FEDERAL FURNITURE HOLDINGS (M) BHD

Explanatory notes on Quarterly Report on consolidated results for the third financial quarter ended 30 September 2000.

Notes :

1.	Accounting Policies
The quarterly financial statements have been prepared based on accounting policies and methods of computation consistent with those adopted in the most recent annual financial statements.

2.	Exceptional Items
There was no exceptional item during the financial period under review

3.	Extraordinary Items
There was no extraordinary item during the financial period under review. 

4.	Taxation
The write-back for taxation in the current financial year to-date represents a net overprovision of tax in respect of prior years. 

5.	Pre-acquisition Profits
There were no pre-acquisition profits for the current financial year to-date.

6.	Sale of Investment and/or Properties
There was no sale of investment or property for the current financial year to-date. 

7.	Quoted Securities
There were no purchases or disposals of quoted securities for the current financial year to- date.

8.	Changes in the Composition of the Group
On 7 November 2000, announced that Avante Corporation Sdn Bhd (“Avante”), a 55%-owned subsidiary acquired 1 subscriber share of HKD1.00 in Pacific Avante International Ltd (“PAIL”), a dormant shelf company incorporated in Hong Kong on 17 March 2000 with an issued and paid-up capital of HKD2.00.  Avante had further subscribed for another 9,998 new shares of HKD1.00 in PAIL making PAIL a 99.9%-owned subsidiary of Avante. Save as disclosed, there are no changes in the composition of the Group for the current financial year to-date.

9.	Status of Corporate Proposal
On 12 October 2000, Aseambankers Malaysia Berhad, announced on behalf of FFHB that the Company had on 11 October 2000 entered into a conditional Debt Restructuring Agreement with some of its lenders to restructure part of its borrowings and to undertake the following proposals:
9.1	Proposed renounceable rights issue of up to 33,085,920 new ordinary shares of RM1.00 each together with 24,814,440 detachable new warrants at an issue price to be determined at the price-fixing date after the approval of the Securities Commission (“SC”) on the basis of four (4) new ordinary shares of RM1.00 each together with three (3) detachable new warrants for every five (5) existing ordinary shares of RM1.00 each.
9.2	Proposed debt restructuring arrangement between FFHB and certain subsidiaries and their respective scheme lenders to restructure an estimated debt of RM58,700,457 (inclusive of interest capitalised up to 31 May 2001) which involve, inter alia,
9.2.1	Proposed restricted issue of up to 13,408,820 new ordinary shares of RM1.00 each to the scheme lenders at an issue price to be determined at the price-fixing date after the approval of the SC,
9.2.2	Proposed restricted issue of rights to allotment of RM27,681,500 nominal value of Irredeemable Convertible Unsecured Loan Stocks (“ICULS”) to the scheme lenders at an issue price of RM1.00 per ICULS,
9.2.3	Proposed restricted offer for sale of the rights to allotment of RM27,681,500 nominal value of ICULS to shareholders on a renounceable rights basis of RM1.00 nominal value of ICULS for each existing share held,
9.2.4	Proposed cash repayment of approximately RM17,610,137 for the remaining 30% of the principal debts outstanding.   
FFHB is currently preparing the submission papers to the SC and relevant authorities to seek approval for the above proposals.

10.	Comment about seasonal or cyclical aspects of operations.
The manufacturing and Export division is subject to the seasonality of its export markets and the third quarter is the slowest period while the fourth quarter is the peak period. The Trading operations which carry out a substantial portion of its business activities in the United States of America’s market is subject to the seasonal nature of retail sales of furniture in that country. Turnover for the operations is higher in the fourth quarter corresponding with the Christmas season and bottom out in the next quarter. Turnover for the Renovation and Interior Fit-out operations is lower in the first quarter due to the long Chinese New Year break. The operation is also subject to the cyclical nature of the property market which has experienced a drastic downturn after the economic crisis in 1997.  

11.	Changes in Share Capital and/or debt securities
There were no issuance and repayment of debt security nor changes in the share capital for the current financial year to-date.

