FERTILIZANTES. Report HERINGER. Heringer 2007 Annual Report 1

Transcription

1 FERTILIZANTES 2007Annual Report HERINGER Heringer 2007 Annual Report 1

2 Highlights»» 59% growth in Gross Revenue in the year. In 2007, gross revenue was R$2,305 million.»» 140% growth in Adjusted EBITDA in the year and reached R$125.3 million. Adjusted EBITDA margin rose from 3.7% to 5.5% in 2007.»» 135% growth in Net Income in the year. Adjusted Net Income in 2007 was R$84.8 million, for net margin of 3.8%, 130 basis points (bps) higher than the net margin in 2006.»» Selling, General and Administrative Expenses. In 2007, this percentage declined 150 bps, from 9.8% in 2006 to 8.3% in 2007.»» 33% growth in Sales Volume. In 2007, the volume of fertilizers delivered rose from 2,461,000 tonnes to 3,264,000 tonnes, company s fertilizer volumes grew 33% year on year, versus growth in the market of 17%.»» Heringer reached market share in the domestic market of 13.2%, in a market of 24.6 million tonnes, 150 bps higher than a year earlier.»» Inauguration of new own unit. Conclusion of the Ourinhos unit in São Paulo state and lease of a new unit in Porto Alegre - Rio Grande do Sul, Bom Jesus de Goiás Goiás and Rio Brilhante Rio Grande do Sul, reaching a total of 15 mixing units and annual production capacity of more than 3.5 million tonnes.»» Conclusion of mixing units expansion in Três Corações and Manhuaçu, both in Minas Gerais state.»» Increase in Sales of Specialty Products, which increased their share of sales volume from 20% in 2006 to 22%.»» Launch of new Specialty products:. Heringer s first foliage application fertilizer. It is an easy-to-apply mixed mineral fertilizer, with excellent absorption of micro nutrients, essential for coffee plantation. It is also highly soluble and compatible with leading pesticides., launch of the FH NitroMais line, which boosts usage of urea, which is necessary in all crops.»» The client base grew by 13% in the year, with growth consistently in all regions of the country, reaching more than 31 thousand clients in the end of Heringer 2007 Annual Report

3 2007 Financial Highlights (in R$ million) 2006 %RL 2007 %NR % BP Gross Revenue 1, , Net Revenue 1, % 2, % 58.5 COGS (1,273.4) -89.3% (2,017.2) -89.2% Gross Profit (Adjusted "Pro-forma") (1) % % SG&A (139.8) -9.8% (186.7) -8.3% Adjusted Net Income (2) % % Adjusted EBITDA (1) and (3) % % (1) To better demonstrate its effective operating margin, the company is reclassifying on a pro-forma basis the gains from foreign exchange variation (appreciation of the local currency in relation to the U.S. dollar) on the imported inventories effectively sold in the period currently booked in the Financial Income and Expenses line of the financial statements prepared under Brazilian BR GAAP. The impact of this reclassification was R$13.2 million in 4Q07 and R$0.9 million in 4Q06; and R$30.9 million in 2007 and R$3.9 million in (2) Extraordinary Adjustments Effect on Net Income: 2007 Exclusion of R$7.3 million after income tax (R$11.1 million before Income Tax) for the IPO expenses incurred in the first half of Non-recurring revenue from a COFINS tax lawsuit won (reversal of accounting reserve) and change in the criterion for meeting the targets established for awarding rebates from offshore suppliers in December 2006, in the total amount of R$9.4 million after income tax. (3) Extraordinary Adjustments Effect on EBITDA: 2007 Exclusion of R$11.1 million for the IPO expenses Non-recurring income in the amount of R$10.4 million (reversal of COFINS reserve of R$6.4 million and adjustment in the criterion for meeting the targets established for awarding rebates from offshore suppliers). Positive impact of R$4.0 million in 4Q06. Heringer 2007 Annual Report 3

