Sadia
FORM 6-K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16
OF THE SECURITIES EXCHANGE ACT OF 1934

For the month of February 2006

Commission File Number 1-15184

SADIA S.A.
(Exact Name as Specified in its Charter)

N/A
--------------------------------------
(Translation of Registrant's Name)

Rua Fortunato Ferraz, 365
Vila Anastacio, Sao Paulo, SP
05093-901 Brazil
(Address of principal executive offices) (Zip code)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F   [X]                    Form 40-F    [   ]

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):    [   ]

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):    [   ]

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes   [    ]                           No   [X]

If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): Not applicable.




 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the Report to be signed
on its behalf by the undersigned, thereunto duly authorized.

Date: Feb 15, 2007

SADIA S.A.


By:/s/Welson Teixeira Junior
----------------------------------
Name: Welson Teixeira Junior
Title: Investor Relations Officer



 

 

 

 

 

Sadia S.A.
(Public-held company)

Financial statements
December 31, 2006 and 2005

(A translation of the original report in Portuguese as published in Brazil containing financial statements prepared in accordance with accounting practices adopted in Brazil).

 

 

 

 

 

1


 

Sadia S.A.

 

Public-held company

 

Financial Statemets

December 31, 2006 and 2005

 

 

Contents  
Independent auditors' report 3/4
Balance sheets 5
Statements of income 6
Statements of changes in shareholders' equity 7
Statements of changes in financial position 8
Statements of cash flows 9
Statements of consolidated added value 10
Notes to the financial statements 11/64

2


 

Independent auditors´ report

To
The Board of Directors and Shareholders
Sadia S.A.
Concórdia - SC

 

1.   We have examined the balance sheets of Sadia S.A. and the consolidated balance sheets of the Company and its subsidiaries as of December 31, 2006 and 2005, and the related statements of income, changes in shareholders’ equity and changes in financial position for the years then ended, which are the responsibility of its management. Our responsibility is to express an opinion on these financial statements.

2.   Our examination were conducted in accordance with auditing standards generally accepted in Brazil and included: (a) planning of the audit work, considering the materiality of the balances, the volume of transactions and the accounting systems and internal accounting controls of the Company and its subsidiaries; (b) verification, on a test basis, of the evidence and records which support the amounts and accounting information disclosed; and (c) evaluation of the most significant accounting policies and estimates adopted by Company management and its subsidiaries, as well as the presentation of the financial statements taken as a whole.

3.   In our opinion, the aforementioned financial statements present fairly, in all material respects, the financial position of Sadia S.A. and the consolidated financial position of the Company and its subsidiaries as of December 31, 2006 and 2005, and the results of its operations, changes in its shareholders’ equity and changes in its financial position for the year then ended, in conformity with accounting practices adopted in Brazil.

3


 

Independent auditors´ report

To
The Board of Directors and Shareholders
Sadia S.A.
Concórdia - SC

 

 

4.   Our examinations were performed with the objective of expressing an opinion on the financial statements taken as a whole. The statements of cash flows and added value as of December 31, 2006 and 2005, are supplementary to the aforementioned financial statements, which are not required under accounting practices adopted in Brazil and have been included to facilitate additional analysis. This supplementary information was subject to the same audit procedures as applied to the aforementioned financial statements and, in our opinion, is presented fairly, in all material respects, in relation to the financial statements taken as a whole.

 

January 29, 2007

KPMG Auditores Independentes
CRC SP014428/O-6-S-SC

 

Adelino Dias Pinho
Accountant CRC SP097869/O-6-S-SC

4


Sadia S.A.

Publicly-held Company

Balance sheets

December 31, 2006 and 2005

(In thousands of Reais)

   
Parent company
 
Consolidated
Assets
Note
2006
2005
2006
2005
 
Current assets
   Cash and cash equivalents
200,177
148,716
234,069
196,306
   Short-term investments
5
371,535
659,149
2,187,406
2,402,326
   Accounts receivable from future contracts
-
221
26,357
28,287
   Trade accounts receivable
6
617,408
481,154
678,598
509,615
   Inventories
7
1,011,691
948,560
1,084,454
992,490
   Recoverable taxes
8
160,905
140,212
169,347
147,088
   Deferred tax credits
22
52,518
27,223
56,509
29,494
   Other credits
11c
208,946
66,815
229,909
75,251
 
 
2,623,180
2,472,050
4,666,649
4,380,857
Noncurrent assets
   Long-term investments
5
129,127
65,057
129,127
65,057
   Recoverable taxes
8
161,237
120,024
162,229
120,024
   Deferred tax credits
22
83,243
76,550
83,243
76,550
   Judicial deposits
16
46,968
51,008
46,968
51,008
   Related parties
9
92,952
96,377
-
-
   Advances to suppliers
73,358
34,229
73,358
34,229
   Other credits
23,814
23,679
25,751
24,370
 
 
610,699
466,924
520,676
371,238
Permanent assets
   Investments
10
1,286,456
1,107,275
55,588
77,136
   Property, plant and equipment
11
2,171,789
1,571,395
2,199,399
1,576,013
   Deferred charges
12
125,489
87,487
134,039
90,193
 
 
3,583,734
2,766,157
2,389,026
1,743,342
Total
6,817,613
5,705,131
7,576,351
6,495,437

See the accompanying notes to the financial statements.


Sadia S.A.

Publicly-held Company

Balance sheets

December 31, 2006 and 2005 / (In thousands of Reais)

   
Parent company
 
Consolidated
Liabilities and shareholders' equity
Note
2006
2005
2006
2005
Current liabilities
   Loans and financing
13
362,473
782,810
1,207,878
1,384,667
   Accounts payable from future contracts
510
-
9,077
10,702
   Trade accounts payable
494,643
490,659
503,285
495,758
   Advances from subsidiaries
9
720,751
458,284
-
-
   Salaries, social charges and accrued vacation payable
110,324
97,640
112,433
99,225
   Taxes payable
55,930
34,151
63,349
38,651
   Dividends payable
17
59,420
128,210
59,420
128,210
   Employees' profit sharing
19
44,581
58,454
45,776
59,304
   Deferred taxes
22
18,355
3,321
18,355
3,321
   Other accounts payable
127,179
135,492
182,672
161,737
 
1,994,166
2,189,021
2,202,245
2,381,575
Noncurrent liabilities
   Loans and financing
14
1,095,422
715,048
2,677,542
1,714,527
   Advances from subsidiaries
9
1,025,812
401,430
-
-
   Employee benefit plan
15
96,178
82,997
96,178
82,997
   Provision for contingencies
16
43,616
42,256
44,765
44,559
   Deferred taxes
22
76,369
29,490
76,369
29,490
   Other accounts payable
19,956
16,849
19,930
16,824
 
2,357,353
1,288,070
2,914,784
1,888,397
Minority interest in subsidiaries
-
-
964
1,816
Shareholders' equity
17
   Capital
1,500,000
1,500,000
1,500,000
1,500,000
   Capital reserve
5
-
5
-
   Profit reserves
999,430
738,417
999,430
738,417
   Treasury stock
(33,341)
(10,377)
(33,341)
(10,377)
   Retained earnings
-
-
(7,736)
(4,391)
 
2,466,094
2,228,040
2,458,358
2,223,649
Total
6,817,613
5,705,131
7,576,351
6,495,437

See the accompanying notes to the financial statements.

5


Sadia S.A.

Publicly-held Company

Statements of income

Years ended December 31, 2006 and 2005

(In thousands of Reais, except for information on earnings per shares)

   
Parent company
 
Consolidated
 
Note
2006
2005
2006
2005
Gross operating revenue
   Domestic market
4,482,017
4,219,242
4,482,017
4,251,675
   Foreign market
3,145,589
3,722,795
3,458,463
4,076,324
 
7,627,606
7,942,037
7,940,480
8,327,999
Sales deductions
(922,712)
(856,215)
(1,063,779)
(1,009,561)
Net operating revenue
6,704,894
7,085,822
6,876,701
7,318,438
Cost of goods sold
(5,160,351)
(5,347,406)
(5,185,217)
(5,311,062)
Gross profit
1,544,543
1,738,416
1,691,484
2,007,376
 
Selling expenses
(1,172,189)
(1,125,815)
(1,286,994)
(1,234,138)
Administrative
(57,406)
(52,013)
(57,251)
(52,013)
Management Fees
(14,011)
(13,714)
(14,011)
(13,714)
Other operating income
20
57,443
(11,111)
58,877
(6,643)
Employees' profit sharing
19
(46,772)
(58,682)
(48,349)
(60,034)
Financial income (expenses), net
21
(93,218)
(50,639)
59,871
235,973
Equity in earnings of subsidiaries
10
204,001
290,229
16,810
(152,399)
 
Operating income
422,391
716,671
420,437
724,408
Nonoperating income (expense)
(4,527)
2,653
(5,783)
4,612
 
Income before income and social contribution taxes
417,864
719,324
414,654
729,020
Current income and social contribution taxes
22
(8,006)
(51,384)
(10,967)
(51,991)
Deferred income and social contribution taxes
22
(29,925)
(20,537)
(28,205)
(20,909)
 
Net income
379,933
647,403
375,482
656,120
Minority interest
-
-
(1,106)
(1,219)
 
Controlling shareholder equity interest
379,933
647,403
376,588
657,339
Earnings per thousand outstanding shares
561.14
951.37

See the accompanying notes to the financial statements.

6


Sadia S.A.

Publicly-held Company

Statements of changes in shareholders’ equity

Years ended December 31, 2006 and 2005 / (In thousands of Reais)

Profit reserves
Capital
Legal
Expansion
Research &
Treasury
Retained
Parent Company
Capital
reserve
reserve
reserve
development reserve
shares
earnings
Total
Balances at December 31, 2004
1,000,000
-
56,727
644,881
65,833
(198)
24,932
1,792,175
Acquisition of treasury stock
-
-
-
-
-
(10,179)
-
(10,179)
Capital increase with reserves
500,000
-
(33,255)
(399,057)
(42,756)
-
(24,932)
-
Net income for the year
-
-
-
-
-
-
647,403
647,403
Destinations:
Reserves
-
-
32,370
381,304
32,370
-
(446,044)
-
Interest on shareholders' equity/dividends
-
-
-
-
-
-
(201,359)
(201,359)
Balances at December 31, 2005
1,500,000
-
55,842
627,128
55,447
(10,377)
-
2,228,040
Acquisition of treasury stock
-
-
-
-
-
(23,427)
-
(23,427)
Sales of treasury stock
-
-
-
-
-
463
463
Gain on sale of treasury stock
-
5
-
-
-
-
-
5
Net income for the year
-
-
-
-
-
-
379,933
379,933
Destinations:
Reserves
-
-
18,997
223,019
18,997
-
(261,013)
-
Interest on shareholders' equity/dividends
-
-
-
-
-
-
(118,920)
(118,920)
Balances at December 31, 2006
1,500,000
5
74,839
850,147
74,444
(33,341)
-
2,466,094

See the accompanying notes to the financial statements.

 

7


Sadia S.A.

