WESTMORELAND COAL CO
SC 13E4, 1999-03-10
BITUMINOUS COAL & LIGNITE MINING
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<PAGE>
 
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1999


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 SCHEDULE 13E-4

                          Issuer Tender Offer Statement
      (Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934)



                            WESTMORELAND COAL COMPANY
                (Name of the Issuer and Person Filing Statement)

               DEPOSITARY SHARES, EACH REPRESENTING ONE QUARTER OF
          A SHARE OF SERIES A CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
                         (Title of Class of Securities)

                                   960878 30 4
                      (CUSIP Number of Class of Securities)

                              THEODORE E. WORCESTER
                 SENIOR VICE PRESIDENT OF LAW AND ADMINISTRATION
                               AND GENERAL COUNSEL
                            WESTMORELAND COAL COMPANY
                           2 NORTH CASCADE, 14TH FLOOR
                        COLORADO SPRINGS, COLORADO 80903
                                 (719) 442-2600
   (Name, Address and Telephone Number of Person Authorized to Receive Notices
            and Communications on Behalf of Person Filing Statement)

                 Please Address a Copy of All Communications to:

        MICHAEL J. LEVITIN                     ROBERT M. CHILSTROM
WINTHROP, STIMSON, PUTNAM & ROBERTS              ERIC J. FRIEDMAN
    1133 CONNECTICUT AVENUE, NW      SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
      WASHINGTON, D.C. 20036                     919 THIRD AVENUE
          (202) 775-9800                       NEW YORK, N.Y. 10022
                                                  (212) 735-3000
                    ----------------------------------------

                                 MARCH 10, 1999
     (Date Tender Offer First Published, Sent or Given to Security Holders)


                            CALCULATION OF FILING FEE
==============================================================================

      TRANSACTION VALUATION               AMOUNT OF FILING FEE
- ------------------------------------------------------------------------------

          $19,999,989*                        $4,000.00**
- ------------------------------------------------------------------------------

[_]  Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
     and identify the filing with which the offsetting fee was previously paid.
     Identify the previous filing by registration statement number, or the Form
     or Schedule and the date of its filing.

Amount Previously Paid:  N/A                          Filing Party:  N/A
Form or Registration Nos.:  N/A                       Date Filed:  N/A

*  Assumes purchase of 1,052,631 depositary shares at $19.00 per share.
** Calculated based on the transaction value multiplied by one-fiftieth of one 
   percent.
<PAGE>
 
ITEM 1.  SECURITY AND ISSUER.

         (a) The name of the issuer is Westmoreland Coal Company, a Delaware
corporation (the "Company"). The address of its principal executive office is 2
North Cascade, 14th Floor, Colorado Springs, Colorado 80903.

         (b) The exact title of the class of securities being sought is
Depositary Shares, each representing one quarter of a share of Series A
Convertible Exchangeable Preferred Stock of the Company. Reference is made to
the front cover page, "Summary", "Introduction", Section 4. "Number of Shares;
Proration; Expiration Date; Extension of the Offer", Section 8. "Certain
Conditions of the Offer" and Section 12. "Transactions and Arrangements
Concerning the Depositary Shares" of the Offer to Purchase, a copy of which is
attached hereto as Exhibit 99.A (the "Offer to Purchase"), which are
incorporated herein by reference.

         (c) Reference is made to "Introduction" and Section 9. "Price Range of
the Depositary Shares; Dividends" in the Offer to Purchase, which are
incorporated herein by reference.

         (d) This statement is being filed by the issuer.

ITEM 2.  SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.

         (a) and (b) Reference is made to Section 11. "Source and Amount of
Funds" in the Offer to Purchase, which is incorporated herein by reference.

ITEM 3.  PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR 
         AFFILIATE.                                         

     (a)-(j) Reference is made to Section 1. "Background to the Offer; Purpose 
of the Offer; Certain Effects of the Offer; Plans of the Company after the 
Offer" in the Offer to Purchase, which is incorporated herein by reference.

ITEM 4.  INTEREST IN SECURITIES OF THE ISSUER.

         Reference is made to Section 12. "Transactions and Arrangements
Concerning the Depositary Shares" in the Offer to Purchase, which is
incorporated herein by reference.

ITEM 5.  CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT 
         TO THE ISSUER'S SECURITIES.

         Reference is made to Section 12. "Transactions and Arrangements
Concerning the Depositary Shares" in the Offer to Purchase, which is
incorporated herein by reference.


ITEM 6.  PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.

         Reference is made to Section 14. "Fees and Expenses" in the Offer to
Purchase, which is incorporated herein by reference.

ITEM 7.  FINANCIAL INFORMATION.

         (a) Reference is made to Section 10. "Certain Information Concerning
the Company" in the Offer to Purchase, which is incorporated herein by
reference.


                                       2
<PAGE>
 
         (b) Inapplicable.

ITEM 8.  ADDITIONAL INFORMATION.

         (a) None.

         (b) Reference is made to Section 3. "Certain Legal Matters; Regulatory
and Foreign Approvals; No Appraisal Rights" in the Offer to Purchase, which is
incorporated herein by reference.

         (c) Reference is made to Section 1. "Background to the Offer; Purpose
of the Offer; Certain Effects of the Offer; Plans of the Company after the
Offer" in the Offer to Purchase, which is incorporated herein by reference.

         (d) None.

         (e) Reference is made to the Offer to Purchase and the related Letter
of Transmittal, copies of which are attached hereto as Exhibits 99.A and 99.C,
respectively, which are incorporated in their entirety herein by reference.

ITEM 9.  MATERIAL TO BE FILED AS EXHIBITS.

         (a) Offer to Purchase dated March 10, 1999 (Exhibit 99.A); Press
Release issued by the Company on March 10, 1999 (Exhibit 99.B); Form of Letter
of Transmittal (Exhibit 99.C); Form of Letter to Clients (Exhibit 99.D); Form of
Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
(Exhibit 99.E); Form of Letter to Shareholders (Exhibit 99.F); Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 (Exhibit
99.G); and Summary Instructions for Participation in Tender Offer (Exhibit
99.H).

         (b)   None.

         (c)   None.

         (d)   None.

         (e)   Inapplicable.

         (f)   None.


                                       3
<PAGE>
 
                                    SIGNATURE

         After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.

Dated: March 10, 1999

                                       WESTMORELAND COAL COMPANY


                                       By: /s/ Robert J. Jaeger
                                          --------------------------------
                                          Name:  Robert J. Jaeger
                                          Title: Senior Vice President of 
                                                 Finance and Treasurer


                                       4
<PAGE>
 
                                INDEX TO EXHIBITS

                                                                  PAGE IN 
                                                                  SEQUENTIALLY 
EXHIBIT                    DESCRIPTION                            NUMBERED COPY
- -------                    -----------                            -------------

99.A     Offer to Purchase dated March 10, 1999
99.B     Press Release issued by the Company on March 10, 1999.
99.C     Form of Letter of Transmittal
99.D     Form of Letter to Clients
99.E     Form of Letter to Brokers, Dealers, Commercial Banks, 
         Trust Companies and Other Nominees
99.F     Form of Letter to Shareholders
99.G     Guidelines for Certification of Taxpayer Identification 
         Number on Substitute Form W-9
99.H     Summary Instructions for Participation in Tender Offer



                                       5

<PAGE>
 
OFFER TO PURCHASE
 
                           WESTMORELAND COAL COMPANY
 
                          OFFER TO PURCHASE FOR CASH
            UP TO 1,052,631 DEPOSITARY SHARES (CUSIP 960878 30 4),
           EACH REPRESENTING ONE QUARTER OF A SHARE OF ITS SERIES A
                 CONVERTIBLE EXCHANGEABLE PREFERRED STOCK, AT
                          $19.00 PER DEPOSITARY SHARE
 
                THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
        12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, APRIL 6, 1999,
                         UNLESS THE OFFER IS EXTENDED.
 
   Westmoreland Coal Company, a Delaware corporation (the "Company"), is
offering to purchase up to 1,052,631 Depositary Shares ("Depositary Shares"),
each representing one quarter of a share of its Series A Convertible
Exchangeable Preferred Stock, par value $1.00 per share ("Series A Preferred
Stock"), liquidation preference equal to $25 per Depositary Share, at $19.00
per Depositary Share, net to the seller in cash, upon the terms and subject to
the conditions set forth in this Offer to Purchase and in the related Letter
of Transmittal (which, as amended and supplemented from time to time, together
constitute the "Offer").
 
   The offer is not conditioned upon any minimum number of Depositary Shares
being tendered. The Offer is, however, subject to certain other conditions.
See Section 8. "Certain Conditions of the Offer."
 
   The Depositary Shares are currently traded on the over-the-counter market.
Bid and ask prices for the Depositary Shares in such market are reported on
the OTC Bulletin Board under the symbol "WMCLP". On March 9, 1999, the last
trading day before the Company announced the Offer, the closing sales price of
the Depositary Shares as reported on the OTC Bulletin Board was $16 7/8 per
Depositary Share. The Company intends to apply to have its common stock, par
value $2.50 per share ("Common Stock") (including the associated preferred
stock purchase rights), and Depositary Shares listed for trading on the
American Stock Exchange or the NASDAQ national market. Shareholders are urged
to obtain a current market quotation for the Depositary Shares.
 
                                                       (Continued on next page)
 
   THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH
TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
 
   THE COMPANY, ITS BOARD OF DIRECTORS, AND ITS EXECUTIVE OFFICERS MAKE NO
RECOMMENDATION AS TO WHETHER ANY SHAREHOLDER SHOULD TENDER ANY OR ALL OF SUCH
SHAREHOLDER'S DEPOSITARY SHARES PURSUANT TO THE OFFER. EACH SHAREHOLDER MUST
DECIDE WHETHER TO TENDER DEPOSITARY SHARES AND, IF SO, HOW MANY DEPOSITARY
SHARES TO TENDER.
 
                    The Information Agent for the Offer is:
 
                              MORROW & CO., INC.
 
             The date of this Offer to Purchase is March 10, 1999.
<PAGE>
 
   The payment of $19.00 per Depositary Share shall be in full satisfaction of
claims to cumulative dividends on the Depositary Shares that have not
previously been paid. The Company is presently prohibited from paying
dividends on the Series A Preferred Stock by the Master Agreement dated as of
January 4, 1999 (the "Master Agreement") among the Company, Westmoreland
Energy, Inc., Westmoreland Resources, Inc., Westmoreland Terminal Company,
Westmoreland Coal Sales Company, the United Mine Workers of America, the UMWA
1992 Benefit Plan, the UMWA Combined Benefit Fund, the UMWA 1974 Pension
Trust, and the Official Committee of Equity Security Holders. As of March 9,
1999, the amount of dividends in arrears on the Depositary Shares aggregated
$20,771,875 ($9.03 per Depositary Share). See Section 9. "Price Range of the
Depositary Shares; Dividends." Unless the context requires otherwise, all
references to the Depositary Shares shall include any claims to cumulative
dividends on such shares that have not previously been paid.
 
                                   IMPORTANT
 
   Any shareholder desiring to tender all or any portion of such shareholder's
Depositary Shares should either (1) complete the Letter of Transmittal or a
facsimile copy thereof, in accordance with the instructions in the Letter of
Transmittal, mail or deliver it and any other required documents to First
Chicago Trust Company of New York (the "Depositary"), and either mail or
deliver the depositary receipts for such Depositary Shares to the Depositary
along with the Letter of Transmittal or follow the procedure for book-entry
transfer set forth in Section 5, or (2) request such shareholder's broker,
dealer, commercial bank, trust company, or nominee to effect the transaction
for such shareholder. Shareholders having Depositary Shares registered in the
name of a broker, dealer, commercial bank, trust company, or other nominee
must contact such person if they desire to tender their Depositary Shares.
 
   Questions and requests for assistance or for additional copies of this
Offer to Purchase or the Letter of Transmittal may be directed to Morrow &
Co., Inc. (the "Information Agent") at the addresses and telephone numbers set
forth on the back cover of this Offer to Purchase.
 
   NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE
COMPANY AS TO WHETHER SHAREHOLDERS SHOULD TENDER OR REFRAIN FROM TENDERING
DEPOSITARY SHARES PURSUANT TO THE OFFER. THE COMPANY HAS NOT AUTHORIZED ANY
PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THE OFFER OTHER THAN THOSE CONTAINED IN THIS OFFER TO PURCHASE OR IN THE
LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH RECOMMENDATION AND SUCH
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY.
 
              CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
 
   Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this document, and
sometimes are preceded by, followed by or include the words "intends,"
"believes," "expects," "anticipates," "should," or similar expressions. Such
forward-looking statements are based on management's current views and
assumptions and involve known and unknown risks, uncertainties, and other
factors which may cause the Company's actual results of operations, liquidity
status, levels of activity, performance, or achievements, or industry results,
to be materially different from any future results of operations, liquidity
status, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions; the ability of
<PAGE>
 
the Company to implement its business strategy; the Company's access to
financing; the Company's ability to successfully identify new business
opportunities; the Company's ability to achieve anticipated cost savings and
profitability targets; changes in the industry; competition; the Company's
ability to utilize its tax net operating loss carryforwards; the completion of
the sale of the Rensselaer independent power project; the ability to reinvest
excess cash at an acceptable rate of return; weather conditions; the
availability of transportation; price of alternative fuels; costs of coal
produced by other countries; the effect of regulatory and legal proceedings;
and other factors discussed in Item 1 of the Company's Form 10-K/A for the
fiscal year ended December 31, 1998. As a result of the foregoing and other
factors, no assurance can be given as to the future results and achievements
of the Company. Neither the Company nor any other person assumes
responsibility for the accuracy and completeness of these statements.
<PAGE>
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                       Page
                                       ----
<S>                                    <C>
Summary.....................             1
Introduction................             3
Special Factors.............             4
Section 1.Background to the
          Offer; Purpose of
          the Offer; Certain
          Effects of the
          Offer; Plans of
          the Company after
          the Offer.........             4
          Background to the
          Offer.............             4
          Purpose of the
          Offer.............             9
          Certain Effects of
          the Offer; Plans
          of the Company
          after the Offer...             9
Section 2.Certain U.S.
          Federal Income Tax
          Consequences......            11
          Tax Consequences
          to the Company....            11
          Tax Consequences
          to Holders of
          Depositary
          Shares............            15
Section 3.Certain Legal
          Matters;
          Regulatory and
          Foreign Approvals;
          No Appraisal
          Rights............            18
The Offer...................            19
Section 4.Number of Shares;
          Proration;
          Expiration Date;
          Extension of the
          Offer.............            19
Section 5.Procedure for
          Tendering
          Depositary
          Shares............            20
          Proper Tender of
          Depositary
          Shares............            20
          Signature
          Guarantees and
          Method of
          Delivery..........            20
          U.S. Federal
          Backup
          Withholding.......            21
          Book-Entry
          Delivery..........            21
          Determinations of
          Validity;
          Rejection of
          Depositary Shares;
          Waiver of Defects;
          No Obligation to
          Give Notice of
          Defects...........            21
Section 6.Withdrawal
          Rights............            22
Section 7.Acceptance for
          Payment of
          Depositary Shares
          and Payment of
          Purchase Price....            22
Section 8.Certain Conditions
          of the Offer......            23
Section 9.Price Range of the
          Depositary Shares;
          Dividends.........            25
          Price Range of
          Depositary
          Shares............            25
          Dividends.........            26
Section 10.Certain
          Information
          Concerning the
          Company...........            27
          General...........            27
          Selected Financial
          Data and Other
          Data of the
          Company...........            27
          Additional
          Information.......            31
Section 11.Source and Amount
          of Funds..........            31
Section 12.Transactions and
          Arrangements
          Concerning the
          Depositary
          Shares............            31
Section 13.Extension of the
          Tender Period;
          Termination;
          Amendments........            32
Section 14.Fees and
          Expenses..........            33
Section 15.Miscellaneous....            33
Annex: Management's
Discussion and Analysis of
Financial Condition and
Results of Operations;
Financial Statements and
Supplementary Data..........           F-1
</TABLE>
 
                                       i
<PAGE>
 
                                    SUMMARY
 
   This general summary is provided solely for the convenience of holders of
Depositary Shares and is qualified in its entirety by reference to the full
text and more specific details contained in this Offer to Purchase and the
related Letter of Transmittal and any amendments hereto and thereto.
 
The Company..................  Westmoreland Coal Company.
 
The Depositary Shares........  Depositary Shares, each representing one
                               quarter of a share of Series A Convertible
                               Exchangeable Stock, par value $1.00 per share,
                               liquidation preference equal to $25 per
                               Depositary Share, of the Company.
 
Number of Depositary Shares
Sought.......................
                               1,052,631.
 
Purchase Price...............  $19.00 per Depositary Share, net to the seller
                               in cash. See Section 9. "Price Range of the
                               Depositary Shares; Dividends."
 
Expiration Date of Offer.....  April 6, 1999, at 12:00 midnight, New York City
                               time, unless extended.
 
How to Tender Depositary       See Section 5. "Procedure for Tendering
Shares.......................  Depositary Shares." For further information,
                               call the Information Agent or consult your
                               broker for assistance.
 
Purpose of the Offer.........  The Company is making the Offer pursuant to the
                               Master Agreement. See Section 1. "Background to
                               the Offer; Purpose of the Offer; Certain
                               Effects of the Offer; Plans of the Company
                               After the Offer."
 
Market Price of Depositary     On March 9, 1999, the closing sales price per
Shares.......................  Depositary Share as reported on the OTC
                               Bulletin Board was $16 7/8. Shareholders are
                               urged to obtain a current market quotation for
                               the Depositary Shares. See Section 9. "Price
                               Range of the Depositary Shares; Dividends."
 
Dividends....................  The Company suspended the payment of dividends
                               on the Series A Preferred Stock in the second
                               quarter of 1994 pursuant to agreements with its
                               lenders. Upon the expiration of these
                               agreements, the Company paid two quarterly
                               dividends. The Company again suspended payment
                               of dividends on the Series A Preferred Stock in
                               the third quarter of 1995 and has not declared
                               a dividend on the Series A Preferred Stock
                               since such suspension commenced. At March 9,
                               1999, accrued but unpaid dividends on the
                               Series A Preferred Stock aggregated
                               $20,771,875, or $9.03 per Depositary Share. By
                               tendering Depositary Shares, shareholders agree
                               to forego any claim for accrued but unpaid
                               dividends. See Section 9. "Price Range of the
                               Depositary Shares; Dividends."
 
                                       1
<PAGE>
 
Brokerage Commissions........  Not payable by shareholders.
 
Stock Transfer Tax...........  The Company will pay any applicable stock
                               transfer taxes, except as provided in
                               Instruction 6 of the Letter of Transmittal.
 
Date of Payment to             As soon as practicable after the Expiration
Shareholders.................  Date of the Offer.
 
Further Information..........  Additional copies of this Offer to Purchase and
                               the Letter of Transmittal may be obtained by
                               contacting Morrow & Co., Inc., 445 Park Avenue,
                               5th Floor, New York, New York 10022, telephone:
                               (800) 566-9061 (toll free), (212) 754-8000
                               (collect), (800) 662-5200 (banks and brokerage
                               firms).
 
                                       2
<PAGE>
 
To the Holders of Depositary Shares of Westmoreland Coal Company:
 
                                 INTRODUCTION
 
   Westmoreland Coal Company, a Delaware corporation ("Westmoreland" or the
"Company"), is offering to purchase up to 1,052,631 outstanding Depositary
Shares (the "Depositary Shares") (including the associated dividend
arrearages), each representing one quarter of a share of Series A Convertible
Exchangeable Preferred Stock, par value $1.00 per share (the "Series A
Preferred Stock"), liquidation preference equal to $25 per Depositary Share,
of the Company, at $19.00 per Depositary Share (the "Purchase Price"), net to
the seller in cash, upon the terms and subject to the conditions set forth in
this Offer to Purchase and in the related Letter of Transmittal (which, as
amended and supplemented from time to time, together constitute the "Offer").
Unless the context requires otherwise, all references to the Depositary Shares
shall include any claims to cumulative dividends on such shares that have not
previously been paid.
 
   THE COMPANY, ITS BOARD OF DIRECTORS, AND ITS EXECUTIVE OFFICERS MAKE NO
RECOMMENDATION AS TO WHETHER ANY SHAREHOLDER SHOULD TENDER ANY OR ALL OF SUCH
SHAREHOLDER'S DEPOSITARY SHARES PURSUANT TO THE OFFER. EACH SHAREHOLDER MUST
DECIDE WHETHER TO TENDER DEPOSITARY SHARES AND, IF SO, HOW MANY DEPOSITARY
SHARES TO TENDER.
 
   The Offer is not conditioned upon any minimum number of Depositary Shares
being tendered. The Offer is, however, subject to certain other conditions.
See Section 8. "Certain Conditions of the Offer."
 
   The Depositary Shares are currently traded on the over-the-counter market.
Bid and ask prices for the Depositary Shares in such market are reported on
the OTC Bulletin Board under the symbol "WMCLP". On March 9, 1999, the last
trading day before the Company announced the Offer, the closing sales price of
the Depositary Shares as reported on the OTC Bulletin Board was $16 7/8 per
Depositary Share. See Section 9. "Price Range of the Depositary Shares;
Dividends." The Company intends to apply to have its common stock, par value
$2.50 per share ("Common Stock") (including the associated preferred stock
purchase rights), and Depositary Shares listed for trading on the American
Stock Exchange or the NASDAQ national market. Shareholders are urged to obtain
a current market quotation for the Depositary Shares.
 
   The Offer does not constitute a notice of redemption of the Series A
Preferred Stock representing the Depositary Shares pursuant to the Company's
Restated Certificate of Incorporation, nor is the Offer intended to affect a
redemption of the Depositary Shares or the Series A Preferred Stock.
Shareholders are not under any obligation to accept the Offer or to remit the
Depositary Shares to the Company pursuant to the Offer.
 
   Tendering shareholders will not be obligated to pay brokerage commissions,
solicitation fees or, subject to the Instructions to the Letter of
Transmittal, stock transfer taxes on the purchase of Depositary Shares by the
Company. The Company will pay all charges and expenses of the Depositary and
Information Agent incurred in connection with the Offer.
 
                                       3
<PAGE>
 
                                SPECIAL FACTORS
 
   SECTION 1. BACKGROUND TO THE OFFER; PURPOSE OF THE OFFER; CERTAIN EFFECTS
OF THE OFFER; PLANS OF THE COMPANY AFTER THE OFFER
 
Background to the Offer
 
   On December 23, 1996, the Company and four of its subsidiaries filed
petitions under Chapter 11 of the Federal bankruptcy code with the U.S.
Bankruptcy Court for the District of Colorado ("Bankruptcy Court"). Two years
later, on December 23, 1998, the Bankruptcy Court granted Westmoreland's
motion to dismiss its case and the related cases involving the Company's
subsidiaries. This Offer results from an agreement among the Company, its
principal creditors, and the Official Committee of Equity Security Holders
("Equity Committee") that facilitated the dismissal of the bankruptcy
proceedings.
 
 Events leading to the filing of the bankruptcy petitions
 
   Beginning in the second half of 1993, Westmoreland initiated a major effort
to improve results and address growing liquidity issues. Management's
restructuring plan focused on eliminating losses from Westmoreland's eastern
coal operations, investing in more profitable opportunities, and generating
needed cash by reducing costs, terminating or selling under-performing
business lines, and selling non-strategic assets. By the end of 1995, a large
part of this job had been completed. The eastern coal operations had been shut
down; the Company had withdrawn from the coal-brokering and international
coal-sales businesses; and selling, general and administrative costs ("SG&A")
had been significantly reduced through, among other things, personnel
reductions, job consolidations, and the closure, consolidation, and relocation
of offices, including the former corporate headquarters in Philadelphia.
Westmoreland had also sold numerous non-strategic assets, including eastern
coal sales contracts, reserves, and its Kentucky and West Virginia coal
operations. Negotiations to sell virtually all of its idled Virginia
operations were nearing completion. As a result of these efforts, Westmoreland
had generated sufficient cash to pay off its commercial debt, to provide
working capital, and to fund profitable, cash-producing investments (such as
its independent power projects and an increased position in the western coal
operations located in the state of Montana). The Company also had substantial
tax assets in the form of net operating loss carryforwards ("NOLs"), which may
be used to reduce a corporation's taxable income for U.S. federal income tax
purposes.
 
   However, Westmoreland's balance sheet and cash flow remained heavily
burdened by the costs of providing retiree and workers' compensation benefits
to former employees and their dependents. These benefits were required by the
1988 National Bituminous Coal Wage Agreement ("1988 NBCWA"), by the Coal
Industry Retirement Health Benefit Act of 1992 ("Coal Act"), 26 U.S.C.
(S) 9701 et seq., and by state workers' compensation laws. The 1988 NBCWA
required Westmoreland to maintain an Individual Employer Plan ("IEP") for the
purpose of providing health care coverage benefits to specified employees,
former employees and retirees, and their respective dependents. These
contractual obligations were carried forward in all material respects in the
1993 Wage Agreement ("1993 Agreement") between Westmoreland and the United
Mine Workers of America ("UMWA"). The Coal Act created a privately funded and
administered mechanism to provide health care benefits to certain coal
industry retirees and related beneficiaries. The Coal Act imposed upon certain
coal companies that had been signatory to collective bargaining agreements
with the UMWA (including Westmoreland) liability for the health care costs of
a specific universe of beneficiaries receiving benefits under previous
collective bargaining agreements and established mechanisms by which that
liability would be satisfied over time through the payment of premiums to the
multiemployer fund that provides coverage to these individuals. The Coal Act
requires a coal company like Westmoreland to continue to maintain an IEP or
provide benefit funding for a specified population of retirees and dependents
who formerly worked for it. The Coal Act also assigned to coal companies that
remained
 
                                       4
<PAGE>
 
in business (including Westmoreland) the obligation to provide health benefits
to certain retirees (and their dependents) of coal companies that had ceased
doing business through the payment of premiums to the multiemployer fund that
provides coverage to these individuals. Under the Coal Act, Westmoreland was
liable both to the UMWA 1992 Benefit Plan ("1992 Plan") and UMWA Combined
Benefit Fund ("Combined Fund" and together with the 1992 Plan, the "Funds")
with respect to the obligations described herein. The Coal Act's obligations
extend to businesses that are affiliated with the signatory coal operator (so-
called "related parties") as a matter of joint and several liability. In many
situations, Coal Act obligations also apply to successors of signatory coal
operators and/or their related parties. The Coal Act also required the Company
to secure a portion of its projected future obligations to the 1992 Plan by
posting a bond or letter of credit or establishing a cash escrow in favor of
the 1992 Plan. Benefit coverage under both the IEP required by the 1993
Agreement and the Coal Act is extraordinarily generous, providing virtually
free health care to covered beneficiaries through what is, in effect, a
traditional fee-for-service medical plan.
 
   Faced with the cost of maintaining its IEP and paying premiums to the
Combined Fund and the 1992 Plan, the related requirement to provide security
to the 1992 Plan, and other liabilities, including significant obligations
under state workers' compensation laws, Westmoreland recognized that it could
not indefinitely satisfy these cash obligations, which exceeded $20 million
per year, on the terms or in the amounts demanded without additional
reinvestment and sources of cash flow. In the fall of 1995, Westmoreland
initiated discussions with the Funds with a view toward promptly achieving
alternative arrangements for the satisfaction of its obligations to the Funds
so that its restructuring could be completed.
 
   By October of 1996, with cash resources depleting due to continued full
funding of benefits, amounts escrowed with the Funds during negotiations
unavailable to it, limited remaining assets to sell in the near term, and no
progress in the negotiations with the Funds, Westmoreland began to fall behind
in its payments to Healthsource Provident ("Provident"), the third-party
administrator responsible for medical claims under the IEP. The Combined Fund
then advised Westmoreland that the Company would be required to pay the
Combined Fund $7.9 million in 1997, which included a one-time supplemental
charge. The Combined Fund's $7.9 million assessment was in addition to
$8 million that the Company projected it would pay to maintain the IEP in
1997. Westmoreland unsuccessfully sought an accelerated consummation of
negotiations with the Funds and release of escrowed funds. Westmoreland made a
last payment to Provident on October 28, 1996. Shortly thereafter, with
unreimbursed expenses of about $1.8 million, Provident stopped paying claims
under the IEP.
 
   On November 27, 1996, the 1992 Plan commenced litigation against
Westmoreland and four of its subsidiaries in the U.S. District Court for the
Western District of Virginia, requesting, among other things, a preliminary
injunction requiring Westmoreland to "reinstate" the IEP. On December 4, 1996,
the district court denied the requested relief. The district court noted
Westmoreland's serious financial difficulties and, in an effort to protect the
ability of the 1992 Plan to collect an ultimate judgment, required
Westmoreland to pay the 1992 Plan security in the amount of $200,000 per week.
Several weeks later, the Company and its four principal subsidiaries filed
their Chapter 11 petitions. The Company filed these cases in order to prevent
liquidation of its businesses at distress values and to give it an opportunity
to complete implementation of its restructuring plan.
 
 Developments during the bankruptcy cases
 
   The Company's financial position improved significantly during the course
of the bankruptcy proceedings as its business plan further took hold.
Developments at Westmoreland Energy, Inc. ("WEI"), the Company's independent
power subsidiary, and Westmoreland Resources, Inc. ("WRI"), the Company's
Montana-based mining subsidiary, along with certain corporate initiatives,
resulted in the accumulation of significant amounts of new cash and improved
cash flows.
 
                                       5
<PAGE>
 
   In the summer of 1998, two independent power projects in which WEI owned an
interest--the Rensselaer project and the Fort Drum project--successfully
restructured their contractual relationships with Niagara Mohawk Power
Corporation, a New York utility ("NiMo"). As a result of these restructurings,
WEI received approximately $31 million in cash and an interest in an "Index
Swap Contract" between the Rensselaer project and NiMo. In addition, continued
improvement in the performance of WEI's other projects produced $12.2 million
in cash during 1997, an increase of $2.4 million over the preceding year. This
increase was due to reduced forced outage days and lower operating and
maintenance costs.
 
   The Company also benefitted from substantial growth in sales and production
at its western coal subsidiary, WRI. The Company enhanced these benefits by
increasing its ownership interest in WRI to 80% in October of 1996. This
allowed the Company to consolidate WRI's financial results with those of the
Company and its other consolidating subsidiaries for tax purposes. Its
increased ownership, improved performance at WRI, and the ability to
consolidate, and thereby apply the Company's NOLs to WRI's taxable income,
increased the Company's cash flow from WRI by over 50%. WRI produced and
shipped a record 7.1 million tons of coal in 1997, resulting in cash available
to shareholders of $6.8 million.
 
   At the corporate level, management continued to reduce costs and developed
strategies to tap new sources of cash. The Company liquidated additional
assets, recovered sums owed to Westmoreland by third parties, and reduced
ongoing operating and reclamation expenses, as well as SG&A. In early 1998,
the Company successfully terminated its overfunded Salaried Retiree Pension
Plan, thereby accessing $12.5 million in cash, net of lump sum payments,
purchase of annuities, establishment of a replacement plan, and payment of
excise taxes. The Company also developed a plan to access $10 million of
surplus cash in its Black Lung Trust and apply that amount to other retiree
health costs. This redeployment of the surplus from the Black Lung Trust is
expected to occur in two installments; the first installment occurred in 1998,
and the second is expected to occur by 2001.
 
 Filing of the Motions to Dismiss and Convert
 
   Based on these developments, on July 28, 1998, the Company filed a motion
to dismiss its bankruptcy case. In its motion, the Company asserted that it
was able to pay all claims allowable under the bankruptcy code in full, in
cash, with interest at the rate applicable under the bankruptcy code, and that
it would be able to meet its obligations on an ongoing basis for the
foreseeable future. The Funds and the Equity Committee opposed the Company's
motion.
 
   On August 19, 1998, the Equity Committee filed a motion to convert the
Company's case to a case under Chapter 7. In Chapter 7, the Company would have
been liquidated. The proceeds of the liquidation would have been paid first to
persons holding administrative claims (including Coal Act beneficiaries), then
to general creditors, and then to holders of the Depositary Shares. Funds
remaining, if any, would have been distributed to holders of the Company's
common stock. The Company and the Funds opposed the Equity Committee's motion.
(In the course of the bankruptcy proceedings, the Funds had proposed a plan of
reorganization, which contemplated that ownership of all of the stock of the
Company would be transferred to a trust for the benefit of the Funds. The
Company also vigorously opposed that plan. The Funds withdrew their plan prior
to hearings scheduled on the Motions to Dismiss and Convert.)
 
 The Settlement Term Sheet; dismissal of the bankruptcy cases
 
   Arguments on the Company's motion to dismiss and the Equity Committee's
motion to convert were scheduled for October 14, 1998. On that date, and after
extensive negotiations, the Company, its four principal subsidiaries, the
Equity Committee, the Funds, the UMWA, and a third employee benefit plan, the
UMWA 1974 Pension Trust ("1974 Plan") executed a settlement term sheet
("Settlement Term Sheet"). The Settlement Term Sheet was the basis for the
Master Agreement.
 
                                       6
<PAGE>
 
   Prior to the negotiation of the Settlement Term Sheet, the Company proposed
making an offer for all of the Depositary Shares for consideration that
included cash, Common Stock and debt securities issued by the Company. The
Equity Committee proposed that the Company conduct a partial tender offer for
Depositary Shares for consideration consisting entirely of cash. The Equity
Committee conditioned its support of the Settlement Term Sheet on the
Company's agreement to conduct such a partial tender offer. The Funds
negotiated to minimize the amount of cash to be paid by the Company in the
tender. The Settlement Term Sheet provided that, contingent on the sale of the
Company's remaining interest in the Rensselaer project, the Company would
conduct a tender offer for the number of Depositary Shares that could be
purchased for $20 million, at a price per Depositary Share designated by the
Equity Committee. The Settlement Term Sheet also provided that the price per
Depositary Share could not exceed $20. The Equity Committee subsequently
designated an offer price of $19 per Depositary Share.
 
   As part of the process of implementing the Settlement Term Sheet, on
December 23, 1998, the Company and the Funds stipulated, and the Equity
Committee consented, to the entry of judgments in two contested matters
pending before the Bankruptcy Court, and the Bankruptcy Court dismissed the
bankruptcy cases involving the Company and its subsidiaries. Pursuant to the
Federal bankruptcy rules, the dismissal was stayed for 10 days.
 
 Effectiveness of the dismissal; the Master Agreement and payments pursuant
 thereto
 
   The stay expired, and the dismissal of the bankruptcy cases became
effective, on January 4, 1999. Through January, the parties continued to
negotiate the terms of an overall settlement, and on January 29, they executed
the Master Agreement, which is effective as of January 4, 1999. The principal
terms of the Master Agreement are as follows:
 
  .  The Funds, the UMWA, and the Equity Committee withdrew their objections
     to the Company's Motion to Dismiss the Chapter 11 case and joined in the
     entry of stipulated judgments and the execution of the Master Agreement,
     which preserves the Company as an ongoing enterprise with undiluted
     ownership vested in its existing shareholders.
 
  .  The Company agreed that it would not file, institute nor support any
     action under state or federal liquidation, insolvency, or reorganization
     statutes for a period of five years.
 
  .  The Company agreed to pay in full, with interest, all undisputed
     creditor claims and satisfy all other ongoing obligations. Pursuant to
     this commitment, the Company paid approximately $5.7 million to holders
     of undisputed claims in early January, 1999.
 
  .  The Company agreed to pay in full all arrearages, with interest, under
     the Coal Act. Pursuant to this commitment, the Company paid
     approximately $18.1 million to the 1992 Plan and approximately $19.4
     million to the Combined Fund in early January, 1999.
 
  .  The Company agreed to pay $4 million to the Funds in full satisfaction
     of all other asserted claims for damages, liquidated damages, penalties,
     charges, fees, and costs. The Company made this payment on February 1,
     1999.
 
  .  The Company agreed to reinstate its Individual Employer Plan for 1992
     Plan retirees.
 
  .  The Company agreed to pay its future obligations to the Funds as and
     when due.
 
  .  The 1974 Plan had asserted a claim for withdrawal liability in the
     amount of approximately $13.8 million against the Company to which the
     Company objects. The Company and the 1974 Plan agreed to resolve this
     dispute through arbitration, as provided by law.
 
  .  As required under the Coal Act, the Company agreed to secure its
     obligation to provide retiree health benefits under the 1992 Plan by
     posting a bond, letter of credit, or cash collateral in the amount of
     three years benefits (or $20.8 million). The Company provided this
     security on March 2, 1999.
 
                                       7
<PAGE>
 
  .  In addition, the Company agreed to secure its obligations to the Funds
     by providing the Funds with a Contingent Promissory Note ("Note"). The
     original principal amount of the Note is $12 million; the principal
     amount of the Note decreases to $6 million in 2002. The Note is payable
     only in the event the Company does not meet its Coal Act obligations,
     fails to meet certain ongoing financial tests specified in the Note,
     fails to maintain the required balance in the escrow account established
     under the Escrow Agreement, or fails to comply with certain covenants
     set forth in the Security Agreement. (These covenants require the
     Company to give the Funds access to the books and records of WEI and
     certain of its subsidiaries, to execute and deliver a financing
     statement noting the security interest created by the Security
     Agreement, and to deliver to the Funds financial reports concerning WEI
     and certain of its subsidiaries.) The Note includes certain notice and
     cure provisions. If no default occurs, the Note terminates on January 1,
     2005. To secure its obligations to the Funds under the Note, the Company
     entered into a Security Agreement and an Escrow Agreement. In the
     Security Agreement, the Company pledged the annual cash flow to which it
     is entitled from the Roanoke Valley I project. Pursuant to the Escrow
     Agreement, the Company placed $6 million into an escrow account. In
     2002, when the amount of the Note is reduced to $6 million, the amount
     in the escrow account may be adjusted so that the amount in escrow will
     be $8 million minus the amount of Westmoreland's cash flow from the
     Roanoke Valley I project in the preceding year. In no event will the
     amount of the required balance in the escrow account be more than $6
     million or less than zero. If the Company is not required to make
     payment under the Note, the Security Agreement and the Escrow Agreement
     terminate upon the termination of the Note. The Company executed and
     delivered the Note, the Security Agreement, and the Escrow Agreement to
     the Funds on January 29, 1999.
 
  .  The Company agreed not to initiate further litigation to challenge the
     Coal Act or seek to initiate legislation to amend or repeal the Coal
     Act.
 
  .  The Company agreed to make payments for retiree health benefits as if it
     continued to be obligated under the 1993 UMWA Wage Agreement for
     eligible retirees and beneficiaries for a period of five years. At the
     expiration of such five-year period, the Company is free to initiate
     litigation contesting its obligation to continue to provide such
     benefits, and the Company will continue to provide such benefits after
     the expiration of the five-year period until it obtains a ruling from a
     court of competent jurisdiction that it is not obligated to provide such
     benefits.
 
  .  The Equity Committee would dissolve on February 3, 1999.
 
  .  Provided that the pending sale of the Company's remaining interest in
     the Rensselaer project occurs, the Company agreed to make a public
     tender for 1,052,631 depositary shares, each representing one quarter of
     a share of the Company's outstanding Series A Convertible Exchangeable
     Preferred Stock, at $19 per depositary share. Assuming 1,052,631
     depositary shares are properly tendered and not withdrawn in the offer,
     the Company would be required to pay $20 million in consideration for
     these shares. The tender would occur in the first quarter of 1999, or as
     soon thereafter as is practicable, following the date of the Rensselaer
     sale.
 
