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Chairman’s Statement

4 HAISAN RESOURCES BERHAD ANNUAL REPORT 2005

Kamarudin BBin MMd. DDeromExecutive Chairman

To Our S

hareholders

On behalf of the Board of Directors, I am pleased to present the annual report and financial statements of HaisanResources Berhad (Haisan) for the financial year ended 31st December 2006.

REVIEW OOF PPERFORMANCEThe year 2005 has seen a measured success for Haisan with the Group recording a notable growth in revenue of 47percent to RM68.24 million, as compared with RM46.33 million in the previous year. Group profit after taxation beforeminority interest also increased by 57 percent to RM3.84 million as compared to RM2.45 million in 2004. The improvedresults can be attributed to higher contributions from our temperature-controlled logistics (TCL) and engineeringdivisions, coupled with the consolidation of IGLO in the Philippines since the beginning of the year. As a result, theGroup reported a net profit after taxation and minority interest of RM2.93 million.

During the financial year under review, we continued with our regional positioning strategies that were embarked upon toachieve our goal of becoming the leading integrated cold-chain logistics solutions provider in the region. In recent years,this has meant aggressively building TCL facilities and capacity, plus continually upgrading our systems. We stronglybelieve that the Group's investment not only in Malaysia but also in China and the Philippines will further provide uswith the impetus to expand cold-chain network and facilities within the region, thus enabling Haisan to gain a stronghold in the burgeoning cold logistics industry.

The decision to move aggressively into the overseas market was driven by continued pressures on margins. The Grouphas a competitive edge as evident in our home-grown refrigeration technology and tried-and-tested cold logisticsmanagement systems, which can be maximised by entering the regional market. I will elaborate more on this pointin a later section of my review on operations.

BUSINESS EENVIRONMENTGlobalisation has indeed made Asia-Pacific, especially China, the factory floor to the world, making manufacturing andlogistics a key economic activity of this country and region. At Haisan we sincerely believe there is much potential in thissector since the world's logistics market is worth approximately US$1.3 trillion (US$1 = RM3.60) a year, which includesperishable goods. In China alone, the third-party logistics industry grew by 25 percent between 2002 and 2005.

With rising standards of living clearly evident in many developing countries across the globe, there come higherexpectations and demands for improved quality by enterprises and consumers alike. This is indeed true of the foodindustry, consumers today expect food items to transcend boundaries, to be fresher, to be always available and to beof higher quality.

In light of this, the Chinese government has invested more than RMB350 billion (USD42 billion) to build new railways,upgrade the existing network and improve the speed of delivery. The Philippines government has also identified TCL asa main source to reduce wastage of perishable goods. Both governments have realised the importance of TCL becausehigh wastage of agricultural food produce is often due to poor transport network and storage infrastructure.

Tapping the huge opportunities in these countries and other nations in the region form the cornerstone of Haisan'slong-term expansion plans.

The year 2005 has seen a measured successfor Haisan with the Group recording a notablegrowth in revenue of 47 percent to RM68.24million, as compared with RM46.33 million inthe previous year.

CORPORATE DDEVELOPMENTSOn corporate initiatives, Haisan has embarked on a number of strategies toincrease its liquidity position. For instance, in January of 2006 we acquired apiece of vacant industrial land on a 50-year lease, situated north of Shanghai,for a purchase consideration of RM9.87 million. The rationale for this purchasewas to facilitate the construction of a TCL facility to complement our existingoperations in Guangzhou.

Conversely, after much deliberation, we disposed of a piece of leasehold land inPanyu District, China for approximately RM3.14 million in December 2005. Thisstep was taken as the management felt that the land had not been utilised since2002 and the sale in actuality assisted us to dispose of non-productive assets.

In a move to meet our increasing working capital requirements, Haisan issuedRM30 million in redeemable bonds in June 2005, which will mature in 2010 witha coupon rate of 6 percent. The main impetus for this exercise was mainly tobetter match our short-term borrowings with our operational income stream. Italso enabled us to take advantage of the low interest rates in 2005 for a periodof five years.

DIVISIONAL OOVERVIEWTCL && WWarehousingLeading on from 2004, our TCL & Warehousing division continued to fare well in2005. In line with the increased demand for our services, IGLO (M) Sdn Bhd(IGLO Malaysia) and IGLO (Guangzhou) Co Ltd (IGLO Guangzhou) turned inhigher revenues in the year under review. The TCL division remained the singlelargest revenue earner, accounting for RM30.92 million or 45 percent of totalGroup revenue. Profit after tax from TCL operations amounted to RM3.04 million,an increase of 104 percent from 2004.

In an effort to strengthen the Group's position as a leading regional cold-logisticsservice provider, we have invested in Warehouse Management Systems (WMS)and Radio Frequency Identification (RFID) at all our TCL facilities to enhanceefficiency and productivity of inventory management and maximise capacityutilisation. As at the end of 2005, IGLO Malaysia has been fully equipped with theWMS system. WMS was successfully employed in IGLO Philippines and IGLOGuangzhou in June and October 2005 respectively whilst the RFID system isexpected to be implemented in our TCL facilities in China and the Philippines bythe second half of 2006.

The need for effective and efficient cold-chain logistics management across theregion has intensified with the ever-increasing focus on cost competitiveness,product leadership and customer intimacy. The implementation of these newsystems will give greater flexibility and control towards the planning, managementand distribution of goods in a temperature-controlled environment.

On the capacity expansion front, IGLO Philippines completed its Phase 3expansion plan in October 2005, increasing capacity from 6,100-pallet space to9,700-pallet space. I am also proud to announce that following the completionof an acquisition exercise in April 2005 Haisan now owns a 50 percent stake inIGLO Philippines.

Meanwhile we continued our foray into China last year, forming a relationshipwith Guangzhou Refrigerated Foods Ltd, a subsidiary of Nestle (China) Ltd,which will see IGLO Guangzhou handling the management and operation oflogistics activities for its ice-cream products.

