<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

(Mark One)
[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1999
                                       or
[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934 For the transition period from ________________ to
         ________________.

                        COMMISSION FILE NUMBER 333-59037

                             LODESTAR HOLDINGS, INC.
             (Exact name of registrant as specified in its charter)

                     DELAWARE                             13-3903875
         (State or other jurisdiction of       (IRS Employer Identification No.)
          incorporation or organization)

         30 ROCKEFELLER PLAZA, SUITE 4225
                 NEW YORK, NEW YORK                          10112
      (Address of principal executive offices)             (Zip Code)

                                 (606) 255-4006
              (Registrant's telephone number, including area code)

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.

                               [ X ] YES  [  ] NO

Number of shares outstanding of each of the registrant's classes of common
stock, as of September 14, 1999:

COMMON STOCK, $1.00 PAR VALUE                                        1000 SHARES
<PAGE>

                                TABLE OF CONTENTS

                                                                        Page No.
                                                                        --------

TABLE OF CONTENTS                                                              1

PART I. FINANCIAL INFORMATION

         ITEM 1 - FINANCIAL STATEMENTS

         Consolidated Balance Sheets
         July 31, 1999 and October 31, 1998                                    2

         Consolidated Statements of Operations
         Three Months Ended July 31, 1999 and 1998                             3

         Consolidated Statements of Operations
         Nine Months Ended July 31, 1999 and 1998                              4

         Consolidated Statements of Cash Flows
         Nine Months Ended July 31, 1999 and 1998                              5

         Notes To Consolidated Financial Statements                            6

         ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS                          8

         ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  15

PART II. OTHER INFORMATION

         ITEM 1 - LEGAL PROCEEDINGS                                           15

         ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K                            16

SIGNATURE                                                                     17
<PAGE>

Part I. - Item 1 Financial Statements

                             Lodestar Holdings, Inc.

                                and Subsidiaries

                           Consolidated Balance Sheets

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                               July 31, 1999  October 31, 1998
                                                               -------------  ----------------
<S>                                                              <C>             <C>
                           Assets                             (in thousands, except share data)

Current assets:
     Cash                                                        $   2,916       $  14,949
     Accounts receivable                                            36,371          29,874
     Inventories                                                    16,895           9,550
     Prepaid expenses and other current assets                       4,931           4,092
                                                                 ---------       ---------
                    Total current assets                            61,113          58,465

Property, plant and equipment, net                                 114,876          95,498
Coal and ash disposal contracts in excess of market, net of
   accumulated amortization of $7,028 and $5,058, respectively      39,780          41,750
Other assets                                                        18,016          18,065
                                                                 ---------       ---------

                                                                 $ 233,785       $ 213,778
                                                                 =========       =========

             Liabilities and Stockholder's Deficit

Current liabilities:
     Current installments of long-term debt                      $   1,025       $    --
     Accounts payable                                               28,013          25,161
     Accrued expenses                                               23,855          32,411
                                                                 ---------       ---------
                    Total current liabilities                       52,893          57,572

Long-term obligations, excluding current installments              181,480         150,000
Other non-current liabilities                                       50,830          40,789
                                                                 ---------       ---------
                    Total liabilities                              285,203         248,361
                                                                 ---------       ---------

Stockholder's  deficit:
     Common stock, $1.00 par value.  Authorized, issued and
        outstanding 1,000 shares                                         1               1
     Additional paid-in capital                                      5,000           5,000
     Accumulated deficit                                           (55,263)        (38,428)
     Accumulated other comprehensive loss - minimum
        pension liability adjustment                                (1,156)         (1,156)
                                                                 ---------       ---------
                    Total stockholder's deficit                    (51,418)        (34,583)
                                                                 ---------       ---------
                                                                 $ 233,785       $ 213,778
                                                                 =========       =========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       2
<PAGE>

                             Lodestar Holdings, Inc.
                                and Subsidiaries

                      Consolidated Statements of Operations
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                           Three Months Ended
                                                     July 31, 1999   July 31, 1998
                                                     -------------   -------------
                                                             (in thousands)
<S>                                                     <C>            <C>
 Coal sales and related revenue                         $ 67,719       $ 63,419
                                                        --------       --------

 Operating costs:
      Cost of revenues                                    55,286         54,883
      Depreciation, depletion
         and amortization                                  7,740          8,168
      Selling, general and administrative                  5,230          5,283
                                                        --------       --------
                                                          68,256         68,334
                                                        --------       --------

                  Operating loss                            (537)        (4,915)

 Interest expense, net                                    (5,152)        (3,876)
                                                        --------       --------

