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<SEC-DOCUMENT>0001116502-01-000218.txt : 20010223
<SEC-HEADER>0001116502-01-000218.hdr.sgml : 20010223
ACCESSION NUMBER:		0001116502-01-000218
CONFORMED SUBMISSION TYPE:	10QSB
PUBLIC DOCUMENT COUNT:		2
CONFORMED PERIOD OF REPORT:	20001231
FILED AS OF DATE:		20010214

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			SINGING MACHINE CO INC
		CENTRAL INDEX KEY:			0000923601
		STANDARD INDUSTRIAL CLASSIFICATION:	PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652]
		IRS NUMBER:				953795478
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			0331

	FILING VALUES:
		FORM TYPE:		10QSB
		SEC ACT:		
		SEC FILE NUMBER:	000-24968
		FILM NUMBER:		1541724

	BUSINESS ADDRESS:	
		STREET 1:		6601 LYONS ROAD
		STREET 2:		BLDG A-7
		CITY:			COCONUT CREEK
		STATE:			FL
		ZIP:			33073
		BUSINESS PHONE:		9545961000

	MAIL ADDRESS:	
		STREET 1:		6601 LYONS ROAD BLDG
		CITY:			COCONUT CREEK
		STATE:			FL
		ZIP:			33073
</SEC-HEADER>
<DOCUMENT>
<TYPE>10QSB
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>QUARTERLY REPORT
<TEXT>


                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549


                                   FORM 10-QSB

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


                For the quarterly period ended December 31, 2000
                                               -----------------


                                    0 - 24968
                                    ---------
                             Commission File Number

                        THE SINGING MACHINE COMPANY, INC.
                        ---------------------------------
        (Exact Name of Small Business Issuer as Specified in its Charter)



            Delaware                                    95-3795478
            --------                                    ----------
      (State of Incorporation )                    (IRS Employer I.D. No.)


             6601 Lyons Road, Building A-7, Coconut Creek, FL 33073
             ------------------------------------------------------
                    (Address of principal executive offices )


                                 (954) 596-1000
                                 --------------
                (Issuer's telephone number, including area code)


Check whether the Issuer: (1) filed all reports required to be
filed by section 13 or 15(d) of the Exchange Act during the past 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  x   No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a
court. Yes  x  No

               APPLICABLE ONLY TO CORPORATE ISSUERS

     There were 4,359,120 shares of Common Stock, $.01 par value, issued and
outstanding at December 31, 2000.






<PAGE>
                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

                                      INDEX

PART I.    FINANCIAL INFORMATION

     Item 1.   Financial Statements

               Consolidated Balance Sheets - December 31, 2000 (Unaudited) and
               March 31, 2000.

               Consolidated Statement of Operations - Three months and nine
               months ended December 31, 2000 and 1999 (Unaudited).

               Consolidated Statement of Cash Flows - Three months and nine
               months ended December 31, 2000 and 1999 (Unaudited).

               Notes to Consolidated Financial Statements.

     Item 2.   Management's Discussion and Analysis of Financial
               Condition and Results of Operations.

PART II.                   OTHER INFORMATION

     Item 1.   Legal Proceedings

     Item 2.   Changes in Securities

     Item 3.   Defaults Upon Senior Securities

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

     Item 5.   Other Information

     Item 6.   Exhibits and Reports on Form 8-K

SIGNATURES

                                       -2-

<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY

                         PART I - FINANCIAL INFORMATION

Item I.     Financial Statements

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                                                December 31,        March 31,
                                                    2000              2000
                                                    ----              ----
                                               (unaudited)
CURRENT ASSETS:
  Cash                                         $    411,184      $    378,848
  Accounts Receivable                             4,965,001           728,038
  Due from Factor                                 2,630,918           115,201
  Due from Officer(s)                               110,000           110,000
  Due from related party                               --             394,706
  Inventory - net                                 2,563,634         1,487,206
  Interest Receivable                                 4,950             7,425
  Prepaid Expenses and
    Other Current Assets                            546,070           204,311
  Deferred Tax Asset                                363,194           363,194
                                               ------------      ------------
         TOTAL CURRENT ASSETS                    11,594,951         3,788,929

PROPERTY AND EQUIPMENT, NET                         291,218            99,814

OTHER ASSETS:
  Reorganization Intangible - net                   389,434           458,158
                                               ------------      ------------
         TOTAL ASSETS                          $ 12,275,603      $  4,346,901
                                               ============      ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts Payable                                1,517,104           354,193
  Accrued Expenses                                1,739,366            73,675
  Income taxes payable                              769,583            11,994
  Notes Payable                                           0                 0
  Due to related party                              204,683               753
                                               ------------      ------------
         TOTAL CURRENT LIABILITIES                4,230,736           440,615
                                               ------------      ------------

SHAREHOLDERS' EQUITY:
Preferred Stock, $1.00 par value;
 1,000,000 shares authorized,
 issued and outstanding                                --           1,000,000
Common Stock, $.01 par value;
 18,900,000 shares authorized;
 4,362,920 and 2,960,120, shares
 issued and outstanding,
 respectively                                        43,629            29,600
Common stock to be issued
 (50,000 and 67,500 shares,
  respectively)                                         500               675
Additional Paid In Capital                        3,285,840         1,719,049
Deferred Guarantee Fees                            (228,629)         (400,101)
Retained Earnings                                 4,943,528         1,557,063
                                               ------------      ------------
         TOTAL SHAREHOLDERS' EQUITY               8,044,868         3,906,286
                                               ------------      ------------

TOTAL LIABILITIES
 AND SHAREHOLDERS' EQUITY                      $ 12,275,603      $  4,346,901
                                               ============      ============

                See accompanying notes to financial statements.

                                       -3-

<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (Unaudited)

<TABLE>
<CAPTION>

                                                          Three Months Ended                   Nine Months Ended
                                                    December 31,      December 31,      December 31,       December 31,
                                                       2000               1999              2000              1999
                                                       ----               ----              ----              ----

<S>                                                 <C>               <C>               <C>               <C>
NET SALES                                           $ 21,008,040      $  8,640,813      $ 38,863,337      $ 16,967,618

COST OF SALES                                         16,318,104         6,393,568        29,349,574        12,494,742
                                                    ------------      ------------      ------------      ------------
GROSS PROFIT                                           4,689,936         2,247,245         9,513,763         4,472,876

SELLING, GENERAL AND
 ADMINISTRATIVE EXPENSES                               2,259,606           938,747         4,806,054         1,921,996
                                                    ------------      ------------      ------------      ------------
INCOME FROM OPERATIONS                                 2,430,330         1,308,498         4,707,709         2,550,880

OTHER INCOME (EXPENSES):
  Other income                                            10,268             5,480            14,214            16,142
  Interest expense                                      (201,294)          (40,430)         (404,486)          (48,681)
  Interest income                                          6,594                 0            41,809                 0
  Factoring fees                                        (144,245)         (150,416)         (212,743)         (347,689)
                                                    ------------      ------------      ------------      ------------

                  NET OTHER EXPENSES                    (328,677)         (185,366)         (561,206)         (380,228)

INCOME BEFORE INCOME TAX
  EXPENSE                                              2,101,653         1,123,132         4,146,503         2,170,652

INCOME TAX EXPENSE                                       371,522                 0           760,038                 0

NET INCOME                                          $  1,730,131      $  1,123,132      $  3,386,465      $  2,170,652
                                                    ============      ============      ============      ============

NET INCOME PER COMMON SHARE
  Basic                                             $       0.40      $       0.39      $       0.81      $       0.75
                                                    ============      ============      ============      ============
  Diluted                                           $       0.34      $       0.23      $       0.69      $       0.53
                                                    ============      ============      ============      ============

WEIGHTED AVERAGE COMMON AND
 COMMON EQUIVALENT SHARES OUTSTANDING
  Basic                                                4,360,772         2,898,500         4,190,480         2,898,500
  Diluted                                              5,124,436         4,812,900         4,906,869         4,110,317
</TABLE>

                 See accompanying notes to financial statements



                                       -4-

<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>

                                                 Three Months Ended                 Nine Months Ended
                                                 ------------------                 -----------------
                                            December 31,     December 31,    December 31,      December 31,
                                                2000             1999            2000              1999
                                                ----             ----            ----              ----
<S>                                         <C>              <C>              <C>              <C>
NET CASH PROVIDED BY (USED IN)
  OPERATING ACTIVITIES                      $ 5,985,004      $ ( 295,523)     $ 1,623,779      $(1,294,369)
                                            -----------      -----------      -----------      -----------

CASH FLOWS FROM INVESTING
 ACTIVITIES:
  Purchase of property and
    equipment                                   (45,613)          34,759         (255,007)         (96,796)
  Due from factor                            (2,260,398)          (7,554)      (2,515,717)         (32,214)
  Due from related parties                          --            (3,143)         394,706           (5,559)
                                            -----------      -----------      -----------      -----------
         Net cash provided by (used in)
          investing activities               (2,306,011)          24,062       (2,376,018)        (149,241)

CASH FLOW FROM FINANCING
 ACTIVITIES:
  Proceeds from issuance of common
   stock & exercise of warrants
   and options                                  188,000             --          1,580,645             --
  Proceeds from issuance of preferred
   stock                                           --               --         (1,000,000)       1,375,000
  Net proceeds from related party            (3,352,085)            --            203,930             --
  Net proceeds from notes payable              (600,000)         831,873             --            852,011
                                            -----------      -----------      -----------      -----------
         Net cash provided by
          financing activities               (3,764,085)         831,873          784,575        2,227,011
                                            -----------      -----------      -----------      -----------

Increase in cash and cash
 equivalents                                    (85,092)         560,412           32,336          783,401

Cash and cash equivalents
  - beginning of period                         496,276          272,277          378,848           49,288
                                            -----------      -----------      -----------      -----------

CASH AND CASH EQUIVALENTS
  - END OF PERIOD                           $   411,184      $   832,689      $   411,184      $   832,689
                                            ===========      ===========      ===========      ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       -5-

<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2000

                                   (Unaudited)

NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS

         The accompanying consolidated financial statements of the Company have
         been prepared in accordance with the instructions to Form 10-QSB and,
         therefore, omit or condense certain footnotes and other information
         normally included in financial statements prepared in accordance with
         generally accepted accounting principles. It is suggested that these
         consolidated condensed financial statements should be read in
         conjunction with the Company's financial statements and notes thereto
         included in the Company's audited financial statements on Form 10-KSB
         for the fiscal year ended March 31, 2000.