12.	Group Borrowings as at end of Reporting Period

•	Short Term Borrowings :
					   
	RM’000	
Secured :		
   Bank overdrafts	999	
   Short Term loans	41,498	
		
Unsecured :		
   Bank overdrafts	6,668	
   Loan against imports	218	
   Bankers’ acceptances	31,862	
   Short term advance	2,705	
   Revolving credit	7,299	
   Supplier credit financing	87	
   Factoring	208	
   Trust receipts		
		
Total short term borrowings	91,544	

•	Long Term Borrowings :

Secured :	RM’000	
   Term loans	5,697	

13.	Contingent Liabilities
(a)	A subsidiary company involved in the trading of furniture has been requested by its local banker to repay the sum of RM 695,350 which was paid by the bank’s overseas correspondent bank to certain suppliers against Letters of Credit issued on behalf of the subsidiary. The subsidiary is objecting to the demand for repayment as written instructions had been given to the local bank to reject the Letters of Credit due to unacceptable discrepancies. The local bank and the subsidiary have mutually agreed to jointly pursue the matter with the overseas bank to ask them to recover the full amount wrongly paid to the suppliers.

(b)	Corporate guarantees given to financial institutions for credit facilities granted to subsidiaries amounted to RM 58,241,000

14.	Off Balance Sheet Financial Instruments
There were no off balance sheet financial instruments at the date of this report.

15.	Material Litigation
None.

16.	Segmental Reporting

By activity :	Turnover

RM ‘000	Profit /(Loss)
Before Taxation
RM ‘000	Total Assets
Employed
RM ‘000	
				
Manufacture and export of furniture	5,675	(2,662)	56,327	
Trading	5,089	(1,036)	6,420	
Renovation and interior fit-out	13,040	(2,129)	42,829	
Investment holding	16	(910)	28,544	
Others		(62)	976	
	23,819	(6,799)	135,096	

17.	Comment on material Changes in profit before tax for the quarter compared to the preceding quarterly.
There was no material change in loss before tax for the quarter amounting to RM2.4 million compared to the preceding quarter loss of RM2.1 million. 

18.	Review of Performance
Sales for the Manufacturing and Export division fell by 58% over the preceding quarter due to the seasonality of business in the export markets. Consequently, operating loss was 41% higher than the preceding quarter. Sales for the Trading division was also affected by the seasonality of sales to USA and contracted by 55% compared to the preceding quarter. Operating loss increased by 40% to RM0.4 million for the current quarter. This is also partly attributable to higher samples cost to develop new sales programs for the coming festive season. The Renovation and Interior Fit-out division registered a 154% increase in turnover over the preceding quarter due to the completion of certain projects. Operating results for the quarter improved by 66%. The Group’s result was adversely affected by the increase in interest cost as the additional short term loan of nearly RM40 million taken to redeem the Bonds which had matured on 29 June 2000 bear a higher interest rate compared to the Bonds coupon of 2.5%.

19.	Current Year Prospects
Underpinned by the continued improvements in economies in Asia and Europe and the initiatives taken to develop new export markets, the Manufacturing and Export division is expected to better its export sales for the current financial year. However operating results will be affected by lower margin yields due to the increasingly competitive marketplace and the promotional costs incurred to develop new export markets. The Trading division is unlikely to match last year’s performance due the termination of certain suppliers for quality problems that had resulted in the cancellation of some sales programs this year. Steps are being taken to develop new sources of supplies and also to develop new markets outside the USA. The Board is confident that barring unforeseen circumstances, the operation will be able to turn around next year. The current year prospect for the Renovation and Interior Fit-out Division will be impeded by the general lethargy in the interior fit-out and the property industry. The division is continuing its efforts to break into the corporate fit-out segment of the market and the prospect for the year will also hinge on the outcome of these efforts. 
Interest costs are expected to increase substantially in the second half as a result of the short-term loan taken to redeem the RM40 million Bonds that matured on 29 June 2000. This will have an adverse impact on the Group financial results for the current year. The proposed rights issue and debt restructuring exercise will not have an impact on the results of the current year as it is expected to be completed in the next financial year. In the meantime, the Board is considering various options including disposal of non-core assets to reduce the Group’s borrowings.

20.	Variance From Profit Forecast
Not applicable.

21.	Dividend
No interim dividend has been declared during the period under review.