São Martinho S.A. (Convenience Translation into English from the Original Previously Issued in Portuguese)

Transcription

1 (Convenience Translation into English from the Original Previously Issued in Portuguese) São Martinho S.A. Financial Statements for the Years Ended March 31, 2007 and April 30, 2006 and Independent Auditors Report Deloitte Touche Tohmatsu Auditores Independentes

2 Management Report Management Report Pradópolis, June 27, Dear shareholders, We herein present the Management Report, the Financial Statements, and the Accounting Firm Report for the fiscal year ended March 31, This was an unprecedented year. The Company's IPO on the São Paulo Stock Exchange's (BOVESPA) Novo Mercado and the laying of the foundation stone for the Boa Vista Mill were the highlights of the period. Our operating result was in line with our performance levels, even though it has been affected by the decline in sugar and ethanol prices, and by the continuous increase in productive, logistics and operating processes. The outlook for our sector remains positive. The local ethanol market grows at a fast pace, boosted by sales of flex fuel vehicles. In the international market, negotiations have favored the replacement of fossil fuels for renewable sources. São Martinho one of the world's most efficient sugar and ethanol producers is in line with this outlook, posting outstanding results this year, and showing full capacity to grow. Chief Executive Officer São Martinho S.A. Page 1

3 Management Report 1 Business Description São Martinho S.A. one of Brazil's largest sugar and ethanol producers currently has a crushing capacity of 10.3 million tonnes of sugarcane (2.8 million in Iracema mill, and 7.5 million in São Martinho mill). Up to the 2010/11 harvest, another 3.4 million tonnes will be added with the conclusion of the first stage of the construction of the Boa Vista mill. In April through our wholly-owned subsidiary Usina São Martinho S.A. - we acquired a 41.67% interest in the capital stock of Usina Santa Luzia S.A. (crushing capacity of 1.8 million tonnes per harvest), and in its subsidiary Agropecuária Aquidaban S.A. (in charge of the production of most of the processed sugarcane, around 1.5 million tonnes per harvest), both located in the municipality of Motuca, in the state of São Paulo. 2 Market Outlook Average Sugar Prices Var.% US$/R$ Exchange rate % NY11 US$ cents/pound % NY11 R$ / 50-kilogram sack % London 5 US$/ton % London 5 R$/50-kilogram sack % Sugar ESALQ Gross R$/50-kilogram sack % In the first six months of 2006 raw sugar price reached historical quotes in the international market, but suffered a gradual decline thereafter. The price change is related to forecast from many industry entities anticipating a global offering growth of the product, mainly in Brazil, India, China and Thailand. In Brazil, the major global player in this industry, was influenced by the reduction in the ratio of anhydrous ethanol in the gasoline mix and to the good sugarcane harvest that rose sugar production by 17.3% (3.8 million tones). China, India and Thailand were stimulated by good rain period and attractive prices in the international market. In addition, important importers, particularly USA, Russia and Pakistan, adopted measures towards increasing their production and to reduce imports (Russia announced plans to increase demerara sugar import tariffs to US$ 250/tonne in order to reduce imports. Such tariff has been at US$140/tonne, since October 2005.) São Martinho S.A. Page 2

4 Management Report 3 Human Resources Personnel management is based in modern tools (PPR Results Participation Plan, Variable Monthly remuneration linked to strategic goals and Performance Management, based on Competencies and abilities) maintain teams motivated and commitment to better results. A wide program for technical, behavior and educational environment speeds perception and responsiveness from our 7,297 employees to goals and challenges. Training, professional recognition and valorization allied to good life quality are the main values of our Human Resources policy 4 Capital Expenditures (*) Capital Expenditures CAPEX Breakdown In R$ Thousand Var.% Sugarcane Planting 65,671 53, % Industrial / Agricultural 76,673 35, % Sub Total 156,195 89, % Upgrading, Mechanization and Expansion Industrial / Agricultural 54,871 27, % Other 13, n.m. Sub Total 68,721 27, % Boa Vista Mill (Greenfield) Sugarcane Planting 27, n.m. Industrial / Agricultural 58,437 9, % Deferred Expenses 5, n.m. Sub Total 91,851 10,160 n.m. Total 302, , % (*) Considers the last 12 months (April/06 March/07 and April/05 March/06) Investments are a highlight for the year of In Usina Boa Vista (the group s greenfield project), the capital expenditures program were on schedule and the start-up is anticipated for the 2008/09 harvest. It was also invested around R$ 54.9 million in Usina Iracema and Usina São Martinho. Most went to harvest mechanization in Iracema allowing it to begin the 2007/08 harvest with a harvest mechanization ratio of close to 81% as well as in the adequacy of the industrial plant. São Martinho S.A. Page 3