       Loss before income taxes                           (5,689)        (8,791)
        and extraordinary items

 Income tax benefit                                         --               54
                                                        --------       --------

        Loss before extraordinary
          items                                           (5,689)        (8,737)

Extraordinary items                                         --            6,572
                                                        --------       --------

                   Net loss                             $ (5,689)      $ (2,165)
                                                        ========       ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       3
<PAGE>

                             Lodestar Holdings, Inc.
                                and Subsidiaries

                      Consolidated Statements of Operations
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                          Nine Months Ended
                                                     July 31, 1999  July 31, 1998
                                                     -------------  -------------
                                                            (in thousands)
<S>                                                    <C>            <C>
 Coal sales and related revenue                        $ 172,463      $ 199,657
                                                       ---------      ---------

 Operating costs:
      Cost of revenues                                   142,661        169,527
      Depreciation, depletion
         and amortization                                 21,892         19,997
      Selling, general and administrative                 10,092         10,158
                                                       ---------      ---------
                                                         174,645        199,682
                                                       ---------      ---------

                  Operating loss                          (2,182)           (25)

 Interest expense, net                                   (14,653)        (8,633)
                                                       ---------      ---------

      Loss before income taxes and
       extraordinary items                               (16,835)        (8,658)

 Income tax provision                                       --             --
                                                       ---------      ---------

        Loss before extraordinary
         items                                           (16,835)        (8,658)

Extraordinary items                                         --            6,572
                                                       ---------      ---------

                  Net loss                             $ (16,835)     $  (2,086)
                                                       =========      =========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       4
<PAGE>

                             Lodestar Holdings, Inc.
                                and Subsidiaries

                      Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                   Nine Months Ended
                                                              July 31, 1999  July 31, 1998
                                                              -------------  -------------
                                                                     (in thousands)
<S>                                                             <C>            <C>
 Cash flows from operating activities:
       Net loss                                                 $ (16,835)     $  (2,086)
       Adjustments to reconcile net loss to net cash
         used in operating activities
            Depreciation, depletion and amortization               21,892         19,997
            Loss (gain) on sale/disposal of property plant
            and equipment                                              37             (2)
            Amortization of deferred financing fees                   833            539
            Imputed interest                                          469          1,164
            Financing fees written off                               --            1,388
         Changes in operating assets and liabilities:
            Accounts receivable                                    (6,497)         4,890
             Inventories                                           (6,996)          (829)
            Prepaid expenses and other current assets                (948)        (3,372)
             Other assets                                          (1,113)         1,979
            Accounts payable                                        2,852        (13,524)
            Accrued expenses                                       (9,418)        (5,426)
            Other non-current liabilities                            (350)       (14,855)
                                                                ---------      ---------
            Net cash used in operating activities                 (16,074)       (10,137)
                                                                ---------      ---------

  Cash flows from investing activities:
            Cost of acquisitions, net of liabilities incurred     (10,384)          --
            Capital expenditures                                  (10,686)       (31,313)
            Proceeds from sales of property, plant and
               equipment                                               98            282
                                                                ---------      ---------
            Net cash used in investing activities                 (20,972)       (31,031)
                                                                ---------      ---------

 Cash flows from financing activities:
            Proceeds from long-term debt                           25,258        150,000
            Principal payments on long-term obligations              (245)       (58,557)
            Payments on related party borrowings                     --           (5,000)
            Financing fees paid                                      --           (6,300)
            Dividends paid                                           --          (27,818)
                                                                ---------      ---------
            Net cash provided by financing activities              25,013         52,325
                                                                ---------      ---------
       Net increase (decrease) in cash                            (12,033)        11,157
       Cash at beginning of period                                 14,949          3,056
                                                                ---------      ---------
       Cash at end of period                                    $   2,916      $  14,213
                                                                =========      =========

Supplemental cash flow disclosures:
      Interest paid                                             $  17,679      $   3,589
                                                                =========      =========
      Property, plant and equipment and inventory
        acquired through debt incurred and liabilities
        assumed                                                 $  18,275      $    --
                                                                =========      =========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       5
<PAGE>

                             Lodestar Holdings, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements
                    Nine Months ended July 31, 1999 and 1998
                           (Unaudited - in thousands)

(1)  Basis of Presentation

     The accompanying consolidated financial statements have been prepared from
     the accounting records of Lodestar Holdings, Inc. and its subsidiaries (the
     Company), without audit. Lodestar Holdings, Inc. is a wholly owned
     subsidiary of The Renco Group, Inc. (Renco). The consolidated financial
     statements reflect all adjustments (consisting solely of normal recurring
     adjustments) which are, in the opinion of management, necessary for a fair
     statement of results for the interim periods presented. The results of
     operations presented for the three and nine month periods ended July 31,
     1999 are not necessarily indicative of the results to be expected for the
     full year.