         The accounting policies followed for interim financial reporting are
         the same as those disclosed in Note 1 of the Notes to Financial
         Statements included in the Company's audited financial statements for
         the fiscal year ended March 31, 2000, which are included in Form 10-
         KSB.

         In the opinion of management, all adjustments which are of a normal
         recurring nature and considered necessary to present fairly the
         financial positions, results of operations, and cash flows for all
         periods presented have been made.

         The results of operations for the nine month period ended December 31,
         2000 are not necessarily indicative of the results that may be expected
         for the entire fiscal year ending March 31, 2001.

         The accompanying consolidated condensed financial statements include
         the accounts of the Company and its wholly-owned subsidiary. All
         significant inter-company balances and transactions have been
         eliminated. Assets and liabilities of the foreign subsidiary are
         translated at the rate of exchange in effect at the balance sheet date;
         income and expenses are translated at the average rates of exchange
         prevailing during the year. The related translation adjustment is not
         material.

NOTE 2 - MAJOR CUSTOMERS

         As a percentage of total revenues, the Company's net sales in the
         aggregate to its five (5) largest customers during the quarters ended
         December 31, 2000 and 1999 were approximately 81% and 73%,
         respectively. For the nine months ending December 31, 2000, two (2)
         major retailers accounted for 36% and 19% each of total

                                       -6-

<PAGE>

                THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2000

                                   (Unaudited)

NOTE 2 - MAJOR CUSTOMERS (Cont'd)

         revenues. Because of the seasonality of the Company's sales, these
         results may be distorted due to the historically high percentage of
         overall sales during the Company's second and third fiscal quarters of
         each year.

NOTE 3 - LOANS PAYABLE

         During May 2000, the Company entered into two working capital loan
         agreements of $100,000 and $500,000, respectively. The loans extend
         over a maximum period of eight months, bear interest at 15% per annum,
         and are secured by corporate guarantees. In addition, the lenders were
         granted 5,000 and 25,000 stock options, respectively, to purchase
         shares of the Company's common stock at an exercise price of $3.25. The
         30,000 stock options were accounted for as expense based on the
         estimated value of the options at the grant dates which aggregate
         aproximately $38,000. As of December 31, these loans have been paid in
         full.

NOTE 4 - EXERCISE OF STOCK OPTIONS AND WARRANTS AND MODIFICATION

         Stock options and warrants were exercised during the third quarter of
         fiscal year 2001. 104,000 shares of common stock were issued with
         proceeds to the Company of $188,000.

         On October 26,2000, the Company extended the expiration of the
         Company's Public Warrants to November 10, 2001. All other terms and
         conditions of the Public Warrants shall remain the same (exercise
         price, manner of exercise, etc.)

NOTE 5 - ISSUANCE OF STOCK OPTIONS TO EMPLOYEES

         At the end of September 2000, the Company issued 648,000 options to
         employees of the Company. The exercise price of these options is $3.06
         per option. This price is equal to the fair market value of the
         Company's common stock on the grant date. These options were accounted
         for in accordance with APB No. 25.

NOTE 6 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company has an agreement with FLX (a China manufacturer of consumer
         electronics products) to produce electronic recording equipment based
         on the Company's specifications. Paul Wu, a former director of the

                                       -7-

<PAGE>

         Company, is Chairman of the Board and a principal stockholder of FLX.
         During the fiscal years ended March 31, 2000 and 1999, the Company
         purchased approximately $10.3 million and $1.7 million respectively, in
         equipment from FLX. The amount due to FLX at December 31, 2000 of
         $204,683 is included in the related party payable. The Company believes
         that all of the foregoing transactions with FLX have been on terms no
         less favorable to the Company than could have been obtained from
         unaffiliated third parties in arms-length transactions under similar
         circumstances.

NOTE 7 - ADVANCES

         In November 2000, the Company advanced a refundable amount of $170,000
         to a potential acquiree. The transaction is subject to a due diligence
         review, which must be completed by June 1, 2001. This amount is
         included in Prepaid and Other Current Assets at December 31, 2000.

NOTE 8 - SEGMENTS

         The Company operates in one business segment. Sales during the three
         months and nine months ended December 31, 2000, were generated in the
         following geographic regions.

                                  Three Months      Nine Months
                                      Ended           Ended

                                      -----           -----

                 United States     $20,835,330     $38,425,625
                 Europe/Asia           172,710         437,713
                                   -----------     -----------
                 Total Sales       $21,008,040     $38,863,338
                                   ===========     ===========

                                       -8-

<PAGE>

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

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10- QSB, including
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute "forward-looking
statements." You should not place undue reliance on these forward-looking
statements. Our actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including the risks faced by
us described below and elsewhere in this Quarterly Report, and in other
documents we file with the Securities and Exchange Commission

Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof. We
undertake no obligation to revise or publicly release the results of any
revision to these forward-looking statements.

GENERAL

The Singing Machine Company, Inc. and its wholly owned subsidiary, International
(SMC) HK, Ltd.("the "Company," "we" or "us") engages in the production and
distribution of karaoke audio software and electronic recording equipment. Our
electronic karaoke machines and audio software products are marketed under The
Singing Machine(TM) trademark.

Our products are sold throughout the United States, primarily through department
stores, lifestyle merchants, mass merchandisers, direct mail catalogs and
showrooms, music and record stores, national chains, specialty stores and
warehouse clubs.

Our karaoke machines and karaoke software are currently sold in such retail
outlets as Best Buy, Toys R Us, Wal-mart, Target, J.C. Penney and Fingerhut.

We had net income before estimated income tax of $4,146,503 for the nine month
period ended December 31, 2000. Our working capital as of December 31, 2000, was
approximately $7,402,616.

RESULTS OF OPERATIONS

REVENUES

Our revenues increased 143% to $21,008,040 for the three month period ended
December 31, 2000 compared with revenues of $8,640,813 for the three-month
period ended December 31, 1999. Our revenues increased by 129% to $38,863,338
for the nine month period ended December 31, 2000, compared with revenues of
$16,967,618 during the same period in 1999. The increase in total revenues can
be attributed to the addition of a major customer. It can also be attributed to
the growing popularity of karaoke as wholesome family entertainment.

GROSS PROFIT

Our gross profit from equipment and music sales increased by 108.6% to
$4,689,936, for the three month period ended December 31, 2000 compared with
gross profit of $2,247,245,for the three month period ended December 31, 1999.
Our gross profit from equipment and music sales increased by 112% to $9,513,764,
for the nine month period ended December 31, 2000, compared with gross profit of
$4,472,876, for the same period in 1999.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Our SG&A expenses were $2,259,606, or 10.7% of total revenues, and $938,747, or
10.9% of total revenues for the three month periods ended December 31, 2000 and
1999. Our SG&A expenses were $4,806,055, or 12.4% of total revenues, and
$1,921,996, or 11.3% of total revenues, for the nine month periods ended
December 31, 2000 and 1999. The period-to-period increase in SG&A expenses is
due to (1) an increase in salary related expenses due to an increase in

                                       -9-

<PAGE>

corporate office staff, (2) a non-cash expense due to the continued amortization
of stock based guarantee fee, and (3)increases in sales based expenses such as
commissions and royalties.

DEPRECIATION AND AMORTIZATION EXPENSES

Our depreciation and amortization expenses were $33,983, or .16% of total
revenues and $29,747, or .34% of total revenues, for the three month periods
ended December 31, 2000 and 1999. This increase in depreciation and amortization
expenses can be attributed to the addition of new tooling for the production of
machines. Depreciation and amortization expenses were $93,194, or .23% of total
revenues and $82,820, or .48% of total revenues, for the nine month periods
ended December 31, 2000 and 1999.

OTHER EXPENSES

Net interest expense was $201,294, or .96% of total revenues, and $40,430, or
 .46% of total revenues, for the three months ended December 31, 2000 and 1999.
Net interest expense was $404,486, or 1.04% of total revenues, and $48,681, or
 .48% of total revenues, for the nine months ended December 31, 2000 and 1999.
The increase in net interest expense can be attributed to our increased use of
our credit line facilities to fund the inventory necessary to meet demand for
our products.