5 Management Report 5 Corporate Restructuring 5.1. Partial spin-off of assets and liabilities On March 31, 2006, the Company and its subsidiary Usina São Martinho S.A. completed a spin-off of certain assets and liabilities not related to the planting of sugarcane and production of sugar and alcohol. Such spin-off was approved by the Extraordinary Shareholders' Meeting held on April 30, Increase in ownership interest in Mogi Agrícola S.A. During the year ended March 31, 2007 the subsidiary Usina São Martinho S.A. increased its ownership interest on Mogi Agrícola S.A. to 46.02%, by mean of common shares acquisition and intercompany loan granted, which may be settled through the delivery of additional common shares Merger of shares of Usina São Martinho S.A., capital and number of shares increase, change of the Company s name and change of the fiscal year-end date On September 28, 2006, the Company s and Usina São Martinho S.A. s shareholders approved: a) the merger of all Usina São Martinho s shares into the Company; b) the Company s capital increase of R$ 93.9 million, with proceeds of R$ 3.3 million booked as accumulated profits for such purpose; c) Increase of the number of shares to 50,000,000 million common shares with no par value; d) the change of the company s name from Companhia Industrial e Agrícola Ometto to São Martinho S.A.; and e) the change of the fiscal year end date from April 30 to March 31 of each year, according to the initiative adopted by COPERSUCAR and the trend of advancing the start and the end of the sugarcane crop. Therefore, the year ended March 31, 2007 covered an elevenmonth period Split and list the Company s shares on the Bolsa de Valores de São Paulo BOVESPA (São Paulo Stock Exchange) and listing to Novo Mercado On November 24, 2006, the Company s shareholders approved: a) the split of the Company s shares in the ratio of 1 (one) common share for 1 (one) new common share, without change in the capital. Due to such split, the number of shares composing the capital was increased to 100,000,000 of common shares with no par value; b) to list the Company s shares on the Bolsa de Valores de São Paulo BOVESPA (São Paulo Stock Exchange); and c) the Company s entering to the BOVESPA New Market ( Novo Mercado ). São Martinho S.A. Page 4

6 Management Report The register of Public Company was provided by CVM (Brazilian Securities and Exchange Commission) on February 7, The company proceeded to the initial public offering of 13,000,000 common shares, which was concluded on February 27, 2007, increasing to 113,000,000 the number of common shares with no par value and resulting in a capital increase of R$ 260 million. In addition, the offering comprised a secondary sale of 8,184,000 common shares owned by the Company s shareholders. Due to this offering, 25,864 new shareholders entered into the Company s shareholders base (on February 22, 2007) Sale of interest on Usina Boa Vista S.A. On March 24, 2007, the Board of Directors authorized the Executive Officer s of Company and Usina São Martinho S.A to sell 7,172,627 common shares of Usina Boa Vista S.A., with no par value to to Mitsubishi Corporation. After this operation, the Company and Usina São Martinho S.A. remained with respectively, 27% and 63% of the subsidiary Usina Boa Vista S.A. (jointly, the Company and Usina São Martinho S.A. hold 90% of Usina Boa Vista S.A. common shares). 6 Corporate Governance and Dividend Policy 6.1. Corporate Governance The Company has confirmed its choice for the best corporate governance practices by joining the Bovespa's Novo Mercado, ensuring its shareholders total transparency and fair treatment, by complying with one of the most important and restricted market regulations, even among international markets. Once its shares started trading on the Bovespa, the Company formed an Investor Relations team to disclose to investors and the market both in English and in Portuguese all notices, material facts, and financial statements Dividend Policy The Shareholders' Annual General Meeting, to be held before July 31 each year, will resolve on, among other topics, the annual dividend distribution. All those who hold shares on the date the dividends are announced will have the right to receive the mandatory dividends of at least 25% of the Company's adjusted net income, ascertained in the annual financial statements. The annual dividend notice and the payment of dividends over the minimum mandatory amount shall be approved in the Annual General Meeting. São Martinho S.A. Page 5

7 Management Report The Company's management proposes, for approval in the Annual General Meeting, the dividends of the year ended on March 31, 2007, as follows: Description 03/31/ /30/2006 Net income for the period 67,005 20,888 (-) Formation of legal reserve (5%) (3,350) - Calculation basis for the establishment of dividends 63,655 20,888 Minimum dividends pursuant to Bylaws 15,913 1,253 Proposed complementary dividends 4,087 - Total proposed dividends 20,000 1,253 Total dividends per share of the capital stock by the end of the year R$ Complimentary dividends aims at compensating shareholders by the fact that the fiscal year ended on March 31, 2007 has 11 (eleven) months. The balance of the net income and the accumulated profits will be booked as Capital Reserve in order to reinforce working capital to meet the planned investments for the next fiscal years. 7. Outlook Outlook for the Coming Harvests At the beginning of the fourth quarter of 2007, a downward trend was observed in international sugar prices, mainly due to record production in Brazil, which reached 425 million tonnes in the 2006/07 harvest, as well as prospects of increased crushing in the 2007/08 harvest. In addition, Indian output is expected to grow by 30%, increasing global supply and pushing international prices down. Moreover, and no less importantly, anhydrous and hydrous ethanol prices fell at the beginning of the 2007/08 harvest due to expectations of higher ethanol production vis-à-vis the ethanol/sugar mix in this harvest and a consequent surplus of these products. However, these estimates probably do not take into account the growth of the flex-fuel fleet, favorable ethanol price when compared to those of gasoline and the recent increase of the anhydrous ethanol ratio in the gasoline mix in Brazil. Regarding sugar, prices are expected to recover in the long term due to the following factors: 1. Production costs of more than 15 cents/pound in India, the EU and Thailand, Brazil s main competitors in the export market; 2. A gradual reduction in EU sugar export subsidies, giving more room for other exporters; 3. Stronger demand for ethanol in Brazil and worldwide (see more details below), helping to reduce the sugar production surplus in Brazil. For Ethanol the scenario is the following: São Martinho S.A. Page 6

