at the time of sale.  The
      actual quality of the shipped coal may vary from these estimates due to
      factors such as: a) the particle size of the coal fed to the plant; b) the
      specific gravity of the float media in use at the preparation plant; c)
      the type of plant circuit(s); d) the efficiency of the plant circuit(s);
      e) the moisture content of the final product; and f) customer
      requirements.





(3)
            For
      the CAPP region, represents reserve information for our mining complexes
      as of March 31, 2004.  For  the Midwest region,
      represents weighted average reserve information as of February 1, 2005 and
      April 11, 2006, for the reserves obtained on the acquisition of the Triad
      mining complex and for a lease entered into during 2006,
      respectively.  The reserve information is based on the
      independent reserve studies conducted by
  MM&A.





(4)
            Represents
      the Company’s estimate of reserves at December 31, 2008 based on
      additional information or reserves obtained from exploration and
      acquisition activities, production activities or discovery of new geologic
      information.  We calculated the adjustments to the reserves in
      the same manner, and based on the same assumptions and qualifications,
      as used in the MM&A studies described above, but these December
      31, 2008 estimates have not been reviewed by
  MM&A.








Processing
and Transportation





Coal from
each of our mine complexes is transported by conveyor belt or by truck to one of
our ten preparation plants or directly to one of our load-outs, all of which are
in close proximity to our mining operations.  These preparation plants
remove impurities from the run-of-mine coal (the raw coal that comes directly
from the mine) and offer the flexibility to blend various coals and coal
qualities to meet specific customer needs.  We regularly upgrade and
maintain all of our preparation plants to achieve a high level of coal cleaning
efficiency and maintain the necessary capacity.





In
Central Appalachia, substantially all of our coal is shipped by train and sold
f.o.b. the railcar at the point of loading; transportation costs are normally
borne by the purchaser.  In addition to our well-positioned unit train
loadout facilities on the CSX Corporation railroad, our Bell County mining
complex has dual service provided by the CSX and Norfolk Southern Corporation
railroads in Bell County, Kentucky.





In the
Midwest, coal is shipped by train and by truck to our customers.  The
trucked coal is primarily sold f.o.b delivery point with transportation costs
borne by either the customer or us.  Coal delivered by train is sold
f.o.b. the railcar at the point of loading, with transportation costs normally
borne by the purchaser.  Our Triad mining complex has rail service
provided by Indiana Railroad and Indiana Southern Railroad.





Our
mining complexes are supported by personnel located in London and Lexington,
Kentucky who provide engineering and permitting assistance, project management,
land management and lease administration, coal quality control and quality
reporting, accounting and purchasing support, and railroad transportation
scheduling services.


7




Customers
and Coal Contracts




As is
customary in the coal industry, we regularly enter into long-term contracts
(which we define as contracts with terms of one year or longer) with many of our
customers.  These arrangements allow customers to secure a supply for
their future needs and provide us with greater predictability of sales volume
and sales prices.  In 2008, we generated approximately 57% of our
total revenues from long-term contracts to sell coal to electric
utilities.




For the
year ended December 31, 2008, Georgia Power Company (36%) and South Carolina
Public Service Authority (12%) were our largest customers by
revenues.  No other customer accounted for more than 10% of
revenues.




The terms
of our contracts result from a bidding and negotiation process with our
customers.  Consequently, the terms of these contracts often vary
significantly in many respects.  Our long-term supply contracts
typically contain one or more of the following pricing mechanisms:




·
            Fixed
      price contracts;





·
            Annually
      negotiated prices that reflect market conditions at the time;
      or





·
            Base-price-plus-escalation
      methods that allow for periodic price adjustments based on fixed
      percentages or, in certain limited cases, pass-through of actual cost
      changes.




A limited
number of our contracts have features of several contract types, such as
provisions that allow for renegotiation of prices on a limited basis within a
base-price-plus-escalation agreement.  Such re-opener provisions allow
both the customer and us an opportunity to adjust prices to a level close to
then current market conditions.  Each contract is negotiated
separately, and the triggers for re-opener provisions differ from contract to
contract.  Some of our existing contracts with re-opener provisions
adjust the contract price to the market price at the time the re-opener
provision is triggered.  Re-opener provisions could result in early
termination of a contract or a reduction in the volume to be purchased if the
parties were to fail to agree on price.




Our
long-term supply contracts also typically contain force majeure provisions
allowing for the suspension of performance by the customer or us for the
duration of specified events beyond the control of the affected party, including
labor disputes.  Some contracts may terminate upon continuance of an
event of force majeure for an extended period, which are generally three to six
months.  Contracts also typically specify minimum and maximum quality
specifications regarding the coal to be delivered.  Failure to meet
these conditions could result in substantial price reductions or termination of
the contract, at the election of the customer.  Although the volume to
be delivered under a long-term contract is stipulated, we, or the buyer, may
vary the timing of delivery within specified limits.




The terms
of our long-term coal supply contracts also vary significantly in other
respects, including: coal quantity parameters, flexibility and adjustment
mechanisms, permitted sources of supply, treatment of environmental constraints,
options to extend, suspension, termination and assignment provisions, and
provisions regarding the allocation between the parties of the cost of complying
with future government regulations.




Competition




The U.S.
coal industry is highly competitive, with numerous producers in all coal
producing regions.  We compete against various large producers and
hundreds of small producers.  According to the U.S. Department of
Energy, the largest producer produced approximately 16.8% (based on tonnage
produced) of the total United States production in 2007, the latest year for
which government statistics are available.  The U.S. Department of
Energy also reported 1,374 active coal mines in the United States in
2007.  Demand for our coal by our principal customers is affected
by:




·
            the
      price of competing coal and alternative fuel supplies, including nuclear,
      natural gas, oil and renewable energy sources, such as hydroelectric
      power;





·
            coal
      quality;





·
            transportation
      costs from the mine to the customer;
and


8





·
            the
      reliability of supply.





Continued
demand for our coal and the prices that we obtain are affected by demand for
electricity, environmental and government regulation, technological developments
and the availability and price of competing coal and alternative fuel
supplies.





Employees





At
December 31, 2008, we had 1,751 employees.   None of our
employees are currently represented by collective bargaining
agreements.  Relations with our employees are generally
good.





Government
Regulation




The coal
mining industry is subject to extensive regulation by federal, state and local
authorities on matters such as:




·
            employee
      health and safety;




·
            permitting
      and licensing requirements;




·
            air
      quality standards;




·
            water
      quality standards;




·
            plant,
      wildlife and wetland protection;




·
            blasting
      operations;




·
            the
      management and disposal of hazardous and non-hazardous materials generated
      by mining operations;




·
            the
      storage of petroleum products and other hazardous
    substances;




·
            reclamation
      and restoration of properties after mining operations are
      completed;




·
            discharge
      of materials into the environment, including air emissions and wastewater
      discharge;




·
            surface
      subsidence from underground mining;
and




·
            the
      effects of mining operations on groundwater quality and
      availability.




Complying
with these requirements, including the terms of our permits, has had, and will
continue to have, a significant effect on our costs of operations. We could
incur substantial costs, including clean up costs, fines, civil or criminal
sanctions and third party claims for personal injury or property damage as a
result of violations of or liabilities under these laws and
regulations.




In
addition, the utility industry, which is the most significant end-user of coal,
is subject to extensive regulation regarding the environmental impact of its
power generation activities, which could affect demand for our coal. The
possibility exists that new legislation or regulations may be adopted which
would have a significant impact on our mining operations or our customers’
ability to use coal and may require us or our customers to change operations
significantly or incur substantial costs.




Numerous
governmental permits and approvals are required for mining operations. In
connection with obtaining these permits and approvals, we are, or may be,
required to prepare and present to federal, state or local authorities data
pertaining to the effect or impact that any proposed exploration for or
production of coal may have upon the environment, the public, historical
artifacts and structures, and our employees’ health and safety. The requirements
imposed by such authorities may be costly and time-consuming and may delay
commencement or continuation of exploration or production operations. Future
legislation and administrative regulations may emphasize the protection of the
environment and health and safety and, as a consequence, our activities may be
more closely regulated. Such legislation and regulations, as well as future
interpretations of existing laws, may require substantial increases in our
equipment and operating costs and delays, interruptions or a termination of
operations, the extent of which cannot be predicted.




9


While it
is not possible to quantify the costs of compliance with all applicable federal
and state laws, those costs have been and are expected to continue to be
significant. We estimate that we will make expenditures of approximately $10.0
million and $0.9 million for environmental control facilities and complying with
safety regulations in 2009 and 2010, respectively. These costs are in addition
to reclamation and mine closing costs and the costs of treating mine water
discharge, when necessary. Compliance with these laws has substantially
increased the cost of coal mining, but is, in general, a cost common to all
domestic coal producers.




Mine
Health and Safety Laws




Stringent
health and safety standards were imposed by federal legislation when the Federal
Coal Mine Safety and Health Act of 1969 was adopted. The Federal Mine Safety and
Health Act of 1977, which significantly expanded the enforcement of safety and
health standards of the Coal Mine Safety and Health Act of 1969, imposes safety
and health standards on all mining operations. Regulations are comprehensive and
affect numerous aspects of mining operations, including training of mine
personnel, mining procedures, blasting, the equipment used in mining operations
and other matters. The Federal Mine Safety and Health Administration monitors
compliance with these federal laws and regulations and can impose under recently
enacted regulations maximum penalties of up to $220,000 for certain violations,
as well as closure of the mine. In addition, certain portions of the Coal Mine
Safety and Health Act of 1969 and the Federal Mine Safety and Health Act of
1977, the Black Lung Benefits Revenue Act of 1977 and the Black Lung Benefits
Reform Act of 1977, as amended in 1981, require payments of benefits to disabled
coal miners with black lung disease and to certain survivors of miners who die
from black lung disease.




In 2001,
Kentucky made significant changes to its mining laws. A new independent agency,
the Kentucky Mine Safety Review Commission, was created to assess penalties
against anyone, including owners or part owners (defined as anyone owning one
percent or more shares of publicly traded stock), whose intentional violations
or order to violate mine safety laws place miners in imminent danger of serious
injury or death. Mine safety training and compliance with state statutes and
regulations related to coal mining is monitored by the Kentucky Office of Mine
Safety and Licensing. The Commission can impose a penalty of up to $10,000 per
violation, as well as suspension or revocation of the mine license.




Increased
scrutiny of coal mining in general and underground coal mining in particular has
led to new legislation.   Legislation has been enacted at the state
and federal level that creates requirements for maintaining caches of
self-contained self-rescuers throughout underground mines; equipping all
underground miners with wireless communications devices and tracking devices;
and in some cases, installing cable lifelines from the mine portal to all
sections of the mine for assistance in emergency
escape.  Additionally, new requirements for prompt reporting of
accidents and increased fines and penalties for violation of these and other
regulations have been enacted.  The Federal Mine Safety and Health
Administration issued final regulations in December 2006 that place new or
amended requirements on all underground mines relating to the storage and use of
self-contained self-rescuers, evacuation training for miners, the installment
and maintenance of lifelines and notification of MSHA in the event of an
accident.  In addition, new Federal Mine Safety and Health
Administration regulations issued in December 2008 include requirements for
providing refuge alternatives and improving flame-resistant conveyor belts and
other fire protection measures.




It is our
responsibility to our employees to provide a safe and healthy environment
through training, communication, following and improving safety standards and
investigating all accidents, incidents and losses to avoid reoccurrence. The
combination of federal and state safety and health regulations in the coal
mining industry is, perhaps, the most comprehensive system for protection of
employee safety and health affecting any industry. Most aspects of mine
operations are subject to extensive regulation. This regulation has a
significant effect on our operating costs. However, our competitors are subject
to the same level of regulation.




10


Black
Lung Legislation




Under the
federal Black Lung Benefits Act (as amended) (the “Black Lung Act”), each coal
mine operator is required to make black lung benefits or contribution payments
to:




·
            current
      and former coal miners totally disabled from black lung
      disease;




·
            certain
      survivors of a miner who dies from black lung disease or pneumoconiosis;
      and




·
            a
      trust fund for the payment of benefits and medical expenses to any
      claimant whose last mine employment was before January 1, 1970, or where a
      miner’s last coal employment was on or after January 1, 1970 and no
      responsible coal mine operator has been identified for claims, or where
      the responsible coal mine operator has defaulted on the payment of such
      benefits.




Federal
black lung benefits rates are periodically adjusted according to the percentage
increase of the federal pay rate.




In
addition to the Black Lung Act, we also are liable under various state statutes
for black lung claims. To a certain extent, our federal black lung liabilities
are reduced by our state liabilities. Our total (federal and state) black lung
benefit liabilities, including the current portions, totaled approximately $30.6
million at December 31, 2008. These obligations were unfunded at December 31,
2008.




The
United States Department of Labor issued a final rule, effective January 19,
2001, amending the regulations implementing the Black Lung Act. The amendments
give greater weight to the opinion of the claimant’s treating physician, expand
the definition of black lung disease and limit the amount of medical evidence
that can be submitted by claimants and respondents. The amendments also alter
administrative procedures for the adjudication of claims, which, according to
the Department of Labor, results in streamlined procedures that are less formal,
less adversarial and easier for participants to understand. These and other
changes to the black lung regulations could significantly increase our exposure
to federal black lung benefits liabilities. Experience to date related to these
changes is not sufficient to determine the impact of these changes. The National
Mining Association challenged the amendments but the courts, to date, with minor
exception, affirmed the rules. However, the decision left many contested issues
open for interpretation. Consequently, we anticipate increased litigation until
the various federal District Courts have had an opportunity to rule on these
issues.




In recent
years, proposed legislation on black lung reform has been introduced in, but not
enacted by, Congress and the Kentucky legislature. It is possible that
legislation on black lung reform will be reintroduced for consideration by these
legislative bodies. If any of the proposals that have been introduced are
passed, the number of claimants who are awarded benefits could significantly
increase. Any such changes in black lung legislation, if approved, or in state
or federal court rulings, may adversely affect our business, financial condition
and results of operations.




Workers’
Compensation




We are
required to compensate employees for work-related injuries. Our accrued workers’
compensation liabilities, including the current portion, were $55.8 million at
December 31, 2008. These obligations are unfunded. Our expense for workers’
compensation was $10.8 million and $9.5 million in 2008 and 2007,
respectively.  Both the federal government and the states in which we
operate consider changes in workers’ compensation laws from time to time. Such
changes, if enacted, could adversely affect us.




Environmental
Laws and Regulations




We are
subject to various federal environmental laws and regulatory entities,
including:




·
            the
      Surface Mining Control and Reclamation Act of
  1977;




·
            the
      Clean Air Act;




11


·
            the
      Clean Water Act;




·
            the
      Toxic Substances Control Act;




·
              the
      Comprehensive Environmental Response, Compensation and Liability
      Act;




·
            the
      U.S. Army Corps of Engineers; and




·
            the
      Resource Conservation and Recovery
Act.




We are
also subject to state laws of similar scope in each state in which we
operate.




These
environmental laws require reporting, permitting and/or approval of many aspects
of coal operations. Both federal and state inspectors regularly visit mines and
other facilities to ensure compliance. We have ongoing compliance and permitting
programs designed to ensure compliance with such environmental
laws.




Given the
retroactive nature of certain environmental laws, we have incurred and may in
the future incur liabilities, including clean-up costs, in connection with
properties and facilities currently or previously owned or operated as well as
sites to which we or our subsidiaries sent waste materials.




Surface
Mining Control and Reclamation Act (SMCRA)




The
SMCRA, and its state counterparts, establish operational, reclamation and
closure standards for all aspects of surface mining as well as many aspects of
underground mining. The Act requires that comprehensive environmental protection
and reclamation standards be met during the course of and following completion
of mining activities. Permits for all mining operations must be obtained from
the Federal Office of Surface Mining Reclamation and Enforcement or, where state
regulatory agencies have adopted federally approved state programs under the
Act, the appropriate state regulatory authority.




The SMCRA
and similar state statutes, among other things, require that mined property be
restored in accordance with specified standards and approved reclamation plans.
The mine operator must submit a bond or otherwise secure the performance of
these reclamation obligations. The earliest a reclamation bond can be fully
released is five years after reclamation has been achieved. All states impose on
mine operators the responsibility for repairing or compensating for damage
occurring on the surface as a result of mine subsidence, a possible consequence
of underground mining. In addition, the Abandoned Mine Reclamation Fund, which
is part of the SMCRA, imposes a tax on all current mining operations, the
proceeds of which are used to restore unreclaimed mines closed before 1977. The
maximum tax is $0.315 per ton on surface mined coal and $0.135 per ton on coal
produced by underground mining.




Statement
of Financial Accounting Standards No. 143 (“Statement No. 143”) provides the
guidance to account for the costs related to the closure of mines and the
reclamation of the land upon exhaustion of coal reserves. This statement
requires the fair value of an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The present value of the estimated asset retirement costs are capitalized
as part of the carrying amount of the long-lived asset. Asset retirement
obligations primarily relate to the closure of mines and the reclamation of the
land upon exhaustion of coal reserves. At December 31, 2008, we had accrued
$41.5 million related to estimated mine reclamation costs. The amounts recorded
are dependent upon a number of variables, including the amount and timing of
estimated future retirement costs, estimated proven reserves, assumptions
involving profit margins, inflation rates, and the assumed credit-adjusted
risk-free interest rate.




Our
future operating results would be adversely affected if these accruals were
determined to be insufficient. These obligations are unfunded. The amount that
was expensed for the year ended December 31, 2008 was $2.8 million, while the
related cash payment for such liability during the same period was $1.1
million.




12


We also
lease some of our coal reserves to third-party operators. Although specific
criteria varies from state to state as to what constitutes an “owner” or
“controller” relationship, under the federal SMCRA, responsibility for
reclamation or remediation, unabated violations, unpaid civil penalties and
unpaid reclamation fees of independent contract mine operators can be imputed to
other companies which are deemed, according to the regulations, to have “owned”
or “controlled” the contract mine operator. Sanctions against the “owner” or
“controller” are quite severe and can include being blocked, nationwide, from
receiving new permits, or amendments and revisions to existing permits, and
revocation, rescission and/or suspension of any permits that have been issued
since the time of the violations or, in the case of civil penalties and
reclamation fees, since the time such amounts became due.




Clean
Air Act




The
federal Clean Air Act and similar state laws and regulations, which regulate
emissions into the air, affect coal mining and processing operations primarily
through permitting and/or emissions control requirements. In addition, the
Environmental Protection Agency (the “EPA”) has issued certain, and is
considering further, regulations relating to fugitive dust and particulate
matter emissions that could restrict our ability to develop new mines or require
us to modify our operations. The EPA has adopted stringent National Ambient Air
Quality Standards for particulate matter, which may require some states to
change existing implementation plans for particulate matter. Because coal mining
operations and plants burning coal emit particulate matter, our mining
operations and utility customers are likely to be directly affected when the
revisions to the National Ambient Air Quality Standards are implemented by the
states. Regulations under the Clean Air Act may restrict our ability to develop
new mines or could require us to modify our existing operations, and may have a
material adverse effect on our financial condition and results of
operations.




The Clean
Air Act also indirectly affects coal mining operations by extensively regulating
the air emissions of coal-fired electric power generating plants. Coal contains
impurities, such as sulfur, mercury and other constituents, many of which are
released into the air when coal is burned. New environmental regulations
governing emissions from coal-fired electric generating plants could reduce
demand for coal as a fuel source and affect the volume of our sales. For
example, the federal Clean Air Act places limits on sulfur dioxide emissions
from electric power plants. In order to meet the federal Clean Air Act limits
for sulfur dioxide emissions from electric power plants, coal users need to
install scrubbers, use sulfur dioxide emission allowances (some of which they
may purchase), blend high sulfur coal with low sulfur coal or switch to low
sulfur coal or other fuels. The cost of installing scrubbers is significant and
emission allowances may become more expensive as their availability declines.
Switching to other fuels may require expensive modification of existing
plants.




The EPA
has also adopted new federal rules intended to reduce the interstate transport
of fine particulate matter and ozone through reductions in sulfur dioxides and
nitrogen oxides through the eastern United States.  The reductions
were to be implemented in stages, some through a market-based cap-and-trade
program. Such new regulations would likely require some power plants to install
new equipment, at substantial cost, or discourage the use of certain coals
containing higher levels of mercury.  The particular rules introduced
by the EPA in March 2005 were subsequently struck down by the U.S. Court of
Appeals for the D.C. Circuit on July 11, 2008.  On December 23, 2008,
the U.S. Court of Appeals for the D.C. Circuit remanded consolidated cases to
the EPA without vacatur of the Clean Air Interstate Rule in order that the EPA
could remedy flaws in the Rule. The EPA continues to address the issues raised
in the Court’s opinions issued on July 11, 2008 and December 23,
2008.  New and proposed reductions in emissions of sulfur dioxides,
nitrogen oxides, particulate matter or various greenhouse gases may require the
installation of additional costly control technology or the implementation of
other measures, including trading of emission allowances and switching to other
fuels.




Congress
and several states are now considering legislation, to further control air
emissions of multiple pollutants from electric generating facilities and other
large emitters. These new and proposed reductions will make it more costly to
operate coal-fired plants and could make coal a less attractive fuel alternative
in the planning and building of utility power plants in the future. To the
extent that any new and proposed requirements affect our customers, this could
adversely affect our operations and results.




Along
with these regulations addressing ambient air quality, a regional haze program
initiated by the EPA to protect and to improve visibility at and around national
parks, national wilderness areas and international parks may restrict the
construction of new coal-fired power plants whose operation may impair
visibility at and around federally protected areas and may require some existing
coal-fired power plants to install additional control measures designed to limit
haze-causing emissions. These requirements could limit the demand for coal in
some locations.




13


The
United States Department of Justice, on behalf of the EPA, has filed lawsuits
against several investor-owned electric utilities and brought an administrative
action against one government-owned utility for alleged violations of the Clean
Air Act. Some of these lawsuits have settled, requiring the utilities to pay
penalties, install pollution control equipment and/or undertake other emission
reduction measures, and the remaining lawsuits or future lawsuits could require
the utilities involved to take similar steps, which could adversely impact their
demand for coal.




Any
reduction in coal’s share of the capacity for power generation could have a
material adverse effect on our business, financial condition and results of
operations. The effect such regulations, or other requirements that may be
imposed in the future, could have on the coal industry in general and on us in
particular cannot be predicted with certainty.




We
believe we have obtained all necessary permits under the Clean Air Act. We
monitor permits required by operations regularly and take appropriate action to
extend or obtain permits as needed. Our permitting costs with respect to the
Clean Air Act are typically less than $100,000 per year.




Framework
Convention On Global Climate Change




The
United States and more than 160 other nations are signatories to the 1992 United
Nations Framework Convention on Climate Change, commonly known as the Kyoto
Protocol, which is intended to reduce or offset emissions of greenhouse gases
such as carbon dioxide. In December 1997, the signatories to the convention
established a binding set of emissions targets for developed nations. Although
the specific emissions targets vary from country to country, the United States
would be required to reduce emissions to 93% of 1990 levels over a five-year
budget period from 2008 through 2012. The U.S. Senate has not ratified the
treaty commitments.  The current administration could support the
effort to ratify the treaty. With Russia’s ratification of the Kyoto Protocol in
2004, it became binding on all ratifying countries. The implementation of the
Kyoto Protocol in a number of countries, and other emissions limits, such as
those adopted by the European Union, could affect demand for coal outside the
United States. If the Kyoto Protocol or other comprehensive regulations focusing
on greenhouse gas emissions are implemented by the United States, it could have
the effect of restricting the use of coal. Other efforts to reduce emissions of
greenhouse gases and federal initiatives to encourage the use of coal bed
methane gas also may affect the use of coal as an energy source.




Clean
Water Act




The
federal Clean Water Act and corresponding state laws affect coal mining
operations by imposing restrictions on discharges into regulated effluent
waters. Permits requiring regular monitoring and compliance with effluent
limitations and reporting requirements govern the discharge of pollutants into
regulated waters. We believe we have obtained all permits required under the
Clean Water Act and corresponding state laws and are in substantial compliance
with such permits. However, new requirements under the Clean Water Act and
corresponding state laws may cause us to incur significant additional costs that
could adversely affect our operating results.




In
addition, the U.S. Army Corps of Engineers imposes stream mitigation
requirements on surface mining operations. These regulations require that
footage of stream loss be replaced through various mitigation processes, if any
ephemeral, intermittent, or perennial streams are impacted due to mining
operations. In 2008, the federal Office of Surface Mining Reclamation and
Enforcement imposed regulatory requirements applicable to excess spoil
placement, including the requirement that operators return as much spoil as
possible to the excavation created by the mine. These regulations may also cause
us to incur significant additional operating costs.




Comprehensive
Environmental Response, Compensation and Liability Act




The
Comprehensive Environmental Response, Compensation and Liability Act (commonly
known as Superfund) and similar state laws create liabilities for the
investigation and remediation of releases of hazardous substances into the
environment and for damages to natural resources. Our current and former coal
mining operations incur, and will continue to incur, expenditures associated
with the investigation and remediation of facilities and environmental
conditions, including underground storage tanks, solid and hazardous waste
disposal and other matters under these environmental laws. We also must comply
with reporting requirements under the Emergency Planning and Community
Right-to-Know Act and the Toxic Substances Control Act.




14


The
magnitude of the liability and the cost of complying with environmental laws
with respect to particular sites cannot be predicted with certainty due to the
lack of specific information available, the potential for new or changed laws
and regulations, the development of new remediation technologies, and the
uncertainty regarding the timing of remedial work. As a result, we may incur
material liabilities or costs related to environmental matters in the future and
such environmental liabilities or costs could adversely affect our results and
financial condition. In addition, there can be no assurance that changes in laws
or regulations would not result in additional costs and affect the manner in
which we are required to conduct our operations.




Resource
Conservation and Recovery Act




The
Resource Conservation and Recovery Act and corresponding state laws and
regulations affect coal mining operations by imposing requirements for the
treatment, storage and disposal of hazardous wastes. Facilities at which
hazardous wastes have been treated, stored or disposed of are subject to
corrective action orders issued by the EPA and other potential obligations,
which could adversely affect our results of operations or financial
condition.







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. These statements are known as “forward-looking
statements,” as that term is used in Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934.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;
      and





·
            our plans and objectives for future operations and
      expansion or consolidation.





15


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; our dependency on one railroad
for transportation of a large percentage of our products; failure to exploit
additional coal reserves; the risk that reserve estimates are inaccurate;
failure to diversify our operations; increased capital expenditures;
encountering difficult mining conditions; increased costs of complying with mine
health and safety regulations; bottlenecks or other difficulties in transporting
coal to our customers; delays in the development of new mining projects;
increased costs of raw materials; the effects of litigation, regulation and
competition; lack of availability of financing sources; our compliance with debt
covenants; the risk that we are unable to successfully integrate acquired assets
into our business; and the risk factors set forth in this Annual Report on Form
10-K under Item 1A “Risk Factors.” Those are representative of factors that
could affect the outcome of the forward-looking statements. These and the other
factors discussed elsewhere in this document are not necessarily all of the
important factors that could cause our results to differ materially from those
expressed in our forward-looking statements. Forward-looking statements speak
only as of the date they are made and we undertake no obligation to update
them.





