<PAGE>   1


                     U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                                   (MARK ONE)

            [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED
                                DECEMBER 31, 2000

                                       OR

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

                        COMMISSION FILE NUMBER 333-60599

                               PEN HOLDINGS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

             TENNESSEE                                  62-0852576
  (STATE OR OTHER JURISDICTION OF          (I.R.S. EMPLOYER IDENTIFICATION NO.)
  INCORPORATION OR ORGANIZATION)

                          5110 MARYLAND WAY, SUITE 300
                           BRENTWOOD, TENNESSEE 37027
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 371-7300

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

        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. Yes [  ]  No [  ]  N/A

         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. [  ]  N/A

         State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant. The aggregate market value
shall be computed by reference to the price at which the common equity was sold,
or the average bid and asked prices of such common equity, as of a specified
date within 60 days prior to the date of filing: None

         Indicate the number of shares of each of the registrant's classes of
common stock as of the latest practical date: As of March 31, 2001: Class I
Common stock, $.01 par value per share, 4,290,000 shares and Class II Common
stock, $.01 par value per share, 177,550 shares.

DOCUMENTS INCORPORATED BY REFERENCE  - NONE


<PAGE>   2


                               PEN HOLDINGS, INC.

                                      INDEX

                                TABLE OF CONTENTS

                                                                          PAGE
                                                                         NUMBER
PART I

Item   1.  Business                                                        1

Item   2.  Properties                                                     14

Item   3.  Legal Proceedings                                              20

Item   4.  Submission of Matters to a Vote of Security Holders            20

PART II

Item   5.  Market for Registrant's Common Equity and Related
           Stockholder Matters                                            20

Item   6.  Selected Consolidated Financial Data                           21

Item   7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                      24

Item   7A. Quantitative and Qualitative Disclosure About Market Risk      30

Item   8.  Financial Statements and Supplementary Data                    31

Item   9.  Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure                            50

PART III

Item  10.  Directors and Executive Officers of the Registrant             50

Item  11.  Executive Compensation                                         51

Item  12.  Security Ownership of Certain Beneficial Owners
           and Management                                                 52

Item  13.  Certain Relationships and Related Transactions                 52

PART IV

Item  14.  Exhibits, Financial Statement Schedules, and
           Reports on Form 8-K                                           E-1

           Glossary of Certain Terms                                     G-1

           Kentucky-West Virginia Operations Map                         M-1

                                      -i-

<PAGE>   3



PART 1.

FORWARD LOOKING STATEMENTS

         The statements contained in this report that are not historical facts
are "forward looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which statements can be identified by
the use of forward looking terminology such as "believes," "expects," "may,"
"will," "should," "intends," "predicts" "potential," "estimates," "continues" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
Management cautions the reader that these forward looking statements are only
predictions. No assurance can be given that future results will be achieved;
actual events or results may differ materially as a result of risks facing Pen
Holdings, Inc. ("Pen Holdings") and its consolidated subsidiaries (Pen Holdings
and its consolidated subsidiaries are referred to herein collectively as, the
"Company" or "Pen"). Such risks include, but are not limited to the Company's
reliance on long-term sales contracts, the Company's reliance on long-term
mineral leases, the competitive environment in which the Company operates, the
risks inherent to the mining industry, acquisitions, government regulation,
reclamation and mine closure accruals, the effects of Clean Air Act Amendments
on the coal industry, replacement and recoverability of coal reserves, economic
conditions in the coal industry generally and technological developments.
Management also cautions readers that any forward-looking statements made by the
Company are not guarantees of future performance and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors, including, but not limited to, the following: (i) there can be
no assurance that the Company's creditors will not accelerate the indebtedness
owing by the Company due to the financial covenant defaults by the Company that
have occurred and are anticipated to occur in the future; (ii) the Company's
available cash may not be sufficient to fund the Company's working capital needs
for an extended period of time; (iii) there can be no assurance Travelers (as
defined below) will not execute on the Cheyenne Judgment (as defined below) bond
causing defaults under the Credit (as defined below) and the Indenture (as
defined below) and (iv) there can be no assurance that the Company will be able
to divest certain of its assets, refinance any of it is existing debt or
renegotiate any contract in order to increase liquidity or to fund working
capital requirements and repay its long term debt. Such risks and factors are
described in more detail in ITEM 1--"Business--Factors That May Affect Future
Results" and ITEM 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Such risks could cause actual results to
vary materially from the future results indicated, expressed or implied, in such
forward looking statements.

ITEM 1. BUSINESS.

         The Company is engaged in the mining, preparation, marketing and
leasing of compliance coal and low-sulfur coal from mines located in the Central
Appalachian region of eastern Kentucky and southern West Virginia.

RECENT EVENTS

         On March 15, 2001, Pen Holdings and certain of its subsidiaries entered
into the Forbearance and Amendment No. 4 to the Amended and Restated Credit
Agreement (the "Credit Facility" or "Credit") between Pen Holdings, certain of
its subsidiaries and Mellon Bank, N.A. ("Mellon") as agent under the Credit
Facility and for itself, CIBC, Inc., and AmSouth Bank (collectively, the
"Banks") dated June 3, 1998, as amended. The Forbearance and Amendment No. 4 to
the Credit Facility was necessary as a result of the occurrence of certain
potential defaults or events of default occurring under the Credit Facility
which arose as a result of the Supreme Court of Kentucky's decision not to
review the lower state court's decision in The Elk Horn Coal Corporation ("Elk
Horn Coal") v. Cheyenne Resources, Inc. (the "Cheyenne Litigation"). See Item 3.
"Legal Proceedings". On April 16 and 23 , 2001 Pen Holdings and the Banks
amended the Forbearance and Amendment No. 4 to the Credit Facility (such
agreement as amended to date is referred to as "Bank Forbearance Agreement").

         Under the Bank Forbearance Agreement, the Banks have agreed to forbear
from taking any action to accelerate the loans or dispose of or collect upon any
collateral under the Credit Facility or other ancillary documentation until
April 30, 2001 (the "Forbearance Period") as a result of the known defaults or
potential defaults under the Credit Facility. The forbearance by the Banks will
terminate before the end of the Forbearance Period if (i) Pen Holdings or
certain of


                                       1
<PAGE>   4

its subsidiaries fail to pay or perform any indebtedness, liability or
obligation under the Bank Forbearance Agreement; (ii) there is a material
adverse change in the condition of Pen Holdings or certain of its subsidiaries;
(iii) additional defaults occur under the Credit Facility; (iv) Pen Holdings or
certain of its subsidiaries fail to adhere to certain restrictions imposed on
their accounts with the Banks; (v) an event of default occurs under the Pen
Holdings' 9 7/8% Senior Notes due 2008 (the "Senior Notes" or "Notes"); or (vi)
Pen Holdings or Travelers Casualty and Surety Company of America ("Travelers")
breaches the Forbearance and Stand Still Agreement by and among Pen Holdings,
the Banks and Travelers, dated as of March 15, 2001, as amended on April 16 and
30, 2001 (the "Tri-Party Forbearance Agreement").

         Subject to the terms of the Credit Facility and the satisfaction of
certain conditions, the Banks have agreed to continue to make loans under the
Credit Facility during the term of the Bank Forbearance Agreement. The Banks
have also provided that the loans under the Credit Facility will carry the
default rate of interest under the Credit Facility. The default rate of interest
imposes a 200 basis points penalty over the grid spread. The current grid spread
is 2.75% above LIBOR (as defined in the Credit) (or an effective rate when
calculated to include the default penalty of 4.75% above LIBOR) and 1.75% above
the Prime Rate (as defined in the Credit) (or an effective rate when calculated
to include the default penalty of 3.75% above the Prime Rate). At April 30,
2001, the Credit Facility had borrowings of $39,031,000. Pen Holdings, the Banks
and Travelers have also entered into the Tri-Party Forbearance Agreement.
Travelers is the administrator of the judgment bond issued by Reliance Insurance
Company in connection with the Cheyenne Litigation. Because the Supreme Court of
Kentucky's decision in the Cheyenne Litigation is final and non-appealable, the
plaintiff in the Cheyenne Litigation was entitled to draw against the judgment
bond in the amount of $14,500,000 on or after March 16, 2001 (the "Cheyenne
Judgment").

         In connection with the Banks agreeing to forbear from certain actions
under the Credit during the Forbearance Period, Travelers and its affiliates
have also agreed to forbear from taking action to demand payment, enforce any
remedies or commence any proceedings or take any action to enforce any remedies
(including foreclosure on the Cheyenne Judgment, commencement of any action
against Pen Holdings or any other indemnitor of the obligations of Elk Horn Coal
to Travelers or cancellation or termination of any reclamation or other bonds or
surety obligations of Travelers issued for the benefit of Pen Holdings or any of
its subsidiaries or affiliates) against Elk Horn Coal, Pen Holdings or any
subsidiary or affiliate of Pen Holdings or any assets or properties of any of
the foregoing, whether in connection with the judgment bond or any other
obligation of any of the foregoing owing to Travelers or any subsidiary or
affiliate of Travelers. Travelers is permitted, however, during the Forbearance
Period to (i) present the $4,000,000 letter of credit issued by Mellon under the
Credit to Mellon (the "Mellon LC") for payment; (ii) file or docket the Cheyenne
Judgment of record wherever Elk Horn Coal owns property or assets (provided that
Travelers is prohibited from taking any action to enforce or foreclose upon the
Cheyenne Judgment); or (iii) pursue its remedies or take enforcement actions if
the Banks are no longer prohibited from doing the same under the Bank
Forbearance Agreement. Travelers has filed or docketed the Cheyenne Judgment
against Elk Horn Coal in some jurisdiction which resulted in a lien on certain
of Elk Horn Coal's assets. Travelers has also presented the Mellon LC for
payment.

         The purpose of the Forbearance Period is to allow Pen Holdings
additional time to attempt to implement a strategy that will remedy the events
of default or potential defaults under the Credit and structure a resolution
that is satisfactory to the Banks, Travelers and Pen Holdings' and its
subsidiaries other creditors. Pen Holdings has engaged Houlihan, Lokey, Howard &
Zukin to advise and assist it in connection with structuring such a resolution
as well as assessing its strategic alternatives. See ITEM -- 7 "Management's
Discussion and Analysis of Financial Position and Results of
Operations--Liquidity and Capital Resources."

DESCRIPTION OF BUSINESS

         Throughout this report reference is made to coal reserves. Management
has used, in part, coal reserve data supplied by independent consultants as the
basis for the estimates of coal reserve data contained herein. These reserve
estimates account for mining completed on the property or other changes in the
reserve since the date of the referenced reserve study. The basis for the
Company's recoverable coal reserve estimates (other than the Company's Fork
Creek and Bear Branch reserves) were derived from a report dated May 1998, in
which Marshall Miller & Associates ("Marshall Miller") had audited the Company's
recoverable coal reserves as of such date (the "Marshall Miller Report"). The
estimates of the Company's recoverable Fork Creek reserves as of September 1997
have been reviewed by Stagg Engineering Services, Inc. ("Stagg Engineering") as
of such date (the "Stagg Engineering Report"). The estimates of the Company's
reserves for Bear Branch are based upon management's estimates and
representations



                                       2
<PAGE>   5

made by the former owners of those reserves. As used herein, "reserves" means
Proven Reserves or Probable Reserves (as defined in the Glossary) which could be
economically extracted or produced at the time of the reserve determination.
Reserve estimates for all of the Company's coal properties (except for Bear
Branch) are based on the Marshall Miller Report and the Stagg Engineering
Report, which are collectively referred to herein as the "Reserve Studies." All
references to "tons" are to short tons unless otherwise indicated. For
definitions of certain coal-related terms, see Glossary of Certain Terms
attached to this Form 10-K.

         Based in part on the Reserve Studies, the Company estimates that it
controls the mineral rights to approximately 214 million tons of coal reserves,
of which management believes 191 million tons are owned in fee. In 2000, the
Company sold approximately 5.3 million tons of coal, approximately 91% of which
was generated from captive production with the remainder purchased from other
coal mine operators. In 2000, approximately 72% of the tonnage was sold to nine
long-term sales contract customers, with most of the remainder sold to 24 spot
market customers. The Company sells coal primarily to domestic public utilities
and industrial customers. In addition to its coal sales, the Company leased the
mineral rights on approximately 49 million tons of its reserves to 22 operators
who mined approximately 3.5 million tons in 2000. The Company received average
leasing revenue per ton of coal from its lessees of approximately $ 2.03 in
2000. The Company's coal leases typically have a term of five years, although
some leases are for the life of the respective reserves. For the year ended
December 31, 2000, the Company generated revenues, net loss and EBITDA (EBITDA
represents operating income plus depreciation, depletion and amortization, and
other non-cash items) all as adjusted to represent only business units currently
in operation, of $150 million, $11 million and $19 million, respectively. EBITDA
may not be comparable to other similarly titled measures of other companies.
However, the Company's management believes EBITDA is a meaningful measure of
performance as substantially all of the Company's financing arrangements contain
covenants based on formulations of EBITDA. Cash provided (used) by operating
activities, investing activities and financing activities for the year ended
December 31, 2000, adjusted to represent only business units currently in
operation was $18 million, ($30) million and $11 million, respectively.

         The Company has demonstrated a long-term record of selectively
increasing its reserves through acquisitions and consistently increasing its
production through the development of its reserves. Since 1992, reserves have
increased more than 300%, and captive production has increased from 156 thousand
tons in 1992 to 4.8 million tons in 2000. Beginning in 1987, Pen commenced
surface coal mining production with the purchase of approximately 49 million
tons of compliance and low-sulfur coal reserves located in southern West
Virginia ("Kiah Creek"). Prior to the purchase of Kiah Creek, the Company
fulfilled its contractual obligations through coal purchases and limited
contract mining. Approximately 70% of the Company's 2000 coal production was
from Kiah Creek, where three mines (two underground and one surface, including a
highwall miner) were operating.

         In 1994, the Company acquired approximately 108 million tons of
primarily compliance and low-sulfur coal reserves located in eastern Kentucky
("Elk Horn"). The Company's strategy for Elk Horn is (i) to lease a significant
portion of the reserves to other mining operators under long-term agreements and
(ii) to produce coal for Company sales from contract mining operations ("Levisa
Fork Operations"). Annual lease payments including minimum royalties paid to the
Company from Elk Horn leases have averaged $7.8 million per year since 1995.

         In November 1997, the Company acquired approximately 80 million tons of
primarily compliance, low-sulfur, and metallurgical coal reserves located in
southern West Virginia ("Fork Creek"). The Company obtained all necessary
permits and completed construction of the preparation plant and rail loadout for
Fork Creek in September 2000 and loaded its first shipment of coal in September
2000. Management anticipates that the Fork Creek operations could produce up to
3.3 million tons annually by 2002 with the majority of this coal being shipped
via CSX rail.

         In December 1999, Pen Holdings purchased an estimated 4.5 million tons
of coal reserves, a preparation plant, equipment, and several coal sales
contracts located in eastern Kentucky (the "Bear Branch Operations" or "Bear
Branch"). There is currently one Company-operated underground mine and one
contract surface mine producing coal at Bear Branch. The Company expects Bear
Branch to produce approximately 600,000 tons of coal annually over the life of
the reserves. If financial conditions permit, the Company may attempt to
acquire, by purchase or lease, additional reserves for its Bear Branch
Operations. This coal is transported by truck (i) directly to the customer's
plant or (ii) to the Company's barge loading facility along the Big Sandy River,
which is a navigable tributary of the Ohio River.


                                       3
<PAGE>   6

         Historically, the Company's strategy has been to secure sales contracts
with customers accessible from its own loading terminals in advance of planned
increases in production. In each of the last five years, the Company's
production has been fully committed under long-term sales contracts. Management
believes that the strategy of being heavily contracted has provided the Company
with greater flexibility in managing mine development, production levels and
reserve life. However, several market factors have combined to sharply increase
the spot market price of coal during 2000. As the current contracts expire,
management intends to obtain new long-term sales contracts, which will be
favorably impacted by the current increased spot market price. Due to the
Company's current liquidity position, it is also attempting to renegotiate the
terms of certain of its long-term coal contracts to take advantage of higher
market prices for coal. However, there can be no assurance that the Company's
efforts in this regard will be successful.

         The Company's current shipments on sales contracts and spot market
agreements are primarily with domestic public utilities and industrial customers
located in the upper Ohio River Valley and accessible by river barge
transportation from the Company's terminal on the Big Sandy River. The Company
shipped 6% of its tonnage sold in 2000 by rail, but it anticipates shipping
approximately 40% by rail once Fork Creek is fully developed.

         The Company utilizes room and pillar mining in its underground mines
and contour, point removal and highwall mining at its surface mines, which the
Company believes are the most cost-efficient methods for extracting its reserves
given their geological composition. The Company has three integrated production,
preparation and loading operations which management believes enhances control
over product quality and consistency, storage capability and delivery scheduling
for its customers. In 1990, the Company built a modern, heavy media preparation
plant at Kiah Creek to clean and size its underground coal production, which the
Company believes: (i) improved its reputation with customers by increasing the
quality and quantity of marketable compliance and low-sulfur coal production and
(ii) positioned the Company to be able to bid for more favorably priced sales
contracts and spot market agreements. The Company acquired a second preparation
plant in December 1999 when it purchased the Bear Branch Operations. In
September of 2000, the Company began operating from a third, newly constructed
preparation plant at Fork Creek. This facility is a modern, heavy media
preparation plant and rail loading facility, which extends product control over
production from Fork Creek and provides the Company an opportunity to supply new
customers in the Northeast and upper Midwest which are primarily accessible by
rail.

         Pen Holdings was incorporated under the laws of Tennessee in 1971. The
Company's headquarters are located at Center Court Building, Suite 300, 5110
Maryland Way, Brentwood, TN 37027, and its telephone number is (615) 371-7300.
As of December 31, 2000, the Company had 453 full time employees.

FACTORS THAT MAY AFFECT FUTURE RESULTS

         Investing in Pen Holdings' 9 7/8% Senior Notes due 2008 (the "Senior
Notes" or "Notes") involves a high degree of risk. Investors should carefully
consider the risks and uncertainties described below before investing in the
Notes. If any of the following risks actually occur, Pen Holdings' business,
financial condition, or results of operations may be materially adversely
affected.

LIQUIDITY

         As a result of the outcome of the Cheyenne Litigation, Pen Holdings
entered into the Bank Forbearance Agreement and the Tri-Party Forbearance
Agreement. As well, the Company encountered unfavorable mining conditions during
much of 2000. The combination of these factors has placed severe limitations on
the Company's ability to obtain sufficient sources of liquidity to fund its
capital expenditures and its working capital needs.

         Although the Company has obtained forbearance under the Credit Facility
with respect to certain potential defaults or events of default occurring and a
forbearance agreement with Travelers, such forbearance terminates on April 30,
2001. If the Bank Forbearance Agreement and the Tri-Party Forbearance Agreement
are not extended, the Company would not be in compliance with certain financial
and other covenants under the Credit Facility permitting the Banks to accelerate
the indebtedness owing under the Credit Facility. The Company lacks the funds to
repay the Banks upon an acceleration of the Credit Facility which would in turn
cause defaults under other agreements of the Company including the indenture
(the "Indenture") for the Notes. The Banks hold liens on substantially all of
the Company's assets and could seek to enforce those liens upon acceleration of
the indebtedness owing under the Credit


                                       4
<PAGE>   7

Facility. Additionally, once the Forbearance Period has expired, Travelers can
then take action to execute on the Cheyenne Judgment against assets of the
Company unless the Company pays the judgment. Currently, the Company has no
available source of funds to pay the total amount due under the judgment bond.

         If the Bank Forbearance Agreement and the Tri-Party Forbearance
terminate and the Company's obligations are accelerated or Travelers executes on
the Cheyenne Judgment, such events would have a material adverse effect on the
Company's liquidity and financial position. Furthermore, if such obligations
were to be accelerated, in whole or in part, management cannot currently provide
any assurance that it would be successful in identifying or consummating
financing necessary to satisfy such obligations.

         The Company has engaged financial advisors and legal counsel to assist
reviewing its strategic and restructuring alternatives. The Company is (i)
engaged in discussions with the Banks and Travelers to extend the forbearance
agreements, (ii) seeking alternative sources of financing that may be able to
replace the credit that has been extended by the Banks, extinguish the
obligation to Travelers and provide additional liquidity, (iii) taking steps to
improve operational results, (iv) attempting to renegotiate the terms of certain
of its long-term coal contracts to take advantage of currently higher market
prices for coal, and (v) is exploring the disposition of certain of its assets.
There can be no assurance that the Company's efforts will be successful.

         Additionally, given the Company's current liquidity position,
management cannot anticipate how the Company's customers, other creditors,
services providers or vendors may react to its current financial position. There
can be no assurance that the Company will be able to continue to enter into
transactions and receive supplies and services required for its business from
its vendors and suppliers. Also, it is difficult to determine how the Company's
customers or other creditors may treat the Company given its current liquidity
position. The inability of the Company to engage vendors and suppliers on
customary terms, or at all, would have a materially adverse effect on the
Company's financial position and liquidity.

LEVERAGE; ABILITY TO SERVICE DEBT

         The Company has, and will continue to have, substantial leverage. At
December 31, 2000, the Company had approximately $149 million of indebtedness,
representing approximately 74% of the Company's total capitalization.
Furthermore, subject to certain restrictions in the Indenture relating to the
Notes, the Company may incur additional indebtedness from time to time to
finance acquisitions, to provide for working capital or capital expenditures or
for other purposes.

         The level of the Company's indebtedness could have important
consequences to holders of the Notes, including, but not limited to, the
following: (i) the ability of the Company to obtain additional financing for
acquisitions, working capital, capital expenditures or other purposes, if
necessary, may be impaired or such financing may not be on terms favorable to
the Company; (ii) the Company will have significant cash requirements for debt
service; (iii) financial and other covenants and operating restrictions imposed
by the terms of the Indenture and by its Amended and Restated Credit Facility by
and among Pen Holdings, certain of its subsidiaries, Mellon Bank, N.A., Canadian
Imperial Bank of Commerce and AmSouth Bank, N.A. (the "Credit Facility") will
limit, among other things, its ability to borrow additional funds or to dispose
of assets; (iv) a downturn in the Company's businesses will have a more
significant impact on its results of operations; and (v) the Company may,
subject to its covenants, increase indebtedness senior to the Notes.

         The ability of Pen Holdings to satisfy its obligations will be
primarily dependent upon (i) the resolution of defaults and potential defaults
under the Credit Facility, (ii) the resolution of the Cheyenne Judgment, (iii)
whether the Company can obtain a new credit facility to replace the Credit
Facility, (iv) the Company securing additional sources to provide liquidity and
(v) the future financial and operating performance of Pen Holdings and its
subsidiaries There can be no assurance that the Company can achieve any of the
foregoing.