  .  Unless the tender offer is initiated in time to be completed by early
     April, the Company agreed to hold a meeting of shareholders, for matters
     including the election of directors, by March 31, 1999. The Offer is
     being initiated in time to be completed by early April, and the Company
     presently anticipates that the shareholders' meeting will take place on
     or about May 11, 1999.
 
  .  Except for the payment to preferred shareholders in the tender offer,
     the Company agreed not to make any other cash distribution to preferred
     or common shareholders for any purpose prior to June 30, 1999.
 
                                       8
<PAGE>
 
 Sale of the Company's interest in the Rensselaer project
 
   The partnership that owns the Rensselaer project has finalized but not
signed an agreement for the sale of the partnership's remaining interest in
the project. Through WEI, the Company owns a 50% interest in that partnership.
The agreement has not been signed because the purchaser does not wish to sign
until all consents to the closing of the transaction have been obtained. (This
transaction is referred to as the "Rensselaer Phase II Transaction" to
distinguish it from the transaction involving the Rensselaer project that
occurred in the summer of 1998.) If the Rensselaer Phase II Transaction
closes, Westmoreland projects that its share of the net cash proceeds from the
transaction will approximate $35 million. There can be no assurance that the
Rensselaer Phase II Transaction will close. The closing of the Rensselaer
Phase II Transaction is a condition to the consummation of the Offer.
 
   Except for the unaudited pro forma summary financial data included in
Section 10 of this Offer to Purchase, which give effect to both the purchase
of 1,052,631 Depositary Shares for $20 million and the Rensselaer Phase II
Transaction, the financial statements included with this Offer to Purchase do
not reflect the occurrence of the Rensselaer Phase II Transaction.
 
Purpose of the Offer
 
   The Company is making the Offer pursuant to the Master Agreement. The Board
of Directors of the Company believes that the Company's agreement to the terms
of the Master Agreement, including the requirement that the Company make the
tender offer contemplated by this Offer, is in the best interest of the
Company, in particular because it facilitated a consensual termination of the
Company's bankruptcy case. In approving the Master Agreement, the Board also
took into account, among other things, that upon retirement of the Series A
Preferred Stock represented by the Depositary Shares purchased hereby, the
amount of dividends in arrears will be reduced from $20,771,875 to $11,265,301
and the Company's quarterly dividend requirement will be reduced from
$1,221,875 to $662,665 (in each case assuming that 1,052,631 Depositary Shares
are properly tendered and not withdrawn). The Company had cash and cash
equivalents of $84 million at December 31, 1998. On January 4, 1999, the
Company paid approximately $46 million to creditors, including the Funds,
pursuant to the Master Agreement. Cash will be reduced by approximately $20
million as a result of the consummation of the Offer if 1,052,631 Depositary
Shares are properly tendered and not withdrawn. The Board of Directors of the
Company has authorized the Offer.
 
Certain Effects of the Offer; Plans of the Company after the Offer
 
   Following the consummation of the Offer, the business and operations of the
Company will be continued by the Company substantially as they are currently
being conducted. Except as disclosed in this Offer to Purchase, the Company
has no present plans or proposals that would result in (i) the acquisition by
any person of additional securities of the Company, or the disposition of
securities of the Company other than in the ordinary course of business, (ii)
an extraordinary corporate transaction, such as a merger, reorganization,
liquidation or sale or transfer of a material amount of assets, involving the
Company or any of its subsidiaries, (iii) any change in the present Board of
Directors of the Company or management of the Company, including, but not
limited to, a plan or proposal to change the number or term of the directors,
to fill any existing vacancy on the Board of Directors, or to change any
material term of the employment contract of any executive officer, except in
each case in connection with the Company's 1999 Annual Meeting of
Shareholders, or a special meeting in lieu thereof, currently expected to be
held on or about May 11, 1999, (iv) any material change in the present
dividend rate or policy or indebtedness or capitalization of the Company, (v)
any other material change in the Company's corporate structure or business, or
(vi) any changes in the Company's charter, bylaws, or instruments
corresponding thereto or, except in connection with the Annual Meeting of
Shareholders or special meeting in lieu thereof described above, any other
actions which may impede the acquisition of control of the Company by any
person. On March 9, 1999, Messrs. Frank E. Williams, Jr., R. Bentley Offutt,
and Guy Orlando Dove III, and Wynnefield Partners Small
 
                                       9
<PAGE>
 
Cap Value L.P. I, Wynnefield Partners Small Cap Value L.P., and Wynnefield
Small Cap Offshore Fund Ltd. ("Group") filed a Schedule 13D which stated, "The
Group seeks to remove the present Board of Directors and replace some or all
of that Board with nominees to be chosen by the Group, which in all likelihood
will include members of the Group." The Company has an executive severance
policy, but none of the Company's executive officers is party to an employment
contract with the Company. On January 26, 1999, the Company's board of
directors authorized the grant of 95,000 shares of restricted Common Stock to
the Company's senior executive officers and incentive stock options covering
95,000 shares of Common Stock to the Company's officers and employees. Robert
E. Killen, a director of the Company, has expressed an interest in purchasing
additional shares of Common Stock. Mr. Killen has advised the Company that any
possible future purchases of Common Stock will depend on many factors,
including the market price of the Common Stock, the Company's business and
financial position, alternative investment opportunities, and general economic
and market conditions. Each of the Company's directors and executive officers
has expressed an interest in purchasing shares of Common Stock that are
subject to options granted by the Company. Each of the directors and executive
officers has advised the Company that any possible future exercise of options
will depend on many factors, including the market price of the Common Stock.
 
   Following the expiration of the Offer and subject to the terms and
conditions of the Master Agreement, the Company may, in its sole discretion,
determine to purchase any remaining Depositary Shares through privately
negotiated transactions, open market purchases or another tender offer or
otherwise, on such terms and at such prices as the Company may determine from
time to time, the terms of which purchases or offers could differ from those
of the Offer, except that the Company will not make any such purchases of
Depositary Shares until the expiration of ten business days after the
termination of the Offer. Any possible future purchases of Depositary Shares
by the Company will depend on many factors, including the market price of the
Depositary Shares, the Company's business and financial position, alternative
investment opportunities available to the Company, the results of the Offer,
and general economic and market conditions. However, the Company will also
remain subject to all limitations of Delaware law plus contractual
restrictions under the Master Agreement and the Note. Going forward, the
Company's Board of Directors will review the Company's options in light of
these restrictions and in consideration of the shareholders' best interests.
It is likely that in the near term most available cash will be reinvested
rather than distributed in order to enhance the long-term value of the Company
for all shareholders. The Company expects to focus first on its core
businesses for such reinvestment, as it did in 1996 when it increased its
ownership of WRI. In view of the foregoing, the Company does not presently
anticipate that, following the consummation of the Offer, any cash would be
paid to holders of Depositary Shares in any transaction that could be
completed in the near term.
 
   The purchase of Depositary Shares pursuant to the Offer may reduce the
number of holders of Depositary Shares, will reduce the number of Depositary
Shares that might otherwise trade publicly, and, depending upon the number of
Depositary Shares so purchased, could adversely affect the liquidity and
market value of the remaining Depositary Shares held by the public.
 
   Following the purchase of Depositary Shares pursuant to the Offer,
Depositary Shares may continue to trade in the over-the-counter market, and
price quotations may be reported on the OTC Bulletin Board or be available
through other sources. The extent of the public market for the Depositary
Shares and the availability of such quotations would, however, depend upon
such factors as the number of shareholders remaining at such time, the
interest in maintaining a market in the Depositary Shares on the part of
securities firms, the possible termination of registration under the
Securities Exchange Act of 1934 (the "Exchange Act") as described below, and
other factors.
 
   The Depositary Shares are currently registered under the Exchange Act.
Registration of the Depositary Shares under the Exchange Act may be terminated
upon application of the Company to the Securities and Exchange Commission (the
"Commission") if the Depositary Shares are neither held by 300 or more holders
of record nor listed on a national securities exchange. Termination of
 
                                      10
<PAGE>
 
registration of the Depositary Shares under the Exchange Act would make
certain provisions of the Exchange Act, such as the requirements of Rule 13e-3
thereunder with respect to "going private" transactions, no longer applicable
in respect of the Depositary Shares. As of March 9, 1999, the Depositary
Shares were not held of record by 300 or more persons and were not listed on a
national securities exchange.
 
   All Depositary Shares purchased by the Company pursuant to the Offer will
be exchanged by the Company for the related Series A Preferred Stock which
will in turn be retired, cancelled, and thereafter returned to the status of
authorized but unissued shares of the Company's preferred stock. Any share of
Series A Preferred Stock (and the corresponding Depositary Shares) remaining
outstanding after the Offer will continue to be redeemable or exchangeable, in
each case at the option of the Company, on the terms specified in the
Certificate of Designation creating the Series A Preferred Stock. Upon
liquidation or dissolution of the Company, holders of the Series A Preferred
Stock are entitled to receive a liquidation preference of $100 per share of
Series A Preferred Stock (equal to $25 per Depositary Share), plus an amount
equal to accrued and unpaid dividends thereon to the date of payment, prior to
the payment of any amounts to the holders of the Company's Common Stock.
 
   THE COMPANY, ITS BOARD OF DIRECTORS, AND ITS EXECUTIVE OFFICERS MAKE NO
RECOMMENDATION AS TO WHETHER ANY SHAREHOLDER SHOULD TENDER ANY OR ALL OF SUCH
SHAREHOLDER'S DEPOSITARY SHARES PURSUANT TO THE OFFER. EACH SHAREHOLDER MUST
DECIDE WHETHER TO TENDER DEPOSITARY SHARES AND, IF SO, HOW MANY DEPOSITARY
SHARES TO TENDER.
 
   SECTION 2. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
 
   The discussion below summarizes only certain of the U.S. federal income tax
consequences associated with the Offer. The summary discusses only Depositary
Shares held as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and
does not address all of the tax consequences that may be relevant to
particular shareholders in light of their particular circumstances, or to
certain types of shareholders (such as certain financial institutions, broker
dealers, insurance companies, tax-exempt organizations, or persons who hold
Depositary Shares as a position in a "straddle" or as part of a "hedging,"
"constructive sale," or "conversion" transaction for U.S. federal income tax
purposes). This discussion also does not address state, local, or foreign tax
consequences or the consequences of any U.S. federal tax other than the U.S.
federal income tax.
 
   The following discussion is based upon the provisions of the Internal
Revenue Code, the regulations promulgated thereunder, existing judicial
decisions, and administrative rulings, all of which are subject to change
(possibly with retroactive effect). Certain tax consequences of the Offer are
uncertain due to the lack of applicable legal authority and may be subject to
judicial or administrative interpretations that differ from the discussion
below.
 
   SHAREHOLDERS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING
THE TAX CONSEQUENCES TO THEM OF THE TRANSACTIONS CONTEMPLATED BY THE OFFER,
INCLUDING FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES.
 
Tax Consequences to the Company
 
   The Company's purchase of Depositary Shares pursuant to the Offer may
affect its ability to utilize its NOLs. The Company carried forward
approximately $224 million of consolidated NOLs for U.S. federal income tax
purposes from the tax year ending December 31, 1997 into the tax year ending
December 31, 1998. The Company estimates that it will use approximately $110
million of these
 
                                      11
<PAGE>
 
NOLs in 1998, and it anticipates reporting for U.S. federal income tax
purposes approximately $114 million of consolidated NOLs carrying forward from
the tax year ending December 31, 1998 into the tax year ending December 31,
1999. The Company does not expect to utilize any of these NOLs in connection
with the Rensselaer Phase II Transaction because it is anticipated that the
transaction will not generate any taxable income for U.S. federal income tax
purposes. The Company also expects to generate additional NOLs during 1999 as
a result of the payments required by the Master Agreement. As a result, at
December 31, 1999, the Company expects to have approximately $114 million of
NOLs generated prior to 1999 and $40 million of NOLs generated in 1999.
 
   In general, a corporation may reduce its taxable income in any year by
using NOLs generated in prior periods. Subject to requirements relating to
alternative minimum taxation, for Westmoreland, the value of the NOLs is equal
to the amount of the reduction of the Company's taxable income multiplied by
the Company's marginal tax rate. (The highest current marginal U.S. federal
corporate tax rate is 35%.)
 
   The amount of the Company's NOLs for U.S. federal income tax purposes is
subject to review and adjustment upon audit by the Internal Revenue Service
("IRS"). In addition, the foregoing estimates of the Company's NOLs are
subject to legal and factual uncertainty. The Company's ability to use its
NOLs for U.S. federal income tax purposes may also be affected by Section 382
of the Internal Revenue Code ("Section 382").
 
   Section 382 limits the use of a corporation's NOLs for U.S. federal income
tax purposes if an "ownership change" within the meaning of the Internal
Revenue Code ("Ownership Change") occurs with respect to that corporation. In
general, an Ownership Change occurs if, among other things, "5-percent
shareholders" within the meaning of the Internal Revenue Code ("5-Percent
Shareholders") increase their percentage ownership of the corporation's stock
by more than 50 percentage points over any three-year period. A 5-Percent
Shareholder is any person who owns 5 percent or more of the value of the
corporation's stock, and the value of the corporation's stock is the sum of
the market values of all of the corporation's outstanding shares. As an
example of the foregoing, if, at the start of any period, 5-Percent
Shareholders own 10 percent of the value of a corporation's stock, and if they
increase their ownership interest in the corporation to 51 percent during the
next three years, then an Ownership Change has not occurred. However, if 5-
Percent Shareholders own 10 percent of the value of a corporation's stock at
the beginning of the relevant period and more than 60 percent of the value of
the corporation's stock at any time in the following three years, then that
corporation has experienced an Ownership Change. In other words, it is the
change in ownership, not the absolute level of ownership, that matters for
purposes of determining whether an Ownership Change has occurred.
 
   For the reasons discussed below, there can be no assurance that the Company
will experience an Ownership Change--or will not experience an Ownership
Change--either prior to or after the Offer.
 
   If an Ownership Change does occur, whether in connection with the Offer or
otherwise, the Company's ability to use the NOLs generated prior to the
Ownership Change will be significantly limited. In general, if an Ownership
Change occurs, the Company will be able to use, in each year following the
Ownership Change, an amount of pre-Ownership Change NOLs equal to (i) the
Company's "value" on the date the Ownership Change occurs, multiplied by (ii)
the long-term tax exempt rate. The long-term tax-exempt rate is based on
statutory criteria and computed by the IRS on a monthly basis; it currently
approximates 4.7 percent. The Company's "value" is the value of all of its
outstanding stock immediately prior to the occurrence of the Ownership Change.
If the Ownership Change takes place upon the consummation of the Offer, the
Company anticipates that the Company's "value" will be reduced by the amount
paid in the Offer. The limitation described in this paragraph is referred to
below as the "Section 382 Limitation."
 
 
                                      12
<PAGE>
 
   The Section 382 Limitation would not be applicable to NOLs generated
following the Ownership Change. Generally, losses generated in the year in
which the Ownership Change occurs are allocated ratably to the pre-Ownership
Change and post-Ownership Change periods. For example, if an Ownership Change
occurred on June 1, 1999, approximately 42 percent of any NOLs generated in
1999 would be allocated to the pre-change period (and subject to the Section
382 Limitation) and approximately 58 percent would be allocated to the post-
change period (and not subject to the Section 382 Limitation).
 
   In addition, if, on the date an Ownership Change occurs, Westmoreland has
"net unrealized built-in gain" of at least $10 million or 15 percent of the
value of its non-cash assets, then the Section 382 Limitation will be
increased in any year by the amount of any "recognized built-in gain" for that
year. "Net unrealized built-in gain" is equal to the difference between (i)
the fair market value of a corporation's assets immediately before an
Ownership Change and (ii) the aggregated adjusted basis of such assets at such
time. "Recognized built-in gain" is gain recognized by a corporation on the
disposition of an asset, if (i) the corporation owned the asset on the date
the Ownership Change occurred and (ii) it sells the asset in the five-year
period beginning on the date the Ownership Change occurs. Numerous factual and
legal uncertainties arise in connection with the application of the rules
governing "net unrealized built-in gain" to the Company. In view of these
uncertainties, there can be no assurance that, if Westmoreland experiences an
Ownership Change, the Company will have "net unrealized built-in gain" or that
it will be able to take advantage of the rules relating to "recognized built-
in gain."
 
   For most of the period during which the Company's bankruptcy proceedings
were pending, the Company requested that persons who knew that they were 5-
Percent Shareholders voluntarily refrain from trading in the Company's
securities. In December 1998, the Company ceased making such a request, and
the Company takes no position on whether persons who are 5-Percent
Shareholders should tender in response to the Offer.
 
   The Company determined to cease requesting that 5-Percent Shareholders
voluntarily refrain from trading, and to take no position on whether persons
who are 5-Percent Shareholders should tender in response to the Offer, after
reviewing numerous Ownership Change scenarios with its tax advisors and after
consulting with the Equity Committee. The Company made that determination in
part because it had no assurance that, even if it requested that 5-Percent
Shareholders voluntarily refrain from trading, an Ownership Change would not
occur. Among the factors that influenced the Company were the following:
 
  .  First, the Company encountered significant informational obstacles in
     identifying the persons who are and were 5-Percent Shareholders and
     determining what percentage ownership they hold and held, individually
     and collectively. Because the Company has both Common Stock and Series A
     Preferred Stock outstanding, determination of a person's status as a 5-
     Percent Shareholder is based on the number of the Depositary Shares and
     shares of Common Stock that person owns and the market prices for such
     Depositary Shares and shares of Common Stock. A person may be a 5-
     Percent Shareholder for purposes of Section 382 even if that person owns
     less than 5 percent of the number of shares of either the Company's
     Common Stock or its Series A Preferred Stock. Although the Company would
     ordinarily be apprised of the identity and shareholdings of persons who
     own 5 percent or more of the number of shares of a single class of the
     Company's stock, the Company would not necessarily be apprised of the
     identity and shareholdings of a person who owns less than 5 percent of
     the number of shares of a class of the Company's stock. Moreover, the
     Company had no assurance that its information on shareholdings was or
     will be current: Section 13 of the Exchange Act and the rules and
     regulations thereunder only require certain institutional investors who
     own 5 percent of the number of shares of either the Company's Common
     Stock or Series A Preferred Stock to file reports of ownership within 45
     calendar days after the end of the year. Finally, because the Company's
     value changes with its market capitalization,
 
                                      13
<PAGE>
 
     which varies with the price of the Common Stock and Depositary Shares,
     and because the percentage of the Company owned by persons who are 5-
     Percent Shareholders varies with the market price of the Common Stock
     and Series A Preferred Stock, and because the prices of those securities
     move independently of each other, changes in the relative prices of the
     Common Stock and the Depositary Shares made the calculations under
     Section 382 challenging.
 
  .  Second, the Company's ability to predict whether an Ownership Change
     will occur in connection with the Offer was complicated by the Company's
     inability to predict the relative prices of the Common Stock and the
     Depositary Shares following the completion of the Offer. As noted above,
     the Company's value and the percentage ownership of the Company's
     securities held by different shareholders varies with the relative
     market prices of the Company's Common Stock and Depositary Shares; thus,
     calculations under Section 382 will be sensitive to, among other things,
     the relative prices of the Common Stock and the Depositary Shares
     following the Offer.
 
  .  Third, the Company's ability to predict whether an Ownership Change will
     occur in connection with the Offer was complicated by the Company's
     inability to predict which of its shareholders will tender their
     Depositary Shares and what percentage of their Depositary Shares they
     will tender. Indeed, an Ownership Change might occur, even if no 5-
     Percent Shareholder tenders in response to the Offer. Such a result
     could occur--whether or not any 5-Percent Shareholders tender--by
     altering the Company's market capitalization and the relative prices of
     the Common Stock and Depositary Shares. In addition, depending on the
     identity of the shareholders who do and do not tender and the nature of
     their respective shareholdings, additional 5-Percent Shareholders may be
     created by the purchase of Depositary Shares in the Offer.
 
  .  Fourth, in early December, 1998, the Equity Committee declined to join
     the Company in requesting that 5-Percent Shareholders voluntarily
     refrain from trading in the Company's securities.
 
  .  Fifth, in light of the Equity Committee's position and in view of other
     information available to it, the Company had no assurance that all of
     its 5-Percent Shareholders would continue to refrain from trading in the
     Company's securities prior to, in connection with, and after the Offer.
 
  .  Sixth, the Company estimates that it will be able to use, for U.S.
     federal income tax purposes, approximately $110 million of the NOLs that
     it carried forward from the tax year ending December 31, 1997 into the
     tax year ending December 31, 1998.
 
  .  Seventh, if an Ownership Change occurs in 1999, the Section 382
     Limitation would be applied to NOLs generated prior to 1999 and a pro
     rata portion of the NOLs generated in 1999. The Section 382 Limitation
     would not apply to a pro rata portion of the NOLs generated in 1999 or
     thereafter, unless another Ownership Change were to occur. In other
     words, the Company believes that substantial NOLs could now be retained
     even if an Ownership Change occurred in connection with the Offer.
 
   Taking into account the foregoing and other factors, the Company determined
to adopt a policy of neutrality towards trading by 5-Percent Shareholders.
Consistent with that policy, the Company neither encourages nor discourages 5-
Percent Shareholders, or any other shareholder, from tendering their
Depositary Shares in response to the Offer.
 
   As noted above, there can be no assurance that an Ownership Change will
occur or will not occur in connection with the Offer or in 1999. The Company
continues to monitor the trading in its securities and to consult with its tax
advisors on strategies to maximize the value of its tax attributes, including
its NOLs.
 
                                      14
<PAGE>
 
Tax Consequences to Holders of Depositary Shares
 
   Sales of Depositary Shares by shareholders pursuant to the Offer will be
taxable transactions, the consequences of which will be determined under the
stock redemption rules of Section 302 of the Internal Revenue Code ("Section
302"). These rules are described below.
 
  U.S. Holders
 
   For purposes of this discussion, a "U.S. Holder" means a beneficial owner
of a Depositary Share that is, for U.S. federal income tax purposes, (i) a
citizen or resident of the United States; (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States;
(iii) an estate the income of which is subject to U.S. federal income tax
regardless of its source; or (iv) any trust if a court within the United
States is able to exercise primary supervision over the administration of such
trust and one or more U.S. persons have the authority to control all
substantial decisions of such trust. A "Non-U.S. Holder" is a beneficial owner
of a Depositary Share that is not a U.S. Holder.
 
 Treatment as a Sale or Exchange
 
   Under Section 302, a transfer of Depositary Shares to the Company pursuant
to the Offer will, as a general rule, be treated as a sale or exchange of the
Depositary Shares (rather than as a dividend distribution) if the receipt of
cash upon the sale (a) is "substantially disproportionate" with respect to the
U.S. Holder, (b) results in a "complete termination" of the U.S. Holder's
interest in the Company, or (c) is "not essentially equivalent to a dividend"
with respect to the U.S. Holder. These tests (the "Section 302 tests") are
explained more fully below.
 
   If any of the Section 302 tests is satisfied, a tendering U.S. Holder will
recognize capital gain or loss equal to the difference between the amount of
cash received by the U.S. Holder pursuant to the Offer and such U.S. Holder's
basis in the Depositary Shares sold pursuant to the Offer. Gain recognized by
a U.S. Holder on Depositary Shares held for 12 months or less will be taxable
at the short-term capital gains rate, while Depositary Shares held more than
12 months will be taxable at the long-term capital gains rate. Capital losses
are subject to certain limitations.
 
 Constructive Ownership of Stock
 
   In determining whether any of the Section 302 tests is satisfied, a U.S.
Holder must take into account not only Depositary Shares and Common Stock
actually owned by him, but also Depositary Shares and Common Stock that are
constructively owned pursuant to Section 318 of the Interna l Revenue Code
("Section 318"). Under Section 318, a U.S. Holder may constructively own
Depositary Shares and Common Stock actually owned, and in some cases
constructively owned, by certain related individuals and certain entities in
which the U.S. Holder has an interest, or, in the case of U.S. Holders that
are entities, by certain individuals or entities that have an interest in such
U.S. Holder, as well as any Depositary Shares and Common Stock the U.S. Holder
has a right to acquire by exercise of an option or by the conversion or
exchange of a security. With respect to option and convertible security
attribution, the IRS takes the position that stock constructively owned by a
U.S. Holder by reason of a right on the U.S. Holder's part to acquire shares
from the Company are not to be considered outstanding for purposes of applying
the Section 302 tests to other U.S. Holders; however, there are both contrary
and supporting judicial decisions with respect to this issue.
 
 The Section 302 Tests
 
   One of the following tests must be satisfied in order for the transfer of
Depositary Shares pursuant to the Offer to be treated as a sale rather than as
a dividend distribution.
 
                                      15
<PAGE>
 
   Although the issue is not free from doubt, a U.S. Holder may be able to
take into account acquisitions or dispositions of Depositary Shares and Common
Stock (including market purchases and sales) substantially contemporaneous
with the Offer in determining whether any of the Section 302 tests is
satisfied.
 
   In the event that the Offer is oversubscribed, the Company's purchase of
Depositary Shares pursuant to the Offer will be prorated. Thus, in such case
even if all the Depositary Shares actually and constructively owned by a U.S.
Holder are tendered pursuant to the Offer, not all of the Depositary Shares
will be purchased by the Company, which in turn may affect such U.S. Holder's
ability to satisfy the Section 302 tests.
 
   Substantially Disproportionate Test. Under Section 302(b)(2) of the
Internal Revenue Code, a sale of Depositary Shares pursuant to the Offer, in
general, will be "substantially disproportionate" as to a U.S. Holder if the
ratio of the outstanding voting stock of the Company actually and
constructively owned by the U.S. Holder compared to all of the Company's
voting stock outstanding immediately after all sales of Depositary Shares
pursuant to the Offer is less than 80% of the ratio of voting stock actually
and constructively owned by such U.S. Holder compared to all of the Company's
voting stock outstanding immediately before such sales.
 
   The U.S. Holder's ownership of Common Stock after and before all sales of
Depositary Shares pursuant to the Offer must also meet the 80 percent
requirement of the preceding sentence. In addition, in order to meet the
"substantially disproportionate test," a U.S. Holder must immediately after
the Offer own less than 50 percent of the total combined voting power of all
the Company's classes of stock entitled to vote.
 
   Complete Termination Test. The receipt of cash by a U.S. Holder pursuant to
the Offer will be a complete termination of the U.S. Holder's interest if at
the conclusion of the Offer either (i) the U.S. Holder actually and
constructively owns no Depositary Shares or Common Stock, or (ii) the U.S.
Holder actually owns no Depositary Shares or Common Stock and the U.S. Holder
is eligible to waive, and effectively waives, the attribution of Depositary
Shares and Common Stock constructively owned by the U.S. Holder in accordance
with the procedures described in Section 302(c) (2) of the Internal Revenue
Code.
 
   Not Essentially Equivalent to a Dividend Test. The receipt of cash by a
U.S. Holder pursuant to the Offer will not be essentially equivalent to a
dividend if the U.S. Holder's exchange of Depositary Shares pursuant to the
Offer results in a "meaningful reduction" of the U.S. Holder's proportionate
interest in the Company. Whether the receipt of cash by a U.S. Holder will
result in a meaningful reduction of the U.S. Holder's proportionate interest
will depend on the U.S. Holder's particular facts and circumstances. However,
in the case of a small minority U.S. Holder, even a small reduction may
satisfy this test where, as with the Offer, payments are not expected to be
pro rata with respect to all outstanding Depositary Shares. The IRS has held
in a published ruling that, under the particular facts of that ruling, a very
small reduction in the percentage stock ownership of a shareholder constituted
a "meaningful reduction" when the shareholder owned an insignificant
percentage of the corporation's stock before and after a redemption and did
not exercise any control over corporate affairs.
 
 Treatment as a Dividend or Otherwise as a Distribution
 
   If none of the Section 302 tests is satisfied and if the Company has
sufficient current or accumulated earnings and profits, as calculated for U.S.
federal income tax purposes, a tendering U.S. Holder will be treated as having
received a dividend includible in gross income in an amount equal to the
entire amount of cash received by such U.S. Holder pursuant to the Offer. This
amount will not be reduced by the U.S. Holder's basis in the Depositary Shares
exchanged pursuant to the Offer, and (except as described below for corporate
U.S. Holders eligible for the dividends-received deduction)
 
                                      16
<PAGE>
 
the U.S. Holder's basis in those Depositary Shares will be added to such U.S.
Holder's basis in the remaining Depositary Shares and Common Stock retained by
such U.S. Holder. No assurance can be given that any of the Section 302 tests
will be satisfied as to any particular U.S. Holder, and thus no assurance can
be given that any particular U.S. Holder will not be treated as having
received a dividend taxable as ordinary income.
 
   Notwithstanding the discussion immediately above, if none of the Section
302 tests is satisfied, any cash received for Depositary Shares pursuant to
the Offer in excess of the Company's current or accumulated earnings and
profits, as calculated for U.S. federal income tax purposes, will be treated,
first, as a non-taxable return of capital to the extent of, and in reduction
of, the U.S. Holder's basis for such U.S. Holder's Depositary Shares and,
thereafter, as a capital gain to the extent it exceeds such basis. Gain
recognized by a U.S. Holder on Depositary Shares held for 12 months or less
will be taxable at the short-term capital gains rate, while Depositary Shares
held more than 12 months will be taxable at the long-term capital gains rate.
 
   Although it is not entirely free from doubt, the Company does not
anticipate having positive current or accumulated earnings and profits, as
calculated for U.S. federal income tax purposes, during its 1999 taxable year.
Consequently, if none of the Section 302 tests is satisfied, a U.S. Holder is
likely to be subject to the U.S. federal income tax treatment described in the
immediately preceding paragraph as to any cash received for Depositary Shares
pursuant to the Offer.
 
 Special Rules for Corporate U.S. Holders
 
   If the exchange of Depositary Shares by a corporate U.S. Holder qualifies
as a dividend, which the Company believes is not likely, see "--Treatment as a
Dividend or Otherwise as a Distribution", such corporate U.S. Holder generally
will be entitled to a dividends-received deduction, subject to applicable
limitations. Also, since it is expected that purchases pursuant to the Offer
will not be pro rata as to all shareholders, any amount treated as a dividend
to a corporate U.S. Holder will constitute an "extraordinary dividend" subject
to the provisions of Section 1059 of the Internal Revenue Code (except as may
otherwise be provided in regulations yet to be promulgated by the Treasury
Department). Corporate U.S. Holders should consult their own advisors as to
the implications of the "extraordinary dividend" provisions to their own
situations.
 
  Non-U.S. Holders
 
   Although the Company believes that no holder will receive a dividend, for
U.S. federal income tax purposes, because of the anticipated lack of positive
current or accumulated earnings and profits, as calculated for U.S. federal
income tax purposes, applicable Treasury regulations require the Company to
assume that any exchange pursuant to the Offer will be a dividend as to all
Non-U.S. Holders. Consequently, the Depositary will withhold U.S. federal
income tax at a rate equal to 30% of the gross proceeds paid to a Non-U.S.
Holder or his agent pursuant to the Offer, unless the Depositary determines
that a reduced rate of withholding is available pursuant to a tax treaty or
that an exemption from withholding is applicable because the gross proceeds
are effectively connected with the conduct of a trade or business by the Non-
U.S. Holder within the United States.
 
   Generally, the determination of whether a reduced rate of withholding is
applicable is made by reference to a Non-U.S. Holder's address or to a
properly completed IRS Form 1001 furnished by the Non-U.S. Holder, and the
determination of whether an exemption from withholding is available on the
grounds that gross proceeds paid to a Non-U.S. Holder are effectively
connected with a United States trade or business is made on the basis of a
properly completed IRS Form 4224 furnished by the Non-U.S. Holder. The
Depositary will determine a Non-U.S. Holder's eligibility for a reduced rate
of, or exemption from, withholding by reference to the Non-U.S. Holder's
address and any IRS Forms 1001 or 4224 submitted to the Depositary by a Non-
U.S. Holder unless facts and circumstances indicate
 
                                      17
<PAGE>
 
that such reliance is not warranted or unless applicable law requires some
other method for determining whether a reduced rate of withholding is
applicable. These forms can be obtained from the Information Agent. See the
instructions to the Letter of Transmittal.
 
   A Non-U.S. Holder with respect to whom tax has been withheld may be
eligible to obtain a refund of all or a portion of the withheld tax if the
Non-U.S. Holder satisfies one of the Section 302 tests for capital gain
treatment or is otherwise able to establish that no tax or a reduced amount of
tax was due. Non-U.S. Holders are urged to consult their own tax advisors
regarding the application of U.S. federal income tax withholding, including
eligibility for a withholding tax reduction or exemption, the availability of
a refund and the refund procedure.
 
   Although it is not completely clear, the Company believes that it is not,
and has not been, during a 5-year look-back period, a United States real
property holding corporation ("USRPHC"), within the meaning of Section 897(c)
of the Internal Revenue Code. A Non-U.S. Holder should consult its own tax
advisor as to the consequences to it, if any, of the Company's being a USRPHC.
 
   ANY TENDERING SHAREHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE FULLY AND
SIGN THE SUBSTITUTE IRS FORM W-9 INCLUDED IN THE LETTER OF TRANSMITTAL (OR, IN
THE CASE OF A FOREIGN INDIVIDUAL, IRS FORM W-8 OBTAINABLE FROM THE DEPOSITARY)
MAY BE SUBJECT TO REQUIRED BACKUP FEDERAL INCOME TAX WITHHOLDING OF 31% OF THE
GROSS PROCEEDS PAID TO SUCH SHAREHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER.
 
   BACKUP WITHHOLDING IS NOT AN ADDITIONAL TAX AND A SHAREHOLDER MAY BE
ELIGIBLE FOR A REFUND OR CREDIT IN RESPECT OF SUCH TAX.
 
   SECTION 3. CERTAIN LEGAL MATTERS; REGULATORY AND FOREIGN APPROVALS; NO
APPRAISAL RIGHTS
 
   The Company is not aware of any license or regulatory permit that appears
to be material to its business that might be adversely affected by its
acquisition of Depositary Shares as contemplated in the Offer or of any
approval or other action by any government or governmental, administrative or
regulatory authority, or agency, domestic or foreign, that would be required
for the Company's acquisition or ownership of Depositary Shares pursuant to
the Offer. Should any such approval or other action be required, the Company
currently contemplates that it will seek such approval or other action. The
Company cannot predict whether it may determine that it is required to delay
the acceptance for payment of, or payment for, Depositary Shares tendered
pursuant to the Offer pending the outcome of any such matter. There can be no
assurance that any such approval or other action, if needed, would be obtained
or would be obtained without substantial conditions or that the failure to
obtain any such approval or other action might not result in adverse
consequences to the Company's business. The Company intends to make all
required filings under the Exchange Act. The Company's obligation under the
Offer to accept for payment, or make payment for, Depositary Shares is subject
to certain conditions. See Section 8. "Certain Conditions of the Offer."
 
   There is no shareholder vote required in connection with the Offer.
 
   No appraisal rights are available to holders of Depositary Shares in
connection with the Offer.
 
                                      18
<PAGE>
 
                                   THE OFFER
 
   SECTION 4. NUMBER OF SHARES; PRORATION; EXPIRATION DATE; EXTENSION OF THE
OFFER
 
   Upon the terms and subject to the conditions of the Offer, the Company will
accept for payment (and thereby purchase) 1,052,631 Depositary Shares, or such
lesser number of Depositary Shares as are properly tendered on or before the
Expiration Date (and not withdrawn in accordance with Section 6), at the
Purchase Price. The term "Expiration Date" means 12:00 midnight, New York City
time, on Tuesday, April 6, 1999, unless and until the Company shall have
extended the period of time during which the Offer is open, in which event the
term "Expiration Date" shall refer to the latest time and date at which the
Offer, as so extended by the Company, shall expire. See Section 13. "Extension
of the Tender Period; Termination; Amendments" for a description of the
Company's right to extend the time during which the Offer is open and to
delay, terminate or amend the Offer. See also Section 8. "Certain Conditions
of the Offer."
 
   The Company expressly reserves the right, in its sole discretion but
subject to the terms and conditions of the Master Agreement, (a) to purchase
more than 1,052,631 Depositary Shares pursuant to the Offer and (b) at any
time or from time to time, to extend the period of time during which the Offer
is open by giving oral followed by written notice of such extension to the
Depositary and making a public announcement thereof. See Section 13.
"Extension of the Tender Period; Termination; Amendments." There can be no
assurance, however, that the Company will purchase more than 1,052,631 or
exercise its right to extend the Offer.
 
   If (a) the Company (i) increases or decreases the price to be paid for
Depositary Shares or (ii) increases or decreases the number of Depositary
Shares being sought and (b) the Offer is scheduled to expire at any time
earlier than the tenth business day from and including the date that notice of
such increase or decrease is first published, sent, or given in the manner
specified in Section 13, the Offer will be extended until the expiration of
such ten business day period; provided, however, that in accordance with
regulations of the Securities and Exchange Commission ("Commission"), no such
extension is required if the Company purchases pursuant to the Offer an
additional number of Depositary Shares not to exceed 2% of the number of
Depositary Shares outstanding as of the date hereof. For purposes of the
Offer, "business day" means any day other than a Saturday, Sunday, or Federal
holiday and consists of the time period from 12:01 a.m. through 12:00
midnight, Eastern Standard Time. Under the Master Agreement, any increase in
the amount to be paid to the holders of Depositary Shares prior to June 30,
1999, and any change to the terms of the Offer from those specified in the
Master Agreement, would require an amendment to the Master Agreement. See
Section 13. "Extension of the Tender Period; Termination; Amendments."
 
   All Depositary Shares purchased pursuant to the Offer will be purchased at
the Purchase Price, net to the seller in cash. All Depositary Shares not
purchased pursuant to the Offer, including Depositary Shares tendered and
withdrawn, will be returned to the tendering shareholders at the Company's
expense as promptly as practicable.
 
   If more than 1,052,631 Depositary Shares are properly tendered and not
withdrawn prior to the Expiration Date, and if the Company does not increase
the number of Depositary Shares purchased, proration will be required. In the
event that proration of tendered Depositary Shares is required, the Company
will determine the proration factor as soon as practicable following the
Expiration Date. Proration for each shareholder tendering Depositary Shares
shall be based on the ratio of the number of Depositary Shares properly
tendered and not withdrawn by such shareholder to the total number of
Depositary Shares properly tendered and not withdrawn by all shareholders,
subject to adjustment to avoid the purchase of fractional shares. Because of
the difficulty in determining the number of Depositary Shares properly
tendered and not withdrawn, the Company does not expect that it will be
 
                                      19
<PAGE>
 
able to announce the final proration factor or commence payment to
shareholders for any Depositary Shares purchased pursuant to the Offer until
approximately five NYSE trading days after the Expiration Date. (A NYSE
trading day is any day on which the New York Stock Exchange, Inc. is open for
trading.) The preliminary results of any proration will be announced by press
release as promptly as practicable after the Expiration Date. Shareholders may
obtain such preliminary information from the Information Agent and may be able
to obtain such information from their brokers.
 
   As described in Section 2. "Certain Federal Income Tax Consequences," the
number of Shares that the Company will purchase from a shareholder may affect
the United States Federal income tax consequences to the shareholder of such
purchase and, therefore, may be relevant to a shareholder's decision whether
or not to tender Shares.
 
   This Offer to Purchase and the related Letter of Transmittal will be mailed
to record holders of Depositary Shares and will be furnished to brokers,
banks, and similar persons whose names, or the names of whose nominees, appear
on the Company's shareholder list or, if applicable, who are listed as
participants in a clearing agency's security position listing for subsequent
transmittal to beneficial owners of Depositary Shares.
 