Loss on sales of accounts receivable was $144,245, or .69% of total revenues,
and $150,689, or 1.7% of total revenues, during the three month periods ended
December 31, 2000 and 1999. Loss on sales of accounts receivable was $212,744,
or .5% of total revenues, and $347,689, or 2.0% of total revenues, during the
nine month periods ended December 31, 2000 and 1999. This decrease is due to
decreased charges on factored invoices. These decreased charges are the result
of a larger total amount of invoices being factored, which in turn decreased
both the interest percentage and gives us better terms of factor.

INCOME BEFORE INCOME TAX EXPENSE

As a result of the foregoing, our net income before income tax expenses
increased by 87.1% to $2,101,653, for the three month period ended December 31,
2000, compared with $1,123,132, for the three month period ended December 31,
1999. Our net income before income tax expense increased by 91.1% to $4,146,503,
for the nine month period ended December 31, 2000 compared with $2,170,652, for
the same period in 1999.

INCOME TAX EXPENSE

As of the nine months ending December 31,2000, the Company has incurred an
estimated income tax of $760,038. For the three months ended December 31, 2000
the amount of estimated income tax was $371,522. During previous periods, we did
not have to pay income taxes, because we used our tax-loss carry-forwards. As of
September 30, 2000,we had used up our tax-loss carry-forwards and will have

                                      -10-

<PAGE>

to pay income taxes.  We expect our income tax rate to be
approximately 22% in future quarters, reflecting the combined tax
rates on our operations in the U.S. and Hong Kong.

NET INCOME

As a result of the foregoing, our net income increased 54.0% to $1,730,131, for
the three month period ended December 31, 2000, compared with net income of
$1,123,132 for the three month period ended December 31, 1999. Our net income
increased by 56.0% to $3,386,465, for the nine month period ended December 31,
2000, compared with net income of $2,170,652 for the same period in 1999.

SEASONALITY AND QUARTERLY RESULTS

Historically, our operations have been seasonal, with the highest net sales
occurring in the second and third quarters (reflecting increased orders for
equipment and music merchandise during the Christmas selling months) and to a
lesser extent the first and fourth quarters of the fiscal year.

Our results of operations may also fluctuate from quarter to quarter as a result
of the amount and timing of orders placed and shipped to customers, as well as
other factors. The fulfillment of orders can therefore significantly affect
results of operations on a quarter-to-quarter basis.

FINANCIAL CONDITION AND LIQUIDITY

At December 31, 2000, we had current assets of $11,594,951 and total assets of
$12,275,603 compared to current assets of $3,788,929 and total assets of
$4,346,901 at March 31, 2000. This increase in current assets and total assets
is primarily due to the increase in accounts receivable and inventory.

Current liabilities increased to $4,192,335 as of December 31, 2000, compared to
$440,615 at March 31, 2000. This increase in current liabilities is because of
increased accounts payable, increased accrued expenses, an income tax payable
and the increased use of our credit lines to fund future sales. We increased the
use of credit lines primarily to purchase more inventory. Accounts payable
increased to $1,517,104 as of December 31, 2000 from $354,193 as of March 31,
2000, primarily as a consequence of our increased expenditures to finance our
sales efforts.

Our shareholder equity increased from $3,906,286 as of March 31, 2000, to
$8,083,268 as of December 31, 2000. Our increase in shareholder equity has
occurred because of the increase in our current assets, and our retained
earnings in the amount of $3,386,465.

Cash flows generated from operating activities were $1,623,779 during the nine
month period ended December 31, 2000. Cash used in investing activities during
the nine month period ended December 31, 2000 was $(2,376,018). Cash flows from
financing

                                      -11-

<PAGE>

activities were $784,575 during the nine month period ended December 31, 2000.
This consisted of proceeds in the amount of $1,580,645 from the exercise of
warrants and options, and proceeds from certain loans.

CAPITAL RESOURCES

The Company has obtained significant financing for continuing operations and
growth. Two (2) specific lines of credit have been opened through the Company's
Hong Kong subsidiary, and two (2) financing agreements through its U.S.
operations.

Belgian Bank

Effective February 14, 2000, the Company, through its Hong Kong subsidiary,
International SMC(HK) Ltd., obtained a credit facility of $500,000 (US) from
Belgian Bank, Hong Kong, a subsidiary of Generale Bank, Belgium. This facility
is a revolving line based upon drawing down a maximum of 15% of the value of
export letters of credit held by Belgian Bank. There is no maturity date except
that Belgian Bank reserves the right to revise the terms and conditions at the
Bank's discretion. The cost of this credit facility is the U.S. Dollar prime
rate plus 1.25%. Repayment of principal plus interest shall be made upon
negotiation of the export letters of credit, but not later than ninety (90) days
after the advance.

Hong Kong Bank

Effective July 7, 1999, the Company, through its Hong Kong subsidiary,
International SMC(HK) Ltd., obtained a credit facility of $200,000 (US) from
Hong Kong Bank. This facility is a revolving line based upon drawing down a
maximum of 15% of the value of export letters of credit held by Hong Kong Bank.
There is no maturity date except that Hong Kong Bank reserves the right to
revise the terms and conditions at the Bank's discretion. The cost of this
credit facility is the U.S. dollar prime rate plus 2.5%. Repayment of principal
plus interest shall be made upon negotiation of the export letters of credit,
but not later that ninety (90) days after the advance.

Main Factors, Inc.

The Company is a party to a factoring agreement, as amended April 7, 2000 with
Main Factors, Inc. ("Main Factors") pursuant to which Main Factors has agreed to
purchase certain of the Company's accounts receivable. Under the agreement, Main
Factors will purchase certain selected accounts receivable from the Company and
advance between 75% and 85% of the face value of those receivables to the
Company. The accounts receivable are purchased by Main Factors without recourse
and Main Factors performs an intensive credit review prior to the purchase of
the receivables.

                                      -12-

<PAGE>

The Company is charged a variable percentage from 1.5% to 1% based upon the
total amount of factored receivables within a calendar year. Main Factors has
placed no maximum limit on the amount of the Company's receivables it will
purchase. The factoring agreement is personally guaranteed by John Klecha, the
Company's Chief Operating Officer and Chief Financial Officer.

EPK Financial Corporation

The Company has also entered into an agreement with EPK Financial Corporation
("EPK") whereby EPK will open letters of credit with the Company's factories to
import inventory for distribution to the Company's customers. This allows the
Company to purchase domestic hardware inventory for distribution to customers in
less than container load quantities, thus providing the Company's customers with
flexibility, and further, saving the customer the expense of opening a letter of
credit in favor of the Company. The selling price to these customers is
considerably higher because the Company pays financing costs to EPK and incurs
costs of ocean freight, duty, and handling charges. Upon shipment of product
from these financed transactions, the receivables are factored by Main Factors,
thereby buying the shipments and related interest from EPK.

The Company pays EPK a negotiated flat fee per transaction, and the maximum
purchase price per transaction is $1,000,000. There have been no maximum total
shipments established under this agreement. Main Factors has entered into this
agreement as a third party agreeing to purchase all receivables invoiced
pursuant to the EPK agreement. The transactions financed by EPK are supported by
personal guarantees of Edward Steele, the Company's Chairman and Chief Executive
Officer and John Klecha, the Company's Chief Operating Officer, and Chief
Financial Officer. The agreement is in effect until July 1, 2001, unless
terminated by either party upon a thirty (30) day written notice.

Loans Payable

During May 2000, the Company entered into two working capital loan agreements of
$100,000 and $500,000, respectively. The loans extend over a maximum period of
eight months, bear interest at 15% per annum, and are secured by corporate
guarantees. In addition, the lenders were granted 5,000 and 25,000 stock
options, respectively, to purchase shares of the Company's common stock at an
exercise price of $3.25. As of December 31, 2000, these loans were paid in full.

We believe that our current cash and equivalents, lines of credit, and cash
generated from operations will satisfy our expected working capital and capital
expenditure requirements at least through the next 12 months.

The Company has no present commitment that is likely to result in its liquidity
increasing or decreasing in any material way. In addition, the Company knows of
no trend, additional demand, event or uncertainty that will result in, or that
is reasonably likely

                                      -13-

<PAGE>

to result  in, the Company's liquidity increasing or decreasing in
any material way.

The Company has no material commitments for capital expenditures. The Company
knows of no material trends, favorable or unfavorable, in the Company's capital
resources. The Company has no additional outstanding credit lines or credit
commitments in place and has no additional current need for financial credit.

RISK FACTORS

Set forth below and elsewhere in this Quarterly Report and in the other
documents we file with the SEC are risks and uncertainties that could cause
actual results to differ materially from the results contemplated by the forward
looking statements contained in this Quarterly Report.

We have significant future capital needs which are subject to the
uncertainty of additional financing

We may need to raise significant additional funds to fund our rapid sales growth
and/or implement other business strategies. If adequate funds are not available
on acceptable terms, or at all, we may be unable to sustain our rapid growth,
which would have a material adverse effect on our business, results of
operations, and financial condition.