Publicly-held Company

Statements of changes in financial position

Years ended December 31, 2006 and 2005

(In thousands of Reais)

 
Parent company
Consolidated
 
2006
2005
2006
2005
Sources of funds
 Operations
   Net income for the year
379,933
647,403
375,482
656,120
Items not affecting working capital
   Minority interest
-
-
254
2,875
   Depreciation, amortization and depletion
238,846
177,226
240,569
178,175
   Goodwill amortization
25,763
16,484
25,763
16,484
   Long term interest and variations
20,909
(25,032)
(69,683)
(228,925)
   Residual cost on disposal of permanent assets
8,288
6,552
8,978
6,815
   Provision for contingencies
1,360
6,970
206
11,612
   Employee benefit plan
13,181
421
13,181
421
   Equity in earnings of subsidiaries
(208,228)
(293,852)
(21,037)
148,776
   Long term deferred taxes
40,186
8,259
40,186
8,259
 
520,238
544,431
613,899
800,612
From third parties
   Increase in noncurrent loans and financing
592,791
310,745
1,387,870
1,336,858
   Redemption of long-term investments
-
13,088
-
13,088
   Proceeds obtained from the sale of fixed assets
14,915
19,622
14,967
19,622
   Interest on shareholders' equity of subsidiaries
4,226
4,548
-
-
   Transfer from long-term to current assets
36,264
296,119
4,567
296,119
   Sale of treasury stock
463
-
463
-
   Gain on sale of treasury stock
5
-
5
-
   Transfer from property plant and equipment to current assets
123,656
-
123,632
-
   Increase in other long-term liabilities
627,489
402,074
3,106
460
   Decrease in the other long-term assets
3,425
-
-
-
 
1,403,234
1,046,196
1,534,610
1,666,147
         Total sources
1,923,472
1,590,627
2,148,509
2,466,759
Applications of funds
   Long-term assets
      Long-term investments
-
85,002
-
85,002
      Judicial deposit
(4,040)
(4,515)
(4,040)
159
      Increase in other long-term assets
116,741
148,329
87,282
52,508
   Decrease in other long-term liabilities
-
-
-
-
   Investments
1,000
66,321
4,215
74,360
   Property, plant and equipment
963,319
639,724
975,725
642,149
   Transfer of current liabilities to property, plant and equipment
-
19,317
-
19,101
   Deferred charges
60,724
41,242
79,653
43,843
   Acquisition of treasury stock
23,427
10,179
23,427
10,179
   Interest on shareholders' equity/dividends
118,920
201,359
118,920
201,359
   Transfer of current assets to non current assets
54,960
-
54,960
-
   Transfer of noncurrent liabilities to current liabilities
242,436
422,831
343,245
660,105
 
         Total applications
1,577,487
1,629,789
1,683,387
1,788,447
(Decrease)/increase in working capital
345,985
(39,162)
465,122
678,312
Changes in working capital
   At end of year
629,014
283,029
2,464,404
1,999,282
   At beginning of year
283,029
322,191
1,999,282
1,320,970
(Decrease)/increase in working capital
345,985
(39,162)
465,122
678,312

See the accompanying notes to the financial statements.

8


Sadia S.A.
Publicly-held Company

Statements of cash flows

Years ended December 31, 2006 and 2005 / (In thousands of Reais)

 
Parent company
 
Consolidated
 
2006
2005
2006
2005
Net income for the year
379,933
647,403
375,482
656,120
 Adjustments to reconcile net income to cash generated by operating activities
   Variation in minority interest
-
-
254
2,875
   Accrued interest, net of paid interest
29,748
(157,443)
(64,126)
(47,233)
   Depreciation, amortization and depletion allowances
238,846
177,226
240,569
178,175
   Goodwill amortization
25,763
16,484
25,763
16,484
   Equity in earnings of subsidiaries
(208,228)
(293,852)
(21,037)
148,776
   Deferred taxes
29,925
20,537
28,205
20,908
   Contingencies
1,360
6,970
206
11,612
   Result from the disposal of permanent assets
8,230
6,552
8,978
6,815
 
Variation in operating assets and liabilities
   Trade notes receivable
(136,254)
211,703
(168,983)
(160,010)
   Inventories
(63,131)
76,565
(91,964)
72,181
   Recoverable taxes and others
(115,359)
(61,867)
(118,691)
(231,230)
   Judicial deposits
4,040
4,515
4,040
159
   Trade accounts payable
3,984
8,320
7,527
8,104
   Advances from subsidiaries
886,849
720,723
-
-
   Taxes payable, salaries payable and others
11,214
60,298
43,763
44,864
 
Net cash generated by operating activities
1,096,920
1,444,134
269,986
728,600
 Investment activities
   Funds from the sale of permanent assets
14,915
3,400
14,967
3,400
   Investments in subsidiaries
(1,000)
(29,702)
-
-
   Purchase of property, plant and equipment
(1,024,043)
(680,966)
(1,055,378)
(685,992)
   Acquisition of subsidiary
(485)
(54,443)
(485)
(54,443)
   Short-term investments
(624,169)
(442,156)
(3,320,118)
(2,313,367)
   Redemption of investments
562,510
255,129
3,167,532
1,818,443
 
Net cash from investment activities
(1,072,272)
(948,738)
(1,193,482)
(1,231,959)
Loans activities
   Loans received
1,276,661
968,439
2,862,349
2,529,773
   Loans paid
(1,060,438)
(1,163,696)
(1,708,255)
(1,845,795)
   Dividends paid
(169,871)
(129,734)
(169,871)
(129,734)
   Loans with subsidiaries
3,425
(95,780)
-
-
   Sale of treasury stock
463
-
463
-
   Acquisition of treasury stock
(23,427)
(10,179)
(23,427)
(10,179)
 
26,813
(430,950)
961,259
544,065
Net cash from loans activities
   Cash at beginning of year
148,716
84,270
196,306
155,600
   Cash at end of year
200,177
148,716
234,069
196,306
Net increase (decrease) in cash
51,461
64,446
37,763
40,706

See the accompanying notes to the financial statements.

9


Sadia S.A.

Publicly-held Company

Statements of consolidated added value

Years ended December 31, 2006 and 2005

(In thousands of Reais)

 

 
Consolidated
 
2006
2005
Revenues/income
8,136,352
8,439,424
 Wealth generated by operations
7,816,396
8,232,688
   Sale of products, goods and services
7,816,396
8,232,688
 Wealth from third parties
319,956
206,736
   Other operating results
58,877
(6,643)
   Financial income
250,053
361,165
   Equity in earnings of subsidiaries
21,037
(148,776)
   Other nonoperating results
(10,011)
990
Raw materials acquired from third parties
(3,706,036)
(4,046,583)
Services rendered by third parties
(1,520,476)
(1,429,735)
Added value to be distributed
2,909,840
2,963,106
Distribution of added value
   Human resources
1,084,173
994,309
   Interest on third-party capital
154,143
91,445
   Government
1,016,230
1,022,339
   Shareholders (dividends)
118,920
201,359
Retention
536,374
653,654
   Depreciation/amortization/depletion
266,332
194,659
   Retained profits
256,562
454,761
   Others
13,480
4,234
See the accompanying notes to the financial statements,

10


Sadia S.A.

Publicly-held Company

Notes to the financial statements

Years ended December 31, 2006 and 2005

(In thousands of Reais)

 

1 Operations

The Company’s main business activities are organized into four operational segments: processed products, poultry (chickens and turkeys), pork and and beef. The beef segment was included as from the beginning of this fiscal year as the Company decided to resume to this activity for export. The large production chain permits its products to be commercialized in Brazil and abroad by retailers, small groceries and food service chains.

The Company distributes its products through a large number of sales points in the local market and exports to countries in Europe, the Middle East, Eurasia, Asia and the Americas. The Company has 13 industrial units and 16 distribution centers located in 14 Brazilian states.

The industrially processed products segment has been the principal focus of the Company’s investments in recent years and comprises products such as oven-ready frozen food, refrigerated pizzas and pasta, margarine, industrially processed poultry and pork by-products, crumbed products, a diet line and pre-sliced ready-packed products and desserts.

The Company has a corporate governance tier one listing for its shares on the São Paulo Stock Exchange, the Madrid Stock Exchange (Latibex) and ADRs negotiated on the New York Stock Exchange (NYSE).

2 Preparation and presentation of the financial statements

The individual and consolidated financial statements were prepared in accordance with accounting practices derived from the Brazilian Corporation Law and the rules of the Brazilian Securities and Exchange Commission (CVM), including the compliance with CVM Deliberations 488/05 and 489/05.

With the objective of presenting the information provided to the market better, the Company is presenting supplementary consolidated information, obtained from accounting records of the parent company and its subsidiaries, as follow:

11


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)


a. Segment reporting

A segment is a group of asset and liabilities set by the Company to manage its businesses and similar in aspects such as productive process or nature of the products or services (business segment) in a particular economic environment (geographic segment).

b. Statement of cash flows

The cash flows were prepared in accordance with NPC 20 - Statement of Cash Flows, issued by IBRACON (Brazilian Institute of Independent Auditors).

c. Statement of added value

The value added statement has been presented in accordance with the model proposed by the foundation Instituto de Pesquisa Contábeis, Atuariais e Financeiras - University of Sao Paulo the aim of which is to show the value of the wealth generated by the Company and its distribution among the elements that contributed to its generation.

3 Description of significant accounting policies

a. Statement of income

Income and expenses are recognized on the accrual basis. Revenue from the Company’s sales is recognized upon shipment of the products and when the following conditions are met:
i) the ownership is transferred and therefore risk of loss has passed to the client; ii) collection is probable; iii) there is evidence of an arrangement; and iv) the sales price is fixed or determinable.

12


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)



b. Foreign currency

Monetary assets and liabilities denominated in foreign currencies were translated into reais at the foreign exchange rate ruling at the balance sheet date and the foreign exchange differences arising on translation are recognized in the statement of income for the year.

c. Accounting estimates

The preparation of the financial statements in accordance with accounting practices adopted in Brazil requires that management uses its judgment in determining and recording accounting estimates. Significant assets and liabilities subject to these estimates and assumptions include the residual value of property, plant and equipment, deferred charges, allowance for doubtful accounts, inventories, deferred tax assets and liabilities, provision for contingencies, valuation of derivative instruments, and assets and liabilities related to employees’ benefits. The settlement of transactions involving these estimates may result in different amounts due to the lack of precision inherent to the process of their determination. The Company reviews the estimates and assumptions periodically.

d. Long and short-term investments

Investment funds in local and foreign currency are recorded at market value according to the respective shares price at the date of the financial statements.

Other long and short-term investments in local and foreign currency are recorded at cost plus income accrued up to the balance sheet date, not exceeding market value.

Additionally, the portion receivable from currency swap contracts is recorded at the difference between the nominal amounts of these contracts and the amounts restated by the variation of the foreign currency, plus interest earned up to the balance sheet date.

13


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)



e. Trade accounts receivable

Trade accounts receivable are recorded at the amount invoiced and interest is not levied. The allowance for doubtful accounts is the best estimate the Company has and is considered sufficient by management to cover any losses arising on collection of accounts receivable. Accounts receivable are written off against the allowance for doubtful accounts after all means of collection have been exhausted and the possibility of recovery of the amounts receivable is considered remote.

f. Inventories

Finished goods, livestock (excluding breeders), work-in-progress, raw materials and supplies and others are valued at the lower of cost of acquisition or production (average method), or replacement or realization. The cost of finished goods and work-in-progress includes raw materials acquired, labor, production expenses, transport and storage relating to the purchase and production of inventories. Normal production losses are inventoried and abnormal losses are expensed immediately as cost of goods sold.

g. Investments

Investments in subsidiaries in Brazil and abroad are valued using the equity method based on the respective net equity calculated on the same date, as disclosed in Note 10.

