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2 Contents Corporate Information 02 Directors Standing for Re-election 03 Profile of Directors 06 Chairman Statement 12 Corporate Structure 14 Financial Highlights 15 Audit Committee s Report 16 Statement on Internal Control 20 Corporate Governance Statement 22 Recurrent Related Party Transactions of a Revenue Nature 28 Group Properties 29 Financial Statements 30 Analysis of Shareholdings 84 Notice of Annual General Meeting 87 Proxy form The term used to describe the STRENGTH of its physical structure to uphold the weight and PROTECTING of its content to maximum limitation. to

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4 HPI Resources Berhad ( K) 02 Corporate Information BOARD OF DIRECTORS Chan Choo Sing Executive Chairman Chan Chor Ngiak Managing Director Chan Chor Ang Executive Director Chan Chow Tek Tan Kwee Kee Lai Kee Peng Chew Teck Cheng Koh Kee Tee AUDIT COMMITTEE Chew Teck Cheng Chairman, Independent Non-Executive Director Chan Choo Sing Non-Independent Executive Director Lai Kee Peng Independent Non-Executive Director COMPANY SECRETARIES REGISTERED OFFICE & PRINCIPAL PLACE OF BUSINESS Sujata Menon A/P K.R.D.S Chandran (A.A.C.S.) (LS ) Plo 7, Kawasan Perindustrian Parit Raja Batu Pahat, Johor Darul Takzim. Tel : Fax : REGISTRAR Securities Services (Holdings) Sdn Bhd (36869-T) Level 7, Menara Milenium, Jalan Damanlela, Pusat Bandar Damansara, Damansara Heights, Kuala Lumpur Tel : Fax : , AUDITORS KPMG Chartered Accountants 179-3, Jalan Munshi Abdullah Melaka PRINCIPLE BANKERS HSBC Bank Malaysia Berhad ( V) CIMB Bank Berhad (13491-P) OCBC Bank (Malaysia) Berhad ( W) SUBSIDIARY COMPANIES Harta Packaging Industries Sdn Bhd ( W) Harta Packaging Industries (Selangor) Sdn Bhd ( X) Harta Packaging Industries (Perak) Sdn Bhd ( M) Harta Packaging Industries (Malacca) Sdn Bhd ( D) Chiga Light Industries Sdn Bhd (38496-U) Harta Distribution Network Sdn Bhd ( D) K.H. Chan Trading Sdn Bhd (70773-A) Cabaran Minda Sdn Bhd ( V) Cabaran Perspektif Sdn Bhd ( K) HPI Resources (Overseas) Sdn Bhd ( T) Harta Fleksipak Sdn Bhd ( K) Harta Packaging Industries (Cambodia) Limited ASSOCIATE COMPANIES Fibre Pak Malaysia Sdn Bhd (19304-V) Harta Land Limited STOCK EXCHANGE LISTING Bursa Malaysia Securities Berhad

5 03 HPI Resources Berhad ( K) Directors Standing For Re-election Directors standing for re-election at the Eleventh Annual General Meeting of the Company to be held at the Corporate Office, Lot 1376, GM 127, Mukim Simpang Kanan, Jalan Kluang, Batu Pahat, Johor on Tuesday, 23 October 2007 at a.m. Directors standing for re-election: a) Mr. Chan Choo Sing b) Mr. Chan Chow Tek; and c) Mr. Chow Chor Ang Details of attendance at Board Meetings held in the financial year ended 31 May, (Total of four meetings held) NAME OF DIRECTOR DATE OF APPOINTMENT NO. OF MEETING ATTENDED CHAN CHOO SING 08/04/ / 4 CHAN CHOR NGIAK 08/04/ / 4 CHAN CHOR ANG 08/04/ / 4 CHAN CHOW TEK 08/04/ / 4 CHEW TECK CHENG 08/04/ / 4 LAI KEE PENG 10/04/ / 4 TAN KWEE KEE 22/10/ / 4 KOH KEE TEE 22/10/ / 4 Details of the Board Meetings held in the financial year ended 31 May, 2007 PLACE DATE TIME Corporate Office 21 July, pm Lot 1376, GM 127, Mukim Simpang Kanan Jalan Kluang, Batu Pahat Johor Darul Takzim Corporate Office 30 October, pm Lot 1376, GM 127, Mukim Simpang Kanan Jalan Kluang, Batu Pahat Johor Darul Takzim Corporate Office 17 January, pm Lot 1376, GM 127, Mukim Simpang Kanan Jalan Kluang, Batu Pahat Johor Darul Takzim Corporate Office 11 April, pm Lot 1376, GM 127, Mukim Simpang Kanan Jalan Kluang, Batu Pahat Johor Darul Takzim

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8 HPI Resources Berhad ( K) 06 Profile Of Directors Chan Choo Sing Non-Independent and Executive Chairman Chan Chor Ngiak Non-Independent and Managing Director Chew Teck Cheng Independent and Non-Executive Director Tan Kwee Kee Non-Independent and Non-Executive Director

9 07 HPI Resources Berhad ( K) Chan Chor Ang Non-Independent and Executive Director Chan Chow Tek Non-Independent and Non-Executive Director Lai Kee Peng Independent and Non-Executive Director Koh Kee Tee Independent and Non-Executive Director