   SECTION 5. PROCEDURE FOR TENDERING DEPOSITARY SHARES
 
Proper Tender of Depositary Shares
 
   For Depositary Shares to be properly tendered pursuant to the Offer, the
depositary receipts for such Depositary Shares (or confirmation of receipt of
such Depositary Shares pursuant to the procedures for book-entry transfer set
forth below), together with a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) with any required signature guarantees
(or in the case of book-entry transfer, an Agent's Message (as defined
below)), and any other documents required by the Letter of Transmittal, must
be received before the Expiration Date by the Depositary at one of its
addresses set forth on the back cover of this Offer to Purchase.
 
   The term "Agent's Message" means a message, transmitted by The Depository
Trust Company ("DTC") to, and received by, the Depositary and forming a part
of the confirmation of book-entry transfer, which states that DTC has received
an express acknowledgement from the participant in DTC tendering the
Depositary Shares that such participant has received and agrees to be bound by
the terms of the Letter of Transmittal and that the Company may enforce such
agreement against the participant.
 
   A tender of Depositary Shares made pursuant to any method of delivery set
forth herein will constitute a binding agreement between the tendering
shareholder and the Company upon the terms and subject to the conditions of
the Offer.
 
Signature Guarantees and Method of Delivery
 
   Except as otherwise provided below, all signatures on the Letter of
Transmittal must be guaranteed by a financial institution (including most
banks, savings and loan associations, and brokerage houses) that is a
participant in the Security Transfer Agents Medallion Program (each of the
foregoing being referred to as an "Eligible Institution"). Signatures on the
Letter of Transmittal need not be guaranteed if (a) the Letter of Transmittal
is signed by the registered holder of the Depositary Shares tendered therewith
and such holder has not completed the box entitled "Special Payment
Instructions" on the Letter of Transmittal or (b) the Depositary Shares
tendered therewith are tendered for the account of an Eligible Institution. If
Depositary Shares are registered in the name of a person other than the
signatory on the Letter of Transmittal, or if unpurchased Depositary Shares
are to be
 
                                      20
<PAGE>
 
issued to a person other than the registered holder(s), the depositary
receipts representing tendered Depositary Shares must be endorsed or
accompanied by appropriate stock powers, in either case signed exactly as the
name or names of the registered holder(s) appear on the depositary receipts
with the signature(s) on the depositary receipts or stock powers guaranteed as
aforesaid. THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING DEPOSITARY
RECEIPTS, THE LETTER OF TRANSMITTAL, AND ANY OTHER REQUIRED DOCUMENTS, IS AT
THE ELECTION AND RISK OF THE TENDERING SHAREHOLDER. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED. In all cases, sufficient time should be allowed to ensure timely
delivery.
 
U.S. Federal Backup Withholding
 
   Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of U.S. federal income tax, the Depositary
will be required to withhold, and will withhold, 31% of the gross proceeds
otherwise payable to a shareholder or other payee pursuant to the Offer unless
the shareholder or other payee provides such person's tax identification
number (social security number or employer identification number) and
certifies that such number is correct. Each tendering shareholder, other than
a noncorporate foreign shareholder, should complete and sign the main
signature form and the Substitute Form W-9 included as part of the Letter of
Transmittal, so as to provide the information and certification necessary to
avoid backup withholding, unless an applicable exemption exists and is proved
in a manner satisfactory to the Company and the Depositary. Noncorporate
foreign shareholders should generally complete and sign a Form W-8,
Certificate of Foreign Status, a copy of which may be obtained from the
Depositary, in order to avoid backup withholding.
 
   Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the proper information is submitted to the IRS.
 
Book-Entry Delivery
 
   The Depositary will establish an account with respect to the Depositary
Shares at DTC for purposes of the Offer within two business days after the
date of this Offer to Purchase. Any financial institution that is a
participant in DTC's system may make book-entry delivery of the Depositary
Shares by causing DTC to transfer such Depositary Shares into the Depositary's
account in accordance with DTC's procedure for such transfer. Prior to the
applicable Expiration Date, an Agent's Message in connection with any book-
entry transfer must be transmitted to, and received by, the Depositary at one
of its addresses set forth on the back cover of this Offer to Purchase.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE DEPOSITARY.
 
Determinations of Validity; Rejection of Depositary Shares; Waiver of Defects;
No Obligation to Give Notice of Defects
 
   All questions as to the validity, form, eligibility (including time of
receipt), and acceptance for payment of any tender of Depositary Shares will
be determined by the Company, in its sole discretion, which determination
shall be final and binding on all parties. The Company reserves the absolute
right to reject any or all tenders it determines not to be in proper form or
the acceptance for payment of which may, in the opinion of the Company's
counsel, be unlawful. The Company also reserves the absolute right to waive
any of the conditions of the Offer and any defect or irregularity in the
tender of any particular Depositary Shares. No tender of Depositary Shares
will be deemed to be properly made until all defects or irregularities have
been cured or waived. None of the Company, the Depositary, the Information
Agent or any other person is or will be obligated to give notice of any
defects or irregularities in tenders, and none of them will incur any
liability for failure to give any such notice.
 
                                      21
<PAGE>
 
   SECTION 6. WITHDRAWAL RIGHTS
 
   Except as otherwise provided in this Section 6, a tender of Depositary
Shares pursuant to the Offer is irrevocable. Depositary Shares tendered
pursuant to the Offer may be withdrawn at any time before the Expiration Date
and, unless theretofore accepted for payment by the Company, may also be
withdrawn after 12:00 midnight, New York City time, on May 4, 1999.
 
   For a withdrawal to be effective, the Depositary must timely receive (at
one of its addresses set forth on the back cover of this Offer to Purchase) a
written or facsimile transmission notice of withdrawal. Such notice of
withdrawal must specify the name of the person having tendered the Depositary
Shares to be withdrawn, the number of Depositary Shares to be withdrawn, and
the name of the registered owner, if different from that of the person who
tendered such Depositary Shares. If the depositary receipts have been
delivered or otherwise identified to the Depositary, then, prior to the
release of such depositary receipts, the tendering shareholder must also
submit the serial numbers shown on the particular depositary receipts
evidencing the Depositary Shares, and the signature on the notice of
withdrawal must be guaranteed by an Eligible Institution (except in the case
of Depositary Shares tendered by an Eligible Institution). If Depositary
Shares have been delivered pursuant to the procedure for book-entry transfer
set forth in Section 5. "Procedure for Tendering Depositary Shares," the
notice of withdrawal must specify the name and the number of the account at
DTC to be credited with the withdrawn Depositary Shares and otherwise comply
with the procedures of DTC.
 
   All questions as to the form and validity (including time of receipt) of
notices of withdrawal will be determined by the Company, in its sole
discretion, which determination shall be final and binding on all parties.
None of the Company, the Depositary, the Information Agent, or any other
person is or will be obligated to give any notice of any defects or
irregularities in any notice of withdrawal, and none of them will incur any
liability for failure to give any such notice. A withdrawal of a tender of
Depositary Shares may not be rescinded, and Depositary Shares properly
withdrawn will thereafter be deemed not validly tendered for purposes of the
Offer. Withdrawn Depositary Shares may, however, be retendered before the
Expiration Date by again following any of the procedures described in
Section 5. "Procedure for Tendering Depositary Shares."
 
   SECTION 7. ACCEPTANCE FOR PAYMENT OF DEPOSITARY SHARES AND PAYMENT OF
PURCHASE PRICE
 
   Upon the terms and subject to the conditions of the Offer, promptly after
the Expiration Date, the Company will accept for payment and will pay the
Purchase Price for 1,052,631 Depositary Shares (subject to certain matters
discussed in Section 4. "Number of Shares; Proration Expiration Date;
Extension of the Offer" and Section 13. "Extension of the Tender Period;
Termination; Amendments") or such lesser number of Depositary Shares as are
properly tendered and not withdrawn as permitted in Section 6. "Withdrawal
Rights." For purposes of the Offer, the Company will be deemed to have
accepted for payment (and thereby purchased) Depositary Shares which are
tendered and not withdrawn when, as, and if it gives oral followed by written
notice to the Depositary of its acceptance of such Depositary Shares for
payment pursuant to the Offer.
 
   In the event of proration, the Company will determine the proration factor
and pay for those tendered Depositary Shares accepted for payment as soon as
practicable after the Expiration Date; however, the Company does not expect to
be able to announce the final results of any proration and commence payment to
shareholders for Depositary Shares purchased until approximately five NYSE
trading days after the Expiration Date. Certificates for all Depositary Shares
tendered and not purchased, including all Depositary Shares not purchased due
to proration, will be returned (or, in the case of Depositary Shares tendered
by book-entry transfer, such Depositary Shares will be credited to the account
maintained with the applicable Book-Entry Transfer Facility by the participant
therein who so delivered such Depositary Shares) to the tendering stockholder
at the Company's expense as promptly as practicable after the Expiration Date
without expense to the tendering shareholders.
 
                                      22
<PAGE>
 
   Payment for Depositary Shares purchased pursuant to the Offer will be made
by depositing the aggregate Purchase Price therefor with the Depositary, which
will act as agent for tendering shareholders for the purpose of receiving
payment from the Company and transmitting payment to the tendering
shareholders. Notwithstanding any other provision hereof, payment for
Depositary Shares accepted for payment pursuant to the Offer will in all cases
be made only after timely receipt by the Depositary of depositary receipts for
such Depositary Shares (or a timely confirmation by DTC of book-entry transfer
of such Depositary Shares to the Depositary), a properly completed and duly
executed Letter of Transmittal (or facsimile thereof) with any required
signature guarantees (or, in the case of book-entry transfer, an Agent's
Message), and any other required documents. Under no circumstances will
interest be paid on the Purchase Price of the Depositary Shares to be paid by
the Company, regardless of any delay in making such payment.
 
   The Company will pay any stock transfer taxes with respect to the transfer
and sale of Depositary Shares to it pursuant to the Offer. If, however,
payment of the Purchase Price is to be made to, or if depositary receipts for
Depositary Shares not tendered or accepted for purchase are to be registered
in the name of, any person other than the registered holder, or if tendered
depositary receipts are registered in the name of any person other than the
person signing the Letter of Transmittal, the amount of any stock transfer
taxes (whether imposed on the registered holder or such person) payable on
account of the transfer to such person will be deducted from the Purchase
Price unless satisfactory evidence of the payment of such taxes or exemption
therefrom is submitted. See Instruction 6 of the Letter of Transmittal.
 
   ANY TENDERING SHAREHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE AND SIGN THE
SUBSTITUTE FORM W-9 INCLUDED IN THE LETTER OF TRANSMITTAL (OR, IN THE CASE OF
A FOREIGN INDIVIDUAL, FORM W-8 OBTAINABLE FROM THE DEPOSITARY) MAY BE SUBJECT
TO REQUIRED U.S. FEDERAL INCOME TAX WITHHOLDING OF 31% OF THE GROSS PROCEEDS
PAID TO SUCH SHAREHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER. SEE SECTION 5.
"PROCEDURE FOR TENDERING DEPOSITARY SHARES."
 
   SECTION 8. CERTAIN CONDITIONS OF THE OFFER
 
   Notwithstanding any other provision of the Offer, and in addition to (and
not in limitation of) the Company's right to extend or amend the Offer at any
time in its sole discretion, but subject to the terms and conditions of the
Master Agreement, the Company shall not be required to accept for payment or
make payment for any Depositary Shares tendered, and may terminate or amend
the Offer, if the Rensselaer Phase II Transaction shall not have closed or if
before acceptance for payment or payment for any such Depositary Shares any of
the following shall have occurred (or shall have been determined by the
Company to have occurred):
 
  (a) there shall have been threatened, instituted or pending any action or
      proceeding by any government or governmental, regulatory, or
      administrative agency or authority or tribunal or any other person,
      domestic or foreign, before any court or governmental, regulatory, or
      administrative authority, agency or tribunal, domestic or foreign,
      which (i) challenges the making of the Offer, the acquisition of
      Depositary Shares pursuant to the Offer, or otherwise relates in any
      manner to the Offer; or (ii) in the sole judgment of the Company, could
      materially adversely affect the business, condition (financial or
      other), income, operations, or prospects of the Company and its
      subsidiaries, taken as a whole, or otherwise materially impair in any
      way the contemplated future conduct of the business of the Company or
      any of its subsidiaries or materially impair the Offer's contemplated
      benefits to the Company;
 
                                      23
<PAGE>
 
  (b) there shall have been any action threatened, pending or taken, or
      approval withheld, or any statute, rule, regulation, judgment, order or
      injunction threatened, proposed, sought, promulgated, enacted, entered,
      amended, enforced or deemed to be applicable to the Offer or the
      Company or any of its subsidiaries, by any court or any government or
      governmental, regulatory, or administrative authority, agency, or
      tribunal, domestic or foreign, which, in the Company's sole judgment,
      would or might directly or indirectly (i) make the acceptance for
      payment of, or payment for, Depositary Shares illegal or otherwise
      restrict or prohibit consummation of the Offer; (ii) delay or restrict
      the ability of the Company, or render the Company unable, to accept for
      payment, or pay for, Depositary Shares; (iii) materially impair the
      contemplated benefits of the Offer to the Company; or (iv) materially
      adversely affect the business, condition (financial or other), income,
      operations, or prospects of the Company and its subsidiaries, taken as
      a whole, or otherwise materially impair in any way the contemplated
      future conduct of the business of the Company or any of its
      subsidiaries;
 
  (c) there shall have occurred after March 10, 1999, (i) any general
      suspension of trading in, or limitation on prices for, securities on
      any United States national securities exchange or in the over-the-
      counter market (excluding any coordinated trading halt triggered solely
      as a result of a specified decrease in a market index), (ii) the
      declaration of a banking moratorium or any suspension of payments in
      respect of banks in the United States, (iii) the commencement of a war,
      armed hostilities, or other international or national crisis directly
      or indirectly involving the United States, or (iv) any limitation
      (whether or not mandatory) by any governmental, regulatory, or
      administrative agency or authority on, or any event which, in the sole
      judgment of the Company, might affect the extension of credit by banks
      or other lending institutions in the United States, (v) any significant
      decline in the market price of the Depositary Shares, (vi) any change
      in the general political, market, economic, or financial conditions in
      the United States or abroad that could, in the sole judgment of the
      Company, have a material adverse effect on the Company's business,
      operations, prospects, or the trading in the Depositary Shares, or
      (vii) in the case of any of the foregoing existing at the time of the
      commencement of the Offer, a material acceleration or worsening
      thereof;
 
  (d) after March 10, 1999, any tender or exchange offer with respect to the
      Depositary Shares or any other class of the Company's equity
      securities, or any merger, acquisition, business combination, or other
      similar transaction with or involving the Company or any subsidiary,
      shall have been proposed, announced, or made by another person;
 
  (e) after March 10, 1999, any change shall occur or be threatened in the
      business, condition (financial or other), income, operations, or
      prospects of the Company and its subsidiaries taken as a whole
      (including, without limitation, any downgrade in the credit ratings of
      any securities of the Company or any of its subsidiaries by Moody's or
      S&P or any announcement by Moody's or S&P that it has placed any such
      rating under surveillance or review with possible negative
      implications), which, in the sole judgment of the Company, is or may be
      materially adverse to the Company; or
 
  (f) (i) any person, entity, or "group" (as that term is used in Section
      13(d)(3) of the Exchange Act) shall have acquired, or proposed to
      acquire, beneficial ownership of more than 20% of the Company's
      outstanding Common Stock, (ii) any group shall have been formed which
      beneficially owns more than 20% of the Company's outstanding Common
      Stock, or (iii) any person, entity, or group shall have filed a
      Notification and Report Form under the Hart-Scott-Rodino Antitrust
      Improvement Act of 1976, or made a public announcement reflecting an
      intent to acquire the Company or any of its subsidiaries or any of
      their respective assets or securities;
 
                                      24
<PAGE>
 
and, in the sole judgment of the Company, in any such case and regardless of
the circumstances (including any action or inaction by the Company) giving
rise to such condition, such event makes it undesirable or inadvisable to
proceed with the Offer or with such acceptance for payment or payment.
 
   The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances (including any action
or inaction by the Company) giving rise to any such condition, and any such
condition may be waived by the Company, in whole or in part, at any time and
from time to time in its sole discretion. The Company's failure at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right; the waiver of any such right with respect to particular facts and
circumstances shall not be deemed a waiver with respect to any other facts or
circumstances; and each such right shall be deemed an ongoing right which may
be asserted at any time and from time to time. The Company's failure at any
time to exercise any of the foregoing rights shall not be deemed an admission
that the facts or events entitling the Company to assert such right do not
exist or have not occurred and shall not be deemed a waiver to the Company's
assertion in any forum or against any person that the facts or events
entitling the Company to assert such right do exist or have occurred. Any
determination by the Company concerning the events described above and any
related judgment by the Company regarding the undesirability or inadvisability
of proceeding with the acceptance for payment or payment for any tendered
Depositary Shares will be final and binding on all parties.
 
  SECTION 9. PRICE RANGE OF THE DEPOSITARY SHARES; DIVIDENDS
 
Price Range of Depositary Shares
 
   The Depositary Shares are traded on the over-the-counter market. Bid and
ask prices for the Depositary Shares in such market are reported on the OTC
Bulletin Board under the symbol "WMCLP". The following table sets forth, for
each period shown, the high and low quarterly bid prices as reported by the
National Association of Securities Dealers Composite Feed or other qualified
interdealer medium. The Depositary Shares were first traded on or about July
9, 1992.
 
<TABLE>
<CAPTION>
                                                          DEPOSITARY SHARE
                                                            PRICE RANGE
                                                          ------------------
                                                           HIGH       LOW
                                                          -------   --------
      <S>                                                 <C>       <C>
      1997
        1st Quarter......................................   $5 3/4    $ 2
        2nd Quarter......................................    5 1/2      5
        3rd Quarter......................................    6 3/4      5 1/8
        4th Quarter......................................    7 3/8      4 7/8
      1998
        1st Quarter......................................   14 1/4      5 1/8
        2nd Quarter......................................   14 1/2      4 11/16
        3rd Quarter......................................   14 5/8      4 5/8
        4th Quarter......................................   17 1/2     10 3/8
      1999
        1st Quarter (through March 8, 1999)..............  18         16 1/4
</TABLE>
 
   On March 9, 1999, the last trading day before the Company announced the
Offer, the closing sales price of the Depositary Shares as reported on the OTC
Bulletin Board was $16 7/8 per Depositary Share. The Company intends to apply
to have the Common Stock (including the associated preferred stock purchase
rights) and Depositary Shares listed for trading on the American Stock
Exchange or the NASDAQ national market. Shareholders are urged to obtain a
current market quotation for the Depositary Shares.
 
                                      25
<PAGE>
 
Dividends
 
   Holders of shares of the Series A Preferred Stock are entitled to receive,
when, as and if declared by the Board of Directors out of funds of the Company
legally available therefor, cumulative cash dividends on the shares of the
Series A Preferred Stock at the rate of $8.50 per annum per share of Series A
Preferred Stock (equal to $2.125 per Depositary Share). Dividends are payable
in equal quarterly installments on April 1, July 1, October 1, and January 1
in each year and are cumulative from the date of original issue of each share
of the Series A Preferred Stock. Each such dividend is payable to holders of
record of the shares of the Series A Preferred Stock as they appear on the
stock records of the Company on such record date, which shall be not more than
30 days nor less than 10 days preceding the dividend payment date thereof, as
shall be fixed by the Company's Board of Directors or a duly authorized
committee thereof.
 
   Preferred stock dividends were paid quarterly from the third quarter of
1992 through the first quarter of 1994. The declaration and payment of
preferred stock dividends were suspended in the second quarter of 1994 in
connection with extension agreements of the Company's principal lenders. Upon
the expiration of these extension agreements, the Company paid a quarterly
dividend on April 1, 1995 and July 1, 1995. Pursuant to the requirements of
Delaware law, described below, the preferred stock dividend was suspended in
the third quarter of 1995 as a result of recognition of losses and the
subsequent shareholders' deficit. The seventeen quarterly dividends which are
in arrears (dividend payment dates July 1, 1994, October 1, 1994, January 1,
1995, October 1, 1995, January 1, 1996, April 1, 1996, July 1, 1996, October
1, 1996, January 1, 1997, April 1, 1997, July 1, 1997, October 1, 1997,
January 1, 1998, April 1, 1998, July 1, 1998, October 1, 1998 and January 1,
1999) amount to $20,771,875 in the aggregate ($36.13 per share of Series A
Preferred Stock or $9.03 per Depositary Share).
 
   There are statutory restrictions limiting the payment of preferred stock
dividends under Delaware law, the state in which the Company is incorporated.
Under Delaware law, the Company is permitted to pay preferred stock dividends
only: (1) out of surplus, surplus being the amount of shareholders' equity in
excess of the par value of the Company's two classes of stock; or (2) in the
event there is no surplus, out of net profits for the fiscal year in which a
preferred stock dividend is declared (and/or out of net profits from the
preceding fiscal year), but only to the extent that shareholders' equity
exceeds the par value of the preferred stock ($575,000). The Company had
shareholders' equity at December 31, 1998, of $21,845,000 and the par value of
all outstanding Depositary Shares and shares of Common Stock aggregated
$17,988,000.
 
   In addition, the Company is subject to contractual restrictions on the
payment of preferred stock dividends. Under the terms of the Master Agreement,
the Company may not pay any dividend or make any other distribution to
shareholders until June 30, 1999.
 
   The payment of the Purchase Price for Depositary Shares will extinguish all
claims with respect to such shares, including claims to accrued but unpaid
dividends. Accordingly, no person will be entitled to receive the accrued but
unpaid dividends with respect to Depositary Shares (or the Series A Preferred
Stock represented thereby) purchased in the Offer.
 
   Going forward, the Company's Board of Directors will review the payment of
quarterly preferred stock dividends, the preferred stock dividends which are
in arrears, and common stock dividends, in light of the above restrictions and
in consideration of the shareholders' best interests. The Company may not pay
dividends on its Common Stock until it has paid all preferred stock dividends
that are in arrears.
 
                                      26
<PAGE>
 
   SECTION 10. CERTAIN INFORMATION CONCERNING THE COMPANY
 
General
 
   The Company is the oldest independent coal company in the United States.
The Company presently has three principal lines of business: (i) the
production and sale of coal from the Powder River Basin in eastern Montana;
(ii) the ownership of interests in cogeneration and other non-regulated
independent power plants; and (iii) the leasing of capacity at Dominion
Terminal Associates, a coal storage and vessel loading facility.
 
   WRI is 80% owned by the Company and 20% by Morrison Knudsen Corporation,
which also mines the coal on a contract basis. WRI operates one large surface
mine on approximately 15,000 acres of subbituminous coal reserves in the
Powder River Basin. WRI shipped 6,458,000 tons, 7,051,000 tons, 4,668,000
tons, and 4,426,000 tons, of coal in 1998, 1997, 1996 and 1995, respectively.
 
   WEI owns and manages interests in independent power projects. After giving
effect to the Rensselaer Phase II Transaction, WEI, through various
subsidiaries, has interests in seven such power projects, all of which are
currently operational. Independent power projects sell electricity through
long term power contracts to utilities, or in some cases, to large industrial
users. There are three types of independent power projects: cogeneration
projects which provide two types of useful energy (e.g., electricity and
steam) sequentially from a single primary fuel (e.g., coal); small power
producers which utilize waste, biomass or other renewable resources as fuel;
and exempt wholesale generators which provide electrical energy without the
requirement to sell thermal energy or use waste or renewables as fuel sources.
Through WEI, the Company has invested in projects that provide two types of
useful energy sequentially from a single primary fuel and in projects that are
exempt wholesale generators.
 
   Westmoreland Terminal Company, a wholly-owned subsidiary of the Company,
owns a 20% interest in Dominion Terminal Associates ("DTA"), the owner of a
coal storage and vessel-loading facility in Newport News, Virginia. DTA's
annual throughput capacity is 22,000,000 tons, with a ground storage capacity
of 1,700,000 tons. DTA loaded 11,511,000, 14,075,000, and 16,444,000 tons in
1998, 1997, and 1996, respectively. The Company's portion of these tons was
2,069,000, 2,682,000, and 3,278,000 in 1998, 1997, and 1996, respectively.
Prior to 1995, the Company utilized the terminal for most of its coal
exporting and intracoastal business. Presently, the Company leases ground
storage space and vessel-loading capacity and facilities to others and
provides related support services.
 
Selected Financial Data and Other Data of the Company
 
   Set forth below is certain selected consolidated financial data and other
data with respect to the Company excerpted or derived from financial
information contained in the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1998 (the "1998 10-K Report"). More comprehensive
financial information is included in the 1998 10-K Report and other documents
filed by the Company with the Commission. The financial and other information
set forth herein is qualified in its entirety by reference to the 1998 10-K
Report and such other documents, including the financial statements and
related notes therein. The 1998 10-K Report and such other documents are
available for inspection and copies thereof can be obtained in the manner set
forth below. Items 7 ("Management's Discussion and Analysis of Financial
Condition and Results of Operations") and 8 ("Financial Statements and
Supplementary Data") from the 1998 10-K Report are attached as an Annex to
this Offer to Purchase.
 
 
                                      27
<PAGE>
 
                   WESTMORELAND COAL COMPANY AND SUBSIDIARIES
 
                                FIVE YEAR REVIEW
 
<TABLE>
<CAPTION>
                            1998     1997(/1/)    1996(/1/)   1995       1994
                          ---------  ---------  --------    ---------  ---------
                                (in thousands except per share data)
<S>                       <C>        <C>        <C>         <C>        <C>
Consolidated Statement
 of Operations
 Information
Revenue--Coal...........  $  44,010  $ 47,182   $ 44,152    $ 109,114  $ 368,715
   --Independent Power
    and other...........     64,559    18,650     16,162       15,886      5,443
                          ---------  --------   --------    ---------  ---------
Total revenues..........    108,569    65,832     60,314      125,000    374,158
Cost and expenses.......     78,250    66,383     80,104      156,732    391,476
Pension expense
 (benefit)..............        111    (5,547)    (3,601)      (2,440)       --
Unusual charges
 (credits)..............      2,000   (27,214)   (11,896)      66,623     (2,100)
Doubtful accounts
 recoveries.............     (1,028)   (1,410)    (3,449)        (967)       --
DTA impairment charge...     12,164       --         --           --         --
                          ---------  --------   --------    ---------  ---------
Operating income
 (loss).................     17,072    33,620       (844)     (94,948)   (15,218)
Gains on the sales of
 assets.................        475       969     24,238        9,088     41,130
Interest expense........       (190)     (320)      (400)      (1,164)    (5,425)
Minority interest.......       (775)   (1,092)      (890)      (1,368)      (583)
Interest and other
 income.................      1,999       713      3,491        3,761      2,540
                          ---------  --------   --------    ---------  ---------
Income (loss) before
 reorganization items
 and income taxes.......     18,581    33,890     25,595     (84,631)     22,444
Reorganization legal and
 consulting fees........     (9,872)   (2,484)       --           --         --
Reorganization interest
 income (expense).......     (1,594)    1,552        --           --         --
Income tax expense......     (3,787)      --        (575)      (1,488)    (2,291)
                          ---------  --------   --------    ---------  ---------
Income (loss) from
 continuing operations..      3,328    32,958     25,020      (86,119)    20,153
Discontinued operations:
  Operating loss........        --     (1,284)    (1,049)        (267)       --
  Impairment and loss on
   disposal.............        --     (3,518)       --           --         --
                          ---------  --------   --------    ---------  ---------
Loss from discontinued
 operations.............        --     (4,802)    (1,049)        (267)       --
                          ---------  --------   --------    ---------  ---------
Cumulative effect of
 change in accounting
 principle..............     (9,876)      --      14,372          --         --
                          ---------  --------   --------    ---------  ---------
Net income (loss).......     (6,548)   28,156     38,343      (86,386)    20,153
Less preferred stock
 dividends:
  Declared..............        --        --         --         2,444      1,222
  In arrears............      4,888     4,888      4,888        2,444      3,666
                          ---------  --------   --------    ---------  ---------
Net income (loss)
 applicable to
 common shareholders....  $ (11,436) $ 23,268   $ 33,455    $ (91,274) $  15,265
                          =========  ========   ========    =========  =========
Net income (loss) per
 share applicable to
 common shareholders....  $   (1.64) $   3.34   $   4.80    $  (13.11) $    2.19
Weighted average number
 of common
 and common equivalent
 shares.................      6,965     6,965      6,965        6,965      6,965
                          =========  ========   ========    =========  =========
Balance Sheet
 Information
Working capital
 (deficit)..............  $  15,054  $ 38,512   $ 10,185    $ (16,458) $  (1,481)
Net property, plant and
 equipment..............     36,950    35,687     42,700       59,868     89,728
Total assets............    215,606   181,997    153,971      167,107    229,739
Total debt..............      1,762       458      1,324        4,593     15,931
Liabilities subject to
 compromise.............        --    132,667    136,191          --         --
Shareholders' equity
 (deficit)..............     21,845    28,393        237      (38,106)    50,724
</TABLE>
 
                                                         (footnote on Next Page)
 
                                       28
<PAGE>
 
- --------
(/1/)On December 23, 1996, Westmoreland Coal Company and four subsidiaries,
     Westmoreland Resources, Inc., Westmoreland Coal Sales Company,
     Westmoreland Energy, Inc., and Westmoreland Terminal Company (the "Debtor
     Corporations"), filed voluntary petitions for reorganization under
     Chapter 11 of the United States Bankruptcy Code in the United States
     Bankruptcy Court for the District of Colorado. The Debtor Corporations
     were in possession of their respective properties and assets and operated
     as debtors in possession pursuant to provisions of the Bankruptcy Code.
     The cases were dismissed on December 23, 1998. Refer to Note 1 to the
     Consolidated Financial Statements for further information.
 
 Summary Unaudited Pro Forma Financial Data
 
   The table below sets forth historical and pro forma summary consolidated
financial information of the Company and its subsidiaries. The historical
Statement of Operations Data for the years ended December 31, 1998 and 1997
(except pro forma amounts) have been derived from the Company's audited
financial statements, which are included as an Annex to this Offer to
Purchase.
 
   The unaudited pro forma financial data gives effect to the purchase of
1,052,631 Depository Shares for $20 million and the sale of the remaining
assets of the Rensselaer project, since the purchase of the shares is
contingent upon the completion of the sale of the Rensselaer project.
 
   The summary historical financial information should be read in conjunction
with, and is qualified in its entirety by reference to, the audited financial
statements and the related notes thereto from which it has been derived which
are included in the Company's Form 10-K/A filed with the SEC on February 23,
1999. The pro forma financial information should be read in conjunction with
the historical consolidated financial information. It does not purport to be
indicative of the results that would actually have been obtained had the sale
of the Rensselaer project and the purchase of such shares pursuant to the
Offer been completed at the dates indicated or that may be obtained in the
future.
 
                                      29
<PAGE>
 
                  SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
                 (Amounts in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                             ----------------------------------
                                                                     1998
                                              1997      1998    Pro Forma (/1/)
                                             -------  --------  ---------------
<S>                                          <C>      <C>       <C>
Statement of Operations Data:
  Revenues.................................. $65,832  $108,569     $125,569
  Cost and expenses.........................  32,212    91,497       91,497
                                             -------  --------     --------
  Operating income..........................  33,620    17,072       34,072
  Other income (expense)
   Interest expense.........................    (320)     (190)        (190)
   Reorganization items, net................    (932)  (11,466)     (11,466)
   Other, net...............................     590     1,699        1,699
                                             -------  --------     --------
  Income before income taxes................  32,958     7,115       24,115
  Provision for income taxes................     --     (3,787)      (3,787)
  Discontinued operations...................  (4,802)      --           --
  Cumulative effect of change in accounting
   principle................................     --     (9,876)      (9,876)
                                             -------  --------     --------
  Net income (loss).........................  28,156    (6,548)      10,452
  Less preferred stock dividends in
   arrears..................................   4,888     4,888        2,651
                                             -------  --------     --------
  Net income (loss) applicable to common
   shareholders............................. $23,268  $(11,436)    $  7,801
                                             =======  ========     ========
  Net income (loss) per share--basic and
   diluted.................................. $  3.34  $  (1.64)    $   1.12
                                             =======  ========     ========
  Weighted average shares outstanding--basic
   and diluted..............................   6,965     6,965        6,965
                                             =======  ========     ========
Other Data:
  Ratio of earnings to combined fixed
   charges and preferred stock
   dividends(/2/) (/3/).....................               1.4          8.6
</TABLE>
 
<TABLE>
<CAPTION>
                                                         As of December 31, 1998
                                                         -----------------------
                                                          Actual  Pro Forma(/4/)
                                                         -------- --------------
<S>                                                      <C>      <C>
Balance Sheet Data:
  Working capital....................................... $ 15,054    $ 31,041
  Total assets..........................................  215,606     212,606
  Long term debt, net of current maturities.............    1,562       1,562
  Stockholders' equity..................................   21,845      18,845
  Book value per common share (/5/).....................      --          --
</TABLE>
- --------
(/1/)Revenues, operating income, and preferred dividends have been adjusted as
     if the Rensselaer Phase II Transaction and the purchase of 1,052,631
     Depository Shares for $20 million occurred on January 1, 1998.
 
(/2/)For purposes of computing this ratio, earnings consist of income from
     continuing operations before income taxes plus fixed charges and fixed
     charges consist of interest on debt and the amount of pre-tax earnings
     required to cover preferred stock dividend requirements.
 
(/3/)For the year ended December 31, 1998, the pro forma ratio of earnings to
     combined fixed charges and preferred stock dividends without giving
     effect to the Rensselaer Phase II Transaction would have been 2.6.
 
(/4/)The pro forma balance sheet amounts were adjusted for the Rensselaer
     Phase II Transaction and the purchase of 1,052,631 Depository Shares for
     $20 million.
 
(/5/)Book value per common share was calculated by dividing total
     Stockholders' equity reduced by the liquidation value of the preferred
     stock by the number of shares outstanding. After considering the
     liquidation value of the preferred stock, the book value per common share
     is less than zero and therefore is not shown.
 
                                      30
<PAGE>
 
Additional Information
 
   The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files periodic reports, proxy and information
statements, and other information with the Commission. The Company has also
filed an Issuer Tender Offer Statement on Schedule 13E-4 with the Commission
that includes certain additional information relating to the Offer.
 
   Such reports, statements, and other information filed by the Company with
the Commission can be inspected and copied at the public reference facilities
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: 7 World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison St.,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the
Commission maintains a Web site that contains reports, proxy and information
statements, and other information regarding registrants that file
electronically, such as the Company. The address of the Commission's Web site
is http://www.sec.gov.
 
   SECTION 11. SOURCE AND AMOUNT OF FUNDS
 
   Assuming that the Company purchases 1,052,631 Depositary Shares pursuant to
the Offer, the total amount required by the Company to purchase such
Depositary Shares and pay related fees and expenses will be approximately $20
million. See Section 14. "Fees and Expenses." The Company will fund the
purchase of Depositary Shares pursuant to the Offer and the payment of related
fees and expenses from available cash of the Company, including the proceeds
of the Rensselaer Phase II Transaction. The closing of the Rensselaer Phase II
Transaction is a condition to the consummation of the Offer.
 
   SECTION 12. TRANSACTIONS AND ARRANGEMENTS CONCERNING THE DEPOSITARY SHARES
 
   The Depositary Shares were issued by the Company in an underwritten public
offering for cash that was registered under the Securities Act of 1933, as
amended. The offering, which commenced on July 1, 1992, was for 2,300,000
Depositary Shares (including 300,000 Depositary Shares purchased upon exercise
of the over-allotment option) at a price to the public of $25 per Depositary
Share, and the Company received aggregate proceeds of $55,487,500 after
deducting the aggregate underwriting discount of $2,012,500, but before
expenses.
 
   Based upon the Company's records and upon information provided to the
Company by its directors, executive officers, and affiliates, neither the
Company nor any of its subsidiaries nor, to the best of the Company's
knowledge, any of the directors or executive officers of the Company or any of
its subsidiaries, nor any associates of any of the foregoing, has effected any
transactions in the Depositary Shares during the past 40 business days.
 
   Except as set forth in this Offer to Purchase, neither the Company nor, to
the best of the Company's knowledge, any of its affiliates, directors, or
executive officers, or any of the executive officers or directors of its
subsidiaries, is a party to any contract, arrangement, understanding, or
relationship with any other person relating, directly or indirectly, to the
Offer with respect to any securities of the Company (including, but not
limited to, any contract, arrangement, understanding, or relationship
concerning the transfer or the voting of any such securities, joint ventures,
loan or option arrangements, puts or calls, guarantees of loans, guarantees
against loss, or the giving or withholding or proxies, consents, or
authorizations). As of December 31, 1998: (i) Christopher K. Seglem, the
Chairman, Chief Executive Officer, and President of the Company, owned 358
units of the
 
                                      31
<PAGE>
 
Westmoreland Preferred Stock Fund, which units were held at December 31, 1998
by Mellon Bank as Trustee of the Westmoreland Coal Company and Affiliated
Companies Savings/Retirement Plan, (ii) Pemberton Hutchinson, a director of
the Company, owned 3,200 Depositary Shares, and (iii) Robert E. Killen, a
director of the Company, owned 2,000 Depositary Shares as a personal
investment, and The Killen Group, Inc., of which Mr. Killen is an affiliate,
had sole voting power over 21,021 Depositary Shares held by its Berwyn Income
Fund and dispositive power over 22,351 Depositary Shares held in various
client accounts. Each of Messrs. Seglem, Hutchinson, and Killen has advised
the Company that he intends to tender all Depositary Shares he owns pursuant
to the Offer, and Mr. Killen has advised the Company that The Killen Group,
Inc. intends to tender all Depositary Shares over which it exercises
dispositive power.
 
   SECTION 13. EXTENSION OF THE TENDER PERIOD; TERMINATION; AMENDMENTS
 
   The Company is making the Offer pursuant to the Master Agreement. The
provision of the Master Agreement that requires the Company to make the Offer
may be amended by consent of the Company and at least four former members of
the Equity Committee or, if any former member of the Equity Committee has sold
all of its shares of the Company's stock, the majority in number of the former
members of the Equity Committee that are still shareholders of the Company. If
all the former members of the Equity Committee have sold all of their stock in
the Company, the relevant provision may be amended with the consent of a
majority of the Company's shareholders. The members of the Equity Committee
were Lonestar Partners, L.P., Frank E. Williams, Jr., Alvin Hoffman c/o Burt
Hoffman, Offutt Securities, Inc., Wynnefield Capital, Inc., and Ryback
Management Corporation. The co-chairmen of the Equity Committee were Frank E.
Williams, Jr. and Jerome L. Simon, investment adviser to and general partner
of Lonestar Partners, L.P. The Company's ability to extend the tender period,
terminate the Offer, or modify the terms of the Offer is limited by the Master
Agreement.
 