Your investment may be diluted

If additional funds are raised through the issuance of equity securities, your
percentage ownership in the Company's equity will be reduced. Also, you may
experience additional dilution in net book value per share, and the equity
securities may have rights, preferences, or privileges senior to those of yours.

Our ability to manage growth could hurt our business

To manage our growth, we must implement systems, and train and manage our
employees. We may not be able to implement these action items in a timely
manner, or at all. Our inability to manage growth effectively could have a
material adverse effect on our business operating results, and financial
conditions. There can be no assurance that we will achieve our planned expansion
goals, manage our growth effectively, or operate profitably.

Our inability to compete and maintain our niche in the
entertainment industry could hurt our business

The business in which we are engaged is highly competitive. In addition, we must
compete with all the other existing forms of entertainment including, but not
limited to, motion pictures, video arcade games, home video games, theme parks,
nightclubs, television and prerecorded tapes, CD's and video cassettes.
Competition in the Company's markets is based primarily on price, product
performance, reputation, delivery times, and customer

                                      -14-

<PAGE>

support. We believe that new product introductions and enhancements of existing
products are material factors for our continuing growth and profitability. Many
of our competitors are substantially larger and have significantly greater
financial, marketing and operating resources than we have. No assurance can be
given that we will continue to be successful in introducing new products or
further enhancing existing products.

We rely on sales to key customers which subjects us to risk

As a percentage of total revenues, the Company's net sales in the aggregate to
its five largest customers during the fiscal years ended March 31, 1999 and
2000, were approximately 91% and 70% respectively. For the nine months ended
December 31, 2000, two major retailers accounted for 36% and 19% each of total
revenues. During fiscal year 2001, the Company has made significant progress in
broadening its base of customers. Although we have long- established
relationships with many of our customers, we do not have long-term contractual
arrangements with any of them. A decrease in business from any of our major
customers could have a material adverse effect on our results of operations and
financial condition.

We have significant reliance on large retailers which are subject
to changes in the economy

We sell products to retailers, including department stores, lifestyle merchants,
direct mail retailers which are catalogs and showrooms, national chains,
specialty in stores, and warehouse clubs. Certain of such retailers the economy
have engaged in leveraged buyouts or transactions in which they incurred a
significant amount of debt, and some are currently operating under the
protection of bankruptcy laws. Despite the difficulties experienced by retailers
in recent years, we have not suffered significant credit losses to date. A
deterioration in the financial condition of our major customers could have a
material adverse effect on our future profitability.

We are subject to the risks of doing business abroad

We are dependent upon foreign companies for manufacture of all of our electronic
products. Our arrangements with manufacturers are subject to the risks of doing
business abroad, such as import duties, trade restrictions, work stoppages,
foreign currency fluctuations, political instability, and other factors which
could have an adverse impact on the business of the Company. We believe that the
loss of any one or more of our suppliers would not have a long-term material
adverse effect on us, because other manufacturers with whom we do business would
be able to increase production to fulfill our requirements. However, the loss of
certain of our suppliers, could, in the short-term, adversely affect our
business until alternative supply arrangements were

                                      -15-

<PAGE>

secured. During fiscal 2000 and 1999, suppliers in the People's Republic of
China accounted for 88% and 93%, respectively of the Company's total product
purchases, including virtually all of the Company's hardware purchases. If Most
Favored Nation ("MFN") status for China is restricted or revoked in the future,
the costs of goods purchased from Chinese vendors is likely to increase.
Management continues to closely monitor the situation and has determined that
the production capabilities in countries outside China which have MFN status
and, therefore, have favorable duty rates, would meet production needs. Such a
change in suppliers may have a short-term adverse effect on operations and,
possibly, earnings.

We are subject to seasonality which is affected by various economic conditions
and changes resulting in fluctuations in quarterly results

We have experienced, and will experience in the future, significant fluctuations
in sales and operating results from quarter to quarter. This is due largely to
the fact that a significant portion of our business is derived from a limited
number of relatively large customer orders, the timing of which cannot be
predicted. Furthermore, as is typical in the karaoke industry, the quarters
ended September 30 and December 31 includes increased revenues from sales made
during the holiday season. Additional factors that can cause our sales and
operating results to vary significantly from period to period include, among
others, the mix of products, fluctuating market demand, price competition, new
product introductions by competitors, fluctuations in foreign currency exchange
rates, disruptions in delivery of components, political instability, general
economic conditions, and the other considerations described in this section.
Accordingly, period-to- period comparisons may not necessarily be meaningful and
should not be relied on as indicative of future performance. Historically, the
third quarter of our fiscal year, the three months ended December 31, have been
the most profitable quarter, and the fourth quarter of our fiscal year, the
three months ended March 31, have been the least profitable quarter.

Our proprietary technology may not be sufficiently protected

Our success depends on our proprietary technology. We rely on a combination of
contractual rights, patents, trade secrets, know- how, trademarks,
non-disclosure agreements and technical measures to establish and protect our
rights. We cannot assure you that we can protect our rights to prevent third
parties from using or copying our technology.

We may be subject to claims from third parties for unauthorized
use of their proprietary technology

We believe that we independently developed our technology and that it does not
infringe on the proprietary rights or trade secrets of others. However, we
cannot assure you that we have not infringed on the technologies of third
parties or those third parties will

                                      -16-

<PAGE>

not make infringement violation claims against us. Any infringement claims may
have a negative effect on our ability to manufacture our products.

Consumer discretionary spending may affect karaoke purchases and
is affected by various economic conditions and changes

Purchases of karaoke audio software and electronic discretionary recording
equipment are considered discretionary for consumers. Our success will therefore
be influenced by a number of economic factors affecting discretionary and
consumer spending, such as employment levels, business, interest rates, and
taxation rates, all of which are not under our control. Adverse economic changes
affecting these factors may restrict consumer spending and thereby adversely
affect our growth and profitability.

We depend on third party suppliers, and if we cannot obtain supplies as needed,
our operations will be severely damaged

We rely on third party suppliers to produce the parts and materials we use to
manufacture our products. If our suppliers are unable to provide us with the
parts and supplies, we will be unable to produce our products. We cannot
guarantee that we will be able to purchase the parts we need at reasonable
prices or in a timely fashion. If we are unable to purchase the supplies and
parts we need to manufacture our products, we will experience severe production
problems, which may possibly result in the termination of our operations.

We may not be able to attract and retain key personnel

The development of our business has been largely able to attract dependent on
the efforts of Edward Steele and John Klecha. Although we have entered into
employment contracts with Messrs. Steele and Klecha, the loss of the services of
either of these individuals could have a material adverse affect on the Company.
We believe that our future success also will depend significantly upon our
ability to attract, motivate, and retain additional highly skilled managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that we will be successful in attracting, assimilating, and retaining
the personnel we require to grow and operate profitability.

There is only a limited market for our stock and we cannot assure a more
significant market will ever develop

Our common stock is traded on the OTC Bulletin Board under the symbol "SING". As
result, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, our Common Stock. On January 24,
2001, we applied to have our securities listed on the American Stock Exchange.
While we believe that we meet all the requirements to be listed on the American
Stock Exchange, there are no assurances that our common stock will be listed on
the American Stock Exchange.

                                      -17-

<PAGE>

 PART II  -  OTHER  INFORMATION


Item 1.   LEGAL PROCEEDINGS

The Company is not a party to any material legal proceeding, nor to the
knowledge of management, are any legal proceedings threatened against the
Company. From time to time, the Company may be involved in litigation relating
to claims arising out of operations in the normal course of business.

Item 2.   CHANGES IN SECURITIES

         (a) On October 26, 2000, the Board of Directors of the Company
unanimously consented to extend the expiration date of the Company's Public
Warrants to November 10, 2001. All other terms and conditions of the Public
Warrants shall remain the same (exercise price, manner of exercise, etc.).

         (b) Not Applicable.

         (c) During the three month period ended December 31, 2000, four warrant
holders exercised their warrants to acquire an aggregate of 104,000 shares of
our common stock. The names of the warrant holders, the dates of exercise the
number of shares purchased, the exercise price and the proceeds recieved by the
Company are listed below.

                                Date of         No. of       Exercise
Name                            Exercise        Shares         Price    Proceeds
- ----                            --------        ------         -----    --------
Bank Sal
Oppenheim                       10/27/00        40,000       $   2.00    $80,000

Union Atlantic                  11/01/00        20,000       $   1.00    $20,000

Sil Venturi                     12/01/00         4,000       $   2.00    $ 8,000

Aton Trust                      12/01/00        40,000       $   2.00    $80,000

Each of these warrant holders exercised their warrants in reliance upon Section
4(2) of the Securities Act of 1933, because each of these holders was
knowledgeable, sophisticated and had access to comprehensive information about
the Company. The Company placed legends on the certificates stating that the
securities were not registered under the Securities Act and set forth the
restrictions on their transferability and sale.

         (d) Not applicable.

Item 3.   DEFAULTS UPON SENIOR SECURITIES

         Not applicable

Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

         Not applicable.


                                      -18-

<PAGE>

Item 5.   OTHER INFORMATION

         The Company is reporting information regarding its proposed acquisition
of a controlling interest in Toy Concepts International Limited, a Hong Kong
company, in this Form 10-QSB instead of in a Current Report on Form 8-K. This
contains information required under "Item 5. Other Events."