8 Management Report Domestic Market At present more than 85% of vehicles sold in Brazil have flex-fuel capabilities which, together with record domestic vehicle sales, suggests that demand for ethanol will grow exponentially in the coming years. According to UNICA, Brazil needs to produce 27 billion liters of ethanol only to meet the needs of the domestic market in 2012/2013 harvest. Considering that ethanol sales to the domestic market in 2006/07 harvest totaled 13.4 billion liters, the production must more than double in the next 5 years. Export Market: In the past few years, global demand for clean energy has increased considerably due to concern over oil prices, geopolitical risks, global warming, the need to obtain renewable sources of energy, and compliance with the Kyoto Protocol. Although still under discussion, Japan and the EU are studying the use of ethanol as a gasoline additive. In addition to Brazil, the US is a huge consumer of ethanol; however, possibly in the 2007/08 harvest the bulk of demand of this country will be met by local production. In the long term, countries like the US, which plans to substitute 20% of gasoline consumption in the next 10 years for ethanol, what means a consumption of billion liters in absolute numbers, are expected to substantially increase their imports from Brazil. Alert to growth opportunities in the ethanol market, São Martinho recently announced that investments in Usina Boa Vista would be speeded up, raising sugarcane crushing capacity to 3.4 million tonnes in the 2010/11 harvest in order to meet demand in the domestic and export markets. São Martinho S.A. Page 7

9 Management Report 8. Management s Discussion and Analysis (*) Main Indicators Var. (%) In Thousand Reais Net Operating Revenue 826, ,547 2% Sugar 422, ,296 22% Anhydrous Ethanol 216, ,341-35% Hydrous Ethanol 150,579 99,521 51% Other 37,146 32,390 15% Operating Profit 116, ,157-22% Net Income 64,523 85,767-25% Adusted EBITDA (**) 290, ,615 13% EBITDA Margin 34.15% 31.21% 3 p.p. Net Debt (16,125) 158,848 (*) Considers the last 12 months (April/06 March/07 and April/05 March/06 (**) São Martinho s EBITDA has been adjusted for these items to facilitate comparison with its peers. Thus, EBITDA is adjusted in order to reverse non-recurring effects, such as IPO expenses, revenues from a lawsuit won by Copersucar and transferred to its partners and effects of price adjustments of for export sugar futures market transactions made by Copersucar Trading that are booked by other players in the industry as financial income/revenues. São Martinho s net revenue totaled R$ million for the 12 months ended March 31, 2007, 2.2% up on the previous 12 months, chiefly due to the increase in average sugar prices on the domestic and international markets and higher sugar export volume. Hydrous and anhydrous ethanol export prices moved up strongly due to a one-off opportunity in the US market and total ethanol shipments to the US jumped by more than 35% in volume (considering sales volumes of both products). The main negative impact was due to the lower sales volume that dropped by approximately 10% (in raw sugar equivalent basis). Such drop is explained by the sale of inventories left over from 2004/05 harvest (134% higher in raw sugar equivalent basis) and thus favoring the results achieved in 2006 and prejudicing comparability with 2007 results. EBITDA EBITDA Reconciliation R$ Thousand Var.% Adjusted EBITDA 290, , % Adjusted EBITDA Margin 34.2% 31.2% +3.0 p.p Pricing adjustment Net Revenue 22,811 17, % Pricing adjustment Sales Expenses 8,318 - n.m. IPO Expenses 16,029 - n.m. Non-recurring Operating Revenues (13,305) - n.m. EBITDA 256, , % EBITDA Margin 31.0% 29.8% +1.2 p.p (-) Depreciation and Amortization (140,091) (92,456) 51.5% (-) Financial Revenue (Expense), net (26,109) (28,392) -8.0% (=) Operating lncome 90, , % São Martinho S.A. Page 8

10 Management Report As can be seen from the above table, adjusted EBITDA climbed by 12.6% over the 05/06 harvest. The main positive impact came from higher average prices in 2007 (see net revenue ). The biggest negative pressure came from the 10% reduction in annual sales volume (in raw sugar equivalent basis), in turn due to the sale of inventories left over from 2004/05 harvest (134% higher in raw sugar equivalent basis), when compared to the inventories left over observed in 2005/06 harvest and thus favoring the results achieved in 2006 and prejudicing comparability with 2007 results. The selling expenses and net revenue pricing adjustment lines pricing adjustment - net revenue and pricing adjustment sales expenses refer to futures market transactions by Copersucar via its subsidiary Copersucar Trading. São Martinho s EBITDA has been adjusted for these items to facilitate comparison with its peers. São Martinho S.A. Page 9