10 HPI Resources Berhad ( K) 08 Profile Of Directors CHAN CHOO SING (Non-Independent and Executive Chairman), a Malaysian and aged 53, was appointed to the Board of HPI on 8 April Mr. Chan started his career when he ventured into a garment business known as Chan Trading in In 1981, he founded Perusahaan Chan Choo Sing Sdn Bhd ("PCCSSB"), a Company primarily involved in the manufacturing of garments. His entrepreneurial skills and ability to recognize business and expansion opportunities have led to successful business ventures including the forming of a number of companies actively involved in the garment industry. PCCSSB and its associate companies were successfully listed on the Main Board of Bursa Malaysia Securities Berhad ("Bursa Securities") on 16 August 1995 as PCCS Group Berhad ("PCCS"). He was appointed as the Group Director of PCCS in In 1990, Mr. Chan ventured into the packaging business by founding Harta Packaging Industries Sdn Bhd ("Harta"). His sharp business acumen led to successful business ventures through the acquisition of shares in Harta Packaging Industries (Perak) Sdn Bhd in 1992, Fibre Pak (Malaysia) Sdn Bhd in 1994, Harta Packaging Industries (Selangor) Sdn Bhd in 1995, Chiga Light Industries Sdn Bhd ("Chiga") in 1997 and Harta Packaging Industries (Malacca) Sdn Bhd in Harta was successfully listed on the Second Board of Bursa Securities on 30 May 1997 as HPI Resources Berhad ("HPI"). He is an Exco-member of the Malaysian Textile Manufacturing Association since1992. During the periods from 2001 to 2006, Mr. Chan was the Chairman of the Chinese Association in Parit Raja, Batu Pahat and from 1994 to 1996, he was an Excomember of the Batu Pahat Chinese Chamber of Commerce. Mr. Chan also sits on the board of several private limited companies. He is a member of the Audit Committee and Remuneration Committee of PCCS and HPI. CHAN CHOR NGIAK (Non-Independent and Managing Director), a Malaysian and aged 45, was appointed to the Board of HPI on 8 April Mr. Chan started his career in 1980 assisting his father and brothers in marketing the products of Chan Trading to local departmental stores. In 1989, he assists his brothers in exploring overseas market for PCCSSB's garment products and appointed as a Director of PCCS in He joined Harta in 1991 as Marketing Manager and during his employment with Harta, his determination and enthusiasm approach had driven Harta became a leader of packaging business in the Southern Region of Peninsular Malaysia within a short period of time. He was subsequently promoted to the position of Managing Director of HPI in May 1999, overseeing the Group's packaging business. His vast experience in marketing coupled with his good inter-personal and negotiating skills has enabled him to aggressively penetrate and secure new customers from different types of industries. Throughout his career in the industry, he has continually established connections with many business executives in the industries, Chamber of Commerce and Associations. He is the Vice-Chairman of the Chinese Chamber of Commerce in Batu Pahat, Chairman of the Chinese Association in Parit Raja, Batu Pahat and the Vice-Chairman of the Chinese Association in Johor State. He also sits on the broad of several private limited companies. CHAN CHOR ANG (Non-Independent and Executive Director), a Malaysian and aged 44, was appointed to the Board of HPI on 8 April He possesses more than 25 years of experience in the textile and garment industry. He began his career with PCCSSB in the year 1981 and became the Factory Manager of Jusca Garments Sdn Bhd (one of the subsidiary of PCCS) in the year 1985 and subsequently appointed to the Board of PCCS in In 1990, he joined Harta as a Factory Manager and appointed as Maintenance Manger in His responsibilities includes organizing and managing the total maintenance and machines upkeep for the packaging companies. He has undergone various technical training programs under several expatriate Technical Advisors from Hong Kong, Taiwan and China and became instrumental in the establishment of total training programs on production management, machine maintenance and productivity enhancement in HPI. Mr. Chan Chor Ang is appointed as the General Manager of Harta in November 2006 and also oversees the operation of Chiga. He also sits on the board of several private limited companies.

11 09 HPI Resources Berhad ( K) CHAN CHOW TEK (Non-Independent and Non-Executive Director), a Malaysian and aged 50, was appointed to the Board of HPI on 8 April He started his career in 1973 in marketing the products of Chan Trading to local departmental stores. He joined PCCSSB as Marketing Manager in 1981 and has successfully secured the first export order for PCCSSB and has since brought PCCSSB export sales to greater success. He leads all the marketing activities in PCCSSB and has more than 30 years of experience in textile and apparel marketing and merchandising. He is responsible for the development and growth of PCCSSB's garment business. His job includes keeping abreast with the latest development in the apparel and fashion industry by frequent oversea trips to identify new and potential markets. He was appointed to the Board of PCCS as an Executive Director in He also sits on the board of several private limited companies. TAN KWEE KEE (Non-Independent and Non-Executive Director), a Malaysian and aged 49, was appointed to the Board of HPI on 22 October She is the spouse of Mr. Chan Choo Sing who is an Executive Chairman and major shareholder of HPI. She started her career by assisting her husband, Mr. Chan Choo Sing in Chan Trading in 1973 and PCCSSB in She was appointed as manufacturing director in PCCS Garments Limited (one of the subsidiary of PCCS) in year In January 2006, she is reassigned to assume the position and responsibility of PCCS's Cambodia operation as a Country General Manager. She holds no other directorships in public companies in Malaysia. CHEW TECK CHENG (Independent and Non-Executive Director), a Malaysian and aged 51, was appointed to the Board of HPI on 8 April He graduated with a Diploma in Commerce from Tunku Abdul Rahman College in He is an associate member of the Association of Chartered Certified Accountants in 1983 and a member of the Malaysian Institute of Accountants (Public Accountant, now Chartered Accountant) in He is also a fellow member of the Association of Chartered Certified Accountants since Mr. Chew has been practicing as a public accountant, now Chartered Accountant and approved company auditor since 1986 under Messrs. T.C. Chew & Co. He was appointed to the Board of Ramatex Berhad in LAI KEE PENG (Independent and Non-Executive Director), a Malaysian and aged 44, was appointed to the Board of HPI on 10 April She graduated with a Bachelor of Law (Honours) from University of Malaya, Malaysia in 1987 and was called to the Malaysian Bar in April Since then she practiced as a legal assistant in a legal firm until August, 1990 where she left to continue her academic pursue in King's College, University of London. Upon return from London with a Master of Law in 1992, she joined Cosmopac Sdn Bhd, a property development company as an Executive Director. In March 1993, she set up her legal practice under the name of Lai Kee Peng & Associates in Johor Bahru, Johor Darul Takzim and remains active in practice. She holds no other directorships in public companies in Malaysia. KOH KEE TEE (Independent and Non-Executive Director), a Malaysian and aged 68, was appointed to the Board of HPI on 22 October Prior to that he was elected to the Committee of Bursa Securities in Since then, he had served more than ten years as Committee Member of Bursa Securities. He also served as a director of Securities Clearing Automated Network Services as well as member of the Board of Governors of the Research Institute of Investment Analysts Malaysia. Both are the affiliated companies of Bursa Securities. He had also served as an Executive Chairman of Pan Pacific Asia Bhd from , a company listed on the main board of Bursa Securities. Currently, he is the Head of Muar Branch of K & N Kenanga Bhd, he had served as executive director for a number of private companies. He holds no other directorships in public companies in Malaysia. Note : 1) Chan Choo Sing, Chan Chow Tek, Chan Chor Ngiak and Chan Chor Ang are siblings. Chan Choo Sing and Tan Kwee Kee are spouse. They are all substantial shareholders of HPI. 2) None of the Directors have any convictions for offences within the past ten (10) years. (other than traffic offences, if any) 3) None of the Directors have any conflict of interest with the Company.