(2)  Inventories

     Inventories consist of the following at July 31,1999 and October 31,1998:

<TABLE>
<CAPTION>
                                          July 31,                 October 31,
                                            1999                      1998
                                      ----------------          ----------------
<S>                                     <C>                       <C>
 Coal                                   $      13,924             $       6,067
 Materials and supplies                         2,971                     3,483
                                      ----------------          ----------------
                                        $      16,895             $       9,550
                                      ================          ================
</TABLE>

(3)  Acquisition of Assets of Colonial Coal Company, Inc.

     On January 15, 1999, Lodestar acquired coal inventory, mining rights,
     leases of real property, and equipment from Colonial Coal Company, Inc.
     (Colonial), a mining company in Eastern Kentucky. The consideration to
     Colonial was $5,384 in cash paid at the closing, periodic deferred payment
     obligations of $5,806, and the assumption of $5,440 in reclamation and
     other liabilities.

(4)  Acquisition of Assets of White Oak Mining and Construction Company, Inc.,
     Horizon Mining LLC, and Grand Valley Coal Company.

     On July 16, 1999, Lodestar acquired mining rights, leases of real property,
     and equipment from White Oak Mining and Construction Company, Inc., Horizon
     Mining LLC, and Grand Valley Coal Company (Sellers), mining companies in
     Utah and Colorado. The consideration to the Sellers was $5,000 in cash paid
     at the closing and the assumption of $7,029 in reclamation and other
     liabilities.


                                       6
<PAGE>

                             Lodestar Holdings, Inc.
                                and Subsidiaries

(5)  Subchapter S Corporation Election

     On January 15, 1999, Renco filed an election with the consent of its
     shareholders with the Internal Revenue Service to change its taxable status
     from that of a subchapter C corporation to that of a subchapter S
     corporation, effective November 1, 1998. At the same time, Renco elected
     for the Company to be treated as a qualified subchapter S subsidiary
     (QSSS). Most states in which the Company operates will follow similar tax
     treatment. QSSS status requires the ultimate shareholders to include their
     pro rata share of the Company's income or loss in their individual tax
     returns. The Company will continue to provide for state and local income
     taxes for the taxing jurisdictions which do not recognize QSSS status;
     however, management believes this is not material to the Company.

(6)  Contingencies

     On August 12, 1999, a Florida state court ruled in favor of a significant
     customer (the Customer) of the Company in its litigation against the
     utility for which the Customer generates power (the Utility). The Customer
     was awarded $18.1 million representing underpayment by the Utility pursuant
     to the contract in place. It is expected that the Utility will appeal this
     judgment. The Customer's ability to meet its financial obligations,
     including those under its contract with the Company may be adversely
     affected to the extent the Customer is not successful in collecting this
     judgment. As of July 31, 1999, the Company has receivables from the
     Customer totaling $11,990 ($6,439 of which is classified as current and
     $5,551 of which is classified as long-term). The Company also has contracts
     with the Customer to sell coal and dispose of coal ash. These contracts
     were part of the intangible asset recorded in connection with the March 14,
     1997, purchase of the capital stock of Costain Coal Inc. and its
     subsidiaries (subsequently renamed Lodestar Energy, Inc.) by the Company.
     As of July 31, 1999, the net amount capitalized for these contracts with
     the Customer is $15,225. The management of the Company does not expect the
     resolution of this legal proceeding to have a material adverse impact on
     the results of operations or the financial condition of the Company.


                                       7
<PAGE>

Part I. - Item 2

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

Lodestar Holdings, Inc. (the Company) was formed in August 1996 to acquire all
of the capital stock of Costain Coal Inc. from Costain America Inc. (the
Acquisition). The Acquisition, which was effective March 14, 1997, was accounted
for using the purchase method of accounting. After the Acquisition, Costain Coal
Inc. was renamed Lodestar Energy, Inc. (Lodestar). On May 15, 1998, the Company
sold and issued (the Notes Offering) $150.0 million of 11.5% Senior Notes due
2005 (the Notes).