5HAISAN RESOURCES BERHAD ANNUAL REPORT 2005

State-of-the-art TCL facility - dockboards with inflatable dock seals


Closer to home, Haisan entered into a joint venture with a local logistics company, Prestige Frozen Sdn Bhd to establish atransportation company, IGC Logistics Sdn Bhd (IGC) in June 2005, to enhance our ability to provide more extensive distributionand transportation services to complement our TCL and warehousing businesses.

We are also expected to begin work on cross-docking facilities in the Port Klang operations in early 2006, moving on to theChina and Philippines facilities in 2007. Via cross-docking incoming goods from various suppliers are consolidated andshipped out within the same day, directly to customers and retailers respectively. When used together with the RFID, cross-dockingprovides timely and accurate information and improves inventory management, thus leading to greater accuracy in sales andproduction forecast.

EngineeringHaisan's Engineering Division, which is focused on designing, supplying and commissioning industrial refrigeration equipment,contributed 34 percent or RM23.01 million of total revenue. The division's profit after tax showed exciting increment to RM3.85million, a increase of 306 percent from 2004.

While 2005 remained competitive, with the upswing in engineering material prices putting pressure on margins, Haisan continuedto look at opportunities in the Asia Pacific region and other new markets such as Central Asia and the Middle East.

In January 2005, Haisan completed designing, building and leasing an office cum warehouse and food processing plant forHavi Food (M) Sdn Bhd. The project was awarded by Havi in August 2004. Havi is currently renting the facility from Haisanfor a period of six years.

The project awarded by Hock Seng Lee Berhad (HSL) in 2004, to design and install refrigeration parts and equipment for theconstruction of a deep sea fishing port in Tanjung Manis, Mukah, Sarawak, is still in progress. Worth RM8.7 million, this projectbears testimony to our expertise, experience and quality standards in refrigeration engineering.

Ice MManufacturingThe Group's Ice Manufacturing division contributed approximately 17 percent or RM11.88 million of Haisan's total revenue inthe year of review. The division's profits after tax decreased by 61 percent to RM0.51 million.

Production capacity of block ice and tube ice stands at approximately 300 and 380 metric tonnes respectively at our sixfactories. In view of the increasingly competitive marketplace and the need to move up the value chain to protect margins, wehave ventured into the arena of ice sculpting and moulding. This area of business is still in its initial phase and is targeted atthe hospitality and food & beverage industry.

In line with efforts to raise standards, I am proud to announce that on 20th March 2006 our ice manufacturing business receivedISO 9001:2000 and HACCP (Hazard Analysis & Critical Control Point) certification from Certification International (UK) Limitedfor the manufacture of tube ice and moulded ice sculptures.

ISO 9001 : 2000 &

HA

CCP

IGC’s refrigerated truck

Industrial refrigeration equipments


HUMAN CCAPITAL DDEVELOPMENTAs a service oriented company, we believe that human capital development is crucial for the success of our plans. We understand that thekey to achieving our long-term vision of becoming a leading integrated industrial refrigeration player in the region is to have a team of strongand dedicated employees.

The talents and dedication of our employees have been integral to the success of our company for more than three decades since itsformation. We not only create opportunities for our customers but for our employees as well. Great attention is paid towards motivatingemployees and ensuring that the workplace is always conducive.

FUTURE PPROSPECTSFuture business prospects and long-term dealings look encouraging for Haisan Group. As consumers become more affluent, theirexpectations and needs increase; hence the demands for superior products. With globalisation and the accessibility to information, thepublic has now become more knowledgeable about quality and the availability of the products itself. The Asian region is considered oneof the fastest growing regions in the world in terms of population and this factor also contributes to the spending power of the people.

Development in the food industry itself has evolved over the years. The efficiency in food production has created a demand for this additionalsupply to reach new markets and meet new demands. Food producers are now keen on penetrating markets for their products, which wereinaccessible in the past due to logistic reasons. The infrastructure required for efficient logistics is improving and the growing pressure toaccess locations not available in the past has increased the demand for logistic providers to consider creating new infrastructure to servicethose needs. One such example is the size of the market in China not only in terms of sheer number of consumers but also the immensityof the country itself.

Aimed at enhancing the economic wealth of the nation, the Malaysian Government has increased its focus on self-sustainment in the localagricultural arena in order to grow production of food items and reduce its dependency on imports. Malaysia incurs a cost of over RM2.0 billion on food imports annually.

To be self reliant, Malaysia has to increase its own food production capabilities. In order to achieve this, there is an urgent need for infrastructurelogistics to be in place to provide the reach and durability of our locally produced food products. This augurs well for Haisan's multi-temperaturecontrolled facilities (MTCF) and in industrial refrigeration engineering businesses.

The increasing growth rate of the population in the Asian region has created an economic market that is dynamic and increasinglysophisticated. The demand for food supply has become a priority for governments developing countries in their quest for self-sufficiency thatultimately leads to sustainable national economic wealth. In addition, the hot and humid weather of the Asian region creates an environmentthat is suitable for the growth of the refrigeration business. This alone provides an ideal environment for the sustained growth in the demandfor industrial and edible ice. Haisan's MTCF, industrial refrigeration, engineering and ice manufacturing business is well positioned to tap theburgeoning demand as countries begin to develop.

DIVIDENDFor the financial year ended 31st December 2005 we will not be declaring a dividend, in line with the Group's strategy to retain funds in orderto finance Haisan's expansion plans for long-term value creation.

APPRECIATIONOn behalf of the Board, I would like to express my sincere appreciation to all our customers, business partners, consultants, bankers, merchantbankers and advisers for their continued support to the Group during 2005. We are confident that their commitment towards us in 2006 willensure the continued growth and vitality of the Group.

