SECURITIES AND EXCHANGE COMMISSION
                                    FORM 20-F

|_|  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
     EXCHANGE ACT OF 1934 OR

|X|  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 - FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR

|_|  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 - For the transition period from ______________ to
     ____________

                         Commission file number: 1-14606

                       CHINA ENERGY RESOURCES CORPORATION
             (Exact name of Registrant as specified in its charter)

                      ------------------------------------


                             BRITISH VIRGIN ISLANDS
                 (Jurisdiction of incorporation or organization)


Citco Building, Wickhams Cay                  971-B Russell Avenue
P.O. Box 662, Road Town                       Gaithersburg
Tortola, British Virgin Islands               Maryland 20879
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                      ------------------------------------

SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT.


                                                    Name of Each Exchange
             Title of Each Class                     on Which Registered
   ---------------------------------------         -----------------------
   Common Stock, par value $0.01 per share         American Stock Exchange

                      ------------------------------------


Securities registered or to be registered pursuant to Section 12(g) of the Act.
                                      NONE

        Securities for which there is a reporting obligation pursuant to
                            Section 15(d) of the Act.

                                      NONE
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report. As of December 31, 1998, 3,248,494 common shares, par value $0.01 per
share (the "Common Stock"), were issued and outstanding.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / /  No /X/

Indicate by check mark which financial statement item the registrant has elected
to follow. Item 17 / / Item 18 /X/



<PAGE>



                CERTAIN DEFINITIONS AND SUPPLEMENTAL INFORMATION

    All references to "China" or "PRC" in this Annual Report are references to
The People's Republic of China. Unless otherwise specified, all references in
this Annual Report to "U.S. dollars," "dollars," or "$" are to United States
Dollars; all references to "Renminbi" or "Rmb" are to Renminbi, which is the
official currency of China. Unless otherwise specified, for the convenience of
the reader, translation of amounts from Renminbi to U.S. dollars have been made
in this Annual Report at the exchange rates indicated in Item 8. "Selected
Financial Data -- Exchange Rate Information," as quoted by the People's Bank of
China. No representation is made that the Renminbi amounts could have been, or
could be, converted into U.S. dollars at that rate or at any other rate. See
Item 6. "-- Exchange Controls and Other Limitations Affecting Security Holders
-- PRC."

    The financial statements of China Energy Resources Corporation (the
"Company") are presented in U.S. dollars. All financial statements of the
Company presented herein have been prepared in conformity with United States
generally accepted accounting principles ("U.S. GAAP").

                           FORWARD-LOOKING STATEMENTS

    This Annual Report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are not guarantees
of future performance and involve a number of substantial risks and
uncertainties that could materially affect the subsidiaries of the Company,
including, without limitation, the subsidiaries' operations, markets and ability
to generate revenue and profits, and, accordingly, the price of the Company's
common stock, par value $.01 per share (the "Common Stock"). Among the factors
that could cause actual results to differ are changes in the planned economic
development of the PRC, competitive pressures, delays or difficulties in
increasing capacity utilization at existing production facilities, delays in
development of mining operations, a significant increase in PRC coal production
capacity or a significant decrease in demand for the Operating Company's (as
defined herein) products, changes in PRC regulation or taxation of foreign
equity joint ventures, increased PRC regulations of the mining, production and
sale of coal under the National Coal Act, increased or more stringent PRC
environmental regulations and the tightening of PRC exchange controls. The
Company has experienced difficulty in generating sufficient cash flow to enable
it to operate all its facilities and develop its Coal Mine Use Rights (as
defined herein). These difficulties have raised substantial doubt about the
Company's ability to continue as a going concern. Management's plans concerning
these matters are described in "Item 1.--Description of Business" and note 3 to
the Financial Statements.


                                     PART I

ITEM 1.      DESCRIPTION OF BUSINESS

HISTORICAL BACKGROUND

    The Company was incorporated on March 15, 1996, under the International
Business Companies Act of the British Virgin Islands (the "IBC Act"). The
Company is a holding company which is the sole shareholder of China Coal Mining
(B.V.I.) Co. Ltd. ("CCM"), a corporation organized under the IBC Act. Pursuant
to a joint venture agreement dated September 16, 1995, CCM acquired an eighty
percent (80%) interest in Mishan Hua Xing Coke Limited ("MHXC"), a Sino-foreign
equity joint venture company organized in the PRC. Pursuant to this agreement,
CCM paid cash in the amount of $7,886,000 for its 80% interest in MHXC. The MHXC
joint venture agreement expires in 2025. CCM purchased its interest in MHXC from
the government of the PRC, which remains the owner of a 20% interest in MHXC.
MHXC succeeded to the business of Mishan Coal Chemical Holding Company, a PRC
government-owned enterprise ("MCCH"), which owned and operated two production
factories: Mishan City Coke Factory ("MCCF") and Qitaihe City Coal Factory
("QCCF"). The financial results of the Company have been primarily derived from
the operations of MCCF and QCCF.

    In December 1995, the principals of the Company entered into a definitive
agreement for the merger of Jackson Holding Corp. ("JHC") with and into the
Company. JHC was incorporated for the sole purpose of acquiring or merging with
an unspecified operating business.



                                        1

<PAGE>



    In connection with the merger, which was consummated in November 1996, the
Company issued 109,850 shares of Common Stock to the shareholders of JHC in
exchange for all of the issued and outstanding shares of common stock of JHC. At
the time of the merger, JHC had no operating assets.

    On April 21, 1997, the Company listed 5,898,436 shares of Common Stock on
the American Stock Exchange, which included 3,248,494 shares outstanding and
2,649,942 shares reserved for issuance.

    All of the Company's operations are conducted through its operating
subsidiary, CCM, and in turn through the PRC-based MHXC joint venture to which
CCM is a party (referred to hereinafter as the "Operating Company"). The
Operating Company has two wholly-owned coal refining operations, MCCF and QCCF.

RECENT DEVELOPMENTS

    MANAGEMENT AND OPERATIONAL DIFFICULTIES AT MCCF AND QCCF. During the fiscal
year ended December 31, 1998 ("1998"), the Company experienced significant
management and operational difficulties with MCCF and QCCF.

    MCCF. During the fiscal year ended December 31, 1997 ("1997") the Company
terminated the services of the MCCF plant manager for substandard management
performance in general, including substandard collection efforts. However, prior
to his termination, the plant manager improperly signed various documents that
provided collateral to local banks affiliated with the Mishan City Municipal
Government ("Mishan") over MCCF assets. In March 1998, MCCF ceased operations
due to the depletion of its working capital, which was entirely depleted due to
a large amount of uncollected trade receivables and poor operating management.
The situation was exacerbated by the refusal of local banks and raw coal
suppliers to advance further credit. Currently, MCCF only retains a minimum
workforce and incurs minimum expenses to maintain its facility. Total sales by
MCCF to its customers during 1998 amounted to $52,000. In addition, coke
products valued at $659,000 were used to settle debts due to suppliers and coke
valued at $175,000 was used to settle wages due to workers.

    In June 1999, the Company entered into a memorandum of understanding with
Mishan whereby the Company agreed to transfer most of MCCF's assets to Mishan in
exchange for cancellation of MCCF's indebtedness to local banks. The memorandum
of understanding was subsequently memorialized in a contract with Mishan dated
July 10, 1999. Pursuant to the memorandum of understanding and subsequent
contract, the Company will retain MCCF's mining rights (the "Coal Mine Use
Rights"), which were granted on June 20, 1995 and continue in force for 100
years. Management intends to seek a third party who would use the Coal Mine Use
Rights in exchange for a negotiated royalty fee. For a discussion of MCCF's
operations, see "--Subsidiary Operations--MCCF."

    QCCF. During the third quarter of 1998, it came to the attention of the
Company that QCCF was operating independently from MHXC and the Company and was
under the direction and influence of the local government in the PRC. QCCF
refused to comply with financial and business reporting protocols and disputed
that its operations were under the direction and control of the Company.
However, after a change in the executive management of the Company (as described
below) the Company's independent accountants were able to complete a certified
audit for 1998, and QCCF has subsequently complied with various directives from
the new management. Currently, management is in discussions with QCCF and local
government officials in an effort to fashion long-term solutions to the
operational and management issues. In addition, the Company is negotiating with
QCCF regarding the repayment terms of between $3 million and $4 million in debt
owed to the Operating Company by QCCF. However, final agreements are not
currently in place, and there can be no assurance that the Company and QCCF will
be able to negotiate long-term solutions to such operational and management
issues or that the Company will successfully negotiate the repayment terms of
such $3-4 million debt. For a discussion of QCCF's operations, see "--Subsidiary
Operations--QCCF."

    TRANSACTIONS WITH CHINA ORIENT GROUP INDUSTRIES, INC. AND ITS AFFILIATES,
AND RESULTING CHANGE OF EXECUTIVE MANAGEMENT. In response to the management and
operational difficulties at MCCF and QCCF, former management of the Company
began discussions with officers of China Orient Group Industries, Inc., a
private sector conglomerate in the PRC (the "Orient Group"), and its affiliates
regarding an investment by the Orient Group in the Company and a possible change
in the Company's executive management. Such discussions resulted in a change of
executive management of the Company and certain financing agreements which are
described below.

    THE STOCK AND WARRANT PURCHASE AGREEMENT. In December 1998, the Company and
America Orient Group, Inc. a Maryland corporation and wholly owned subsidiary of
the Orient Group ("AOG"), executed a stock and warrant


                                        2

<PAGE>



purchase agreement whereby the Company agreed to sell to AOG 5,000,000 shares of
Common Stock and a warrant to purchase 5,000,000 shares of Common Stock for an
aggregate price of $1.0 million (the "Stock and Warrant Purchase Agreement").
Such warrant is exercisable at any time after the closing of the Stock and
Warrant Purchase Agreement (the "Exercise Date") in the five years following the
Exercise Date, in whole or in part, at the lower of (a) 75% of the average
closing price of the Common Stock for the 30 days immediately prior to such
exercise, or (b) as follows: $0.75 per share in 1999; $1.00 per share in 2000:
$1.50 per share in 2001; $2.00 per share in 2002; and $3.00 per share in 2003
(subject to adjustments for stock splits, stock dividends and similar
transactions). Closing of the Stock and Warrant Purchase Agreement is subject to
several conditions which are further described in the Stock and Warrant Purchase
Agreement. See "Exhibit 2.1"

    AOG LOANS TO THE COMPANY. In February 1999, AOG loaned the Company $24,160
at an interest rate of 8% per annum payable on demand for working capital
purposes in exchange for a convertible note (the "AOG Convertible Note") and a
warrant to purchase 120,800 shares of Common Stock at an exercise price of $0.20
per share. Based on a conversion price of $0.20 per share, the AOG Convertible
Note was convertible at the time of issuance into 120,800 shares of Common
Stock. In March 1999, the Company issued a revolving convertible note to AOG of
up to $250,000 at an interest at 8% per annum payable on demand (the "Revolving
Note"). AOG may convert any amounts owed under the Revolving Note to Common
Stock on the same terms as the AOG Convertible Note. In April 1999, the
Revolving Note was increased to up to $1.3 million, and as of July 1999 the
Company had outstanding borrowings under the Revolving Note of approximately
$326,000.

    ORIENT FINANCE CO. LOAN TO THE COMPANY. In March 1999, the Company, together
with MHXC, entered into a definitive loan and guarantee agreement with Orient
Finance Co. ("Orient Finance") for a $2.0 million term loan of three years with
a one-year grace period and a 6.625% interest rate per annum (the "Loan
Agreement"). The Loan Agreement provides no conversion features. Orient Finance
is a subsidiary of the Orient Group and, accordingly, an affiliate of AOG. Under
the terms of the Loan Agreement, as amended in July 1999, the $2.0 million will
be disbursed to MHXC no later than July 31, 1999.

    JOINT VENTURE AGREEMENT WITH JINZHOU HARBOR (GROUP) CO. LTD. In March 1999,
the Company, through CCM, entered into a definitive agreement (the "Jinzhou
Agreement") with Jinzhou Harbor (Group) Co. Ltd., a majority owned subsidiary of
the Orient Group and affiliate of AOG ("JHG"), to form Jinzhou Port Coal
Terminal Co. Ltd. (the "Jinzhou Terminal"). Under the original Jinzhou
Agreement, CCM was to invest approximately $11 million for a 60% interest in the
Jinzhou Terminal. In order to comply with rules of the Shanghai Stock Exchange,
where JHG shares are traded, the Jinzhou Agreement was amended in July 1999 to
provide for CCM to invest $7.4 million for a 49% interest in the Jinzhou
Terminal. Funding for the $7.4 million investment is expected to be financed by
AOG's exercise of its warrant to purchase 5,000,000 shares of Common Stock under
the Stock and Warrant Purchase Agreement and other purchases of the Common Stock
by AOG or its affiliates. If the Jinzhou Agreement is consummated, the Jinzhou
Terminal is expected to derive revenues primarily from coal and oil and gas port
activity. However, management has not completed its long-term business strategy,
and no assurance can be given that the Jinzhou Agreement will be consummated.

    CHANGE IN EXECUTIVE MANAGEMENT. In connection with the Stock and Warrant
Purchase Agreement, the loans from AOG and Orient Finance to the Company and the
Jinzhou Agreement, executive officers from AOG and the Orient Group assumed
control of Company management, which included the resignation of Mr. C.T. Yeh,
the President, Chief Executive Officer and Acting Chairman of the Company, on
March 3, 1999 and the appointment of Mr. Bill H. Zhao, a director and Executive
Vice President of AOG, as President, Chief Executive Officer and Chairman of the
Board of the Company the same day. In April 1999, the Company appointed Guoliang
Guan, a director and Senior Vice President of AOG, as a director of the Company.
In addition, upon closing of the Stock and Warrant Purchase Agreement, the Board
of Directors of the Company (the "Board") will be expanded to include
appointments of AOG so as to give AOG appointees management control of the
Company. Management believes that implementation of its business strategy,
including the continued operation of QCCF, consummation of the Stock and Warrant
Purchase Agreement and the Loan Agreement, will allow the Company to continue as
a going concern; however, there can be no assurance that such business strategy
will be implemented or, if implemented, capable of restoring profitable
operations in the future.



                                        3

<PAGE>



SUBSIDIARY OPERATIONS

MCCF

    When operating, MCCF engages primarily in the production and sale of
metallurgical coke. MCCF completed its steam coal preparation facility in 1993.
In 1995, MCCF completed construction of an additional production facility to
process steam coal into metallurgical coke and foundry coke. This facility has
been designed for annual production capacities of approximately 200,000 tons of
steam coal, approximately 85,000 tons of metallurgical coke and approximately
56,000 tons of foundry coke. The total output of metallurgical coke only reached
19,880 tons in 1998, accounting for 23% of its production capacity for
metallurgical coke. Improvements to the facility, which cost approximately $3.0
million, were financed through an unsecured loan by a local PRC bank at a fixed
term rate of 15.3% per annum. These improvements enabled MCCF to produce
metallurgical coke and foundry coke which it was unable to do prior to such
improvements. Presently, when operating, the main product of the MCCF plant is
metallurgical coke and low-end metallurgical coke.

    On June 20, 1995, the Mishan granted MCCF the Coal Mine Use Rights, which
are exclusive underground rights to mine coal from certain coal reserves located
in Mishan City, within Heilongjiang Province, PRC. The Coal Mine Use Rights were
granted on June 20, 1995 and continue in force for 100 years. See "--Government
Regulation." Upon the formation of the Operating Company, the PRC joint venture
partner made an interest free loan in the amount of $7.9 million to MCCF to
partially finance the acquisition of the Coal Mine Use Rights.

    The coal reserves are located within approximately 10 kilometers of the MCCF
production facility. Present access to these reserves is solely by way of an
undeveloped road system. The coal reserves are located in the districts of
Dalizi, Jinshazi, Beiyinzi, Dazhushan and Zhushan. These five districts
collectively produce the four types of coal: coking, fat, gas and meager. The
combination of these four types of coal is required to produce high quality
foundry coke. MCCF is not presently involved in the mining of these reserves due
to the lack of funds available for this purpose. During 1997 and 1998, MCCF had
been engaged in conducting mine site surveys, clearing the surface of potential
mine entrance sites, performing geological surveys and preparing mining plans.
The Company needs to complete additional work on the survey and mining plans
before the mine is ready for use. During 1998, the Company engaged outside
consultants to assist in this process. The costs associated with mining
preparation work have been capitalized as part of MCCF's Coal Mine Use Rights.

    As a result of the macro-economic adjustments and related credit policy
advocated by the central PRC government, MCCF was not able to obtain working
capital from local banks after the completion of its production facilities in
1995. Due to this lack of working capital, in June 1996, operation of the MCCF
plant was subcontracted to a company under the control of the PRC's Ministry of
Coal. According to the subcontract, the party which operated the plant (i) was
obligated to meet all the operating expenses of the plant, (ii) was entitled to
receive all the revenues from the plant's operation and (iii) paid MCCF a
subcontracting fee. This subcontract was terminated on March 31, 1997 and MCCF
resumed the production and sales of metallurgical coke during the second quarter
of 1997. In order to expand sales and fully utilize the existing facilities,
MCCF also produced some low-end metallurgical coke. Total production and sales
by MCCF during 1997 after the termination of the subcontracting agreement
amounted to 61,009 tons of regular and low-end metallurgical coke generating
gross revenues of $1.3 million.

    As discussed above, during 1997 the Company terminated the services of the
MCCF plant manager for substandard management performance in general, including
substandard collection efforts. However, prior to his termination, the plant
manager improperly signed various documents that provided collateral to bank
lenders of MCCF over MCCF assets. In March of 1998, MCCF ceased operations due
to the depletion of working capital, which was entirely depleted due to a large
amount of uncollected trade receivables and poor operating management. The
situation was exacerbated by the refusal of local banks and raw coal suppliers
to advance further credit. At the current stage, MCCF only retains a minimum
workforce and incurs minimum expenses to maintain its facility. Total sales by
MCCF to its customers during 1998 amounted to $52,000. In addition, coke
products valued at $659,000 were used to settle debts due to suppliers and coke
valued at $175,000 was used to settle wages due to workers. Both of these
transactions were recorded as sales in the financial statements of MCCF.