   Subject to the requirements of the Master Agreement (as it may be amended
from time to time), the Company expressly reserves the right, in its sole
discretion, at any time or from time to time and regardless of whether or not
any of the events set forth in Section 8. "Certain Conditions of the Offer"
shall have occurred or shall be deemed by the Company to have occurred, to
extend the period of time during which the Offer is open and thereby delay
acceptance for payment of, or payment for, any Depositary Shares by giving
oral or written notice of such extension to the Depositary and making a public
announcement thereof. During any such extension, all Depositary Shares
previously tendered and not purchased or withdrawn will remain subject to the
Offer, except to the extent that such Depositary Shares may be withdrawn as
set forth in Section 6. "Withdrawal Rights." The Company also expressly
reserves the right, in its sole discretion, to terminate the Offer, not accept
for payment and not make payment for any Depositary Shares not theretofore
accepted for payment or paid for upon the occurrence of any of the conditions
specified in Section 8 by giving oral or written notice of such termination to
the Depositary and making a public announcement thereof. Subject to compliance
with applicable law and the Master Agreement, the Company further reserves the
right, in its sole discretion, and regardless of whether or not any of the
events set forth in Section 8 shall have occurred or shall be deemed by the
Company to have occurred, to amend the Offer in any respect (including,
without limitation, by decreasing or increasing the consideration offered in
the Offer to owners of Depositary Shares or by decreasing the number of
Depositary Shares being sought in the Offer). Amendments to the Offer may be
made at any time or from time to time effected by public announcement thereof,
such announcement, in the case of an extension, to be issued no later than
9:00 a.m., Eastern Standard Time, on the next business day after the
previously scheduled Expiration Date. Any public announcement made pursuant to
the Offer will be disseminated promptly to shareholders in a manner reasonably
designed to inform shareholders of such change. Without limiting
 
                                      32
<PAGE>
 
the manner in which the Company may choose to make a public announcement,
except as required by applicable law, the Company shall have no obligation to
publish, advertise, or otherwise communicate any such public announcement
other than by making a release to the Dow Jones News Service.
 
   If (a) the Company (i) increases or decreases the price to be paid for
Depositary Shares or (ii) increases or decreases the number of Depositary
Shares being sought and (b) the Offer is scheduled to expire at any time
earlier than the expiration of a period ending on the tenth business day from
and including the date that notice of such increase or decrease is first
published, sent or given, the Offer will be extended until the expiration of
such period of ten business days; provided, however, that in accordance with
regulations of the Commission, no such extension is required if the Company
purchases pursuant to the Offer an additional number of Depositary Shares not
to exceed 2% of the number of Depositary Shares outstanding as of the date
hereof. (As noted above, under the Master Agreement, any increase in the
amount to be paid to the holders of Depositary Shares prior to June 30, 1999,
and any change to the terms of the Offer from those specified in the Master
Agreement, would require an amendment to the Master Agreement.) In addition,
if a material change occurs in the information set forth herein, the Company
shall disseminate promptly disclosure of such change in a manner reasonably
calculated to inform holders of Depositary Shares of such changes and extend
the Offer if and as appropriate.
 
   SECTION 14. FEES AND EXPENSES
 
   The Company has retained First Chicago Trust Company of New York as
Depositary and Morrow & Co., Inc. as Information Agent in connection with the
Offer. The Information Agent will assist shareholders who request assistance
in connection with the Offer and may request brokers, dealers, and other
nominee shareholders to forward materials relating to the Offer to beneficial
owners. The Depositary and Information Agent will receive reasonable and
customary compensation for their services in connection with the Offer and
will also be reimbursed for reasonable out-of-pocket expenses, including
attorneys' fees. The Company has agreed to indemnify the Depositary and
Information Agent against certain liabilities in connection with the Offer,
including certain liabilities under the Federal securities laws. Neither the
Depositary nor the Information Agent has been retained to make solicitations
or recommendations, in either case with respect to the Offer, in their
respective roles as Depositary and Information Agent.
 
   The Company will not pay fees or commissions to any broker, dealer,
commercial bank, trust company, or other person for soliciting any Depositary
Shares pursuant to the Offer. The Company will, however, on request, reimburse
such persons for customary handling and mailing expenses incurred in
forwarding materials in respect of the Offer to the beneficial owners for
which they act as nominees. No broker, dealer, bank, trust company, or
fiduciary shall be deemed to be the agent of the Company, the Depositary, or
the Information Agent for purposes of the Offer.
 
   The Company will pay (or cause to be paid) any stock transfer taxes on its
purchase of Depositary Shares, except as otherwise provided in Instruction 6
of the Letter of Transmittal.
 
   SECTION 15. MISCELLANEOUS
 
   The Offer is not being made to, nor will the Company accept tenders from,
owners of Depositary Shares in any jurisdiction in which the Offer or its
acceptance would not be in compliance with the laws of such jurisdiction. The
Company is not aware of any jurisdiction where the making of the Offer or the
tender of Depositary Shares would not be in compliance with applicable law. If
the Company becomes aware of any jurisdiction where the making of the Offer or
the tender of Depositary Shares is not in compliance with any applicable law,
the Company will make a good faith effort to comply with
 
                                      33
<PAGE>
 
such law. If, after such good faith effort, the Company cannot comply with
such law, the Offer will not be made to (nor will tenders be accepted from or
on behalf of) the holders of Depositary Shares residing in such jurisdiction.
In any jurisdiction in which the securities, blue sky or other laws require
the Offer to be made by a licensed broker or dealer, the Offer will be deemed
to be made on the Company's behalf by one or more registered brokers or
dealers licensed under the laws of such jurisdiction.
 
WESTMORELAND COAL COMPANY
 
March 10, 1999
 
                                      34
<PAGE>
 
                                     ANNEX
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND RESULTS OF OPERATIONS; FINANCIAL STATEMENTS
                             AND SUPPLEMENTARY DATA
 
Index
 
<TABLE>
<S>                                                                       <C>
Management's Discussion and Analysis of Financial Condition and Results
 of Operations........................................................... F-2
Consolidated Balance Sheets.............................................. F-11
Consolidated Statements of Operations.................................... F-12
Consolidated Statements of Shareholders' Equity (Deficit)................ F-13
Consolidated Statements of Cash Flows.................................... F-14
Summary of Significant Accounting Policies............................... F-16
Notes to Consolidated Financial Statements............................... F-18
Independent Auditor's Report............................................. F-49
</TABLE>
 
                                      F-1
<PAGE>
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS
 
Management's Discussion and Analysis of Financial Condition Years Ended
December 31, 1998, 1997 and 1996
 
 Forward-Looking Disclaimer
 
   Certain statements in this report which are not historical facts or
information are "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including, but not limited to, the information set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, levels of
activity, performance or achievements of the Company, or industry results, to
be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general
economic and business conditions; the ability of the Company to implement its
business strategy; the Company's access to financing; the Company's ability to
successfully identify new business opportunities; the Company's ability to
achieve anticipated cost savings and profitability targets; changes in the
industry; competition; the Company's ability to utilize its tax net operating
losses; the completion of the sale of a significant asset; the ability to
reinvest excess cash at an acceptable rate of return; weather conditions; the
availability of transportation; price of alternative fuels; costs of coal
produced by other countries; the effect of regulatory and legal proceedings
and other factors discussed in Item 1 of the Company's Form 10-K. As a result
of the foregoing and other factors, no assurance can be given as to the future
results and achievement of the Company. Neither the Company nor any other
person assumes responsibility for the accuracy and completeness of these
statements.
 
 Bankruptcy Proceeding
 
   Westmoreland Coal Company and four subsidiaries, Westmoreland Resources,
Inc., Westmoreland Coal Sales Company, Westmoreland Energy, Inc., and
Westmoreland Terminal Company ("the Debtor Corporations"), filed voluntary
petitions for protection under Chapter 11 of the Bankruptcy Code on December
23, 1996. On December 23, 1998, the Bankruptcy Court granted the Debtors'
Motion to Dismiss the cases. The automatic stay period pursuant to the Federal
Rules of Bankruptcy Procedure expired on January 4, 1999.
 
   Continued financial improvement of the Debtors during the bankruptcy
provided the basis for dismissal and settlement with the UMWA Health and
Benefit Funds, the Company's principal creditors. On October 15, 1998, the
Company, the Funds, the United Mine Workers of America ("UMWA") and the
Official Committee of Equity Security Holders ("Equity Committee") reached
agreement on a settlement term sheet, which contained the principal terms of
an agreement among them and provided for, among other things, the resolution
of the Chapter 11 cases. The agreement, which facilitated a consensual
dismissal of the bankruptcy cases, was announced during scheduled hearings on
Westmoreland's Motion to Dismiss and the Equity Committee's Motion to Convert
to Chapter 7, and the hearings were subsequently recessed. The agreement was
subsequently documented in certain stipulated judgments and in a Master
Agreement among the Company, the Funds, the UMWA, and the Equity Committee. On
October 30, 1998, the Debtor Corporations, the Funds, the UMWA, and the Equity
Committee filed a joint motion with the Bankruptcy Court, setting forth the
outline of a procedure for dismissal of the Chapter 11 Cases combined with the
entry of "consent judgments" in connection with certain of the pending
litigation. The Debtor Corporations filed motions requesting approval of the
consent judgments on or around November 18, 1998. Notices of
 
                                      F-2
<PAGE>
 
the filing of these motions were mailed to creditors as directed by the
Bankruptcy Court. There were no allowable objections and dismissal of the
Chapter 11 Cases occurred on December 23, 1998. The Master Agreement was
executed on January 29, 1999.
 
   The key terms of the Master Agreement are summarized as follows:
 
  .  The Funds, the UMWA, and the Equity Committee withdrew their objections
     to the Company's Motion to Dismiss the Chapter 11 cases and joined in
     the entry of stipulated judgments and the execution of a Master
     Agreement which preserve the Company as an ongoing enterprise with
     undiluted ownership vested in its existing shareholders.
 
  .  The Company agreed that it would not file, institute nor support any
     action under state or federal bankruptcy liquidation, insolvency or
     reorganization statutes for a period of five years.
 
  .  The Company agreed to pay in full, with interest, all undisputed
     creditor claims and satisfy all other ongoing obligations. Pursuant to
     this commitment, the Company paid approximately $5.7 million to holders
     of undisputed claims in early January, 1999.
 
  .  The Company agreed to pay in full all arrearages, with interest, under
     the Coal Industry Retirement Health Benefit Act of 1992 ("Coal Act").
     Pursuant to this commitment, the Company paid approximately $18.1
     million to the UMWA 1992 Benefit Plan ("1992 Plan") and approximately
     $19.4 million to the UMWA Combined Fund ("Combined Fund," and together
     with the 1992 Plan, the "Funds") in early January, 1999.
 
  .  The Company agreed to pay $4 million to the Funds in full satisfaction
     of all other asserted claims for damages, liquidated damages, penalties,
     charges, fees and costs. The Company made this payment on February 1,
     1999.
 
  .  The Company agreed to reinstate its Individual Employer Plan for 1992
     Plan retirees.
 
  .  The Company agreed to pay its future obligations to the Funds as and
     when due.
 
  .  The UMWA 1974 Pension Trust ("1974 Plan") had asserted a claim for
     withdrawal liability in the amount of approximately $13.8 million
     against the Company to which the Company objects. The Company and the
     1974 Plan agreed to resolve this dispute through arbitration, as
     provided by law.
 
  .  As required under the Coal Act, the Company agreed to secure its
     obligation to provide retiree health benefits under the 1992 Plan by
     posting a bond, letter of credit, or cash collateral in the amount of
     three years benefits (or $20.8 million). The Company has 60 days from
     January 4, 1999 to provide this security.
 
  .  In addition, the Company agreed to secure its obligations to the Funds
     by providing the Funds with a Contingent Promissory Note ("Note"). The
     original principal amount of the Note is $12 million; the principal
     amount of the Note decreases to $6 million in 2002. The Note is payable
     only in the event the Company does not meet its Coal Act obligations,
     fails to meet certain ongoing financial tests specified in the Note,
     fails to maintain the required balance in the escrow account established
     under an escrow agreement ("Escrow Agreement"), or fails to comply with
     certain covenants set forth in a security agreement ("Security
     Agreement"). Certain notice and cure provisions are included in the
     Note. If no default occurs, the Note terminates on January 1, 2005. To
     secure its obligations to the Funds under the Note, the Company entered
     into a Security Agreement and an Escrow Agreement. In the Security
     Agreement, the Company pledged the annual cash flow to which it is
     entitled from the Roanoke Valley I project. Pursuant to the Escrow
     Agreement, the Company placed $6 million into an escrow account on
     February 1, 1999. In the year 2002, when the amount of the Note is
     reduced to $6 million, the amount in the escrow account may be adjusted
     so that the amount in escrow will be $8 million minus the amount of
     Westmorelands cash flow from the Roanoke
 
                                      F-3
<PAGE>
 
     Valley I project in the preceding year. In no event will the amount of
     the required balance in the escrow account be more than $6 million or
     less than zero. If the Company is not required to make payment under the
     Note, the Security Agreement and the Escrow Agreement terminate upon the
     termination of the Note. The Company executed and delivered the Note,
     the Security Agreement, and the Escrow Agreement to the Funds on January
     29, 1999.
 
  .  The Company agreed not to initiate further litigation to challenge the
     Coal Act or seek to initiate legislation to amend or reject the Coal
     Act.
 
  .  The Company agreed to make payments for retiree health benefits as if it
     continued to be obligated under the 1993 UMWA Wage Agreement for
     eligible retirees and beneficiaries for a period of five years. At the
     expiration of such five year period, the Company is free to initiate
     litigation contesting its obligation to continue to provide such
     benefits, and the Company will continue to provide such benefits after
     the expiration of the five year period until it obtains a ruling from a
     Court of competent jurisdiction that it is not obligated to provide such
     benefits.
 
  .  Provided that the pending sale of the Company's remaining interest in
     the Rensselaer project occurs and subject to the terms of the Master
     Agreement, a public tender for 1,052,631 depositary shares will be
     implemented, each representing one quarter of a share of the Company's
     outstanding Series A Convertible Exchangeable Preferred Stock, at $19
     per depositary share. Assuming 1,052,631 depositary shares are tendered
     in the offer, the Company would be required to pay $20 million in
     consideration for these shares. The tender shall occur in the first
     quarter of 1999, or as soon thereafter as is practicable, following the
     date of the asset sale.
 
  .  Unless the tender offer is initiated in time to be completed by early
     April, the Company will hold a meeting of shareholders by March 31,
     1999, at which shareholders may nominate and elect directors and bring
     other matters before the shareholders. The Company presently anticipates
     that the shareholders' meeting will take place by May 11, 1999.
 
  .  The Equity Committee would dissolve on February 3, 1999.
 
  .  Except for the payment to preferred shareholders in the tender offer,
     the Company may not make any other cash distribution to preferred or
     common shareholders for any purpose prior to June 30, 1999.
 
   Refer to Note 1 of the Consolidated Financial Statements for additional
information concerning the bankruptcy.
 
 Liquidity and Capital Resources
 
   Cash provided by operating activities was $55,894,000 and $19,931,000 in
1998 and 1997, respectively. Cash used by operating activities totaled
$14,949,000 in 1996. The increase of $35,963,000 in cash provided by
operations in 1998 compared to 1997 is mainly a result of the following:
proceeds from the restructuring of the Rensselaer project, termination of the
over-funded salaried pension plan, increased operating revenues at WRI, and
increased cash distributions from independent power projects. The increase in
cash provided by operations in 1997 as compared to 1996 is principally due to
decreased payments relating to heritage costs as a result of the automatic
stay associated with the bankruptcy.
 
   Cash used in investing activities was $2,434,000 in 1998. This is the
result of additions to property, plant and equipment of $2,945,000, offset by
proceeds from sales of Virginia Division assets of $511,000. Cash provided by
investing activities in 1997 and 1996 was $2,093,000 and $14,684,000,
respectively. The reduction in cash provided from investing activities in 1997
as compared to 1996 is primarily a result of a decrease in proceeds from sales
of Virginia Division assets in 1997. In 1997,
 
                                      F-4
<PAGE>
 
the Company continued to sell various assets of the Virginia Division for
aggregate net proceeds of $2,757,000. The Company received $19,689,000 from
the sale of various Virginia Division assets in 1996. Offsetting these cash
inflows was a cash outlay of $4,200,000 for the purchase of an additional
interest in WRI in 1996.
 
   Cash used in financing activities in 1998, 1997 and 1996 totaled $51,000,
$151,000, and $2,655,000, respectively. Cash used in 1998, 1997 and 1996
primarily related to the repayment of debt of WRI and dividends paid to
minority shareholders of WRI in 1996.
 
   Consolidated cash and cash equivalents at December 31, 1998 totaled
$84,073,000 (including $14,712,000 at WRI.) At December 31, 1997, cash and
cash equivalents totaled $30,664,000 (including $11,378,000 at WRI). The cash
at WRI, an 80%-owned subsidiary, is available to the Company only through
dividends. In addition, the Company had restricted cash, which was not
classified as cash or cash equivalents, of $4,140,000 at December 31, 1998 and
$6,665,000 at December 31, 1997. The restricted cash represents an interest-
bearing cash deposit account, which collateralizes the Company's outstanding
surety bonds for its workers compensation self-insurance programs. The Company
also has $8,000,000 in debt reserve accounts for certain of the Company's
independent power projects. This cash is restricted as to its use and is
classified as part of the investment in independent power projects. In
addition, there is a surplus in the Company's black lung trust, approximately
$10,900,000, that may be available to pay postretirement health benefits
dependent upon future actuarial calculations. Refer to Note 9 to the
Consolidated Financial Statements for additional information on this item.
 
   Preferred stock dividends at a rate of 8.5% per annum were paid quarterly
from the third quarter of 1992 through the first quarter of 1994. The
declaration and payment of preferred stock dividends was suspended in the
second quarter of 1994 in connection with extension agreements entered into
with the Company's principal lenders. Upon the expiration of these extension
agreements, the Company paid a quarterly dividend on April 1, 1995 and July 1,
1995. Pursuant to the requirements of Delaware law, described below, the
preferred stock dividend was suspended in the third quarter of 1995 as a
result of the recognition of losses related to the idling of the Virginia
division and the resulting shareholders' deficit. The seventeen quarterly
dividends which are in arrears (those dividends whose payment dates would have
been July 1, 1994, October 1, 1994, January 1, 1995, October 1, 1995, January
1, 1996, April 1, 1996, July 1, 1996, October 1, 1996, January 1, 1997, April
1, 1997, July 1, 1997, October 1, 1997, January 1, 1998, April 1, 1998, July
1, 1998, October 1, 1998 and January 1, 1999) amount to $20,772,000 in the
aggregate ($36.13 per preferred share or $9.03 per depositary share).
 
   The use of cash is restricted under the Master Agreement. Except for the
$20,000,000 tender offer referred to above, the Company may not redeem any
equity security for cash or make any cash distributions to preferred or common
shareholders for any purpose prior to June 30, 1999. Thereafter, covenant
limitations included in the Master Agreement regarding liquidity, operating
cash flow and debt coverage could restrict the amount of cash available for
dividends for a period of six years.
 
   There are also statutory restrictions limiting the payment of preferred
stock dividends under Delaware law, the state in which the Company is
incorporated. Under Delaware law, the Company is permitted to pay preferred
stock dividends only: (1) out of surplus, surplus being the amount of
shareholders' equity in excess of the par value of the Company's two classes
of stock; or (2) in the event there is no surplus, out of net profits for the
fiscal year in which a preferred stock dividend is declared (and/or out of net
profits for the preceding fiscal year), but only to the extent that
shareholders' equity exceeds the par value of the preferred stock ($575,000).
The Company had shareholders' equity at December 31, 1998 of $21,845,000.
 
 
                                      F-5
<PAGE>
 
   Going forward the Company's Board of Directors will review the payment of
quarterly preferred stock dividends, the preferred stock dividends which are
in arrears, and common stock dividends, in light of the above restrictions and
consideration of the shareholders' best interests.
 
 Liquidity Outlook
 
   The major factors impacting the Company's liquidity outlook are its
significant "heritage costs" and its ongoing and future business needs. These
heritage costs consist primarily of cash payments for postretirement medical
benefits, workers' compensation costs and UMWA pension benefits. The Company
also is obligated for pension and pneumoconiosis benefits; however, both of
these future obligations have a funding surplus at present. The Company has
ongoing cash expenditures in excess of $16,000,000 per year for postretirement
medical benefits which will remain fairly constant over the next five years
and then decline to zero over the next approximately thirty-seven years. In
addition, the Company has cash expenditures of approximately $3,000,000 per
year for workers' compensation benefits which will steadily decline to zero
over the next approximately twenty years. Since the UMWA pension plan is a
multiemployer plan under ERISA a contributing company is liable for its share
of unfunded vested liabilities upon termination or withdrawal from the plan.
The Company believes the plan was fully funded at the time of the Company's
withdrawal in 1998. However, the plan has asserted a claim of $13,800,000,
which the Company vigorously contests. The Company is contesting this amount
through arbitration, as provided under ERISA. Should it ultimately be
determined that the Company is liable for this or some lesser amount, the
Company would be required to fund the obligation over no more than nine and
one half years.
 
   Under the Coal Act, the Company is required to provide postretirement
medical benefits for UMWA miners by making premium payments into three benefit
plans: (i) the UMWA Combined Benefit Fund (the "Combined Fund"), a
multiemployer plan which benefits miners who retired before January 1, 1976 or
who retired thereafter but whose last employer did not provide benefits
pursuant to an operator-specific Individual Employer Plan ("IEP"), (ii) an IEP
for miners who retired after January 1, 1976 and (iii) the 1992 UMWA Benefit
Plan, a multiemployer plan which benefits (A) miners who were eligible to
retire on February 1, 1993, who did retire on or before September 30, 1994 and
whose former employers are no longer in business, (B) miners receiving
benefits under an IEP whose former employer goes out of business and ceases to
maintain the IEP, and (C) new spouses or new dependents of retirees in the
Combined Fund who would be eligible for coverage thereunder but for the fact
that the Combined Fund closed to new beneficiaries as of July 20, 1992. The
premiums paid by the Company cover its own retirees and its allocated portion
of the pool of retired miners whose previous employers have gone out of
business.
 
   The Company, as a result of its improved financial position and subsequent
dismissal from bankruptcy, satisfied all of its premium obligations to the
Combined Fund through the end of 1998, and made a prepayment to the Combined
Fund for its premiums for the first quarter of 1999. The payment was made on
January 4, 1999. The Company's current annual premiums to the Combined Fund of
approximately $6,000,000 are included in the annual cash expenditures of
$16,000,000 for postretirement medical benefits described above.
 
   In addition, the Coal Act authorized the Trustees of the 1992 UMWA Benefit
Plan to implement security provisions pursuant to the Act. In 1995, the
Trustees issued security provisions which give contributors to the Plan
several options for satisfying the Coal Act's security requirements, and set
the level of security to be provided by the Company at approximately
$21,000,000. The Company must secure its obligation to provide retiree health
benefits under the 1992 Plan by posting a bond, letter of credit, or cash
collateral in the amount of three years benefits (or $20.8 million). The
Company has 60 days from January 4, 1999 to provide this security under terms
of the Master Agreement signed on January 29, 1999.
 
 
                                      F-6
<PAGE>
 
   The Company's current principal sources of cash flow include cash
distributions from its independent power projects, dividends from WRI, cash
from operations of DTA and interest earned on its cash reserves. In addition,
the Company will receive its share of the judgment in the ROVA litigation if
VEPCO's appeal to the Virginia Supreme Court is unsuccessful and its share of
the proceeds of the sale of the remaining assets of the Rensselaer facility if
it is completed. Management believes that cash generated from these sources
and cash reserves should be sufficient to pay the Company's heritage costs and
fund its ongoing operations and other capital requirements for the foreseeable
future.
 
   Capital commitments include a requirement to spend up to a total of
$4,800,000 to repair the dragline at WRI. Approximately $2,000,000 was
expended in 1998 with the remainder to be expended in 1999. The Company has
undertaken to spend these amounts in order to assure continued, uninterrupted
production at WRI, but the Company believes the obligation to repair the
dragline is solely Morrison-Knudsen's and, therefore, is in discussion with
them on this and a variety of matters, including enforcement of the Company's
right to require Morrison-Knudsen to pay for the repair.
 
   The Company hopes to further improve its long-term liquidity in a number of
ways, including the development of additional cash flow from existing and new
business operations, selling the remaining Virginia Division assets and
monetizing assets where proceeds on sale would exceed the expected return from
continued operation. The Company also plans to seek further cost reductions
wherever feasible and prudent, and attempt to reduce certain postretirement
medical, workers' compensation and related payments. Although management
expects to improve the Company's profitability, the time required to realize
such increases cannot be estimated at this time nor can assurances be given
that the Company can achieve any such improvements.
 
 Year 2000
 
   The Year 2000 ("Y2K") problem concerns the inability of information and
technology-based operating systems to properly recognize and process date-
sensitive information beyond December 31, 1999. This could result in systems
failures and miscalculations which could cause business disruptions. Equipment
that uses a date, such as computers and operating control systems, may be
affected. This includes equipment used by our customers and suppliers, as well
as the Company's independent power projects.
 
   Some of the Company's systems and related software are already Y2K
compliant. The Company is actively reviewing all hardware and software
associated with its computers, personal computers and client/servers,
telecommunications and embedded systems found in equipment throughout its
operations. This program consists of identifying and inventorying all software
applications and systems, making required replacements, modifications, and
testing.
 
   The Company recently successfully completed testing at one of the
independent power projects. The project operated normally with only minor
errors in the reporting process. Similar test methods will be used at the
remaining projects with a scheduled completion date of September 30, 1999, for
testing at all facilities.
 
   Computer systems at WRI's coal operations have been or will be replaced or
appropriately modified by mid-1999. WRI's mining contractor and rail supplier
have embarked on aggressive campaigns to bring these systems into compliance
and the Company is carefully monitoring those activities.
 
   Compliance at the Company's terminal operations has been nearly completed
through replacement of non-compliant systems. Efforts to upgrade the few
remaining systems will be
 
                                      F-7
<PAGE>
 
completed by mid-1999. The terminal is dependent on efficient and timely rail
service and the Company is closely monitoring the compliance efforts of the
terminal's rail service providers.
 
   The nature of the Company's operations make substantive contingency plans
extremely difficult. No reasonable alternatives exist for the inability of the
railroads to provide timely service to WRI and the DTA terminal. As previously
mentioned, the Company is closely following the compliance efforts of the
railroads and other major suppliers and, if necessary, will participate in
those efforts.
 
   Based on information currently available, it is estimated that the costs to
replace and modify Company systems to achieve Y2K compliance will not exceed
$125,000, of which approximately $5,000 has been incurred through December 31,
1998.
 
   The goal is to have all critical Company systems Y2K compliant during the
first half of 1999. This should allow time before December 31, 1999, to
validate the system modifications and complete contingency plans for
customers, suppliers and others who may not be Y2K compliant. While there can
be no assurance that all such modifications and plans will be successful, the
Company does not expect that any disruptions will have a material adverse
effect on its overall financial position, results of operations, or liquidity.
 
   The foregoing constitutes a "forward-looking statement" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. It is based on management's current expectations,
estimates and projections, which could ultimately prove to be inaccurate.
Factors which could affect the Company's ability to be Y2K compliant by the
end of 1999 include the failure of customers, suppliers, governmental entities
and others to achieve compliance and the inaccuracy of certifications received
from them.
 
 New Accounting Standards
 
   Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), was issued in June
1998 by the Financial Accounting Standards Board. SFAS 133 establishes new
accounting and reporting standards for derivative instruments and for hedging
activities. This statement requires an entity to establish at the inception of
a hedge, the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspect
of the hedge. Those methods must be consistent with the entity's approach to
managing risk. SFAS 133 is effective for fiscal years beginning after June 15,
1999. The Company does not expect adoption of SFAS 133 to have a material
effect on its consolidated financial statements.
 
Results of Operations 1998 Compared to 1997
 
   Coal Operations. Coal revenues in 1998 were $44,010,000 compared to
$47,182,000 in 1997. The change is due to a slight decrease in tons sold in
1998 compared to 1997's record setting level. Prices received were comparable
in the two periods.
 
   Independent Power Operations. Equity in earnings of independent power
operations in 1998 was $64,465,000 compared to $17,770,000 in 1997. The
increase is mainly due to increased earnings at WEI's Rensselaer project as a
result of the restructuring of its power purchase contract with Niagara
Mohawk.
 
   Dominion Terminal Associates. Equity in earnings from Dominion Terminal
Associates was $94,000 in 1998 compared to $880,000 in 1997. The decrease is
due to a decrease in throughput as a result of a decline in export coal sales
from the U.S. In 1998, as a result of the continuing decline in the export
market, the Company recognized a $12,164,000 impairment charge relating to its
investment in DTA. DTA is dependent upon its customer's coal export business
to maintain an
 
                                      F-8
<PAGE>
 
acceptable level of throughput. The coal export business has recently
experienced a significant decline due to intense competitive pressure from
coal suppliers in other nations. At this time the Company does not believe
that those competitive pressures will abate in the near term. The fair value
assigned to DTA was based on a recently completed sale of a similar nearby
terminal.
 
   Selling and administrative expenses were $7,040,000 in 1998 compared to
$5,932,000 in 1997. The increase is due to additional franchise taxes paid to
the State of New York as a result of the Rensselaer project restructuring.
 
   Heritage costs were $31,449,000 in 1998 compared to $16,673,000 in 1997.
The increase is due to $17,230,000 of Combined Fund benefit accruals made as a
result of the bankruptcy dismissal discussed in Notes 1 and 12.
 
   In 1998, the Company recorded an unusual charge of $2,000,000 relating to a
term of the Master Agreement described in Note 1 to the Consolidated Financial
Statements. Under that Agreement, the Company agreed to make payments for
retiree health benefits as if it continued to be obligated under the 1993 UMWA
Wage Agreement for eligible retirees and beneficiaries for a period of five
years. At the expiration of such five year period, the Company is free to
initiate litigation contesting its obligation to continue to provide such
benefits and the Company will continue to provide such benefits after the
expiration of the five year period until it obtains a ruling from a Court of
competent jurisdiction that it is not obligated to provide such benefits.
 
   In 1997, the Company recorded an unusual credit of $27,214,000 which
included a curtailment gain of $14,199,000 associated with the anticipated
expiration of the 1993 Wage Agreement and a benefit of $13,015,000 due to a
charge in the estimated liability for pneumoconiosis benefits.
 
   Gains on the sale of assets were $475,000 for 1998 most of which related to
the sales of various equipment from the idled Virginia Division. Gains on the
sales of assets were $969,000 during 1997, which was net of a loss of
$1,609,000 related to the removal and final sale of a longwall mining machine
at the idled Virginia Division. Cash proceeds of $3,200,000 were received from
the sale of the longwall mining machine but were offset by $2,000,000 of costs
to remove the machine, $1,500,000 of remaining book value, and $1,300,000
relating to the buy-out of the lease on the machine. Proceeds of $1,400,000
were received from the sale of various equipment from the idled Virginia
Division in 1997, all of which was recorded as a gain.
 
Results of Operations 1997 Compared to 1996
 
   Coal Operations. Coal revenues for 1997 were $47,182,000 as compared to
$44,152,000 in 1996. This increase is a direct result of an increase of
2,391,000 in tons produced and sold at Westmoreland Resources, Inc. Expenses
associated with coal revenues decreased as a result of the winding down of
operations at the Virginia Division in 1996 and the subsequent reduction of
costs associated with idle properties.
 
   Independent Power Operations. Equity in earnings of independent power
projects in 1997 were $17,770,000 compared to $15,335,000 in 1996. This 16%
increase is attributable to an increase in project earnings primarily as a
result of increased capacity payments, and reductions in operating and
maintenance expenses.
 
   Terminal Operations. The equity in earnings of DTA of $880,000 in 1997 was
comparable to the equity in earnings of $827,000 in 1996.
 
   Selling and administrative costs decreased $4,287,000 or 42% as a result of
the continued wind-down of Virginia Division operations, a further Company
wide reduction in personnel and related
 
                                      F-9
<PAGE>
 
expenses, and lower travel, legal and consulting expenses. All expenses
relating to the Company's reorganization under the Bankruptcy Code are
classified separately.
 
   Heritage costs expensed for 1997 of $16,673,000 were comparable to the
$16,686,000 of heritage costs in 1996. The majority of these liabilities were
subject to compromise and were to be determined in the bankruptcy process.
 
   In 1997, the Company recorded an unusual credit of $27,214,000 which
included a curtailment gain of $14,199,000 associated with the anticipated
expiration of the 1993 Wage Agreement and a benefit of $13,015,000 due to a
change in the estimated liability for pneumoconiosis benefits. In 1996, the
Company recorded an unusual credit of $11,896,000, representing an adjustment
of $5,896,000 to the liability for post-retirement medical benefits recorded
when the Hampton Division was sold in 1995, and an adjustment of $6,000,000
related to an updated actuarial valuation of the UMWA pension withdrawal
liability.
 
   In September, 1997, the Company completed the sale of the Corona Group
which provided technical repair and maintenance services to the power
generating industry. The impairment and loss on disposal of $3,518,000 in
1997, and the operating losses of $1,284,000 in 1997 and $1,049,000 in 1996,
have been reflected as discontinued operations.
 
                                     F-10
<PAGE>
 
                   WESTMORELAND COAL COMPANY AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                          December 31,
                                                        ------------------
                                                          1998      1997
                                                        --------  --------
                                                           (in thousands)
<S>                                                     <C>       <C>       <C>
                        Assets
Current assets:
 Cash and cash equivalents............................. $ 84,073  $ 30,664
 Receivables:
  Trade................................................    2,566     4,483
  Terminated pension plan, net.........................      500    13,040
  Other................................................    2,730     1,026
                                                        --------  --------
                                                           5,796    18,549
 Other current assets..................................      691       402
                                                        --------  --------
   Total current assets................................   90,560    49,615
                                                        --------  --------
Property, plant and equipment:
 Land and mineral rights...............................   10,990    11,684
 Plant and equipment...................................   94,989    94,265
                                                        --------  --------
                                                         105,979   105,949
 Less accumulated depreciation and depletion...........   69,029    70,262
                                                        --------  --------
                                                          36,950    35,687
Investment in independent power projects...............   62,386    54,152
Investment in Dominion Terminal Associates (DTA).......    5,475    18,680
Workers' compensation bond.............................    4,140     6,665
Prepaid pension cost...................................    3,748     3,528
Excess of trust assets over pneumoconiosis benefit
 obligation............................................   10,891    11,700
Other assets...........................................    1,456     1,970
                                                        --------  --------
   Total Assets........................................ $215,606  $181,997
                                                        ========  ========
         Liabilities and Shareholders' Equity
Current liabilities:
 Current installments of long-term debt................ $    200  $     51
 Accounts payable and accrued expenses:
  Trade................................................    4,213     2,894
  Taxes, other than income taxes.......................    3,893     5,208
  Workers compensation.................................    3,800       --
  Postretirement medical costs.........................   11,066       --
  Reorganization expenses..............................    7,900     1,645
  Consent judgment payment obligation..................   39,006       --
  Other accrued expenses...............................    3,143     1,205
  Reclamation costs....................................      100       100
 Income taxes..........................................    2,185       --
                                                        --------  --------
   Total current liabilities...........................   75,506    11,103
                                                        --------  --------
Liabilities subject to compromise......................      --    132,667
Long-term debt, less current installments..............    1,562       407
Accrual for workers compensation.......................   17,338       --
Accrual for postretirement medical costs...............   73,143       --
1974 UMWA Pension Plan obligations.....................   13,776       --
Accrual for reclamation costs, less current portion....    3,046     3,182
Other liabilities......................................    2,370       --
Minority interest......................................    7,020     6,245
Commitments and contingent liabilities:
Shareholders' equity
 Preferred stock of $1.00 par value Authorized
  5,000,000 shares;
  Issued and outstanding 575,000 shares................      575       575
 Common stock of $2.50 par value Authorized 20,000,000
  shares;
  Issued and outstanding 6,965,328 shares..............   17,413    17,413
 Other paid-in capital.................................   94,630    94,630
 Accumulated deficit...................................  (90,773)  (84,225)
                                                        --------  --------
   Total shareholders' equity..........................   21,845    28,393
                                                        --------  --------
   Total Liabilities and Shareholders' Equity.......... $215,606  $181,997
                                                        ========  ========
</TABLE>
 
    See accompanying Summary of Significant Accounting Policies and Notes to
                       Consolidated Financial Statements.
 
                                      F-11
<PAGE>
 
                   WESTMORELAND COAL COMPANY AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                              --------------------------------
                                                1998         1997       1996
                                              --------  -------------- -------
                                                        (in thousands)
<S>                                           <C>       <C>            <C>
Revenues:
 Coal.......................................  $ 44,010     $47,182     $44,152
 Independent power projects--equity in
  earnings..................................    64,465      17,770      15,335
 Dominion Terminal Associates ("DTA")--
  equity in earnings .......................        94         880         827
                                              --------     -------     -------
                                               108,569      65,832      60,314
                                              --------     -------     -------
Cost and expenses:
 Cost of sales--coal........................    37,472      42,063      50,863
 Depreciation, depletion and amortization...     2,289       1,715       2,336
 Selling and administrative.................     7,040       5,932      10,219
 Heritage costs.............................    31,449      16,673      16,686
 Pension expense (benefit) (including
  termination gain of $1,512,000 in 1997)...       111      (5,547)     (3,601)
 Unusual charges (credits)..................     2,000     (27,214)    (11,896)
 Doubtful accounts recoveries...............    (1,028)     (1,410)     (3,449)
 DTA impairment charge......................    12,164         --          --
                                              --------     -------     -------
                                                91,497      32,212      61,158
                                              --------     -------     -------
Operating income (loss).....................    17,072      33,620        (844)
Other income (expense):
 Gains on sales of assets (including
  $10,700,000 from Penn Virginia Corporation
  in 1996) .................................       475         969      24,238
 Interest expense...........................      (190)       (320)       (400)
 Interest income............................       --          --        1,455
 Minority interest..........................      (775)     (1,092)       (890)
 Other income...............................     1,999         713       2,036
                                              --------     -------     -------
                                                 1,509         270      26,439
                                              --------     -------     -------
Income from continuing operations before
 reorganization items and income taxes......    18,581      33,890      25,595
Reorganization items:
 Legal and consulting fees..................    (9,872)     (2,484)        --
 Interest expense...........................    (5,188)        --          --
 Interest income............................     3,594       1,552         --
                                              --------     -------     -------
Income before income taxes..................     7,115      32,958      25,595
Income tax expense..........................     3,787         --          575
                                              --------     -------     -------
Income from continuing operations...........     3,328      32,958      25,020
Discontinued operations:
 Operating loss.............................       --       (1,284)     (1,049)
 Impairment and loss on disposal............       --       (3,518)        --
                                              --------     -------     -------
 Loss from discontinued operations..........       --       (4,802)     (1,049)
Cumulative effect of changes in accounting
 principles.................................    (9,876)        --       14,372
                                              --------     -------     -------
Net income (loss)...........................    (6,548)     28,156      38,343
Less preferred stock dividends in arrears...     4,888       4,888       4,888
                                              --------     -------     -------
Net income (loss) applicable to common
 shareholders...............................  $(11,436)    $23,268     $33,455
                                              ========     =======     =======
<CAPTION>
                                                 Years Ended December 31,
                                              --------------------------------
                                                1998         1997       1996
                                              --------  -------------- -------
                                              (in thousands except per share
                                                           data)
<S>                                           <C>       <C>            <C>
Income (loss) per share applicable to common
 shareholders:
 Continuing operations......................  $   (.22)    $  4.03     $  2.89
 Discontinued operations....................       --        (0.69)       (.15)
 Cumulative effect of changes in accounting
  principles................................     (1.42)        --         2.06
                                              --------     -------     -------
                                              $  (1.64)    $  3.34     $  4.80
                                              ========     =======     =======
Pro forma amounts assuming the changes in
 accounting principles are applied
 retroactively:
 Net income (loss) applicable to common
  shareholders .............................  $ (1,560)                $19,083
 Income (loss) per share applicable to
  common shareholders.......................  $   (.22)                $  2.74
                                              ========     =======     =======
Weighted average number of common shares
 outstanding--basic and diluted.............     6,965       6,965       6,965
</TABLE>
 
    See accompanying Summary of Significant Accounting Policies and Notes to
                       Consolidated Financial Statements.
 