12 Print Every part of its surface is printable and can EASILY BE MARKED by any allowable printing methods for identification or labeling purposes.

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14 HPI Resources Berhad ( K) 12 Chairman Statements FINANCIAL RESULTS The Group s turnover increased by 19.47% to register a new record high of RM million in FY2007 as compare to RM million in FY2006. The Group s profit before tax grew by 25.8%, from RM9.68 million in FY2006 to RM12.18 million in FY2007, registering another record high. The higher revenue and earnings in FY2007 were primarily attributable to the Group s strategy to increase its market share by enhancing total customer satisfaction through closer customer-supplier relationship, and also providing excellent quality products & services. REVIEW OF GROUP PERFORMANCE By Geographical Segments - Malaysia Corrugated Carton Packaging Division Overall performance of the corrugated carton packaging division in Malaysia has improved over the previous corresponding year. With the effective cost cutting measures, improvement in production efficiency and productivity, the division recorded a turnover of RM million in FY2007 as compared to RM million in FY2006, and profit before tax of RM12.38 million in 2007 as compare to RM8.85 million in FY2006. Plastic Packaging Division The plastic division s turnover is slightly increased from RM16.00 million in FY2006 to RM17.89 million in FY2007. Despite an increase in turnover, the division recorded a profit before tax of RM464,000 in FY2007 as compared to a profit before tax of RM522,000 in FY2006 due to the substantial increase in raw material costs as a result of escalating global fuel cost. The stiff competition has affected the division s effort in transferring the cost to its customers. Thus, the division did not perform as expected and will continue to exercise appropriate measures to improve its results in the next financial year. By Geographical Segments - Cambodia Harta Packaging Industries (Cambodia) Limited ( Harta Cambodia ) is principally involved in the manufacturing of corrugated carton boxes and plastic film packaging products, has recorded a turnover of RM42.43 million and profit before tax of RM2.53 million for FY2007 as compared to a turnover of RM24.74 million and profit before tax of RM1.07 million for FY2006. With the stronger economy growth in the Cambodia, demand of carton and plastic packaging in Cambodia is expected to improve in the coming year. We believe with the more intensified effort in penetrating into the local corrugated and plastic packaging market, Harta Cambodia is confident of improving its earnings over the next 12 months. CURRENT YEAR PROSPECT Malaysia s economic growth is expected to improve in 2007 especially with the implementation of the Ninth Malaysia Plan ( 9MP ) projects and the development of the Iskandar Development Region for the Southern Corridor as announced by the Government, and underpinned by stronger export performance, sustained domestic demand and robust global economic growth, all of which should benefit the operating companies in the Group. Barring unforeseen circumstances, the Board anticipates a growth in the Group s results for the coming financial year ending 31 May DIVIDENDS The Board of Directors does not recommend any dividend payment in respect of the financial year ended 31 May 2007 at the forthcoming Annual General Meeting. APPRECIATION On behalf of the Board, I would like to extend our sincere appreciation to the management and staff of the Group for their continued commitment and dedication in facing challenging times. May we continue to grow together from strength to strength and achieve greater success for the Group. I wish to extend our gratitude to our loyal shareholders, business associates, and bankers for their continued support, confidence and assistance given to us. Finally, I wish to thank my fellow board members for their counsel, contribution and support throughout the year. CHAN CHOO SING EXECUTIVE CHAIRMAN 21 September 2007

15 13 HPI Resources Berhad ( K) On behalf of the Board of Directors of HPI RESOURCES BERHAD, I am pleased to present the Annual Report and audited financial statements of the Company and the Group for the financial year ended 31 May Chairman s Statement

16 HPI Resources Berhad ( K) 14 Corporate Structure Harta Packaging Industries (Malacca) Sdn Bhd Carton Converter 100% Chiga Light Industries Sdn Bhd Plastic Film and Packaging Products 100% HPI Resources (Overseas) Sdn Bhd Investment holding 100% Harta Packaging Industries (Cambodia) Limited Corrugated Board, Carton Boxes & Plastic Film Packaging Product 100% Harta Land Limited Property Investment Holding K.H.Chan Trading Sdn Bhd Transportation 49% 100% Harta Distribution Network Sdn Bhd Trading Company Fibre Pak Malaysia Sdn Bhd Carton Converter HPI Resources Berhad Holding Company 100% Harta Packaging Industries Sdn Bhd Corrugated Board & Carton Boxes 100% 40% Harta Packaging Industries (Perak) Sdn Bhd Corrugated Board & Carton Boxes 100% Cabaran Minda Sdn Bhd Transportation 100% Harta Packaging Industries (Selangor) Sdn Bhd Corrugated Board & Carton Boxes 100% Cabaran Perspektif Sdn Bhd Transportation 100% Harta Fleksipak Sdn Bhd Hawker Wrapper & Paper Bag 100%

17 15 HPI Resources Berhad ( K) Financial Highlights FOR THE YEAR ENDED 31 MAY RM'000 RM'000 RM'000 RM'000 RM'000 Revenue 143, , , , ,471 Profit/(Loss) Before Taxation (4,637) 56 (589) 9,682 12,176 Net Profit/(Loss) for the year (4,118) (410) (965) 8,476 11,239 Net Assets 70,453 70,169 69,204 77,366 86,755 Net Assets Per Share (RM) Revenue (RM Million) Profit/(loss) Before Taxation (RM Million) (0.59) (4.64) Net Profit/(loss) for the year (RM Million) Net Assets (RM Million) (0.41) (0.97) (4.12)

