Financial information
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2005 has been noted for the stabilization of the recovery of the world economy that started in 2004, so that the growth in the aggregate GDP was 4.3%, higher than the levels recorded in 2004 (3.6%), 2003 (2.2%) and 2002 (1%). This growth has been driven by the USA (3.6%), Japan (2.4%) and the UK (1.7%), while the Eurozone has grown only 1.4%. Other notable increases are those recorded in China (9.8%), India (7.1%), Turkey (5.8%) and Russia (5.5%). Despite the continuous rise in oil prices, the economies of the main industrialized countries have not been affected too much, which has helped to maintain the level of world activity. The main factors that have permitted this are the high rates growth in world trade and the emergence of new players with grown weight on global activity (China, India, Turkey …). The forecasts for 2006 are that, although the price of crude will continue to increase and interest rates will be higher, the countries in the OECD will have similar growth to 2005 while developing countries will continue to show significant economic growth.

As regards the textile industry, the increase in the importance of Asian production is maintained, compared to production in Europe and the USA, mainly due to the different in salary costs between the two zones. The increase in imports from Asian markets to western markets results in a general fall in prices that finally benefits consumers. In this environment, the European textile industry has been forced to redirect its business strategy by strengthening design, innovation, quality and excellence in service. This situation for the western textile industry has become more acute during 2005, with the liberalization of the textile sector on 1st January 2005, when the systems of import quotas disappear for many textile categories coming from China. According to the first reports published in relation to world trade, Chinese textile exports increased in 2005 by more than 50% compared to the previous year. In any case, it is considered that part of these new exports replace others in developing countries, as the abolition of quotas has allowed Europe and the USA to choose the most competitive suppliers, i.e. China. In this competitive environment, companies in our industry that decide to keep their production centres in Europe and the USA have to adapt their business strategy so that price is not the key factor in the purchasing decisions of their customers, building up other aspects of the marketing mix such as exclusiveness, adaptability, innovation and service.

Turnover

In 2005, the net sales of the Dogi Group totalled 152 million euros (including 100% of the turnover of Penn Asia Ltd., out Thai joint venture), which represents a fall of 2.5% compared to the 155 million recorded in 2004.

The evolution of sales in the companies in the Philippines and China, where DOGI made huge investments, has been very favourable, with significant increases both in volume and turnover. In this regard, the evolution of the Chinese company is notable, with volumes that have increased from 4 to 4.5 million metres and with turnover that has increased by 15% in local currency and 18% in Euros. For its part, the Thai company has maintained a similar level of turnover to the previous year. Consequently, the relative importance of the turnover of the Asian plants within the group was 26% in 2005, compared to 22% in 2004. Finally, it should be noted that with effect from November 2005 facilities have started to be used in the Chinese plant that will increase its production capacity by 50%.

In Europe, the Spanish company saw its turnover fall from 79 million euros in 2004 to 71 million in 2005. It should be noted that part of the decrease is due to the uncertainty on the market as to the impacts of the abolition of the quota and the increase in competition from Asian imports. Consequently, the decrease occurs in customers with a medium/low profile with no strong brand or own distribution system, while the turnover in major international accounts has improved significantly. It is significant to note that 66% of the fall in sales in 2005 in Spain occurred in the first half of the year, which shows that the situation is gradually being reversed. In Germany, the evolution of turnover has been good with growth of 4%. The increase in turnover is mainly due to the success of products in the Dreamshape line. Finally, in 2005 construction began of a new logistics centre in the land adjoining the factory that will improve the plant’s efficiency.

Operating Profit

The 41% increase in operating profit compared to 2004, up to profits of 4.1 million euros is basically due to the increase in the activity of the Asian plants and the cost containment policy, in a year marked by the abolition of import quotas by the EU.

Non-operating Result

The Dogi Group recorded financial losses in 2005 of 4.6 million euros compared to 6.8 million euros reported in 2004. The difference can be explained basically by the reduction in average net debt and the positive evolution of exchange rate differences.

Additionally, the Dogi Group has recorded extraordinary expenses totalling 0.3 million euros in 2005, of which 0.5 million relate to the expenses for the restructuring of Textiles ATA and SNE. In 2004, 1.2 million euros were recorded for this item, which was offset by the sale of the Mexican subsidiary Deor for 0.8 million euros and the sale of the SNE building for 0.4 million euros. The total extraordinary result recorded in 2004 was a profit of 0.1 million euros.

Analysis of balance sheet

Tangible assets

The tangible assets of the Dogi Group at 31st December 2005 totalled 70 million euros compared to 57.9 million the previous year. Net investments (Acquisitions– Net Value of Disposals) totalled 14.3 million euros, while depreciation totalled 7.6 million euros. As regards the major investments made, attention should be drawn to the extension of the capacity of the Chinese plant to 7.5 million metres per year (50% more than the existing capacity) with a cost of approximately 5 million euros and the new logistics centre of Penn Elastic, with an investment of 2 million euros. The positive impact of the differences on exchange on tangible assets was 5.5 million euros.

Capital and Reserves

The movement in the Group’s capital and reserves shows the profit for the year and an improvement caused by differences on exchange. The impact of the depreciation of the euro compared to the dollar and the Asian currencies (closely linked to the US currency) on the Group’s capital and reserves represents an increase of approximately 2.9 million euros.

As regards the movements in Capital and Reserves, it should be noted that in accordance with Regulation number 1606/2002 of the European Parliament and the Council of 19th July 2002, regulated in Spain in the eleventh final provision of Act 62/2003, of 30th December, the consolidated financial information for the year ended 31st December 2005 of the Dogi Group has been drawn up in accordance with International Financial Reporting Standards. Application of these Standards has been a purely accounting change which has not affected either the operations or the commercial and operating activities of the Group. The effect of the change to IFRS on the Group’s capital and reserves at 31st December 2005 and 31st December 2004 has been a decrease of 3,132 thousand and 1,049 thousand euros respectively.

In December 2006 the CNMV (Spanish Securities Market Commission) approved the issue of convertible debentures of Dogi International Fabrics, S.A. with a value of 68 million euros. This issue was successfully competed in January 2006, with all of the debentures being subscribed within the Preferential Subscription Period.

The applications made of the funds obtained on the issue of the debentures are: the early repayment of the entire outstanding amount of the Syndicated Loan of 50 million euros, repayment of the subordinated loan granted to the Company by the shareholder referred to in 2004 of 11.8 million euros, covering the expenses of the debenture issue of 4 million euros and to finance new investment projects of the company in 2006.

Mr. Domènech’s holding is currently 49.098% of the Company’s share capital. However, if all the debentures were converted into shares in the Initial Conversion Period, his holding in the share capital would become 28.45%.

Borrowing

The Group’s net borrowing at the end of 2005 totals 84.9 million euros compared to 73.2 million at the end of the previous year. The increase in debt is due to the significant investments made by the Group in 2005, with net investments of 16 million euros.