In addition I would also like to extend my appreciation to our shareholders for their confidence in Haisan and its management team andemployees for their dedication in the past year. Likewise, I look forward to your continued loyalty and support of the Group's objectives in 2006.

Kamarudin BBin MMd. DDeromExecutive Chairman

RReevveennuuee(RM’000)

Five-Year Financial Highlights

NNeett PPrrooffiitt AAfftteerr TTaaxx(RM’000)


02001 2002 2003 2004 2005

35,727

40,058 40,613

46,329

68,236

10

20

30

40

50

60

70

02001 2002 2003 2004 2005

7,084

5,611

2,7613,132

5,394

2

4

6

8

10

PPrrooffiitt BBeeffoorree TTaaxxaattiioonn aanndd EExxcceeppttiioonn IItteemm

(RM’000)

RReevveennuuee CCoonnttrriibbuuttiioonn bbyy DDiivviissiioonn ((RRMM’’000000))(for financial year ended 31st December 2005)

Ice Manufacturing & DistributionsEngineering of Industrial RefrigerationTemperature-Controlled Logistics Dry Warehousing

-42001 2002 2003 2004 2005

4,8444,269

(193)

2,453

3,839

-2

0

2

4

6

-52001 2002 2003 2004 2005

1211

(1)

5.6

3.63

0

5

10

15

20

EEaarrnniinngg PPeerr SShhaarree(Sen)

0

20

40

60

80

2001 2002 2003 2004 2005

64,220 62,67860,752

66,455 65,598

SShhaarreehhoollddeerrss’’ FFuunnddss(RM’000)

0

20

40

60

80

2001 2002 2003 2004 2005

63,041 61,565 59,65063,724 62,872

NNeett TTaannggiibbllee AAsssseettss(RM’000)

3300,,9922002233,,001166

1111,,888800 22,,442200

PROFILE OF DIRECTORS


Kamarudin BBin MMd. DDeromAged 48, Malaysian, is the Executive Chairman of the Company. Hewas appointed to the Board on 30th October 2000 as ExecutiveVice-Chairman and re-appointed to the current position on 5thMarch 2005.

En. Kamarudin graduated with a Bachelor of Science degree in Civiland Environmental Engineering from the University of Wisconsin,USA in 1983. He started his engineering career with PrometConstruction Sdn Bhd as a civil engineer in 1983. He then joinedEnergoprojekt Engineering & Constructing Co., a company involvedin the Expressway Project from 1986 to 1989. Thereafter, hebecame the Sales Manager of Senju (M) Sdn Bhd, a multinationalcompany from Japan involving in the manufacturing of industrialsolders for electronics until 1991. He was later engaged as a projectmanager with Pembinaan TLN Sdn Bhd from 1991 to 1994. In 1995,he co-founded a bonded warehousing company together withHaisan Group to provide bonded warehousing facilities. He nowactively oversees the business development of the Group.

En. Kamarudin is also an Independent Director of LTKM Berhad.

En. Kamarubin is deemed interested in transactions betweenHaisan Group and his privately owned company, which are neces-sary for day-to-day operations and are in the ordinary course ofbusiness. He has attended all seven Board Meetings held duringthe financial year ended 31st December 2005. Save and except fortraffic offences, En. Kamarudin has not been convicted for anyoffences within the past ten years.

Ong CChin YYetAged 44, Malaysian, is the Managing Director/President of theCompany. He was appointed to the Board on 30th October 2000.

Mr. Ong obtained his degree on Bachelor of Science (Honours) inAccounting & Data Processing from Leeds University, UnitedKingdom. Upon graduation in 1984, he joined Haisan Group andwas responsible for its financial and administration duties. Later,he extended his responsibilities into operations particularly inrefrigeration engineering. He is responsible for Haisan Group'sexpansion, including its diversification into other industries liketemperature-controlled logistics, bonded and non-bondedwarehousing facilities.

Mr. Ong is also a member of Audit Committee of the Company.

Mr. Ong is the brother of Ong Chin Cheong, who is also a Directorof the Company. He is deemed interested in transactions betweenHaisan Group and certain of his privately owned companies whichare necessary for the day-to-day operations and are in ordinarycourse of business. He has attended all seven Board Meetings heldduring the financial year ended 31st December 2005. Save andexcept for traffic offences, Mr Ong has not been convicted for anyoffences within the past ten years.

Ong CChin CCheongAged 41, Malaysian, is the Executive Director of the Company. Hewas appointed to the Board on 30th October 2000.

Upon completion of his "A" level education from United Kingdomin 1982, Mr. Ong joined Haisan Group and was responsible for itsblock ice manufacturing activity which he later expanded intoproducing tube ice product in 1997. He now actively overseesthe various operational matters of the Group and in particular theice manufacturing division.

Mr. Ong is the brother of Ong Chin Yet who is also a Director of theCompany. He is deemed interested in transactions betweenHaisan Group and certain of his privately owned companies whichare necessary for the day-to-day operations and are in ordinarycourse of business. He has attended all seven Board Meetingsheld during the financial year ended 31st December 2005. Saveand except for traffic offences, Mr Ong has not been convicted forany offences within the past ten years.

Azman BBin CChe OOnnAged 40, Malaysian, is an Independent Non-Executive Director of theCompany. He was appointed to the Board on 30th October 2000.

En. Azman graduated with a Bachelor of Commerce (Accounting)from the University of New South Wales, Sydney, Australia in 1990.Upon graduation, he joined Yeo, Yong Poh & Co. (Public Accountingfirm). In 1991, he left the firm and ventured into his own business.

En. Azman has no family relationship with any other directors/majorshareholders of the Company and does not have any conflict ofinterest with the Company. He attended all seven Board Meetingsheld during the financial year ended 31st December 2005. Saveand except for traffic offences, En. Azman has not been convictedfor any offences within the past ten years.

