The Company: The Company's net sales increased by 10.9% against The volume of commercialized tonnes increased by 23.5% compared to 2005.

Transcription

1 FERTILIZANTES HERINGER S.A. CNPJ/MF nº / Management Report In order to comply with legal provisions, Fertilizantes Heringer S.A. ("Heringer" or "Company") herein presents the Management Report and Financial Statements referring to the period ended December 31, 2006, accompanied by the Independent Auditors' Report and corresponding Notes. Market: In 2006, the total volume of fertilizers commercialized in Brazil reached 20.7 million tonnes, compared to 20.2 million tonnes in the previous year, an increase of 2.7%. This rise, despite being lower than the 22.7 million tonnes commercialized in 2004, marks the resumption of the growth interrupted in 2005, year when a drop of 11.3% was recorded. The growth resumption in the Brazilian fertilizer market in 2006 occurred basically due to a rebound in prices of important agricultural commodities, such as corn and soybeans, and a 3% decrease in prices of fertilizers in the international market. The Company: The Company's net sales increased by 10.9% against The volume of commercialized tonnes increased by 23.5% compared to Volume & Net Revenues Volume - Thousand Tonnes , , , , Revenues - Thounsand R$ Net Revenues Volume FERTILIZANTES HERINGER S.A. 1

2 These rises occurred mainly due to: (i) the rise in our share in markets where we have expanded our production capacity;(ii) the beginning of our operations in new markets;(iii) the expansion of our sales network, which has allowed for our expansion to new markets and markets with supply deficiency, resulting in an increase in the total number of active customers;and (iv) the expansion of our line of special products. As a consequence, our commercialization margins (gross profit), EBITDA, net profit at year-end, and the Company's market share have also been positively affected, as follows: Perspectives: For 2007, we expect the continuation of the market's growth, with volumes close to the levels seen in 2004, basically represented by the continuous rebound in prices of the main agricultural commodities, linked to the promising agroenergy business in the country and worldwide. The "dollar" variable might not have an influence on 2007 results, as we believe the currency's stability will continue. Brief Description: The Company is controlled by the Heringer family, which has a long history of investment and participation in the Brazilian agricultural sector. We were founded in 1968 by agriculturist Dalton Dias Heringer, as a one-man company, operating under the name of Dalton Dias Heringer. We began our operations in the State of Minas Gerais, supplying coffee producers with fertilizers, through a small plant in the City of Manuaçu. In the 1970's, the Dalton Dias Heringer one-man company became Fertilizantes Heringer Ltda. Later on, in 1979, we settled in the Port of Vitória, State of Espírito Santo, where we began operations in a leased warehouse, supplying fertilizers for several cultures, as an attempt to service not only this State, but also Rio de Janeiro and southern Bahia. In 1979, we built our first production unit, in the City of Viana, State of Espírito Santo. In 1979, we started operating in the State of São Paulo, first in the City of Santos, and later in Paulínia, when we could considerably increase the volume of mediumsized customers. In the 1980's, we implemented a production unit in the City of Paulínia, State of São Paulo, expanding our market throughout the State. The 1990's were marked with many accomplishments for our Company, among which we can accentuate: (i) in 1994, we implemented the "Eloy Carlos Heringer" coffee FERTILIZANTES HERINGER S.A. 2

3 research center, in Minas Gerais;(ii) in 1996, we built a new unit in Manhuaçu, more modern and with increased production capacity;(iii) in 1997, we began our fertilizer production activities in Paranaguá, State of Paraná;and (iv) built a new production unit in the City of Três Corações, State of Minas Gerais in 1998, servicing the State's southern and western markets. In 2000, we built a new production unit in Uberaba, servicing the whole Triângulo Mineiro, and the State of Goiás. In 2001, the production unit of Camaçari went online, in the State of Bahia, servicing the State of Bahia and northern Minas Gerais. In 2002, we leased a production unit in the City of Catalão, in the State of Goiás, increasing our market share in that State. In 2004, we leased a production unit in Rondonópolis, as an attempt to improve our activities in the State of Mato Grosso. In 2003, we implemented the CEMAP ("Centro de Manejo e Adubação em Pastagens") in the City of Viana, and in the following year we inaugurated a new and more modern production unit in the same city, with increased production capacity, replacing the plant previously built. Later on, in November 2004, we carried out the transformation from a limited liability quota company to a joint-stock company, with the consequent increase in our capital stock, resulting from the investment of 20.6% of our capital stock made by AIG Capital Partners, through its investment subsidiary BSSF Fertilizantes Holding Ltda. In 2005, we concluded the construction of our production unit of Rosário do Catete, in the State of Sergipe, in order to efficiently meet the demand of the states in Brazil's northern region. In 2006, we inaugurated an own production unit in Paranaguá, State of Paraná, and started making mixtures in an outsourced production unit in the City of Bebedouro, State of São Paulo. Human Resources: On December 31, 2006, we had approximately 1,687 employees, out of which 336 were temporary and 1,351 were permanent. In 2007, our payroll, including compensation, social charges, and benefits totaled approximately R$ 47.0 million. The salary of our employees is calculated in accordance with the law, and their compensation is made of base pay (nominal) and variable payment, including overtime and night work pay, risk premium, productivity, and bonus. We see our benefit policy as advantages and features we offer to our collaborators as an attempt to provide safety and well-being, both in the internal and external environments. We also offer our employees a package of benefits, including health insurance, and meal and transportation payment. The Company also has a profit-sharing program (PLR), through which it distributes to its employees 10% of the net profits adjusted by contingent losses accumulated in previous years. Moreover, the Company distributes, before the end of each year, a nominal salary as advance payment, which is independent from profit generation. The employees hired during the fiscal year receive an interest which is proportional to the time of service. FERTILIZANTES HERINGER S.A. 3

