RE TEAM CONCEPTS MANUFACTURING LTD.

HCMP 2741/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2741 OF 2001

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REASONS FOR DECISION

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1. This is a petition under section 166 of the Companies Ordinance for the sanction of the Court to a Scheme of Arrangement (hereafter referred to as "the Scheme") between Team Concepts Manufacturing Limited (hereafter called "the Company") and the Scheme Creditors who are the unsecured creditors of the Company.

2. The Company was incorporated in Hong Kong in 1982 and is a wholly owned subsidiary of Learning Concepts Holdings Limited (hereafter referred to as "LCH"), the shares of which are listed on the Stock Exchange of Hong Kong. LCH is itself a subsidiary of Sino-i.com Limited which owns a little short of 70% of the issued share capital of LCH. The objects and principal activities of the Company are to carry on the business of manufacture of telecommunications and consumer electronics products.

3. It would appear from the accounts that for the 3 years ended 31 December 1998, 1999 and 2000, LCH and its subsidiaries have recorded operating losses of more than $11 million, $75 million and $210 million respectively. The Company is one of the main operating companies of the LCH Group and most of the losses of the Group are attributable to the operating results of the Company.

4. All the assets of the Company are subject to a floating charge created under a debenture in favour of the LCH Group's principal banker. The total amount of indebtedness to the bank appears to be in the region of HK$55 million. The current assets of the Company shown in a balance sheet exhibited as "YPH-5" to the affirmation of Mr Yu Pun Hoi affirmed on 17 May 2001 comprise Inventories of $51 million, Trade Debtors/Bills Receivable in the Amount of $4.8 million, Amount due from group companies of $223 million and less than $500,000 by way of Deposit and advance payments, Trade Creditors and Cash in bank balances.

5. As against the amount due from Group companies of $223 million, however, the Company owes Group companies about $270 million and it has independent unsecured creditors in the amount of $119 million. In other words, once the bank loan is discharged by the enforcement of the floating charge against the Company's Inventories and Trade Debtors/Bills Receivable, there would be very little left for the independent unsecured creditors after the amount due from Group companies are set off against the amount due to Group companies. Indeed, the amount due to Group companies is about $50 million greater than the amount due from Group companies.

6. It would appear from the above that the independent unsecured creditors to which the Company owes a total of about $119 million is unlikely to get anything more than a minimal amount of return should the Company go into liquidation. It was in these circumstances that the present Scheme was proposed. The Group's banker has indicated its willingness to consider continuing to provide financial support to the Company if the proposal set out in the Scheme is implemented and the Company's financial position hopefully thereby improved.

7. The Scheme involves the discharge of the indebtedness due to the unsecured creditors in the following manner.

8. The Scheme Debts will be discharged by, first of all, in respect of each Scheme Creditor whose portion of the Scheme Debts is equal to or less than $10,000, paying to such Scheme Creditor $0.40 for every $1.00 in full and final satisfaction of that portion of the Scheme Debts.

9. Secondly, in respect to each Scheme Creditor whose portion of the Scheme Debts exceed $10,000, issuing to such Scheme Creditor

(i) one Share, credited as paid up in full at par, for every $1.00, such share being a share in LCH; and

(ii) a Convertible Debenture in an aggregate principal amount representing $0.10 for every $1.00 comprising its portion of the Scheme Debts.

The Convertible Debentures are, unless converted, to be repaid by LCH in full on or before 31 December 2001.

10. On 17 May 2001, an Originating Summons was issued which I heard. I required a meeting to be held of the creditors for the purposes of consider the Scheme under section 166 to be chaired by an independent accountant to be nominated by the President of the Hong Kong Society of Accountants and for such chairman to report the result of the meeting to the court. The reason why an independent accountant was appointed as chairman of the meeting was because in the list of unsecured creditors, there were companies within the LCH Group, and the Court was anxious to ensure that the meeting should be held in such a way that the statutory provisions should be complied with and to ensure that there would not be a coercion of the minority by the statutory majority. On the hearing of the originating summons, I also considered the Explanatory Statement which is a necessary requirement for the purposes of the statutory provisions relating to schemes of arrangement.

11. On 10 July 2001, the meeting was duly convened with Mr Kennedy Liu Tat Yin appointed by the President of the Hong Kong Society of Accountants to be the chairman of the meeting. I have a report from Mr Liu which has been filed in court and it would appear from the report made by Mr Liu that there were a total of 112 creditors present and voting, with 74 voting in favour of the Scheme and 38 voting against. In relation to the 74 voting in favour of the Scheme, 4 were by proxy by way of inter-company debts. The rest were non-inter-company debts and persons or entities which had nothing to do with the LCH Group. Therefore, even if one were to ignore the 4 inter-company debts, it would be seen that there was a majority in number of those creditors voting in favour of the Scheme than those against.

12. In relation to value, 96% in value voted in favour of the Scheme whilst 3.57% voted against. Again, if one were to ignore the inter-company debts, even then there would be $82 million in value of creditors voting in favour of the Scheme as opposed to $13 million in value of creditors voting against. That would be more than the statutory requirement of 75% in value of the creditors.

13. Before me today, only one creditor has appeared and it would appear, after submissions by the creditor, that there were no submissions relevant to the petition. The creditor in question was only concerned with the value of the debt owed by the Company to it, but that does not matter for present purposes because in fact the Company took a slightly larger sum than that asserted by this creditor when considering the Scheme debt.

14. In section 166 applications, before the court sanctions a scheme, it would need to be satisfied that the statutory provisions have been complied with, that the class has been fairly represented and that the arrangement must be such as a man of business would reasonably approve. In relation to the statutory provisions, I am satisfied that the resolutions have been passed by the statutory majority in value and number in accordance with the legislation and I am satisfied that the meeting has been duly convened and held. In relation to representation of the class, as I have said, even if one were to ignore the inter-company debts, it would be seen that the statutory majorities in number and value are present. There is nothing to show that there has been any coercion of the minority by the majority.

15. Finally, I am satisfied that notwithstanding the rather small return by way of the Scheme, the arrangement is one that a man of business would reasonably approve. If one looks at the accounts of the Company, it would be seen that if the Scheme is not put into effect and the Company is put into liquidation, if there is to be any return to the creditors, it would be minimal indeed. Under the Scheme, within the course of 3 months there would be at least a return in relation to the Convertible Debentures and that would be better than the extremely minimal return that the creditors might get if the Company were put into liquidation. Indeed, the return would be so small in that situation that it may well result in nothing after the normal costs of liquidation are incurred.

16. In these circumstances, I sanctioned the Scheme.