         On February 12, 2001, the Company through its wholly owned subsidiary,
International SMC (HK) Limited, entered into an agreement to purchase 600,000
shares or 60% of the issued and outstanding shares of Toy Concepts International
Limited, a Hong Kong company from Lui Ka Shing David and Lui Yu Pik Kitty. The
Company has a 3 1/2 month due diligence period to investigate Toy Concepts,
which expires on June 1, 2001. There can be no assurances that this acquisition
will close or that it will be profitable to the Company if it closes.

           Toy Concepts is engaged in the business of manufacturing and
distributing toys, including toy lines of figures, molded horses and other
animals, dolls and doll products. If the acquisition is closed, Toy Concepts
intends to continue in its current line of business and will also begin
distributing more toy karaoke products.

         The proposed stock purchase is being made pursuant to a Stock Purchase
Agreement dated February 12, 2001. The foregoing discussion of the Stock
Purchase Agreement is qualified by reference to the complete text of the Stock
Purchase Agreement, as amended, which is filed as Exhibit 2.1 hereto and is
incorporated herein by this reference.

         (c)      Exhibits.

         2.1      Stock Purchase Agreement dated February 12, 2001 by and
                  between International SMC (HK) Limited, as purchaser, and Lui
                  Ka Shing David and Lui Yu Pik Kitty, as the vendors, and Liu
                  Yiu Wah, as vendor guarantor relating to the sale of 600,000
                  shares of Toy Concepts International Limited.

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit
Number            Title

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

 2.1              Stock Purchase Agreement dated February 12, 2001 by and
                  between International SMC (HK) Limited, as purchaser, and Lui
                  Ka Shing David and Lui Yu Pik Kitty, as the vendors, and Liu
                  Yiu Wah, as vendor guarantor relating to the sale of 600,000
                  shares of Toy Concepts International Limited.

(b) Reports on Form 8-K

                  On November 30, 2000, the Company filed a Form 8-K reporting
                  information under Item 4 - Change in Registrant's Certifying
                  Accountant.

                                      -19-

<PAGE>

                                   SIGNATURES

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

                              THE SINGING MACHINE COMPANY, INC.




Dated: February 13, 2000      By: /s/ John F. Klecha
                                  ---------------------------
                                      John F. Klecha
                                      Chief Financial Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2.1
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>STOCK PURCHASE AGREEMENT DATED FEBRUARY 12, 2001
<TEXT>


         THIS AGREEMENT made the 12th day of February Two Thousand and One
BETWEEN all those persons whose respective names and addresses are set out in
the First Schedule hereto (the "Vendors") of the one part and the person whose
name and address are set out in the Second Schedule hereto (the "Purchaser") of
the second part and LUI YIU WAH, holder of Hong Kong Identity Card No.
Al85781(1), gentleman of 1/F., Liven House, 61-63 King Yip Street, Kwun Tong,
Kowloon, Hong Kong (the "Vendor Guarantor") of the third part.

WHEREAS

(A)      TOY CONCEPTS INTERNATIONAL LIMITED (the "Company") was incorporated in
         Hong Kong under the Companies Ordinance on 5 August 1993 as a private
         company limited by shares with an authorized share capital of
         HK$1,000,000.00 divided into 1,000,000 ordinary shares of HK$1.00 each,
         all of which have been issued and fully paid up as at the date hereof.

(B)      The Vendors are respectively the registered holders of the number of
         shares in the Company as am set out opposite to their respective names
         in the third column of the First Schedule hereto at the date hereof
         (hereinafter referred to as "the Sole Shares") and each of the Vendors
         has the right, power and authority to sell and transfer the Sale
         Shares, free from any claims, debts, liens, options, preemption rights,
         charges, encumbrances, equities or adverse rights of any description
         together with all rights attached thereto and all dividends and
         distributions declared paid or made in respect thereof after the, date
         hereof.

(C)      The Vendors have agreed to sell and the Purchaser has agreed to
         purchase the Sale Shares on the terms and conditions and on the basis
         of the warranties, representations, undertakings, agreements and
         indemnities hereinafter mentioned.

NOW IT IS HEREBY AGREED as follows

1.       DEFINITIONS AND INTERPRETATION
         ------------------------------

1.1      In this Agreement, unless otherwise expressed or required by context,
         the following expressions shall have the respective meanings set
         opposite thereto, as follows:
<TABLE>
<CAPTION>
<S>                                 <C>

         Expression                 Meaning
         ----------                 -------

         "Accounts"                 the unaudited profit and loss account for the year ended on
                                    and the unaudited balance sheet as at the Accounts Date of the
                                    Company together with the pro forma consolidated balance
                                    sheet of the Company for the financial period ended on the
                                    Accounts Date, a copy of which has been initialed by the
                                    Vendors for the purpose of identification and , annexed hereto
                                    as Annex A;




                                        1


<PAGE>



         "Accounts Date"            31 March 2000;

         "Business Day"             any day on which banks in Hong Kong are officially open for
                                    business, except a Saturday;

         "Completion"               completion of the sale and purchase of the Sale Shares
                                    pursuant to Clause 4;

         "Completion Date"          the first Business Day after
                                    the fulfillment of the Conditions
                                    Precedent or June 1, 2001, whichever
                                    shall occur later, on which
                                    completion of the transactions set
                                    out in Clause 4.1 are to take place;

         "Conditions Precedent"     the condition precedent provided in Clause 2.1;

         "Consideration"            the purchaser price for the purchase of the Sale Shares as set
                                    out in Clause 3.1;

         "Deposits"                 the payment of the Consideration made by the Purchaser pursuant to Clause 3;

         "Disclosed"                fully and fairly disclosed to the Purchaser in this Agreement
                                    and the Disclosure Letter and the Accounts;

         "Disclosure Letter"        the disclosure letter dated
                                    the date of this Agreement, from the
                                    Vendors to the Purchaser annexed
                                    hereto as Annex B;

         "HK$"                      Hong Kong Dollars, the lawful currency of Hong Kong;

         "Hong Kong"                The Hong Kong Special Administrative Region of the
                                    People's Republic of China;

         "Purchaser's Solicitors"   Messrs. T.S. Tong & Co., at 8th Floor, Wing Lung Bank
                                    Building, 45 Des Voeux Road Central, Hong Kong;

         "Tax"                      and "Taxation" means any form of
                                    taxation, levy, duty, surcharge,
                                    contribution or imposition of
                                    whatever nature (including any fine,
                                    penalty, surcharge or interest in
                                    relation thereto) imposed by a
                                    local, municipal, governmental,
                                    state, federal or other body or
                                    authority iii Hong Kong;

         "Vendors' Solicitors"      Messrs. Chan, Lau & Wai at Room 601, Aon China Building,
                                    No.29 Queen's Road Central, Hong Kong;




                                        2


<PAGE>



         "Warranties"               the representations, warranties, undertakings or indemnities
                                    made or given! by the Vendors in this Agreement;

         "US$"                      the United States of America Dollars, the lawful currency of
                                    the United States of America;
</TABLE>

1.2      The headings to the Clauses of this Agreement are for ease of reference
         only and shall be ignored in interpreting this Agreement.

1.3      Reference herein to "Clauses" and "Schedules" are reference to clauses
         of and schedules to this Agreement.

1.4      Words and expressions in the singular include the plural and vice
         versa,

1.5      Reference to person include any public body and any body of persons,
         corporate or unincorporate.

1.6      Reference to Ordinances, statutes, legislations or enactments shall be
         construed as a reference to such Ordinances, statutes, legislations or
         enactments as may be amended or re-enacted from time to time and for
         the time being in force.

1.7      Recitals (A), (B) and (C) form part of this Agreement.

2.       CONDITIONS PRECEDENT FOR THE SALE AND PURCHASE OF SALE SHARES
         -------------------------------------------------------------

2.1.     The respective obligations to affect Completion in accordance with
         Clause 4 of this Agreement shall be conditional upon the fulfillment of
         the condition that the due diligence investigation to be carried out
         pursuant to Clause 2.6 having been completed to the reasonable
         satisfaction of the Purchaser ("Conditions Precedent"). The Vendors and
         the Purchaser shall use all reasonable endeavors to procure the
         fulfillment of the Conditions Precedent as soon as possible but in any
         event before 1 June 2001 and the Vendors shall provide all reasonable
         assistance required by the Purchaser so as to fulfill the Conditions
         Precedent.

2.2      If the Conditions Precedent shall not have been fulfilled or waived on
         or before 1 June 2001 and the non-fulfillment is not attributable to
         the default of any of the parties hereto, this Agreement shall become
         null and void and of no legal effect and neither of the parties hereto
         shall have any claim and/or recourse against the other of them save and
         except any antecedent breach of the terms hereof and the Vendors shall
         forthwith thereafter refund and return the Deposits in full to the
         Purchaser without interest, costs or compensations whatsoever.

