<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C.  20549

                                   FORM 10-K

            [ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                                       OR

          [    ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
             THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                         Commission file number 1-13298

                          ZEIGLER COAL HOLDING COMPANY
             (Exact name of registrant as specified in its Charter)


        DELAWARE                                     36-3344449
(State of incorporation)                  (I.R.S. Employer Identification No.)

            50 JEROME LANE                  62208         (618) 394-2400
      FAIRVIEW HEIGHTS, ILLINOIS         (Zip Code)    (Registrant's telephone
(Address of principal executive offices)            number, including area code)


          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:


      Title of class                  Name of each exchange on which registered
 Common Stock, $.01 par value                 New York Stock Exchange


          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                                      None

        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

        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.     [ X ]

        On March 25, 1997, the aggregate market value of the shares of voting
stock of the Registrant held by non-affiliates was approximately $424 million.

        As of March 25, 1997, 28,403,961 shares of the Registrant's common
stock were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A for the 1997 Annual Meeting of Shareholders are
incorporated by reference in Part III of this Report.






<PAGE>   2



                          ZEIGLER COAL HOLDING COMPANY
                                   FORM 10-K
                                 ANNUAL REPORT
                               TABLE OF CONTENTS


  ITEM                                                                    PAGE
  ----                                                                    ----
                                     PART I

   1    Business ........................................................   1
   2    Properties ......................................................  28
   3    Legal proceedings ...............................................  28
   4    Submission of matters to a vote of security holders .............  28


                                    PART II

   5    Market for registrant's common stock and related shareholder
         matters ........................................................  31
   6    Selected financial data .........................................  32
   7    Management's discussion and analysis of financial condition and
         results of operations ..........................................  34
   8    Financial statements and supplementary data .....................  40
   9    Changes in and disagreements with accountants on accounting and
         financial disclosure ...........................................  63

                                    PART III

  10   Directors and executive officers of the registrant ...............  64
  11   Executive compensation ...........................................  64
  12   Security ownership of certain beneficial owners and management ...  64
  13   Certain relationships and related transactions ...................  64

                                   PART IV

  14   Exhibits, financial statement schedules and reports on Form 8-K ..  65


  Signatures ............................................................  71



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                                    PART  I

                               ITEM 1.  BUSINESS

     Zeigler Coal Holding Company ("Zeigler" or the "Company") is transitioning
from a predominantly coal producing company into a diversified energy company
with six current or emerging business segments:


      - Coal

      - Technology

      - Power

      - Environmental and Engineering

      - Asset Management

      - International


     Zeigler, through its subsidiaries, is one of the largest coal producers in
the United States, and an entrant into several other business segments that
represent logical expansions for the Company along the economic value chain for
electricity.  The Company currently operates, through its subsidiaries, eight
active underground and surface coal mining complexes located in five states,
two East Coast transloading terminals, a power marketing business, a clean coal
technology plant, and other energy-related businesses.

     Coal operations accounted for 95% of the Company's total revenues and 91%
of operating income in 1996.  The Company produces primarily steam coal, with
sales to electric utilities accounting for approximately 91% of its 1996
revenues from coal sales.  In 1996, approximately 84% of the Company's revenues
from coal sales resulted from long-term supply contracts, most of which call
for prices that exceed the price at which such coal could be sold in the spot
market.  At December 31, 1996, the Company owned or held through leases
approximately 1.2 billion tons of economically recoverable coal reserves,
including .8 billion tons of low-sulfur and compliance coal.

     Zeigler's mission is to be the safest, most efficient provider of
high-quality products and services to its customers, while providing
outstanding opportunities to its employees and an above-average return to its
shareholders, through a focus on sustainable, long-term growth in revenues,
earnings, and cash flows.  The Company's primary corporate strategies are to:


  -    Strategically align with customers; and
  -    Grow along strategic links of the economic value chain for electricity.

     In 1996, non-coal business segments contributed 9% of operating income.
Management expects that the contribution to operating income from non-coal
business segments could grow significantly in the future.  Management believes
that the business areas in which Zeigler has just begun to develop a presence -
technology, power, environmental and engineering, asset management, and
international - could eventually, in the long-term, generate more revenue than
the Company's existing coal operations.  There can be no assurance, however,
that the anticipated growth in the non-coal business segments will occur.






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                     ELECTRIC UTILITY DEREGULATION OVERVIEW

     Generation of electricity, combined with businesses that support that
function, is a $200 billion segment of the U.S. economy, or approximately 2.6%
of the nation's GNP in 1996.  The electric utility is the final link between
the consumer of electricity and all of the other components of electricity
creation. Therefore, changes in the utility industry have the potential to have
a domino effect on all other parts of the electricity value chain.

     The following reviews the deregulation efforts that are occurring in the
utility industry and addresses the potential impact of those changes on the
business areas in which Zeigler participates.

BACKGROUND ON THE ELECTRIC UTILITY INDUSTRY

     Since electricity became commonplace in the 1930s, growth in generating
output has closely paced the gross national product.  Culminating with the
passage of the Federal Power Act and the Public Utility Holding Company Act in
1935, the national and state governments determined that, despite its
competitive origins, the electric power industry was so "imbued with the public
interest" that massive regulation along with public ownership of utilities was
justified.

     Until the 1970s, the industry moved along with little change in its
operating structure, but produced steady declines in the average real price for
electricity.  This trend reversed in the 1970s, driven by higher plant
construction and interest costs, the twin maladies of troubled nuclear plants,
and soaring prices for foreign oil.  Subsequently, the 1978 Public Utility
Regulatory Policies Act ("PURPA") responded to demands from electricity users
for alternative power sources to create price competition.  PURPA enabled the
creation of independent power generation that could compete with utilities.
Under PURPA, non-utility independent power producers have shown that
electricity could, in some cases, be produced more efficiently and sold at
lower prices.

ENERGY POLICY ACT

     The success of PURPA was a driving force behind the passage of the 1992
Energy Policy Act ("EPAct"), which is ushering in a new era in utility
competition.  EPAct changed two federal laws as a means to encourage
accelerated and expanded competition in the utility marketplace.  Its passage
paved the way for rapid wholesale deregulation, while leaving considerable
latitude with the states locally to manage the transition from a regulated
industry to a competitive environment at the retail level.

     Specifically, EPAct lifted restrictions on utilities that had been imposed
by PURPA.  Under EPAct, utility affiliates can pursue generation opportunities
under a new classification called exempt wholesale generator ("EWG").  Further,
EPAct unambiguously enhanced the authority of the Federal Energy Regulatory
Commission ("FERC") to compel utilities to provide open-access transmission
services for wholesale buyers seeking alternative supplies.  However, EPAct
includes restrictions that limit electricity purchasing choice to the wholesale
buyer - those buying for resale to other buyers.

     While awaiting the resolution of several federal and state issues, much of
the utility industry has responded to the passage of EPAct by instituting plans
that would prepare them for the competitive future of the industry at the
ultimate retail level.  Among other measures, utilities across the country
renegotiated contracts, stabilized rates, prepared special pricing plans, and
eliminated more than 15,000 jobs.




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FERC OPEN-ACCESS ORDER

     In April 1996, the FERC approved a comprehensive framework for opening the
transmission and distribution networks to competing suppliers commonly known as
FERC Order 888.  This important step in reaching a deregulated marketplace
included the following:

   -    Functional unbundling - compelling utilities to separate out
        transmission services and costs.

   -    Tariff filings - requiring public utility owners of transmission
        facilities to file tariffs for providing services to all wholesale
        buyers and sellers of electricity.

   -    Ancillary services rates - demanding that utilities set standard
        rates and conditions for services related to the transmission of
        electricity through their wires.

   -    Comparability - requiring that public owners of generating capacity
        and transmission capabilities take service themselves at the same
        rates, terms, and conditions offered to third parties.

   -    Stranded cost recovery - allowing the opportunity for stranded cost
        recovery, negotiable for each specific transaction.

STATE UTILITY REGULATORS

     While FERC's action has spawned wholesale deregulation, state regulators
are responsible for change at the retail level.  About 90% of the electric
utility industry's revenue is controlled by state regulatory organizations
which set prices, rates of return, and resource planning.

     States have moved at varying speeds to implement changes made possible by
EPAct and FERC Order 888.  Key concerns in their decision-making processes
include:

   -    Stranded cost recovery - uneconomical assets are an issue for
        utilities moving from asset-based returns to efficiency/cost-based
        returns.  State regulators are faced with developing the appropriate
        mechanisms for managing stranded costs.

   -    Social support and low-income programs - many states have had
        programs to make certain that electricity was available to low-income
        households.  State regulators must decide how these programs will be
        handled in the future.

   -    Environmental regulations - state level environmental regulations,
        which put a higher compliance burden on utilities, may drive costs
        higher for certain generating capacity, thereby decreasing the ability
        to compete.

   -    Choice - state regulators must decide if retail customers will be
        allowed the same choice as the wholesale purchasers.














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                     OVERVIEW OF ZEIGLER'S BUSINESS MARKETS

COAL MARKET

     The United States coal industry is highly competitive, with numerous
producers in all coal producing regions.  A trend towards industry
consolidation is expected to continue as large companies seek economies of
scale and larger market shares.  Environmental legislation is the other major
factor currently driving changes in the structure of the coal industry.

     According to statistics compiled by the federal government, the number of
operating mines has declined approximately 49% over the last ten years even
though production has increased approximately 17%.  During this same period,
work practice and technological improvements, as well as the rapid expansion of
surface mining in Wyoming, have allowed production per man day to increase by
approximately 96%, while industry employment declined approximately 47%.  These
productivity gains and resulting overcapacity in most segments of the industry
have contributed to the relative stability of coal prices in recent years at
levels lower than in the 1970s and early 1980s.

     Clean air concerns and legislation have increased consumption of
low-sulfur products mined in Appalachia and the western U.S., and this trend is
expected to continue.  According to industry estimates, the top 10 producers
accounted for approximately 51% of the total production in 1995, and the
largest producer had approximately 14% of the total United States market based
on tons sold.

     Consumption

     Most of the coal consumed in the U.S. is used to generate electricity,
with electric utilities consuming more than 80% of total coal output.  Coal
fuels approximately 500 of the nation's 3,000 electric utility power plants,
with larger facilities consuming more than 20,000 tons of coal daily.  The other
major coal consumers are the steel, chemical, food processing, stone, clay,
glass, and paper industries.  Over 90% of all coal output is consumed
domestically - the rest is exported. The following table presents five year
U.S. coal consumption by market segment (U.S. coal industry data set forth
above and in the following table are derived from industry trade sources):

                           Five Year Coal Consumption
                             (In millions of tons)


<TABLE>
<CAPTION>
                                    1996*   1995   1994   1993  1992
                                   -----   -----  -----  -----  ----
<S>                                <C>     <C>    <C>    <C>    <C>
Domestic:
 Electric Utilities ..............   863     829    827    814   780
 Metallurgical ...................    31      33     32     32    32
 Industrial ......................    77      79     81     82    80
Export ...........................    85      81     71     75   103
TOTAL ............................ 1,056   1,022  1,011  1,003   995
</TABLE>


* Preliminary figure.

     Coal currently generates approximately 56% of the electricity produced in
the U.S. One major alternative to the use of coal is nuclear power, which
currently generates about 22% of all electricity.  This percentage is expected
to decrease in the future based on the belief that, due to the high costs of
nuclear plants, no new nuclear plants will be built and existing ones will be

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retired.  Natural gas primarily fueled about 8% of electricity in 1996, and is
expected to fuel an increasing share of electricity in the future.  Despite
projected growth of natural gas usage, growth in the use of natural gas is not
necessarily expected to diminish coal's presence in the electricity market.
The majority of any additional natural gas-fueled power that may be generated
is expected to be used for peak periods, which should not significantly affect
the base level of coal that is needed for energy production.  Oil, hydro, and
geothermal plants combined produce about 14% of all electricity and are
expected to maintain the same level.  Currently, these sources do not pose a
major threat to the coal industry as they are much more expensive.

     Impact of utility deregulation

     Electric utility deregulation is expected  to create more opportunities
for coal sales in view of coal's cost advantage when compared with other fuels.
However, deregulation may also cause electric utilities to be more aggressive
in negotiating with coal suppliers.  In recent years there has been excess coal
production capacity in the U.S. due to increased development of large surface
mining operations in the western U.S., more efficient mining equipment and
techniques, and reduced consumption of higher-sulfur coal.  Competition
resulting from excess capacity encourages producers to reduce prices and to
pass through to customers productivity gains achieved at the mines.

     Regulation

     The coal mining industry is subject to regulation by federal, state, and
local authorities on matters such as employee health and safety, permitting and
licensing requirements, air quality standards, water pollution, plant and
wildlife protection, the reclamation and restoration of mining properties after
mining is completed, the discharge of materials into the environment, surface
subsidence from underground mining, and the effects of mining on groundwater
quality and availability.  In addition, the utility industry is subject to
extensive regulations regarding the environmental impact of its power
generation activities which could affect demand for coal.  The following
summarizes the more significant regulations impacting the industry.

   Clean Air Act Amendments of 1990 - One of the largest challenges the
   industry has faced is the implementation of the Clean Air Act Amendments of
   1990 (the "Amendments").  Phase I was enacted in 1995 calling for a
   reduction in SO(2) emissions to 2.5 pounds per mmBTU multiplied by each
   plant's annual average fuel consumption between 1985 and 1987.  Phase II
   requires further reduction of SO(2) emissions to 1.2 pounds per mmBTU.  The
   Amendments will require coal users to either purchase lower-sulfur products,
   invest in scrubbers, or purchase emission allowances in order to comply.
   The enactment of these standards will cause an increase in demand for
   "compliance" coal (coal that emits less than 1.2 pounds of SO2 per mmBTU)
   with a corresponding decrease in demand for higher-sulfur coal.  Coal
   producers have reacted to this trend by shifting their investments away from
   the high-sulfur regions in the Midwest towards the lower-sulfur regions such
   as Appalachia and the Powder River Basin.  The majority of companies have
   been using a combination of lower-sulfur coal and emission allowances to
   meet the requirements of Phase I of the Amendments, since the installation
   of scrubbers is both expensive and time consuming.  So far, it has generally
   not been necessary for utilities to drastically change their operations to
   meet the requirements of Phase I.  It is difficult to predict how utilities
   will meet the challenges of the Phase II requirements, and the resulting
   effect on coal demand.

   The Amendments also require existing major sources of nitrogen oxides in
   moderate or higher ozone non-attainment areas to install reasonably
   available control technology ("RACT") for nitrogen oxides, which are
   precursors of ozone.  The area from northern Virginia through Maine has been
   designated as an ozone transport region ("OTR").  Installation of RACT was
   required

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   by May 1995 for major sources throughout the OTR and other areas designated
   as being in a moderate or higher state of non-attainment of national ambient
   air standards for ozone.  Such sources generally include coal-fired power
   plants.  A regional commission established for the OTR, the Ozone Transport
   Commission ("OTC"), has been formed to make recommendations to the EPA for
   additional control measures.  Both installation of RACT and any control
   measures beyond RACT that the OTC, other states, and the EPA may require
   could make it more costly to operate coal-fired power plants and, depending
   on the requirements of individual state attainment plans and the development
   of revised new source performance standards, could make coal a less
   attractive fuel alternative in the planning and building of power plants in
   the future.

   Comprehensive Environmental Response, Compensation and Liability Act - The
   federal Comprehensive Environmental Response, Compensation and Liability Act
   ("CERCLA") and similar state laws affect coal mining operations by imposing
   clean-up requirements for threatened or actual releases of hazardous
   substances that may endanger public health or welfare or the environment.
   Under CERCLA, joint and several liability may be imposed on waste
   generators, site owners and operators and others regardless of fault or the
   legality of the original disposal activity. Waste substances generated by
   coal mining and processing are generally not regarded as hazardous
   substances for purposes of CERCLA.

   Clean Water Act - The federal Clean Water Act imposes restrictions on
   effluent discharge into waters.  Regular monitoring, as well as compliance
   with reporting requirements and performance standards, are preconditions for
   the issuance and renewal of permits governing the discharge of pollutants
   into waters.

   Resource Conservation Recovery Act - The federal Resource Conservation
   Recovery Act ("RCRA") imposes requirements for the treatment, storage and
   disposal of hazardous wastes.  Although many mining wastes are excluded from
   the regulatory definition of hazardous waste, and coal mining operations
   covered by SMCRA (defined below) permits are exempted from regulation under
   RCRA by statute, the EPA is studying the possibility of expanding regulation
   of mining wastes under RCRA.

   Surface Mining Control and Reclamation Act - The federal Surface Mining
   Control and Reclamation Act of 1977 ("SMCRA") establishes mining and
   reclamation standards for all aspects of surface mining as well as many
   aspects of deep mining. SMCRA and similar state statutes, among other
   things, require that mined property be restored in accordance with specified
   standards pursuant to an approved reclamation plan.  In addition, the
   Abandoned Mine Lands Act ("AML"), which is part of SMCRA, imposes a tax on
   all current mining operations, the proceeds of which are used to restore
   mines closed before 1977.  The maximum tax is 35 cents per ton on
   surface-mined coal and 15 cents per ton on underground-mined coal.

   SMCRA also requires that comprehensive environmental protection and
   reclamation standards be met during the course of and upon completion of
   mining activities.  For example, SMCRA requires coal companies to restore a
   surface mine to approximate original contour as contemporaneously as
   practicable with surface coal mining operations.  The mine operator must
   submit a bond or otherwise secure the performance of these reclamation
   obligations.  Permits for surface 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 SMCRA, the appropriate state regulatory authority.

   Under SMCRA, responsibility for 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

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   being blocked from receiving new permits and revocation 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.

   Mine Health and Safety Acts - Stringent safety and health standards have
   been imposed by federal legislation since 1969 when the federal Coal Mine
   Health and Safety Act of 1969 (the "1969 Act") was adopted.  The 1969 Act
   resulted in increased operating costs and reduced productivity.  The Federal
   Mine Safety and Health Act of 1977 (the "1977 Act") significantly expanded
   the enforcement of health and safety standards. The 1977 Act 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 Mine Safety and Health Administration
   ("MSHA") monitors compliance with these federal laws and regulations.  In
   addition, as part of the 1969 Act and the 1977 Act, the Black Lung Benefits
   Act of 1969 and Black Lung Benefits Reform Act of 1977 require payments of
   benefits by all businesses conducting current mining operations to coal
   miners with pneumoconiosis (black lung) as described below.

   Federal Coal Leasing Amendments Act - Mining operations on federal lands in
   the West are also affected by regulations of the U.S. Department of the
   Interior.  The Federal Coal Leasing Amendments Act of 1976 (the "1976 Act")
   amended the Mineral Lands Leasing Act of 1920 which authorized the leasing
   of federal lands for coal mining.  The 1976 Act increased the royalties
   payable to the United States Government for federal coal leases and required
   diligent development and continuous operations of leased reserves within a
   specified period of time.

   Black Lung Benefits - In order to compensate miners who were last employed
   as miners prior to 1970, the Black Lung Benefits Revenue Act of 1977 and the
   Black Lung Benefits Reform Act of 1977, as amended by the Black Lung
   Benefits Revenue Act of 1981 and the Black Lung Benefits Amendments of 1981
   (the "1981 Acts"), levied a tax on production of $1.10 per ton for
   deep-mined coal and $0.55 per ton for surface-mined coal, but not to exceed
   4.4% of the sales price.  In addition, the 1981 Acts provide that certain
   claims for which coal operators had previously been responsible will be
   obligations of the government trust funded by the tax.  The Revenue Act of
   1987 extended the termination date of the tax from January 1, 1996 to the
   earlier of January 1, 2014, or the date on which the government trust
   becomes solvent.  Most companies have set aside reserves  for workers last
   employed as miners after 1969.


TECHNOLOGY MARKET

     Under the Clean Air Act, utilities have strong incentives to use very
low-sulfur coal products in the generating process.  Deregulation is expected
to accelerate the search for low-sulfur, high-heating value energy sources
because deregulation is expected to drive utilities to seek means of reducing
costs, either through greater operating efficiency or reduced expenses, or
potential gains through the exchange of credits under the Clean Air Act.
Within this marketplace, Zeigler believes it has a promising position due to
its investment in the development of the Liquids From Coal ("LFC") Process.
The LFC technology, which is still in the development stage, is owned and
licensed by the TEK-KOL Partnership ("TEK-KOL"), a partnership between a
Zeigler subsidiary and SGI International, the original developer of the LFC
process.

     The LFC process converts one ton of feedstock coal into approximately
one-half ton of solid product called Processed Derived Fuel ("PDF"), and
approximately one-half barrel of liquid called Coal Derived Liquid ("CDL").
PDF is not, technically speaking, coal.  It is a coal product with some
significant advantages over its parent coal.  PDF offers possible solutions to
utilities facing clean air

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challenges by taking the already-low-sulfur coal from the Powder River Basin
and further reducing the sulfur dioxide.  Power plant testing of PDF has
demonstrated several environmental benefits that indicate it is superior to
its feedstock-coal, including:

   -    Reducing sulfur dioxide an additional 25% to 30%.

   -    Reducing by 20% to 30% the physical amount of coal product needed
        to be burned to produce an equivalent amount of electricity.

   -    Reducing emissions of nitrous oxides (NO(x)) by 20% or more at
        certain power plants when compared to coals typically burned at these
        plants.

   -    Improving combustion efficiency by as much as 5% over feedstock
        coals.

     PDF also offers potential solutions to utilities reluctant to invest
significant expansion capital in the face of deregulation.  For utilities
already using low-sulfur coal, PDF offers higher heating value.  PDF enables
utilities economically to maintain the capacity of their generating stations,
which is not generally possible with low-rank coals.  Initial estimates by SGI
International, the original developer of the LFC process, indicate that the
potential market for PDF may be between 60 million and 100 million tons
annually in the United States.  The global market potential for PDF, although
not quantifiable, should increase as high-quality coal deposits become
depleted.  Abundant low-cost, low-rank deposits will require beneficiation to
fill the gap left by depleting reserves of higher-quality coals.  PDF may also
have potential for certain steelmaking and other metallurgical applications,
and those possibilities are currently being explored.

     CDL is a low-sulfur hydrocarbon liquid that can be processed into a number
of products, ranging from chemical feedstocks to transportation fuels.  These
products are generally grouped in four categories:

   -    Crude cresylic acid - a chemical feedstock in relatively short
        supply in the United States because of reduced production of coal
        liquids from refineries.