4 Investments: On December 31, the Company's investments amounted to R$102.8 million, consisting basically of investment in owned property, which totals an area of approximately hectares. On December 31, 2006, we had seven own properties. In 2006, R$13.0 million were invested, mostly in (i) remodeling of equipment acquired in 2004 for the construction of the plant "SSP Super Fosfato Simples" in Paranaguá, State of Paraná; (ii) beginning of the remodeling of unit II of Paulínia, State of São Paulo, for the construction of the "Micro Total" project; and (iii) acquisition of machinery and equipment, as well as maintenance of facilities in several plants of the Company. Research and Development: We have made investments in technology for the development of our products. We own two Research and Development Centers, aimed at ensuring increased efficiency and better results for our products. Also, our Research and Development Centers allow for stronger bonds with the producers, as well as producing and commercializing more efficient fertilizers in agronomic terms. We have recently developed FH Micro Total, a product line developed through an innovative production process by which micronutrients are incorporated to the fertilizer granules, substantially increasing the fertilizers' efficacy. Currently, we use the Micro Total technology for all product formulations, as this process results in increased productivity for consumers compared to the conventional formulations. The CEPEC - Centro Experimental de Extensão e Pesquisa Cafeeira Eloy Carlos Heringer, an initiative of the company in a partnership with the Brazilian Ministry of Agriculture, Cattle Raising and Supply (Mapa), has operated in Martins Soares since 1994 and is considered a national reference in technological development for mountain coffee culture. The CEPEC is visited by 1,000 rural producers and technicians a year, during the research results meetings. The CEMAP - Centro de Manejo e Adubação de Pastagens, located in our plant in Viana, promotes visits and meetings with agriculturists, cattle raisers, and technicians, as an attempt to spread the results and knowledge generated there. The center has an area of 31.0 hectares of pasture, out of which 18 hectares are allocated to the production system, which imitates the field reality and where different fertilizing levels are tested; and 2 hectares are allocated to the implementation of different forage species for knowledge and demonstration of the nutritional requirements of each one. Under the coordination of a Research Supervisor, since its creation, the CEMAP has received more than 1,500 visitors, including universities, producers, and the whole network of representatives of Heringer in Brazil, and delivered 180 lectures in several Brazilian states, such as Bahia, Espírito Santo, Rio de Janeiro, São Paulo, Minas Gerais, Goiás, Mato Grosso, Mato Grosso do Sul, and Paraná. FERTILIZANTES HERINGER S.A. 4

5 Environment: We comply with the environmental legislation and rules in force, considering and observing the environmental matters in the project, construction, and operation stages of our blending units. As a consequence of the production of fertilizers, gases and particles are thrown into the atmosphere. In order to moderate these emissions, we have control equipment, such as electrostatic precipitators or bagging machines, which minimize or remove certain particles from the emissions. The blend formulation processes do not generate any type of toxic residue. The requirements of the environmental norms applicable to the blending companies focus especially the dust control in the blending and granulation processes of raw-materials and basic fertilizers. Depending on the place where the production units are located, the environmental norms vary in terms of application and strictness. Anyway, all production units need to be authorized by the regulating authorities to operate, and are subject to continuous supervision. In addition to the investments made in our production units, so as to adjust to the environmental legislation, we have made several supplementary investments in our units, as a preventive and anticipatory measure, since the Brazilian environmental legislation has got stricter every day. We have an environmental management system that allows for the development and implementation of policies and objectives that take into account the legal requirements and information about significant environmental aspects. Shareholders' rights: According to the Company's Bylaws, net profits at year-end, available after management profit-sharing up to the legal maximum limit, and after accrued extraordinary losses are offset, have the following allocation: (i) 5% for legal reserve, observing the legal limits, and (ii) 25% of the remaining balance for the payment of mandatory dividends. Relationship with external auditors: In compliance with Rule CVM no. 381/03, in 2006 the Company did not obtain from the independent auditors, or people related to them, any other service but external audit. In addition, the policy adopted by the Company is in line with the principles that preserve the Auditor's independence, for hiring auditing services, according to criteria accepted internationally, which are: The auditor must not audit his or her own work, or perform managerial tasks for his or her customer, or promote the customer's interests. Final conclusions: Fertilizantes Heringer remains, in this context, focused on seeking excellence in all its areas of activity, through the work and dedication of its whole team, aiming at always offering high-quality products and services to its customers. The Management FERTILIZANTES HERINGER S.A. 5

6 Financial Statements at December 31, 2006, 2005 and 2004 and Report of Independent Auditors F-1

7 F-2

8 F-3

9 Balance Sheets at December 31 In thousands of reais Assets Note Current assets Cash and banks 9,605 19,839 27,221 Financial investments 3 167,443 15,427 54,510 Trade accounts receivable 4 251, , ,543 Inventories 5 159, , ,550 Taxes recoverable 6 68,195 63,926 23,070 Deferred taxes 7(a) 12,937 13,781 3,903 Related parties 8 2,183 1,983 Other 14,932 16,517 24, , , ,818 Non-current assets Trade accounts receivable 4 7,784 8,790 Taxes recoverable 6 5,000 2,000 Deferred taxes 7(a) 6,245 10, Judicial deposits 14(a) 10,050 14,190 8,355 Properties held for sale 9 13,697 14,700 1,619 42,776 50,462 10,273 Permanent assets Investments Property, plant and equipment 11 84,741 79,506 47,032 84,880 79,645 47,171 Total non current and permanent assets Total assets 811, , ,262 The accompanying notes are an integral part of these financial statements. F-4