Datin FFawziah BBinti HHussein SSazally Aged 52, Malaysian, is an Independent Non-Executive Director of theCompany. She was appointed to the Board on 30th October 2000.

Datin Fawziah was a computer programmer and has served theGovernment service for more than 10 years. Her last appointmentwas at Information Resource Centre, Public Services Department,Malaysia before she resigned in 1991 to set up her own business.

Datin Fawziah is also a member of the Audit Committee,Remuneration Committee and Nomination Committee of theCompany. She is also a Non-Executive Director of Johore TinBerhad.

Datin Fawziah has no family relationship with any otherdirectors/major shareholders of the Company and does not haveany conflict of interest with the Company. She attended six out ofseven Board Meetings held during the financial year ended 31stDecember 2005. Save and except for traffic offences, Datin Fawziahhas not been convicted for any offences within the past ten years.


Heng WWee PPouAged 45, Malaysian, is an Independent Non-Executive Director ofthe Company. He was appointed to the Board on 26th July 2001.

Mr. Heng graduated with a Bachelor of Commerce Degree(Honours) from University of Windsor, Canada. Upon graduation, hejoined a telecommunication company as a Product Executive andlater he was promoted to the position of Marketing Manager. In1990, he left to set up his own private company involved in thetelecommunication business.

Mr. Heng is also a member of the Remuneration Committee andNomination Committee of the Company.

Mr. Heng has no family relationship with any other directors/majorshareholders of the Company and does not have any conflict ofinterest with the Company. He attended all seven Board Meetingsheld during the financial year ended 31st December 2005. Saveand except for traffic offences, Mr. Heng has not been convicted forany offences within the past ten years.

Chua BBoon LLeongAged 51, Malaysian, is an Independent Non-Executive Director ofthe Company. He was appointed to the Board on 26th July 2001.

Mr. Chua has more than 20 years of working experience in thefinancial, audit and corporate finance field. He has held senior positionsin those various fields of corporate finance, audit and accounting in avariety of companies including a public listed company, a licensedfinance company, manufacturing and trading companies as well asin auditing firms both locally and abroad. He is a member of theMalaysian Institute of Accountants and the Chartered Institute ofManagement Accountants, United Kingdom.

Mr. Chua also serves as the Chairman of the Audit Committee andis a member of the Remuneration Committee and NominationCommittee of the Company.

Mr. Chua has no family relationship with any other directors/majorshareholders of the Company and does not have any conflict ofinterest with the Company. He attended six out of seven BoardMeetings held during the financial year ended 31st December2005. Save and except for traffic offences, Mr. Chua has not beenconvicted for any offences within the past ten years.

Lee PPeck CChuanAged 49, Malaysian, is an Independent Non-Executive Director of theCompany. He was appointed to the Board on 19th December 2001.

Mr. Lee is a holder of a Master in Business Administration, aChartered Financial Consultant and Diploma holder in Banking &Management. He has considerable experience in the field of banking,insurance and consultancy. Currently he is the Senior DistrictManager in AIA and also the Principal Consultant for Training in PC &Associates Sdn Bhd which conducts training for Banks and FinanceCompanies.

Mr. Lee is also a member of the Audit Committee.

Mr. Lee has no family relationship with any other directors/majorshareholders of the Company and does not have any conflict ofinterest with the Company. He attended all seven Board Meetingsheld during the financial year ended 31st December 2005. Saveand except for traffic offences, Mr. Lee has not been convicted forany offences within the past ten years.

Chen FFai PPengAged 44, Malaysian, is a Non-Independent Non-Executive Directorof the Company. He was appointed to the Board on 27thSeptember 2004.

Mr. Chen graduated with LLB from University of Adelaide andobtained his MBA (IM) from University of RMIT, Melbourne,Australia. He is an advocate and solicitor in Malaysia and a legalpractitioner in New South Wales and South Australia. He hasexperience in the area of banking, capital raising, commercial andcorporate laws and foreign investment laws. He is a fellow of theTaxation Institute of Australia, a member of the Australia-ChinaBusiness Council and member of Australia Institute of CompanyDirectors.

Mr. Chen has no family relationship with any other directors / majorshareholders of the campony and does not have any conflict ofinterest with the company. He attended five out of seven BoardMeeting held during the financial year ended 31st December 2005.Save and except for traffic offences, Mr. Chen has not beenconvicted for any offences within the past ten years.

HAISAN GROUP CORPORATE CALENDAR


2005

June 2

21

23

28

Sept 9

Dec 9

2006

Jan 8

April 3

IGLO Cold Chain Logistics Sdn. Bhd., a wholly-owned subsidiary of Haisan Resources Berhad, entered intoa Joint Venture Agreement with Prestige Frozen Sdn. Bhd. to establish a transportation company, IGCLogistics Sdn. Bhd.

The RM30,000,000 nominal value 5-years 6% redeemable bonds were fully subscribed by Public MerchantBank Berhad and Employees Provident Fund Board with allotment of RM10,000,000 and RM20,000,000bonds respectively. Haisan was rated 'A' by MARC the rating agency for this issuance.

Held the Fifth Annual General Meeting at Crystal Crown Hotel, Klang.

Signed a Memorandum of Understanding with Di'rincon Services for a Majlis Perbandaran Klang projectknown as "Cadangan Membina Loji Pelupusan Sisa Pepejal Perbandaran Bersepadu Tenaga (IntegratedWaste to Energy) yang Tidak Melibatkan Dana Kerajaan di Klang".

Signed a Facility Agreement with EON Bank Berhad as Lender and CapOne Berhad for an unsecured fixedrate term loan facility of RM40 million under a Primary Collateralised Loan Obligations Programme arrangedby Malaysian International Merchant Bankers Berhad. Facility was granted due to Haisan’s “A” rating by therating agency.