   -    Petroleum refinery feedstock - a usable catalytic cracker feedstock
        that can be used to produce diesel and other transportation-grade fuels.

   -    Oxygenated middle distillate - a byproduct that can be sold as a fuel.

   -    Pitch - a product used in a number of metallurgic production processes
        such as aluminum smelting.


     The LFC process, applied to low-rank coal, competes with several other
thermal processes.  Thermal processes consist of drying, forming or coating.
Unlike the LFC process, which produces solid and liquid co-products, all
competing processes produce only an upgraded solid product.  Competing
processes include:

   -    K-Fuels Process

   -    Puron Process

   -    Carbontec Process

   -    Western Energy's Synfuels Process

     See "Zeigler Overview - Technology Segment" for a description of the
status of the Company's efforts to commercialize the LFC process.


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POWER MARKET

     The power links of the economic value chain for electricity include
generation, transmission, distribution, and marketing.  Five years ago, these
services were primarily embedded within the traditional electric utility
structure in a largely static environment, with the typical utility company
having:


-    Generating assets - fueled by coal for more than half of its power.

-    Transmission systems - taking electricity from generating facilities to
     distribution areas.

-    Distribution systems - local systems that enable delivery, measurement and
     other services for end users.

-    Marketing systems - usually modest and targeted toward the largest
     commercial and industrial users.

-    Regional monopolies - geographically exclusive territories.

-    Access to the grid system - an interconnected web of transmission
     lines to ensure peak national power reliability.

     Within this framework, a utility generated most of its own electricity,
sold it over its own transmission and distribution networks, and set rates,
with the oversight of regulatory organizations, to ensure a specific return on
its assets.  Predominantly publicly owned, utilities' primary means of
improving returns to investors came through investment in assets to increase
the base on which the specific return, set by regulatory policy, would be
calculated.

     These dynamics have resulted in geographic neighbors sometimes paying
dramatically different prices for electricity.  The industry has also developed
unused capacity, presenting opportunities for low-cost and aggressive producers
and higher risk for those saddled with now-uncompetitive costs.

     Adding to the variables within utility deregulation is the unbundling of
power generation, transmission, distribution, and marketing.  While the
physical assets of transmission and distribution are expected to remain partly
regulated under the management of independent system operators, the use of
those assets will become subject to competition.  Power marketers will be able
to transmit electricity from one area of the country to another and deliver
electricity to the end user through competitors' wires, just as the breakup of
the long-distance telephone monopoly in the 1980s kept physical delivery assets
in place while allowing access for competing companies.

     Ownership of generating capacity, managed for efficient, cost effective
production of electricity, is already undergoing change.  Consolidation is
increasing, allowing companies to leverage their management, operating, and
engineering staffs across a larger base of sales.  Low-cost capacity, often
coal-fired, is in increasing demand.  Power marketers are now brokering and
trading electricity.  In the future, customers are expected to be able to
decide, as they do today with long-distance phone carriers, their preferred
source of electricity.

     The utility industry currently is highly fragmented with no single company
producing more than 6% of the U.S. total in 1996.  There are regulated electric
utilities such as shareholder-owned companies, and there are non-regulated
utilities, such as rural electric cooperatives, and government-owned utilities.
Government-owned utilities include municipal systems, public power districts,
state projects, and federal agencies.

     In the past few years, laws designed to promote competition in wholesale
electricity markets have led to the creation of many non-regulated suppliers.
These include PURPA-qualifying facilities, exempt wholesale generators, or
EWGs, and power marketers.  Power provided by non-utility

                                       9


<PAGE>   12



generators has increased by more than 115 percent in the past five years and
the number of EWGs and power marketers is growing rapidly.  Many of these new
power producers are not bound by the same regulations imposed on
shareholder-owned utilities.  The total number of each supplier (as of March
1997) is shown below.


         Non-utility generators (excluding EWGs)                  4,190
         Municipal systems                                        1,818
         Rural electric cooperatives                                922
         Power marketers                                            277
         Shareholder-owned companies                                223
         Domestic exempt wholesale generators (EWGs)                143
         Public power districts                                      75
         State projects                                              68
         Federal agencies                                            37

     (Source: Edison Electric Institute - March 1997)


     In addition to existing capacity and plans for additional generating
capacity, electric utilities have engaged in other activities to meet future
load requirements. These activities include rerating, repowering, or life
extension of existing units, purchases from non-utility power producers, and
demand-side management ("DSM") programs.  The objective of DSM programs is to
reduce electricity use by implementing conservation and load management,
thereby providing resources that postpone the need for construction of new
power plants by modifying the growth in demand and energy use.  Data collected
by the Energy Information Administration indicate that the number and scope of
DSM programs in the United States are increasing.

     Non-utilities are expected to supply a significant portion of the
generating capacity needed to meet energy requirements of electric utilities.
The contribution of non-utility capacity to total electricity supply has
increased significantly over the past several years and is expected to continue
to increase.  Competitive bidding requirements by public utility commissions
and wholesale deregulation allow non-utilities to compete with electric
utilities for new capacity construction.  This is expected to result in an
increasing share of non-utility capacity in the electric power supply.

     The greatest sales growth in the wholesale market has occurred in the
power marketing sector.   After Congress enacted EPAct and expanded exemptions
from cost-based regulation to a broader class of non-utility sources of
electricity, sales by power marketers soared.  Power marketers act as
independent middlemen that buy and sell wholesale electricity at market prices.
Although power marketers traditionally do not own electrical generation,
transmission or distribution assets, they are in some instances affiliated with
large corporations that own such assets and have vast experience competing in
the energy market.  Some of the marketers are integrated gas companies,
subsidiaries of electric utilities, independent power developers, or
commodities traders.  As of January 1997, FERC has approved 277 power marketing
entities.  Of these, 10 accounted for approximately 75% of the electricity
delivered by power marketing entities in 1996.








                                       10


<PAGE>   13


<TABLE>
<CAPTION>

                                                         Sales           Purchases
      Rank                Company                     (in MWh)            (in MWh)
      ----          ----------------------          ----------          ----------
      <S>           <C>                             <C>                 <C>
         1          Enron                           59,723,290          58,036,093
         2          Duke/Louis Dreyfus              28,303,534          28,314,827
         3          LG&E                            17,075,223          14,229,717
         4          Elec. Clearinghouse             14,627,509          14,901,991
         5          Citizens Lehman & Subs          12,134,565          13,850,434
         6          Vitol                           10,005,546          10,150,413
         7          Koch                             9,963,860           9,982,831
         8          Aquila                           6,726,504           6,725,936
         9          CNG                              4,880,360           4,827,187
        10          Panenergy                        4,239,391           4,288,420

</TABLE>


(Source: Power Markets Week - March 3, 1997)

   At the end of 1996, the utility industry faced the following:

   -    The U.S. has experienced radical growth in sales from power
        marketers since 1995, doubling each quarter and accounting for 10% of
        all wholesale transactions.  At the same time, affiliates of utilities
        only account for 8% of all power market sales.

   -    An increasing number of states, including Illinois, Massachusetts,
        Michigan, New Hampshire and New York, have begun pilot programs that
        provide choice to retail customers.

   -    Many of the nation's utilities have posted tariffs with FERC for
        the distribution of electricity through the power grid in their region.

   -    The Schaeffer Bill, pending in Congress, mandates competition at
        the retail level by the year 2000.  In this bill and other legislation
        being reviewed, the federal government seeks to enforce retail
        deregulation if the states fail to take action.


ENVIRONMENTAL AND ENGINEERING, ASSET MANAGEMENT AND RELATED BUSINESSES

     There exists a vast variety of businesses that support the economic value
chain for electricity, including transportation of coal, and the use, recovery,
and development of land resources related to coal properties.  Because of the
diversity of the business opportunities, the potential for competition from
innumerable firms with a variety of different levels of resources (some with
substantially greater resources than Zeigler), and varying degrees of exposure
to changes in the utility market, it is impossible to assess the potential
impact of deregulation on these business markets or identify the specific
competitive trends that might impact Zeigler's ability to establish a
significant presence in any narrow segment of the market.


INTERNATIONAL

     Coal continues to be a popular, inexpensive fuel source globally, mined
in more than 50 countries and powering approximately 40% of all electricity
worldwide.  While power tends to grow at a 2% to 4% rate domestically,
electrical demand in certain European and Asian countries is growing at 7% to
10% annually. Deregulation of the domestic utility industry should accelerate
the current  trend of greater participation in the international power industry
by unregulated subsidiaries of domestic utilities.

                                       11


<PAGE>   14



Zeigler has strong relationships with many of these utilities and intends to
use its strategy of customer alliances to participate in integrated
international power projects where all of the partners bring expertise and
added value.


                                ZEIGLER OVERVIEW


HISTORY

     Zeigler's mining history dates back to the early 1900s, making its coal
operations among the oldest in the nation.  In January 1985, the Company
purchased Zeigler Coal Company from Houston Natural Gas Corporation.  At that
time, Zeigler Coal Company's mines and principal reserves were located in
southern and central Illinois.  In July 1990, the Company acquired all of the
common stock of Old Ben Coal Company from BP America Inc.  At the time of the
acquisition, Old Ben Coal Company had mines and reserves in Illinois, Indiana
and West Virginia.  In November 1992, Zeigler Coal Company was merged into Old
Ben Coal Company.  Also in November 1992, the Company acquired all of the stock
of Shell Mining Company.  At the time of the acquisition, Shell Mining Company
controlled mines and reserves in 10 states, two transloading terminals located
on the East Coast, ENCOAL Corporation, and other coal-related assets.

     In 1996, the Company established several new subsidiaries to conduct
business activities related to the economic value chain for electricity.  EnerZ
Corporation, the Company's new energy trading and marketing subsidiary,
received approval from the FERC in the fourth quarter of 1996 for status as a
wholesale power marketer, and initiated trading activities.  Another new
subsidiary, Zenergy, Inc., owns (along with NRG Energy, Inc. and an affiliate
of Southern Energy, Inc.) a 30% interest in Louisiana Generating LLC, which
has made an offer to purchase out of bankruptcy the non-nuclear assets of Cajun
Electric Power Cooperative, Inc. of Baton Rouge, Louisiana.  NuCoal, LLC was
established and signed a contract with Mitsubishi International Corporation for
construction of a full-scale LFC plant in the Powder River Basin.  Another new
subsidiary, Zeigler International, Inc., was formed to pursue international
development opportunities.


OPERATING STRUCTURE AND BUSINESS SEGMENT STRATEGIES

     The Company's operations can be segregated into six primary segments:


     -    Coal

     -    Technology

     -    Power

     -    Environmental and Engineering

     -    Asset Management

     -    International








                                       12


<PAGE>   15




     Coal Segment

     Strategy

     In 1996, Zeigler largely concluded its transition to a predominately
low-sulfur coal producer as new operations were developed or acquired and
high-sulfur mines were closed, unless contracts for their production were in
place.  In 1997, the company expects that Phase I or Phase II compliance coal
will make up approximately 80% of the tonnage produced.

     Within the context of a deregulating electric utility industry, growth of
Zeigler's coal mining operations will be driven by a three part strategy that
emphasizes (1) customer relationships and operating flexibility, with a focus
on enhancing contract value, (2) improving productivity, and (3) strategic
investments and acquisitions.

     In addition to devoting substantial resources to relationships with
utilities under contract with Zeigler, the Company has been proactive in
seeking to restructure contracts in an effort to enhance contract value for
Zeigler and help customers position their coal supply needs.  The Company's
coal groups seek to be among the lowest-cost producers in each region in which
they operate while providing a broad range of coal qualities and transportation
alternatives to their customers.  In response to increasing demand from
electric utilities for lower-sulfur coal, Zeigler has focused its marketing
efforts on the sale of its low-sulfur coal, while continuing to market its
higher-sulfur coal to electric utilities that can continue to burn such coal in
compliance with the Clean Air Act Amendments.

     Strategic reserve development and acquisitions provide the third growth
strategy in the Company's coal units. The coal segment seeks to grow by
acquiring operating coal mines, undeveloped coal properties and related
facilities with a particular focus on those that would expand its compliance
and low-sulfur coal reserve base.  The Company will also consider the
acquisition of high-sulfur coal reserves that are committed to be sold under
long-term contracts.  The Company's properties enable it to offer a broad range
of coal qualities, mine locations, and transportation alternatives.  In
addition to increasing sales, Zeigler seeks to achieve significant operating
benefits through acquisitions, including elimination of redundant services,
increased purchasing efficiencies, and enhanced marketing opportunities.

     The Company views each of its mining complexes as a separate resource,
with distinct coal qualities, reserve lives, transportation alternatives, and
production and cost characteristics.  While spot market sales may justify
continued operations of a particular mine, the Company generally seeks
long-term coal supply contracts for each mine's output.  Due to the Clean Air
Act Amendments, the Company expects to expand the sale of its low-sulfur coal
resources and to focus its higher-sulfur coal sales effort on those utilities
which have installed scrubbers or have other capabilities to meet their
compliance objectives with such coal.  The Company intends to develop its
reserves and open mines as satisfactory long-term commitments for the coal are
obtained.

     Coal Operations

     The Company's primary coal operations include the following:

     Bluegrass Coal Development Company - Bluegrass includes Evergreen Mining
Company in West Virginia, Pike County Coal Corporation in Kentucky, R. & F.
Coal Company in Ohio, and Turris Coal Company in Illinois.


                                       13


<PAGE>   16




     Mountaineer Coal Development Company - Mountaineer consists of Marrowbone
Development Company in West Virginia and Wolf Creek Collieries Company (idled)
in Kentucky.

     Old Ben Coal Company - Old Ben includes the Old Ben Spartan Mine and Old
Ben Mine #11 in Illinois.

     Triton Coal Company - Triton includes the Buckskin Mine and the North
Rochelle Mine (under development) in Wyoming.

     Franklin Coal Sales Company - Franklin is responsible for providing sales
and marketing services to all of the Zeigler companies.  Sales activities are
organized for the different coal groups, with a sales team responsible for all
accounts within each group.  The sales teams are responsible for submitting
bids, negotiating sales terms and conditions, and for providing other services
as customers require.  Franklin provides a limited range of services to other
Zeigler companies, including coal purchasing for blending and market research.
Franklin forecasts future demand for various coal types and works with
employees of the operating companies to determine the optimal production of
coal.  Franklin also assists in the negotiation and maintenance of coal sales
contracts, helps customers in securing transportation agreements, and monitors
compliance with contract terms and delivery schedules.

     Competition and Pricing

     Zeigler competes with other large producers and hundreds of small
producers in the U.S. and abroad.  The principal customers for Zeigler coal
production are electric utilities, with coal qualities, price, location,
transportation costs, and reliability being the most important factors upon
which the Company competes with other coal producers.  Most of Zeigler's
production is sold under long-term coal supply contracts which are the result
of competitive bidding and extensive negotiations.

     The markets in which Zeigler sells its coal are affected by numerous
factors beyond Zeigler's control. Continued demand for Zeigler's coal and the
prices that Zeigler will be able to obtain will depend primarily on coal
consumption patterns of the domestic electric utility industry which in turn
are affected by the demand for electricity, environmental and other
governmental regulations and orders, technological developments, and the
availability and price of competing coal and alternative fuel supply sources
such as natural gas or oil.

     Transportation is an important factor in coal marketing because a
significant portion of a customer's delivered cost of coal is attributable to
transportation.  Generally, transportation costs from the mine to the place of
use (e.g., the customer's power plant) are incurred directly by the customer.
The availability and cost of transportation affects the marketability of coal.

     In 1996, approximately 89% of Zeigler's sales tonnage left the mine site
by rail with the balance by truck.  Transportation by inland waterway barges,
at a lower cost than by railroad, is available to many of Zeigler's mines in
the Midwest and West Virginia, and approximately 27% of the Company's coal
shipments are moved by barge at some point during shipping.  Most of the
Company's mines are served by a single railroad, although some mines are served
by multiple railroads.  The Staggers Rail Act of 1980 limited the Interstate
Commerce Commission's regulation of the railroad industry and increased the
freedom of railroads to set their own rates and enter into transportation
contracts.  The practices of and rates set by the railroad servicing a mine may
affect, either adversely or favorably, Zeigler's marketing efforts with respect
to coal produced from that mine.

     North Rochelle Development

     The Company announced in February 1996, the full-scale development of
Triton Coal Company's North Rochelle mine in the southern Powder River Basin.
Since that time, Triton has purchased and is moving dragline overburden removal
equipment, has completed production of

                                       14


<PAGE>   17



diligence tonnage, has progressed with permitting, and has begun engineering
and construction work on the mine.  Triton continues to talk with potential
customers to evaluate and analyze the market in an effort to time North
Rochelle's production to best meet a firming market and peak customer demand
for this coal.  At this time, Triton estimates full production at North
Rochelle to begin in mid-to-late 1998.  The estimated total cost to develop
North Rochelle is approximately $95.0 million.

     Long-term Coal Supply Contracts

     Zeigler's subsidiaries have entered into various long-term coal supply
contracts with its electric utility customers.  Customers enter into long-term
contracts for coal principally to secure a reliable source of supply at a
predictable price.  Zeigler enters into such contracts to provide the stable
sources of revenues required to support the large expenditures needed to open,
expand or maintain a mine to service the contract.  The Company's major
long-term contracts have remaining terms ranging from one to 20 years.  The
loss of one or more of its long-term contracts could have a material adverse
effect on Zeigler's operations and business.  The following table sets forth
information regarding the Company's long-term coal supply contracts which, at
December 31, 1996, had remaining terms of one or more years.

<TABLE>
<CAPTION>
                                                                                                   Actual
                                                                               Expiration            1996
                                                                                Date of            Tonnage
                                                                              Contract (1)      (In millions)
                                                                            ----------------    -------------
<S>                                                                            <C>                     <C>
Western Fuels Association, Inc. - Cajun Electric Power
  Cooperative, Inc. .................................................           2016 (2)                5.0
Carolina Power & Light Company - Marrowbone .........................           2006                    2.4
Western Farmers Electric Cooperative ................................           2011 (3)                1.8
Western Fuels Association, Inc. - Basin Electric Power Cooperative ..           2000                    1.5
Georgia Power Company - Marrowbone ..................................           2008                    1.5
Carolina Power & Light Company ......................................           2004                    1.5
Columbus Southern Power Company .....................................           1999                    1.3
Springfield City Water, Light & Power ...............................           2011                    1.1
Tampa Electric Company ..............................................           2004                    1.1
Georgia Power Company - Pike County .................................           2010                    1.0
Muscatine Power & Water .............................................           1998                    0.6
Duke Power Company ..................................................           2003                    0.5
South Carolina Public Service Authority .............................           2000                    0.5
Northern Indiana Public Service .....................................           1998                    0.5
Shell Coal International Limited ....................................           2002                    0.4
Ohio Edison Company - Evergreen/Marrowbone ..........................           2000                    0.4
AE Staley ...........................................................           1998                    0.3
Cardinal Operating Co. - Evergreen ..................................           2006                    0.3
Electric Fuels Corporation ..........................................           2002                    0.3
Costain - Pike County ...............................................           2001 (4)                  -
Carolina Power & Light Company ......................................           2004 (5)                  -
ADM - CCP ...........................................................           1998 (6)                  -
Anker Energy - Evergreen ............................................           1999 (7)                  -
Oklahoma Gas and Electric Company ...................................           2011 (8)                  -
</TABLE>


(1)  Reflects stated term of contract and does not assume the exercise by the
     Company of unilateral options to extend.  The  contract reopeners and
     other provisions of certain contracts may make the specified term of a
     long-term contract less meaningful.


                                       15


<PAGE>   18




(2)  Earliest estimated expiration date.  Actual date will vary with life of
     the units used by the customer.  See Item 8., "Financial Statements and
     Supplementary Data," Note 16, below.

(3)  The contract contains a 15 year first-right-of-refusal extension
     provision in favor of Triton.  In an effort to assist its customer in
     meeting its Phase II (Clean Air Act) requirements, Zeigler converted the
     extension provision into a firm contract for North Rochelle coal,
     contingent on opening the North Rochelle mine.  The contract provides the
     flexibility for deliveries from Buckskin, under certain circumstances, if
     North Rochelle is not yet in commercial production by 1999.  The Company
     estimates that full production at North Rochelle will begin in mid-to-late
     1998.

(4)  Contract commences in June 1997 at .75 million tons for the first two
     years and .5 million for the remaining three years on the contract.

(5)  Contract commences on April 1, 1997 for .5 million tons per year.

(6)  Contract commences January 1, 1997 for .3 million tons per year.

(7)  Contract commenced in March 1997 for .2 million tons per year.

(8)  Shipments will commence upon the opening of the North Rochelle mine for
     1.0 million tons per year for the first two years and 4.0 million tons per
     year thereafter until 2011.

     The terms of long-term coal supply contracts are the result of both
bidding procedures and extensive negotiations with the customer.  As a result,
the terms of such contracts vary significantly in many respects, including
price adjustment features, price reopener terms, coal qualities, quantity,
flexibility and adjustments, Zeigler's ability to provide coal from various
sources, environmental restraints, force majeure provisions, termination
provisions, extension options and assignability.

     Virtually all of Zeigler's long-term coal supply contracts are subject to
price adjustment provisions which permit an increase or decrease periodically
in the contract price to reflect changes in specified price indices or items
such as taxes or royalties. Such provisions, however, may not assure that the
contract price will reflect changes in production or other costs.  In fact, the
contracts allocate the benefits and risks of productivity changes to the
seller.

     A majority of Zeigler's long-term coal supply contracts contain price
reopener provisions under which the contract price can be periodically adjusted
upward or downward based on changes in the market price of coal since the
contract was executed or the last application of a price reopener provision.
The price reopener provision may specify an index or other market pricing
mechanism on which a new contract price is to be based.  Frequently, bid
solicitations are sent by the customer to other suppliers to use in
establishing a new price or for the purpose of establishing a
first-right-of-refusal.  In some cases, the parties may seek an arbitration or
other dispute resolution mechanism after termination if the parties do not
agree.  In other cases, the contract may provide for termination.  Some price
reopener provisions contain limitations on the amount of price change that can
result from application of the provision.

     The contract prices under long-term coal supply agreements frequently vary
from the price at which a customer could acquire and take delivery of coal of
similar quality in the spot market.  The delivered cost to the customer in the
spot market will depend on the quality of the available coal, the competitive
climate in the market from which deliveries can economically be made, the
availability and cost of transportation to the customer's facility and other
factors.  All such factors vary from time to time.