18 HPI Resources Berhad ( K) 16 Audit Committee Report Membership The present members of the Committee comprise :- Mr. Chew Teck Cheng - Chairman, Independent Non-Executive Director Ms. Lai Kee Peng - Independent Non-Executive Director Mr. Koh Kee Tee - Independent Non-Executive Director Mr. Chan Choo Sing - Non-Independent Executive Director Term of Reference The Audit Committee was established on 10 April 1997 to act as a Committee of the Board of Directors, with the terms of reference as set out on pages 17 to 19 of the Annual Report. Meetings The Audit Committee convened four (4) meetings during the financial year. Details of attendance at Audit Committee Meetings are as follows: Chew Teck Cheng 4/4 Lai Kee Peng 3/4 Koh Kee Tee 4/4 Chan Choo Sing 4/4 The other Directors and the Company Secretary were present by invitation in the meetings. Representative of the external auditors, Messrs. KPMG, the Head of Internal Audit as well as the Group General Manager and Manager of Accounts and Finance also attended the meetings upon invitation. Summary of Activities During the Financial Year The Audit Committee carried out its duties in accordance with the terms of reference during the year. The main activities undertaken by the Audit Committee were as follows :- * Reviewed the external auditors scope of work and audit plan for the year. Prior to the audit commencement, representatives from the external auditors presented their audit strategy and plan. * Reviewed with the external auditors the results of the audit, the audit report and management letter. * Reviewed the quarterly unaudited financial results announcement before recommending them for the Board s approval. The review and discussion were conducted with Group General Manager and Manager of Accounts and Finance. * Reviewed the related party transactions entered into by the Group. Internal Audit Function The Group has also established the Internal Audit function in order to assist the Audit Committee in discharging their duties in regards to the adequacy and integrity of the system of internal control. The Internal Audit function oversees few major areas as follows: * Perform review of operational compliance with the established internal control procedure and the risk profiles of the major business units of the Group. * Conduct investigations on specific areas or issues directed by the Audit Committee. * Review the risk management processes.

19 17 HPI Resources Berhad ( K) Audit plan for the Group is presented to the Audit Committee for approval. All adverse findings and weaknesses noted during the audit fieldwork are forwarded to the management for its attention and further actions. The reports on the audit findings are reported to the Audit Committee on a quarterly basis. In this regards, the Board is pleased to report that there were no significant adverse findings during the financial year ended 31 May 2007 that adversely affected the Group s reputation or financial position. TERMS OF REFERENCE OF AUDIT COMMITTEE 1. Composition of members The Board shall elect the Audit Committee members from amongst themselves, comprising no fewer than three (3) directors, where the majority shall be independent directors. The term of office of the Audit Committee is 2 years and may be re-nominated and appointed by the Board of Directors. In this respect, the Board adopts the definition of independent director as defined under the Listing Requirements of Bursa Malaysia Securities Berhad. At least one member of the Audit Committee must be:- (a) (b) a member of the Malaysian Institute of Accountant ( MIA ); or if he is not a member of MIA, he must have at least 3 years of working experience and: i. he must have passed the examinations specified in Part I of the 1st Schedule of the Accountants Act 1967; or (c) fulfils such other requirements as prescribed by Bursa Malaysia Securities Berhad. No alternate director of the Board shall be appointed as a member of the Audit Committee. Retirement and resignation If a member of the Audit Committee resigns, dies, or for any reason ceases to be a member with the result that the number of members is reduced below three (3), the Board shall within three (3) months of the event appoint such number of the new members as may be required to fill the vacancy. 2. Chairman The Chairman of the Audit Committee, elected from amongst the Audit Committee members, shall be an independent director. The Chairman of the Audit Committee shall be approved by the Board of Directors. 3. Secretary The Secretary of the Audit Committee shall be the Company Secretary. The Secretary shall be responsible for drawing up the agenda with concurrence of the Chairman and circulating it, supported by explanatory documentation to members of the Audit Committee prior to each meeting. The Secretary shall also be responsible for keeping the minutes of meetings of the Audit Committee, circulating them to members of the Audit Committee and to the other members of the Board of Directors and for following up outstanding matters. ii. he must be a member of one of the associations of the accountants specified in Part II of the First Schedule of the Accountants Act 1967; or

20 HPI Resources Berhad ( K) 18 Audit Committee Report (cont d) 4. Meetings The Audit Committee meetings shall be conducted at least four (4) times annually, or more frequently as circumstances dictate. In addition, the Chairman may call for additional meetings at any time at the Chairman s discretion. In the absence of the Chairman, the other independent director shall be the Chairman for that meeting. The members of the Audit Committee, Group General Manager, Manager of Accounts and Finance, and the head of internal audit will normally be in attendance at the meetings. Representatives of the external auditors are to be in attendance at meeting where matters relating to the audit of the statutory accounts and/or external auditors are to be discussed. Other directors, officers and employees of the Company and/or Group may be invited to attend, except for those portions of the meetings where their presence is considered inappropriate, as determined by the Audit Committee. However, at least once a year the Audit Committee shall meet with the external auditors without any executive board member present. Minutes of each meeting shall be kept and distributed to each member of the Audit Committee and also to the other members of the Board of Directors. The Audit Committee Chairman shall report on each meeting to the Board of Directors. 5. Quorum The quorum for the Audit Committee meeting shall be the majority of members present whom must be independent directors. 6. Reporting The Audit Committee shall report to the Board of Directors, either formally in writing, or verbally, as it considers appropriate on the matters within its terms of reference at least once a year, but more frequently if it so wishes. The Audit Committee shall report to the Board of Directors on any specific matters referred to it by the Board for investigation and report. 7. Objectives The principal objectives of the Audit Committee is to assist the Board of Directors in discharging its statutory duties and responsibilities relating to accounting and reporting practices of the holding company and each of its subsidiaries. In addition, the Audit Committee shall: * evaluate the quality of the audits performed by the internal and external auditors; * provide assurance that the financial information presented by management is relevant, reliable and timely; * oversee compliance with laws and regulations and observance of a proper code of conduct; and * determine the quality, adequacy and effectiveness of the Group s control environment.