    The local government has been assisting the Company to supervise the daily
operations of MCCF. The majority of the workforce was dismissed after the plant
closed with approximately 50 workers remaining on the premises. These workers
spent most of their time defending the MCCF assets from creditors' claims and
dealing with lawsuits brought


                                        4

<PAGE>



by suppliers. During the third quarter of 1998, the Company was informed by MCCF
that the workers at MCCF had not been paid wages and certain of the workers of
MCCF have petitioned the municipal government in the PRC for aid in being paid.
In February 1999, AOG loaned the Company $24,160, which was used primarily to
pay a portion of the accrued wages to the MCCF's workers. Since such payment,
the workers have stopped petitioning. Although the MCCF factory has been closed
since March 1998, the Company has continued to accrue wages on its financial
statements. The amount of unpaid wages as of December 31, 1998 was approximately
$167,000. The Company has recently entered into an agreement to dispose of all
of the MCCF assets other than the Coal Mine Use Rights. See "--Recent
Developments."

QCCF

    QCCF's primary product is steam coal, which is used by thermal power plants.
Historically, a substantial percentage of the sales of QCCF has been to a few
power plants in the nearby region. On an annual basis, the PRC government
designates the quota of steam coal that will be purchased for each of its power
plants and the districts from which such coal will be supplied. Each power plant
can then determine which suppliers within each district it will contract with
for the year. QCCF sold 475,305 tons, 396,627 tons and 299,086 tons of steam
coal in 1996, 1997 and 1998 respectively. Overall sales volume decreased from
1996 to 1997 due to the shortage of transportation capacity as a result of a
good harvest in the Heilongjiang Province which occupied most of the
transportation capacity during the second quarter of 1997. The transportation
capacity continued to be a major obstacle to sales in 1998 because of the severe
flood problem in the northeast regions of PRC where QCCF's customers are
located. In addition, there was a deceleration in the economic growth in PRC
which resulted in a corresponding decrease in the demand for coal products in
1998. Accordingly, the sales of QCCF's steam coal declined substantially from
$7.7 million in 1997 to $5.8 million in 1998.

BUSINESS STRATEGY

    The Company raised net proceeds of approximately $5.4 million through
offerings of convertible notes and warrants in November 1996 and January 1997.
These proceeds were primarily used as follows: $2.0 million for purchase of raw
coal and working capital of MCCF, $648,000 for repayment of bank loans by QCCF,
$1.3 million for a loan to the former owner of QCCF, $337,000 for the
administrative expenses of Heilongjiang representative office which was set up
in 1997, $286,000 in an unauthorized withdrawal by the former Chairman of the
Company, $832,000 for the Company's administrative and reporting expenses and
$15,000 as cash on hand. Management believes that the proposed transactions with
AOG and its affiliates, if implemented, will provide adequate capital to allow
the Company to continue as a going concern. See "--Recent Developments."

    MCCF's working capital was entirely depleted due to a large amount of
uncollected trade receivables and poor operating management. As a result, MCCF
ceased operations in March of 1998 and is not planned to resume production under
the management of the Company. Presently, MCCF only retains a minimum workforce
and incurs minimum expenses to maintain its facility. The Company has entered
into an agreement to transfer most of MCCF's assets to Mishan in exchange for
cancellation of MCCF's indebtedness to local banks. See "--Recent Developments--
Management and Operational Difficulties at MCCF and QCCF--MCCF."

    QCCFs business strategy is to obtain the necessary transportation capacity
so that additional products can be marketed and distributed to customers. It is
expected that QCCF will utilize existing cash flow from operations to meet its
operational needs. Management believes that steam coal production can be
increased by a substantial percentage without any significant capital
improvements, as QCCF has the plant and equipment necessary to support this
business expansion. During 1998, QCCF began operating independently from MHXC
and the Company. However, after a change in the executive management of the
Company, QCCF has subsequently complied with various directives of the new
management. See "--Recent Developments--Management and Operational Difficulties
at MCCF and QCCF-- QCCF."

    The Company is planning to expand its business through the formation of the
Jinzhou Terminal. The annual throughput capacity of the Jinzhou Terminal is 1.1
million metric tons of coal products. Management believes the Jinzhou Terminal
provides a strategic advantage for the Company's future development,
particularly if the Company can export QCCF's coal products. However, management
has not completed its long-term business strategy, and no assurance can be given
that the Jinzhou Agreement will be consummated. See "--Recent
Developments--Joint Venture Agreement with Jinzhou Harbor (Group) Co. Ltd."



                                        5

<PAGE>




    Management intends to commence a feasibility study regarding mining the coal
reserves to which MCCF has exclusive mining rights. Management intends to seek a
third party to use the Coal Mine Use Rights for a negotiated royalty fee.
Construction of MCCF's coal mining facilities is expected to require a
substantial investment in mining equipment or the acquisition of an existing
coal mining operation. The Operating Company expects that it will cost in excess
of $3.0 million to commence such mining operations, including, but not limited
to, purchasing equipment for digging, mining, safety, ventilation and
transportation. The Company expects such construction would take approximately
one year from commencement to completion.

SALES AND MARKETING

    MCCF. When operating, MCCF's primary product is high quality metallurgical
coke, which is sold to steel mills. Due to a shortage of working capital, the
MCCF factory operated substantially below capacity during 1998, 1997 and 1996.
During the first half of 1996, MCCF sold certain residual products which were
below the factory's quality standards. Subsequently, during the second half of
1996 and the first quarter of 1997, the operation of the MCCF plant was
subcontracted to a company under the control of the PRC's Ministry of Coal.
Therefore, the sales volume of the MCCF factory attributable to the Operating
Company showed a significant decrease for 1996, as well as a decrease in the
average net sales price per ton from the 1995 level. As a result of the working
capital raised in 1996 and early 1997, the MCCF subcontracting agreement was
terminated on March 31, 1997 and MCCF's management focused on the process of
rebuilding its workforce, production and sales operations in the remaining
quarters of 1997. MCCF produced low-end as well as standard metallurgical coke
in order to increase sales and fill back orders. However, due to poor credit
management and collection efforts by MCCF Management, most of the MCCF's trade
receivables were not collected. By the beginning of 1998, MCCF did not have
sufficient working capital to continue its operations and production at the
facility was halted in March of 1998.

    MCCF reported the following sales of metallurgical coke for the previous
three fiscal years:

<TABLE>
<CAPTION>

                                                                     1996           1997           1998
                                                                     ----                          ----
<S>                                   <C>                           <C>            <C>            <C>
Sales volume (in tons)                -metallurgical coke            6,758         21,783         19,880
                                      -low-end metallurgical coke        -         39,226         25,734
Average net sales price (per ton)*    -metallurgical coke           $38.32         $41.73         $39.15
                                      -low-end metallurgical coke        -         $10.30          $4.19
</TABLE>

--------------------------------------------
*Sales prices indicated are net of discounts and returns.

    QCCF. QCCF has entered into various long-term coal supply contracts with its
major electric utility customers to ensure a stable demand for its products
along with a source of working capital. These contracts generally stipulate that
the utility company will provide a certain amount of working capital to QCCF in
return for QCCF's obligation to supply coal at the prevailing market price. In
addition, pursuant to these contracts, the utility companies are generally
responsible for obtaining transportation capacity for which they earn a fee on a
per ton basis.

    QCCF implemented certain self-assessed "penalty" policies in its sales
contracts as a method to emphasize quality control and customer satisfaction in
the marketing of its products. Its sales contracts specify quality standards for
the coal to be delivered, generally in terms of the coal's BTU and burn
characteristics. To the extent that any QCCF product fails to meet the agreed
upon standard, QCCF will rebate a set amount to its customer. Similarly, if QCCF
delivers a tonnage that is higher than the quantity purchased, QCCF does not
charge the customer for the freight cost of transporting the excess goods.



                                        6

<PAGE>




    QCCF reported the following sales of steam coal for the previous three
fiscal years:


<TABLE>
<CAPTION>
                                                      1996                 1997               1998
                                                      ----                                    ----
<S>                                                  <C>                <C>                 <C>
Sales volume (in tons)                               475,305            396,627             299,086
Average net sales price (per ton)*                    $15.86             $19.52              $19.31
</TABLE>
---------------------------------------------
* Sales prices indicated are net of discounts and returns.

DEPENDENCE ON ONE MAJOR CUSTOMER

    Historically, a substantial percentage of the sales of QCCF (and its
predecessor companies) has been to one customer, Mudanjiang No. 2 Power Plant
("Mudanjiang"), in Heilongjiang Province, PRC, which accounted for approximately
82%, 80% and 89% of QCCF's net sales and approximately 78% and 71% and 80% of
the Operating Company's net sales for the years ended December 31, 1996, 1997
and 1998, respectively. On an annual basis, the PRC government designates the
quota of steam coal that will be purchased for each of its power plants and the
districts from which such coal will be supplied. Each power plant can then
determine which suppliers within each district it will contract with for the
year. In 1996, QCCF sold 390,890 tons of steam coal to Mudanjiang. On December
31, 1996, QCCF signed a long-term supply contract with Mudanjiang for a term of
seven years from January 1, 1997 to January 1, 2004. According to the contract,
QCCF has agreed to supply up to 900,000 tons to Mudanjiang each year, subject to
QCCF's ability to obtain sufficient transportation capacity. The actual sales
volume to Mudanjiang totaled 327,743 tons in 1997 and 259,624 tons in 1998. The
loss of Mudanjiang as a customer of QCCF would have a material adverse effect on
both the Operating Company's and the Company's financial condition, results of
operations, cash flows, business and prospects.

TRANSPORTATION

    Transportation is an important factor in coal marketing in the PRC because a
significant portion of the cost of processed coal is attributable to
transportation. The availability and cost of such transportation has a
significant effect upon the marketability of coal. During 1997 the local
government in Heilongjiang utilized more transportation capacity for
agricultural products because of a good harvest in the northeast part of China.
As a result, QCCF suffered from a shortage of rail transportation and its
revenue decreased in 1997. Generally, the cost of transportation from the
Operating Company's two factories to their customers are incurred by the
factories. The transportation capacity continued to be a major obstacle to make
sales in 1998 because of the severe flood problem in the northeast regions of
PRC where QCCF's customers are located.

    The development of the PRC railway system still lags behind the growth of
the PRC economy as a whole. Currently, most of the customers of the Operating
Company's factories are located within their respective regions, and the
factories utilize the PRC's rail transport system to deliver substantially all
of their products to their customers. Because of the Operating Company's ongoing
efforts to develop new customers, the Company expects the number of customers
located in areas other than the PRC's northeast region to increase. Accordingly,
alternative means of transportation may be required to accommodate future
product transportation needs. Although the Company believes that the Operating
Company's factories will be able to satisfy their transportation needs in the
foreseeable future based on their current production capacities, there can be no
assurance that either of the Operating Company's factories will continue to
receive a sufficient amount of rail transport capacity. Additionally, there can
be no assurance that either of the factories will be able to locate alternative
means of transportation that are reliable and cost-efficient.

COAL RESERVE

    The raw coal that is mined in the Mishan City area contains high quality
coal for use in coke production. This type of raw coal generally has low sulfur
and phosphorus contents and strong cohesiveness. The ash content in the raw coal
is, according to an independent governmental test conducted in Beijing, between
17% and 24%. An ash content of between 8% and 9% is considered to be the
international standard for high quality foundry coke. The Company engaged John
T. Boyd Company, a leading U.S. geological company ("Boyd"), to review and
comment on the availability, reliability and quality of the coking coal reserve
to MCCF (the "Boyd Report"). According to the Boyd Report, in October 1997,
based on the existing MCCF coking production capacity of 56,000 tons per year,
the remaining demonstrated coal reserve equates to approximately 60 years of
production. Using the latest expansion plans for the


                                        7

<PAGE>



coking facility at 156,000 tons per year, the remaining life of the demonstrated
reserve base is about 21 years. Subject to future confirmation via on-site
exploration, there are an additional 9.4 million recoverable tons of coking coal
reserve base available for expansion and/or continuation of operations. The Boyd
Report recommended that the Company implement various programs to expand the
demonstrated coal reserve base. Due to inadequate working capital, the Company
has not been able to conduct further mine surveys.

TECHNOLOGY

    The processing plant at QCCF employs the "air-heavy medium fluid bed" dry
process of coal preparation, which the Company believes is the leading
technology worldwide. This process was the result of ten years' research by
China Minerals University, which has patented the technology. This process
provides a new method for coal sorting in areas where water resources are in
short supply and where it is severely cold. Management of the Operating Company
believes that this process is more environmentally friendly than the wet
separation processes because it produces no waste water and slime.

GOVERNMENT REGULATION

    Companies operating in the PRC are subject to certain laws, rules and
regulations promulgated by the government thereof. PRC laws applicable to the
mining, production and utilization of coal include the Mineral Resources Law of
the PRC and the Regulations for the Implementation of the Mineral Resources Law
of the PRC. In particular, the Operating Company is subject to the Coal Law of
the People's Republic of China, which became effective on December 1, 1996 (the
"National Coal Law"), and which regulates the mining of the PRC's coal
resources, the production of coal and related business operations. The planned
mining operations of the Operating Company may, pursuant to the National Coal
Law, require approval by the Heilongjiang Provincial Coke and Coal Bureau. New
rules that may be promulgated by the State Council under the National Coal Law
could impose substantial substantive regulation of the production and pricing of
coal and coke. There can be no assurance that the National Coal Law and the
rules and regulations promulgated thereunder will not have an adverse effect on
the business or operations of the Operating Company or the Coal Mine Use Rights
of MCCF. In addition, prior to the export of coke or coal, the Operating Company
must obtain an export license from the Ministry of Foreign Trade and Economic
Cooperation, which, under the National Coal Law, may be authorized to grant such
licenses only to large scale coal-production enterprises. While management
believes that it will be able to obtain such a license once it is in a position
to begin exporting, there can be no assurance that such a license will be
obtained by the Operating Company.

    The Operating Company is subject to certain PRC laws and regulations
applicable to Sino-foreign equity joint ventures. The laws related to PRC
Sino-Foreign Joint Equity Enterprise (the "Joint Venture Law") provides a
comprehensive regulatory and corporate governance framework with respect to
Sino-foreign equity joint ventures. Some pertinent provisions of the Joint
Venture Law provide as follows: (i) Article 4 requires that the transfer of one
party's share be effected only with the consent of the other party or parties;
(ii) Article 5 provides that if site-use rights are not part of the Chinese
partner's investment contribution, the joint venture shall pay fees to the
government for such usage; (iii) Article 9 requires that the production and
operational plans of a joint venture be filed with the relevant authorities and
(iv) Article 12 requires approval by the government for any extension of a joint
venture's term. More detailed restrictions are provided in Regulations for the
Implementation of the Law of the PRC on Sino-Foreign Joint Equity Enterprise. In
addition, the Regulations on Labor Management in Foreign Investment Enterprises
set forth certain restrictions, including, but not limited to, restrictions on
the hiring and discharge of employees, establishment of wages, maintenance of
insurance and welfare and other benefits. The Operating Company is also subject
to certain PRC national and local environmental regulations with which it must
comply in the production of its coal and coke products. See "--Environmental
Protection."

ENVIRONMENTAL PROTECTION

    The Company is subject to PRC national and local environmental protection
regulations which currently impose fees for the discharge of waste substances,
require the payment of fines for pollution, and provide for the closure by the
PRC government of any facility that fails to comply with orders requiring it to
cease or cure certain activities causing environmental damage. Due to the nature
of the Operating Company's business, the Operating Company produces significant
amounts of waste water, coal dust, solid waste materials, and noise during the
course of its production of coke and coal. The Operating Company has established
environmental protection systems to treat certain of its waste materials, to
safeguard against accidents and to reduce noise. The Operating Company believes
that its environmental


                                        8

<PAGE>



protection facilities and systems are adequate for it to comply with the
existing national and local environmental protection regulations. However, there
can be no assurance that the PRC national or local authorities will not impose
additional or more stringent regulations which would require additional
expenditure on environmental matters, changes in the Operating Company's
processes or systems and/or plant closures.

    The Operating Company regards environmental protection as a priority and
maintains an environmental protection department which is responsible for
coordinating its environmental protection systems. The Operating Company
believes that it is in substantial compliance with all applicable environmental
statutes and regulations.

COMPETITION

MCCF - Metallurgical and Foundry Coke

    The coke produced in the PRC is mainly of the metallurgical quality.
Generally, coke quality is measured by its high caloric value and its low
content of sulfur, phosphorous and ash. Metallurgical coke is considered to be a
lesser grade of coke than foundry coke due to its ash, sulfur and phosphorous
contents. The output of foundry coke in the PRC remains low due to highly
technological production requirements.

    The Operating Company believes that the Jixi City Coal Preparation Plant
("Jixi"), which produces mainly metallurgical coke, is its only major competitor
within the Operating Company's region. The Operating Company believes that
MCCF's preparation process can achieve a lower ash content for coke than is
possible with the process employed by Jixi. A low ash content is required to
meet international standards for foundry coke. The Operating Company believes
that its coke products are priced competitively with those of Jixi.

    The Operating Company believes that its potential major competitors for the
production of foundry coke in the PRC are Zhenjiang Coking Chemical Plant,
Beijing Coking Chemical Plant and other coking plants in central China. Because
these plants are located in the central regions of the PRC, the Operating
Company believes that transportation costs have been, and will continue to be, a
factor which increases the cost of coke delivered by these plants to the
Operating Company's customers. The Operating Company believes that such
increased costs of delivery may provide an effective barrier to competition from
these other producers until such time as the transportation system in the PRC is
better developed. In addition, the Operating Company believes that all of these
other plants produce only limited quantities of foundry coke and there is still
market demand for additional foundry coke.

QCCF - Steam Coal

    QCCF presently processes steam coal for use by thermal power generating
plants in its region. The Operating Company has not experienced significant
competition in the sale of steam coal produced by QCCF due to the strong demand
for steam coal in the PRC. In QCCF's region, Heilongjiang Province, there are
four major production districts, which include Jixi, Hegang, Qitaihe and
Shuangyashan. Within each of these districts are many government-owned steam
coal production facilities, all of which represent competition to QCCF. The
Operating Company is not aware of any available statistics regarding these
government-owned facilities, some of which may have significantly greater
production capacities than the combined capacities of the Operating Company.

    INTERNATIONAL. The Operating Company has not engaged in any sales of its
coal or coke products to customers located outside the PRC. There are many coke
and coal producers worldwide that have significantly greater resources and
experience in international sales than the Operating Company, and which may have
an established customer base for their coal and coke production.