HOLDING COMPANY STRUCTURE

         Pen Holdings is a holding company that conducts substantially all of
its operations through its subsidiaries. Pen Holdings' only significant assets
are (i) the capital stock of its subsidiaries, all of which are wholly owned
(ii) the building which houses the Company's headquarters and (iii) certain
office furniture and computer equipment.



                                       5
<PAGE>   8

As a holding company, Pen Holdings is dependent on dividends or other
distributions of funds from its subsidiaries to meet its debt service and other
obligations, including its obligations under the Notes.

EFFECTIVE SUBORDINATION OF THE NOTES AND GUARANTEES; RESTRICTIVE DEBT COVENANTS

         The Notes are senior unsecured obligations of Pen Holdings and will
rank generally the same in priority of payment with all existing and future
unsubordinated obligations of Pen Holdings and senior in right of payment to all
existing and future subordinated indebtedness of Pen Holdings. Borrowings under
the Credit Facility are secured by certain of Pen Holdings' and certain of its
subsidiaries' assets, including the stock of Pen Coal Corporation ("Pen Coal")
and Elk Horn Coal and substantially all of the assets of Pen Holdings' active
subsidiaries (defined to include Pen Coal, Elk Horn Coal, River Marine
Terminals, Inc. and Marine Terminals Incorporated). Accordingly, while the Notes
will rank generally the same in priority of payment with borrowings under the
Credit Facility, the Notes will be effectively subordinated to the obligations
outstanding under the Credit Facility to the extent of the value of the assets
securing such borrowings. The active subsidiaries also guarantee obligations
under the Credit Facility. The guarantees of the guarantors will rank generally
the same in priority of payment with all obligations of the respective
guarantors that are not by their terms expressly subordinated to the guarantees.
In the event of a default under the Credit Facility or other secured
indebtedness (whether as a result of the failure to comply with a payment or any
covenant, a cross-default or otherwise), the lenders thereunder will have a
secured claim foreclosure right on their collateral, and, if exercised, the
Company's financial condition and the value of the Notes will be materially
adversely affected. In the event of certain asset sales, the Credit Facility
provides that net proceeds thereof not reinvested as provided therein must be
applied to the repayment of borrowings under the Credit Facility.

         The Credit Facility and the Indenture contain covenants that, among
other things, limit the Company's ability to incur additional indebtedness,
prepay subordinated indebtedness, dispose of certain assets, incur liens, make
capital expenditures, make certain investments or acquisitions and otherwise
restrict corporate activities. The Credit Facility also requires the Company to
comply with certain financial ratios and tests, under which the Company is
required to achieve certain financial and operating results. The ability of the
Company to comply with such provisions may be affected by events beyond its
control. A breach of any of these covenants would result in a default under the
Credit Facility. See ITEM 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." In the event of any such default, depending on the actions taken by
the lenders under the Credit Facility, the Company could be prohibited from
making any payments on the Notes. In addition, such lenders could elect to
declare all amounts borrowed under the Credit Facility, together with accrued
interest thereon, to be due and payable, which would be an event of default
under the Indenture. As a result of the priority and/or security afforded the
Credit Facility, there can be no assurance that the Company would have
sufficient assets to pay indebtedness then outstanding under the Credit Facility
and the Indenture. Any future refinancing of the Credit Facility is likely to
contain similar restrictive covenants.

RELIANCE ON LONG-TERM SALES CONTRACTS, DEPENDENCE ON SIGNIFICANT CUSTOMERS AND
RISKS ASSOCIATED WITH PRICE ADJUSTMENT PROVISIONS

         A substantial portion of the Company's coal is sold pursuant to
long-term sales contracts which are significant to the stability and
profitability of the Company's operations. In 2000, approximately 68% of the
Company's revenues from coal sales were made under long-term sales contracts
with nine customers. Historically, the Company's long-term sales contracts
provided for coal to be sold at a price which exceeds the price at which such
coal could be sold in the spot market, but as a result of a recent increases in
the market price of coal, the Company's contract prices are currently below the
spot market price of coal. While the long-term sales contracts provide
stability, they are currently preventing the Company from obtaining higher
prices on the spot market.

         The Company's long-term sales contract with Dayton Power & Light, which
expired in 2000, accounted for 21%, 24%, 23%, 18%, and 24% of the Company's coal
sales revenues from 1996 through 2000, respectively. Two new contracts were
negotiated with Dayton Power & Light to replace the tonnage which was expiring.
Shipments on the new contracts began in January of 2001. These contracts were
based on then current market prices, which are below the current market prices
today. The Company's long-term sales contract with American Electric
Power-Mountaineer, which expired at the end of 2000, accounted for 18%, 17%,
17%, 16%, and 14% of the Company's coal sales revenues from 1996 through 2000.
This contract was not renewed. When economic conditions dictate, the Company
bids on new contracts to replace existing contracts in order to align supply
requirements with its


                                       6
<PAGE>   9

anticipated production levels. There can be no assurance, however, that the
Company will be able to secure additional contracts to replace any expiring
contract or to replace such contract on terms favorable to the Company. In
addition, as a result of improved coal prices, the advantage of stability that
long-term contracts had historically provided has been outweighed by the
inability of the Company to sell production for higher prices in the spot
market.

         Virtually all of the Company's long-term sales contracts are subject to
price adjustment provisions which permit an increase or decrease in the contract
price at specified times during the contract term to reflect changes in certain
price or other economic indices, taxes and other governmental charges. Long-term
sales contracts also typically contain force majeure provisions allowing
suspension of performance by the Company or the customer to the extent necessary
during the duration of certain events beyond the control of the affected party,
including labor disputes and changes in government regulations. There can be no
assurance that the Company's currently existing contracts will remain in force
for the duration of their current terms.

         The operating profit margins realized by the Company under its
long-term sales contracts depend on a variety of factors, including production
costs, transportation costs, delivered coal qualities and quantities and various
general macro-economic indices, many of which are beyond the Company's control.
Price adjustment, price re-opener and other provisions may reduce the insulation
from short-term coal price volatility provided by such contracts and may
adversely impact the Company's operating profit margins. The relative stability
of pricing in the Company's long-term sales contracts can result in
lost-opportunity costs when spot market prices are in excess of prices in the
Company's long-term sales contracts.

RELIANCE ON LONG-TERM MINERAL LEASES

         A portion of the Company's revenues is derived from the leasing of its
coal reserves pursuant to long-term (longer than one year) mineral lease
agreements. Although under such leases the lessees are required to pay certain
minimum royalties upon entering into the lease by a lessee, they will generally
be obligated to pay the Company royalties based on the level of its production
from the leased reserve. In 2000, approximately 24% of the Company's gross
profits were derived from the leasing of its mineral reserves. See ITEM 7--
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Selected Consolidated Financial Data" As of December 31, 2000, the
Company had 30 mineral leases with a weighted average remaining life of
approximately six years.

         The amount of gross profit the Company derives from long-term mineral
leases is subject to the production of its lessees. The Company evaluates each
prospective lessee to determine its ability to efficiently and productively mine
the leased reserves based in large part upon past performance of the particular
prospective lessee. Beyond this evaluation, however, the ability of the lessee
to generate royalties for the Company is beyond the Company's control. Lessees
and potential lessees participate in the same highly competitive industry as the
Company. There can be no assurance that the companies which lease the Company's
mineral reserves will continue to have production levels from the Company's
reserves at the same levels they have been in the past.

         The revenues generated by the Company's leases depends upon a variety
of other factors, including the long-term viability of the lessees and the
Company's ability to renew these leases as they approach termination or find
other willing and suitable lessees. If a number of the leases are terminated due
to the lessee ceasing operations, or the leases are not renewed upon expiration
of their term, the Company's results of operations could be adversely affected
to the extent that it is not able to find suitable alternate lessees.

HIGHLY COMPETITIVE INDUSTRY

         The U.S. coal industry is highly competitive, with numerous producers
in all coal producing regions. The Company competes with other large producers
and hundreds of small producers in the United States and abroad. Many of the
Company's customers also purchase coal from its competitors. The markets in
which the Company sells its coal are highly competitive and affected by factors
beyond the Company's control. Demand for coal and the prices that the Company
will be able to obtain for its coal are closely linked to coal consumption
patterns of the domestic electric utility industry, which accounted for
approximately 87.4% of domestic coal consumption in 1999. These coal consumption
patterns are influenced by the demand for electricity, coal transportation
costs,


                                       7
<PAGE>   10

environmental and other governmental regulation, technological developments and
the location, availability and price of competing sources of coal, alternative
fuels such as natural gas, oil and nuclear, and alternative energy sources such
as hydroelectric power.

RISKS INHERENT TO MINING

         The Company's mining operations are subject to conditions beyond the
Company's control which can negatively affect the cost of mining at particular
mines for varying lengths of time. These conditions include weather and natural
disasters such as heavy rains and flooding, unexpected maintenance problems of
mine access structures, such as shafts and slopes, variations in coal seam
thickness, variations in the amount of rock and soil overlying the coal deposit,
variations in rock and other natural materials and variations in other
geological and other conditions. See ITEM 7-- "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

IMPORTANCE OF ACQUISITIONS AND RELATED RISKS

         The Company has grown, in part, through the acquisition of coal
companies, coal properties, coal leases and related assets, and management
believes such acquisitions could continue to be important to the Company.
Acquisitions involve a number of special risks, including possible adverse
effects on the Company's operating results, diversion of management's attention,
failure to retain key acquired personnel, risks associated with unanticipated
events or liabilities and difficulties in the assimilation of the operations,
technologies, services and products of the acquired companies, some or all of
which could have a material adverse effect on the Company's financial condition
and results of operations. There can be no assurance that the Company will be
successful in the development of such acquisitions or that the acquired
companies or other businesses acquired in the future will achieve anticipated
revenues and earnings. See ITEM 7-- "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."

GOVERNMENT REGULATION OF THE MINING INDUSTRY

         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, 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 that mining has on
groundwater quality and availability. Numerous governmental permits and
approvals are required for mining operations. The Company believes all material
permits 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.
The possibility exists that new legislation and/or regulations and orders may be
adopted which may materially adversely affect the Company's mining operations,
its cost structure and/or its customers' ability to use coal. New legislation,
including proposals related to the protection of the environment which would
further regulate and tax the coal industry, may also require the Company or its
customers to change their operations significantly or incur increased costs.
Such factors and legislation (if enacted) could have a material adverse effect
on the Company's financial condition and results of operations.

         A legal challenge to the issuance of mountaintop mining permits in West
Virginia has created uncertainty relating to the regulation of the coal mining
industry in West Virginia. In July 1998, a West Virginia property owner and
environmental group instituted a challenge to state and federal permits granted
in West Virginia for mountaintop removal coal mining in Bragg v. Robertson, et
al. On February 17, 2000, a settlement was reached in Bragg, et al. Management
understands that the settlement provides that the West Virginia Department of
Environmental Protection ("WVDEP") will be required to regulate mountain top
removal operations with a higher level of scrutiny than before, and that permits
for removal operations will not be granted unless concrete development plans are
submitted for post-mining land uses. New regulations to implement these
guidelines are being proposed by the WVDEP. This settlement resolved all
remaining issues in this case except one issue relating to buffer zones and
valley fills. On April 24, 2001 the U.S. Court of Appeals for the Fourth Circuit
affirmed the settlement reached on February 17, 2001, but dismissed the claim
relating to the unsettled buffer zones and the


                                       8
<PAGE>   11

valley fills issue without prejudice to any suit which may be pursued in West
Virginia State court. Management believes that although Bragg has delayed the
issuance of certain mining permits, the settlement of the case and the recent
U.S. Court of Appeals decision provides more guidance to mining companies and
operators relating to regulation concerning West Virginia operations. However,
no assurances can be given that other legal actions or the remaining issue in
Bragg, if adversely decided, could have a material adverse impact on the
Company's financial condition and results of operations.

RECLAMATION AND MINE CLOSURE ACCRUALS

         The federal Surface Mining Control and Reclamation Act of 1977
("SMCRA") and similar state statutes require that mine property be restored in
accordance with specified standards and an approved reclamation plan. The
Company accrues for the costs of final mine closure over the estimated useful
mining life of the property. These costs relate to reclaiming the pit and
support acreage at surface mines and sealing portals and contour reclamation at
underground mines, scrap removal, and contour reclamation at its preparation
plants. Other costs common to both types of mining are related to reclaiming
refuse and slurry ponds. The Company accrues for current mine disturbance which
will be reclaimed prior to final mine closure. The establishment of the final
mine closure reclamation liability and the current disturbance is based upon
permit requirements and requires various estimates and assumptions, principally
associated with costs and production levels. Although the Company's management
believes it is making adequate provisions for all expected reclamation and other
costs associated with mine closures, the Company's financial condition and its
future operating results would be adversely affected if such accruals were later
determined to be insufficient.

IMPACT OF CLEAN AIR ACT AMENDMENTS ON COAL CONSUMPTION

         The federal Clean Air Act, as amended ("Clean Air Act") and amendments
to the Clean Air Act ("Clean Air Act Amendments"), and corresponding state laws
which regulate the emissions of materials into the air, affect coal mining
operations both directly and indirectly. Coal mining and processing operations
may be directly affected by state and federal air emissions permitting
requirements and/or emissions control requirements relating to particulate
matter (e.g., "fugitive dust"). Coal mining and processing may also be impacted
by future regulation of fine particulate matter measuring 2.5 micrometers in
diameter or smaller. The Clean Air Act indirectly affects coal mining operations
by extensively regulating the air emissions of coal-fueled utility power plants.
Such regulations directly impact a coal producer's ability to sell coal to its
customers. Regulations relating to fugitive dust and coal combustion emissions
may restrict the Company's ability to develop new mines or could require the
Company to modify its existing operations and products. Title IV of the 1990
Clean Air Act Amendments places limits on sulfur dioxide emissions from electric
power generation plants. Implementing these rules sets baseline emission
standards for such facilities. Reductions in such emissions will occur in two
phases: the first began in 1995 ("Phase I") and applies only to certain
identified facilities; and the second began in 2000 ("Phase II") and applies to
most remaining facilities, as well as those subject to the 1995 restrictions.
The affected utilities have been and may be able to meet these requirements by,
among other ways, switching to lower sulfur fuels, installing pollution control
devices such as scrubbers, reducing electricity generating levels or purchasing
or trading "pollution credits." Specific emission sources will receive these
credits which utilities and industrial concerns can trade or sell to allow other
units to emit higher levels of sulfur dioxide. In addition, the Clean Air Act
Amendments require a study of utility power plant emission of certain toxic
substances and their eventual regulation, if warranted.

         The effect of the Clean Air Act Amendments on the Company cannot be
completely ascertained at this time. The Company believes that implementation of
Phase II will likely exert a downward pressure on the price of higher sulfur
coal, as additional coal-burning utility power plants become subject to the
restrictions of Title IV. This price effect is expected to result after the
large surplus of pollution credits which has accumulated in connection with
Phase I has been reduced and before utilities electing to comply with Phase II
by installing scrubber sulfur-reduction technologies are able to implement such
a compliance strategy. If the price of compliance coal rises as Phase II is
implemented, scrubber compliance strategies may become more attractive to
utility customers, thereby lessening the downward pressure on the price of high
sulfur coal which could adversely affect the Company's prices for its compliance
and low-sulfur coal. Currently, approximately 74% of the Company's coal reserves
are estimated to be composed of compliance or low-sulfur coal and 26% of the
Company's reserves are estimated to be composed of medium-sulfur coal.



                                       9
<PAGE>   12
         The Clean Air Act Amendments also require that utilities that currently
are major sources of nitrogen oxides in moderate or higher ozone non-attainment
areas install reasonably available control technology ("RACT") for nitrogen
oxides, which are precursors of ozone. The Ozone Transport Assessment Group
("OTAG"), formed to make recommendations to the Environmental Protection Agency
(the "EPA") for addressing ozone problems in the eastern United States,
submitted its final recommendations to the EPA in June 1997. Based on the OTAG's
recommendations in October 1998, the EPA announced a rule (the "SIP call") that
required the District of Columbia and 22 eastern states, including states in
which the Company's customers are located, to make substantial reductions in
nitrous oxide emissions. Several affected states and certain industry groups
challenged the SIP call. In March 2000, the D.C. Circuit Court of Appeals
essentially affirmed the SIP call in Michigan v. EPA by upholding that 19 of the
22 states be required to implement new nitrogen oxide emission control levels to
meet the nitrogen emission budget targets set by the EPA. The D.C. Circuit
extended the original implementation date of May 1, 2003 to May 31, 2004. In
March 2001, the United States Supreme Court denied certiorari of the appeal of
the D.C. Circuit's holding in Michigan v. EPA. One of the ways the EPA expects
that states will achieve these reductions is by requiring power plants to reduce
their nitrous oxide emissions by an average of 85%. Installation of RACT and
additional control measures required under the SIP call will make it more costly
to operate coal-fired utility power plants and, depending on the requirements of
individual state attainment plans and the development of revised new source
performance standards, could make coal a less attractive fuel alternative in the
planning and building of utility power plants in the future. Any reduction in
coal's share of the capacity for power generation could have a material adverse
effect on the Company's financial condition and results of operations. The
effect such legislation or regulation, or other legislation that may be enacted
in the future, could have on the coal industry in general and on the Company in
particular cannot be predicted with certainty. Although a large portion of the
Company's coal reserves are comprised of compliance and low-sulfur coal, there
can be no assurance that the implementation of the Clean Air Act Amendments or
any future regulatory provisions will not materially adversely affect the
Company.

POTENTIAL IMPACT OF KYOTO PROTOCOL

         On December 11, 1997, U.S. government representatives at the climate
change negotiations in Kyoto, Japan, agreed to reduce the emissions of
greenhouse gas (including carbon dioxide and other gas emissions that are
believed to be trapping heat in the atmosphere and warming the Earth's climate)
in the United States. The adoption of the requirements of the Kyoto protocol by
the United States are subject to conditions which may not occur, and are also
subject to the protocol's ratification by the U.S. Senate. The U.S. Senate has
indicated that it will not ratify an agreement unless certain conditions, not
currently provided for in the Kyoto protocol, are met. In a letter to members of
the U.S. Senate dated March 19, 2001, President George W. Bush presented his
administration's opposition to the Kyoto protocol. Although the President and
the U.S. Senate have indicated that they oppose the Kyoto protocol in its
current form, it is not presently . possible to predict whether some form of the
Kyoto protocol will attain the force of law in the United States or what its
impact would be on the Company. Further developments in connection with the
Kyoto process could adversely affect the Company's financial condition and
results of operations.

REPLACEMENT AND RECOVERABILITY OF RESERVES

         The Company's future success depends, in part, upon its ability to
find, develop or acquire additional coal reserves. The reserves of the Company
will generally be depleted as mining operations are conducted, except to the
extent the Company conducts successful exploration and development activities or
acquires properties containing reserves. To increase reserves and production,
the Company must continue its development, exploration and acquisition
activities or undertake other replacement activities. The Company's current
strategy includes increasing its reserve base through acquisitions of producing
properties and by continuing to exploit its existing properties. There can be no
assurance, however, that the Company's planned development and exploration
projects and acquisition activities will result in significant additional
reserves or that the Company will have continuing success developing additional
mines. Most of the Company's mining operations are conducted on properties owned
or leased by the Company. Because title to most of the Company's leased
properties and mineral rights is not thoroughly verified until a permit is
obtained to mine the property, the Company's right to mine certain of its
reserves may be adversely affected if defects in title or boundaries exist. In
addition, there is no assurance that the Company can successfully negotiate new
leases or mining contracts for properties containing additional reserves or
maintain its leasehold interest in properties on which mining operations are not
commenced during the term of the lease. See ITEM 2-- "Properties."


                                       10
<PAGE>   13

PRICE FLUCTUATIONS AND MARKETS

         The Company's results of operations are highly dependent upon the
prices received for the Company's coal. While the prices for coal have
dramatically increased in 2000, any significant decline in prices for coal, from
the prices which existed prior to the recent increases, could have a material
adverse effect on the Company's financial condition, results of operation and
quantities of reserves recoverable on an economic basis. Should the industry
experience significant price declines from the levels that existed prior to the
recent increases or other adverse market conditions, the Company may not be able
to generate sufficient cash flow from operations to meet its obligations and
make planned capital expenditures. See ITEM 7--"Management's Discussion And
Analysis Of Financial Condition And Results Of Operations-Liquidity And Capital
Resources."

         Another factor that may impact the sale of coal in the future is the
development of coal commodity trading. The New York Mercantile Exchange
initiated electricity commodity trading recently and has been developing
standards for coal contracts. The Exchange has announced its intention to
initiate coal contract trading based on a Huntington, West Virginia barge
loading hub. The development of standards to determine pricing has been
difficult because of the non-homogeneous character of coal and diversity in
commodity trading, some brokerage and marketing firms have entered the coal
markets and devised transactions that mimic commodity activity. Today,
over-the-counter trading is being conducted to a limited extent on both firm
forward transactions as well as put, call and other options. The trend to more
commodity type transactions could mark a significant change in how coal is sold.
Management believes it is too early to determine whether this trend could have a
material effect on the Company and its operating results.

         Several years ago, Section 29 was added to the Internal Revenue Code.
This Section provided "credit[s] for producing fuel from a non-conventional
source." These credits were intended to encourage the production of alternative
fuels that are otherwise more expensive than their petroleum-based counterparts.
For example, a 12,500 BTU coal synthetic fuel product would generate a tax
credit of $26.40 per ton for the synthetic fuel producer. Coal-based synthetic
fuel is produced by combining coal fines, as the feedstock, with a petroleum
based emulsion binder to create a synthetic product that qualifies for the tax
credit. This coal-based product is sold into the utility market and can be sold
at a discount to prevailing coal prices because of the tax credits afforded to
the producer. In order to qualify for the credit the synthetic fuel producer had
to be in production by July of 1998. Management believes while a limited number
of producers are qualified for this credit, the synthetic fuel from these plants
is having an effect on the coal market. Management believes it is too early to
determine whether this trend could have a material effect on the Company and its
operating results.

RELIANCE ON ESTIMATES OF RECOVERABLE RESERVES

         There are numerous uncertainties inherent in estimating quantities of
reserves, including many factors beyond the control of the Company. The coal
reserve data set forth in this report are based on the Reserve Studies and
estimates made by the Company's management. Estimates of coal reserves and
future net cash flows necessarily depend upon a number of variable factors and
assumptions, such as historical production from the area compared with
production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions concerning future coal prices, future
operating costs, severance and excise taxes, development costs and reclamation
costs, all of which may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of coal
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of future net cash flows
expected therefrom prepared by different engineers or by the same engineers at
different times may vary substantially. Actual production, revenues and
expenditures with respect to the Company's reserves will likely vary from
estimates, and such variances will likely be material. As a result, potential
investors should not place undue reliance on the coal reserve data included
herein. See ITEM 2-- "Properties."

