Financial information
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In 2006 the world economies started to return to a more stable situation. World growth was 3.6%, which reflects deceleration compared to the growth for 2005 (4.3%). Expansion in North America (3.3%) slowed down while the recovery in Europe was confirmed (2.6%) and growth in most of Asia was notable, yet controlled, with notable growth in China (10.7%), Japan (2.8%) and India (8.5%). The price of oil continued to be volatile, but ended the year at lower levels than those reached during 2006.

Prospects for 2007 show a certain deceleration in world economic growth after three years of high growth. This will be marked by the deceleration in the USA while European and Japanese growth will not be strong enough to offset this deceleration. A moderate reduction in global imbalances is also envisaged. A greater depreciation of the dollar is expected to stimulate exports and limit the demand for American imports, and oil is expected to stop being a major cause of uncertainty for the markets in 2007, and initially chances of its price reaching the peak levels of 2006 have been ruled out.

As regards the evolution of the textile sector, and after the strong impact of the liberalisation of international trade in 2005, it has tended towards greater stability, although countries in the west have continued to make production adjustments as a result of the increase in Asian imports in recent years. This rapid adaptation of the supply by western producers has been reflected in a sharp reduction in production capacity and also the intensification of delocalisation processes at the final phases of the process. In Spain, for example, production in the textile sector in 2006 is 32% lower than in 2000 with a reduction in jobs of 28% (65,000 employees) compared to the same period.

The need for western companies to redirect their strategies and adapt to the new environment is taking place in an unfavourable economic environment marked by the drop in sales and the impossibility of passing on increases in costs, such as energy costs, onto selling prices, with the resulting decline in operating margins.

Differences between the individual situations of companies on account of their speciality, structure and type of organisation, economic solvency, etc. have also increased.

Prospects show that the process of adjustment and adaptation to the new world environment by companies in the west will continue, although the sector seems to be evolving towards a more stable environment.

Revenue

Consolidated net sales of the Dogi Group for 2006 reached 144 million euros (including 100% of the revenue of Penn Asia, Ltd., our Thai joint venture), which is a decrease of 4.8% compared to the 152 million reached in 2005.

Overall, the Asian plants have increased turnover by 5.4%, the increase recorded by the Chinese company being particularly important, with a 12% increase in turnover. The Thai plant saw sales increase by 5%, while sales of the subsidiary in the Philippines fell by 5%. The revenues of the Asian plants make up 33% of the Group’s sales (Thailand 100%).

In Europe, both the sales of the Spanish company and those of the German company have fallen, by 8.7 and 8.5% respectively. Sales of the Spanish company suffered as a result of the evolution of the Spanish and French markets, in relation to the gradual elimination and delocalisation to Asia of the manufacturing centres. In turn, the sales of the German subsidiary Penn Elastic fell basically in the standard product range.

Operating Results

The Group’s operating profit has fallen from 3.5 million euros to a loss of 10.7 million. In Asia, production problems and high energy costs determined the evolution of the result for the entire year. The Chinese company, after a first half of the year marked by problems in the start-up of capacity and the increase in supply costs, has shown a very positive evolution in the second half of the year, and therefore the forecasts for 2007 are very favourable. The evolution of the plant in the Philippines has been affected by a certain weakness in demand, especially for traditional products, despite having improved production processes and increased the level of service.

In Europe, the evolution of the Spanish company is particularly noteworthy, which has determined the evolution of the Group’s results in 2006. The results of Dogi España were characterised by a reduction in sales and lower return. Margins deteriorated in light of the difficulty in passing on increases in costs, particularly in energy costs, to selling prices. To all this we have to add the costs of the restructuring plan the Spanish company will carry out during 2007.

Non-operating Result

The evolution of the financial result, unlike the situation in 2005, has been shaped by the losses on exchange generated as a result of the appreciation of the euro against the dollar. The reduction in the financial burden in respect of interest resulting from the repayment of the Syndicated Loan was countered by the expenses involved in formalising the repayment. After the repayment of the Syndicated Loan, forecasts for 2007 indicate a reduction in bank borrowing expense. The high interest paid to debenture-holders will also not be repeated, due to the high rates of conversion of debentures in the first two conversion periods.

In addition, the Group has recorded exceptional (non-recurring) expenses totalling 6.5 million euros in 2006, which include, among other items, a provision of 1.5 million euros recorded for impairment of assets that are expected to be written off in relation to the planned transfer of the Spanish plant to new premises in 2007, redundancy costs of 3.5 million euros relating to the Statutory Redundancy procedure, and the adjustment of the tax rate of 1.5 million euros.

Analysis of balance sheet

Property, plant and equipment

Property, plant and equipment of the Dogi Group at 31 December 2006 is 64 million compared to 70 million at the end of 2005. The depreciation expense for 2006 totalled 8 million euros, differences on exchange have had a negative impact of 2.8 million euros and the Spanish plant has recorded provisions for impairment of fixed assets related to the transfer of the plant that is to take place in 2007, totalling 1.5 million euros. The net capital expenditure (Acquisitions – Net Value of Disposals) was 6.5 million euros, the continued investment efforts in Dogi China being noteworthy, as well as the commencement of the acquisition of new machinery by the Spanish company for the transfer and renovation process, and the acquisition of new machinery by the subsidiary in the Philippines in relation to the implementation of the Penn product range.

Equity

The movement in the Group’s equity shows the loss for the year and the negative impact caused by translation differences. The impact of the appreciation of the euro compared to the dollar, a currency to which the Asian currencies are closely linked, has caused a reduction of 3.5 million euros in the Group’s equity. It also reflects the capital increase that was carried out in March 2006 to cover the conversion of convertible debentures into shares in the company issued in January 2006 for a total of 68 million euros. During the first exceptional conversion period, more than 97% of the debenture-holders participated.

In February 2007 the Spanish National Securities Market Commission (Comisión Nacional del Mercado de Valores) approved a new capital increase of 39 million euros which has been subscribed in full during the preferential subscription period in the month of February 2007. The main use of the funds is the acquisition of the US company EFA, and the financing of the Dogi II transfer project (transfer of the Spanish plant) and of the investment projects in Asia, mainly the creation of the DogiEFA Joint Venture in Sri Lanka.

The stake of Mr Josep Domènech, the leading shareholder, after the conversion of debentures that took place in March 2006, was 29.395%. After the capital increase that took place in March 2007, Mr Domènech’s stake has been diluted to 25%.

Borrowing

The Dogi Group’s net borrowing according to totalled 40.6 million euros at the end of 2006, compared to 87.9 million at the end of 2005. This decrease in debt mainly reflects the repayment of the Syndicated Loan (50 million euros) and debts with the leading shareholder. The funds to repay these debts came from the issue of convertible debentures in January 2006.