The financial statements of foreign subsidiaries are translated into Brazilian Reais, based on the following criteria:

• Balance sheet accounts at the exchange rate at the end of the year.
• Statement of income accounts at the exchange rate at the end of each month.

Other investments are valued at cost less a provision for devaluation, when applicable.

14


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)



h. Property, plant and equipment

Property, plant and equipment are recorded at cost of acquisition, formation or construction, including the interest incurred on financing, during the period of construction, modernization and expansion of the industrial units. Expenditures that materially extent the useful lives of existing facilities and equipment are capitalized. Depreciation is calculated using the straight-line method at rates that take into account the estimated useful life of the assets, adjusted in keeping with the work shifts, as disclosed in Note 11. Depletion of forestry resources is calculated based on the extraction of timber and the average costs of the forests.

Breeding stock is recorded at the cost of formation which includes the appropriation of costs of the breeding hens, animal feed, medication and labor. These costs are accumulated for approximately six months until the breeding stock initiates the breeding cycle. From then on, the costs of the breeding stock begin to be amortized by the estimated number of offsprings. The productive cycle ranges from fifteen to thirty months.

i. Impairment of long lived assets

The Company reviews its property, plant and equipment to verify possible impairment losses, whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable based on future cash flows. If these events occur, the reviews will be conducted at the lowest level of groups of assets for which the Company manages to attribute future cash flows. If the carrying amount of an asset is higher than the future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Until now, these reviews have not indicated the need to recognize impairment losses.

j. Deferred charges

Deferred charges are represented substantially by pre-operating costs incurred in the implementation of software, reorganization charges and development of new products, which are amortized on a straight-line basis over 5 years as from the beginning of operation.

15


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)



k. Current and noncurrent liabilities

Current and noncurrent liabilities are stated at known or estimated amounts, plus related charges and monetary and exchange variations up to the balance sheet date.

l. Provisions

A provision is recognized in the balance sheet when the Company has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation.

m. Income and social contribution taxes

The income and social contribution taxes, both current and deferred, are calculated monthly based on taxable income at the rates of 15% plus a surcharge of 10% for income tax and 9% for social contribution and consider the offsetting of tax losses and negative basis of social contribution, limited to 30% of taxable income.

The deferred tax assets were recorded in accordance with CVM Instruction 371/02 and are represented significantly by temporary differences arising from non-deductible provisions, including tax loss carryforward and negative basis of social contribution.

n. Employees’ benefits

Employees’ benefits are recorded based on actuarial studies prepared annually at the end of the year in compliance with CVM Deliberation 371/00.

o. Environmental questions

Our production facilities and our forestry activities are subject to government environmental regulations. We have reduced the risks associated with environmental questions through operational controls and procedures, as well as investments in equipment and systems for pollution control. We believe that no provision for losses related to environmental questions is currently necessary, based on existing Brazilian laws and regulations.

16


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)



4 Consolidated financial information

The transactions and balances between the Parent company and its subsidiaries included in the consolidation process have been eliminated and the non-realized profit arising from the sales to the subsidiaries were excluded and incorporated to the inventory balances for each year. Minority interests were excluded from shareholders’ equity and net income and are presented separately in the consolidated balance sheets and income statements.

In the case of joint ventures, the assets, liabilities and shareholders’ equity and the result for the year were consolidated in proportion to the percentage of ownership.

In accordance with the CVM Instruction 408/04, the Company consolidated the financial statements of its investment funds Concórdia Foreign Investment Fund Class A and Taurus Fund Limited, where it is the wholly investment holder. These investment funds have the sole purpose of centralizing the foreign investment fund portfolio, delegating to a third party the administrative functions and maximizing shareholder returns. As of December 31, 2006 and 2005, these investment funds were consolidated in the Company’s financial statements as they had loans collateralized by its own financial assets.

The consolidated financial statements include the accounts of Sadia S.A. and its direct and indirect subsidiaries, including investments in joint ventures. The consolidated direct or indirect subsidiaries and the corresponding shareholdings of the Company are as follows:

17


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 

 
  Shareholdings in % at
 
2006
2005
Sadia International Ltd.
100
100
Sadia Uruguay S.A.
100
100
Sadia Alimentos S.A.
0.01
0.01
Sadia Chile S.A.
60
60
Sadia Alimentos S.A.
99.99
99.99
Churrascaria Beijing Brazil Ltd. (*)
50
50
Concórdia Foods Ltd. (*)
100
50
Sadia UK Ltd.
100
100
Concórdia S.A. C.V.M.C.C.
99.99
99.99
Empresa Matogrossense de Alimentos Ltda. (**)
100
100
Intergen Ltda. (***)
100
     -
Rezende Óleo Ltda.
100
100
Rezende Marketing e Comunicações Ltda.
0.09
0.09
Rezende Marketing e Comunicações Ltda.
99.91
99.91
Sadia GmbH
100
100
Wellax Food Logistics C. P. A. S. U. Lda.
100
100
Sadia Foods GmbH
100
100
Sadia Panama S.A.
100
-
Qualy B. V.
100
100
Sadia Japan Ltd.
100
100
 
(*) Joint-Venture
(**) Acquired of controlling on January 11, 2006 (see note 10)
(***) Acquired of controlling on May 26, 2006 (see note 10)

18


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

Reconciliation of shareholders' equity and net income between the Company and consolidated is as follows:

 
Net income
Shareholders' equity
 
2006
2005
2006
2005
Company´s financial statements
379,933
647,403
2,466,094
2,228,040
Elimination of unrealized profits on inventories in intercompany operations, net of taxes
(7,736)
(4,391)
(12,127)
(18,718)
Reversal of the elimination of unrealized results in inventories, net of taxes, resulting from intercompany operations at December 31, 2005 and 2004
4,391
14,327
4,391
14,327
Consolidated financial statements
376,588
657,339
2,458,358
2,223,649

 

19


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 

5 Long and short-term investments
 
  Interest %
Parent company
Consolidated
 
  (annual
       
 
  average)
  2006
  2005
  2006
  2005
Short-term investments
Local currency
Investment funds
13.08
214,000
362,971
259,697
401,931
Austrian Bonds indexed in Reais
16.30
-
278,040
-
278,040
Others
7.65
           -
97
           -
97
 
214,000
641,108
259,697
680,068
Foreign currency
Investment funds
8.37
157,535
-
1,689,498
1,613,682
Interest-bearing current accounts
5.25
-
-
232,913
87,959
Currency swap contracts
-
18,041
-
18,041
Interest rate swap contracts
           -
          -
5,298
2,576
 
157,535
18,041
1,927,709
1,722,258
Total short-term
371,535
659,149
2,187,406
2,402,326
Long-term investments
Local currency
National Treasury Certificate - CTN
12,00
29,849
25,710
29,849
25,710
Treasury bills - LFT
14,00
45,286
39,347
45,286
39,347
Investment funds
13.08
53,992
          -
53,992
          -
Total long-term
129,127
65,057
129,127
65,057

 

20


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

Long-term investments as of December 31, 2006 mature as follows:  
 
Maturity  
 
2009
53,992
2010
45,286
2012 onwards
29,849
 
 
129,127

The investment fund portfolio in local currency is composed mainly of post-fixed Bank Deposit Certificates, National Treasury Securities and investment funds.

The investment fund portfolio in foreign currency is composed mainly of investments in dual currency, which have differentiated profitability according to the strike negotiated, and structured notes issued by first-tier American and European banks, pegged to securities of first-tier Brazilian companies and banks.

6 Accounts receivable        
 
Parent company
Consolidated
 
 
2006
2005
2006
2005
Foreign
Subsidiaries
167,950
79,566
-
-
Customers
156,818
151,266
391,477
260,545
Advance on delivered export contracts
-
(19,102)
-
(19,102)
 
Total of foreign
324,768
211,730
391.477
241,443
 
Domestic customers
301,877
278,791
302,055
278,799
(-) Allowance for doubtful accounts
(9,237)
(9,367)
(14,934)
(10,627)
 
 
617,408
481,154
678,598
509,615

 

21


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 

The changes in the allowance for doubtful accounts are as follows:
 
Parent company
Consolidated
 
 
2006
2005
2006
2005
 
Balance at the beginning of the year
(9,367)
(7,043)
(10,627)
(9,252)
Additions
(7,855)
(3,496)
(6,435)
(4,234)
Write offs
7,985
1,172
2,128
2,859
 
Balance at the end of the year
(9,237)
(9,367)
(14,934)
(10,627)

The Company and its subsidiaries abroad (Sadia International Ltd. and Wellax Food Logistics C.P.A.S.U. Lda.) entered into an agreement for sale of its receivables with an outside financial institution up to the maximum amount of US$170 million, with interest rate of 0.375% p.a. + LIBOR.

As of December 31, 2006, the amount of receivables sold under this agreement amounted to approximately R$ 170 million (R$ 100 million as of December 31, 2005). During the year ended December 31, 2006, the Company received cash proceeds of approximately R$ 1,910 million
(R$ 1,840 million for the year ended December 31, 2006) and incurred expenses of R$ 14 million (R$ 8 million in 2005) with respect to this agreement.

A credit insurance policy covering 90% of the value of the receivables was taken out with third parties and the beneficiaries in the event of default are the contracting financial institutions.

The Company also assigned receivables to a Credit Assignment Investment Fund (FIDC), administered by Concórdia S.A. Corretora de Valores Móbiliarios, Cambio e Commodities. As of December 31, 2006, the net equity of this fund was R$ 264,949 (R$ 231,197 at December 31, 2005), of which R$ 254,861 (R$ 190,350 at December 31, 2005) was represented by acquisitions of the Company’s receivables on the domestic market, with a discounted cost equivalent to 95% of the CDI per senior quota. The assignment of the receivables is made without right of recourse, and the eventual losses from default for Sadia are limited to the value of the subordinated quotas, which at December 31, 2006, represented R$ 53,992 (R$ 17,150 at December 31, 2005).

 

22


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 

During the year ended December 31, 2006, the Company received cash proceeds related to the local receivables sold of approximately R$ 2,795 million (R$ 2,598 million in 2005) and incurred expenses of R$ 30 million (R$ 27 million in 2005) with respect to this agreement.

For the other local receivables, the Company maintains a credit insurance policy that guarantees the collection in case of default of 90% of the uncollected amounts for customers with approved credit limits and up to R$ 100 to new customers or customers with no approved credit limits.