EMPLOYEES

    As of December 31, 1998, the Company and CCM each had 1 full-time employee.
As of December 31, 1998, the Operating Company, including its two factories, had
approximately 308 employees, 258 of whom worked for QCCF and 50 of whom worked
for MCCF. During 1998, due to lack of working capital, MCCF ceased operations
and dismissed 500 workers. Although the workers were terminated, the local labor
law stipulated that the Operating Company is still liable for the worker's wages
and benefits. The total amount of unpaid wages and benefits as of December 31,
1998 amounted to approximately $167,000. Of the Operating Company's total number
of employees, approximately 91% were production workers, approximately 7% were
managerial staff and approximately 2% were


                                        9

<PAGE>



engineering and technical staff. QCCF retired 32 workers during 1998 as part of
its cost control program. Generally, the MCCF and QCCF factories have entered
into employment contracts with their workers, which contracts typically are
subject to annual renewal, contain annual wage determination provisions and
provisions regarding pension and medical benefits in accordance with applicable
PRC regulations governing the management of labor. In addition to cash
compensation, each of the factories provides certain pension funds and costs of
medical care to their employees.


ITEM 2.      DESCRIPTION OF PROPERTIES

PROPERTIES

    Substantially all of the operations of the Company and CCM are conducted at
the facilities of the Operating Company.

    The Operating Company owns and operates two coal production factories, MCCF
and QCCF, in the northeast region of the PRC. These factories include certain
buildings, fixtures and equipment necessary for the production of steam coal and
metallurgical and foundry coke. These factories are owned by the Operating
Company. The Company has recently entered into an agreement to dispose of all of
the MCCF assets other than the Coal Mine Use Rights. See "Item 1---Description
of Business--Recent Developments."

    The MCCF factory and raw material stockpiles are located on a 127,000 square
meter site located in Mishan City, Heilongjiang Province, PRC. MCCF has been
granted certain land use rights by the Mishan City government in connection with
the real property that MCCF occupies. Pursuant to these rights, MCCF has the
exclusive right to use and occupy the real property until 2045. MCCF also owns
and operates 1.13 kilometers of railroad track located on the real property,
which it uses exclusively in connection with its business. The real property on
which the railroad track is located is also subject to the 50-year land use
rights mentioned above. The MCCF factory has the capacity to produce
approximately 200,000 tons of steam coal, 85,000 tons of metallurgical coke and
56,000 tons of foundry coke per year.

    According to the Administrative Bureau for Coal Mining of Heilongjiang, the
coal reserves which have been assigned to MCCF have the potential to mine raw
recoverable coal of the following types: Dalizi - coke and fat coal; Jinshazi -
fat and gas coal; Beiyinzi - coke coal; Dazhushan - gas; and Zhushan - meager
coal. According to the Boyd Report, which was based upon source data provided by
or at the direction of the Company, without independent verification as to its
accuracy, MCCF controls coal reserves sufficient to produce high quality foundry
coke for 20-60 years and there are an additional 9.4 million recoverable tons of
coking reserve base.

    While the Operating Company has the right to mine coal from these reserves,
it has not yet done so. The Operating Company estimates that it will require in
excess of $3.0 million to commence mining operations. To date, the Operating
Company has engaged in conducting mine site surveys, clearing the surface of
potential mine entrance sites, performing geological surveys and preparing
mining plans. The costs associated with mining preparation work have been
capitalized as part of MCCF's Coal Mine Use Rights.

    The QCCF factory and raw material stockpiles are located on a 150,000 square
meter site located in Qitaihe City, Heilongjiang Province, PRC. QCCF has been
granted certain land use rights by the Qitaihe City government in connection
with the real property that QCCF occupies. Pursuant to these rights QCCF has the
exclusive right to use and occupy the real property until 2025. The QCCF factory
has the capacity to produce approximately 750,000 tons of steam coal per year
and was operated at approximately 40% of capacity in 1998.

    The MCCF and QCCF factories of the Operating Company are located in Mishan
City and Qitaihe City, respectively, in the PRC. Fire and disaster relief or
assistance in the PRC is far less sophisticated than in the United States. The
Operating Company and its factories do not currently maintain personal injury,
fire, casualty or other property insurance covering their raw materials,
environmental damage, work in progress, furniture, equipment or factory
buildings in the PRC. Accordingly, any damage or loss relating to the Operating
Company or its facilities would have a material adverse effect on both the
Operating Company's and the Company's business, results of operations and
financial condition. In addition, none of the Company, the Operating Company nor
its factories maintain any business interruption insurance.




                                       10

<PAGE>



ITEM 3.      LEGAL PROCEEDINGS

    Neither the Company nor CCM is a party to, nor is the property of the
Company or CCM subject to any pending legal proceedings which are potentially
material to the Company or CCM.


ITEM 4.      CONTROL OF REGISTRANT

    The following table sets forth certain information regarding ownership of
the Company's shares of Common Stock as of December 31, 1998 by (i) all persons
who own more than ten percent (10%) of the outstanding shares of
Common Stock and (ii) all officers and directors of the Company as a group.


<TABLE>
<CAPTION>
                                                                       AMOUNT            PERCENT
TITLE OF CLASS         IDENTITY OF PERSON OR GROUP                      OWNED            OF CLASS
--------------         ---------------------------                      -----            --------
<S>                    <C>                                             <C>                 <C>
Common Stock           Hualong Holding Co. Ltd.                        1,250,000           38%
Common Stock           Rana Energy Investment Ltd.                       734,444           23%
Common Stock           All officers and directors as a group                   -            0%
</TABLE>

    The Company issued a total of 52,000 options to a consulting firm, the
Equity Group, in July 1997 and January 1998, 32,000 of which are fully vested
with an exercise price of $5.00 per share, and 20,000 of which are fully vested
with an exercise price of $3.50 or at a lower price at which the Company issued
additional equity or warrants between January 22, 1998 and January 21, 1999.
Such options expire in 2002 and 2003, respectively.

    On September 2, 1998 the Company entered into an employment agreement with
Mr. C.T. Yeh, the former Acting Chairman, President and Chief Executive Officer
of the Company (the "Employment Agreement"). Under the Employment Agreement,
among other things, Mr. Yeh received 15,000 shares as part of his compensation
for the 1998 fiscal year. In addition, Mr. Yeh received a total of 120,000
options to subscribe for and purchase shares of the Common Stock at $1.00 per
share. At December 31, 1998, 50,000 of these options were unrestricted, the
remainder will cease to be restricted on December 31, 1999 or upon the
occurrence of certain specified events described in the Employment Agreement.
Such options are exercisable within five years from the date of issuance.

    As of January 25, 1999, there were 3,263,494 shares of Common Stock issued
and outstanding. In the event that the holders of the outstanding Convertible
Notes in the principal amount of $3,237,500 (the "Convertible Notes") exercise
their rights to convert the Convertible Notes at the floor price of $3.50 per
share (resulting in the issuance of an additional 1,082,250 shares of Common
Stock), (ii) AOG purchased 5,241,600 shares of Common Stock, (iii) AOG exercises
its right to convert, the AOG Convertible Notes, at the conversion price of $.20
per share (resulting in the issuance of an additional 120,800 shares of Common
Stock) and (iv) all the holders of warrants and options of the Company exercise
their purchase rights (resulting in the issuance of an additional 7,428,543
shares of Common Stock), the Company would have a total of 17,136,687 shares of
Common Stock issued and outstanding. Dilution to the existing shareholders would
be approximately 81%.

    Assuming full conversion (in the case of the Convertible Notes and the AOG
Convertible Notes) or exercise in the case of warrants and options of the
Company) of the outstanding Convertible Notes, the AOG Convertible Notes,
warrants and options of the Company, the following table sets forth information
regarding ownership of the Company's shares of Common Stock on a fully diluted
basis by (i) all persons who own more than ten percent (10%) of the outstanding
shares of Common Stock and (ii) all officers and directors of the Company as a
group.


<TABLE>
<CAPTION>
                         IDENTITY OF                                     AMOUNT            PERCENT OF
TITLE OF CLASS           PERSON OR GROUP                                  OWNED               CLASS
--------------           ---------------                                  -----               -----
<S>                      <C>                                            <C>                  <C>
Common Stock             Hualong Holding Co. Ltd.                       1,250,000              7%
Common Stock             Rana Energy Investment Ltd.                      734,444              4%
Common Stock             All officers and directors as a group                  -              0%
Common Stock             AOG                                            5,241,600             31%
</TABLE>




                                       11

<PAGE>



ITEM 5.      NATURE OF TRADING

    The Common Stock of the Company is listed on the American Stock Exchange
(the "AMEX"). The AMEX is the principal trading market for the Common Stock,
which is not listed on any other exchanges within or without the United States.
The Common Stock commenced trading on the AMEX on April 21, 1997 under the
symbol "CHG."

    The high and low sales prices for shares of the Common Stock on the AMEX for
the period indicated were as follows:


                                            HIGH                  LOW
1997 Second Quarter                       $6.0000              $4.5625
1997 Third Quarter                         5.1250               3.1250
1997 Fourth Quarter                        3.8750               1.6250
1998 First Quarter                         2.9375               1.5000
1998 Second Quarter                        2.1250               1.5000
1998 Third Quarter                         1.3750               0.3750
1998 Fourth Quarter                        1.3750               0.3125

    As of December 31, 1998, there were 3,248,494 shares of Common Stock issued
and outstanding, 1,467,694 of which were held of record by approximately 290
holders with addresses in the United States.


ITEM 6.      EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
             HOLDERS

CURRENCY CONTROLS - PEOPLES' REPUBLIC OF CHINA

    The Operating Company receives almost all of its revenues in Renminbi, which
is not freely convertible into foreign currency. However, the Operating Company
may require foreign currency to convert profits, if any, into U.S. dollars in
the amounts needed for the Company to pay dividends, if any, and to discharge
obligations denominated in foreign currency. The Company has not paid any
dividends and has no current plans to pay any dividends.

    The PRC government imposes control over its foreign currency reserves in
part through direct regulation of the conversion of Renminbi into foreign
currency and through restrictions on foreign trade. Prior to January 1, 1994,
the PRC had a dual exchange rate system, which consisted of the rate fixed from
time-to-time by the PRC State Administration of Exchange Control (the "SAEC")
and the rates prevailing in the various swap centers around the country (the
"Swap Rates"). In most cases, foreign enterprises satisfied their need for
foreign currency through such means as exporting products for foreign currency,
selling "import substitute" products in the PRC for payment in foreign currency,
or accessing a swap center. Among the more widely used Swap Rates was the rate
at the swap center in Shanghai. Effective January 1, 1994, a new unitary,
managed floating-rate system was introduced in the PRC to replace the previous
dual-track foreign exchange system, which was abolished pursuant to the Notice
of the People's Bank of China Concerning Further Reform of the Foreign Currency
Control System (the "PBOC Notice"). The conversion of Renminbi into U.S. dollars
must now be based on the rate set by the People's Bank of China, which is set
based on the previous day's PRC interbank foreign exchange market rate and with
reference to current exchange rates on the world financial markets. In
furtherance of these currency reforms, the China Foreign Exchange Trading Center
(the "CFETC") was formally established in Shanghai and began operating in April
1994. The establishment of the CFETC was originally intended to coincide with
the phasing out of the swap centers. However, the swap centers have been
retained as an interim measure and it is envisaged that the local swap centers
will be phased out gradually.

    Currently, foreign investment enterprises ("FIEs") in the PRC (including
Sino-foreign equity and co-operative joint ventures) are required to apply to
the local bureau of the SAEC for "foreign exchange registration certificates for


                                       12

<PAGE>



foreign investment enterprises." Upon the presentation of appropriate
documentation, FIEs may enter into foreign exchange transactions at swap
centers, or in the future, in the event the unitary exchange rate system is
implemented as anticipated, through the unified market when all swap centers are
consolidated under the CFETC. On January 29, 1996, the State Council promulgated
the Regulations of the People's Republic of China Regarding Foreign Exchange
Control (the "Regulations") which came into effect on April 1, 1996. Pursuant to
the Regulations, conversion of Renminbi into foreign exchange for current
account items is permissible. Conversion of Renminbi into foreign exchange for
capital items, such as direct investment, loans or security is still under the
sole jurisdiction and requires approval of the SAEC.

    As a result of the adoption of the unitary exchange rate system on January
1, 1994, the official bank exchange rate for Renminbi to U.S. dollars
experienced an immediate devaluation of approximately 50% to US$1.00 = Rmb
8.7000. Any future volatility or devaluation of the Renminbi could have a
material adverse effect on the Company's business, results of operations and
financial condition.

    Management believes that the Operating Company will be able to obtain all
required approvals for the conversion and remittance abroad of foreign currency
necessary for the operations of both the Operating Company's and the Company's
businesses. However, such approvals do not guarantee the availability of foreign
currency and no assurance can be given that the Operating Company will be able
to convert sufficient amounts of foreign currency in the PRC's foreign exchange
markets in the future at acceptable rates, or at all, for the repayment of debt,
payments of interest, purchases of equipment or payment of dividends, if any,
and payments for services and other contracts. To the extent that the Operating
Company is restricted from distributing dividends and profits to CCM, such
restrictions could have a material adverse effect on the Company's business,
results of operations and financial condition.

CERTAIN FOREIGN ISSUER CONSIDERATIONS

    The Company is an International Business Company ("IBC") incorporated under
the provisions of the International Business Companies Act (the "Act") of the
British Virgin Islands (the "BVI"). The transfer of shares between persons
regarded as residents outside of the BVI is not subject to any exchange
controls. Likewise, issues and transfers of shares involving any person regarded
as resident in the BVI are not subject to exchange control approval. There are
no limitations on the rights of non-BVI owners of the Common Stock to hold or
vote their shares. Because the Company is an IBC, there are no restrictions on
its ability to transfer funds into and out of the BVI or to pay dividends to
U.S. residents who are holders of the Common Stock.

    In accordance with the Company's Memorandum and Articles of Association,
share certificates are only issued as shares registered on the books of the
Company. In the case of a representative acting in a special capacity (for
example, as an executor or trustee), share certificates should record the
capacity in which the representative is acting. Notwithstanding the recording of
any such special capacity, the Company is not bound to investigate or incur any
responsibility in respect of the proper administration of any such estate or
trust. The Company takes no notice of any trust applicable to any of its shares
whether or not it had notice of such trust.

    As an IBC, the Company may not: (i) transact business with persons resident
in the BVI except as set out in Section 5(2) of the Act; (ii) own an interest in
real property situated in the BVI, other than a lease of property for use as an
office from which to communicate with shareholders or where books and records of
the Company are prepared and maintained; (iii) maintain a banking or trust
business, unless it is licensed under the BVI Banks and Trusts Companies Act of
1990; (iv) transact business as an insurance or a reinsurance company, insurance
agency or insurance broker, unless it is licensed under an enactment authorizing
it to transact that business; (v) maintain the business of company management
unless it is licensed under the BVI Company Management Act, 1990; or (vi)
maintain the business of providing a registered office or act as the registered
agent for companies incorporated in the BVI.

    There are no restrictions on the degree of foreign ownership of the Company.
The Company is subject neither to taxes on its income or dividends nor to any
foreign exchange controls in the BVI. In addition, the Company is not subject to
capital gains tax in the BVI, and profits can be accumulated by the Company, as
deemed by management to be required, without limitation.






                                       13

<PAGE>



ITEM 7.      TAXATION

    The following discussion summarizes certain tax consequences to a holder of
Common Stock of the Company under present British Virgin Islands tax laws. The
discussion does not deal with all possible tax consequences relating to the
Company's operations or ownership of the Common Stock and does not purport to
deal with the tax consequences applicable to particular investors, some of which
(including banks, securities dealers, insurance companies and tax-exempt
entities) may be subject to special rules. In particular, the discussion does
not address the tax consequences under state, local and other national (non-BVI)
tax laws. The following discussion is based upon laws and relevant
interpretations thereof in effect as of the date of this Annual Report, all of
which are subject to change.

BRITISH VIRGIN ISLANDS TAXATION

    Under the International Business Companies Act of the British Virgin Islands
(the "International Business Companies Act") as currently in effect, a holder of
Common Stock of the Company who is not a resident of the BVI is exempt from BVI
income tax on dividends paid with respect to the Common Stock of the Company. A
holder of Common Stock of the Company is not liable for BVI income tax on gains
realized on the sale or disposal of such shares. The BVI does not impose a
withholding tax on dividends paid by the Company to its shareholders due to its
incorporation under the International Business Companies Act.

    There are no capital gains or income taxes levied by the BVI on companies
incorporated under the International Business Companies Act. In addition, the
Common Stock of the Company is not subject to transfer taxes, stamp duties
or similar charges.

    There is no income tax treaty or convention currently in effect between the
United States and the BVI.

    As an exempted company, the Company is required to pay the BVI government an
annual license fee based on the Company's stated authorized capital.

ITEM 8.      SELECTED FINANCIAL DATA

SUMMARY FINANCIAL AND OPERATING DATA

    The selected information set forth below should be read in conjunction with,
and is qualified in its entirety by reference to, the consolidated financial
statements of the Company included in this Annual Report. The Company prepares
its financial statements in accordance with U.S. GAAP.

    The Company holds 100% of the capital stock of CCM. The Operating Company is
a Sino-foreign equity joint venture company which owns and operates two
production factories, MCCF and QCCF. The figures below primarily reflect the
financial operating results of MCCF and QCCF.