11 Management Report 9. Source of Funding INDEBTEDNESS Debt R$ Thousand Mar/07 Apr/06 Var%. PESA 120, , % Rural Credit 42,981 8, % Finame / BNDES Automatic 126,394 88, % Working Capital 22,402 1,158 n.m. FRN (Commercial Paper) 10,408 10, % Prepaiment - 7,663 n.m. Total Gross Debt (Market) 322, , % Other Financial Liabilities - Copersucar Copersucar's Working Capital 28,036 21, % Total Copersucar's Debt 28,036 21, % Gross Debt 350, , % Cash and Cash Equivalents 366, , % Debt with Copersucar (16,125) 158,848 n.m. On March 31, 2007, São Martinho s gross debt stood at R$ million, broken down as in the table above, 34% more than at the close of March, Cash and cash equivalents totaled R$ million on March 31, 2007, a massive increase over the year before due to the R$ 243 million raised by the IPO (net of related expenses). The reduction in the net debt would have been even greater but for investments of around R$ 91.8 million in Usina Boa Vista and other investments in upgrading existing mills, part of our commitment to constantly improving efficiency (for more details, see Capex). As of March 31, 2007, the vast majority of São Martinho s debt (96%) is in Reais, and 60.6% is long-term. 10. Sustainability One of the Company's key values is the sustainable development of its businesses. São Martinho currently recycles all of its industrial and agricultural waste, analyzing and developing alternatives to replace and/or supplement its use of mineral fertilizers and commercial herbicides and to improve sugarcane growth and control pests and diseases.. The leaves that remain after the sugarcane has been harvested mechanically form a protective cover for the field, reducing evaporation and aiding in weed control. Both the filter cake (transformed into organic material) and the vinasse are used as fertilizers. The residues are completely analyzed and controlled. It is applied after physical and chemical analyses are conducted, in which needs for soil correction and the limits of each application are identified. The biological control of the pests that harm sugarcane fields is done by the Company through the multiplication and release of their natural predators, bred in two laboratories called "bioplants". São Martinho S.A. Page 10

12 Management Report In addition to investing in materials recycling and improvements in production technology, the Company invests in the following social-environmental projects: Social projects: "Cristo Rei Community Center" (Centro Social Comunitário Cristo Rei): located in the City of Guariba, it has worked with children and teenagers who are at risk for over 30 years. In a partnership with the Brazilian Development Bank (BNDES), the center has improved the quality of its service to teenagers by implementing a kitchen and a dining hall, a sports court and a computing workshop. The teachers are volunteers, workers of Usina São Martinho S.A. This project is sponsored through the investment of resources of São Martinho Group in the Municipal Fund for Children and Adolescents' Rights. Projov/Patrulheiros : Developed in partnerships with institutions from Pradópolis and Iracemápolis, the Company hires 16 to 18 year-old teenagers to work in administrative services, aiming at their social, economic, and professional development. São Martinho Group works with an average 40 teenagers per year. These projects are also sponsored through the investment of resources of Group São Martinho in the Municipal Fund for Children and Adolescents' Rights. Telessalas : An education project in a partnership with Fundação Bradesco and the city councils of Iracemápolis and Limeira. Four offsite learning centers were built in Iracemápolis, two for grammar to middle school and two for high school, totaling 160 places for children of the Company s employees and other community members. In Limeira, there are two offsite learning centers, totaling 80 places. São Martinho donated the buildings used by these facilities, as well as the equipment that they use. The Company also pays the teachers salaries. "City Theatre" (Teatro na Cidade): this project brings culture to the communities in which the Company operates (Iracemápolis, Pradópolis, Barrinha and Quirinópolis). From 2004 to 2007, more than 18,000 people - students and citizens - benefited from this project. The project was created in accordance with the Federal Law for Culture Incentives (Lei Federal de Incentivo à Cultura - Lei Rouanet). Young Entrepreneur Program (Programa Jovem Empreendedor): developed in a partnership with the Institute for the Development of Limeira (IDELI - Instituto de Desenvolvimento de Limeira) and the Junior Achievement, its goal is to encourage entrepreneurship among students. The Company s employees volunteer as monitors in this project. The Company sponsors 30 students from the João Ometto State School (Escola Estadual João Ometto) each year. São Martinho S.A. Page 11

13 Management Report Environmental Projects Environmental Education Center (CEA Centro de Educação Ambiental): Inaugurated in 2000, its purpose is to serve collaborators and visitors. It approaches environmental responsibilities and concerns, emphasizing the environmental projects developed by the Company. In ,670 people (collaborators, students, and teachers from the region's communities) visited the center. "Viva a Natureza Project: Implemented in 2000, it aims at the plantation of one million tree seedlings for the restoration of the riparian forests up to A total of 697,000 trees have already been planted. Raw Cane Harvesting: Mills São Martinho and Iracema harvest raw cane in about 80% of its fields. This practice eliminates the sugarcane burn, and the leaves are left on the soil, preserving humidity and controlling erosion. Biological Control: The Company has laboratories which breed the natural predators of some pests that attack sugarcane. One of the laboratories (Entomology Lab) breeds million individuals of wasps (Cotesia flavipes) to control the sugarcane borer, and the other (Fungi Lab) breeds 20,007 Kg of fungus Metarhizium anisopliae, which works as a biological insecticide to control pests such as the sugarcane root spittlebug, and 48,560 Kg of fungus Beauveria bassiana which controls the Sphenophurus Levis. Recycling of Industrial Waste: Industrial waste is allocated to organic fertilizing. Filter cake solid residue resulting from the sugarcane juice decantation process; Soot solid residue resulting from burning cane bagasse in the boiler; Vinasse liquid residue that results from ethanol production. Ecological Practices and Non-Pollutant Methods: - Recycling of herbicide packagings (triple washing and delivery at certificated cooperatives); - Recycling of bulbs (collected and delivered at companies that specialize in chemical decontamination); - Installation of soot decanter in a semi-open circuit with gas washers, reducing the flow of replacement water; - Maintenance of the boiler's gas washers; and - A system to recover condensates and the continuous flow measurers, in order to save water used in the industrial process, quantifying and qualifying the hydrous effluents. São Martinho S.A. Page 12

