FEDERAL FURNITURE HOLDINGS (M) BHD

Explanatory notes on Quarterly Report on consolidated results for the first financial quarter ended 31 March 2001.

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
None										

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

4.	Taxation
Current year provision			    nil
under provision in prior years		  4,000

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
None

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 certain 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 two months from 12 May 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 that has experienced a drastic downturn since 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	1,994	
   Short Term loans	41,950	
   Revolving credits	1,900	
   Bankers acceptances	956	
		
Unsecured :		
   Bank overdrafts	5,369	
   Loan against imports	67	
   Short term advance	490	
   Bankers’ acceptances	33,090	
   Revolving credit	5,399	
   Supplier credit financing	1,284	
   Short term loan	553	
		
Total short term borrowings	93,052	

•	Long Term Borrowings :

Secured :	RM’000	
   Term loans	5,238	

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 57,861,000

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	2,028	(1,096)	56,775	
Trading	1,300	(335)	2,334	
Renovation and interior fit-out	2,355	(538)	33,400	
Investment holding	8	(658)	47,413	
Others		(15)	613	
	5,691	(2,643)	140,535	

17.	Comment on material Changes in profit before tax for the quarter compared to the preceding quarterly.
The substantial reduction in loss before tax from RM13.7 million in the preceding quarter to RM2.6 million in the current quarter is attributable to the exceptional items amounting to RM10.0 million incurred in the preceding quarter. 

18.	Review of Performance
Sales for the furniture Manufacturing and Export division increased by 55% over the preceding quarter due to the increase in supply of furniture to the contracts segment of the US market. Operating loss for the quarter improved by 34% as a result of this increase in sales and the higher margin yielded from these sales. Loss before tax was 72% lower due to exceptional loss of RM2.2 million incurred in the preceding quarter arising from loss on revaluation of property and provision for obsolete stocks.  
The furniture Trading division’s turnover fell by 50% against the preceding quarter due to the traditionally lower retail sales in the US after the festive period in the fourth quarter.  Although operating loss was virtually the same as the previous quarter, loss before tax was 66% lower due to exceptional loss of RM0.8 million incurred in the previous quarter.
The Renovation and Interior Fit-out division registered sales that was 85% lower than the preceding quarter due to the completion of most projects and the traditionally lower level of activities arising from the long Chinese New Year break. Operating loss was RM0.6 million for the quarter compared to RM7.1 million in the preceding quarter which recorded exceptional losses of RM6.1 million due to irrecoverable contracts-work-in-progress written off and provision made for doubtful debts. 
Against the previous quarter, Group loss before tax and exceptional items was lower by 29% although this is 16% higher than the same period last year and this is due principally to the 29% increase in interest cost.

19.	Year 2001 Prospects
Two key issues will have significant bearing on the outlook for the furniture export industry in Malaysia in 2001 are the state of the US economy and the performance of the Japanese Yen vis-à-vis the US Dollar. 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. The depreciation of the Japanese Yen has hurt exports to Japan, Malaysia’s second largest furniture export market after the USA. However, the Furniture Manufacturing and Export division expects to be able to maintain it turnover with higher contributions from the supply of furniture to the contracts segment of the US market. Although the shrinking export market has resulted in very intense competition, the division has been able to take advantage of the prevailing 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 Furniture 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. Efforts are being made to enhance the local retailing business with sales promotion and the import of related products from the Asia Pacific region. The prospect for the year ahead therefore will hinge on the state of the US economy and the results of efforts to resuscitate the local retail business. 
The Renovation and Interior Fit-out industry is not expected to improve significantly in the coming 12 months as new governmental projects are planned for rollout in 2002. The hospitality segment of the market is expected to remain sluggish and corporate fit-outs will continue to be the mainstay of the renovation and fit-out market. The Renovations and Interior Fit-out Division will benefit from the new business involving the supply of  retail outlets fittings to multi-location retailers for 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.