Lodestar Holdings, Inc. is a holding company whose wholly-owned direct and
indirect subsidiaries include Lodestar Energy, Inc., Eastern Resources, Inc. and
Industrial Fuels Minerals Company. These subsidiaries have guaranteed the Notes.
The assets, equity, income and cash flows of other non-guarantor subsidiaries
are inconsequential (i.e. individually and combined less than 3% of the Lodestar
Holdings, Inc. totals). Lodestar Holdings, Inc. has no operations or assets
separate from its investment in its subsidiaries. Accordingly, separate
financial information of the subsidiaries is not considered necessary to
include, as in management's opinion, it would not be material to investors.

The Company, through its wholly-owned subsidiary, Lodestar, is engaged in the
mining and marketing of bituminous coal used principally for the generation of
electricity, as well as for other industrial applications. Lodestar's Western
Kentucky coal product is mid to high sulfur and competes primarily in the
regional utility market. Lodestar's Eastern Kentucky coal product, as compared
to its Western Kentucky coal product, is generally higher in energy (as measured
in British thermal units (Btu's)) content and lower in sulfur content and is
marketed in the Eastern, South Central and Great Lakes regions of the United
States. Lodestar also owns and operates an ash disposal facility in Eastern
Kentucky.

On July 16, 1999, Lodestar acquired certain assets of White Oak Mining and
Construction Company, Inc., Horizon Mining LLC, and Grand Valley Coal Company
(Sellers), including the White Oak and Horizon Mines in Utah and certain
undeveloped reserves in Colorado. All of the aforementioned mines had been idled
by Sellers. The acquisition of the Utah and Colorado properties provides the
Company access to coal reserves which are lower in sulfur content than its
Kentucky reserves, and which will allow market expansion. The Company began
production at the White Oak Mine in mid-August.

As of July 31, 1999, Lodestar controlled the mineral rights through lease or
ownership at fifteen active mines. Two of the active mines are in Western
Kentucky (both underground) and thirteen in Eastern Kentucky (8 underground and
5 surface). All operations temporarily idled by Lodestar during the second
quarter of fiscal year 1999, have been reactivated.

During Lodestar's third quarter of fiscal year 1999, Lodestar idled the Smith
underground mining operation, which generated 720,000 sold tons in fiscal year
1998 and 189,000 sold tons year-to-date in fiscal year 1999. Equipment
previously employed at the Smith underground operation has been relocated to the
newly acquired Utah properties or to the Eastern Kentucky underground
operations. The Smith underground mine was the primary source of tonnage sold on
a long-term contract with West Kentucky Energy, an electrical utility in Western
Kentucky formerly known as Big Rivers. This contract was surrendered by Lodestar
as one component of successful negotiations between Lodestar and Webster County
Coal Corporation (WCCC), which resolved various disputes relating to Lodestar's
past mining at the Smith surface mine. Another component of this settlement was
a long-term coal waste disposal agreement between Lodestar and WCCC. The
efficient utilization of the waste material from WCCC reduces Lodestar's Western
Kentucky reclamation liability.


                                       8
<PAGE>

Results of Operations

Three months ended July 31, 1999 compared with three months ended July 31, 1998.

The following table summarizes the tons shipped by region and other operating
data for the Company for the periods presented.

<TABLE>
<CAPTION>
                                               Three Months Ended
                                         July 31, 1999   July 31, 1998
                                         -------------   -------------
                                             ( tons in thousands )
<S>                                         <C>             <C>
Region:
Brokered                                        113               -
Eastern Kentucky                              1,019           1,167
Western Kentucky                              1,510           1,331
                                            -------         -------
                                 Total        2,642           2,498
                                            =======         =======

Other Operating Data:
Coal sales and related revenue per
   ton shipped                              $ 25.63         $ 25.39
Cost of coal sales and related
   revenues per ton shipped                 $ 20.93         $ 21.98

Coal sales revenue per ton shipped          $ 25.10         $ 23.46
Cost of coal sales revenues per
   ton shipped                              $ 20.77         $ 20.35
</TABLE>

Coal sales and related revenue for the three months ended July 31, 1999 (the
1999 Quarter) were $67.7 million, an increase of $4.3 million, or 6.8%, compared
to the three months ended July 31, 1998 (the 1998 Quarter). The 1998 Quarter
included $3.2 million of revenue related to contract mining operations that were
completed in the first quarter of fiscal year 1999, representing a decreasing
component of the total net $4.3 million increase. Coal sales revenue increased
by $7.7 million, which partially was the result of a 5.8% increase in the volume
of tons shipped, as well as an increase in realization of $1.64 per sold ton, or
7.0%. The sold tonnage volume increase is the result of an aggressive marketing
effort implemented in the 1999 Quarter to relieve inventory build ups resulting
from mild winter weather during the 1998-1999 season.