                                       16


<PAGE>   19




     Some of these contracts contain hardship or gross inequities clauses.
From time to time, customers have asserted the right to use these clauses as
price reopener clauses in an attempt to reduce the prices under long-term
contracts.  The Company has rejected these assertions, but there can be no
assurance that customers will not assert such clauses in the future in an
attempt to obtain favorable price concessions.  In most cases, market
conditions do not constitute gross inequities or hardship.

     Zeigler's long-term coal supply contracts specify qualities for the coal
to be delivered relating to the coal's BTU and burn characteristics, sulfur and
moisture content, grindability, and other factors. Generally, the coal quality
specifications are based on the reserves from which the coal is intended to be
mined, and the contract may specify the reserves from which the coal is to be
mined.

     Zeigler's long-term coal supply contracts contain force majeure provisions
allowing suspension of performance by Zeigler or the customer to the extent
necessary during the duration of certain events beyond the control of the
affected party, including labor disputes, natural disasters, casualties,
government impositions, transportation disruptions, and similar events.
Certain contracts may terminate upon continuation of an event of force majeure
for an extended period of time (generally six months or more).  Deficiencies in
deliveries of coal which are caused by force majeure may or may not be made up,
depending upon the specific language of the contract or needs of the parties.

     From time to time during the term of the various long-term contracts,
Zeigler is involved in disputes relating to, among other things, coal quality,
pricing and quantity.  While customer disputes, if unresolved, could result in
termination or cancellation of the contract involved, Zeigler's experience has
been that curative and/or dispute resolution measures decrease the likelihood
of termination or cancellation.  In addition, Zeigler's development of
long-term business relationships with many of its customers has generally
permitted it to resolve business disputes in a mutually acceptable manner.
Nonetheless, Zeigler has from time to time been involved in arbitration and
other legal proceedings regarding its long-term contracts and there can be no
assurance that existing and future disputes can be resolved in a mutually
satisfactory manner.  The Company believes that in recent years the potential
deregulation of electric utilities and reduced spot market prices for coal have
caused some customers to become more aggressive in seeking to reduce, modify,
or terminate their obligations under their long-term contracts.

     The operating profit margins realized by Zeigler under its long-term coal
supply contracts depend on a variety of factors, vary from contract to
contract, and will fluctuate during the contract term, depending on contract
provisions, Zeigler's production cost, and other factors.  Termination or
suspension of deliveries under a high-priced contract could have an adverse
effect on earnings and operating cash flow disproportionate to the percentage
of production represented by the tonnage delivered under such contract.

     From time to time the Company discusses possible modifications to
long-term contracts with its customers, with a view toward responding to
concerns (including price and quality issues) raised by its customers while
preserving or enhancing the value of the contract to the Company.  In 1996, the
Company worked closely with several significant customers to reduce contract
risk, increase contract tonnage, and give Zeigler the flexibility to better
operate its mines in a cost effective manner as well as help customers meet
their own needs.  Elements of a contract that can be renegotiated include
sourcing and geographic flexibility, quality flexibility, increased volume, and
multi-tier pricing.   The Carolina Power & Light Company ("CP&L") contracts
described below were renegotiated in 1996 to accomplish one or more of those
elements.

     The following discussion contains a brief description of three long-term
contracts with CP&L and two long-term contracts with Georgia Power Company that
accounted for more than 10% of Zeigler's consolidated 1996 revenues from coal
sales.  Each of these contracts calls for coal prices

                                       17


<PAGE>   20



that exceed the current spot price for coal sold in their respective markets.
The five contracts collectively accounted for approximately 32% of revenues
from coal sales and more than 35% of the Company's operating income in 1996.

   Carolina Power & Light Company - CP&L has three long-term contracts to
   purchase coal from subsidiaries of the Company during 1997.  One contract
   provides for 2.8 million tons annually from the Marrowbone mining complex
   through 2006.  The contract price has fixed increases each year. The second
   agreement, which expires in December 2004, provides for the purchase of 1.5
   million tons of coal annually with fixed increases each quarter.  Currently,
   coal required to fulfill this contract is being sourced through outside
   suppliers.  A third contract calls for 0.5 millions tons annually from Pike
   County or other CSX sources beginning in 1997 through 2004.  This contract
   price is adjusted by a published index.  During both 1996 and 1995, sales to
   CP&L under these contracts accounted for approximately 18% of Zeigler's
   consolidated revenues from coal sales.

   Georgia Power Company - Georgia Power Company has two long-term contracts
   with subsidiaries of the Company.  One contract requires the purchase of 1.5
   million tons annually from Marrowbone.  This agreement expires in December
   2008 with an option to extend for five years with the mutual consent of both
   parties.  The price adjusts to reflect changes in industry labor costs,
   quarterly changes in indices, and any changes in governmental impositions
   resulting from new or amended laws, rules and regulations levied upon the
   production, preparation or sale of coal.  The contract has a partial price
   reopener in July 1999 and every five years thereafter.  Georgia Power also
   has a long-term contract, which expires in December 2010, to purchase 1.0
   million tons annually from Pike County.  The price adjusts to reflect
   changes in industry labor costs and quarterly indices and may be reopened
   every five years.  The next reopener will be January 2001.  During 1996 and
   1995, sales to Georgia Power under these contracts and short-term
   arrangements accounted for approximately 14% and 13%, respectively, of
   Zeigler's consolidated revenues from coal sales.

   Strategic Developments and Acquisitions

     The development of reserves and strategic acquisitions are key to the
achievement of the Company's performance objectives.  In 1996, Zeigler largely
concluded its transition to a predominately low-sulfur coal producer.  The
Company's high-sulfur operations, which comprised more than 90% of its sales at
the beginning of 1992, will represent less than 20% of sales in 1997.  This is
particularly important, given the increasing restrictions on sulfur emissions
imposed by the Clean Air Act Amendments of 1990.

     In February 1996, Zeigler announced full-scale development of Triton Coal
Company's North Rochelle mine in the southern Powder River Basin.  North
Rochelle contains a 186 million ton reserve that is estimated to have an
as-mined heating value of  8,800-8,900 BTU per pound and to emit, when burned,
about .5 pounds of sulfur dioxide per million BTU.  Diligence tonnage required
to maintain the lease for North Rochelle was completed in the fourth quarter of
1996.  The long-term mining plan provides for average production of 10 to 12
million tons a year, depending on market conditions.   At this time, Triton
estimates full production at North Rochelle to begin in mid-to-late 1998.  The
estimated total cost to develop North Rochelle is approximately $95.0 million.

     In the fourth quarter of 1996,  Pike County Coal Corporation completed its
acquisition of the Betsy Layne reserve in eastern Kentucky.  The 17.5 million
ton reserve is expected to begin production in the first half of 1997 and
produce approximately 1.0 million tons of low-sulfur coal annually.  More than
75% of Betsy Layne's production is already under contract for the first several
years of operation.


                                       18


<PAGE>   21




     In addition, Evergreen Mining Company purchased Knight Ink, a 6.0 million
ton surface reserve, in the fourth quarter of 1996.  The addition of this
reserve will expand Evergreen's mine life while improving quality and reducing
costs.

     R. & F. Coal Company acquired the adjacent Adamsville reserve in the first
quarter of 1996, and began production during the fourth quarter.  This reserve
offers a higher BTU content which will increase quality premiums, lower
production costs due to the continued use of R. & F.'s dragline, and reduce
transportation costs to a nearby customer.

     Coal Reserves and Other Properties

     The Company controls coal reserves in 10 states which contain substantial
amounts of coal of varying qualities.  Reserve estimates are prepared by the
Company's engineers and geologists and reviewed periodically to reflect data
received and developments affecting the reserves. Accordingly, reserve
estimates will change from time to time reflecting mining activities, analysis
of new engineering and geological data, changes in reserve holdings,
modification of mining plans, or mining methods and other factors.

     The following table summarizes the Company's coal reserves as of December
31, 1996. Information in the table, including the classification of reserves as
"Economic," is based on estimates by Company personnel.  As used in the table,
the following terms are defined as follows: "Assigned reserves" refers to
reserves legally recoverable generally through existing facilities using
current mining technology; "Economic" means that the reserve is recoverable
using current mining technology at costs estimated to be similar to those
incurred by currently operating mines producing similar quality coal;
"Unassigned reserves" refers to reserves legally recoverable using current
mining technology but which would require substantial capital investment for
facilities to enable recovery of the coal.  In addition to the reserves
reflected in the table, the Company owns or holds through leases approximately
1.0 billion tons of coal deposits which are minable using current mining
technology but the costs of mining such coal may cause recovery to not be
commercially viable under current economic conditions or require further
investigation and evaluation to determine whether recovery is commercially
viable.
























                                       19


<PAGE>   22



<TABLE>
<CAPTION>
                                         Underground     Reserves      Measured       Indicated
                                          (UG) or       (tons in       (tons in        (tons in      Sulfur
     Mine                                Surface (S)    millions)    millions)(1)     millions)(2)   (%)(3)    Btu/lb.
     ----                                -----------    ---------    ------------     ------------   ------    -------
<S>                                      <C>             <C>           <C>              <C>             <C>     <C>
ASSIGNED ECONOMIC RESERVES:
 Mountaineer Coal Development Co.
   Marrowbone                            UG&S               88.7           71.3           17.4        0.7       12,100
   Wolf Creek                            UG                 11.7            9.7            2.0        1.7       13,275

 Old Ben Coal Company
   Old Ben Spartan                       UG                  1.0            1.0            0.0        3.1       11,100
   Old Ben Mine #11                      UG                 20.2           20.2            0.0        2.3       11,100

 Bluegrass Coal Development Co.
   Evergreen                             S                  28.9           19.9            9.0        1.0       12,350
   Pike County                           UG&S               39.5           37.1            2.4        1.2       12,500
   R. & F.                               S                  30.8           30.8             .0        3.8       11,800
   Turris                                UG                 73.4           73.4             .0        3.0       10,400

 Triton Coal Company
   Buckskin                              S                 481.4          315.7          165.7        0.5        8,350
   North Rochelle                        S                 186.4          151.1           35.3        0.2        8,850
                                                         -------          -----          -----
     Total assigned economic reserves                      962.0          730.2          231.8
UNASSIGNED ECONOMIC RESERVES                               227.4          171.1           56.3
                                                         -------          -----          -----
TOTAL ECONOMIC RESERVES                                  1,189.4          901.3          288.1
                                                         =======          =====          =====
</TABLE>


(1)  "Measured" reserves are those with the highest degree of geologic
     assurance.  Coal quantities are computed from bed thickness measurements
     in core holes, mine workings, and bed outcrops of prospect trenches.  The
     measurement sites are so closely spaced that coal bed continuity, geometry
     and minability are well established.   Generally, coal that lies within
     1/4 mile of a reliable point of coal thickness measurement is considered
     in the measured class.

(2)  "Indicated" reserves are those with a moderate degree of geologic
     assurance.  The assurance, although lower than for proven reserves, is
     high enough to assume continuity between points of measurement.  Coal that
     lies between 1/4 and 3/4 mile from a point of coal thickness measurement
     is considered in the indicated class.

(3)  The percentage of sulfur content is not necessarily indicative of the
     suitability of the coal for consumption in compliance with applicable air
     quality laws.  Such suitability is dependent upon a number of other
     factors, including other coal characteristics (such as BTU content), the
     emission control technology used or to be used at the power station, and
     specific emission limitations applicable to that station.  Current
     estimates of coal reserves owned or leased by the Company that would be
     considered "compliance" (coal which, when burned, emits less than 1.2
     pounds of sulfur dioxide per million BTU) coal are 0.8 billion tons.  In
     addition, the Company estimates that it has 0.4 billion tons of reserves
     which, when burned, would emit less than 2.0 pounds of sulfur dioxide per
     million BTU.

     Of the total 1,189.4 million tons of economic reserves shown above,
approximately 17.5% are owned by Zeigler or its subsidiaries, approximately
26.4% are leased from private parties, and approximately 56.1% are leased from
the federal government.  Of the remaining 1.0 billion tons of

                                       20


<PAGE>   23



non-economically recoverable coal deposits, approximately 61.0% are owned by
Zeigler or its subsidiaries, approximately 37.6% are leased from private
parties, and approximately 1.4% are leased from state governments.

     The private leases generally have terms of between 10 and 20 years,
although they generally allow Zeigler the right to renew the lease for a stated
period or to maintain the lease in force until the exhaustion of minable and
merchantable coal.  These leases provide for royalties to be paid to the lessor
either as a fixed amount per ton or as a percentage of the sales price.  Many
leases also require payment of a lease bonus or minimum royalties, payable
either at the time of the execution of the lease or in periodic installments.
In most cases, the minimum royalty payments are applied to reduce future
production royalties.  The loss of certain leases could adversely affect
Zeigler's ability to develop the related mine.

     Zeigler holds four federal coal leases which are administered by the
United States Department of the Interior pursuant to the Federal Coal Leasing
Amendments Act of 1976.  These leases cover the Company's principal reserves in
Wyoming.  Each of these leases continues for an indefinite term provided there
is diligent development of the lease and continued operation of the related
mine or mines.  The Bureau of Land Management ("BLM") has asserted the right to
adjust the terms and conditions of these leases, including rents and royalties,
after the first 20 years of their life and at 10-year intervals thereafter.
Annual rents under the Company's BLM leases are now generally $3 per acre.
Production royalties on BLM leases are 12.5 percent of the gross proceeds of
coal mined and sold.

     Consistent with industry practices, the Company conducts limited
investigations of title to its coal properties prior to leasing.  The title of
the lessors or grantors and the boundaries of the Company's leased properties
are not completely verified until such time as the Company prepares to mine
such reserves.  If defects in title or boundaries of undeveloped reserves arise
in the future, the Company's control of and right to mine such reserves could
be adversely affected.


     Technology Segment

     Zeigler's technology segment is charged with pursuing promising
technologies that could shape the way the energy sector does business in the
future.  Federal clean air legislation is greatly increasing the demand for
low-sulfur, low-NO(x) coal within the United States.  Concurrently, emerging
utility deregulation is increasing the demand for low-cost, high-BTU coal.

     The only significant current project in the Company's emerging Technology
segment is ENCOAL Corporation ("ENCOAL") and the LFC process.  ENCOAL is a
wholly-owned subsidiary of the Company, and is using the proprietary LFC
process to produce PDF and CDL from the low-sulfur sub-bituminous coal at
Triton Coal Company's Buckskin mine.  ENCOAL owns and operates a pilot plant at
the Buckskin Mine which was constructed in cooperation with the Department of
Energy ("DOE") as part of the Clean Coal Technology Program, a DOE program
designed to develop new technologies for producing and using clean coal.

     The LFC process, which is still in the development stage, converts
low-rank coals into a low-sulfur, low-NO(x), coal-like product called Process
Derived Fuel, or PDF, and a low-sulfur hydrocarbon liquid called Coal Derived
Liquid, or CDL.  PDF is useable in utility boilers and has potential value in
the steel industry which currently burns bituminous coal.  CDL can be processed
into a number of products, and the Company is exploring commercial applications
for these products.

     The LFC process is owned by TEK-KOL.  ENCOAL is responsible for commercial
development of the LFC process, with TEK-KOL entitled to certain license
payments from commercial use of this

                                       21


<PAGE>   24



process. In 1995, ENCOAL resolved the most significant technical hurdle in the
LFC process, setting the stage for ENCOAL to begin marketing efforts.  In 1996,
the Company greatly advanced its commercialization efforts and began permitting
work for a full scale plant that would be located in the Powder River Basin.
In addition, TEK-KOL is in discussions with several entities regarding sale or
license of the LFC technology both domestically and internationally.

     In late 1996, the Company's newly formed subsidiary - NuCoal, LLC
signed contracts with Mitsubishi International Corporation for construction of
a full-scale LFC plant in Wyoming.  Completion of the facility is subject to
certain conditions, including obtaining construction and permanent financing
and all necessary permits.  The Company continues exploring financing
arrangements as well as discussing with potential equity partners and customers
the sale of products from the proposed plant.  The new agreements call for the
engineering, procurement, and construction of a three module LFC processing
facility capable of processing six million tons of coal feedstock per year.
The contract cost of the LFC plant will be approximately $460.0 million.  As of
the date of this Report on Form 10-K, the Company has not given Mitsubishi
International Corporation notice to proceed with construction of the facility
and there can be no assurances as to when, or whether, the commercial LFC plant
will be built.  Mitsubishi Heavy Industries, Ltd. and TEK-KOL have also for the
past year been engaged in advanced feasibility studies regarding the
prospective joint engineering and construction of commercial LFC plants,
including this plant and potential projects in Indonesia and Russia.

     The LFC clean coal technology project is still in the development stage
and is subject to a number of risks and uncertainties, including, without
limitation, the unproved commercial viability of the LFC process, permitting
and other regulatory uncertainties, the ability to obtain financing on
acceptable terms, competition in the marketplace and uncertain demand for the
output produced by the LFC process, engineering and construction risks, legal
proceedings, and other conditions.


     Power Segment

     The Zeigler family of companies, whose coal powers over 50 billion kilowatt
hours each year of power, is well positioned to recognize and take advantage of
the many opportunities posed by utility deregulation.  The Company's twin
strategies of alignment with customers and growth along the electricity value
chain are clearly evident through its activities in this segment, both in terms
of equity participation and strategic alliances.  In 1996, Zeigler made
significant progress in power linkages through Zenergy, Inc. and EnerZ
Corporation.

     Zenergy, Inc.

     In a deregulated environment, low-cost power producers have had little
incentive to increase underutilized capacity and little opportunity to market
that low-cost power outside their native territories.  These barriers are today
rapidly falling.  Generators with inexpensive coal-fired capacity will look to
use generating capacity at close to full capacity, generating low-cost
incremental production, and selling it onto the grid.  That will create
opportunities for operators of low-cost facilities like the non-nuclear assets
of Cajun Electric Power Cooperative, Inc. ("Cajun") in Baton Rouge, Louisiana.

     Cajun's non-nuclear assets include 1,463 megawatts of coal burning
capacity and 220 megawatts of gas, along with related operating facilities such
as a load control center.  Cajun supplies about 80% of the power to the rural
Louisiana markets and is currently operating at about 60% capacity.  Cajun was
forced into bankruptcy in 1994 after a dispute between federal and state
regulators resulted in Cajun being unable to set its rates at a level that
would satisfy federal

                                       22


<PAGE>   25



and state regulatory requirements due to an investment Cajun had made in an
expensive nuclear power facility.

     During 1996, the $1 billion-plus proposal by Louisiana Generating, LLC
("Generating") (the three members of which are Zenergy, Inc., a wholly owned
subsidiary of the Company, NRG Energy, Inc., the non-regulated affiliate of
Minneapolis-based Northern States Power Company, and Southern Energy-Cajun,
Inc., a wholly-owned subsidiary of Southern Energy, Inc.) to purchase out of
bankruptcy Cajun's non-nuclear assets (the "Cajun Assets") was named the lead
proposal by Cajun's court-appointed bankruptcy trustee.  The trustee filed a
plan of reorganization that incorporated Generating's proposal, including a
definitive purchase agreement (the "Purchase Agreement") containing bankruptcy
court-approved buyer protection provisions.

     The consummation of Generating's acquisition of the Cajun Assets is
subject to a number of conditions, including, without limitation, the entering
of a final and non-appealable order by the United States Bankruptcy Court for
the Middle District of Louisiana (the "Bankruptcy Court") confirming the
trustee's plan of reorganization that incorporates the terms and conditions of
the Purchase Agreement, the receipt of all regulatory approvals, and other
conditions customary for transactions such as the acquisition of the Cajun
Assets.  Two other competing reorganization plans for Cajun have been filed
with the Bankruptcy Court.  Because of the uncertainty as to whether or when
the Bankruptcy Court will confirm the trustee's plan of reorganization
(especially in light of the competing reorganization plans and competitive
bidding nature of the bankruptcy proceeding) and as to whether all of the
conditions to consummating the acquisition of the Cajun Assets can be
satisfied, there can be no assurance that Generating's acquisition of the Cajun
Assets will be consummated upon the current terms and provisions of the
Purchase Agreement or any other terms.  The Bankruptcy Court confirmation
hearing commenced on December 16, 1996, was adjourned in January 1997, and is
scheduled to reconvene on April 21, 1997.

     Under the existing agreement regarding Cajun, Zenergy, Inc., Southern
Energy-Cajun, Inc., and NRG Energy, Inc., respectively, own 30%, 40%, and 30%
of the ownership interests in Generating, and would each contribute their pro
rata share of the capital required by Generating to consummate the acquisition
of, and operate, the Cajun Assets.  The Company currently estimates that, if
Generating is successful in its bid to acquire the Cajun Assets, Zenergy's
capital investment in Generating will be approximately $60 million to $70
million.  The Company is in the process of developing financing alternatives to
fund its investment in Generating, but presently does not have any commitments
with respect to funding such investment.

     EnerZ Corporation

     In September 1996, Zeigler formed a new subsidiary, EnerZ Corporation, an
integrated energy marketing company.  EnerZ initially will participate in the
wholesale electric power market and in both bulk wholesale and retail gas
marketing.

     Over and above straightforward trading transactions, however, EnerZ seeks
to implement an asset-based strategy that leverages Zeigler's natural long
position in coal, with a significant presence in all three major coal producing
regions.

     Zeigler and EnerZ further hope to take advantage of the Company's
expertise in coal marketing to help shape the future of the energy markets in
the financial marketplace.  For instance, EnerZ has provided input to the New
York Mercantile Exchange as it develops coal futures contracts.

     1997 will be a start-up year for EnerZ.  Even so, the Company's seven
professional staff members average 18 years each in the energy business and
have already commenced making transactions.  EnerZ's business is subject to a
number of risks and uncertainties, including, without limitation, the start-up
nature of EnerZ's operations, regulatory changes that limit or slow the

                                       23


<PAGE>   26



advance of deregulation in the utility marketplace, competition in the
wholesale power market, fluctuations in the market price of electricity, and
other factors, and there can be no assurance that EnerZ's operations will be
successful.


     Environmental and Engineering Segment

     Zeigler believes the environmental and engineering industries offer
opportunities to add shareholder value using existing expertise.  Three areas
currently being explored include environmental services, industrial
development, and contract mining.

     Zeigler has had extensive experience and opportunity managing
environmental issues, including land and water reclamation as well as waste
disposal, clean-up, and transportation.  In 1996, Zeigler developed several
pilot projects to best evaluate a greater entree into environmental services.
Based on its experience, the Company intends to attempt to grow environmental
services into an emerging business segment in 1997.