10 Balance Sheets at December 31 In thousands of reais Liabilities and Shareholders equity Note Current liabilities Suppliers Domestic 65,448 87,874 68,621 Imports , , ,849 Loans and financing ,863 58,824 86,294 Salaries and social charges 5,008 4,425 7,604 Taxes payable 2, Advances from customers 42,674 19,242 7,273 Interest attributed to shareholders equity 15(e) 1,097 Other 22,621 21,994 40, , , ,072 Long-term liabilities Loans and financing 13 3,356 7, Provision for contingencies 14 3,904 28,475 21,493 Taxes payable ,269 35,714 21,711 Shareholders equity 15 Capital 175, , ,944 Capital reserves 16,256 4, Revenue reserves 31,308 3,173 3,173 Retained earnings 3,779 48, , , ,479 Total liabilities and shareholders equity 811, , ,262 The accompanying notes are an integral part of these financial statements. F-5

11 Statements of Operations Years ended December 31 In thousands of reais Note Gross sales revenues 1,454,366 1,308,057 1,645,321 Taxes and other sales deductions (28,397) (22,708) (73,871) Net sales revenues 1,425,969 1,285,349 1,571,450 Cost of sales (1,273,369) (1,216,254) (1,360,753) Gross profit 152,600 69, ,697 Operating revenues (expenses) Selling (107,895) (108,204) (108,231) General and administrative (31,899) (35,216) (24,566) Other operating income, net 17 39,388 36,458 21,338 (100,406) (106,962) (111,459) Operating profit (loss) before financial results 52,194 (37,867) 99,238 Financial (expenses) income 16 Financial income 99,723 74,868 91,916 Financial expenses (92,212) (94,439) (97,328) 7,511 (19,571) (5,412) Operating profit (loss) 59,705 (57,438) 93,826 Non-operating income (expenses), net 231 (3,257) 381 Profit (loss) before taxes and profit sharing expenses 59,936 (60,695) 94,207 Income tax and social contribution 7(b) Current (9,077) (28,161) Deferred (5,381) 20,361 1,830 (14,458) 20,361 (26,331) Employee profit sharing expense (4,425) Net income (loss) for the year 45,478 (40,334) 63,451 Net income (loss) per share at the end of the year - R$ 0.31 (0.28) 0.43 The accompanying notes are an integral part of these financial statements. F-6

12 Statements of Changes in Shareholders Equity In thousands of reais Capital Capital reserves Revenue reserves Tax Investment Legal Investments incentive subsidy Retained - PSDl earnings Total At January 1, ,000 61, ,293 Capitalization of retained 61,290 (61,290) earnings Capital increase (R$ 1.98 per 59,654 59,654 share) Donation for investment Net income for the year 63,451 63,451 Appropriation of net income Legal reserve (Note 15 (d)) 3,173 (3,173) Interest attributed to shareholders equity (R$ 0.08 per share) (Note 15 (e) and (f)) (11,939) (11,939) At December 31, , ,173 48, ,479 Tax incentives (Note 15(c)) 4,229 (4,229) Loss for the year (40,334) (40,334) At December 31, ,944 4, ,173 3, ,145 Tax incentives (Note 15 (c)) 12,007 (6,538) 5,469 Net income for the year 45,478 45,478 Appropriation of net income Legal reserve (Note 15(d)) 2,274 (2,274) Interest attributed to shareholders equity (14,584) (14,584) (R$ 0.10 per share) (Note 15(e) and (f)) Transfer to Investments reserve (Note15(g)) 25,861 (25,861) At December 31, ,944 16, ,447 25, ,508 The accompanying notes are an integral part of these financial statements. F-7

13 Statements of Changes in Financial Position Years Ended December 31 In thousands of reais Financial resources provided by (used in) operations Net income (loss) for the year 45,478 (40,334) 63,451 Expenses (income) not affecting working capital Depreciation 6,412 4,375 2,215 Residual value of property, plant and equipment disposals 1, Reversal of provision for loss on investments (102) Provision (reversal) for losses for properties held for sale (1,437) 2,851 Deferred income tax and social contribution, long-term 4,537 (10,483) 47 Provision (reversal) for loss contingencies, net (8,338) 4,635 3,224 Interest on long-term receivables (472) Interest and indexation charges on long-term liabilities 1,389 2,347 1,674 49,403 (37,045) 70,980 Financial resources were provided by Operations 49,403 70,980 From shareholders Capital increase 59,654 Decrease in long-term receivables from shareholders 2,010 Other 420 From third parties Tax incentives PSDI 5,469 Taxes payable 16 Loans 7,224 Transfer from long-term receivables to current assets 6,720 1, Total funds provided 61,592 8, ,000 Financial resources were used for Operations 37,045 Long-term receivables 4,028 22,745 2,812 Property, plant and equipment 13,009 36,885 28,183 Interest attributed to shareholders equity 14,584 11,939 Transfer from current assets to long-term receivables 3,000 10,790 Transfer from long-term to current liabilities 16, Total funds used 51, ,684 43,206 Increase (decrease) in working capital 10,369 (98,994) 90,794 Changes in working capital Current assets 104,932 (159,133) 147,960 Current liabilities (94,563) 60,139 (57,166) Increase (decrease) in working capital 10,369 (98,994) 90,794 The accompanying notes are an integral part of these financial statements. F-8