7 Inventories
 
Parent company
Consolidated
 
2006
2005
2006
2005
 
Finished goods and products for sale
279,969
307,445
351,186
349,360
Livestock and poultry for slaughter and sale
304,561
386,561
304,561
386,561
Raw materials
187,543
127,963
188,864
129,245
Work in process
158,284
38,336
158,284
38,336
Packaging materials
33,653
36,702
33,653
36,702
Storeroom
25,665
22,776
25,665
22,776
Advances to suppliers
12,654
13,599
12,879
13,599
Imports in transit
9,352
6,570
9,352
6,570
Products in transit
10
8,608
10
9,341
 
 
1,011,691
948,560
1,084,454
992,490

 

23


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 

8 Recoverable taxes
 
Parent company
Consolidated
 
2006
2005
2006
2005
 
ICMS
145,291
160,227
150,063
162,060
PIS and COFINS
84,290
7,082
84,619
7,411
IPI
59,142
48,820
59,175
48,853
Income and social contribution taxes
33,416
44,051
37,679
48,679
Others
3
56
40
109
 
 
322,142
260,236
331,576
267,112
 
Short-term portion
160,905
140,212
169,347
147,088
 
Long-term portion
161,237
120,024
162,229
120,024

a. Value-added tax on sales and services - ICMS

Composed of credits generated by the commercial operations and by the acquisition of property, plant and equipment, of a number of the Company’s units and can be offset with taxes of the same nature.

b. Social contributions - PIS/COFINS

The balance is composed of the amount of R$ 80,168 (see Note 20) and of R$ 4,451 of credits originated from noncumulative collection of PIS and COFINS, and these credits may be compensated with other federal taxes.

c. Excise tax - IPI

Composed of amounts arising from the following operations: presumed credit on packaging and inputs, presumed credit for reimbursement of PIS/PASEP and COFINS on exportations and export incentives, which can be compensated with other federal taxes.

 

24


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 

d. Income and social contribution taxes

Correspond to income tax withheld at source on short-term financial investments and income tax and social contributions paid in advance that can be offset with federal taxes and contributions.

9 Related party transactions

Related party transactions refers to mainly of sales operations between the Company and its subsidiaries, which were performed under normal market conditions for similar types of operations. The balance sheet and income statement transactions between related parties are shown below:

 
2006
2005
Accounts receivable
Wellax Food Logistics C. P. A. S. U. Lda.
143,197
59,190
Sadia International Ltd.
17,744
2,440
Sadia Alimentos S.A.
2,265
1,161
Sadia Uruguay S.A.
1,642
831
Qualy B.V.
299
14,396
Sadia Chile S.A.
2,803
1,548
 
 
167,950
79,566
 
Interest on shareholders' equity
Concórdia C.V.M.C.C.
4,226
4,548
 
 
4,226
4,548

 

25


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 

Loans
2006
2005
Wellax Food Logistics C. P. A. S. U. Lda.
91,482
95,063
Sadia International Ltd.
(231)
(253)
Empresa Matogrossense de Alimentos Ltda.
769
659
Rezende Óleo Ltda.
874
848
Concórdia S.A. CCVMCC
1
4
Rezende Marketing e Comunicação Ltda.
57
56
 
 
92,952
96,377
 
Advances from subsidiaries
Wellax Food Logistics C. P. A. S. U. Lda.
(1,744,718)
(857,699)
Sadia International Ltd.
(1,845)
(2,015)
 
 
(1,746,563)
(859,714)
 
Sales
Wellax Food Logistics C. P. A. S. U. Lda.
1,881,303
2,240,660
Sadia International Ltd.
168,259
71,391
Sadia Chile S.A.
15,366
16,493
Sadia Alimentos S.A.
10,556
11,999
Sadia Uruguay S.A.
5,499
4,536
Só Frango Produtos Alimentícios Ltda.
-
1,291
Qualy B. V.
25,603
          -
 
 
2,106,586
2,346,370
Goods purchase
Só Frango Produtos Alimentícios Ltda.
          -
16,030
 
 
-
16,030
Net financial result
Wellax Food Logistics C. P. A. S. U. Lda.
(2,267)
22,536
Sadia International Ltd.
160
320
 
(2,107)
22,856

26


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 

10 Investments            
 
Net income
Investment balances
 
Shareholder' s
(loss) for
Equity
Investments
Ownership
equity
the year
result
2006
2005
 
Sadia GmbH
100
1,103,002
176,828
200,859
1,103,002
902,143
Sadia International Ltd.
100
88,835
3,473
(4,610)
88,835
93,445
Concórdia S.A. CVMCC
99.99
61,943
8,260
12,491
61,943
53,678
Rezende Óleo Ltda.
100
1,112
(26)
(26)
1,112
1,138
Empresa Matogrossense de Alimentos Ltda.
100
780
(570)
(570)
780
1,350
Intergen Ltda.
100
571
91
86
571
-
Rezende Market. e Comun. Ltda.
99.91
(27)
(2)
(2)
          -
            -
 
Total in subsidiaries
208,228
1,256,243
1,051,754
 
Goodwill
-
28,828
54,076
Other investments
           -
1,385
1,445
 
Total investments of the Parent Company
208,228
1,286,456
1,107,275
 
Other investments of subsidiaries/affiliates
-
25,375
21,615
Investments eliminated on consolidation
(187,191)
(1,256,243)
(1,051,754)
 
Total consolidated investments
21,037
55,588
77,136

27


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

The changes in the investments are as follows:

 
Shareholding result
 
Acquisition
Write offs
Amortization
Negative equity
Dividends received
Operational
Non Operational
Sadia G.m.b.H.
-
-
-
-
-
200,859
-
Sadia International Ltd.
-
-
-
-
-
(4,610)
-
Concórdia S.A. CVMCC
-
-
-
-
(4,226)
8,261
4,230
Rezende Óleo Ltda.
-
-
-
-
(23)
(3)
Empresa Matogrossense de Alimentos Ltda.
-
-
-
-
-
(570)
-
Intergen Ltda.
485
-
-
-
-
86
-
Rezende Marketing e Comun. Ltda.
           -
           -
           -
2
           -
(2)
           -
 
485
-
-
2
(4,226)
204,001
4,227
Goodwill
515
-
(25,763)
-
-
-
-
Other investments
           -
(60)
           -
           -
           -
           -
           -
 
1,000
(60)
(25,763)
2
(4,226)
204,001
4,227

The accumulated income from equity interest on the consolidated financial statements is represented by translation gains of R$ 16,810 and a non-operating income of R$ 4,227.

On January 11, 2006 the Company acquired 100% of the quotas representing the capital of the Intergen Ltda. The acquisition generated a goodwill in the amount of R$ 515, classified as other economical reasons and therefore amortized directly in the income statement as other operating expenses. The acquired company’s business relates to porks genetics.

On May 26, 2006 Sadia acquired by the book value the remaining 50% equity interest in Concórdia Foods Ltd.

On December 31, 2006, the net balance of goodwill amounted to R$ 28,828 and was comprised of: i) goodwill related to the acquisition of Só Frango Produtos Alimentícios Ltda. in the amount of R$ 62,505 with accumulated amortization of R$ 25,248 (R$ 16,484 in 2005) and ii) goodwill related to the acquisition of Empresa Matogrossense de Alimentos Ltda. (start-up phase) in the amount of R$ 8,055, that will be amortized once it starts its operations forecasted for 2007. Such goodwill has been recorded based on projections of future profitability.

28


Sadia S.A.

Publicly-held Company

Notes to the financial statements / (In thousands of Reais)

11 Property, plant and equipment
Parent company
 
Cost
Depreciation
Residual amount

 
Annual average %
2006
2006
2006
2005
Lands
-
104,450
-
104,450
63,828
Buildings
4
847,306
(355,663)
491,643
383,747
Machinery and equipment
15
1,199,410
(607,833)
591,577
446,072
Installations
10
316,002
(142,135)
173,867
96,818
Vehicles and plane
27
12,572
(7,600)
4,972
4,580
Breeding stock
-
315,512
(194,537)
120,975
105,014
Forestation and reforestation
-
30,878
(5,491)
25,387
17,094
Others
-
1,306
(1,160)
146
1,624
Construction in progress
-
623,595
-
623,595
408,354
Advances to suppliers
35,177
           -
35,177
44,264
 
3,486,208
(1,314,419)
2,171,789
1,571,395
 
Consolidated
 
Cost
Depreciation
Residual amount
 
Annual average %
2006
2006
2006
2005
Lands
-
104,665
-
104,665
64,031
Buildings
4
848,474
(356,275)
492,199
383,945
Machinery and equipment
15
1,202,802
(609,551)
593,251
447,311
Installations
10
319,181
(142,314)
176,867
96,984
Vehicles and plane
27
20,371
(8,269)
12,102
5,491
Breeding stock
-
315,769
(194,666)
121,103
105,014
Forestation and reforestation
-
30,878
(5,491)
25,387
17,094
Others
-
2,834
(2,065)
769
2,201
Construction in progress
-
637,879
-
637,879
409,378
Advances to suppliers
-
35,177
           -
35,177
44,564
 
3,518,030
(1,318,631)
2,199,399
1,576,013

29


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

We present the changes in the cost of property, plant and equipment below:

 
Position in 12/31/2005
Position in 12/31/2006
 
Acquisitions
Disposal
Tranfers
Lands
64,031
40,481
(3)
156
104,665
Buildings
713,957
47,651
(609)
87,475
848,474
Machinery and equipment
988,805
38,296
(19,711)
195,412
1,202,802
Breeding stock
219,159
96,610
-
-
315,769
Installations
218,843
12,205
(1,758)
89,891
319,181
Vehicles and plane
13,554
8,979
(2,317)
155
20,371
Forestation and reforestation
23,013
4,496
(1,681)
5,050
30,878
Others
4,266
318
(453)
(1,297)
2,834
Construction in progress
409,378
721,406
(14,314)
(478,591)
637,879
Advances to suppliers
44,564
5,283
           -
(14,670)
35,177
Total cost of acquisition
2,699,570
975,725
(40,846)
(116,419)
3,518,030

a. The construction in progress is mainly represented by projects related to the expansion and modernization of industrial units, mainly Uberlandia and Lucas do Rio Verde units.

b. In accordance with CVM Deliberation 193/96 the interest incurred in the period arising from financing of projects for modernization and expansion of the industrial units has been recorded in the respective costs of the construction in progress in the amount of R$ 44,554 (R$ 16,852 at December 31, 2005).

c. On November 16, 2006 a claim occurred, as a result of fire that destroyed completely the building where the factory of roasted products of the Toledo unit was located. The amount of the assets damaged was estimated in R$ 120,000, which are totally covered by insurance policy, with an amount sufficient to comprehensively cover the material damage suffered. The inventory of assets is in course and, due to this event, a provision reducing fixed assets was recorded, in comparison to the amounts receivable from insurance in other credits in current assets. The amount of the franchise, of R$ 100, was provided for.

30


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

12 Deferred charges          
 
Parent company
 
Cost
Amortization
Residual value
 
Rate
2006
2006
2006
2005
Software implementation
25
125,547
(57,868)
67,679
70,705
Reorganization expenses
20
31,271
(5,672)
25,599
5,126
Pre operational costs
20
27,225
(6,652)
20,573
-
Product development and markets
20
17,481
(6,184)
11,297
11,293
Others
20
795
(454)
341
363
 
202,319
(76,830)
125,489
87,487
 
 
Consolidated
 
Cost
Amortization
Residual value
 
Rate
2006
2006
2006
2005
Software implementation
25
126,721
(58,435)
68,286
73,352
Reorganization expenses
20
31,271
(5,672)
25,599
5,126
Pre operational costs
20
31,669
(6,793)
24,877
-
Product development and markets
20
21,096
(6,297)
14,798
11,293
Others
20
1,081
(602)
479
422
 
211,838
(77,799)
134,039
90,193

The expenses with rearrangement refer to the implementation of the Service Center in the city of Curitiba.