                                      F-12
<PAGE>
 
                   WESTMORELAND COAL COMPANY AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                 Years Ended December 31, 1996, 1997, and 1998
 
<TABLE>
<CAPTION>
                           Class A
                         Convertible                                        Total
                         Exchangeable            Other                  Shareholders'
                          Preferred   Common    Paid-In     Accumulated    Equity
                            Stock     Stock     Capital       Deficit     (Deficit)
                         ------------ ------ -------------- ----------- -------------
                                             (in thousands)
<S>                      <C>          <C>    <C>            <C>         <C>
Balance at January 1,
 1996...................     $575     17,413     94,630      (150,724)     (38,106)
  Net income............      --         --         --         38,343       38,343
                             ----     ------     ------      --------      -------
Balance at December 31,
 1996...................      575     17,413     94,630      (112,381)         237
  Net income............      --         --         --         28,156       28,156
                             ----     ------     ------      --------      -------
Balance at December 31,
 1997...................      575     17,413     94,630       (84,225)      28,393
  Net loss..............      --         --         --         (6,548)      (6,548)
                             ====     ======     ======      ========      =======
Balance at December 31,
 1998...................     $575     17,413     94,630       (90,773)      21,845
                             ====     ======     ======      ========      =======
</TABLE>
 
 
    See accompanying Summary of Significant Accounting Policies and Notes to
                       Consolidated Financial Statements.
 
                                      F-13
<PAGE>
 
                   WESTMORELAND COAL COMPANY AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                      Years Ended December
                                                               31,
                                                     -------------------------
                                                      1998     1997     1996
                                                     -------  -------  -------
                                                         (in thousands)
<S>                                                  <C>      <C>      <C>
Cash flows from operating activities:
Net income (loss)................................... $(6,548) $28,156  $38,343
 Adjustments to reconcile net income (loss) to net
 cash provided by (used in) operating activities:
 Equity in earnings of independent power projects... (64,465) (17,770) (15,335)
 Cash distributions from independent power
  projects..........................................  46,355   14,995   12,971
  Equity earnings from Dominion Terminal Associ-
   ates.............................................     (94)    (880)    (827)
  Cash generated by Dominion Terminal Associates
   facility.........................................   2,952    4,865    3,786
  Cash contributions to Dominion Terminal Associ-
   ates.............................................  (1,877)  (2,883)  (3,187)
  DTA impairment charge.............................  12,164      --       --
  Depreciation, depletion and amortization..........   2,289    1,715    2,336
  Gain on termination of pension plan...............     --    (1,512)     --
  Unusual charges (credits).........................   2,000  (27,214) (11,896)
  Gains on sales of assets..........................    (475)    (969) (24,238)
  Cash from pension termination, net................  12,540      --       --
  Distribution from pneumoconiosis trust............   2,634      --       --
  Minority interest.................................     775    1,092      890
  Deferred income tax benefit.......................     --       --      (579)
  Impairment and loss on disposition of discontin-
   ued operations...................................     --     3,518      --
  Cumulative effect of change in accounting princi-
   ple..............................................   9,876      --   (14,372)
  Other.............................................    (358)      96    2,747
Changes in assets and liabilities:
   Receivables, net of allowance for doubtful ac-
    counts..........................................     213    1,392   (1,331)
   Inventories......................................     --       660      252
   Prepaid pension cost.............................    (220)  (4,035)     --
   Excess of trust assets over pneumoconiosis bene-
    fit obligation..................................  (1,825)   1,188      127
   Accounts payable and accrued expenses............   1,690      880   (9,037)
   Income taxes payable.............................   2,185      --    (2,905)
   Accrual for workers' compensation................    (678)     --    (6,285)
   Accrual for postretirement medical costs.........  (2,502)     --     7,250
   Consent judgment payment obligation..............  39,006      --       --
   Other liabilities................................  (5,998)      15     (914)
                                                     -------  -------  -------
Net cash provided by (used in) operating activities
 before
 reorganization items...............................  49,639    3,309  (22,204)
                                                     -------  -------  -------
Changes in reorganization items:
 Trade and other liabilities subject to
  compromise........................................     --    14,977    7,255
 Reorganization expenses............................   6,255    1,645      --
                                                     -------  -------  -------
 Net change in reorganization items.................   6,255   16,622    7,255
                                                     -------  -------  -------
Net cash provided by (used in) operating activi-
 ties...............................................  55,894   19,931  (14,949)
Cash flows from investing activities:
 Additions to property, plant and equipment.........  (2,945)    (174)    (664)
 (Increase) decrease in notes receivable............     --       --      (141)
 Purchase of additional interest in WRI.............     --       --    (4,200)
 Net proceeds from sales of investments and assets..     511    2,757   19,689
 Cash held by subsidiary disposed of................      --     (490)     --
                                                     -------  -------  -------
Net cash (used in) provided by investing activi-
 ties...............................................  (2,434)   2,093   14,684
                                                     -------  -------  -------
Cash flows from financing activities:
 Repayment of long-term debt........................     (51)    (151)  (1,662)
 Dividends paid to minority shareholders of subsidi-
  ary...............................................     --       --      (993)
                                                     -------  -------  -------
Net cash used in financing activities...............     (51)    (151)  (2,655)
                                                     -------  -------  -------
Net increase (decrease) in cash and cash
 equivalents........................................  53,409   21,873   (2,920)
Cash and cash equivalents, beginning of year........  30,664    8,791   11,711
                                                     -------  -------  -------
Cash and cash equivalents, end of year.............. $84,073  $30,664  $ 8,791
                                                     =======  =======  =======
Supplemental disclosures of cash flow information:
 Cash paid during the year for:
 Interest........................................... $    27  $    31  $   228
 Income taxes.......................................     120      --     1,140
</TABLE>
 
    See accompanying Summary of Significant Accounting Policies and Notes to
                       Consolidated Financial Statements.
 
                                      F-14
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)
 
   In September 1997, the Company completed the sale of the Corona Group Inc.
("Corona"). Corona was sold for $895,000 in notes receivable, the Company
retained a 15% interest in Corona, and the purchaser assumed a contingent
liability.
 
   In September 1996, the Company completed a non-cash transaction for the
transfer of several of its idled Virginia Division mining operations. In
exchange for these operations, the purchaser assumed responsibility for
certain reclamation obligations amounting to approximately $2,200,000. The
entire amount of the obligations assumed was recorded as a gain on the sale of
assets.
 
   In May 1996, the Company completed non-cash transactions for the sale of
its idled Wentz and Pine Branch Mining operations. The purchasers of those
assets assumed reclamation and other liabilities totaling approximately
$3,000,000 as part of those transactions. The entire amount of the obligations
assumed was recorded as a gain on the sale of assets.
 
 
 
     See accompanying Summary of Significant Accounting Policies and Notes to
                      Consolidated Financial Statements.
 
                                     F-15
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
                  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Consolidation Policy
 
   The consolidated financial statements of Westmoreland Coal Company (the
"Company") include the accounts of the Company and its majority-owned
subsidiaries, after elimination of intercompany balances and transactions. The
Company uses the equity method of accounting for companies where its ownership
is between 20% and 50% and for partnerships and joint ventures in which less
than a controlling interest is held.
 
 Use of Estimates
 
   Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses and
the disclosure of contingent liabilities in order to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results will likely differ from those estimates.
 
 Cash Equivalents
 
   The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents. All such
instruments are carried at cost. Cash equivalents consists of Eurodollar time
deposits, money market funds and bank repurchase agreements.
 
 Property, Plant and Equipment
 
   Property, plant and equipment are carried at cost and include expenditures
for new facilities and those expenditures that substantially increase the
productive lives of existing plant and equipment. Development costs of mines
are capitalized until commercial operations commence. Maintenance and repair
costs are expensed as incurred. Mineral rights and development costs are
depleted based upon estimated recoverable proven and probable reserves. Plant
and equipment are depreciated straight-line over the assets' estimated useful
lives, ranging from 3 to 40 years. The Company assesses the carrying value of
its property, plant and equipment for impairment by comparing estimated
undiscounted cash flows expected to be generated from such assets with their
net book value. If net book value exceeds estimated cash flows, the asset is
written down to fair value. When an asset is retired or sold, its cost and
related accumulated depreciation and depletion are removed from the accounts.
The difference between unamortized cost and proceeds on disposition is
recorded as a gain or loss. Fully depreciated plant and equipment still in use
are not eliminated from the accounts.
 
 Workers' Compensation and Pneumoconiosis Benefit Liabilities
 
   The Company is self-insured for workers' compensation claims incurred prior
to 1996 and federal and state pneumoconiosis benefits for current and former
employees. Workers compensation claims incurred after January 1, 1996 are
covered by a third party insurance provider.
 
   The liability for workers' compensation claims is an actuarially determined
estimate of the ultimate losses incurred on such claims based on the Company's
experience, and includes a provision for incurred but not reported losses.
Adjustments to the probable ultimate liability are made continually based on
subsequent developments and experience and are included in operations as
incurred.
 
   Effective January 1, 1996 and as discussed in Note 9, the Company changed
its method of accounting for pneumoconiosis benefits to recognize actuarial
gains and losses related to the pneumoconiosis benefit obligation, as
actuarially determined, in the period in which they occur. Previously, the
Company accrued for the projected costs of pneumoconiosis benefits, on an
actuarial
 
                                     F-16
<PAGE>
 
basis, over the period which benefits were expected to be paid. An independent
trust has been established to pay these benefits.
 
 Post Retirement Benefits Other than Pensions
 
   The Company accounts for health care and life insurance benefits provided
to certain retired employees and their dependents by accruing the cost of such
benefits over the service lives of employees. The Company is amortizing its
transition obligation, for past service costs relating to these benefits, over
twenty years. For UMWA represented union employees who retired prior to 1976,
the Company provides similar medical and life insurance benefits by making
payments to a multiemployer union trust fund. The Company expenses such
payments when made.
 
 Coal Revenues
 
   The Company recognizes coal sales revenue at the time title passes to the
customer. The Company also records as revenue amounts received from coal
related activities, such as proceeds from coal contract buy-outs and coal
option payments. Coal revenues include the sale of mined coal and sales of
coal produced by unaffiliated mining companies where the Company is a sales
agent or broker. The Company recognizes revenue for the coal sold for
unaffiliated companies since the Company assumes the credit risk for the sale,
performs other services such as invoicing, quality control and shipment
monitoring, and in most cases takes title to the coal. The Company had no
revenue pertaining to coal sold for others during 1998 or 1997. Coal revenues
pertaining to coal sold for other companies amounted to $11,598,000 in 1996.
 
 Reclamation
 
   Reclamation costs at WRI are fixed and are being recognized evenly over a
15 year period. Total expected reclamation costs at idled sites were fully
accrued at the time of idling. Estimates at idle sites are periodically
reviewed and adjustments are made in accruals to provide for changes in
expected future costs.
 
 Income Taxes
 
   The Company accounts for deferred income taxes using the asset and
liability method. Deferred tax liabilities and assets are recognized for the
expected future tax consequences of events that have been reflected in the
Company's financial statements based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities, using
enacted tax rates in effect in the years in which the differences are expected
to reverse.
 
 Income (Loss) Per Share Applicable to Common Shareholders
 
   Income (loss) per share applicable to common shareholders has been
calculated based on the weighted average number of common shares outstanding
during the period in accordance with the Statement of Financial Accounting
Standards No. 128, issued in February 1997.
 
 Reclassifications
 
   Certain prior year amounts have been reclassified to conform to the current
year presentation.
 
                                     F-17
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                       December 31, 1998, 1997 and 1996
 
1. NATURE OF OPERATIONS
 
   The Company's principal activities, conducted within the United States are:
(i) the production and sale of coal from a contractor operated mine in the
Powder River Basin in Eastern Montana; (ii) the ownership of interests in
cogeneration and other non-regulated independent power plants; and (iii) the
leasing of capacity at Dominion Terminal Associates, a coal storage and vessel
loading facility.
 
 Chapter 11 Reorganization Proceedings
 
   On December 23, 1996 ("Petition Date"), Westmoreland Coal Company and four
subsidiaries, Westmoreland Resources, Inc., Westmoreland Coal Sales Company,
Westmoreland Energy, Inc., and Westmoreland Terminal Company (the "Debtor
Corporations"), filed voluntary petitions for reorganization under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the District of Colorado (the "Chapter 11 Cases"). By order of the Bankruptcy
Court entered on December 23, 1998, pursuant to the request of the Debtor
Corporations, the Chapter 11 Cases were dismissed. There were no objections
during the ten day stay period that expired on January 4, 1999. Upon the
dismissal, the Debtor Corporations were and are no longer subject to the
protections afforded or restrictions imposed by the Bankruptcy Code. Prior to
the dismissal, the Debtor Corporations were in possession of their respective
properties and assets and were operating as debtors in possession pursuant to
provisions of the Bankruptcy Code. During the Chapter 11 Cases, the Debtor
Corporations engaged in litigation with the 1992 UMWA Benefit Plan (the "1992
Plan"), the UMWA Combined Benefit Fund (the "Combined Fund") and the 1974 UMWA
Pension Plan (the "1974 Plan") (sometimes collectively referred to as the
"Funds") as well as the UMWA regarding various matters. With respect to the
1992 Plan and the Combined Fund, the key issues in dispute were (i) whether
the postpetition assessments of the 1992 Plan and the Combined Fund under the
Coal Industry Retirement Health Benefits Act of 1992 (the "Coal Act") are
entitled to administrative priority in the Chapter 11 Cases; (ii) if the 1992
Plan's and the Combined Fund's claims are not entitled to administrative
priority but instead constitute general unsecured non-priority claims, what is
the allowed amount of those claims for bankruptcy purposes; and (iii) whether
the claims and assessments of the 1992 Plan and the Combined Fund violate the
United States Constitution. The Debtor Corporations and the 1992 Plan also
disputed whether the Company could be compelled to "reinstate" its individual
employer plan (the "IEP") for those beneficiaries who were eligible and were
receiving benefits under the IEP as of February 1, 1993 and who retired before
October 1, 1994, and their dependents. With respect to the 1974 Plan, the key
issue was the date of withdrawal and the Company's liability for its share of
unfunded vested liabilities, if any, upon termination or withdrawal from the
plan. With respect to the UMWA, the key issue was the effect of the expiration
of the 1993 Collective Bargaining Agreement on the Company's obligation to
provide health care benefits to the beneficiaries covered by that agreement.
 
   During the Chapter 11 Cases, pursuant to an order entered on September 5,
1997, the Bankruptcy Court ruled that the 1992 Plan's claims were not entitled
to administrative priority but instead constituted general unsecured non-
priority claims, and that the 1992 Plan could not compel reinstatement of the
IEP. Thereafter, by order dated June 11, 1998, the Bankruptcy Court
determined, among other things, that the 1992 Plan held a prepetition general
unsecured claim against the Debtor Corporations in the amount of $146,103,383.
 
   During the Chapter 11 Cases, both the Debtor Corporations and the Funds
filed plans of reorganization (the "Competing Plans"). Each Competing Plan was
premised upon the treatment of
 
                                     F-18
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
the 1992 Plan's and Combined Fund's claims as general unsecured non-priority
claims. After the Bankruptcy Court issued the above-noted ruling regarding the
amount of the 1992 Plan's general unsecured claim, the Bankruptcy Court deemed
the Debtor Corporations' Competing Plan withdrawn as unconfirmable absent a
change in law or circumstances.
 
   On July 9, 1998, the United States Court of Appeals for the Tenth Circuit
("Tenth Circuit") decided UMWA 1992 Plan v. Rushton (In re Sunnyside), 146
F.3d 1273 (10th Cir. 1998) ("Sunnyside"). In Sunnyside, the Tenth Circuit held
that the premium assessments for the 1992 Plan at issue in that case are taxes
entitled to administrative priority in bankruptcy. Although the Debtor
Corporations previously contended that the facts in Sunnyside were
distinguishable from the facts in the Debtor Corporations' case, the Tenth
Circuit's broad decision appeared to dictate that the postpetition assessments
of the 1992 Plan (and the Combined Fund) are entitled to administrative
priority in the Chapter 11 Cases to the extent allowed. As a result, on July
28, 1998, the Debtor Corporations filed a motion before the United States
District Court of Colorado (the "District Court"), moving to reverse the
Bankruptcy Court's September 5, 1997 order which held that the claims of the
1992 Plan were general unsecured prepetition claims. The District Court
granted the Debtor Corporation's motion, thereby reversing the Bankruptcy
Court's September 5, 1997 ruling with respect to the priority of the 1992
Plan's assessments but otherwise vacating and remanding back to the Bankruptcy
Court the remaining aspects of the Bankruptcy Court's rulings involving the
1992 Plan including the determination that the 1992 Plan's allowed claim was
$146,103,383. Thereafter, the Funds advised the Bankruptcy Court that the
Funds had withdrawn their Competing Plan.
 
   On July 28, 1998, the Debtor Corporations filed a motion ("Dismissal
Motion") before the Bankruptcy Court to dismiss these Chapter 11 Cases based
upon the foregoing substantial changes in law, the improvement in their
financial condition and their belief that dismissal would benefit all
creditors and shareholders. As a condition to dismissal, the Debtor
Corporations proposed to: (i) pay in full all undisputed claims, including the
assessments of the 1992 Plan and the Combined Fund through the effective date
of dismissal ("Dismissal Date"); (ii) provide such security as is required by
section 9712(d)(1)(C) of the Coal Act; (iii) pay all future premiums assessed
by the 1992 Plan and the Combined Fund on an ongoing basis as and when due;
and (iv) not pay dividends to preferred or common shareholders based on funds
on hand or earnings prior to the Dismissal Date and only to pay dividends in
the future if and to the extent that the Debtor Corporations have current
earnings which would permit the payment of such dividends under applicable
Delaware law. Westmoreland Coal also proposed to continue to maintain its
individual employee plan ("IEP") for the benefit of retirees under the 1993
collective bargaining agreement between Westmoreland Coal and the UMWA even
beyond the expiration of that agreement in August of 1998, unless and until a
forum of competent jurisdiction determined that it was not required to do so.
The Dismissal Motion stated that the Debtor Corporations reserved their right
to contest the constitutionality of the Coal Act and/or to seek to recover any
payments made to the 1992 Plan or the Combined Fund in any appropriate forum.
The Equity Committee (see below) and the Funds opposed this motion.
 
   On June 29, 1998, the Office of the United States Trustee granted certain
shareholders' request to appoint an Official Committee of Equity Security
Holders ("Equity Committee") pursuant to Bankruptcy Code section 1102(a)(1).
The Equity Committee retained its own counsel and financial advisor, subject
to the Company's obligation under the Bankruptcy Code to pay their reasonable
and necessary fees and expenses. On July 28, 1998, the Equity Committee filed
a motion ("Conversion Motion") before the Bankruptcy Court to convert the
Debtor Corporations' cases to Chapter 7, contending that pursuant to
Sunnyside, liquidation of the Company would maximize recovery for shareholders
since the Funds' allowable claims would be limited to those accruing during
the
 
                                     F-19
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
bankruptcy and that the Funds' amended plan of reorganization was not
confirmable. The Debtor Corporations opposed the Conversion Motion, as did the
Funds.
 
   On October 15, 1998 the Company, the Funds, the UMWA, and the Equity
Committee reached agreement on a settlement term sheet, which contained the
principal terms of an agreement among them and provided for, among other
things, the resolution of the Chapter 11 cases. The agreement was read into
the record during scheduled hearings on the Dismissal Motion and the
Conversion Motion, and following such announcement the hearings were recessed.
 
   On October 30, 1998, the Debtor Corporations, the Funds, and the Equity
Committee filed a joint motion with the Bankruptcy Court, setting forth the
outline of a procedure for dismissal of the Chapter 11 Cases combined with the
entry of "consent judgments" in connection with certain of the pending
litigation. The Bankruptcy Court approved the proposed procedure at a hearing
held before the Bankruptcy Court on November 10, 1998. The procedure called
for the consensual, unconditional dismissal of the chapter 11 cases in
conjunction with certain consent judgments related to contested matters with
the Funds and resolution of all remaining items by contractual settlement
agreement among the parties.
 
   The parties negotiated and documented certain additional agreements, a
consent judgment in the prepetition litigation in the Virginia District Court
(imposing obligations that duplicate the obligations imposed under the above-
referenced consent judgments) and documents to further memorialize the
parties' agreement. These documents and agreements include: the Master
Agreement; various pleadings filed in Micheal Buckner, et. al. v. Westmoreland
Coal Co., et al., Civil Action No. 96-0187-A, in the United States District
Court for the Western District of Virginia, comprised of the Joint Motion to
Join the Combined Benefit Fund, the Joint Motion for Stipulated Final Order,
the Memorandum in Support of Joint Motion for Stipulated Final Order and the
Stipulated Final Order; the Contingent Note, the Escrow Agreement for the
Contingent Note; and the Security Agreement for the Contingent Note. These
agreements and documents imposed certain material obligations on the Debtor
Corporations. Thereafter, the Debtor Corporations filed motions with the
Bankruptcy Court requesting approval of the consent judgments, which motions
were granted (and the consent judgments and dismissal order were entered) on
December 23, 1998.
 
   The key terms of the Master Agreement are summarized as follows:
 
  .  The Funds, the UMWA, and the Equity Committee withdrew their objections
     to the Company's Motion to Dismiss the Chapter 11 cases and joined in
     the entry of stipulated judgments and the execution of a Master
     Agreement which preserve the Company as an ongoing enterprise with
     undiluted ownership vested in its existing shareholders.
 
  .  The Company agreed that it would not file, institute nor support any
     action under state or federal bankruptcy liquidation, insolvency or
     reorganization statutes for a period of five years.
 
  .  The Company agreed to pay in full, with interest, all undisputed
     creditor claims and satisfy all other ongoing obligations. Pursuant to
     this commitment, the Company paid approximately $5.7 million to holders
     of undisputed claims in early January, 1999.
 
  .  The Company agreed to pay in full all arrearages, with interest, under
     the Coal Industry Retirement Health Benefit Act of 1992 ("Coal Act").
     Pursuant to this commitment, the Company paid approximately $18.1
     million to the UMWA 1992 Benefit Plan ("1992 Plan") and approximately
     $19.4 million to the UMWA Combined Fund ("Combined Fund," and together
     with the 1992 Plan, the "Funds") in early January, 1999.
 
 
                                     F-20
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  .  The Company agreed to pay $4 million to the Funds in full satisfaction
     of all other asserted claims for damages, liquidated damages, penalties,
     charges, fees and costs. The Company made this payment on February 1,
     1999.
 
  .  The Company agreed to reinstate its Individual Employer Plan for 1992
     Plan retirees.
 
  .  The Company agreed to pay its future obligations to the Funds as and
     when due.
 
  .  The UMWA 1974 Pension Trust ("1974 Plan") had asserted a claim for
     withdrawal liability in the amount of approximately $13.8 million
     against the Company to which the Company objects. The Company and the
     1974 Plan agreed to resolve this dispute through arbitration, as
     provided by law.
 
  .  As required under the Coal Act, the Company agreed to secure its
     obligation to provide retiree health benefits under the 1992 Plan by
     posting a bond, letter of credit, or cash collateral in the amount of
     three years benefits (or $20.8 million). The Company has 60 days from
     January 4, 1999 to provide this security.
 
  .  In addition, the Company agreed to secure its obligations to the Funds
     by providing the Funds with a Contingent Promissory Note ("Note"). The
     original principal amount of the Note is $12 million; the principal
     amount of the Note decreases to $6 million in 2002. The Note is payable
     only in the event the Company does not meet its Coal Act obligations,
     fails to meet certain ongoing financial tests specified in the Note,
     fails to maintain the required balance in the escrow account established
     under the Escrow Agreement, or fails to comply with certain covenants
     set forth in a security agreement. Certain notice and cure provisions
     are included in the Note. If no default occurs, the Note terminates on
     January 1, 2005. To secure its obligations to the Funds under the Note,
     the Company entered into a Security Agreement and an Escrow Agreement.
     In the Security Agreement, the Company pledged the annual cash flow to
     which it is entitled from the Roanoke Valley I project. Pursuant to the
     Escrow Agreement, the Company placed $6 million into an escrow account
     on February 1, 1999. In the year 2002, when the amount of the Note is
     reduced to $6 million, the amount in the escrow account may be adjusted
     so that the amount in escrow will be $8 million minus the amount of
     Westmorelands cash flow from the Roanoke Valley I project in the
     preceding year. In no event will the amount of the required balance in
     the escrow account be more than $6 million or less than zero. If the
     Company is not required to make payment under the Note, the Security
     Agreement and the Escrow Agreement terminate upon the termination of the
     Note. The Company executed and delivered the Note, the Security
     Agreement, and the Escrow Agreement to the Funds on January 29, 1999.
 
  .  The Company agreed not to initiate further litigation to challenge the
     Coal Act or seek to initiate legislation to amend or reject the Coal
     Act.
 
  .  The Company agreed to make payments for retiree health benefits as if it
     continued to be obligated under the 1993 UMWA Wage Agreement for
     eligible retirees and beneficiaries for a period of five years. At the
     expiration of such five year period, the Company is free to initiate
     litigation contesting its obligation to continue to provide such
     benefits, and the Company will continue to provide such benefits after
     the expiration of the five year period until it obtains a ruling from a
     Court of competent jurisdiction that it is not obligated to provide such
     benefits.
 
  .  Provided that the pending sale of the Company's remaining interest in
     the Rensselaer project occurs and subject to the terms of the Master
     Agreement, a public tender for 1,052,631
 
                                     F-21
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
     depositary shares will be implemented, each representing one quarter of
     a share of the Company's outstanding Series A Convertible Exchangeable
     Preferred Stock, at $19 per depositary share. Assuming 1,052,631
     depositary shares are tendered in the offer, the Company would be
     required to pay $20 million in consideration for these shares. The
     tender shall occur in the first quarter of 1999, or as soon thereafter
     as is practicable, following the date of the asset sale.
 
  .  Unless the tender offer is initiated in time to be completed by early
     April, the Company will hold a meeting of shareholders by March 31,
     1999, at which shareholders may nominate and elect directors and bring
     other matters before the shareholders. The Company presently anticipates
     that the shareholders' meeting will take place by May 11, 1999.
 
  .  The Equity Committee would dissolve on February 3, 1999.
 
  .  Except for the payment to preferred shareholders in the tender offer,
     the Company may not make any other cash distribution to preferred or
     common shareholders for any purpose prior to June 30, 1999.
 
   On October 30, 1998, the Debtor Corporations, the Funds, and the Equity
Committee filed a joint motion with the Bankruptcy Court, setting forth the
outline of a procedure for dismissal of the Chapter 11 Cases combined with the
entry of "consent judgments" in connection with certain of the pending
litigation. The Bankruptcy Court approved the proposed procedure at a hearing
held before the Bankruptcy Court on November 10, 1998. Thereafter, the Debtor
Corporations filed motions with the Bankruptcy Court requesting approval of
the consent judgments, which motions were granted (and the consent judgments
and dismissal order were entered) on December 23, 1998.
 
   The consent judgment in respect of the 1992 Plan required the payment of:
(i) an allowed unsecured non-priority claim against the Debtor Corporations in
the amount of $1,097,000, plus interest at the rate established under Internal
Revenue Code ("I.R.C.") (S) 6621 on this claim from December 23, 1996 through
the date of payment, less $200,000 (together with interest thereon) deposited
with the 1992 Plan pursuant to certain prepetition litigation before the
United States District for the Western District of Virginia (the "Virginia
District Court"); and (ii) premiums payable to the 1992 Plan under Section
9712 of the Coal Act for the time periods beginning on and after December 23,
1996 and ending on such payment date, in the amount of  approximately
$16,500,000, plus interest at the rate established pursuant I.R.C. (S) 6621
from October 15, 1998 through the date of payment. In addition, this consent
judgment requires the Debtor Corporations to post security in the amount of
$20,800,000 pursuant to Section 9712(d)(1)(C) of the Coal Act, within sixty
(60) days of the effectiveness of such judgment. The consent judgment in
respect of the Combined Fund required the payment of: (i) an allowed unsecured
non-priority claim against the Debtor Corporations in the amount of
$8,581,000, plus interest at the rate established under I.R.C.(S) 6621, on
this claim from December 23, 1996 through the date of payment; and (ii) all
Combined Fund premiums accrued with respect to the Debtor Corporations for the
plan years beginning October 1, 1997 in the amount of $5,581,000, plus
interest on such amount pursuant I.R.C. (S) 6621, for the period beginning
October 1, 1997 through the date of payment. In addition, the Debtor
Corporations were required to pay one-half the Combined Fund's October 1, 1998
annual premium assessment of $6,111,000, subject to certain discount/interest
calculations. The total payments by the Company to the 1992 Plan and the
Combined Fund made on January 4, 1999 were approximately $37,500,000. All of
these charges were recognized as expenses and accrued on the balance sheet in
1998, with the exception of the 1992 Plan premiums, which were previously
recognized in accordance with FAS 106.
 
                                     F-22
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   During 1998, the Company recognized $9,872,000 in legal and consulting fees
related to the bankruptcy, including fees attributable to the activities of
the Equity Committee which, under Federal Bankruptcy Law, must be funded by
the Company. In February, 1999, pursuant to the Master Agreement, the Company
paid to the 1992 Plan and the Combined Fund an additional $4 million (which
had been accrued in 1998) in full and final satisfaction of additional claims,
including claims for attorney's fees, that arose prior to that date and paid
bonuses totaling $2,600,000.
 
 Liabilities Subject to Compromise
 
   As discussed above, the Company was a debtor-in-possession from December
23, 1996 through December 23, 1998, at which time the Bankruptcy Court
dismissed the case. The following discussion relating to liabilities subject
to compromise applies only to liabilities at December 31, 1997, while the
Company was in bankruptcy. None of the Company's liabilities at December 31,
1998, are subject to compromise and have been classified accordingly.
 
   The filing of the Chapter 11 Cases by the Debtor Corporations (i)
automatically stayed actions by creditors and other parties in interest to
recover any claim that arose prior to the commencement of the cases, and (ii)
served to accelerate, for purposes of allowance, all prepetition liabilities
of the Company, whether or not those liabilities were liquidated or contingent
as of the Petition Date. In accordance with AICPA Statement of Position 90-7
("Financial Reporting by Entities in Reorganization under the Bankruptcy
Code") liabilities subject to compromise were segregated from those that were
not in the accompanying balance sheet. The following table sets forth the
liabilities of the Company that were subject to compromise as of December 31,
1997:
 
<TABLE>
<CAPTION>
                                                               December 31, 1997
                                                               -----------------
      <S>                                                      <C>
      Trade and other liabilities.............................   $  7,035,000
      Long-term debt..........................................      1,607,000
      1974 UMWA Pension Plan..................................     13,800,000
      Workers' compensation...................................     24,341,000
      1992 UMWA Benefit Plan..................................     40,469,000
      1993 Wage Agreement Plan................................     32,067,000
      UMWA Combined Benefit Fund..............................            --
      Salaried Plan...........................................     12,175,000
      SERP....................................................      1,173,000
                                                                 ------------
        Total.................................................   $132,667,000
                                                                 ============
</TABLE>
 
2. ACQUISITIONS
 
 Westmoreland Resources, Inc.
 
   During 1996, the Company increased its ownership in Westmoreland Resources,
Inc. ("WRI") from 60% to 80% through the completion of separate transactions
with Morrison Knudsen ("MK") and Penn Virginia Corporation ("Penn Virginia").
As a result of these transactions, MK is now a 20% minority owner of WRI and
will continue as the contract operator for WRI.
 
   Westmoreland purchased a 4% share of WRI from MK for $1,200,000 cash on
September 30, 1996. Westmoreland also exercised a previously negotiated option
with Penn Virginia Corporation for the purchase of Penn Virginia's 16% share
of WRI for $3,000,000 cash on October 1, 1996, increasing Westmoreland's
ownership to 80%. The transactions were accounted for as purchases and the
excess
 
                                     F-23
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
of the share of the book value of the assets acquired over the cost of the
interests purchased is reflected as a reduction in the carrying value of land
and mineral rights.
 
3. DISPOSITIONS
 
 The Corona Group
 
   On September 9, 1997 the Company completed the sale of the Corona Group
which provides technical repair and maintenance services to the power
generating industry. Revenues for the discontinued operations were $3,814,000,
and $7,800,000 in 1997 and 1996, respectively. The Company recorded a loss on
disposition of $418,000 during the third quarter of 1997. The Company
previously recorded an impairment of $3,100,000 relating to its investment in
Corona in the second quarter of 1997. Consideration received from the sale
included secured promissory notes receivable of $895,000, of which $570,000
was paid in 1997. The remaining $325,000 is due no later than September 10,
1999. The Company also retained a 15% interest in the Corona Group.
 
 Virginia Division
 
   In 1998 and 1997, the Company sold various assets of the Virginia Division
for aggregate net proceeds of $511,000 and $2,757,000, respectively, and
recorded gains of $475,000 and $969,000, respectively. The purchasers assumed
certain reclamation liabilities associated with these assets.
 
   During 1996, the Company realized proceeds of $19,689,000 from the sale of
Virginia Division in nine separate transactions. The gain on these
transactions was $24,238,000 which included $5,224,000 in reclamation
obligations that were assumed by the various purchasers.
 
4. UNUSUAL CHARGES OR CREDITS
 
 1996
 
   In 1996, the Company recorded an unusual credit of $11,896,000 for the
adjustment of accrued post-retirement medical benefits of $5,896,000 recorded
when the Hampton Division was sold in 1995 and an adjustment of $6,000,000
related to an updated actuarial valuation of the UMWA pension withdrawal
liability. See Notes 10 and 11.
 
 1997
 
   In 1997, the Company recorded an unusual credit of $14,199,000 for a
curtailment gain relating to the 1993 Wage Agreement. See Note 10. In 1997,
the Company also recorded an unusual credit of $13,015,000 due to a change in
the estimated liability for pneumoconiosis benefits. See Note 9.
 
 1998
 
   On January 29, 1999, the Company executed the Master Agreement described in
Note 1 to the Consolidated Financial Statements. Under that Agreement, the
Company agreed to make payments for retiree health benefits as if it continued
to be obligated under the 1993 UMWA Wage Agreement for eligible retirees and
beneficiaries for a period of five years. At the expiration of such five year
period, the Company is free to initiate litigation contesting its obligation
to continue to provide such benefits, and the Company will continue to provide
such benefits after the expiration of the five year period until it obtains a
ruling from a Court of competent jurisdiction that it is not obligated to
provide such benefits. The estimated present value of the Company's obligation
to provide these benefits for the five year period is approximately
$2,000,000, and was charged to expense in 1998. The Company
 
                                     F-24
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
currently expects that it will be necessary to litigate this matter at the
conclusion of the five year period. On the advice of counsel, management
believes that the Company should prevail in any such litigation, although, as
in any litigation, there can be no assurance. Should the UMWA's position be
ultimately upheld, the Company would be required to provide retiree health
benefits to such beneficiaries after the expiration of the five year period.
The estimated present value of this contingent liability, calculated as of
December 31, 1998, is approximately $11,600,000.
 
5. WESTMORELAND ENERGY, INC.
 
   Westmoreland Energy, Inc., ("WEI"), a wholly owned subsidiary of the
Company, holds general and limited partner interests in partnerships which
were formed to develop and own cogeneration and other non-regulated
independent power plants. Equity interests in these partnerships range from
1.25 percent to 50 percent. WEI has interests in eight operating projects as
listed and described in the Project Summary below. The lenders to these
partnerships have recourse only against these projects and the income and
revenues therefrom. The debt agreements contain various restrictive covenants
including restrictions on making cash distributions to the partners, with
which the partnerships are in compliance. The type of restrictions on making
cash distributions to the partners vary from one project lender to another.
 
                                     F-25
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
<TABLE>
<CAPTION>
                                                                                                          Roanoke
Project          Ft. Drum     Altavista       Hopewell     Southampton     Ft. Lupton     Rensselaer      Valley I
- ---------------------------------------------------------------------------------------------------------------------
<S>             <C>         <C>            <C>            <C>            <C>            <C>            <C>
                 Watertown    Altavista       Hopewell     Southampton     Ft. Lupton     Rensselaer       Weldon
Location:        New York      Virginia       Virginia       Virginia       Colorado       New York    North Carolina
- ---------------------------------------------------------------------------------------------------------------------
Gross Megawatt
Capacity:         55.5 MW       70 MW          70 MW          70 MW          290 MW         81 MW          180 MW
- ---------------------------------------------------------------------------------------------------------------------
WEI Equity
Ownership:         1.25%        30.0%          30.0%          30.0%          4.49%          50.0%          50.0%
- ---------------------------------------------------------------------------------------------------------------------
Electricity       Niagara                                                Public Service    Niagara
Purchaser:        Mohawk    Virginia Power Virginia Power Virginia Power  of Colorado       Mohawk     Virginia Power
- ---------------------------------------------------------------------------------------------------------------------
                               The Lane    Firestone Tire                  Rocky Mtn.                   Patch Rubber
Steam Host:       US Army   Company, Inc.   & Rubber Co.  Hercules, Inc.  Produce, Ltd       BASF         Company
- ---------------------------------------------------------------------------------------------------------------------
Fuel Type:         Coal          Coal           Coal           Coal       Natural Gas    Natural Gas        Coal
- ---------------------------------------------------------------------------------------------------------------------
                Cyprus Amax  Westmoreland   United Coal    United Coal   Thermo Fuels,   Western Gas     TECO Coal/
Fuel Supplier:   Coal Co.    Coal Company     Company        Company          Inc.      Marketing, Ltd     CONSOL
- ---------------------------------------------------------------------------------------------------------------------
Commercial
Operations
Date:              1989          1992           1992           1992           1994           1994           1994
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
                   Roanoke
Project           Valley II
- ---------------------------------------------------------------------------------------------------------------------
<S>             <C>
                    Weldon
Location:       North Carolina
- ---------------------------------------------------------------------------------------------------------------------
Gross Megawatt
Capacity:           50 MW
- ---------------------------------------------------------------------------------------------------------------------
WEI Equity
Ownership:          50.0%
- ---------------------------------------------------------------------------------------------------------------------
Electricity
Purchaser:      Virginia Power
- ---------------------------------------------------------------------------------------------------------------------
                 Patch Rubber
Steam Host:        Company
- ---------------------------------------------------------------------------------------------------------------------
Fuel Type:           Coal
- ---------------------------------------------------------------------------------------------------------------------
                  TECO Coal/
Fuel Supplier:      CONSOL
- ---------------------------------------------------------------------------------------------------------------------
Commercial
Operations
Date:                1995
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
 
                                      F-26
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   The following is a summary of aggregated financial information for all
investments owned by WEI and accounted for under the equity method:
 
Balance Sheets
<TABLE>
<CAPTION>
                                                           December 31,
                                                         ------------------
                                                           1998      1997
                                                         --------  --------
                                                          (in thousands)
<S>                                                      <C>       <C>       <C>
Assets
  Current assets........................................ $127,901  $140,510
  Property, plant and equipment, net....................  599,293   670,090
  Other assets..........................................   50,406    76,238
                                                         --------  --------
  Total assets.......................................... $777,600  $886,838
                                                         ========  ========
Liabilities and equity
  Current liabilities...................................   54,526  $ 50,107
  Long-term debt and other liabilities..................  458,787   648,000
  Equity................................................  264,287   188,731
                                                         --------  --------
  Total liabilities and equity.......................... $777,600  $886,838
                                                         ========  ========
WEI's share of equity................................... $ 63,156  $ 53,803
Capitalized start-up costs..............................      --      1,012
Other, net..............................................     (770)     (663)
                                                         --------  --------
WEI's investment in independent power operations........ $ 62,386  $ 54,152
</TABLE>
   The Partnerships and the Company adopted Statement of Position No 98-5,
Reporting the Costs of Start-Up Activities as of January 1, 1998. The
statement requires companies to expense the costs of start-up activities as
incurred. The statement also requires certain previously capitalized start-up
costs to be charged to expense at the time of adoption and reported as the
cumulative effect of a change in accounting principle. The cumulative effect
on WEI's share of earnings of the Partnerships and the recognition of its
start-up costs was $9,876,000 and was recorded separately in the Consolidated
Statements of Operations.
 