Item 1A.       Risk
Factors




Risks
Related to the Coal Industry





Because
the demand and pricing for coal is greatly influenced by consumption patterns of
the domestic electricity generation industry, a reduction in the demand for coal
by this industry would likely cause our revenues and profitability to decline
significantly.




We
derived 81% of our total revenues (contract and spot) in 2008 and 86% of our
total revenues in 2007 from our electric utility customers. Fuel cost is a
significant component of the cost associated with coal-fired power generation,
with respect to not only the price of the coal, but also the costs associated
with emissions control and credits (i.e., sulfur dioxide,
nitrogen oxides, etc.), combustion by-product disposal (i.e., ash) and equipment
operations and maintenance (i.e., materials handling
facilities). All of these costs must be considered when choosing between coal
generation and alternative methods, including natural gas, nuclear,
hydroelectric and others.





Weather
patterns also can greatly affect electricity generation. Extreme temperatures,
both hot and cold, cause increased power usage and, therefore, increased
generating requirements from all sources. Mild temperatures, on the other hand,
result in lower electrical demand, which allows generators to choose the
lowest-cost sources of power generation when deciding which generation sources
to dispatch. Accordingly, significant changes in weather patterns could reduce
the demand for our coal.




Overall
economic activity and the associated demands for power by industrial users can
have significant effects on overall electricity demand. Downward economic
pressures can cause decreased demands for power, by both residential and
industrial customers.





Any
downward pressure on coal prices, whether due to increased use of alternative
energy sources, changes in weather patterns, decreases in overall demand or
otherwise, would likely cause our profitability to decline.




16


Electric
utility deregulation is expected to provide incentives to generators of
electricity to minimize their fuel costs and is believed to have caused electric
generators to be more aggressive in negotiating prices with coal suppliers. To
the extent utility deregulation causes our customers to be more cost-sensitive,
deregulation may have a negative effect on our profitability.





Changes
in the export and import markets for coal products could affect the demand for
our coal, our pricing and our profitability.




We
compete in a worldwide market. The pricing and demand for our products is
affected by a number of factors beyond our control. These factors
include:




•
            currency
      exchange rates;•
            growth
      of economic development;•
            price
      of alternative sources of electricity;•
            world
      wide demand; and•
            ocean
      freight rates




Any
decrease in the amount of coal exported from the United States, or any increase
in the amount of coal imported into the United States, could have a material
adverse impact on the demand for our coal, our pricing and our
profitability.




Increased
consolidation and competition in the U.S. coal industry may adversely affect our
revenues and profitability.




During
the last several years, the U.S. coal industry has experienced increased
consolidation, which has contributed to the industry becoming more competitive.
Consequently, many of our competitors in the domestic coal industry are major
coal producers who have significantly greater financial resources than us. The
intense competition among coal producers may impact our ability to retain or
attract customers and may therefore adversely affect our future revenues and
profitability.





Fluctuations
in transportation costs and the availability and dependability of transportation
could affect the demand for our coal and our ability to deliver coal to our
customers.




Increases
in transportation costs could have an adverse effect on demand for our coal.
Customers choose coal supplies based, primarily, on the total delivered cost of
coal. Any increase in transportation costs would cause an increase in the total
delivered cost of coal. That could cause some of our customers to seek less
expensive sources of coal or alternative fuels to satisfy their energy needs. In
addition, significant decreases in transportation costs from other
coal-producing regions, both domestic and international, could result in
increased competition from coal producers in those regions. For instance, coal
mines in the western United States could become more attractive as a source of
coal to consumers in the eastern United States, if the costs of transporting
coal from the West were significantly reduced.





Our
Central Appalachia mines generally ship coal via rail systems. During 2008, we
shipped in excess of 95% of our coal from our Central Appalachia mines via CSX.
In the Midwest, we shipped approximately 63% of our produced coal by truck and
the remainder via rail systems.  Our dependence upon railroads and
third party trucking companies impacts our ability to deliver coal to our
customers. Disruption of service due to weather-related problems, strikes,
lockouts, bottlenecks and other events could temporarily impair our ability to
supply coal to our customers, resulting in decreased shipments. Decreased
performance levels over longer periods of time could cause our customers to look
elsewhere for their fuel needs, negatively affecting our revenues and
profitability.




In past
years, the major eastern railroads (CSX and Norfolk Southern) have experienced
periods of increased overall rail traffic due to an expanding economy and
shortages of both equipment and personnel. This increase in traffic could impact
our ability to obtain the necessary rail cars to deliver coal to our customers
and have an adverse impact on our financial results.


17





Shortages
or increased costs of skilled labor in the Central Appalachian coal region may
hamper our ability to achieve high labor productivity and competitive
costs.




Coal
mining continues to be a labor-intensive industry. As the demand for coal has
increased, many producers have attempted to increase coal production, which has
resulted in a competitive market for the limited supply of trained coal miners
in the Central Appalachian region. In some cases, this market situation has
caused compensation levels to increase, particularly for “skilled” positions
such as electricians and mine foremen. To maintain current production levels, we
may be forced to respond to these increases in wages and other forms of
compensation, and related recruiting efforts by our competitors. Any future
shortage of skilled miners, or increases in our labor costs, could have an
adverse impact on our labor productivity and costs and on our ability to expand
production.




Government
laws, regulations and other requirements relating to the protection of the
environment, health and safety and other matters impose significant costs on us,
and future requirements could limit our ability to produce coal.




We are
subject to extensive federal, state and local regulations with respect to
matters such as:




·
            employee
      health and safety;·
            permitting
      and licensing requirements;·
            air
      quality standards;·
            water
      quality standards;·
            plant,
      wildlife and wetland protection;·
            blasting
      operations;·
            the
      management and disposal of hazardous and non-hazardous materials generated
      by mining operations;·
            the
      storage of petroleum products and other hazardous
    substances;·
            reclamation
      and restoration of properties after mining operations are
      completed;·
            discharge
      of materials into the environment, including air emissions and wastewater
      discharge;·
            surface
      subsidence from underground mining; and·
            the
      effects of mining operations on groundwater quality and
      availability.







Complying
with these requirements, including the terms of our permits, has had, and will
continue to have, a significant effect on our costs of operations. We could
incur substantial costs, including clean up costs, fines, civil or criminal
sanctions and third party claims for personal injury or property damage as a
result of violations of or liabilities under these laws and
regulations.




The coal
industry is also affected by significant legislation mandating specified
benefits for retired miners. In addition, the utility industry, which is the
most significant end user of coal, is subject to extensive regulation regarding
the environmental impact of its power generating activities. Coal contains
impurities, including sulfur, mercury, chlorine and other elements or compounds,
many of which are released into the air when coal is burned. Stricter
environmental regulations of emissions from coal-fired electric generating
plants could increase the costs of using coal, thereby reducing demand for coal
as a fuel source or the volume and price of our coal sales, or making coal a
less attractive fuel alternative in the planning and building of utility power
plants in the future.




New
legislation, regulations and orders adopted or implemented in the future (or
changes in interpretations of existing laws and regulations) may materially
adversely affect our mining operations, our cost structure and our customers’
operations or ability to use coal.




The
majority of our coal supply agreements contain provisions that allow the
purchaser to terminate its contract if legislation is passed that either
restricts the use or type of coal permissible at the purchaser’s plant or
results in too great an increase in the cost of coal. These factors and
legislation, if enacted, could have a material adverse effect on our financial
condition and results of operations.




18





The
passage of legislation responsive to the Framework Convention on Global Climate
Change or similar governmental initiatives could result in restrictions on coal
use.




The
United States and more than 160 other nations are signatories to the 1992
Framework Convention on Global Climate Change, commonly known as the Kyoto
Protocol, which is intended to limit or capture emissions of greenhouse gases,
such as carbon dioxide. In December 1997, the signatories to the convention
established a potentially binding set of emissions targets for developed
nations. Although the specific emissions targets vary from country to country,
the United States would be required to reduce emissions to 93% of 1990 levels
over a five-year budget period from 2008 through 2012. The U.S. Senate has not
ratified the treaty commitments.  The current administration could
support the effort to ratify the treaty. With Russia’s ratification of the Kyoto
Protocol in 2004, it became binding on all ratifying countries. The
implementation of the Kyoto Protocol in the United States and other countries,
and other emissions limits, such as those adopted by the European Union, could
affect demand for coal outside the United States. If the Kyoto Protocol or other
comprehensive legislation focusing on greenhouse gas emissions is enacted by the
United States, it could have the effect of restricting the use of
coal.  Other efforts to reduce emissions of greenhouse gases and
federal initiatives to encourage the use of natural gas also may affect the use
of coal as an energy source.




We
are subject to the federal Clean Water Act and similar state laws which impose
treatment, monitoring and reporting obligations.




The
federal Clean Water Act and corresponding state laws affect coal mining
operations by imposing restrictions on discharges into regulated waters. Permits
requiring regular monitoring and compliance with effluent limitations and
reporting requirements govern the discharge of pollutants into regulated waters.
New requirements under the Clean Water Act and corresponding state laws could
cause us to incur significant additional costs that adversely affect our
operating results.




Regulations
have expanded the definition of black lung disease and generally made it easier
for claimants to assert and prosecute claims, which could increase our exposure
to black lung benefit liabilities.




In
January 2001, the United States Department of Labor amended the regulations
implementing the federal black lung laws to give greater weight to the opinion
of a claimant’s treating physician, expand the definition of black lung disease
and limit the amount of medical evidence that can be submitted by claimants and
respondents. The amendments also alter administrative procedures for the
adjudication of claims, which, according to the Department of Labor, results in
streamlined procedures that are less formal, less adversarial and easier for
participants to understand. These and other changes to the federal black lung
regulations could significantly increase our exposure to black lung benefits
liabilities.




In recent
years, legislation on black lung reform has been introduced but not enacted in
Congress and in the Kentucky legislature. It is possible that this legislation
will be reintroduced for consideration by Congress. If any of the proposals
included in this or similar legislation is passed, the number of claimants who
are awarded benefits could significantly increase. Any such changes in black
lung legislation, if approved, may adversely affect our business, financial
condition and results of operations.




Extensive
environmental laws and regulations affect the end-users of coal and could reduce
the demand for coal as a fuel source and cause the volume of our sales to
decline.




The Clean
Air Act and similar state and local laws extensively regulate the amount of
sulfur dioxide, particulate matter, nitrogen oxides, mercury and other compounds
emitted into the air from electric power plants, which are the largest end-users
of our coal. Compliance with such laws and regulations, which can take a variety
of forms, may reduce demand for coal as a fuel source because they require
significant emissions control expenditures for coal-fired power plants to attain
applicable ambient air quality standards, which may lead these generators to
switch to other fuels that generate less of these emissions and may also reduce
future demand for the construction of coal-fired power plants.




19


The U.S.
Department of Justice, on behalf of the EPA, has filed lawsuits against several
investor-owned electric utilities and brought an administrative action against
one government-owned utility for alleged violations of the Clean Air Act. We
supply coal to some of the currently-affected utilities, and it is possible that
other of our customers will be sued. These lawsuits could require the utilities
to pay penalties, install pollution control equipment or undertake other
emission reduction measures, any of which could adversely impact their demand
for our coal.




A
regional haze program initiated by the EPA to protect and to improve visibility
at and around national parks, national wilderness areas and international parks
restricts the construction of new coal-fired power plants whose operation may
impair visibility at and around federally protected areas and may require some
existing coal-fired power plants to install additional control measures designed
to limit haze-causing emissions.




The Clean
Air Act also imposes standards on sources of hazardous air pollutants. These
standards and future standards could have the effect of decreasing demand for
coal. So-called multi-pollutant bills, which could regulate additional air
pollutants, have been proposed by various members of Congress. If such
initiatives are enacted into law, power plant operators could choose other fuel
sources to meet their requirements, reducing the demand for coal.




Other
so-called multi-pollutant bills, which could regulate additional air pollutants,
have been proposed by various members of Congress. If such initiatives are
enacted into law, power plant operators could choose other fuel sources to meet
their requirements, reducing the demand for coal.




The
characteristics of coal may make it difficult for coal users to comply with
various environmental standards related to coal combustion. As a result, they
may switch to other fuels, which would affect the volume of our
sales.




Coal
contains impurities, including sulfur, nitrogen oxide, mercury, chlorine and
other elements or compounds, many of which are released into the air when coal
is burned. Stricter environmental regulations of emissions from coal-fired
electric generating plants could increase the costs of using coal thereby
reducing demand for coal as a fuel source, and the volume and price of our coal
sales. Stricter regulations could make coal a less attractive fuel alternative
in the planning and building of utility power plants in the future.




For
example, in order to meet the federal Clean Air Act limits for sulfur dioxide
emissions from electric power plants, coal users may need to install scrubbers,
use sulfur dioxide emission allowances (some of which they may purchase), blend
high sulfur coal with low sulfur coal or switch to other fuels. Each option has
limitations. Lower sulfur coal may be more costly to purchase on an energy basis
than higher sulfur coal depending on mining and transportation costs. The cost
of installing scrubbers is significant and emission allowances may become more
expensive as their availability declines. Switching to other fuels may require
expensive modification of existing plants.




In March
2005, the EPA adopted new federal rules intended to reduce the interstate
transport of fine particulate matter and ozone through reductions in sulfur
dioxides and nitrogen oxides through the eastern United States.  The
reductions were to be implemented in stages, some through a market-based
cap-and-trade program. Such new regulations would likely require some power
plants to install new equipment, at substantial cost, or discourage the use of
certain coals containing higher levels of mercury.  The particular
rules introduced by the EPA in March 2005 were subsequently struck down by the
U.S. Court of Appeals for the D.C. Circuit on July 11, 2008.  On
December 23, 2008, the U.S. Court of Appeals for the D.C. Circuit remanded
consolidated cases to the EPA without vacatur of the Clean Air Interstate Rule
in order that the EPA could remedy flaws in the Rule. The EPA continues to
address the issues raised in the Court’s opinions issued on July 11, 2008 and
December 23, 2008.  New and proposed reductions in emissions of sulfur
dioxides, nitrogen oxides, particulate matter or greenhouse gases may require
the installation of additional costly control technology or the implementation
of other measures, including trading of emission allowances and switching to
other fuels.




Congress
and several states are now considering legislation to further control air
emissions of multiple pollutants from electric generating facilities and other
large emitters. These new and proposed reductions will make it more costly to
operate coal-fired plants and could make coal a less attractive fuel alternative
to the planning and building of utility power plants in the future. To the
extent that any new or proposed requirements affect our customers, this could
adversely affect our operations and results.




20


We
must obtain governmental permits and approvals for mining operations, which can
be a costly and time consuming process and result in restrictions on our
operations.





Numerous
governmental permits and approvals are required for mining operations. Our
operations are principally regulated under permits issued by state regulatory
and enforcement agencies pursuant to the federal Surface Mining Control and
Reclamation Act (SMCRA).  Regulatory authorities exercise considerable
discretion in the timing and scope of permit issuance. Requirements imposed by
these authorities may be costly and time consuming and may result in delays in
the commencement or continuation of exploration or production operations. In
addition, we often are required to prepare and present to federal, state and
local authorities data pertaining to the effect or impact that proposed
exploration for or production of coal might have on the environment. Further,
the public may comment on and otherwise engage in the permitting process,
including through intervention in the courts. Accordingly, the permits we need
may not be issued, or, if issued, may not be issued in a timely fashion, or may
involve requirements that restrict our ability to conduct our mining operations
or to do so profitably.




Prior to
placing excess fill material in valleys in connection with surface mining
operations, coal mining companies are required to obtain a permit from the U.S.
Army Corps of Engineers (Corps) under Section 404 of the Clean Water Act (404
Permit). The permit can be either a simplified Nation Wide Permit #21 (NWP 21)
or a more complicated individual permit. Litigation respecting the validity of
the NWP 21 permit program as currently administered has been ongoing for several
years. On March 23, 2007, U.S. District Judge Robert Chambers of the Southern
District of West Virginia struck down several 404 permits that had been issued
by the Corps and found that the Corps’ decisions to issue such permits did not
conform to the requirements of the Clean Water Act or the National Environmental
Policy Act because the Corps failed to do a full assessment of all of the
impacts of eliminating headwater streams. .This ruling was recently
reversed on appeal to the 4th Circuit
Court of Appeals. While the lower court ruling applied only to the permits at
issue in the case before Judge Chambers and thus would have had precedence only
with respect to certain counties in southern West Virginia (where we do not now
operate), the matters at issue in that case may be litigated in the future in
jurisdictions in which we do operate and a ruling for the plaintiffs in such
litigation or the NWP 21 litigation could have an adverse impact on our planned
surface mining operations.




In
January 2005, a virtually identical claim to that filed in West Virginia was
filed in Kentucky. The plaintiffs in this case, Kentucky Riverkeepers, Inc., et al.
v. Colonel Robert A. Rowlette, Jr., et al., Civil Action No 05-CV-36-JBC,
seek the same relief as that sought in West Virginia. The court heard oral
arguments on plaintiffs’ preliminary injunction motion and/or motion for summary
judgment in late 2005 and those motions were denied as moot as the 2002 NWP
being challenged had expired before a decision was rendered in the
case.  The presiding judge has allowed the plaintiffs to renew the
challenge against the 2007 permits and the case continues to move forward. A
ruling for the plaintiffs in this matter could have an adverse impact on our
planned surface mining operations.




We
have significant reclamation and mine closure obligations. If the assumptions
underlying our accruals are materially inaccurate, we could be required to
expend greater amounts than anticipated.




The SMCRA
establishes operational, reclamation and closure standards for all aspects of
surface mining as well as many aspects of underground mining. We accrue for the
costs of current mine disturbance and of final mine closure, including the cost
of treating mine water discharge where necessary. Under U.S. generally accepted
accounting principles we are required to account for the costs related to the
closure of mines and the reclamation of the land upon exhaustion of coal
reserves. Specifically, the fair value of an asset retirement obligation is
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The present value of the estimated asset retirement
costs is capitalized as part of the carrying amount of the long-lived asset. At
December 31, 2008, we had accrued $41.5 million related to estimated mine
reclamation costs. These amounts recorded are dependent upon a number of
variables, including the estimated future retirement costs, estimated proven
reserves, assumptions involving profit margins, inflation rates, and the assumed
credit-adjusted interest rates. Furthermore, these obligations are unfunded. If
these accruals are insufficient or our liability in a particular year is greater
than currently anticipated, our future operating results could be adversely
affected.





21


Terrorist
attacks and threats, escalation of military activity in response to such attacks
or acts of war may negatively affect our business, financial condition and
results of operations.




Terrorist
attacks and threats, escalation of military activity in response to such attacks
or acts of war may negatively affect our business, financial condition and
results of operations. Our business is affected by general economic conditions,
fluctuations in consumer confidence and spending, and market liquidity, which
can decline as a result of numerous factors outside of our control, such as
terrorist attacks and acts of war. Future terrorist attacks against U.S.
targets, rumors or threats of war, actual conflicts involving the United States
or its allies, or military or trade disruptions affecting our customers could
cause delays or losses in transportation and deliveries of coal to our
customers, decreased sales of our coal and extension of time for payment of
accounts receivable from our customers. Strategic targets such as energy-related
assets may be at greater risk of future terrorist attacks than other targets in
the United States. In addition, disruption or significant increases in energy
prices could result in government-imposed price controls. It is possible that
any, or a combination, of these occurrences could have a material adverse effect
on our business, financial condition and results of operations.




Risks
Related to Our Operations





We
have experienced operating losses and net losses in each of the last three years
and may experience losses in the future.




We have
experienced operating losses and net losses and in the years ended December 31,
2008, 2007 and 2006.  Our operating loss and net loss increased in each of
these three years.  In order to return to profitability, we must carefully
manage our business, including the balance of our long-term and short-term sales
contracts and our production costs.  Although we seek to balance our
contract mix to achieve optimal revenues over the long term, the market price of
coal is affected by many factors that are outside of our control.  Our
production costs have increased in recent years, and we expect higher costs to
continue for the next several years.  Accordingly, we cannot assure you
that we will be able to achieve profitability in the future.





The
loss of, or significant reduction in, purchases by our largest customers could
adversely affect our revenues.




For 2008,
we generated approximately 81% of our total revenues from several long-term
contracts and spot sales with electrical utilities, including 36% from our
largest customer, Georgia Power Company, and 12% from South Carolina Public
Service Authority. At December 31, 2008, we had coal supply agreements with
these customers that expire in 2009 to 2011. The execution of a substantial coal
supply agreement is frequently the basis on which we undertake the development
of coal reserves required to be supplied under the contract.





Many of
our coal supply agreements contain provisions that permit adjustment of the
contract price upward or downward at specified times. Failure of the parties to
agree on a price under those provisions may allow either party to either
terminate the contract or reduce the coal to be delivered under the contract.
Coal supply agreements also typically contain force majeure provisions allowing
temporary suspension of performance by the customer or us for the duration of
specified events beyond the control of the affected party. Most coal supply
agreements contain provisions requiring us to deliver coal meeting quality
thresholds for certain characteristics such as:







·
            British
      thermal units (Btu’s);·
            sulfur
      content;·
            ash
      content;·
            grindability;
      and·
            ash
      fusion temperature.





Failure
to meet these specifications could result in economic penalties, including price
adjustments, the rejection of deliveries or termination of the contracts. In
addition, all of our contracts allow our customers to renegotiate or terminate
their contracts in the event of changes in regulations or other governmental
impositions affecting our industry that increase the cost of coal beyond
specified limits. Further, we have been required in the past to purchase sulfur
credits or make other pricing adjustments to comply with contractual
requirements relating to the sulfur content of coal sold to our customers, and
may be required to do so in the future.





The
operating profits we realize from coal sold under supply agreements depend on a
variety of factors. In addition, price adjustment and other provisions may
increase our exposure to short-term coal price volatility provided by those
contracts. If a substantial portion of our coal supply agreements are modified
or terminated, we could be materially adversely affected to the extent that we
are unable to find alternate buyers for our coal at the same level of
profitability. As a result, we might not be able to replace existing long-term
coal supply agreements at the same prices or with similar profit margins when
they expire.


22





Our
operating results will be negatively impacted if we are unable to balance our
mix of contract and spot sales.




We have
implemented a sales plan that includes long-term contracts (one year or greater)
and spot sales/short-term contracts (less than one year). We have structured our
sales plan based on the assumptions that demand will remain adequate to maintain
current shipping levels and that any disruptions in the market will be
relatively short-lived. If we are unable to maintain a balance of contract sales
with spot sales, or our markets become depressed for an extended period of time,
our volumes and margins could decrease, negatively affecting our operating
results.





Our
ability to operate our company effectively could be impaired if we lose senior
executives or fail to employ needed additional personnel.




The loss
of senior executives could have a material adverse effect on our business. There
may be a limited number of persons with the requisite experience and skills to
serve in our senior management positions. We may not be able to locate or employ
qualified executives on acceptable terms. In addition, as our business develops
and expands, we believe that our future success will depend greatly on our
continued ability to attract and retain highly skilled and qualified personnel.
We might not continue to be able to employ key personnel, or to attract and
retain qualified personnel in the future. Failure to retain senior executives or
attract key personnel could have a material adverse effect on our operations and
financial results.




Underground
mining is subject to increased regulation, and may require us to incur
additional cost.





Underground
coal mining is subject to federal and state laws and regulations relating to
safety in underground coal mines and enforcement activities by federal and state
regulators.  These laws and regulations, the most significant of which is
the federal MINER Act,  include requirements for constructing and
maintaining caches for the storage of additional self-contained self rescuers
throughout underground mines; installing rescue chambers in underground mines;
constant tracking of and communication with personnel in the mines; installing
cable lifelines from the mine portal to all sections of the mine to assist in
emergency escape; submission and approval of emergency response plans; new and
additional safety training; providing refuge alternatives; and improving
flame-resistant conveyor belts and other fire protection measures.  In
2007, implementation of the MINER Act continued with new penalty regulations
that significantly increased regular penalty amounts and special
assessments.  In addition, a new emergency temporary standard was
issued relating to mine seal requirements.  During the 2007-2008
Congressional term, additional new federal legislation known as the S-MINER Act
was proposed.  Although the bill passed in the House of
Representatives by roll call vote, the Senate referred it to the Committee on
Health, Education, Labor and Pensions and never voted on the
bill.  The outlook for 2009 includes the possibility that the S-MINER
Act could be passed which would further increase our cost structure and
materially adversely impact our operating performance.  Various states
also have enacted their own new laws and regulations addressing many of these
same subjects.   These new laws and regulations will cause us to incur
substantial additional costs, which will adversely impact our operating
performance.




During
2007 and 2008, we were notified by the U.S. Department of Labor, Mine Safety and
Health Administration (MSHA) that a potential pattern of violations may exist at
four of our mines based upon initial screening and pattern criteria review by
MSHA.  Upon receipt of such notifications, we conduct a comprehensive
review of the operations at each mine and prepare and submit plans to MSHA
designed to enhance employee safety at the mines through better education,
training, mining practices, and safety management.   Following
implementation of the plans, MSHA conducts a complete inspection of each mine
and further evaluates the situation.  MSHA subsequently advised us with
respect to each of the four mines that a potential pattern of violations no
longer existed and that MSHA therefore would take no further action with respect
to these matters.  The issuance of any future Notice of a Pattern of
Violations could have a significant impact on our operations.




23


Unexpected
increases in raw material costs could significantly impair our operating
results.




Our coal
mining operations use significant amounts of steel, petroleum products and other
raw materials in various pieces of mining equipment, supplies and materials,
including the roof bolts required by the room and pillar method of mining.
Recently and historically, petroleum prices and other commodity prices have been
volatile. If the price of steel or other of these materials increase, our
operational expenses will increase, which could have a significant negative
impact on our cash flow and operating results.




Coal
mining is subject to conditions or events beyond our control, which could cause
our quarterly or annual results to deteriorate.




Our coal
mining operations are conducted, in large part, in underground mines and, to a
lesser extent, at surface mines. These mines are subject to conditions or events
beyond our control that could disrupt operations, affect production and the cost
of mining at particular mines for varying lengths of time and have a significant
impact on our operating results. These conditions or events have
included:




•
            variations
      in thickness of the layer, or seam, of coal;•
            variations
      in geological conditions;•
            amounts
      of rock and other natural materials intruding into the coal
      seam;•
            equipment
      failures and unexpected major repairs;•
            unexpected
      maintenance problems;•
            unexpected
      departures of one or more of our contract miners;•
            fires
      and explosions from methane and other sources;•
            accidental
      minewater discharges or other environmental accidents;•
            other
      accidents or natural disasters; and•
            weather
      conditions.





Mining
in Central Appalachia is complex due to geological characteristics of the
region.




The
geological characteristics of coal reserves in Central Appalachia, such as depth
of overburden and coal seam thickness, make them complex and costly to mine. As
mines become depleted, replacement reserves may not be available when required
or, if available, may not be capable of being mined at costs comparable to those
characteristic of the depleting mines. These factors could materially adversely
affect the mining operations and cost structures of, and customers’ ability to
use coal produced by, operators in Central Appalachia, including
us.