     Coal mines are among the largest engineered structures on earth, and the
Company believes it has a significant opportunity to leverage its core
competencies to begin developing an engineering and construction business unit.
The first major project in this segment is the Phoenix Commerce Center, a
415-acre industrial park being developed by the Company in southern Indiana on
land already owned by Zeigler.  The Company has begun to explore financing
alternatives and is in the process of attempting to attract tenants for the
park, expected to be one of the largest in the state, which is located within
20 miles of a truck manufacturing plant now under construction.  The Company is
also evaluating several similar opportunities.


     Asset Management Segment

     Buying, selling, and managing assets that advance Zeigler's position along
the chain of economic value of electricity is the prime focus of Zeigler's
Asset Management segment.  Asset Management includes the two East Coast
transloading terminals, Pier IX and Shipyard River, and Phoenix Land Company.

     Pier IX, located in Newport News, Virginia, is served by the CSX Railroad
and deals primarily with coal and cement.  Zeigler is expanding the terminal's
product base to include a variety of dry bulk products in an effort to fully
maximize the facility's throughput capacity of 12 million tons per year.

     Shipyard River Coal Terminal, in Charleston, South Carolina, is located on
50 acres of land at the mouth of the Port of Charleston.  The terminal accesses
both rail and water transportation and handles liquid, granular, and bulk
materials including coal, fertilizers, aggregates, asphalt and other industrial
minerals.  Shipyard has an annual throughput capacity of 2.5 million tons per
year and is served by the CSX and Norfolk Southern Railroads.

     Phoenix Land Company manages land and reserves to best meet the needs of
the Coal Segment and other Zeigler businesses.  The Zeigler family of companies
owns or leases 1.2 billion tons of economic reserve, plus another 1.0 billion
tons of non-economic reserves, and controls an additional 300,000-plus acres of
surface land located in ten states.





                                       24


<PAGE>   27




     International Segment

     In addition to domestic expansion, Zeigler is evaluating international
opportunities through its subsidiary, Zeigler International, Inc.  As of the
date of this Report on Form 10-K, the Company has not entered into any
significant international ventures.  However, Zeigler is evaluating several
different mechanisms by which it can participate in international ventures:

   -    Privatizations - In eastern Europe, Poland, Hungary, Turkey, India
        and Australia, governments are evaluating the privatization of coal
        production and electric power generation.  Zeigler believes that its
        expertise and financial resources position the Company well to take
        part in these activities.

   -    Independent Power Projects - Countries with indigenous coal
        reserves and shortages of power plants and mining include Indonesia,
        Philippines, Thailand, India, Columbia, Venezuela, China and Mexico.
        While not seeking sole control of operations in these sites, Zeigler
        believes that its expertise makes the Company a viable partner for
        locally-driven development activities in which the Company can bring to
        bear its skills in efficient mining while taking an equity interest in
        integrated power projects.

   -    Contract Mining - Zeigler has a substantial talent base that can be
        outsourced.  Similar to other industries, as the need for safe,
        low-cost coal grows with the demand for inexpensive power, Zeigler
        believes it is ready to provide international contract mining services.

OTHER PROPERTIES

     Corporate Headquarters - The Company owns a 44,000 square-foot, two-story
office building in Fairview Heights, Illinois, which serves as Zeigler Coal
Holding Company's executive offices and headquarters for the Company's service
subsidiaries.  Administrative offices for Mountaineer Coal Development Company,
Bluegrass Coal Development Company, and Triton Coal Company are held under
leases in Charleston, West Virginia; Lexington, Kentucky; and Gillette,
Wyoming, respectively.  The Company also owns a one-story office building in
Benton, Illinois which serves as the administrative office for Old Ben Coal
Company.

EMPLOYEE AND LABOR RELATIONS

     As of December 31, 1996, Zeigler and its subsidiaries employed a total of
2,156 persons, of which approximately 718 were represented by the UMWA and
covered by the terms and conditions of the National Bituminous Coal Wage
Agreement ("NBCWA").  The current NBCWA expires on August 1, 1998.

     Current UMWA Contract

     The current NBCWA became effective on December 16, 1993 and will expire on
August 1, 1998.  On August 16, 1996, Old Ben Coal Company, through the
Bituminous Coal Operators' Association, entered into an agreement with the UMWA
which avoided the reopening of the NBCWA in 1996 and 1997.  Marrowbone
Development Company entered into an identical agreement with the UMWA.  This
agreement provided for lump-sum wage bonuses of $600 in 1996 and 1997 and
lump-sum pension bonuses for pensioners in 1996 and 1997.

     The parties also agreed to begin early negotiations on a successor
agreement to the NBCWA not later than August 1, 1997 in an effort to avoid a
work stoppage upon the expiration of the NBCWA on August 1, 1998.  No
assurance, however, can be given that the NBCWA will be successfully
renegotiated upon its expiration on August 1, 1998 without a work stoppage.
Apart

                                       25


<PAGE>   28



from work stoppages which may occur upon termination of a collective bargaining
agreement, Zeigler may from time to time be subject to certain unauthorized
work stoppages or wildcat strikes.  Typically, these events are isolated, short
in duration and localized.

     Coal Industry Retiree Health Benefit Act of 1992

     The Coal Industry Retiree Health Benefit Act of 1992 (the "Health Benefits
Act") was enacted in October 1992 to provide for the funding of health benefits
for retirees who were UMWA retirees. The essential feature of the Health
Benefits Act is to remove the UMWA health benefit plans from the collective
bargaining process and eliminate the per-hour-worked method of funding the UMWA
health benefit plans.  The Health Benefits Act establishes a trust fund to
which "signatory operators," operators who are signatory to the current NBCWA
or prior NBCWAs, and "related persons," including Old Ben Coal Company, are
obligated to pay annual premiums for assigned beneficiaries, together with a
pro rata share for certain beneficiaries ("unassigned beneficiaries") who never
worked for such employers, in amounts to be determined by the Secretary of
Health and Human Services on the basis set forth in the Health Benefits Act.
The expense under this legislation, which is recognized as contributions are
made, amounted to $3.0 million in 1996.  Based upon independent actuarial
estimates, Zeigler believes the amount of its obligation under the new plan to
be approximately $24.8 million as of December 31, 1996, using a 7.5% discount
rate.

REGULATION

     The possibility exists that new legislation and/or regulations may be
adopted which may have a significant impact on Zeigler's mining operations
and/or its customers' ability to use coal and may require the Company or its
customers to change their operations significantly or incur substantial costs.

     Numerous governmental permits or approvals are required for mining
operations.  Zeigler believes all permits currently required to conduct its
present mining operations have been obtained. The Company 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.  All requirements imposed by any such authority
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, as a
consequence, the activities of the Company may be more closely regulated.  Such
legislation and regulations, as well as future interpretations of existing
laws, may require substantial increases in equipment and operating costs to the
Company and delays, interruptions or a termination of operations, the extent of
which cannot be predicted.

     The Company's independent operating subsidiaries endeavor to conduct
mining operations in compliance with all applicable federal, state and local
laws and regulations.  However, because of extensive and comprehensive
regulatory requirements, violations during mining operations are not unusual in
the industry and, notwithstanding compliance efforts, the Company does not
believe such violations can be completely eliminated.  None of the violations
to date or the monetary penalties assessed upon the Company's subsidiaries have
been material.

     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.  It is estimated that Zeigler made capital
expenditures for environmental control facilities in the amount of
approximately $2.1 million in 1996. These costs are in addition to reclamation
costs.  Compliance with these laws has substantially increased the cost of coal
mining, but is, in general, a cost common to all domestic coal producers.


                                       26


<PAGE>   29




     Most of the states in which the Company operates have state programs for
mine safety and health regulation and enforcement.  In combination, federal and
state safety and health regulations in the coal mining industry is perhaps the
most comprehensive and pervasive system for protection of employee safety and
health affecting any segment of the industry.  The most minute aspects of mine
operations, particularly underground mine operations, are subject to extensive
regulation.  This regulation has a significant effect on the Company's
operating costs.  However, the Company's competitors in all of the areas in
which it operates are subject to the same degree of regulation.

     EnerZ Corporation is subject to FERC regulation as a wholesale power
marketer and is required to file its rate schedule and quarterly transaction
reports with the FERC.  The Company's other non-mining businesses are also
subject to federal, state and/or local regulation.


                                       27


<PAGE>   30





                              ITEM 2.  PROPERTIES

     The information required by this item concerning the Company's properties
is included under Item 1., "Business" above.  Such information is incorporated
herein by reference.


                          ITEM 3.  LEGAL  PROCEEDINGS

     The information required by this item concerning the Company's legal
proceedings is included in Note 16 to the Company's consolidated financial
statements under Item 8., "Financial Statements and Supplementary Data."  Such
information is incorporated herein by reference.


          ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fourth
quarter of 1996.


                      EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers and certain key employees of Zeigler, their ages as
of December 31, 1996, and positions held during the last five years are as
follows:

Name                          Age                      Position
----------------------------  ---  ----------------------------------------
Chand B. Vyas ..............   52  President, Chief Executive Officer and
                                   Director
Michael V. Altrudo .........   48  President of Franklin Coal Sales Company
Francis L. Barkofske .......   57  Vice President, Administration
Michael D. Bauersachs ......   32  President of Phoenix Land Company
W. Douglas Blackburn, Jr. ..   46  Senior Vice President, Mining Operations
Sharad M. Desai ............   48  Treasurer
Paul D. Femmer .............   44  Controller
Michael M. Frye ............   47  President of Zeigler International, Inc.
Coy K. Lane ................   36  President of Bluegrass Coal Development
                                    Company
James W. Mahler ............   48  President of Americoal Development  Company
Robert E. Mohrmann .........   51  Senior Vice President and Chief Financial
                                   Officer
Brent L. Motchan ...........   47  Vice President, General Counsel and Secretary
Tayeb B. Tahir .............   42  President of EnerZ Corporation
Alan D. Williams ...........   51  Vice President, Marketing and Business
                                    Development
John C. Willson ............   47  President of Triton Coal Company
David M. Young .............   46  President of Mountaineer Coal Development
                                   Company


     Chand B. Vyas - Mr. Vyas has been President since 1991 and Chief Executive
Officer since January 1, 1995.  Prior to his election as Chief Executive
Officer, Mr. Vyas held the following positions with the Company:  1991-1994
Chief Operating Officer; 1989-1991 Executive Vice President; February 1989 to
November 1989 Senior Vice President - Finance and Administration; 1985-1989
Vice President and Chief Financial Officer.  Mr. Vyas joined Zeigler Coal
Company in 1982 as a Director and Vice President, Finance.  He is a director of
the Center for Energy and Economic Development and a past director of the
National Coal Association.


                                       28


<PAGE>   31




     Michael V. Altrudo - Mr. Altrudo has been President of Franklin Coal Sales
Company, the Company's marketing and sales subsidiary since November 1995.
From November 1992 to October 1995, he was Executive Vice President of Sales
for Franklin Coal Sales Company.  He was Vice President of Sales for Franklin
Coal Sales Company from April 1992 to October 1992.  From February 1988 to
March 1992, he was Vice President of Domestic Coal & Coke Sales with Drummond
Coal Sales Company.

     Francis L. Barkofske - Mr. Barkofske has been Vice President,
Administration since September 1996.  From November 1995 to August 1996, he was
Vice President, Corporate Affairs; from October 1994 to October 1995, he was
Vice President, External Affairs; and from July 1992 to October 1994, he was
Vice President, Government Relations.  From October 1990 to July 1992, Mr.
Barkofske was a partner and Chairman of the Natural Resources Practice area of
the law firm of Thompson & Mitchell. Prior thereto, he was Senior Vice
President, Legal & Public Affairs and Secretary of Peabody Holding Company,
Inc.

     Michael D. Bauersachs - Mr. Bauersachs has been President of Phoenix Land
Company since May 1996.  From January 1996 to April 1996, he was General
Manager of Land and Development and from August 1994 to December 1995, he was
Manager of Property Development for Phoenix Land Company.  Prior to joining the
Company, Mr. Bauersachs was Vice President of Real Estate for Ark Land Company,
a subsidiary of Arch Mineral Corporation.  From 1993 and prior thereto, he held
various real estate positions within Ark Land Company.

     W. Douglas Blackburn, Jr. - Mr. Blackburn has been Senior Vice President,
Mining Operations since November 1994. Mr. Blackburn joined the Company on June
20, 1994 as the President of Old Ben Coal Company.  Prior thereto, he served as
a consultant to the coal industry from 1992 to 1994 and as Senior Vice
President of Operations at Mapco Coal, a coal mining company, from 1990 to
1992.

     Sharad M. Desai - Mr. Desai has been Treasurer of the Company since
January 1993.  He previously held various positions in the financial and
accounting areas at Zeigler since joining the Company at its inception.

     Paul D. Femmer - Mr. Femmer has been Controller of the Company since March
1994.  From 1990 to 1994 he was Controller of Sigma Chemical Company.  Prior
thereto, he was a Senior Manager with Price Waterhouse.

     Michael M. Frye - Mr. Frye has been President of Zeigler International,
Inc., the Company's international development subsidiary, since March 1997. He
joined the Company in October 1996 as Manager of International Business
Development.  From November 1994 to February 1996 he was Vice President,
Project Development of Coastal Power Company.  Prior thereto, he was a Vice
President with EEA Development, Inc.

     Coy K. Lane - Mr. Lane has been President of Bluegrass Coal Development
Company since November 1995.  From March 1995 to October 1995, he was President
of Old Ben Coal Company.  In October 1994, he joined Zeigler Coal Holding
Company as General Manager of the Indiana Operations of Old Ben Coal Company
until February 1995.  From January 1994 to September 1994, he was General
Manager of the Ashland Division of Pittston Coal Group for Addington, Inc.
operations.  From April 1993 to December 1993, he was Manager of Operations
Development for Addington, Inc.  From May 1990 to March 1993, he was Assistant
Vice President of Operations for Pen Coal Corporation.

     James W. Mahler - Mr. Mahler has been President of Americoal Development
Company, the Company's non-mining and business development subsidiary, since
1992.  Prior thereto, he was Vice President, Administration for Zeigler, a
position he held from 1990 to 1992.  From 1988 to 1990, Mr. Mahler was
Controller of BP Coal (U.S.A.) Inc.


                                       29


<PAGE>   32






     Robert E. Mohrmann - Mr. Mohrmann has been Senior Vice President and Chief
Financial Officer since joining the Company in March 1997.  Prior to this, he
was a partner in a private investment and management firm, and held various
senior management positions with Wetterau, Inc., including Vice Chairman of the
Board, Executive Vice President, and Senior Vice President and Chief Financial
Officer.

     Brent L. Motchan - Mr. Motchan has been Vice President, General Counsel
and Secretary of the Company since 1985.  From 1977 to 1985, he was the
Assistant General Counsel and Director of Real Estate for Arch Mineral
Corporation, a coal mining company.

     Tayeb B. Tahir - Mr. Tahir has been President of EnerZ Corporation since
September 1996.  From 1994 to August 1996, he was with PIRA Energy Group in New
York where he was Director, International Global Gas Group.  Prior to 1994, he
served various positions with Consolidated Edison Company.

     Alan D. Williams - Mr. Williams has been Vice President - Marketing and
Business Development since March 1997.  From February 1996 to March 1997, he
was Manager of Business Development and from April 1993 to January 1996, he was
Senior Vice President of Marketing for Franklin Coal Sales, the Company's
marketing subsidiary.  Prior thereto, he was President of Triton Coal Company.

     John C. Willson - Mr. Willson has been President of Triton Coal Company
since January 1996.  From March 1995 to December 1995, he was Vice President of
SMC Western Operations.  From 1989 to 1994, Mr. Willson was President of the
Eastern Division of Costain Coal, Inc.

     David M. Young - Since November 1995, Mr. Young has been President of
Mountaineer Coal Development Company.  Prior thereto, he was President of
Marrowbone Development Company and Wolf Creek Collieries Company.  From
November 1992 to June 1994, Mr. Young was President of Old Ben Coal Company.
He was Vice President of the Company's Illinois Division of mining operations
from September 1991 to November 1992.  Mr. Young was employed in various
capacities by Old Ben Coal Company's West Virginia Division prior to September
1991.





                                       30


<PAGE>   33




                                    PART  II


                 ITEM 5.   MARKET FOR REGISTRANT'S COMMON STOCK
                        AND RELATED SHAREHOLDER MATTERS

     Zeigler's common stock, $.01 par value, is listed and traded on the New
York Stock Exchange.  The table below presents its high and low market prices,
and dividends declared per common share since the initial public offering on
September 29, 1994.


<TABLE>
<CAPTION>
                                       Market Price
                                  ---------------------
  Quarter Ended:                   High           Low        Dividends
                                  -------       -------      ---------
<S>                               <C>            <C>            <C>
1996
  Fourth ......................    $22 1/4       $17 1/4       $.075
  Third .......................     17 3/4        12 3/4        .075
  Second ......................     17 3/4        14 1/2         .05
  First .......................     14 3/4        12 1/4         .05
1995
  Fourth ......................    $14 1/4       $10 5/8       $ .05
  Third .......................     13 1/4        11 5/8         .05
  Second ......................     12 1/4         9 3/4         .05
  First .......................     12 1/8        10             .05
1994
  Fourth ......................    $15 3/4       $10 1/2       $ .05
  Third .......................     15 1/2        15 1/8           -
</TABLE>



     Long-term debt agreements include certain dividend-restrictive covenants.
The most restrictive covenant limits dividends to an amount in aggregate of no
more than $40 million (which is exclusive of dividends declared and paid prior
to January 15, 1996). For a more complete discussion of dividend restrictions
contained in debt covenants, see Note 4 to the Company's consolidated financial
statements.

     The Company intends to continue paying regular cash dividends.  However,
future dividends will be at the sole discretion of the Board of Directors and
will depend upon Zeigler's level of earnings, financial position, capital
expenditures and debt service requirements, restrictions in debt covenants and
other factors that the Board of Directors may deem relevant.

     As of March 25, 1997, there were 183 shareholders of record of the
Company's common stock and approximately 6,500 shareholders for whom
securities firms acted as nominees.



                                       31


<PAGE>   34




                       ITEM 6.   SELECTED FINANCIAL DATA

                      SUMMARY FINANCIAL AND OPERATING DATA

     The information in the following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7., and the Company's consolidated financial statements
under Item 8.


<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                        ----------------------------------------------------------------------
                                                         1996           1995             1994             1993          1992
                                                        -------     ------------     ------------     ------------     -------
<S>                                                     <C>         <C>              <C>              <C>              <C>
                                                                      (In millions, except per share data)
STATEMENT OF CONSOLIDATED OPERATIONS DATA:
Total revenues .......................................   $731.6           $783.1           $870.9           $873.0      $503.0
Costs and expenses:
Cost of coal sales ...................................    613.1            686.2            738.8            776.8       406.6
  Selling, general and administrative expenses .......     21.3             20.7             20.2             13.5        15.7
  Other costs and expenses ...........................     22.5             18.5             22.7             28.6         7.2
  Gain on curtailment of postretirement benefits(1) ..    (16.3)               -                -                -           -
  Reduction in accrued pneumoconiosis benefits(2) ....        -            (23.3)               -                -       (54.5)
  Provision for asset impairments and accelerated
    mine closings(3) .................................        -            114.7                -             55.7         3.6
Other income:
  Proceeds from contract settlement ..................        -             45.5                -                -           -
                                                        -------     ------------     ------------     ------------     -------

Operating income (loss) ..............................     91.0             11.8             89.2             (1.6)      124.4
Net interest expense .................................     21.7             27.5             42.1             52.2        10.0
Income taxes (benefit) ...............................     11.3             (4.5)            13.6            (19.5)       40.0
                                                        -------     ------------     ------------     ------------     -------
Net income (loss) before extraordinary items and
 cumulative effects of changes in accounting .........     58.0            (11.2)            33.5            (34.3)       74.4
Extraordinary item - Loss on early retirement of
 debt, net of taxes (4) ..............................        -                -              8.4                -           -
Cumulative effects of changes in accounting (5) ......        -                -                -           (111.9)          -
                                                        -------     ------------     ------------     ------------     -------
Net income (loss) ....................................    $58.0           ($11.2)           $25.1          ($146.2)      $74.4
                                                        =======     ============     ============     ============     =======

Net income (loss) per share ..........................    $2.04            ($.40)           $1.01           ($6.29)      $3.26
                                                        =======     ============     ============     ============     =======

Weighted average shares outstanding ..................     28.4             28.4             24.9             23.2        22.9

CONSOLIDATED BALANCE SHEET DATA (AT YEAR-END):
Working capital ......................................    $84.9            $29.8            $67.6            $29.9       $87.6
Total assets .........................................  1,050.6          1,025.2          1,165.5          1,231.2     1,199.5
Total long-term debt (6) .............................    344.8            344.8            450.1            551.8       687.8
Other long-term liabilities (7) ......................    440.2            481.4            471.0            468.4       202.2
Total shareholders' equity ...........................    132.6             81.5             98.4              6.1       152.2

OTHER DATA:
Net cash provided by operating activities ............   $131.9           $160.3            $91.1           $130.4       $92.9
Net cash used in investing activities ................     30.5             51.8             41.7             33.0       471.5
Net cash used in (provided by) financing activities ..      6.1            111.0             96.8             92.8      (386.4)
Additions to property, plant and equipment (8) .......     31.4             56.3             45.6             36.5        17.4
Payment of dividends .................................      6.4              5.7                -                -        30.0
EBITDA (9) ...........................................    151.1            171.8            158.5            129.7       108.6
EBITDA/net interest expense ..........................      7.0              6.2              3.8              2.5        10.9
Total long-term debt/EBITDA ..........................      2.3              2.0              2.8              4.3         6.3
Tons produced (10) ...................................     31.4             35.1             38.5             35.7        18.5
Tons sold(11) ........................................     34.6             36.9             40.0             38.8        20.0
</TABLE>




                                       32


<PAGE>   35






(1)  Reflects a pretax reduction to the accrual for the FAS 106 obligation as
     a result of certain Midwestern employees'  re-employment or termination
     prior to vesting.

(2)  Reflects a pretax reduction to the accrual for the pneumoconiosis (black
     lung) claims liability which was based on a revised actuarial estimate as
     a result of the Company's favorable claims experience.

(3)  Reflects acceleration of the accruals related to mine closing costs and
     pretax writedowns in certain asset carrying values, primarily in
     connection with the idling, closing, and projected closing of certain
     mines earlier than previously forecast.