21 19 HPI Resources Berhad ( K) 8. Authority The Audit Committee shall, in accordance with a procedure to be determined by the Board of Directors and at the expense of the Company, (a) (b) authorise to investigate any activity within its terms of reference. All employees shall be directed to co-operate as requested by members of the Audit Committee. have full and unlimited/unrestricted access to all information and documents/resources which are required to perform its duties as well as to the internal and external auditors and senior management of the Company and Group. * To ensure the adequacy of internal and external audit procedures; * To evaluate the quality of external auditors and make recommendations concerning their appointment and remuneration and to consider the nomination of a person or persons as external auditors; * To provide liaison between the external auditors, the management and the Board of Directors and also to review the assistance given by the management to the external auditors; * To review the findings of the internal and external auditors; (c) (d) (e) obtain, at the expense of the Company, other independent professional advice or other advice and to secure the attendance of outsiders with relevant experience and expertise if it considers necessary. be able to convene meetings with the external auditors, without the attendance of the executive members of the Audit Committee, whenever deemed necessary. be able to make relevant reports when necessary to the relevant authorities if a breach of the Listing Requirements occurred. * To review the quarterly results and financial statements and annual report prior to submission to the Board of Directors; * To monitor any related party transactions that may arise within the Group and to report, if any, transactions between the Group and any related party outside the Group which are not based on arms-length terms and on terms which are disadvantageous to the Group; * To report its findings on the financial and management performance, and other material matters to the Board of Directors; 9. Duties and Responsibilities The duties and responsibilities of the Audit Committee are as follows:- * To review the maintenance and control of an effective accounting system; * To act in line with the directions of the Board of Directors; and * To consider and examine such other matters as the Audit Committee considers appropriate. * To review the Group s public accountability and compliance with the law;

22 HPI Resources Berhad ( K) 20 Statement On Internal Control INTRODUCTION It is the requirement of the Malaysian Code on Corporate Governance that the Board of Directors should maintain a sound system of internal control to safeguard shareholders investments and the Group s assets. The Board is committed to the Listing Requirements of Bursa Malaysia Securities Berhad and Statement on Internal Control: Guidance for Directors of Public Listed Companies, and is pleased to set out below its Statement on Internal Control which outlines the nature and scope of internal control of the Group during the year. BOARD RESPONSIBILITY The Board acknowledges its responsibility for maintaining a sound system of internal control and for reviewing its adequacy and integrity, including financial and operational controls, compliance with relevant law and regulations, and risk management to safeguard shareholders investments and the Group s assets. Due to the limitations that are inherent in any system of internal control, the Group s system of internal control is designed to manage, rather than eliminate the risk of failure to achieve corporate objectives. Accordingly, it only provides reasonable but not absolute assurance against material misstatement or loss. This denotes that the control systems has been designed and implemented to manage the likelihood and consequences of risk to acceptable levels, and within cost levels appropriate to the significant of the risk being managed. CONTROL ENVIRONMENT AND STRUCTURE The Board put in place within the Group an adequate and conducive control environment for it to accomplish its business objectives. The Group s internal control system encompasses the Board and its various Board Committees with its specific terms of reference, executive management that is accountable for all its actions and also various monitoring and review procedures that is embedded in the Group s processes. Both the Board and the management strive to enhance, implement and review the internal control system regularly to manage those risks that could affect the Group s continued growth and financial viability effectively. The key elements of the Group s internal control system are described below: * The Group has a well-defined organizational structure that is aligned to its business and operation requirement. Clearly defined lines of accountability, delegation of responsibility and level of authorization for all aspects of the business have been laid down and communicated throughout the Group. * Authority charts are established within the Group to provide a functional framework of authority in approving revenue and capital expenditure. * The Group s performance is monitored through an integrated budgeting system which requires all material variances to be identified, discussed and resolved by management on a scheduled and ad-hoc basis. * The Board reviews the Group s financial and operational performance quarterly, which analyses the Group performance with comparison against previous quarter and previous corresponding quarter.

23 21 HPI Resources Berhad ( K) * Adequate procedures manuals equipped for management and staff are developed to foster long lasting and harmonious working relationship among the employees and set out the rules and regulations to be adhered by all employees in performing their duties. These manuals are regularly reviewed to incorporate the changes that will enhance working efficiently. * A series of orientation programs are made compulsory for every new employee in cultivating long-lasting and harmonious working relationship among employees. Programmes such as Environmental Management System (EMS) Awareness Program, Waste Management System Program and Safety and Emergency Briefing are conducted to assist in maintaining a safe working environment for all employees besides acting as a guideline to protect the Group s assets. * Regular audits are conducted by internal auditors to monitor compliance with established internal controls procedures and the risk profiles of the major business units of the Group, whilst the statutory audit of the financial statements are conducted by the external auditors and they report their findings to the Audit Committee. * Annual surveillance audit are conducted by assessors of the ISO certification body as specified by ISO 9001:2000 Quality Management System on certain subsidiaries. This ensures that internal procedures and standard operating procedures had been properly implemented and documented. RISK MANAGEMENT The Board recognizes that risk management is an integral part of the Group s business operations and that the identification and management of risks will affect the achievement of the Group s business objectives. To this end the Board has formalized for the Group a Risk Management Policy and Risk Management Framework. During the financial year, the Board has continued its on-going process for identifying, evaluating, monitoring and managing the significant risks affecting the achievement of its business objectives and has taken into account the guidance of the Malaysian Code on Corporate Governance. The Corporate Risk Profiling Exercise is being continually updated to re-affirm existing risks, identify new risk which may impact the key business processes; evaluate current controls and determine appropriate management action plans to manage the said risks. CONCLUSION For the financial year under review the Board is of the opinion that the existing system of internal control is adequate to achieve the Group s business objectives so as to safeguard shareholders investment and the Group s assets. The Board will continuously assess the adequacy of the Group s system of internal control and make improvements and enhancements to the system as and when necessary.