Our
future success depends upon our ability to acquire or develop additional coal
reserves that are economically recoverable.




Our
recoverable reserves decline as we produce coal. Since we attempt, where
practical, to mine our lowest-cost reserves first, we may not be able to mine
all of our reserves at a similar cost as we do at our current operations. Our
planned development and exploration projects might not result in significant
additional reserves, and we might not have continuing success developing
additional mines. For example, our construction of additional mining facilities
necessary to exploit our reserves could be delayed or terminated due to various
factors, including unforeseen geological conditions, weather delays or
unanticipated development costs. Our ability to acquire additional coal reserves
in the future also could be limited by restrictions under our existing or future
debt facilities, competition from other coal companies for attractive properties
or the lack of suitable acquisition candidates.




In order
to develop our reserves, we must receive various governmental permits. We have
not yet applied for the permits required or developed the mines necessary to
mine all of our reserves. In addition, we might not continue to receive the
permits necessary for us to operate profitably in the future. We may not be able
to negotiate new leases from the government or from private parties or obtain
mining contracts for properties containing additional reserves or maintain our
leasehold interests in properties on which mining operations are not commenced
during the term of the lease.





24


Factors
beyond our control could impact the amount and pricing of coal supplied by our
independent contractors and other third parties.




In
addition to coal we produce from our Company-operated mines, we have mines that
typically are operated by independent contract mine operators, and we purchase
coal from third parties for resale. For 2009, we anticipate less than 10% of our
total production will come from mines operated by independent contract mine
operators and from third party purchased coal sources. Operational difficulties,
changes in demand for contract mine operators from our competitors and other
factors beyond our control could affect the availability, pricing and quality of
coal produced for us by independent contract mine operators. Disruptions in
supply, increases in prices paid for coal produced by independent contract mine
operators or purchased from third parties, or the availability of more lucrative
direct sales opportunities for our purchased coal sources could increase our
costs or lower our volumes, either of which could negatively affect our
profitability.





We
face significant uncertainty in estimating our recoverable coal reserves, and
variations from those estimates could lead to decreased revenues and
profitability.




Forecasts
of our future performance are based on estimates of our recoverable coal
reserves. Estimates of those reserves were initially based on studies conducted
by Marshall Miller & Associates, Inc. in accordance with industry-accepted
standards which we have updated for current activity using similar
methodologies. A number of sources of information were used to determine
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;•
            new
      engineering and geological data;•
            acquisition
      or divestiture of reserve holdings; and•
            modification
      of mining plans or mining methods.





Therefore,
actual coal tonnage recovered from identified reserve areas or properties, and
costs associated with our mining operations, may vary from estimates. These
variations could be material, and therefore could result in decreased
profitability.




Our
operations could be adversely affected if we are unable to obtain required
surety bonds.




Federal
and state laws require bonds to secure our obligations to reclaim lands used for
mining, to pay federal and state workers’ compensation and to satisfy other
miscellaneous obligations. As of December 31, 2008, we had outstanding surety
bonds with third parties for post-mining reclamation totaling $60.2 million.
Furthermore, we have surety bonds for an additional $44.7 million in place for
our federal and state workers’ compensation obligations and other miscellaneous
obligations. Insurance companies have informed us, along with other participants
in the coal industry, that they no longer will provide surety bonds for workers’
compensation and other post-employment benefits without collateral. We have
satisfied our obligations under these statutes and regulations by providing
letters of credit or other assurances of payment. However, letters of credit can
be significantly more costly to us than surety bonds. The issuance of letters of
credit under our senior secured credit facility also reduces amounts that we can
borrow under our senior secured credit facility for other purposes. If we are
unable to secure surety bonds for these obligations in the future, and are
forced to secure letters of credit indefinitely, our profitability may be
negatively affected.


25





Our
work force could become unionized in the future, which could adversely affect
the stability of our production and reduce our profitability.





In 2008,
our company owned mines were operated by union-free employees. However, our
subsidiaries' employees have the right at any time under the National Labor
Relations Act to form or affiliate with a union. Additionally, the current
administration has indicated that it will support legislation that may make it
easier for employees to unionize.  Any unionization of our
subsidiaries' employees, or the employees of third-party contractors who mine
coal for us, could adversely affect the stability of our production and reduce
our profitability.





We
have significant unfunded obligations for long-term employee benefits for which
we accrue based upon assumptions, which, if incorrect, could result in us being
required to expend greater amounts than anticipated.




We are
required by law to provide various long-term employee benefits. We accrue
amounts for these obligations based on the present value of expected future
costs. We employed an independent actuary to complete estimates for our workers’
compensation and black lung (both state and federal) obligations. At December
31, 2008, the current and non-current portions of these obligations included
$30.6 million for coal workers’ black lung benefits and $55.8 million for
workers’ compensation benefits.





We use a
valuation method under which the total present and future liabilities are booked
based on actuarial studies. Our independent actuary updates these liability
estimates annually. However, if our assumptions are incorrect, we could be
required to expend greater amounts than anticipated. All of these obligations
are unfunded. In addition, the federal government and the governments of the
states in which we operate consider changes in workers’ compensation laws from
time to time. Such changes, if enacted, could increase our benefit expenses and
payments.





We
may be unable to adequately provide funding for our pension plan obligations
based on our current estimates of those obligations.




We
provided pension benefits to eligible employees through September 30, 2007, at
which time we froze the plan. As of December 31, 2008, we estimated that our
obligation under the pension plan was underfunded by approximately $19.7
million. If future payments are insufficient to fund the pension plan adequately
to cover our future pension obligations, we could incur cash expenditures and
costs materially higher than anticipated. The pension obligation is calculated
annually and is based on several assumptions, including then prevailing
conditions, which may change from year to year. In any year, if our assumptions
are inaccurate, we could be required to expend greater amounts than
anticipated.




Substantially
all of our assets are subject to security interests.




Substantially
all of our cash, receivables, inventory and other assets are subject to various
liens and security interests under our debt instruments. If one of these
security interest holders becomes entitled to exercise its rights as a secured
party, it would have the right to foreclose upon and sell, or otherwise
transfer, the collateral subject to its security interest, and the collateral
accordingly would be unavailable to us and our other creditors, except to the
extent, if any, that other creditors have a superior or equal security interest
in the affected collateral or the value of the affected collateral exceeds the
amount of indebtedness in respect of which these foreclosure rights are
exercised.




We
may be unable to comply with restrictions imposed by the terms of our
indebtedness, which could result in a default under these
instruments.




We were
not in compliance with the minimum Adjusted EBITDA and Leverage Ratio covenants
required by our credit facilities as of March 31, 2008 and September 30, 2008.
We entered into amendments to the facilities that waived the non-compliance as
of March 31, 2008 and September 30, 2008, and also modified certain
covenants.   As a result of the amendments, we were in compliance with
all of the financial covenants under the facilities as of December 31,
2008.  Although we project that we will be in compliance with these
covenants through 2009, we cannot assure you that we will remain in compliance
with these covenants in 2009 or in subsequent periods.  If necessary, we
will consider seeking an additional waiver or other alternatives to remain in
compliance with the covenants.





26


Additional
detail regarding the terms of the facilities, including these covenants and the
related definitions, can be found in our debt agreements, as amended, that have
been filed as exhibits to our SEC filings.





Our debt
instruments impose a number of restrictions on us, some of which become more
restrictive over time. A failure to comply with these restrictions could
adversely affect our ability to borrow under our revolving credit facility or
result in an event of default under our debt instruments. Our debt instruments
contain financial and other covenants that create limitations on our ability to,
among other things, borrow the full amount on our revolver, issue letters of
credit under our letter of credit facility or incur additional debt, and require
us to maintain various financial ratios and comply with various other financial
covenants. These most restrictive covenants include the following:




·
            The
      facilities require that we achieve minimum Adjusted EBITDA (defined in the
      facilities as “Consolidated EBITDA”).  Adjusted EBITDA
      is measured at the end of each quarter.  We are required to
      have minimum Adjusted EBITDA of $5.0 million for the twelve months ended
      December 31, 2008.  For the year ended December 31, 2008, we had
      Adjusted EBITDA of $17.8 million.  Beginning March 31, 2009 Adjusted
      EBITDA is calculated on a trailing 12-month basis with Adjusted EBITDA
      increasing each quarter thereafter.  We are required to have Adjusted
      EBITDA for the 12 months ended March 31, 2009 of $54.1 million.In
      order to meet the twelve month adjusted EBITDA target at March 31, 2009,
      we will need adjusted EBITDA of $44.2 million in the first quarter of
      2009.  Based on the increase in our committed tons sold, we expect to
      make this covenant; however there can be no assurance that we will achieve
      the required amount.Adjusted
      EBITDA is not a recognized term under US GAAP and is not an alternative to
      net income, operating income or any other performance measures derived in
      accordance with US GAAP or an alternative to cash flow from operating
      activities as a measure of operating liquidity.  The most directly
      comparable US GAAP financial measure is net loss.  For the twelve
      months ended December 31, 2008, we had a net loss of $92.3 million. 
      Adjusted EBITDA is defined and reconciled to EBITDA and Net Loss under
      “Reconciliation of Non-GAAP Measures” in Part I – Item 2 – Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.





·
            The
      facilities require that our Leverage Ratio (as defined in the facilities)
      not exceed a specified multiple at the end of each quarter.  The
      Leverage Ratio was waived through December 31, 2008, and is permitted to
      be 2.2x as of March 31, 2009 and decreases further thereafter. 
      Leverage Ratio is defined under “Reconciliation of Non-GAAP Measures”
      in Part I – Item 2 – Management’s Discussion and Analysis of Financial
      Condition and Results of
Operations.





·
            The
      facilities limit the Capital Expenditures (other than Mandated Capital
      Expenditures) (as both are defined in the facilities) that we may make or
      agree to make in any fiscal year.  For the fiscal year ended December
      31, 2008, we could not make Capital Expenditures in excess of $56.1
      million.  The acquisition of mineral rights from Cheyenne Resources
      in July of 2008 is excluded from Capital Expenditures for purposes of the
      debt covenants. For the year ended December 31, 2008, we made Capital
      Expenditures of $52.2 million, excluding the acquisition of mineral rights
      from Cheyenne Resources.  For the fiscal year ended December 31, 2009
      and each fiscal year thereafter, we may not make Capital Expenditures in
      excess of $66 million.





·
            The
      facilities require that our Minimum Liquidity (as defined in the
      facilities) be no less than a specified amount at the end of each
      quarter.  We were required to have Minimum Liquidity of $10.0
      million, as of December 31, 2008, and our Minimum Liquidity was $13.4
      million on such date.





In the
event of a default, our lenders could terminate their commitments to us and
declare all amounts borrowed, together with accrued interest and fees,
immediately due and payable. If this were to occur, we might not be able to pay
these amounts or we might be forced to seek amendments to our debt agreements
which could make the terms of these agreements more onerous for us and require
the payment of amendment or waiver fees. Failure to comply with these
restrictions, even if waived by our lenders, also could adversely affect our
credit ratings, which could increase our costs of debt financings and impair our
ability to obtain additional debt financing.  While the lenders have,
to date, waived any covenant violations and amended the covenants, there is no
guarantee they will continue to do so if future violations occur.





27


Changes
in our credit ratings could adversely affect our costs and
expenses.




Any
downgrade in our credit ratings could adversely affect our ability to borrow and
result in more restrictive borrowing terms, including increased borrowing costs,
more restrictive covenants and the extension of less open credit. This, in turn,
could affect our internal cost of capital estimates and therefore impact
operational decisions.





Defects
in title or loss of any leasehold interests in our properties could limit our
ability to mine these properties or result in significant unanticipated
costs.




We
conduct substantially all of our mining operations on properties that we lease.
The loss of any lease could adversely affect our ability to mine the associated
reserves. Because we generally do not obtain title insurance or otherwise verify
title to our leased properties, our right to mine some of our reserves has been
in the past, and may again in the future be, adversely affected if defects in
title or boundaries exist. In order to obtain leases or rights to conduct our
mining operations on property where these defects exist, we have had to, and may
in the future have to, incur unanticipated costs. In addition, we may not be
able to successfully negotiate new leases for properties containing additional
reserves. Some leases have minimum production requirements. Failure to meet
those requirements could result in losses of prepaid royalties and, in some rare
cases, could result in a loss of the lease itself.




Inability
to satisfy contractual obligations may adversely affect our
profitability.




From time
to time, we have disputes with our customers over the provisions of long-term
contracts relating to, among other things, coal quality, pricing, quantity and
delays in delivery. In addition, we may not be able to produce sufficient
amounts of coal to meet our commitments to our customers. Our inability to
satisfy our contractual obligations could result in our need to purchase coal
from third party sources to satisfy those obligations or may result in customers
initiating claims against us. We may not be able to resolve all of these
disputes in a satisfactory manner, which could result in substantial damages or
otherwise harm our relationships with customers.




We
may be unable to exploit opportunities to diversify our operations.




Our
future business plan may consider opportunities other than underground and
surface mining in eastern Kentucky and southern Indiana. We will consider
opportunities to further increase the percentage of coal that comes from surface
mines. We may also consider opportunities to expand both surface and underground
mining activities in areas that are outside of eastern Kentucky and southern
Indiana. We may also consider opportunities in other energy-related areas that
are not prohibited by the Indenture governing our senior notes due 2012 or other
financing agreements. If we undertake these diversification strategies and fail
to execute them successfully, our financial condition and results of operations
may be adversely affected.




There
are risks associated with our acquisition strategy, including our inability to
successfully complete acquisitions, our assumption of liabilities, dilution of
your investment, significant costs and additional financing
required.




We may
explore opportunities to expand our operations through strategic acquisitions of
other coal mining companies. We currently have no agreement or understanding for
any specific acquisition. Risks associated with our current and potential
acquisitions include the disruption of our ongoing business, problems retaining
the employees of the acquired business, assets acquired proving to be less
valuable than expected, the potential assumption of unknown or unexpected
liabilities, costs and problems, the inability of management to maintain uniform
standards, controls, procedures and policies, the difficulty of managing a
larger company, the risk of becoming involved in labor, commercial or regulatory
disputes or litigation related to the new enterprises and the difficulty of
integrating the acquired operations and personnel into our existing
business.




We may
choose to use shares of our common stock or other securities to finance a
portion of the consideration for future acquisitions, either by issuing them to
pay a portion of the purchase price or selling additional shares to investors to
raise cash to pay a portion of the purchase price. If shares of our common stock
do not maintain sufficient market value or potential acquisition candidates are
unwilling to accept shares of our common stock as part of the consideration for
the sale of their businesses, we will be required to raise capital through
additional sales of debt or equity securities, which might not be possible, or
forego the acquisition opportunity, and our growth could be limited. In
addition, securities issued in such acquisitions may dilute the holdings of our
current or future shareholders.





28


Our
currently available cash may not be sufficient to finance any additional
acquisitions.




We
believe that our cash on hand, the availability under our Revolver and
cash generated from our operations will provide us with adequate
liquidity through 2009.  However, such funds may not provide
sufficient cash to fund any future acquisitions. Accordingly, we may need to
conduct additional debt or equity financings in order to fund any such
additional acquisitions, unless we issue shares of our common stock as
consideration for those acquisitions. If we are unable to obtain any such
financings, we may be required to forego future acquisition
opportunities.




Our
current reserve base in the Midwest is limited.




Our
southern Indiana mining complex currently has rights to proven and probable
reserves that we believe will be exhausted in approximately 13.5 years at 2008
levels of production, compared to our current Central Appalachia mining
complexes, which have reserves that we believe will last an average of
approximately 29.2 years at 2008 levels of production. We intend to increase our
reserves in southern Indiana by acquiring rights to additional exploitable
reserves that are either adjacent to or nearby our current reserves. If we are
unable to successfully acquire such rights on acceptable terms, or if our
exploration or acquisition activities indicate that such coal reserves or rights
do not exist or are not available on acceptable terms, our production and
revenues will decline as our reserves in that region are depleted. Exhaustion of
reserves at particular mines also may have an adverse effect on our operating
results that is disproportionate to the percentage of overall production
represented by such mines.





Surface
mining is subject to increased regulation, and may require us to incur
additional costs.





Surface
mining is subject to numerous regulations related, among others, to blasting
activities that can result in additional costs. For example, when blasting in
close proximity to structures, additional costs are incurred in designing and
implementing more complex blast delay regimens, conducting pre-blast surveys and
blast monitoring, and the risk of potential blast-related damages increases.
Since the nature of surface mining requires ongoing disturbance to the surface,
environmental compliance costs can be significantly greater than with
underground operations. In addition, the U.S. Army Corps of Engineers imposes
stream mitigation requirements on surface mining operations. These regulations
require that footage of stream loss be replaced through various mitigation
processes, if any ephemeral, intermittent, or perennial streams are filled due
to mining operations. In 2008, the U.S. Department of Interior’s Office of
Surface Mining imposed regulatory requirements applicable to excess spoil
placement, including the requirement that operators return as much spoil as
possible to the excavation created by the mine. These regulations may cause us
to incur significant additional costs, which could adversely impact our
operating performance.




Risks
Relating to our Common Stock





The
market price of our common stock has been volatile and difficult to predict, and
may continue to be volatile and difficult to predict in the future, and the
value of your investment may decline.




The
market price of our common stock has been volatile in the past and may continue
to be volatile in the future. The market price of our common stock will be
affected by, among other things:




•
            variations
      in our quarterly operating results;•
            changes
      in financial estimates by securities analysts;•
            sales
      of shares of our common stock by our officers and directors or by our
      shareholders;•
            changes
      in general conditions in the economy or the financial
    markets;•
            changes
      in accounting standards, policies or interpretations;•
            other
      developments affecting us, our industry, clients or competitors;
      and•
            the
      operating and stock price performance of companies that investors deem
      comparable to us.





29


Any of these factors could have a
negative effect on the price of our common stock on the Nasdaq Global Select
Market, make it difficult to predict the market price for our common stock in
the future and cause the value of your investment to
decline.





Dividends
are limited by our senior secured credit facility.




We do not
anticipate paying any cash dividends on our common stock in the near future. In
addition, covenants in our senior secured credit facility and senior
notes restrict our ability to pay cash dividends and may prohibit the
payment of dividends and certain other payments.




Provisions
of our articles of incorporation, bylaws and shareholder rights agreement could
discourage potential acquisition proposals and could deter or prevent a change
in control.




Some
provisions of our articles of incorporation and bylaws, as well as Virginia
statutes, may have the effect of delaying, deferring or preventing a change in
control. These provisions may make it more difficult for other persons, without
the approval of our Board of Directors, to make a tender offer or otherwise
acquire substantial amounts of our common stock or to launch other takeover
attempts that a shareholder might consider to be in such shareholder's best
interest. These provisions could limit the price that some investors might be
willing to pay in the future for shares of our common stock.




We have a
shareholder rights agreement which, in certain circumstances, including a person
or group acquiring, or the commencement of a tender or exchange offer that would
result in a person or group acquiring, beneficial ownership of more than 20% of
the outstanding shares of our common stock, would entitle each right holder,
other than the person or group triggering the plan, to receive, upon exercise of
the right, shares of our common stock having a then-current fair value equal to
twice the exercise price of a right. This shareholder rights agreement provides
us with a defensive mechanism that decreases the risk that a hostile acquirer
will attempt to take control of us without negotiating directly with our Board
of Directors. The shareholder rights agreement may discourage acquirers from
attempting to purchase us, which may adversely affect the price of our common
stock.





Item 1B.      Unresolved Staff
Comments




None.




Item
2.       Properties




As of
December 31, 2008, we owned approximately 10,700 acres of land.  Our mineral rights are
primarily controlled through leases.  In a mining context, control of
a property is typically divided into three categories:





·
            mineral
      rights, which allows the controlling party to remove the minerals on the
      property;





·
            surface
      rights, which allows the controlling party to use and disturb the surface
      of the property; and





·
            fee
      control, which includes both mineral and surface
  rights.





Our
rights with respect to properties that we lease vary from lease to lease, but
encompass mineral rights, surface rights, or both.





The coal
properties that we control in Central Appalachia are located in the Big Sandy,
Hazard and Upper Cumberland coal districts of the Central Appalachian coal basin
in eastern Kentucky and north central Tennessee.These three coal
districts are located in the Appalachian Plateau structural and physiographic
province.  The coal properties that we control in the Midwest are part
of the Illinois Coal basin and are located in southwest Indiana.  The
terms of our leases can vary significantly, including the following
provisions:





·
            length
      of term;


30





·
            renewal
      requirements;





·
            minimum
      royalties;





·
            recoupment
      provisions;





·
            tonnage
      royalty rates;





·
            minimum
      tonnage royalty rates;





·
            wheelage
      rates;





·
            usage
      fees; and





·
            other
      factors.





Our
leases typically provide for periodic royalty payments, subject to specified
annual minimums.  The annual minimums are typically based on the
forecasted tonnage of coal to be produced on the leased property over the term
of the lease.  Payments made pursuant to these minimums for years in
which periodic royalty payments do not meet the minimums are typically
recoupable against future periodic production royalties paid within a fixed
period of time.  We typically are responsible for the payment of
property taxes due on the properties we have under lease.





For a
discussion of our coal reserves see Item 1 Business “Reserves.”





Our
corporate headquarters are located in Richmond, Virginia and are occupied
pursuant to a lease that expires in 2014.







Item 3.       Legal
Proceedings




We are
parties to a number of legal proceedings incidental to our normal business
activities, including a large number of workers’ compensation
claims.  While we cannot predict the outcome of these proceedings, in
our opinion, any liability arising from these matters individually and in the
aggregate should not have a material adverse effect on our consolidated
financial position, cash flows or results of operations.







Item 4.       Submission
of Matters to a Vote of Security Holders




There
were no matters submitted to a vote of security holders of the Company through a
solicitation of proxies or otherwise during the fourth quarter of the Company’s
year ended December 31, 2008.




31


PART
II




Item 5.   Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities




Market
Information




Ourcommon stock trades on the Nasdaq Global Select Market under the tickersymbol “JRCC”. The table below sets forth the high and low closing sales prices for our common stock for the periods indicated, as reported by Nasdaq.





First
              Quarter
            Second
              Quarter
            Third
              Quarter
            Fourth
              QuarterFiscal year ended December 31, 2008High
            
            $19.65
            62.14
            58.79
            21.25Low
            
            $8.57
            17.22
            20.34
            5.09Fiscal year ended December 31,
      2007High
            
            $8.46
            15.08
            12.98
            11.58Low
            
            $6.11
            7.59
            3.86
            5.15





Recent Sales of Unregistered
Securities




We issued
common stock and options to purchase 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
            
            No.
              Options
            
            Date of
              Issuance
            
            Consideration
            
            Option
              Exercise
              Price




Operating
      and senior management
            
            239,140
            
            -
            
            January 1, 2008 to
              September
      5, 2008
            
            Services
              rendered
            
            N/ANon-employee
      directors (aggregate)
            
            5,000
            
            20,000
            
            May
      25, 2008
            
            Services
              rendered
            
            $36.30





Please
refer to note 7 of our December 31, 2008 consolidated financial statements for
securities authorized to be issued under our 2004 Equity Incentive
Plan.








Holders




As of
December 31, 2008, there were 134 record holders of our common
stock.




Dividends




We did
not pay any cash dividends on our common stock during the years ended December
31, 2008, 2007 or 2006.  We do not anticipate paying cash dividends in
the foreseeable future.  Any future determination as to the payment of
cash dividends will depend upon such factors as earnings, capital requirements,
our financial condition, restrictions in financing agreements and other factors
deemed relevant by the Board of Directors.  The payment of cash
dividends is also currently prohibited by our credit
facilities.


32







Stock
Performance Graph





Set forth
below is a line graph comparing the percentage change in the cumulative total
shareholder return of James River Coal Company’s Common Stock against the
cumulative total return of the NASDAQ Global Market (U.S.) Index and the Dow
Jones U.S. Coal Index for the period commencing on January 25, 2005 (the date
the Company’s Common Stock began trading on the Nasdaq Global Market) and ending
on December 31, 2008.















Item  6.       Selected
Financial Data




The
following table presents our selected consolidated financial and operating data
as of and for each of the periods indicated.  The selected
consolidated financial data for years ended December 31, 2008, 2007, 2006 and
2005, the eight months ended December 31, 2004 (the successor periods) and the
four months ended April 30, 2004 (predecessor period) are derived from our
audited consolidated financial statements.  The selected consolidated
financial and operating data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
our consolidated financial statements and related notes.


33





In March
2003, the Company and all of its subsidiaries filed voluntary petitions with the
United States Bankruptcy Court for the Middle District of Tennessee for
reorganization under Chapter 11.  Upon emergence from bankruptcy, we
adopted “fresh start” accounting as contained in the American Institute of
Certified Public Accountant’s Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code (“SOP 90-7”).  Our
consolidated financial statements after emergence are those of a new reporting
entity (the “Successor Company”) and are not comparable to the consolidated
financial statements of the pre-emergence company (the “Predecessor Company”). A
black line has been drawn in the consolidated financial statements to
distinguish Predecessor and Successor financial information.





Financial
statements for periods prior to April 30, 2004 include the effects of our
bankruptcy proceedings.  These include the classification of certain
liabilities as “liabilities subject to compromise,” the classification of
certain expenses, and gains and losses as reorganization items, and other
matters described in the notes to our consolidated financial
statements.

