   The Company's capitalized start-up costs were being amortized straight-line
over the term of the power contract for the related project.
 
Income Statements
<TABLE>
<CAPTION>
                                                     For years ended December
                                                               31,
                                                    ---------------------------
                                                      1998      1997     1996
                                                    --------  -------- --------
                                                          (in thousands)
<S>                                                 <C>       <C>      <C>
Revenues........................................... $247,015  $270,887 $271,237
Operating income...................................  128,302   136,226  137,872
                                                    --------  -------- --------
Net income......................................... $252,191  $ 54,423 $ 55,382
                                                    ========  ======== ========
WEI equity in earnings............................. $ 64,465  $ 17,770 $ 15,335
Cumulative effect of change in
 accounting principle..............................   (9,876)      --       --
                                                    --------  -------- --------
WEI's share of earnings............................ $ 54,589  $ 17,770 $ 15,335
                                                    ========  ======== ========
</TABLE>
 
   WEI performs project development and venture and asset management services
for the partnerships and has recognized related revenues of $510,000,
$531,000, and $499,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Management fees, net of related costs, are recorded as other
income when the service is performed.
 
 
                                     F-27
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   Southampton Project--WEI owns a 30% general partnership interest in LG&E-
Westmoreland Southampton ("Southampton Partnership"), which owns the
Southampton Project. The Southampton Project, which was engaged in start-up
and testing operations from September 1991 through March 1992, failed to meet
Federal Energy Regulatory Commission ("FERC") operating standards for a
qualifying facility ("QF") in 1992. The failure was due to three factors: (i)
the facility was not dispatched by its power customer, Virginia Electric and
Power Company ("Virginia Power"), on a baseload schedule as anticipated, (ii)
the facility was engaged in start-up and testing operations during a portion
of that year, and (iii) the facility operator mistakenly delivered non-
sequential steam to the host over a significant period of time. On February
23, 1994, the Southampton Partnership filed a request with the FERC for a
waiver of the FERC's QF operating standard for 1992. Virginia Power intervened
in the FERC proceeding, opposed the granting of a waiver, and alleged that its
power contract with the Southampton Partnership had been breached due to the
failure of the facility to maintain QF status in 1992.
 
   On July 7, 1994, the FERC issued an order (1) denying the application of
the Southampton Partnership for a waiver of the FERC's QF operating standard
in 1992 with respect to the Southampton Project and (2) directing the
Southampton Partnership to show cause why it should not be required to file
rate schedules with the FERC governing its 1992 electricity sales for resale
to Virginia Power. In 1994 the Southampton Project established a reserve for
the anticipated refund obligations relating to this issue. On August 9, 1994,
the Southampton Partnership filed a request for rehearing of FERC's order or,
alternatively, a motion for reconsideration.
 
   On August 1, 1996, FERC entered its decision in the Southampton case. FERC
determined that the Partnership's request for reconsideration should be
treated as timely filed, but that the Southampton facility was not in complete
compliance with the QF requirements for 1992. FERC ordered Southampton to
comply with Section 205 for the Federal Power Act ("FPA"), and file, for
FERC's review, rates for calendar year 1992 for wholesale power sales to
Virginia Power. Otherwise, the Southampton project remains exempt from
regulation under the Public Utility Holding Company Act ("PUHCA"), utility
laws of Virginia and the other provisions of the FPA. In August 1996, the
Partnership filed a motion seeking clarification of the August 1, 1996 order.
The Partnership also filed an additional request for rehearing. On May 13,
1998 the FERC entered an Order clarifying its August 1, 1996 decision in the
Southampton case. While affirming the requirement to make a refund to Virginia
Power, the FERC ruled that Virginia Power must compensate Southampton for
every hour in which the unit was available for dispatch, but not actually
dispatched. FERC appointed a settlement Judge to assist the parties in
evaluating and negotiating a settlement.
 
   In October, 1998, the Southampton Partnership and Virginia Power entered
into a settlement agreement which resolved these issues. The settlement
provided for, among other items, payments by the Southampton Partnership to
Virginia Power of $1,000,000 annually for the years 1999-2001, followed by a
reduction in capacity payments from Virginia Power to the Southampton
Partnership of $500,000 for the years 2002-2008. Following 2008, Virginia
Power may elect to terminate its power purchases from the Southampton
Partnership or continue to receive the $500,000 annual reduction in capacity
payments for the remainder of the power purchase agreement. The settlement has
been approved by the FERC.
 
   A limited partner of LG&E-Southampton, L.P. has made a demand on the
Southampton Partnership and the related LG&E and Westmoreland entities for
reimbursement in the amount of $1,979,000 in connection with its share of the
settlement. The Westmoreland entities anticipate making a similar demand
against the LG&E entities in the amount of $3,000,000.
 
                                     F-28
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   ROVA I Project--WEI owns a 50% partnership interest in Westmoreland-LG&E
Partners (the "ROVA Partnership"). The ROVA Partnership's principal customer,
Virginia Power contracted to purchase the electricity generated by ROVA I, one
of two units included in the ROVA partnership, under a long-term contract. In
the second quarter of 1994, that customer disputed the ROVA Partnership's
interpretation of the provisions of the contract dealing with the payment of
the capacity purchase price when the facility experiences a "forced outage"
day. A forced outage day is a day when ROVA I is not able to generate a
specified level of electrical output. The ROVA Partnership believes that the
customer is required to pay the ROVA Partnership the full capacity purchase
price unless forced outage days exceed a contractually stated allowed annual
number. The customer asserts that it is not required to do so.
 
   From May, 1994, through October, 1998, Virginia Power withheld
approximately $14,800,000 of these capacity payments during periods of forced
outages. To date, the Company has not recognized any revenue on its 50%
portion of the capacity payments being withheld by Virginia Power. In October
1994, The ROVA Partnership filed a complaint against Virginia Power seeking
damages, contending that Virginia Power breached the Power Purchase Agreement
in withholding such payments. In December, 1994, Virginia Power filed a motion
to dismiss the complaint and in March, 1995, the court granted this motion.
The ROVA Partnership filed an amended complaint in April, 1995. Virginia Power
filed another motion to dismiss the complaint and in June 1995, the Circuit
Court of the City of Richmond, Virginia denied Virginia Power's motion to
dismiss the complaint. In November, 1995, Virginia Power filed with the court
a motion for summary judgment, and a hearing on the motion was held in early
December, 1995. In late January, 1996, the court denied Virginia Power's
motion for summary judgment. Virginia Power filed a second summary judgment
motion on March 1, 1996. On March 18, 1996, the Court granted Virginia Power's
second summary judgment motion and effectively dismissed the complaint. The
ROVA Partnership appealed the Court's decision granting summary judgment to
the Virginia Supreme Court. On June 6, 1997 the Virginia Supreme Court
reversed the trial court's decision to grant Virginia Power's summary judgment
motion and remanded the matter for trial. The case was tried on October 26,
1998. The trial judge requested the parties to submit post trial briefs and on
December 2, 1998 entered judgment in the ROVA Partnership's favor for the
amount of $14,800,000 plus interest for a total of $19,336,214. On December
21, 1998, Virginia Power posted its appeal bond and on December 29, 1998,
noted its appeal of the Court's decision to the Virginia Supreme Court. The
Court has not indicated whether it will hear the appeal. Due to the
uncertainty of the appeal, the financial statements do not reflect any portion
of this judgment.
 
   Rensselaer--On June 30, 1998, LG&E--Westmoreland Rensselaer ("LWR"),
completed the restructuring of the Rensselaer Project under the terms of a
Master Restructuring Agreement with Niagara Mohawk. LWR received $157 million
in cash as consideration for terminating its original Power Purchase
Agreement. After satisfying project finance debt obligations and renegotiating
project related contracts for fuel supply and transportation and steam supply,
WEI's share of the remaining consideration was approximately $30 million,
which it subsequently received. The LWR Partnership also entered into a ten
year transition power supply agreement with Niagara Mohawk Power Corporation
and retained ownership of the plant. LWR has recently been negotiating the
sale of the remaining assets of the Rensselaer Project. The prospective
purchaser would acquire the power plant, inventories, environmental permits,
and the material operating contracts. The signing of a definitive purchase
agreement could occur as early as late February, 1999, with closing of the
transaction soon thereafter.
 
                                     F-29
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
6. DOMINION TERMINAL ASSOCIATES
 
   Westmoreland Terminal Company ("WTC"), a wholly-owned subsidiary of the
Company, has a 20% interest in Dominion Terminal Associates ("DTA"), a
partnership formed for the construction and operation of a coal-storage and
vessel-loading facility in Newport News, Virginia. DTA's annual throughput
capacity is 22 million tons, and its ground storage capacity is 1.7 million
tons. Each partner is responsible for its share of throughput and expenses at
the terminal. Total throughput tons for DTA were 11,511,000, 14,075,000 and
16,440,000 for 1998, 1997 and 1996, respectively. The Company currently leases
the terminal's ground storage space and vessel-loading facilities to certain
unaffiliated parties who are engaged in the export business and provides
related support services.
 
   The following is a summary of financial information for DTA:
 
Balance Sheets
<TABLE>
<CAPTION>
                                                               December 31,
                                                             -----------------
                                                               1998     1997
                                                             --------  -------
                                                              (in thousands)
<S>                                                          <C>       <C>
Assets
  Current assets............................................ $  4,816  $ 5,705
  Non-current assets........................................   86,175   89,484
                                                             --------  -------
  Total assets.............................................. $ 90,991  $95,189
                                                             ========  =======
Liabilities and partners' deficit
  Current liabilities....................................... $  1,967  $ 1,760
  Long-term debt and other liabilities......................  115,660  116,109
  Partners' deficit.........................................  (26,636) (22,680)
                                                             --------  -------
  Total liabilities and partners' deficit................... $ 90,991  $95,189
                                                             ========  =======
WTC's share of partners' deficit............................ $(10,586) $(9,667)
DTA Bonds...................................................   26,560   26,560
Goodwill, net of amortization...............................    1,189    1,249
Impairment allowance........................................  (12,164)     --
Other, net..................................................      476      538
                                                             --------  -------
Investment in DTA........................................... $  5,475  $18,680
                                                             ========  =======
</TABLE>
   The Company is amortizing the goodwill using the straight-line method over
30 years.
 
Income Statements
<TABLE>
<CAPTION>
                                                       For the Years ended
                                                          December 31,
                                                     -------------------------
                                                      1998     1997     1996
                                                     -------  -------  -------
                                                         (in thousands)
<S>                                                  <C>      <C>      <C>
Contribution from Partners.......................... $15,393  $20,164  $21,354
Total expenses......................................  19,349   22,789   24,294
                                                     -------  -------  -------
Excess of expenses over partners' contributions..... $(3,956) $(2,625) $(2,940)
                                                     =======  =======  =======
Revenues from DTA................................... $ 2,890  $ 4,201  $ 4,640
Company share of DTA costs..........................   2,796    3,321    3,813
                                                     -------  -------  -------
Equity in earnings from DTA......................... $    94  $   880  $   827
                                                     =======  =======  =======
</TABLE>
 
                                     F-30
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   WTC and the Company have a joint and several obligation for interest and
principal obligations with respect to its share of certain DTA bonds
($26,560,000 principal amount at December 31, 1998 and 1997). These
obligations were supported by a letter of credit on which the Company was the
ultimate obligor. In 1994, the Company was in violation of certain covenant
requirements in connection with the DTA letter of credit. As a result, on June
9, 1994 the DTA letter of credit was drawn. The proceeds of the draw were used
to purchase $26,560,000 (par value) of DTA bonds. The Company repaid the
amounts drawn under the DTA letter of credit on December 22, 1994. The
$26,560,000 of DTA bonds are now owned by WTC and have been accounted for as
an increase in the investment in DTA.
 
   The Company actively markets its 20% share of the terminal's facilities.
Accordingly, the Company's equity in earnings (share of losses) from DTA
represents the revenue received net of the Company's share of the expenses
incurred attributable to the terminal's coal-storage and vessel loading
operations.
 
   The DTA partners have a Throughput and Handling Agreement whereby WTC is
committed to fund its proportionate share of DTA's operating expenses and
capital expenditures. WTC's total cash funding requirements, were $1,877,000,
$2,883,000 and $3,187,000 for 1998, 1997 and 1996, respectively.
 
   In 1998, the Company recognized a $12,164,000 impairment charge relating to
its investment in DTA to reduce its carrying value to its estimated fair
value. DTA is dependent upon its customer's coal export business to maintain
an acceptable level of throughput. The coal export business has recently
experienced a significant decline due to intense competitive pressure from
coal suppliers in other nations. At this time the Company does not believe
that those competitive pressures will abate in the near term. The fair value
assigned to DTA was based on a recently completed sale of a similar nearby
terminal.
 
7. DEBT
 
   The Company's debt is summarized as follows:
<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1998    1997
                                                                ------- -------
                                                                (in thousands)
<S>                                                             <C>     <C>
WRI:
Long term debt subject to compromise........................... $   --  $ 1,607
                                                                ------- -------
Contracts for deed and mortgage notes payable with interest
 rates ranging from 4% to 7%, net of unamortized discount of
 $169,000 in 1998 and $220,000 in 1997, secured by property
 plant and equipment...........................................   1,762     458
                                                                ------- -------
Total debt.....................................................   1,762   2,065
Less current installments (including $122,000 subject to
 compromise in 1997)                                                200     173
                                                                ------- -------
Long-term debt, less current installments...................... $ 1,562 $ 1,892
                                                                ======= =======
</TABLE>
 
   The secured contracts for deed and mortgage notes payable by WRI are
secured by land and surface rights with a net book value of $1,444,000 at
December 31, 1998.
 
   All long term debt subject to compromise at December 31, 1997, was brought
current on January 4, 1999. On that date all arrearages, with interest, were
paid.
 
                                     F-31
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Principal payments due on long-term debt, for the next five years and
thereafter are as follows:
 
<TABLE>
<CAPTION>
      Year Ending                                                     Amount
      -----------                                                 --------------
                                                                  (in thousands)
      <S>                                                         <C>
      December 31, 1999..........................................      $200
      December 31, 2000..........................................       220
      December 31, 2001..........................................       241
      December 31, 2002..........................................       265
      December 31, 2003..........................................       291
      After December 31, 2003....................................       545
</TABLE>
 
8. WORKERS' COMPENSATION BENEFITS
 
   The Company was self-insured for workers' compensation benefits prior to
and through December 31, 1995. Beginning in 1996, the Company is covered by
third party insurance for new workers' compensation claims and is no longer
self-insured. Based on updated actuarial and claims data, $469,000 was
credited to earnings in 1998, $753,000 was charged to earnings in 1997 and
$1,300,000 was credited to earnings during 1996. The cash payments for
workers' compensation benefits were $3,540,000, $3,752,000, and $5,010,000 in
1998, 1997 and 1996, respectively.
 
   The Company was required to obtain surety bonds in connection with its
self-insured workers' compensation plan. The Company's surety bond underwriter
required cash collateral for such bonding. As of December 31, 1998 and 1997,
$4,140,000 and $6,665,000 respectively, was held in the cash collateral
account.
 
   In connection with its dismissal from bankruptcy, the Company has been
engaged in settlement discussions with the Commonwealth of Virginia and the
State of West Virginia. Under the settlement with the Commonwealth of
Virginia, the Company will post a new bond in the amount of approximately
$8,000,000 and resume paying benefits directly. The outcome of these
discussions with the State of West Virginia is unknown at this time.
 
   The workers compensation benefits obligation was classified as a liability
subject to compromise in 1997. During the bankruptcy proceedings, workers'
compensation claims were paid out of the surety bond cash collateral account.
 
9. PNEUMOCONIOSIS (BLACK LUNG) BENEFITS
 
   The Company is self-insured for federal and state pneumoconiosis benefits
for current and former employees and has established an independent trust to
pay these benefits.
 
   The following table sets forth the funded status of the Company's
obligation:
 
<TABLE>
<CAPTION>
                                                                December 31,
                                                               ---------------
                                                                1998    1997
                                                               ------- -------
                                                               (in thousands)
<S>                                                            <C>     <C>
Actuarial present value of benefit obligation:
Expected claims from terminated employees..................... $10,726 $11,900
Claimants.....................................................  17,878  17,900
                                                               ------- -------
Total present value of benefit obligation.....................  28,604  29,800
Plan assets at fair value, primarily government-backed
 securities...................................................  39,495  41,500
                                                               ------- -------
Excess of trust assets over pneumoconiosis benefit
 obligation................................................... $10,891 $11,700
                                                               ======= =======
</TABLE>
 
                                     F-32
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The discount rate used in determining the accumulated pneumoconiosis
benefit as of December 31, 1998 and 1997 was 6.75% and 7.0%, respectively.
 
   As a result of the closing down of the Company's eastern coal operations
(as discussed in Notes 3 and 4) and the termination of all employees eligible
for pneumoconiosis benefits, the Company changed its method of accounting for
pneumoconiosis benefits during the fourth quarter of 1996, and applied such
change retroactively to January 1, 1996. Previously, the Company accrued for
the projected costs of pneumoconiosis benefits, on an actuarial basis, over
the period which benefits were expected to be paid. Under the newly adopted
method of accounting, the Company recognizes all actuarial gains or losses
related to the pneumoconiosis benefit obligation in the period in which they
occur. The cumulative effect of the change at January 1, 1996, was a credit of
$14,372,000. Adoption of this new accounting method decreased net income by
$2,562,000 in 1996. Management believes the newly adopted accounting method is
preferable since, with the shutdown of its eastern operations, new obligations
for pneumoconiosis benefits will not be incurred.
 
   In 1997 the Company recorded a benefit of $13,015,000 due to a change in
the estimated liability for pneumoconiosis benefits, which has been recorded
as a component of unusual credits in 1997.
 
10. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
 
 Single-Employer Plans
 
   The Company and its subsidiaries provide certain health care and life
insurance benefits for retired employees and their dependents. Substantially
all of the Company's current employees may become eligible for these benefits
if certain age and service requirements are met at the time of termination or
retirement as specified in the plan agreement. These benefits are provided
through self-insured programs. The Company adopted SFAS 106 effective January
1, 1993 and elected to amortize its unrecognized, unfunded accumulated
postretirement benefit obligation over a 20-year period.
 
   The Company maintains three plans subject to FAS 106: the Salaried Plan,
the 1993 Wage Agreement Plan, and the 1992 Plan. The Salaried Plan provides
certain health and life insurance benefits for salaried retired employees and
their dependents. The 1993 Wage Agreement Plan is the plan that resulted from
the 1993 Wage Agreement between the Company and the UMWA. That agreement
required the Company to establish and provide health care benefits under an
individual employer plan for age- and service-eligible employees (and their
dependents) who retired during the term of the 1993 Wage Agreement. The 1992
Plan was established as a result of the Coal Act. The Company is required to
provide health care benefits for beneficiaries (and their dependents) who were
age- and service-eligible to receive benefits under the Coal Act as of
February 1, 1993, and who retired before October 1, 1994.
 
   Prior to 1997, the calculation of the present value of the Company's
obligation under the 1993 Wage Agreement assumed that the Company would enter
into successor wage agreements to the 1993 Wage Agreement and would thereby
continue to provide retiree health benefits to such beneficiaries. During
1997, the Company determined that it would not need to enter into a successor
wage agreement. Accordingly, the Company reduced the liability for the 1993
Wage Agreement and recorded a curtailment gain of $14,199,000 in 1997, which
has been recorded as a component of unusual credits.
 
   The UMWA contests the Company's right to terminate benefits at the
expiration of the collective bargaining agreement and further asserts that
former employees will be entitled to such benefits as they reach age 55. As a
condition for not opposing dismissal of the bankruptcy, the UMWA demanded and
pursuant to the terms of the Master Agreement discussed in Note 1, the Company
agreed to continue
 
                                     F-33
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
to provide benefits to participants of the 1993 Wage Agreement for a period of
five years from the dismissal of the bankruptcy. The estimated present value
of the Company's obligation to provide these benefits for the five year period
was charged to expense in 1998 as an unusual charge. At the expiration of such
five year period, the Company is free to initiate litigation contesting its
obligation to continue to provide such benefits, and the Company will continue
to provide such benefits after the expiration of the five year period until it
obtains a ruling from a Court of competent jurisdiction that it is not
obligated to provide such benefits. The Company currently expects that it will
be necessary to litigate this matter at the conclusion of the five year
period. On the advice of counsel, management believes that the Company should
prevail in any such litigation, although, as in any litigation, there can be
no assurance. Should the UMWA's position be ultimately upheld, the Company
would be required to provide retiree health benefits to such beneficiaries
after the expiration of the five year period. The estimated present value of
this contingent liability, calculated as of December 31, 1998, is
approximately $11,600,000.
 
   The following table sets forth the actuarial present value of
postretirement benefit obligations and amounts recognized in the Company's
financial statements:
 
<TABLE>
<CAPTION>
                           Salaried Plan    1993 Wage Agreement       1992 Plan
                           December 31,        December 31,         December 31,
                          ----------------  --------------------  -----------------------
                           1998     1997      1998       1997       1998           1997
                          -------  -------  ---------  ---------  --------       --------
                                             (in thousands)
<S>                       <C>      <C>      <C>        <C>        <C>            <C>
Assumptions:
Discount rate...........     6.75%    7.00%      6.75%      7.00%     6.75%          7.00%
Change in benefit
 obligation:
Net benefit obligation
 at beginning of year...   10,505    8,592     33,418     48,386   114,406        100,078
Service cost............       57       48        --         --        --             --
Interest cost...........      701      737      2,461      2,250     7,721          7,893
Plan amendments.........      --       --      1 ,865        --        --             --
Actuarial (gain) loss...      148    2,166      1,688     (2,135)   19,997          6,435
Curtailments............      --       --         --     (14,199)      --             --
Gross benefits paid.....     (788)  (1,038)      (725)      (884)      --             --
                          -------  -------  ---------  ---------  --------       --------
                           10,623   10,505     38,707     33,418   142,124        114,406
Change in plan assets:
Employer contributions..      788    1,038        725        884       --             --
Gross benefits paid.....     (788)  (1,038)      (725)      (884)      --             --
                          -------  -------  ---------  ---------  --------       --------
Fair value of plan
 assets at end of year..      --       --         --         --        --             --
Funded status at end of
 year...................  (10,623) (10,505)   (38,707)   (33,418) (142,124)      (114,406)
Unrecognized net
 actuarial (gain) loss..   (3,207)  (3,526)     3,040      1,351    33,492         14,305
Unrecognized prior
 service cost...........      --       --         --         --        --             --
Unrecognized net
 transition obligation
 (asset)................    1,732    1,856        --         --     55,670         59,632
                          -------  -------  ---------  ---------  --------       --------
Net amount recognized at
 end of year (recorded
 as accrued benefit cost
 in the accompanying
 balance sheet).........  (12,098) (12,175)   (35,667)   (32,067)  (52,962)(/1/)  (40,469)
                          =======  =======  =========  =========  ========       ========
</TABLE>
 
(/1/This)includes $16,518,000 classified as Consent judgment payment
    obligations in the accompanying balance sheet. Refer to Note 12.
 
 
                                     F-34
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The components of net periodic postretirement benefit cost are as follows:
 
<TABLE>
<CAPTION>
                            Salaried Plan      1993 Wage Agreement            1992 Plan
                             Year ended             Year ended               Year ended
                            December 31,           December 31,             December 31,
                          -------------------  ----------------------  -------------------------
                          1998   1997   1996    1998    1997    1996    1998     1997     1996
                          -----  -----  -----  ------  ------  ------  -------  -------  -------
                                                  (in thousands)
<S>                       <C>    <C>    <C>    <C>     <C>     <C>     <C>      <C>      <C>
Assumptions:
Discount rate...........   6.75%  7.00%  7.50%   6.75%   7.00%   7.50%    6.75%    7.00%    7.50%
Components of net peri-
 odic benefit cost:
Service cost............  $  56  $  48  $  66  $  --   $  --   $  --   $   --   $   --   $   --
Interest cost...........    701    737    614   2,461   2,250   3,469    7,721    7,893    7,103
Amortization of:
Transition obligation...    124    124    124     --      --      --     3,976    3,976    3,976
Prior service cost......    --     --     --    1,865     --      --       --       --       --
Actuarial (gain) loss...   (170)  (196)  (266)    --      --      109      812      485      199
                          -----  -----  -----  ------  ------  ------  -------  -------  -------
  Total net periodic
   benefit cost.........  $ 711  $ 713  $ 538  $4,326  $2,250  $3,578  $12,509  $12,354  $11,278
                          =====  =====  =====  ======  ======  ======  =======  =======  =======
Sensitivity of retiree
 welfare results:
Effect of a one percent-
 age point
 increase in assumed
 health care cost
 trend..................
- --on total service and
 interest cost compo-
 nents..................     44    --     --      444     --      --       903      --       --
- --on postretirement ben-
 efit
 obligation.............    428    --     --    6,875     --      --    13,190      --       --
Effect of a one percent-
 age point decrease in
 assumed health care
 cost trend.............
- --on total service and
 interest cost compo-
 nents..................    (44)   --     --     (444)    --      --      (903)     --       --
- --on postretirement ben-
 efit
 obligation.............   (428)   --     --   (6,875)    --      --   (13,190)     --       --
</TABLE>
 
   Postretirement benefits include medical benefits for retirees and their
spouses (and Medicare Part B reimbursement for certain retirees) and retiree
life insurance.
 
   The health care cost trend assumed on covered charges were 6.0%, 6.5%, and
7.0% for 1998, 1997 and 1996, respectively decreasing to an ultimate trend of
5.0% in 2001 and beyond.
 
   Cash payments for medical and life insurance benefits were $1,452,000,
$1,823,000, and $8,929,000 in 1998, 1997 and 1996, respectively.
 
   All postretirement benefit obligations were liabilities subject to
compromise on December 31, 1997.
 
 Multiemployer Plan
 
   Until December, 1996, and before the commencement of the Chapter 11 cases
for the Debtor Corporations, the Company made payments to the Combined Benefit
Plan, which is a multiemployer health plan neither controlled nor administered
by the Company. The Combined Benefit Plan is designed to pay benefits to UMWA
workers (and dependents) who retired prior to 1976. Prior to
 
                                     F-35
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
February 1993, the amount paid by the Company was based on hours worked or
tons processed (depending on the source of the coal) in accordance with the
national contract with the UMWA. Beginning February 1993 the Company was
required by the Coal Act to make monthly premium payments into the Combined
Benefit Plan. These payments were based on the number of beneficiaries
assigned to the Company, the Company's UMWA employees who retired prior to
1976 and the Company's pro-rata assigned share of UMWA retirees whose
companies are no longer in business. The net present value of the Company's
future cash payments is estimated to be $36,200,000. The Company expenses
payments to the Combined Benefit Plan when they are made.
 
   As a result of the bankruptcy, no payments were made during 1998 or 1997.
Payments of $2,805,000 were made in 1996. In January, 1999, in accordance with
the Master Agreement, the Company made payments totaling $19,408,000 to the
Combined Benefit Plan. This payment included $15,715,000 for delinquent
premiums, $2,178,000 for interest on those premiums and $1,515,000 for
premiums due for the first three months of 1999, discounted at 6%. The
delinquent premiums and interest were recognized as expense in 1998. The
Company will resume monthly payments to the Combined Benefit Plan beginning in
April, 1999.
 
   All of the postretirement medical and life insurance benefit obligations
discussed above were classified as liabilities subject to compromise in 1997.
 
11. RETIREMENT PLANS
 
 Defined Benefit Pension Plans
 
   During 1997, the Company elected to terminate its over-funded non-
contributory defined benefit pension plan. Pension income for 1997 included a
gain on termination of approximately $1,512,000. Upon termination of the plan,
the excess fund assets reverted to the Company. The reversion to the Company
was approximately $13,040,000, net of excise taxes payable of $3,135,000. The
Company received $12,540,000 of the funds and paid the excise taxes in
February, 1998. The remaining $500,000 is being held in escrow to pay any
final termination costs related to the plan.
 
   Simultaneously with the termination of this plan, the Company adopted a new
plan that provides for essentially the same benefits as the old plan for
current employees. For the purpose of the benefit calculation under the new
plan, credited service under the old plan is combined with credited service
under the new plan and a benefit amount is calculated. The amount of the
accrued benefit under the old plan, calculated as of the old plan termination
date, is subtracted to arrive at the benefit amount payable under the new
plan.
 
   Benefits are based on years of service and the employee's average annual
compensation for the highest five continuous years of employment as specified
in the plan agreement. The Company's funding policy is to contribute annually
the minimum amount prescribed, as specified by applicable regulations. Prior
service costs and actuarial gains are amortized over plan participants'
expected future period of service using the straight-line method.
 
 Supplemental Executive Retirement Plan
 
   Effective January 1, 1992, the Company adopted the Westmoreland Coal
Company Supplemental Executive Retirement Plan ("SERP"). The SERP is an
unfunded non-qualified deferred compensation plan which provides benefits to
certain employees that are not eligible under the Company's defined benefit
pension plan beyond the maximum limits imposed by the Employee Retirement
Income Security Act ("ERISA") and the Internal Revenue Code.
 
                                     F-36
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The following table provides a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the periods ending December
31, 1998 and 1997 and the amounts recognized in the Company's financial
statements for both the defined benefit pension and SERP Plans:
 
<TABLE>
<CAPTION>
                                   Qualified
                                    Pension
                                   Benefits         SERP Benefits
                                 --------------     --------------
                                  December 31        December 31
                                 --------------     --------------
                                 1998    1997        1998    1997
                                 -----  -------     ------  ------
                                       (in thousands)
<S>                              <C>    <C>         <C>     <C>     <C> <C> <C>
Assumptions:
Discount rate..................   6.75%    7.00%      6.75%   7.00%
Expected return on plan
 assets........................   9.00%    9.00%      9.00%   9.00%
Rate of compensation increase..   5.00%    5.00%      5.00%   5.00%
Change in benefit obligation:
Net benefit obligation at
 beginning of year.............  1,429   54,632      1,349   1,266
Service cost...................    183      185         56      59
Interest cost..................     89    3,959         86      86
Actuarial gain.................   (271)     --         (98)    (62)
Settlements....................    --     8,159 /1/    --      --
Gross benefits paid............    (12) (65,506)/2/    --      --
                                 -----  -------     ------  ------
Net benefit obligation at end
 of year.......................  1,418    1,429      1,393   1,349
Change in plan assets:
Fair value of plan assets at
 beginning of year ............  5,225   84,177        --      --
Actual return on plan assets...    273    5,220        --      --
Gross benefits paid............    (11) (84,172)/3/    --      --
                                 -----  -------     ------  ------
Fair value of plan assets at
 end of year...................  5,487    5,225        --      --
Funded status at end of year...  4,069    3,796     (1,393) (1,349)
Unrecognized net actuarial
 gain..........................   (507)    (490)      (563)   (517)
Unrecognized prior service
 cost..........................    222      264        577     693
Unrecognized net transition
 asset.........................    (36)     (42)       --      --
                                 -----  -------     ------  ------
Net amount recognized at end of
 year..........................  3,748    3,528     (1,379) (1,173)
Amounts recognized in the
 accompanying balance sheet
 consist of:
Prepaid benefit cost...........  3,748    3,528        --      --
Accrued benefit cost (included
 in other liabilities) ........    --       --      (1,379) (1,173)
                                 -----  -------     ------  ------
Net amount recognized at end of
 year..........................  3,748    3,528     (1,379) (1,173)
                                 =====  =======     ======  ======
</TABLE>
- --------
/1 /Represents additional PBO created in order to purchase annuities and pay
   lump sums ($62,789,000--$54,630,000).
/2 /Represents purchase of annuities, payment of lump sums, and regular
   monthly payments.
/3 /Represents purchase of annuities, payment of lump sums, regular monthly
   payments, related expenses, and reversion to Company
 
                                     F-37
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The components of net periodic pension cost (benefit) are as follows:
 
<TABLE>
<CAPTION>
                         Qualified Pension Benefits     SERP Benefits
                         -----------------------------  ----------------
                                                          Year ended
                           Year ended December 31        December 31
                         -----------------------------  ----------------
                          1998      1997       1996     1998  1997  1996
                         -------- ---------  ---------  ----  ----  ----
                                       (in thousands)
<S>                      <C>      <C>        <C>        <C>   <C>   <C>   <C> <C> <C> <C>
Assumptions:
Discount rate...........    6.75%      7.00%      7.50% 6.75% 7.00% 7.50%
Expected return on plan
 assets.................    9.00%      9.00%      9.00% 9.00% 9.00% 9.00%
Rate of compensation
 increase...............    5.00%      5.00%      5.00% 5.00% 5.00% 5.00%
Components of net
 periodic benefit cost
Service cost............ $   183  $     185  $     267  $ 56  $ 59  $ 59
Interest cost...........      88      3,958      4,103    86    86    79
Expected return on
 assets.................    (491)    (7,393)    (7,370)  --    --    --
Amortization of:
Transition asset........      (6)      (284)      (285)  --    --    --
Prior service cost......      42         42         42   116   116   116
Actuarial gain..........     (36)      (543)      (358)  (52)  (45)  (43)
                         -------  ---------  ---------  ----  ----  ----
Total net periodic
 pension cost
 (benefit).............. $  (220) $  (4,035) $  (3,601) $206  $216  $211
                         =======  =========  =========  ====  ====  ====
</TABLE>
 
   The SERP obligation was a liability subject to compromise at December 31,
1997. The bankruptcy dismissal had no effect on SERP benefits.
 
 1974 UMWA Pension Plan
 
   The Company was required under the 1993 Wage Agreement to pay amounts based
on hours worked or tons processed (depending on the source of the coal) in the
form of contributions to the 1974 UMWA Pension Plan with respect to UMWA
represented employees. The 1974 UMWA Pension Plan is neither controlled nor
administered by the Company.
 
   Under the Multiemployer Pension Plan Act ("MPPA"), a company contributing
to a multiemployer plan is liable for its share of unfunded vested liabilities
upon withdrawal from the plan. In connection with the cessation of mining
operations described in Note 4, the Company recorded an estimate of the
liability the Company would incur upon withdrawal from the 1974 UMWA Pension
plan. The actuarial estimate of this obligation decreased by $6,000,000 in
1996, which was reflected as an unusual credit to earnings in 1996. The 1974
UMWA Pension Plan has not provided the Company with an updated actuarial
estimate of the withdrawal liability calculated as of June 30, 1998, the date
of the asset valuation the Company believes should be used to determine the
actual withdrawal liability, in accordance with the provisions of MPPA. The
Company is contesting this withdrawal liability through arbitration. In
accordance with MPAA, the Company must amortize this withdrawal liability,
with interest, during the arbitration process by making payments of
approximately $172,500 per month. These payments are recoverable to the extent
the final assessed amount is less than the amounts paid.
 
 
                                     F-38
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
12. CONSENT JUDGMENT AND OTHER DISMISSAL OBLIGATIONS
 
   On January 4, 1999, pursuant to the consent judgments described in Note 1,
the Company paid the Combined Benefit Fund and the 1992 Benefit Plan
$17,230,000 and $16,518,000, respectively, plus interest of $5,258,000 for a
total of $39,006,000. Included in the amount paid to the Combined Benefit Fund
was a prepayment of approximately $1,515,000 for the first quarter of 1999.
The Master Agreement also required certain other payments to general pre-
petition creditors, the reimbursement of bankruptcy related costs incurred by
the Funds and an annual installment to the 1974 UMWA Pension. These amounts
were $5,686,000 (including interest), $4,000,000, and $1,606,000 (including
interest), respectively. The total amount paid on January 4, 1999, for all
obligations was $50,288,000. Of this amount $26,306,000 was charged to expense
in 1998. Other than the consent judgment obligations, all remaining dismissal
related liabilities are classified at December 31, 1998, as accounts payable
and accrued liabilities.
 
13. INCOME TAXES (BENEFIT)
 
   As discussed in Note 2, on October 1, 1996, the Company increased its
ownership in WRI to 80%, the threshold for including WRI in the Company's
consolidated income tax return. WRI filed a separate tax return for the nine
months ended September 30, 1996 and the Company was not able to offset the
Company's net operating loss carryforwards against WRI's taxable income for
that period.
 
   Income tax expense attributable to income (loss) before income taxes
consists of:
 
<TABLE>
<CAPTION>
                                                              1998  1997  1996
                                                             ------ ---- ------
                                                               (in thousands)
      <S>                                                    <C>    <C>  <C>
      Federal:
        Current............................................. $3,687 $--  $1,150
        Deferred............................................    --   --    (579)
                                                             ------ ---- ------
                                                              3,687  --     571
      State:
        Current.............................................    100  --       4
        Deferred............................................    --   --     --
                                                             ------ ---- ------
                                                                --   --       4
                                                             ------ ---- ------
      Income tax expense.................................... $3,787 $--  $  575
                                                             ====== ==== ======
</TABLE>
 
   Income tax expense attributable to income (loss) before income taxes
differed from the amounts computed by applying the statutory Federal income
tax rate of 34% to pretax income (loss) from continuing operations as a result
of the following:
<TABLE>
<CAPTION>
                                                       1998    1997    1996
                                                      ------  ------  -------
                                                         (in thousands)
      <S>                                             <C>     <C>     <C>
      Computed tax expense (benefit) at statutory
       rate.......................................... $ (939) $9,573  $13,232
      Increase (decrease) in tax expense resulting
       from:
        Percentage depletion.........................   (807)   (402)    (206)
        State income taxes, net......................    --      --       --
      Change in valuation allowance for net deferred
       tax assets ...................................  5,676  (8,657) (12,255)
      Other..........................................   (143)   (514)    (196)
                                                      ------  ------  -------
      Income tax expense (benefit)................... $3,787  $  --   $   575
                                                      ======  ======  =======
</TABLE>
 
                                     F-39
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997 are presented below:
 
<TABLE>
<CAPTION>
                                                         1998      1997
                                                       --------  --------
                                                           (in thousands)
<S>                                                    <C>       <C>       <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 38,750  $ 76,484
Alternative minimum tax credit carryforwards..........    3,702       --
Investment tax credit carryforwards...................    2,594     4,500
Capital loss carryforwards............................    1,933       --
DTA impairment........................................    4,136       --
Independent power projects transactions recorded for
 tax purposes.........................................   18,316       --
Deferred income.......................................      117       117
Accruals for the following:
Workers' compensation.................................    7,186     8,028
Postretirement benefit obligation.....................   40,011    28,979
Pneumoconiosis benefits...............................    5,273     4,926
Reorganization expenses...............................    1,776       --
Reclamation costs.....................................    1,506     1,436
Other accruals........................................     (642)   (2,346)
                                                       --------  --------
Total gross deferred assets...........................  124,658   122,124
Less valuation allowance.............................. (111,638) (105,962)
                                                       --------  --------
Net deferred tax assets............................... $ 13,020  $ 16,162
                                                       --------  --------
Deferred tax liabilities:
Plant and equipment, differences due to depreciation
 and amortization..................................... $(12,807) $(13,983)
Prepaid pension cost..................................      --     (1,966)
Advanced royalties, capitalized for financial
 purposes.............................................     (110)     (110)
Unamortized discount on long-term debt for financial
 purposes.............................................     (103)     (103)
                                                       --------  --------
Total gross deferred tax liabilities..................  (13,020)  (16,162)
                                                       --------  --------
Net deferred tax liability............................ $    --   $    --
                                                       ========  ========
</TABLE>
 
   The Company and subsidiaries have available net operating loss
carryforwards to reduce future taxable income and investment tax credit
carryforwards to offset future taxes payable. Following are the expiration
date and amounts of the net operating loss carryforwards for both regular and
alternative minimum tax purposes:
 
<TABLE>
<CAPTION>
                                                                Regular  Minimum
      Expiration Date                                             Tax      Tax
      ---------------                                           -------- -------
                                                                 (in thousands)
      <S>                                                       <C>      <C>
      2007..................................................... $  7,409  $--
      2008.....................................................   13,014   --
      2009.....................................................    4,754   --
      2010.....................................................   51,986   --
      after 2011...............................................   36,807
                                                                --------  ----
      Total.................................................... $113,970  $--
                                                                ========  ====
</TABLE>
 
   The Company has investment tax credit carryforwards of $2,594,000 which
expire by the year 2000.
 