DEPENDENCE ON KEY MANAGEMENT AND CONTROL BY PRINCIPAL SHAREHOLDER

         The Company's business is managed by a number of key personnel, the
loss of any of whom could have a material adverse effect on the Company. In
addition, as the Company's business develops and expands, the Company believes
that its future success will depend greatly on its continued ability to attract
and retain highly skilled and qualified personnel. See ITEM 10-- "Directors and
Executive Officers of the Registrant."


                                       11
<PAGE>   14

         William E. Beckner beneficially owns 90.4% of the outstanding voting
securities of the Company. Accordingly, Mr. Beckner is able to control the
election of the Company's directors and to determine the corporate and
management policies of the Company, including decisions relating to any mergers
or acquisitions by the Company, sales of all or substantially all of the
Company's assets and other significant corporate transactions, which
transactions may result in a Change of Control under the Indenture and Credit
Facility. See ITEM 12-- "Security Ownership of Certain Beneficial Owners and
Management."

TRANSPORTATION

         The U.S. coal industry depends on rail, trucking and river barge
transportation to deliver shipments of coal to customers. Disruption of these
transportation services could temporarily impair the Company's ability to supply
coal to its customers and thus adversely affect the Company's financial
condition and operating results. Transportation costs are a significant
component of the total cost of supplying coal to customers and can affect
significantly the Company's competitive position and profitability. Increases in
the Company's transportation costs, or changes in such costs relative to
transportation costs incurred by providers of competing coal or of other fuels,
could have an adverse effect on the Company's financial condition and operating
results. Although the Company currently has fixed-price transportation contracts
with its transportation providers, the significant increase in diesel fuel and
gasoline prices could adversely affect the Company's ability to renew these
contracts at current levels. In addition, the Company may be adversely affected
by labor or other disruptions throughout the transportation industry as a whole.

         In the past, the Company has experienced delays in transporting coal
from its mine sites near the Kentucky-West Virginia border due to temporary
cessations of operations at its Big Sandy River loading terminals. In the past,
the Big Sandy River has flooded or water levels have risen after sustained
periods of adverse weather conditions, forcing the terminals to cease loading
barges. These terminals were unable to load barges 56 days during the five year
period ending December 31, 2000. Delays in transporting its coal to customers
increases the Company's cost of production and decreases customer satisfaction
and, if prolonged, could have a material adverse effect on the Company.
Additionally, the coal production from Fork Creek is shipped on rail via CSX
and, as a result, the Company is also dependent upon CSX to transport this coal.

UNIONIZATION OF LABOR FORCE

         The Company is not currently a party to any collective bargaining
agreement and considers its relations with its employees to be good. If some or
all of the Company's currently non-union operations were to become unionized,
the Company could incur higher labor costs and an increased risk of work
stoppages or inefficiencies. There can be no assurance that the Company's
workforce will not unionize in the future. In addition, even if the Company
remains non-unionized, its operations may still be adversely affected by work
stoppages at unrelated unionized companies.

NEW TECHNOLOGY

         The coal mining industry is increasingly affected by advances in
technology. The ability of the Company to compete successfully may depend on the
extent to which it is able to implement and exploit such technological changes.
The failure of the Company to develop, anticipate or respond to such changes
could have a material adverse effect on the Company. The development of new and
better technologies by the Company's competitors could have a material adverse
effect on the Company's financial condition and results of operations.

FRAUDULENT CONVEYANCE STATUTES

         Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if a court were to find that, among
other things, at the time Pen Holdings incurred the indebtedness evidenced by
the Notes or a guarantor executed its guaranty, Pen Holdings or the guarantor,
as the case may be: (i) (a) was or is insolvent or rendered insolvent by reason
of such occurrence, (b) was or is engaged in a business or transaction for which
the assets remaining with Pen Holdings or such guarantor constituted
unreasonably small capital, or (c) intended or intends to incur, or believed or
believes that it would incur, debts beyond its ability to pay such debts as they
mature; and (ii) received or receives less than reasonably equivalent value or
fair consideration for the


                                       12
<PAGE>   15

incurrence of such indebtedness, then the Notes or guarantee, as the case may
be, could be voided, or claims in respect of the Notes or guarantees could be
subordinated to all other debts of Pen Holdings, as the case may be. In
addition, the payment of interest and principal by Pen Holdings pursuant to the
Notes could be voided and required to be returned to the person making such
payment, or to a fund for the benefit of the creditors of Pen Holdings.

         The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, Pen Holdings or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the salable value of all of its assets at a fair valuation or if
the present fair salable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature or (ii) it could not
pay its debts as they become due.

         On the basis of historical financial information, recent operating
history and other factors, the Company believes that, as a result of the
indebtedness incurred in connection with the Notes and the establishment of the
Credit Facility, it was not rendered insolvent, did not have unreasonably small
capital for the business in which it is engaged and did not incur debts beyond
its ability to pay such debts as they mature. There can be no assurance,
however, as to what standard a court would apply in making such determinations
or that a court would agree with the Company's conclusions in this regard.

POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER

         Upon a change of control, the Company will be required to offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of repurchase. However, there
can be no assurance that sufficient funds will be available at the time of any
change of control to make any required repurchases of Notes tendered or that
restrictions in the Credit Facility will allow the Company to make such required
repurchases.



                                       13
<PAGE>   16


ITEM 2. PROPERTIES.

Mining Operations

         For reference, the Company has included on page M-1, a small scale map
illustrating the Company's coal operations. See "Page M-1-Kentucky-West Virginia
Operation".

         Captive Coal Production - Summary. The Company currently conducts
mining operations in various locations through four operating divisions (Kiah
Creek, Fork Creek, Levisa Fork and Bear Branch). Approximately 56% of the
Company's 2000 production originated from its underground mines, and
approximately 44% originated from its surface mines. Coal seam thickness,
location and the amount of overburden required to be removed, among other
conditions, are factors utilized by the Company to determine the appropriate
mining method. The Company has shifted a greater percentage of its production to
underground mines to maximize its reserve utilization. In 1993, 37% of the
Company's production was from underground mines, compared to 56% in 2000.
Contract miners, under the terms of contract mining agreements with the Company,
operated in seven underground mines and three surface mines on the Company's Elk
Horn reserves during 2000. Contract mining has represented 17%, 22%, 16%, 21%,
and 14% of the Company's coal production in the periods 1996 through 2000,
respectively.

         The following table presents the Company's total captive coal
production for the previous five years:

<TABLE>
<CAPTION>
    OPERATING DIVISION              1996          1997          1998          1999          2000
    ------------------              ----          ----          ----          ----          ----
                                                      (IN THOUSANDS OF TONS)
<S>                                <C>           <C>           <C>           <C>           <C>
Kiah Creek (West Virginia)         2,746         2,947         3,244         3,659         3,360
Fork Creek (West Virginia)            --            --            --            --           303
Levisa Fork (Kentucky)               552           557           707           972           599
Bear Branch (Kentucky)                --            --            --            19           572
                                   -----         -----         -----         -----         -----
     Total                         3,298         3,504         3,951         4,650         4,834
                                   =====         =====         =====         =====         =====
</TABLE>


         Kiah Creek. Through 2000, the Company's principal mining operations
have been located at Kiah Creek. These reserves were purchased by the Company in
1987 for $16.5 million, and mining operations commenced shortly thereafter with
surface mining and, later, underground mining. This property consists of
approximately 45,000 acres of owned and leased surface area located in Wayne,
Lincoln and Mingo counties in southern West Virginia. In 1995 and 1996, the
Company acquired by lease approximately 26 million tons of reserves which are
contiguous to Kiah Creek. Management estimates that the Company currently owns
in fee approximately 24 million tons of reserves and currently controls,
primarily through leases, an additional approximately 21 million tons of
reserves on this property. Management estimates that the quality of its
production at Kiah Creek has averaged 10 to 15% ash, and 11,500 to 12,500 Btu
per pound, and that its remaining reserves at Kiah Creek are 23% compliance coal
and 77% low-sulfur and medium sulfur.

         At Kiah Creek, two underground mining units in two underground mines
are currently operating. The Company operates one underground high performance
unit in Mine #6 in the Coalburg seam, and one underground high performance
mining unit in its Mine #7 in the 5-Block seam. In addition for most of 2000 the
Company had single underground units operating in Mine #3 in the Coalburg seam
and Mine #4 and #5 in the 5-Block seam. In May of 2000, one section of
underground equipment was idled to free-up capacity in the preparation plant for
the additional production from the highwall miner. During the fourth quarter of
2000 the Company began transitioning from Mines #4 and #5 into Mines #6 and #7
and reconfigured the equipment mix into two high performance units. Mining is
now complete at Mines #3, #4 and #5. Approximately 1.5, 1.9, 2.0, 2.0, and 1.3
million tons of coal were produced from the Company's Kiah Creek underground
mines in the years from 1996 through 2000, respectively.

         The Company also operates one surface mine in the 5-Block and Coalburg
seams at Kiah Creek. The Company utilizes contour and point removal and area
mining techniques in its surface mining operations. Late in the second quarter
of 1999, the Company added a highwall miner to its Kiah Creek surface mine to
supplement the production from that mine. In May of 2000, the highwall miner
began operating 24 hours per day, seven days a week


                                       14
<PAGE>   17

to increase its production. Approximately 1.3, 1.1, 1.2, 1.7, and 2.0 million
tons of coal were produced from the Company's Kiah Creek surface mines in the
years from 1996 through 2000, respectively.

         The Company owns and operates a computer-controlled, 600-ton-per-hour
heavy media preparation plant on the Kiah Creek property where the coal from all
of its underground mines and the highwall miner on this property and a small
percentage of its surface mined coal is processed. The preparation plant sizes
the raw product, then directs the sized product to one of three circuits: heavy
media vessel, heavy media cyclones or coal spirals. Each of these circuits
utilizes specific gravity separation to separate coal from rock and other
impurities. This preparation plant is also capable of producing stoker coal. The
preparation plant has a storage capacity of approximately 50,000 tons and a
processing capacity of approximately four million raw tons per year. This plant
processed 1.5, 1.9, 2.0, 2.2, and 1.9 million tons of clean coal in the years
from 1996 through 2000, respectively, and has averaged recovery rates of 54%,
51%, 53%, 54%, and 52% in the years 1996 through 2000, respectively. The
preparation plant currently operates 24 hours per day, seven days a week. The
coal from the Kiah Creek surface mine and from the Kiah Creek preparation plant
is sent by truck via Company roads and state highways approximately 50 miles to
the Company's Wayne County River Terminal located in West Virginia along the Big
Sandy River, a navigable tributary of the Ohio River.

         The Company built its Wayne County River Terminal in 1988 at an initial
cost of approximately $3.5 million and has made additional capital expenditures
on this facility of $3.9 million. This river terminal, which is approximately 15
miles from Huntington, West Virginia, has blending capabilities and a loading
capacity of approximately six million tons annually.

         Currently, the Company's coal from its Kiah Creek and Levisa Fork
divisions is being delivered primarily by barge to its domestic customers along
the Ohio River and Mississippi Rivers. Either an independent barge operator or
the Company's customers transport the coal after it has been loaded into the
river barges. In April 1998, the Company terminated its operations at its
smaller river terminal in Kentucky located along the Big Sandy River. This
termination occurred because management believed the Company's barge loading
needs were more efficiently met at the Company's Wayne County River Terminal.
The Company is seeking to sell the Kentucky dock facility.

         The Company shipped 4.4, 4.5, 4.7, 5.0, and 4.0 million tons from its
terminals on the Big Sandy River from 1996 through 2000, respectively. According
to the Big Sandy River Committee, an organization of shipping facilities on the
Big Sandy River, including 10 coal-loading facilities, the Company shipped more
tonnage than any other operator on this river in each of the last five years.

         Generally, the Company undertakes and controls all permitting and
permit maintenance under the SMCRA requirements and similar state requirements
in West Virginia for its captive production. The Company provides surety bonds
for these SMCRA permits.

         Fork Creek. In November 1997, the Company acquired a 28,000-acre
contiguous tract located in Kanawha, Boone and Lincoln counties in West
Virginia. Based on the Reserve Studies, Fork Creek contains approximately 80
million tons of coal reserves. The Fork Creek acquisition is consistent with the
Company's strategy to focus its operations on large contiguous properties
located in the Central Appalachia region. The purchase price for this property
was $16 million.

         The Fork Creek reserves are a large contiguous tract of mineral
reserves analogous in size to the Kiah Creek reserves. Unlike Kiah Creek,
however, the geological conditions of the Fork Creek reserves have led the
Company to plan primarily underground mining operations to extract the mineral.
Originally, the Company intended to develop Fork Creek for its own production
while selectively contracting with other miners where such contracts are
commercially attractive. However, given the Company's increasing need for cash
and liquidity, management is exploring possible transactions that could transfer
the ownership of these mineral rights to third parties. Based upon data received
from core-hole drilling done on the property, management estimates that the
quality of the reserves at Fork Creek will generally be between 5% to 13% ash
and 12,150 to 13,250 Btu per pound and the reserves are 25% compliance coal, 41%
low-sulfur and 34% medium sulfur.

         The Company has invested approximately $73 million (excluding mobile
mining equipment) to develop this property, including the construction of an
upgradeable 900 tons per hour coal preparation plant and a 150 car, four hour,
batch weigh, fast feed rail loadout adjacent to a CSX rail line and an access
road to the heart of the property. The


                                       15
<PAGE>   18

Company began mining in Fork Creek #1 in May 2000 while the preparation plant
construction was being completed. The construction of the preparation plant and
the rail loadout was completed in September 2000 and shipments began immediately
thereafter. The Fork Creek reserves are accessible by truck via a state highway
and an access road on to the property.

         At Fork Creek, four underground mining units in two underground mines
are currently operating. The Company operates one super section and two
continuous haulage units in Mine #1, which is a slope and shaft mine in the
No. 2 Gas seam and one super section in the Tiny Creek #2 drift mine which is in
the 5-Block seam. If the Company's liquidity permits, management expects to add
an additional unit in Tiny Creek #2 mine as soon as equipment and manpower can
be secured. Mining began with one mining unit in Mine #1 in May 2000. Additional
mining units were added throughout the remainder of 2000. The Tiny Creek mine
started in December 2000. During 2000, Fork Creek produced 308,000 tons. If the
Company's liquidity permits, management expects to produce approximately 2.4
million tons in 2001 and assuming that manpower and equipment can be secured to
meet its expansion plans.

         Levisa Fork. The Levisa Fork operating division consists of the captive
production performed by contract miners on the Elk Horn reserves (see
description of the Elk Horn reserves under Elk Horn Coal Leasing) During 2000,
Levisa Fork's contract mines included eight underground mines (of which five are
still active) and two surface mines (which are no longer active). Because of the
reserve's geological composition, Levisa Fork's contract underground miners
currently utilize conventional mining techniques. Conventional mining techniques
are often used in thinner coal seams (approximately 30-inch mining height) and
generally result in less volume and productivity per man-hour versus utilizing
continuous mining units. However, conventional mining tends to produce coal with
less ash content, which reduces the requirement to wash the coal at a
preparation plant. As a result, the Company does not maintain a preparation
plant on the Elk Horn reserve.

         Under these contract mining arrangements, the Company contracts with
independent mining companies to extract coal in exchange for a predetermined
per-ton fee. Contract mining fees at Levisa Fork have averaged approximately
$14.72 per ton from 1996 through 2000. Contract mining fees typically exclude
taxes and royalties. The relationships between the Company and its contract
miners are generally governed by the Company's standard contract mining
agreement (the "Contract Mining Agreement"). The Contract Mining Agreement is
for a term of one year which is automatically renewed from year-to-year,
although either party may elect not to renew upon 60 days' notice. Several of
the Contract Mining Agreements allow either party to terminate upon 30 days'
notice for virtually any reason. Each Contract Mining Agreement provides that
the independent contractor meet certain minimum daily and monthly production
requirements and minimum coal quality standards. Contractors are given premiums
or charged penalties based on delivered coal quality. The Contract Mining
Agreement is not assignable by the contractor without the express permission of
the Company nor is a significant change in ownership of the contractor
permitted. The Contract Mining Agreement requires the contractor to provide all
of the equipment, manpower and other resources necessary to mine the coal. The
contractor must provide all required insurance coverage to its employees and
liability insurance for its operation. The Contract Mining Agreement provides
that the contractor will hold the Company harmless from any environmental or
health and safety liability incurred by the contractor as a result of its
mining. The Company in conjunction with the contractor, determines the most
efficient mining plan for the coal reserve in order to maximize the use of the
resources.

         The Company generally undertakes and controls all permitting and permit
maintenance under SMCRA requirements and similar state requirements in Kentucky
(including providing the surety bonds for the SMCRA permits for these contract
mine sites). Each contract miner fulfills the site maintenance requirements for
the SMCRA permits as part of its contract with the Company. All federal Mine
Safety Health Act requirements are also the sole responsibility of the contract
miner.

         The coal produced at Levisa Fork is typically transported to the
Company's Wayne County River Terminal on the Big Sandy River for delivery to
customers along the Ohio River and Mississippi River systems and to the Gulf of
Mexico.

         From 1996 through 2000, contract mining at Levisa Fork produced
557,000, 542,000, 713,000, 971,000 and 602,000 tons, respectively. The average
raw coal quality produced by these contract mining operations has consistently
exceeded the Company's sales contract requirements.




                                       16
<PAGE>   19

         Bear Branch The Company's Bear Branch operating division in Martin and
Lawrence counties in Kentucky currently operates one underground high
performance unit in its Peach Orchard #1 mine in the Peach Orchard seam (which
is equivalent to the Coalburg seam in West Virginia). The Company also has a
contract miner operating one surface mine on the property. Additionally, during
the first half of 2000 an additional contract miner in an underground mine was
producing coal. The Company expects Bear Branch to produce approximately 600,000
tons of coal annually over the life of its reserves. Consistent with its
historical strategy, the Company will attempt to acquire, by purchase or lease,
additional reserves at Bear Branch.

         The coal produced at Bear Branch is transported by truck either
directly to customers or to the Company's Wayne County River Terminal on the Big
Sandy River for delivery to customers along the Ohio River and Mississippi River
systems and to the Gulf of Mexico.




                                       17
<PAGE>   20


Leasing Operations

         Elk Horn Coal Leasing. In 1994, the Company acquired the Elk Horn
properties through its purchase of all of the outstanding capital stock of Elk
Horn Coal for $71 million in cash. This acquisition made the Company one of the
largest private owners of coal reserves in Central Appalachia. The Company
produces coal through the use of contract mining companies (see "Levisa Fork"
above) and leases to other coal companies the mineral rights to a portion of the
coal from its Elk Horn reserves. The Company's Elk Horn reserves include
approximately 142,000 non-contiguous surface acres of coal bearing lands located
in Floyd, Johnson, Knott, Letcher, Magoffin, Martin and Pike counties in eastern
Kentucky, all of which is owned in fee. Based on the Reserve Studies, the Elk
Horn reserves are estimated to contain more than 92 million tons of coal.

         The Company believes that due to the location and geological
composition of its Elk Horn reserves, it is more economically attractive to
either contract with other mining companies or lease to other coal companies
than for the Company to mine. However, the Company continually reevaluates its
reserves and production to determine whether the Company can cost-effectively
extract coal through its own mining operations. Therefore, given the appropriate
economic and geological factors, the Company could determine to mine the
reserves at Elk Horn itself.

         The primary use of the Company's Elk Horn property has involved the
leasing of its mineral rights to independent coal producers in exchange for
revenue-based lease royalties. The Company's strategy has been to lease
attractive coal reserves to reliable coal producers under financially sound
leases. The Elk Horn coal reserves are strategically located in eastern
Kentucky, with access to major markets on the CSX rail system, and by barge via
the Big Sandy and Ohio Rivers. Many of these reserves are adjacent to numerous
mining companies' operations. As a result, it often is cost-effective for such
mining companies to continue mining in such areas, including on reserves leased
from the Company for a fee, rather than to cease mining operations at such
locations and redeploy equipment to other locations or idle or dispose of
equipment. All of these factors make the Company's Elk Horn reserves attractive
lease property to independent producers and coal operators.

         During the year ended December 31, 2000, the Company had 29 operators
who were actively mining on leased coal reserves, including MC Mining, Inc.,
Bull Creek Coal Corporation, Locust Grove, Inc., Johns Creek Coal Company, Maple
Ridge Inc., Industrial Fuels Minerals Company, Kris-Coal Mining, Inc., Turner
Elkhorn Mining Company, Pike-Letcher Land Company, Heck Energy, Addington Mining
and Mineral Resources, Inc. Generally, the lease terms provide the Company with
a royalty fee of up to 10% of the sales price of the coal with a minimum of
$1.75 to $2.50 per ton. The length of such leases generally varies from three to
five years with five years being the most common term. The Company has a limited
number of longer term leases which have terms of 35 years to the exhaustion of
the reserve. Under these longer term leases the royalties range from 4% to 7% of
the coal sales price. A minimum royalty is required whether the property is
mined or not. If sufficient coal is not mined such that the property does not
meet the minimum, the lessee pays the deficiency. Such deficiency (or minimum
royalty) can be recouped by the lessee as a credit against royalties owed on
mined coal if there is production within a period of time after a deficiency is
paid. This system motivates the lessee to maximize production of the property
during the term of the lease. The Company's credit experience with its lessees
has historically been favorable, with minimal bad debt write-offs for the period
from 1996 through 2000 of $3,000, $111,000, $0, $40,767, and $0 respectively.
The Company has subsequently recovered $86,000 of the $111,000 written off in
1997.

         In the period from 1996 through 2000, independent coal producers mined
approximately 3.4, 3.0, 3.3, 4.0, and 3.4 million tons, respectively, of coal
under leases. Management believes the amount of coal mined in 2000 decreased
from 1999 levels due to a decline in coal demand and market conditions during
the first nine months of 2000. Leasing contributed an average of $8.6 million
per year in royalty revenues since 1996 and management believes leasing will
continue to generate significant revenues based on existing leases and
indication of future mining by these operators. During the fourth quarter of
2000 and the first quarter of 2001 increases in natural gas and petroleum prices
along with the shortages of electrical power has substantially strengthened the
coal market and leads management to believe that there will be a increase in
leasing and mining activity.

         In recent years, Elk Horn's internal engineering and mapping group has
identified and prioritized the coal reserves which are favorable for
development. Management has proactively sought lessees for these identified
areas.



                                       18
<PAGE>   21

The Company has also negotiated leases in response to inquiries about mining
opportunities in specific seams, areas, or boundaries.

Transportation Operations

         Wayne County River Terminal. The Company's coal is currently
transported to its customers primarily by barges loaded at this river terminal
on the Big Sandy River and, to a much lesser extent, by truck and rail. The
Company generally pays truck charges to deliver coal from its preparation plant
or mine site to its Wayne County River Terminal and incurs costs to load it onto
a barge. Customers typically pay the transportation costs from the barge to the
customer's ultimate destination of delivery. The average annual cost per ton
incurred by the Company for transporting its coal from the preparation plant or
mine site to its river terminals during the period from 1996 through 2000 was
$3.70.