14 Management Report 11. Adherence to Arbitration Chamber The Company, its shareholders, managers, and members of the Board of Directors and Fiscal Chamber (when one is implemented) shall resolve, through arbitration, any and all disputes or controversies that might arise among them, pursuant to article 44 of the Company's Bylaws. 12. Services Provided by External Auditors Classification of the Service Duration Permanent tax/fiscal revision services (Compliance) November 2006 to October 2007 Annual external audit, and limited quarterly revision services of subsidiary Usina São Martinho S.A, included in the external audit services agreement, and the limited quarterly revision of the Company. May 2006 to March 2007 Limited annual and quarterly revision services of subsidiaries Usina Boa Vista S.A., Omtek Indústria e Comércio Ltda, and Mogi Agrícola S.A., included in the external audit services agreement, and the limited quarterly revision of the Company. May 2006 to March 2007 The Company, in compliance with the rules of the Bovespa's Novo Mercado has committed not to hire its independent auditors for the provision of services that result in conflict of interest or harm their independence. The Company and the auditors understand the other works, due to their nature and to values which are not representative (inferior to 5% of the auditors' remuneration), do not compromise the auditors' independence nor represent conflict of interest. São Martinho S.A. Page 13

15 (Convenience Translation into English from the Original Previously Issued in Portuguese) INDEPENDENT AUDITORS REPORT To the Shareholders and Management of São Martinho S.A. Pradópolis - SP 1. We have audited the accompanying individual (Company) and consolidated balance sheets of São Martinho S.A. (formerly Companhia Industrial e Agrícola Ometto) and subsidiaries as of March 31, 2007 and April 30, 2006, and the related statements of income, changes in shareholders equity (Company), and changes in financial position for the years then ended, all expressed in Brazilian reais and prepared under the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements. 2. Our audits were conducted in accordance with auditing standards in Brazil and comprised: (a) planning of the work, taking into consideration the significance of the balances, volume of transactions, and the accounting and internal control systems of the Company and its subsidiaries, (b) checking, on a test basis, the evidence and records that support the amounts and accounting information disclosed, and (c) evaluating the significant accounting practices and estimates adopted by Management, as well as the presentation of the financial statements taken as a whole. 3. In our opinion, the financial statements referred to in paragraph 1 present fairly, in all material respects, the individual and consolidated financial positions of São Martinho S.A. and subsidiaries as of March 31, 2007 and April 30, 2006, and the results of their operations, the changes in shareholders equity (Company), and the changes in their financial positions for the years then ended in conformity with Brazilian accounting practices. 4 As described in note 2, at the Extraordinary Shareholders Meeting held on September 28, 2006, the Company s shareholders approved the change of the fiscal year-end to March 31 of each year. As a result, the statements of income, changes in shareholders equity, and changes in financial position for the year ended March 31, 2007 and the notes to these financial statements cover an eleven-month period of operations and, therefore, are not comparable with the financial statements for the year ended April 30, 2006, which cover a twelve-month period of operations. Due to this fact, supplemental information is presented in note 27, related to the consolidated and combined statements of income for the twelvemonth periods ended March 31, 2007 and 2006, respectively, for purposes of comparative analysis of the Company s operations. In addition, for supplemental information, beginning the year ended March 31, 2007 the Company opted to present consolidated statement of cash flows also for the twelve-month period.

16 5 The accompanying financial statements have been translated into English for the convenience of readers outside Brazil. Campinas, May 25, 2007 DELOITTE TOUCHE TOHMATSU Auditores Independentes José Carlos Amadi Engagement Partner

17 SÃO MARTINHO S.A. (FORMERLY COMPANHIA INDUSTRIAL E AGRÍCOLA OMETTO) BALANCE SHEETS AS OF MARCH 31, 2007 AND APRIL 30, 2006 (In thousands of Brazilian reais - R$) Company Consolidated Company Consolidated ASSETS Notes 03/'31/07 04/30/06 03/'31/07 04/30/06 LIABILITIES AND SHAREHOLDERS EQUITY Notes 03/'31/07 04/30/06 03/'31/07 04/30/06 CURRENT ASSETS CURRENT LIABILITIES Cash and banks Loans and financing Temporary cash investments Trade accounts payable Receivables from Copersucar Payables to Copersucar Inventories Payroll and related taxes Recoverable taxes Taxes payable Other assets Intercompany payables Dividends payable Other liabilities NONCURRENT ASSETS Intercompany receivables Deferred income and social contribution taxes NONCURRENT LIABILITIES Other assets Loans and financing Investments in subsidiaries and affiliates Payables to Copersucar Other investments Deferred income and social contribution taxes Property, plant and equipment Provision for contingencies Deferred charges Other liabilities Minority interest SHAREHOLDERS EQUITY 15 Capital Revaluation reserve Legal reserve Reserve for capital budget Retained earnings TOTAL ASSETS TOTAL LIABILITIES AND SHAREHOLDERS EQUITY The accompanying notes are an integral part of these financial statements. 2