24 HPI Resources Berhad ( K) 22 Statement On Corporate Governance The Board of Directors ( the Board ) appreciates the importance of adopting high standards of corporate governance within the Group. The Board views corporate governance as synonymous with four key concepts; namely transparency, accountability, integrity and corporate performance. As such, the Board strives to adopt the substance behind corporate governance prescriptions and not merely the form. The Board is thus fully committed to the maintenance of high standards of corporate governance by supporting and implementing the prescriptions of the principles and best practices as set out in Parts 1 and 2 of the Malaysian Code of Corporate Governance ( the Code ) respectively. The Board is pleased to provide the following statement, which outlines the main corporate governance practices that were in place throughout the financial year unless otherwise stated. Principles Statement The following statement sets out how the Company has applied the Principles in Part I of the Code. A. DIRECTORS The Board The Group acknowledges the pivotal role played by the Board in stewardship of its direction and operations, and ultimately the enhancement of long-term shareholders value. To fulfill this role, the Board is responsible for the overall corporate governance of the Group, including its strategic direction, establishing goals for management and monitoring the achievement of these goals. Matters which require Board s decision are deliberated during Board meetings, which includes the overall Group strategy and direction, acquisition and divestment policy, approval of major capital expenditure projects and consideration of significant financial matters. The Board also reviews the financial and operating performance of the Group. Meetings The Board ordinarily meets at least four (4) times a year at quarterly intervals with additional meetings convened when urgent and important decisions need to be taken between the scheduled meetings. During the year ended 31 May 2007, the Board met on four (4) occasions; where it deliberated upon and considered a variety of matters including the Group s financial results, financing structures, major investments and strategic decisions and business plan and direction of the Group. The Board receives documents on matters requiring its consideration prior to and in advance of each meeting. The Board papers are comprehensive and encompass both quantitative and qualitative factors so that informed decisions are made. All proceedings from Board meetings are minuted and signed by the Chairman of the meeting. All Directors have complied with the minimum attendance at Board meetings as stipulated by the Listing Requirements of Bursa Malaysia Securities Berhad during the financial year. Details of each existing Director s meeting attendances are as follow: Name Attendance Chan Choo Sing Executive Chairman 4/4 Chan Chor Ngiak Managing Director 4/4 Chan Chor Ang Executive Director 4/4 Chan Chow Tek Non-Executive Director 3/4 Tan Kwee Kee Non-Executive Director 2/4 Chew Teck Cheng Independent, 4/4 Non-Executive Director Lai Kee Peng Independent, 3/4 Non-Executive Director Koh Kee Tee Independent, 4/4 Non-Executive Director

25 23 HPI Resources Berhad ( K) Board Committees The Board of Directors delegates certain responsibilities to the Board Committees namely, the Audit Committee, Nomination Committee and Remuneration Committee in order to enhance business and operational efficiency as well as efficacy. All Committees have written terms of reference, and operating procedures, and the Board receives reports of their proceedings and deliberations. The Chairman of the various committees will report to the Board the outcome of the Committee meetings and such reports are incorporated in the minutes of the Board meetings. Board Balance As at the date of this statement, the Board consists of eight (8) members comprising three (3) independent nonexecutive Directors, two (2) non-executive Directors and three (3) executive Directors. A brief profile of each Director is presented on pages 6 to 9 of this Annual Report. The concept of independence adopted by the Board is in tandem with the definition of an independent Director in Section 1.01 of the Listing Requirements of Bursa Malaysia Securities Berhad. The key elements for fulfilling the criteria are the appointment of an independent Director who is not a member of management (a non-executive Director) and who is free of any relationship which could interfere with the exercise of independent judgement or the ability to act in the best interests of the Company. The Board complies with paragraph of the Listing Requirements of Bursa Malaysia Securities Berhad, which requires that at least two (2) Directors or one-third (1/3) of Board, whichever is the higher, are independent Directors. The Directors, with their different backgrounds and specialisations, collectively bring with them a wide range of experience and expertise in areas such as finance, legal, marketing and operations. The executive Directors in particular are responsible for implementing the policies and decisions of the Board, overseeing the operations as well as coordinating the development and implementation of business and corporate strategies. The independent non-executive Directors bring to bear objective and independent judgement to the decision making of the Board and provide a capable check and balance for the executive Directors. The non-executive Directors contribute significantly in areas such as policy and strategy, performance monitoring, allocation of resources as well as improving governance and controls. Together with the executive Directors who have in-depth knowledge of the business, the Board is constituted of individuals who are committed to business integrity and professionalism in all its activities. There is a clear division of responsibilities at the head of the company to ensure a balance of authority and power. Mr. Chan Choo Sing as the Executive Chairman leads the Board and Mr. Chan Chor Ngiak, the Group Managing Director, leads the executive management of the company. The roles of the Chairman and the Group Managing Director are clearly defined with their individual position descriptions. The Chairman is responsible for running the Board and ensures that all Directors receive sufficient relevant information on financial and nonfinancial matters to enable them to participate actively in Board decisions. The Group Managing Director is responsible for the day-to-day management of the business as well as the implementation of Board s policies and decisions. The Board is satisfied that the current Board composition fairly reflects the investment of minority shareholders in the Company.

26 HPI Resources Berhad ( K) 24 Statement On Corporate Governance (cont d) Supply of Information The Chairman ensures that all Directors have full and timely access to information with Board papers distributed in advance of meetings. Every Director has also unhindered access to the advice and services of the Company Secretary in carrying out their duties. The Board believes that the current Company Secretary is capable of carrying out her duties to ensure the effective functioning of the Board while terms of appointment permit her removal and appointment only by the Board as a whole. Prior to the meetings of the Board and the Board Committees, Board papers which include the agenda and reports relevant to the issues of the meetings covering the areas of strategic, financial, operational and regulatory compliance matters, were circulated to all the Directors. These Board papers are issued at least five (5) working days in advance to enable the Directors to obtain further explanation, where necessary before the meeting. The Directors meet, review and approve all corporate announcements, including the announcement of the quarterly financial results, prior to releasing them to Bursa Malaysia Securities Berhad. The Board of Directors can take independent professional advice, where necessary and in appropriate circumstances, in furtherance of their duties, at the Company s expense. Appointment to the Board Nomination Committee The Nomination Committee comprised the following members during the year : Ms. Lai Kee Peng - Chairman, Independent Non-Executive Director The Nomination Committee is responsible for making recommendations to the Board as to the appointment of new Directors. The Committee also keeps under review the Board structure, size and composition. The Nomination Committee systematically assessed the effectiveness of the Board, its Committees and the contribution of each individual Director on an annual basis. Directors Training All Directors have attended and successfully completed the Mandatory Accreditation Programme (MAP) conducted by the Research Institute of Investment Analysts Malaysia (RIIAM). The Directors will continue to undergo other relevant training programmes to further enhance their skills and knowledge, where relevant. Re-election The Articles of Association provide that at least one-third (1/3) of the Board or the number nearest to one-third (1/3), are subject to retirement by rotation at each Annual General Meeting provided always that all Directors shall retire from office once at least in each three (3) years. The Directors to retire at each year are the Directors who have been longest in office since their appointment or re-election. A retiring Director is eligible for re-election. This provide an opportunity for the shareholders to renew their mandates. The election of each Director is voted on separately. To assist shareholders in their decision, sufficient information such as personal profile, meetings attendance and shareholdings in the Company can be obtained from the Annual Report. Directors over seventy (70) years of age are required to submit themselves for re-appointment annually in accordance with Section 129 (6) of the Companies Act Mr. Chew Teck Cheng - Independent Non-Executive Director The Committee consists entirely of non-executive Directors, all of whom are independent.