         The Company currently contracts with four independent trucking
companies to haul its coal from the mine site or preparation plant to the Wayne
County River Terminal. These hauling arrangements typically consist of a term of
three years and are based on a fixed fee per ton. The Company believes it can
replace, if necessary, any of its independent trucking relationships with other
independent trucking companies upon relatively short notice.

         International Marine Terminals. The Company has a one-third partnership
interest in International Marine Terminals ("IMT"). IMT owns and operates an
ocean marine loading facility located in Louisiana south of New Orleans along
the Mississippi River. IMT (i) transloads coal from river barges into gulf
barges or ocean going vessels to Gulf Coast coal customers and international
markets; (ii) transloads petroleum coke for domestic producers (or their sales
brokers); and (iii) provides transloading services for the U.S. steel industry
with imported iron ore and other ferro alloys. During 1999, IMT transloaded a
total of 5.6 million tons of cargo, 0.6 million tons of which related to the
Company's TPC contract which expired in 1999.

Cotton Operations

         In June 2000, the Company sold the stock of Pen Cotton Company of South
Carolina, a wholly owned subsidiary engaged in cotton ginning and warehousing in
South Carolina. The selling price was $2,900,000 paid in cash at closing. Pen
Holdings, Inc. is a guarantor of the debt that the buyer incurred to purchase
the business. The gain resulting from the sale of approximately $847,000 is
included in income from discontinued operations. As a result of this sale the
Company has discontinued its cotton operations. The Company's balance sheet at
December 31, 1999 and the statements of income and cash flows for the year ended
December 31, 1999 have been restated to reflect the Company's discontinuation of
cotton operations.

Administrative Offices

         The Company maintains administrative offices in Brentwood (located near
Nashville), Tennessee; Kenova, Dunlow, Charleston, and Alum Creek, West
Virginia; and Prestonsburg and Richardson, Kentucky.




                                       19
<PAGE>   22



ITEM 3. LEGAL PROCEEDINGS.


         On February 16, 2001, Pen Holdings announced that the Supreme Court of
Kentucky decided to not review a February 25, 2000 two-to-one split decision of
the Commonwealth of Kentucky Court of Appeals upholding a September 1998 Floyd
County Kentucky Circuit Court jury verdict in favor of Cheyenne Resources, Inc.
and its wholly-owned subsidiary, PC&H Construction, Inc. (collectively,
"Cheyenne"). The Floyd County Kentucky Circuit Court jury verdict awarded
Cheyenne damages of approximately $9.5 million (plus prejudgment interest of
approximately $5 million). This lawsuit was brought against Elk Horn Coal on a
case relating to a coal lease that was entered into by Elk Horn Coal prior to
the Company's purchase of Elk Horn Coal. The Supreme Court of Kentucky decision
not to review the lower court decision renders the judgment final and
non-appealable.

         The Company informed its senior lenders of the event and continues to
seek necessary extensions of forbearance under the Credit Facility and with
Travelers, the Cheyenne Judgment bond holder. There can be no assurance that any
necessary forbearance period will be extended. In the event that the Company's
senior lenders do not grant the necessary extension, do not permit the Company
to borrow under the senior credit facility, or seek to accelerate the
indebtedness under the facility, this will materially and adversely impact the
liquidity and financial position of the Company. See - ITEM 7-- "Management's
Discussion And Analysis Of Financial Position And Results Of
Operations--Liquidity and Capital Resources." Additionally, once the Forbearance
Period has expired Travelers then can take actions to execute on the Cheyenne
Judgment bond. Currently, the Company has no available source of funds to pay
the total amount due under the judgment bond.

         The Company previously had filed suit against Tredegar Industries for
any judgment the Company may have to pay with regard to the Cheyenne Litigation.
Tredegar Industries was the owner of Elk Horn Coal when part of the events that
gave rise to Cheyenne Litigation occurred. The Company is pursuing this
litigation, however, this case is in its preliminary stages.

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

         There were no matters submitted to a vote of security holders of the
Company through the solicitation of proxies or otherwise during 2000.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The Company does not have a class of equity securities which are
registered under the Securities Exchange Act of 1934. No equity securities were
sold by the Company during the year ended December 31, 2000.




                                       20
<PAGE>   23



ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

         The following selected consolidated financial data as of and for each
of the five years ended December 31, 2000 have been derived from the
consolidated financial statements of the Company which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The information presented
below is qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements of the Company and
related notes included elsewhere in this document. For purposes of this
presentation, depreciation, depletion, and amortization have been reclassified
into a separate component of operating expenses from cost of sales and selling,
general and administrative expenses. The balance sheet items as of December 31,
1996, 1997 and 1998 and the statement of operations data and other data for the
years ended December 31, 1996 and 1997 have been derived from audited
consolidated financial statements not included herein.


                      SELECTED CONSOLIDATED FINANCIAL DATA
            (DOLLARS IN THOUSANDS, EXCEPT PER TON AND FOOTNOTE DATA)

<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31, RESTATED FOR SALE OF COTTON OPERATIONS
                                                     ---------------------------------------------------------------
                                                        1996          1997          1998         1999        2000
                                                        ----          ----          ----         ----        ----
<S>                                                  <C>          <C>            <C>          <C>         <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Coal Sales                                           $ 154,205    $  161,462     $ 154,908    $ 158,856   $  139,333
Leased coal                                              9,348         8,235         6,121        8,048        7,101
Other                                                    2,320         2,299            77          338        3,667
                                                     ---------    ----------     ---------    ---------   ----------
         Total revenues                                165,873       171,996       161,106      167,242      150,101

Cost of sales:
Coal sales                                             133,965       138,950       130,480      135,055      125,023
Leased coal                                              1,179         1,171         1,706        1,688        1,239
Other                                                       --            --            --           --           --
                                                     ---------    ----------     ---------    ---------   ----------
         Total cost of sales                           135,144       140,121       132,186      136,743      126,262

Gross profit:
Coal sales                                              20,240        22,514        24,428       23,801       14,310
Leased coal                                              8,169         7,064         4,415        6,360        5,862
Other                                                    2,320         2,297            77          338        3,667
                                                     ---------    ----------     ---------    ---------   ----------
         Total gross profit                             30,729        31,875        28,920       30,499       23,839

Selling, general and administrative                      5,013         5,445         4,407        5,274        5,137
Depreciation, depletion, and amortization (1)           14,302        14,948        14,933       14,562       16,054
                                                     ---------    ----------     ---------    ---------   ----------

Operating income                                        11,414        11,482         9,580       10,663        2,648
Interest expense (2)                                     8,916         7,998         9,659        9,028        9,976
Other income (loss)                                      1,844         6,072         3,472        1,167     (13,438)
                                                     ---------    ----------     ---------    ---------   ----------

Income (loss) from continuing operations before
  income taxes                                           4,342         9,756         3,393        2,802     (20,766)
Income taxes                                             1,176         2,240          (77)      (1,109)      (8,402)
                                                     ---------    ----------     ---------    ---------   ----------
Income before discontinued operations                    3,166         7,516         3,470        3,911     (12,364)
Income (loss) from discontinued operations (3)           (481)          (49)         (250)        (344)          453
                                                     ---------    ----------     ---------    ---------   ----------
         Net income before extraordinary item        $   2,685    $    7,467     $   3,220    $   3,567   $ (11,911)
                                                     =========    ==========     =========    =========   ==========

OPERATING DATA:
Coal sold (in thousands of tons)                         5,051         5,317         5,340        5,757        5,292
Coal production (in thousands of tons) (4)               3,298         3,504         3,951        4,638        4,833
Leased coal production (in thousands of tons)            3,406         2,952         3,300        3,979        3,495
Average sales price per ton of coal (5)              $   30.53    $    30.37     $   29.01    $   27.59   $    26.33
Average cash cost per ton of coal shipped (FOB
  barge) (6)                                             23.05         23.22         22.58        21.92        23.44
Average leasing revenue per ton of coal (7)               2.74          2.79          1.85         2.11         2.89

STATEMENT OF CASH FLOW DATA:
Net cash provided by operating activities            $   4,258    $   14,957     $  15,589    $  17,813   $   17,741
Net cash provided (used) by investing activities        (1,837)        4,548       (12,845)     (52,452)     (29,545)
Net cash provided (used) by financing activities        (9,875)      (14,853)       12,084       15,052       11,383

</TABLE>

                                       21
<PAGE>   24

<TABLE>
<CAPTION>
                                                                         YEARS ENDED DECEMBER 31,
                                                        ---------------------------------------------------------
                                                         1996          1997          1998         1999        2000
                                                         ----          ----          ----         ----        ----
<S>                                                  <C>          <C>            <C>          <C>         <C>
BALANCE SHEET ITEMS:
Cash and cash equivalents                                  707         5,358        20,186          599          178
Working capital (8)                                     13,685        12,166         9,536        7,028       (5,312)
Total assets                                           227,459       221,479       242,591      257,396      291,978
Total debt                                              95,684        85,205       108,003      123,133      148,965
Mandatorily redeemable preferred stock (9)              15,344        17,097        14,115       13,018       14,110
Total shareholders' equity                              35,786        41,486        45,823       50,487       38,510

OTHER DATA:
EBITDA (10)                                             25,716        26,430        24,513       25,225       18,702
Capital Expenditures (11)                                9,436        23,721        17,003       49,463       46,271

</TABLE>

----------

(1)    Excludes $62,000 and $116,000 of finance cost amortization for the year
       ended December 31, 1999 and 1998, respectively. For the year ended
       December 31, 2000, depreciation, depletion, and amortization excludes
       $441,000 of finance cost amortization and $151,000 of capitalized
       depreciation related inventory at December 31, 2000.

(2)    Excludes capitalized interest expense of $97 for 1997, $1,417,000 for the
       year ended December 31, 1998, $2,801,000 for the year ended December 31,
       1999, and $3,996,000 for the year ended December 31, 2000. There was no
       capitalized interest expense in 1996.

(3)    Represents the earnings (loss) of Pen Cotton of South Carolina, Pen
       Cotton Company and Pen Hardwood Company (collectively, the "Discontinued
       Operations"), which were discontinued or disposed of.

(4)    Coal production includes contract mining production of 552,000, 770,000,
       844,000, 989,000, and 692,000 tons for the years ended December 31, 1996,
       1997, 1998, 1999, and 2000, respectively.

(5)    In the four years ended December 31, 1999, the average sales price per
       ton of coal includes per-ton costs of approximately , $1.97, $1.98, $1.54
       and $0.82, respectively, for the shipment of coal sold to Taiwan Power
       Company ("TPC") from the Company's loading facility on the Big Sandy
       River until loaded into a vessel at a transloading facility along the
       Mississippi River near the Gulf of Mexico. The TPC contract expired in
       1999 and was not renewed.

(6)    Average cash cost per ton of coal shipped includes all cash costs of coal
       production, transportation of the coal to the loading facility, loading
       of the coal into barges, and selling expenses.

(7)    Represents average leasing revenue per ton of coal for coal produced by
       lessees subsequent to the Company's acquisition of Elk Horn Coal.

(8)    Equal to current assets (excluding cash and cash equivalents) less
       current liabilities (excluding current portion of long-term debt, current
       maturities of capital leases and revolving credit loans).

(9)    The Company's outstanding convertible preferred stock (the "Convertible
       Preferred Stock") was issued in connection with the Company's
       Recapitalization in December 1995. The Convertible Preferred Stock which
       had an original liquidation preference of $13,650,000 does not pay cash
       dividends and no dividends accrued from the date of issuance through
       December 2000; beginning in January 2001, dividends will accrue on the
       then liquidation preference at an annual rate of 25.25% for a five-year
       period. The aggregate amount of dividends which will accumulate from 2001
       to 2006 is being recorded evenly from the date of issuance in 1996
       through the redemption date in 2006. The Convertible Preferred Stock is
       mandatorily redeemable in January 2006 and is redeemable with the
       issuance of a note equal to the liquidation preference which equally
       amortizes over the 10 years following the redemption at an interest rate
       2.25% above the rate on five-year U.S. Treasury obligations. Accumulated
       dividends will be payable on the same terms over the same period. The
       liquidation preference of the Convertible Preferred Stock, as well as the
       amounts owed upon redemption of the Convertible Preferred Stock, were
       reduced by tax deficiencies or settlements (including interest and


                                       22
<PAGE>   25

       penalties) paid or payable for all tax periods beginning prior to
       December 29, 1995. The liquidation preference of the Convertible
       Preferred Stock was reduced to $10,238,000 in December 1998 as a result
       of the January 1999 settlement of the Company's 1982-1989 tax court
       matters and further reduced to $8,650,000 for the settlement of the
       1990-1993 IRS audit examination. The Convertible Preferred Stock is
       convertible, at the option of the holder, into 2,950,000 shares of Class
       I Common Stock. The conversion feature is exercisable from January 2001
       until January 2002, and immediately prior to certain fundamental
       transactions.

(10)   EBITDA represents operating income plus depreciation, depletion and
       amortization. EBITDA is not intended to represent cash flow from
       operations as defined by generally accepted accounting principals and
       should not be used as an alternative to net income or as an indicator of
       operating performance or to cash flows as a measure of liquidity. EBITDA
       may not be comparable to other similarly titled measures of other
       companies. However, the Company's management believes EBITDA is a
       meaningful measure of performance as substantially all of the Company's
       financing arrangements contain covenants based on formulations of EBITDA.


(11)   Includes capital additions financed through capital lease transactions
       amounting to $7,221,000, $4,098,000, $2,156,000, $0, and $14,372,000 for
       the years ended December 31, 1996 through 2000. Capital expenditures for
       1997 include $16,035,000 related to the purchase of the Fork Creek
       reserves and 1999 include $10,255,000 related to the purchase of the Bear
       Branch reserves and related assets.


                                       23
<PAGE>   26


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


RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, certain
operating and other data of the Company presented as a percent of revenues.

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED
                                                                                    DECEMBER 31,
                                                                        ------------------------------------
                                                                        2000            1999            1998
                                                                        ----            ----            ----
<S>                                                                    <C>             <C>             <C>
OPERATING DATA:
Revenues                                                                100.0%          100.0%          100.0%
Operating expenses:
   Cost of sales                                                         94.3            90.1            90.9
   Selling, general and administrative                                    3.9             3.5             3.1
                                                                        -----           -----           -----
Operating income                                                          1.8             6.4             6.0

   Interest expense                                                       6.6             5.4             6.0
   Interest income                                                       (0.6)           (0.4)           (0.6)
   Litigation settlement                                                  9.4              --              --
   Other income                                                           0.2            (0.3)           (1.5)
                                                                        -----           -----           -----
Income (loss) from continuing operations before income taxes            (13.8)            1.7             2.1
   Provision (benefit) for income taxes                                  (5.6)           (0.7)           (0.1)
                                                                        -----           -----           -----
Net income (loss) before income from discontinued operations             (8.2)            2.4             2.2
Income (loss) from discontinued operations                                0.3            (0.2)           (0.2)
                                                                        -----           -----           -----
Net income (loss) before extraordinary items and change in
   accounting principle                                                  (7.9)            2.2             2.0
Extraordinary item, net of taxes                                           --              --             1.2
                                                                        -----           -----           -----
Net income (loss) before change in accounting principle                  (7.9)            2.2             0.8
Change in accounting principle, net of tax                                0.7              --              --
                                                                        -----           -----           -----

Net income (loss)                                                        (7.2)%           2.2%            0.8%
                                                                        =====           =====           =====
</TABLE>

YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

REVENUES

         Coal sales. Coal sales revenues were $139,333,000 for the year ended
December 31, 2000 compared to $158,856,000 for the year ended December 31, 1999,
a decrease of 12.3%. The decrease primarily resulted from decreased volume
shipped. Coal sales volume was 5.3 million tons for the year ended December 31,
2000 compared to 5.8 million tons for the year ended December 31, 1999, a
decrease of 8.6%. The decreased volume is primarily attributable to the
expiration of a sales contract for export to TPC and a limited supply of coal
available to purchase. The Company has historically used purchased coal to
supplement its own production. Additionally, the sales price per ton on the
expired export contract was higher than most of the Company's domestic sales
contracts, primarily due to the fact that the selling point for that contract
was the Gulf of Mexico, whereas most of its domestic sales contract selling
points are closer to the Company's production sources and therefore
transportation costs to the selling points are lower.

         Coal leasing. Coal leasing revenues were $7,101,000 for the year ended
December 31, 2000 compared to $8,048,000 for the year ended December 31, 1999, a
decrease of 11.8%. The decrease in coal leasing revenues primarily resulted from
decreased volume of coal mined by lessees. Lessee mining operations produced 3.5
million tons for the year ended December 31, 2000 compared to 4.0 million tons
for the year ended December 31, 1999, a decrease of 12.5%.

         Other. Other revenues primarily includes revenues from timber sales on
the Company's coal reserves for the year ended December 31, 2000 and for the
year ended December 31, 1999. Other revenues were $3,667,000 for the year ended
December 31, 2000 compared to $338,000 for the


                                       24
<PAGE>   27

year ended December 31, 1999. The increase is related to the sale of a large
tract of timber overlying the Company's Fork Creek reserves.

COST OF SALES

         Cost of sales-Coal sales. Cost of coal sales totaled $137,679,000 for
the year ended December 31, 2000 compared to $146,191,000 for the year ended
December 31, 1999, a decrease of 5.8%. This decrease resulted primarily from
decreased volume of coal shipped. Cost of coal sold increased from $25.39 per
ton in 1999 to $26.02 per ton in 2000, due primarily to unfavorable mining
conditions during much of 2000 at the Company's Kiah Creek and Bear Branch
operations and start up costs at the Fork Creek operation.

         Cost of sales-Leasing. Cost of coal lease revenues totaled $3,943,000
for the year ended December 31, 2000 compared to $4,499,000 for the year ended
December 31, 1999, a decrease of 12.4%. The decrease primarily resulted from a
decrease in the volume of coal mined by lessees.

OTHER

         Selling, general and administrative expenses totaled $5,831,000 for the
year ended December 31, 2000 compared to $5,889,000 for the year ended December
31, 1999, a decrease of 1.0%. Selling, general and administrative expenses were
3.9% and 3.5% of revenues for the years ended December 31, 2000 and 1999,
respectively.

         EBITDA ("EBITDA" as defined to mean operating income plus depreciation,
depletion and amortization, and other non-cash items; EBITDA is not intended to
represent cash flow from operations as defined by generally accepted accounting
principles and should not be used as an alternative to net income or as an
indicator of operating performance or to cash flows as a measure of liquidity)
totaled $18,702,000 for the year ended December 31, 2000 compared to $25,225,000
for the year ended December 31, 1999, a decrease of 25.9%. The decrease resulted
primarily from a decrease in coal sales and higher mining costs.

         Interest expense totaled $9,976,000 for the year ended December 31,
2000 compared to $9,028,000 for the year ended December 31, 1999, an increase of
10.5%. This increase is primarily attributable to increased borrowings under the
Credit Facility and the addition of capital leases during the year ended
December 31, 2000.

         Interest income totaled $903,000 for the year ended December 31, 2000
compared to $668,000 for the year ended December 31, 1999, an increase of 35.2%.
The increase primarily resulted from interest income accrued on several income
tax refunds.

         Other expense was $14,341,000 for the year ended December 31, 2000
compared to income of $499,000 for the year ended December 31, 1999. Other
expense for 2000 was related primarily to the Company's loss of the Cheyenne
Litigation See ITEM 3 - "Legal Proceedings." Other income for 1999 resulted
primarily from the Company's investment in International Marine Terminals (IMT).

         Income taxes were a benefit of $8,402,000 for the year ended December
31, 2000 compared to a benefit of $1,109,000 for the year ended December 31,
1999, an increase in tax benefit of $7,293,000. This increase in tax benefit is
a result of the decrease in volume in income (loss) from continuing operations
before income taxes. Income (loss) from continuing operations before income
taxes for the year ended December 31, 2000 was ($20,766,000) compared to
$2,802,000 for the year ended December 31, 1999.

         The Company had a net loss before discontinued operations,
extraordinary items and change in accounting principle of $12,364,000 for the
year ended December 31, 2000 compared to net income before income from
discontinued operations and extraordinary items of $3,911,000 for the year ended
December 31, 1999. The decrease resulted primarily from the loss of the Cheyenne
Litigation, unfavorable mining conditions, and start-up costs related to the
Fork Creek development.


                                       25
<PAGE>   28

DISCONTINUED OPERATIONS

         Income from discontinued operations, net of tax, was $453,000 for the
year ended December 31, 2000 compared to a loss of $344,000 for the year ended
December 31, 1999, a net increase of $109,000. This increase is attributed to
the gain from on the sale of cotton ginning, warehousing and seed facilities in
June 2000.

CHANGE IN ACCOUNTING PRINCIPLE

         During 2000, the Company changed its method of accounting for supply
parts inventory from expensing upon purchase to capitalization upon purchase and
expensing upon usage. In prior years, the Company has had a fairly even mix of
operations in underground mining and surface mining. However, the Company
recently started two new underground mines in 2000. The underground mining
process requires a large amount of supply parts inventory and the anticipated
tons to be produced from underground mining is projected to increase to over 75%
of the Company's output in the next few years. Accordingly, the Company believes
that the capitalization of supply parts inventory will result in a better
measurement of operating results by matching revenues with related expenses. The
$1,137,000 cumulative effect of the change on prior years (after reduction for
income taxes of $586,000) is included in income in 2000. The supplies inventory
balance at December 31, 1999 was $1,723,000. The effect of the change in 2000
was to decrease net income $112,000. The pro forma amounts reflect the effect of
retroactive application on supplies inventory expense and related income taxes
that would have been made in 2000 had the new method been in effect at January
1, 2000. The pro forma effect of the adoption for periods prior to January 1,
2000 could not be determined, as the Company did not separately track inventory
supplies for such prior periods.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998

REVENUES

         Coal sales. Coal sales revenues were $158,856,000 for the year ended
December 31, 1999 compared to $154,908,000 for the year ended December 31, 1998,
an increase of 2.6%. The increase primarily resulted from increased volume
shipped. Coal sales volume was 5.8 million tons for the year ended December 31,
1998 compared to 5.3 million tons for the year ended December 31, 1999, an
increase of 7.8%.

         Coal leasing. Coal leasing revenues were $8,048,000 for the year ended
December 31, 1999 compared to $6,121,000 for the year ended December 31, 1998,
an increase of 31.5%. The increased revenue primarily resulted from increased
production from lessees' mining operations, which was 4.0 million tons for the
year ended December 31, 1999 compared to 3.3 million tons for the year ended
December 31, 1998, an increase of 20.6%.

         Other. Other revenues primarily includes timber sales for the year
ended December 31, 1999 and December 31, 1998. The increase in timber sales is
the result of the sale of timber from the newly acquired Fork Creek reserves in
1999.