IGLO (Guangzhou) Co. Ltd, a wholly-owned subsidiary of Haisan Resources Berhad entered into a Sale andPurchase Agreement for the disposal of a piece of land for a consideration of RM3,135,360.00.

IGLO International Limited, a wholly-owned subsidiary of Haisan Resources Berhad, entered into a Sale andPurchase Agreement with Shanghai Pities North Industrial Zone Investment & Development Co. Ltd to acquirean industrial land for a consideration of approximately RM9,870,000.00.

Entered into a into a Sale & Purchase Agreement with Biztrak R&D Sdn. Bhd. to acquire the WarehouseManagement System (WMS) Source Codes and all the rights to the WMS software for a total purchaseconsideration of RM2,000,000 to be satisfied in cash.

MEMBERS Designation

Chua Boon Leong Chairman / IndependentNon-Executive Director

Datin Fawziah Binti Hussein Sazally Independent Non-Executive Director

Lee Peck Chuan Independent Non-Executive Director

Ong Chin Yet Member / Managing Director /President

TERMS OOF RREFERENCE1. Composition oof AAudit CCommitteeThe Audit Committee shall be appointed by the Board ofDirectors from amongst their members and shall comprise of nofewer than three (3) members of whom a majority beingIndependent Non-Executive Directors and at least one (1) memberof the Audit Committee shall be a member of the Malaysian Instituteof Accountants or one of the associations of accountants specifiedin Part II of the 1st Schedule of the Accountants Act, 1967.

The Chairman, who shall be elected by the members of the AuditCommittee, shall be an Independent Non-Executive Director. TheBoard of Directors must review the term of office and performanceof an Audit Committee and each of its members at least once everythree years to determine whether such Audit Committee hascarried out their duties in accordance with their terms of references.

2. ObjectivesThe primary functions of the Committee are:

a. To assist the Board of Directors in fulfilling its fiduciaryresponsibilities relating to the Company and its Group ofcompanies' accounting and management control, financialreporting practices;

b. To provide greater emphasis on the audit functions byincreasing the objectivity and independence of externaland internal auditors; and

c. To reinforce the independence of the Company's externalauditors, thereby help ensure that they will have free reinin the audit process and to provide, by way of regularmeetings, a line of communication between the Board, theexternal auditors and the internal auditors for theexchange of views and information.

3. Duties aand RResponsibilitiesThe following are the main duties and responsibilities of the AuditCommittee:

a. To consider the appointment of suitable accounting firm toact as external auditors, the audit fee payable and anyquestions of resignation or dismissal;

b. To approve the Internal Audit Charter, which defines theindependent purposes, authority, scope and responsibilityof the internal audit function in the Company and Group.

c. To discuss with the external auditor before the auditcommences, the nature and scope of the audit, and ensureco-ordination where more than one audit firm is involved;

d. To review the quarterly and year-end financial statements ofthe Company, focusing particularly on:

i) Any changes in accounting policies and practices;

ii) Significant adjustments and issues arising from the audit;

iii) The going concern assumption; and

iv) Compliance with accounting standards, Stock Exchangeand other regulatory Requirements.

e. To review with the management on a periodic basis, theCompany's general policies, procedures and controlsespecially in relation to management accounting, financialreporting, risk management and business ethics.

f. To discuss problems and reservations arising from the interimand final audits, and any matter the auditor may wish todiscuss in the absence of management where necessary;

g. To review the external auditors' management letter andmanagement's response and audit report.

h. To do the following where an internal audit function exists:

i) review the adequacy of the scope, functions andresources of the internal audit function, and that it hasthe necessary authority to carry out its work;

ii) review the internal audit programme and results of theinternal audit process and where necessary, ensure thatappropriate follow-up actions is taken by managementon the recommendations of the internal audit function;

iii) review any appraisal or assessment of the performanceof members of the internal audit function;

iv) approve any appointment or termination of senior staff members of the internal audit function; and

v) inform itself of resignations of internal audit staff memberfor an opportunity to submit his reasons for resigning.

AUDIT COMMITTEE REPORT


i. To consider and review any significant transactions whichare not within the normal course of business and relatedparty transactions that may arise within the Company orGroup;

j. To consider the major findings of internal investigations andmanagement's response; and

k. To consider any other topics and activities as defined bythe Board.

4. AuthorityThe Audit Committee is authorized by the Board to investigate anymatters within its terms of reference, the resources which it needsto do so and has unrestricted access to information, records,properties, and personnel of the Group. The Audit Committee hasdirect communication channels with the external and internalauditors. The Audit Committee is also authorised by the Board toobtain external independent professional advice where necessary.

5. MeetingThe Audit Committee shall hold a minimum of at least four (4)meetings in a financial year. The meeting shall be chaired by theChairman of the Committee or in the absence of the Chairman,another committee member who is an Independent Non-ExecutiveDirector nominated by the committee members. The quorum of themeeting shall consist of at least three (3) members, the majority ofwhom shall be Independent Directors.

EMPLOYEES’ SSHARE OOPTION SSCHEME ((ESOS)Regards to the ESOS, the audit committee has reviewed theallocation option during the financial year under the ESOS to ensurethat this was in compliance with the allocation criteria determine inaccordance with the bye-laws of the ESOS. The details of theESOS are set out in the directors’ report (page 21) of the AnnualReport.

MEETINGSDuring the financial year under review, the Committee convened six(6) meetings. The attendance record of each member is as follows:

SUMMARY OOF AACTIVITIESThe main activities undertaken by the Audit Committee during theperiod were as follows:

a. Review of the quarterly financial results of the Companyand making appropriate variations to the report beforerecommending for adoption by the Board and announcementto Bursa Securities;

b. Reviewed the related party transactions that had arisenwithin the Company or the Group;

c. Considered the appointment of external auditors and theirrequest for increase in audit fees;

d. Reviewed the draft audited accounts before recommendingto the Board for approval; and

e. Reviewed the findings and recommendation on the internalaudit report prepared by the internal auditors.

