HARLEQUIN ENTERPRISES LIMITED Harlequin is unique in the publishing industry. It has evolved from a predominantly series romance publisher to a diversified women’s fiction publisher offering a variety of women’s fiction genres in many different formats (mass-market paperback, trade paperback, hardcover) in multiple channels (retail, direct-to-consumer, e- commerce) in 94 international markets. While Harlequin’s highly profitable series romance business is the foundation of the company, Harlequin’s single title business has grown significantly and now accounts for 44 per cent of global retail sales.  Harlequin also attracts and acquires many top- level authors. The U.S. consumer book publishing industry had a particularly difficult year in 2004 in the mass-market paperback segment. Statistics published by the Association of American Publishers indicate that net billings of mass-market paperbacks were down 8.9 per cent in 2004. Harlequin is more affected by this dynamic than other publishers as the majority of Harlequin’s retail business (85 per cent) is in the mass-market paperback segment. The major reasons for the poor performance of mass-market paperbacks seem to be a shift in purchasing dollars to bestsellers, an increase in sales in hardcover and trade paperback formats and fierce discounting to consumers in the mass merchandiser channel. In 2004, the direct- to-consumer environment also remained challenging due to competition from alternate channels and lack of available mailing lists. These trends were not restricted to the U.S. market but were global in nature, and therefore affected Overseas markets as well.  zu MAGGIE SHAYNE Harlequin recognizes the need to publish books that are highly entertaining and relevant to women’s lives and has embarked on a multi-year editorial plan, underpinned by robust consumer research, to ensure that we are publishing stories that have high appeal to our readers.  Innovation is at the core of Harlequin’s business. Each year , Harlequin strives to create and develop  In 2004, Harlequin remained focused on executing its strategy of being a leading women’s fiction publisher. Harlequin has committed itself to seven core strategic objectives in order to maintain and grow its share of the women’s fiction market.  Harlequin is unique in the publishing industry developing more authors than any other publisher. As a result of these trends, 2004 was a challenging year for Harlequin. In 2004, Harlequin achieved EBITDA of $105.7 million, down 20 per cent from 2003. Revenues declined by $46.5 million to $538.4 million from 2003 results.  Operational review  Harlequin’s strategy 1. Attracting and developing authors 3. Driving product innovation Industry 2004 Accomplishments 2005 Initiatives 2. Achieving editorial excellence 2004 Accomplishments 2005 Initiatives • Signed several top-level authors including Debbie Macomber, Christina Skye, Shannon Drake, Carole Matthews, Carly Phillips and Mercedes Lackey . • Increased investment in developing top authors, resulting in strong bestseller placements and performance for those authors in 2004. For example, Diana Palmer’s hardcover  Renegade placed in the top 15 on the  New York Times Bestseller hardcover list, a first for Diana Palmer and for Harlequin. • Harlequin will increase its efforts to develop and promote its top authors. • Focus will be placed on recruiting new authors to broaden the range of editorial Harlequin publishes. • Harlequin’s outstanding editorial was recognized by the industry through numerous awards including the Christy Award for inspirational fiction given to  Hideaway by Hannah Alexander.  • Harlequin titles appeared on the  New York Times Bestseller lists for a total of 156 weeks.  • Continue to develop more contemporary, relevant editorial in all lines. • Broaden its editorial line up from romance to thrillers to literary fiction to appeal to a wider group of female readers. Under new editorial leadership, Harlequin plans to: 15 TORSTAR 2004