                                       14

<PAGE>





<TABLE>
<CAPTION>
                                                                                Year Ended          Year Ended          Year Ended
                                                                               12/31/96(2)          12/31/97(2)        12/31/98(2)
THE COMPANY:                                                               ---------------------------------------------------------
                                                                              (amounts in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:

<S>                                                                               <C>                 <C>                 <C>
Net sales ..............................................................          $  7,801            $  9,053            $  6,660
Subcontracting income ..................................................               723                 362                --
Cost of sales ..........................................................            (5,584)             (5,516)             (4,835)
                                                                                  --------            --------            --------
Gross profit ...........................................................             2,940               3,899               1,825
Selling, general and administrative expenses ...........................              (961)             (4,921)             (2,634)
Write off of advances to related parties ...............................              --                (1,768)               --
                                                                                  --------            --------            --------
Operating income/(loss) ................................................             1,979              (2,790)               (809)
Interest expense  ......................................................              (422)             (1,056)             (1,339)
Other income/(expenses) ................................................                46                (190)                (79)
                                                                                  --------            --------            --------
Income (loss) before income taxes and minority interest ................             1,603              (4,036)             (2,227)
Income tax .............................................................              --                  --                  --
                                                                                  --------            --------            --------
Income (loss) before minority interest .................................             1,603              (4,036)             (2,227)
Minority interest ......................................................              (345)                494                 196
                                                                                  --------            --------            --------


Net income (loss) ......................................................          $  1,258            $ (3,542)           $ (2,031)


Earnings (loss) per share (1) ..........................................          $   0.66            $  (1.18)           $  (0.63)
Dividends per share ....................................................              --                  --
Weighted average number of shares outstanding (1) ......................             1,918               2,994               3,248

CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):


Working capital ........................................................          $  1,804            $ (4,421)           $ (6,956)
Total assets ...........................................................            28,833              27,393              24,077
Total long-term debt ...................................................             5,369               4,761               5,348
Minority interest ......................................................             2,377               1,739               1,543
Shareholders' equity ...................................................            12,156               7,608               4,434

CONSOLIDATED CASH FLOW STATEMENT DATA:
Net cash provided by/(used in) operating activities ....................             1,960              (3,493)              1,282
Net cash used in investment activities .................................            (1,028)             (1,250)               (372)
Net cash provided by/(used in) financing activities ....................            (3,795)                562              (1,595)
Additions to property, plant and equipment .............................             1,028                 997                 442
Depreciation ...........................................................               863                 643                 858

STATISTICAL DATA:
Gross margin ...........................................................              28.4%               39.1%               27.4%
Operating margin .......................................................              16.1%              (30.8)%             (12.1%)
</TABLE>

(1) The calculation of actual earnings per share of Common Stock for 1998, 1997
    and 1996 are based on the weighted average number of shares outstanding
    during the years ended December 31, 1998, 1997 and 1996.

(2) See Consolidated Statement of Operations of the Company for the years ended
    December 31, 1998, 1997 and 1996.


                                       15

<PAGE>



         Following are certain operating results, set forth separately, of the
Company, MCCF and QCCF. These operating results form the basis for the
Consolidated Statement of Operations Data for the Company.



<TABLE>
<CAPTION>
                                                                                Year Ended          Year Ended          Year Ended
                                                                                 12/31/96            12/31/97            12/31/98
THE COMPANY:                                                                    ----------------------------------------------------
                                                                                             (expressed in thousands)
<S>                                                                                 <C>                 <C>                 <C>
STATEMENT OF OPERATIONS DATA (UNCONSOLIDATED)
Net sales ..............................................................            $  --               $  --               $  --
Cost of sales ..........................................................               --                  --                  --
                                                                                    -------             -------             -------
Gross profit ...........................................................               --                  --                  --
Selling, general and administrative expenses
                                                                                        (96)               (953)               (619)
                                                                                    -------             -------             -------
Operating loss .........................................................                (96)               (953)               (619)
Interest expense .......................................................                (47)               (483)               (454)
Other expenses .........................................................               --                  (199)               (102)
                                                                                    -------             -------             -------
Loss before income taxes and minority interest .........................               (143)             (1,635)             (1,175)
Income tax .............................................................               --                  --                  --
Loss before minority interest ..........................................               (143)             (1,635)             (1,175)
Minority interest ......................................................               --                  --                  --
Net loss ...............................................................               --                  --                  --
                                                                                    -------             -------             -------
                                                                                    $  (143)            $(1,635)            $(1,175)
</TABLE>


<TABLE>
<CAPTION>
                                                                                Year Ended          Year Ended          Year Ended
                                                                                 12/31/96            12/31/97            12/31/98
MCCF:                                                                           ----------------------------------------------------
                                                                                             (expressed in thousands)
<S>                                                                                 <C>                 <C>                 <C>
STATEMENT OF OPERATIONS DATA (UNCONSOLIDATED)
Net sales ..............................................................            $   259             $ 1,313             $   886
Subcontracting income ..................................................                723                 362                --
Cost of sales ..........................................................               (684)             (1,559)             (1,183)
                                                                                    -------             -------             -------
Gross profit (loss) ....................................................                298                 116                (297)
Selling, general and administrative expenses ...........................               (309)             (2,116)               (265)
                                                                                    -------             -------             -------
Operating loss .........................................................                (11)             (2,000)               (562)
Interest expense .......................................................               (127)               (433)               (640)
Other expenses .........................................................               --                    24                --
Loss before income taxes and minority interest .........................               (138)             (2,409)             (1,202)
Income tax .............................................................               --                  --                  --
Loss before minority interest ..........................................               (138)             (2,409)             (1,202)
Minority interest ......................................................                 28                 495                 226
                                                                                    -------             -------             -------
Net loss ...............................................................            $  (110)            $(1,914)            $  (976)
</TABLE>



                                       16

<PAGE>





<TABLE>
<CAPTION>
                                                                      Year Ended          Year Ended          Year Ended
                                                                       12/31/96            12/31/97            12/31/98
QCCF:                                                                 ----------------------------------------------------
                                                                                   (expressed in thousands)
<S>                                                                       <C>                 <C>                 <C>
STATEMENT OF OPERATIONS DATA (UNCONSOLIDATED)
Net sales..................................................
                                                                          $ 7,542             $ 7,740             $ 5,774
Cost of sales..............................................                (4,900)             (3,957)             (3,652)
                                                                          -------              -------            -------
Gross profit...............................................                 2,642               3,783               2,122
Selling, general and administrative expenses...............                  (556)             (1,852)             (1,750)
Write off advances to related parties......................                    --              (1,768)                 --
                                                                          -------              -------            -------
Operating income...........................................                 2,086                 163                 372
Interest expense...........................................                  (248)               (140)               (245)
Other income/(expenses)....................................                    46                 (15)                 23
                                                                          -------              -------            -------
Income before income taxes and minority interest...........                 1,884                   8                 150
Income tax.................................................                    --                  --                  --
                                                                          -------              -------            -------
Income before minority interest............................                 1,884                   8                 150
Minority interest..........................................                  (373)                 (1)                (30)
                                                                          -------              -------            -------
Net income.................................................               $ 1,511              $    7             $   120
</TABLE>


<TABLE>
<CAPTION>
                                                                                  Production Mix and Sales Volume
OPERATING COMPANY:                                                    ----------------------------------------------------

                                                                             1996               1997                1998
                                                                             ----               ----                ----
                                                                         (expressed in thousands except average figures)
<S>                                                                      <C>                 <C>                  <C>
Metallurgical coke:
    Sales volume...........................................                 6,758              21,783              19,880
    Average sales price per ton............................              $  38.32            $  41.73             $ 39.15
    Average production cost per ton........................              $ 101.21            $  55.86             $ 50.39

Low-end metallurgical coke:
    Sales volume...........................................                    --              39,226              25,734
    Average sales price per ton............................                    --            $  10.30             $  4.19
    Average production cost per ton........................                    --            $   8.72             $  7.03

Steam coal:
    Sales volume...........................................               475,305             396,627             299,086
    Average sales price per ton............................              $  15.86            $  19.52             $ 19.31
    Average production cost per ton........................              $  10.31            $   9.98             $ 12.21
</TABLE>

EXCHANGE RATE INFORMATION

         The following table sets forth the applicable exchange rate used for
the presentation of financial information in this Annual Report and in the
financial statements presented herein:


           Period Ended                           Exchange Rate
           ------------                           -------------
         December 31, 1996                     US$1.00 = Rmb8.2982
         December 31, 1997                     US$1.00 = Rmb8.2798
         December 31, 1998                     US$1.00 = Rmb8.2787



                                       17

<PAGE>



ITEM 9.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS

         CCM, which was incorporated on August 18, 1995, entered into the joint
venture which created the Operating Company on September 16, 1995. The Company
was subsequently incorporated on March 15, 1996 to be the sole shareholder of
CCM. All of the Company's operations are conducted through its operating
subsidiary, CCM, and in turn through CCM's interest in the Operating Company. As
a result, the Company's operations and financial condition depend entirely upon
the Operating Company's results of operations and financial condition.

         References to the Company for the year ended 1998, 1997 and 1996 are to
the consolidated results of CCM and the Company.

         The Operating Company has two wholly-owned coal refining operations,
MCCF and QCCF. The Operating Company derives its revenues principally from two
lines of business within the PRC's coal industry: (1) the production and sale of
metallurgical coke to steel mills and machinery manufacturers; and (2) the
production and sale of steam coal to power plants, with all of such sales to
customers located in the PRC.

MCCF

         When operating, MCCF engages primarily in the production and sale of
metallurgical coke. MCCF completed its steam coal preparation facility in 1993.
In 1995, MCCF completed construction of an additional production facility to
process steam coal into metallurgical coke and foundry coke. This facility has
been designed for annual production capacities of approximately 200,000 tons of
steam coal, approximately 85,000 tons of metallurgical coke and approximately
56,000 tons of foundry coke. The total output of metallurgical coke only reached
19,880 tons in 1998, accounting for 23% of its production capacity for
metallurgical coke. Improvements to the facility, which cost approximately $3.0
million, were financed through an unsecured loan by a local PRC bank at a fixed
term rate of 15.3% per annum. These improvements enabled MCCF to produce
metallurgical coke and foundry coke which it was unable to do prior to such
improvements. Presently, when operating, the main product of the MCCF plant is
metallurgical coke and low-end metallurgical coke.

         On June 20, 1995, the Mishan granted MCCF the Coal Mine Use Rights,
which are exclusive underground rights to mine coal from certain coal reserves
located in Mishan City, within Heilongjiang Province, PRC. The Coal Mine Use
Rights were granted on June 20, 1995 and continue in force for 100 years. See
"Item 1--Description of Business--Government Regulation." Upon the formation of
the Operating Company, the PRC joint venture partner made an interest free loan
in the amount of $7.9 million to MCCF to partially finance the acquisition of
the Coal Mine Use Rights.

QCCF

         QCCF engages in the production and sale of steam coal. The QCCF factory
was constructed in 1993 and employs the "air-heavy medium fluid bed" dry process
of coal preparation, which management believes is a leading production
technology worldwide and is appropriate for production in cold and dry regions
such as the region where QCCF's factory is located. QCCF's annual production
capacity is approximately 750,000 tons of steam coal and the factory operated at
40% of capacity in 1998.


                                       18

<PAGE>



COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1998 AND
1997.

         NET SALES. Net sales are recorded as gross sales less returns and
discounts. Net sales decreased from $9.1 million in 1997 to $6.7 million in
1998.

         MCCF's sales during the first quarter of 1998 consisted of sales
totaling $52,000 to the customers and coke products valued at $834,000 which
were used to settle wage and coal supplier claims. The sales price for coke
products used to settle wages and creditor claims was determined by the local
court in the PRC and was lower than the market price. Such amount was based on a
physical counting of the inventory, and was based on the actual tonnage removed
from the MCCF facility. MCCF's sales to customers decreased 96% from $1.3
million in 1997 to $52,000 in 1998 primarily because the factory was not able to
produce and operate due to a depletion of working capital in 1998.

         QCCF's sales of steam coal decreased 25% from $7.7 million in 1997 to
$5.8 million in 1998. Coal sales volume decreased 25% from 396,627 tons in 1997
to 299,086 tons in 1998. The decline in sales volume was primarily due to (1) a
deceleration in the economic growth rate which resulted in a corresponding slow
down in the demand for coal products, (2) an inability to obtain transportation
capacity in the fourth quarter of 1998 which is the peak season for the steam
coal business, and (3) a reduction in sales volume caused by pressure from the
local government which requested power plants to purchase coal products from
state-owned producers as part of the government's effort to support state-owned
enterprises.

         MCCF received a subcontracting fee of $362,000 in 1997 as a result of a
subcontracting agreement with a company under the control of PRC's Ministry of
Coal.

         This agreement expired in March 1997 and MCCF did not receive any
subcontracting income in 1998.

         COST OF SALES. The cost of coal sales includes the cost of raw
material, direct labor and benefits, depreciation, transportation and
manufacturing overhead. Cost of sales decreased from $5.5 million in 1997 to
$4.8 million 1998.

         MCCF's average unit cost of producing metallurgical coke decreased due
to (1) a decline in direct labor as a result of the dismissal of approximately
520 workers and (2) a decrease in the price of raw coal.

         QCCF's average unit cost for steam coal increased by 22% as a result of
the lack of economies of scale for certain production costs such as
depreciation, direct labor and other manufacturing overhead. Also, the price for
raw coal decreased slightly due to poor demand.

         GROSS PROFIT. Gross profit decreased 53% from $3.9 million in 1997 to
$1.8 million in 1998. The decrease was primarily attributable to the decline in
sales in both factories, including QCCF's sales decrease of 25% and the
termination of operations at MCCF in March 1998. Furthermore, MCCF did not
receive any subcontracting income in 1998.

         SELLING, GENERAL AND ADMINISTRATION EXPENSES. Selling, general and
administrative expenses decreased 46% to $2.6 million in 1998 from $4.9 million
in 1997. The decease of $2.3 million is mainly attributable to the following
factors: (1) MCCF's decrease in salary expenses due to its termination of
operations in March 1998; (2) MCCF's decrease in salary expenses due to the
dismissal of approximately 500 workers; (3) MCCF's elimination of the bad debt
provision, which in 1997 totalled $1.6 million; (4) QCCF's termination of
workers due to reduced sales which reduced salary and benefit expenses by
$107,000; (5) QCCF's reduction in other general and administrative expenses by
$507,000 due to tighter control of expenditures for all departments by the
management; and (6) the Company's reduction in general and administrative
expenses by closing the Harbin office in 1998 and exercising tighter control
over administrative expenses.

         INTEREST EXPENSE. Interest expense was reported net of interest income.

         Interest expense increased by 27% from $1.1 million in 1997 to $1.3
million in 1998. The increase of $283,000 was attributable to an increase in
MCCF's interest expense by $150,000. This increase was attributable to the
expiration of the agreement between the local government and MCCF which
obligated the local government to share one-half of the interest expense on
certain loans. In addition, MCCF incurred $57,000 in penalties in 1998 due to
its default on the


                                       19

<PAGE>



payments of all of its outstanding loans with local banks. QCCF's interest
expense increased by $105,000 due to increase in loan borrowings.

         Interest expense in the amount of $386,000 was imputed for the year
ended December 31, 1998 on the interest free loan from CCM's joint venture
partner at the rate of 16% per annum. Such interest was capitalized as part of
MCCF's Coal Mine Use Rights.

         OTHER EXPENSES. In 1997 the former Chairman of the Company withdrew
funds in the amount of $286,000 from the MHXC without the authority of the
Company. The Chairman died in October 1997 and the Company has been seeking to
recover the amount from his estate and family. The Company wrote off $184,000
and $102,000 in 1997 and 1998 respectively.

         INCOME TAXES. Substantially all of the Company's current profits
accrued in the PRC where the applicable tax rate is currently 33%. However,
pursuant to the PRC Income Tax Law, the Operating Company is exempt from payment
of income taxes for its first two profitable years. This two-year "tax-holiday"
was to begin with the first profitable year of the Operating Company, measured
from its formation on September 16, 1995. For the following three years, the
Operating Company will pay income tax at a rate of one-half of the then current
tax rate. There is no tax payable in the British Virgin Islands on dividends
paid to CCM and the Company by any of their subsidiaries or factories.
Therefore, there was no provision for income tax for the year ended December 31,
1997 and 1998.

         NET LOSS. Net loss decreased from $3.5 million in 1997 to $2.0 million
in 1998. The decrease in net loss by $1.5 million was due to: (1) a decrease in
salary and benefit expenses of MCCF and QCCF by $227,000 due to the dismissal of
workers; (2) a decrease in bad debt provision of $1,630,000 in MCCF; (3) a
decrease in the Company's general and administrative expenses of $334,000 by
closing the Harbin office and exercising tighter controls in overall
administrative expenses; and (4) the lack of write offs of advances to related
parties. The decrease in net loss was partially offset by (1) a decrease in
gross profit of $2.1 million in MCCF and QCCF and (2) an increase in the selling
expenses of $463,000 in QCCF.

COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1997 AND
1996.

         NET SALES. Net sales are recorded as gross sales less returns and
discounts. Net sales increased from $7.8 million in 1996 to $9.1 million in
1997.

         MCCF's sales increased 407% from $259,000 in 1996 to $1.3 million in
1997. Net sales of metallurgical coke increased 251% from $259,000 in 1996 to
$909,000 in 1997 while volume increased 222% from 6,758 tons in 1996 to 21,783
tons in 1997. The average unit sales price of metallurgical coke increased from
$38.32 per ton in 1996 to $41.73 per ton in 1997 because of the increase in
production improved the quality of the product. MCCF entered into a
subcontracting agreement with a third party in June 1996. According to this
agreement, the subcontracting party (i) operated the coal production plant (ii)
was obligated to meet all of the operating expenses of the plant, (iii) was
entitled to receive all of the revenues from the plant's operation and (iv) paid
MCCF a subcontracting fee of $723,000 in 1996 and $362,000 in 1997. MCCF was not
able to collect the $362,000 in 1997 due to the death of Chairman of the
Company. Upon the receipt of working capital in March of 1997, MCCF terminated
the subcontracting agreement and resumed the operations and production of
metallurgical coke. MCCF produced low-end metallurgical coke as an additional
coke product in order to increase revenue and fill backlog orders. In order to
alleviate the immediate transportation capacity problems in 1997, MCCF sold
10,466 tons of metallurgical coke at the production point to the subcontracting
party which in turn sold to its customers using its own transportation capacity.

         QCCF's sales of steam coal increased 2.6% from $7.5 million in 1996 to
$7.7 million in 1997. Coal sales volume decreased 17% from 475,305 tons in 1996
to 396,627 tons in 1997. The average net sales price increased from $15.86 per
ton in 1996 to $19.52 per ton in 1997. The decrease in sales volume was due
primarily to the shortage of transportation capacity in May 1997. The local
government utilized the majority of transportation capacity to transport
agricultural products because the harvest in the area was better than expected.
The transportation capacity was still in short supply during the remaining year.
Although QCCF sold approximately 78,678 tons less steam coal in 1997 compared to
1996, its sales price increased due to stricter quality control and testing
which resulted in higher customer satisfaction and fewer discounts and rebates.
Sales to its major customer, Mudanjiang No. 2 Power Plant amounted to 327,743
tons in 1997 compared to 390,890 tons in 1996. Such decrease was due to a
shortage of transportation capacity.