INTERNAL AAUDIT FFUNCTIONDue to the limited access to suitable staff resources the Boarddecided to outsource the function to an external party. The Boardhas appointed BDO Governance Advisory Sdn Bhd (BDOGA) toperform the internal audit function on behalf of the Group. Theprimary function of the BDOGA is to assist the Audit Committeein discharging its duties and responsibilities. Their role is to provideaudit committee with independent and objective report on the stateof internal control of the operating units within the Group and theextent of compliance by such units with the Group's establishedpolicies and procedures. The Audit Committee approves theInternal Audit Plan that is developed on risk analysis approach atthe beginning of the year. BDOGA assist the management toensure that the Company and its Group system of internal controlsremain effective, efficient and is being monitored adequately andenhanced as and when the need arises.

Committee mmember Total nnumber oof mmeetings Number oof mmeeting aattended

Chua Boon Leong 6 5Datin Fawziah Binti Hussein Sazally 6 4Lee Peck Chuan 6 6Ong Chin Yet 6 6

The Company secretary was present by invitation in all the meetings.


STATEMENT ONCORPORATE GOVERNANCE


Details of each existing Director's meeting attendances are as follows:

Name oof DDirector Total nnumber oof mmeetings Meetings aattended

1. Kamarudin Bin Md Derom 7 7

2. Ong Chin Yet 7 7

3. Ong Chin Cheong 7 7

4. Datin Fawziah Binti Hussein Sazally 7 6

5. Azman Bin Che Onn 7 7

6. Heng Wee Pou 7 7

7. Chua Boon Leong 7 6

8. Lee Peck Chuan 7 7

9. Chen Fai Peng 7 5

The Board of Directors of HRB recognizes the importance of andsubscribes to the principles and best practice set out in theMalaysian Code on Corporate Governance ("the Code") as a keyfactor towards achieving an optimal governance framework andmaximizing shareholder.

With this in mind, measures and efforts have and shall be taken toensure as far as possible the adoption and implementation of theCode's Best Practices and adherence to the Listing Requirementsof the Bursa Malaysia Berhad ("Bursa Malaysia") in the Company'sgovernance.

DIRECTORSBoard oof DDirectorsThe Board currently has nine (9) members comprising an ExecutiveChairman, a Managing Director, an Executive Director, a Non-IndependentNon-Executive Director and five Independent Non-ExecutiveDirectors. There is a clear division of responsibility between theExecutive Chairman and Managing Director to ensure that there isa balance of power and authority. A brief profile of each Director ispresented separately on pages 9 and 10 in the Annual Report.

All board members come from diverse professional backgroundswith a wide range of experience. They participate actively in keyissues involving the Group and contribute positively by providingindependent opinions and judgments when discussing thestrategies proposed by the Management, taking into account thelong-term interests of the various parties connected to theGroup.

All five Independent Non-Executive Directors are persons of greatcalibre and credibility and who exercise independent judgment tothe Board without fear or favour. Their role is to ensure that anydecision of the Board is (all decisions of the board are) deliberatedfully and objectively with regard to the long term interest of allstakeholders. Mr.Chua Boon Leong has been appointed by theBoard as the senior Independent Non-Executive Director to whomall concerns may be conveyed.

Board MMeetingThe Board meets at least four times a year at quarterly intervals withadditional meetings held whenever necessary. During the financialyear ended 31st December 2005, the Board met on seven occasions.

Supply oof IInformationThe Board recognises that the decision-making process is highlydependent on the quality of information furnished. As such, allDirectors have unrestricted access to any information pertaining tothe Company.

Each Director also has unhindered access to the advice andservices of the Company Secretary, whose term of appointmentpermits her removal and appointment only by the Board as awhole.

There is also a formal procedure approved by the Board for allDirectors, whether as a full Board or in their individual capacity, toobtain independent professional advice when necessary, at theGroup's expense.

Note

i) Director's fee payable to the father of an Independent Non-Executive Director who acts as an Independent Non-Executive Director in one

of the subsidiary company has not been included in the Salaries & Other Emoluments for Non-Executive Directors.

ii) Consultancy service fee amounting to RM84,000 payable to a Non- Independent Non-Executive Director who acts as a General Counsel

of the Group has not been included in the Salaries & Other Emoluments for Non-Executive Directors.


Fee Salaries && OOther EEmoluments TTotal

(RM) (RM) (RM)

Executive Directors 30,000 692,500 722,500

Non-Executive Directors 60,000 18,000 78,000

90,000 710,500 800,500

Nomination CCommitteeThe Nomination Committee was established on 28th August 2001with the responsibility of setting up a formal and transparentprocedure for the appointment of any new Directors to theBoard. The Committee comprises three Independent NonExecutive Directors namely Mr. Heng Wee Pou (as Chairman),Datin Fawziah Binti Hussein Sazally and Mr. Chua Boon Leong.

The Nomination Committee shall recommend to the Board suitablecandidates for appointment as Directors to fill the seats on theBoard. In addition, the Committee assesses the effectiveness of theBoard and reviews annually its required mix of skills, expertise andexperience from its Board members. It reviews annually the individualskills, expertise and experience of its board members.

Re-eelectionIn accordance with the Company's Articles of Association, at leastone-third of the Directors shall retire by rotation at each AnnualGeneral Meeting and can offer themselves for re-election at thesame meeting. The Articles also provide that all Directors who areappointed by the Board to fill a casual vacancy are subject toelection by shareholders after their first appointment. TheDirectors including the Managing Director shall retire at least oncein three years, but shall be eligible for re-election.

Director's TTrainingAll Directors have attended the Mandatory Accreditation Programme(MAP) and also successfully completed the Continuing EducationProgramme (CEP) for directors of public listed companiesaccredited by Bursa Malaysia.