14 1 Operations The principal activity of Fertilizantes Heringer S.A. (the Company or we ), founded in 1968, is the production and sale of fertilizers under the trademark Heringer. The Company operates throughout Brazil, primarily in the Southeast, Northeast and Midwest regions. At December 31, 2006, the Company, which is headquartered in Viana in the State of Espírito Santo, Brazil, owns and operates industrial units in Viana and Paulínia in the State of São Paulo; in Manhuaçu, Três Corações and Uberaba in the State of Minas Gerais; in Rosário do Catete in the State of Sergipe, and in Paranaguá in the State of Paraná. The Company leases industrial units in Camaçari in the State of Bahia and, in Rondonópolis in the State of Mato Grosso; and operates a third-party industrial unit in Bebedouro in the State of São Paulo. The Company has signed a lease agreement for industrial units in Rio Brilhante in the State of Mato Grosso do Sul and in Bom Jesus de Goiás in the State of Goiás, and expects these facilities to begin operations in April In August 2006, the Company began the construction of a new industrial unit in Ourinhos in the State of São Paulo, which it expects to start operating in August/September On November 3, 2004, the Company changed its corporate structure from a private limited liability company (Ltda.) to a private corporation (S.A.), and issued 116,290,000 nominative common shares with no par value. On December 1, 2004, the Company s shareholders approved a capital increase of R$ 59,654, through subscription and payment of 30,170,957 nominative preferred shares with no par value. The Company benefits from a state tax incentive agreement originally granted by the State of Sergipe in September 2003, also known as PSDI (Programa Sergipano de Desenvolvimento Industrial), which provides the Company tax relief equivalent to 92% of the ICMS sales tax due in respect of products manufactured by its Rosário do Catete industrial unit. This benefit has a term of 10 years and expires in F-9

15 2 Significant Accounting Practices The financial statements were approved by the Company s Board of Directors on February, 8, The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, based on the regulations of Brazilian Corporate Law (Law No and subsequent amendments), standards and instructions of the Brazilian Securities Commission (CVM), technical pronouncements issued by the Institute of Independent Auditors of Brazil (IBRACON) and the resolutions of the Federal Accounting Council (CFC). These financial statements differ from the financial statements previously issued by the Company, which were prepared for statutory purposes, in compliance with Brazilian Corporate Law, in relation to the number of periods presented and explanatory footnotes presented in fuller detail. The presentation of these financial statements has been prepared to be consistent with CVM requirements, in light of the proposed offering of shares of the Company. The financial statements for December 31, 2005 and 2004 were reclassified, when applicable, to conform to the 2006 presentation. Those reclassifications refer to taxes related to financial transactions (primarily the CPMF, IOF and PIS taxes on financial incomes), reclassified from the line item General and administrative expenses to the line item Financial expenses, in the amounts of R$ 6,789 and R$ 1,602, for 2005 and 2004, respectively. In addition, R$ 4,425 relating to statutory employee profit sharing expenses were reclassified from the line item General and administrative expense to the line item Statutory employee profit sharing expense in The preparation of financial statements requires the Company s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to the allowance for doubtful accounts, the selection of the useful lives of property, plant and equipment, fair value of assets held for sale, the provisions required for non-recoverability of assets, the provision for unrecognized credits related to deferred income tax and the recognition of contingent liabilities. Actual results could differ from those estimates. The statement of cash flows, which is presented as supplemental information, is not required by Brazilian Corporate Law but is prepared in accordance with IBRACON Accounting Standard and Procedure No. 20. F-10

16 The following accounting standards were recently issued by the CVM and adopted by the Company: - Deliberation No. 488, dated October 3, 2005, which approved IBRACON s Accounting Standard and Procedure No. 27, related to aspects of presentation of the financial statements, which is applicable to the periods beginning after December 31, 2006, by the Deliberation 496, dated January 3, 2006; and - Deliberation No. 489, dated October 3, 2005, which approved IBRACON s Accounting Standard and Procedure No. 22 related to provisions, liabilities, contingent liabilities and contingent assets. The more significant aspects of these Deliberations have already been adopted by the Company. (a) Measurement of the net income (loss) and Revenue recognition Income is measured on the accrual basis. The Company recognizes revenue and associated costs of sales at the time its products are delivered to its customers or when title and associated risks are transferred to customers. Revenue is recognized when the customer takes delivery of the product either upon delivery to the customer s carrier (FOB) or premises (CIF). Sales are principally made on cash or credit terms. Certain sales are also effected through a vendor program in which sales are financed through a bank, which holds the Company s receivables as collateral, for periods of up to one year. Vendor rebates are recorded in the line item Other operating income only after all preestablished sales volume conditions and other parameters have been met. Freight expenses related to the purchase of raw and indirect materials are classified as Cost of sales upon the sale of the products. Freight expenses related to the delivery of our products to our customers are classified as Selling expenses. (b) Marketable securities Marketable securities are recorded at cost value, plus accrued earnings up to the balance sheet date. (c) Current and non-current assets The allowance for doubtful accounts is sufficient to cover expected losses on realization of the receivables. The allowance is based on an analysis of the credit history of each customer, guarantees offered, and the recommendations of legal counsel and specialized collection agencies. F-11