                                       20

<PAGE>



         COST OF SALES. The cost of coal sales includes the cost of raw
materials, direct labor and benefits, depreciation, transportation and
manufacturing overhead. Cost of sales decreased from $5.6 million in 1996 to
$5.5 million in 1997.

         MCCF's average unit cost of producing metallurgical coke decreased 45%
from $101.21 in 1996 to $55.86 in 1997 due to economies of scale arising from
increased production volume of metallurgical coke. The average unit cost of
producing low-end metallurgical coke was $8.72 in 1997.

         QCCF's average unit cost of producing steam coal decreased slightly
from $10.31 in 1996 to $9.98 in 1997 due to reclassification of selling expenses
from cost of sales in 1996 to selling, general and administrative expenses in
1997. Selling expenses amounted to $392,000 in 1997.

         GROSS PROFIT. Gross profit increased 33% from $2.9 million in 1996 to
$3.9 million in 1997. The increase was primarily attributable to an increase in
MCCF's gross profit on sales of coke products by 42% and an increase in QCCF's
gross profit by 43% due to an increase in average sales price. The increase was
partially offset by the decrease in subcontracting income from $723,000 in 1996
to $362,000 in 1997.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 412% to $4.9 million in 1997 from $961,000 in
1996. The increase of $4.0 million is mainly attributable to the following
factors:

         (1) In 1997, MCCF increased its write-off of trade receivables and
subcontracting income in the amount of $1.6 million due to poor credit
management and collection efforts. Salaries and selling expenses increased by
$416,000 due to an increase in selling efforts in 1997. (2) QCCF increased its
$311,000 write off of trade and other receivables, and increased its loss of
$152,000 on retirement of certain transportation vehicles. Salaries and benefits
increased by $193,000. Selling expenses increased by $392,000 which was included
in cost of sales in 1996. The Company opened a representative office in
Heilongjiang in 1997 which increased the office expenses by $337,000 in 1997
compared to 1996. (4) In addition, the Company incurred approximately $432,000
in professional and administrative expenses associated with its reporting
obligations as a public entity. There was an additional amortization of issuance
cost totaling $88,000 when compared to 1996 due to additional financing which
closed in 1997.

         WRITE OFF OF ADVANCES TO RELATED PARTIES. In 1997 advances totaling
$1.8 million were made under the authority of the former chairman of the Company
to the former owner of QCCF which were intended to establish relationships for
potential future business opportunities. The terms of the repayment of the
advances became unclear with the death of the Company's former Chairman.
Accordingly, management wrote off such costs in 1997.

         INTEREST EXPENSE. Interest expense was reported net of interest income.

         Interest income increased by $44,000 from $11,000 in 1996 compared to
$55,000 in 1997.

         Interest expense increased 157% from $433,000 in 1996 to $1.1 million
in 1997. The increase of $678,000 was attributable to the following factors: (1)
The Company incurred an additional $480,000 in interest expense on the
convertible notes in the principal amount of $6.1 million; (2) an increase in
MCCF's interest expense of $306,000 due to the loss of a waiver of interest
expense from a local bank and another lender in 1997 compared to 1996. Such
increase was offset by a decrease in QCCF interest expense of $108,000 as the
average borrowing rate decreased from 18% in 1996 to 9.5% in 1997 and QCCF
repaid a loan of $648,000 on March 31, 1997. The Operating Company's average
short-term borrowing rate was 17% in 1996 and 13% in 1997, whereas the long-term
borrowing rate was fixed at 14% for both 1996 and 1997.

         Commencing October 1, 1995, Mishan agreed to share one-half of the
interest owed by MCCF on certain long-term interest bearing loans. The
government's share of interest expenses was $150,000 in 1997 and $197,000 in
1996. This agreement expired on December 31, 1997. Interest expense in the
amount of $341,000 was imputed for the year ended December 31, 1997 on the
interest free loan from CCM's joint venture partner at the rate of 16% per
annum. Such interest was capitalized as part of MCCF's Coal Mine Use Rights.

         OTHER EXPENSES. In 1997 the former Chairman of the Company withdrew
funds in an amount totaling $285,562 from MHXC without authority from the
Company. The Chairman died in October 1997 and the Company recorded an expense
of $184,000 in "other expense" representing the amounts not recovered.


                                       21

<PAGE>



         INCOME TAXES. Substantially all of the Company's current profits accrue
in the PRC where the applicable tax rate is currently 33%. However, pursuant to
the PRC Income Tax Law, the Operating Company is exempt from the payment of
income taxes for its first two profitable years. This two-year "tax holiday" was
to begin with the first profitable year of the Operating Company, measured from
its formation on September 16, 1995. For the following three years, the
Operating Company will pay income tax at a rate of one-half of the then current
tax rate. There is no tax payable in the British Virgin Islands on dividends
paid to CCM and the Company by any of their subsidiaries or factories.
Accordingly, there was no provision for income tax for the year ended December
31, 1997 and 1996.

         NET INCOME. The Company incurred a net loss of ($3.5 million) in 1997
as compared to a net income of $1.2 million in 1996. The decrease in earnings of
$4.8 million was mainly attributable to: (1) the increase in the write off of
uncollectible receivables and other assets of $2.0 million; (2) an increase in
net interest expense of $634,000; (3) an increase in selling, general and
administration expenses of $857,000 attributable to the additional Heilongjiang
representative office, additional professional expenses related to public
reporting requirements and additional financing activities; (4) an increase in
selling expenses, salary and benefits in the Operating Company of $1.0 million;
(5) additional expenses due to the unauthorized withdrawal by the deceased
Chairman in the amount of $184,000; (6) additional writeoffs of $1.8 million
made to the former owner of QCCF; and (7) a decrease in subcontracting income of
$361,000. The decrease in net income was partially offset by the increase in
gross profit attributable from the increase in sale of metallurgical and steam
coal in the amount of 1.3 million and a decrease in minority interest of
$839,000.

LIQUIDITY AND CAPITAL RESOURCES

         As a holding company, the Company's only sources of cash flow are
dividends, if any, paid by the Operating Company and retained net proceeds from
its offerings of securities. The Company believes that such sources of cash
flow, including the transactions pending with AOG and its affiliates, are
sufficient to fund its current operating expenses. See "--Financing Activities."

         Since the completion of the offerings in early 1997, the Company has
applied $2.0 million of the net proceeds of $5.4 million to MCCF primarily for
its working capital needs. MCCF purchased raw coal and applied its other working
capital needs to ramp sales and production during the months of April and
November of 1997. Unfortunately, due to poor credit management, MCCF was not
able to collect $1.6 million of its trade receivables and subcontracting income.
This created a severe cash flow problem for MCCF at the end of 1997. MCCF's
average receivable turnover deteriorated from 135 days in 1996 to 313 days in
1997. As a result of the unwillingness of local banks and raw coal suppliers to
provide credit, MCCF ceased its operations in March of 1998 and its coking
facilities are no longer in operational mode due to the lack of working capital
to maintain the minimum operational condition.

         QCCF has generally satisfied its working capital requirements, capital
expenditures and scheduled debt repayments from its operating cash flows. QCCF
average receivable turnover deteriorated from 73 days in 1997 to 122 days in
1998 as a result of deceleration in economic growth in PRC and Heilongjiang
Province. As of December 31, 1998, QCCF had $3.1 million in short-term loans and
no long-term debt. Management believes that cash generated from operations will
continue to be sufficient to meet QCCF's working capital requirements, planned
or anticipated capital expenditures, scheduled debt repayments and other
financial commitments.

CAPITAL EXPENDITURES

         Capital expenditures of the Company amounted to $442,000 in 1998, which
mainly represented continued expenditures to modernize its older coal production
facility, improve productivity, purchase equipment and replace the
transportation equipment and build up the transportation system of QCCF. The
Operating Company does not expect significant capital expenditures in 1999.

FINANCING ACTIVITIES

         In November 1996, the Company raised net proceeds of approximately $4.5
million through an offering of convertible notes and warrants. Subsequently, in
January 1997, the Company raised net proceeds of approximately $900,000 in a
follow-up offering of convertible notes and warrants on the same terms as the
November 1996 offering. The convertible notes and the warrants are referred to
hereinafter as the "Notes" and the "Warrants" respectively. The aggregate
principal amount of the Notes issued in the November 1996 and January 1997
offerings was $6.1 million.


                                       22

<PAGE>



Based on a conversion price of $3.50 per share of Common Stock, the Notes were
convertible at the time of issuance into an aggregate of 1,749,293 shares of
Common Stock. In connection with the purchase of a Note, each purchaser was
issued a Warrant exercisable for the same number of shares of Common Stock into
which such purchaser's Note was convertible. Including Warrants issued in
payment of offering-related fees, the Company issued Warrants exercisable for an
aggregate of 1,894,150 shares of Common Stock based on an exercise price of
$3.50 per share of Common Stock at the time of issuance. As of December 31,
1998, Notes in the aggregate principal amount of $3.2 million remained
outstanding and Warrants to purchase an aggregate of 1,894,150 shares of Common
Stock remained outstanding (with an initial conversion price of $3.50 per
share).

         The Notes bear interest at 8% per annum and the outstanding principal
amount of the Notes and any accrued and unpaid interest thereon are payable on
the maturity date of November 14, 2001. The Warrants became exercisable to
purchase shares of Common Stock on May 14, 1997 and expire on November 14, 1999.
The exercise price per share for the Warrants is the same as the conversion
price in effect at such time for the Notes. See "Item 12. Options to Purchase
Securities from Registrant or Subsidiaries."

         The proceeds from the offerings were used primarily as follows: $2.0
million for purchase of raw coal and working capital of MCCF, $648,000 for bank
loan repayment in QCCF, $1.3 million for loan to the former owner of QCCF,
$337,000 for the expenses of the representative office in Heilongjiang, an
unauthorized withdrawal of $286,000 by the former Chairman, and $832,000 for the
Company's administrative and reporting expenses with the remaining $15,000 as
cash on hand.

         TRANSACTIONS WITH CHINA ORIENT GROUP INDUSTRIES, INC. AND ITS
AFFILIATES. In response to the management and operational difficulties of MCCF
and QCCF, former management of the Company began discussions with officers of
China Orient Group Industries, Inc., a private sector conglomerate in the PRC
(the "Orient Group"), and its affiliates regarding an investment by the Orient
Group in the Company and a possible change in the Company's executive
management. Such discussions resulted in a change of executive management of the
Company and certain financing agreements which are described below.

         THE STOCK AND WARRANT PURCHASE AGREEMENT. In December 1998, the Company
and America Orient Group, Inc. a Maryland corporation and wholly owned
subsidiary of the Orient Group ("AOG"), executed a stock and warrant purchase
agreement whereby the Company agreed to sell to AOG 5,000,000 shares of Common
Stock and a warrant to purchase 5,000,000 shares of Common Stock for an
aggregate price of $1.0 million (the "Stock and Warrant Purchase Agreement").
Such warrant is exercisable at any time after the closing of the Stock and
Warrant Purchase Agreement (the "Exercise Date") in the five years following the
Exercise Date, in whole or in part, at the lower of (a) 75% of the average
closing price of the Common Stock for the 30 days immediately prior to such
exercise, or (b) as follows: $0.75 per share in 1999; $1.00 per share in 2000:
$1.50 per share in 2001; $2.00 per share in 2002; and $3.00 per share in 2003
(subject to adjustments for stock splits, stock dividends and similar
transactions). Closing of the Stock and Warrant Purchase Agreement is subject to
several conditions which are further described in the Stock and Warrant Purchase
Agreement. See "Exhibit 2.1"

         AOG LOANS TO THE COMPANY. In February 1999, AOG loaned the Company
$24,160 at an interest rate of 8% per annum payable on demand for working
capital purposes in exchange for a convertible note (the "AOG Convertible Note")
and a warrant to purchase 120,800 shares of Common Stock at an exercise price of
$0.20 per share. Based on a conversion price of $0.20 per share, the AOG
Convertible Note was convertible at the time of issuance into 120,800 shares of
Common Stock. In March 1999, the Company issued a revolving convertible note to
AOG of up to $250,000 at an interest at 8% per annum payable on demand (the
"Revolving Note"). AOG may convert any amounts owed under the Revolving Note to
Common Stock on the same terms as the AOG Convertible Note. In April 1999, the
Revolving Note was increased to up to $1.3 million, and as of July 1999 the
Company had outstanding borrowings under the Revolving Note of approximately
$326,000.

         ORIENT FINANCE CO. LOAN TO THE COMPANY. In March 1999, the Company,
together with MHXC, entered into a definitive loan and guarantee agreement with
Orient Finance Co. ("Orient Finance") for a $2.0 million term loan of three
years with a one-year grace period and a 6.625% interest rate per annum (the
"Loan Agreement"). The Loan Agreement provides no conversion features. Orient
Finance is a subsidiary of the Orient Group and, accordingly, an affiliate of
AOG. Under the terms of the Loan Agreement, as amended in July 1999, the $2.0
million will be disbursed to MHXC no later than July 31, 1999.



                                       23

<PAGE>



INFLATIONARY IMPACT

         General inflation of costs had no material impact on the Company's
revenues and expenses during the year 1997 and no adverse effects from inflation
are anticipated in 1998. The Company has generally been able to adjust the price
of its products offered to its customers to minimize any risks associated with
inflationary pressures. However, due to the capital-intensive nature of the
Company's activities, inflation may have a significant impact on the future
development or improvement of the coal operations in the PRC.

EXCHANGE RATE RISK

         The exchange rate between the Renminbi and the U.S. dollar as quoted by
the People's Bank of China was US$1.00 = Rmb 8.2787 on December 31, 1998.

         During the last few years, the value of the Renminbi generally has
experienced a gradual devaluation against most major currencies, declining from
5.5309 Renminbi per U.S. dollar on December 31, 1992 to 8.2674 Renminbi per U.S.
dollar on December 31, 1997. As a result of the adoption of the unitary exchange
rate system on January 1, 1994, the official bank exchange rate for Renminbi to
U.S. dollars experienced an immediate devaluation of approximately 50% to
US$1.00 = Rmb 8.7000 on January 1, 1994. Since the unification of the two-tier
exchange rate system effective January 1, 1994, the Renminbi has strengthened
somewhat against the U.S. dollar. Since there can be no assurance that the
Renminbi exchange rate will not again become volatile or that the Renminbi will
not devalue significantly against the U.S. dollar, the Company believes that
exchange rate fluctuations may adversely affect the Company's financial
performance because of its foreign currency denominated liabilities and may have
a material adverse effect on the value, translated or converted into U.S.
dollars, of the Company's assets, earnings and dividends, if any. The Company
does not currently engage in hedging transactions and does not intend to do so
in the future.


ITEM 10.     DIRECTORS AND OFFICERS OF REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         Set forth below is certain information regarding the directors and
executive officers of the Company.


<TABLE>
<CAPTION>
                                                                         Date First Elected
Name                        Position                                        Or Appointed
----                        --------                                        ------------
<S>                         <C>                                             <C>
Bill H. Zhao (1)(2)         President, CEO and Chairman of the Board        March 1999
Weixing Zhang               Vice President                                  March 1999
Ming Wong                   Vice President and Chief Financial Officer      March 1999
Jianmin Xin                 Vice President - MCCF                           March 1999
Guoliang Guan               Director                                        April 1999
Luan Jixiang                Director                                        April 1997
Wu Chunlai (1)              Director                                        April 1997
Zhang Geng Xin (1)          Director                                        April 1998
</TABLE>

         (1) Member of Audit Committee.
         (2) Mr. Zhao succeeded C.T. Yeh, who resigned from his positions as
President, CEO and Acting Chairman of the Company in March 1999. Mr. Yeh
succeeded Wang Gongquan, who resigned from his positions as President and
Chairman of the Board of the Company in August 1998 to devote more time to his
investment company.



                                       24

<PAGE>




DIRECTORS AND EXECUTIVE OFFICERS OF CCM

         Set forth below is certain information regarding the directors and
executive officers of CCM, a wholly-owned subsidiary of the Company.


<TABLE>
<CAPTION>
                                                                         Date First Elected
Name                        Position                                        Or Appointed
----                        --------                                        ------------
<S>                         <C>                                             <C>
Bill H. Zhao (1)(2)         President, CEO and Chairman of the Board        March 1999
</TABLE>


         (1) Member of Audit Committee.
         (2) Mr. Zhao succeeded C.T. Yeh, who resigned from his positions as
President, CEO and Acting Chairman of CCM in March 1999. Mr. Yeh succeeded Wang
Gongquan, who resigned from his positions as President and Chairman of the Board
of CCM in August 1998 to devote more time to his investment company.

DIRECTORS AND EXECUTIVE OFFICERS OF THE OPERATING COMPANY

         Set forth below is certain information regarding the directors and
executive officers of the Operating Company, which owns and operates the MCCF
and QCCF factories. An 80% interest in the Operating Company is owned by CCM.


<TABLE>
<CAPTION>
                                                                            Date First Elected
Name                    Position                                                Or Appointed
----                    --------                                                ------------
<S>                     <C>                                                    <C>
Bill H. Zhao (1)(2)     Chairman of the Board and Legal Representative         March 1999
Weixing Zhang           President and CEO                                      March 1999
Yabin Yin               Vice President and CFO                                 March 1999
Fangping Yao            Vice President and Chief Engineer                      March 1999
Luan Jixiang            Director                                               September 1995
Xu Changhai             Director                                               September 1995
Yuan Si Xian            Director                                               September 1995
Wu Chunlai              Director                                               September 1995
</TABLE>

         (1)  Member of Audit Committee.
         (2) Mr. Zhao succeeded C.T. Yeh, who resigned from his positions as
Chairman of the Board and Legal Representative of the Operating Company in March
1999. Mr. Yeh succeeded Wang Gongquan, who resigned from his positions as
Chairman of the Board and Legal Representative of the Operating Company in
August 1998 to devote more time to his investment company.

EXECUTIVE OFFICERS AND KEY EMPLOYEES OF MCCF

         Set forth below is certain information regarding the executive officers
and key employees of MCCF.