COST OF SALES

         Cost of sales-Coal sales. Cost of coal sales totaled $146,191,000 for
the year ended December 31, 1999 compared to $142,543,000 for the year ended
December 31, 1998, an increase of 2.6%. This increase resulted primarily from
increased volume of coal shipped. Cost of coal sold decreased from $26.78 per
ton in 1998 to $25.39 per ton in 1999, due primarily to favorable weather
conditions and improved operating efficiencies at the Kiah Creek operation.

         Cost of sales-Leasing. Cost of coal lease revenues totaled $4,499,000
for the year ended December 31, 1999 compared to $3,980,000 for the year ended
December 31, 1998, an increase of 13.0%. The increase primarily resulted from an
increase in the volume of coal mined by lessees.

OTHER

         Selling, general and administrative expenses totaled $5,889,000 for the
year ended December 31, 1999 compared to $5,003,000 for the year ended December
31, 1998, an increase of 17.7%. This increase primarily resulted


                                       26
<PAGE>   29

from increased payroll costs, payroll benefit costs, consulting fees, and bank
fees. Payroll costs increased as a result of opening a coal field office in
Charleston, West Virginia, as part of the staff in the office had previously
been charged to cost of sales. Payroll benefits increased primarily as a result
of higher medical claims on the Company's self-insured medical plan. Consulting
costs increased as a result of the Company's decision to outsource more of its
information technology needs. Bank fees increased as a result of increased line
of credit non-utilization fees. In conjunction with the issuance of the Senior
Notes in June of 1998, the Company's line of credit was increased from $12
million to $40 million. Selling, general and administrative expenses were 3.5%
and 3.1% of revenues for the years ended December 31, 1999 and 1998,
respectively.

         EBITDA ("EBITDA" as defined to mean operating income plus depreciation,
depletion and amortization, and other non-cash items; EBITDA is not intended to
represent cash flow from operations as defined by generally accepted accounting
principles and should not be used as an alternative to net income or as an
indicator of operating performance or to cash flows as a measure of liquidity)
totaled $25,225,000 for the year ended December 31, 1999 compared to $24,513,000
for the year ended December 31, 1998, an increase of 2.9% This increase is
primarily attributable to the increased coal sales.

         Interest expense totaled $9,028,000 for the year ended December 31,
1999 compared to $9,659,000 for the year ended December 31, 1998, a decrease of
6.5%. This decrease is primarily attributable to interest paid to the Internal
Revenue Service relating to settlement of the Company's 1982-1989 tax court
matter, which was recorded in the fourth quarter of 1998.

         Interest income totaled $668,000 for the year ended December 31, 1999
compared to $1,053,000 for the year ended December 31, 1998, a decrease of
36.6%. This primarily resulted from the Company's use of cash (which was
previously earning interest) to develop the Fork Creek operations.

         Other income was $499,000 for the year ended December 31, 1999 compared
to $2,419,000, for the year ended December 31, 1998. Other income for 1999 was
related primarily to the Company's earnings related to its one-third-partnership
interest in International Marine Terminals (IMT). Other income for 1998 results
primarily from gain on the sale of certain mining equipment and income that
resulted from a U.S. Supreme Court ruling relating to the Coal Industry Retirees
Health Benefit Act (CIRHBA) which was favorable to the Company.

         Income taxes were a benefit of $1,109,000 for the year ended December
31, 1999 compared to a benefit of $77,000 for the year ended December 31, 1998,
a decrease of $1,032,000. The decrease is a result of lower income in the year
ended December 31, 1999 than in the year ended December 31, 1998. The reduction
in the effective tax rate from (2.3%) in 1998 to (39.8%) in 1999 results
principally from (i) the favorable impact of the amount of the tax over book
depletion expense in relation to the amount of pretax income and (ii) the
reduction of taxes previously accrued for the settlement of the 1990-1993 IRS
examination.

         The Company had net income of $3,567,000 for the year ended December
31, 1999 compared to $1,355,000 for the year ended December 31, 1998. The
increase resulted primarily from the extraordinary loss on retirement of debt in
1998.

INFLATION

         Inflation has not had a significant effect on the Company's business.

LIQUIDITY AND CAPITAL RESOURCES

         On June 8, 1998, Pen Holdings, the Company's parent holding company,
issued the $100,000,000 aggregate principal amount of 9 7/8% senior notes due
2008 (the "Offering"). On December 4, 1998, the Company exchanged all of these
privately placed senior notes for the senior notes, which are substantially
identical to the privately placed notes in all material respects. Interest on
the Notes is payable semiannually on June 15 and December 15 of each year,
commencing December 15, 1999. As a result of the Offering, the Company has
significant indebtedness and debt service requirements. At December 31, 2000,
the Company had total indebtedness of $148,965,000, including capital leases and
current maturities. The Indenture for the Notes permits the Company to incur
additional indebtedness,


                                       27
<PAGE>   30

subject to certain limitations. The Indenture also includes certain covenants
that, among other things: (i) limit the incurrence by the Company of additional
indebtedness; (ii) restrict the ability of the Company to pay dividends or make
certain other payments; (iii) limit transactions by the Company with affiliates;
(iv) limit the ability of the Company to incur certain liens; (v) limit the
ability of the Company to consolidate or merge with or into, or to transfer all
or substantially all of its assets to, another person; and (vi) limit the
ability of the Company to engage in other lines of business.

         In connection with the Offering, Pen Holdings refinanced its senior
secured indebtedness and entered the Credit Facility, which currently provides
for aggregate borrowings of up to $40,000,000 in principal. Interest rates on
the revolving loans under the Credit Facility are based, at the Company's
option, on a grid spread to LIBOR (as defined therein) or the Prime Rate (as
defined therein). Borrowings under the Credit Facility bear interest at a
variable rate, based on either LIBOR (an effective rate of 9.52% at December 31,
2000), or the Prime Rate (an effective rate of 11.25% at December 31, 2000). In
conjunction with the Bank Forbearance Agreement, the Company is now paying a
default rate of interest, which imposes a 200 basis points penalty over the grid
spread. The current grid spread is 2.75% above LIBOR (or an effective rate when
calculated to include the default penalty of 4.75% above LIBOR) and 1.75% above
the Prime Rate (or an effective rate when calculated to include the default
penalty of 3.75% above the Prime Rate). Although the Company has obtained
forbearance under the Credit Facility with respect to certain potential defaults
or events of default occurring and a forbearance agreement with Travelers, such
forbearance terminates on April 30, 2001.

         The Credit Facility matures by its terms, subject to the Bank's
remedies which include acceleration as a result of certain events of default,
and subject to extensions requested by the Company at the discretion of the
lenders, five years after the closing date, which occurred simultaneously with
the closing of the Offering. The Credit Facility contains certain restrictions
and limitations, including financial covenants, which require the Company to
maintain and achieve certain levels of financial performance and limit the
payment of cash dividends and similar payments. See Item - 7 "Legal
Proceedings."

         The Company's principal liquidity requirements are for debt service
requirements under the Notes, and other outstanding indebtedness, and for
working capital needs and capital expenditures. Historically, the Company has
funded its capital and operating requirements with a combination of cash on
hand, operating cash flow and borrowings under credit facilities and capital
leases. The Company has utilized these sources of funds to make acquisitions,
fund significant capital investments in its properties, fund operations and
service debt under credit facilities.

         For the year ended December 31, 2000, the Company acquired property,
plant and equipment of $46,271,000 (including that attributable to the Fork
Creek development of $38,317,000, which includes capitalized interest of
$3,996,000). The Company is projecting acquisitions of property, plant and
equipment for 2001 of approximately $26,784,000 (including Fork Creek
expenditures of $16,277,000). Of the $26,784,000, $12,913,000 is expected to
be financed with operating leases.

         As previously disclosed, the Company made a decision to increase the
planned production from Fork Creek and as a result, capital expenditures with
respect to that development have increased substantially from those originally
projected. The Company's original plans called for a 400-raw-ton-per-hour (1.7
million annual clean tons) preparation plant at this site and four mining units.
The Company's revised plan includes a 900-raw-ton-per-hour (3.3 million annual
clean tons) preparation plant and six mining units. As a result, capital
expenditures for the project increased from approximately $45 million to $72
million. In addition, due to the increase in the number of mining units, mining
equipment costs increased from approximately $12 million to approximately $19
million. Management believes that the increase in revenues and EBITDA from this
larger project will, on a proportionate basis, exceed these increased costs.

         Net cash generated by operating activities was $17,741,000 for the year
ended December 31, 2000 compared to $17,813,000 for the year ended December 31,
1999, a decrease of $72,000.

         Net cash used by investing activities was $29,545,000 for the year
ended December 31, 2000 compared to net cash used by investing activities of
$52,452,000 for the year ended December 31, 1999, a decrease of $22,907,000. The
1999 investing activities were primarily attributed to the increased capital
expenditures for mine development costs for Fork Creek and the purchase of the
Bear Branch operation. The 2000 investing activities were primarily for mine
development costs for Fork Creek.


                                       28
<PAGE>   31

         Net cash provided from financing activities of $11,383,000 for the year
ended December 31, 2000 reflects a decrease of $3,669,000 over the $15,052,000
provided by financing activities for the year ended December 31, 1999. The 2000
decrease in net cash provided from financing activities resulted primarily from
reduced borrowings under line of Credit Agreement.

         As a result of the outcome of the Cheyenne Litigation, Pen Holdings
entered into the Bank Forbearance Agreement and the Tri-Party Forbearance
Agreement. As well, the Company encountered unfavorable mining conditions during
much of 2000. The combination of these factors has placed severe limitations on
the Company's ability to obtain sufficient sources of liquidity to fund its
capital expenditures and its working capital needs.

         Although the Company has obtained forbearance under the Credit Facility
with respect to certain potential defaults or events of default occurring and a
forbearance agreement with Travelers, such forbearance terminates on April 30,
2001. If the Bank Forbearance Agreement and the Tri-Party Forbearance Agreement
are not extended, the Company would not be in compliance with certain financial
and other covenants under the Credit Facility permitting the Banks to accelerate
the indebtedness owing under the Credit Facility. The Company lacks the funds to
repay the Banks upon an acceleration of the Credit Facility which would in turn
cause defaults under other agreements of the Company including the Indenture and
Notes. The Banks hold liens on substantially all of the Company's assets and
could seek to enforce those liens upon acceleration of the indebtedness owing
under the Credit Facility. Additionally, once the Forbearance Period has
expired, Travelers can then take action to execute on the Cheyenne Judgment
against assets of the Company unless the Company pays the judgment. Currently,
the Company has no available source of funds to pay the total amount due under
the judgment bond.

         If the Bank Forbearance Agreement and the Tri-Party Forbearance
terminate and the Company's obligations are accelerated or Travelers executes on
the Cheyenne Judgment, such events would have a material adverse effect on the
Company's liquidity and financial position. Furthermore, if such obligations
were to be accelerated, in whole or in part, management cannot currently provide
any assurance that it would be successful in identifying or consummating
financing necessary to satisfy such obligations.

         The Company has engaged financial advisors and legal counsel to assist
reviewing its strategic and restructuring alternatives. The Company is (i)
engaged in discussions with the Banks and Travelers to extend the forbearance
agreements, (ii) seeking alternative sources of financing that may be able to
replace the credit that has been extended by the Banks, extinguish the
obligation to Travelers and provide additional liquidity, (iii) taking steps to
improve operational results, (iv) attempting to renegotiate the terms of certain
of its long-term coal contracts to take advantage of currently higher market
prices for coal, and (v) is exploring the disposition of certain of its assets.
There can be no assurance that the Company's efforts will be successful.

         Additionally, given the Company's current liquidity position,
management cannot anticipate how the Company's customers, other creditors,
services providers or vendors may react to its current financial position. There
can be no assurance that the Company will be able to continue to enter into
transactions and receive supplies and services required for its business from
its vendors and suppliers. Also, it is difficult to determine how the Company's
customers or other creditors may treat the Company given its current liquidity
position. The inability of the Company to engage vendors and suppliers on
customary terms, or at all, would have a materially adverse effect on the
Company's financial position and liquidity.

         The Company issued 10,000 shares of Convertible Preferred Stock in
connection with the recapitalization of the Company in 1995. The liquidation
value of the Convertible Preferred Stock of $8,649,000 (which is net of a
$3,413,000 reduction and a $1,588,000 reduction for settlement of the Company's
tax matters in 1998 and 1999, respectively) plus accrued dividends of
$10,920,000 will be due in January 2006. The Convertible Preferred Stock will be
redeemed at that time by the issuance of a note payable which amortizes over the
10 years following the redemption, unless converted to common stock in
accordance with its terms.

YEAR 2000 ISSUE

         The year 2000 issue relates to the way computer systems and
technologies utilize fields containing date information and recognize and
process such information beyond December 31, 1999. The year portion of such date


                                       29
<PAGE>   32

information has traditionally been stored as two digits only. Any of the
Company's computers, computer programs, operational or administration equipment
or products that have date sensitive software or imbedded technologies may
interpret the year portion of the date "00" as the year 1900 rather than the
year 2000. System failures or miscalculations may occur as a result, thus
causing disruptions in operations and the ability to process transactions.

         The Company has not experienced any significant impact on its systems
or operations as a result of the Year 2000 Issue. The Company spent $272,000 on
its Year 2000 efforts. The majority of the costs associated with the Company's
Year 2000 efforts would have otherwise been incurred to upgrade systems for
operational reasons in the normal course of business. These costs are associated
with the replacement of computer systems and equipment, substantially all of
which were capitalized. These costs do not include the costs of implementing
contingency plans or internal costs associated with the review of Year 2000
issues.

         In addition, the Company has not encountered any significant problems
with third parties such as its customers, suppliers, or other business partners.
However, if these or other third parties with whom the Company conducts business
experience develop Year 2000 Issues, the Company could experience a material
adverse impact on the Company's operations.

RECENT ACCOUNTING PRONOUNCEMENTS

         There are no recent accounting pronouncements which have not been
adopted by the Company and which are expected to have a material effect on the
Company's financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable.


                                       30
<PAGE>   33



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





                               PEN HOLDINGS, INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                              PAGE
                                                                              ----
<S>                                                                          <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
     Report of Independent Accountants                                         32

     Consolidated Balance Sheet as of December 31, 2000 and 1999               33

     Consolidated Statement of Income for the Years Ended December 31,
       2000, 1999 and 1998                                                     34

     Consolidated Statement of Changes in Shareholders' Equity for the
       Years Ended December 31, 2000, 1999 and 1998                            35

     Consolidated Statement of Cash Flows for the Years Ended
     December 31, 2000, 1999 and 1998                                          36

     Notes to Consolidated Financial Statements                                38
</TABLE>



                                       31
<PAGE>   34



                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Shareholders and
Board of Directors
of Pen Holdings, Inc.

         In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of changes in shareholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Pen Holdings, Inc. and its subsidiaries at December 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

         As discussed in Note 3 to the consolidated financial statements, on
April 1, 2000, the Company changed its method of accounting for supply parts
inventory.

         The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company is a party to a
forbearance agreement with certain of its lenders because of non-compliance with
certain covenants related to debt agreements, principally caused by the
unfavorable outcome of certain litigation discussed more fully in Note 16 to the
consolidated financial statements. The liquidity issues facing the Company and
the restrictions imposed by its lenders raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with
respect to the liquidity problems of the Company are partially discussed in Note
1. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.


PRICEWATERHOUSECOOPERS LLP


Nashville, Tennessee
March 30, 2001




                                       32
<PAGE>   35



                               PEN HOLDINGS, INC.

                           CONSOLIDATED BALANCE SHEET
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                           RESTATED
                                                                          DECEMBER 31,    DECEMBER 31,
                                                                              2000            1999
                                                                          ------------    ------------
<S>                                                                      <C>             <C>
                                     ASSETS
Current assets:
   Cash and cash equivalents                                                $    178        $    599
   Accounts receivable (net of allowance for doubtful accounts
     of $558 and $517 in 2000 and 1999, respectively)                         14,253          16,863
   Inventories                                                                 3,004           2,556
   Deferred income taxes                                                       4,739              --
   Refundable income taxes                                                     3,015             686
   Other assets                                                                2,886           2,257
                                                                            --------        --------

       Total current assets                                                   28,075          22,961

Investment in an unconsolidated affiliated company                             3,046           5,773
Coal reserves and mine development costs, net                                151,845         140,329
Property, plant and equipment, net                                            85,771          66,667
Long-term investments                                                         16,960          15,663
Other                                                                          6,281           6,003
                                                                            --------        --------

                                                                            $291,978        $257,396
                                                                            ========        ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Revolving credit loans                                                   $ 31,936        $     --
   Current maturities of long-term debt                                      103,312             113
   Current maturities of capital leases                                       13,717           1,252
   Accounts payable                                                           12,224           8,345
   Accrued liabilities                                                        20,985           6,777
   Deferred income taxes                                                          --             212
                                                                            --------        --------

       Total current liabilities                                             182,174          16,699

Revolving credit loans                                                            --          17,505
Long-term debt                                                                    --         103,233
Long-term capital leases                                                          --           1,030
Deferred income taxes                                                         51,780          51,739
Other liabilities                                                              5,404           3,685
                                                                            --------        --------

       Total liabilities                                                     239,358         193,891
                                                                            --------        --------

Guaranties, commitments and contingencies (Notes 1,2,7,9 and 16)
Mandatorily redeemable preferred stock (Note 10)                              14,110          13,018

Shareholders' equity:
   Class I common stock, $.01 par value; 7,800,000 authorized,
     4,290,000 shares issued and outstanding                                      43              43
   Class II common stock, $.01 par value; 200,000 shares authorized,
     177,550 shares issued and outstanding                                         2               2
   Additional paid in capital                                                     19              19
   Retained earnings                                                          38,446          50,423
                                                                            --------        --------

       Total shareholders' equity                                             38,510          50,487
                                                                            --------        --------

                                                                            $291,978        $257,396
                                                                            ========        ========
</TABLE>


The accompanying notes are an integral part of these financial statements.



                                       33
<PAGE>   36




                               PEN HOLDINGS, INC.

                        CONSOLIDATED STATEMENT OF INCOME
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                                             ------------------------------------------
                                                                               2000             1999             1998
                                                                             --------         --------         --------
<S>                                                                         <C>              <C>              <C>
Revenues                                                                     $150,101         $167,242         $161,106
Operating expenses
   Cost of sales                                                              141,622          150,690          146,523
   Selling, general and administrative                                          5,831            5,889            5,003
                                                                             --------         --------         --------
Operating income                                                                2,648           10,663            9,580
Other (income) expense
   Interest expense                                                             9,976            9,028            9,659
   Interest income                                                               (903)            (668)          (1,053)
   Litigation settlement                                                       14,136               --               --
   Other (income) expense                                                         205             (499)          (2,419)
                                                                             --------         --------         --------
Income (loss) from continuing operations before income taxes                  (20,766)           2,802            3,393
Provision (benefit) for income taxes                                           (8,402)          (1,109)             (77)
                                                                             --------         --------         --------
Net income (loss) before results of discontinued
   operations                                                                 (12,364)           3,911            3,470
Income (loss) from discontinued operations net of tax                             453             (344)            (250)
                                                                             --------         --------         --------
Net income (loss) before extraordinary items and change in accounting
   principle                                                                  (11,911)           3,567            3,220
Extraordinary item, net of tax                                                     --               --            1,865
                                                                             --------         --------         --------
Net income (loss) before change in accounting principle                       (11,911)           3,567            1,355
Change in accounting principle, net of tax                                      1,026               --               --
                                                                             --------         --------         --------

Net income (loss)                                                             (10,885)           3,567            1,355
Accretion of preferred stock                                                    1,092              491              431
                                                                             --------         --------         --------
Net income (loss) available to common shareholders                           $(11,977)        $  3,076         $    924
                                                                             ========         ========         ========
</TABLE>



The accompanying notes are an integral part of these financial statements.




                                       34
<PAGE>   37



                               PEN HOLDINGS, INC.

            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                          (dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                  CLASS I                CLASS II
                                               COMMON STOCK            COMMON STOCK      ADDITIONAL
                                          ---------------------    -------------------    PAID-IN    RETAINED
                                             SHARES      AMOUNT     SHARES     AMOUNT     CAPITAL    EARNINGS    TOTAL
                                          ----------    -------    --------   --------   ---------   --------   --------
<S>                                       <C>          <C>        <C>        <C>        <C>         <C>        <C>
Balance at December 31, 1997               4,290,000        $43     177,550          2         $19     41,422     41,486
Adjustment for tax settlement (Note 10)                                                                 3,413      3,413
Accretion of Preferred Stock                                                                             (431)      (431)
Net Income                                                                                              1,355      1,355
                                          ----------    -------    --------   --------   ---------   --------   --------
Balance at December 31, 1998               4,290,000        $43     177,550         $2         $19    $45,759    $45,823
Accretion of Preferred Stock                                                                             (491)      (491)
Adjustment for tax settlement (Note 15)                                                                 1,588      1,588
Net Income                                                                                              3,567      3,567
                                          ----------    -------    --------   --------   ---------   --------   --------
Balance at December 31, 1999               4,290,000        $43     177,550         $2         $19    $50,423    $50,487
Accretion of Preferred Stock                                                                           (1,092)    (1,092)
Net Loss                                                                                              (10,885)   (10,885)
                                          ----------    -------    --------   --------   ---------   --------   --------
Balance at December 31, 2000               4,290,000        $43     177,550         $2         $19    $38,446    $38,510
                                          ==========    =======    ========   ========   =========   ========   ========
</TABLE>


The accompanying notes are an integral part of these financial statements.



                                       35
<PAGE>   38



                               PEN HOLDINGS, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                         ------------------------------------------
                                                                           2000             1999             1998
                                                                         --------         --------         --------
<S>                                                                      <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                     $(10,885)        $  3,567         $  1,355
Adjustments to reconcile net income (loss) to net
   cash provided by operating activities:
   Depreciation, depletion and amortization                                16,495           15,154           14,933
   Equity in net (earnings) losses of affiliates                            1,226            2,284           (1,302)
   Deferred income taxes                                                   (4,905)          (3,249)          (3,360)
   Gain on sale of investment                                                (827)              --               --
   Gain on sale of equipment                                                  (69)            (285)            (681)
   Interest income on long-term investments                                (1,297)          (1,218)          (1,122)
   Extraordinary loss on debt refinancing, net of tax                                           --            1,866
                                                                         --------         --------         --------
Cash generated (used) by operations, before changes in assets and
   liabilities                                                               (262)          16,253           11,749
Changes in assets and liabilities, net of effects
   from dispositions:
   Accounts receivable                                                      2,610            1,293           (1,182)
   Inventories                                                               (448)             467              993
   Accounts payable and accrued expenses                                   18,088             (262)           3,601
   Other                                                                   (2,247)              62              428
                                                                         --------         --------         --------
   Net cash provided by operating activities                               17,741           17,813           15,589
                                                                         --------         --------         --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                                   (31,899)         (39,207)         (14,847)
   Payment for purchase of Bear Branch assets                                  --          (12,765)              --
   Proceeds from sale of investment                                         2,900               --               --
   Proceeds from sale of equipment                                            254              520            1,009
   (Investments in) Distributions from affiliated companies                  (800)          (1,000)             993
                                                                         --------         --------         --------
   Net cash used by investing activities                                  (29,545)         (52,452)         (12,845)
                                                                         --------         --------         --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Buyout of stock warrants                                                    --               --           (3,000)
   Proceeds from issuance of long-term debt                                    --               --           99,216
   Repayment of long-term debt                                               (112)            (103)         (75,924)
   Repayment of capital leases                                             (2,936)          (2,350)          (4,253)
   Net borrowings under line of credit agreements and current
     notes payable                                                         14,431           17,505               --
   Debt issuance costs                                                         --               --           (3,955)
                                                                         --------         --------         --------
   Net cash provided by financing activities                               11,383           15,052           12,084
                                                                         --------         --------         --------
   Net increase (decrease) in cash                                           (421)         (19,587)          14,828
   Cash and cash equivalents at beginning of year                             599           20,186            5,358
                                                                         --------         --------         --------
   Cash and cash equivalents at end of year                              $    178         $    599         $ 20,186
                                                                         ========         ========         ========
</TABLE>


The accompanying notes are an integral part of these financial statements.