2.3      In the event that (other than due to the default of the Purchaser) the
         Vendors shall despite fulfillment or waiver of the Conditions Precedent
         fail to complete the sale of the Sale Shares



                                        3


<PAGE>



         to the Purchaser pursuant to the terms hereof and/or to carry out any
         of the Vendors' obligations herein, it shall be open to the Purchaser
         either to enforce the sale of the Sale Shares and the performance of
         the outstanding obligations by decree of specific performance against
         the Vendors or by written notice to the Vendors to forthwith rescind
         this Agreement whereupon the Deposits shall be refunded to the
         Purchaser forthwith but without prejudice to the Purchaser's right to
         claim for damages (if any) against the Vendors and all documents and
         things in respect of the Company previously delivered by the Vendors or
         the Vendors' Solicitors to the Purchaser or the Purchaser's Solicitors
         shall forthwith be returned to the Vendors or the Vendors' Solicitors.

2.4      In the event that (other than due to the default of the Vendors) the
         Purchaser shall despite fulfillment or waiver of the Conditions
         Precedent fail to complete the purchase of the Sale Shares and/or to
         pay the Consideration or any part thereof pursuant to the terms hereof,
         the Vendors may sue the Purchaser for specific performance of this
         Agreement or may by notice in writing to the Purchaser forthwith
         rescind this Agreement whereupon the Deposits shall be absolutely
         forfeited to the Vendors as liquidated damages but without prejudice to
         the right of the Vendors to claim for damages (if any) and specific
         performance of this Agreement against the Purchaser and all documents
         and things in respect of the Company previously delivered by the
         Vendors or the Vendors' Solicitors to the Purchaser or the Purchaser's
         Solicitors shall be returned to the Vendors or the Vendors' Solicitors.

2.5      The Purchaser may in its absolute discretion waive all of the
         Conditions. If the Vendors shall not receive from the Purchaser any
         objection or query in writing in relation to the business or any other
         matters concerning the Company on or before 1 June 2001, the due
         diligence review and investigation referred to in Clause 2.6 shall be
         deemed to have been carried out to the satisfaction of the Purchaser
         and the Conditions Precedent shall be deemed to have been fulfilled by
         the parties hereto or waived by the Purchaser.

2.6      The Purchaser shall be entitled to carry out a due diligence review and
         investigation of the business of the Company to such extent as is
         necessary for the transaction contemplated under this Agreement, such
         due diligence review to be completed on or before 1 June 2001. In order
         to facilitate such due diligence review, as soon as practicable after
         the date of this Agreement, the Vendors shall. procure the Company to
         make available for inspection to authorized representatives of the
         Purchaser all such information relating to the Company and such access
         to the premises and all books, title deeds, records, accounts,
         contracts relating to the Company as soon as practicable and other
         documentation of the Company as the Purchaser may reasonably request as
         soon as practicable.

2.7      The Purchaser shall not be obliged to complete the purchase of any of
         the Sale Shares unless the sale and purchase of all the Sale Shares
         shall be, completed simultaneously.



                                        4


<PAGE>



3.       PAYMENT
         -------

3.1      In November 2000, the Company advanced a refundable deposit in the
         amount of One Hundred Seventy Thousand ($170,000) to the Vendors as
         Consideration for the proposed purchase of the Shares.

3.2      If the Purchaser is not satisfied with the results of its due diligence
         investigation which expires on June 1, 2001, the Purchaser shall be
         entitled to a full refund of the $170,000 that was advanced to the
         Vendors.

3.3      The Purchaser's obligations set out in this Section 3 are conditional
         upon the compliance of all the applicable terms and conditions of this
         Agreement on the part of the Vendors,

4.       COMPLETION
         ----------

4.1      Completion of the sale and purchase of the Sale Shares shall take place
         on the tenth Business Day after the fulfillment of the Conditions
         Precedent or 1 June 2001, whichever shall occur later ("Completion
         Date") at the offices of Vendors' Solicitors, or at such date or place
         as may be mutually agreed by the parties hereto when the following
         business will be simultaneously transacted:

         4.1.1    The Vendors shall deliver and/or procure the delivery to the
                  Purchaser or its nominee(s) the following

         4.1.1.1  instrument(s) of transfer in favor of the Purchaser
                  and/or its nominee(s) in respect of the Sale Shares all duly
                  executed by the Vendors or the registered holder of the Sale
                  Shares;

         4.1.1.2  original share certificates and the relevant declarations of
                  trust (if executed) in respect of the Sale Shares;

         4.1.1.3  such other documents as may be required to give a good and
                  effective transfer of title to the Sale Shares to the
                  Purchaser and/or its nominee(s) and to enable it/them to
                  become the registered holder(s) thereof;

         4.1.1.4  written resignation of the Vendors directors of the Company
                  with immediate effect after the appointment of the Purchaser's
                  nominees as referred to in Clause 4.1.2(ii) of this Agreement
                  and with acknowledgment that they have no claim or right of
                  action against the Company for compensation for loss of
                  office, termination of employment or otherwise;



                                        5


<PAGE>



         4.1.1.5  written resignation of the company secretary of the Company
                  with immediate effect and with acknowledgment that they have
                  no claim or right of action against the Company for
                  compensation for loss of office, termination of employment or
                  otherwise;

         4.1.1.6  written resignation, if required, of the Auditors (if any) of
                  the Company;

         4.1.1.7  all other documents and papers whatsoever relating to the
                  affairs of the Company as are in the possession or custody of
                  the Vendors.

         4.1.2    The Vendors together with the other director(s) of the Company
                  shall procure that a board meeting of the Company be held on
                  Completion and shall procure the passing thereat of board
                  resolutions to the following effect;

                  (i)      approving the transfer of the Sale Shares to the
                           Purchaser and/or its nominees and the registration of
                           the appropriate share transfers subject to the same
                           being duly stamped;

                  (ii)     appointing three persons as may be nominated by the
                           Purchaser as directors and appointing such person as
                           may be nominated by the Purchaser as secretary of the
                           Company and approving the resignation of the Vendors
                           directors of the Company and the resignation of the
                           existing company secretary of the Company.

         4.1.3    The Vendors shall do all that is necessary to ensure that the
                  Sale Shares are duly transferred and registered in the name of
                  the Purchaser (or its nominee(s)) and that the three persons
                  as the Purchasers shall nominate are appointed as new
                  directors of the Company.

4.2      The transactions described in Clause 4.1 shall take place at the same
         time so that in default of the performance of any such transactions the
         other party or parties shall not be obliged to complete the sale and
         purchase aforesaid (without prejudice to any further legal remedies).

5.       FURTHER OBLIGATIONS OF THE VENDORS PENDING COMPLETION
         -----------------------------------------------------

5.1      The Vendors shall procure that the business of the Company is and shall
         be operated in a manner consistent with past practices and shall use
         all reasonable endeavors to carry on the business of the Company in the
         best interest of the Company in the circumstances or then prevailing
         circumstances during the period from the date hereof until Completion.
         The Vendors shall procure that the Company shall not during the
         aforesaid period except with the prior consent in writing of the
         Purchaser:



                                        6


<PAGE>



         5.1.1    in any material way depart from the ordinary course of its day
                  to day business either as regards the nature, scope or manner
                  of conducting the same, or otherwise do anything whereby its
                  financial position will be materially and adversely affected;

         5.1.2    sell or transfer or otherwise dispose of (other than in the
                  ordinary course of business) any part of its assets, or waive
                  any rights of material value or cancel or release any debt or
                  claim, or create or permit to arise any encumbrance on or in
                  respect of any part of its undertaking, property or assets
                  save for any encumbrance arising by operation of law and
                  without any default by the Vendors or the Company;

         5.1.3    discharge or satisfy (otherwise than in the ordinary course of
                  business) any encumbrance, its undertaking, property or assets
                  or any obligation or liability whether actual or contingent,
                  or make any payment or enter into any commitment or obligation
                  or any kind (other than in respect of normal trading accounts
                  entered into on an arm's length basis and in the ordinary
                  course of business where full payment is made directly between
                  the original debtor and creditor so that the direct liability
                  is discharged in fall);

         5.1.4    knowingly contravene or fail to comply with any obligation,
                  statutory or otherwise, fail to perform and continue to
                  perform in accordance with the terms of any material
                  contracts, or knowingly terminate any material agreement,
                  arrangement or understanding, or enter into any contract or
                  arrangement outside the ordinary course of business of the
                  Company;

         5.1.5    fail to duly reserve and preserve its material rights in
                  respect of any actual or potential litigation, arbitration or
                  other proceedings material to it, or fail to continue to
                  maintain full force and effect all insurance policies now in
                  effect or renewals thereof, and not knowingly default under
                  any provision thereof and duly to give any notice and
                  presentand maintain any claims under any such insurance
                  policies;

         5.1.6    fail to duly file all reports or other documents required to
                  be filed with governmental authorities or to duly observe and
                  conform in all material respects to all applicable laws, or
                  any consent, approvals, licences and permits in relation to
                  its business or any or its, assets, or dispose of the
                  ownership, possession, custody or control of any of its
                  corporate or other books or records;

         5.1.7    issue any shares or other securities or loan capital or merge
                  or consolidate with any other equity or take any steps with a
                  view to dissolution, liquidation or winding up or do or permit
                  to be done any act, deed or thing which might result in the
                  same;

         5.1.8    appoint any director, secretary or (pursuant to any power of
                  attorney or similar authority) attorney save for the purpose
                  of Completion under this Agreement;

         5.1.9    declare, make or pay any dividend or under distribution;



                                        7


<PAGE>



         5.1.10   amend, vary or agree to amend or vary any material contract to
                  which the Company is a party;

         5.1.11   lend any money to any of the directors or their respective
                  associates or give any security over any of its assets to any
                  of the directors or their respective associates in respect of
                  any loan made to them;

         5.1.12   commit any act or omission which would constitute a breach of
                  the Warranties set out in the Third Schedule hereto.