For the financial year ended 31st December 2005, all directors haveattended a CEP training to keep abreast with the development on a

continuous basis in compliance with Bursa Malaysia ListingRequirement.

The Directors will continue to undergo other relevant trainingprogrammes to further enhance their skills and knowledge andto keep themselves abreast with relevant changes in laws,regulations and the business environment.

DIRECTORS' RREMUNERATIONThe llevel aand mmake-uup oof rremunerationThe Company's policy on Directors' remuneration is formulated toattract and retain the Directors needed to run the Group successfully.The component parts of the remuneration for Executive Directorsare structured so as to link rewards to corporate and individualperformance. In the case of Non-Executive Directors, the level ofremuneration should reflect the experience and level of responsibilitiesundertaken by the particular Non-Executive Director concerned.

ProcedureThe Remuneration Committee was formed on 28th August 2001 withthe responsibilities of recommending the remuneration frameworkto the Directors' as well as the remuneration packages of ExecutiveDirectors of the Board. None of the Executive Directors participatedin any way in determining their individual remuneration.

The Remuneration Committee comprise of Mr. Chua Boon Leong(as Chairman), Datin Fawziah Binti Hussein Sazally and Mr. HengWee Pou.

DisclosureThe aggregate remuneration of Directors for the financial yearended 31st December 2005 is as follows:


The number of Directors whose remuneration fall into the following bands are as follows:

Number oof DDirectorsExecutive Non-EExecutive

Range oof rremuneration ((RM)

50,000 and below - 6 50,001 - 100,000 - -100,001 - 150,000 - -150,001 - 200,000 - -200,001 - 250,000 2 -250,001 - 300,000 1 -300,001-350,000 - -

SHAREHOLDERSDialogue bbetween tthe CCompany aand iinvestorsThe Board recognizes the importance of informing all materialbusiness matters affecting the Company to the investors.Announcements and release of quarterly financial results as well asother material matters to the Bursa Malaysia provides the overviewof the Group's financial and operational performance.

Annual GGeneral MMeetingThe Annual General Meeting (AGM) is the principal forum in whichthe Board reports on its stewardship to shareholders and accountfor the performance of the Company and of the Group.

The AGM provides the opportunity for interaction among shareholders,Directors and Management, where issues pertaining to the AnnualReport, interim and quarterly reports, announcements to BursaMalaysia and Circulars to Shareholders could be raised and explained.

At each AGM, the Directors welcome the opportunity to gatherthe views of minority shareholders, who represent the largestproportion of shareholders attending the AGM. Shareholders (andproxies) may enquire, among others, on the resolutions beingproposed at the AGM, business operations of the Group, theGroup's past performance, its results and intended futureperformance.

The Board provides adequate time for the shareholders'question-and-answer session, which the Board believes isparamount to the proper and efficient operation of the AGM.

Representatives of the Management are also present at each AGMto answer questions on the business operations of the Group. Thisensures a high level of accountability, transparency and identificationwith the Group's business operations, strategies and goals.

ACCOUNTABILITY AAND AAUDITFinancial RReportingThe Board aims to provide and present a clear, balanced andcomprehensive assessment of the Group's financial performanceand prospects at the end of the financial year.

This is achieved primarily through the annual financial statements,quarterly and half yearly announcement of results to shareholdersas well as the Chairman's statement and review of operations inthe annual report.

The Board is assisted by the Audit Committee to oversee theGroup's financial reporting processes and the quality of its financialreporting.

Internal CControlsThe Board acknowledges their responsibilities for the Group'ssystems of internal control covering not only financial controls butalso controls relating to operational, compliance and riskmanagement. However, the Board recognizes that risks cannotbe fully eliminated. As such, the internal control systems andprocedures provide reasonable but not absolute assurance againstany material misstatement, loss or fraud.

An Internal Audit department was established during the year toperform ongoing reviews to identify, evaluate, monitor and managesignificant risks affecting the business and ensure that adequateand effective controls are in place. The findings of the internal auditfunctions are regularly reported to the Audit Committee.

Relationship wwith tthe AAuditorsThe Company has established transparent and appropriaterelationships with the Company's Auditors through the AuditCommittee. The external Auditors continue to report to members ofthe Company on their findings which are included as part of theCompany's financial reports with respect to each year's audit onthe statutory financial statements.

From time to time, the auditors highlight to the Audit Committee andBoard of Directors on matters that require the Board's attention.


DIRECTORS' RRESPONSIBILITIES SSTATEMENTThe Directors are required under Paragraph 15.27(a) of the ListingRequirement of the Bursa Securities to issue a statement explainingtheir responsibility for preparing the annual financial statements. TheDirectors are also required by the Companies Act, 1965 to preparefinancial statements which are in accordance with applicableapproved accounting standards and give a true and fair view of thestate of affairs of the Group and the Company at the end of thefinancial year and of the results and cash flows of the Group and theCompany for the financial year then ended.

The Directors are responsible for keeping proper accounting recordswhich disclose with reasonable accuracy the financial position of theGroup and the Company and enable them to ensure the accountscomply with the Companies Act, 1965.

The Directors are satisfied that in preparing the financial statementsof the Group for the year ended 31st December 2005, the Grouphas used the appropriate accounting policies and applied themconsistently and prudently. The Directors are of the opinion thatall relevant approved accounting standards have been followedand confirmed that the financial statements have been preparedon a going concern basis.

The Directors have general responsibility for taking such steps tosafeguard the assets of the Group and the Company and to detectand prevent fraud as well as other irregularities

STATEMENT OON GGOING CCONCERNThe Board having reviewed the budgets and long-term businessplans of the Company and of the Group. The Board has a reasonableexpectation of the Company and the Group that it has adequateresources to continue in operation for the foreseeable future.Accordingly, the financial statements of the Company and of theGroup have been prepared on a going concern basis.