34


James
River Coal Company and Subsidiaries
 Selected
Financial Data




Successor
      Company
            
            
            Predecessor
              CompanyYear
              Ended
              2008
            
            
            Year
              Ended
              2007
            
            
            Year
              Ended
              2006
            
            
            Year
              Ended
              2005
            
            
            Eight
      Months
              Ended
              December
      31,
              2004
            
            
            Four
      Months
              Ended
              April
      30,
              2004(in
      thousands, except per share, per ton and number of employees
      information)Consolidated
      Statement of Operations:Revenues
            
            $
            568,507
            
            
            
            520,560
            
            
            
            564,791
            
            
            
            453,999
            
            
            
            231,698
            
            
            
            113,949Cost
      of coal sold
            
            
            527,888
            
            
            
            473,347
            
            
            
            496,799
            
            
            
            389,222
            
            
            
            190,926
            
            
            
            89,294Gain
      on curtailment of pension plan
            
            
            -
            
            
            
            (6,091
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Depreciation,
      depletion, and amortization
            
            
            70,277
            
            
            
            71,856
            
            
            
            74,562
            
            
            
            51,822
            
            
            
            21,765
            
            
            
            12,314Gross
      profit (loss)
            
            
            (29,658
            )
            
            
            (18,522
            )
            
            
            (6,570
            )
            
            
            12,955
            
            
            
            19,007
            
            
            
            12,341Selling,
      general, and administrative expenses
            
            
            34,992
            
            
            
            32,191
            
            
            
            30,867
            
            
            
            25,453
            
            
            
            11,412
            
            
            
            5,023Operating
      income (loss)
            
            
            (64,650
            )
            
            
            (50,743
            )
            
            
            (37,437
            )
            
            
            (12,498
            )
            
            
            7,595
            
            
            
            7,318Interest
      expense
            
            
            17,746
            
            
            
            19,764
            
            
            
            16,782
            
            
            
            12,892
            
            
            
            5,733
            
            
            
            567Interest
      income
            
            
            (469
            )
            
            
            (471
            )
            
            
            (366
            )
            
            
            (226
            )
            
            
            (72
            )
            
            
            -Charges
      associated with repayment of debt
            
            
            15,618
            
            
            
            2,421
            
            
            
            -
            
            
            
            2,524
            
            
            
            -
            
            
            
            -Miscellaneous
      income, net
            
            
            (1,279
            )
            
            
            (598
            )
            
            
            (533
            )
            
            
            (1,067
            )
            
            
            (833
            )
            
            
            (331
            )Reorganization
      items, net
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (100,907
            )Income
      tax expense (benefit)
            
            
            (273
            )
            
            
            (17,844
            )
            
            
            (27,151
            )
            
            
            (14,283
            )
            
            
            791
            
            
            
            -Net
      income (loss)
            
            $
            (95,993
            )
            
            
            (54,015
            )
            
            
            (26,169
            )
            
            
            (12,338
            )
            
            
            1,976
            
            
            
            107,989Basic
      earnings (loss) per common share:
            
            
            (3.91
            )
            
            
            (3.29
            )
            
            
            (1.65
            )
            
            
            (0.83
            )
            
            
            0.14
            
            
            
            6,393.67Shares
      used to calculate basic earnings (loss) per common share
            
            
            24,520
            
            
            
            16,412
            
            
            
            15,849
            
            
            
            14,955
            
            
            
            13,800
            
            
            
            17Diluted
      earnings (loss) per common share:
            
            
            (3.91
            )
            
            
            (3.29
            )
            
            
            (1.65
            )
            
            
            (0.83
            )
            
            
            0.14
            
            
            
            6,393.67Shares
      used to calculate diluted earnings (loss) per share
            
            
            24,520
            
            
            
            16,412
            
            
            
            15,849
            
            
            
            14,955
            
            
            
            14,623
            
            
            
            17




35




Successor
      Company
            
            
            Predecessor
              CompanyDecember
    31,
            
            
            April
      30,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2004(in
      thousands, except per share, per ton and number of employees
      information)Consolidated
      Balance Sheet Data:Working
      capital (deficit)
            
            $
            (54,961
            )
            
            
            (8,471
            )
            
            
            (2,589
            )
            
            
            6,123
            
            
            
            10,046
            
            
            
            5,896Property,
      plant, and equipment, net
            
            
            344,848
            
            
            
            319,204
            
            
            
            337,780
            
            
            
            360,000
            
            
            
            255,575
            
            
            
            254,259Total
      assets
            
            
            463,546
            
            
            
            439,287
            
            
            
            451,254
            
            
            
            472,669
            
            
            
            327,826
            
            
            
            332,589Long
      term debt, including current portion
            
            
            168,000
            
            
            
            188,800
            
            
            
            167,493
            
            
            
            150,000
            
            
            
            95,000
            
            
            
            6,400Liabilities
      subject to compromise
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            319,451Total
      shareholders’ equity (deficit)
            
            
            65,238
            
            
            
            69,774
            
            
            
            86,397
            
            
            
            111,267
            
            
            
            65,585
            
            
            
            (127,837
            )







Successor
      Company
            
            
            Predecessor
              CompanyYear
              Ended
              2008
            
            
            Year
              Ended
              2007
            
            
            Year
              Ended
              2006
            
            
            Year
              Ended
              2005
            
            
            Eight
              Months
      Ended
              December
      31, 2004
            
            
            Four
      Months Ended
              April
      30,
              2004Consolidated
      Statement of Cash Flow Data:Net
      cash provided by (used in) operating activities
            
            $
            (1,576
            )
            
            
            4,022
            
            
            
            31,680
            
            
            
            48,990
            
            
            
            14,098
            
            
            
            1,513Net
      cash used in investing activities
            
            
            (73,589
            )
            
            
            (49,201
            )
            
            
            (54,738
            )
            
            
            (135,362
            )
            
            
            (21,744
            )
            
            
            (9,463
            )Net
      cash provided by financing activities
            
            
            73,076
            
            
            
            48,785
            
            
            
            15,929
            
            
            
            91,429
            
            
            
            10,224
            
            
            
            4,361Supplemental
      Operating Data:Tons
      sold
            
            
            11,383
            
            
            
            12,049
            
            
            
            13,128
            
            
            
            11,091
            
            
            
            5,775
            
            
            
            3,107Tons
      produced
            
            
            11,355
            
            
            
            12,051
            
            
            
            13,054
            
            
            
            11,155
            
            
            
            5,770
            
            
            
            3,081Revenue
      per ton sold (excluding synfuel)
            
            $
            49.94
            
            
            
            42.63
            
            
            
            42.67
            
            
            
            40.19
            
            
            
            39.21
            
            
            
            35.98Number
      of employees
            
            
            1,751
            
            
            
            1,681
            
            
            
            1,742
            
            
            
            1,429
            
            
            
            1,070
            
            
            
            984Capital
      expenditures
            
            $
            74,697
            
            
            
            49,343
            
            
            
            62,507
            
            
            
            84,987
            
            
            
            25,811
            
            
            
            9,521







36


Item 7.        Management’s Discussion and
Analysis of Financial Condition and
Results ofOperation


The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the accompanying notes and "Selected Financial Data" included
elsewhere in this filing.  This
discussion contains forward-looking statements that involve risks and
uncertainties.  Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of numerous factors,
including the risks discussed in "Risk Factors" in this filing.





Overview





We mine,
process and sell bituminous, steam- and industrial-grade coal through six
operating subsidiaries (“mining complexes”) located throughout eastern Kentucky
and in southern Indiana.  We have two reportable business segments
based on the coal basins in which we operate (Central Appalachia (CAPP) and the
Midwest (Midwest)).  In 2008, our mines produced 11.1 million tons of
coal(including 0.2 million tons of contract coal)andwe purchased another 0.2 million
tons for resale.  Of the 11.1 million tons we produced from Company
operated mines, approximately 66% came from underground mines, while the
remaining 34% came from surface mines.  In 2008,we
generated revenues of $568.5 millionand a
net loss of $96.0million.





CAPP
Segment





In
Central Appalachia, the majority of our coal is primarily sold to customers in
the southern portion of the South Atlantic region of the United
States.  The South Atlantic Region includes the states of Florida,
Georgia, South Carolina, North Carolina, West Virginia, Virginia, Maryland and
Delaware.  According to the most recent information available
from the US Energy Information Administration (EIA), in 2007 the South
Atlantic region consumed 186.4 million tons of coal or about 18% of all coal for
electric generation in the United States.  We have been providing coal to customers in the South
Atlantic region since our formation in 1988.  In 2008, Georgia Power
Company and South Carolina Public Service Authority were our largest customers,
representing approximately 36% and 12% of our total revenues,
respectively.  No other customer accounted for more than 10% of our
revenues.





According
to the EIA, coal production for Eastern Kentucky and West Virginia was 240
million tons in 2007.  During 2008, our CAPP segment shipped 8.3
million tons of coal.  As of December
31, 2008, we estimate that we controlled approximately 235 million tons of
proven and probable coal reserves in our CAAP segment.  Based on our
most recent analysis prepared by Marshall Miller &Associates, Inc.
(“MM&A”) as of March 31, 2004, we estimate that these reserves have an average heat content of 13,300 Btu
per pound and an average sulfur content of 1.3%.  At current
production levels, we believe these reserves would support approximately 29
years of production.





Midwest
Segment





In the
Midwest, the majority of our coal is sold in the East North Central Region,
which includes the states of Illinois, Indiana, Ohio, Michigan and
Wisconsin.  According to the  EIA, in 2007 the East North
Central Region consumed about 237.5 million tons of coal or 23% of all coal
consumed for electric generation in the United States.  In 2008, our Midwest segment’s largest customer
representedapproximately 5% of our total
revenues.





During
2008, our Midwest segment shipped 3.1 million tons of coal.  We believe that coal-fired electric utilitiesand industrial customersvalue the high energy coal that comprises the majority
of our Midwest reserves.  As of December 31, 2008, we estimate that we
controlled approximately 42 million tons of proven and probable coal reserves in
our Midwest segment.  Based on our most recent analyses prepared byMM&A as of February 1, 2005 and April 11, 2006, we estimate that
these reserves have an average heat content of
12,000 Btu per pound and average sulfur content of 3.2%.  At current
production levels, we believe these reserves would support approximately
14years of production.


37




Reserves




MM&A
prepared a detailed study of our CAPP reserves as of March 31, 2004 based on all
of our geologic information, including our updated drilling and mining data.
MM&A completed their report on our CAPP reserves in June
2004.  For the Triad properties, MM&A also prepared a detailed
study of Triad’s reserves as of February 1, 2005 for the reserves obtained in
the acquisition of Triad and as of April 11, 2006 for certain additional
reserves acquired in the second quarter of 2006.  The MM&A studies
were planned and performed to obtain reasonable assurance of the subject
demonstrated reserves.  In connection with the studies, MM&A prepared
reserve maps and had certified professional geologists develop estimates based
on data supplied by us and Triad using standards accepted by government and
industry.  We have used MM&A’s March 31, 2004 study as the basis
for our current internal estimate of our Central Appalachia reserves and
MM&A’s February 1, 2005 and April 11, 2006 studies as the basis for our
current internal estimate of our Midwest reserves.




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), MM&A’s engagement did not
include performing an economic feasibility study for our reserves.  In
accordance with standard industry practice, we have performed our own economic
feasibility analysis for our 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 in “Critical Accounting Estimates – Coal Reserves”.




Based on
the MM&A reserve studies and the foregoing assumptions and qualifications,
and after giving effect to our operations from the respective dates of the
studies through December 31, 2008, we estimate that, as of December 31, 2008, we
controlled approximately 235.1 million tons of proven and probable coal reserves
in the CAPP region and 42.0 millions tons in the Midwest region.  The
following table provides additional information regarding changes to our
reserves since December 31, 2007 (in millions of tons):





CAPP
                
                
                Midwest
                
                
                TotalProven
      and Probable Reserves, as of December 31, 2007 (1)
                
                
                225.3
                
                
                
                42.6
                
                
                
                267.9Coal
      Extracted
                
                
                (8.0
                )
                
                
                (3.1
                )
                
                
                (11.1
                )Acquisitions
      (2)
                
                
                17.8
                
                
                
                2.4
                
                
                
                20.2Adjustments
      (3)
                
                
                0.7
                
                
                
                0.1
                
                
                
                0.8Divestures
      (4)
                
                
                (0.7
                )
                
                
                -
                
                
                
                (0.7
                )Proven
      and Probable Reserves, as of December 31, 2008 (1)
                
                
                235.1
                
                
                
                42.0
                
                
                
                277.1





1)
Calculated in the same manner, and based on the same assumptions and
qualifications, as used in the MM&A studies described above, but these
estimates have not been reviewed by MM&A.  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 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.





38


(2)
Represents estimated reserves on leases entered into or properties acquired
during the relevant period.  We calculated the reserves in the same manner,
and based on the same assumptions and qualifications, as used in the MM&A
studies described above, but these estimates have not been reviewed by
MM&A.





(3)
Represents changes in reserves due to additional information obtained from
exploration activities, production activities or discovery of new geologic
information. We calculated the adjustments to the reserves in the same manner,
and based on the same assumptions and qualifications, as used in the
MM&A studies described above, but these estimates have not been reviewed by
MM&A.





(4)
Represents changes in reserves due to expired leases.





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 and 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, 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. We closely monitor the cost per ton of our mines against our
budgeted costs and against our other mines.





EBITDA
and Adjusted EBITDA are also measures used by management to measure operating
performance. We define EBITDA as net income (loss) plus interest expense (net),
income tax expense (benefit) and depreciation, depletion and amortization. We
regularly use EBITDA to evaluate our performance as compared to other companies
in our industry that have different financing and capital structures and/or tax
rates. In addition, we use EBITDA in evaluating acquisition targets. EBITDA is
not a recognized term under GAAP and is not an alternative to net income,
operating income or any other performance measures derived in accordance with
GAAP or an alternative to cash flow from operating activities as a measure of
operating liquidity.  Adjusted EBITDA is used in calculating
compliance with our debt covenants and adjusts EBITDA for certain items as
defined in our debt agreements, including stock compensation and certain bank
fees.  See “Other Supplemental Information  — 
Reconciliation of Non-GAAP Measures.”





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





Near-term,
the global economic slowdown has lowered demand for coal which has resulted in a
decline in spot coal prices.  The price of spot coal has also been
impacted by a decrease in the price of competing fuel sources including oil and
natural gas.  Recently, the coal industry has announced cutbacks in
supply in response to decrease in demand for coal.  Due to the
uncertainties in the global market place, we are unable to forecast the price or
demand for coal over the next few years.  Long-term, we believe that
the demand for coal worldwide will continue to be strong as supply challenges
will continue in the regions that we mine coal.  We also believe that
in the United States that coal will continue to be one of the most economical
energy sources.   A number of factors beyond our control impact
coal prices, including:





·
              the
      supply of domestic and foreign
coal;


·
              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;


39





·
              domestic
      and foreign governmental regulations and
taxes;


·
              world
      economic conditions


·
              air
      emission standards for coal-fired power plants;
  and


·
              the
      price and availability of alternative fuels for electricity
      generation.





As
discussed previously, our costs of production have increased in recent
years.  We expect the higher costs to continue for the next several
years, due to a number of factors, including increased governmental regulations,
high prices in worldwide commodity markets, and a highly competitive market for
a limited supply of skilled mining personnel.




Our
business is very sensitive to changes in supply and demand for coal and we
carefully manage our mines to maximize operating results.  Events beyond
our control could impact our profit margins.





Results
of Operations





Year
Ended December 31, 2008 Compared with the Year Ended December 31,
2007





The
following table shows selected operating results for 2008 and 2007 (in
thousands, except per ton amounts):





Year
      Ended December 31,2008
              
              
              2007
              
              
              ChangeTotal
              
              
              Per
      Ton
              
              
              Total
              
              
              Per
      Ton
              
              
              TotalVolume
      Shipped (tons)
              
              
              11,383
              
              
              
              
              
              
              12,049
              
              
              
              
              
              
              -6
              %Coal
      sales revenue
              
              $
              568,507
              
              
              
              49.94
              
              
              $
              513,706
              
              
              
              42.63
              
              
              
              11
              %Synfuel
      handling
              
              
              -
              
              
              
              
              
              
              
              6,854
              
              
              
              
              
              
              
              N/ACost
      of coal sold
              
              
              527,888
              
              
              
              46.38
              
              
              
              473,347
              
              
              
              39.29
              
              
              
              12
              %Gain
      on curtailment of pension plan
              
              
              -
              
              
              
              -
              
              
              
              (6,091
              )
              
              
              (0.51
              )
              
              
              N/ADepreciation,
      depletion and amortization
              
              
              70,277
              
              
              
              6.17
              
              
              
              71,856
              
              
              
              5.96
              
              
              
              -2
              %Gross
      profit (loss)
              
              
              (29,658
              )
              
              
              (2.61
              )
              
              
              (18,552
              )
              
              
              (1.54
              )
              
              
              60
              %Selling,
      general and administrative
              
              
              34,992
              
              
              
              3.07
              
              
              
              32,191
              
              
              
              2.67
              
              
              
              9
              %




Volume
and Revenues by Segment





Year
      Ended December 31,2008
              
              
              2007CAPP
              
              
              Midwest
              
              
              CAPP
              
              
              MidwestVolume
      Shipped (tons)
              
              
              8,271
              
              
              
              3,112
              
              
              
              8,893
              
              
              
              3,156Coal
      sales revenue
              
              $
              467,609
              
              
              
              100,898
              
              
              
              422,429
              
              
              
              91,277Average
      sales price per ton
              
              $
              56.54
              
              
              
              32.42
              
              
              
              47.50
              
              
              
              28.92




In 2008,
we shipped 11.4 million tons of coal compared to 12.0 million tons in
2007.  Coal sales revenue increased from $513.7 million in 2007 to
$568.5 million in 2008. This increase was due to an increase in the average
sales price per ton in both the CAPP and Midwest regions, partially offset by a
decrease in the volume of tons shipped.


40





In 2008,
the CAPP region sold approximately 4.6 million tons of coal under long-term
contracts (56% of total CAPP sales volume) at an average selling price of $52.52
per ton. In 2007, the CAPP region sold approximately 7.7 million tons of coal
under long-term contracts (86% of total CAPP sales volume) at an average selling
price of $46.30 per ton. In 2008, the CAPP region sold 3.7 million tons of coal
(44% of total CAPP sales volume) under short term contracts (includes spot
sales) at an average selling price of $61.62 per ton. In 2007, the CAPP region
sold 1.2 million tons of coal (14% of total CAPP sales volume) under short term
contracts (includes spot sales) at an average selling price of $54.94 per
ton.





Prior to
2008, we received revenues from coal supplied to a third party synfuel plant and
received fees for the handling, shipping and marketing of the synfuel
product.  After January 1, 2008, we no longer received any revenues
related to synfuel.





The
Midwest’s region sales of coal were primarily sold under long term contracts for
both the 2008 and 2007. In 2008, the Midwest region sold 3.1 million tons at an
average sales price of $32.42.  In 2007, the Midwest region sold 3.2
million tons at an average sales price of $28.92.





Year
      Ended December 31,2008
              
              
              2007CAPP
              
              
              Midwest
              
              
              Corporate
              
              
              CAPP
              
              
              Midwest
              
              
              CorporateCost
      of Coal Sold
              
              $
              433,781
              
              
              
              94,107
              
              
              
              -
              
              
              
              396,639
              
              
              
              76,708
              
              
              
              -Per
      ton
              
              
              52.45
              
              
              
              30.24
              
              
              
              -
              
              
              
              44.60
              
              
              
              24.31
              
              
              
              -Depreciation,
      depletion, and amortization
              
              
              55,979
              
              
              
              14,218
              
              
              
              80
              
              
              
              56,506
              
              
              
              15,199
              
              
              
              151Per
      ton
              
              
              6.77
              
              
              
              4.57
              
              
              
              -
              
              
              
              6.35
              
              
              
              4.82
              
              
              
              -




Cost
of Coal Sold





The cost
of coal sold, excluding depreciation, depletion and amortization increased from
$473.3 million in 2007 to $527.9 million in 2008.  Our cost per ton of
coal sold in the CAPP region increased from $44.60 per ton in the 2007 period to
$52.45 per ton in the 2008 period.  This $7.85 increase in cost per
ton of coal sold was primarily the result of lower productivity due to increased
federal and state regulatory scrutiny, adverse geological conditions, a tight
labor market, rising commodity prices including diesel fuel and steel, and the
impact of increased average sales prices on our sales related costs. The major
components of this increase include an increase in the Company’s labor and
benefit costs of $2.53 per ton, variable costs of $1.61 per ton and sales
related costs of $1.13 per ton.    For more detail regarding
the increased regulatory activity see “Part II – Item 1A – Risk Factors –
Underground mining is subject to increased regulation, and may require us to
incur additional cost.”





Our cost
per ton of coal sold in the Midwest region increased from $24.31 in 2007 to
$30.24 in 2008.  The increase in cost per ton of coal sold was
primarily due to an increase of $3.59 per ton in variable costs.  The
increase in the variable costs was due to increased costs for diesel fuel and
explosives. Our labor and benefit costs and trucking costs also increased $0.61
and $0.62 per ton, respectively.  The increase in labor costs was due
to an increase in wages as compared to prior year and trucking costs increased
due to an increase in rates.




Depreciation,
depletion and amortization




Depreciation,
depletion and amortization decreased from $71.9 million in 2007 to $70.3 million
in 2008.  In
the CAPP region, depreciation, depletion and amortization decreased $0.5 million
to $56.0 millionor $6.77per ton.  In the Midwest,
depreciation, depletion and amortization decreased $1.0 million to $14.2 million
or $4.57 per ton.


41




Selling,
general and administrative




Selling,
general and administrative expenses increased from $32.2 million for 2007 to
$35.0 million for 2008. The increase was primarily due to increases in employee
stock compensation, bank service costs including letter of credit fees, and
bonding and permitting costs.





Charges
associated with repayment and amendment of debt





In 2008,
we expensed and paid approximately $7.8 million of costs associated with the
Credit Amendments, which are described below.  In 2008, we also
expensed but had not paid fees of approximately $5.5 million associated with the
Credit Amendments.  Additionally, the Company wrote-off approximately
$2.4 million of unamortized financing charges on the Term Facility in
2008.





In 2007,
we wrote off $2.4 million of financing charges in connection with the repayment
of the Prior Senior Secured Credit Facility. The write off of the financing
charges is classified as charges associated with repayment of debt.





Income
Taxes





Our
effective income tax rate is impacted primarily by the amount of the valuation
allowance recorded and percentage depletion.  For 2008, we had a 0.3%
effective tax rate primarily based on the conclusion that the benefit of
the expected 2008 net operating loss is not more likely than not to be
realized.  The criteria for recording a valuation allowance are
described in “Critical Accounting Estimates – Income Taxes.”  As of
December 31, 2008, we had a $54.3 million valuation allowance against gross
deferred tax assets.   Our effective tax rate for 2007 was
24.8%.  We recorded an $8.8 million valuation allowance for tax
purposes for the year ended December 31, 2007, which reduced our effective tax
rate for 2007 by 13.2%.  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 basis in the properties, 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.





Year
Ended December 31, 2007 Compared with the Year Ended December 31,
2006





The
following table shows selected operating results for 2007 and 2006 (in
thousands, except per ton amounts):





Year
      Ended December 31,2007
              
              
              2006
              
              
              ChangeTotal
              
              
              Per
      Ton
              
              
              Total
              
              
              Per
      Ton
              
              
              TotalVolume
      Shipped (tons)
              
              
              12,049
              
              
              
              
              
              
              13,128
              
              
              
              
              
              
              -8
              %Coal
      sales
              
              $
              513,706
              
              
              
              42.63
              
              
              $
              560,183
              
              
              
              42.67
              
              
              
              -8
              %Synfuel
      handling
              
              
              6,854
              
              
              
              
              
              
              
              4,608
              
              
              
              
              
              
              
              49
              %Cost
      of coal sold
              
              
              473,347
              
              
              
              39.29
              
              
              
              496,799
              
              
              
              37.84
              
              
              
              -5
              %Gain
      on curtailment of pension plan
              
              
              (6,091
              )
              
              
              (0.51
              )
              
              
              -
              
              
              
              -
              
              
              
              N/ADepreciation,
      depletion and amortization
              
              
              71,856
              
              
              
              5.96
              
              
              
              74,562
              
              
              
              5.68
              
              
              
              -4
              %Gross
      profit (loss)
              
              
              (18,552
              )
              
              
              (1.54
              )
              
              
              (6,570
              )
              
              
              (0.50
              )
              
              
              182
              %Selling,
      general and administrative
              
              
              32,191
              
              
              
              2.67
              
              
              
              30,867
              
              
              
              2.35
              
              
              
              4
              %


42


Volume
and Revenues by Segment





Year
      Ended December 31,2007
              
              
              2006CAPP
              
              
              Midwest
              
              
              CAPP
              
              
              MidwestVolume
      Shipped (tons)
              
              
              8,893
              
              
              
              3,156
              
              
              
              9,780
              
              
              
              3,348Coal
      sales revenue
              
              $
              422,429
              
              
              
              91,277
              
              
              
              467,492
              
              
              
              92,691Average
      sales price per ton
              
              $
              47.50
              
              
              
              28.92
              
              
              
              47.80
              
              
              
              27.69




In 2007,
we shipped 12.0 million tons of coal compared to 13.1 million tons in
2006.  Coal sales revenue decreased from $560.2 million in 2006 to
$513.7 million in 2007. This decrease was due to a decrease in both tons sold
and the average sales price per ton in CAPP.  The decrease in tons
sold in CAPP was due to weak market conditions for coal.   In
2007, the CAPP region sold 7.7 million tons of coal (86% of total CAPP sales
volume) under long-term contracts at an average selling price of $46.30 per ton.
In 2006, the CAPP region sold 7.9 million tons of coal (80% of total CAPP sales
volume) under long-term contracts at an average selling price of $44.62 per
ton.  In 2007, the CAPP region sold approximately 1.2 million tons
(14% of total CAPP sales volume) to the spot market at an average selling price
of $54.94 per ton.   In 2006, the CAPP region sold approximately
1.9 million tons (20% of total CAPP sales volume) to the spot market at an
average selling price of $60.99 per ton.





The
Midwest’s region sales of coal were primarily sold under long term contracts for
both the 2007 and 2006 periods. In 2007, the Midwest region sold 3.2 million
tons at an average sales price of $28.92.  In 2006, the Midwest region
sold 3.3 million tons at an average sales price of $27.69.





Year
      Ended December 31,2007
              
              
              2006CAPP
              
              
              Midwest
              
              
              Corporate
              
              
              CAPP
              
              
              Midwest
              
              
              CorporateCost
      of Coal Sold
              
              $
              396,639
              
              
              
              76,708
              
              
              
              -
              
              
              
              420,223
              
              
              
              76,576
              
              
              
              -Per
      ton
              
              
              44.60
              
              
              
              24.31
              
              
              
              -
              
              
              
              42.97
              
              
              
              22.87
              
              
              
              -Depreciation,
      depletion, and amortization
              
              
              56,506
              
              
              
              15,199
              
              
              
              151
              
              
              
              60,040
              
              
              
              14,411
              
              
              
              111Per
      ton
              
              
              6.35
              
              
              
              4.82
              
              
              
              -
              
              
              
              6.14
              
              
              
              4.30
              
              
              
              -




Cost
of Coal Sold





The cost
of coal sold, excluding depreciation, depletion and amortization decreased from
$496.8 million in 2006 to $473.3 million in 2007.  Our cost per ton of
coal sold in the CAPP region increased from $42.97 per ton in the 2006 period to
$44.60 per ton in the 2007 period.  Variable costs increased by $1.03
per ton, primarily due to an increase in equipment rental at our surface mines,
and an increase in fuel costs due to an increase in surface mining production in
2007 as compared to 2006.   The remaining increase in the CAPP
region was primarily due to an increase in costs at our preparation and load out
facilities due to a decrease in tons processed by those facilities due to the
impact on production of continuing regulatory scrutiny that began in
2006.  Our cost per ton of coal sold in the Midwest region increased
from $22.87 in 2006 to $24.31 in 2007. The increase in cost per ton of coal sold
was primarily due to a $1.25 per ton increase in labor costs due to an increase
in wages and an increase in headcount, a $0.30 increase in variable costs and
$0.32 in royalty costs.   This increase in the Midwest was offset by a
decrease in trucking costs of $0.59 per ton due to certain customers assuming
responsibility for trucking costs.In the fourth quarter
of 2006, the Company also recorded a $4.1 million charge in the CAPP region to
write-off of a prepaid royalty in connection with the restructuring of a mineral
lease contract.





43


Gain
on curtailment of pension plan





Effective
September 30, 2007, the Company froze pension plan benefit accruals for all
employees covered under its non-contributory defined benefit pension plan,
resulting in a curtailment gain of $6.1 million in 2007.