6.       REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS
         --------------------------------------------

6.1      Save as Disclosed on or before the date hereof, the Vendors hereby
         represent and warrant to and undertake with the Purchaser that each of
         the matters set out in the Third Schedule are as at the date hereof and
         shall as at the Completion Date be true and correct and not misleading
         in all material respects.

6.2      Each of Warranties contained in this Agreement (including all
         Schedules) will survive the completion of the sale and purchase of the
         Sale Shares.

6.3      Nothing herein contained shall prejudice either or the parties' right
         to specific performance of this Agreement,

6.4      Each party hereby undertakes to execute and do and cause or procure to
         be executed and done all such other documents, instruments, acts and
         things as the other party may reasonably require in order to give
         effect to this Agreement.

6.5      The Vendors hereby agree and undertake to do execute and perform such
         further acts deeds, documents and things as the Purchaser may require
         effectively to vest the beneficial ownership of the Sale Shares in the
         Purchaser or its nominee(s) and to exercise and compel the exercise of
         all voting rights as directors and shareholders of or in the Company to
         procure that the Company to do all necessary acts and things to fulfill
         the obligations of the Vendors herein contained.

6.6      Each of the parties hereto hereby unconditionally and irrevocably
         represents to and warrants to the other that its entry into and
         performance of this Agreement will not be contrary to any applicable
         law.

6.7      The Vendors shall promptly notify the Purchaser in writing of any
         matter or thing which the Vendors become aware which is in breach of or
         inconsistent with any of the Warranties. Where the breach of the
         Warranty is not of a material nature, upon receipt of such notice by
         the Purchaser or at such time when the Purchaser becomes aware of the
         matter or thing which is in breach of or inconsistent with any of the
         Warranties, the Purchaser shall have the right to demand the Vendors to
         remedy or rectify the same by service of a written notice to



                                        8


<PAGE>



         the Vendors setting forth the particulars of such breach. Upon receipt
         of the written notice by the Vendors, the Vendors shall have 14 days
         from the date of such notice or until the Completion Date, whichever is
         the earlier, to rectify or remedy the breach.

6.8      Where the breach of Warranty is of a material nature or if the Vendors
         shall fail to remedy or rectify the breach within the prescribed period
         pursuant to Clause 6.7, the Purchaser may elect to rescind this
         Agreement. Upon such rescission, the Vendors shall forthwith refund the
         Deposits to the Purchaser.

6.9      (a)      The liability of the Vendors and the Vendor Guarantor in
                  respect of any breach of the Warranties and any terms and
                  conditions of this Agreement shall be limited as provided in
                  the following subclauses of this Clauses.

         (b)      The Vendors and the Vendor Guarantor shall be under no
                  liability in respect of a breach of any of the Warranties or
                  any terms and conditions of this Agreements unless both of
                  them shall have received written notice from the Purchaser
                  prior to the 1st anniversary of the date of this Agreement
                  giving details of the relevant claim and any such claim shall
                  (if not previously satisfied, settled or withdrawn) be deemed
                  to have been waived or withdrawn at the expiration of 3 months
                  after the 1st anniversary of the date of this Agreement unless
                  proceedings in respect, thereof shall then already have been
                  commenced against the Vendors and Vendor Guarantor.

         (c)      The Vendors and the Vendor Guarantor shall be under no
                  liability in respect of any breach of the Warranties or any
                  terms and conditions of this Agreement

                  (i)      if such liability would not have arisen but; for
                           something voluntarily done or omitted to be done
                           (other than pursuant to a legally bindingcommitment
                           created on or before Completion) by the Purchaser
                           after Completion and otherwise than in the ordinary
                           course of business;

                  (ii)     if such liability arises by reason of an increase in
                           the rates of taxation since the Accounts Date;

                  (iii)    to the extent that provision or reserve in respect of
                           such liability was made in the Accounts; or

                  (iv)     to the extent that such liability arises or is
                           increased as a result only of any increase in rates
                           of tax made after Completion with retrospective
                           effect;

                  (v)      if such liability arises in respect of tax for which
                           the Company is primarily liable and which arose in
                           the ordinary course of business of the Company
                           between Accounts Date and Completion;



                                        9


<PAGE>



         (d)      The aggregate liability of the Vendors and the Vendor
                  Guarantor in respect of any claim for breach of any of the
                  Warranties or any terms and conditions of this Agreement shall
                  be limited to the extent that the amount of such liability
                  shall be computed after deducting therefrom

                  (i)      the amount by which any taxation for which the
                           Company is or may be assessed or accountable is
                           reduced or extinguished as a result of such
                           liability;

                  (ii)     the amount by which any provision for tax (including
                           deferred or provisional tax), bad or doubtful debts
                           or contingent or other liabilities contained in the
                           Accounts has proved at the date of the relevant claim
                           to be in excess of the matter for which such
                           provision was made; and

                  (iii)    the amount of any taxation credits, relief or set-off
                           due to or already received by the Purchaser or the
                           Company (except to the extent that the same shall
                           have been taken into account in the Accounts) and
                           shall be further limited to the aggregate
                           Consideration received by the Vendors hereunder. The
                           Purchaser shall and shall procure the Company to
                           reimburse to the Vendors and the Vendor Guarantor an
                           amount equal to any sum paid by the Vendors or the
                           Vendor Guarantor or any of them in respect of a claim
                           under the Warranties which is subsequently recovered,
                           or paid to the Purchaser or the Company by any third
                           party provided that the Purchaser and/or the Company
                           shall be entitled to deduct from the amount to be
                           reimbursed to the Vendors and the Vendor Guarantor as
                           aforesaid, any costs and expenses as may be incurred
                           in the recovery of the sum so paid by the Vendors or
                           the Vendor Guarantor or any part thereof from the
                           third party.

         (f)      Without prejudice to the liability of the Vendors and the
                  Vendor Guarantor in respect of any breach of the Warranties or
                  any term and conditions of this Agreement

                  (i)      the Purchaser shall notify the Vendors and the Vendor
                           Guarantor of any assessment or claim against the
                           Purchaser and shall procure the Vendor Guarantor of
                           any Company to notify the Vendors and the assessment
                           or claim against the Company in respect of which (if
                           valid) a claim would lie against the Vendors and the
                           Vendor Guarantor under any of the Warranties
                           forthwith upon the Purchaser or (as the case may be)
                           the Company becoming aware of the same; and

                  (ii)     The Vendors and the Vendor Guarantor shall be offered
                           a reasonable opportunity at their expense of
                           resisting in the name of the Purchaser or (as the
                           case may be) the Company my such assessment or claim
                           and shall at the Vendors' and/or the Vendor
                           Guarantor's expenses be provided with or have made
                           available to, them all information and documents of
                           the Company and


                                       10


<PAGE>



                           (to the extent applicable) of the Purchaser
                           reasonably required by them for the purpose Of such
                           resistance as aforesaid, but subject to the Company
                           and the Purchaser being indemnified to their
                           reasonable satisfaction against all costs and
                           expenses thereby incurred and to the Purchaser being
                           kept fully informed of all steps proposed to be taken
                           by the Vendors and/or the Vendor Guarantor and the
                           Purchaser shall not and shall procure that the
                           Company shall not without written consent (such
                           consent shall not be unreasonably withheld) of the
                           Vendors and the Vendor Guarantor admit, settle or
                           discharge any such assessment or claim.

6A.      GUARANTEE BY THE VENDOR GUARANTOR
         ---------------------------------

         6A.1     The Vendor Guarantor hereby guarantees, unconditionally and
                  irrevocably as primary obligor, to the Purchaser the due
                  observance and performance by the Vendors of all the
                  agreements, obligations, commitments and undertakings
                  contained in this Agreement ("Vendors' Guaranteed
                  Obligations") on the part of the Vendors to be observed and
                  performed and that the Warranties given or provided by the
                  Vendors to the Purchaser under this Agreement are true
                  accurate and correct and the Vendor Guarantor undertakes and
                  agrees that he will indemnify the Purchaser and keep the
                  Purchaser fully indemnified on a full indemnity basis in
                  respect of all losses, costs, expenses and damage whatsoever
                  which may be sustained by the Purchaser by reason of or in
                  consequence of any failure of the Vendors to carry out any
                  such Vendors' Guaranteed Obligations or any breach of the
                  Warranties' given or provided by the Vendors to the Purchaser
                  under this Agreement.