ADDITIONAL CCOMPLIANCE IINFORMATIONShare bbuybacksDuring the financial year ended 31st December 2005, the companybought back a total of 4,431,600 numbers of shares amounting toRM4,717,961.57 as detailed above.

Share rresoldThe Company sold a total of 500,000 numbers of shares atRM0.909 per share amounting to RM454,349.26 on 11th July2005.

Share ccancelledThere were no shares cancelled during the financial year ended31st December 2005.

Treasury sshareThe Company has retained 3,931,600 shares as treasury sharesduring the financial year ended 31st December 2005.

Option, WWarrants aand CConvertible SSecuritiesThe Company has not issued any options, warrants and convertiblesecurities during the financial year other than disclosed in theDirectors' Report.

American DDepository RReceipt (("ADR") oorGlobal DDepository RReceipt (("GDR")The Company has not sponsored any ADR or GDR programme inthe financial year ended 31st December 2005.

Sanctions aand // oor ppenaltiesThere were no sanctions and / or penalties imposed on theCompany and its subsidiaries, Directors or management by therelevant regulatory bodies.

Non-AAudit FFeeThere were no non-audit fees paid to the external auditors for thefinancial year ended 31st December 2005.

Profit GGuaranteeDuring the financial year, there were no profit guarantees given bythe Company.

Material CContractsThe were no material contracts on the Company or its subsidiariesinvolving Directors and major shareholders' interest for the financialyear other than disclosed in the financial statements.

Revaluation PPolicyThe revaluation policy is disclosed in Note 3 (g) of the financialstatements.

The detail of share buybacks are as follows:

Price pper sshare ((RM) Number oof TotalDate Lowest Highest Average Shares consideration ((RM)

27 JJan 22005 1.090 1.110 1.096 92,200 101,079.4728 JJan 22005 1.070 1.110 1.086 176,500 191,671.6431 JJan 22005 1.070 1.100 1.096 3,449,200 3,780,647.6620 MMay 22005 0.900 0.905 0.907 125,900 114,238.7724 MMay 22005 0.905 0.920 0.919 124,000 113,997.0925 MMay 22005 0.895 0.910 0.912 126,000 114,937.2802 JJune 22005 0.800 0.900 0.892 337,800 301,389.66

4,431,600 4,717,961.57

IntroductionThe Malaysia Code on Corporate Governance requires listedcompanies to maintain a sound system of internal control tosafeguard shareholders' investments and the Group's assets.Paragraph 15.27(b) of the Bursa Securities Listing Requirementsrequire directors of listed companies to include a statement inannual reports on the state of their internal controls. The Board ofDirectors set out below the Internal Control Statement of theGroup which has been prepared in accordance with the guidanceprovided under Bursa Securities "Statement of Internal Control:Guidance for Directors of Public Listed Companies".

Board oof DDirector's RResponsibilityThe Board of Directors and the senior management recognize theimportance of ensuring a sound system of internal controls andeffective risk management practices are put in place in theorganisation. The Board acknowledges its overall responsibility formaintaining the Company's system of internal control, and hasestablished processes for identifying, evaluating and managing thesignificant risks faced by the Company. The Board of Directorsendeavors to maintain an adequate system of internal controlsorganisation-wide designed to manage rather than eliminate risk toachieve business objectives. However, it is recognized that evaluationand implementation of the system can only provide reasonableassurance of the Group achieving its objectives. The system will notprovide absolute assurance against any material loss occurring.The Board of Directors confirms that appropriate initiatives toimplement a system of internal control with the elementshighlighted above are currently being implemented. The systemis subject to regular reviews by the Board of Directors.

The system of internal control is maintained to achieve the followingobjectives:-

1. Safeguard the shareholders' interest and assets of the Group2. Ensure the achievement of operation objectives3. Ensure compliance with regulatory requirements4. Identify and manage risks affecting the Group

Risk MManagement FFrameworkThe Group has outsourced its Internal Audit function to BDOGovernance Advisory Sdn. Bhd. (BDOGA). During the financialyear, BDOGA has assisted the Board in identifying and evaluatingvarious risk factors (financial and non-financial) and the businessfunctions that can potentially have impact on the Group's objectivesand continuity. From these risk factors and business functions, anoverall risk profile and a detailed audit plan for the Group wereestablished and presented to the Audit Committee for approval.

Internal AAudit FFunctionBDOGA provides the Board with much of the assurance it requiresregarding the adequacy and integrity of the system of internal controls.BDOGA independently reviews the system of internal controls andreport to the Audit Committee on a quarterly basis, following theestablishment of the risk management framework.

Other KKey EElements oof IInternal CControlSalient features of the framework of internal control system of theGroup are as follows:-

1. The management structure is well defined, with clear line ofresponsibilities and delegation of authorities and appropriatesegregation of duties.

2. Policies and procedures of key subsidiaries are established,documented and communicated to all staff member. Theseprocedures are the subject of regular reviews and improvementsto reflect changing risks or to resolve operational deficiencies.

3. The Board has assessed key risks areas with the help of theAudit Committee.

4. Financial results are reviewed quarterly by the Board and theAudit Committee.

5. Executive Directors and head of departments meet regularly todiscuss operational, corporate, financial and key managementissues.

6. Effective reporting system to ensure timely generation offinancial information for management review.

7. Senior management displays a 'hands-on' approach to theoperational activities of the Group.

The Directors are of the opinion that the existing system of internalcontrol is adequate to achieve the above objectives.

Weaknesses iin IInternal CControl tthat RResult iin MMaterial LLossesThere were no material losses reported during the current financialyear as a result of weaknesses in internal control. The developmentof the system of internal control is an ongoing process and theManagement of the Group continues to take measures tostrengthen the internal control environment.

STATEMENT ON INTERNAL CONTROL


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