Depreciation,
depletion and amortization




Depreciation,
depletion and amortization decreased from $74.6 million in 2006 to $71.9 million
in 2007.  In
the CAPP region, depreciation, depletion and amortization decreased $3.5 million
to $56.5 million or $6.35 per ton.  This decrease was primarily due to
a drop in the depreciable assets base due to certain assets that became fully
depreciated in May 2007.  In the Midwest, depreciation, depletion and
amortization increased $0.8 million to $15.2 million or $4.82 per
ton.




Selling,
general and administrative




Selling,
general and administrative expenses increased from $30.9 million for 2006 to
$32.2 million for 2007. The increase was primarily due to an increase in certain
salary and benefit amounts, property taxes and bank service
charges.  A $1.7 million expense for the resolution of a contingent
obligation dealing with our previous bankruptcy was recorded in the fourth
quarter of 2006.





Charges
associated with repayment and amendment of debt





In 2007,
we wrote off $2.4 million of financing charges in connection with the repayment
of the Prior Senior Secured Credit Facility. The write off of the financing
charges is classified as charges associated with repayment of debt.





Income
Taxes





Our
effective tax rates for 2007 and 2006 were 24.8% and 51.0%,
respectively.  Our effective income tax rate is impacted primarily by
the amount of the valuation allowance recorded and percentage depletion. We
recorded an $8.8 million valuation allowance for tax purposes for the year ended
December 31, 2007, which reduced our effective tax rate for 2007 by 13.2%.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 the cost basis of the property, it creates a permanent difference and
directly impacts the effective tax rate. Fluctuations in the effective tax rate
may occur between fiscal periods due to the varying levels of profitability (and
thus, taxable income and percentage depletion) at each of our mine
locations.





Liquidity
and Capital Resources





The
following chart reflects the components of our debt as of December 31, 2008 and
2007:





2008
            
            
            2007Senior
      Notes
            
            $
            150,000
            
            
            
            150,000Revolver
            
            
            18,000
            
            
            
            -Term
      Facility
            
            
            -
            
            
            
            38,800Total
      long-term debt
            
            
            168,000
            
            
            
            188,800Less
      amounts classified as current
            
            
            18,000
            
            
            
            1,600Total
      long-term debt, less current maturities
            
            $
            150,000
            
            
            
            187,200





44


The
Senior Notes are due on June 1, 2012.  The Senior Notes are unsecured
and accrue interest at 9.375% per annum. Interest payments on the Senior Notes
are required semi-annually. We may redeem the Senior Notes, in whole or in part,
at any time on or after June 1, 2009 at redemption prices from 104.86% in 2009
to 100% in 2011. The Senior Notes limit our ability, among other things, to pay
cash dividends. In addition, if a change of control occurs (as defined in the
Indenture), each holder of the Senior Notes will have the right to require us to
repurchase all or a part of the Senior Notes at a price equal to 101% of their
principal amount, plus any accrued interest to the date of
repurchase.




In 2007,
we entered into a $35.0 million Revolving Credit Agreement (the Revolver) and a
Term Credit Agreement (collectively the Facilities). The Term Credit Agreement
consists of a term facility (the Term Facility) and a $60.0 million letter of
credit facility (the Letter of Credit Facility).  As discussed below,
the Company repaid the outstanding balance of the Term Facility in October
2008.  The Letter of Credit Facility does not constitute a loan to the
Company and accordingly is not available for borrowing by the Company.  The
Letter of Credit Facility supports the issuance of up to $60 million of letters
of credit by the Company.





In May
2008, we entered into the Third Amendment to the Term Credit Agreement and the
Second Amendment to the Revolving Credit Agreement and in November 2008, we
entered into the Fourth Amendment to the Term Credit Agreement and the Third
Amendment to the Revolving Credit Agreement (collectively the Credit
Amendments).  The Credit Amendments waived defaults under the
Facilities as of March 31, 2008 and September 30, 2008, prospectively waived or
modified certain existing financial covenants under the Facilities, increased
the fee on the unused portion of Revolver to 0.75% and increased the usage rates
of the Letter of Credit Facility by amounts ranging from 3.0% to 7.0% at
designated periods from October 1, 2008 to the Letter of Credit Facility’s
maturity date.





The
following is a summary of significant terms of the outstanding portion of our
Facilities, as amended, as of December 31, 2008.





Revolver
            Letter
      of Credit FacilityMaturity
            February
      2012(c)
            February
      2013Interest/Usage
      Rate
            Company’s
      option of Base Rate(a)
      plus 1.75% or LIBOR plus 2.75% per annum
            10.0%
      effective January 1, 2009; and 12.5% effective April 1, 2009 to the Letter
      of Credit Facility’s maturity date.Maximum
      Availability
            Lesser
      of $35.0 million and the borrowing base (b)
            $60.0
      millionPeriodic
      Principal Payments
            None
            Not
      applicable





(a)
            Base
      rate is the higher of (1) the Federal Fund Rate plus 0.5%, and (2) the
      prime rate.(b)
            The
      Revolver’s borrowing base is the sum of up to 85% of the eligible accounts
      receivable plus the lesser of (1) up to 60% of eligible inventory and (2)
      up to 85% of the net orderly liquidation value of eligible inventory;
      minus reserve from time to time set by administrative
      agent.  Amount available is also subject to a minimum liquidity
      covenant.(c)
            The
      balance of the Revolver is classified as current on our balance sheet
      based on our intent to pay within the next
year.




The
Revolver provides that we can use up to $10.0 million of the Revolver
availability to issue letters of credit. The Revolver provides for a 2.75% fee
on any outstanding letters of credit issued under the Revolver and a 0.75% fee
on the unused portion of the Revolver. The Facilities require certain mandatory
prepayments from certain asset sales, incurrence of indebtedness and excess cash
flow. The Facilities include financial covenants that require us to maintain a
minimum EBITDA, a minimum liquidity level and a maximum leverage ratio and limit
capital expenditures, each as defined by the agreement. The Facilities are
secured by substantially all of our assets.





45


As of
December 31, 2008, we had $10.1 million of availability under our Revolver due
to a seasonably low level of inventory and accounts receivable which support the
borrowing base.  We are required to maintain minimum liquidity as
defined under our credit agreements of $10 million and as a result had $0.1
million of borrowing capacity at December 31, 2008.  However, as a
result of higher levels of inventory and accounts receivable, $16.2 million was
available under our Revolver as of January 31, 2009, which provided us with $6.2
million of borrowing capacity at such date.  At December 31, 2008, we
also had $3.3 million of cash and cash equivalents.





As a
result of the Credit Amendments, we were in compliance with all of the financial
covenants under the Facilities and Senior Notes as of December 31, 2008. 
We cannot assure you that we will remain in compliance in subsequent
periods.  If necessary, we will consider seeking a waiver or other
alternatives to remain in compliance with the covenants.  For
more detail regarding the covenants under the Facilities, see Part II - Item 1A
- Risk Factors - “We may be unable to comply with restrictions imposed by the
terms of our indebtedness, which could result in a default under these
instruments.”





During
2007 and 2008, we raised a total of approximately $126.3 million through the
issuances of common shares.  As required by the Term Facility, we
offered a portion of the proceeds from the issuance of the common shares in
excess of $40 million to the holders of the Term Facility to redeem amounts
outstanding.  The mandatory tender offers were accepted by the holders
of the Term Facility and the Company repaid the outstanding balance under the
Term Facility ($38.2 million) and used $5.2 million of our cash to secure
letters of credit under the Letter of Credit Facility.  The $5.2
million of cash used to secure the letters of credit under the Letter of Credit
Facility is included in other assets on our consolidated balance sheet as of
December 31, 2008, as we are not permitted to use this cash for general
corporate purposes.





In July
2008, we acquired certain coal reserves and permits from Cheyenne Resources,
Inc.  The acquired assets include approximately 10.2 million tons of
proven and probable surface reserves and 3.6 million tons of proven and probable
underground reserves, plus additional surface resources.  The purchase
price for the acquisition was $36 million, comprised of $16 million in cash at
closing, a short term promissory note for $4 million that was paid in full
September 2008 and 387,973 shares of newly issued common stock of the Company,
valued at $16 million (shares valued based on the most recent closing price
prior to closing).





Our
primary source of cash is expected to be sales of coal to our utility and
industrial customers. The price of coal received can change dramatically based
on market factors and will directly affect this source of cash. We have over 6.6
million committed tons sold for 2009 at an average price of approximately $90
per ton, which will positively impact our liquidity in 2009 as compared to
2008.  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 as the claims are
submitted. 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 issued letters of credit to
secure these bonds. We believe that our Letter of Credit Facility and Revolver
provide us with the ability to meet the necessary bonding
requirements.





Our
secondary source of cash is the Revolver.  We believe that cash
generated from operations, borrowings under our credit facilities and future
debt and equity offerings, if any, will be sufficient to meet working capital
requirements, anticipated capital expenditures and scheduled debt payments
throughout 2009 and for the next several years. Nevertheless, our ability to
satisfy our working capital requirements and debt service obligations, or fund
planned capital expenditures, will substantially depend upon our future
operating performance (which will be affected by prevailing economic conditions
in the coal industry), debt covenants, and financial, business and other
factors, some of which are beyond our control.





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,
seek additional financing, or both. We may seek to raise funds through
additional debt financing or the issuance of additional equity securities.
If such actions are not sufficient, we may need to limit our growth, sell assets
or reduce or curtail some of our operations to levels consistent with the
constraints imposed by our available cash flow, or any combination of these
options. Our ability to seek additional debt or equity financing may be limited
by our existing and any future financing arrangements, economic and financial
conditions, or all three. In particular, our Senior Notes and the Facilities
restrict our ability to incur additional indebtedness. We cannot provide
assurance that any reductions in our planned expenditures or in our expansion
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.





46


Currently,
our primary use of cash during the next several years is expected to be ordinary
course of business expenses and capital expenditures for existing mines. We
currently project that our capital expenditures for 2009 will be approximately
$75million. Our
projected capital expenditures primarily consist of capital expenditure for
normal mining activities including new and replacement mine
equipment.  Our projected capital expenditures for 2009 also includes
$10.0 million for safety mandates. We expect that such expenditures will be
funded through cash on hand, cash generated by operations and borrowings under
our debt Facilities.





Net cash
provided by or used in operating activities reflects net loss adjusted for
non-cash charges and changes in net working capital (including non-current
operating assets and liabilities).  Net cash used in operating activities
was $1.6 million for the year ended December 31, 2008 and net cash provided by
operating activities was $4.0 million for the year ended December 31,
2007.  Our net loss increased from $54.0 million in 2007 to $96.0 million
in 2008.  In reconciling our net loss to cash provided by operating
activities, $81.8 million was added for non cash charges during 2008 as
compared to $57.2 million during 2007.   During 2008, our net loss, as
adjusted for non cash charges, was increased by a $12.6 million increase in cash
from our operating assets and liabilities.  The $12.6 million change
in our operating assets and liabilities for 2008, includes a $7.7 million
decrease in accounts receivable, a $9.8 million increase in accounts payables, a
$9.6 million increase in other assets and an $8.7 million increase in other
current liabilities.  During 2007, our net income, as adjusted for non
cash charges, was offset by a $0.8 million increase in cash from our operating
assets and liabilities.  The primarily changes in our operating assets and
liabilities were a $6.9 million decrease in our accounts receivables and an
increase in accounts payables of $4.6 million.  These changes are primarily
due to timing of payments as compared with the prior
year.




Net cash
used by investing activities increased $24.4 million to $73.6 million for 2008, as
compared to 2007.  Capital expenditures were $74.7 million in 2008 and
$49.3 million in 2007.  The increase in capital expenditures was
primarily due to $20.0 million paid by the Company for a mineral rights
acquisition during the third quarter of 2008.    Excluding
the mineral rights acquisition, capital expenditures primarily consisted of new
and replacement mine equipment and various projects to improve the production
and efficiency of our mining operations.





Net cash
provided by financing activities was $73.1 million 2008. During 2008 our primary
financing activities were the receipt of $93.8 million of net proceeds from the
issuance of our common stock, net borrowings of $18.0 million on our Revolver
and the repayment $38.8 million under our Term Loan.  Net cash provided by
financing activities was $48.8 million for 2007.  During 2007, we
received $40.0 million of proceeds from the entrance into our Term Facility and
$32.4 million of net proceeds from the issuance of common
stock.  During 2007, the cash inflows from financing activities were
offset by $19.0 million of repayments on our various debt facilities and $4.6
million of debt issuance costs.





47


Contractual
Obligations





The
following is a summary of our contractual obligations and commitments as of
December 31, 2008:





Payment
      Due by Period (in thousands)Contractual Obligations
              
              Total
              
              
              2009
              
              
              
              2009-2010
              
              
              
              2011-2012
              
              
              ThereafterLong
      term debt (1)
              
              $
              168,000
              
              
              
              18,000
              
              
              
              -
              
              
              
              150,000
              
              
              
              -Interest
      on long term debt and fees under our Letter of Credit Facility (2)
              
              
              77,652
              
              
              
              20,548
              
              
              
              42,008
              
              
              
              15,096
              
              
              
              -Operating
      lease obligations (3)
              
              
              11,516
              
              
              
              6,368
              
              
              
              4,511
              
              
              
              473
              
              
              
              164Royalty
      obligations (4)
              
              
              275,262
              
              
              
              24,411
              
              
              
              47,773
              
              
              
              61,146
              
              
              
              141,932Purchase
      obligations (5)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -462,481
              
              
              
              45,840
              
              
              
              81,621
              
              
              
              219,668
              
              
              
              115,352





(1)
              Consists
      of our Senior Notes and our Revolver as of December 31,
    2008.





(2)
              Consists
      of interest payments on our Senior Notes.  Also includes the
      charge associated with our Letter of Credit Facility.  Our
      revolver interest is not included in the schedule.  For each
      $10,000,000 in borrowing we will have annual interest of $500,000 based on
      the interest rate at December 31, 2008 on the
  Revolver.





(3)
              See
      Note 11 in the notes to the consolidated financial statements for
      additional information on
leases.





(4)
              Royalty
      obligations include minimum royalties payable on leased coal
      rights.  Certain coal leases do not have set expiration dates
      but extend until completion of mining of all merchantable and mineable
      coal reserves.  For purposes of this table, we have generally
      assumed that minimum royalties on such leases will be paid for a period of
      ten years.  Certain coal leases require payment based on minimum
      tonnage, for these contracts an average sales price of $90.00 per ton was
      used to project the future
commitment.





(5)
              Purchase
      obligations, if any, include agreements to purchase coal that include
      fixed quantities or minimum amounts and a fixed price
      provision.  They do not include agreements to purchase coal with
      vendors that do not include quantities or minimum tonnages, or monthly
      purchase orders.





Additionally,
we have liabilities relating to pension, workers compensation, black lung, and
mine reclamation and closure. As of December 31, 2008, the undiscounted payments
related to these items are estimated to be:




Payments
      Due by Years (In Thousands)Within
      1
              Year
            
            2
      - 3
              Years
            
            4
      - 5
              Years$17,548
            
            $30,453
            
            $26,246




Our
determination of these noncurrent liabilities is calculated annually and is
based on several assumptions, including then prevailing conditions, which may
change from year to year. In any year, if our assumptions are inaccurate, we
could be required to expend greater amounts than anticipated. Moreover, in
particular for periods after 2009, our estimates may change from the amounts
included in the table, and may change significantly, if our assumptions change
to reflect changing conditions. These assumptions are discussed in the Notes to
the Consolidated Financial Statements and in the Critical Accounting Estimates
in Management’s Discussion and Analysis.





48


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 December 31, 2008, we had $104.9 million of
outstanding surety bonds with third parties. These bonds were in place to secure
obligations as follows: post-mining reclamation bonds of $60.2 million, workers’
compensation bonds of $40.3 million, wage payment, collection bonds, and other
miscellaneous obligation bonds of $4.4 million. Recently, surety bond costs have
increased and 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
December 31, 2008, we had $60.0 million of letters of credit
outstanding.  The letters of credits were issued under our Letter of
Credit Facility.  In addition, we may use up to $10 million of our $35
million Revolver for the issuance of additional letters of credit, if
necessary.





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 U.S generally accepted
accounting principles (US GAAP).  US GAAP 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 the notes to the 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





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. In June of 2005, we became self insured
for workers’ compensation for our Kentucky operations.





We accrue
for the present value of certain workers’ compensation obligations as calculated
annually 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 6.0% at
December 31, 2008.  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 6.0% to 5.5%, all other things
being equal, the present value of our workers’ compensation obligation would
increase by approximately $1.7 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 December 31, 2008 was $55.8
million.





49


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 calculates the estimated pneumoconiosis liability annually
based on assumptions regarding disability incidence, medical costs, mortality,
death benefits, dependents and interest rates. The discount rate is based on
interest rates on high quality corporate bonds with maturities similar to the
estimated future cash flows. The discount rate used to calculate the present
value of these future obligations was 5.75% at December 31, 2008. 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 5.75% to 5.25%, all other things being equal, the present value of our
black lung obligation would increase by approximately $2.1 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 December 31, 2008 was
$30.6 million.





Defined
Benefit Pension





We have
in place a non-contributory defined benefit pension plan under which all benefit
were frozen in 2007.  The estimated cost and benefits of our
non-contributory defined benefit pension plans are determined annually by
independent actuaries, who, with our review and approval, use various actuarial
assumptions, including discount rate 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 with comparable maturities. At
December 31, 2008, the discount rate used to determine the obligation was 6.0%.
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 6.0% to 5.50%, all other things being equal, the present
value of our projected benefit obligation would increase by approximately $4.4
million. 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 was 7.5% for the periods ended December 31, 2008. Significant
changes to these rates would introduce volatility to our pension expense. 
Our accrued pension obligation as of December 31, 2008 was $19.7
million.





Reclamation
and Mine Closure Obligation




The
Surface Mining Control Reclamation Act of 1977 establishes operational,
reclamation and closure standards for all aspects of surface mining as well as
many aspects of underground mining. Our asset retirement obligation liabilities
consist of spending estimates related to reclaiming surface land and support
facilities at both surface and underground mines in accordance with federal and
state reclamation laws. Our total reclamation and mine-closing liabilities are
based upon permit requirements and our engineering estimates related to these
requirements. US GAAP requires that asset retirement obligations be initially
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 profit. 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 our estimate of our credit
adjusted risk free rate. 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 US GAAP, then the
costs should be lower. If governmental regulations change, then the costs of
reclamation will be impacted. US GAAP recognizes that the recorded liability
could 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 paid to settle the
obligation, a gain or loss upon settlement is included in earnings. Our asset
retirement obligation as of December 31, 2008 was $41.5 million.





50


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
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 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.





We
recorded no tax benefit for the 2008, based on the conclusion that the
benefit of the expected 2008 net operating loss carryforward does not meet the
more likely than not criteria to be realized.  As of December 31,
2008, the Company had recorded a $54.3 million valuation allowance against its
gross deferred tax assets.





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 initially assembled
by our staff and analyzed by Marshall Miller & Associates, Inc. (MM&A).
The reserve information has subsequently been updated by our staff. The updates
to the reserves have been calculated in the same manner, and based on similar
assumptions and qualifications, as used in the MM&A studies described above,
but these updates to the reserve estimates have not been reviewed by
MM&A.  A number of sources of information were used to determine
accurate recoverable reserves estimates, including:





·
              all
      currently available data;





·
              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;





·
            new
      engineering and geological data;





·
            acquisition
      or divestiture of reserve holdings;
and


51





·
            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 on our annual calculation for potential
impairment. For a further discussion of our coal reserves, see
“Reserves.”





Evaluation
of Goodwill and Long-Lived Assets for Impairment





Goodwill
is not amortized, but is subject to periodic assessments of impairment. 
Impairment testing is performed at the reporting unit level. We test goodwill
for impairment annually during the fourth quarter, or when changes in
circumstances indicate that the carrying value may not be recoverable. 
Long-lived asset groups are tested for recoverability when changes in
circumstances indicate the carrying value may not be recoverable.  Events
that trigger a test for recoverability include material adverse changes in
projected revenues and expenses, significant underperformance relative to
historical or projected future operating results and significant negative
industry or economic trends.





The
estimates used to determine whether impairment has occurred to goodwill and
long-lived assets is subject to a number of management assumptions.  We
estimate the fair value of a reporting unit or asset group based on market
prices (i.e., the amount for which the asset could be bought by or sold to a
third party), when available.  When market prices are not available, we
estimate the fair value of the reporting unit or asset group using the income
approach and/or the market approach, which are subject to a number of management
assumptions.  The income approach uses cash flow projections. 
Inherent in our development of cash flow projections are assumptions and
estimates derived from a review of our operating results, approved operating
budgets, expected growth rates and cost of capital.  We also make certain
assumptions about future economic conditions, interest rates, and other market
data.  Many of the factors used in assessing fair value are outside the
control of management, and these assumptions and estimates can change in future
periods.





Changes
in assumptions or estimates could materially affect the determination of fair
value of an asset group, and therefore could affect the amount of potential
impairment of the asset.  The following assumptions are key to our income
approach:




·
              We
      make assumptions about coal production, sales price for unpriced coal,
      cost to mine the coal and estimated residual value of property, plant and
      equipment.  These assumptions are key inputs for developing our cash
      flow projections.  These projections are derived using our internal
      operating budget and are developed on a mine by mine basis.  These
      projections are updated annually and reviewed by the Board of
      Directors.  Historically, the Company’s primary variances between its
      projections and actual results have been with regard to assumptions for
      future coal production, sales prices of coal and costs to mine the
      coal.  These factors are based on our best knowledge at the time we
      prepare our budgets but can vary significantly due to regulatory issues,
      unforeseen mining conditions, change in commodity prices, availability and
      costs of labor and changes in supply and demand.  While we make our
      best estimates at the time we prepare our budgets it is reasonably likely
      that these estimates will change in future budgets, due to the changing
      nature of the coal
environment;


·
              Economic Projections –
      Assumptions regarding general economic conditions are included in and
      affect the assumptions used in our impairment tests.  These
      assumptions include, but are not limited to, supply and demand for coal,
      inflation, interest rates, and prices of raw materials (commodities);
      and


·
              Discount Rates – When
      measuring a possible impairment, future cash flows are discounted at a
      rate that we believe represents our cost of
  capital.





52


Recent
Accounting Pronouncements




In 2006,
the FASB issued SFAS No. 157, “Fair Value Measurements”
(SFAS 157), which defines fair value, establishes a framework for measuring
fair value in U.S. GAAP, and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. In February 2008, the FASB deferred
the effective date of SFAS 157 by one year for certain non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
On January 1, 2008, we adopted the provisions of SFAS 157, except as
it applies to those non-financial assets and non-financial liabilities for which
the effective date has been delayed by one year. The adoption of SFAS 157
did not have a material effect on our financial position or results of
operations.





In June
2008, the FASB issued FASB Staff Position Emerging Issues Task Force
No. 03-6-1Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore need to be included in
the earnings allocation in computing earnings per share under the two-class
method as described in SFAS No. 128, “Earnings per Share.” Under the
guidance of FSP EITF 03-6-1, unvested share-based payment awards that
contain non-forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. The
Company’s unvested restricted stock awards are considered “participating
securities” because they contain non-forfeitable rights to dividends. FSP
EITF 03-6-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all prior-period earnings per share
data presented shall be adjusted retrospectively. Early application is not
permitted. We have
not completed our evaluation of the impact of the adoption of FSP EITF 03-6-1,
but expect that adoption will result in an increase in our basic shares
outstanding and, due to the requirement to retroactively adopt the standard,
expect that there will be a decrease in our previously reported net loss per
share amounts.





Other
Supplemental Information





Reconciliation
of Non-GAAP Measures





EBITDA is
a measure used by management to measure operating performance.  We define
EBITDA as net income or loss plus interest expense (net), income tax expense
(benefit) and depreciation, depletion and amortization (EBITDA), to better
measure our operating performance.  We regularly use EBITDA to evaluate our
performance as compared to other companies in our industry that have different
financing and capital structures and/or tax rates.  In addition, we use
EBITDA in evaluating acquisition targets.





Adjusted
EBITDA and the leverage ratio are the amounts used in our current debt
covenants.  Adjusted EBITDA is defined as EBITDA further adjusted for
certain cash and non-cash charges and the leverage ratio limits are debt to a
multiple of adjusted EBITDA.  Adjusted EBITDA and the leverage ratio
are used to determine compliance with financial covenants and our ability to
engage in certain activities such as incurring additional debt and making
certain payments.





EBITDA,
Adjusted EBITDA, and the leverage ratio are not recognized terms under US GAAP
and are not an alternative to net income, operating income or any other
performance measures derived in accordance with US GAAP or an alternative to
cash flow from operating activities as a measure of operating liquidity. 
Because not all companies use identical calculations, this presentation of
EBITDA, Adjusted EBITDA and the leverage ratio may not be comparable to other
similarly titled measures of other companies.  Additionally, EBITDA or
Adjusted EBITDA are not intended to be a measure of free cash flow for
management’s discretionary use, as they do not reflect certain cash requirements
such as tax payments, interest payments and other contractual
obligations.





The
leverage ratio is calculated as the Company’s Senior Funded Indebtedness divided
by annualized adjusted EBITDA as calculated below.  The Senior Funded
Indebtedness as of December 31, 2008 is $72.8 million and includes the amounts
outstanding under our revolver and amounts of the letters of credit available to
be issued under our letter of credit facility as of December 31, 2008.


53





Years
      EndedDecember
      31
              
              
              December
      312008
              
              
              2007Net
      loss
              
              $
              (95,993
              )
              
              
              (54,015
              )Income
      tax benefit
              
              
              (273
              )
              
              
              (17,844
              )Interest
      expense
              
              
              17,746
              
              
              
              19,764Interest
      income
              
              
              (469
              )
              
              
              (471
              )Depreciation,
      depletion, and amortization
              
              
              70,277
              
              
              
              71,856EBITDA
      (before adjustments)
              
              $
              (8,712
              )
              
              
              19,290Other
      adjustments specifiedin
      our current debt agreement:Gain
      on curtailment of pension plan
              
              
              -
              
              
              
              (6,091
              )Charges
      associated with repayment of debt
              
              
              15,618
              
              
              
              2,421Other
      adjustments
              
              
              10,665
              
              
              
              9,140Adjusted
      EBITDA
              
              $
              17,571
              
              
              
              24,760





Item 7a.     Quantitative and
Qualitative Disclosures about Market Risk





Our $150
million Senior Notes have a fixed interest rate and are not sensitive to changes
in the general level of interest rates.  Our Revolver has floating
interest rates based on our option of either the base rate or LIBOR
rate.  As of December 31, 2008, we had $18 million outstanding under
the Revolver.  We currently do not 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 $0.1 million for each $10 million of borrowings under the
Revolver.





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.  The percentage of our
sales pursuant to long-term contracts was approximately 60% for the year ended
December 31, 2008.





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 8.       Financial
Statements and Supplementary Data




See
Financial Statements beginning on page F-1.




Item 9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures




None.