18 SÃO MARTINHO S.A. (FORMERLY COMPANHIA INDUSTRIAL E AGRÍCOLA OMETTO) STATEMENTS OF INCOME FOR THE YEARS ENDED MARCH 31, 2007 AND APRIL 30, 2006 (In thousands of Brazilian reais - R$, except earnings per share) Company Consolidated 03/'31/07 04/30/06 03/'31/07 04/30/06 Notes (11 months) (12 months) (11 months) (12 months) GROSS SALES DEDUCTIONS (19.458) (24.451) (71.671) (31.589) NET SALES COST OF SALES ( ) ( ) ( ) ( ) GROSS PROFIT Operating (expenses) income: Selling expenses 23 (12.158) (7.709) (52.316) (11.201) General and administrative expenses (20.174) (17.903) (68.623) (24.665) Management fees 21 (3.432) (2.034) (7.133) (2.794) Equity in subsidiaries Other operating income (expenses), net 24 (9.455) 533 (1.562) (20.335) ( ) (38.077) Income from operations before financial income (expenses) Financial income (expenses): Financial income Financial expenses (28.177) (24.352) (82.158) (30.876) Monetary and exchange gains Monetary and exchange losses (3.735) (4.728) (16.752) (6.200) (9.240) (13.765) (21.028) (14.577) Income from operations Nonoperating income Income before income and social contribution taxes and income from spun-off net assets Income and social contribution taxes - current (8.543) (32) (34.296) (3.067) Income and social contribution taxes - deferred (7.069) (7.610) 17 (4.248) (7.101) (33.061) (10.677) Income from spun-off assets and liabilities Net income Earnings per share at year-end (R$) 0,59 0,61 The accompanying notes are an integral part of these financial statements. 3

19 SÃO MARTINHO S.A. (FORMERLY COMPANHIA INDUSTRIAL E AGRÍCOLA OMETTO) STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (COMPANY) FOR THE YEARS ENDED MARCH 31, 2007 (ELEVEN MONTHS) AND APRIL 30, 2006 (TWELVE MONTHS) (In thousands of Brazilian reais - R$) Profit reserve Revaluation reserves Legal Capital Retained Notes Capital Company Subsidiaries Total reserve budget earnings Total BALANCE AS OF APRIL 30, Capital reduction due to spin-off (17.481) (17.481) Realization of revaluation reserve, net of taxes (5.348) (2.172) (7.520) Dividends paid from retained earnings (1.689) (1.689) Net income Proposed allocation of net income: Proposed dividends (1.253) (1.253) BALANCE AS OF APRIL 30, Capital increase (3.346) - Merger of shares Payment of shares - public offering Recognition of revaluation reserve Realization of revaluation reserve (5.042) (11.663) (16.705) Dividends paid from retained earnings 15 (13.593) (13.593) Net income Proposed allocation of net income: Reserva legal (3.350) - Proposed dividends 15 (20.000) (20.000) Retention of profits (95.427) - BALANCE AS OF MARCH 31, The accompanying notes are an integral part of these financial statements. 4

20 SÃO MARTINHO S.A. (FORMERLY COMPANHIA INDUSTRIAL E AGRÍCOLA OMETTO) STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE YEARS ENDED MARCH 31, 2007 AND APRIL 30, 2006 (In thousands of Brazilian reais - R$) Company Consolidated 03/'31/07 04/30/06 03/'31/07 04/30/06 Notes (11 months) (12 months) (11 months) (12 months) SOURCES OF FUNDS From operations Net income Items not affecting working capital: Provision for contingencies Income from noncurrent assets (195) - (1) - Equity in subsidiary and jointly-owned subsidiaries 10 (58.803) (6.778) - - Proceeds from sale of interest in subsidiary 1.6 (215) - (717) - Loss from spun-off assets and liabilities without affecting working capital - (8.262) - (8.024) Net book value of permanent assets written off Depreciation and amortization Interest on noncurrent assets and liabilities (3.028) (3.250) Deferred income and social contribution taxes (4.295) (1.235) Decrease in investment due to spin-off Adjusted net income Other sources: Decrease in noncurrent assets, net Decrease in spun-off assets and liabilities, net Increase in noncurrent liabilities, net Capital payment Effect of the increase in consolidation of Mogi Agrícola to 46.02% in the working capital of Usina São Martinho Effect of the increase in consolidation of Usina São Martinho to 100% in the working capital Income from sale of interest in subsidiary Dividends received Total sources USES OF FUNDS In noncurrent assets In permanent assets: Investments Property, plant and equipment Deferred charges Dividends paid Proposed dividends Total uses INCREASE IN WORKING CAPITAL REPRESENTED BY: Current assets At end of year At beginning of year Current liabilities At end of year At beginning of year (2.968) (1.712) INCREASE IN WORKING CAPITAL The accompanying notes are an integral part of these financial statements. 5

21 (Convenience Translation into English from the Original Previously Issued in Portuguese) SÃO MARTINHO S.A. (FORMERLY COMPANHIA INDUSTRIAL E AGRÍCOLA OMETTO) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2007 AND APRIL 30, 2006 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) 1. OPERATIONS 1.1. Operations São Martinho S.A. (the Company ) and its subsidiaries are primarily engaged in planting sugarcane and manufacturing and selling sugar, alcohol and other sugarcane byproducts; cattle raising and agricultural activities; import and export of goods, products and raw material, and holding of equity interest in other companies. Approximately 73% (67% - consolidated) of the sugarcane used in the manufacture of products is obtained from the Company s crops, shareholders, related parties and agricultural partnerships, and 27% (33% - consolidated) is obtained from third parties. Currently, the Company is upgrading its industrial structure (Usina Iracema) by operating with a single mill in an optimized manner, capable of assuring the same processing capacity per crop, through the prolongation of the milling period, which will provide better operational performance and cost reduction, especially maintenance costs. In the agricultural area, we highlight the processes of fitting the harvest period to the new industrial demand and the intensified mechanical harvesting, as well as the change in the sugarcane variety profile and improved pest control, aimed at increasing productivity. Sugarcane planting demands an 18-month period for maturing and for the beginning of the harvest, which generally takes place between April and November, during which sugar and alcohol are produced. The sale of the production is made throughout the year and, thus, the Company s revenues are not subject to seasonality. At the Extraordinary Shareholders Meeting held on September 28, 2006, shareholders approved the change of the company name from Companhia Industrial e Agrícola Ometto to São Martinho S.A. At the Extraordinary Shareholders Meeting held on November 24, 2006, the Company s shareholders approved the proposal to list the Company s shares on the São Paulo Stock Exchange (BOVESPA), with the Company entering the BOVESPA New Market ( Novo Mercado ). The registration of Publicly Traded Company was provided by the Brazilian Securities and Exchange Commission (CVM) on February 7, The Company performed an initial public offering of 13,000,000 common shares, resulting in a capital increase of R$ 260,000, including the stock option of the financial institution coordinator of the offering, which was concluded on February 27, In addition, the offering comprised a secondary sale of 8,184,000 common shares owned by the Company s shareholders. Due to this offering, the Company has 25,864 new shareholders (position at the time of the public offering). 6