27 25 HPI Resources Berhad ( K) B. DIRECTORS REMUNERATION Remuneration Committee The Remuneration Committee comprised the following members during the financial year : Mr. Chew Teck Cheng - Chairman, Independent Non-Executive Director Ms. Lai Kee Peng - Independent Non-Executive Director Directors Remuneration Details of the remuneration for the Directors during the year are as follow: Aggregate remuneration of directors categorized into appropriate components: Salary Fees Benefit Total and other in Kind emoluments RM 000 RM 000 RM 000 RM 000 Mr. Chan Choo Sing - Non-Independent Executive Director Executive ,088 Directors The Remuneration Committee is responsible for recommending the remuneration framework for Directors as well as the remuneration packages of executive Directors to the Board. None of the executive Directors shall participate in any way in determining their individual remuneration. The Board as a whole determines the remuneration of non-executive Directors with individual Directors abstaining from decisions in respect of their individual remuneration. The policy practiced on Directors remuneration by the Remuneration Committee is to provide the remuneration packages necessary to attract, retain and motivate Directors of the quality required to manage the business of the Company and to align the interest of the Directors with those of the shareholders. Non-Executive Directors The number of directors of the Company whose total remuneration fall within the following bands: Range of remuneration Number of Directors Executive Non-Executive Below RM50,000 5 RM50,001 to RM100,000 RM100,001 to RM150,000 RM150,001 to RM200,000 RM200,001 to RM250,000 1 RM250,001 to RM300,000 RM300,001 to RM350,000 RM350,001 to RM400,000 RM400,001 to RM450,000 2 Details of the remuneration of each director are not disclosed due to security reasons.

28 HPI Resources Berhad ( K) 26 Statement On Corporate Governance (cont d) C. SHAREHOLDERS The Company recognizes the importance of communicating with its shareholders and does this through the Annual Report, Annual General Meetings and Extraordinary General Meetings. The policy of the Company is to maintain an active dialogue with its shareholders with the intention of giving shareholders a clear and complete picture of the Company s performance and position as possible. The Company will use the General Meetings as means of communicating with shareholders. The Board encourages full participation by the shareholders at every General Meeting. Every opportunity is given to the shareholders to make enquiries and seek clarification in the business and performance of the Group. Members of the Board will answer questions raised at the Meeting. Where it is not possible to provide immediate answers, the Chairman will undertake to furnish the shareholders with a written answer after the General Meeting. D. ACCOUNTABILITY AND AUDIT Financial Reporting The Board aims to provide and present a balanced and meaningful assessment of the Group s financial performance and prospects at the end of the financial year, primarily through the annual financial statements, quarterly announcement of results to shareholders as well as the Chairman s statement and review of operations in the Annual Report. The Board is assisted by the Audit Committee to oversee the Group s financial reporting processes and the quality of its financial reporting. Directors Responsibility Statement in respect of the preparation of the Audited Financial Statements The Board is responsible for ensuring that the financial statements of the Group give a true and fair view of the state of affairs of the Group and of the Company as at the end of the accounting year and the results of their operations and cash flows for the year then ended. In preparing the financial statements, the Directors have ensured that applicable approved accounting standards in Malaysia and provisions of the Companies Act, 1965 have been complied with. In preparing the financial statements, the Directors have selected and applied consistently suitable accounting policies and made reasonable and prudent judgements and estimates. The Directors also have a general responsibility for taking reasonable steps to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Internal Controls The statement on Internal Control furnished on page 20 to 21 of the Annual Report provides an overview of the state of internal controls within the Group. Relationship with the Auditors The Company maintains a professional and transparent relationship with the auditors in seeking their professional advice and towards ensuring compliance with the accounting standards. Key features underlying the relationship of the Audit Committee with the external auditors are included in the Audit Committee s terms of reference as detailed on pages 17 to 19 of the Annual Report. A summary of the activities of the Audit Committee during the year, including the evaluation of the independent audit processes, are set out in the Audit Committee Report on pages 17 to 19 of the Annual Report.

29 27 HPI Resources Berhad ( K) OTHER INFORMATION REQUIRED BY THE LISTING REQUIREMENTS OF BURSA MALAYSIA SECURITIES BERHAD Family Relationship Chan Choo Sing, Chan Chow Tek, Chan Chor Ngiak and Chan Chor Ang are siblings. Chan Choo Sing and Tan Kwee Kee are spouse. Share Buybacks During the financial year, the Company did not enter into any share buyback transactions. Imposition of Sanctions and Penalties There were no sanctions or penalties imposed on the Company and its subsidiaries, directors or management by the relevant regulatory bodies during the financial year. Non-Audit Fees There was no non-audit fee paid to the external auditor by the Group for the financial year. Material Contracts There were no material contracts involving Directors or major shareholders interest that are still subsisting at the end of financial year or since then. American Depository Receipt (ADR) or Global Depository Receipt (GDR) Programme The Company did not sponsor any ADR or GDR programme during the financial year ended 31 May Variance From Unaudited Results Announced During the financial year, there were no significant variances noted between the reported results and the unaudited results announced. Profit Estimate, Forecast or Projection During the financial year, the Company has not made any profit estimate, forecast or projection. Profit Guarantee During the financial year, there were no profit guarantees given by the Company. Revaluation Policy On Landed Properties The Company do not have a revaluation policy on landed properties. Utilisation Of Proceeds There were no proceeds arising from the corporate exercises during the financial year. For information on recurrent related party transactions of revenue nature, please refer to page 28 of the Annual Report. Options, Warrants or Convertible Securities The Company has not issued any options, warrants or convertible securities during the financial year ended 31 May 2007.