The preoperating expenses refer basically to expenses incurred with the Lucas do Rio Verde Project - MT.

31


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 

13 Loans and financing - Short-term
 
Parent company
Consolidated
 
2006
2005
2006
2005
Short-term
Foreign currency
Net working financing composed of prepayment subject to LIBOR variation for 1-month deposits (5.32% in December 2006) plus interest of 0.10% p.a., guaranteed by its own investments
-
-
472,665
329,976
 
Advanced collection relating to the receivables sold, with no interest
107
-
275,253
54,376
 
Credit lines for the development of foreign trade, with interest rates of 6.50% p.a., guaranteed by promissory notes or sureties
-
-
4,543
4,871
 
Export financing composed of prepayment subject to interest rate of 4.20% p.a., guaranteed by promissory notes or sureties
-
23,735
-
23,735
 
Currency swap contracts
2,436
3,522
2,436
3,522
Interest rate swap contracts
           -
76
           -
76
 
 
2,543
27,333
754,897
416,556
Local currency
Rural credit lines and working capital loans with interest of 8.75% p.a.
231,660
167,751
231,660
167,751
 
Currency swap contracts
6,613
106,180
6,613
106,180
 
 
238,273
273,931
238,273
273,931
 
 
240,816
301,264
993,170
690,487

32


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 

 
Parent company
Consolidated
 
 
2006
2005
2006
2005
Short-term portion of the long-term debt
 
Foreign currency
Export financing composed of prepayment in amount of R$ 21,101 subject to LIBOR variation for 6-month deposits (5.37% in December 2006) and interest of 2.38% p.a. and an amount of R$ 93,051 of a line focused on the incentive for foreign trade activities, plus annual interest of 2.2% p.a., guaranteed by promissory notes or sureties
21,101
123,815
114,152
336,449
 
BNDES (National Bank for Economic and Social Development), for investments and exports credit lines, composed as follows: FINEM in the amount of R$ 9,411 subject to the weighted average of exchange variation of currencies traded by BNDES - UMBNDES and fixed interest of 3.50% p.a. and FINAME in the amount of R$ 6,651 subject to the weighted average of exchange variation of currencies traded by BNDES-UMBNDES and fixed interest of 3.50%, guaranteed by mortgage bonds and real estate mortgage.
16,062
10,956
16,062
10,956
 
IFC (International Finance Corporation) funding in foreign currency for investment in property, plant and equipment, subject to interest at the rate of 9.05% p.a., guaranteed by real estate mortgages
13,734
23,325
13,734
23,325
 
Financing subject to LIBOR variation for 1-month deposits (4.39% in December 2005) plus interest from 0.10% p.a., guaranteed by its own titles
           -
145,719
           -
145,719
 
 
50,897
303,815
143,948
516,449

33


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 
Parent company
Consolidated
 
2006
2005
2006
2005
Local currency
BNDES (National Bank for Economic and Social Development), credit linesfor investments and exports, composed as follows: FINAME in the amount of R$ 41,839 subject to the Long-Term Interest Rate -TJLP (6.85% p.a. in December 2006) and interest of 3.59% p.a., and FINEM in the amount of R$ 12,474subject to TJLP and interest of 3.50% p.a., guaranteed by mortgage bonds and real estate mortgages
54,313
165,225
54,313
165,225
 
PESA - Special Aid for Agribusiness payable in installments, subject to IGPM variation and annual interest of 9.89%, guaranteed by sureties
5,743
5,549
5,743
5,549
 
Others subject to interest rate from 1% to 14% p.a.
10,704
6,957
10,704
6,957
 
 
70,760
177,731
70,760
177,731
 
Short-term portion of long-term debt
121,657
481,546
214,708
694,180
 
Total short-term
362,473
782,810
1.207,878
1,384,667
At December 31, 2006 the weighted average interest in short-term loans was 5.36% p.a. (6.90% p.a. at December 31, 2005).

At December 31, 2006 the weighted average interest in short-term loans was 5.36% p.a. (6.90% p.a. at December 31, 2005).

34


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 

14 Loans and financing - Long-term
 
Parent company
Consolidated
 
 
2006
2005
2006
2005
Foreign currency
Export financing composed of prepayment, payable in amount of R$ 229,070 in installments up to 2010, subject to LIBOR variation for 6-month deposits (5.37% in December 2006) plus annual interest of 2.38% p.a, and a line focused on the incentive for foreign trade in amount of R$ 1.675,171, subject to LIBOR variation for 6-month plus interest of 2.20% p.a., guaranteed by promissory notes or sureties
229,070
372,780
1,904,241
1,584,893
 
BNDES (National Bank for Economic and Social Development), payable from 2007 to 2013, composed as follows: FINEM in the amount of R$ 17,193 subject to the weighted average of the exchange variation of currencies traded by BNDES - UMBNDES and fixed interest of 3.50% p.a. and FINAME in the amount of R$ 128,265 subject to the weighted average of the exchange variation of currencies traded by BNDES - UMBNDES and fixed annual interest of 3.50% p.a. guaranteed by mortgage bonds and real estate mortgages
145,458
69,750
145,458
69,750
 
IFC (International Finance Corporation) for investments in property, plant and equipment, subject to interest at the rate of 9.05% p.a., guaranteed by real estate mortgages
13,734
23,325
13,734
23,325
 
Currency swap contracts
1,769
3,334
1,769
3,334
 
Financing subject to LIBOR variation for 1-month deposits (4.39% in December 2006) plus interest of 0.10% p.a., guaranteed by its own titles
           -
145,719
           -
145,719
 
390,031
614,908
2,065,202
1,827,021

35


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

 

 
Parent company
Consolidated
 
2006
2005
2006
2005
Local currency
BNDES (National Bank for Economic and Social Development), credit lines for investments and exports, payable from 2007 to 2012, composed as follows: FINAME in the amount of R$ 630,803 subject to the Long-Term Interest Rate -TJLP (6.85% p.a. in December 2006) and interest of 3.59% p.a., and FINEM in the amount of R$ 20,734 subject to TJLP and interest of 3.50% p.a., guaranteed by mortgage bonds and real estate mortgages
651,537
402,659
651,537
402,659
 
PESA - Special Aid for Agribusiness payable, subject to IGPM variation and annual interest of 9.89%, guaranteed by sureties
136,440
131,831
136,440
131,831
 
Others subject to interest rate from 1% to 14% p.a.
34,267
40,187
34,267
40,187
 
Currency swap contracts
4,804
7,009
4,804
7,009
 
 
827,048
581,686
827,048
581,686
 
 
1,217,079
1,196,594
2,892,250
2,408,707
 
Short-term portion of long-term debt
(121,657)
(481,546)
(214,708)
(694,180)
 
Total long-term
1,095,422
715,048
2,677,542
1,714,527

36


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

The noncurrent portions of financings at December 31, 2006 mature as follows:    
 
Maturity
Parent company
Consolidated
 
2008
187,847
244,370
2009
282,676
282,676
2010
187,212
1,141,695
2011 onwards
137,707
708,821
 
299,980
299,980
 
 
1,095,422
2,677,542

15 Pension plans for employees

In addition to the pension plan, the Company’s human resources policy offers the following benefits:

• Payment of the penalty in connection with the Government Severance Indemnity Fund for Employees upon retirement;

• Payment of a bonus for time of service;

• Payment of indemnification for termination of service; and

• Payment of indemnification for retirement.

These benefits are due in one single payment upon the employee’s retirement or termination of service, and the amounts are computed by actuarial calculations.


37


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

16 Commitments and contingencies

Commitments

The Company has non-cancelable leasing agreements for industrial units that expire over the next two years. These leasing are subject to renewal for 4 more years and do not require any penalty if the Company does not renew them. The Company does not pay execution costs, such as maintenance and insurance. The rental expenses totaled R$ 64,470 in 2006 (R$ 33,110 in 2005).

The table below shows the future payments related to the leasing agreement at December 31, 2006:

2007 65,200
2008 29,900
Total 94,200

In addition the Company signed purchase agreements for production purposes (packaging) in the approximate amount of R$ 84 million on December 31, 2006, payable until 2010.

Contingencies

The Company and its subsidiaries have several on going claims of a labor, civil and tax nature, resulting from its normal business activities. The respective provisions for contingencies were constituted based on the opinion of the Company’s legal counsel, which considered that unfavorable outcomes are likely.

 

38


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

Based on management estimates, the provision for contingencies provided for, net of the respective legal deposits, established by CVM Deliberation 489/05, as presented below, is sufficient to cover possible losses with legal proceedings.

Parent company
Consolidated
2006 2005 2006 2005
Tax proceedings 41,634 39,810 42,888 42,217
Civil proceedings 8,950 13,281 8,950 13,281
Labor proceedings 24,115 16,447 24,116 16,449
74,699
69,538
75,954
71,947
Related legal deposits (31,083) (27,282) (31,189) (27,388)
Provision for contingencies - Net 43,616
42,256
44,765
44,559

The changes in the provision for contingencies are presented as follows:

Position in
2005
Additions Disposals Monetary updates Position in
2006
Tax proceedings 42,217 14,213 (12,214) (1,328) 42,888
Civil proceedings 13,281 5,652 (9,933) (50) 8,950
Labor proceedings 16,449 5,612 (4,266) 6,321 24,116
71,947
25,477
(26,413)
4,943
75,954

 

39


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

Tax litigation

The main tax contingencies involve the following cases:

a. Income and social contribution taxes on net income

Provision for income and social contribution taxes on net income amounting to R$ 16,018, of which R$ 11,283 recorded on the acquisition of the subsidiary Granja Rezende (incorporated in 2002), R$ 3,852 on withholding income tax on investments of Granja Rezende and R$ 883 for other provisions.

b. Value - Added tax on sales and services - ICMS

The Company is a defendant in several administrative cases involving ICMS, mainly in the States of São Paulo, Rio de Janeiro and Amazonas (SUFRAMA), totaling a probable contingency estimated at R$ 18,499.

c. Other tax contingencies

Several cases related to payment of IOF (Tax on Financial Operations), PIS (Social Integration Program Tax), COFINS (Tax for Social Security Financing) and others totaling a provision of R$ 8,371.

The Company has other contingencies of a tax nature with a claimed amount of R$ 327,278, which were assessed as possible losses by the legal advisors and by the Management of the Company and, therefore, no provision was recorded.

Civil litigation

Represents principally proceedings involving claims for indemnification for losses and damages, including pain and suffering, arising from work-related accidents and consumer relations.

 

40


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

The Company has other contingencies of a civil nature with a claimed amount of R$ 28,141, which were assessed as possible losses by the legal advisors and by Management and, therefore, no provision was recorded.

Labor claims

The company is involved in approximately 2,481 labor claims. These labor lawsuits refer mainly to claims for overtime, and health exposure and hazard claims, none of which involve a significant amount on an individual basis. The total amount involved is R$ 41,441, for which the provision in the amount of R$ 24,116 was recorded based on historical information, representing the best estimate for probable losses.

Court deposits

The Company, as appropriate, performs legal deposits not related to provisions for contingencies, which balance as of December 31, 2006 was R$ 46,968 (R$ 51,008 on December 31, 2005).