                                       36
<PAGE>   39



                               PEN HOLDINGS, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                                  (in thousands)

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                             -----------------------------------
                                                               2000           1999         1998
                                                             -------        -------       ------
<S>                                                         <C>            <C>           <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for:
     Interest                                                $13,887        $13,608       $9,315
     Income taxes                                                 71          3,432        1,675
</TABLE>

SUPPLEMENTAL INFORMATION ON NON-CASH TRANSACTIONS:

In 2000, 1999, and 1998, the Company leased certain machinery and equipment
under capital leases as more fully described in Note 9.

The Company sold the assets of its lumber operations in August 1998 for
consideration of $400,000 comprised of $25,000 paid at closing and a note
receivable of $375,000. This note was subsequently paid off by the issuer in
1999.





The accompanying notes are an integral part of these financial statements.



                                       37
<PAGE>   40


                               PEN HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--DESCRIPTION OF BUSINESS:

DESCRIPTION OF THE BUSINESS

         Pen Holdings, Inc. ("Pen Holdings") and its consolidated subsidiaries
(the "Company" or "Pen") are engaged in the mining, preparation, marketing and
leasing of compliance coal and low-sulfur coal from mines located in the Central
Appalachian region of eastern Kentucky and southern West Virginia. In 2000, all
sales were to domestic customers whereas in 1999 and 1998 export sales to Taiwan
were $21,849,000 and $34,991,000 respectively.

         On March 15, 2001, Pen Holdings and certain of its subsidiaries entered
into the Forbearance and Amendment No. 4 to the Amended and Restated Credit
Agreement (the "Credit Facility" or "Credit") between Pen Holdings, certain of
its subsidiaries and Mellon Bank, N.A. ("Mellon") as agent under the Credit
Facility and for itself, CIBC, Inc., and AmSouth Bank (collectively, the
"Banks") dated June 3, 1998, as amended. The Bank Forbearance Agreement was
necessary as a result of the occurrence of certain potential defaults or events
of default occurring under the Credit Facility which arose as a result of the
Supreme Court of Kentucky's decision not to review the lower state court's
decision in The Elk Horn Coal Corporation ("Elk Horn Coal") v. Cheyenne
Resources, Inc. (the "Cheyenne Litigation"). On April 16, 23 and 30, 2001 Pen
Holdings and the Banks amended the Forbearance and Amendment No. 4 to the Credit
Facility (such agreement as amended to date is referred to as "Bank Forbearance
Agreement").

         Under the Bank Forbearance Agreement, the Banks have agreed to forbear
from taking any action to accelerate the loans or dispose of or collect upon any
collateral under the Credit Facility or other ancillary documentation until
April 30, 2001 (the "Forbearance Period") as a result of the known defaults or
potential defaults under the Credit Facility. The forbearance by the Banks will
terminate before the end of the Forbearance Period if (i) Pen Holdings or
certain of its subsidiaries fail to pay or perform any indebtedness, liability
or obligation under the Bank Forbearance Agreement; (ii) there is a material
adverse change in the condition of Pen Holdings or certain of its subsidiaries;
(iii) additional defaults occur under the Credit Facility; (iv) Pen Holdings or
certain of its subsidiaries fail to adhere to certain restrictions imposed on
their accounts with the Banks; (v) an event of default occurs under the Pen
Holdings' 9 7/8% Senior Notes due 2008 (the "Senior Notes" or "Notes"); or (vi)
Pen Holdings or Travelers Casualty and Surety Company of America ("Travelers")
breaches the Forbearance and Stand Still Agreement by and among Pen Holdings,
the Banks and Travelers, dated as of March 15, 2001, as amended on April 16 and
30, 2001 (the "Tri-Party Forbearance Agreement").

         Subject to the terms of the Credit Facility and the satisfaction of
certain conditions, the Banks have agreed to continue to make loans under the
Credit Facility during the term of the Bank Forbearance Agreement. In
conjunction with the Bank Forbearance Agreement, the Company is now paying a
default rate of interest, which imposes a 200 basis points penalty over the grid
spread. The current grid spread is 2.75% above LIBOR (or an effective rate when
calculated to include the default penalty of 4.75% above LIBOR) and 1.75% above
the Prime Rate (or an effective rate when calculated to include the default
penalty of 3.75% above the Prime Rate).

         Pen Holdings, the Banks and Travelers have also entered into the
Tri-Party Forbearance Agreement. Travelers is the administrator of the judgment
bond issued by Reliance Insurance Company in connection with the Cheyenne
Litigation. Because the Supreme Court of Kentucky's decision in the Cheyenne
Litigation is final and non-appealable, the plaintiff in the Cheyenne Litigation
was entitled to draw against the judgment bond in the amount of $14,500,000 on
or after March 16, 2001 (the "Cheyenne Judgment").

         In connection with the Banks agreeing to forbear from certain actions
under the Credit during the Forbearance Period, Travelers and its affiliates
have also agreed to forbear from taking action to demand payment, enforce any
remedies or commence any proceedings or take any action to enforce any remedies
(including foreclosure on the Cheyenne Judgment, commencement of any action
against Pen Holdings or any other indemnitor of the obligations of Elk Horn Coal
to Travelers or cancellation or termination of any reclamation or other bonds or
surety obligations of Travelers issued for the benefit of Pen Holdings or any of
its subsidiaries or affiliates) against Elk Horn Coal, Pen Holdings or any
subsidiary or affiliate of Pen Holdings or any assets or properties of any of
the




                                       38
<PAGE>   41

foregoing, whether in connection with the judgment bond or any other obligation
of any of the foregoing owing to Travelers or any subsidiary or affiliate of
Travelers. Travelers is permitted, however, during the Forbearance Period to (i)
present the $4,000,000 letter of credit issued by Mellon under the Credit to
Mellon (the "Mellon LC") for payment; (ii) file or docket the Cheyenne Judgment
of record wherever Elk Horn Coal owns property or assets (provided that
Travelers is prohibited from taking any action to enforce or foreclose upon the
Cheyenne Judgment); or (iii) pursue its remedies or take enforcement actions if
the Banks are no longer prohibited from doing the same under the Bank
Forbearance Agreement. Travelers has filed or docketed the Cheyenne Judgment
against Elk Horn Coal in some jurisdiction which resulted in a lien on certain
of Elk Horn Coal's assets. Travelers has also presented the Mellon LC for
payment.

         The purpose of the Forbearance Period is to allow Pen Holdings
additional time to attempt to implement a strategy that will remedy the events
of default or potential defaults under the Credit and structure a resolution
that is satisfactory to the Banks, Travelers and Pen Holdings' and its
subsidiaries other creditors. Pen Holdings has engaged Houlihan, Lokey, Howard &
Zukin to advise and assist it in connection with structuring such a resolution
as well as assessing its strategic alternatives.

         As of December 31, 2000, all of the Company's debt is classified as
current due to subsequent potential defaults and events of default that occurred
under to the Company's Credit Facility and the fact that these defaults could,
absent forbearance arrangements or waivers, trigger the cross-default provisions
of the Company's other debt.

         In June 2000, the Company sold the stock of Pen Cotton Company of South
Carolina, a wholly owned subsidiary engaged in cotton ginning and warehousing in
South Carolina. The sale represents the disposition of all cotton ginning and
warehousing business segments, therefore, all such operations have been restated
as discontinued operations. In consideration for the stock of Pen Cotton of
South Carolina, the Company received $2,900,000, paid by cash at closing. The
gain on sale of $847,000, net of taxes of $393,000, is included in income from
discontinued operations. Losses for the years ended December 31, 2000, 1999, and
1998 of $27,000, $352,000 and $257,000, net of taxes of $9,000, $120,000, and
$88,000 are recorded as loss from discontinued operations.

         In September, 1996 the Company sold the assets of Pen Cotton Company, a
wholly-owned subsidiary engaged in cotton ginning and warehousing in west
Tennessee. The selling price was $5,000,000, paid by $4,500,000 cash at closing
and the issuance of a $500,000 note receivable with a five-year term. Net income
(loss) for the years ended December 31, 2000, 1999, and 1998 of $27,000,
($183,000) and ($129,000), net of tax expense (benefit) of $10,000, ($71,000),
and ($48,000) are recorded as Income (loss) from discontinued operations.

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

         The consolidated financial statements include the accounts of the
Company and its majority and wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain prior year balances have been re-stated to conform with current year
presentation.

         The investment in an affiliated enterprise in which the Company owns
less than a controlling interest is presented under the equity basis of
accounting representing the Company's investment in affiliate, reduced by
goodwill amortization and increased (decreased) by the Company's proportionate
equity in the net income (losses) of the unconsolidated affiliate.

RECOGNITION OF REVENUE

         Revenue from sale of coal is recognized when title passes to the
customer. Royalty income is recognized as minimum advanced royalties are
received or as coal is mined by lessees.

CASH AND CASH EQUIVALENTS

         The Company considers all highly-liquid interest-bearing instruments
purchased with an original maturity of three months or less to be cash
equivalents.

INVENTORIES

         Inventories, consisting of coal and mining supplies, including fuel ,
are stated at the lower of cost or market with cost being determined on the
first-in, first-out method.

LONG-TERM INVESTMENTS

         Long-term investments are considered as held to maturity and are
carried at amortized cost.

CONCENTRATION OF CREDIT RISK

         Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash, accounts receivable,
long-term investments and other off-balance sheet financial instruments. The
Company


                                       39
<PAGE>   42

maintains cash and cash equivalents mostly in large financial institutions.
Concentration of credit risk with respect to trade receivables is limited due to
the diversity of the Company's business and customer base. Long-term investments
principally consist of U.S. Government obligations.

         The Company performs continuing credit evaluations of its customers and
does not generally require collateral. Historically, the Company has not
experienced significant losses related to individual customers in any particular
industry or geographic region.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying values of cash and cash equivalents, accounts receivable,
short-term notes payable, revolving credit loans and accounts payable
approximate fair value due to the short-term maturities of these assets and
liabilities. The fair value of the Senior Notes at December 31, 2000 was
$60,000,000 based on quoted market prices. The carrying value of $99,419,000 was
based on amortized cost. The carrying amount of all other long-term debt
approximates fair value. The carrying amount of mandatorily redeemable stock
approximates fair value as the dividend rate is the equivalent of a market rate
for securities of that type.

DEBT ISSUANCE COSTS

         Debt issuance costs are recorded as assets and amortized over the lives
of related debt.

COAL RESERVES AND MINE DEVELOPMENT COSTS

         Depletion of coal reserves and certain mine development costs are
recognized based on tons mined during the year as a percentage of total
estimated recoverable tons. Estimated recoverable reserves include only proven
and probable reserves. The Company capitalizes all development costs for
construction in new areas being developed (including employee costs for
employees directly involved in development; site preparation costs; and interest
related to the assets being employed). Once the assets are placed in service,
the Company amortizes these costs over their expected lives. Exploration costs
are expensed as incurred until discovery of proven and probable reserves. Such
expenditures approximated $106,000, $102,000 and $160,000 in 2000, 1999, and
1998, respectively. Mine development costs include $3,996,000, $2,801,000 and
$1,417,000 of capitalized interest cost for the years ended December 31, 2000,
1999 and 1998, respectively.

PROPERTY, PLANT AND EQUIPMENT

         Equipment and other properties are recorded at cost and depreciated
over the estimated useful lives of the respective assets using the straight-line
method. Amortization of capitalized lease assets is included in depreciation
expense and accumulated depreciation. Depreciation expense was $10,656,000 in
2000, $9,713,000 in 1999 and $9,267,000 in 1998. Estimated useful lives are as
follows:

               Building and improvements            10-20 years
               River terminals                      10-20 years
               Machinery and equipment               5-10 years

GOODWILL AND LONG-LIVED ASSETS

         Goodwill related to the Company's investment in affiliated companies is
amortized using the straight-line method over 25 years. Amortization expense of
$219,000 was recognized in each of the years 2000, 1999, and 1998. Goodwill is
included in investment in unconsolidated affiliated companies in the
consolidated balance sheet. The Company periodically reviews the recoverability
of all long-lived assets using a cash flow analysis. If impairment of value
exists, a loss is recognized. No adjustment for impairment was necessary at
December 31, 2000, 1999 or 1998.

RECLAMATION COSTS

         The Company is subject to various laws and regulations which require
the restoration and reclamation of mined properties. The Company accrues the
reclamation costs for surface mine restoration as the mining operations occur.
Reclamation costs associated with site restoration for the Company's coal
preparation plant are accrued over the estimated useful life of the plant using
the units of production method. The accrued reclamation costs, amounting to
$5,408,000 and $4,497,000 at December 31, 2000 and 1999, are included primarily
in other noncurrent liabilities, net of a current portion based on management's
estimate of funds to be disbursed within the following year.



                                       40
<PAGE>   43

COST OF SALES AND GENERAL AND ADMINISTRATIVE EXPENSES

         Cost of sales includes direct and indirect cost of production,
processing and transportation. Selling, general and administrative expenses
include selling costs and general corporate expenses of the Company.

INCOME TAXES

         Provisions for federal and state income taxes are calculated on
reported financial statement pretax income based on current tax law. Deferred
income taxes are provided for the temporary differences between the financial
reporting basis and income tax basis of the Company's assets and liabilities.
The Company's temporary differences consist primarily of excess financial
accounting basis over tax basis of acquired coal reserves, depreciation,
depletion and timing of certain revenue and expense recognition.

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
disclosures of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.

NOTE 3--INVENTORIES:

         Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ---------------------
                                                        2000           1999
                                                       ------         ------
<S>                                                   <C>            <C>
                  Coal                                 $1,604         $2,556
                  Supplies                              1,400             --
                                                       ------         ------
                                                       $3,004         $2,556
                                                       ======         ======
</TABLE>

         Effective April 1, 2001 , the Company changed its method of accounting
for supply parts inventory from expensing upon purchase to capitalization upon
purchase and expensing upon usage. In prior years, the Company has had a fairly
even mix of operations in underground mining and surface mining. However, the
Company recently started two new underground mines in 2000. The underground
mining process requires a large amount of supply parts inventory and the
anticipated tons to be produced from underground mining is projected to increase
to over 75% of the Company's output in the next few years. Accordingly, the
Company believes that the capitalization of supply parts inventory will result
in a better measurement of operating results by matching revenues with related
expenses. The $1,137,000 cumulative effect of the change on prior years (after
reduction for income taxes of $586,000) is included in income in 2000. The
supplies inventory balance at December 31, 1999 was $1,723,000. The effect of
the change in 2000 was to decrease net income $112,000. The pro forma amounts
reflect the effect of retroactive application on supplies inventory expense and
related income taxes that would have been made in 2000 had the new method been
in effect at January 1, 2000. The pro forma effect of the adoption for periods
prior to January 1, 2000 could not be determined, as the company did not
separately track inventory supplies for such prior periods.

NOTE 4--COAL RESERVES AND MINE DEVELOPMENT COSTS:

         Coal reserves and mine development costs consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                     ------------------------
                                                       2000            1999
                                                     --------        --------
<S>                                                 <C>             <C>
                  Coal reserves                      $153,967        $153,883
                  Mine development costs               31,625          15,063
                                                     --------        --------
                                                      185,592         168,946
                  Accumulated depletion               (33,747)        (28,617)
                                                     --------        --------
                                                     $151,845        $140,329
                                                     ========        ========
</TABLE>

         Depletion expense was $4,811,000, $5,020,000, and $5,133,000 in 2000,
1999, and 1998, respectively. Mine development costs include $8,311,000, and
$3,234,000 at December 31, 2000 and 1999, respectively, of capitalized interest
on the Fork Creek Reserves. The 2000 balance of $1,081,000 was formerly
classified in the Fork Creek Development portion of the Property, Plant and
Equipment footnote (Note 5).




                                       41
<PAGE>   44

NOTE 5--PROPERTY, PLANT AND EQUIPMENT:

         Property, plant and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                               -----------------------
                                                                 2000           1999
                                                               --------       --------
<S>                                                           <C>            <C>
                  Machinery and equipment                      $ 99,160       $ 58,763
                  River terminals                                11,633         11,625
                  Buildings                                       8,135          5,771
                  Coal preparation plants                        20,042          8,114

                  Fork Creek development                             --         27,526
                  Other                                           3,713          3,126
                                                               --------       --------
                                                                142,683        114,925
                  Accumulated depreciation                      (56,912)       (48,258)
                                                               --------       --------
                                                               $ 85,771       $ 66,667
                                                               ========       ========
</TABLE>

         Machinery and equipment includes assets under capital leases with
aggregate cost of $23,099,000 and $6,255,000 at December 31, 2000 and 1999,
respectively. Accumulated amortization related to these capitalized leased
assets was $11,563,000 and $4,066,000 at December 31, 2000 and 1999,
respectively. Amortization expense was $4,329,000 in 2000, $1,615,000 in 1999
and $3,215,000 in 1998.

         Buildings include an office building and related improvements that
serves as the Company's headquarters. The carrying value of the building was
$2,840,000 and $3,002,000 at December 31, 2000 and 1999, respectively.
Depreciation expense recognized on the building was $215,000, $218,000 and
$215,000 in 2000, 1999, and 1998, respectively.

         Fork Creek development costs of $27,526,000 at December 31, 1999
included all development costs to date. Upon the completion of the development,
$14,653,000 of the cost accumulated through 2000 was classified as mine
development with the remaining assets being allocated to the proper
classification within Property, Plant and Equipment. Fork Creek development
costs include $1,081,000 at December 31, 1999 of capitalized interest on the
construction of the Fork Creek Facilities.

NOTE 6--LONG-TERM INVESTMENTS:

         Long-term investments include zero coupon U.S. Treasury bonds held in
escrow in connection with the Company's purchase of Marine Terminals, Inc. (Note
19) having maturity dates as follows at December 31, 2000 (in thousands):

<TABLE>
<CAPTION>
                                                   Carrying          Market
                                                     Value            Value
                                                   --------          -------
<S>                                               <C>               <C>
                  2001                              $ 7,883          $ 7,847
                  2006                                9,059           10,269
                                                    -------          -------
                                                     16,942           18,116
                  Other                                  18               18
                                                    -------          -------
                                                    $16,960          $18,134
                                                    =======          =======
</TABLE>

NOTE 7--REVOLVING LINES OF CREDIT:

         The Company has available revolving line of credit facilities totaling
$40,000,000, expiring May 2003, which are secured by assets of the Company other
than mobile equipment. Borrowings bear interest at a variable rate based on
either LIBOR (an effective rate of 9.52% at December 31, 2000) or the bank's
prime lending rate (an effective rate of 11.25% at December 31, 2000). The
revolving lines of credit had an outstanding cash balance of $31,936,000 and
$4,360,000 of outstanding standby letters of credit at December 31, 2000. These
agreements contain minimum operating and financial ratios and covenants as
defined in the agreements. The Company was not in compliance with certain
financial ratio covenants of December 31, 2000. See additional information in
Note 1.



                                       42
<PAGE>   45

NOTE 8--LONG-TERM DEBT:

         Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                         2000            1999
                                                                                       --------         --------
<S>                                                                                   <C>              <C>
 Senior 9-7/8% Notes (the "Senior Notes") due 2008 in the aggregate principal
   amount of $100,000,000. On June 8, 1998, Pen Holdings issued the Senior Notes
   which accrue interest at 9-7/8%, payable semi-annually in June and December
   through the maturity date of June 15, 2008. The entire principal amount is
   due at the maturity date. The Senior Notes were issued with an aggregate
   original issue discount of $784,000, which is being amortized over the ten
   year term of the Senior Notes. The Senior Notes are general unsecured
   obligations of Pen Holdings ranking generally the same in priority of payment
   with all existing and future unsubordinated indebtedness of the Company. The
   Senior Notes are unconditionally guaranteed (the "Guarantees") on a senior
   unsecured basis, as to the payment of principal, premium, if any, and
   interest, fully and unconditionally, joint and severally, by certain of Pen
   Holdings' subsidiaries (the "Guarantors"). The Guarantees will rank generally
   the same in priority of payment with all existing and future unsubordinated
   indebtedness of the Guarantors and senior in right of payment to all existing
   and future indebtedness of the Guarantors. The Senior Notes are redeemable at
   the option of Pen Holdings, in whole or in part, at any time on or after June
   15, 2003 at premiums to face value identified in the Indenture by and among
   Pen Holdings, the Guarantors, and The Bank of New York, as Trustee, dated
   June 8, 1998 (the "Indenture"), relating to the Senior Notes.                       $ 99,419         $ 99,340

 Notes payable secured by a lien on an office building which serves as the
   Company's headquarters, with a net book value of $2,840,000, payable in
   monthly installments of $37,000 through 2016. Interest included in the
   monthly installments is a fixed  rate of 8.33%.                                        3,893            4,006
                                                                                       --------         --------

Total long-term debt                                                                                     103,346

Current maturities of long-term debt                                                    103,312             (113)
                                                                                       --------         --------
                                                                                       $      0         $103,233
                                                                                       ========         ========
</TABLE>

         The Indenture for the Senior Notes contains various covenants, the most
significant of which restricts the Company's ability to incur certain forms of
additional indebtedness, pay dividends or transfer or sell assets except in the
ordinary course of business. The proceeds from the issuance of the Senior Notes
were used to repay previously existing indebtedness, redeem warrants on the
Company's common stock and provide working capital for development of mining
properties. Certain of the Company's other loan agreements contain minimum
operating and financial ratios and covenants as defined in the separate
agreements. See additional information in Note 1.