(4)  Reflects payment of a yield maintenance premium ($2.9 million, net of
     $1.0 million income tax benefit) and write-off of deferred financing costs
     ($5.5 million, net of $1.8 million income tax benefit) related to the
     prepayment of debt.

(5)  Reflects the cumulative effects to January 1, 1993 of changes in
     accounting principles for Statement of Financial Accounting Standards
     ("SFAS") No. 106, Employers' Accounting for Postretirement Benefits Other
     than Pensions ("SFAS No. 106") ($95.1 million, net of $60.8 million income
     tax benefit), and SFAS No. 109, Accounting for Income Taxes ("SFAS No.
     109") ($16.8 million).

(6)  Excludes current maturities of long-term debt.

(7)  Includes accrued postretirement benefit obligations, accrued
     pneumoconiosis (black lung) benefits, accrued mine closing costs and other
     long-term liabilities (other than debt and deferred income taxes).

(8)  Excludes the acquisition of Shell Mining Company in 1992.

(9)  EBITDA is defined as earnings (loss) before interest, income taxes,
     depreciation, depletion and amortization.  EBITDA excludes the cumulative
     effects of accounting changes related to SFAS No. 106 and SFAS No. 109,
     provision for asset impairments and accelerated mine closings, and
     reduction in accrued pneumoconiosis (black lung) benefits.  The Company
     believes EBITDA provides cash flow from operations as determined by
     generally accepted accounting principles, and EBITDA is not necessarily an
     indication of whether cash will be sufficient to fund cash requirements.

(10) Reflects tons mined by the Company.  Tons produced are included in
     inventory prior to shipment.

(11) Includes tons mined by the Company plus tons bought by the Company in the
     open market and resold.



























                                       33


<PAGE>   36




                ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS



     In 1996, 95% of the Company's revenues and 91% of the Company's operating
profit were derived from its coal operations, with the remainder of revenues
and operating profits derived almost entirely from business activities that the
Company has had in operation for several years.  Business development in the
areas of technology, power, environmental and engineering, and international
development have not yet contributed significantly to the Company's financial
results, and there can be no assurance that the Company's strategies for growth
in these markets will generate significant revenue and/or operating profit in
the foreseeable future.

                             RESULTS OF OPERATIONS

     Net income for the year ended December 31, 1996 was $58.0 million ($2.04
per share),  compared to a net loss of $11.2 million (loss of $.40 per share)
in 1995, and net income of $25.1 million ($1.01 per share) in 1994.  The
following table reconciles major differences in these reported results.


<TABLE>
<CAPTION>
                                                                1996             1995
                                                            ---------------  ---------------
                                                             ($ millions)     ($ millions)
<S>                                                          <C>              <C>
NET INCOME (LOSS), PRIOR YEAR                                   $(11.2)          $ 25.1
Significant items not recurring from prior year:
  1995 provision for asset impairments and accelerated
     mine closings                                                86.0            (86.0)
  1995 proceeds from SIGECO contract settlement                  (34.1)            34.1
  1995 actuarial reduction in pneumoconiosis benefits            (17.5)            17.5
  1994 extraordinary loss on early retirement of debt               -               8.4
Other major variances:
  Lower mining costs and higher productivity                      18.8              3.6
  Curtailment of postretirement benefits                          12.2               -
  Lower effective tax rate                                         8.5               -
  Lower (higher) costs at inactive properties                      4.9             (7.1)
  Lower net interest costs                                         4.3             11.0
  Higher income from non-coal segments                              .8              8.2
  Lower sales volume and sales prices                            (11.3)           (27.9)
  Other, net                                                      (3.4)             1.9
----------------------------------------------------------------------------------------
NET INCOME (LOSS), CURRENT YEAR                                 $ 58.0           $(11.2)
========================================================================================
</TABLE>

REVENUES

     Coal sales - The decline in coal sales from 1995 to 1996 was largely due
to mine closings in the high-sulfur coal markets in Illinois and Indiana ($36.9
million), price reductions on two major long-term coal supply contracts ($13.6
million), and the October 1996 closing of Old Ben Mine #20 ($5.8 million).
1996 marked the final year in the Company's strategic transition to the
higher-margin, lower-sulfur coal markets.  The sales decrease from 1994 to 1995
reflects expiration of a contract with Georgia Power and the

                                       34


<PAGE>   37



related closing of Old Ben Mine #25 in August 1994 ($31.0 million), expiration
of R. & F. Coal Company's contract with Cravat Coal in December 1994
($17.0 million), termination of a contract with Southern Indiana Gas and
Electric Company (SIGECO) in conjunction with the idling of Old Ben Mine #1 in
July 1995 ($16.0 million), and weaker overall demand for Illinois Basin
high-sulfur coal, mainly because of the Clean Air Act Amendments of 1990 ($21.0
million).  That weakness also reflected unseasonably mild weather and Midwestern
flooding during the first half of 1995.

     Other revenues - Other revenues include throughput fees at the Company's
two East Coast transloading terminals; farm, timber, coal trucking, and ash
disposal income; royalty and rental income from land and mineral interests; and
gains from sales of surplus properties.  The 1996 revenue improvement was
primarily the result of increased sales of surplus coal reserves.  The 1995
increase was chiefly due to higher terminal fees related to a stronger coal
export market, and increased asset sales.


<TABLE>
<CAPTION>
                              1996            1995             1994
                         --------------  ---------------  ---------------
                          ($ millions)    ($ millions)     ($ millions)
<S>                     <C>             <C>              <C>
Coal sales                    $ 698.5          $ 755.0          $ 849.5
Other revenues                   33.1             28.1             21.4
-----------------------------------------------------------------------
   Total revenues               731.6            783.1            870.9
Costs and expenses             (640.6)          (816.8)          (781.7)
Other income                  -                   45.5          -
------------------------------------------------------------------------
   Operating income              91.0             11.8             89.2
Net interest expense            (21.7)           (27.5)           (42.2)
Income taxes                    (11.3)             4.5            (13.5)
Extraordinary item            -                -                   (8.4)
-----------------------------------------------------------------------
   Net income (loss)          $  58.0          $ (11.2)         $  25.1
=======================================================================
</TABLE>

COSTS AND EXPENSES

     Cost of coal sales - The decrease in cost of coal sales from 1995 to 1996
principally reflects significantly reduced sales from closed mines in Illinois
and Indiana ($52.7 million), plus savings from idling Wolf Creek Collieries
Mine #4 and outsourcing the restructured coal supply contract with Carolina
Power & Light Co. (CP&L) ($18.3 million).  The decrease in cost of coal sales
from 1994 to 1995 was mainly attributable to contract expirations and other
sales volume decreases ($66.5 million) and, to a lesser extent, revised
actuarial estimates to recognize plan changes for retiree medical benefits
($9.3 million).  These factors were partially offset in 1995 by higher
operating and legal costs associated with the CP&L and SIGECO contract disputes
($10.5 million), and updated estimates for postemployment and workers'
compensation costs to reflect more recent claims experience ($8.6 million).

     Costs at inactive properties - The 1996 cost decrease resulted chiefly
from donation of Old Ben Mine #25 to a coal museum, which included discharge of
the mine's  reclamation liability, plus the sale of Old Ben Mine #1 and Old Ben
Mine #2.  These improvements were partially offset by the idling of Old Ben
Mine #11 and closing of Old Ben Mine #24, Old Ben Mine #20, and Old Ben Mine
#26.  The cost increase from 1994 to 1995 primarily reflects the closing of Old
Ben Mine #1 and the idling of Wolf Creek Mine #4.

                                       35


<PAGE>   38





     Selling, general and administrative expenses - Higher 1996 expenses were
largely due to expanded business development activities.  The 1995 increase
primarily reflects higher legal costs associated with the shareholder suits,
contractual disputes, and other litigation.

     Other costs and expenses - These amounts are directly associated with
"other revenues" described above.  The changes in 1996 and 1995 are mainly
attributable to the timing of federal government cost-sharing receipts at the
Encoal clean coal technology plant in Wyoming.

     Gain on curtailment of postretirement benefits - The 1996 curtailment gain
represents a reduction in the Company's recorded obligation to provide retiree
medical benefits to certain former Midwestern mining employees as a result of
their re-employment or termination prior to vesting.

     Reduction in accrued pneumoconiosis benefits - The 1995 liability decrease
was based on an updated actuarial estimate that recognized a positive trend in
claims experience.

     Provision for asset impairments and accelerated mine closings - In July
1995, Old Ben closed  Old Ben Mine #1, which resulted in a $32.3 million charge
to earnings.  In October 1995, the Company idled the high-cost Wolf Creek Mine
#4 and took a related $33.3 million charge to earnings.  In December 1995, the
Company recorded impairment losses totaling $49.1 million upon idling Old Ben
Mine #11 and developing plans to close Old Ben Mine #24 and Old Ben Mine #26.

OTHER

     Proceeds from contract settlement - The Company received cash payments
totaling $45.5 million in 1995 in connection with the SIGECO contract
settlement.

     Net interest expense - Expense reductions in 1996 and 1995 primarily
resulted from lower average borrowings.

     Income taxes (benefit) - Higher pretax income was responsible for the
increase in income taxes from 1995 to 1996.  The Company's effective tax rate
was 16.3% in 1996, versus 28.6% in 1995 and 28.8% in 1994.  The 1996 rate
improvement was mainly due to the benefits of tax loss carryforwards.  The 1995
income tax decrease reflects lower pretax income.

     The valuation allowance on the deferred tax asset decreased $8.9 million
from 1995 to 1996, mainly because of reduced deductible temporary differences
(mostly reclamation liabilities), use of net operating loss carryforwards, and
a partially offsetting increase in alternative minimum tax credit
carryforwards.

     Extraordinary loss on early retirement of debt - The loss in 1994 consists
of yield maintenance premiums and a write-off of deferred financing costs
associated with prepayment of a portion of the 8.61% senior secured notes.

                              FINANCIAL CONDITION

     The Company's financial condition remains very strong.  As of December 31,
1996, cash and cash equivalents totaled $108.3 million, up from $13.1 million
at December 31, 1995.  Cash generated from operating activities rose to $131.9
million in 1996, compared to $114.8 million in 1995 (excluding proceeds from
1995 contract settlement), and $91.1 million in 1994.

     Working capital was $84.9 million and $29.8 million at December 31, 1996
and 1995, respectively.  Inventory levels decreased $9.0 million in 1996,
primarily because of mine closings in

                                       36


<PAGE>   39



Illinois and Indiana.  Lower average daily sales and the timing of receipts
contributed to the $16.1 million trade accounts receivable decrease from 1995
to 1996.

     Investing activities consumed $30.5 million in cash during 1996, compared
to $51.8 million in 1995 and $41.7 million in 1994.  The Company continued to
invest in property, plant and equipment needed to support business growth and
improve productivity.  The Company expects to spend approximately $110.0
million for capital additions during 1997, including approximately $58.6
million for continued development of the North Rochelle mine, but excluding
major acquisitions and anticipated expenditures associated with the development
of the proposed commercial LFC plant in the Powder River Basin.  The Company
anticipates that, if Louisiana Generating LLC is successful in its bid to
purchase the non-nuclear assets of Cajun Electric Power Cooperative, Inc., the
Company's estimated investment in Louisiana Generating LLC will be
approximately $60 million to $70 million.

     The Company used $6.1 million in cash for financing activities in 1996,
down from $111.0 million in 1995 and $96.8 million in 1994.  The major
application of cash in 1996 was dividend payments.  Financing applications of
cash in 1995 included debt repayments and, to a lesser extent, dividends.  Cash
applications in 1994 included debt repayments, funded in part by the $68.6
million net proceeds from the Company's initial public stock offering.

     The ratio of outstanding debt to total capital was 2.60 to 1.00 at
December 31, 1996 compared to 4.23 to 1.00 at December 31, 1995 and 4.58 to
1.00 at December 31, 1994.  The 1996 ratio improvement reflects higher 1996
earnings while the 1995 decrease was principally due to debt reductions.

     Other sources of liquidity include a $200.0 million revolving credit
facility, of which $162.7 million was available as of December 31, 1996.  The
Company is currently negotiating a new credit facility which would replace the
existing Credit Agreement.  The Company believes that it has the financial
resources and borrowing capacity needed to meet business requirements in the
foreseeable future.

                                    OUTLOOK

     "Safe Harbor" Statement Under the Private Securities Litigation Reform
Act of 1995 - The following Outlook and other items of this Report on Form 10-K
contain forward-looking statements that are subject to risks and uncertainties
inherent in the Company's business.  The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth herein and elsewhere in
documents filed with the Securities and Exchange Commission, including, without
limitation, the Company's Forms 10-K and 10-Q.  Forward-looking statements made
by the Company are used to describe business operations that fall into six
areas of operation.  Those operations are subject to factors that can
negatively or positively affect the Company's results as follows:


-    Coal:  The Company's coal operations can be negatively or positively
     impacted by factors including, but not limited to, weather; unexpected
     maintenance problems; variations in coal seam thickness, amount of
     overburden, rock and other natural materials; disruption of transportation
     services; labor problems; disputes and/or interruption of deliveries under
     coal contracts due to circumstances affecting the customer; regulatory
     uncertainties; legal proceedings; and other conditions.

-    Technology:  The Company's technology operations, specifically the LFC
     clean coal technology, can be negatively or positively impacted by factors
     including, without limitation, the unproved commercial viability of the
     technology being developed; permitting and other regulatory uncertainties;
     the ability to obtain financing on acceptable terms; competition in the
     marketplace and uncertain demand for the output produced by the LFC
     process; engineering and construction risks; and other conditions.

                                      37

<PAGE>   40


-    Power:  The Company's operations in this area, which are in start-up or
     pre-start-up phases, can be negatively or positively impacted by factors
     including, but not limited to, whether the Company's joint proposal to
     acquire out of bankruptcy the non-nuclear assets of Cajun Electric Power
     Cooperative, Inc. is confirmed by the bankruptcy court and approved by the
     relevant regulatory authorities; regulatory changes that limit or slow the
     advance of deregulation in the utility marketplace; competition in the
     wholesale power market; interruptions and uncertainties relating to fuel
     supply and transportation; and other conditions.

-    Environmental and Engineering:  The Company's operations in businesses
     related to environmental and engineering services, which are in the
     start-up phase, can be negatively or positively impacted by factors
     including, without limitation, permitting and other regulatory
     uncertainties; availability of technology needed to perform environmental
     services; potential liability exposure related to the handling of
     hazardous materials; demand for services offered by the Company; legal
     proceedings; and other conditions.

-    Asset Management:  The Company's operations in the area of asset
     management can be negatively or positively impacted by factors including,
     but not limited to, weather; unexpected maintenance problems; zoning,
     permitting and other regulatory uncertainties; legal proceedings; and
     other conditions.

-    International:  The Company's international operations can be negatively
     or positively impacted by factors including, without limitation, political
     changes; regulatory uncertainties; currency fluctuations; legal
     proceedings; and other conditions.

     Estimates for 1997 - Zeigler expects 1997 to be another strong year.
Management estimates that total 1997 revenues will range between $700.0 and
$750.0 million.  Revenue growth in the power and asset management segments is
expected to help offset the loss of coal sales attributable to mine closings
($120.2 million per table below) and non-recurring 1996 sales to Western
Farmers Electric Cooperative ($20.6 million).  The Company's five largest
customers are expected to account for approximately 52% of total 1997 revenues,
up from 51% in 1996.

     Management has targeted further productivity gains in the coal segment, as
well as reductions in reclamation, interest and long-term benefit costs.
Selling, general and administrative expenses are expected to rise modestly
because of increased business development activity.  The Company's estimated
effective tax rate for 1997 is approximately 18%.  The Company expects that
capital expenditures, excluding major acquisitions, will increase to
approximately $110.0 million in 1997.  In addition to planned expenditures,
incremental strategic investments will be considered on a case-by-case basis.
Depreciation, depletion and amortization expense is expected to range between
$60.0 and $70.0 million for the year.

     Mine Closings - The following summarizes the 1996 revenues and pretax
earnings from the three mines closed during 1996.  These results are not
representative of what the impact of these operating changes will be on the
1997 financial results because coal provided under certain contracts from a
closed or idled mine may be provided from other sources and the costs incurred
with respect to a closed or idled mine will differ significantly from costs
associated with an operating mine:


<TABLE>
<CAPTION>
                                                   Pretax Earnings
                                         Revenues       (Loss)
                                         --------      --------
    <S>                                   <C>          <C>
    Old Ben Mine #24 ..................   $14,561      $ 2,961
    Old Ben Mine #20 ..................    31,281      (11,533)
    Old Ben Mine #26 ..................    74,329       19,083
</TABLE>


                                      38

<PAGE>   41




     Inflation - Inflation may have a significant effect on the Company's
revenues and expenses.  Most of the Company's long-term contracts provide for
the adjustment over time of certain components of revenue either through
indices, formulas or direct pass-through of costs.  These long-term contract
provisions help mitigate some of the effects of increasing costs.  Due to the
capital-intensive nature of the Company's activities, inflation may also have a
significant impact on the development or acquisition of mining operations, on
the future cost of final mine reclamation and the satisfaction of other
long-term liabilities, such as health care or pneumoconiosis (black lung)
benefits.



                                       39


<PAGE>   42




              ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


       Index to Consolidated Financial Statements and Supplementary Data


                                                                      Page

      Independent Auditors' Report ..................................  41

      Financial Statements:

      Consolidated Statements of Operations, Years Ended December 31,
        1996, 1995 and 1994 .........................................  42

      Consolidated Balance Sheets, December 31, 1996 and 1995 .......  43

      Consolidated Statements of Cash Flows, Years Ended December 31,
        1996, 1995 and 1994 .........................................  45

      Consolidated Statements of Shareholders' Equity,
        Years Ended December 31, 1996, 1995 and 1994 ................  46

      Notes to Consolidated Financial Statements ....................  47








                                       40


<PAGE>   43




                          INDEPENDENT AUDITORS' REPORT




To Zeigler Coal Holding Company:

     We have audited the accompanying consolidated balance sheets of Zeigler
Coal Holding Company and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, cash flows and shareholders'
equity for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.









DELOITTE & TOUCHE LLP

St. Louis, Missouri
January 30, 1997




                                       41


<PAGE>   44





                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                (Amounts in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                           -----------------------
                                                                1996               1995               1994
                                                                ----               ----               ----
<S>                                                         <C>                <C>                <C>
REVENUES:
  Coal sales (Notes 13 and 16) .............................  $698,523           $754,975           $849,447
  Other revenues ...........................................    33,101             28,128             21,443
                                                              --------           --------           --------
     Total revenues ........................................   731,624            783,103            870,890
                                                              --------           --------           --------

COSTS AND EXPENSES:
  Cost of coal sales .......................................   597,100            663,633            725,652
  Cost at inactive properties ..............................    16,066             22,599             13,195
  Selling, general and administrative expenses .............    21,271             20,740             20,209
  Other costs and expenses .................................    22,514             18,487             22,682
  Gain on curtailment of postretirement benefits (Note 7) ..   (16,295)              -                  -
  Reduction in accrued pneumoconiosis benefits (Note 8) ....      -               (23,299)              -
  Provision for asset impairments and accelerated
    mine closings (Note 10)                                       -               114,662               -
                                                              --------           --------           --------
Total costs and expenses ...................................   640,656            816,822            781,738
                                                              --------           --------           --------
OTHER INCOME:
 Proceeds from contract settlement .........................      -                45,500               -
                                                              --------           --------           --------

OPERATING INCOME ...........................................    90,968             11,781             89,152

NET INTEREST EXPENSE .......................................    21,704             27,478             42,136
                                                              --------           --------           --------

INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ...    69,264            (15,697)            47,016

INCOME TAXES (BENEFIT) (Note 3) ............................    11,300             (4,484)            13,523
                                                              --------           --------           --------

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ....................    57,964            (11,213)            33,493

EXTRAORDINARY ITEM - Loss on early retirement of debt, net
  of taxes (Note 4) ..........................................    -                  -                 8,400
                                                              --------           --------           --------

NET INCOME (LOSS) ..........................................  $ 57,964           ($11,213)          $ 25,093
                                                              ========           ========           ========

WEIGHTED AVERAGE SHARES OUTSTANDING ........................    28,362             28,356             24,882

NET INCOME (LOSS) PER COMMON SHARE:
  Income (loss) before extraordinary item ..................     $2.04             ($0.40)             $1.35
  Extraordinary item .......................................      -                   -                (0.34)
                                                              --------           --------           --------
  Net income (loss) per common share .......................     $2.04             ($0.40)             $1.01
                                                              ========           ========           ========

</TABLE>










                See notes to consolidated financial statements.

                                       42


<PAGE>   45




                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                (Amounts in thousands, except per share amount)

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                    1996         1995
                                                                    ----         ----
                                     ASSETS
                                     ------
<S>                                                             <C>          <C>
CURRENT ASSETS:
Cash and cash equivalents ....................................  $  108,321   $   13,119
Receivables:
  Trade accounts receivable (net of allowances of $2,840
    and $2,611) ..............................................      51,122       67,175
  Other receivables ..........................................       3,974        4,961
                                                                ----------   ----------
       Total receivables, net ................................      55,096       72,136

Inventories:
  Coal finished goods ........................................      12,525       20,050
  Coal work in process .......................................       8,744        7,343
  Mine supplies ..............................................      20,093       22,966
                                                                ----------   ----------
      Total inventories ......................................      41,362       50,359

Deferred income taxes (Note 3) ...............................       9,747        8,357
Other current assets .........................................       3,426        3,377
                                                                ----------   ----------
      Total current assets ...................................     217,952      147,348
                                                                ----------   ----------

PROPERTY, PLANT AND EQUIPMENT:
  Land and mineral rights ....................................     627,369      633,091
  Prepaid royalties ..........................................      21,705       21,303
  Plant and equipment ........................................     493,962      506,976
                                                                ----------   ----------
      Total at cost ..........................................   1,143,036    1,161,370

      Less - Accumulated depreciation, depletion
        and amortization .....................................    (324,166)    (302,714)
                                                                ----------   ----------
      Property, plant and equipment, net .....................     818,870      858,656
                                                                ----------   ----------

OTHER ASSETS:
  Prepaid pension expense (Note 6) ...........................       7,056        9,555
  Deferred financing costs, net ..............................       1,835        2,674
  Deferred income taxes (Note 3) .............................        -           2,242
  Other long-term assets .....................................       4,912        4,766
                                                                ----------   ----------
      Total other assets .....................................      13,803       19,237
                                                                ----------   ----------

TOTAL ASSETS .................................................  $1,050,625   $1,025,241
                                                                ==========   ==========
</TABLE>





                See notes to consolidated financial statements.