Guarantees

The Company provides guarantees to loans obtained by certain out growers located in the central region of the country as part of a special development program for that region. Such loans are used to improve the out growers farms installations and will be repaid in 10 years, where the Company obtain from the out growers their farms and installations as a collateral for such guarantees provided. The amount for such guarantees provided as of December 31, 2006 amounted R$ 20,245 (R$ 11,468 in December 31, 2005).

 

41


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

17 Shareholders’ equity

a. Capital

Subscribed and paid-in capital is represented by the following shares with no par value, at December 31, 2006 and 2005:

2006 2005
     
Common shares 257,000,000 257,000,000
Preferred shares 426,000,000 426,000,000
        Total shares 683,000,000
683,000,000
Preferred shares in treasury (5,924,288) (2,504,288)
        Total outstanding shares 677,075,712
680,495,712

b. Statutory reserves

Legal reserve

In compliance with article 193 of Law 6404/76, the reserve was recorded at the rate of 5% of the net profit for the year, up to the limit of 20% of the capital.

Research and development reserve

It is recorded at the rate of 5% of the net profit for the year, up to the limit of 10% of capital.

 

42


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

Expansion reserve

It is recorded with at least 15% and with a maximum of 60% of the net profit for the year, up to the limit of 70% of capital.

c. Treasury stock

The Company’s treasury stock consists of 5,924,288 preferred shares acquired at R$ 33,804 for future sale and/or cancellation. At December 31, 2006 the market value corresponded to R$ 42,918.

d. Shareholders’ remuneration

The corporate bylaws determine the distribution of a minimum dividend of 28% of the net income for the year, adjusted in accordance with article 202 of Law 6404/76. The minimum dividend was paid or credited as interest on own capital. The Company calculated interest on own capital based on the long-term interest rate (TJLP) in force in the year, as shown below:

 

43


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

2006 2005
   
Net income for the year 379,933 647,403
    Legal reserve (18,997) (32,370)
Basis 360,936 615,033
Distribuition to shareholders:
    Interest on shareholders' equity (net of withholding tax of R$ 7,500) paid in advance in August 17, 2006 42,500 -
    Interest on shareholders' equity (net of withholding tax of R$ 10,340) recorded at December 31, 2006, to be paid on February 16, 2007. 58,580 -
    Interest on shareholders' equity (net of withholding tax of R$ 26,211) paid related to 2005 - 148,527
    Interest on shareholders' equity (net of withholding tax of R$ 17,814) recorded at December 31, 2005, to be paid on February 16, 2006.       - 26,621
            Total 101,080
175,148
    Percentage in relation to the basis 28.00% 28.48%
    Interest on shareholders' equity by 1,000 shares in Reais:
        Preferred R$ 175,64 R$ 259.87
        Common R$ 175,64 R$ 253.29

e. Market value

The market value of Sadia S.A. shares according to the average quotation of shares traded on the São Paulo Stock Exchange - BOVESPA, corresponded to R$ 7.16 per thousand shares at December 31, 2006 (R$ 6.43 at December 31, 2005). Net equity on that date was R$ 3.64 per thousand shares (R$ 3.27 at December 31, 2005).

 

44


Sadia S.A.

Publicly-held Company

Notes to the financial statements / (In thousands of Reais)

f. Shareholders composition

Shareholders composition, until the natural person level, of Sadia S.A, which have more than 5% of ordinary stock, at December 31, 2006.

Shareholders CS % PS % Total %
Fundação Attilio F. X. Fontana 24,998,558 9.73 - - 24,998,558 3.66
Sunflower Participações S.A. (i) 35,964,747 13.99 - - 35,964,747 5.27
Administradora e Comercial Old Ltda. 25,661,658 9.99 60,000 0.01 25,721,658 3.77
Other shareholders (i) 101,034,002 39.31 28,622,376 6.72 129,656,378 18.97
PREVI - Caixa Prev. Func. Bco. Brasil 1,996,511 0.78 59,359,870 13.93 61,356,381 8.98
Dodge & Cox - - 43,494,000 10.21 43,494,000 6.37
Oppenheimer Funds Inc.(ii) - - 42,014,480 9.86 42,014,480 6.15
Other shareholders 67,344,524 26.20 246,524,986 57.88 313,869,510 45.96
Treasury stock             -             - 5,924,288 1.39 5,924,288 0.87
        Total 257,000,000
100.00
426,000,000
100.00
683,000,000
100.00

(i) Participants of the shareholders’ agreement
(ii) Foreign investment fund

Shareholders composition of Sunflower Participações S.A. at December 31, 2006:

Shareholders CS % PS % Total %
Maria Aparecida Cunha Fontana 14,084,143 39.16 - - 14,084,143 39.16
Walter Fontana Filho 9,458,032 26.30 - - 9,458,032 26.30
Vânia Cunha Fontana 6,706,010 18.65 - - 6,706,010 18.65
Attilio Fontana Neto 5,716,562 15.89             -             - 5,716,562 15.89
        Total 35,964,747
100.00
-
-
35,964,747
100.00

Shareholders composition of Administradora e Comercial Old Ltda. at December 31, 2006:

Shareholders CS % PS % Total %
Luiz Fernando Furlan 5,147,728 20.06 12,036 20.06 5,159,764 20.06
Leila Maria Furlan da Silva Telles 5,140,030 20.03 12,018 20.03 5,152,048 20.03
Lucila Maria Furlan 5,132,332 20.00 12,000 20.00 5,144,332 20.00
Osório Henrique Furlan Júnior 5,132,332 20.00 12,000 20.00 5,144,332 20.00
Diva Helena Furlan 5,109,236 19.91 11,946 19.91 5,121,182 19.91
        Total 25,661,658
100.00
60,00 0
100.00
25,721,658
100.00

45


Sadia S.A.

Publicly-held Company

Notes to the financial statements

(In thousands of Reais)

Shareholders composition of Oppenheimer Funds Inc. at December 31, 2006:

Shareholders CS
%
Total
%
Oppenheimer Developing Markets Fund 32,872,000 78.23 32,872,000 78.23
Pacific Select Fund 4,923,290 11.72 4,923,290 11.72
TA Index Oppenheimer Emerging Markets 1,301,000 3.1 1,301,000 3.1
OFI Trust Company 928,400 2.21 928,400 2.21
OppenheimerFunds PLC 674,380 1.61 674,380 1.61
OFI Institutional Emerging Markets Eq. Fund LP 440,870 1.05 440,870 1.05
Stichting Pensionenfonds Hoogovens 340,000 0.81 340,000 0.81
Raytheon Company Master Trust 185,540 0.44 185,540 0.44
Altria Corp Serv Master Retirement Trust 200,000 0.48 200,000 0.48
Pacific Funds PF Oppenheimer Emerging Markets Fund 149,000 0.35 149,000 0.35
       
    Total 42,014,480
100
42,014,480
100

Stocks in possession of the Controllers, Advisory Board, Directors and the Fiscal Council of the Sadia S.A.

At December 31, 2006

Shareholders
CS
%
PS
%
Total
%
Controlling shareholders 136,998,749 53.31 28,622,376 6.72 165,621,125 24.25
Board of Directors members(*) - - 10,003,400 2.35 10,003,400 1.46
Officers(*) 12,472 - 3,152,207 0.74 3,164,679 0.46
Fiscal council         -         - 528         - 528         -
Total 137,011,221
41,778,511
178,789,732

(*)Excludes shareholders who are members of the controlling group.

At December 31, 2005

Shareholders CS % CS PS % PS Total %Total
Controlling shareholders 136,732,133 53.20% 41,973,939 9.85% 178,706,072 26.16%
Board of directors members (*) 19,864,334 7.73% 9,101,201 2.14% 28,965,535 4.24%
Officers (*) 11,915 - 4,956,929 1.16% 4,968,844 0.73%
Fiscal council 1,629         - 528         - 2,157         -
Total 156,610,011
-
56,032,597
-
212,642,608
-

(*)Excludes shareholders who are members of the controlling group.

46


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

Outstanding stocks of Sadia S.A. at December 31, 2006:

CS % PS % Total %
Outstanding stocks 119,988,779 46.69 378.297.729 88.8 498,286,508 72.96
Total 257,000,000
100.00%
426,000,000
100.00%
683,000,000
100.00%

18 Stock option plan

The Company has a granting plan of option of purchase of shares, which contemplates nominative preferred shares of issue of the Company, available in treasury, the objective of which is a long-term view, motivating the feeling of property and commitment of the Company’s players, in line with the shareholders’ interests.

The plan is managed by a Management Committee, composed of the Chief Executive Officer and the Human Resources Committee of the Board of Directors.

The price for exercising the purchase options does not include any discount and will be based on the average value of the quotation for the share in the last three days of trading on the São Paulo Stock Exchange prior to the grant date, updated by the accumulated National Consumer Price Index (INPC) between the grant date of exercising the option. The vesting period, during which the participant cannot exercise his/her right to purchase the shares, will be three years as from the option granting date. The participant will be able to fully or partially exercise his/her purchase rights after the vesting period within a maximum period of 2 years, and only after this period has expired will he/she lose the right to the options not exercised.

The composition of the options granted is presented as follows:

Date
Quantity
of
Shares
Price of Shares
Cycle Grant Start Final Grant date Update - INPC
             
2005 6/24/05 6/24/08 6/24/10 2.200.000 4.55 4.76
2006 9/26/06 9/26/09 9/26/11 3.520.000 5.68 5.76

 

47


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

2006 2005
     
Balance at January 1º 2,200,000 -
    Conceded options - Cycle 2006 3,520,000 2,200,000
    Exercised options - Cicle 2005 (100,000) -
    Cancelled options - Cycle 2005 (200,000) -
    Cancelled options - Cycle 2006 (100,000)             -
     
Balance at December 31 5,320,000
2,200,000

Since the Company has treasury shares earmarked for the stock option plan, the difference between the market value and the updated price for the year will not affect the Company’s results.

19 Employees’ profit sharing

The Company grants its employees a profit sharing plan, which depends on attaining specific targets, established and agreed to at the beginning of each year. This plan has been approved by Board of Directors of the Company and it has been registered by a formal agreement with the unions.

20 Other operating income

On October 26, the Company obtained recognition of the final, favorable, unappealable decision on the COFINS proceedings referring to the unconstitutionality of Law 9718/98, which changed the basis for the calculation of PIS and COFINS by including operating and financial income. This matter was judged and considered unconstitutional by the Superior court of Justice on November 9, 2005. The Company has been collecting the tax in accordance with legislation and, based on the transit in rem judicatam of this proceeding, recognized the tax credit in the amount of R$ 80,168, which, net of attorneys’ fees, represented a gain of R$ 75,654.

 

48


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

21 Financial result

Parent company
Consolidated
2006 2005 2006 2005
Financial expenses
    Interest (183,857) (211,320) (233,360) (235,176)
    Monetary variations - Liabilities (12,579) (10,570) (12,579) (20,379)
    Exchange variations - Liabilities 50,617 226,931 120,260 199,039
    Others (52,668) (43,068) (64,503) (68,676)
(198,487) (38,027) (190,182) (125,192)
Financial income
    Interest 62,286 90,668 198,638 218,685
    Monetary variations - Assets 5,540 205 5,540 205
    Exchange variations - Assets (28,210) (121,196) (32,851) 112,962
    Others 65,653 17,711 78,726 29,313
105,269 (12,612) 250,053 361,165
(93,218)
(50,639)
59,871
235,973

22 Income and social contribution taxes

Income before the provision for income tax (IR) and social contribution on net income (CSLL) was composed as follows:

Parent company
Consolidated
2006 2005 2006 2005
Local 417,864 719,324 234,349 299,766
Foreign         -         - 180,305 429,254
417,864
719,324
414,654
729,020

 

49


Sadia S.A.