         Scheduled principal payments on these obligations (if the Senior Notes
are not accelerated as described in Note 1) as of December 31, 2000 are as
follows (in thousands):

<TABLE>
<CAPTION>
                         YEAR ENDED
                        DECEMBER 31,
                        ------------
<S>                                                                <C>
                    2001                                            $    123
                    2002                                                 133
                    2003                                                 145
                    2004                                                 157
                    2005                                                 171
                    Thereafter                                       103,164
                                                                    --------
                                                                     103,893
                    Less:  Unamortized bond discount                   (581)
                                                                    --------
                                                                    $103,312
                                                                    ========
</TABLE>




                                       43
<PAGE>   46

NOTE 9--LEASES:

CAPITAL LEASES

         Property, plant and equipment (Note 5) includes assets under capital
leases with a total cost of $23,099,000 and accumulated depreciation of
$11,563,000. Future minimum payments in the aggregate under these leases
(assumes lease payments will not be accelerated as described in Note 1) consist
of the following (in thousands):

<TABLE>
<CAPTION>
                      YEAR ENDED
                     DECEMBER 31,
<S>                                                                            <C>
                          2001                                                  $  5,156
                          2002                                                     5,313
                          2003                                                     4,118
                          2004                                                     1,069
                          Thereafter                                                  80
                                                                                --------
                          Total lease payments                                    15,736
                          Amount representing interest                            (2,019)
                                                                                --------
                          Total long-term capital leases                          13,717
                          Current maturities of capital leases                   (13,717)
                                                                                --------
                          Long-term portion                                     $      0
                                                                                ========
</TABLE>

         Certain of these lease agreements contain minimum operating and
financial ratios and covenants, which are consistent with the covenants for the
revolving line of credit. The Company was not in compliance with all covenants
in 2000, but is working with lending institutions to obtain waivers. See
additional information in Note 1.

OPERATING LEASES

         The Company utilizes certain vehicles and equipment under
noncancellable operating lease agreements, with minimum payments as follows (in
thousands):

<TABLE>
<CAPTION>
                        YEAR ENDED
                       DECEMBER 31,
<S>                                                                           <C>
                         2001                                                  $ 6,411
                         2002                                                    4,961
                         2003                                                    2,901
                         2004                                                      196
                         2005                                                      119
                         Thereafter                                                912
                                                                               -------
                                                                               $15,500
                                                                               =======
</TABLE>

         Total rent expense under these leases aggregated $3,666,000 in 2000,
$1,710,000 in 1999, and $1,326,000 in 1998.

         The Company leases its mining rights in certain coal reserves to other
coal companies. Amounts due to the Company under these leases are based on the
greater of fixed amounts per ton or a percentage of the selling price the lessee
receives for the coal when it is sold. The leases also provide for annual
minimum payments. Revenue recognized from leasing of mining rights was
$7,101,000 in 2000, $8,048,000 in 1999 and $6,121,000 in 1998.

         The Company also leases office space to various commercial tenants in
the office building that serves as the Company's headquarters under five year
noncancellable operating leases, including renewal options ranging up to ten
years. Rental income was $925,000 in 2000, $863,000 in 1999, and $737,000 in
1998.

         Future minimum lease payments to be received are as follows (in
thousands):

<TABLE>
<CAPTION>
                         YEAR ENDED
                        DECEMBER 31,
<S>                                                                           <C>
                           2001                                                $ 3,449
                           2002                                                  3,396
                           2003                                                  3,020
                           2004                                                  2,408
                           2005                                                  2,210
                           Thereafter                                           15,643
                                                                               -------
                                                                               $30,126
                                                                               =======
</TABLE>


                                       44
<PAGE>   47

NOTE 10--MANDATORILY REDEEMABLE PREFERRED STOCK:

         The Company issued 10,000 shares of convertible preferred stock with a
face value of $13,650,000 in January 1996. The face value of the preferred stock
was reduced by amounts incurred related to settlement of tax issues existing at
the issuance date. The Company reduced the value of the preferred stock by
$1,588,000 for such settlements in 1999 . There were no adjustments in 2000.

         No dividends accrue from the date of issuance through December 2000.
Beginning in January 2001, dividends will accrue at 25.25% per year for a
five-year period. The original aggregate amount of $17,233,000 in dividends,
which was to accrue from 2001 through 2006 was being recorded evenly from the
date of issuance in 1996 through the redemption date in 2006. In 1999, accretion
of the preferred stock was increased by $255,000 and decreased in 1998 by
$861,000 to adjust the accumulated accrued dividends based on the adjusted face
value of the preferred stock. The remaining aggregate amount of $6,552,000 in
dividends will be recorded evenly from 2000 through the redemption date in 2006.

         The preferred stock calls for mandatory redemption in 2006. The
preferred stock will be redeemed at that time by the issuance of a note payable,
which amortizes over the ten years following the redemption. The preferred stock
is convertible, at the option of the holder, into 2,950,000 shares of Class I
common stock. The conversion feature is exercisable in January 2001 and expires
in January 2002. No dividends may be paid on any class of common stock prior to
the full redemption of the convertible preferred stock. The convertible
preferred stock does not contain any voting rights.

NOTE 11--SHAREHOLDERS' EQUITY:

COMMON STOCK

         The Company has reserved 560,000 shares of Class I common stock for
issuance pursuant to option, warrant or other rights granted or which may be
granted to financial institutions with which the Company has a borrowing
relationship. As of December 31, 2000, no Class I common stock has been issued
with regard to these options. No other Class I common shares may be issued until
the convertible preferred stock is redeemed in full.

         Each holder of Class I common stock has the option to sell to the
Company 100% of the stock held at a price of $.01 per share. This option is
exercisable beginning January 2005 and lapses upon redemption or conversion of
the convertible preferred stock to Class I common stock.

         The 200,000 shares of authorized Class II common stock were issued in
1996 under the Pen Holdings, Inc. Stock Purchase Plan dated June 1, 1996 to
various officers of the Company. In 1997, 22,450 shares were repurchased for
$13,650 by the Company from one of the officers who resigned. The shares were
concurrently canceled.

STOCK WARRANTS

         The Company issued warrants to purchase 326,722 shares of Class I
common stock in January 1996 to its primary lenders in connection with a
recapitalization in 1995. The exercise price of the warrants equaled the fair
value of the Class I common stock at the date of issuance. The warrants were
exercisable beginning January 2001 at $.01 per share. The warrants were to
expire January 2006. The Company repurchased these warrants for $3,000,000
(minimum redemption value identified in the warrant agreement) in connection
with the issuance of the Senior Notes on June 8, 1998.

NOTE 12--EXTRAORDINARY ITEM:

         In 1998, the Company recorded an extraordinary charge which represents
the after-tax impact of (i) the write-off of unamortized loan costs and (ii) the
write-off of unamortized original issue discount and repurchase of redeemable
common stock warrants on the debt that was repaid with the proceeds from the
issuance of the Senior Notes.

NOTE 13--OTHER MATTERS:


         On February 16, 2001, Pen Holdings announced that the Supreme Court of
Kentucky decided to not review a February 25, 2000 two-to-one split decision of
the Commonwealth of Kentucky Court of Appeals upholding a September 1998 Floyd
County Kentucky Circuit Court jury verdict in favor of Cheyenne Resources, Inc.
and its wholly-owned subsidiary, PC&H Construction, Inc. (collectively,
"Cheyenne"). The Floyd County Kentucky Circuit Court jury verdict awarded
Cheyenne damages of approximately $9.5 million (plus prejudgment interest of




                                       45
<PAGE>   48

approximately $5 million). This lawsuit was brought against Elk Horn Coal on a
case relating to a coal lease that was entered into by Elk Horn Coal prior to
the Company's purchase of Elk Horn Coal. The Supreme Court of Kentucky decision
not to review the lower court decision renders the judgment final and
non-appealable.

         The Company informed its senior lenders of the event and continues to
seek necessary extensions of forbearance under the Credit Facility and with
Travelers, the Cheyenne Judgment bond holder. There can be no assurance that any
necessary forbearance period will be extended. In the event that the Company's
senior lenders do not grant the necessary extension, do not permit the Company
to borrow under the senior credit facility, or seek to accelerate the
indebtedness under the facility, this will materially and adversely impact the
liquidity and financial position of the Company. Additionally, once the
Forbearance Period has expired Travelers then can take actions to execute on the
Cheyenne Judgment bond. Currently, the Company has no available source of funds
to pay the total amount due under the judgment bond.


NOTE 14--EMPLOYEE BENEFIT PLANS:

         The Company maintains a contributory, defined contribution 401(k)
salary deferral plan to provide retirement and other benefits for its employees.
All employees become eligible after attaining the age of 21, completing one year
of service and working 1,000 hours during the preceding 12 months. The Company
contributes by matching a percentage of employee voluntary contributions.
Company contributions aggregated $542,000 in 2000, $471,000 in 1999, and
$402,000 in 1998.

NOTE 15--INCOME TAX (BENEFIT) EXPENSE:

         Income tax (benefit) expense for continuing operations consists of the
following (in thousands):

<TABLE>
<CAPTION>
                                                              2000            1999             1998
                                                            -------         -------           -------
<S>                                                        <C>             <C>               <C>
Current
   Federal                                                  $(2,594)        $ 2,201           $ 2,951
   State                                                         19             (31)              320
                                                            -------         -------           -------
                                                             (2,575)          2,170             3,271
                                                            -------         -------           -------

Deferred
   Federal                                                   (4,397)         (3,248)           (3,348)
   State                                                     (1,430)            (31)               --
                                                            -------         -------           -------
                                                             (5,827)         (3,279)           (3,348)
                                                            -------         -------           -------
                                                            $(8,402)        $(1,109)          $   (77)
                                                            =======         =======           =======
</TABLE>

         The income tax (benefit) expense effective rates of (40.5%), (39.8%),
and (2.3%) for 2000, 1999 and 1998, respectively, reconcile with the federal
statutory tax rate of 34% as follows (in thousands):

<TABLE>
<CAPTION>
                                             2000                        1999                     1998
                                     ---------------------        -------------------      --------------------
                                     AMOUNT        PERCENT        AMOUNT      PERCENT      AMOUNT       PERCENT
                                     ------        -------        ------      -------      ------       -------
<S>                                <C>            <C>            <C>         <C>          <C>          <C>
Tax at statutory rate               $(7,060)        (34.0)%       $   960       34.0%      $ 1,154         34.0%
State income taxes (net of
   federal income tax benefit)         (931)         (4.5)            (38)      (1.3)          211          6.2
Statutory depletion in excess
   of cost depletion                   (635)         (3.0)         (1,361)     (48.6)       (1,019)       (30.0)
Adjustment of prior years' tax           73           0.3            (805)     (28.7)         (441)       (13.0)
Goodwill amortization                    75           0.3              75        2.7            75          2.2
Other                                    76           0.4              60        2.1           (57)        (1.7)
                                    -------         -----         -------      -----       -------        -----
                                    $(8,402)        (40.5)%       $(1,109)     (39.8)%     $   (77)        (2.3)%
                                    =======         =====         =======      =====       =======        =====
</TABLE>





                                       46
<PAGE>   49

         The deferred tax liabilities (assets) in the accompanying balance sheet
includes the following (in thousands):

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                       ---------------------------------
                                                                         2000                     1999
                                                                       --------                  -------
<S>                                                                   <C>                       <C>
            Depletion of coal reserves                                 $ 44,184                  $45,223
            Accelerated depreciation                                      6,752                    6,976
            Mine development costs                                        8,115                    4,408
            Other                                                         6,654                    3,013
                                                                       --------                  -------
            Gross deferred tax liabilities                               65,705                   59,620
                                                                       --------                  -------

            AMT credit carryforwards                                     (3,171)                  (5,352)
            Net operating loss carryforwards                             (7,162)                      --
            Settlement of Cheyenne litigation                            (5,941)                      --
            Other                                                        (2,390)                  (2,317)
                                                                       --------                  -------
            Gross deferred tax assets                                   (18,664)                  (7,669)
                                                                       --------                  -------
                                                                       $ 47,041                  $51,951
                                                                       ========                  =======
</TABLE>

         Deferred taxes primarily result from differences between the financial
accounting and tax basis of acquired coal reserves and differences between the
methods used for computing depreciation and depletion and in the timing of
certain revenue and expense recognition for financial reporting and income tax
purposes. At December 31, 2000, the Company had a net operating loss
carryforward of $15,932,000, which expires, if unused, in 2020 and alternative
minimum tax credit carryforwards of $3,171,000 available to offset future
regular tax liabilities, which can be carried forward indefinitely.

         In 2000 the IRS examined the Company's federal income tax returns for
the years 1994 through 1996. The examination was completed in early 2001 and no
additional provision for taxes was required as a result of this examination.

         During January 1999, the Company reached a settlement with the IRS of
its pending U.S. Tax Court matter relating to certain issues raised by the IRS
in its examinations of the Company's federal income tax returns for the years
1982 through 1989. Also during 1999, the IRS completed its examination of the
Company's federal income tax returns for the years 1990 through 1993. The
Company recorded a tax benefit by reducing the taxes previously accrued by
$441,000 in 1998 and $805,000 in 1999 as a result of finalizing these tax
matters.

         Currently, none of the Company's tax returns are under examination.

NOTE 16--GUARANTIES, COMMITMENTS AND CONTINGENCIES:

         The Company was a guarantor of $7,667,000 of International Marine
Terminals' debt (IMT, a partnership in which the Company has a 1/3 interest-Note
19). On March 15, 2001, the Company made a capital infusion to IMT of $7,667,000
using the proceeds from the sale of long-term investments. (See Note 6.) IMT
used the capital infusion to repay a portion of the partnership's debt, which
included the $7,667,000 described above.

         On February 16, 2001, Pen Holdings announced that the Supreme Court of
Kentucky decided to not review a February 25, 2000 two-to-one split decision of
the Commonwealth of Kentucky Court of Appeals upholding a September 1998 Floyd
County Kentucky Circuit jury verdict in favor of Cheyenne Resources, Inc. and
its wholly-owned subsidiary, PC&H Construction, Inc. (collectively, "Cheyenne").
The Floyd County Kentucky Circuit Court jury verdict awarded Cheyenne damages of
approximately $9.5 million (plus prejudgment interest currently of approximately
$5 million). This lawsuit was brought against Elk Horn Coal on a case relating
to a coal lease that was entered into by Elk Horn Coal prior to the Company's
purchase of Elk Horn Coal. The Supreme Court of Kentucky decision not to review
the lower court decision renders the judgment final and non-appealable.

         The Company informed its senior lenders of the event and continues to
seek necessary extensions of forbearance under the Credit Facility and with
Travelers, the Cheyenne Judgment bond holder. There can be no assurance that any
necessary forbearance period will be extended. In the event that the Company's
senior lenders do not grant the necessary extension, do not permit the Company
to borrow under the senior credit facility, or seek to accelerate the
indebtedness under the facility, this will materially and adversely impact the
liquidity and financial position of the Company. Additionally, once the
Forbearance Period has expired Travelers then can take actions to execute on the
Cheyenne Judgment bond. Currently, the Company has no available source of funds
to pay the total amount due under the judgment bond. See additional information
in Notes 1 and 13.

         There are legal proceedings pending against the Company arising from
the normal course of business. Management of the Company and its legal counsel
handling such matters do not expect any of these matters to have a material
effect on the Company's financial position or results of operations.




                                       47
<PAGE>   50

NOTE 17--OTHER RELATED PARTY TRANSACTIONS:

         Related party transactions not otherwise disclosed in the financial
statements include fees paid to International Marine Terminals (Note 20) for
coal loading of $0 in 2000, $1,255,000 in 1999, and $1,758,000 in 1998. At
December 31, 2000 and 1999, $0 and $10,000, respectively, was included in
accounts payable and accrued expenses relating to coal loading fees described
above.

NOTE 18--LONG-TERM COAL SUPPLY CONTRACTS:

         The Company is committed under several long-term coal supply contracts.
The contracts require the Company to supply specified tonnages and quality of
coal during the term of the agreements. The contracts stipulate the base prices
at inception, which are subject to periodic escalation based on specified
indices.

         The Company has the capacity to fulfill all contract requirements with
existing proven coal reserves. Approximately 69% of revenues in 2000, 70% in
1999, and 80% in 1998 were derived from customers supplied under long-term
contracts. The Company had sales to significant customers as follows (in
thousands):

<TABLE>
<CAPTION>
                               2000                           1999                              1998
                     ------------------------       -----------------------         ----------------------------
                                   PERCENTAGE                    PERCENTAGE                           PERCENTAGE
                     DOLLAR         OF TOTAL        DOLLAR        OF TOTAL          DOLLAR             OF TOTAL
                     AMOUNT         REVENUES        AMOUNT        REVENUES          AMOUNT             REVENUES
                     ------        ----------       ------       ----------         ------            ----------
<S>                 <C>           <C>              <C>          <C>                  <C>             <C>
Customer A                --            --           $21,849         13%            $34,991               21%
Customer B            35,220            24%           30,731         18              35,120               21
Customer C            30,976            21            35,093         20              26,082               15
                     -------            --           -------         --             -------               --
                     $66,196            45%          $87,673         51%            $96,193               57%
                     =======            ==           =======         ==             =======               ==
</TABLE>

         In 2000, 3,797,000 tons were shipped on long-term coal supply
contracts. Future minimum tonnage commitments under long-term coal supply
contracts are as follows (in thousands):

<TABLE>
<CAPTION>
                          YEAR                                SHORT TONS
                          ----                                ----------
<S>                                                          <C>
                          2001                                 3,748,000
                          2002                                 3,360,000
                          2003                                 1,680,000
                          2004                                   500,000
</TABLE>



NOTE 19--INVESTMENT IN AFFILIATED COMPANY:

        The Company's investment in an affiliated company is a one-third general
partnership interest in International Marine Terminals (IMT), an ocean marine
loading facility located in Louisiana (Note 16). Components of the investment in
affiliated company and equity in net earnings (losses) of affiliated company are
as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                         YEAR ENDED
                                                                                        DECEMBER 31,
                                                                           ---------------------------------------
                                                                             2000            1999           1998
                                                                           -------         -------         -------
<S>                                                                       <C>             <C>             <C>
INVESTMENT IN AFFILIATED COMPANY:
   Equity in partnership interest at
      time of purchase                                                     $ 5,977         $ 5,977         $ 5,977

   Earnings (loss) since acquisition                                        (1,398)           (172)            476

   Net distributions since acquisition                                      (3,707)         (4,507)         (4,507)
                                                                           -------         -------         -------

                                                                               872           1,298           1,946
Goodwill, less accumulated amortization
      of $3,305, $3,086 and $2,867 at December 31,
      2000, 1999, and 1998, respectively                                     2,174           2,394           2,613
                                                                           -------         -------         -------

Investment in IMT                                                          $ 3,046           3,692           4,559

Investment in other affiliated companies                                        --           2,081           1,081
                                                                           -------         -------         -------
Total Investment in affiliated investments                                 $ 3,046         $ 5,773         $ 5,640
                                                                           =======         =======         =======

NET EARNINGS (LOSSES) ON IMT INVESTMENT
Company's share of affiliate earnings (losses)                             $(1,226)        $  (648)        $   378

Net Interest Income on escrowed funds related to the IMT investment          1,027           1,017           1,008
                                                                           -------         -------         -------

Net earnings (losses) on IMT investment                                    $  (199)        $   369         $ 1,386
                                                                           =======         =======         =======
</TABLE>



                                       48
<PAGE>   51

         The above net earnings (losses) are reported as a component of other
income in the statement of income. All earnings (losses) of IMT are shared by
each partner on a pro rata basis, with the exception of interest expense, a
portion of which is allocated to the partners based on their individual credit
ratings. In addition, amortization of goodwill on the IMT investment of $219,000
for 1998, 1999, and 2000 is included in selling, general and administration.

Condensed financial information for IMT, is as follows (in thousands):

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                          ---------------------------------------
                                           2000             1999            1998
                                          -------         -------         -------
<S>                                      <C>             <C>             <C>
BALANCE SHEET
   Current assets                         $ 5,041         $ 3,734         $ 3,165
   Noncurrent assets                       63,815          66,974          68,622
                                          -------         -------         -------
      Total assets                        $68,856         $70,708         $71,787
                                          =======         =======         =======
   Current liabilities                    $26,088         $ 3,714         $ 2,927
   Noncurrent liabilities                  40,000          63,000          63,000
                                          -------         -------         -------
      Total liabilities                    66,088          66,714          65,927
   Equity                                   2,768           3,994           5,860
                                          -------         -------         -------
      Total liabilities and equity        $68,856         $70,708         $71,787
                                          =======         =======         =======
STATEMENT OF INCOME
   Revenues                               $14,695         $17,525         $19,133
                                          =======         =======         =======
   Operating income (loss)                $(1,139)        $ 1,245         $ 2,707
                                          =======         =======         =======
   Earnings (loss)                        $(3,627)        $(1,865)        $ 1,235
                                          =======         =======         =======
</TABLE>

NOTE 20--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial data for 2000 and 1999 is summarized below:

<TABLE>
<CAPTION>
                                                      MARCH 31          JUNE 30            SEPT 30          DEC 31
                                                      --------          -------            -------          ------
<S>                                                  <C>               <C>                <C>              <C>
2000:
   Revenues                                            $39,757           $37,750           $35,691          $36,903

   Operating Income                                        926             1,082             3,076           (2,436)

   Net Income (loss)                                      (762)              925               276          (11,324)

1999:
   Revenues                                            $38,715           $44,534           $45,732          $38,261

   Operating Income                                      3,820             4,656             2,252              (65)

   Net Income (loss)                                     1,470             2,065               329             (297)
</TABLE>




                                       49
<PAGE>   52
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

None


PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

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

<TABLE>
<CAPTION>
       NAME                          AGE                        POSITION WITH PEN HOLDINGS
       ----                          ---                        --------------------------
<S>                                <C>       <C>
William E. Beckner                   49       Chairman of the Board of Directors, President and Chief
                                              Executive Officer
Stephen G. Capelli                   50       Senior Vice President of Operations; Director
Joseph A. Davis, Jr.                 53       Senior Vice President of Sales and Marketing; Director
Mark A. Oldham                       43       Senior Vice President, Secretary and Treasurer/Chief
                                              Financial Officer; Director
</TABLE>

         William E. Beckner has been the President and Chief Executive Officer
of the Company since 1993, and Chairman of the Board of Directors since 1996.
Mr. Beckner also served as Executive Vice President and Chief Operating Officer
of Pen Holdings from 1986 to 1993 and as Vice President of Finance from 1982 to
1986. Mr. Beckner, who has 22 years of experience in the coal industry and has
been with the Company for 18 years, holds a controlling interest in Pen
Holdings. Mr. Beckner received an M.B.A. degree from the University of Tennessee
(Nashville) in 1979 and received a B.S. degree in Business from the University
of Evansville in 1973.