                                       43


<PAGE>   46




                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                (Amounts in thousands, except per share amount)


<TABLE>
<CAPTION>
                                                                               December 31,
                                                                               ------------
                                                                            1996         1995
                                                                            ----         ----
                     LIABILITIES AND SHAREHOLDERS' EQUITY
                     ------------------------------------
<S>                                                                     <C>         <C>
CURRENT LIABILITIES:
  Accounts payable - trade ...........................................  $   38,895  $   44,434
  Dividends payable ..................................................       2,128       1,418
  Income taxes payable ...............................................       2,683       2,271
  Other taxes payable ................................................      22,057      24,291
  Accrued payroll and related benefits ...............................      23,807      25,264
  Other accrued expenses (Note 6) ....................................      43,452      19,890
                                                                        ----------  ----------
Total current liabilities ............................................     133,022     117,568
LONG-TERM DEBT (Notes 4 and 5) .......................................     344,770     344,770
ACCRUED POSTRETIREMENT BENEFIT OBLIGATIONS (Note 7) ..................     245,385     255,839
ACCRUED PNEUMOCONIOSIS BENEFITS (Note 8) .............................      46,256      49,424
ACCRUED MINE CLOSING COSTS (Note 10) .................................      75,663     105,676
DEFERRED INCOME TAXES (Note 3) .......................................      13,033        -
OTHER LONG-TERM LIABILITIES:
  Accrued workers' compensation ......................................      36,617      30,766
  Accrued postemployment benefits ....................................      18,095      17,284
  Stock appreciation units (Note 6) ..................................        -         15,075
  Other ..............................................................       5,178       7,353
                                                                        ----------  ----------

       Total other long-term liabilities .............................      59,890      70,478
                                                                        ----------  ----------

COMMITMENTS AND CONTINGENCIES (Notes 15 and 16) ......................        -           -
                                                                        ----------  ----------

       Total liabilities .............................................     918,019     943,755
                                                                        ----------  ----------

SHAREHOLDERS' EQUITY:
  Preferred stock (Note 12) ..........................................        -           -
  Common stock - $0.01 par value per share - 50,000 shares authorized;
   28,377 shares issued and outstanding as of December 31, 1996
   and 28,356 as of December 31, 1995 ................................         284         283
  Capital in excess of par value .....................................      72,191      71,945
  Retained earnings (Note 4) .........................................      60,131       9,258
                                                                        ----------  ----------
      Total shareholders' equity .....................................     132,606      81,486
                                                                        ----------  ----------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...........................  $1,050,625  $1,025,241
                                                                        ==========  ==========
</TABLE>





                See notes to consolidated financial statements.

                                       44


<PAGE>   47




                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                               1996            1995          1994
                                                                               ----            ----          ----
<S>                                                                          <C>            <C>            <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................           $57,964        ($11,213)       $25,093
                                                                            --------       ---------       --------
Adjustments for differences between net income and cash
flows from operating activities:
  Extraordinary item .............................................              -               -             7,292
  Depreciation, depletion and other amortization .................            60,134          68,576         69,369
  Amortization of deferred financing costs .......................               838             838          4,708
  Postretirement benefits ........................................           (10,454)          3,318         12,901
  Gain on sales of property, plant and equipment .................            (5,062)         (1,462)            (2)
  Prepaid pension costs ..........................................             2,499           2,943          2,291
  Pneumoconiosis benefits ........................................            (3,168)        (23,754)        (5,199)
  Postemployment benefits ........................................               811           3,485         (3,956)
  Workers' compensation ..........................................             5,851           8,905          4,251
  Mine closing costs .............................................            (6,539)         (9,654)       (17,547)
  Provision for asset impairments and accelerated mine closings ..              -            114,662           -
  Stock appreciation units .......................................           (10,172)          2,492          8,383
  Deferred income taxes ..........................................            13,885         (16,984)         7,145
  Other noncash items ............................................            (4,892)         (1,489)          (186)
  Changes in working capital components:
    (Increase) decrease in receivables ...........................            16,660          15,502        (11,937)
    (Increase) decrease in inventories ...........................             8,584           7,809        (11,705)
    (Increase) decrease in other current assets ..................              (441)          2,353          4,604
    Increase (decrease) in accounts payable - trade ..............            (7,292)         (7,365)         3,236
    Increase (decrease) in accrued expenses and other current
     liabilities .................................................            12,668           1,323         (7,595)
                                                                            --------       ---------       --------
      (Increase) decrease in working capital .....................            30,179          19,622        (23,397)
                                                                            --------       ---------       --------

  Total adjustments to net income ................................            73,910         171,498         66,053
                                                                            --------       ---------       --------

 Net cash provided by operating activities .......................           131,874         160,285         91,146
                                                                            --------       ---------       --------

INVESTING ACTIVITIES:
 Additions to property, plant and equipment ......................           (31,427)        (56,334)       (45,640)
 Cash paid for sale of Indiana assets ............................            (7,000)           -              -
 Proceeds from sales of property, plant and equipment ............             7,890           4,545          3,961
                                                                            --------       ---------       --------
 Net cash used in investing activities ...........................           (30,537)        (51,789)       (41,679)
                                                                            --------       ---------       --------

FINANCING ACTIVITIES:
Net proceeds from public offering of common stock ................              -               -            68,640
Proceeds from common stock issued under stock option plan ........               246            -                 5
Payment of dividends .............................................            (6,381)         (5,672)             -
Net repayments of long-term debt .................................              -           (105,288)      (164,778)
Payment of debt acquisition costs ................................              -               -              (640)
                                                                            --------       ---------       --------
 Net cash used in financing activities ...........................            (6,135)       (110,960)       (96,773)
                                                                            --------       ---------       --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............            95,202          (2,464)       (47,306)

 CASH AND CASH EQUIVALENTS, BEGINNING ............................            13,119          15,583         62,889
                                                                            --------       ---------       --------
 CASH AND CASH EQUIVALENTS, ENDING ...............................          $108,321         $13,119        $15,583
                                                                            ========       =========       ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid (received) during period for:
     Interest ....................................................           $22,804         $27,372        $40,908
     Income taxes, net of refunds ................................            (2,997)         10,549           (826)
</TABLE>



                See notes to consolidated financial statements.

                                       45


<PAGE>   48




                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                (Amounts in thousands, except per share amounts)




<TABLE>
<CAPTION>
                                                                                                      Total
                                                                             Capital in               Share-
                                                                     Common   Excess of   Retained   holders'
                                                                      Stock   Par Value   Earnings    Equity
                                                                     ------  ----------  ---------  ---------
<S>                                                                  <C>     <C>         <C>        <C>
BALANCE, JANUARY 1, 1994 ..........................................    $233     $ 3,350  $  2,468   $  6,051

   Issuance of 32 shares of common stock under stock option plan ..     -             5       -          5
   Initial public offering of 5,000 shares of common stock ........      50      68,590       -       68,640
   Net income .....................................................     -           -      25,093     25,093
   Cash dividends declared ($.05 per share) .......................     -           -      (1,418)    (1,418)
                                                                       ----     -------  --------   --------

BALANCE, DECEMBER 31, 1994 ........................................     283      71,945    26,143     98,371

   Net loss .......................................................     -           -     (11,213)   (11,213)
   Cash dividends declared ($.20 per share) .......................     -           -      (5,672)    (5,672)
                                                                       ----     -------  --------   --------

BALANCE, DECEMBER 31, 1995 ........................................     283      71,945     9,258     81,486

  Issuance of 22 shares of common stock under stock option plan ...       1         246       -          247
  Net income ......................................................     -           -      57,964     57,964
  Cash dividends declared ($.25 per share) ........................     -           -      (7,091)    (7,091)
                                                                       ----     -------  --------   --------

BALANCE, DECEMBER 31, 1996 ........................................    $284     $72,191  $ 60,131   $132,606
                                                                       ====     =======  ========   ========
</TABLE>



                See notes to consolidated financial statements.


                                       46


<PAGE>   49




                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994

           (Amounts in thousands, except share and per share amounts)



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation - The consolidated financial statements
include the accounts of Zeigler Coal Holding Company and Subsidiaries (Zeigler
or the "Company"), all of which are wholly-owned.  All material intercompany
transactions and accounts have been eliminated in consolidation.

     Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
balance sheet date, and the reported amounts of revenues and expenses during
the year.  Actual results could differ from those estimates.

     Cash and Cash Equivalents - Cash and cash equivalents include cash on
deposit and highly liquid investments with a maturity of three months or less.

     Inventories - Coal inventory is valued using the average cost method and
is stated at the lower of cost or market.  Coal inventory costs include labor,
equipment costs and operating overhead.  Coal work in process includes
partially uncovered coal and unprocessed coal.  Mine supply inventory is valued
using the average cost method and is stated at the lower of cost or market.

     Property, Plant and Equipment - Additions and betterments are capitalized
at cost.  Maintenance and repair costs are expensed as incurred.  Depreciation
of plant and equipment is computed principally by the straight-line method over
the expected useful lives of the assets.

     Mine development costs are capitalized.  Exploration costs are expensed as
incurred.  Depletion of mineral rights and capitalized mine development costs
is provided on the basis of tonnage mined in relation to total estimated
recoverable tonnage.

     Zeigler pays royalties to certain landowners and holders of mineral
interests for the rights to perform certain mining activities.  Amounts
advanced to landowners, which are recoupable against future production, are
capitalized; as the coal is mined, these prepayments are offset against earned
royalties and included in the cost of coal sales.

     Deferred Financing Costs - The costs of issuing and restructuring
long-term debt are capitalized and amortized using the effective interest
method over the term of the related debt.

     Income Taxes - Zeigler accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes.  Under SFAS No. 109, deferred taxes are established for the
temporary differences between the financial reporting basis and the tax basis
of Zeigler's assets and liabilities at enacted tax rates expected to be in
effect when such amounts are realized or settled.

                                       47


<PAGE>   50




                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     Postretirement Benefits Other Than Pensions - As prescribed by Statement
of Financial Accounting Standards (SFAS) No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, Zeigler accrues, based on annual
independent actuarial valuations, for the expected costs of providing
postretirement benefits other than pensions, primarily medical benefits, during
an employee's actual working career until vested.

     Pneumoconiosis Benefits - Certain Zeigler subsidiaries are liable under
the Federal Black Lung Benefits Act of 1972, as amended, to pay pneumoconiosis
(black lung) benefits to eligible employees, former employees and their
dependents for claims filed after June 30, 1973.  These subsidiaries are also
liable under certain state statutes for black lung claims.  Zeigler acts as
self-insurer for most federal and state black lung benefits.  The remaining
portion of black lung claims are covered by state insurance funds into which
Zeigler pays premiums.

     The accrual for self-insured pneumoconiosis benefits is adjusted to equal
the present value of future claim payments, determined as of the beginning of
the year, based on outside actuarial valuations performed annually.

     Postemployment Benefits - Zeigler provides certain postemployment
benefits, primarily long-term disability and medical benefits, to former and
inactive employees and their dependents during the time period following
employment but before retirement.  The Company accrues the discounted present
value of expected future benefits, determined as of the beginning of the year,
based on annual outside actuarial valuations.

     Reclamation and Mine Closing Costs - Zeigler provides for the estimated
costs of future mine closings over the expected lives of active mines.  Those
costs relate to sealing portals at deep mines and to reclaiming the final pit
and support acreage at surface mines.  Other costs common to both types of
mining are related to removing or covering refuse piles and slurry (or
settling) ponds and dismantling preparation plants and other facilities.  The
regular provision for future mine closing costs is calculated under the
units-of-production method based on a per ton charge determined by dividing
estimated unrecorded closing costs by estimated remaining recoverable tons.
These estimates are updated annually and the accrual rate is adjusted on a
prospective basis accordingly.  The cost of restoring land and water resources
affected by normal ongoing surface mining operations is expensed as incurred.

     Asset Impairments and Accelerated Mine Closing Accruals - In certain
situations, expected mine lives are shortened because of changes to planned
operations.  When that occurs, and it is determined that the mine's underlying
costs are not recoverable in the future, reclamation and mine closing
obligations are accelerated and the mine closing accrual is increased
accordingly.  Also, to the extent that it is determined that asset carrying
values will not be recoverable during a shorter mine life, a provision for such
impairment is recognized.  In addition, Zeigler adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of in 1995.  SFAS
No. 121 expanded the Company's criteria for loss recognition, and provides
methods for both determining when an impairment has occurred and for measuring
the amount of the impairment.  SFAS No. 121 requires that projected future cash
flows from use and disposition of all the Company's assets be compared with the
carrying amounts of those assets.  When the sum of projected cash flows is less
than the carrying amount, impairment losses are recognized.

     Revenue Recognition - Coal sales are recognized at contract prices at the
time title transfers to the customer.  Coal sales are reduced and an allowance
is established for pricing disputes.  Revenue at the import/export terminals is
recognized at the time of throughput.



                                       48

<PAGE>   51




                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     Other Revenues, Costs and Expenses - Other revenues represent amounts
primarily related to the terminals, coal leases to third parties, farming,
timber, gains on sales of surplus assets, and oil and gas royalties.  Costs and
expenses related to other revenues and those related to Zeigler's clean coal
plant are included in other costs and expenses.

     Stock-Based Compensation - In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation,
which required adoption in 1996.  The new standard defines a fair value method
of accounting for stock options and similar equity instruments.  Pursuant to
the new standard, companies are encouraged, but not required, to adopt the fair
value method of accounting for employee stock-based transactions.  Companies
are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued
to Employees, but are required to disclose in a note to the financial
statements pro forma net income and earnings per share as if the Company had
applied the new method of accounting.  The accounting requirements of the new
method are effective for all employee awards granted after the beginning of the
fiscal year of adoption.  The Company has elected to continue to account for
such transactions under APB No. 25.

     Net Income Per Common Share - Earnings per common share are determined by
dividing the weighted average number of common shares outstanding during the
year into net income.  Common share equivalents, in the form of stock options,
are excluded from the calculations since they have no material dilutive effect
on per share figures.

     Reclassifications - Certain amounts in the 1995 and 1994 financial
statements and notes have been reclassified to conform with the 1996
presentation.


2.  DESCRIPTION OF BUSINESS

     Zeigler is engaged principally in the mining of coal for sale primarily to
electric utilities in the United States.

3.  INCOME TAXES

     Income tax expense (benefit) is comprised of the following:


<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                                1996       1995     1994
                                               --------  --------  -------
   <S>                                         <C>       <C>       <C>
   Current:
     Federal ................................  ($2,179)   $10,521   $7,975
     State ..................................     (408)     1,979   (1,252)
   Deferred:
     Federal ................................   12,151    (14,862)   5,950
     State ..................................    1,736     (2,122)     850
                                              --------   --------  -------
         Total ..............................  $11,300    ($4,484) $13,523
                                              ========   ========  =======
</TABLE>




                                       49


<PAGE>   52







                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate of 35% to income before income
taxes and extraordinary item due to the following:


<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                               ----------------------------
                                                 1996      1995      1994
    <S>                                        <C>       <C>       <C>
    Computed tax at federal statutory rate ..   $24,246   ($5,494)  $16,456
    State tax - net of federal benefits .....     2,162    (4,758)    1,345
    Percentage depletion ....................    (8,164)  (10,469)  (12,621)
    Change in valuation allowance ...........    (8,889)   14,113     5,514
    Other - net .............................     1,945     2,124     2,829
                                               --------  --------  --------
    Income tax expense (benefit) provided ...   $11,300   ($4,484)  $13,523
                                               ========  ========  ========
</TABLE>


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


<TABLE>
<CAPTION>
                                                              December 31,
                                                            1996       1995
                                                          --------   --------
<S>                                                       <C>        <C>
Deferred tax liabilities related to:
  Property and equipment ...............................  $127,798   $120,601
  Land and mineral rights ..............................    31,666     35,805
  Other ................................................    11,592      9,305
                                                          --------   --------
       Total deferred tax liability ....................   171,056    165,711
                                                          --------   --------
Deferred tax assets related to:
  Accrued mine closing costs ...........................    23,730     35,654
  Accrued pneumoconiosis benefits ......................    18,344     19,769
  Accrued workers' compensation costs ..................    14,647     12,306
  Accrued postretirement benefits ......................    98,154    102,336
  Other ................................................    21,812     27,262
  Alternative minimum tax credit carryforwards .........    32,419     29,208
                                                          --------   --------

       Total deferred tax asset before valuation
         allowance .....................................   209,106    226,535

       Less - Valuation allowance ......................   (41,336)   (50,225)
                                                          --------   --------
       Total deferred tax asset ........................   167,770    176,310
                                                          --------   --------
Net deferred tax (liability) asset .....................   ($3,286)  $ 10,599
                                                          ========   ========

Shown as:
  Current deferred tax asset ...........................  $  9,747   $  8,357
  Noncurrent deferred tax (liability) asset ............   (13,033)     2,242
</TABLE>


     The Company has a net deferred tax (liability) asset of ($3,286) and
$10,599 at December 31, 1996 and 1995, respectively.  Realization of deferred
tax assets is dependent on generating sufficient taxable income in the future.
Although realization is not assured, the deferred tax assets have been reduced
by a valuation allowance to the amount considered more likely than not to be
realized.



                                       50


<PAGE>   53







                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


4.  LONG-TERM DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                 December 31,
                                                1996      1995
                                                ----      ----
      <S>                                     <C>       <C>
      8.61% senior secured notes ...........  $198,970  $198,970
      Industrial revenue bonds .............   145,800   145,800
                                              --------  --------
      Total ................................  $344,770  $344,770
                                              ========  ========

</TABLE>

     8.61% Senior Secured Notes - The 8.61% senior secured notes are payable to
a group of insurance companies and other financial institutions under Note
Purchase Agreements dated as of November 16, 1992.  Interest on the notes is
payable semiannually.  Annual principal payments begin on November 15, 1998 at
the rate of 20% of the original outstanding amount of $400,000.  The notes
require Zeigler to offer to make mandatory prepayments in the event Zeigler
generates excess cash flow, as defined in the Note Purchase Agreements, or
makes asset sales above specified levels.  The amount of excess cash flow that
must be offered as a prepayment to the Noteholders is based upon the percentage
of debt due to the Noteholders divided by the total indebtedness to both the
Noteholders and the lenders under the Credit Agreement described in the third
following paragraph.  The Noteholders will be offered a prepayment of
approximately $25,050 in 1997 based on free cash flow, as defined, for 1996.
The Noteholders are not required to accept the prepayments.  In 1996, Zeigler
offered the Noteholders a prepayment of approximately $28,700 pursuant to the
free cash flow provisions, as defined for 1995, of the Note Purchase
Agreements.  None of the prepayments offered in 1996 were accepted by the
Noteholders.

     The notes are collateralized by a first mortgage on substantially all of
Zeigler's assets.  The collateral is shared pari passu with the lenders
involved with the Credit Agreement.  The Note Purchase Agreements require
Zeigler to maintain specific ratios including current ratio, leverage ratio and
fixed charge coverage ratio and contain restrictive covenants which limit
indebtedness, investments, dividends, sales of assets and other actions.  The
notes may be prepaid at Zeigler's discretion; however, the Noteholders are
entitled to receive a prepayment premium that protects the yield to the
Noteholders over the remainder of the term of notes.  In effect, this yield
maintenance premium is the net present value of the reduced yield to the
Noteholders over the remaining scheduled term of the Notes based upon an
assumed reinvestment rate of 50 basis points (0.5%) over the then available
yield for U.S. Treasury securities with a maturity equal to that of the Senior
Notes.  No yield maintenance premium is payable on mandatory prepayments out of
excess cash flow.  In the event a person or group of persons (other than the
shareholders at the time of the issuance of the Senior Notes) acquires more
than 50% of the outstanding Common Stock of  Zeigler and, within 60 days
following such acquisition, the Senior Notes are not rated investment grade by
at least two rating agencies (at least one of which must be Standard & Poor's
Corporation or Moody's Investors Services, Inc.), Zeigler is required to offer
to prepay the Senior Notes, together with the yield maintenance premium.  On
November 15, 1994, Zeigler prepaid $200,000 to the Noteholders, using proceeds
from Zeigler's initial public stock offering, and the Credit Agreement's
revolving credit facility.  A related yield maintenance premium of $3,908 was
also paid to the Noteholders as required by the Note Purchase Agreement.
Accordingly, Zeigler recorded an extraordinary loss of $11,200 ($8,400 net of
taxes) in 1994, consisting of the yield maintenance premium and the write-off
of deferred financing costs related to the early extinguishment of debt.

     Industrial Revenue Bonds - The industrial revenue bonds are floating rate
obligations issued by the Peninsula Ports Authority of Virginia ($115,000) and
Charleston County, South Carolina ($30,800).  The obligation by the Peninsula
Ports Authority is guaranteed by Shell Oil Company ("Shell").  The obligation
by Charleston County, South Carolina is backed by a letter of credit for which
the related reimbursement




                                      51

<PAGE>   54


                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     obligation is guaranteed by Shell.  Zeigler reimburses Shell for its costs
in providing the guarantees.  The Shell related guarantees continue until the
related obligations have been paid.  Under a Stock Purchase Agreement dated
September 8, 1992 and a related agreement between Zeigler and Shell, which were
executed at the same time, Zeigler is obligated to join Shell in negotiating a
release of Shell's guaranty effective no later than November 1997.  If such
release is not obtained, Zeigler is obligated to arrange collateral security
for Shell as Shell may reasonably demand.  The principal of the obligation by
the Peninsula Ports Authority of Virginia is due in one lump-sum payment on
December 1, 2005, and the principal of the obligation by Charleston County,
South Carolina is due in one lump-sum payment on January 1, 2007.  Interest on
these obligations is payable monthly.  The weighted average interest rate for
these borrowings was 3.38% and 3.74% as of December 31, 1996 and 1995,
respectively.