17 Inventories of raw and packaging materials are evaluated and stated at average purchase cost, which is lower than replacement cost or realizable values. Advances to suppliers and the imports in transit are stated at cost. Other assets and receivables are stated at cost or realizable values, including accrued earnings, when applicable. (d) Permanent assets Permanent assets are stated at cost and take into account: Investments in an associated company (not significant) which are stated at cost (Note 10) and other investments which are presented net of provision for losses; and Depreciation of property, plant and equipment, which is calculated on the straight-line method (Note 11). (e) Loans and financing Loans and financings are recorded to include accrued interest and indexation charges through each balance sheet date. (f) Income tax and social contribution on net income Taxes on income in Brazil comprise Federal income taxes (25%) and social contribution taxes (9%), as recorded in the statutory accounting records for which the Company s composite statutory income tax rate is 34%. Deferred taxes are provided on all temporary tax differences. All tax losses expected to be recovered through offset are recorded as deferred tax assets. In the event realization of deferred tax assets is not considered probable, no such assets are recorded. Deferred tax assets arising from net operating losses have no expiration dates, though offset is restricted to 30% of annual income before tax. (g) Other liabilities The liability related to remuneration of employees, mainly vacation pay and payroll, is provisioned as earned. (h) (i) Employee profit sharing plan The Company provides for the distribution of profit sharing benefits to employees through which it distributes 10% of net income, pursuant to a Union agreement (Note 21). Transactions in foreign currency Assets and liabilities denominated in foreign currencies are converted to Brazilian reais at the exchange rate at each balance sheet date. F-12

18 (j) Derivative financial instruments The Company carries out transactions with derivative financial instruments, contracted for the purpose of mitigating the effects of volatility of foreign currencies, principally on its purchases of imported products and does not use such instruments for speculative purposes. The financial instruments are recorded at cost plus accrued interest (recorded on the yield curve) and gains or losses are deferred and recorded in financial income (expenses), net when the underlying transaction has occurred. (k) (l) Tax incentives The Company benefits from the PSDI state tax incentive agreement granted by the State of Sergipe. Benefits accrue and are recorded as follows: (i) the benefit is credited directly to our Capital Reserve/Tax Incentive PSDI in shareholders equity in an aggregate sum equal to the amount that the Company invested in property, plant and equipment in the State of Sergipe under the program and (ii) the portion related to the benefit which exceeds the amount in (i) is recorded in Other operating income. Net income per share Net income per share is calculated based on the number of outstanding shares at the balance sheet date. 3 Marketable Securities Bank Deposit Certificates (CDBs) 167,327 15,210 52,846 Savings account and capitalization securities Foreign exchange investment fund 1,336 Fixed income investment fund 112 Equity securities ,443 15,427 54,510 Marketable securities mainly comprise highly liquid bank deposit certificates (CDBs) with maturities of 90 days or less, or which at all times throughout their terms can be put to the issuer within three months with no early withdrawal penalty clauses. At December 31, 2006, the Company had CDBs in the amount of R$ 14,290 (2005 R$ 3,950; 2004 R$ 12,469) which are bound to import financing operations (Note 13). At December 31, 2006, the increase in the CDB securities balance arose primarily from funds generated from operations, new loans and advances from customers. F-13

19 4 Trade Accounts Receivable Domestic customers 322, , ,355 Export customers Rural credit transactions (i) (19,168 ) (11,803 ) Vendor transactions (i) (11,354 ) (19,481 ) (18,949 ) Allowance for doubtful account(ii) (33,480 ) (32,623 ) (11,607 ) 259, , ,543 Current (251,457 ) (270,306 ) (375,543 ) Long-term (iii) 7,784 8,790 (i) The Company has agreements with financial institutions related to Vendor operations and Rural Credit transactions (cash sales with direct financing to the purchaser) whereby the financial institutions extend credit terms to preferred customers to which the Company provides the respective receivables as collateral. (ii) In 2005, certain customers had experienced financial difficulties due to suffering crop losses from adverse climatic conditions and a decline in prices for agricultural products following to the appreciation of the Real against the US dollar. The Company increased the allowance for doubtful account by R$ 21,016 to cover the increased risk of defaults. This provision has been maintained at December 31, (iii) Long-term accounts receivables mainly consist of renegotiated credits for customers (mainly in 2005) who experienced financial difficulties as described in (ii). The receivables are collaterized based on Rural Certificates, real estate mortgages, agricultural chattel mortgages and/or sureties. 5 Inventories Raw materials and packaging 127, , ,467 Imports in transit 28,744 21,679 66,910 Advances to suppliers 724 2,853 5,222 Spare parts 2,469 1, , , ,550 F-14

20 6 Taxes Recoverable Value Added Tax on Sales and Services (ICMS) 42,144 31,115 15,551 Provision for discount on credits (i) (520) (520) Social Contribution on Revenues (COFINS) (ii) 13,492 21,437 4,651 Corporate Income Tax (IRPJ) 9,470 3, Social Contribution on Net Income (CSLL) 3,358 2, Social Integration Program (PIS) (ii) 3,039 5, Withholding tax on financial investments (IRRF) 2,212 3, ,195 65,926 23,070 Current asset (68,195) (63,926) (23,070) Long-term (iii) 5,000 2,000 (i) At December 31, 2005, a provision of R$ 520 was recorded, corresponding to the expected discount on the sale of R$ 4,000 of ICMS credits. The remaining ICMS taxes recoverable will be applied in the purchase of assets and in the Company s normal operations. The Company has obtained approval from governmental authorities under the ICMS Special Regime to transfer of accumulated credits arising from the purchase of property, plant and equipment, in amount of R$15,272, and is awaiting approval for a further R$ 3,850; (ii) In 2005, the Company recorded PIS and COFINS credits receivable pursuant to Law No. 11,116/05, which authorized the offset of non-cumulative PIS and COFINS credits against other federal taxes (Note 17); and (iii) Long-term taxes recoverable relate to ICMS credits arising from purchases of property, plant and equipment expected to be extinguished by F-15