The $1.64 increase in realization per sold ton during the 1999 Quarter is
primarily the result of higher prices on the Western Kentucky shipments due to
overall higher coal quality, subsequent to the elimination of the production
from the Smith underground and surface mines, and to a lesser extent, to the
higher quality of coal production from the Eastern Kentucky mines.


                                       9
<PAGE>

Cost of revenues for the 1999 Quarter was $55.3 million, an increase of $.4
million, or .1%, compared to the 1998 Quarter. The 1998 Quarter included $3.6
million of costs related to contract mining operations that were completed in
the first quarter of fiscal year 1999. Adjusted for such benefit, cost of
revenues increased $4.0 million primarily as a result of the 144,000 additional
tons shipped during the 1999 Quarter and the $.42 increase in the cost of coal
sales revenue per ton shipped as compared to the 1998 Quarter. Cost of revenues
at the Western Kentucky operations were relatively unchanged overall from the
1998 Quarter to the 1999 Quarter with favorable productivity and operating
factors offsetting lower salable yield recoveries. The cost of revenues at the
Eastern Kentucky operations increased due to higher mining ratios (cubic yards
of overburden removed to salable tons of coal produced) encountered at certain
surface operations and lower salable yield recoveries at certain underground
operations.

Depreciation, depletion, and amortization for the 1999 Quarter decreased from
the 1998 Quarter by $.4 million. This decrease is primarily the result of the
timing of capital expenditures during the 1999 fiscal year period as compared to
the 1998 fiscal year period.

Selling, general and administrative expenses during the 1999 Quarter were $5.2
million compared to $5.3 million in the 1998 Quarter. The 1999 Quarter selling,
general, and administrative expenses included a nonrecurring charge of $3.0
million, which represents costs charged to operations in conjunction with due
diligence on a potential acquisition which is not expected to provide a future
benefit to the Company. The selling, general, and administrative expenses for
the 1998 Quarter include a nonrecurring payment of $2.8 million to certain
employees in connection with the Notes Offering. Notwithstanding these
nonrecurring charges, selling, general and administrative expenses for the 1999
Quarter have decreased by $.3 million compared to the 1998 Quarter with
favorable variances in other administrative expenses offsetting costs associated
with Year 2000 compliance efforts.

Operating loss decreased from $4.9 million during the 1998 Quarter to $.5
million during the 1999 Quarter, primarily as a result of the improved sales
pricing during the 1999 Quarter.

Interest expense, net was $5.2 million for the 1999 Quarter, an increase of $1.3
million over the 1998 Quarter, which reflects the impact of increased debt.

Income taxes for the 1999 Quarter were $0 as compared to a $54,000 tax benefit
recorded during the 1998 Quarter. Due to the Company's change in tax status (See
Note 5 of Notes to Consolidated Financial Statements), the Company is no longer
subject to income taxes, and accordingly, no provision or credit for income
taxes has been recorded during the 1999 Quarter.

Extraordinary items for the 1999 Quarter were $0 as compared to $6.6 million of
income recorded during the 1998 Quarter. The 1998 Quarter extraordinary income
was attributable to the buyout of certain deferred payment obligations with the
proceeds of the Notes Offering.

Net loss increased from $2.2 million during the 1998 Quarter to $5.7 million
during the 1999 Quarter as a result of the factors described above.


                                       10
<PAGE>

Nine months ended July 31, 1999 compared with nine months ended July 31, 1998.

The following table summarizes the tons shipped by region and other operating
data for the Company for the periods presented.

<TABLE>
<CAPTION>
                                                    Nine Months Ended
                                             July 31, 1999     July 31, 1998
                                             -------------     -------------
                                                   ( tons in thousands )
<S>                                             <C>               <C>
Region:
Brokered                                            230                 -
Eastern Kentucky                                  2,838             3,146
Western Kentucky                                  3,717             4,562
West Virginia                                         -               200
                                                -------           -------
                             Total                6,785             7,908
                                                =======           =======

Other Operating Data:
Coal sales and related revenue per
   ton shipped                                  $ 25.42           $ 25.25
Cost of coal sales and related
   revenues per ton shipped                     $ 21.03           $ 21.44

Coal sales revenue per ton shipped              $ 24.18           $ 23.23
Cost of coal sales revenues per
   ton shipped                                  $ 20.45           $ 19.75
</TABLE>

Coal sales and related revenue for the nine months ended July 31, 1999 (the 1999
Period) were $172.5 million, a decrease of $27.2 million, or 13.6%, compared to
the nine months ended July 31, 1998 (the 1998 Period). The related revenue
component was $8.4 million in the 1999 Period and $16.0 million in the 1998
Period, representing $7.6 million of the total $27.2 million decrease. Of this
decrease, $6.9 million is primarily attributable to the completion of the
contract mining operation in Eastern Kentucky.