54


Item 9A.     Controls and
Procedures




Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”),
the Company carried out an evaluation, with the participation of the Company’s
management, including the Company’s Chief Executive Officer (“CEO”) and Chief
Accounting Officer (“CAO”) (the Company’s principal financial and accounting
officer), of the effectiveness of the Company’s disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the
end of the period covered by this report. Based upon that evaluation, the
Company’s CEO and CAO concluded that the Company’s disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that the Company files or submits under the Exchange
Act, is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to the Company’s management, including the Company’s CEO and
CAO, as appropriate, to allow timely decisions regarding required
disclosure.








Management’s Report on
Internal Control over Financial Reporting





Internal
control over financial reporting is a process to provide reasonable assurance
regarding the reliability of consolidated financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.  There has been no change in
the Company’s internal control over financial reporting during the year ended
December 31, 2008 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.




The
Company’s management, including the Company’s CEO and CAO, does not expect that
the Company’s disclosure controls and procedures or the Company’s internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of the
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected.





Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that the
company’s internal control over financial reporting was effective as of December
31, 2008.





Item 9B.     Other
Information




None.


55


PART
III





Item 10.      Director, Executive
Officers and Corporate Governance of the Registrant




The information contained under the headings
“Election ofDirectors”, “Section 16(a)
Beneficial Ownership Reporting Compliance” "Board Matters" and
"Management" in the definitive Proxy Statement used in connection with the
solicitation of proxies for the Company’s 2009 Annual Meeting of Shareholders,
to be filed with the Commission, is hereby incorporated herein by
reference.





Item 11.     Executive
Compensation





The information contained under the headings
“Compensation Committee Report,” “Executive Compensation,” “Equity Compensation Plans,” and “Compensation
Committee Interlocks and Insider Participation” in
the definitive Proxy Statement used in connection with the solicitation of
proxies for the Company’s 2009 Annual Meeting of Shareholders, to be filed with the Commission,is hereby incorporated herein by reference.





Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters





The information contained under the headings
“Principal Shareholdersand Securities
Ownership of Management,” and “Equity
Compensation Plans” in the definitive Proxy
Statement used in connection with the solicitation of proxies for the Company’s
2009Annual Meeting of Shareholders, to be filed with the Commission, is hereby
incorporated herein by reference.





Item 13.     Certain Relationships and
Related Transactions





The information contained under the heading “Compensation Committee Interlocks and
Insider Participation” in the definitive Proxy
Statement used in connection with the solicitation of proxies for the Company’s
2009Annual Meeting of Shareholders, to be filed with the Commission, is hereby
incorporated herein by reference.





Item 14.    Principal Accounting Fees and
Services





The information contained under the heading “Independent
Registered Public Accountants” in the definitive Proxy Statement used in
connection with the solicitation of proxies for the Company’s 2009 Annual
Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by
reference.







56


PART
IV









Item 15.
              Exhibits,
      Financial Statement Schedules





(a)
            The
      following documents are filed as part of this
  Report:




1.
            Financial
      Statements





The
following financial statements and related report of Independent Registered
Public Accounting Firm are incorporated in Item 8 of this
report:





Report of
Independent Registered Public Accounting Firm





Consolidated
Balance Sheets as of December 31, 2008 and 2007





Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and
2006





Consolidated
Statements of Changes in Shareholders’ Equity (Deficit) and Comprehensive Income
(Loss) for the years ended December 31, 2008, 2007 and 2006





Consolidated
Statements of Cash Flows for the for the years ended December 31, 2008, 2007 and
2006





Notes to
Consolidated Financial Statements








2.
            Financial
      Statement Schedules




None.




3.
            Exhibits




The
following exhibits are required to be filed with this Report by Item 601 of
Regulation S-K:





Exhibit
              Number
            Description2.1
            Second
      Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy
      Code of the Registrant and its Subsidiaries, dated as of April 20, 2004,
      incorporated herein by reference to Exhibit 2 to the Registrant’s
      Registration Statement on Form S-1 filed August 13,
20042.2
            Stock Purchase Agreement by and among James River
      Coal Company, Triad Mining, Inc. and the Stockholders of Triad Mining,
      Inc. dated as of March 30, 2005, incorporated herein by reference
      to Exhibit 2.2 to the Registrant’s Registration Statement on Form S-1
      filed April 19, 20053.1
            Amended
      and Restated Articles of Incorporation of the Registrant, as Amended,
      incorporated herein by reference to Exhibit 3.1 to the Registrant’s
      Registration Statement on Form S-1 filed August 13,
20043.2
            Amended
      and Restated Bylaws of the Registrant, incorporated herein by reference to
      Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed August
      9, 2007


57





4.1
            Specimen
      common stock certificate, incorporated herein by reference to Exhibit 4.1
      to the Registrant’s Registration Statement on Form S-1 filed August 13,
      20044.2
            Rights
      Agreement between the Registrant and SunTrust Bank as Rights Agent, dated
      as of May 25, 2004, incorporated herein by reference to Exhibit 4.2 to the
      Registrant’s Registration Statement on Form S-1 filed August 13,
      20044.3
            Amendment
      No. 1 to Rights Agreement between the Registrant and Computershare Trust
      Company, N.A., successor to SunTrust Bank, as Rights Agent, dated as of
      November 3, 2006, incorporated herein by reference to Exhibit 4.2 to the
      Registrant’s Quarterly Report on Form 10-Q filed November 9,
      20064.4
            Amendment
      No. 2 to Rights Agreement between the Registrant and Computershare Trust
      Company, N.A., successor to SunTrust Bank, as Rights Agent, dated as of
      August 2, 2007, incorporated herein by reference to Exhibit 4.2 to the
      Registrant’s Quarterly Report on Form 10-Q filed August 9,
      20074.5
            Form
      of rights certificate, incorporated herein by reference to Exhibit 4.3 to
      the Registrant’s Registration Statement on Form 8-A filed January 24,
      20054.6
            Indenture
      among the Registrant, certain of its subsidiaries and U.S. Bank, National
      Association, as Trustee, dated as of May 31, 2005, incorporated herein by
      reference to Exhibit 4.3 to the Registrant’s Registration Statement on
      Form S-1/A filed May 24, 20054.7
            Form
      of Senior Debt Indenture, incorporated herein by reference to Exhibit 4.8
      to the Registrant’s Registration Statement on Form S-3 filed June 7,
      20074.8
            Form
      of Subordinated Debt Indenture, incorporated herein by reference to
      Exhibit 4.10 to the Registrant’s Registration Statement on Form S-3 filed
      June 7, 200710.1
            Registration
      Rights Agreement by and among the Registrant and the Shareholders
      identified therein, dated May 6, 2004, incorporated herein by reference to
      Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 filed
      August 13, 200410.2
            Loan
      and Security Agreement by and among the Registrant and its Subsidiaries,
      the Lenders that are Signatories thereto, Wells Fargo Foothill, Inc. and
      Morgan Stanley Senior Funding, Inc., dated as of May 6, 2004, incorporated
      herein by reference to Exhibit 10.2 to the Registrant’s Registration
      Statement on Form S-1 filed August 13, 200410.3
            $75,000,000
      Term Loan Agreement by and among the Registrant and its Subsidiaries, the
      Lenders from time to time party thereto and BNY Asset Solutions LLC, dated
      as of May 6, 2004, incorporated herein by reference to Exhibit 10.3 to the
      Registrant’s Registration Statement on Form S-1 filed August 13,
      200410.4*
            Employment
      Agreement between the Registrant and Peter T. Socha, dated as of May 7,
      2004, incorporated herein by reference to Exhibit 10.4 to the Registrant’s
      Registration Statement on Form S-1 filed August 13,
200410.4a*
            Amendment
      to Employment Agreement between the Registrant and Peter T. Socha, dated
      as of December 31, 2008 (filed herewith)10.5*
            2004
      Equity Incentive Plan of the Registrant, incorporated herein by reference
      to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1
      filed August 13, 200410.6
            Form
      of Indemnification Agreement between the Registrant and its officers and
      directors, incorporated herein by reference to Exhibit 10.6 to the
      Registrant’s Registration Statement on Form S-1 filed August 13,
      2004


58





10.7**
            Agreement
      for Purchase and Sale of Coal among Georgia Power Company, the Registrant
      and James River Coal Sales, Inc., dated as of March 11, 2004, incorporated
      herein by reference to Exhibit 10.7 to the Registrant’s Registration
      Statement on Form S-1 filed August 13, 200410.8**
            Fuel
      Supply Agreement #141944 between South Carolina Public Service Authority
      and the Registrant, dated as of March 1, 2004, incorporated herein by
      reference to Exhibit 10.8 to the Registrant’s Registration Statement on
      Form S-1 filed August 13, 200410.9
            Credit
      Agreement between Registrant and PNC Bank, National Association and Morgan
      Stanley Senior Funding, Inc. dated as of May 31, 2005, incorporated herein
      by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form
      10-Q filed November 14, 200510.10
            Amendment
      No. 1 and Waiver to the Credit Agreement between the Registrant and PNC
      Bank, National Association and Morgan Stanley Senior Funding, Inc., dated
      as of February 22, 2006, incorporated herein by reference to Exhibit 10.11
      to the Registrant’s Annual Report on Form 10-K filed March 16,
      200610.11
            Amendment
      No. 2 and Waiver to the Credit Agreement between the Registrant and PNC
      Bank, National Association and Morgan Stanley Senior Funding, Inc., dated
      as of May 30, 2006, incorporated herein by reference to Exhibit 10.13 to
      the Registrant’s Quarterly Report on Form 10-Q filed August 9,
      200610.12
            Amendment
      No. 3 and Waiver to the Credit Agreement between the Registrant and PNC
      Bank, National Association and Morgan Stanley Senior Funding, Inc., dated
      as of November 7, 2006, incorporated herein by reference to Exhibit 10.13
      to the Registrant’s Annual Report on Form 10-K filed March 16,
      200710.13
            Amendment
      No. 4 to the Credit Agreement between the Registrant and PNC Bank,
      National Association and Morgan Stanley Senior Funding, Inc., dated as of
      December 27, 2006, incorporated herein by reference to Exhibit 10.14 to
      the Registrant’s Annual Report on Form 10-K filed March 16,
      200710.14
            Registration
      Rights Agreement between the Registrant and the Shareholders named
      therein, dated as of May 31, 2005, incorporated herein by reference to
      Exhibit 10.9 to the Registrant’s Annual report on Form 10-K filed March
      16, 200610.15*
            Severance
      and Retention Plan, effective as of March 13, 2006, incorporated herein by
      reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form
      10-Q filed August 9, 200610.15a*
            Amendment
      to Severance and Retention Plan dated as of December 31, 2008 (filed
      herewith)10.16
            $100,000,000
      Term Credit Agreement by and among the Registrant, certain of its
      subsidiaries, the Lenders thereto, Morgan Stanley Senior Funding, Inc., as
      Administrative Agent, Sole Bookrunner and Lead Arranger, and Morgan
      Stanley & Co. Incorporated, as Collateral Agent, dated as of February
      26, 2007, incorporated herein by reference to Exhibit 10.15 to the
      Registrant’s Annual Report on Form 10-K filed March 16,
    200710.17
            $35,000,000
      Revolving Credit Agreement by and among the Registrant, certain of
      its subsidiaries, the Lenders thereto, and General Electric Capital
      Corporation, as Co-Lead Arranger, Administrative Agent and Collateral
      Agent, with Morgan Stanley Senior Funding, Inc., having acted as Co-Lead
      Arranger, dated as of February 26, 2007, incorporated herein by reference
      to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K filed
      March 16, 200710.18
            Waiver,
      Consent and Second Amendment to Term Credit Agreement by and among
      the Registrant, certain of its subsidiaries, the Lenders thereto,
      Morgan Stanley Senior Funding, Inc., as Administrative Agent, Sole
      Bookrunner and Lead Arranger, and Morgan Stanley & Co. Incorporated,
      as Collateral Agent, dated as of August 7, 2007, incorporated herein by
      reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      filed August 8, 2007


59





10.19
            Waiver,
      Consent and First Amendment to Revolving Credit Agreement by and among
      the Registrant, certain of its subsidiaries, the Lenders thereto, and
      General Electric Capital Corporation, as Co-Lead Arranger, Administrative
      Agent and Collateral Agent, with Morgan Stanley Senior Funding, Inc.,
      having acted as Co-Lead Arranger, dated as of August 7, 2007, incorporated
      herein by reference to Exhibit 10.2 to the Registrant’s Current Report on
      Form 8-K filed August 8, 200710.20*
            Annual
      Incentive Compensation Plan, incorporated herein by reference to Exhibit
      10.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 9,
      200710.20a*
            Amendment
      to Annual Incentive Compensation Plan, dated December 31, 2008 (filed
      herewith)12.1
            Computation
      of Ratio of Earnings to Fixed Charges (filed herewith)21
            Subsidiaries
      of the Registrant, incorporated herein by reference to Exhibit 21 to the
      Registrant’s Annual Report on Form 10-K filed March 16,
    200623.1
            Consent
      of Marshall Miller & Associates, Inc. (filed
      herewith)23.2
            Consent
      of KPMG LLP (filed herewith)24
            Power
      of Attorney (see signature page)31.1
            Certification of Peter T. Socha, President and
      Chief Executive Officer of James River Coal Company, pursuant to rule
      13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002(filed
    herewith)31.2
            Certification of Samuel M. Hopkins, II, Vice
      President and Chief Accounting Officer of James River Coal Company,
      pursuant to rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(filed
      herewith)32.1
            Certification of Peter T. Socha, President and
      Chief Executive Officer of James River Coal Company, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002(filed herewith)32.2
            Certification of Samuel M. Hopkins, II, Vice
      President and Chief Accounting Officer of James River Coal Company,
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002(filed
  herewith)




*
            Management
      contract or compensatory plan or arrangement.**
            Portions
      of these documents have been omitted and filed separately with the
      Securities and Exchange Commission pursuant to a request for confidential
      treatment of the omitted portions.









60




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Audited
      Financial Statements
              PageReport
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
              F-3Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007 and
      2006
              F-5Consolidated
      Statements of Changes in Shareholders’ Equity and
      Comprehensive Income (Loss)for
      the years ended December 31, 2008, 2007 and 2006
              F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006
              F-7Notes
      to Consolidated Financial Statements
              F-8
       
  F-1
   Report of
Independent Registered Public Accounting Firm
  
 The Board
of Directors
 James
River Coal Company:
 
 We have
audited the accompanying consolidatedbalance sheets of James
River Coal Company and subsidiaries (the Company) as of December 31, 2008 and
2007, and the related consolidated statements of operations, changes in
shareholders’ equity and comprehensive income (loss), and cash flows for each of
the years in the three-year period ended December 31, 2008. We also have audited
the Company’s internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for these
consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Controls over Financial Reporting. Our
responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Company's internal control over financial
reporting based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of James River Coal Company and
subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
 
 
 /s/ KPMG
LLP
  Richmond,
VA
 February 26,
2009
 
 
   F-2
  JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Consolidated
Balance Sheets
 (in
thousands, except share data)
  December
      31,
                  2008
                
                
                December
      31,
                  2007AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                3,324
                
                
                
                5,413Receivables:Trade
                
                
                33,086
                
                
                
                40,544Other
                
                
                475
                
                
                
                762Total
      receivables
                
                
                33,561
                
                
                
                41,306Inventories:Coal
                
                
                6,847
                
                
                
                5,915Materials
      and supplies
                
                
                9,581
                
                
                
                8,277Total
      inventories
                
                
                16,428
                
                
                
                14,192Prepaid
      royalties
                
                
                2,803
                
                
                
                3,817Other
      current assets
                
                
                5,094
                
                
                
                4,180Total
      current assets
                
                
                61,210
                
                
                
                68,908Property,
      plant, and equipment, at cost:Land
                
                
                6,693
                
                
                
                6,220Mineral
      rights
                
                
                229,841
                
                
                
                191,586Buildings,
      machinery and equipment
                
                
                320,982
                
                
                
                285,009Mine
      development costs
                
                
                39,596
                
                
                
                31,923Total
      property, plant, and equipment
                
                
                597,112
                
                
                
                514,738Less
      accumulated depreciation, depletion, and amortization
                
                
                252,264
                
                
                
                195,534Property,
      plant and equipment, net
                
                
                344,848
                
                
                
                319,204Goodwill
                
                
                26,492
                
                
                
                26,492Other
      assets
                
                
                30,996
                
                
                
                24,683Total
      assets
                
                $
                463,546
                
                
                
                439,287See
      accompanying notes to consolidated financial statements.
  F-3
  JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Consolidated
Balance Sheets
 (in
thousands, except share data)
  December
      31,
                  2008
                
                
                December
      31,
                  2007Liabilities
      and Shareholders' EquityCurrent
      liabilities:Current
      maturities of long-term debt (note 4)
                
                $
                18,000
                
                
                
                1,600Accounts
      payable
                
                
                57,068
                
                
                
                46,641Accrued
      salaries, wages, and employee benefits
                
                
                6,642
                
                
                
                6,010Workers'
      compensation benefits
                
                
                9,300
                
                
                
                9,450Black
      lung benefits
                
                
                1,539
                
                
                
                2,050Accrued
      taxes
                
                
                4,457
                
                
                
                4,234Other
      current liabilities (note 3)
                
                
                19,165
                
                
                
                7,394Total
      current liabilities
                
                
                116,171
                
                
                
                77,379Long-term
      debt, less current maturities
                
                
                150,000
                
                
                
                187,200Other
      liabilities:Noncurrent
      portion of workers' compensation benefits
                
                
                46,477
                
                
                
                44,142Noncurrent
      portion of black lung benefits
                
                
                29,029
                
                
                
                22,084Pension
      obligations
                
                
                19,693
                
                
                
                5,423Asset
      retirement obligations
                
                
                36,409
                
                
                
                32,288Other
                
                
                529
                
                
                
                997Total
      other liabilities
                
                
                132,137
                
                
                
                104,934Total
      liabilities
                
                
                398,308
                
                
                
                369,513Commitments
      and contingencies (note 12)Shareholders'
      equity:Preferred
      stock, $1.00 par value.  Authorized 10,000,000
      shares
                
                
                -
                
                
                
                -Common
      stock, $.01 par value.  Authorized 100,000,000 shares;issued
      and outstanding 27,393,493 and 21,906,265 sharesas
      of December 31, 2008 and 2007, respectively
                
                
                274
                
                
                
                219Paid-in-capital
                
                
                272,366
                
                
                
                159,403Accumulated
      deficit
                
                
                (187,712
                )
                
                
                (91,719
                )Accumulated
      other comprehensive income (loss)
                
                
                (19,690
                )
                
                
                1,871Total
      shareholders' equity
                
                
                65,238
                
                
                
                69,774Total
      liabilities and shareholders' equity
                
                $
                463,546
                
                
                
                439,287See
      accompanying notes to consolidated financial statements.
   F-4
  JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Consolidated
Statements of Operations
 (in
thousands, except per share data)
  Year
                
                
                Year
                
                
                YearEnded
                
                
                Ended
                
                
                EndedDecember
      31,
                
                
                December
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2006Revenues
                
                $
                568,507
                
                
                
                520,560
                
                
                
                564,791Cost
      of sales:Cost
      of coal sold
                
                
                527,888
                
                
                
                473,347
                
                
                
                496,799Gain
      on curtailment of pension plan
                
                
                -
                
                
                
                (6,091
                )
                
                
                -Depreciation,
      depletion, and amortization
                
                
                70,277
                
                
                
                71,856
                
                
                
                74,562Total
      cost of sales
                
                
                598,165
                
                
                
                539,112
                
                
                
                571,361Gross
      profit (loss)
                
                
                (29,658
                )
                
                
                (18,552
                )
                
                
                (6,570
                )Selling,
      general, and administrative expenses
                
                
                34,992
                
                
                
                32,191
                
                
                
                30,867Total
      operating loss
                
                
                (64,650
                )
                
                
                (50,743
                )
                
                
                (37,437
                )Interest
      expense
                
                
                17,746
                
                
                
                19,764
                
                
                
                16,782Interest
      income
                
                
                (469
                )
                
                
                (471
                )
                
                
                (366
                )Charges
      associated with repayment and amendment of debt (note 4)
                
                
                15,618
                
                
                
                2,421
                
                
                
                -Miscellaneous
      income, net
                
                
                (1,279
                )
                
                
                (598
                )
                
                
                (533
                )Total
      other expenses, net
                
                
                31,616
                
                
                
                21,116
                
                
                
                15,883Loss
      before  income taxes
                
                
                (96,266
                )
                
                
                (71,859
                )
                
                
                (53,320
                )Income
      tax benefit
                
                
                (273
                )
                
                
                (17,844
                )
                
                
                (27,151
                )Net
      loss
                
                $
                (95,993
                )
                
                
                (54,015
                )
                
                
                (26,169
                )Loss
      per common share (note 13)Basic
      loss per common share
                
                $
                (3.91
                )
                
                
                (3.29
                )
                
                
                (1.65
                )Shares
      used to calculate basic loss per share
                
                
                24,520
                
                
                
                16,412
                
                
                
                15,849Diluted
      loss per common share
                
                $
                (3.91
                )
                
                
                (3.29
                )
                
                
                (1.65
                )Shares
      used to calculate dilutive loss per share
                
                
                24,520
                
                
                
                16,412
                
                
                
                15,849See
      accompanying notes to consolidated financial statements.
  F-5
  JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Consolidated
Statements of Changes in Shareholders’
 Equity
and Comprehensive Income (Loss)
 (in
thousands)
 
 Predecessor
      Company
                
                Common
                  stock
                  shares
                
                
                Common
                  stock
      par
                  value
                
                
                Paid-in-
                  capital
                
                
                Deferred
      stock
                  based
                  compensation
                
                
                Retained
                  earnings
      (accumulated
                  deficit)
                
                
                Accumulated
      other comprehensive income (loss)
                
                
                TotalBalances,
      December 31, 2005
                
                
                16,653
                
                
                $
                167
                
                
                
                135,923
                
                
                
                (13,226
                )
                
                
                (11,187
                )
                
                
                (410
                )
                
                
                111,267Adoption
      of SFAS 123R (note 1)
                
                
                -
                
                
                
                -
                
                
                
                (13,226
                )
                
                
                13,226
                
                
                
                -
                
                
                
                -
                
                
                
                -Adoption
      of SFAS 158 (note 1)Pension
      plan
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (348
                )
                
                
                (2,650
                )
                
                
                (2,998
                )Black
      lung obligation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,324
                
                
                
                1,324Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (26,169
                )
                
                
                -
                
                
                
                (26,169
                )Pension
      liability adjustment, net
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,479
                
                
                
                1,479Comprehensive
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (24,690
                )Issuance
      of restricted stock awards, net of forfeitures
                
                
                99
                
                
                
                1
                
                
                
                (1
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Repurchase
      of shares for tax withholding
                
                
                (83
                )
                
                
                (1
                )
                
                
                (2,350
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,351
                )Stock
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                3,845
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,845Balances,
      December 31, 2006
                
                
                16,669
                
                
                
                167
                
                
                
                124,191
                
                
                
                -
                
                
                
                (37,704
                )
                
                
                (257
                )
                
                
                86,397Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (54,015
                )
                
                
                -
                
                
                
                (54,015
                )Amortization
      of black lung liability
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (180
                )
                
                
                (180
                )Black
      lung obligation adjustment, net of $(812) of tax
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,909
                
                
                
                4,909Pension
      liability adjustment, net of $969 of tax
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,601
                )
                
                
                (2,601
                )Comprehensive
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (51,887
                )Issuance
      on common stock net of offeringcosts
      of $213
                
                
                5,175
                
                
                
                52
                
                
                
                32,337
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                32,389Issuance
      of restricted stock awards, net of forfeitures
                
                
                135
                
                
                
                1
                
                
                
                (1
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Repurchase
      of shares for tax withholding
                
                
                (73
                )
                
                
                (1
                )
                
                
                (977
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (978
                )Stock
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                3,853
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,853Balances,
      December 31, 2007
                
                
                21,906
                
                
                
                219
                
                
                
                159,403
                
                
                
                -
                
                
                
                (91,719
                )
                
                
                1,871
                
                
                
                69,774Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (95,993
                )
                
                
                -
                
                
                
                (95,993
                )Amortization
      of black lung liability
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (562
                )
                
                
                (562
                )Black
      lung obligation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (5,334
                )
                
                
                (5,334
                )Pension
      liability adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (15,665
                )
                
                
                (15,665
                )Comprehensive
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (117,554
                )Issuance
      on common stock, net of offeringcosts
      of $421
                
                
                4,913
                
                
                
                49
                
                
                
                93,771
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                93,820Common
      stock issued for acquisition of mineral rights (note 2)
                
                
                388
                
                
                
                4
                
                
                
                15,996
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                16,000Issuance
      of restricted stock awards, net of forfeitures
                
                
                238
                
                
                
                2
                
                
                
                (2
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Repurchase
      of shares for tax withholding
                
                
                (72
                )
                
                
                -
                
                
                
                (2,474
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,474
                )Exercise
      of Stock Options
                
                
                20
                
                
                
                -
                
                
                
                542
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                542Stock
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                5,130
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,130Balances,
      December 31, 2008
                
                
                27,393
                
                
                $
                274
                
                
                
                272,366
                
                
                
                -
                
                
                
                (187,712
                )
                
                
                (19,690
                )
                
                
                65,238
  F-6
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Consolidated
Statements of Cash Flows
 (in
thousands)
  Year
                
                
                Year
                
                
                YearEnded
                
                
                Ended
                
                
                EndedDecember
      31,
                
                
                December
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2006Cash
      flows from operating activities:Net
      loss
                
                $
                (95,993
                )
                
                
                (54,015
                )
                
                
                (26,169
                )Adjustments
      to reconcile net loss to net cash provided by  operating
      activitiesDepreciation,
      depletion, and amortizationof
      property, plant, and equipment
                
                
                70,277
                
                
                
                71,856
                
                
                
                74,562Accretion
      of asset retirement obligations
                
                
                2,768
                
                
                
                2,270
                
                
                
                2,066Amortization
      of debt issue costs
                
                
                1,411
                
                
                
                1,569
                
                
                
                1,282Stock-based
      compensation
                
                
                5,130
                
                
                
                3,853
                
                
                
                3,845Deferred
      income tax benefit
                
                
                4
                
                
                
                (18,572
                )
                
                
                (24,994
                )Gain
      (loss) on sale or disposal of property, plant, and
    equipment
                
                
                (163
                )
                
                
                (87
                )
                
                
                113Write-off
      of deferred financing costs
                
                
                2,383
                
                
                
                2,421
                
                
                
                -Gain
      on curtailment of pension plan
                
                
                -
                
                
                
                (6,091
                )Changes
      in operating assets and liabilities:Receivables
                
                
                7,745
                
                
                
                6,930
                
                
                
                (11,811
                )Inventories
                
                
                (2,236
                )
                
                
                (1,232
                )
                
                
                1,057Prepaid
      royalties and other current assets
                
                
                100
                
                
                
                (58
                )
                
                
                200Other
      assets
                
                
                (9,625
                )
                
                
                (2,929
                )
                
                
                983Accounts
      payable
                
                
                9,762
                
                
                
                4,576
                
                
                
                8,854Accrued
      salaries, wages, and employee benefits
                
                
                632
                
                
                
                1,277
                
                
                
                444Accrued
      taxes
                
                
                (2,251
                )
                
                
                (2,772
                )
                
                
                (538
                )Other
      current liabilities
                
                
                8,702
                
                
                
                (1,030
                )
                
                
                1,853Workers'
      compensation benefits
                
                
                2,185
                
                
                
                8
                
                
                
                1,153Black
      lung benefits
                
                
                538
                
                
                
                1,435
                
                
                
                1,620Pension
      obligations
                
                
                (1,395
                )
                
                
                (3,129
                )
                
                
                (3,062
                )Asset
      retirement obligations
                
                
                (1,082
                )
                
                
                (1,457
                )
                
                
                (1,349
                )Other
      liabilities
                
                
                (468
                )
                
                
                (801
                )
                
                
                1,571Net
      cash provided by operating activities
                
                
                (1,576
                )
                
                
                4,022
                
                
                
                31,680Cash
      flows from investing activities:Additions
      to property, plant, and equipment
                
                
                (74,697
                )
                
                
                (49,343
                )
                
                
                (62,507
                )Proceeds
      from sale of property, plant and equipment
                
                
                1,108
                
                
                
                142
                
                
                
                7,769Net
      cash used in investing activities
                
                
                (73,589
                )
                
                
                (49,201
                )
                
                
                (54,738
                )Cash
      flows from financing activities:Proceeds
      from issuance of long-term debt
                
                
                -
                
                
                
                40,000
                
                
                
                -Repayment
      of long-term debt
                
                
                (38,800
                )
                
                
                (1,200
                )
                
                
                -Proceeds
      from Revolver
                
                
                26,500
                
                
                
                31,043
                
                
                
                41,600Repayments
      of Revolver
                
                
                (8,500
                )
                
                
                (48,536
                )
                
                
                (24,107
                )Net
      proceeds from issuance of common stock
                
                
                93,820
                
                
                
                32,389
                
                
                
                -Principal
      payments under capital lease obligations
                
                
                -
                
                
                
                (262
                )
                
                
                (363
                )Debt
      issuance costs
                
                
                (486
                )
                
                
                (4,649
                )
                
                
                (1,201
                )Proceeds
      from exercise of stock options
                
                
                542
                
                
                
                -
                
                
                
                -Net
      cash provided by financing activities
                
                
                73,076
                
                
                
                48,785
                
                
                
                15,929Increase
      (decrease) in cash
                
                
                (2,089
                )
                
                
                3,606
                
                
                
                (7,129
                )Cash
      and cash equivalents at beginning of period
                
                
                5,413
                
                
                
                1,807
                
                
                
                8,936Cash
      and cash equivalents at end of period
                
                $
                3,324
                
                
                
                5,413
                
                
                
                1,807See
      accompanying notes to consolidated financial statements.
  F-7
 Notes
to Consolidated Financial Statements
  
 (1)
              Summary
      of Significant Accounting Policies and Other
  Information
  Description
of Business and Principles of Consolidation
  The
Company mines, processes and sells bituminous, steam- and industrial-grade coal
through five operating complexes located throughout eastern Kentucky and one in
southern Indiana. Substantially all coal sales and accounts receivable relate to
the electric utility and industrial markets.
 