4 Index (A free translation of the original in Portuguese) 4 Heringer 2007 Annual Report

5 Management Report 06 Specialized Products 27 Financial Statements 29 Balance Sheets 30 Statements of Income 32 Statements of Changes in Shareholders' Equity 33 Statements of Changes in Financial Position 34 Statements of Cash Flows 35 Note 37 Report of Independent Auditors 59 Corporate Information 60 Heringer 2007 Annual Report 5

6 6 Heringer 2007 Annual Report Management Report

7 In 2007, the domestic fertilizer market in volume terms reached 24.6 million tonnes, growth of 17% in relation to 2006 Dear Shareholders, In order to comply with the legal regulations, Fertilizantes Heringer S.A., ( Heringer or Company ) hereby presents the Management Report and the financial statements for the year ended December 31, 2007, accompanied by the report of independent auditors and related notes to the financial statements. Brief History Fertilizantes Heringer S.A. is one of the first companies to produce, sell and distribute fertilizers in Brazil, and it has been in this market for 40 years. Since the start-up of its operations the Company has presented a significant growth resulting from investments in new production units, the quality of its products, differentiated service to its customers, large network of sale and distribution, safe and stable access to raw materials, agility in the decision-making process and timely strategic positioning within important regional markets. Heringer sells and distributes basic fertilizers, NPK formulas and specialty fertilizers to rural producers, agricultural companies, commercial companies and cooperatives located all over the Brazilian territory. The Company's possesses an ample capacity for the development of new specialty fertilizers through its group of technicians, besides two research centers, which permits the Company to serve various segments of the agribusiness sector. The Company was formed in 1968, by the agronomist Dalton Dias Heringer, as a sole proprietorship under the name of Dalton Dias Heringer. As an important step for its growth and modernization, the Company went public by entering the New Market of the São Paulo Stock Exchange (Bovespa) in April 2007, and currently trades its shares under the code FHER3. Market in 2007 and Perspectives for 2008 In 2007, the total volume of fertilizers sold in Brazil increased by 17%, from 21 million tons to 24.6 million tons when compared to the prior year. This increase confirms the resumption of the growth that was interrupted in 2005, when the Company presented a drop of 11.3%. The increase in volume in 2007 was driven by the high price of the international commodities due to a series of factors which will be presented below. This important increase in demand was not limited only to Brazil and pressured the international prices of the raw materials, mainly of the potassic and phosphate fertilizers, since their offer takes more time to respond to the demand, necessitating significant and lengthy investments. In the fourth quarter of 2007, the continuing increase of prices was noted, for both the fertilizer raw materials and also the price of the agricultural commodities. Heringer 2007 Annual Report 7

8 Raw Materials The Urea Industry operated at the limit of its capacity. For 2008, a tight market is expected, with an increase in demand in India and indefinition in the exports of China. The phosphate fertilizers market should be tight in 2008, limited by the production of phosphatic rock and pressured by the increased costs of sulphur and ammonia. For the potassium chloride market, only a marginal increase is expected in the production capacity, perpetuating the conditions of scarcity observed in In summary, the main chains operated at the limit of their installed capacity, with rates approximating or higher than 90%. US$ per Ton 600 MAP (C&F) +106% 500 TSP (FOB) +122% 400 KCL (C&F) + 89% MAP in bulk Brazil TSP in bulk Africa, Potassium Bulk Potassium MOP - Brazil Jan/25 Feb/25 Mar/25 Apr/25 May/25 Jun/25 Jul/25 Aug/25 Sep/25 Oct/25 Nov/ US$ per Ton Urea (FOB) + 37% Nitrate (FOB) + 88% Sulphate (C&F) + 81% Urea in bulk Yuzhny Nitrate in bulk Black sea Ammonium Sulphate in bulk Brazil Jan/25 Feb/25 Mar/25 Apr/25 May/25 Jun/25 Jul/25 Aug/25 Sep/25 Oct/25 Nov/ Source: The Market 8 Heringer 2007 Annual Report