<TABLE>
<CAPTION>
                                                                          Date First Elected
Name                          Position                                       Or Appointed
----                          --------                                       ------------
<S>                           <C>                                          <C>
Xu Changhai                   Chief Engineer                               September 1995
</TABLE>

EXECUTIVE OFFICERS AND KEY EMPLOYEES OF QCCF

         Set forth below is certain information regarding the executive officers
and key employees of QCCF:


<TABLE>
<CAPTION>
                                                                          Date First Elected
Name                          Position                                       Or Appointed
----                          --------                                       ------------
<S>                           <C>                                          <C>
Luan Jixiang                  Director                                     September 1995
Yuan Si Xian                  Director                                     September 1995
</TABLE>

         There is no known family relationship between any director, executive
officer or key employee listed above and any other director, executive officer
or key employee listed above.




                                       25

<PAGE>



ITEM 11.     COMPENSATION OF DIRECTORS AND OFFICERS

         For the year ended December 31, 1998, the aggregate amount of
compensation and bonuses paid by the Company to executive officers of the
Company listed in Item 10 above, for service in all capacities, was
approximately $47,500 which includes $25,000 paid to Mr. Wang in his capacity as
President and Chairman of the Board of the Company, from which he resigned in
August 1998. The grant of bonuses is determined in the sole discretion of the
Board of Directors of the Company. No compensation was granted to the Directors
listed in Item 10 above.

         On September 2, 1998 the Company entered into an employment agreement
with Mr. C.T. Yeh, the Chairman, President and Chief Executive Officer of the
Company at that time. Under the agreement, among other matters, Mr. Yeh received
15,000 shares at a fair market value of $8,000 which has been recognized as
compensation expense. These shares were issued in January 1999.


ITEM 12.     OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES

         In November 1996, the Company raised net proceeds of approximately $4.5
million through an offering of Notes and Warrants. Subsequently, in January
1997, the Company raised net proceeds of approximately $900,000 in a follow-on
offering of Notes and Warrants on the same terms as the November 1996 offering.
The aggregate principal amount of Notes issued in the November 1996 and January
1997 offerings was $6.1 million. Based on a conversion price of $3.50 per share
of Common Stock, the Notes were convertible at the time of issuance into an
aggregate of 1,749,293 shares of Common Stock. In connection with the purchase
of a Note, each purchaser was issued Warrants exercisable for the same number of
shares of Common Stock into which such purchaser's Note was convertible.
Including Warrants issued in payment of offering-related fees, the Company
issued Warrants exercisable for an aggregate of 1,894,150 shares of Common Stock
based on an exercise price of $3.50 per share of Common Stock at the time of
issuance.

         The Notes carry interest at 8% per annum and the outstanding principal
amount of the Notes and any accrued and unpaid interest thereon are payable on
the maturity date of November 14, 2001. The Warrants became exercisable to
purchase shares of Common Stock on May 14, 1997 and expire on November 14, 1999.
The exercise price per share for the Warrants is the same as the conversion
price in effect at such time for the Notes. The complete terms of the Notes and
the Warrants, along with the applicable conversion and exercise prices thereof,
are set forth in the Notes, Warrants and the subscription agreements of the
purchasers thereof.

         The holders of the Notes have the right, prior to the payment in full
of all principal and interest on the Notes, to convert any outstanding and
unpaid principal portion of the Note and accrued and unpaid interest thereon
into fully-paid and nonassessable shares of Common Stock at the conversion price
specified in the Notes. In the event that a holder does not convert the entire
principal amount of its Note and all accrued and unpaid interest thereon before
the maturity date for such Note, then on the maturity date, the Company has the
option of compelling the conversion of such Note or paying to such holder the
remaining unpaid principal and accrued interest amount on such holder's Note.

         The conversion price for the Notes, which is subject to a floor price
of $3.50 and a ceiling price of $8.50, is computed by calculating 60% of the
average closing bid and ask price for a share of the Common Stock on any
securities exchange or other securities market on which the Common Stock is then
being traded for the 10 trading days immediately preceding the conversion date;
PROVIDED, that in the event of a public offering or private placement of
securities of the Company resulting in gross proceeds of at least $10 million,
consummated within 18 months of the issuance date of the Notes (a "Qualifying
Offering"), the floor price shall be adjusted to equal 60% of the offering price
per share in such Qualifying Offering. Pursuant to the terms of the Notes, at
any time prior to the date on which the Common Stock has begun trading on a U.S.
securities exchange or market (including the American Stock Exchange), the
conversion price would equal $3.50 per share.

         The principal amount outstanding on the Notes, and all interest accrued
and payable thereon, may be prepaid by the Company, in whole but not in part, on
or after November 15, 1997; provided, that the average closing bid price of the
Common Stock has remained at or above $17.00 per share for 30 consecutive
business days; and provided, that written notice of prepayment is delivered to
the holder of a Note not more than 60 days nor less than 30 days prior to the
applicable prepayment date. A holder has the right to exercise any conversion
rights it may have with respect to its Note until such time as any prepayment by
the Company is made.


                                       26

<PAGE>



         The principal amount outstanding on any Note, and all interest accrued
and payable thereon, may be prepaid at the request of the holder thereof, in
whole or in part; provided, that such holder has received a notice from the
Company that a Qualifying Offering has been consummated.

         The Company issued total of 52,000 options to a consulting firm, the
Equity Group, on July 22, 1997 and January 15, 1998: 32,000 of the options are
fully vested with an exercise price of $5.00 per share, and 20,000 options are
fully vested with an exercise price of $3.50 or at a lower price at which the
Company issued new equity or warrants between January 22, 1998 and January 21,
1999.  Such options expire in 2002 and 2003, respectively.

         During 1997, holders of Notes converted principal and accrued interest
in the amount of $2.9 million into 848,644 shares of Common Stock. As of
December 31, 1998, Notes in the aggregate principal amount of $3.2 million
remained outstanding and Warrants to purchase an aggregate of 1,894,150 shares
of Common Stock remained outstanding.

         On September 2, 1998 the Company entered into an employment agreement
with Mr. C.T. Yeh, the Acting Chairman, President and Chief Executive Officer of
the Company at that time. Under the agreement, among other things, Mr. Yeh
received 15,000 shares as his compensation for 1998. In addition, he received a
total of 120,000 options to subscribe for and purchase shares of the Common
Stock at $1.00 per share. At December 31, 1998, 50,000 options were unrestricted
and the remainder will cease to be restricted December 31, 1999 or upon the
earlier occurrence of certain specified transactions listed in his employment
agreement. Such options are exercisable within five years from the date of
issuance.


ITEM 13.     INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

             None.


                                     PART II

ITEM 14.     DESCRIPTION OF SECURITIES TO BE REGISTERED

             Not required.


                                    PART III

ITEM 15.     DEFAULTS UPON SENIOR SECURITIES

             None.


ITEM 16.     CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED
             SECURITIES AND USE OF PROCEEDS

             None.


                                     PART IV

ITEM 17.     FINANCIAL STATEMENTS

         The Company has elected to provide the financial statements and related
information specified in Item 18 in lieu of Item 17.




                                       27

<PAGE>




ITEM 18.     FINANCIAL STATEMENTS

                          INDEX TO FINANCIAL STATEMENTS

CHINA ENERGY RESOURCES CORPORATION (THE "COMPANY")


Independent Auditors' Report.................................................F-1

Consolidated statements of operations for the years ended
December 31, 1998, 1997 and 1996.............................................F-2

Consolidated balance sheets at December 31, 1998 and 1997....................F-3

Consolidated statements of stockholders' equity for the years ended
December 31, 1998, 1997 and 1996.............................................F-4

Consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996.............................................F-5

Notes to consolidated financial statements...................................F-6


ITEM 19.     FINANCIAL STATEMENTS AND EXHIBITS

(a)      Financial Statements.

         See Item 18 for a list of the financial statements filed as part of
this Annual Report.

(b)      Exhibits.

         Exhibit 2.1 -- Stock and Warrant Purchase Agreement, dated December 3,
1998, between America Orient Group, Inc. and China Energy Resources Corporation.



                                       28

<PAGE>



                                    SIGNATURE


         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant certifies that it meets all of the requirements for filing on
Form 20-F and has duly caused this annual report to be signed on its behalf by
the undersigned, thereunto duly authorized.




                                  CHINA ENERGY RESOURCES CORPORATION



                                  By:    /s/ Bill H. Zhao
                                         ---------------------------------------
                                             Bill H. Zhao
                                             President, Chief Executive Officer
                                               and Chairman of the Board


Date:  July 14, 1999


                                       29

<PAGE>



                          INDEPENDENT AUDITORS' REPORT









To the shareholders and board of directors of
CHINA ENERGY RESOURCES CORPORATION

         We have audited the accompanying consolidated balance sheets of China
Energy Resources Corporation (a British Virgin Islands Company) and its
subsidiaries as of December 31, 1998 and 1997 and the related consolidated
statements of operations and cash flows for the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

         In our opinion, such financial statements referred to above present
fairly, in all material respects, the financial position of China Energy
Resources Corporation and its subsidiaries as of December 31, 1998 and 1997 and
the results of their operations and their cash flows for the three years in the
period ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States of America.

/s/ Deloitte Touche Tohmatsu

Deloitte Touche Tohmatsu
Hong Kong
March 29, 1999, except for note 3 as to which is dated July 10, 1999




                                       F-1

<PAGE>



<TABLE>
<CAPTION>
                                       CHINA ENERGY RESOURCES CORPORATION

                                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                (Amounts in thousands except per share amounts)



                                                                             Years ended December 31,
                                                                    1998               1997               1996
                                                                    ----               ----               ----
<S>                                                               <C>                <C>                <C>
Net sales.....................................................    $ 6,660            $ 9,053            $ 7,801
Subcontracting income (note 1)................................          -                362                723
Cost of sales.................................................     (4,835)            (5,516)            (5,584)
                                                                  -------            -------            -------
Gross profit..................................................     1,825               3,899              2,940
Selling, general and administrative expenses..................    (2,634)             (4,921)              (961)
Write-off of advances to related parties (note 12)............         -              (1,768)                 -
                                                                  -------            -------            -------
Operating (loss) income.......................................       (809)            (2,790)             1,979
Interest expense..............................................     (1,339)            (1,056)              (422)
Other (expense) income (note 12)..............................        (79)              (190)                46
                                                                  -------            -------            -------
(Loss) income before minority interests.......................     (2,227)            (4,036)             1,603
Minority interest.............................................        196                494               (345)
                                                                  -------            -------            -------
Net (loss) income.............................................    $(2,031)           $(3,542)           $ 1,258
                                                                  =======            =======            =======
(Loss) earnings per share
- Basic.......................................................    $ (0.63)           $ (1.18)           $  0.66
                                                                  =======            =======            =======
- Fully-diluted...............................................    $ (0.63)           $ (1.18)           $  0.57
                                                                  =======            =======            =======
Weighted average number of shares outstanding
- Basic.......................................................      3,248              2,994              1,918
                                                                  =======            =======            =======
- Fully-diluted...............................................      3,248              2,994              2,314
                                                                  =======            =======            =======
</TABLE>

          See accompanying notes to consolidated financial statements.



                                      F-2

<PAGE>



<TABLE>
<CAPTION>
                                        CHINA ENERGY RESOURCES CORPORATION

                                            CONSOLIDATED BALANCE SHEETS
                             (Amounts in thousands except share and per share amounts)


                                                                                    December 31,
                                                                         1998                        1997
                                                                         ----                        ----
<S>                                                                    <C>                         <C>
ASSETS
Current assets:
Cash and cash equivalents...................................           $     82                    $    767
Accounts receivable, net of allowance for doubtful
       accounts of $1,571 (1997:$1,576).....................              1,472                       2,346
Prepayments, prepaid expenses, and other assets.............              1,222                       1,615
Inventories (note 6)........................................              3,020                       4,136
                                                                       --------                    --------
       Total current  assets................................              5,796                       8,864
Property, plant and equipment, net (note 7).................             17,916                      18,002
Value added taxes receivable (note 8).......................                 81                         140
Other assets................................................                284                         387
                                                                       --------                    --------
       Total assets.........................................           $ 24,077                    $ 27,393
                                                                       ========                    ========

LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Short-term borrowings (note 9)..............................           $  4,625                    $  5,057
Current portion of long-term debt (note 10).................              1,812                       1,812
Accounts payable............................................                796                       1,629
Customer deposits...........................................                225                          87
Other payables..............................................              2,078                       2,392
Plant construction payables.................................                  7                          77
Accrued payroll and employee benefits.......................                385                         474
Accrued interest............................................              2,495                       1,596
Other accrued liabilities...................................                329                         161
                                                                       --------                    --------
       Total current liabilities............................             12,752                      13,285
Long-term debt (note 10)
 Related parties............................................              2,800                       2,414
Convertible notes (note 11).................................              2,548                       2,347
Minority interests..........................................              1,543                       1,739

Commitments and contingencies (note 14)

Stockholders' equity:
Preferred shares, $0.01 par value, 2,000,000 shares
       authorized, no shares issued and outstanding.........                  -                           -
Common stock, $0.01 par value, 50,000,000 shares
       authorized, 3,248,494 (1997:3,248,494) shares
       issued and outstanding...............................                 32                          32
Additional paid-in capital..................................             11,808                      11,788
Deficit.....................................................             (3,971)                     (1,940)
Advances receivable from related parties (note 12)..........             (3,435)                     (2,272)
                                                                       --------                    --------

       Total stockholders' equity...........................              4,434                       7,608
                                                                       --------                    --------

       Total liabilities and stockholders' equity...........             24,077                      27,393
                                                                       ========                    ========
</TABLE>

          See accompanying notes to consolidated financial statements.




                                       F-3

<PAGE>



<TABLE>
<CAPTION>
                                                 CHINA ENERGY RESOURCES CORPORATION

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                       (Amounts in thousands)


                                                         Common Stock
                                                         ------------



                                                                                                          Advances
                                                                              Additional     Retained     receivable       Total
                                                                               paid-in       earnings    from related  stockholders'
                                                   Shares        Amount        capital      (deficit)      parties         equity
                                                   ------        ------        -------      ---------      -------         ------
<S>                                                 <C>          <C>          <C>            <C>          <C>           <C>
Balance at December 31, 1995.....................   2,290        $   23       $  7,864       $    346     $        -    $    8,233
Merger with Jackson (note 1).....................     110             1             47             (2)             -            46
Amount created on issuance of convertible
notes............................................       -             -          2,619              -              -         2,619
Net income.......................................       -             -              -          1,258              -         1,258
                                                    -----        ------       --------       --------     ----------    ----------
Balance at December 31, 1996.....................   2,400            24         10,530          1,602              -        12,156
Issues of shares.................................     848             8          1,232              -              -         1,240
Stock compensation expense (note 13).............       -             -             26              -              -            26
Net loss.........................................       -             -              -         (3,542)             -        (3,542)
Advances to related parties......................       -             -              -              -         (2,272)       (2,272)
                                                    -----        ------       --------       --------     ----------    ----------
Balance at December 31, 1997 ....................   3,248            32         11,788         (1,940)        (2,272)        7,608
Stock compensation expense (note 13).............       -             -             20              -              -            20
Net loss.........................................       -             -              -         (2,031)             -        (2,031)
Advances to related parties......................       -             -              -              -         (1,163)       (1,163)
                                                    -----        ------       --------       --------     ----------    ----------
Balance at December 31, 1998 ....................   3,248        $   32       $ 11,808       $ (3,971)    $   (3,435)   $    4,434
                                                    =====        ======       ========       ========     ==========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       F-4

<PAGE>


<TABLE>
<CAPTION>
                                                CHINA ENERGY RESOURCES CORPORATION

                                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                      (Amounts in thousands)


                                                                                               Years ended December 31,
                                                                                       1998              1997             1996
                                                                                ----------------------------------------------------
<S>                                                                                 <C>               <C>               <C>
Cash flow from operating activities:
Net (loss) income ...............................................................   $ (2,031)         $ (3,542)         $ 1,258
Adjustments to reconcile net (loss) income to
     net cash provided by (used in) operating activities:
     Minority interest...........................................................       (196)             (494)             345
     Loss on disposal of property, plant and equipment...........................         19               152                -
     Depreciation................................................................        858               643              863
     Bad debt provisions.........................................................          -             1,365               15
     Imputed interest on convertible notes.......................................        201               211                7
     Write-off of prepaid expenses...............................................          -               289                -
     Value added tax on opening debit balance utilized...........................         59                27               53
     Stock compensation expense..................................................         20                26                -
Changes in assets and liabilities:
     Accounts receivable.........................................................        874            (2,467)           1,456
     Inventories.................................................................      1,116            (1,064)            (105)
     Prepayments, prepaid expenses, and other assets.............................        393              (433)            (427)
     Accounts payable............................................................       (833)              577             (581)
     Customer deposits...........................................................        138               (81)             (82)
     Other payables..............................................................       (314)              563              288
     Amount due to PRC joint venture partner.....................................          -              (278)            (525)
     Accrued payroll and employee benefits.......................................        (89)              165                7
     Accrued interest............................................................        899               695             (580)
     Other accrued liabilities...................................................        168               153              (32)
                                                                                    --------          --------          -------

Net cash provided by (used in) operating activities..............................      1,282            (3,493)           1,960
                                                                                    --------          --------          -------

Cash flow from investing activities:
     Sales proceeds of property, plant and equipment.............................         70               129                -
     Purchase of property, plant and equipment...................................       (442)             (997)          (1,028)
     Addition of other assets....................................................          -              (382)               -
                                                                                    --------          --------          -------

Net cash used in investing activities............................................       (372)           (1,250)          (1,028)
                                                                                    --------          --------          -------

Cash flow from financing activities:
     Advances to related parties.................................................     (1,639)           (2,272)               -
     Prepayments from related parties............................................        476                 -                -
     Repayment of long-term debt from related parties............................          -                 -           (1,266)
     Repayment to minority interests.............................................          -              (144)             (83)
     Increase in short-term borrowings - net ....................................       (432)            1,949              140
     Issuance of convertible notes...............................................          -                 -            2,340
     Issuance of common stock....................................................          -             1,029            2,619
     Cash and cash equivalents acquired on merger with Jackson...................          -                 -               45
                                                                                    --------          --------          -------

Net cash (used by) provided by financing activities..............................     (1,595)              562           (3,795)
                                                                                    --------          --------          -------

(Decrease) increase in cash and cash equivalents.................................       (685)           (4,181)           4,727
Cash and cash equivalents at beginning of year...................................        767             4,948              221
                                                                                    --------          --------          -------

Cash and cash equivalents at end of year.........................................   $     82          $    767          $ 4,948
                                                                                    ========          ========          =======

Supplementary disclosures of cash information

Cash paid during the year for:
Interest.........................................................................   $    247          $    405          $ 1,202
</TABLE>

          See accompanying notes to consolidated financial statements.