Coal sales revenue decreased by $19.6 million, which primarily was the result of
a 14.2% decrease in the volume of tons shipped. Coal sales revenue per ton
shipped was $24.18 in the 1999 Period compared to $23.23 in the 1998 Period,
increasing as a result of a higher ratio of contract shipments to spot market
orders, improved overall coal quality, as well as a greater ratio of higher
priced Eastern Kentucky coal sales to Western Kentucky coal sales. The 1.1
million ton decline in coal shipped for the 1999 Period versus the 1998 Period
is the result of Lodestar's decision to reduce spot shipments during a weak coal
market, the temporarily reduced production levels at certain mine sites in both
the Western and Eastern Kentucky operations during the second quarter of 1999,
the closure of mines during fiscal year 1998, and the deferral of certain
contracted customer shipments.

Cost of revenues for the 1999 Period was $142.7 million, a decrease of $26.9
million, or 15.9%, compared to the 1998 Period. The $26.9 million reduction in
cost of revenues is primarily the result of fewer sold tons during the 1999
Period. Additionally, a $9.3 million reduction in cost of revenues due to the
completion of the contract mining operation in Eastern Kentucky benefited the
1999 Period. Cost of coal sales revenue increased $.70 per ton shipped primarily
due to lower salable yield from the Western Kentucky Baker underground mine and
higher surface mining ratios at certain Eastern Kentucky surface mines, net of
the benefit of a $5.6 million reduction in equipment lease expense associated
with the buyout of those obligations with the proceeds of the Notes.


                                       11
<PAGE>

Depreciation, depletion, and amortization for the 1999 Period increased from the
1998 Period by $1.9 million. The primary reason for this increase was
depreciation as a result of capital equipment additions during the interim
twelve months including $27.5 million, which was capitalized in conjunction with
the buyout of leases with the proceeds of the Notes.

Selling, general and administrative expenses during the 1999 Period were $10.1
million compared to $10.2 million in the 1998 Period. The 1999 Period selling,
general, and administrative expenses included a nonrecurring charge of $3.0
million, which represents costs charged to operations in conjunction with due
diligence on a potential acquisition which is not expected to provide a future
benefit to the Company. The selling, general, and administrative expenses for
the 1998 Period include a nonrecurring payment of $2.8 million to certain
employees in connection with the Notes Offering. Notwithstanding, these
nonrecurring charges, selling, general and administrative expenses for the 1999
Period have decreased by $.3 million compared to the 1998 Period with favorable
variances in other administrative expenses offsetting costs associated with Year
2000 compliance efforts.

Operating loss increased from $25,000 during the 1998 Period to $2.2 million
during the 1999 Period primarily as a result of the impact of reduced shipments
during the 1999 Period.

Interest expense, net was $14.7 million for the 1999 Period, an increase of $6.0
million over the 1998 Period, which reflects the impact of interest on the
Notes.

Income taxes for the 1999 Period are $0. Due to the Company's change in tax
status (See Note 5 of Notes to Consolidated Financial Statements), the Company
is no longer subject to income taxes, and accordingly, no provision or credit
for income taxes has been recorded during the 1999 Period.

Extraordinary items for the 1999 Period were $0 as compared to $6.6 million of
income recorded during the 1998 Period. The 1998 Period extraordinary income was
attributable to the buyout of certain deferred payment obligations with the
proceeds of the Notes Offering.

Net loss increased from $2.1 million during the 1998 Period to a loss of $16.8
million during the 1999 Period as a result of the factors described above.

Liquidity and Capital Resources

The Company's liquidity requirements arise from working capital requirements,
capital investments, interest payment obligations and costs of implementing its
business strategy to grow through strategic acquisitions. The Company's primary
source of liquidity is cash provided by operating activities. The Company also
has available a $120 million senior credit facility (the Senior Credit Facility)
that provides for advances by the lender to a maximum of $90.0 million, based on
specific percentages of eligible receivables and inventories, and for letters of
credit of up to $30.0 million, based on a percentage of appraised value of
equipment and mineral reserves. As of July 31, 1999, the Senior Credit Facility
debt was $25.3 million, and $21.2 million of letters of credit were outstanding.
Based upon eligible collateral as of July 31, 1999, the net unused borrowing and
letter of credit availability thereunder was $8.8 million and $3.5 million,
respectively.