     Credit Agreement - On October 19, 1994, Zeigler amended and restated its
Credit Agreement dated November 16, 1992, as previously amended and restated on
March 15, 1994.  The new Credit Agreement provides for a $200,000 revolving
credit facility, with a three year term, and can be used for both loans and
letters of credit. As of December 31, 1996, Zeigler had used $37,346 out of the
total $200,000 revolving credit facility for outstanding letters of credit.
The provisions of the Credit Agreement require a commitment fee to be paid on
the unused portion of the revolving credit facility.  Interest is paid based on
floating rates which fluctuate based on the prime rate, or the London Interbank
Offer Rate (LIBOR) plus various increments.  The interest rate was 6.31% at
December 31, 1996.  The Credit Agreement is collateralized by a first mortgage
on substantially all of Zeigler's assets.  The collateral is shared pari passu
with the holders of the Senior Secured Notes.  The Credit Agreement requires
Zeigler to maintain specific ratios including current ratio, fixed charge
coverage ratio and funded debt to cash flow ratio, and contains restrictive
covenants which limit capital expenditures, minimum net worth, mergers and
consolidations, sale of assets and subsidiary stock, liens, acquisitions,
investments and subsidiary indebtedness.  On February 29, 1996, the Credit
Agreement was amended to restrict dividends in an aggregate amount to no more
than $40,000 (which is exclusive of dividends declared and paid prior to
January 15, 1996).  The Company is currently negotiating a new $700,000 credit
facility to replace the existing Credit Agreement.


     Maturities - At December 31, 1996, aggregate scheduled maturities of all
long-term debt for each year through 2001 are as follows:


<TABLE>
    <S>                                   <C>
    1997 ................................  $      -
    1998 ................................    80,000
    1999 ................................    80,000
    2000 ................................    38,970
    2001 ................................         -
    Thereafter ..........................   145,800
                                           --------
    Total ...............................  $344,770
                                           ========
</TABLE>

5.  FINANCIAL INSTRUMENTS

     The fair value of Zeigler's long-term debt has been calculated based on
quoted market prices for similar issues or current rates offered to Zeigler for
debt of the remaining maturities.  Long-term debt has an estimated fair value
of $349,451 and $350,910 compared to the carrying amount of $344,770 at
December 31, 1996 and 1995, respectively.  The carrying amount of all other
financial instruments, including cash and cash equivalents, accounts receivable
and accounts payable approximates fair value due to the short-term nature of
these instruments.



                                      52


<PAGE>   55

                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


6.  PENSION AND SAVINGS PLANS

     Salaried Pension Plan - Zeigler has a non-contributory pension plan
covering substantially all employees other than those who are members of the
United Mine Workers of America ("UMWA").  The plan is a cash balance retirement
plan which provides benefits based upon the employee's length of credited
service and compensation during each year of employment.  Zeigler's funding
policy is to make, as a minimum contribution, the equivalent of the minimum
payment required by the Employee Retirement Income Security Act of 1974.

     The pension cost components for the year ended December 31, are as
follows:




<TABLE>
<CAPTION>
                                                          1996           1995          1994
                                                          ----           ----          ----
<S>                                                    <C>              <C>           <C>
Service cost (for benefits earned during the
  year)                                                  $3,543         $3,566        $3,836
Interest cost on projected benefit
  obligations                                             7,321          7,636         7,217
Actual return on plan assets                            (14,043)       (20,889)        1,953
Net amortization and deferral                             5,678         12,630       (11,100)
                                                       --------       --------      --------
    Total                                                $2,499         $2,943        $1,906
                                                       ========       ========      ========

</TABLE>

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

<TABLE>
<CAPTION>
                                                                                             1996               1995
                                                                                             ----               ----
<S>                                                                                       <C>                 <C>
Plan assets at fair value ..........................................................       $105,897           $107,220
                                                                                           --------           --------
Actuarial present value of plan benefits:
  Vested ...........................................................................         84,305             88,876
  Nonvested ........................................................................          3,390              3,889
                                                                                           --------           --------
  Accumulated benefit obligation ...................................................         87,695             92,765
  Additional obligation for future salary increases ................................          7,190              8,131
                                                                                           --------           --------
     Projected benefit obligation ..................................................         94,885            100,896
                                                                                           --------           --------

  Excess of plan assets over projected
    benefit obligation .............................................................         11,012              6,324
  Unrecognized net transition asset ................................................           (548)              (617)
  Unrecognized prior service cost ..................................................            264                287
  Unrecognized net (gain) loss .....................................................         (3,672)             3,561
                                                                                           --------           --------
  Prepaid pension expense ..........................................................       $  7,056           $  9,555
                                                                                           ========           ========
</TABLE>


     The unrecognized net transition asset, representing the excess of the fair
value of plan assets over the projected benefit obligation at the date of
adoption, is being amortized over the average expected future service periods
of employees.


                                      53




<PAGE>   56


                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     Assumptions used in developing the projected benefit obligation as of
December 31, are as follows:


<TABLE>
                                                    1996   1995
                                                    ----   -----
  <S>                                              <C>    <C>
  Discount rate ..................................  7.75%  7.50%
  Rate of compensation increase ..................  4.00%  4.00%
  Rate of return on plan assets ..................  9.50%  9.50%
</TABLE>



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

     UMWA Pension Plan - Old Ben Coal Company ("Old Ben"), a wholly-owned
subsidiary, Marrowbone Development Company and Wolf Creek Collieries Company,
both divisions of Mountaineer Coal Development Company, an indirect subsidiary,
are required under their respective contracts with the UMWA to pay amounts
based on hours worked to the UMWA Pension Plan and Trust, a multi-employer
pension plan covering all employees who are members of the UMWA.  The
accompanying consolidated statements of operations include $2,102, $2,778, and
$1,939 of expense in 1996, 1995, and 1994, respectively, applicable to the
plan.  The National Bituminous Coal Wage Agreement of 1993 ("NBCWA") authorizes
the Bituminous Coal Operators Association to increase the rate of contributions
from employers to assure payment of benefits.  The union contract requires all
currently participating employers to guarantee benefits jointly, but not
severally, with all other currently participating employers.  It is not
practical to determine each subsidiaries' allocable share of the plan's net
assets and accumulated benefits.

     Supplemental Retirement Plan - The Company has a non-qualified
supplemental retirement plan.  The plan provides for incremental pension
payments from the Company's funds so that total pension payments equal amounts
that would have been payable from the Company's salaried pension plan
(described above) if it were not for limitations imposed by income tax
regulations.  The projected benefit obligation relating to this unfunded plan
was $897 and $2,010 at December 31, 1996 and 1995, respectively.  Pension
expense for the plan was $981, $538 and $968 in 1996, 1995 and 1994,
respectively.

     401(k) Plans - Zeigler and certain subsidiaries sponsor savings and
long-term investment plans for substantially all employees other than employees
covered by the contract with the UMWA.  One of the plans will match 50% of the
voluntary contributions up to a maximum contribution of 3% of a participant's
salary with an additional matching contribution subject to certain performance
criteria.  The expense under these plans was $1,391, $1,036, and $1,581 in
1996, 1995 and 1994, respectively.

     Stock Appreciation Units - Zeigler has a long-term incentive plan which
entitles certain officers and key employees to receive a cash award for an
amount equal to the excess of the fair market value of Zeigler's common stock
on the date the unit matures over the base price at the date of grant of the
award.  The plan permits an aggregate of 1,635,200 such stock appreciation
units of which 284,320 and 1,370,880 were outstanding at December 31, 1996 and
1995, respectively. The vesting period ranges from three to five years. During
1996, 1,086,560 stock appreciation units matured.  Costs and expenses include
approximately $2,917, $3,178, and $8,843 of charges in connection with this
plan for 1996, 1995 and 1994, respectively. Outstanding stock appreciation
units with maturities less than one year are included as a component of other
accrued expenses.

                                      54



<PAGE>   57





                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


7.  POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

     UMWA Combined Benefit Fund - Zeigler provides healthcare benefits to
eligible retirees and their dependents.  Retirees who were members of the UMWA
and who retired on or before December 31, 1975 received these benefits from
multi-employer benefit plans.  Old Ben contributed to these funds based on the
number of its retirees in one of the funds and based on hours worked by current
UMWA members for the other fund.  Current and projected operating deficits of
these trusts led to the passage of the Coal Industry Retiree Health Benefit Act
of 1992 (the "Act").  The Act established a new multi-employer benefit trust
that will provide healthcare and life insurance benefits to all beneficiaries
of the earlier trusts who were receiving benefits as of July 20, 1992. The Act
provides for the assignment of beneficiaries to their former employers and any
unassigned beneficiaries to employers based on a formula.  The expense under
these plans, which is recognized as contributions are made, amounted to $2,968,
$3,527, and $2,396  in 1996, 1995 and 1994, respectively.  Based upon an
independent actuarial valuation, Zeigler estimates the amount of its obligation
under the new plan to be approximately $24,757 as of December 31, 1996.

     Zeigler Benefit Plans - Net postretirement healthcare cost for the year
ended December 31, includes the following:


<TABLE>
<CAPTION>
                                                 1996           1995              1994
                                                 ----           ----              ----
<S>                                            <C>             <C>              <C>
Service cost ................................  $ 4,562         $5,027           $ 5,663
Interest cost................................   17,123         17,842            19,798
Amortization of prior service cost ..........   (4,608)        (9,208)           (3,847)
Amortization of unrecognized (gain) loss.....     (573)          (327)              956
                                               -------        -------           -------
  Net periodic postretirement benefit cost...  $16,504        $13,334           $22,570

</TABLE>

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

<TABLE>
<CAPTION>
                                                                   1996             1995
                                                                   ----             ----
<S>                                                              <C>             <C>
Accumulated postretirement benefit obligation:
    Retirees ..............................................      $135,044        $ 127,251
    Fully eligible active employees .......................        53,477           57,877
    Other active employees ................................        52,760           74,039
                                                                 --------         --------
         Total ............................................       241,281          259,167
Unrecognized net gain (loss) ..............................         4,909           (8,401)
Unrecognized prior service cost (benefit) .................          (805)           5,073
                                                                 --------         --------
Accumulated postretirement benefit obligation .............      $245,385         $255,839
                                                                 ========         ========
</TABLE>


     As a result of the re-employment or termination prior to vesting of
certain Midwestern employees, the Company recorded a $16,295 gain related to
the curtailment of its postretirement benefit plan.

     The discount rate used to determine the accumulated postretirement benefit
obligation was 7.5% at December 31, 1996 and January 1, 1996.  The assumed
healthcare cost trend rates used in determining the net expense for 1996 are
shown in the following table.  Healthcare cost trends were assumed to decline
from 1996 levels to an ultimate ongoing level over six years as follows:

                                      55


<PAGE>   58

                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)




<TABLE>
                                            1996    Ultimate
                                            Rate      Rate
                                           -----    --------
      <S>                                  <C>       <C>
      Pre-65 ............................   8.6%      5.0%
      Post-65 ...........................   6.8%      5.0%
      Medicare offset ...................   6.2%      5.0%
</TABLE>


     The expense and liability estimates can fluctuate by significant amounts
based upon the assumptions used by the actuaries.  If the healthcare cost trend
rate were increased by one percent in each year, the accumulated postretirement
benefit obligation would be 14 percent higher as of December 31, 1996.  The
effect of this change on the 1996 expense accrual would be an increase of 18
percent.


8.  PNEUMOCONIOSIS BENEFITS

     The actuarially determined liability for pneumoconiosis (black lung)
benefits is based on a 6% discount rate and various other assumptions including
incidence of claims, benefit escalation, terminations and life expectancy.  The
annual black lung expense is comprised of the net change in the beginning
accrual balance, a charge for interest on the unfunded accrual balance plus the
premiums paid to the state insurance funds.  The January 1, 1995 actuarial
study reduced the estimated pneumoconiosis liability by $23,299 as compared to
the previous study.  The lower estimate resulted primarily from favorable
claims experience and reduced projected future claims.

     The cost of black lung benefits charged (credited) to operations for
Zeigler and its subsidiaries, excluding the change in estimated liability
mentioned above, was $157, $2,967 and  ($1,054) in 1996, 1995 and 1994,
respectively.


9.  STOCK OPTION PLAN

     In February 1994, Zeigler's Board of Directors and shareholders adopted a
Stock Option Plan (the "Option Plan").  A total of 2,560,000 shares of Common
Stock are reserved for issuance upon exercise of options granted under the
Option Plan.  The Option Plan is administered by the Compensation Committee of
the Board of Directors which determines the terms of the options granted
including the exercise price, number of shares subject to the option and
exercisability.

     The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its plan.  The Company
has adopted the disclosure-only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation.  Accordingly, no compensation cost has been
recognized for the stock option plan.




                                      56

<PAGE>   59





                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     The following summarizes the stock option transactions under the Option
Plan for the three years ended December 31, 1996:



<TABLE>
                               Number of                     Weighted Average
                                Shares      Option Prices     Exercise Price
                             -------------  --------------   ----------------
  <S>                        <C>            <C>              <C>
   Options outstanding at
      January 1, 1994 .....             -   $     -              $         -
       Granted ............     1,104,800   11.13 to 16.05             14.28
       Canceled ...........        (8,000)           16.05             16.05
                             ------------

     Options outstanding at
      December 31, 1994 ...    1,096,800    11.13 to 16.05             14.27
       Granted ............       19,000    10.75 to 12.88             12.54
       Canceled ...........      (29,800)   11.13 to 16.05             15.22
                            ------------

     Options outstanding at
      December 31, 1995 ...    1,086,000    10.75 to 16.05             14.22
       Granted ............      688,000    14.00 to 20.00             15.86
       Exercised ..........      (21,530)   11.13 to 16.05             11.42
       Canceled ...........     (153,320)   11.13 to 16.05             14.50
                            ------------

    Options outstanding at
    December 31, 1996 .....    1,599,150    10.75 to 20.00             14.93
                            ============
</TABLE>


     The outstanding stock options at December 31, 1996, 1995 and 1994 have a
weighted average remaining life of 9.34, 8.52, and 7.48 years, respectively.
The number of stock option shares exercisable at December 31, 1996, 1995, and
1994 were 362,710,  213,400, and zero, respectively.

     Generally, stock options are granted at prices which are equal to the
market value of the stock on the date of grant, have a maximum term of ten
years, and vest in equal annual increments over five years.  The weighted
average fair value at date of grant for options granted during 1996, 1995, and
1994 was $5.76, $3.96, and $5.01 per option, respectively.  The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following weighted average assumptions:


<TABLE>
                                          1996    1995    1994
                                         -----   -----   -----
                <S>                      <C>     <C>     <C>

                Expected life (years)        7       7       7

                Risk-free interest rate   6.26%   6.18%   6.15%

                Volatility               29.90%  29.90%  29.90%

                Dividend yield            1.94%   2.52%   2.17%
</TABLE>


                                      57

<PAGE>   60




                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     As previously discussed, the Company accounts for the Option Plan in
accordance with APB No. 25 under which no compensation expense has been
recognized for stock option awards.  Had compensation cost for the Company's
stock option plan been determined on the fair value at the grant date for
awards for the two year period ended December 31, 1996 consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and income (loss)
per share would have been reduced to the pro forma amounts indicated below:


<TABLE>
<CAPTION>
                                                       1996      1995
                                                    -------  --------
          <S>                                       <C>      <C>

          Net income (loss) - as reported ........  $57,964  ($11,213)

          Net income (loss) - pro forma ..........   57,611   (11,217)

          Income (loss) per share - as reported ..  $  2.04     ($.40)

          Income (loss) per share - pro forma ....  $  2.03     ($.40)
</TABLE>



     Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.


10.  ASSET IMPAIRMENTS AND ACCELERATED MINE CLOSING COSTS

     The following summarizes the components of asset impairments and
accelerated mine closing costs:

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                      ------------------------
                                                        1996      1995    1994
                                                      ------  --------  ------
  <S>                                                 <C>     <C>       <C>
  Regular accruals for future mine closings ........  $6,875  $  9,440  $4,868
                                                      ======  ========  ======
  Impairments and accelerated accruals:
  Write-down of assets .............................  $    -  $ 84,513  $    -
  End of mine closing and reclamation liabilities ..       -    28,024       -
  Other liabilities ................................       -     2,125       -
                                                      ------  --------  ------
  Total impairments and accelerated accruals .......  $    -  $114,662  $    -
                                                      ======  ========  ======
</TABLE>


     In July 1995, the Company closed Old Ben Mine #1 in Indiana after
termination of its supply contract with Southern Indiana Gas and Electric
Company.  Accordingly, the carrying value of the mine and other related assets
that supported the contract were reduced to their estimated net realizable
values, which resulted in asset write-downs of $15,762.  In addition, a
provision for accelerated mine closing costs of $16,500 was recorded, based on
the amount of estimated closing costs that would have been expensed during the
full term of the contract.

     In the fourth quarter of 1995, the Company recorded asset impairments and
accelerated accruals totaling $82,400 in connection with the idling, closing
and projected closing of certain mines.  $49,100 of that amount relates to Old
Ben's operations in Southern Illinois.  Old Ben idled one mine in Randolph
County, Illinois  on  December 31, 1995, and  made plans  to  close  two
others in  Franklin County, Illinois later in 1996, mainly

                                      58



<PAGE>   61

                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


due to a sharp reduction in demand for the Illinois Basin's high-sulfur
coal.  Management did not expect the high-sulfur market to improve
significantly in the foreseeable future.  The remaining $33,300 fourth quarter
charge was associated with the indefinite idling of Wolf Creek's underground
mine in Eastern Kentucky on October 1, 1995.  That amount consists of asset
write-downs totaling $26,000 and increased reclamation liabilities of $7,300.
Operations were suspended at the mine chiefly due to the new sourcing
flexibility negotiated in the amended contract with Carolina Power & Light
Company which allowed the Company to supply the contract with coal purchased
from lower-cost producers.  The ongoing high costs at the Wolf Creek mine were
mainly attributable to unfavorable geology and declining productivity.
Management is currently evaluating whether the mine can be reopened as a
smaller, cost-competitive operation.

11.  SALE OF INDIANA ASSETS

     On February 12, 1996, the Company closed the sale of the majority of its
assets in Indiana to Kindill.  These assets had a combined book value of
$13,400 and included Old Ben Mine #1 and Old Ben Mine #2, along with various
other coal properties and interests.  The Company also agreed to make cash
payments to Kindill of $7,000 in 1996 and $4,000 (subject to certain
adjustments) in 1997.  In exchange, Kindill assumed the associated reclamation
liabilities, estimated at approximately $23,400.  This sale was completed on
April 30, 1996, after Kindill secured the required mining permits.  The sale of
these assets did not have a material effect on current income.  However, the
transaction may have a positive impact on the Company's future cash flows
primarily as a result of lower reclamation expenditures.

12.  PREFERRED STOCK

     Zeigler is authorized to issue 1,000,000 shares of preferred stock, $0.01
par value, with such issuance to be in one or more classes or series.  The
Board of Directors is authorized to determine the designations, preferences,
qualifications, limitations and restrictions of any class or series with
respect to, among other things, the rate and nature of dividends, the price and
terms, the amount payable in the event of liquidation, the terms and conditions
for conversion or exchange into any other class or series of the stock or other
securities and voting rights.

13.  SIGNIFICANT CUSTOMERS

     Coal sales include transactions involving both produced and purchased
coal.  Two customers accounted for 18% and 14% of coal sales in 1996, 18% and
13% of coal sales in 1995,  and 20% and 14% of coal sales in 1994.

14.  RELATED PARTY TRANSACTIONS

     Shell Oil Company, a former indirect shareholder, provides guarantees for
certain letters of credit and surety bonds of Zeigler.  Zeigler reimburses
Shell for its costs in providing these guarantees.




                                      59

<PAGE>   62


                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


15.  COMMITMENTS AND CONTINGENCIES (Also see Note 16 - Legal Proceedings)

     Zeigler and its subsidiaries have operating lease commitments expiring at
various dates, primarily for equipment.  Minimum rental obligations under these
leases at December 31, 1996 are summarized by fiscal year as follows:

<TABLE>
                       <S>                 <C>
                       1997..............  $ 5,512
                       1998..............    3,668
                       1999..............      559
                       2000..............      339
                       2001..............       93
                       Thereafter .......        -
                                           -------
                       Total ............  $10,171
                                           =======
</TABLE>


     Rental expense relating to operating leases amounted to $7,834, $9,733 and
$8,406 in 1996, 1995 and 1994, respectively.  As of December 31, 1996, Zeigler
and its subsidiaries had $107,819 of surety bonds issued by an insurance
company to secure self-insured workers' compensation and pneumoconiosis claims,
reclamation and other performance commitments.  Of that amount, $64,289 was
backed by guarantees of Shell (see Note 14).  Letters of credit of $117,187
were outstanding at December 31, 1996, of which amount $79,840 was also
guaranteed by Shell.

16.  LEGAL PROCEEDINGS

     Shareholder Suits - On November 8, 1994, a shareholder of the Company
filed a class action suit, Barish, et al. v. Zeigler Coal Holding Co., et al.,
against the Company and three of its officers in U.S. District Court for the
Southern District of Illinois.   The amended complaint in the matter contained
two counts pleading claims under Sections 10(b) and 20 of the Securities
Exchange Act of 1934 and Sections 11 and 15 of the Securities Act of 1933 and
generally alleged that the Company failed to disclose material facts regarding
its long-term supply contracts and a related dispute with Carolina Power &
Light Company,  and that the Company and the individual defendants issued false
and misleading public statements in the initial public offering of September 29,
1994 and in a press release on October 28, 1994.  The complaint sought damages
in an unspecified amount on behalf of all persons who purchased the common
stock of Zeigler in the public offering and on the open market from September
29, 1994 to November 3, 1994.  On March 10, 1995, a second class action suit,
Greenfield v. Reilly, et al., was filed in the U.S. District Court for the
Southern District of Illinois arising out of the same events and transactions
as the Barish action.   In addition to the claims asserted against the Company
and certain of its officers in the Barish action, the complaint asserted claims
under Section 12(2) of the 1933 Act against the Company's lead underwriters for
its 1994 initial public offering and against a purported class of all other
underwriters who participated in the offering.

     The two suits were subsequently consolidated, and the plaintiffs filed an
amended consolidated complaint.  The Company and the individual defendants have
denied the allegations that they violated the federal securities laws and have
vigorously defended these cases.  The court has previously denied defendants'
motion to dismiss and the plaintiffs' motion for certification of the case as a
class action.  The Company and its insurer have now reached an agreement with
plaintiffs' counsel to settle the claims of all members of the putative class.
This settlement, which is subject to court approval, will not have a material
adverse effect on the Company's consolidated results of operations or financial
position.