                                       F-5

<PAGE>

                       CHINA ENERGY RESOURCES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Amounts in thousands except per share amounts)


1.       ORGANIZATION AND BASIS OF PRESENTATION

         China Energy Resources Corporation (the "Company"), a private company
         incorporated in the British Virgin Islands, was incorporated on March
         15, 1996 for the purpose of holding a 100% interest in China Coal
         Mining (B.V.I.) Co. Ltd. ("China Coal") and to enter into an agreement
         with Jackson Holding Corp. ("Jackson"), a New York Corporation.

         On March 15, 1996 the shareholders in China Coal exchanged their shares
         in China Coal for shares in the Company. The exchange of shares has
         been accounted for as a reorganization of entities under common control
         similar to a pooling of interests. The accompanying financial
         statements include the combined results and operations and financial
         position of the Company, China Coal and its 80% held subsidiary for all
         periods presented.

         On March 22, 1996, pursuant to an agreement and plan of merger between
         the Company and Jackson, Jackson was merged into the Company and the
         Company issued 109,850 shares of its common stock to the shareholders
         of Jackson for the entire issued share capital of Jackson. Jackson had
         been established in 1994 for the sole purpose of acquiring or merging
         with an unspecified business, and at the time of the merger Jackson had
         no operating assets and had not engaged in any business activities. The
         transaction has been accounted for as a reverse acquisition and the
         financial statements presented represent the financial statements of
         the Company and its subsidiary from August 18, 1995, the date the
         subsidiary commenced operations.

         China Coal, a private company incorporated in the British Virgin
         Islands, was incorporated on August 18, 1995. Pursuant to a joint
         venture agreement dated September 16, 1995 between China Coal and
         Mishan Coal Chemical Holding Company ("the Factory"), China Coal
         acquired for cash of Renminbi 65,600 (approximately $7,886) an 80%
         interest in a new joint venture company, Mishan Hua Xing Coke Limited
         ("MHXC"), incorporated in the People's Republic of China ("PRC"), which
         has succeeded to the business of the Factory. In conjunction with the
         agreement the former owner contributed land use rights with a fair
         value of Renminbi 14,806 (approximately $1,780) and coal mine use right
         with a contractual value of Renminbi 95,760 (approximately $11,312) to
         MHXC. The former owner provided an interest free loan of Renminbi
         65,760 (approximately $7,906) to MHXC to finance the acquisition of the
         coal mine use right by MHXC. The coal mine use right and interest free
         loan are recorded at estimated fair value determined based on the
         estimated net present value of the interest free loan. The joint
         venture period is 30 years from the date of formation and may be
         extended by the unanimous resolution of the board of directors, subject
         to the approval of the relevant government authorities. The remaining
         20% interest in MHXC is owned by the former owner of the Factory. The
         purchase price approximated the estimated fair values of MHXC at the
         date of acquisition.

         MHXC operates two production facilities in Heilongjiang Province, PRC;
         the Mishan City Coke Factory ("MCCF") and the Qitaihe City Coal
         Factory. During 1996 the operation of the MCCF plant was subcontracted
         to a company under the control of the central government under an
         agreement where the Company received a subcontracting fee of Renminbi
         6,000 (approximately $723) and the other party was entitled to all the
         revenues from the operations of the plant and was obligated to meet all
         the operating expenses of the plant. MCCF terminated the subcontracting
         agreement on March 31, 1997 and resumed the production and sales of
         metallurgical coke during the second quarter of 1997. In March 1998
         MCCF temporarily ceased production (see note 3).

2.       BASIS OF PREPARATION

         The financial statements were prepared in accordance with accounting
         principles generally accepted in the United States of America ("U.S.
         GAAP"). This basis of accounting differs from that used in the
         statutory accounts of MHXC, the Company's principal operating
         subsidiary, which were prepared in accordance with the accounting
         principles and the relevant financial regulations applicable to
         Sino-foreign equity joint venture enterprises as established by the
         Ministry of Finance of China.

         The principal adjustments made to conform the statutory accounts of
         MHXC to U.S. GAAP included the following:



                                       F-6

<PAGE>


                       CHINA ENERGY RESOURCES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Amounts in thousands except per share amounts)


         o         Adjustment to record the coal mine use right and interest
                   free loan at estimated fair value.

         o         Adjustment to depreciation expense for property, plant and
                   equipment to reflect more accurately the economic useful life
                   of the assets;

         o         Adjustment to recognize interest expense on the accruals
                   basis.

         o         Adjustment to recognize sales and cost of sales upon shipment
                   to customers.

         The preparation of financial statements in conformity with U.S. GAAP
         requires management to make estimates and assumptions that affect the
         reported amounts of assets and liabilities and the disclosure of
         contingent assets and liabilities at the date of the financial
         statements and the reported amounts of revenues and expenses during the
         reporting period. Actual results could differ from those estimates.

3.       GOING CONCERN AND SUBSEQUENT EVENTS

         During 1997 the Company terminated the services of the MCCF plant
         manager, however, prior to his termination this individual signed
         various documents that provided collateral to bank lenders of MCCF over
         MCCF assets.

         In 1998 and 1997 as a result of cash flow shortages, various problems
         with local management and other operational issues, the facility at
         MCCF did not operate at full capacity resulting in the closure of that
         facility in March, 1998. At December 31, 1998 the gross assets of MCCF
         were $7,266. Until March 1999, it had been the Company's intention to
         operate the plant on obtaining additional financing. However, on July
         10, 1999, the Company completed negotiations to transfer the facilities
         back to the Mishan Government.

         MHXC also owns the rights to use the coal mine, which at December 31,
         1998 are stated at $7,562 and which are located in Mishan and are
         planned to supply coking coal for use in MCCF. During 1998 and 1997 the
         Company continued its efforts in preparing the mine sites for mining
         operations and in October 1997 obtained a report prepared by
         international mining and geological consultants on the coking coal
         reserve base and associated coal quality. This report recommended that
         the Company implement various programs to expand the demonstrated coal
         reserve base and provide support for coal quality documentation.
         Additional work on the survey and mining plans is necessary before the
         mine is ready for use. During 1998 the Company engaged outside
         consultants to assist in this process. In 1998, 1997 and 1996 the
         Company capitalized interest amounting to $386, $341 and $458,
         respectively, in the coal mine use right. No provision for impairment
         has been made as it is the Company's intention to develop, license or
         sell the rights on completion of the additional work.

         The Company incurred losses of $2,031 in 1998 and $3,542 in 1997 and is
         continuing to operate at a loss subsequent to the balance sheet date
         and at December 31, 1998 the Company had net current liabilities of
         $6,956, which excludes any long-term debt that may become current in
         the event the Company is unable to continue as a going concern. These
         factors indicated that the Company may not be able to continue as a
         going concern for a reasonable period of time. Management's actions to
         obtain the necessary financing to address the situation are set out as
         follows:

         On December 3, 1998 the Company and America Orient Group, Inc ("AOG"),
         a Maryland corporation and a wholly-owned subsidiary of China Orient
         Group Industries, Inc. ("COG"), a private sector conglomerate in the
         PRC, executed a Stock and Warrant Purchase Agreement (the "Stock
         Purchase Agreement") in which the Company agreed to sell to AOG
         5,000,000 shares of the Company's common stock, and a warrant to
         purchase 5,000,000 shares of the Company's common stock for $1,000. The
         Stock Purchase Agreement provides that AOG will purchase the shares and
         the warrant from the Company for an aggregate purchase price of $1,000.
         The warrant is exercisable at any time after the later of the closing
         date or January 1, 1999 (the "Exercise Date") in the five years
         following the Exercise Date, in whole or in part, at the lower of (a)
         75% of the average closing price of the Common Stock for the 30 days
         immediately prior to such exercise, or (b) as follows: $0.75 per share
         in 1999; $1.00 per share in 2000: $1.50 per share in 2001; $2.00 per
         share in 2002; and $3.00 per share in 2003 (subject to adjustments for
         stock splits, stock dividends or similar transactions).


                                       F-7

<PAGE>


                       CHINA ENERGY RESOURCES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Amounts in thousands except per share amounts)


         On February 13, 1999, AOG loaned the Company $24 for working capital
         purposes in exchange for a convertible note (the "AOG Convertible
         Note") and a warrant to purchase 120,800 shares of Common Stock at an
         exercise price of $0.20 per share. Based on a conversion price of $0.20
         per share, the AOG Convertible Note was convertible at the time of
         issuance into 120,800 shares of Common Stock.

         On March 3, 1999, the then acting Chairman, President and Chief
         Executive Officer of the Company resigned from his positions and on the
         same day, the Board appointed Bill H. Zhao as Chairman, President and
         Chief Executive Officer of the Company, Chairman and Director of China
         Coal Mining (B.V.I.) Co. Ltd., and Legal Representative, Chairman and
         Director of Mishan Hua Xing Coke Limited. Mr. Zhao is a Director and
         Executive Vice President of AOG and a Director of COG.

         On March 24, 1999, MHXC entered into an agreement ("Loan Agreement")
         with Orient Finance Company, an affiliate of AOG, to provide a loan of
         $2,000 for a period of three years, with a one-year grace period at an
         annual interest rate of 6.625%. The Company has pledged as security its
         interest in MHXC. Under the terms of the Loan Agreement, as amended in
         July 1999, the $2,000 will be disbursed to MHXC no later than July 31,
         1999.

         On March 29, 1999 the Company issued a revolving convertible note
         ("Revolving Note") to AOG of up to $250 bearing interest of 8% per
         annum repayable on demand. A shareholder of the Company has granted AOG
         a continuing lien and first priority security interest in certain
         securities owned by the shareholder. AOG has the right prior to the
         payment in full of all principal of and interest on the Revolving Note
         to convert any outstanding and unpaid principal portion into fully paid
         shares of the Company's common stock at a conversion price of $0.20 per
         share. In April 1999, the Revolving Note was increased to up to $1,250
         and as of July 9, 1999, the Company had outstanding borrowings under
         the Revolving Note of $326.

         On March 29, 1999, the Company appointed three new officers and on the
         same date, MHXC made four new officer appointments.

         On March 29, 1999, the Company, through China Coal, entered into a
         definitive agreement (the "Jinzhou Agreement") with Jinzhou Harbor
         (Group) Co. Ltd., a majority owned subsidiary of the Orient Group and
         affiliate of AOG ("JHG"), to form Jinzhou Port Coal Terminal Co. Ltd.
         (the "Jinzhou Terminal"). Under the original Jinzhou Agreement, China
         Coal was to invest $10,843 for a 60% interest in the Jinzhou Terminal.
         In order to comply with rules of the Shanghai Stock Exchange, where JHG
         shares are traded, the Jinzhou Agreement was amended in July 1999 to
         provide for China Coal to invest $7,350 for a 49% interest in the
         Jinzhou Terminal. Funding for the $7,350 investment is expected to be
         financed by AOG's exercise of its warrant to purchase 5,000,000 shares
         of Common Stock under the Stock Purchase Agreement and other purchases
         of the Common Stock by AOG or its affiliates. The closing is subject to
         obtaining the required PRC government approvals and may also be
         affected by development of the long-term business plan of the Company.

         On July 10, 1999, the Company and MHXC entered into an agreement with
         the Mishan City Government for the Mishan City Government to assume the
         liabilities relating to MCCF and the long-term debt owed to it, and in
         exchange the Mishan City Government will take back all the facilities
         and assets of MCCF. The Mishan City Government will also give up its
         20% interest in MHXC. The resulting gain to the Company of between
         $3,000 and $4,000 will be credited to the coal mine use right, which is
         being retained, as an adjustment of the original price MHXC originally
         paid to the government entity.

4.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
         include the assets, liabilities, revenues and expenses of the Company
         and its subsidiaries. All material intra-group transactions have been
         eliminated.

         CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on
         hand, demand deposits and highly liquid instruments with a maturity of
         three months or less at the time of purchase.



                                       F-8

<PAGE>


                       CHINA ENERGY RESOURCES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Amounts in thousands except per share amounts)


         INVENTORIES - Inventories are stated at the lower of cost, determined
         by the average cost method, or market. Finished goods inventories
         consist of raw materials, direct labor and overhead associated with the
         manufacturing process.

         PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated
         at cost. Depreciation is provided to write off the cost of property,
         plant and equipment over their estimated useful lives in equal
         installments as follows:


         Land use rights........................................... 30-50 years
         Buildings................................................. 8-45 years
         Plant and machinery....................................... 5-20 years
         Transportation vehicles................................... 5-10 years
         Railway................................................... 50 years

         COAL MINE USE RIGHT - Coal mine use right is stated at estimated fair
         value at the date of acquisition determined based on the estimated
         market value of the interest free loan used to finance the acquisition
         of the asset plus the costs of preparing the mine site for its intended
         mining operations. Interest is capitalized on the coal mine use right
         during the period in which activities necessary to get the mine ready
         for its intended mining operations are in progress. In 1998, 1997 and
         1996 interest capitalized amounted to $386, $341 and $458,
         respectively. Amortization will be provided to write off the value of
         coal mine use right based on the units extracted compared with
         estimated total units to be extracted. The coal mine use right and the
         Company's other long-lived assets are reviewed for impairment whenever
         events or changes in circumstances indicate that the carrying amount of
         an asset may not be recoverable.

         CONSTRUCTION-IN-PROGRESS represents plant and buildings under
         construction and includes cost of construction, purchase of plant and
         machinery and interest arising from borrowings used to finance these
         assets during the period of construction or installation. No interest
         was capitalized during the period. Construction-in-progress is not
         depreciated until amounts are reclassified to property when available
         for use.

         NET SALES - Net sales represent the invoiced value of products, net of
         sales taxes. Sales are recognized when products are shipped to
         customers.

         FOREIGN CURRENCY TRANSLATION - The consolidated financial statements of
         the Company are presented in United States dollars. The Company's
         principal operating subsidiary, MHXC, conducts substantially all its
         business in Renminbi.

         Foreign currency transactions of MHXC are translated into Renminbi at
         the applicable rates of exchange quoted by People's Bank of China (the
         "PBOC"), prevailing at the date of the transactions. Monetary assets
         and liabilities denominated in foreign currencies are translated into
         Renminbi using the applicable PBOC rate prevailing at the relevant
         balance sheet date. Substantially all the transactions of MHXC are
         denominated in Renminbi and MHXC did not have any material monetary
         assets or liabilities denominated in foreign currencies. On
         consolidation, the assets and liabilities of MHXC are translated into
         United States dollars at the year end rates of exchange and revenues
         and expenses are translated at average exchange rates prevailing during
         the period. Translation adjustments are included as a separate
         components of stockholders' equity.

         PROVISIONS FOR DOUBTFUL ACCOUNTS - Provisions for doubtful accounts are
         established based on management's assessment of the recoverability of
         accounts receivable. The expense amounted to nil in 1998, $1,365 in
         1997 and $15 in 1996.

         REPAIRS AND MAINTENANCE - Repairs and maintenance costs are charged
         against income in the period in which they are incurred. The expense is
         allocated to cost of sales and selling, general and administrative
         expenses. The aggregate expenses were $62 in 1998, $47 in 1997 and $42
         in 1996.

         INCOME TAXES - Deferred income taxes are provided using the liability
         method. Under the liability method, deferred income taxes are
         recognized for all significant temporary differences between the tax
         and financial statement basis of


                                       F-9

<PAGE>


                       CHINA ENERGY RESOURCES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Amounts in thousands except per share amounts)


         assets and liabilities. The tax consequences of those differences are
         classified as current or non current based upon the classification of
         the related asset or liability in the financial statements. During the
         period there were no significant temporary differences.

         (LOSS) EARNINGS PER SHARE - Fully diluted (loss) earnings per share is
         based on net (loss) income for the period and the weighted average
         number of common stock outstanding during each period, plus, the
         dilutive effect, if any, of certain shares subject to issue in
         connection with the conversion of the outstanding convertible notes and
         warrants. Such convertible notes and warrants had no dilutive effect on
         the loss per share in 1998 and 1997 but may dilute future earnings per
         share.

         A reconciliation of the earnings and weighted average number of shares
         used to compute basic and fully-diluted earnings per share for the year
         ended December 31, 1996 is as follows:



                                                             Weighted average
                                             Earnings        number of shares
                                             --------        ----------------


         Basic............................   $   1,258              1,918
         Effect of convertible debt.......          53                396
                                             ---------              -----
                                             $   1,311              2,314
                                             =========              =====

         NEW ACCOUNTING STANDARDS ADOPTED - in 1998, the Company adopted three
         new disclosure standards. Results of operations, financial disclosures
         were unaffected by implementation of these new standards.

         Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
         Comprehensive Income, establishes standards for reporting and display
         of comprehensive income, its components and accumulated balances.
         Comprehensive income is defined to include all changes in equity except
         those resulting from investments by owners and distributions to owners.
         Among other disclosures, SFAS No. 130 requires that all items that are
         required to be recognized under current accounting standards as
         components of comprehensive income be reported in a financial statement
         that is displayed with the same prominence as other financial
         statements. As the Company did not have any items of other
         comprehensive income for the years reported, the net (loss) income
         reported in the statement of operations is equivalent to total
         comprehensive income (loss).

         SFAS No. 131, Disclosures about Segments of an Enterprise and Related
         Information, which supersedes SFAS No. 14, Financial Reporting for
         Segments of a Business Enterprise, establishes standards for the way
         that public enterprises report information about operating segments in
         financial statements issued to the public. It also establishes
         standards for disclosures regarding products and services, geographic
         areas and major customers. SFAS No. 131 defines operating segments as
         components of an enterprise about which separate financial information
         is available that is evaluated regularly by the chief operating
         decision maker in deciding how to allocate resources and in assessing
         performance.

         SFAS No. 132, Employers' Disclosures about Pensions and Other
         Postretirement Benefits, which amends the disclosure requirements for
         pension and other postretirement benefits.