                                       12
<PAGE>

Cash used in the Company's operating activities for the 1999 Period was $16.1
million, compared to $10.1 million used in the 1998 Period operating activities.
The $16.1 million of cash used in operating activities during the 1999 Period
reflects the negative impact on cash resulting from reduced sales volume and the
build up of receivables and inventory experienced during the nine months ended
July 31, 1999. The $10.1 million of cash used in the operating activities during
the 1998 Period reflects the activity resulting from the pay down of liabilities
subsequent to the Notes Offering.

For the nine months ended July 31, 1999, capital expenditures and the cost of
acquisitions funded with cash were $21.1 million, including $5.0 million and
$5.4 million cash payments made in conjunction with the Utah and Tug River
acquisitions, respectively. As of July 31, 1999, the Company had capital
expenditure commitments of approximately $9.1 million of which $2.8 are expected
to be paid prior to October 31, 1999.

The Company's liquidity has decreased substantially during the three month
period ending July 31, 1999. Outstanding borrowings under the Senior Credit
Facility have increased from $3.8 million to $25.3 million. The primary factors
that negatively impacted cash flow during the 1999 Quarter were: (i.) increased
receivables of $13.1 million due to higher sales volume, (ii.) $10.3 million in
capital expenditures, including the $5.0 million spent on the Utah and Colorado
properties, and (iii.) the $8.6 million semi-annual interest payment on the
Notes.

Management believes that borrowings and liquidity will stabilize during the
fourth quarter of fiscal 1999 as capital expenditures return to more normal
levels, and the Company's borrowing base increases in conjunction with the Utah
acquisition, As of August 31, 1999, the Company's availability under its
borrowing and letter of credit facilities were $12.0 million and $8.4 million,
respectively. Accordingly, management believes that cash flow from operations
and availability under the Senior Credit Facility, will be sufficient to provide
for its working capital requirements, capital investments, and interest payment
obligations for the foreseeable future.

The indenture governing the Notes and the Senior Credit Facility contains
numerous covenants and prohibitions that impose limitations on the liquidity of
the Company, including requirements that the Company satisfy certain financial
ratios and limitations on the incurrence of additional indebtedness. The ability
of the Company to meet its debt service requirements and to comply with such
covenants will be dependent upon future operating performance and financial
results which will be subject to financial, economic, political, competitive and
other factors affecting the Company, many of which are beyond its control.

Year 2000

The Company established an internal committee in 1998 responsible for monitoring
year 2000 (Y2K) compliance. During the 1999 Period, the committee, in
conjunction with an independent consulting firm, has been diligently
administering a detailed work schedule designed to minimize the Company's risk
to business interruptions related to Y2K issues.

The Company's information systems (IS) have been evaluated, and Y2K remediation
work to be performed in that area is minimal and is projected to be completed
before the end of the calendar year. The primary non-IS risk areas are the
embedded systems affecting mining equipment, preparation plant systems, scale
system interfaces, laboratory equipment, and other facility-specific equipment.
Testing and evaluation of all critical areas have been completed. Remediation
efforts, which are not expected to be of a material nature, began in the second
quarter of 1999 on selected noncompliance items. Projections at this time
indicate that all remediation work that is required will be accomplished before
the end of the calendar year.


                                       13
<PAGE>

Additionally, the Company has completed a comprehensive review of the Y2K
compliance efforts of its most critical vendors and customers. Although
management believes that it is unlikely that its operations will be disrupted,
contingency plans are currently being developed to address the areas in which
potential disruptions could be most serious. Contingency planning will be
completed during the fourth quarter of calendar year 1999 and monitoring of the
compliance status of critical third party vendors and customers will continue
through the rollover of the millennium.

Without consideration of internal labor costs (which are not expected to be
significant), the expenditures to achieve Y2K compliance are projected to be
less than $1.0 million of which, approximately $740,000 has been incurred
through the 1999 Period.

While every effort is being made to ensure Y2K compliance within the
controllable scope of the Lodestar operations, there can be no assurance that
business interruptions resulting from Y2K issues initiated from external systems
can be prevented.

Effect of Recently Issued Accounting Standards

In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 changes the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly report to stockholders. This Statement requires that companies
disclose segment data based on how management makes decisions about allocating
resources to segments and measuring their performance. This Statement is
effective for the Company in its 1999 fiscal year. The implementation of this
Statement does not have a material effect on its consolidated financial
statements.

In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits." SFAS No. 132 revises employers'
disclosures about pension and other post-retirement benefit plans. It does not
change the measurement or recognition of those plans. This Statement is
effective for the Company in its 1999 fiscal year. The Company does not expect
the implementation of this Statement to have a material effect on its
consolidated financial statements.