                                     F-40
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
14. CAPITAL STOCK
 
   Preferred stock dividends at a rate of 8.5% per annum were paid quarterly
from the third quarter of 1992 through the first quarter of 1994. The
declaration and payment of preferred stock dividends was suspended in the
second quarter of 1994 in connection with extension agreements with the
Company's principal lenders. Upon the expiration of these extension
agreements, the Company paid a quarterly dividend on April 1, 1995 and July 1,
1995. Pursuant to the requirements of Delaware law, described below, the
preferred stock dividend was suspended in the third quarter of 1995 as a
result of recognition of losses and the subsequent shareholders' deficit. The
seventeen quarterly dividends which are in arrears (dividend payment dates
July 1, 1994, October 1, 1994, January 1, 1995, October 1, 1995, January 1,
1996, April 1, 1996, July 1, 1996, October 1, 1996, January 1, 1997, April 1,
1997, July 1, 1997, October 1, 1997, January 1, 1998, April 1, 1998, July 1,
1998, October 1, 1998, and January 1, 1999) amount to $20,772,000 in the
aggregate ($36.13 per preferred share or $9.03 per depositary share). Common
stock dividends may not be declared until the preferred stock dividends that
are in arrears are made current.
 
   There are statutory restrictions limiting the payment of preferred stock
dividends under Delaware law, the state in which the Company is incorporated.
Under Delaware law, the Company is permitted to pay preferred stock dividends
only: (1) out of surplus, surplus being the amount of shareholders' equity in
excess of the par value of the Company's two classes of stock; or (2) in the
event there is no surplus, out of net profits for the fiscal year in which a
preferred stock dividend is declared (and/or out of net profits from the
preceding fiscal year), but only to the extent that shareholders' equity
exceeds the par value of the preferred stock ($575,000). The Company had
shareholders' equity at September 30, 1998, of $21,845,000.
 
   As a result of the filing of voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code, the Company was prohibited
from paying dividends, either common or preferred. The terms of the Master
Agreement, including various financial covenants over the next six years,
discussed in Note 1 to the Consolidated Financial Statements, further prohibit
the payment of dividends, either common or preferred, until after June 30,
1999, in any event.
 
15. INCENTIVE STOCK OPTION AND STOCK APPRECIATION RIGHTS PLANS
 
   As of December 31, 1998, the Company had options, stock appreciation rights
and restricted stock outstanding from three Incentive Stock Option and Stock
Appreciation Rights Plans for employees.
 
   The plans provide for three types of incentive awards: incentive stock
options ("ISOs"), stock appreciation rights ("SARs") and restricted stock. The
1982 and 1985 Plans provide for the granting of ISOs and SARs and the 1995
Plan provides for the granting of ISOs and restricted stock. The 1985 and 1995
Plans also provide for the grant of non-qualified options, if so designated,
and contains the terms specified for non-qualified options. A SAR gives the
holder the right to receive, without payment to the Company, its "value" in
cash. The "value" of an SAR for this purpose will be the excess, if any, of
the fair market value of one share of common stock of the Company on the date
the right is exercised over the exercise price of the SAR. Restricted stock is
an award payable in shares of common stock subject to forfeiture under certain
conditions. ISOs granted under the Plans may not have an option price that is
less than the fair market value of the stock on the date of grant. ISOs and
SARs under the 1982 and 1985 Plans may not be exercised until two years from
the date of grant as to 50% of the total number granted and as to the
remaining 50% not until three years from the date of grant; the right to
exercise ISOs and SARs terminates after eight years from the date of grant.
The maximum number of shares of the
 
                                     F-41
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's common stock and SARs that may be issued or granted under the Plans
is as follows:
 
<TABLE>
<CAPTION>
                                                   1982 Plan 1985 Plan 1995 Plan
                                                   --------- --------- ---------
      <S>                                          <C>       <C>       <C>
      Shares of common stock......................  200,000   400,000   350,000
                                                    -------   -------   -------
      Stock appreciation rights...................  470,000   940,000       N/A
                                                    -------   -------   -------
</TABLE>
 
   The 1982 Plan expired on January 4, 1992, and the 1985 Plan expired on
January 7, 1995. Therefore, no further ISOs or SARs may now be granted from
either of those plans. Information for 1998, 1997 and 1996 with respect to the
Plans is as follows:
 
<TABLE>
<CAPTION>
                                                                        Weighted
                                                  Stock       Stock     Average
                         Issue Price  Restricted  Option   Appreciation Exercise
                            Range       Stock     Shares      Rights     Price
                         ------------ ---------- --------  ------------ --------
<S>                      <C>          <C>        <C>       <C>          <C>
Outstanding at December
 31, 1995............... $2.63--18.50   5,000     545,899      2,766     $6.89
Expired or forfeited in
 1996................... $2.63--18.50     --      (56,342)       --      $6.93
                         ------------   -----    --------     ------     -----
Outstanding at December
 31, 1996............... $2.63--18.50   5,000     489,557      2,766     $6.88
Expired or forfeited in
 1997................... $2.63--14.50     --     (140,471)    (2,766)    $6.10
                         ------------   -----    --------     ------     -----
Outstanding at December
 31, 1997 and 1998...... $2.63--18.50   5,000     349,086        --      $7.20
                         ============   =====    ========     ======     =====
</TABLE>
 
   On January 26, 1999, 95,000 shares of restricted stock and 95,000 shares of
stock options were granted to officers and employees. The options were granted
at an exercise price of $4.00 per share and are exercisable upon grant.
 
   In 1996, the shareholders adopted a stock option plan for directors. The
plan provides for the grant of non-qualified stock options to directors. These
options give the directors the right to purchase from the Company a specified
number of shares of the Company's common stock for a specified price during a
specified period. The maximum number of shares of the Company's common stock
that may be issued or granted under the plan is 350,000 and the options expire
ten years after the date of grant. Options granted pursuant to this plan vest
25% per year over a four year period, so that 25% vest after the first year,
another 25% after the second year, another 25% after the third year and the
final 25% after the fourth year. Options granted during a director's period of
active service continue to vest pursuant to this schedule if a director leaves
the board due to reaching retirement age. In the event of a change of control
of the Company, any option that was not previously exercisable and vested will
become fully exercisable and vested. Information for 1998, 1997 and 1996 with
respect to the plan is as follows:
 
<TABLE>
<CAPTION>
                                                                        Weighted
                                                                 Stock  average
                                                    Issue Price Option  Exercise
                                                       Range    Shares   Price
                                                    ----------- ------- --------
<S>                                                 <C>         <C>     <C>
Outstanding at December 31, 1995...................         --      --     --
Granted in 1996.................................... $3.00--3.88 140,000  $3.75
                                                    ----------- -------  -----
Outstanding at December 31, 1996................... $3.00--3.88 140,000  $3.75
Granted in 1997.................................... $      1.00  70,000  $1.00
                                                    ----------- -------  -----
Outstanding at December 31, 1997................... $1.00--3.88 210,000  $2.83
Granted in 1998.................................... $      1.69  70,000  $1.69
                                                    ----------- -------  -----
Outstanding at December 31, 1998................... $1.00--3.88 280,000  $2.55
                                                    =========== =======  =====
</TABLE>
 
                                     F-42
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the Company's
three stock-based compensation plans been determined on the fair value at the
grant dates for awards under those plans consistent with the FASB Statement
123, the Company's net income (loss) and income (loss) per share would have
been reduced to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                            1998          1997        1996
                                        ------------  ------------ ------------
                                        (in thousands, except per share data)
      <S>                               <C>           <C>          <C>
      Net Income (loss):
        As reported.................... $    (11,436) $     23,268 $    33,455
      Pro forma........................ $    (11,788) $     22,986 $    33,291
      Basic and diluted income (loss)
       per share:
        As reported.................... $      (1.64) $       3.34 $      4.80
        Pro forma...................... $      (1.69) $       3.30 $      4.78
</TABLE>
 
   The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for options granted:
 
<TABLE>
<CAPTION>
                               Dividend  Expected  Risk-Free Interest Expected Life
                                Yield   Volatility     Rate Range      (in years)
                               -------- ---------- ------------------ -------------
      <S>                      <C>      <C>        <C>                <C>
      Options granted in
       1995...................     0       124%              5.59%           8
      Options granted in
       1996...................     0       138%       6.63%--6.77%           5
      Options granted in
       1997...................     0       681%              6.54%           5
      Options granted in
       1998...................     0       718%              5.64%           5
</TABLE>
 
                                     F-43
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
16. BUSINESS SEGMENT INFORMATION
 
   The Company's operations have been classified into three segments: coal,
independent power operations and terminal operations. The coal segment
includes the production and sale of coal from the Powder River Basin in
eastern Montana. It also includes coal mining operations in the eastern United
States which were idled in the third quarter of 1995. The independent power
operations includes the ownership of interests in cogeneration and other non-
regulated independent power plants. The terminal operation segment consists of
the leasing of capacity at Dominion Terminal Associates, a coal storage and
vessel loading facility. Summarized financial information by segment for 1998,
1997 and 1996 is as follows:
 
<TABLE>
<CAPTION>
                                   Independent Terminal            Discontinued
                           Coal       Power    Operation Corporate  Operations   Total
                         --------  ----------- --------- --------- ------------ --------
<S>                      <C>       <C>         <C>       <C>       <C>          <C>
1998
Revenues................ $ 44,010   $ 64,465    $   94    $   --      $  --     $108,569
Earnings of equity
 investees..............      --      64,465        94        --         --       64,559
Operating income
 (loss).................    1,918     61,805      (985)   (45,666)       --       17,072
Depreciation, depletion
 and
 amortization...........    1,472         39       648        130        --        2,289
DTA impairment charge...      --         --     12,164        --         --       12,164
Interest expense........      270         70         9      5,029        --        5,378
Interest income.........      674      1,917        87        916        --        3,594
Investment in equity
 investees..............      --      62,386     5,475        --         --       67,861
  Total assets..........   61,555    124,617     7,040     22,394        --      215,606
Capital expenditures....    2,935          8       --           2        --        2,945
1997
Revenues................   47,182     17,770       880        --         --       65,832
Earnings of equity
 investees..............      --      17,770       880        --         --       18,650
Operating income
 (loss).................    2,593     15,126      (615)    16,516        --       33,620
Depreciation, depletion
 and
 amortization...........    1,499         96        60         60        139       1,854
Interest expense........      180        113       --          27        --          320
Interest income.........      381        551        68        552        --        1,552
Investment in equity
 investees..............      --      54,152    18,680        --         --       72,832
  Total assets..........   53,420     70,546    20,683     37,348        --      181,997
Capital expenditures....      151          8       --          15        --          174
1996
Revenues................   44,152     15,335       827        --         --       60,314
Earnings of equity
 investees..............      --      15,335       827        --         --       16,162
Operating income
 (loss).................   (1,305)    13,569      (611)   (12,497)       --         (844)
Depreciation, depletion
 and
 amortization...........    1,687        100        73        129        347       2,336
Interest expense........      196         91       --         113        --          400
Interest income.........      168        438        61        788        --        1,455
Investment in equity
 investees..............      --      51,386    19,841        --         --       71,227
  Total assets..........   46,495     53,276    20,636     25,786      7,778     153,971
Capital expenditures....      338         28       --          85        213         664
                         ========   ========    ======    =======     ======    ========
</TABLE>
 
                                     F-44
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Reconciliation of operating income to income from continuing operations
before income taxes:
 
<TABLE>
<CAPTION>
                                       Independent Terminal
                               Coal       Power    Operation Corporate   Total
                             --------  ----------- --------- ---------  -------
<S>                          <C>       <C>         <C>       <C>        <C>
1998
Operating income............ $  1,918   $ 61,805    $ (985)  $(45,666)  $17,072
Gains on sale of assets.....      --         --        --         475       475
Interest expense............     (270)       (70)       (9)    (5,029)   (5,378)
Interest income.............      674      1,917        87        916     3,594
Minority interest...........     (775)       --        --         --       (775)
Other income................       35        --        --       1,964     1,999
Reorganization costs........      --         --        --      (9,872)   (9,872)
                             --------   --------    ------   --------   -------
Income from continuing
 operations before income
 taxes...................... $  1,582   $ 63,652    $ (907)  $(57,212)  $ 7,115
                             ========   ========    ======   ========   =======
1997
Operating income............ $  2,593   $ 15,126    $ (615)  $ 16,516   $33,620
Gains on sale of assets.....      --         --        --         969       969
Interest expense............     (180)      (113)      --         (27)     (320)
Interest income.............      381        551        68        552     1,552
Minority interest...........   (1,092)       --        --         --     (1,092)
Other income................      128        --        --         585       713
Reorganization costs........      --         --        --      (2,484)   (2,484)
                             --------   --------    ------   --------   -------
Income from continuing
 operations before income
 taxes...................... $  1,830   $ 15,564    $ (547)  $ 16,111   $32,958
                             ========   ========    ======   ========   =======
1996
Operating income............ $ (1,305)  $ 13,569    $ (611)  $(12,497)  $  (844)
Gains on sale of assets.....      --         --        --      24,238    24,238
Interest expense............     (196)       (91)      --        (113)     (400)
Interest income.............      168        438        61        788     1,455
Minority interest...........     (890)       --        --         --       (890)
Other income................       51         14       --       1,971     2,036
Reorganization costs........      --         --        --         --        --
                             --------   --------    ------   --------   -------
Income from continuing
 operations before income
 taxes...................... $ (2,172)  $ 13,930    $ (550)  $ 14,387   $25,595
                             ========   ========    ======   ========   =======
</TABLE>
 
17. COMMITMENTS AND CONTINGENCIES
 
 Protection of the Environment
 
   The Company believes its mining operations are in compliance with
applicable federal, state and local environmental laws and regulations,
including those relating to surface mining and reclamation, and it is the
policy of the Company to operate in compliance with such standards. The
Company maintains compliance primarily through maintenance and monitoring
activities. WRI has an agreement with its mining contractor, Morrison Knudsen
Company, Inc. (which owns 20% of the stock of WRI), which determined the
Company's maximum liability for reclamation costs associated with final mine
 
                                     F-45
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
closure. It calls for the Company to pay approximately $1,700,000 over a 15
year period which began in December 1990. All remaining liability is that of
customers who are obligated to pay final reclamation costs under provisions of
their respective coal sales contracts or Morrison Knudsen. In addition, per
ton reclamation fees imposed by the Federal Surface Mining Control and
Reclamation Act of 1977 (the "Surface Mining Act") amounted to approximately
$2,241,000, $2,455,000 and $1,707,000 in 1998, 1997 and 1996, respectively.
 
   The Company estimates the total cost for the reclamation of its remaining
Virginia Division properties is $2,736,000, all of which has been accrued as
of December 31, 1998. No assurance can be given that the amount accrued
accurately reflects the actual cost of reclamation activities that may be
required. Costs incurred to perform reclamation in 1998, 1997, and 1996
amounted to $153,000, $257,000, and $148,000 respectively.
 
   In the event final reclamation is not performed in accordance with state
and federal regulations, the Company has $10,600,000 and $5,434,000 of
reclamation bonds in place in Montana and Virginia, respectively, to assure
compliance with all applicable regulations.
 
 Adventure Resources, Inc.
 
   The Company has both secured and unsecured claims against Adventure
Resources, Inc. ("Adventure") in the United States Bankruptcy Court for the
Southern District of West Virginia. The secured claims approximate $3,776,000
and are collateralized by first and subordinated liens on certain assets of
Adventure. Cash payments of $1,028,000 were received during 1998 and the
Company is seeking to recover remaining amounts. As of December 31, 1998, all
remaining claims against Adventure have been fully reserved due to the
uncertainty of collection.
 
 Lease Obligations
 
   The Company leases coal lands from third-parties. Under the terms of these
agreements, the Company is subject to minimum annual royalties aggregating
$198,000 plus real estate taxes, until the reserves are exhausted.
 
   WRI has an agreement to lease coal reserves from the Crow Tribe of Indians
which is in effect until exhaustion of the underlying reserves. This lease
requires annual rentals, recoupable minimum royalty and production royalty
payments. The royalty rate varies from 6% of the F.O.B. mine price to a 12.5%
rate net of all production-based taxes.
 
   Royalties and rentals charged to expense under all lease agreements,
including those in effect for WRI, amounted to $3,591,000, $3,742,000, and
3,438,000 in 1998, 1997 and 1996, respectively.
 
   The Company has operating lease commitments expiring at various dates,
primarily for real property and equipment. Minimum rental obligations existing
under these leases at December 31, 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                                 (in thousands)
        <S>                                                      <C>      <C>
        1999.................................................... $    344
        2000....................................................      251
        2001....................................................      129
        2002....................................................       12
</TABLE>
 
                                     F-46
<PAGE>
 
                  WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 Long-Term Sales Commitments
 
   The following table presents total sales tonnage the Company expects to
ship under existing long-term contracts for the next five years from the
Company's mining operations (all from WRI):
 
<TABLE>
<CAPTION>
                     Projected Sales Tonnage Under
                  Existing Long-Term Contracts (000s)
                  -----------------------------------
        <S>                                               <C>
        1999............................................. 6,200
        2000............................................. 3,700
        2001............................................. 3,700
        2002............................................. 3,700
        2003............................................. 3,700
</TABLE>
 
   WRI has also entered into an option agreement with Northern States Power
whereby it has agreed to sell up to an additional 200,000,000 tons of coal. As
compensation for granting the option, WRI receives 1 1/4 cents, payable
quarterly (with applicable price adjustments) for each optioned ton. The
option may be exercised at any time in whole or in part through December 31,
2005. If exercised, the sales price will be based on the market price at the
time the option is exercised. WRI recorded income totaling $3,171,000,
$3,128,000, and $3,067,000 during 1998, 1997 and 1996, respectively, relative
to the option agreement. No coal has been delivered under the option
agreement.
 
18. TRANSACTIONS WITH AFFILIATED COMPANIES
 
   The Company leases coal lands from Penn Virginia Coal Company whose parent
company, Penn Virginia Corporation ("Penn Virginia") held a 10.85% voting
interest in the Company at December 31, 1996. In January, 1997, Penn Virginia
reduced its ownership interest in the Company to an insignificant level and is
no longer considered an affiliate. The Company paid no royalties to Penn
Virginia for coal sold during 1998 or 1997. Amounts paid to Penn Virginia for
royalties on coal was $1,301,000 for the year ended December 31, 1996. In 1996
and 1995 the Company sold certain mineral leases back to Penn Virginia. Refer
to Note 3 to the Consolidated Financial Statements for additional information
regarding the sale of these leases.
 
   Westmoreland Resources, Inc., a 80% owned subsidiary, has a coal mining
contract with Morrison Knudsen Company, Inc., one of its stockholders. Mining
costs incurred under the contract were $22,654,000, $24,295,000, and
$16,552,000 in 1998, 1997 and 1996, respectively.
 
                                     F-47
<PAGE>
 
                   WESTMORELAND COAL COMPANY AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
 
   Summarized quarterly financial data for 1998 and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                Three Months Ended
                                        --------------------------------------
                                        March 31  June 30   Sept. 30  Dec. 31
                                        --------  --------  --------  --------
                                          (in thousands except per share
                                                       data)
<S>                                     <C>       <C>       <C>       <C>
1998
Revenues..............................  $ 16,962  $ 61,845  $ 15,485  $ 14,277
Costs and expenses....................   (16,198)  (15,342)  (15,226)  (44,731)
                                        --------  --------  --------  --------
Operating income......................       764    46,503       259   (30,454)
Gain (loss) on sale of assets.........       136        51       204        84
Income from continuing operations
 before reorganization items and
 income taxes.........................     2,084    46,221       715   (30,439)
Reorganization items:
 Legal and consulting fees............      (659)     (776)   (1,321)   (7,116)
 Interest expense.....................       --        --        --     (5,188)
 Interest income......................       637       691     1,102     1,164
Income from continuing operations
 before income taxes..................     2,062    46,136       496   (41,579)
Income tax expense....................       --        --       (197)   (3,590)
Cumulative effect of change in
 accounting principle                        --    (9,876)       --        --
Net income (loss).....................     2,062    36,260       299   (45,169)
Less preferred stock dividends in
 arrears..............................    (1,222)   (1,222)   (1,222)   (1,222)
                                        --------  --------  --------  --------
Income (loss) applicable to
 commonshareholders...................  $    840  $ 35,038  $   (923) $(46,391)
                                        ========  ========  ========  ========
Income (loss) per share applicable to
 common shareholders:
 Continuing operations................  $    .12  $   6.45  $   (.13) $  (6.66)
 Cumulative effect of change in
  accounting principle ...............       --      (1.42)      --        --
                                        --------  --------  --------  --------
                                        $    .12  $   5.03  $   (.13) $  (6.66)
                                        ========  ========  ========  ========
Number of common and common equivalent
 shares outstanding (weighted
 average).............................     6,965     6,965     6,965     6,965
                                        ========  ========  ========  ========
1997
Revenues..............................  $ 16,534  $ 16,688  $ 18,994  $ 13,616
Costs and expenses....................   (14,216)  (14,226)  (14,172)   10,402
                                        --------  --------  --------  --------
Operating income......................     2,318     2,462     4,822    24,018
Gain (loss) on sale of assets.........      (905)      732        99     1,043
Income from continuing operations
 before reorganization items and
 income taxes ........................     2,478     3,542     4,978    22,892
Reorganization items:
 Legal and consulting fees............      (750)   (1,034)     (900)      200
 Interest income......................       324       327       403       498
Income from continuing operations
 before income taxes .................     1,880     2,766     4,320    23,992
Loss from discontinued operations.....      (521)   (3,320)     (813)     (148)
Net income (loss).....................     1,359      (554)    3,507    23,844
Less preferred stock dividends in
 arrears..............................    (1,222)   (1,222)   (1,222)   (1,222)
                                        --------  --------  --------  --------
Income (loss) applicable to
 commonshareholders...................  $    137  $ (1,776) $  2,285  $ 22,622
                                        ========  ========  ========  ========
Income (loss) per share applicable to
 common shareholders:
 Continuing operations................       .09       .22       .45      3.27
 Discontinued operations..............      (.07)     (.48)     (.12)     (.02)
                                        --------  --------  --------  --------
                                        $    .02  $   (.26) $    .33  $   3.25
                                        ========  ========  ========  ========
Number of common and common equivalent
 shares outstanding (weighted
 average).............................     6,965     6,965     6,965     6,965
                                        ========  ========  ========  ========
</TABLE>
 
                                      F-48
<PAGE>
 
                         INDEPENDENT AUDITOR'S REPORT
 
The Board of Directors and Shareholders
Westmoreland Coal Company:
 
   We have audited the accompanying consolidated balance sheets of
Westmoreland Coal Company and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
 
   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Westmoreland Coal Company and subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
 
   As discussed in Notes 1 and 9 to the consolidated financial statements, the
Company changed its method of accounting for start-up costs in 1998 and its
method of accounting for pneumoconiosis benefits in 1996.
 
                                          KPMG LLP
 
Denver, Colorado
February 18, 1999
 
                                     F-49
<PAGE>
 
   The Letter of Transmittal, depositary receipts for Depositary Shares and
any other required documents should be sent or delivered by each shareholder
of the Company or such shareholder's broker, dealer, commercial bank, or trust
company to the Depositary at one of its addresses set forth below. Facsimile
copies of the Letter of Transmittal, properly completed and duly executed,
will be accepted from Eligible Institutions only.
 
                       The Depositary for the Offer is:
 
                          FIRST CHICAGO TRUST COMPANY
                                  OF NEW YORK
 
          By Facsimile Transmission (for Eligible Institutions only):
                       (201) 222-4720 or (201) 222-4721
 
                     Confirm by Telephone: (201) 222-4707
 
  By Overnight Courier:           By Mail:                    By Hand:
   First Chicago Trust        First Chicago Trust        First Chicago Trust
   Company of New York        Company of New York        Company of New York
   Tenders & Exchanges        Tenders & Exchanges        Tenders & Exchanges
   Suite 4680 14 Wall      Suite 4660 P.O. Box 2569    c/o Securities Transfer
  Street, 8th Floor New     Jersey City, NJ 07303-     and Reporting Services
     York, NY 10005                  2569                 100 William St.,
                                                        Galleria New York, NY
                                                                10038
 
   Any questions or requests for assistance or for additional copies of this
Offer to Purchase or the Letter of Transmittal may be directed to the
Information Agent. Shareholders may also contact their broker, dealer,
commercial bank, trust company, or other nominee for assistance concerning the
Offer.
 
                    The Information Agent for the Offer is:
 
                              MORROW & CO., INC.
 
                          445 Park Avenue, 5th Floor
                           New York, New York 10022
                           Toll Free (800) 566-9061
                          Call Collect (212) 754-8000
 
                    Banks and Brokerage Firms Please Call:
                                (800) 662-5200

<PAGE>
 
IMMEDIATE RELEASE

            WESTMORELAND OFFERS TO PURCHASE SERIES A PREFERRED STOCK

     COLORADO SPRINGS, CO, March 10, 1999 -- Westmoreland Coal Company today
announced that it has offered to purchase up to 1,052,631 depositary shares,
each representing one quarter of a share of its Series A Convertible
Exchangeable Preferred Stock. The offer price is $19.00 per depositary share.

     The offer and withdrawal rights will expire at midnight on April 6, 1999,
unless the offer is extended.

     The offer is being made pursuant to the terms of the Master Agreement among
the Company, certain of its subsidiaries, the Official Committee of Equity
Security Holders ("Equity Committee"), the United Mine Workers of America
("UMWA"), and the UMWA Health and Retirement Funds that facilitated a consensual
dismissal of the Company's bankruptcy case and under which the Company would
offer to purchase $20 million worth of depositary shares at an offer price of
$19.00 per depositary share, or 1,052,631 shares. The offer price of $19.00 per
depositary share was set by the Equity Committee. The payment of $19.00 per
share is in full satisfaction of claims to dividends in arrears on the
depositary shares. The closing of the offer is contingent on the sale of the
Company's remaining interest in the Rensselaer independent power project.

     On March 9, the depositary shares closed at $16 7/8 per share on the OTC
Bulletin Board.

     The Company, its Board of Directors, and its executive officers make no 
recommendation as to whether any shareholder should tender any or all of such 
shareholder's depositary shares pursuant to the offer.

     The offer is being made pursuant to an offer to purchase and letter of
transmittal, which will be provided to holders of depositary shares. Holders of
the depositary shares may call Morrow & Co., Inc. at (800) 566-9061 (toll free)
or (212) 754-8000 (collect) for further details about the offer. Banks and
brokerage firms may contact Morrow & Co., Inc. at (800) 662-5200.

                                      # # #


     For further information contact Diane Jones (719) 442-2600

<PAGE>
 
                             LETTER OF TRANSMITTAL
 
         TO TENDER DEPOSITARY SHARES (CUSIP 960878 30 4) ("DEPOSITARY
        SHARES"), EACH REPRESENTING ONE QUARTER OF A SHARE OF SERIES A
                   CONVERTIBLE EXCHANGEABLE PREFERRED STOCK,
 
                                      OF
 
                           WESTMORELAND COAL COMPANY
 
            PURSUANT TO THE OFFER TO PURCHASE DATED MARCH 10, 1999
 
 
 THE OFFER, AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY
        TIME, ON TUESDAY, APRIL 6, 1999, UNLESS THE OFFER IS EXTENDED.
 
            To: FIRST CHICAGO TRUST COMPANY OF NEW YORK, DEPOSITARY
 
                                   By Mail:
                               (registered mail               By Hand:
  By Overnight Courier:          recommended)
 
 
 
                                                         First Chicago Trust
   First Chicago Trust        First Chicago Trust        Company of New York
   Company of New York        Company of New York        Tenders & Exchanges
   Tenders & Exchanges        Tenders & Exchanges      c/o Securities Transfer
       Suite 4680                 Suite 4660           and Reporting Services
   14 Wall Street, 8th           P.O. Box 2569            100 William St.,
          Floor             Jersey City, NJ 07303-            Galleria
   New York, NY 10005                2569                New York, NY 10038
 
  DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
 
  THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
 
  This Letter of Transmittal is to be completed by holders of Depositary
Shares, either (i) if depositary receipts for Depositary Shares are to be
delivered herewith or (ii) unless an Agent's Message (as defined in the
accompanying Offer to Purchase of Westmoreland Coal Company (the "Company")
(as amended or supplemented (including documents incorporated by reference),
the "Offer to Purchase") is utilized, if tenders of Depositary Shares are to
be made by book-entry transfer into the account of First Chicago Trust Company
of New York, as Depositary (the "Depositary"), at The Depository Trust Company
("DTC"), pursuant to the procedures described in Section 5 of the Offer to
Purchase. Holders of Depositary Shares who tender Depositary Shares by book-
entry transfer are referred to herein as "Book-Entry Shareholders."
 
  FOR HELP WITH COMPLETING THIS LETTER OF TRANSMITTAL, CONTACT MORROW & CO.,
INC., THE INFORMATION AGENT, TOLL FREE AT (800) 566-9061 OR COLLECT AT
(212) 754-8000. BANKS AND BROKERAGE FIRMS MAY CONTACT MORROW & CO., INC. AT
(800) 662-5200.
<PAGE>
 
                                 INSTRUCTIONS
 
             FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
 
  1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by a financial
institution (including most banks, savings and loan associations, and
brokerage houses) that is a participant in the Security Transfer Agents
Medallion Program (each of the foregoing being referred to as an "Eligible
Institution"). Signatures on this Letter of Transmittal need not be guaranteed
if (a) this Letter of Transmittal is signed by the registered holder of the
Depositary Shares tendered herewith and such holder has not completed the box
entitled "Special Payment Instructions" on this Letter of Transmittal or (b)
the Depositary Shares tendered herewith are tendered for the account of an
Eligible Institution. If Depositary Shares are registered in the name of a
person other than the signatory on this Letter of Transmittal, or if
unpurchased Depositary Shares are to be issued to a person other than the
registered holder(s), the tendered depositary receipts must be endorsed or
accompanied by appropriate stock powers, in either case signed exactly as the
name or names of the registered holder(s) appear on the depositary receipts
with the signature(s) on the depositary receipts or stock powers guaranteed as
aforesaid. See Instruction 5.
 
  2. DELIVERY OF LETTER OF TRANSMITTAL AND DEPOSITARY SHARES. This Letter of
Transmittal is to be completed by holders of Depositary Shares either if
depositary receipts are to be delivered herewith or, unless an Agent's Message
(as defined in Section 5 of the Offer to Purchase) is utilized, if tenders are
to be made pursuant to the procedure for tender by book-entry transfer set
forth in Section 5 of the Offer to Purchase. Depositary receipts for
Depositary Shares, or timely confirmation (a "Book-Entry Confirmation") of a
book-entry transfer of such Depositary Shares into the Depositary's account at
DTC, as well as this Letter of Transmittal (or a facsimile hereof), properly
completed and duly executed, with any required signature guarantees, or an
Agent's Message in the case of a book-entry delivery, and any other documents
required by this Letter of Transmittal, must be received by the Depositary at
one of its addresses set forth herein prior to the Expiration Date. Delivery
of documents to DTC in accordance with DTC's procedures does not constitute
delivery to the Depositary.
 
  Unless the Depositary Shares being tendered by the above-described method
are deposited with the Depositary within the time period set forth above
(accompanied or preceded by a properly completed Letter of Transmittal and any
other required documents) or a confirmation of book-entry transfer of such
Depositary Shares into the Depositary's account at DTC in accordance with
DTC's Automated Tender Offer Program ("ATOP") procedures is received, the
Company may, at its option, reject the tender.
 
  THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING DEPOSITARY RECEIPTS, THIS
LETTER OF TRANSMITTAL, AND ANY OTHER REQUIRED DOCUMENTS, IS AT THE ELECTION
AND RISK OF THE TENDERING SHAREHOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL
WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
 
  No alternative, conditional, or contingent tenders will be accepted. By
executing this Letter of Transmittal (or facsimile hereof), the tendering
holder waives any right to receive any notice of the acceptance of the
Depositary Shares for purchase.
 
  3. INADEQUATE SPACE. If the space provided herein is inadequate, the
depositary receipt numbers and/or the number of Depositary Shares should be
listed on a separate signed schedule attached hereto.
 
  4. PARTIAL TENDERS. (Not applicable to Book-Entry Shareholders) If fewer
than all the Depositary Shares represented by any depositary receipt delivered
to the Depositary are to be tendered, fill in the number of Depositary Shares
which are to be tendered in the box entitled "Number of Depositary Shares
Tendered". In such case, a new depositary receipt for the remainder of the
Depositary Shares represented by the old depositary
 
                                       1
<PAGE>
 
receipt will be sent to the person(s) signing this Letter of Transmittal,
unless otherwise provided in the appropriate box on this Letter of
Transmittal, as promptly as practicable following the Expiration Date. All
Depositary Shares represented by depositary receipts delivered to the
Depositary will be deemed to have been tendered unless otherwise indicated.
 
  5. SIGNATURES ON LETTER OF TRANSMITTAL; STOCK POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Depos-
itary Shares tendered hereby, the signature(s) must correspond with the
name(s) as written on the face of the depositary receipts without alteration,
enlargement or any change whatsoever.
 
  If any of the Depositary Shares tendered hereby are held of record by two or
more persons, all such persons must sign this Letter of Transmittal.
 
  If any of the Depositary Shares tendered hereby are registered in different
names on different depositary receipts, it will be necessary to complete,
sign, and submit as many separate Letters of Transmittal as there are
different registrations of depositary receipts.
 
  If this Letter of Transmittal is signed by the registered holder(s) of the
Depositary Shares tendered hereby, no endorsements of depositary receipts or
separate stock powers are required unless Depositary Shares not tendered or
not purchased are to be returned in the name of any person other than the
registered holder(s). Signatures on any such depositary receipts or stock
powers must be guaranteed by an Eligible Institution.
 
  If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Depositary Shares tendered hereby, depositary
receipts must be endorsed or accompanied by appropriate stock powers, in
either case, signed exactly as the name(s) of the registered holder(s)
appear(s) on the depositary receipts for such Depositary Shares. Signature(s)
on any such depositary receipts or stock powers must be guaranteed by an
Eligible Institution.
 
  If this Letter of Transmittal or any depositary receipt or stock power is
signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation, or other person acting in a fiduciary or
representative capacity, such person should so indicate when signing, and
proper evidence satisfactory to the Company of the authority of such person so
to act must be submitted.
 
  6. STOCK TRANSFER TAXES. The Company will pay all stock transfer taxes, if
any, applicable to the sale of any Depositary Shares pursuant to the Offer.
If, however, depositary receipts representing Depositary Shares not tendered
or not purchased are to be delivered to, or are to be issued in the name of,
any person other than the registered holder of the Depositary Shares tendered
or if a transfer tax is imposed for any reason other than the sale of
Depositary Shares pursuant to the Offer, then the amount of any such transfer
taxes (whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with this Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
 
  7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If any Depositary Shares not
tendered or not purchased are to be issued or to be returned to a person other
than the person(s) signing this Letter of Transmittal or any depositary
receipts for Depositary Shares not tendered or not purchased are to be mailed
to someone other than the person(s) signing this Letter of Transmittal or to
the person(s) signing this Letter of Transmittal at an address other than that
shown above, the appropriate boxes on this Letter of Transmittal should be
completed.
 
  8. SUBSTITUTE FORM W-9. Under U.S. federal income tax law, the Company may
be required to withhold 31% of the amount of any payments made to certain
shareholders or other payees with respect to the Depositary Shares purchased
in the Offer. In order to avoid such backup withholding, each tendering
shareholder, and, if applicable, each other payee, must provide such
shareholder's or payee's correct taxpayer identification
 
                                       2
<PAGE>
 
number and certify that such shareholder or payee is not subject to such
backup withholding by completing the Substitute Form W-9 set forth below. In
general, if a shareholder or payee is an individual, the taxpayer
identification number is the social security number of such individual. If the
Company is not provided with the correct taxpayer identification numbers, the
shareholder or payee may be subject to a $50 penalty imposed by the Internal
Revenue Service. Certain shareholders or payees (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. In order to satisfy the Company that a
foreign individual qualifies as an exempt recipient, such shareholder or payee
must submit a Form W-8, signed under penalties of perjury, attesting to that
individual's exempt status. Such Form W-8 can be obtained from the Depositary.
For further information concerning backup withholding and instructions for
completing the Substitute Form W-9 (including how to obtain a taxpayer
identification number if you do not have one and how to complete the
Substitute Form W-9 if Depositary Shares are held in more than one name),
consult the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
 
  9. WITHHOLDING ON NON-U.S. HOLDERS. Even if a Non-U.S. Holder (as defined in
Section 2 of the Offer to Purchase) has provided the required certification to
avoid backup withholding, the Depositary will withhold U.S. federal income tax
at a rate equal to 30% of the gross proceeds paid to a Non-U.S. Holder or his
agent pursuant to the Offer, unless the Depositary determines, by reference to
the Non-U.S. Holder's address and any IRS Forms 1001 or 4224 submitted to the
Depositary by a Non-U.S. Holder (unless facts and circumstances indicate that
such reliance is not warranted or unless applicable law requires some other
method for determining whether a reduced rate of withholding is applicable),
that a reduced rate of withholding is available pursuant to a tax treaty or
that an exemption from withholding is applicable because the gross proceeds
are effectively connected with the conduct of a trade or business by the Non-
U.S. Holder within the United States. IRS Forms 1001 and 4224 may be obtained
from the Information Agent. See Section 2 of the Offer to Purchase.
 
  10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance or
additional copies of the Offer to Purchase and this Letter of Transmittal may
be obtained from the Information Agent at its address or telephone numbers set
forth below.
 