30 HPI Resources Berhad ( K) 28 Recurrent Related Party Transactions of a Revenue Nature The breakdown of the aggregate value of transactions conducted pursuant to the shareholders mandate during the financial year ended 31st May 2007 are as follow: NAME OF TYPE OF RECURRENT RELATED RELATED PARTY PARTY TRANSACTION RELATIONSHIP RM 000 Perusahaan Chan Choo Sing Sales of corrugated carton boxes by * 876 Sdn Bhd (PCCSSB) Harta Packaging Industries Sdn Bhd (Harta) and Harta Packaging Industries (Malacca) Sdn Bhd (HPIM) Sale of polybags and related packaging material by 460 Chiga Light Industries Sdn Bhd (Chiga) Transport charges received by 131 KH Chan Trading Sdn Bhd (KHC), Cabaran Minda Sdn Bhd (CM) and Cabaran Perspektif Sdn Bhd (CP) Provision of security guard and insurance services by KHC 40 Rental of office and factory premises to Harta 91 Management fee paid by Harta for internal audit services 169 PCCS Garments Limited Sales of corrugated carton boxes and plastic film * and Jusca Garments packaging by Harta Packaging Industries (Cambodia) Limited (Cambodia) Ltd (HPICL) Mega Labels & Stickers Purchase of stickers and labels by Harta, KHC, Chiga, HPIS * 193 Sdn Bhd (Mega) Harta Packaging Industries (Perak) Sdn Bhd (HPIP) and Harta Distribution Network Sdn Bhd (HDN) Keza Sdn Bhd (Keza) Provision of transport, security guard and * 5 insurance services by KHC Beauty Electronic Embroidering Provision of transport, security guard and * 5 Centre Sdn Bhd (BEEC) insurance services by KHC Parit Raja United Transport Transport charges paid by Harta, HPIS ** 542 Sdn Bhd (PRUT) Chiga, HPIM, KHC Mohita Jaya Sdn Bhd (Mohita) Provision of insurance services *** 92 Total 6,160 * These are wholly owned subsidiaries of PCCS Group Berhad (PCCS) in which the following Directors of HPI have interest as at 31 May 2007 :- DIRECT INDIRECT INTEREST NO. OF PCCS % NO. OF PCCS % SHARES SHARES Chan Choo Sing 1,832, ,741, Chan Chow Tek 2,165, ,000, Chan Chor Ngiak 319, ,000, Chan Chor Ang 809, ,040, Tan Kwee Kee 2,741, ,832, ** Chan Choo Sing is a Director and major shareholders in both HPI and PRUT. Chan Choo Sing hold 50.0% of equity interest in PRUT. *** Chan Chor Ang is a Director and major shareholders in both HPI and Mohita. Chan Chor Ang hold 25% of equity interest in Mohita. Chan Choo Sing, Chan Chow Tek, and Chan Chor Ngiak are Directors of HPI and major shareholders of Mohita.

31 29 HPI Resources Berhad ( K) Group Properties NO. LOCATION DESCRIPTION TENURE LAND AREA AGE NET DATE (BUILDING OF BOOK OF AREA) BUILDING VALUE ACQUISITION/ SQ.FT NO. OF YEAR (RM'000) REVALUATION* HARTA PACKAGING INDUSTRIES SDN. BHD. } 1 Plot 1, Kawasan Perindustrian Parit Raja, Leasehold expiring Batu Pahat, Johor. Factory and ,995 2 Storey (52,320) Plot 1, Kawasan Perindustrian Parit Raja, Office Building Leasehold expiring 16 3, * Batu Pahat, Johor Plo 32, Kawasan Perindustrian Parit Raja, Single Storey Leasehold expiring 142, , * Batu Pahat, Johor. Factory Building (77,600) 3 Plo 12, Kawasan Perindustrian Parit Raja, Single Storey Leasehold expiring 102, , * Batu Pahat, Johor. Store Building (48,000) 4 Plo 15, Kawasan Perindustrian Parit Raja, Single Storey Leasehold expiring 102, , * Batu Pahat, Johor. Store Building (48,000) 5 Plo 16, Kawasan Perindustrian Parit Raja, Warehouse Leasehold expiring 40, , Batu Pahat, Johor (25,600) 6 Plo 11, Kawasan Perindustrian Parit Raja, Warehouse Leasehold expiring 87, , Batu Pahat, Johor (60,000) HARTA PACKAGING INDUSTRIES (SELANGOR) SDN. BHD. } 7 No.2, Jalan Dataran 3/2, Taman Kempas, Single Storey Freehold 4, * Johor Bahru, Johor. Terrace Workshop (5,309) No.4, Jalan Dataran 3/2, Taman Kempas, Single Storey Freehold 3, * Johor Bahru, Johor. Terrace Workshop (4,352) 9 No.26, Jalan Dataran 4/2, Taman Kempas, Staff Quarters Freehold 1, * Johor Bahru, Johor. (1,298) 10 Lot A, Jalan Sungai Jati Double Storey Office Freehold 202, , Klang, Selangor cum Single Storey Factory (128,338) HARTA PACKAGING INDUSTRIES (MALACCA) SDN. BHD. 11 PT 3836 & 3837, Taman Tasik Utama, Factory and Leasehold expiring 72, , Fasa 1, Ayer Keroh, Melaka. 2 Storey Office (39,134) Building 12 HS(D) 93903, PT No.27829, Vacant Land Freehold 6, Mukim of Sungai Buloh, District of Petaling, Selangor HARTA PACKAGING INDUSTRIES (PERAK) SDN. BHD. 13 Plot 658, Kawasan Perusahaan Parit Buntar, Factory and Double Leasehold expiring 130, , Parit Buntar, Perak Storey Office Building (85,514) K.H.CHAN TRADING SDN BHD 14 HS(D) 6849, Lot 1498, Vacant Land Freehold 5,334 N/A MK Simpang Kanan, Parit Raja 15 Block 5, JC 2, Jalan Parit Raja, Batu Pahat, Johor Workshop Freehold 202, (6,000) HARTA PACKAGING INDUSTRIES (CAMBODIA) LIMITED 16 No. 4 Road, Srok Ang Snoul, Double Storey Office - - Kandal Province, Cambodia cum Single Storey Factory (54,982) 3 4,

32 cu Financial Statement Directors Report 32 Statement by Directors 36 Statutory Declaration 36 Report of the Auditors 37 Balance Sheets 38 Income Statement 39 Consolidated statement of Change in Equity 40 Cash Flow Statement 41 Notes to the Financial Statement 43