FEDERAL FURNITURE HOLDINGS (M) BHD

Explanatory notes on Quarterly Report on consolidated results for the fourth financial quarter ended 31 December 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 except that preliminary and pre-operating expenses brought forward from previous year have now been written of as required by MASB 1. The directors have also adopted a policy of revaluing all properties to reflect their fair values.

2.	Exceptional Items
Exceptional items for the quarter are as follows: 				     RM	
a)	Loss on forex contracts brought forward					    553,000
b)	Contracts work-in-progress written off					 3,184,000
c)	Provision for doubtful debts						 4,444,000
d)	Provision for stock obsolescence 					 2,823,000
e)	Loss on revaluation of property						 1,100,000
f)	Preliminary and pre-operating expenses written off			    332,000
g)	Bills payable written back						(2,455,000) 
------------
 9,981,000
										========											

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

4.	Taxation
Current year provision			     11,000
Over provision in prior years		  (109,000) 

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 during the financial year to-date
On 7 November 2000, it was 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 (“Aseambankers”), 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 the nominal 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.   

The relevant parties are still in the process of undertaking the necessary due diligence review, and barring unforeseen circumstances, the submission papers to the SC and relevant authorities to seek approval for the above proposals are expected to be completed within three months from 12 February 2001.

10.	Comment about seasonal or cyclical aspects of operations.
The manufacturing and Export division has traditionally been subject to the seasonality of its export markets which peak in the fourth quarter. However with new business secured in the contracts fit-out for colleges and universities in the US, this cycle has now become less pronounced. 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 normally 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	998	
   Short Term loans	43,070	
		
Unsecured :		
   Bank overdrafts	6,547	
   Loan against imports	793	
   Bankers’ acceptances	32,008	
   Short term advance	1,156	
   Revolving credit	5,399	
   Supplier credit financing	1,226	
   Factoring	211	
   Short term loan	553	
		
Total short term borrowings	91,961	

•	Long Term Borrowings :

Secured :	RM’000	
   Term loans	6,058	

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	6,706	(6,534)	57,936	
Trading	7,681	(2,026)	4,214	
Renovation and interior fit-out	18,690	(9,185)	40,723	
Investment holding	21	(2,325)	43,316	
Others		(394)	612	
	33,098	(20,464)	146,801	

17.	Comment on material Changes in profit before tax for the quarter compared to the preceding quarterly.
The substantial increase in loss before tax from RM2.4 million in the preceding quarter to RM13.7 million in the current quarter was attributable to the exceptional items amounting to RM10.0 million as detailed in note 2 above. 

18.	Review of Performance
Sales for the Manufacturing and Export division was flat compared to the preceding quarter despite this being a peak season due to a slowdown in orders from the US market. The division registered an 191% increase in operating loss for the current quarter due exceptional items of RM2.2 million made up of provision for doubtful debts, stock obsolescence and a RM1.1 million loss arising from revaluation of one of its properties. Margin yields continued to be suppressed by the intense competition in the retail segment of the US market.
The Trading division achieved an 139% increase in sales compared to the preceding quarter on account of the seasonal retail sales peak in the USA. Operating loss at RM1.0 million was however higher by 137% against preceding quarter due to provision made for doubtful debts and stock obsolescence. 
The Renovation and Interior Fit-out division registered sales of RM7.8 million which is 14% lower than the preceding quarter due to the completion of certain projects. Operating loss before exceptional items was RM1.0 million for the quarter. The division however incurred exceptional loss of RM6.1 million due to irrecoverable contracts-work-in-progress written off and provision made for doubtful debts aggregating RM6.0 million. A substantial portion of these provisions arose from the completion of Faber Group’s scheme of arrangement with its creditors, of which the division is one, through the issue of Faber ICULS in settlement of its liabilities. 
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.	Year 2001 Prospects
The fall in consumer spending in the US as a result of the slowdown in the US economy is expected to spill over to 2001. This will have an adverse impact on furniture manufacturers who are dependent on the US market. The Manufacturing and Export division has taken initiatives to develop new export markets in Japan and Korea and the non-retail segment of the US market. The shrinking market in the US will result in excess production capacities in the industry that will eventuate in more intense competition and the folding up of the weaker industry players. The division has however been able to take advantage of this excess capacities by outsourcing part of its manufacturing processes to improve its margin yields. The Board is cautiously optimistic that, barring unforeseen circumstances, the division will be able to improve on its results in the current year. The Trading division will continue to be highly dependent on the US retail market although steps are being taken to develop new markets outside the USA. The prospect for the year ahead therefore will hinge on the state of the US economy and the results of efforts to improve cost efficiencies in the supply chain. The Renovation and Interior Fit-out industry is not expected to improve significantly in the coming 12 months and most projects will continue to accrue from ongoing governmental and corporate fit-out market segments as opposed to the hospitality segment. The division’s prospect for the year will depend on the rollout rate from these market segments and the division’s persistence in securing a significant portion of the resultant fit-out contracts. The Renovations and Interior Fit-out Division has also been developing its manufacturing capabilities in fulfillment of the contract secured to supply case goods to Starbucks Coffee Company, USA for their new outlets in the Asia Pacific region. The Board is quietly confident that this new business will contribute positively to the results of the division when production output breached the breakeven level towards the last quarter of the financial year.
Interest costs are expected to continue to impair the Group’s financial results and the impact for the year will depend on the timing of completion of the proposed rights issue and debt restructuring exercise. 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.