21 7 Taxes on income (a) Deferred Income tax and social contribution Net operating loss carryforwards 11,776 14,292 Temporary differences Allowance for doubtful accounts 3,042 7, Unrealized (gains) losses on financial instruments 2,199 (970) Provision for sales commissions 1,665 1,912 3,036 Provision for impairment of properties held for sale Other 20 1, Total deferred income tax 19,182 24,563 4,202 Current assets (12,937) (13,781) (3,903) Long-term receivables 6,245 10, Based on the projections for the generation of future taxable income, the Company estimates it will recover the loss carryforwards as follows: R$ 6,607 in 2007 and R$ 5,169 in The Company estimates that it will utilize the net assets arising from temporary differences of R$ 6,330 in The remaining net credits included as long term assets are estimated to be used as follows: R$ 1,076; R$ 659 and R$ 418. The projections of future taxable income include estimates relating to the performance of the Company and of the market in which it operates, as well as other economic aspects. Actual amounts may differ from these estimates Deferred income tax and social contribution assets generated as a consequence of temporary differences between the carrying value and tax basis of assets are recorded when recovery is probable. (b) Reconciliation of income tax and social contribution benefit (expense) The amounts of income tax and social contribution presented in the statement of operations are reconciled to the nominal rate, as follows: F Income (loss) before income tax and social contribution 59,936 (60,695) 89,782 Composite nominal tax rate 34% 34% 34% Income tax and social contribution at nominal rates (20,378) 20,636 (30,526) Tax benefit from interest on shareholders equity distribution 4,958 4,059 Others 962 (275) 136 Total income tax and social contribution (expense) benefit (14,458) 20,361 (26,331)

22 8 Transactions and Balances with Related Parties The transactions carried out between the Company and related parties are summarized as follows: Accounts receivable Dalton Dias Heringer Others accounts receivable Dalton Dias Heringer 50 Related parties Dalton Carlos Heringer 2,183 1,983 Revenue Dalton Dias Heringer 1,694 1,781 1,939 Juliana Heringer Rezende ,699 1,782 1,943 Cost of sales Dalton Dias Heringer (1,273) (1,436) (1,604) Juliana Heringer Rezende (1) (1) (3) (1,274) (1,437) (1,607) Purchases Dalton Dias Heringer Related parties balances presented in 2005 and 2004 refers to a sale of a farm in Viana to Mr. Dalton Carlos Heringer, the amount of which was paid in full in The Company entered into a five-year rural lease agreement with the controlling shareholder, which expires in The property subject to the lease is recorded as Properties held for sale in the amount of R$ 5,840. Should the Company decide to sell the property during the term of the current lease agreement, the lessee must leave the property without penalty to the Company. Once leasehold improvements to be funded by the Company have been concluded, the monthly lease payments will be based on a scale of between R$4.00 and R$6.00 per head of cattle to be placed on the property. Leasehold improvements are estimated at R$500 and are expected to be concluded in the second quarter of The accounts receivables arise from normal commercial operations in the course of business. Similar third party transactions are used as the basis for the prices which take into account the level of risk, product volumes and characteristics. Transaction volumes are not significant within the context of the financial statements. F-17

23 9 Properties Held for Sale Rural properties 12,632 12, Land and urban properties Machinery and agricultural equipment 1,231 4, Vehicles Provision for losses (1,414) (2,851) 13,697 14,700 1,619 Properties held for sale refer to assets received from customers as payment in kind. A provision for losses is recorded to adjust the assets to market values. Rural properties include the lease agreement with the controlling shareholder (Note 8). 10 Investments The Company holds a 0.08% interest in the capital of Fertifós Administração e Participação S.A., acquired in 1992 and carried at cost. All the other investments are fully provisioned. On September 29, 2004, Heringer Transportes Ltda., an insignificant a wholly-owned subsidiary, was merged into the Company. F-18

24 11 Property, Plant and Equipment % Cost Accumulated depreciation Net Net Net Annual depreciation rate Lands 7,190 7,190 7,012 3,868 Buildings 45,177 (3,644) 41,533 29,790 7, Vehicles 2,874 (989) 1,885 1,457 1, Machinery, equipment and industrial installations 24,828 (7,358) 17,470 11,863 9, Furniture and fixtures 2,583 (1,137) 1,446 1, Computers and software 12,354 (4,706) 7,648 9,273 7, Other 956 (186) Construction in progress 6,799 6,799 18,394 16, ,761 (18,020) 84,741 79,506 47,032 At December 31, 2006, construction in progress refers mainly to: (i) improvements to equipment acquired in 2004 relating to the construction of the SSP simple superphosphate production unit in Paranaguá; and (ii) the beginning of the building improvements of the Paulínia II site for the Micro Total project. At December 31, 2005 construction in progress refers to investments in Paranaguá, the production unit which started operations in January At December 31, 2004, construction in progress refers to the construction of the Rosario do Catete production unit, in the State of Sergipe, which started operations in July Changes in property, plant and equipment are summarized below: F At January 1 79,506 47,032 21,535 Additions 13,009 36,885 28,183 Depreciation (6,4122) (4,375 ) (2,215) Disposals (1,3622) (36 ) (471) At December 31 84,741 79,506 47,032 Depreciation expense was allocated to cost of sales in the amount of R$ 3,652 in 2006 ( R$ 2,223; 2004 R$ 1,028) and to operating expenses in the amount of R$ 2,760 in 2006 ( R$ 2,152; 2004 R$ 1,187). Certain property, plant and equipment assets are pledged in guarantee to financing operations and payment of taxes (Note 13). On November 23, 2005, the Company executed a sale and lease back transaction with Bank of Boston NA, whereby it sold land and buildings at its Paulínia production unit for R$ 10,421. The US dollar denominated lease transaction has a three year term with a 6% annual interest rate. Lease expenses for the year ended December 31, 2005 were R$ 1,519 (2004 R$ 1,797).