         Stephen G. Capelli has been the Senior Vice President of the Company's
coal operations and a director of Pen Holdings since 1996, having previously
served as Vice President of Operations since 1994. Mr. Capelli has 30 years of
experience in the coal industry. Prior to joining the Company, Mr. Capelli was
Vice President of Mining and Development of Amvest Minerals, Inc., a coal
company, from 1991 to 1994. Mr. Capelli serves on the Board of Directors of the
West Virginia Mining and Reclamation Association and the West Virginia State
Mine Board, to which he was appointed by the governor of West Virginia. In 1973,
Mr. Capelli received a B.S. degree in Mining Engineering from Virginia Tech.

         Joseph A. Davis, Jr., has been Senior Vice President of Sales and
Marketing of the Company's coal operations and a director of Pen Holdings since
1996. Prior to that time, Mr. Davis was Vice President of Sales and Marketing
from 1987. Mr. Davis has 26 years of experience in the coal industry. Before
joining the Company, he was Vice President of Sales for Benford-Nightengale Coal
Company from 1977 to 1984, and was Sales Manager of Kentucky Pioneer Coal
Company from 1975 to 1977. Mr. Davis received a B.A. degree from Western
Kentucky University in 1976.

         Mark A. Oldham has been Senior Vice President, Secretary and
Treasurer/Chief Financial Officer of the Company since 1996 and was elected as a
director in 1999. Prior to that time, Mr. Oldham served as Vice President and
Controller from 1993 to 1996 and Controller from 1985 to 1993. Mr. Oldham has 17
years experience in the coal industry. Mr. Oldham is a Certified Public
Accountant (CPA) and has been a member of the American Institute of Certified
Public Accountants and the Tennessee Society of CPA's since 1982. From 1979 to
1984, Mr. Oldham was employed in public accounting. Mr. Oldham received a B.S.
degree in Business Administration from Tennessee Technological University in
1979.

BOARD COMPENSATION

         All current directors are employees of the Company. No additional
remuneration beyond their compensation as employees is currently given to
directors for their services.



                                       50
<PAGE>   53

ITEM 11.  EXECUTIVE COMPENSATION

         The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities for the years ended December 31, 2000, 1999, and 1998 for (i) chief
executive officer of the Company and (ii) each of the three other most highly
compensated executive officers of the Company who received in excess of
$100,000, determined as of December 31, 2000 (collectively, the "Named Executive
Officers").


Summary Compensation Table

<TABLE>
<CAPTION>
                                Compensation         Annual       Annual               Other                 All Other
Name and Principal Position         Year             Salary       Bonus           Compensation (3)        Compensation (1)
---------------------------     ------------         ------       -----           ----------------        ----------------
<S>                            <C>                  <C>          <C>             <C>                     <C>
William E. Beckner                  2000             500,000      169,000                   --                  5,100
President and Chief                 1999             418,000      516,000(2)                --                  4,800
Executive Officer                   1998             403,325      293,000                   --                  4,800

Stephen G. Capelli                  2000             180,000      52,510                    --                  5,100
Senior Vice President               1999             165,000      53,332                35,849                  4,800
of Operations                       1998             157,000      67,150                13,618                  4,800

Joseph A. Davis, Jr.                2000             155,000      44,394                    --                  5,100
Senior Vice President of            1999             151,000      33,810                35,849                  4,800
Sales/Marketing                     1998             147,000      56,785                13,618                  4,800

Mark A. Oldham                      2000             140,000      39,690                    --                  5,100
Senior Vice President, Secretary    1999             135,000      24,104                35,849                  4,784
and Treasurer/Chief Financial       1998             131,000      46,200                13,618                  4,800
Officer
</TABLE>

(1)      Represents annual contribution made by the Company under its 401(k)
         plan.

(2)      Historically, Pen Holdings has paid its executive officers bonuses
         earned for any year in March of the year following the year the bonus
         was earned. In 1999, Pen Holdings changed this policy as it relates to
         Mr. Beckner. Mr. Beckner's bonus compensation for both 1998 and 1999
         was paid to Mr. Beckner in 1999. This effectively accelerated the
         timing of the payment of Mr. Beckner's bonus for 1999 by three months.
         In subsequent years, it is expected that Mr. Beckner's bonus, if any,
         will be paid in December of the year the bonus was earned rather than
         in March of the year following the year the bonus was earned. Pen
         Holdings' policy as it relates to other executive officers and
         employees has not changed, as all other executive officers and
         employees that earn bonus compensation will be paid in March of the
         year following the year the bonus was earned. The bonus compensation
         listed above for Mr. Beckner represents $256,000 paid in 1999 as a
         bonus earned for the year ended December 31, 1998 and $260,000 paid in
         1999 as a bonus for the year ended December 1999.

(3)      Represents incremental increases in the value of the officer's account
         under the Pen Holdings, Inc. Stock Purchase Plan (the "Stock Purchase
         Plan"). The Stock Purchase Plan provides generally that stock issued to
         the officer will be repurchased by the Company upon the termination of
         the officer's employment with the Company. The repurchase price for
         this stock is equal to $0.01 plus the aggregate net income per common
         share, determined over the period beginning with the close of the 1995
         fiscal year and ending with the close of the Company's last fiscal year
         ending prior to the officer's date of termination. The amount included
         does not include amounts credited to the account of the officer prior
         to 2000. Due to fluctuations in the Company's net income per common
         share during a relevant measuring period, an officer's account under
         the Stock Purchase Plan may be valued at an amount less than amounts
         reported in prior periods.



                                       51
<PAGE>   54

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth as of December 31, 2000, certain
information concerning ownership of the Class I and Class II Common Stock of the
Company by each director, each named executive officer, each person who is known
to the Company to be the beneficial owner of more than 5% of the Class I and
Class II Common Stock and all directors and executive officers of the Company as
a group. Each stockholder listed below has sole voting and dispositive power
with respect to the shares listed next to such stockholder's name except as
noted below. Except as noted, the address of each stockholder listed below is:
c/o Pen Holdings, Inc., Center Court Building, 3rd Floor, Brentwood, Tennessee
37027.

<TABLE>
<CAPTION>
                                           Class I Common Stock (1)     Class II Common Stock (1)
                                          ---------------------------  ---------------------------       Percentage of
                                            Number of    Percentage      Number of    Percentage           Class I and
                                             Shares       of Class        Shares       of Class             Class II
          Name and Address                Beneficially   Beneficially  Beneficially   Beneficially        Beneficially
         of Beneficial Owner                  Owned         Owned        Owned(2)        Owned                Owned
         -------------------              ------------   ------------  ------------   ------------       -------------
<S>                                     <C>             <C>           <C>            <C>                <C>
William E. Beckner                         4,040,000         94.2%                                             90.4%

Stephen G. Capelli                                                         44,900         25.3%                 1.0%

Joseph A. Davis, Jr.                                                       44,900         25.3%                 1.0%

Mark A. Oldham                                                             44,900         25.3%                 1.0%

Grace Pen                                    250,000 (3)      5.8%                                              5.6%
   c/o Bass, Berry & Sims
   2700 First American Center
   Nashville, Tennessee  37238

Directors and Executive Officers
   as a group (4 persons)                  4,040,000         94.2%        134,700         75.9%                93.4%
</TABLE>

(1)      The Company's Class I and Class II Common Stock currently have the same
         rights. Prior to the Company's recapitalization in 1995, the class of
         stock had different rights, however, the difference in rights no longer
         exists.

(2)      All shares are subject to repurchase upon termination of employment
         with the Company under the Stock Purchase Plan.

(3)      Includes 187,500 shares held by a trust of which Ms. Pen is one of the
         trustees.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

LOANS AND GUARANTEES

         The Company is also a guarantor of a bank loan in the amount of
$136,000 to Forests, Inc., the Company's partner in Camden Hardwood Company, for
the partner's capital contribution.

         The Company was a guarantor of $7,667,000 of International Marine
Terminals' debt (IMT, a partnership in which the Company has a 1/3 interest-Note
20). On March 15, 2001, the Company made a capital infusion to IMT of $7,667,000
using the proceeds from the sale of long-term investments. IMT used the capital
infusion to repay a portion of the partnership's debt, which included the
$7,667,000 described above.

ARRANGEMENTS INVOLVING AFFILIATES

         During the term of the TPC Contract, the Company used the IMT facility
to load coal for export. Fees paid by the Company to IMT for coal loading in
1999 were approximately $1,255,000. These fees are comparable to the fees paid
by third parties resulting from arms length transactions. There were no fees
paid by the Company to IMT in 2000.

PART IV.

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

(a)  Documents filed as part of this report:




                                       52
<PAGE>   55

                               PEN HOLDINGS, INC.

                          INDEX TO FINANCIAL STATEMENTS


(1)  AUDITED CONSOLIDATED FINANCIAL STATEMENTS:

<TABLE>
<CAPTION>
                                                                                PAGE
                                                                                ----
<S>                                                                            <C>
   Report of Independent Accountants                                             32

   Consolidated Balance Sheet as of December 31, 2000 and 1999                   33

   Consolidated Statement of Income for the Years Ended December 31,
     2000, 1999 and 1998                                                         34

   Consolidated Statement of Changes in Shareholders' Equity for the
     Years Ended December 31, 2000, 1999 and 1998                                35

   Consolidated Statement of Cash Flows for the Years Ended
     December 31, 2000, 1999 and 1998                                            36

   Notes to Consolidated Financial Statements                                    38
</TABLE>

(2)  The schedules for which provision is made in the applicable accounting
     regulation of the Securities and Exchange Commission are not required
     under the related instructions or are inapplicable and, therefore, have
     been omitted.


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


                                       53
<PAGE>   56



                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.                                 DESCRIPTION
-----------                                 -----------
<S>          <C>
    3.1(1)    Form of Restated Charter of Pen Holdings, as amended (Exhibit 3.1)

    3.2(1)    Form of Amended and Restated Bylaws of Pen Holdings, as amended (Exhibit 3.2)

    4.1(1)    Indenture, dated as of June 8, 1998, by and among Pen Holdings, the Guarantors
              and The Bank of New York

    4.2(1)    Form of 9 7/8% Senior Note due 2008

    4.3(1)    Registration Rights Agreement, dated as of June 8, 1998, by and
              among Pen Holdings, the Guarantors and CIBC Oppenheimer Corp.

   10.1(1)    Amended and Restated Credit Agreement, dated as of June 3, 1998, by and among
              Pen Holdings, Mellon Bank, N.A., CIBC, Inc. and other banks later made a party
              to such Agreement (the "Credit Facility")

   10.2(1)    Coal Supply Agreement, dated as of June 15, 1989 by and between Taiwan Power
              Company and Pen Coal Corporation, as amended

   10.3(1)    Coal Supply Agreement between Pen Coal Corporation and Dayton Power and
              Light Company, dated effective July 1, 1992, as amended

   10.4(1)    Pen Holdings, Inc. Stock Purchase Plan

   10.5(2)    Pen Holdings, Inc. Executive Bonus Plan

   10.6(2)    Amendment 7 dated December 21, 1998 of the Coal Supply Agreement,
              dated as of June 15, 1989 by and between Taiwan Company and Pen
              Coal Corporation

   10.7       Amendment No. 3 to the Credit Facility

   10.8(3)    Forbearance and Amendment No. 4 to the Credit Facility dated March 15, 2001 (the "Bank Forbearance
              Agreement") (Exhibit 99.1)

   10.9(3)    Forbearance and Standstill Agreement dated as of March 15, 2001 by and between Pen Holdings, Inc.,
              Mellon Bank, N.A., CIBC Inc., Amsouth Bank and Travelers Casualty and Surety Company of America
              ("Travelers Forbearance") (Exhibit 99.2)

   10.10(4)   Amendment No. 1 to the Bank Forbearance Agreement, dated April 16, 2001 (Exhibit 99.1)

   10.11(4)   Amendment No. 1 to Travelers Forbearance, dated April 16, 2001 (Exhibit 99.2)

   10.12(5)   Amendment No. 2 to the Bank Forbearance Agreement, dated April 23, 2001 (Exhibit 99.1)

  21(1)       Subsidiaries of the Registrant
</TABLE>


(1)      Incorporated by reference from the Company's Registration Statement on
         Form S-4 as amended (Registration No. 333-60599) originally filed with
         the Securities and Exchange Commission on August 4, 1998.

(2)      Incorporated by reference from the Company's annual Form 10-K
         (registration No. 33-60599) filed with the Securities and Exchange
         Commission on March 24, 1999.

(3)      Incorporated by reference from the Company's Form 8-K for the event
         dated March 15, 2001.

(4)      Incorporated by reference from the Company's Form 8-K for the event
         dated April 16, 2001.

(5)      Incorporated by reference from the Company's Form 8-K for the event
         dated April 23, 2001.

(b)  Reports on Form 8-K.

None.



                                       E-1
<PAGE>   57


                                   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.


                               Pen Holdings, Inc.

                               By:    /s/ William E. Beckner
                                  -------------------------------------------
                                   Name:  William E. Beckner
                                   Title: President & Chief Executive Officer
                                   Dated: 4/30/01
                                         ------------------------------------


         Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on

PEN HOLDINGS, INC.
<TABLE>
<CAPTION>
SIGNATURES                                       TITLE                                           DATE
----------                                       -----                                           ----
<S>                                             <C>                                             <C>
     /s/ William E. Beckner                      Chairman of the Board, President, Chief         4/30/01
-------------------------------                  Executive Officer (Principal Executive          -------
       WILLIAM E. BECKNER                        Officer) and Director

     /s/ Mark A. Oldham                          Senior Vice President, Secretary/Treasurer,     4/30/01
-------------------------------                  Chief Financial Officer (Principal              -------
       MARK A. OLDHAM                            Financial Officer) and Director

     /s/ Stephen G. Capelli                      Director                                        4/30/01
-------------------------------                                                                  -------
       STEPHEN G. CAPELLI

     /s/ Joseph A. Davis, Jr.                    Assistant Secretary and Director                4/30/01
-------------------------------                                                                  -------
       JOSEPH A. DAVIS, JR.
</TABLE>


                                      S-1

<PAGE>   58



                                   GLOSSARY OF
                                  CERTAIN TERMS

ASH. Non-combustible solid matter consisting of silicia, iron, alumina and other
material similar to ordinary sand, silt, rock or clay.

BTU (BRITISH THERMAL UNIT). A measure of heat required to raise the temperature
of one pound of water one degree Fahrenheit under controlled conditions. The
gross heating value of coal is commonly reported as "Btu per pound."

CAPTIVE PRODUCTION. Coal produced or contracted to be produced from Company
controlled reserves.

CENTRAL APPALACHIA. A region consisting of southern West Virginia, eastern
Kentucky and Virginia which contains substantial bituminous coal deposits. The
reserves in this region generally contain coal that is low in sulfur (typically
0.7%=1.5%) and high in Btu content (typically 12,000-13,500 Btu). A large
portion of the coal reserves in this region exceed the requirements of Phase I
of the Clean Air Act Amendments and meet the requirements of Phase II of the
Clean Air Act Amendments.

CLEAN COAL. Coal which is ready for sale. This term is usually attributed to
coal which has been washed or cleaned in a preparation plant, but is also
applicable in the case of surface-mined coal or some underground-mined coal
which is ready for sale immediately after it is mined and does not need to be
washed.

COAL DEPOSIT. A coal bearing body which has been appropriately sampled and
assayed in trenches, outcrops, drilling, and underground workings to support
sufficient tonnage and grade to warrant further exploration-development work. A
coal deposit does not qualify as a commercially viable coal reserve as
prescribed by Commission standards until a final comprehensive evaluation based
upon unit cost per ton, recoverability and other material factors conclude legal
and economic feasibility.

COAL SEAM. A layer of coal deposit below the earth's surface. Each seam is
identified by a name or number based on its geographical location.

COMPLIANCE COAL. Coal which, when burned, emits less than 1.2 pounds of sulfur
dioxide per million Btu (0.72% for 12,000 Btu). This coal exceeds the sulfur
dioxide emission requirements for air quality of Phase I of the Clean Air Act
Amendments and meets the proposed sulfur dioxide emission requirements for air
quality of Phase II of such legislation without the need for flue gas
desulfurization.

CONTINUOUS HAULAGE UNIT. A mobile machine that conveys coal from a continuous
mining machine to a stationary conveyor structure. This machine is used in place
of other machines such as shuttle cars which are also used to transport coal
from a continuous mining machine to a stationary conveyor system.

CONTINUOUS MINING. An underground mining method that utilizes a continuous
mining machine which cuts or rips coal from the face and loads it into shuttle
cars or conveyors in one operation. A continuous mining machine typically has a
turning "drum" with sharp bits that cut and dig out the coal for 20 to 40 feet
before mining stops so that the mined area can be supported with roof bolts.

CONTRACT MINING. The contractual engagement of a third-party mining company by
the mineral rights holder to mine coal. Contract mining companies are typically
paid on a set price per ton of coal mined. Under most contract mining
arrangements the mineral rights holder is responsible for the permitting of the
mine site. The contract miner is generally responsible for providing all
equipment, financing for its operation, internal mine capital needs, employee
benefits and all other requirements associated with an independent business.

CONVENTIONAL MINING. An underground mining method that utilizes a cutting
machine to cut beneath a coal seam. Such undercuts allow explosive charges to be
set in the coal seam to separate the coal from surrounding materials. Once
separated, the coal is loaded into shuttle cars and removed from the mine.

DRIFT MINE. An underground mine in which the coal seam being mined is accessible
from the surface of the earth. Drift mines usually start at the base of a hill
and extend underneath the hill.

EXTRACTION. The process of removing coal from a seam for commercial use.

HEAVY MEDIA. High density material such as magnetite used in the gravity
separation process to clean coal.

HIGH PERFORMANCE SECTION.  See Underground Mine High Performance Section.



                                       G-1
<PAGE>   59

HIGHWALL MINING. A surface mining method which extracts coal by inserting a
continuous miner attached to a continuous haulage system into a highwall left
exposed by a contour surface mine. Penetration of up to 800 feet can be obtained
by this method, which negates the need for people or additional machinery used
for roof support underground.

LOW-SULFUR COAL. Coal which, when burned, emits less than 1.6 pounds of sulfur
dioxide per million Btu (0.96% for 12,000 Btu). This coal exceeds the sulfur
dioxide emission requirements for air quality of Phase I of the Clean Air Act
Amendments without the need for flue gas desulfurization.


MEDIUM-SULFUR COAL. Coal which contains more than 1 percent but less than 3
percent sulfur by weight; 0.61 to 1.67 pounds of sulfur per million Btu.

METALLURGICAL COAL. The various grades of coal suitable for carbonization to
make coke for the manufacture of steel. Also know as "met" coal, it possesses
four important qualities: volatility, which affects coke yield; the level of
impurities, which affects coke quality; composition, which affects coke
strength; and basic characteristics, which affect coke oven safety.

OVERBURDEN. Layers of earth and rock covering a coal seam. In surface mining
operations, overburden is removed prior to coal extraction.

POINT REMOVAL MINING. A mining method used in contour mining when the overburden
ratio makes it economically feasible to mine using the mountaintop removal
method.

PREPARATION PLANT. A facility that crushes, sizes and washes (or cleans) coal to
prepare it for commercial use. The washing process separates ash from the coal
and may have the added benefit of removing a portion of the coal's sulfur
content. Most of the coal washed in a preparation plant is extracted from
underground mines.

PROBABLE (INDICATED) RESERVES. Reserves for which quantity and grade and/or
quality are computed from information similar to that used for proven (measured)
reserves, but the sites for inspection, sampling, and measurement are farther
apart or are otherwise less adequately spaced. The degree of assurance, although
lower than that for proven (measured) reserves, is high enough to assume
continuity between points of observation.

PROVEN (MEASURED) RESERVES. Reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or
quality are computed from the results of detailed sampling and (b) the sites for
inspection, sampling and measurement are spaced so closely and the geologic
character is so well defined that size, shape, depth and mineral content of
reserves are well-established.

RAW COAL.  Coal which has not been washed or cleaned in a preparation plant.

RECLAMATION. The restoration of land and environment at a mining site after the
coal is extracted. Reclamation operations are usually underway in locations
where the coal has already been extracted from a mine, even as mining operations
are continuing elsewhere at the site. The process commonly includes
"recontouring" or reshaping the land to its approximate original appearance,
restoring topsoil and planting native grass and ground covers. Reclamation is
closely regulated by both state and federal law.

RECOVERY RATES. The amount of clean coal produced by weight from the amount of
raw coal processed expressed as a percentage of the coal available for
extraction.

RESERVE. That part of a mineral deposit which could be economically and legally
extracted or produced at the time of the reserve determination.

ROOM AND PILLAR MINING. A mining method used in underground mining which uses
either continuous or conventional mining that cuts out a block of coal in 18- to
20-foot wide passages as high as the coal seam. Roof bolters, by installing
conventional or resin grouted rods, stabilize the mine roof prior to mine
advancement. Pillars (typically 50 feet by 50 feet) are left to provide
additional primary roof support.

SLOPE AND SHAFT MINE. An underground mine which requires a tunnel (slope) for
access from the earth's surface to the coal seam for mining. The slope is
usually used for a fixed conveying system to convey the coal to the surface, as
well as for transporting people and supplies into and out of the mine. A shaft
is a vertical shaft, typically used for ventilation of the mine and/or
transporting people and supplies.

SPOT MARKET. Sales of coal pursuant to an agreement or purchase order for
shipments for a period of less than one year. Spot market sales are generally
obtained via a competitive bidding process.


                                       G-2
<PAGE>   60

SPREAD. The amount and type of equipment necessary to extract the coal from a
localized reserve area in a surface mine.

SUPER SECTION. See Underground Mine Super Section.

SURFACE MINE. A mine in which the coal lies near the surface and can be
extracted by removing the covering layer of soil. See "Overburden."

TON. A "short" or net ton is equal to 2,000 pounds. A "long" or British ton is
2,240 pounds. A "metric" ton is approximately 2,205 pounds. The short ton is the
unit of measure used in this document.

UNDERGROUND MINE. A mine which is typically located several hundred feet below
the earth's surface. Two types of underground mines are drift mines and slope
and shaft mines.

UNDERGROUND MINE SECTION. A standard underground mine section consists of one
continuous miner, one roof bolter, and three shuttle cars.

UNDERGROUND MINE HIGH PERFORMANCE SECTION. An underground mine section which
consists of two continuous miners, two roof bolters and three shuttle cars, with
only one continuous miner, one roof bolter and two shuttle cars working at one
time. Productivity is increased over a standard underground mine section by
using the extra continuous miner and roof bolter to eliminate place change
times.

UNDERGROUND MINE SUPER SECTION. An underground mine section which consists of
two continuous miners, two roof bolters and four shuttle cars working in tandem
in a mine and dumping on the same belt.




                                      G-3

<PAGE>   61

         [A small scale map of the Company's coal operations appears in this
space. The map depicts portions of Kentucky and West Virginia. It shows the
Company's operation as shaded portion and also includes major rivers, cities,
roadways, and the demarcation of the county and state borders. The map reflects
a scale whereby one inch equals 10 miles.]


                                      M-1