22 1.2. Association with COPERSUCAR The Company and its wholly-owned subsidiary Usina São Martinho S.A. are associated with the Cooperativa de Produtores de Cana, Açúcar e Álcool do Estado de São Paulo Ltda. COPERSUCAR (Cooperative of Sugarcane, Sugar and Alcohol Producers of the State of São Paulo) [also called the Cooperative ], whose cooperative by-laws signed by the parties require the Company to make 100% of its production of sugar and alcohol available to COPERSUCAR. As established in COPERSUCAR s by-laws, revenue from the sale of these products and expenses incurred due to the Cooperative s operations are allocated by COPERSUCAR to each cooperative member, proportionally to the products made available, regardless the physical amount removed from the cooperative member s warehouses. As stated in its annual financial statements, COPERSUCAR uses the accrual basis to allocate revenues and expenses to its cooperative members in conformity with Brazilian accounting practices and Regulatory Opinion 66 issued by the CST (Coordination of the Tax System) on September 5, The amounts of revenues and expenses calculated by COPERSUCAR upon the apportionment for each cooperative member, including the inventory amounts to be allocated to cost of sales, are reported monthly by COPERSUCAR to its cooperative members in specific and detailed reports according to the nature of the event. The total amount is recorded in accounting books and presented in the Cooperative s financial statements, which are audited by independent auditors, ending March 31 of each year (April 30 up to 2006). During the years ended March 31, 2007 (11 months) and April 30, 2006 (12 months), revenues from transactions with COPERSUCAR accounted for approximately 92% and 94%, respectively, of the Company s individual revenue. In the consolidated, these transactions represented 95% and 93% for the years ended March 31, 2007 and April 30, 2006, respectively, according to the amounts shown below: 03/31/2007 (11 months) Company 04/30/2006 (12 months) 03/31/2007 (11 months) Consolidated 04/30/2006 (12 months) Sugar sales 112, , , ,649 Alcohol sales 102, , , ,792 Export adjustments - (9,791) - (12,985) Total sales derived from COPERSUCAR 214, , , ,456 Sodium salt ,083 13,959 Other sales 18,016 13,606 23,012 8,644 Total gross sales 232, , , ,059 7

23 Export adjustments refer to the results of settlement of commodity future contracts used by the Cooperative to minimize exposure to commodity risk on sugar exports. These amounts are recorded by the cooperative members based on their proportionate share. From the year ended March 31, 2007, such adjustments were replaced by commissions on sales transferred by Copersucar See note 23. Selling and administrative expenses arising from the Cooperative allocations accounted for 39% (38% as of April 30, 2006) of operating expenses recorded by the Company, and 46% in the consolidated (39% as of April 30, 2006). These expenses include expenses on the sale process, logistics and distribution, port and administrative expenses. The Cooperative also provides its cooperative members with operating and economic guidance, in addition to the reciprocal use of administrative, technological, financial and legal services. The Company s officers and shareholders participate in COPERSUCAR s management, holding two positions on the Board of Directors, one position on the Advisory Board and one position on the Administrative Committee, whose terms of office expire in 2009, and one position on the Fiscal Council, whose term of office expires in Partial spin-off of assets and liabilities On March 31, 2006, the Company and its jointly-owned subsidiary Usina São Martinho S.A. completed a spin-off of certain assets and liabilities not related to the planting of sugarcane and production of sugar and alcohol, which were transferred to affiliates. The spin-off was approved by the Extraordinary Shareholders Meetings of both companies, held on April 30, The balances of revenues, expenses and the related tax effects arising from spun off assets and liabilities for the year ended April 30, 2006 are presented in specific lines of the individual and consolidated statements of income, for the segregation of the other balances representing the planting of sugarcane and the production of sugar and alcohol, and to allow for comparative analysis of the Company s operations for that period, exempt from these effects. Net income from spun-off assets and liabilities presented in the Company s statement of income for the year ended April 30, 2006 is net of R$ 732 related to Income and Social Contribution Taxes (R$ consolidated). In the year ended April 30, 2006, the major impacts of spun-off assets and liabilities (Company and consolidated) on income arise from equity gains in subsidiaries of R$ 6,770, and net gain on the sale of properties of R$ 1,346. 8