25 12 Suppliers The majority of raw materials are acquired from foreign suppliers. At December 31, 2006, 2005 and 2004, amounts due in foreign currency were US$ 147,775 thousand, US$ 125,107 thousand and US$ 125,772 thousand, respectively. Purchases of raw materials from foreign suppliers are denominated in U.S. dollars and are partially guaranteed by letters of credit from financial institutions (Note 18 (c)) and sureties of the controlling shareholders. 13 Loans and Financing Import financing (i) Variable 2006 US$ 47, US$ 10, US$ 14,509 Fixed 2006 US$ 3, US$ 2, US$ 8,701 Working capital (ii) 2006 US$ Interest rate LIBOR % p.a. (2005 LIBOR +1.25% p.a.; 2004 LIBOR % p.a., plus CDI + 4.9% p.a.) 102,127 24,895 38, % p.a. ( %.;p.a.; % p.a.) 7,753 5,595 23,095 US dollar denominated + 2.8% p.a., (2005 e 2004 CDI % and TR/IRP - nominal rate of 13.6% p.a.) 11,750 23,681 21,975 Industrial credit certificates BNDES (iii) Machinery and Equipment Financing (FINAME) and National Bank for Economic and Social Development (BNDES) (iv) URTJLP variation and 9.3% p.a. 5% p.a. + URTJLP variation 5,451 6, Compror (v) 1.93% per month 2,200 Fixed credit for financing of accounts receivable from rural producers (vi) TJLP + 4% p.a. 2,138 5, ,219 66,048 86,512 Current (125,863) (58,824) (86,294) Long-term 3,356 7, F-20

26 , Six-monthly LIBOR (London Interbank Offered Rate) at December 31, 2006 was 5.37% p.a. ( %; %);, TJLP ("Taxa de juros de longo prazo"), is a long-term interest rate fixed quarterly by the Brazilian Central Bank, At December 31, 2006, the TJLP was 6.85% p.a. ( %);, The URTJLP is a BNDES index based on the TJLP;, CDI corresponds to interest on interbank deposits. At December 31, 2006 the CDI rate was 13.2% p.a. ( %; %). (i) Import financing Financings through FINIMP (Brazilian Financing Program for Imports), involve a number of agreements with various financial institutions to fund raw material imports. Repayment obligations become due 180 to 270 days from the date of the bill of lading and are guaranteed by the controlling shareholder and by trade bills. Financial interest associated with these import financing facilities averaged 6.2% p.a.as of December 31, 2006; (ii) Working capital Consist of two agreements with a financial institution for working capital. The loans are backed by guarantees from the controlling shareholder and inventory totaling 130% of the outstanding amounts under the facilities. The Company expects to settle its obligations under these facilities by February Amounts are denominated in US dollars and accrue interest of 2.8% p.a.; (iii) Industrial credit certificates Represent funds for investments in the construction of new production facilities in Viana and Rosário do Catete, which are secured by the respective property, plant and equipment of each production unit; (iv) FINAME / BNDES These loans were used to fund 60% of the investments in the Viana and Rosário do Catete production units, by utilizing credit lines with BNDES /FINAME. These credit facilities are backed by promissory notes equal to 150% of the outstanding amount, by property, plant and equipment and guarantees from the controlling shareholder. These facilities bear interest based on the TJLP, plus an average premium of 9.3% p.a.; (v) Compror Refers to funds for the purchase of raw materials in the domestic market and are backed by shareholder guarantees; (vi) Fixed credit The fixed credit for financing of accounts receivable from rural producers refers to a credit line provided in 2005 by the Workers Assistance Fund (FAT) earmarked for situations where rural producers are facing financial difficulties due to adverse weather and commodity prices from the 2004/2005 crop and provide means for debts to be renegotiated. These credits are fully backed by trade bills and shareholder guarantees. F-21

27 The maturities of long-term amounts are as follows: , ,119 2, ,237 1,079 3,356 7, Contingencies and Commitments (a) Analysis of contingencies and judicial escrow deposits The Company is party to certain legal proceedings in Brazil arising in the normal course of business, and has made provisions when it believes that it can reasonably estimate probable losses. In connection with some of these proceedings, judicial escrow deposits have been made that will only be reversed to income upon a judgment in favor of the Company. Judicial deposits Provision for contingencies Nature of contingency: Tax (i) 7,891 12,346 7,577 3,376 27,947 21,230 Civil (ii) 1,169 1, Labor (iii) Social security(iv) Long-term receivables/ liabilities 10,050 14,190 8,355 3,904 28,475 21,493 (i) Tax includes R$ 1,394 in 2006 (2005 R$ 25,965; ,336), related to the contested PIS allegedly due on operating revenues other than billings per Law 9,718/98 and, R$ 1,894 in 2006 (2005 and 2004 R$ 1,894), for the change in the methodology of COFINS from a cumulative to non-cumulative basis, supported by the escrow deposits, in the same amount, per Law 10,833/03; (ii) Civil: Mainly related to claims from customers as well as escrow deposits paid to initiate declaratory actions; (iii) Labor: Mainly comprised of claims by employees relating to severance; and (iv) Social security: Mainly comprised of amounts relating to injunctions obtained by Social Security Authorities, which claim the Company has not complied with all of its legal obligations with respect to these payments. F-22