 The
consolidated financial statements include the accounts of James River Coal
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
  Cash
and Cash Equivalents
  Cash and
cash equivalents are stated at cost. Cash equivalents consist of highly-liquid
investments with an original maturity of three months or less when
purchased.
 Trade
Receivables
  Trade
receivables are recorded at the invoiced amount and do not bear interest. The
Company evaluates the need for an allowance for doubtful accounts based on
review of historical write off experience and industry data. The Company has
determined that no allowance is necessary for trade receivables as of December
31, 2008 and 2007. The Company does not have any off-balance sheet credit
exposure related to its customers.
  Inventories
  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.
   F-8
 Notes
to Consolidated Financial Statements
  Asset
Retirement Obligations
  The
Company’s asset retirement obligation liabilities primarily consist of spending
estimates related to reclaiming surface land and support facilities at both
surface and underground mines in accordance with federal and state reclamation
laws. Asset retirement obligations are initially 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. 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 the extent there is a difference between the liability
recorded and the cost incurred, a gain or loss upon settlement is
recognized.  The following reconciles the Company’s asset retirement
obligation at December 31, 2008 and 2007 (in thousands):
  2008
                
                
                2007Asset
      retirement obligation at beginning of year
                
                $
                34,318
                
                
                
                29,714Liabilities
      incurred
                
                
                5,508
                
                
                
                3,547Revisions
      in estimated cash flows
                
                
                -
                
                
                
                245Accretion
      expense
                
                
                2,768
                
                
                
                2,270Liabilities
      settled
                
                
                (1,085
                )
                
                
                (1,458
                )Asset
      retirement obligation at end of year
                
                
                41,509
                
                
                
                34,318Less
      amount included in other current liabilities
                
                
                (5,100
                )
                
                
                (2,030
                )Total
      non-current liability
                
                $
                36,409
                
                
                
                32,288
  Property,
Plant, and Equipment
  Expenditures
for maintenance and repairs are charged to expense, and the costs of mining
equipment rebuilds and betterments that extend the useful life are capitalized.
Depreciation is provided principally using the straight-line method based upon
estimated useful lives, generally ten to 20 years for buildings and one to
seven years for machinery and equipment. Equipment held under capital
leases is amortized using the straight line method over the lesser of the lease
term or the estimated useful life of the asset. Mine development costs are
capitalized and amortized by the units of production method over estimated total
recoverable proven and probable reserves. Amortization of mineral rights is
provided by the units of production method over estimated total recoverable
proven and probable reserves.
  Impairment
of Long-Lived Assets
  Long-lived
assets, such as property, plant, and equipment are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset or asset group may not be recoverable.  Events that trigger a
test for recoverability include material adverse changes in projected revenues
and expenses, significant underperformance relative to historical or projected
future operating results, and significant negative industry or economic
trends.  The net losses that the Company has incurred in each of the
last three fiscal years and the negative gross margins in the three most recent
fiscal years were considered to be a triggering event. Accordingly, the Company
performed an impairment analysis for all periods presented to determine whether
or not the carrying amount of its long-lived assets may not be
recoverable.  Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset.  If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the amount by which the carrying amount of
the asset exceeds the fair value of the asset.  The Company did not
recognize any impairment charges during the periods presented.
   F-9
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  Goodwill
  Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable intangible assets of businesses
acquired.  Goodwill is not amortized but is tested for impairment
annually, or if certain circumstances indicate a possible impairment may exist.
Impairment testing is performed at a reporting unit level. An impairment loss
generally would be recognized when the carrying amount of the reporting unit
exceeds the fair value of the reporting unit, with the fair value of the
reporting unit determined using a discounted cash flow
analysis.
  Prepaid
Royalties
  Mineral
rights are often acquired in exchange for advance royalty payments. Royalty
payments representing prepayments recoupable against future production are
capitalized, and amounts expected to be recouped within one year are
classified as a current asset. As mining occurs on these leases, the prepayment
is offset against earned royalties and is included in the cost of coal sold.
Amounts determined to be nonrecoupable are charged to expense.
  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 occurs
and risk of loss 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.
 
 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 basis 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
Company evaluates its deferred tax assets to determine the necessity of a
valuation allowance.  A valuation allowance is required 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, the Company takes
into account various factors, including the expected level of future taxable
income. The Company also considers tax planning strategies in determining the
deferred tax asset that will ultimately be realized.
  Our
effective income tax rate is impacted by the amount of the valuation allowance
recorded and 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 the
cost bases of the properties, it creates a permanent difference and directly
impacts the effective tax rate. Fluctuations in the effective tax rate may occur
between fiscal periods due to the varying levels of profitability (and thus,
taxable income and percentage depletion) at each of our mine
locations.
  F-10
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  
 The
Company records interest and penalties, if any, associated with income taxes as
a component of income tax expense.
 
 Accumulated
Other Comprehensive Income (Loss)
  The
accumulated other comprehensive loss at December 31, 2008, includes a $19.9
million actuarial loss on the Company’s pension plan and a $0.2 million
actuarial gain on its black lung obligation.  The accumulated other
comprehensive income at December 31, 2007, includes a $4.2 million actuarial
loss on the Company’s pension plan and a $6.1 million actuarial gain on its
black lung obligation.
  The
Company adopted FASB No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans(SFAS 158) on December 31, 2006. The impact of adopting the
provisions of SFAS 158, that required the recognition of the under funded status
of our defined benefit plan and unrecognized portion of our black lung
obligation was to decrease accumulated other comprehensive income by $2.3
million. SFAS 158 also required a change in the measurement date of our benefit
obligation from September 30 to December 31; the impact of this change as
of December 31, 2006 was to increase accumulated other comprehensive income
by $1.0 million and increase the accumulated deficit by $0.3
million.
  Workers’
Compensation
  The
Company is liable for workers’ compensation benefits for traumatic injuries
under state workers’ compensation laws in which it has operations. Except as
indicated, the Company is self insured for workers’ compensation for its
Kentucky operations, with specific excess insurance purchased from independent
insurance carriers to cover individual traumatic claims in excess of the
self-insured limits. For the period from 1979 to 1982, claims are covered by a
third party insurance company. For the period June 2002 to June 2005, claims are
covered through the voluntary market using a deductible program. The Company’s
operations in Indiana are covered by a third party insurance
company.
  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. The Company provides information to independent actuaries,
who after review and consultation with the Company with regards to actuarial
assumptions, including the discount rate, prepare an estimate of the liabilities
for workers’ compensation benefits.
 
   F-11
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  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 for its
Central Appalachia operations. 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. Actuarial gains and
losses are included as a component of accumulated other comprehensive income
(loss) and are amortized 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.
  Health
Claims
  Company
is self-insured for certain health care coverage. The cost of this
self-insurance program is accrued based upon estimates of the costs for known
and anticipated claims. The Company recorded an estimated amount to cover known
claims and claims incurred but not reported of $2.8 million and $2.6 million as
of December 31, 2008 and 2007, respectively, which is included in accrued
salaries, wages, and employee benefits.
 
 Equity-Based
Compensation Plan
  The
Company stock compensation expense is based on estimated grant-date fair values.
Compensation expense is adjusted for estimated forfeitures and is recognized on
a straight-line basis over the requisite service period of the
award.  The Company’s estimated future forfeiture rates are based on
its historical experience.
 
 Effective
January 1, 2006, the Company adopted FASB No. 123R,Share-Based Payments(SFAS
123R).  Adoption of this standard resulted in amounts previously
classified as deferred stock based compensation in the consolidated statements
of changes in shareholders’ equity and comprehensive income (loss) to be
reclassified as a component of paid in capital as of the adoption
date.
 
 Use
of Estimates
  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 consolidated
financial statements in conformity with U.S. generally accepted accounting
principles (U.S. GAAP). Significant estimates made by management include the
valuation allowance for deferred tax assets, asset retirement obligations and
amounts accrued related to the Company’s workers’ compensation, black lung,
pension and health claim obligations. Actual results could differ from these
estimates.
   F-12
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  Recent
Accounting Pronouncements
  In 2006,
the FASB issued SFAS No. 157, “Fair Value Measurements”
(SFAS 157), which defines fair value, establishes a framework for measuring
fair value in U.S. GAAP, and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. In February 2008, the FASB deferred
the effective date of SFAS 157 by one year for certain non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
On January 1, 2008, the Company adopted the provisions of SFAS 157,
except as it applies to those non-financial assets and non-financial liabilities
for which the effective date has been delayed by one year. The adoption of
SFAS 157 did not have a material effect on the Company’s financial position
or results of operations.
 
 In June
2008, the FASB issued FASB Staff Position Emerging Issues Task Force
No. 03-6-1Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore need to be included in
the earnings allocation in computing earnings per share under the two-class
method as described in SFAS No. 128, “Earnings per Share.” Under the
guidance of FSP EITF 03-6-1, unvested share-based payment awards that
contain non-forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. The
Company’s unvested restricted stock awards are considered “participating
securities” because they contain non-forfeitable rights to dividends. FSP
EITF 03-6-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all prior-period earnings per share
data presented shall be adjusted retrospectively. Early application is not
permitted. The
Company has not completed its evaluation of the impact of the adoption of FSP
EITF 03-6-1, but expects that adoption will result in an increase in its basic
shares outstanding and, due to the requirement to retroactively adopt the
standard, expects that there will be a decrease in previously reported net loss
per share amounts.
 
 (2)
              Acquisition
      of Mineral Rights
  In July
2008, the Company closed a transaction under an Asset Purchase Agreement to
acquire certain coal reserves and permits from Cheyenne Resources,
Inc.  The acquired assets include approximately 10.2 million tons of
proven and probable surface reserves and 3.6 million tons of proven and probable
underground reserves, plus additional surface resources.  The purchase
price for the acquisition was $36 million, comprised of $16 million in cash at
closing, a short term promissory note for $4 million that was paid in full
September 2008 and 387,973 shares of newly issued common stock of the Company,
valued at $16 million (shares valued based on the most recent closing price
prior to closing).
 
 (3)
              Other
      Current Liabilities
  Other
current liabilities at December 31, 2008 and 2007 are as follows (in
thousands):
  F-13
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  
 2008
                
                
                2007Accrued
      Interest and amendment fees
                
                $
                6,689
                
                
                
                1,536Current
      portion of asset retirement obligation
                
                
                5,100
                
                
                
                2,030Accrued
      royalties and other
                
                
                7,376
                
                
                
                3,828$
                19,165
                
                
                
                7,394
  (4)
              Long
      Term Debt and Interest Expense
  Long-term
debt is as follows at December 31, 2008 and 2007 (in thousands):
  2007
              
              
              2007Senior
      Notes
              
              $
              150,000
              
              
              $
              150,000Revolver
              
              
              18,000
              
              
              
              -Term
      Facility
              
              
              -
              
              
              
              38,800Total
      long-term debt
              
              
              168,000
              
              
              
              188,800Less
      amounts classified as current
              
              
              18,000
              
              
              
              1,600Total
      long-term debt, less current maturities
              
              $
              150,000
              
              
              $
              187,200
   Scheduled
maturities of long-term debt are as follows (in thousands):
  Year
      ended December 31:2009
                
                $
                18,0002010
                
                
                -2011
                
                
                -2012
                
                
                150,000$
                168,000
  Senior
Notes
  The $150
million of Senior Notes are due on June 1, 2012 (the Senior Notes).  The
Senior Notes are unsecured and accrue interest at 9.375% per annum. 
Interest payments on the Senior Notes are required semi-annually.  The
Company may redeem the Senior Notes, in whole or in part, at any time on or
after June 1, 2009 at redemption prices ranging from 104.86% in 2009 to 100% in
2011.
 
 The Senior Notes limit the Company’s
ability, among other things, to pay cash dividends.  In addition, if a
change of control occurs (as defined in the Indenture), each holder of the
Senior Notes will have the right to require the Company to repurchase all or a
part of the Senior Notes at a price equal to 101% of their principal amount,
plus any accrued interest to the date of
repurchase.
  F-14
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  Senior
Secured Credit Facilities
  In 2007,
the Company entered into a $35.0 million Revolving Credit Agreement (the
Revolver) and a Term Credit Agreement (collectively the Facilities). The Term
Credit Agreement consists of a term facility (the Term Facility) and a $60.0
million letter of credit facility (the Letter of Credit Facility).  As
discussed below, the Company repaid the outstanding balance of the Term Facility
in October 2008.  The Letter of Credit Facility does not constitute a
loan to the Company and accordingly is not available for borrowing by the
Company.  The Letter of Credit Facility supports the issuance of up to $60
million of letters of credit by the
Company.
  In May
2008, the Company entered into the Third Amendment to the Term Credit Agreement
and the Second Amendment to the Revolving Credit Agreement and in November 2008,
the Company entered into the Fourth Amendment to the Term Credit Agreement and
the Third Amendment to the Revolving Credit Agreement (collectively the Credit
Amendments).  The Credit Amendments waived defaults under the
Facilities as of March 31, 2008 and September 30, 2008, prospectively waived or
modified certain existing financial covenants under the Facilities, increased
the fee on the unused portion of Revolver to 0.75% and increased the usage rates
of the Letter of Credit Facility by amounts ranging from 3.0% to 7.0% at
designated periods from October 1, 2008 to the Letter of Credit Facility’s
maturity date.  In 2008, the Company expensed and paid approximately
$7.8 million of costs associated with the Credit Amendments.  In 2008,
the Company also expensed and had unpaid fees of approximately $5.5 million of
costs associated with the Credit Amendments.  The expenses associated
with the amendments to the Credit Amendments are included in charges associated
with the repayment and amendment of debt in the consolidated financials
statements for the year ended December 31, 2008.
 
 The
following is a summary of significant terms of the Facilities, as amended, as of
December 31, 2008.
  Revolver
              Letter
      of Credit FacilityMaturity
              February
      2012(c)
              February
      2013Interest/Usage
      Rate
              Company’s
      option of Base Rate(a)
      plus 1.75% or LIBOR plus 2.75% per annum
              10.0%
      effective January 1, 2009; and 12.5% effective April 1, 2009 to the Letter
      of Credit Facility’s maturity date.Maximum
      Availability
              Lesser
      of $35.0 million and the borrowing base (b)
              $60.0
      millionPeriodic
      Principal Payments
              None
              Not
      applicable
 
 (a)
              Base
      rate is the higher of (1) the Federal Fund Rate plus 0.5%, and (2) the
      prime rate.(b)
              The
      Revolver’s borrowing base is the sum of up to 85% of the eligible accounts
      receivable plus the lesser of (1) up to 60% of eligible inventory and (2)
      up to 85% of the net orderly liquidation value of eligible inventory;
      minus reserve from time to time set by administrative
      agent.  Amount available is also subject to a minimum liquidity
      covenant.(c)
              The
      Revolver is classified as current on our balance sheet based on our intent
      to pay the balance within the next
year.
 
  F-15
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  The
Revolver provides that the Company can use up to $10.0 million of the Revolver
availability to issue letters of credit. The Revolver provides for a 2.75% fee
on any outstanding letters of credit issued under the Revolver and a 0.75% fee
on the unused portion of the Revolver. The Facilities require certain mandatory
prepayments from certain asset sales, incurrence of indebtedness and excess cash
flow. The Facilities include financial covenants that require us to maintain a
minimum EBITDA, a minimum liquidity level and a maximum leverage ratio and limit
capital expenditures, each as defined by the agreement. The Facilities are
secured by substantially all of our assets.
 
 As of
December 31, 2008, the Company had $10.1 million of availability under its
Revolver due to a seasonably low level of inventory and accounts receivable
which support the borrowing base.  The Company is required to maintain
minimum liquidity as defined under our credit agreements of $10 million and as a
result had $0.1 million of borrowing capacity at December 31,
2008.  However, as a result of higher levels of inventory and accounts
receivable, $16.2 million (unaudited) was available under its Revolver as of
January 31, 2009.  As a result of the Credit Amendments, the Company
was in compliance with all of the financial covenants under the Facilities and
Senior Notes as of December 31, 2008.
 
 During
the 2007 and the 2008, we raised a total of approximately $126.1 million through
the issuances of common shares.  As required by the Term Facility, we
offered a portion of the proceeds from the issuance of the common shares in
excess of $40 million to the holders of the Term Facility to redeem amounts
outstanding.  The mandatory tender offers were accepted by the holders
of the Term Facility and the Company repaid the outstanding balance under Term
Facility ($38.2 million) and used $5.2 million of its cash to secure letters of
credit under the Letter of Credit Facility.  The $5.2 million of cash
used to secure the letters of credit under the Letter of Credit Facility is
included in other assets on our consolidated balance sheet as of December 31,
2008. In connection with these mandatory repayments, the Company wrote-off
approximately $2.4 million of unamortized financing charges on the Term Facility
in the year ended December 31, 2008.  The write-off of the unamortized
financing charges is included in charges associated with repayment and amendment
of debt in the Company’s consolidated financial statements.
  Prior
Senior Secured Credit
  As
discussed above, all amounts outstanding under the Company Prior Senior Secured
Credit Facility were repaid with proceeds from the Term Facility on February 26,
2007.  The Prior Senior Secured Credit Facility consisted of a $25.0
million revolving credit facility (the Prior Revolver) and a $75.0 million
letter of credit facility (the Prior Letter of Credit
Facility).
  During
the year ended December 31, 2007, the Company wrote off $2.4 million of
financing charges in connection with the repayment of a Prior Senior Secured
Credit Facility.  The write off of the financing charges is classified
as charges associated with repayment and amendment of debt in the accompanying
consolidated statements of operations.
 
 Interest
Expense
 
 During
the years ended December 31, 2008, 2007 and 2006, the Company paid $16.8
million, $18.2 million, and $14.7 million in interest,
respectively.
  F-16
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  
 (5)
              Workers’
      Compensation Benefits
  As of
December 31, 2008 and 2007, workers’ compensation benefit obligation consisted
of the following (in thousands):
  2008
                
                
                2007Workers'
      compensation benefits
                
                $
                55,777
                
                
                
                53,592Less
      current portion
                
                
                9,300
                
                
                
                9,450Noncurrent
      portion of workers' compensation benefits
                
                $
                46,477
                
                
                
                44,142
  Actuarial
assumptions used in the determination of the liability for the self-insured
portion of workers’ compensation benefits included a discount rate of 6.0%,
6.0%, and 5.4% at December 31, 2008, 2007 and 2006, respectively.
  (6)
              Pneumoconiosis
      (Black Lung) Benefits
  As of
December 31, 2008 and 2007, black lung benefits obligation consisted of the
following (in thousands):
  2008
                
                
                2007Black
      lung benefits
                
                $
                30,568
                
                
                
                24,134Less
      current portion
                
                
                1,539
                
                
                
                2,050Noncurrent
      portion of black lung benefits
                
                $
                29,029
                
                
                
                22,084
  
   F-17
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
   A
reconciliation of the changes in the black lung benefit obligation is as follows
(in thousands):
  2008
                
                
                2007Beginning
      of the year black lung obligation
                
                $
                24,134
                
                
                
                26,766Black
      lung actuarial liability adjustment
                
                
                5,334
                
                
                
                (4,097
                )Service
      cost
                
                
                480
                
                
                
                388Interest
      cost
                
                
                1,962
                
                
                
                1,589Benefit
      payments
                
                
                (1,342
                )
                
                
                (512
                )End
      of year accumulated black lung obligation
                
                $
                30,568
                
                
                
                24,134
  The
actuarial assumptions used in the determination of accumulated black lung
obligations as of December 31, 2008 and 2007 included a discount rate of 5.75%
and 6.5%, respectively. A 1.0% decrease in the discount rate used at December
31, 2008, would increase the black lung obligation by approximately $4.5
million.  For purposes of determining net periodic expense related to
such obligations, the Company used a discount rate of 6.5%, 5.5%, and 5.1% for
the years ended December 31, 2008, 2007 and 2006.
  The
components of net periodic benefit cost are as follows (in
thousands):
  2008
                
                
                2007
                
                
                2006Service
      cost
                
                $
                480
                
                
                
                388
                
                
                
                523Interest
      cost
                
                
                1,962
                
                
                
                1,589
                
                
                
                1,392Amortization
      of actuarial amount
                
                
                (562
                )
                
                
                (180
                )
                
                
                293Net
      periodic benefit cost
                
                $
                1,880
                
                
                
                1,797
                
                
                
                2,208
  As of
December 31, 2008, the Company has a $0.2 million actuarial gain recorded in
accumulated other comprehensive income (loss) on its black lung
obligation.  The Company expects that it will not recognize any of
this net gain during the year ended December 31, 2009.
  (7)
              Equity
  Preferred
Stock and Shareholder Rights Agreement
  The
Company has authorized 10,000,000 shares of preferred stock, $1.00 par value per
share, 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
Participating Cumulative 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) has acquired or announced the intention to acquire 20% or
more of the Company’s outstanding common stock.
   F-18
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  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.
 
 Equity
Based Compensation
  Under the
2004 Equity Incentive Plan (the Plan), participants may be granted stock options
(qualified and nonqualified), stock appreciation rights (SARs), restricted
stock, restricted stock units, and performance shares. The total number of
shares that may be awarded under the Plan is 1,650,000, and no more than
1,000,000 of the shares reserved under the Plan may be granted in the form of
incentive stock options.  The Company currently has the following
types of equity awards outstanding under the Plan.
 
 Restricted
Stock Awards
  Pursuant
to the Plan certain directors and employees have been awarded restricted common
stock with such shares vesting over two to five years. The related expense is
amortized over the vesting period. Restricted shares subject to continuing
vesting requirements are included in diluted shares outstanding.
 
 Stock
Option Awards
  Pursuant
to the Plan certain directors and employees have been awarded options to
purchase common stock with such shares vesting ratably over three to five years.
The Company’s stock options have been issued at exercise prices equal to or
greater than the fair value of the Company’s stock at the date of
grant.
 
 Shares
awarded or subject to purchase under the Plan that are not delivered or
purchased, or revert to the Company as a result of forfeiture or termination,
expiration or cancellation of an award or that are used to exercise an award or
for tax withholding, will be again available for issuance under the Plan. At
December 31, 2008, there were 260,201 shares available under the Plan for future
awards.
 