24 1.4. Increase in ownership interest in the indirect jointly-owned subsidiary Mogi Agrícola S.A. On May 5, 2006, the wholly-owned subsidiary Usina São Martinho S.A. acquired 2,039,057 common shares from a Mogi Agrícola S.A. shareholder for R$ 7,233, increasing its ownership interest in that subsidiary to 30.86%. In addition to this acquisition, on May 17, 2006, Usina São Martinho, S.A. granted an intercompany loan of R$ 7,116, payable in 24 months, to the same shareholder, which still holds 2,039,056 common shares (corresponding to 15.16% of total capital) of Mogi Agrícola S.A. This loan is subject to monetary adjustment corresponding to the income distributed by Mogi Agrícola S.A. on any account during the period in which the loan is in effect. Usina São Martinho S.A. will also exercise the voting right arising from the shares held by this shareholder during the loan period. In view of the strategic interest of Usina São Martinho S.A. in Mogi Agrícola S.A. s operations and the possibility that this loan may be settled through the delivery of 2,039,056 shares of Mogi Agrícola S.A. to Usina São Martinho S.A., according to the agreement between the parties, Usina São Martinho S.A. recorded this transaction as an acquisition, increasing its ownership interest in Mogi Agrícola S.A. to 46.02%. There was no amendment to the shareholders agreement of Mogi Agrícola S.A. arising from these transactions, and Mogi Agrícola S.A. continued to be a jointly-owned subsidiary of Usina São Martinho S.A. These increases in ownership interest resulted in a negative good will of R$ 358, calculated based on Mogi Agrícola S.A. s financial statements as of April 30, 2006, conformed to the accounting practices of the parent company Merger of shares of Usina São Martinho S.A. into the Company At the Extraordinary Shareholders Meeting held on September 28, 2006, the shareholders of Usina São Martinho S.A. approved the merger of all its shares into the Company, based on Usina São Martinho S.A. s financial statements as of April 30, This operation was approved by the Company s shareholders at the Extraordinary Shareholders Meeting held on the same date. The ratio of exchange of Usina São Martinho s shares for the Company s shares was determined through a business valuation of both companies by an independent specialized firm. After this merger, Usina São Martinho S.A. became a wholly-owned subsidiary of the Company. As provided for in the share merger agreement, the Company recorded the income of Usina São Martinho S.A. as equity in subsidiaries, beginning May 1, These effects, retroactive to May 1, 2006, were recorded in the accounting books beginning on the date of the Extraordinary Shareholders Meeting which took place on September 28, Sale of interest in Usina Boa Vista S.A. On March 26, 2007 the Company and its subsidiary Usina São Martinho S.A. sold to Mitsubishi Corporation 7,172,627 of their Usina Boa Vista S.A. s ( Usina Boa Vista ) common shares (10% interest), for the amount of R$ 7,890, being 2,151,788 shares (3% interest) owned by the Company and 5,020,839 shares (7% interest) owned by the subsidiary Usina São Martinho S.A. After this operation, the Company owns 27% of interest (90% - consolidated) in Usina Boa Vista. The gain from this operation, in the amount of R$ 215 (R$ consolidated), was recorded under the caption nonoperating income. 9

25 2. PRESENTATION OF FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING PRACTICES At the Extraordinary Shareholders Meeting held on September 28, 2006, the shareholders approved the change in the fiscal year end of the Company to March 31 of each year, in line with the initiative of COPERSUCAR and the beginning and end of the sugarcane crop. As a result, the statements of income, changes in shareholders equity, and changes in financial position for the year ended March 31, 2007 and the notes to these financial statements cover an eleven-month period of operations and, therefore, are no comparable with the financial statements for the year ended April 30, 2006, which cover a twelve-month period of operations. For purposes of additional information, presented in note 27 are the consolidated and combined statements of income and cash flows for the twelve-month periods ended March 31, 2007 and 2006, respectively, to allow for comparative analysis of the Company s operations. The financial statements have been prepared and are presented in conformity with Brazilian accounting practices and standards established by the Brazilian Securities Commission (CVM). These financial statements reflect the changes introduced by the following accounting standard: (i) Accounting Standard and Procedure 27 (NPC 27) Presentation and Disclosures, issued by the Brazilian Institute of Independent Auditors (IBRACON) on October 3, 2005, and approved by CVM Resolution No. 488 on the same date. Certain reclassifications have been made to the financial statements for the year ended April 30, 2006, presented for comparative purposes, to conform them to the aforementioned accounting standard and allow comparability with the current year. The main change resulting from applying this standard is the presentation of the group Noncurrent in assets and liabilities. The significant accounting practices adopted in the preparation of the financial statements are as follows: (a) Results of operations: The Company s results are recorded on the accrual basis. Income earned and expenses incurred on cooperative member transactions and in support and management activities informed by COPERSUCAR are recorded in results of operations based on monthly allocations, defined according to the Company s production in relation to other cooperatives, in conformity with CST Regulatory Opinion No. 66, of September 5, 1986, and the accrual basis. (b) Temporary cash investments: Stated at cost plus income earned through the balance sheet dates, which does not exceed fair value. (c) Trade accounts receivable: Recorded based on information received from COPERSUCAR. Represents the net balance receivable by the Company based on its proportional share of the Cooperative s income and expenses, and advances received on future sales. The expense related to the allowance for doubtful accounts is transferred to cooperative members proportionally when recognized by the Cooperative. (d) Inventories: Stated at average acquisition or production cost, which does not exceed the respective replacement and/or realizable value. Costs incurred on maintenance of sugarcane crops are stated as crop treatment under the caption sugarcane crops and are recorded as cost (results of operations) upon the harvest of said crop. 10