                    NOTE: SIGNATURES MUST BE PROVIDED BELOW
 
               PLEASE READ THE PRECEDING INSTRUCTIONS CAREFULLY
 
LADIES AND GENTLEMEN:
 
  The undersigned hereby tenders to Westmoreland Coal Company, a Delaware
corporation (the "Company"), the below-described Depositary Shares (including
the associated dividend arrearages), each representing one quarter of a share
of the Company's Series A Convertible Exchangeable Preferred Stock, par value
$1.00 per share ("Series A Preferred Stock"), liquidation preference equal to
$25 per Depositary Share, pursuant to the Company's offer to purchase up to
1,052,631 Depositary Shares at a price of $19.00 per Depositary Share (the
"Purchase Price"), net to the seller in cash, upon the terms and subject to
the conditions set forth in the Offer to Purchase dated March 10, 1999 (the
"Offer to Purchase"), receipt of which is hereby acknowledged, and in this
Letter of Transmittal (which, together with the Offer to Purchase, and as they
may be amended and supplemented from time to time, constitute the "Offer").
Unless the context requires otherwise, all references to the Depositary Shares
shall include any claims to cumulative dividends on such shares that have not
previously been paid.
 
  Subject to and effective upon acceptance for payment of the Depositary
Shares tendered herewith in accordance with the terms of the Offer (including,
if the Offer is extended or amended, the terms and conditions of any such
extension or amendment), the undersigned hereby sells, assigns, and transfers
to or upon the order of the Company all right, title, and interest in and to
all the Depositary Shares that are being tendered hereby that are purchased
pursuant to the Offer and hereby irrevocably constitutes and appoints the
Depositary the true and lawful agent and attorney-in-fact of the undersigned
with respect to such Depositary Shares, with full power
 
                                       3
<PAGE>
 
of substitution (such power of attorney being deemed to be an irrevocable
power coupled with an interest), to (a) deliver depositary receipts for such
Depositary Shares or transfer ownership of such Depositary Shares on the
account books maintained by The Depository Trust Company ("DTC"), together, in
any such case, with all accompanying evidences of transfer and authenticity,
to or upon the order of the Company, (b) present depositary receipts for such
Depositary Shares for cancellation and transfer on the books of the Company,
and (c) receive all benefits and otherwise exercise all rights of beneficial
ownership of such Depositary Shares, all in accordance with the terms of the
Offer.
 
  The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign, and transfer the Depositary
Shares tendered hereby and that, when the undersigned's Depositary Shares are
accepted for purchase, the Company will acquire good, marketable, and
unencumbered title to such tendered Depositary Shares, free and clear of all
liens, restrictions, charges, and encumbrances and not subject to any adverse
claim. The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment, and transfer of tendered Depositary Shares.
 
  All authority herein conferred or agreed to be conferred shall survive the
death, bankruptcy, or incapacity of the undersigned and every obligation of
the undersigned hereunder shall be binding upon the heirs, legal
representatives, successors, assigns, executors, and administrators of the
undersigned. Except as stated in the Offer, this tender is irrevocable.
 
  The undersigned understands and agrees that tenders of Depositary Shares
pursuant to any one of the procedures described in Section 5 of the Offer to
Purchase and in the instructions hereto will constitute agreements between the
undersigned and the Company upon the terms and subject to the conditions of
the Offer, including its proration provisions, and the Company will return all
other Depositary Shares not purchased pursuant to the Offer, including
Depositary Shares not purchased because of proration. The undersigned
understands and agrees that if the Company accepts the tender of such
Depositary Shares, all claims by and rights of the undersigned or any other
person to receive dividends (including accrued but unpaid dividends) with
respect to the Depositary Shares (or the Series A Preferred Stock represented
by such Depositary Shares) purchased by the Company are forever extinguished
and that the payment of $19.00 per Depositary Share is in full satisfaction of
all claims with respect to such Depositary Shares (and the Series A Preferred
Stock represented by such Depositary Shares), including claims for accrued but
unpaid dividends.
 
  Unless otherwise indicated under "Special Payment Instructions", please
issue the check for the Purchase Price and/or return or issue the depositary
receipt(s) evidencing any Depositary Shares not tendered, not accepted for
payment, or for which payment is not made, in the name(s) of the undersigned
(and, in the case of Depositary Shares tendered by book-entry transfer, by
credit to the account at DTC). Similarly, unless otherwise indicated under
"Special Delivery Instructions", please mail the check for the Purchase Price
and/or the depositary receipt(s) evidencing any Depositary Shares not
tendered, not accepted for payment, or for which payment is not made (and
accompanying documents, as appropriate), to the undersigned at the address
shown below the undersigned's signature(s). If both "Special Payment
Instructions" and "Special Delivery Instructions" are completed, please issue
the check for the Purchase Price and/or issue or return the depositary
receipt(s) evidencing any Depositary Shares not tendered, not accepted for
payment, or for which payment is not made, in the name(s) of, and deliver said
check and/or depositary receipt(s) to, the person(s) so indicated (and in the
case of Depositary Shares tendered by book-entry transfer, by credit to the
account at DTC). The undersigned recognizes that the Company has no
obligation, pursuant to the "Special Payment Instructions", to transfer any
Depositary Shares from the name(s) of the registered holder(s) thereof if the
Company does not accept for payment or make payment for any of the Depositary
Shares so tendered.
 
                                       4
<PAGE>
 
                             [COMPLETE THIS BOX.]
 
 
<TABLE>
<CAPTION>
                                                          Depositary Shares Tendered
                                         --------------------------------------------------
                                                                   Number of
                                                               Depositary Shares Number of
                                                    Depositary  Represented by   Depositary
  Name(s) and Address(es) of Registered Holder(s)    Receipt      Depositary       Shares
            (Please fill in, if blank)              Number(s)     Receipt(s)     Tendered*
- -------------------------------------------------------------------------------------------
                                         --------------------------------------------------
                                         --------------------------------------------------
                                         --------------------------------------------------
                                         --------------------------------------------------
                                         --------------------------------------------------
  <S>                                               <C>        <C>               <C>
                                                    Total number of Depositary Shares
                                                    Tendered:
</TABLE>
 
* Unless otherwise indicated, the holder will be deemed to have tendered the
  full number of Depositary Shares represented by the tendered depositary
  receipts. See Instruction 4.
 
 
 
    SPECIAL PAYMENT INSTRUCTIONS              SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 4, 5, 6, and 7)        (See Instructions 1, 4, 5, and 7)
 
 
  To be completed ONLY if the check         To be completed ONLY if the check
 for the aggregate Purchase Price          for the aggregate Purchase Price
 of Depositary Shares purchased            of Depositary Shares purchased
 and/or depositary receipts for De-        and/or depositary receipts for De-
 positary Shares not tendered or           positary Shares not tendered or
 not purchased, are to be issued in        not purchased, are to be mailed to
 the name of someone other than the        someone other undersigned, or to
 undersigned.                              the undersigned at an address
                                           other than that shown below the
                                           undersigned's signature(s).
 
 Issue Check and Depositary
 Receipts to:
 
 
                                           Mail Check and Depositary Receipts
 Name(s) ___________________________       to:
 
           (Please Print)
                                           Name ______________________________
 
 Address ___________________________                     (Please Print)
 
 ___________________________________
 ___________________________________       Address ___________________________
         (Include Zip Code)                ___________________________________
                                           ___________________________________
 
 Telephone Number __________________               (Include Zip Code)
            (Include Area Code)
 
 ___________________________________
    (Tax Identification or Social
            Security No.)
 
                                       5
<PAGE>
 
 
                                   SIGN HERE
 
 _____________________________________________________________________________
 
 _____________________________________________________________________________
 
 Date: ____________________________ , 1999
 
   Must be signed by the registered holder(s) exactly as name(s) appear(s) on
 depositary receipts for Depositary Shares or on a security position listing
 or by person(s) authorized to become registered holder(s) by endorsed
 depositary receipt(s) or stock powers transmitted herewith. If signature is
 by a trustee, executor, administrator, guardian, attorney-in-fact, officer
 of a corporation, or other person acting in a fiduciary or representative
 capacity, please set forth full title and see Instruction 5.
 
 Name(s) _____________________________________________________________________
 
 _____________________________________________________________________________
 
 _____________________________________________________________________________
                                 (Please Print)
 Capacity (full title) _______________________________________________________
 
 Address _____________________________________________________________________
 
 _____________________________________________________________________________
                               (Include Zip Code)
 Daytime Area Code and Telephone No. ( _____________________________________ )
 
 Tax Identification or Social Security Nos. __________________________________
                                    Please complete Substitute Form W-9
 
                           GUARANTEE OF SIGNATURE(S)
     (Signature(s) must be guaranteed if required by Instructions 1 and 5)
 
 Authorized Signature ________________________________________________________
 
 Dated _______________________________________________________________________
 
 Name and Title ______________________________________________________________
                                      (Please Print)
 Name of Firm ________________________________________________________________
 
 Address _____________________________________________________________________
 
 Area Code and Telephone Number ______________________________________________
 
                                       6
<PAGE>
 
                             [COMPLETE THIS FORM.]
             PAYER'S NAME: FIRST CHICAGO TRUST COMPANY OF NEW YORK
 
                        Part 1--PLEASE PROVIDE YOUR TIN    -------------------
                        IN THE BOX AT RIGHT AND CERTIFY      Social Security
                        BY SIGNING AND DATING BELOW              Number
 
 SUBSTITUTE
 
 Form W-9
                        Part 2--Certification--Under       OR ________________
 Department of          Penalties of Perjury, I certify    Part 3--Awaiting
 the Treasury           that:                              TIN [_]
 Internal                                                       Employer
 Revenue                                                     Identification
 Service                                                         Number
 
                       --------------------------------------------------------
                        (1) The number shown on this
                            form is my correct taxpayer
                            identification number (or I
                            am waiting for a number to
                            be issued to me) and
 
 Payer's Request for Taxpayer Identification Number (TIN)
 
                        (2) I am not subject to backup
                            withholding either because
                            I have not been notified by
                            the Internal Revenue Serv-
                            ice (the "IRS") that I am
                            subject to backup withhold-
                            ing as a result of a fail-
                            ure to report all interest
                            or dividends, or the IRS
                            has notified me that I am
                            no longer subject to backup
                            withholding.
                       --------------------------------------------------------
                        Certificate instructions--You must cross out item (2)
                        in Part 2 above if you have been notified by the IRS
                        that you are subject to backup withholding because of
                        underreporting interest or dividends on your tax
                        return. However, if after being notified by the IRS
                        that you were subject to backup withholding you
                        receive another notification from the IRS stating
                        that you are no longer subject to backup withholding,
                        do not cross out item (2)
 
                        SIGNATURE ____________________________________________
 
                        DATE _________________________________________________
 
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
      WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE EXCHANGE
      OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
      TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
      DETAILS.
 
                  YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
            IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9
 
 
            CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
 
 I certify under penalties of perjury that a taxpayer identification number
 has not been issued to me, and either (a) I have mailed or delivered an
 application to receive a taxpayer identification number to the appropriate
 Internal Revenue Service Center or Social Security Administration Office or
 (b) I intend to mail or deliver such an application in the near future. I
 understand that if I do not provide a taxpayer identification number within
 sixty (60) days, 31% of all reportable payments made to me thereafter will be
 withheld until I provide such a number.
 
 _____________________________________   _____________________________________
               Signature                                 Date
 
                                       7
<PAGE>
 
                           WESTMORELAND COAL COMPANY
                          2 North Cascade, 14th Floor
                        Colorado Springs, Colorado 80903
 
                    THE INFORMATION AGENT FOR THE OFFER IS:
 
 
                               MORROW & CO., INC.
 
                           445 Park Avenue, 5th Floor
                            New York, New York 10022
                            Toll Free (800) 566-9061
                          Call Collect (212) 754-8000
 
                     Banks and Brokerage Firms Please Call:
 
                                 (800) 662-5200
 
March 10, 1999

<PAGE>
 
                           WESTMORELAND COAL COMPANY
 
                          OFFER TO PURCHASE FOR CASH
            UP TO 1,052,631 DEPOSITARY SHARES (CUSIP 960878 30 4),
                EACH REPRESENTING ONE QUARTER OF A SHARE OF ITS
             SERIES A CONVERTIBLE EXCHANGEABLE PREFERRED STOCK, AT
                          $19.00 PER DEPOSITARY SHARE
 
 THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY
 TIME, ON TUESDAY, APRIL 6, 1999, UNLESS THE OFFER IS EXTENDED.
 
                                                                 March 10, 1999
 
To Our Clients:
 
  Enclosed for your consideration are the Offer to Purchase dated March 10,
1999 (the "Offer to Purchase") and the related Letter of Transmittal (which,
as amended and supplemented from time to time, together constitute the
"Offer") in connection with the Offer by Westmoreland Coal Company, a Delaware
corporation (the "Company"), to purchase up to 1,052,631 Depositary Shares
("Depositary Shares") (including the associated dividend arrearages), each
representing one quarter of a share of its Series A Convertible Exchangeable
Preferred Stock, par value $1.00 per share, liquidation preference equal to
$25 per Depositary Share, at a price of $19.00 per Depositary Share, net to
the seller in cash, upon the terms and subject to the conditions of the Offer.
The Company will purchase 1,052,631 Depositary Shares (or such lesser number
of Depositary Shares as are validly tendered and not withdrawn), upon the
terms and subject to the conditions of the Offer, including the proration
provisions thereof. Unless the context requires otherwise, all references to
the Depositary Shares shall include any claims to cumulative dividends on such
shares that have not previously been paid.
 
  Depositary Shares not purchased because of proration will be returned at the
Company's expense to the shareholders who tendered such Depositary Shares. The
Company reserves the right, in its sole discretion (but subject to the terms
and conditions of the Master Agreement dated as of January 4, 1999 among the
Company, certain of its subsidiaries, United Mine Workers of America, UMWA
1992 Benefit Plan, UMWA Combined Benefit Fund, UMWA 1974 Pension Trust, and
Official Committee of Equity Security Holders), to purchase more than
1,052,631 Depositary Shares pursuant to the Offer. See Section 4. "Number of
Shares; Proration; Expiration Date; Extension of the Offer" and Section 13.
"Extension of the Tender Period; Termination; Amendments" of the Offer to
Purchase.
 
  If the number of Depositary Shares validly tendered and not withdrawn on or
prior to the Expiration Date is less than or equal to 1,052,631 Depositary
Shares (or such greater number of Depositary Shares as the Company may elect
to purchase pursuant to the Offer), the Company will, upon the terms and
subject to the conditions of the Offer, purchase all Depositary Shares so
tendered.
 
  Upon the terms and subject to the conditions of the Offer, if at the
Expiration Date more than 1,052,631 Depositary Shares (or such greater number
of Depositary Shares as the Company may elect to purchase pursuant to the
Offer) are properly tendered and not withdrawn, the Company will buy
Depositary Shares on a pro rata basis from all other shareholders who properly
tender Depositary Shares (and do not withdraw them prior to the Expiration
Date). See Section 4. "Number of Shares; Proration; Expiration Date; Extension
of the Offer" and Section 5. "Procedure for Tendering Depositary Shares" of
the Offer to Purchase.
 
  The payment of $19.00 per Depositary Share for Depositary Shares purchased
by the Company is in full satisfaction of all claims with respect to such
Depositary Shares (and the Series A Preferred Stock represented
<PAGE>
 
by such Depositary Shares), including claims for accrued but unpaid dividends,
and all claims by and rights of the owner of Depositary Shares or any other
person to receive dividends (including accrued but unpaid dividends) will be
extinguished with respect to such Depositary Shares (and the Series A
Preferred Stock represented by such Depositary Shares) upon payment by the
Company therefor.
 
  We are the holder of record of Depositary Shares held for your account. A
tender of such Depositary Shares can be made only by us as the holder of
record and pursuant to your instructions. THE LETTER OF TRANSMITTAL IS
FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER
DEPOSITARY SHARES HELD BY US FOR YOUR ACCOUNT.
 
  We request instructions as to whether you wish us to tender any or all of
the Depositary Shares held by us for your account, upon the terms and subject
to the conditions set forth in the Offer to Purchase and the Letter of
Transmittal.
 
  Your attention is invited to the following:
 
    1. The Offer and withdrawal rights expire at 12:00 Midnight, New York
  City time, on Tuesday, April 6, 1999, unless the Offer is extended.
 
    2. The offer price is $19.00 per Depositary Share.
 
    3. The Offer is not conditioned upon any minimum number of Depositary
  Shares being tendered. The Offer is, however, subject to certain other
  conditions, as described in Section 8 of the Offer to Purchase.
 
    4. Any stock transfer taxes applicable to the sale of Depositary Shares
  to the Company pursuant to the Offer will be paid by the Company, except as
  otherwise provided in Instruction 6 of the Letter of Transmittal.
 
  THE COMPANY, ITS BOARD OF DIRECTORS, AND ITS EXECUTIVE OFFICERS MAKE NO
RECOMMENDATION AS TO WHETHER ANY SHAREHOLDER SHOULD TENDER ANY OR ALL OF SUCH
SHAREHOLDER'S DEPOSITARY SHARES PURSUANT TO THE OFFER. EACH SHAREHOLDER MUST
DECIDE WHETHER TO TENDER DEPOSITARY SHARES AND, IF SO, HOW MANY DEPOSITARY
SHARES TO TENDER.
 
  Upon the terms and subject to the conditions of the Offer, if more than
1,052,631 Depositary Shares have been properly tendered and not withdrawn
prior to the Expiration Date, the Company will purchase properly tendered
Shares on a pro rata basis (with appropriate adjustments to avoid purchases of
fractional Depositary Shares) as described in Section 4. "Number of Shares;
Proration; Expiration Date; Extension of the Offer" of the Offer to Purchase.
 
  If you wish to have us tender any or all of your Depositary Shares, please
so instruct us by completing, executing, and returning to us the attached
instruction form. An envelope to return your instructions to us is enclosed.
If you authorize tender of your Depositary Shares, all such Depositary Shares
will be tendered unless otherwise specified on the attached instruction form.
Your instructions should be forwarded to us in ample time to permit us to
submit a tender on your behalf by the expiration of the Offer.
 
  THE OFFER IS NOT BEING MADE TO, NOR WILL TENDERS BE ACCEPTED FROM OR ON
BEHALF OF, HOLDERS OF DEPOSITARY SHARES IN ANY JURISDICTION IN WHICH THE
MAKING OF THE OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
LAWS OF SUCH JURISDICTION.
 
 
                                       2
<PAGE>
 
                                 INSTRUCTIONS
                  WITH RESPECT TO OFFER TO PURCHASE FOR CASH
            UP TO 1,052,631 DEPOSITARY SHARES (CUSIP 960878 30 4),
             EACH REPRESENTING ONE QUARTER OF A SHARE OF SERIES A
                   CONVERTIBLE EXCHANGEABLE PREFERRED STOCK,
                         OF WESTMORELAND COAL COMPANY
 
  The undersigned acknowledge(s) receipt of your letter and the enclosed Offer
to Purchase dated March 10, 1999 and the related Letter of Transmittal (which,
as amended and supplemented from time to time, together constitute the
"Offer") in connection with the Offer by Westmoreland Coal Company, a Delaware
corporation (the "Company"), to purchase up to 1,052,631 Depositary Shares
("Depositary Shares") (including the associated dividend arrearages), each
representing one quarter of a share of its Series A Convertible Exchangeable
Preferred Stock, par value $1.00 per share, liquidation preference equal to
$25 per Depositary Share, at $19.00 per Depositary Share, net to the
undersigned in cash.
 
  This will instruct you to tender the number of Depositary Shares indicated
below (or, if no number is indicated below, all Depositary Shares) which are
held by you for the account of the undersigned, upon the terms and subject to
the conditions of the Offer.
 
                     NUMBER OF DEPOSITARY SHARES TENDERED
 
[_]By checking this box, all Depositary Shares held by you for the account of
   the undersigned, including fractional shares, will be tendered in the
   Offer. If fewer than all Depositary Shares are to be tendered, the
   undersigned has checked the box below and indicated the aggregate number of
   Depositary Shares to be tendered by you.
 
[_]    Depositary Shares*
- --------
* Unless otherwise indicated, it will be assumed that all Depositary Shares
  held by us for your account are to be tendered.
 
 
 
                                   SIGN HERE
 
- -------------------------------------     -------------------------------------
              Signature                                 Signature
 
 
- -------------------------------------     -------------------------------------
                Name                                      Name
 
 
- -------------------------------------     -------------------------------------
 
 
- -------------------------------------     -------------------------------------
               Address                                   Address
 
 
- -------------------------------------     -------------------------------------
 Social Security or Taxpayer ID No.        Social Security or Taxpayer ID No.
 
                             Dated:         , 1999
 
                                       3

<PAGE>
 
                           WESTMORELAND COAL COMPANY
 
                          OFFER TO PURCHASE FOR CASH
            UP TO 1,052,631 DEPOSITARY SHARES (CUSIP 960878 30 4),
                EACH REPRESENTING ONE QUARTER OF A SHARE OF ITS
             SERIES A CONVERTIBLE EXCHANGEABLE PREFERRED STOCK, AT
                          $19.00 PER DEPOSITARY SHARE
 
 THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY
 TIME, ON TUESDAY, APRIL 6, 1999, UNLESS THE OFFER IS EXTENDED.
 
                                                                 March 10, 1999
 
To Brokers, Dealers, Commercial Banks, Trust Companies, and Other Nominees:
 
  We have been appointed to act as Information Agent by Westmoreland Coal
Company, a Delaware corporation (the "Company"), in connection with the
Company's offer to purchase up to 1,052,631 Depositary Shares ("Depositary
Shares") (including the associated dividend arrearages), each representing one
quarter of a share of its Series A Convertible Exchangeable Preferred Stock,
par value $1.00 per share, liquidation preference equal to $25 per Depositary
Share, at a price of $19.00 per Depositary Share (the "Purchase Price"), upon
the terms and subject to the conditions set forth in the Company's Offer to
Purchase dated March 10, 1999 (the "Offer to Purchase") and the related Letter
of Transmittal (which, as amended and supplemented from time to time, together
constitute the "Offer"). Unless the context requires otherwise, all references
to the Depositary Shares shall include any claims to cumulative dividends on
such shares that have not previously been paid. The Company will purchase
1,052,631 Depositary Shares (or such lesser number of Depositary Shares as are
validly tendered and not withdrawn), upon the terms and subject to the
conditions of the Offer, including the proration provisions thereof.
 
  Depositary Shares not purchased because of proration will be returned at the
Company's expense to the shareholders who tendered such Depositary Shares. The
Company reserves the right, in its sole discretion (but subject to the terms
and conditions of the Master Agreement dated as of January 4, 1999 among the
Company, certain of its subsidiaries, United Mine Workers of America, UMWA
1992 Benefit Plan, UMWA Combined Benefit Fund, UMWA 1974 Pension Trust, and
Official Committee of Equity Security Holders), to purchase more than
1,052,631 Depositary Shares pursuant to the Offer. See Section 4. "Number of
Shares; Proration; Expiration Date; Extension of the Offer" and Section 13.
"Extension of the Tender Period; Termination; Amendments" of the Offer to
Purchase.
 
  If the number of Depositary Shares validly tendered and not withdrawn on or
prior to the Expiration Date is less than or equal to 1,052,631 Depositary
Shares (or such greater number of Depositary Shares as the Company may elect
to purchase pursuant to the Offer), the Company will, upon the terms and
subject to the conditions of the Offer, purchase all Depositary Shares so
tendered.
 
  Upon the terms and subject to the conditions of the Offer, if at the
Expiration Date more than 1,052,631 Depositary Shares (or such greater number
of Depositary Shares as the Company may elect to purchase pursuant to the
Offer) are properly tendered and not withdrawn, the Company will buy
Depositary Shares on a pro rata basis from all shareholders who properly
tender Depositary Shares (and do not withdraw them prior to the Expiration
Date). See Section 4. "Number of Shares; Proration; Expiration Date; Extension
of the Offer" and Section 5. "Procedure for Tendering Depositary Shares" of
the Offer to Purchase.
 
  The payment of $19.00 per Depositary Share for Depositary Shares purchased
by the Company is in full satisfaction of all claims with respect to such
Depositary Shares (and the Series A Preferred Stock represented
<PAGE>
 
by such Depositary Shares), including claims for accrued but unpaid dividends,
and all claims by and rights of the owner of Depositary Shares or any other
person to receive dividends (including accrued but unpaid dividends) will be
extinguished with respect to such Depositary Shares (and the Series A
Preferred Stock represented by such Depositary Shares) upon payment by the
Company therefor.
 
  The Offer is not conditioned on any minimum number of Depositary Shares
being tendered. The Offer is, however, subject to certain other conditions.
See Section 8. "Certain Conditions of the Offer" of the Offer to Purchase.
 
  For your information and for forwarding to your clients for whom you hold
Depositary Shares registered in your name or in the name of your nominee, we
are enclosing the following documents:
 
    1. Offer to Purchase;
 
    2. Letter of Transmittal for your use and for the information of your
  clients, together with Guidelines for Certification of Taxpayer
  Identification Number on Substitute Form W-9 providing information relating
  to backup federal income tax withholding;
 
    3. A form of letter that may be sent to your clients for whose accounts
  you hold Depositary Shares registered in your name or in the name of your
  nominee, with space provided for obtaining such clients' instructions;
 
    4. A letter from Christopher K. Seglem, President, Chairman and Chief
  Executive Officer of the Company, to holders of Depositary Shares that may
  be sent to your clients; and
 
    5. Summary instructions for participation in the Offer.
 
  WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. THE OFFER AND
WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY,
APRIL 6, 1999, UNLESS THE OFFER IS EXTENDED.
 
  THE COMPANY, ITS BOARD OF DIRECTORS, AND ITS EXECUTIVE OFFICERS MAKE NO
RECOMMENDATION AS TO WHETHER ANY SHAREHOLDER SHOULD TENDER ANY OR ALL OF SUCH
SHAREHOLDER'S DEPOSITARY SHARES PURSUANT TO THE OFFER. EACH SHAREHOLDER MUST
DECIDE WHETHER TO TENDER DEPOSITARY SHARES AND, IF SO, HOW MANY DEPOSITARY
SHARES TO TENDER.
 
  No broker, dealer, bank, trust company, or fiduciary shall be deemed to be
the agent of the Company, First Chicago Trust Company of New York (the
"Depositary"), or the Information Agent for purposes of the Offer.
 
  The Company will, upon request, reimburse brokers, dealers, commercial
banks, and trust companies for reasonable and necessary costs and expenses
incurred by them in forwarding materials to their customers. The Company will
pay all stock transfer taxes applicable to the sale of Depositary Shares to
the Company pursuant to the Offer, subject to Instruction 6 of the Letter of
Transmittal.
 
  Any inquiries you may have with respect to the Offer should be addressed to,
and additional copies of the enclosed materials may be obtained from, the
undersigned at the address and telephone numbers set forth on the back cover
of the Offer to Purchase.
 
                                          Very truly yours,
 
                                          Morrow & Co., Inc.
 
  NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
THE AGENT OF THE COMPANY, THE INFORMATION AGENT, OR THE DEPOSITARY, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON
BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE DOCUMENTS
ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN.
 
                                       2

<PAGE>
 
 
                           WESTMORELAND COAL COMPANY
 
                                March 10, 1999
 
Dear Preferred Shareholder:
 
  My purpose here is to introduce you to the enclosed Offer to Purchase
Depositary Shares. Your Board and Management have worked hard and successfully
to save, repair, and rebuild Westmoreland Coal Company. Our goal has been to
satisfy our obligations such as retiree health benefits and to deliver value
to all shareholders. We view this Offer and the choice it provides you as a
part of that continuing effort.
 
  This Offer arises out of negotiations and a compromise among the Company,
the Official Committee of Equity Security Holders, and various United Mine
Workers of America Benefit Funds following the Company's motion to dismiss its
bankruptcy cases. The Company filed its motion in July of 1998 as our business
plan continued to take hold as reflected in our substantially improved
financial condition. The Funds had sought to limit or prohibit distributions
to shareholders and the Equity Committee had sought to liquidate the Company
and cut off benefits to retirees. For our part, we sought to maximize the
Company's value and to balance the interests of those to whom we have legal
and moral duties. The result was a Master Agreement, summarized in the
enclosed documents, which preserves the Company as an ongoing enterprise with
undiluted ownership vested in its existing shareholders, continued benefits to
retirees, and the ability to make this Offer.
 
  During the negotiations, we proposed to purchase all of the Depositary
Shares for a combination of cash, debt and Common Stock. The cash component of
that proposal was in the range of $15-20 million. The Company believed that
such an approach would deliver value, certainty and security to preferred
shareholders while providing more predictability and stability to the Company
which in turn could enhance the value of the Company for retirees and all
shareholders. While acceptable to the Funds and within the guidelines of the
emerging settlement agreement, representatives of the Equity Committee
rejected this proposal and demanded instead a partial, all-cash tender offer.
The Board of Directors concluded that the Company's agreement to the terms of
the settlement, including the partial tender contemplated by this Offer, was
in the best interest of the Company and its shareholders because it
facilitated a consensual dismissal of the Company's bankruptcy case. The
Company agreed to offer to purchase no less than 1 million of its Depositary
Shares and the associated dividend arrearages for $20 million in cash.
 
  The agreement gave the Equity Committee the right to designate the price per
share to be offered. On December 9, 1998, the Equity Committee designated a
price of $19 per share which would result in a purchase of up to 1,052,631
Depositary Shares. At the time, the market price for Depositary Shares was
between $13 and $14. At $19 per share the tender offer gives shareholders the
choice to sell at least some of their Depositary Shares for cash at a premium
over the market price and it gives the Company an opportunity to extinguish
the payment of accrued and future dividends on the Depositary Shares that are
purchased. This Offer is expressly conditioned upon the Company's completing
the sale of its remaining interest in the Rensselaer cogeneration project.
 
  With respect to Depositary Shares not tendered, or shares tendered in excess
of the total which may be purchased in the Offer, the right to dividends in
arrears and future dividends prior to the payment of any Common Stock
dividends will remain. However, the Company will also remain subject to all
limitations of Delaware law plus contractual restrictions under the Master
Agreement with respect to the payment of such preferred dividends. Going
forward, the Company's Board of
<PAGE>
 
Shareholder Letter
March 10, 1999
Page 2
 
Directors will review payment of quarterly Preferred Stock dividends in light
of these restrictions and in consideration of the shareholders' best
interests. It is likely that in the near term most available cash should be
reinvested rather than distributed in order to enhance the long-term value of
the Company for all shareholders. The Company will continue to focus first on
its core businesses for such reinvestment, as it did in 1996 when it increased
its ownership in Westmoreland Resources, Inc.
 
  The Company, its Board of Directors and its executive officers make no
recommendation as to whether you should tender your Depositary Shares. I
encourage you to read the enclosed Offer to Purchase and related materials
before making your choice. If you choose to participate in the offer, please
follow the instructions in the enclosed materials.
 
  If you have any questions, please call the Information Agent at the phone
numbers listed on the back cover of the enclosed Offer to Purchase. Thank you.
 
                                     Very truly yours,
 
                                     Christopher K. Seglem
                                     Chairman of the Board,
                                     President and Chief Executive Officer
 

<PAGE>
 
            GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
                         NUMBER ON SUBSTITUTE FORM W-9
 
Guidelines for Determining the Proper Identification Number to Give the
Payer.-- Social Security numbers have nine digits separated by two hyphens,
i.e., 000-00-0000. Employer identification numbers have nine digits separated
by only one hyphen, i.e., 00-0000000. The table below will help determine the
number to give the payer.
 
- -----------------------------------        -----------------------------------
 
 
<TABLE>
<CAPTION>
                             Give The
                             Social Security
For this type of account:    number of--
- ---------------------------------------------
<S>                          <C>
1. An individual's account   The individual
2. Two or more individuals   The actual owner
   (joint account)           of the account
                             or, if combined
                             funds, any one
                             of the
                             individuals(1)
3. Husband and wife (joint   The actual owner
   account)                  of the account
                             or, if joint
                             funds, either
                             person(1)
4. Custodian account of a    The minor(2)
   minor (Uniform Gift to
   Minors Act)
5. Adult and minor (joint    The adult or, if
   account)                  the minor is the
                             only
                             contributor, the
                             minor(1)
6. Account in the name of    The ward, minor,
   guardian or committee     or incompetent
   for a designated ward,    person(3)
   minor, or incompetent
   person
7.a. The usual revocable     The grantor-
     savings trust account   trustee(1)
     (grantor is also
     trustee)
 b. So-called trust account  The actual
    that is not a legal or   owner(1)
    valid trust under State
    law
8. Sole proprietorship       The Owner(4)
   account
- ---------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                             Give the EMPLOYER
                             IDENTIFICATION
For this type of account:    number of--
                                           ---
<S>                          <C>
 9. A valid trust, estate,   The legal entity
    or pension trust         (Do not furnish
                             the identifying
                             number of the
                             personal
                             representative
                             or trustee
                             unless the legal
                             entity itself is
                             not designated
                             in the account
                             title.)(5)
10. Corporate account        The corporation
11. Religious, charitable,   The organization
    or educational
    organization account
12. Partnership account      The partnership
    held in the name of the
    business
13. Association, club, or    The organization
    other tax-exempt
    organization
14. A broker or registered   The broker or
    nominee                  nominee
15. Account with the         The public
    Department of            entity
    Agriculture in the name
    of a public entity
    (such a State or local
    government, school
    district, or prison)
    that receives
    agricultural program
    payments
                                           ---
</TABLE>
 
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's Social Security number.
(3) Circle the ward's, minor's, or incompetent person's name and furnish such
    person's Social Security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension
    trust.
 
Note: If no name is circled when there is more than one name, the number will
      be considered to be that of the first name listed.
<PAGE>
 
            GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
                         NUMBER ON SUBSTITUTE FORM W-9
                                    Page 2
 
Obtaining a Number
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local office
of the Social Security Administration or the Internal Revenue Service and
apply for a number.
 
Payees Exempt from Backup Withholding
Payees specifically exempted from backup withholding on ALL payments include
the following:
 . A corporation
 . A financial institution
 . An organization exempt from tax under section 501(a), or an individual
   retirement plan.
 . The United States or any agency or instrumentality thereof
 . A State, the District of Columbia, a possession of the United States, or
   any subdivision or instrumentality thereof
 . A foreign government, a political subdivision of a foreign government, or
   any agency or instrumentality thereof.
 . A registered dealer in securities or commodities registered in the U.S. or
   a possession of the U.S.
 . An international organization or any agency or instrumentality thereof.
 . A real estate investment trust.
 . A common trust fund operated by a bank under section 584(a).
 . An exempt charitable remainder trust, or an non-exempt trust described in
   section 4947(a) (1).
 . An entity registered at all times under the Investment Company Act of
   1940.
 . A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
 . Payments to nonresident aliens subject to withholding under section 1441.
 . Payments to partnerships not engaged in a trade or business in the U.S.
   and which have at least one nonresident partner.
 . Payments of patronage dividends where the amount received is not paid in
   money.
 . Payments made by certain foreign organizations.
 . Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
 . Payments of interest on obligations issued by individuals. Note: You may
   be subject to backup withholding if this interest is $600 or more and is
   paid in the course of the payer's trade or business and you have not
   provided your correct taxpayer identification number to the payer.
 . Payments of tax-exempt interest (including exempt-interest dividends under
   section 852).
 . Payments described in section 6049(b)(5) to nonresident aliens.
 . Payments on tax-free covenant bonds under section 1451.
 . Payments made by certain foreign organizations.
 . Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT
TO THE PAYER, IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS,
ALSO SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends, that
are subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045, and 6050A.
Privacy Act Notice.--Section 6109 requires most recipients of dividends,
interest, or other payments to give taxpayer identification numbers of payers
who must report the payments to the IRS. The IRS uses the numbers for
identification purposes. Payers must be given the numbers whether or not
recipients are required to file tax returns. Payers must generally withhold
31% of taxable interest, dividend, and certain other payments to a payee who
does not furnish a taxpayer identification number to a payer. Certain
penalties may also apply.
 
Penalties
(1) Penalty for Failure to Furnish Taxpayer Identification Number.--If you
fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments.--If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an
under-payment attributable to that failure unless there is clear and
convincing evidence to the contrary.
(3) Civil Penalty for False Information With Respect to Withholding.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information.--Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE

<PAGE>
 
            SUMMARY INSTRUCTIONS FOR PARTICIPATION IN TENDER OFFER
 
  1. CHECK CONTENTS OF PACKAGE. Before proceeding, please ensure that this
package contains the following materials:
 
    . Letter from Christopher K. Seglem, Chairman of the Board of Directors,
      President and Chief Executive Officer of Westmoreland Coal Company
 
    . Offer to Purchase dated March 10, 1999
 
    . Letter of Transmittal (printed on blue paper) bearing a pre-printed
      label with your account number and address (accompanied by Guidelines
      for Certification of Taxpayer Identification number of Substitute Form
      W-9 (printed on white paper))
 
    . Return envelope addressed to First Chicago Trust Company of New York,
      the Depositary for the Offer
 
  2. REVIEW MATERIALS CAREFULLY BEFORE DECIDING TO TENDER. Please review all
enclosed materials carefully before deciding to participate in the Offer. If
your Depositary Shares are held by a broker or bank for your account and you
decide to participate, you must contact your broker or bank and instruct them
to tender your Depositary Shares on your behalf. (If you have so instructed
your bank or broker, you do not need to proceed with instructions 3 and 4
below.) If your Depositary Shares are registered in your name and you decide
to participate, you must continue with instruction 3 and 4 below.
 
  3. COMPLETE THE LETTER OF TRANSMITTAL. You must do the following to complete
the Letter of Transmittal:
 
    . Read the body of the transmittal letter and the "Instructions" on
      pages 1-5
 
    . Complete the box entitled "Description of Depositary Shares Tendered"
      (page 6)
 
    . Complete, sign and date the box entitled "Sign Here" (page 7)
 
    . Complete, sign and date the "Substitute Form W-9" and, if applicable,
      the box entitled "Certificate of Awaiting Taxpayer Identification
      Number" (page 8)
 
  Some portions of the Letter of Transmittal should only be completed if
applicable:
 
    . If you would like any of your tendered but unpurchased Depositary
      Shares, or the check for your purchased Depositary Shares, to be
      issued in the name of someone other than the current holder or to be
      mailed to someone other than the current holder (or to the current
      holder at an address other than that shown following their signature),
      complete, as applicable, the boxes entitled "Special Payment
      Instructions" and "Special Delivery Instructions" on page 6.
 
  4. MAIL UNSIGNED DEPOSITARY SHARE RECEIPTS AND THE SIGNED LETTER OF
TRANSMITTAL TO THE DEPOSITARY. Send the Letter of Transmittal together with
your depositary receipt(s) representing the Depositary Shares to First Chicago
Trust Company of New York, the Depositary, at the mailing address shown on the
Letter of Transmittal. (For your convenience, a return envelope is included in
this package.) Use of registered mail is recommended. If you choose to use a
courier service, use the overnight courier address shown on the Letter of
Transmittal. (Eligible Institutions may tender by book-entry transfer. See
instruction 2 in the Letter of Transmittal and the box entitled "Book-Entry
Transfer".)
 
  IF YOU HAVE ANY QUESTIONS, HAVE NOT RECEIVED THE LETTER OF TRANSMITTAL OR
OTHER DOCUMENTS PERTAINING TO THE OFFER, OR NEED OTHER ASSISTANCE IN
COMPLETING THE LETTER OF TRANSMITTAL, PLEASE CONTACT THE INFORMATION AGENT:
MORROW & CO., INC., TOLL FREE AT (800) 566-9061. BANKS AND BROKERAGE FIRMS MAY
CONTACT MORROW & CO., INC. AT (800) 662-5200.
 


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