                                      60

<PAGE>   63


                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     Cajun Electric Power Cooperative - On December 21, 1994, Cajun Electric
Power Cooperative Inc.  ("Cajun") filed with the U.S. Bankruptcy Court for the
Middle District of Louisiana (the "Bankruptcy Court") for voluntary
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Triton Coal
Company has a requirements contract (the "Triton Contract") with Cajun through
Western Fuels Association, Inc., with a term extending through the life of Big
Cajun Plant No. 2.   During 1996, Triton Coal Company shipped 5.0 million tons
of coal to Cajun (representing 3.0% of the Company's total consolidated
revenues), while 1995 shipments to Cajun totaled 5.8 million tons.  To date
during the bankruptcy, Triton has continued to ship coal to Cajun and Cajun has
continued to pay for such coal. The price for coal sold under the Triton
Contract is at or near the market price for this coal.  The Triton Contract
provides for a price reopener effective January 1, 1998.

     An Appellate Court affirmed a District Court's ruling that a
court-appointed trustee will manage Cajun's affairs during the bankruptcy.  At
this time, it appears likely that the trustee will reject the Triton Contract.
In the event that the contract is rejected, it may be necessary for Triton to
find other markets for this coal, including sales to the new operator of
Cajun's coal fired units.

     Louisiana Generating LLC (an affiliate of the Company, Southern Energy,
Inc. and NRG Energy, Inc.) has executed an Amended and Restated Asset Purchase
and Reorganization Agreement to purchase substantially all of Cajun's
non-nuclear assets.  This Agreement is incorporated in the trustee's plan of
reorganization, which is subject to Bankruptcy Court approval (including
evaluation of competing plans of reorganization) and a number of other
conditions.  As a result of Louisiana Generating's entering into this
Agreement, Western Fuels Association, Inc. has formally requested certain
assurances regarding Triton Coal Company's performance under the Triton
Contract and informed the Company that it reserves the right to assert certain
claims against Triton Coal Company if the trustee rejects the Triton Contract.

     Janet Saad-Cook et al. v. Zeigler Coal Holding Company and R. & F. Coal
Company - In March, 1995, plaintiff filed a lawsuit against the Company and its
subsidiary, R. & F. Coal Company.   The complaint includes several causes of
action based on alleged actions of the defendant companies involving fraud,
deceit, misrepresentation, and tortuous breach of contract with respect to two
coal mining leases made among the plaintiffs and R. & F. Coal Company. The
plantiffs' complaint has since been amended to add Bluegrass Coal Development
Company as a named defendant, to eliminate the allegations that the defendants'
behavior violated the U.S. Racketeer Influenced and Corrupt Organizations Act
and to include additional causes of action involving trespass and breach of
lease.  The defendant companies have denied the allegations in the complaint,
believe they have meritorious defenses to plaintiffs' claims, and intend to
defend vigorously against the claims.   The Company believes that Shell Oil
Company is obligated to indemnify the Company against any loss (over certain
minimum amounts) that the Company may incur as a result of plaintiffs' claims
in the litigation and has given Shell notice thereof in accordance with the
terms of the purchase agreement under which the Company acquired Shell Mining
companies. The Company believes that ultimate resolution of the claims in the
lawsuit will have no material adverse effect on the Company's consolidated
results of operations or financial position.

     Other - Various lawsuits and claims, including those involving ordinary
routine matters incidental to its business, to which the Company and its
subsidiaries are a party, are pending, or have been asserted, against the
Company.  Although the outcome of these matters cannot be predicted with
certainty, management believes that their disposition will not have materially
adverse effects on the Company's consolidated results of operations or
financial position.



                                      61

<PAGE>   64

                 ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


17.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)


     Quarterly financial data for 1996 and 1995 is summarized below (in
thousands, except for per share amounts):

<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                                  -------------------------------------------------------------
                                                    Mar. 31              Jun. 30           Sep. 30     Dec. 31
                                                    -------              -------          --------     -------
<S>                                               <C>                   <C>               <C>        <C>
1996:
  Total revenues ..........................        $181,018             $182,701          $193,222    $174,683
  Operating income ........................          17,962               21,162            25,965      25,879
  Net income ..............................          10,113               12,674            16,991      18,186
  Net income per common share (3) .........             .36                  .45               .60         .64

1995:
  Total revenues ..........................        $202,932             $190,434          $198,088    $191,649
  Operating income (loss) .................          15,733               34,859(1)         22,444     (61,255) (2)
  Net income (loss) .......................           6,221               21,008            12,362     (50,804)
  Net Income (loss) per common share (3) ..             .22                  .74               .44       (1.79)
</TABLE>



(1)  In the second quarter of 1995, Zeigler recorded a net credit to earnings
     of $13,238, $9,929 net of income taxes ($.35 per share), on settlement of
     the SIGECO contract dispute and the related closing of Old Ben Mine #1.
     The net amount consists of $45,500 in proceeds from termination of the
     coal supply contract and a partially offsetting provision for asset
     impairments and accelerated mine closing costs of $32,262.

(2)  In the fourth quarter of 1995, Zeigler recorded an $82,400 provision,
     $61,800 net of income taxes ($2.18 per share), in connection with the
     idling, closing or projected closing of certain mines in accordance with
     SFAS No. 121.

(3)  The sum of the quarterly earnings per share does not equal earnings per
     share for the year because the per share amounts are calculated
     independently for each quarter and for the year using the weighted average
     number of common shares and common share equivalents outstanding during
     each period.





                                      62


<PAGE>   65





            ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE

     There have been no changes in or disagreements with independent auditors
on accounting and financial disclosure during the two most recent fiscal years.


                                      63

<PAGE>   66




                                   PART  III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information about the Directors of the Company required by this item
is incorporated by reference to the Company's definitive Proxy Statement for
the 1997 Annual Meeting of Shareholders, to be filed not later than April 30,
1997.


ITEM 11.  EXECUTIVE  COMPENSATION

     The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders, to be filed not later than April 30, 1997.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders, to be filed not later than April 30, 1997.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders, to be filed not later than April 30, 1997.











                                      64

<PAGE>   67




                                    PART  IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.


<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
<S>                                                                                  <C>
(a)  Documents filed as part of this Report:

     (1)  The following financial statements are included in Part II, Item 8:

          Independent Auditors' Report ............................................   41

          Financial Statements:

            Consolidated Statements of Operations, Years Ended December 31,
             1996, 1995 and 1994 ..................................................   42

            Consolidated Balance Sheets, December 31, 1996 and 1995 ...............   43

            Consolidated Statements of Cash Flows, Years Ended December 31,
             1996, 1995 and 1994 ..................................................   45

            Consolidated Statements Shareholders' Equity, Years Ended December 31,
             1996, 1995 and 1994 ..................................................   46

          Notes to Consolidated Financial Statements ..............................   47

     (2)  The following consolidated financial statement schedule is included
           in Item 14 at the page indicated:

          Independent Auditors' Report ............................................   69

          Schedule II - Valuation and Qualifying Accounts, Years Ended
            December 31, 1996, 1995 and 1994 ......................................   70


          All other schedules are omitted as not applicable or not required, or
          the required information is shown in the Consolidated Financial
          Statements or Notes thereto.

     (3)  Exhibits filed as part of this Report are as follows:


</TABLE>

Number                                        Description
------                                        -----------

3.1          Restated Certificate of Incorporation of Zeigler Coal Holding
             Company, as amended**

3.2          By-Laws of Zeigler Coal Holding Company

4.1          Form of certificate representing the shares of Common Stock**

4.2          Amended and Restated Credit Agreement, dated as of
             October 19, 1994, among Zeigler Coal Holding Company, certain
             subsidiary borrowers, certain financial institutions, Bank of
             America NT&SA and The First National Bank of Chicago, as
             arrangers, LC issuer and administrative agent***


                                      65
<PAGE>   68



Number                           Description
------                           -----------

   4.3       Note Purchase Agreements, dated November 16, 1992,
             between Zeigler Coal Holding Company and the various purchasers
             named therein**

   4.4       Collateral Agency and Intercreditor Agreement, dated
             November 16, 1992, among Zeigler Coal Holding Company, State
             Street Bank and Trust Company of Connecticut, National
             Association, the Lenders, the Purchasers, the Administrative
             Agent and the LC Issuer, as defined therein**

   4.5       Indenture of Trust, dated as of December 1, 1982
             between Charleston County, South Carolina and The South Carolina
             National Bank, as trustee with attached copies of the Letter of
             Credit, dated as of December 31, 1982, from Morgan Guaranty Trust
             Company and the Supplemental Indenture of Trust, dated April 15,
             1985 related thereto**

   4.6       Restated Agreement of Sale, dated as of December 1,
             1982, between Charleston County, South Carolina and Massey Coal
             Terminal, S.C.  Corporation with attached copies of the documents
             delivered in connection herewith**

   4.7       Indenture of Trust, dated November 1, 1987, between
             Peninsula Ports  Authority of Virginia and Texas Commerce Bank
             National Association with attached copies of the documents
             delivered in connection therewith**

   4.8       Registration Agreement, dated as of January 31, 1985
             and amended as of November 11, 1992, between the Management
             Group, Casati, Kinman, DSC, Heise IR, Shell and the Company, as
             defined therein**

  10.2       Employment Agreement, dated February 24, 1993, between
             Zeigler Coal  Holding Company and Chand B. Vyas**

  10.4       Stock Purchase Agreement, dated September 8, 1992, among
             Zeigler Coal  Holding Company, Shell Oil Company and Shell Energy
             Company, as amended**

  10.5       Indemnification Agreement, dated November 23, 1992, among
             Shell Oil Company, Zeigler Coal Holding Company and subsidiaries
             of Zeigler Coal Holding Company listed on the signature page
             thereto**

  10.6       1994 Stock Option Plan**

  10.7       1990 Stock Appreciation Plan and amendments thereto**

  10.9       Agreement for Sale and Purchase of Coal, dated as of
             January 1, 1971, by and between Carolina Power & Light Company,
             Wolf Creek Collieries, Kermit Coal Company and Massey Coal Sales
             Company, Incorporated, as amended*

  10.10      Agreement, dated March 31, 1977, among A.T. Massey Coal
             Company, Inc. and  Marrowbone  Development  Company  and Georgia
             Power Company, as  amended*

  10.11      Coal Purchase and Sales Agreement, dated October 30, 1987, by and
             between Georgia Power Company and Shell Mining Company, as amended*

                                      66

<PAGE>   69






 Number                                 Description
 ------                                 -----------

  10.13      Contract, dated December 16, 1993, between the United
             Mine Workers of America and the Bituminous Coal Operators**

  10.14      Coal Lease, dated November 1, 1967, between the United
             States of America, through the Bureau of Land Management and
             Farmers Union Central Exchange, Incorporated re Buckskin Mine site
             (Triton Coal Company)*

  10.15      Coal Lease, dated August 23, 1982 and effective as of
             September 1, 1982, between the United States of America, through
             the Bureau of Land Management and Shell Oil Company re Spring Draw
             site (Triton Coal Company)**

  10.16      Coal Lease, dated December 1, 1967, between the United
             States of America, through the Bureau of Land Management and
             Humble Oil & Refining Company (readjusted in the name of Exxon
             Coal USA, Inc.) re conveyance of partial lease to Shell Mining
             Company (Triton Coal Company)**

  10.17      Coal Lease, dated December 1, 1966, between the United
             States, through the Bureau of Land Management of America and
             Sentry Royalty Company (readjusted in the name of Shell Mining
             Company) re North Rochelle site**

  10.18      Fourth Amendment dated as of April 1, 1995 to the
             Agreement for Sale and Purchase of Coal, dated as of January 1,
             1985, between Carolina Power & Light Company, Wolf Creek Collieries
             Company, Kermit Coal Company and Massey Coal Sales Company,
             Incorporated, as amended.****

  10.19      Amended and Restated Agreement for Sale and Purchase of
             Coal dated as of July 1, 1996, by and between Carolina Power &
             Light Company, as buyer, and Mountaineer Coal Development Company,
             d/b/a Marrowbone Development Company, and Bluegrass Coal
             Development Company, as sellers. *****

  21.1       Subsidiaries of the Company

  23.1       Consent of Deloitte & Touche LLP

  24.1       Power of Attorney


*     Previously filed with Registration Statement No. 33-80646 and is
      incorporated herein by reference.  Contains material for which
      confidential treatment has been granted pursuant to Rule 406 under the
      Securities Act.

**    Previously filed with Registration Statement No. 33-80646 and is
      incorporated herein by reference.

***   Previously filed with Form 10-K dated March 30, 1995 and is incorporated
      herein by reference.

****  Previously filed with Form 10-Q dated November 17, 1995 and is
      incorporated herein by reference.

***** Previously filed with Form 8-K dated July 22, 1996 and is incorporated
      herein by reference.  Contains material for which confidential treatment
      has been granted pursuant to Rule 24b-2 under the Securities Exchange Act.

                                      67



<PAGE>   70


(b)   Reports on Form 8-K:
      The Company filed no reports on Form 8-K during the quarterly period ended
      December 31, 1996.

                                      68

<PAGE>   71




                         INDEPENDENT AUDITORS' REPORT



To Zeigler Coal Holding Company:

     We have audited the consolidated financial statements of Zeigler Coal
Holding Company as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996, and have issued our report thereon
dated January 30, 1997; such report is included elsewhere in this Form 10-K.
Our audits also included the consolidated financial statement schedule listed
in Item 14(a)(2) of this report.  This consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.  In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.







DELOITTE & TOUCHE LLP

St. Louis, Missouri
January 30, 1997











                                      69

<PAGE>   72




                                                                     SCHEDULE II


                          ZEIGLER COAL HOLDING COMPANY

                       VALUATION AND QUALIFYING ACCOUNTS

                   YEARS ENDED DECEMBER 31, 1996, 1995, 1994



<TABLE>
<CAPTION>
                                                             Additions
                                                Balance at   Charged to                          Balance
                                                 Beginning    Costs and                Other      at End
               Description                       of Period  Expenses(1)  Deductions  Charges   of Period
               -----------                      ----------  -----------  ----------  -------  ----------
                   (A)                              (B)          (C)         (D)       (E)        (F)
<S>                                               <C>          <C>         <C>         <C>      <C>
1996
Allowance for doubtful accounts ...........       $ 1,010       $  306     $    49     $  -     $ 1,267
Allowance for pricing disputes ............         1,601          407         435        -       1,573
                                                  -------     --------     -------     ----     -------
     Total allowances for accounts
         receivable .......................       $ 2,611       $  713     $   484     $  -     $ 2,840
                                                  =======     ========     =======     ====     =======
Reserve for mine supply inventory
 obsolescence .............................       $ 2,692       $1,396     $   693     $  -     $ 3,395


1995
Allowance for doubtful accounts ...........       $ 1,250       $  100     $   340     $  -     $ 1,010
Allowance for pricing disputes ............        12,177        3,529      14,105        -       1,601
                                                  -------     --------     -------     ----     -------
     Total allowances for accounts
         receivable .......................       $13,427       $3,629     $14,445     $  -     $ 2,611
                                                  =======     ========     =======     ====     =======
Reserve for mine supply inventory
 obsolescence .............................       $ 3,294       $  735     $ 1,337     $  -     $ 2,692


1994
Allowance for doubtful accounts ...........       $ 1,378       $    -     $   128     $  -     $ 1,250
Allowance for pricing disputes ............         6,114        8,202       2,139        -      12,177
                                                  -------     --------     -------     ----     -------
     Total allowances for accounts
         receivable .......................       $ 7,492       $8,202     $ 2,267     $  -     $13,427
                                                  =======     ========     =======     ====     =======
Reserve for mine supply inventory
 obsolescence .............................       $ 3,811       $1,736     $ 2,253     $  -     $ 3,294
</TABLE>





Notes:

(1)  Additions to the allowance for pricing disputes are charged against coal
     sales in accordance with the revenue recognition policy.


                                      70

<PAGE>   73




                                   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, in the City of
Fairview Heights, State of Illinois on March 31, 1997.

                                       ZEIGLER COAL HOLDING COMPANY
                                       (Registrant)

                                       By:      /s/ Brent L. Motchan
                                           ------------------------------------
                                            Name: Brent L. Motchan
                                            Title: Vice President, General
                                                   Counsel and Secretary

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 31, 1997.

       Signature                                             Capacity

           *                                  Chairman of the Board and Director
------------------------------------
     Michael K. Reilly

           *                                  Chief Executive Officer, President
------------------------------------          and Chand B. Vyas Director
    Chand B. Vyas                             (Principal Executive Officer)

  /s/ Paul D. Femmer                          Controller (Principal Accounting
------------------------------------          Officer)
      Paul D. Femmer


           *                                             Director
------------------------------------
     Roland E. Casati

           *                                             Director
------------------------------------
     Robert W. Ericson

           *                                             Director
------------------------------------
     John F. Manley


*By: /s/ Brent L. Motchan                            Attorney-in-Fact
------------------------------------
     Brent L. Motchan


     Original powers of attorney authorizing Brent L. Motchan to sign this
Annual Report on Form 10-K  and amendments thereto on behalf of the above-named
persons have been filed with the Securities and Exchange Commission as Exhibit
24.1 to this Report.




                                      71

<PAGE>   74




                                 EXHIBIT INDEX


Number                               Description
------                               -----------

3.1          Restated Certificate of Incorporation of Zeigler Coal Holding
             Company, as amended**

3.2          By-Laws of Zeigler Coal Holding Company

4.1          Form of certificate representing the shares of Common Stock**

4.2          Amended and Restated Credit Agreement, dated as of
             October 19, 1994, among Zeigler Coal Holding Company, certain
             subsidiary borrowers, certain financial institutions, Bank of
             America NT&SA and The First National Bank of Chicago, as
             arrangers, LC issuer and administrative agent***

4.3          Note Purchase Agreements, dated November 16, 1992,
             between Zeigler Coal Holding Company and the various purchasers
             named therein**

4.4          Collateral Agency and Intercreditor Agreement, dated
             November 16, 1992 among Zeigler Coal Holding Company, State Street
             Bank and Trust Company of Connecticut, National Association, the
             Lenders, the Purchasers, the Administrative Agent and the LC
             Issuer, as defined therein**

4.5          Indenture of Trust, dated as of December 1, 1982 between
             Charleston County, South Carolina and The South Carolina National
             Bank, as trustee with attached copies of the Letter of Credit,
             dated as of December 31, 1982, from Morgan Guaranty Trust Company
             and the Supplemental Indenture of Trust, dated April 15, 1985
             related thereto**

4.6          Restated Agreement of Sale, dated as of December 1, 1982,
             between Charleston County, South Carolina and Massey Coal
             Terminal, S.C.  Corporation with attached copies of the documents
             delivered in connection herewith**

4.7          Indenture of Trust, dated November 1, 1987, between
             Peninsula Ports  Authority of Virginia and Texas Commerce Bank
             National Association with attached copies of the documents
             delivered in connection therewith**

4.8          Registration Agreement, dated as of January 31, 1985 and
             amended as of November 11, 1992, between the Management Group,
             Casati, Kinman, DSC, Heise IR, Shell and the Company, as defined
             therein**

10.2         Employment Agreement, dated February 24, 1993, between
             Zeigler Coal  Holding Company and Chand B. Vyas**

10.4         Stock Purchase Agreement, dated September 8, 1992, among
             Zeigler Coal Holding Company, Shell Oil Company and Shell Energy
             Company, as amended**

10.5         Indemnification Agreement, dated November 23, 1992, among
             Shell Oil Company, Zeigler Coal Holding Company and subsidiaries of
             Zeigler Coal Holding Company listed on the signature page thereto**

10.6         1994 Stock Option Plan**


<PAGE>   75

Number                                  Description
------                                  -----------

10.7        1990 Stock Appreciation Plan and amendments thereto**

10.9        Agreement for Sale and Purchase of Coal, dated as of
            January 1, 1971, by and between Carolina Power & Light Company,
            Wolf Creek Collieries, Kermit Coal Company and Massey Coal Sales
            Company, Incorporated, as amended*

10.10       Agreement, dated March 31, 1977, among A.T. Massey Coal
            Company, Inc. and Marrowbone Development Company and Georgia Power
            Company, as  amended*

10.11       Coal Purchase and Sales Agreement, dated October 30,
            1987, by and between Georgia Power Company and Shell Mining
            Company, as amended*

10.13       Contract, dated December 16, 1993, between the United
            Mine Workers of America and the Bituminous Coal Operators**

10.14       Coal Lease, dated November 1, 1967, between the United
            States of America, through the Bureau of Land Management and
            Farmers Union Central Exchange, Incorporated re Buckskin Mine site
            (Triton Coal Company)*

10.15       Coal Lease, dated August 23, 1982 and effective as of
            September 1, 1982, between the United States of America, through
            the Bureau of Land Management and Shell Oil Company re Spring Draw
            site (Triton Coal Company)**

10.16       Coal Lease, dated December 1, 1967, between the United
            States of America, through the Bureau of Land Management and
            Humble Oil & Refining Company (readjusted in the name of Exxon
            Coal USA, Inc.) re conveyance of partial lease to Shell Mining
            Company (Triton Coal Company)**

10.17       Coal Lease, dated December 1, 1966, between the United
            States, through the Bureau of Land Management of America and
            Sentry Royalty Company (readjusted in the name of Shell Mining
            Company) re North Rochelle site**

10.18       Fourth Amendment dated as of April 1, 1995 to the
            Agreement for Sale and Purchase of Coal, dated as of January 1,
            1985, between Carolina Power & Light Company, Wolf Creek
            Collieries Company, Kermit Coal Company and Massey Coal Sales
            Company, Incorporated, as amended.****

10.19       Amended and Restated Agreement for Sale and Purchase of
            Coal dated as of July 1, 1996, by and between Carolina Power &
            Light Company, as buyer, and Mountaineer Coal Development Company,
            d/b/a Marrowbone Development Company, and Bluegrass Coal
            Development Company, as sellers. *****

21.1        Subsidiaries of the Company

23.1        Consent of Deloitte & Touche LLP

24.1        Power of Attorney





<PAGE>   76

*          Previously filed with Registration Statement No. 33-80646 and is
           incorporated herein by  reference.  Contains material for which
           confidential treatment has been granted pursuant to Rule 406 under
           the Securities Act.

**         Previously filed with Registration Statement No. 33-80646 and is
           incorporated herein by reference.

***        Previously filed with Form 10-K dated March 30, 1995 and is
           incorporated herein by reference

****       Previously filed with Form 10-Q dated November 17, 1995 and is
           incorporated herein by reference.

*****      Previously filed with Form 8-K dated July 22, 1996 and is
           incorporated herein by reference.  Contains material for which
           confidential treatment has been granted pursuant to Rule 24b-2 under
           the Securities Exchange Act.