         NEW ACCOUNTING STANDARD NOT YET ADOPTED - The Financial Accounting
         Standards Board has issued a new standard SFAS No. 133 "Derivative
         Instruments and Hedging Activities". Management has not yet completed
         the analysis of the impact this would have on the financial statements
         of the Company.

5.       INCOME TAXES

         Income is subject to taxation in the various countries in which the
         Company and its subsidiaries operate. The Company is not taxed in the
         British Virgin Islands where it is incorporated. The Company's
         operations are all in China.



                                       F-10

<PAGE>


                       CHINA ENERGY RESOURCES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Amounts in thousands except per share amounts)


         The Company's subsidiary, MHXC, which is incorporated in China, is
         subject to Chinese income taxes at the applicable tax rate (currently
         33%) on taxable income based on income tax laws applicable to foreign
         enterprises. Pursuant to the same income tax laws, the subsidiary is
         fully exempt from Chinese income tax on its manufacturing operations
         for two years starting from the first profit making year and,
         accordingly, no income taxes were payable in respect of 1996. The
         subsidiary also has a 50% exemption from Chinese income tax for the
         subsequent three years. The exemptions applicable to this subsidiary
         will expire in 1999. At December 31, 1998 the Company and its
         subsidiaries have no available tax losses.

6.       INVENTORIES

                                                          December 31,
                                                 1998                    1997
                                                 ----                    ----
         Raw materials..................      $ 2,446                 $ 3,203
         Finished goods.................           79                     724
         Consumables....................          495                     209
                                              -------                 -------
                           Total              $ 3,020                 $ 4,136
                                              =======                 =======

         The amount of work-in-progress is insignificant due to the short
         production cycle of the manufacturing process.

7.       PROPERTY, PLANT AND EQUIPMENT

                                                         December 31,
                                                 1998                   1997
                                                 ----                   ----
         Coal mine use right............      $ 7,562                $ 7,176
         Land use rights................        1,789                  1,789
         Buildings......................        6,630                  6,427
         Plant and machinery............        2,287                  2,213
         Transportation vehicles........          797                    727
         Railway........................        1,438                  1,442
                                              -------                -------
                           Total               20,503                 19,774
         Less: Accumulated depreciation.       (2,594)                (1,778)
         Construction in progress.......            7                      6
                                              -------                -------
                           Total              $17,916                $18,002
                                              =======                =======

         The coal mine use right is stated at estimated fair value at the date
         of acquisition determined based on the estimated market value of the
         interest free loan used to finance the acquisition of the asset plus
         the costs of preparing the mine site for its intended use. The
         contractual price of the coal mine use right was $11,312.

         Certain property is collateralized for bank borrowings (note 9).

8.       VALUE ADDED TAXES RECEIVABLE

         Value added tax ("VAT") is applicable to MHXC at a rate of 17% on the
         gross sales amounts and credit given at the same rate for VAT paid on
         purchases. The net VAT payable is accounted for to the tax authorities.

         In accordance with notices issued by the government authorities, the
         Factory can deem VAT, at the rate of 14%, to have been paid on the
         opening inventory amount at January 1, 1994 (the date VAT was
         introduced) and applied against future VAT payable based on criteria to
         be agreed with the local authorities. This amount has been established
         as a receivable. The Company believes that the amount will be
         recoverable against future VAT payable subject to approval as to timing
         by the tax authorities. Amounts of $59, $ 27 and $53 were utilized in
         1998, 1997 and 1996, respectively



                                      F-11

<PAGE>


                       CHINA ENERGY RESOURCES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Amounts in thousands except per share amounts)


9.       SHORT-TERM BORROWINGS

         Short-term borrowings represent short-term loans provided by banks and
         other lenders to the Company's PRC subsidiary.


<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                              1998                1997
                                                                              ----                ----
<S>                                                                        <C>                 <C>
Short-term borrowings at the end of the year..........................     $ 4,625             $ 5,057
Weighted average interest rate on borrowings at end of year...........          12%                 13%
</TABLE>


         Interest rates are determined periodically by the banks and other
         lenders in consultation with the Company's subsidiary and are normally
         subject to annual review. There are no formal short-term credit
         facilities with the banks and short-term borrowings are negotiated on a
         loan-by-loan basis.

         At December 31, 1998, short-term borrowings of $1,256 and long-term
         bank loans of $1,812 were secured over property, plant and equipment
         with a net book value of $5,882.

10.      LONG-TERM DEBT


<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                              1998                1997
                                                                              ----                ----
<S>                                                                         <C>                  <C>
Long-term debt consists of:
Bank loans at a fixed interest rate
 (14.04% at December 31, 1998)
Due in 1998....................................................             $    --             $ 1,086
Due in 1999....................................................               1,328                 242
Due in 2000....................................................                 242                 242
Due in 2001....................................................                 242                 242
                                                                            -------             -------
                                                                              1,812               1,812

Interest free loan from PRC joint venture partner
Due in 2002....................................................               1,334               1,334
Due in 2003....................................................               1,334               1,334
Due in 2004....................................................               1,335               1,335
Due in 2005....................................................               1,335               1,335
Due in 2006....................................................               1,335               1,335
                                                                            -------             -------
                                                                              6,673               6,673
Less:  notional interest.......................................               3,873               4,259
                                                                            -------             -------
                                                                              2,800               2,414
                  Total........................................               4,612               4,226
                                                                            -------             -------
Current portion of long-term debt..............................               1,812               1,812
                                                                            -------             -------
Long-term debt, less current portion...........................             $ 2,800             $ 2,414
                                                                            =======             =======
</TABLE>

All long-term bank loans are authorized by the provincial or local governments
and are administered by the banks.




                                      F-12

<PAGE>


                       CHINA ENERGY RESOURCES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Amounts in thousands except per share amounts)


         The interest free loan from the PRC joint venture partner was raised to
         partially finance the acquisition of the coal mine use right. At the
         date the loan was obtained it was to be repaid by five equal
         instalments with each installment limited to 40% of the income after
         tax of the relevant year. In 1996 the Company made repayments ahead of
         the original planned payment schedule and the scheduled repayments of
         the remaining balance of the loan were rateably amended. In addition,
         the scheduled repayments were postponed by an agreement dated May 11,
         1997 for an additional two years. The loan is stated in the financial
         statements at the estimated present value calculated based on the
         annual discount rate of 16%, being the estimated annual interest rate
         for fixed asset lending in the PRC. This estimate of the market value
         of the loan is subject to a high degree of uncertainty because there is
         no market for the loan, the loan is not transferrable and the repayment
         terms are contingent on future operations of the Company.

         With effect from October 1, 1995 the government of Mishan City agreed
         to share 50 percent of the interest paid by MCCF on the long-term
         interest - bearing loans. The government's share of interest expense
         amounted to $150 in 1997 and $197 in 1996. This agreement expired in
         December 31, 1997. The interest shared by the local government party of
         $150 in 1997 and $197 in 1996 has been netted against interest expense
         in the statement of operations, as well as $166 in 1996 of interest
         forfeited by the bank lender of the loan.

         During 1998 and 1997, interest was not paid and became overdue and as a
         result all long-term bank loans are currently in default and have been
         classified as current liabilities.

11.      CONVERTIBLE NOTES

         At December 31, 1998 the Company had outstanding convertible notes with
         detachable warrants amounting to $2,548 which were issued in 1996.
         These notes carry interest at 8% per annum and the principal amount and
         the accrued interest thereon are payable in 2001.

         The holders have the right prior to the payment in full of all
         principal of and interest on the notes, to convert any outstanding and
         unpaid principal portion of the notes and accrued interest into fully
         paid and nonassessable shares of common stock, $0.01 par value per
         share, of the Company, as such shares exist on the date of issuance of
         the notes, or any shares of capital stock of the Company into which
         such shares have been changed or reclassified (the "common stock") at
         the conversion price as defined in the note. In the event the holders
         do not convert the entire principal amount of the notes and all accrued
         and unpaid interest earned thereon before the maturity date, then on
         that date the Company has the option of compelling the conversion of
         the notes or paying to the holders the remaining unpaid principal
         amount of the notes and interest thereon.

         The conversion price is subject to a floor price and a ceiling price
         (as defined in the note agreement) and is equal to 60% of the average
         closing bid and ask price for the common stock on any securities
         exchange or other securities market on which the common stock is then
         being traded, for the ten trading days immediately preceding the
         conversion date; provided, however, that in the event of a public
         offering or private placement of securities of the Company, resulting
         in gross proceeds of at least $10,000, consummated within 18 months of
         the date of the notes, the floor price shall be adjusted to equal 60%
         of the offering price per share in such an offering; and provided,
         further, that the floor price, as adjusted, (i) shall never be lower
         than $3.50 per share (the "floor price") and (ii) shall never exceed
         $8.50 per share (the "ceiling price"). At any time prior to the date on
         which the common stock is traded on the American Stock Exchange or
         other U.S. securities exchange or market, the conversion price for the
         common stock shall equal $3.50 per share.

         The conversion price and number and kind of shares or other securities
         to be issued upon conversion is subject to adjustment from time to time
         upon certain events happening as specified in the note agreement while
         this conversion right remains outstanding.

         The principal amount outstanding on the notes, and all interest accrued
         and payable thereon, may be prepaid by the Company, in whole but not in
         part, on or after November 15, 1997; provided that the average closing
         bid price of the common stock has remained at or above $17.00 per share
         for thirty consecutive business days; and provided, further, that
         written notice of prepayment is delivered to the holder not more than
         sixty days nor less than thirty days prior to


                                      F-13

<PAGE>


                       CHINA ENERGY RESOURCES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Amounts in thousands except per share amounts)


         the applicable prepayment date. The holder has the right to exercise
         any conversion rights it may have hereunder until such time as any
         prepayment is made.

         Within ten business days after a holder receives notice from the
         Company that a qualifying offering has been consummated, the holder may
         demand in writing that the principal amount outstanding on the note,
         and all interest accrued thereon, be prepaid by the Company, in whole
         or in part, but any partial demand shall be in increments of $25. The
         borrower shall repay the principal amount outstanding on the note, and
         all interest accrued on payable thereon, within 15 days after receipt
         of such a notice from the holder.

         In 1997 the Company issued convertible notes with a face value of
         $1,000 and holders converted principal and accrued interest of $2,900
         into the Company's common stock resulting in the issue of 848 shares.

         The holders of the warrants detached from the convertible notes are
         entitled to purchase from the Company at any time on or after May 14,
         1997 or from time to time before 5:00 p.m. on November 14, 1999 fully
         paid and nonassessable shares of common stock, $0.1 par value per
         share, of the Company, as adjusted in the event that the following
         computation results in a greater number of shares: the quotient
         obtained by dividing the principal amount of the loan from the holder
         to the Company pursuant to a note from the Company to the holder by the
         purchase price. The purchase price shall be subject to a floor price
         and a ceiling price and shall equal 60% of the average closing bid and
         ask price for the common stock on any securities exchange or other
         securities market on which the common stock is then being traded, for
         the ten trading days immediately preceding the date of exercise;
         provided, however, that in the event of a qualifying offering, the
         floor price shall be adjusted to equal 60% of the offering price per
         share in such qualifying offering; and provided, further, that the
         floor price, as adjusted, (i) shall never be lower than $3.50 per share
         and (ii) shall never exceed $8.50 per share.

12.      RELATED PARTY TRANSACTIONS

         In 1997 advances totaling $1,768 were made under the authority of the
         former Chairman of the Company to the former owner of QCCF which were
         intended to establish relationships for potential future business
         opportunities. As the terms of the repayment of the advances were
         unclear, with the death of the former Chairman current management
         believes that its ability to realize the advances has been severely
         impaired and, accordingly, the amounts have been written off in 1997.

         In 1998 and 1997, the Company advanced $1,639 and $2,272, respectively,
         to the bank of the former owner of QCCF to settle loans and interest
         owed by the former owner of QCCF to the bank. In 1998, repayments of
         $476 were received. The receivable at December 31, 1998 of $3,435 is
         repayable on demand and is interest free.

         In 1997 the former Chairman of the Company withdrew amounts totaling
         $286 from MHXC without authority of the Company. The Chairman died in
         October 1997 and the Company has been seeking to recover these amounts
         from his estate and family. The Company has recorded an expense in 1998
         and 1997 of $102 and $184, respectively, in other (expense) income
         representing the amounts not yet recovered.

         Substantially all of the sales, purchases, raw materials and purchases
         of ancillary items the Company's PRC subsidiary are with state-owned
         enterprises. Even though such state-owned enterprises may be regarded
         as having the same beneficial owner of the PRC joint venture partner of
         the Company's subsidiary, the PRC central government, such state- owned
         enterprises are frequently under separate control and do not possess
         any management, ownership or other interest in each other. As a result,
         the Company does not view transactions with such state-owned
         enterprises as constituting related party transactions.

13.      STOCK OPTIONS AND COMPENSATION

         On September 2, 1998 the Company entered into an employment agreement
         with Mr. C.T. Yeh, the acting Chairman, President and Chief Executive
         Officer of the Company at that time. Under the agreement, among other
         matters, Mr.


                                      F-14

<PAGE>


                       CHINA ENERGY RESOURCES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Amounts in thousands except per share amounts)


         Yeh received 15,000 shares at a fair value of $8 which has been
         recognized as compensation expense and credited to additional paid-in
         capital. These shares were issued in January 1999.

         In addition he was issued options to acquire 120,000 shares of the
         Company's common stock at $1.00 per share. At December 31, 1998, 50,000
         options were unrestricted and the remainder will cease to be restricted
         by December 31, 1999 or on the earlier occurrence of certain specified
         transactions. The options are exercisable within five years from the
         date of issuance.

         The Company accounts for stock options issued to employees pursuant to
         Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
         to Employees. Accordingly, no compensation expense has been recognized
         in connection with the issue of these stock options. The fair value of
         these stock options as calculated under SFAS No. 123, Accounting for
         Stock Based Compensation, would be insignificant and, accordingly, the
         pro forma information required by SFAS No. 123 has not been shown.

         In 1997, the Company issued options to a Consultant, in respect of the
         provision of public relations services, to acquire 32,000 shares of the
         Company's common stock at an exercise price of $5.00 per share. In 1998
         the Company issued options to the same party to acquire an additional
         20,000 shares for services rendered at an exercise price of $3.50 per
         share. All such options have vested. The options expire in 2002 and
         2003, respectively. The Company recognized expense of $12 in 1998 and
         $26 in 1997 in respect of these options.

14.      COMMITMENTS AND CONTINGENCIES

         At December 31, 1998, the Company and its subsidiaries had no
         contracted capital expenditure.

         The Company and its PRC subsidiary do not currently maintain any
         insurance coverage on the property, plant and equipment owned by the
         subsidiary. In addition, the Company and the subsidiary do not
         currently carry any business interruption insurance or any third party
         liability insurance to cover claims in respect of bodily injury,
         property or environmental damages arising from accidents on the
         subsidiary's property or relating to its operations.

15.      FOREIGN CURRENCY EXCHANGE

         The PRC government imposes control over its foreign currency reserves
         in part through direct regulation of the conversion of Renminbi into
         foreign exchange and through restrictions on foreign trade. The
         conversion of Renminbi into US dollars and other foreign currencies is
         based on the rate set by the People's Bank of China, which is set based
         on the previous day's PRC interbank foreign exchange market rate and
         with reference to current exchange rates on the world financial
         markets. The exchange rate at December 31, 1998 was US$1 = Rmb8.2787.

         Foreign investment enterprises may generally remit out of the PRC
         profits or dividends derived from a source within the PRC, subject to
         the availability of foreign currency. Except for such profits or
         dividends, remittance out of the PRC by foreign investors of any other
         amount (including proceeds from a disposition of an investment in the
         PRC) is subject to the approval of State Administration of Foreign
         Exchange and to the availability of foreign currency (at the central
         government or provincial level). In addition, if there is a
         deterioration in the PRC's balance of payments or for other reasons,
         the PRC may impose restrictions on foreign currency remittances abroad.
         No assurance can be given that the Company's PRC subsidiary will be
         able or permitted to remit out of the PRC amounts due to the Company.



                                      F-15

<PAGE>

                       CHINA ENERGY RESOURCES CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (Amounts in thousands except per share amounts)


16.      CONCENTRATION OF CREDIT RISK

         The subsidiary's trade receivables in respect of sales on credit terms
         are subject to a concentration of credit risk with customers in the
         industrial sectors of steel making, metallurgy, electricity and other
         heavy industries. In addition, the PRC subsidiary has no formal credit
         terms and its sales are predominantly to PRC companies. Therefore, the
         subsidiary's ability to collect its trade receivables is related to the
         economic conditions in these industrial sectors and in the PRC as a
         whole.

17.      FINANCIAL INSTRUMENTS

         The carrying values of financial instruments, including cash and cash
         equivalents and short-term borrowings, were equal to their approximate
         fair value as of December 31, 1998 because of the relatively short
         maturities of these investments. At December 31, 1998 the fair value of
         the bank loans and the interest free loan from the PRC joint venture
         partner were approximately $1,812 and $2,800, respectively, estimated
         based on the discount rate the seller would pay to a credit- worthy
         third party to assume its obligation.

18.      EMPLOYEE RETIREMENT BENEFITS

         All the PRC's subsidiary's full-time employees are entitled to a
         retirement pension calculated with reference to their basic salaries on
         retirement and their length of service in accordance with a government
         managed pension plan. The PRC government is responsible for the pension
         obligations of retired staff. The PRC subsidiary is required to make
         contributions to the state retirement plan at 17-25% of the monthly
         salaries of the current full-time employees subject to local
         authorities' discretion. Employees are required to make contributions
         at 2-3% of their basic salary. Contract and part-time employees are not
         entitled to such benefits. The expense of such arrangements to the
         subsidiary was immaterial for the period. The Company and its
         subsidiaries are not obligated under any other post-retirement plans
         and post-employment benefits are not material.

19.      SEGMENT INFORMATION AND CONCENTRATION OF CREDIT RISK AND MAJOR
         CUSTOMERS

         The Company through its PRC subsidiary is engaged in one industry
         segment, the manufacture and sale of coal products in the PRC where the
         PRC subsidiary's operations are located. One customer, Mudanjiang No. 2
         Power Plant of Heilongjiang Province, PRC., accounted for 78% of net
         sales in 1998, 71% in 1997, and 80% in 1996.




                                      F-16