FEDERAL FURNITURE HOLDINGS (M) BHD

Explanatory notes on Quarterly Report on consolidated results for the first financial quarter ended 30 June 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			  42,000
Under/(over) provision in 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 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 three months from 12 July 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	1,997	
   Short Term loans	41,775	
   Revolving credits	1,900	
   Bankers acceptances	2,896	
		
Unsecured :		
   Bank overdrafts	4,827	
   Loan against imports		
   Short term advance	953	
   Bankers’ acceptances	31,746	
   Revolving credit	5,399	
   Supplier credit financing	165	
   Short term loan	553	
		
Total short term borrowings	92,211	

•	Long Term Borrowings :

Secured :	RM’000	
   Term loans	5,197	

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	3,479	(2,367)	55,140	
Trading	1,927	(523)	2,016	
Renovation and interior fit-out	6,957	(1,489)	32,862	
Investment holding	16	(1,306)	47,786	
Others		(35)	609	
	12,379	(5,720)	138,413	

17.	Comment on material Changes in profit before tax for the quarter compared to the preceding quarterly.
The 17% increase in loss before tax for the current quarter compared to the preceding quarter is mainly attributable to the 55% increase in interest charge. 

18.	Review of Performance
Sales for the furniture Manufacturing and Export division fell by 28% over the corresponding period last year. This is attributable to the weak demand in the US retail market due to the economic slowdown and the Japanese market due to the inflationary effect of the severe depreciation of the Japanese Yen. Operating loss for this period increased by 77% as a result of the reduction in sales and the 55% increase in finance costs that is attributable to the division’s share of the higher interest on short-term loan taken to replace the Bonds. The furniture Trading division’s turnover was similarly affected by the slowdown in the US market and consequently registered a 52% reduction in sales compared to last year.  Operating loss was however lower than last year by 16% on account of an error in cost recognition last year and the higher margin yield on local sales of furniture in the current year. 
The Renovation and Interior Fit-out division was able to secure a number of small projects that contributed to its 22% increase in sales over the same period last year.        With this increase, operating loss improved by 22% despite a 39% increase in finance cost. Higher margin yields from these smaller projects also contributed substantially to this improvement in the bottom line. 
On a consolidated basis, operating loss before interest and depreciation was 16% higher than last year. Interest cost however increased by 63% over the same period due to the higher interest on the short-term loan taken to redeem the Bonds. After accounting for interest and depreciation, operating loss before tax was RM5.7 million representing a 31% increase over the RM4.4 million reported last year. 

19.	Year 2001 Prospects
Two key issues that 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 engendered by the slowdown in the US economy is expected to have an adverse impact on the export of furniture in 2001. The depreciation of the Japanese Yen has also hurt exports to Japan, Malaysia’s second largest furniture export market after the USA. Despite higher contributions expected from the supply of furniture to the contracts segment of the US market, the Furniture Manufacturing and Export division expects its turnover to fall in tandem with the lower demand from these key export markets. While the shrinking export market has resulted in a more competitive environment, it has also availed the division the opportunity to improve its margin yields by outsourcing part of its manufacturing processes. With the initiatives taken to reduce overheads, the division is expected to maintain its results for 2001 and the Board is cautiously optimistic that, barring unforeseen circumstances, the division will be able to improve on its results in the next financial 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 furniture retail business. 
The Renovation and Interior Fit-out industry is not expected to improve significantly in the current year as new governmental projects are planned for rollout only 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 results for the year will hinge on the division’s ability to continue to secure smaller projects that yield higher margins. The Renovations and Interior Fit-out Division is also expected to 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 current 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.