Forward - Looking Statements

This report includes "forward-looking statements," within the meaning of the
Private Securities Litigation Reform Act of 1995, which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
industry capacity; demand; industry trends, including coal pricing; competition;
the loss of any significant customers or long-term contracts; availability of
qualified personnel; major equipment failures; changes in, or failure or
inability to comply with, government regulation, including, without limitation,
environmental regulations; outcome of litigation; and other factors referenced
in this report. For a detailed discussion of these factors, please refer to the
information under the caption "Risk Factors" in the Company's Registration
Statement No. 333-59037 (effective November 12, 1998). These forward-looking
statements speak only as of the date of this report. The Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.


                                       14
<PAGE>

Part I. - Item 3

No quantitative or qualitative disclosures about market risks have been included
as in management's opinion, it would not be material to investors.

Part II. - Item 1 Legal Proceedings

(a)      In 1997, Cedar Bay Generating Company Limited Partnership (Cedar Bay),
         one of Lodestar's five largest customers, brought a lawsuit in the
         Circuit Court for Duval County, Florida, against Florida Power & Light
         Company (FP&L), the utility for which Cedar Bay generates power. Cedar
         Bay alleged, among other things, that FP&L was in breach of its
         contract with Cedar Bay for underpaying invoices from Cedar Bay by
         amounts which FP&L disputes were properly due under the contract. While
         the lawsuit has been pending, FP&L has withheld payment to Cedar Bay of
         the portion of the invoices disputed by FP&L and Cedar Bay has, in
         turn, withheld a portion of the amounts invoiced by Lodestar to Cedar
         Bay for coal used by Cedar Bay to generate power for FP&L. In order to
         protect its financial interest in this matter, Lodestar sought approval
         from the court to intervene in the litigation between Cedar Bay and
         FP&L generally in support of Cedar Bay's position. In April 1999, the
         court granted Lodestar's application. On August 12, 1999, following a
         three-week trial, judgment in excess of $18.1 million was entered on
         the jury's verdict in favor of Cedar Bay. Slightly in excess of $5.1
         million of the judgment relates to the portion of Cedar Bay's claim in
         which Lodestar has a financial interest. Lodestar now expects to
         recover from Cedar Bay this $5.1 million, plus an additional amount,
         estimated to be approximately $900,000, due to Cedar Bay's similar
         underpayment on coal burned to produce power for customers other than
         FP&L. Cedar Bay has consistently represented to Lodestar that its
         current financial condition prohibits it from paying Lodestar until it
         actually receives payment from FP&L. Management believes it is unlikely
         that Lodestar will receive the amount due from Cedar Bay until all
         appeals of the judgment by FP&L are exhausted, or until further actions
         are taken by Lodestar against either Cedar Bay or FP&L, or both. The
         management of the Company does not expect the resolution of this legal
         proceeding to have a material adverse impact on the results of
         operations or the financial condition of the Company.

(b)      See Management's Discussion and Analysis of Financial Condition and
         Results of Operations contained herein for information as to the
         settlement of litigation between the Company and Webster County Coal
         Corporation described under "Business - Legal Proceedings" in the
         Company's prospectus dated November 12, 1998.


                                       15
<PAGE>

Part II. - Item 6 Exhibits and reports on Form 8-K

Exhibits:

         A list of exhibits required to be filed as part of this Report Form
         10-Q is set forth in the "Exhibit Index", which immediately precedes
         such exhibits, and is incorporated herein by reference.

Reports on Form 8-K:

         No reports on Form 8-K were filed during the quarter for which this
         report is filed.


                                       16
<PAGE>

                                   SIGNATURE

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

                                 Lodestar Holdings, Inc.
                                      (Registrant)


                                 By: /s/ Michael E. Donohue
                                     ------------------------------------------
                                     Michael E. Donohue
                                     Vice President and Chief Financial Officer
                                     (duly authorized officer and principal
                                     financial and accounting officer)

                                 Date: September 14, 1999


                                       17
<PAGE>

                                  EXHIBIT INDEX

Exhibit No.                               Description
--------------------------------------------------------------------------------

10       Material Contracts

         10.1     Amendment No. 5, dated July 16, 1999, to Amended and Restated
                  Loan and Security Agreement, dated May 15, 1998, by and among
                  Lodestar Energy, Inc., as Borrower, Lodestar Holdings, Inc.,
                  as Guarantor, the financial institutions named therein as
                  lenders, Congress Financial Corporation, as Agent, and The
                  CIT/Business Credit, Inc., as Co-Agent.

27       Financial Data Schedule


                                       18