         6A.2     The guarantee and indemnity provided by the Vendor Guarantor
                  in this Clause 6A shall be a continuing guarantee and
                  indemnity and shall cover all Vendors' Guaranteed Obligations
                  and/or breach of the Warranties given or provided by the
                  Vendors to the Purchaser under this Agreement notwithstanding
                  the liquidation, incapacity or any change in the constitution
                  of the Vendors or any settlement of account or variation or
                  modification of this Agreement or any indulgence or waiver
                  given by any party hereto or other matter whatsoever until the
                  last claim whatsoever by the Purchaser against the Vendors has
                  been satisfied in full,

         6A.3     Should any Vendors' Guaranteed Obligations or the Warranties
                  given or provided by the Vendors to the Purchaser under this
                  Agreement, which if valid or enforceable would be the subject
                  of the guarantee and indemnity in this Clause 6A, be or become
                  wholly or in part invalid or unenforceable against the Vendors
                  by reason of any defect in or insufficiency or want of powers
                  of the Vendors or irregular or improper purported exercise
                  thereof or breach or want of authority by any person
                  purporting to act on behalf of the Vendors or because any of
                  the rights have become barred by reason of any legal
                  limitation, disability, incapacity or any other fact or
                  circumstance whether or not always known to the Purchaser, the
                  Vendor Guarantor shall nevertheless be liable to the Purchaser
                  notwithstanding the avoidance or invalidity



                                       11


<PAGE>



                  of any term or condition of this Agreement whatsoever
                  including (without limitation) avoidance under any enactment
                  relating to liquidation in respect of that Vendors' Guaranteed
                  Obligations or any of the Warranties given or provided by the
                  Vendors to the Purchaser under this Agreement as if the same
                  were wholly valid and enforceable.

         6A.4     The guarantee and indemnity provided by the Vendor Guarantor
                  in this Clause 6A may be enforced against him by the Purchaser
                  at any time without first instituting legal proceedings
                  against the Vendors in the first instance or joining in the
                  Vendors as a party or parties in the same proceedings against
                  him.

         6A.5     For the avoidance of doubt, this Clause 6A shall be subject
                  always to the relevant provisions of Clause 6.

7.       SEVERABILITY
         ------------

         If at any time any one or more provisions hereof is or becomes invalid,
         illegal, unenforceable or incapable of performance in any respect, the
         validity, legality, enforceability or performance of the remaining
         provisions hereof shall not thereby in any way be affected or impaired.

8.       ENTIRE AGREEMENT
         ----------------

         This Agreement constitutes the entire agreement and understanding
         between the parties in connection with the subject-matter of this
         Agreement and supersedes all previous proposals, representations,
         warranties, agreements or undertakings relating thereto whether oral,
         written or otherwise and neither party has relied on any such
         proposals, representations, warranties, agreements or undertakings.

9.       TIME
         ----

         9.1      Time shall be of the essence in this Agreement.

         9.2      No time or indulgence given by any party to the other shall be
                  deemed or in any way be construed as a waiver of any of its
                  rights and remedies hereunder.



                                       12


<PAGE>



10.      ASSIGNMENT
         ----------

         This Agreement shall be binding on and shall enure for the benefits of
         the successors and assigns of the parties hereto but shall not be
         assigned by any party without the prior written consent of the other
         party.

11.      NOTICES AND OTHER COMMUNICATION
         -------------------------------

         11.1     Any notice required or permitted to be given hereunder shall
                  be given in writing in the English language delivered
                  personally or sent by post (airmail if overseas) or by
                  facsimile message to the party due to receive such notice at
                  its address as set out below (or such other address as it may
                  have notified to the other parties in accordance with this
                  Clause).

         11.2     A notice delivered personally shall be deemed to be received
                  when delivered and any notice sent by pre-paid recorded
                  delivery post shall be deemed (in the absence of evidence of
                  earlier receipt) to be received seven Business Days after
                  posting and in proving the time of despatch it shall be
                  sufficient to show that the envelope containing such notice
                  was properly addressed, stamped and posted o that the
                  facsimile message was properly addressed and despatched as the
                  case may be. A notice sent by facsimile message shall be
                  deemed to have been received at the expiration of 24 hours
                  after the time of despatch.

         11.3     (a)      For the purpose of delivery of notices under this
                           Agreement, the address and facsimile number of the
                           Purchaser are:

                  Address    : Unit 519, Vanta Industrial Centre,
                               21-33 Tai Lin Pai Road, Kwai Chung,
                               New Territories, Hong Kong

                  Facsimile  : (852) 2480 5922
                  Attention  : Ms. Alicia Haskamp

         (b)      For the purpose of delivery of notices under this Agreement,
                  the address and facsimile number of the Vendors and the Vendor
                  Guarantor are:

                  Address     : 1/F., Liven House, 61-63 King Yip Street,
                                Kwun Tong, Kowloon, Hong Kong

                  Facsimile   : (852) 2372 9139
                  Attention   : Mr. Lui Yiu Wah

12.      COSTS AND EXPENSES
         ------------------

         12.1     Each party shall bear their respective legal and professional
                  fees, costs and expenses incurred in the negotiation,
                  preparation and execution of this Agreement.



                                       13


<PAGE>



         12.2     All ad valorem stamp duty payable on the instruments of
                  transfer and contract notes of the Sale Shares shall be borne
                  by the Vendors on one, part and the Purchaser on the other
                  part in equal shares. In the event that the Stamp Office
                  requires any document(s), account(s) and/or balance sheet(s)
                  of the Company for the purpose of assessing the amount of
                  stamp duty payable, the Vendors shall at their own expenses
                  arrange for the. production of such document(s), accounts)
                  and/or balance sheet(s).

13.      CONFIDENTIAL
         ------------

         13.1     Each party shall treat as confidential all information
                  obtained as a result of entering into or performing this
                  Agreement which relates to

                  (a)      the provisions of this Agreement;

                  (b)      the negotiations relating to this Agreement;

                  (c)      the subject matter of this Agreement; or

                  (d)      the other party.

         13.2     Notwithstanding the other provisions of this clause, either
                  party may disclose confidential information:

                  (a)      if and to the extent required by law;

                  (b)      if and to the extent required by existing contractual
                           obligations;

                  (c)      if and to the extent required to vest the full
                           benefit of this Agreement in that party;

                  (d)      to its professional advisors, auditors and bankers:,

                  (e)      if and to the extent the information has come into
                           the public domain through no fault of that party;

                  (f)      if and to the extent the other party has given prior
                           written consent to the disclosure, such consent not
                           to be unreasonably withheld or delayed; or

         13.3     The restrictions contained in this clause shall apply without
                  limit in time.

         13.4     No public announcement or communication of any kind shall be
                  made in respect of the subject matter of this Agreement unless
                  specifically agreed between the parties or unless an
                  announcement is required pursuant to the relevant law and/or
                  the rules and regulations of any regulatory bodies. Any
                  announcement by any party required to be made pursuant to any
                  relevant law and/or the rules and regulations of any
                  regulatory bodies shall be issued only



                                       14


<PAGE>



                  after such prior consultation With the other party as is
                  reasonably practicable in the circumstances,

14.      GOVERNING LAW
         -------------

         14.1     This Agreement shall be governed by and construed in
                  accordance with the laws of Hong Kong and the parties hereto
                  agree to submit to the non-exclusive jurisdiction of the
                  courts of Hong Kong.

15.      JOINT AND SEVERAL
         -----------------

         The obligations and liability of the Vendors under this Agreement shall
         be joint and several.


         IN WITNESS whereof the parties hereto have signed this Agreement on the
day and year first above written.

SIGNED, SEALED AND DELIVERED
by LUI KA SHING in the presence of:

         /s/ Wong Chun Hung                          /s/ Lui Ka Shing
         ------------------                          ----------------
         Trainee Solicitor
         Hong Kong SAR

SIGNED, SEALED AND DELIVERED
by LUI YU PIK KITTY in the presence of

         /s/ Wong Chun Hung                          /s/ Lui Yu Pik Kitty
         ------------------                          --------------------
         Trainee Solicitor
         Hong Kong SAR

SIGNED, SEALED AND DELIVERED
by LUI YIU WAH in the presence of

         /s/ Wong Chun Hung                          /s/ Wong Chun Hung
         ------------------                          ------------------
         Trainee Solicitor
         Hong Kong SAR



                                       15


<PAGE>



SEALED with the COMMON SEAL of INTERNATIONAL SMC (HK) LIMITED and signed by MR.
JOHN KLECHA, a director in the presence of:

         /s/ IU TING KWOK                            /s/ John Klecha
         ---------------------                       ---------------
            Solicitor
         T.S. Tong & Co.
         Hong Kong SAR.





                                       16


<PAGE>
<TABLE>
<S>               <C>
First Schedule    Name of Vendors
Second Schedule   Name of Purchaser
Third Schedule    Representations, Warranties and Undertakings
Annex A           Accounts
Annex B           Disclosure Letter
Schedule          1.  Staff List dated July 19, 2000
                  2.  List of Trade Debtors at March 31, 2000
                  3.  List of Trade Creditors at March 31, 2000
                  4.  List of Furniture and Fixtures
                  5.  Annual Return dated August 5, 2000
                  6.  Memorandum and Articles of Association with Special Resolution attached.
                  7.  Salary List dated October 14, 2000.
                  8.  Deed of Guarantee (undated singed Mr. Lui Yiu Wah
                  9.  Copy Trading & Profit & Loss Account from April 1st, 2000 to September 30, 2000 and
                  Balance Sheet as at September 30, 2000 of the Company
</TABLE>




</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