Publicly-held Company

Notes to the financial statements / (In thousands of Reais)

The composition of income and social contribution taxes is as follows:

Parent company
Consolidated
2006 2005 2006 2005
Local
    Current (8,006) (51,384) (10,519) (52,239)
    Deferred (28,744) (18,817) (27,024) (19,189)
(36,750) (70,201) (37,543) (71,428)
Foreign
    Current - - (448) 248
    Deferred (1,181) (1,720) (1,181) (1,720)
(1,181) (1,720) (1,629) (1,472)
(37,931)
(71,921)
(39,172)
(72,900)

Income and social contribution taxes were calculated at applicable rates and reconciliation with the income and social contribution tax expenses is shown below:

Parent company
Consolidated
2006 2005 2006 2005
Income before taxation/profit sharing 417,864 719,324 414,654 729,020
Interest on shareholders' equity (118,920) (174,738) (118,920) (174,738)
Income before income and social contribuition taxes 298,944 544,586 295,734 554,282
Income and social contribuition taxes at nominal rate - 34% (101,641) (185,159) (100,550) (188,456)
Adjustment to calculate the effective rate
Permanent differences
    Equity in earnings fo subsidiaries 70,798 99,910 67,835 95,421
    Interest on shareholders' equity of subsidiaries - - 1,437 1,546
    Others (5,907) 15,048 (6,713) 20,309
    Provision for income and social contribuition taxes on income of foreign subsidiary (1,181) (1,720) (1,181) (1,720)
Income and social contribuition taxes at effective rate (37,931)
(71,921)
(39,172)
(72,900)

50


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

The composition of deferred income and social contribution taxes is as follows:

Parent company
Consolidated
2006 2005 2006 2005
Assets
    Deferred taxes
        Tax loss carryforwards and negative basis of social
        contribution
37,834 9,861 37,834 9,861
        Benefit plan 32,700 28,219 32,700 28,219
        Provision for contingencies 25,397 23,643 25,824 24,462
        Employees' profit sharing 15,157 19,874 15,564 20,163
        Allowance for doubtful accounts 9,645 10,256 9,645 10,256
        Goodwill amortization 7,108 2,037 7,108 2,037
        Provision for loss on property, plant and equipment 5,001 4,417 5,001 4,417
        Others 814 2,632 3,971 3,795
        Summer Plan depreciation 2,105 2,834 2,105 2,834
        Total assets deferred taxes 135,761 103,773 139,752 106,044
        Assets short-term portion 52,518 27,223 56,509 29,494
        Assets long-term portion 83,243 76,550 83,243 76,550
Liabilities
    Deferred taxes
        Depreciation on rural activities 84,716 32,811 84,716 32,811
        Provisão para atualização de Grãos 10,008         - 10,008         -
        Total liabilities deferred taxes 94,724 32,811 94,724 32,811
        Liabilities short-term portion 18,355 3,321 18,355 3,321
        Liabilities long-term portion 76,369 29,490 76,369 29,490
    Net 41,037
70,962
45,028
73,233

The Management considers that the deferred assets arising from temporary differences will be realized in proportion to the final solution of the contingencies and to the payment of the liabilities forecast for the employees’ benefit plans.

51


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

The deferred tax assets related to the income tax loss carryforwards and negative basis of social contribution in the amount of R$ 37,834, represented by R$ 29,160 of the Parent and R$ 8,674 from a foreign subsidiary will be realized base on future taxable income on such companies. Management estimates that the deferred tax asset related to the Parent will be fully realized during this year and the deferred tax asset related to the foreign subsidiary will be realized within three years.

23 Risk management and financial instruments

The Company’s operations are exposed to market risks, especially in relation to exchange rate variations, credit risk and grain purchase prices. These risks are monitored by the Risk Management Area which uses a specific system to calculate the “VAR -Value at Risk”, and they are permanently monitored by the finance committee, composed of members of the Board of Directors and other finance executives of the Company, who are responsible for defining the Board’s risk management strategy by determining the position and exposure limits. At December 31, 2006 the Value at Risk (VAR) of the financial assets and liabilities, for one year, with a 95% confidence rating, represents R$ 96,735 (non-audited information), representing 3.93% of shareholder equity (not audited by auditors).

a. Exchange rate risk

The exchange rate risk for loans, financing and any other payables denominated in foreign currency is hedged by short-term investments denominated in foreign currency, with same interest rates, and by derivative financial instruments, such as rate swaps (dollar to CDI), interest rate swap contracts (Libor to pre-fixed or vice-versa) and future market agreements, in addition to foreign receivables from exports, which also reduce exchange variations by serving as a “natural hedge”.

The Company, within its hedge strategy, uses currency futures contracts (US dollars, Euros and Pounds), as a form of mitigating exchange rate risk over operating and financial assets and liabilities. The nominal amounts of these contracts are not recorded in the financial statements.

 

52


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

The realized income of future contracts, for the year ended December 31, 2006, generated a gain of R$ 150,645 (R$ 152,222 for 2005), and the amount of R$ 150,077 for 2006 was accounted for as financial income in “Monetary Variations Asset”, and the amount of R$ 568 as operating income in “Gross operating revenue”.

The results of the operations in the currency futures market, realized and not financially settled and the daily adjustments of currency futures contracts on the Future and Commodities Exchange - BM&F are recorded in the financial statements as “Amounts receivable from futures contracts” and “Amounts payable for futures contracts”.

The unrealized income of counter operations entered into with future maturity dates are not recognized in the financial statements. These contracts, as from December 2006, are segregated and defined as operating or financial, in accordance with the item to be protected. The amount of these contracts, if recorded as of December 31, 2006, would result in an income of R$ 26,279 in the financial income and of R$ 15,018 in the operating income.

The Company’s exposure to exchange variation (mainly in US dollars) is shown below:

Consolidated
2006 2005
Assets and liabilities in foreign currency
    Cash and cash equivalents and short-term investments 1,960,847 1,769,241
    Amounts receivable from futures contracts 26,357 28,287
    Trade accounts receivable 385,797 240,191
    Suppliers (39,521) (37,697)
    Loans and financing (2,820,099) (2,243,577)
    Amounts payable for futures contracts (9,077) (10,702)
    Swap contracts (dollar for CDI (*)) 22,284 172,374
(473,412)
(81,883)

(*) Interbank deposit interest.

53


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

Consolidated hedge contracts outstanding at December 31, 2006 with their respective payment schedules are as follows:

   
Maturity
 
Position
Derivative contracts
31/12/2006
2007
2008
Currency swap contracts
Base value - R$
22,284
12,908
9,376
Base value - US$
7,504
4,347
3,157
Receivables/payables
Asset
-
-
-
Liability
(15,621)
(9,048)
(6,573)
 
Rate swap contracts
Base value - R$
534,500
534,500
-
Base value - US$
250,000
250,000
-
Amount receivable
5,298
5,298
-
 
Futures contracts - US dollars
Short position- US$
430,000
430,000
-
Long position - US$
274,000
274,000
-
Short position - Euro
139,161
139,161
-
Long position - Euro
3,847
3,847
-
Short position - Libra
86,023
86,023
-
Long position - Libra
18,427
18,427
-
 
Options
Short put option US$
380,000
380,000
-
Long call option US$
380,000
380,000
-
Amount receivable
26,357
26,357
-
Amount payable
(9,077)
(9,077)
-

54


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

b. Credit risk

The Company is potentially exposed to credit risk in relation to its trade accounts receivable, long and short-term investments and derivative instruments. The Company limits the risk associated with these financial instruments by subjecting them to the control of highly rated financial institutions that operate within the limits pre-established by the credit and financing committees.

The concentration of credit risk with respect to accounts receivable is minimized due to the spread of its client base, since the Company does not have any customer or group representing 10% or more of its consolidated revenues, as well as granting credits for customers with solid financial and operational ratios. Generally, the Company does not require a guarantee for sales, however it has contracted an insurance credit policy to its domestic receivables.

c. Grain purchase price risks

The Company’s operations are exposed to the volatility in prices of grain (corn and soybean) used in the preparation of animal feed for its breeding stock, where the price variation results from factors beyond the control of management, such as climate, the size of the harvest, transport and storage costs and government agricultural policies, among others. The Company does not enter into futures or options contracts to hedge against fluctuations in the prices of the commodities, however it maintains a risk management strategy, based on physical control, which includes purchase of grain at fixed and fixable prices. The Company has a Grains Committee, composed of the chief executive officer and financial and operational executives. Its aim is to permanently monitor changes in scenarios, establishing limits of authority for purchase or sale.

d. Estimated market values

The Company used the following methods and assumptions to estimate the disclosure of the fair value of its financial instruments as of December 31, 2006 and 2005:

 

55


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

· Cash and cash equivalents - The book values of cash and banks recorded in the balance sheet are similar to the respective fair values.

· Short-term financial investments - The fair value of short-term financial investments is estimated based on the market quotations of comparable contracts.

· Accounts receivable and payable - The book values of accounts receivable and payable recorded in the balance sheet are similar to their respective fair values.

· Short and long-term loans and financing - The market values of loans and financing were calculated based on their present value calculated through the future cash flows and using interest rates applicable to instruments of similar nature, terms and risks, or based on the market quotation of these securities. The market values of BNDES financing are similar to the book values, since there are no similar instruments with comparable maturities and interest rates.

· Exchange and interest rate swap contracts - The fair values of exchange and interest rate swap contracts were estimated based on market quotations for comparable contracts. As of December 31, 2006 the contracted amounts in force totaled R$ 1,554,843
(R$ 2,381,603 in December 31, 2005) and the valuation of these contracts to fair value would result in losses of R$ 67,041 (loss of R$ 31,227 in December 31, 2005). The effective cash settlements of the contracts occur on the respective maturities of each agreement. The Company does not intend to settle these contracts before their maturity.

The market values were estimated on the balance sheet date, based on “relevant market information”. Changes in the assumptions may significantly affect these estimates.

The book values and the estimated fair values of the Company’s financial instruments as of December 31, 2004 and 2005 are presented in the table below. The fair value of a financial instrument is the amount for which the instrument could be traded between interested parties under current market conditions.