  F-19
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  The
following table highlights the expense related to share-based payment for the
periods ended December 31 (in thousands):
  2008
                
                
                2007
                
                
                2006Restricted
      stock
                
                $
                4,813
                
                
                
                3,535
                
                
                
                3,600Stock
      options
                
                
                317
                
                
                
                318
                
                
                
                245Stock
      based compensation
                
                $
                5,130
                
                
                
                3,853
                
                
                
                3,845
  
 The fair
value of the restricted stock outstanding and issued is equal to the value of
shares at the grant date.  At this time, the Company does not expect
any of its restricted shares or options to be forfeited before vesting. The fair
value of stock options was estimated using the Black-Scholes option pricing
model.  The Company used the following assumptions to value the stock
options issued during the periods indicated below:
 
 Year
      Ended
                Year
      Ended
                Year
      EndedDecember
      31, 2008
                December
      31, 2007
                December
      31, 2006Dividend
      yield
                0.0%
                0.0%
                0.0%Expected
      volatility factor(1)
                70.0%
                50.0%
                40.0%-45.0%Weighted
      average expected volatility
                70.0%
                50.0%
                43.0%Risk-free
      interest rate(2)
                3.4%
                4.8%
                4.8%-5.0%Expected
      term (in years)
                6.5
                6.5
                6.5
 
 (1)
              The
      Company used historical experience to estimate its
    volatility.
 (2)
              The
      risk-free interest rate for periods is based on U.S. Treasury yields in
      effect at the time of grant.
  The
following is a summary of performance stock, restricted stock and stock option
awards:
  Performance
      Stock
                
                
                Restricted
      Stock
                
                
                Stock
      OptionsWeighted
                
                
                
                
                
                Weighted
                
                
                
                
                
                WeightedNumber
      of
                
                
                Average
                
                
                Number
      of
                
                
                Average
                
                
                Number
      of
                
                
                AverageShares
                
                
                Fair
      Value
                
                
                Shares
                
                
                Fair
      Value
                
                
                Shares
                
                
                ExerciseOutstanding
                
                
                at
      Issue
                
                
                Outstanding
                
                
                at
      Issue
                
                
                Outstanding
                
                
                PriceJanuary
      1, 2006
                
                
                18,750
                
                
                $
                4.59
                
                
                
                866,351
                
                
                $
                17.22
                
                
                
                236,000
                
                
                $
                15.66Granted
                
                
                -
                
                
                
                -
                
                
                
                168,659
                
                
                
                16.77
                
                
                
                50,000
                
                
                
                21.58Exercised/Vested
                
                
                (18,750
                )
                
                
                4.59
                
                
                
                (225,614
                )
                
                
                14.84
                
                
                
                -
                
                
                
                -Canceled
                
                
                -
                
                
                
                -
                
                
                
                (69,676
                )
                
                
                12.85
                
                
                
                (24,999
                )
                
                
                23.23December
      31, 2006
                
                
                -
                
                
                
                -
                
                
                
                739,720
                
                
                
                18.25
                
                
                
                261,001
                
                
                
                16.07Granted
                
                
                -
                
                
                
                -
                
                
                
                148,036
                
                
                
                4.65
                
                
                
                25,000
                
                
                
                14.60Exercised/Vested
                
                
                -
                
                
                
                -
                
                
                
                (198,509
                )
                
                
                16.37
                
                
                
                -
                
                
                
                -Canceled
                
                
                -
                
                
                
                -
                
                
                
                (12,940
                )
                
                
                17.39
                
                
                
                (21,667
                )
                
                
                17.72December
      31, 2007
                
                
                -
                
                
                
                -
                
                
                
                676,307
                
                
                
                15.84
                
                
                
                264,334
                
                
                
                15.79Granted
                
                
                -
                
                
                
                -
                
                
                
                244,140
                
                
                
                35.68
                
                
                
                20,000
                
                
                
                36.30Exercised/Vested
                
                
                -
                
                
                
                -
                
                
                
                (212,598
                )
                
                
                15.62
                
                
                
                (20,000
                )
                
                
                27.12Canceled
                
                
                -
                
                
                
                -
                
                
                
                (5,800
                )
                
                
                19.16
                
                
                
                (3,334
                )
                
                
                14.84December
      31, 2008
                
                
                -
                
                
                
                -
                
                
                
                702,049
                
                
                
                22.78
                
                
                
                261,000
                
                
                
                16.51
   F-20
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  The
following table summarizes additional information about the stock options
outstanding at December 31, 2008.
  Range
      of
                  Exercise
      Price
                Shares
                
                Weighted
                  Average
                  Exercise
                  Price
                Weighted
      Average
                  Remaining
                  Contractual
      Life
                  (Years)
                Aggregate
                  Intrinsic
                  Value
      (1)
                  (in
      000's)Oustanding
      at December 31, 2008
                
                $10.80-$36.30
                261,000
                
                $16.51
                
                6.1
                
                $ 703Exercisable
      at December 31, 2008
                
                $10.80-$33.57
                189,337
                
                $15.08
                
                5.7
                
                $
      555Vested
      and expected to vest at December 31, 2008
                
                261,000
                
                $16.51
                
                6.1
                
                $
      703(1)
      The difference between a stock award's exercise price and the underlying
      stock's market price at December 31, 2008.No
      value is assigned to stock awards whose option price exceeds the the
      stock's market price at December 31,
2008.
  The
following table summarizes the Company’s total unrecognized compensation cost
related to stock based compensation as of December 31, 2008.
  Weighted
      AverageRemaining PeriodUnearned
                
                
                Of
      ExpenseCompensation
                
                
                Recognition(in
      000's)
                
                
                (in
      years)Stock
      Options
                
                $
                506
                
                
                
                1.7Restricted
      Stock
                
                
                12,255
                
                
                
                2.4Total
                
                $
                12,761
   (8)
              Income
      Taxes
  Income
tax benefit consists of (in thousands):
  2008
                
                
                2007
                
                
                2006Current:Federal
                
                $
                -
                
                
                
                -
                
                
                
                (2,686
                )State
                
                
                (277
                )
                
                
                728
                
                
                
                529(277
                )
                
                
                728
                
                
                
                (2,157
                )Deferred:Federal
                
                
                53
                
                
                
                (16,320
                )
                
                
                (17,203
                )State
                
                
                (49
                )
                
                
                (2,252
                )
                
                
                (7,791
                )4
                
                
                
                (18,572
                )
                
                
                (24,994
                )$
                (273
                )
                
                
                (17,844
                )
                
                
                (27,151
                )
  A
reconciliation of income taxes computed at the statutory federal income tax rate
to the expense or benefit for income taxes included in the consolidated
statements of operations is presented below:
   F-21
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  
  2008
                
                
                2007
                
                
                2006Federal
      income taxes at statutory rates
                
                
                (34.0
                )
      %
                
                
                (34.0
                )
      %
                
                
                (34.0
                )
      %Percentage
      depletion
                
                
                (3.8
                )
                
                
                (3.8
                )
                
                
                (8.9
                )Other
      permanent items
                
                
                -
                
                
                
                -
                
                
                
                0.9Effect
      of state tax rate change, net
                
                
                (0.1
                )
                
                
                -
                
                
                
                (3.9
                )Change
      in valuation allowance
                
                
                39.2
                
                
                
                13.2
                
                
                
                -State
      income taxes, net of federal
                
                
                (2.4
                )
                
                
                (1.9
                )
                
                
                (5.2
                )Other,
      net
                
                
                0.8
                
                
                
                1.7
                
                
                
                0.2(0.3
                )
      %
                
                
                (24.8
                )
      %
                
                
                (50.9
                )
      %
  The
income tax benefit for the year ended December 31, 2006 includes a deferred
income tax benefit of $1.3 million or $0.08 per basic and fully diluted share
due to a reduction in future state tax rates as enacted in 2005. Management
evaluated the quantitative and qualitative impact of this adjustment,
individually and in the aggregate, on previously reported periods, on the
current fiscal period and on earnings taken as a whole. Based upon this
evaluation, management concluded that the adjustment is not material to the
Company’s financial statements taken as a whole. Adjusted for the benefit
for the reduction in state tax rates, our effective tax rate for the year ended
December 31, 2006 is 48.5%.
  The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2008 and
2007 are presented below (in thousands):
  2008
                
                
                2007Deferred
      tax assets:Accruals
      for financial reporting purposes, principallyworkers'
      compensation and black lung obligations
                
                $
                50,523
                
                
                
                46,125Net
      operating loss carryforwards
                
                
                84,930
                
                
                
                56,705Accumulated
      comprehensive income items
                
                
                7,012
                
                
                
                -Total
      gross deferred tax assets
                
                
                142,465
                
                
                
                102,830Less
      valuation allowance
                
                
                54,299
                
                
                
                8,798Net
      deferred tax asset
                
                
                88,166
                
                
                
                94,032Deferred
      tax liabilities - property, plant and equipment,principally
      due to differences in depreciation, depletionand
      amortization
                
                
                82,915
                
                
                
                88,776Net
      deferred asset (liability)
                
                $
                5,251
                
                
                
                5,256
  The net
deferred tax asset is included in other assets.  The valuation
allowance is based on an assumption that not all of the gross deferred tax
asset recorded will more likely than not be realized.
  At
December 31, 2008, the Company has consolidated NOLs for federal income tax
purposes of approximately $235 million that expire beginning in 2023 and
consolidated Kentucky net operating loss carryforwards of approximately $111
million which expire beginning in 2023. Approximately $170 million of the
federal NOLs and $85 million of the state NOLs are limited in the amount that
can be used in a given year by Section 382 of the internal revenue tax
code.  Prior to application of the valuation allowance, these net
operating loss carryforwards generate a combined federal and state tax benefit
of approximately $84.9 million.
   F-22
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  
  The
Company has analyzed filing positions in all of the federal and state
jurisdictions where it is required to file income tax returns, as well as all
open tax years in these jurisdictions.  The Company has identified its
federal tax return and its state tax returns in Virginia, Kentucky and Indiana
as “major” tax jurisdictions. The only periods subject to examination for the
Company’s federal return are the 2005 through 2008 tax years. The periods
subject to examination for the Company’s state returns in Virginia are years
2005 through 2008; Kentucky are years 2004 through 2008 and Indiana are years
2005 through 2008. The Company believes that its income tax filing positions and
deductions will be sustained on audit and does not anticipate any adjustments
that will result in a material change to its consolidated financial
position.  Therefore, no reserves for uncertain income tax
positions have been recorded.
 
 The
Company received $0.1 million of income tax refunds during 2008.  The
Company received no income tax refunds during 2007.  During the year
ended December 31, 2006, the Company received income tax refunds of $3.1
million.  The income tax benefit includes $0.0 million and $0.2
million of interest and penalties for the year ended December 31, 2008 and 2007,
respectively.
  (9)
              Employee
      Benefit Plans
  Defined
Benefit Pension Plan
  In 2007,
the Company froze pension plan benefit accruals for all employees covered under
its qualified non-contributory defined benefit pension plan.  Prior to
being frozen the pension plan covered substantially all employees in the
Company’s CAPP and corporate segments (as defined in Note 15) who met certain
length of service requirements.  The Company’s funding policy is to
contribute annually an amount at least equal to the minimum funding requirements
actuarially determined in accordance with the Employee Retirement Income
Security Act of 1974.
  The plan
assets for the qualified defined benefit pension plan are held by an independent
trustee. The plan’s assets includes investments in cash and cash equivalents,
corporate and government bonds, preferred and common stocks. The Company has an
internal investment committee that sets investment policy, selects and monitors
investment managers and monitors asset allocation.
  The
investment policy for the pension plan assets includes the objectives of
providing growth of capital and income while achieving a target annual rate of
return of 7.5% over a full market cycle, approximately 5 to 7 years.
Diversification of assets is employed to reduce risk. The current target asset
allocation is 70% for equity securities (including 45% Large Cap, 15% Small Cap,
10% International) and 30% for cash and interest bearing securities. The
investment policy is based on the assumption that the overall portfolio
volatility will be similar to that of the target allocation.  Given
the volatility of the capital markets, strategic adjustments in various asset
classes may be required to rebalance asset allocation back to its target policy.
Investment fund managers are not permitted to invest in certain securities and
transactions as outlined by the investment policy statements specific to each
investment category without prior investment committee approval.
  To
develop the expected long-term rate of return on assets assumption, the Company
considered the historical returns and the future expectations for returns for
each asset class, as well as the target asset allocation of the pension
portfolio.  This evaluation resulted in the selection of the 7.5%
long-term rate of return on assets assumption for the year ended
December 31, 2008.
   F-23
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  The fair
value of the major categories of qualified defined benefit pension plan assets
includes the following (in thousands):
  2008
                
                
                2007Amount
                
                
                Percentage
                
                
                Amount
                
                
                PercentageEquity
      securities
                
                $
                25,817
                
                
                
                60.7
                %
                
                $
                40,271
                
                
                
                68.8
                %Debt
      securities
                
                
                16,462
                
                
                
                38.7
                %
                
                
                17,782
                
                
                
                30.4
                %Other
      (includes cash and cashequivalents)
                
                
                271
                
                
                
                0.6
                %
                
                
                498
                
                
                
                0.8
                %$
                42,550
                
                
                
                100.0
                %
                
                $
                58,551
                
                
                
                100.0
                %
   The
following table sets forth changes in the plan’s benefit obligations, changes in
the fair value of plan assets, and funded status at December 31, 2008 and
2007 (in thousands):
  2008
                
                
                2007Change
      in benefit obligation:Projected
      benefit obligation at beginning of year
                
                $
                63,974
                
                
                
                66,885Service
      cost
                
                
                -
                
                
                
                2,173Interest
      cost
                
                
                3,645
                
                
                
                3,611Actuarial
      (gain) loss
                
                
                (2,530
                )
                
                
                192Gain
      on curtailment
                
                
                -
                
                
                
                (6,110
                )Benefits
      paid
                
                
                (2,847
                )
                
                
                (2,777
                )Projected
      benefit obligation at end of year
                
                $
                62,242
                
                
                
                63,974Change
      in plan assets:Fair
      value of plan assets at beginning of year
                
                $
                58,551
                
                
                
                53,874Actual
      return on plan assets
                
                
                (13,837
                )
                
                
                2,762Employer
      contributions
                
                
                683
                
                
                
                4,692Benefits
      paid
                
                
                (2,847
                )
                
                
                (2,777
                )Fair
      value of plan assets at end of year
                
                $
                42,550
                
                
                
                58,551Reconciliation
      of funded status:Funded
      status
                
                $
                (19,692
                )
                
                
                (5,423
                )Net
      amount recognized
                
                $
                (19,692
                )
                
                
                (5,423
                )Amounts
      recognized in the consolidated balance sheetsconsist
      of:Accrued
      benefit liability
                
                $
                (19,693
                )
                
                
                (5,423
                )
  The
accumulated benefit obligation of the plan was $62.2 million and $64.0 million
as of December 31, 2008 and 2007, respectively. Company contributions in
2009 are expected to be approximately $1.6 million.
   F-24
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  The
components of net periodic benefit cost and benefits paid by period are as
follows (in thousands):
  2008
                
                
                2007
                
                
                2006Service
      cost
                
                $
                -
                
                
                
                2,173
                
                
                
                2,497Interest
      cost
                
                
                3,645
                
                
                
                3,611
                
                
                
                3,217Expected
      return on plan assets
                
                
                (4,358
                )
                
                
                (4,203
                )
                
                
                (3,390
                )Gain
      on curtailment
                
                
                -
                
                
                
                (6,110
                )
                
                
                -Net
      periodic benefit cost
                
                $
                (713
                )
                
                
                (4,529
                )
                
                
                2,324Benefits
      paid
                
                $
                2,847
                
                
                
                2,777
                
                
                
                2,442
  As of
December 31, 2008 and 2007, the Company had a $19.9 million and a $4.2 million
net actuarial loss recorded in accumulated other comprehensive loss on its
defined benefit plan.  The Company expects to recognize $1.6 million
of the net actuarial loss in the year ended December 31, 2009.
  The
weighted-average assumptions used to determine the pension benefit obligations
are as follows:
  2008
                
                2007Discount
      rate
                
                6.00%
                
                5.80%Expected
      return on plan assets
                
                7.50%
                
                7.50%Measurement
      date
                
                December
      31, 2008
                
                December
      31, 2007
  The
weighted-average assumptions used to determine the net periodic benefit cost are
as follows:
  Three
      Months
                
                Nine
      monthsEnded
                
                EndedDecember
      31,
                
                September
      30,2008
                
                2007
                
                2007
                
                2006Discount
      rate
                5.80%
                
                6.00%
                
                5.55%
                
                5.25%Expected
      return on plan assets
                7.50%
                
                7.50%
                
                7.50%
                
                7.50%Rate
      of compensation increase
                Not
      applicable
                
                Not
      applicable
                
                4.00%
                
                4.00%Measurement
      date
                December
      31, 2008
                
                September
      30, 2007
                
                October
      1, 2006
                
                October
      1, 2005
   F-25
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  The
following benefit payments are expected to be paid (based on the assumptions
described above (in thousands)).
  Year
      ended December 31:2009
                
                $
                2,4692010
                
                
                2,6372011
                
                
                2,8362012
                
                
                3,0002013
                
                
                3,1922014-2017
                
                
                18,811
  Savings
and Profit Sharing Plan
  The
Company sponsors defined contribution pension plans and profit sharing
plans.  All U.S. employees are eligible for at least one of the
Company’s plans. The Company’s contributions vary depending on the plan and
cannot exceed the maximum allowable for tax purposes.The Company recognized
approximately $3.7 million, $3.6 million and $3.4 million of expense relating to
these plans for the years ended December 31, 2008, 2007 and 2006,
respectively.
  (10)
              Major
      Customers
  During
2008, approximately 48% of total revenues were from two customers, the largest
of which represented 36% of revenues.  During 2007, approximately 47%
of total revenues were from two customers, the largest of which represented 28%
of revenues.  During 2006, approximately 41% of total revenues were
from two customers, the largest of which represented 25% of
revenues.  These customers for 2008, 2007 and 2006 are both included
in the CAPP segment in Note 15.
  (11)
              Leases
  The
Company leases equipment and various other properties under non-cancelable
long-term leases, expiring at various dates. Certain leases contain options that
would allow the Company to extend the lease or purchase the leased asset at the
end of the base lease term.Future minimum lease
payments under noncancelable operating leases (with initial or remaining lease
terms in excess of one year) as of December 31, 2008 were as follows
(in thousands):
  OperatingleasesYear
      ended December 31:2009
                
                $
                6,3682010
                
                
                3,4252011
                
                
                1,0862012
                
                
                2342013
                
                
                239Thereafter
                
                
                164$
                11,516
  The
Company incurred rent expense on equipment and offices space of approximately
$10.7 million, $7.3 million and $2.3 million for the years ended December 31,
2008, 2007 and 2006, respectively.
   F-26
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  (12)
              Commitments
      and Contingencies
  Future
minimum royalty commitments under coal lease agreements at December 31,
2008 were as follows (in thousands):
  Royalty
                  commitmentsYear
      ended December 31:2009
                
                $
                24,4112010
                
                
                24,1612011
                
                
                23,6122012
                
                
                30,5962013
                
                
                30,5502014
      and thereafter
                
                
                141,932$
                275,262
  Certain
coal leases do not have set expiration dates but extend until completion of
mining of all merchantable and mineable coal reserves.  For purposes
of this table, we have generally assumed that minimum royalties on such leases
will be paid for a period of ten years.
  Certain
coal leases require payment based on minimum tonnage, for these contracts an
average sales price of $90.00 per ton was used to project the future
commitment.
  The
Company has established irrevocable letters of credit totaling $60.0 million as
of December 31, 2008 to guarantee performance under certain contractual
arrangements.  The letters of credit were issued under the Letter of
Credit Facility (Note 4).
  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.
   F-27
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  (13)
              Earnings
      (Loss) Per Share
 
 Basic
earnings (loss) per share is computed by dividing net income (loss) 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 (loss) per share (in
thousands):
  For
      the Years ended December 31,2008
              2007
              2006Weighted
      average number
                of
      common shares
                outstanding:Basic
              24,520
              16,412
              15,849Effect
      of dilutive instruments
              -
              -
              -Diluted
              24,520
              16,412
              15,849
  For
periods in which there was a loss, the Company has excluded from its diluted
loss per share calculation options to purchase shares with underlying exercise
prices less than the average market prices and the unvested portion of time
vested restricted shares, as inclusion of these securities would have reduced
the net loss per share.   The excluded instruments would have
increased the diluted weighted average number of common shares by approximately
0.8 million, 0.7 million and 0.9 million for the years ended December 31, 2008,
2007, and 2006, respectively.
  (14)
                Fair
      Value of Financial
Instruments
  The
estimated fair value of financial instruments has been determined by the Company
using available market information. As of December 31, 2008 and 2007, except for
long-term debt obligations, the carrying amounts of all financial instruments
approximate their fair values due to their short maturities.
  The
Company believes that the fair value of its Senior Notes was $112.1 million and
$132.0 million at December 31, 2008 and 2007, respectively, based on available
market information at that date.  The Company believes that the
carrying amount of the Revolver approximated the fair value at December 31,
2008, due to the variable interest rate and recent amendment to that
facility.  The Company believes that the fair value of its Term Loan
was $38.2 million at December 31, 2007, based on available market information at
that date.
   F-28
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  (15)
              Segment
      Information
  The
Company has two segments based on the coal basins in which the Company operates.
These basins are located in Central Appalachia (CAPP) and in the Midwest
(Midwest). The Company’s CAPP operations are located in eastern Kentucky and the
Company’s Midwest operations are located in southern Indiana. Coal quality, coal
seam height, transportation methods and regulatory issues are generally
consistent within a basin. Accordingly, market and contract pricing have been
developed by coal basin. The Company manages its coal sales by coal basin, not
by individual mine complex. Mine operations are evaluated based on their per-ton
operating costs. Operating segment results are shown below (in
thousands).
  F-29
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
  
 Years
      EndedDecember
      31,2008
                
                
                2007
                
                
                2006RevenuesCAPP
                
                $
                467,609
                
                
                
                429,283
                
                
                
                472,100Midwest
                
                
                100,898
                
                
                
                91,277
                
                
                
                92,691Corporate
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                568,507
                
                
                
                520,560
                
                
                
                564,791Depreciation,
      depletion and amortizationCAPP
                
                $
                55,979
                
                
                
                56,506
                
                
                
                60,040Midwest
                
                
                14,218
                
                
                
                15,199
                
                
                
                14,411Corporate
                
                
                80
                
                
                
                151
                
                
                
                111Total
                
                $
                70,277
                
                
                
                71,856
                
                
                
                74,562Total
      operating income (loss)CAPP
                
                $
                (35,861
                )
                
                
                (30,841
                )
                
                
                (20,425
                )Midwest
                
                
                (10,296
                )
                
                
                (3,276
                )
                
                
                (512
                )Corporate
      (2)
                
                
                (18,493
                )
                
                
                (16,626
                )
                
                
                (16,500
                )Total
                
                $
                (64,650
                )
                
                
                (50,743
                )
                
                
                (37,437
                )Interest
      Income (1)Corporate
                
                $
                (469
                )
                
                
                (471
                )
                
                
                (366
                )Total
                
                $
                (469
                )
                
                
                (471
                )
                
                
                (366
                )Interest
      Expense (1)Corporate
                
                $
                17,746
                
                
                
                19,764
                
                
                
                16,782Total
                
                $
                17,746
                
                
                
                19,764
                
                
                
                16,782Income
      tax benefit (1)Corporate
                
                $
                (273
                )
                
                
                (17,844
                )
                
                
                (27,151
                )Total
                
                $
                (273
                )
                
                
                (17,844
                )
                
                
                (27,151
                )Net
      earnings (loss) (1)CAPP
                
                $
                (35,861
                )
                
                
                (30,841
                )
                
                
                (20,425
                )Midwest
                
                
                (10,296
                )
                
                
                (3,276
                )
                
                
                (512
                )Corporate
      (2)
                
                
                (49,836
                )
                
                
                (19,898
                )
                
                
                (5,232
                )Total
                
                $
                (95,993
                )
                
                
                (54,015
                )
                
                
                (26,169
                )
  (1)
      The Company does not allocate interest income, interest expense or income
      taxes to its segments.(2)  Corporate
      includes a $6.1 million gain on curtailment of the pension plan (note 9)
      in the year ended December 31,
2007.
   F-30
 JAMES
RIVER COAL COMPANY
 AND
SUBSIDIARIES
 Notes
to Consolidated Financial Statements
   
   December
      31,2008
                
                
                2007Total
      AssetsCAPP
                
                $
                336,631
                
                
                
                326,571Midwest
                
                
                89,792
                
                
                
                93,982Corporate
                
                
                37,123
                
                
                
                18,734Total
                
                $
                463,546
                
                
                
                439,287GoodwillCAPP
                
                $
                -
                
                
                
                -Midwest
                
                
                26,492
                
                
                
                26,492Corporate
                
                
                -
                
                
                
                -Total
                
                $
                26,492
                
                
                
                26,492
  Years
      EndedDecember
      31,Capital
      Expenditures
                
                2008
                
                
                2007
                
                
                2006CAPP
                
                $
                66,467
                
                
                
                42,379
                
                
                
                53,906Midwest
                
                
                8,167
                
                
                
                6,564
                
                
                
                8,585Corporate
                
                
                63
                
                
                
                400
                
                
                
                16Total
                
                $
                74,697
                
                
                
                49,343
                
                
                
                62,507
   (16)  
Quarterly Information (Unaudited)
  Set forth
below is the Company’s quarterly financial information for the previous two
fiscal years (in thousands):
 
 Three
      Months EndedMarch
      31,
                
                June
      30,
                
                September 30,
                
                December 31,2008
                
                
                2008
                
                
                2008
                
                
                2008Total
      revenue
                
                $
                138,188
                
                
                
                137,703
                
                
                
                151,842
                
                
                
                140,774Gross
      profit (loss)
                
                
                (4,832
                )
                
                
                (8,716
                )
                
                
                (4,189
                )
                
                
                (11,921
                )Loss
      from operations
                
                
                (12,166
                )
                
                
                (17,448
                )
                
                
                (13,246
                )
                
                
                (21,790
                )Loss
      before taxes
                
                
                (16,688
                )
                
                
                (24,006
                )
                
                
                (21,712
                )
                
                
                (33,860
                )Net
      loss
                
                
                (16,688
                )
                
                
                (24,006
                )
                
                
                (21,712
                )
                
                
                (33,587
                )Loss
      per share (Basic and Diluted):
                
                $
                (0.78
                )
                
                
                (0.97
                )
                
                
                (0.86
                )
                
                
                (1.26
                )Three
      Months EndedMarch
      31,
                
                June
      30,
                
                September 30,
                
                December 31,2007
                
                
                2007
                
                
                2007
                
                
                2007Total
      revenue
                
                $
                132,435
                
                
                
                131,936
                
                
                
                130,052
                
                
                
                126,137Gross
      profit (loss)
                
                
                (486
                )
                
                
                (8,450
                )
                
                
                (466
                )
                
                
                (9,150
                )Loss
      from operations
                
                
                (7,961
                )
                
                
                (16,138
                )
                
                
                (8,528
                )
                
                
                (18,116
                )Loss
      before taxes
                
                
                (14,544
                )
                
                
                (21,027
                )
                
                
                (13,613
                )
                
                
                (22,675
                )Net
      loss
                
                
                (7,255
                )
                
                
                (18,613
                )
                
                
                (9,696
                )
                
                
                (18,451
                )Loss
      per share (Basic and Diluted):
                
                $
                (0.46
                )
                
                
                (1.17
                )
                
                
                (0.60
                )
                
                
                (1.04
                )
 
 
  F-31


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) 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, on the 27th day of February,
2009.




JAMES
      RIVER COAL COMPANYBy:/s/  Peter
      T.
      SochaPeter T. SochaChairman of the Board,President and Chief Executive Officer(principal executive
    officer)










Know all men by these presents, that
each person whose signature appears below constitutes and appoints Peter T.
Socha and Samuel M. Hopkins, II, or either of them, as attorneys-in-fact, with
power of substitution, for him in any and all capacities, to sign any amendments
to this annual report on Form 10-K, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact may do or cause to be done by virtue hereof.




Pursuant to the requirements of the
Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant in the capacities indicated on
the  27th day of February, 2009.





Signature
            Title/s/  Peter
      T.
      Socha
              Peter
      T. Socha
            Chairman of the Board, President and Chief
      Executive Officer (principal executive officer)/s/  Samuel
      M. Hopkins,
      II
              Samuel
      M. Hopkins, II
            Vice President and Chief Accounting Officer
      (principal financial officer and principal accounting
      officer)/s/  Alan
      F.
      Crown
              Alan
      F. Crown
            Director/s/  Ronald
      J.
      FlorJancic
              Ronald
      J. FlorJancic
            Director/s/  Leonard
      J.
      Kujawa
              Leonard
      J. Kujawa
            Director/s/  Joseph
      H.
      Vipperman
              Joseph
      H. Vipperman
            Director