28 (b) Changes in the provision On January 1 28,475 21,493 16,595 New provisions 3,202 4,635 3,224 Reversals to income following favorable judicial decisions (11,540) Contested claim withdrawn and payable offset by judicial deposits (4,894) Transfers to current liabilities (12,728) Interest and indexation accruals 1,389 2,347 1,674 On December 31 3,904 28,475 21,493 In 1998, Brazilian Law 9718/98 was enacted which increased the base for both PIS and COFINS for 1999 (applying to other revenue lines and not only billings), while at the same time increasing the rate for COFINS. In lieu of paying the taxes, amounts due have been deposited into court in escrow. The Company contested these obligations and had recorded a provision for the amounts allegedly due on operating revenues other than billings. In November 2006, the Company received a final ruling in its favor holding that the COFINS tax on the expanded base was unconstitutional and the Company reversed the provision of R$11,540. During 2006, the Company withdrew its claim contesting the increase in the COFINS rate from 2% to 3% and offset the judicial escrow deposit of the R$ 4,894 against the corresponding provision. (c) Possible losses not recorded The Company is party to other legal proceedings in Brazil arising in the normal course of business. Management and external legal counsel have reasonably estimated the risk of loss from these proceedings as possible and, therefore, no provision has been recorded. The amounts described below have been indexed by the SELIC rate or are consistent with legal external counsel determinations Tax (i) 26,034 26,691 23,339 Social security (ii) 3, Labor (iii) 1,703 1,404 1,001 Civil (iv) ,015 28,692 24,918 F-23

29 (i) (ii) (iii) (iv) Tax: refers to PIS credits offset in prior years in the amount of R$ 12,044, as well as challenges relating to payments and compensation of other federal taxes in prior years; Social security: mainly comprised of amounts relating to injunctions obtained by Social Security Authorities, which claim that the Company has not complied with all of its legal obligations with respect to these payments; Labor: mainly comprised of claims by employees relating to severance payments; and Civil: primarily related to claims by customers. (d) Other administrative processes In February 2003, the Company was granted a tax credit formalized by a credit assignment agreement arising from federal tax overpayments and, consequently, offset R$ 66,669 against taxes payable in With the advent of Law 11051/04 of December 29, 2004, the Federal Revenue Secretariat raised a tax assessment against the Company in April 2005 not accepting the offset, which is being appealed by the Company. On October 6, 2006, the tax authorities issued an assessment charging the Company fines and penalties of R$ 56,440 relating to 75% of the original amount of the credits which had been offset. The Company has challenged this assessment at the administrative level. At December 31, 2006, had the tax credit not been offset against federal taxes, the indexed credit in the Company s favor as determined by the judicial decision would be R$114,950 (2005 R$107,900) and the taxes due with interest and fines would be R$115,780 (2005 R$106,026). Based on the position of external legal counsel, who believe that the tax credit is valid, the tax assessment is without merit and the Company s position will prevail, the Company decided not to record an asset and liability as it considers the liability extinguished. Management does not believe that such legal proceedings will, individually or in the aggregate, have a material adverse affect on our business, results of operations or financial condition, and therefore, no provisions have been recorded based on management's assessment of the probability of loss. F-24

30 15 Shareholders Equity (a) Capital Capital comprises 146,460,957 shares, divided into 116,290,000 nominative voting common shares with no par value, and 30,170,957 nominative voting preferred shares, with no par value, convertible into common shares. The preferred shares can be converted to common shares at any time. According to the Company s by-laws, the Board of Directors may increase the Company s capital without limit subject to approval of the shareholders. (b) Rights of preferred shares Preferred shares are not entitled to fixed dividends, although they are assured priority in the event of a return of capital, as per the Company s by-laws. (c) Capital reserves Pursuant to State of Sergipe legislation (State Decree No, 22230/03), R$ 12,007 was recorded directly in Capital reserves Tax Incentives PSDI in 2006 (2005 R$ 4,229), of which R$ 5,469 was related to the tax benefit arising from the Company s participation in the Industrial Development Program of the State of Sergipe. The remaining balance of R$ 6,538 was recorded in the statement of operations and reclassified to retained earnings. (d) Revenue reserves The legal reserve is set up based on the allocation of 5% of net income for the year, limited to 20% of total capital, pursuant to article 193 of Law 6404/76, and can only be used for capital increases or absorption of accumulated losses. (e) Interest attributed to shareholders equity Brazilian companies are permitted to pay limited amounts of interest attributable to capital to shareholders and treat such payments as an expense for Brazilian income and social contribution tax purposes. This notional interest distribution is treated for accounting purposes as a deduction from shareholders' equity in a manner similar to a dividend. Interest attributable to capital is treated as a dividend for purposes of the mandatory dividend payable. A 15% tax is withheld upon credit of the interest. On December 27, 2006 the Board of Directors approved the payment of interest attributed to shareholders equity, based on the variation of the TJLP rate, to meet the minimum mandatory dividend requirement. F-25