 

56


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

Consolidated
2006
2005
Book
value
Market
value
Book
value
Market
value
Cash and cash equivalents 234,069 234,069 196,306 196,306
Short-term investments - Local Currency 388,824 388,824 745,125 745,125
Short-term investments - Foreign Currency 1,927,709 1,927,709 1,722,258 1,723,481
Trade accounts receivable 693,532 693,532 520,242 520,242
Loans and financing 3,885,420 3,924,161 3,099,194 3,085,024
Suppliers 503,285 503,285 495,758 495,758
Futures contracts, net 17,280 17,280 17,585 17,585

e. Financial indebtedness

Consolidated
2006
2005
Currency
Currency
Local Foreign Total Local Foreign Total
Assets
    Cash and cash equivalents 200,931 33,138 234,069 149,323 46,983 196,306
    Short-term investments 259,697 1,927,709 2,187,406 680,068 1,722,258 2,402,326
    Accounts receivable from future contracts             - 26,357 26,357             - 28,287 28,287
        Total current assets 460,628
1,987,204
2,447,832
829,391
1,797,528
2,626,919
    Long-term investments 129,127             - 129,127 65,057             - 65,057
        Total long-term assets 129,127
-
129,127
65,057
-
65,057
        Total Financial Assets 589,755
1,987,204
2,576,959
894,448
1,797,528
2,691,976

 

57


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

Consolidated
2006
2005
Currency
Currency
Local Foreign Total Local Foreign Total
Liabilities
    Short-term financing 309,033 898,845 1,207,878 451,662 933,005 1,384,667
    Accounts paybles from future contracts - 9,077 9,077 - 10,702 10,702
    Swap contracts - short-term 12,908 (12,908)         - 150,090 (150,090)         -
    Total current liabilities 321,941 895,014 1,216,955 601,752 793,617 1,395,369
    Long-term Financing 756,288 1,921,254 2,677,542 403,955 1,310,572 1,714,527
    Swap contracts - long-term 9,376 (9,376) - 22,284 (22,284) -
    Total noncurrent liabilities 765,664 1,911,878 2,677,542 426,239 1,288,288 1,714,527
    Total Financial liabilities 1,087,605 2,806,892 3,894,497 1,027,991 2,081,905 3,109,896
Net debt (497,850)
(819,688)
(1,317,538)
(133,543)
(284,377)
(417,920)

24 Insurance

The Company and its subsidiaries adopt insurance engagement policy at levels that Management considers adequate to cover risks resulting from the claims of its assets. Due to the characteristics of multilocated operations, Management engages its policies with a limit of maximum loss possible in the same event, with amounts calculated based on risk inspections and potential losses. The policies engaged guarantee coverage against fire, general civil liability, windstorms, disorders and electric damage, as well as insurance for merchandise transport, personal and vehicle damage. The amount currently insured guarantees the comprehensive coverage of the Company’s fixed assets.

The assumptions adopted, given their nature, are not part of the scope of an audit of financial statements and, accordingly, they were not examined by our independent auditors.

 

58


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

25 Private pension plan

a. Defined benefit plan

The Company and its subsidiary Concórdia S.A. C.V.M.C.C. are the sponsors of a defined contribution pension plan for employees, managed by Fundação Attílio Francisco Xavier Fontana.

The supplementary pension benefit is defined as the difference between (i) the benefit wage (updated average of the last 12 participation salaries, limited to 80% of the last participation salary) and (ii) the amount of the pension paid by the National Institute of Social Security. The supplementary benefit is updated on the same base date and in accordance with the rates applicable to the main activity category of the Company, discounting real gains.

The actuarial system is that of capitalization for supplementary retirement and pension benefits and of simple apportionment for supplementary disability compensation. The Company’s contribution is based on a fixed percentage of the payroll of active participants, as annually recommended by independent actuaries and approved by the trustees of Fundação Attilio Francisco Xavier Fontana.

According to the Foundation’s statutes, the sponsoring companies are jointly liable for the obligations undertaken by the Foundation on behalf of its participants and dependents. On December 31, 2006 the defined benefit plan presented a surplus of R$ 210,904 (R$ 176,605 as of December 31, 2005).

At December 31, 2006 the Foundation had a total of 20,484 participants (21,697 on December 31, 2005), of which 16,795 were active participants (18,156 on December 31, 2005).

The contributions of the parent company, on December 31, 2006 and 2005, amounted to
R$ 2,004 and R$ 2,044, and R$ 2,073 and R$ 2,097 in the consolidated, respectively.

 

59


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

Information on the actuarial calculation of the social security plan is presented below:

2006 2005
Composition of actuarial assets
    Present value of the actuarial liabilities 736,436 704,529
    Fair value of the actuarial assets (1,128,000) (1,035,000)
    Unrecognized actuarial losses 222,805 198,896
Net actuarial assets (168,759)
(131,575)
Reconciliation of present liabilities value
    Liability value at the beginning of the year 704,529 580,504
    Gross current cost of services (with interest) 25,403 18,442
    Interest in actuarial liabilities 77,995 64,139
    Benefits paid during the year (35,751) (30,468)
    Liabilities - (Gains)/losses (35,740) 71,912
Liabilities value at the end of the year (736,436)
704,529
Reconciliation of fair value of assets
    Fair value of assetes at the beginning of the year 1,035,000 904,695
    Benefits paid during the year (35,751) (30,468)
    Participant contribuitions during the year 6,451 6,177
    Sponsor contribuitions made during the year 2,115 2,154
    Assets earnings for the year 120,185 152,442
Fair value of assetes at the end of the year 1,128,000
1,035,000
Calculation of (gains)/losses
    Value of losses at the beginning of the year (176,381) (187,654)
    Losses in actuarial liabilities 4,672 4,479
    (Gains)/losses in actuarial liabilities (35,740) 49,397
    Gains in plan assets 6,354 (41,850)
    (Gains)/losses in employee contribuitions (638) (753)
(Gains)/losses at the end of the year (201,733)
(176,381)

 

60


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

2006 2005
Actuarial assumptions adopted in the calculation
    Nominal discount rate for actuarial liabilities 11.30% 11.30%
    Expected nominal earnings rate on assets 12.35% 12.35%
    Estimated nominal growth rate for salaries 7.10% 7.10%
    Estimated nominal growth rate for benefits 5.00% 5.00%
    Biometric table of general mortality AT83
    Biometric table of disability leave TASA1927
    Expected rotation rate 3%py
    Probability of applying for retirement 55years

The actuarial asset has not been recognized in the sponsor’s financial statements due to the lack of prospects of realization.

b. Defined contribution plan

As from January 1, 2003, the Company began to adopt new supplementary pension plans under the defined contribution modality for all employees hired by Sadia and its subsidiaries. Under the terms of the regulations, plans are funded on an equitable basis so that the portion paid by the Company is equal to the payment made by the employee in accordance with a contribution scale based on salary bands that vary between 1.5% and 6% of the employee’s remuneration, observing a contribution limit that is updated annually. The contributions made by the Company at December 31, 2006 and 2005 totaled R$ 2,807 and R$ 2,276 respectively. As of December 31, 2005 this plan had 11,924 participants (11,563 in December 31, 2005).

26 Segment and related information

The following information about segments is based upon information used by the Company’s management to assess the performance of operating segments and decides on the allocation of resources.

 

61


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

The Company has four identifiable reportable segments: Processed products, Poultry, Pork and beef. The Company evaluates segment performance based on information generated from its statutory accounting records prepared in accordance with accounting principles generally accepted in Brazil.

a. Segment information

2006 2005
Net operating revenue
    Processed products 3,102,397 3,147,296
    Poultry 2,872,845 3,199,246
    Pork 494,571 732,710
    Beef 309,353 -
    Others 97,535 239,186
        Total net operating revenue 6,876,701
7,318,438

Other net operating revenue is primarily attributable to grain and by-products and beef products operations.

2006 2005
Depreciation expenses
    Processed products (92,214) (60,863)
    Poultry (100,080) (80,336)
    Pork (15,223) (16,853)
    Beef (11,660)
    Others (4,072) (7,294)
        Total depreciation expenses allocated to segments (223,249)
(165,346)
    Depreciation allocated to administrative expenses (17,320) (12,829)
        Total depreciation expenses (240,569) (178,175)

 

62


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

2006 2005
Segment operating income
    Processed Products 194,494 273,684
    Poultry 100,204 269,766
    Pork 35,489 94,586
    Beef 11,482 -
    Others 2,087 2,798
        Total operating income 343,756
640,834
Interest expense (310,442) (324,231)
Interest income 282,904 248,203
Exchange gains (losses), net 104,219 159,602
Income before income taxes and social contribution 420,437 724,408
Segment assets
    Processed products 715,248 626,055
    Poultry 1,018,005 753,255
    Pork 275,533 147,923
    Beef 104,340 -
    Others 220,312 138,973
        Total property, plant and equipment 2,333,438
1,666,206
Reconciling items - Corporate assets
    Cash and cash equivalents 234,069 196,306
    Short-term investments 2,187,406 2,402,326
    Long-term investments 129,127 65,057
    Accounts and notes receivables, net 678,598 509,615
    Inventories 1,084,454 992,490
    Others corporate assets 929,259 690,825
        Total consolidated assets 7,576,351
6,522,825

 

63


Sadia S.A.

Publicly-held Company

 

Notes to the financial statements

(In thousands of Reais)

 

 

 

2006 2005
Capital expenditures
    Processed products 302,648 194,587
    Poultry 367,581 372,761
    Pork 143,032 26,982
    Beef 7,786
    Others 234,331 91,662
        Total segment capital expenditures 1,055,378
685,992

b. Export sales by region/market

2006 2005
Europe 889,171 978,318
Middle East 787,838 1,047,615
Asia 533,295 635,907
Americas 528,453 542,151
Eurasia (mainly Russia and other former Soviet Union countries) 719,706 872,333
3,458,463
4,076,324

Revenues are attributed to regions based upon where the products are shipped. All long-lived operational assets are located in Brazil and assets located outside of Brazil consist of sales offices located in various countries and construction in progress in Russia.

 

64


Sadia S.A.

 

 

 

Board of Directors

 

Walter Fontana Filho
Chairman

Eduardo Fontana D'Ávila
Member

Osório Henrique Furlan
Member

Alcides Lopes Tápias
Member

Everaldo Nigro dos Santos
Member

Francisco Silverio Morales Cespede
Member

José Marcos Konder Comparato
Member

Luiza Helena Trajano Inácio Rodrigues
Member

Marcelo Fontana
Member

Norberto Fatio
Member

Vicente Falconi Campos
Member

 

65


Sadia S.A.

 

 

Officers
   
Gilberto Tomazoni Chief Executive Officer
Adriano Lima Ferreira Chief Financial Officer
Alexandre de Campos International Sales Director
Antonio Paulo Lazzaretti Technology and Quality Guarantee Director
Artêmio Listoni Bovine Activities Director
Cláudio Lemos Pinheiro Administrative and Controllership Director
Eduardo Nunes de Noronha Human Resources and Management Director
Ernest Sícoli Petty Supply Director
Flávio Luís Fávero Regional Production Director
Flávio Riffel Schmidt Investment project Director
Gilberto Meirelles Xandó Baptista Internal Market Commercial Director
Gilberto Pinto Sampaio Júnior Marketing Director
Guilhermo Henderson Larrobla International Sales Director
José Augusto Lima de Sá International Relationships Director
Osório Dal Bello Farming Technology Director
Paulo Francisco Alexandre Striker Logistics Director
Ricardo Fernando Thomas Fernandes Grain Purchase Director
Roberto Banfi International Sales Director
Ronaldo Korbag Muller Poultry Production Director
Sérgio Carvalho Mandin Fonseca National Sales Director
Valmor Savoldi Planning, Logistics and Supplies Director
Welson Teixeira Junior Investor Relations Director
   
Gustavo Teixeira de Freitas
Tax Planning and Controllership Manager
Giovanni F. Lipari Accountant
CRC 1SP201389/0-7-S-SC

 

66