9 Commodities The price cycle of agricultural commodities was extremely favorable in The increase in prices was more evident in the grains, especially soybean and corn, which witnessed a true boom in their national and international prices. This increase in prices is closely related to some factors such as, among other factors, the intense urbanization in China and the increase in income and in the world population, the use of grains for bioenergy (ethanol) programs, the drop in global inventories of cereals and the limitation of the available area for cultivation in the other countries. CRB-Reuters Index: Commodities (jan/2006 = 100) Grains: Corn, Soybeans, Wheat Softs: Cofee, Sugar, Orange Jan/06 Feb/06 Mar/06 Apr/06 May/06 Jun/06 Jul/06 Aug/06 Sep/06 Oct/06 Nov/06 Dec/06 Jan/07 Feb/07 Mar/07 Apr/07 May/07 Jun/07 Jul/07 Aug/07 Sep/07 Oct/07 Nov/07 Dec/07 35% 30% 25% 20% 15% 10% FAO USDA 5% 0% 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 Source: IFA and Reuters Heringer 2007 Annual Report 9

10 SEASoNALITy The distribution of the sales volume in 2007 was as follows: 38% in the first six-month period and 62% in the second. For 2008, we believe that the seasonality will be similar to that in 2007, as a result of anticipation of purchases by the soybean producers, and because of the mid-crop season of corn, which is stronger and more technical. Market 2004 to 2006 (1) 62% 38% 33% Uberaba Unity (MG) 29% 19% 19% Q1 Q2 Q3 Q4 Heringer 2007 (2) 63% 37% 33% 30% (1) Source: ANDA / average of the last three years (2004, 2005 and 2006) (2) Source: Heringer 18% 19% Q1 Q2 Q3 Q4 10 Heringer 2007 Annual Report

11 Perspectives for 2008 For 2008, the perspective is for the continuing growth of the market. We believe that the balance between the offer and demand for fertilizer raw materials, as observed in 2007, should also occur in 2008, considering that the producers of the NPK chain are operating at the limit of their capacity with the expectation of a marginal increase in Projections of the Ministry of Agriculture, Agribusiness and Supply support this expectation of volume, through an agricultural income 6.8% higher than in According to the Ministry, the agricultural income projected for 2008 amounts to R$127.3 billion, the third highest for the past 20 years, only losing to 2003 and 2004, when the foreign exchange rate contributed to the income of the producer. A sales volume of 25.5 million tons is expected at present, representing a growth of approximately 4% as compared to This expectation could be reviewed on a quarterly basis. Participation by culture and region in millions of tons: +4.0% % E % +3.7% +17.1% +17.1% , E Cotton +7.1% Others +1.9% North +15.0% Mid West +4.5% Coffee +0.0% Corn +4.3% Northeast +5.4% Southeast +2.0% Sugarcane +2.8% Soybeans +5.0% South +3.0% Caption: E = Estimated crop and region allocation. Source: ANDA for the years 2005 and 2006 Estimates 2007 and 2008 Heringer/Market Heringer 2007 Annual Report 11

12 The Company Operational and Financial Highlights Operational Evolution of the sales mix by culture In 2007, Heringer delivered 3,264 thousand tons, growing 33% in relation to the volume of 2,461 thousand tons in the previous year, almost twice the Brazilian market growth, which was 17%. This permitted the Company to increase its market share from 11.7% in 2006 to 13.2% in The growth in the volume of fertilizers delivered was caused mainly by an increase of use in the corn, soybean and sugar cane cultures. Heringer's sales mix by culture is shown below, in thousands of tons: % 18% 18% 6% 22% 14% , % , % 18% 20% 6% 18% 16% Sugarcane Others Soybeans Forest Coffee Corn 12 Heringer 2007 Annual Report

13 Growth in the Customer Base Heringer obtained an expressive increase in its customer base, which attained more than 31 thousand active customers in This growth is the result of the expansion of the operating areas of the Company, with the construction and lease of new mixture units, especially in the regions of more recent operations. The strengthening of the customer base is an important element to maintain the sustainable growth of the Company in the following years. 2,132 1,099 23,234 1, ,488 3,198 1,547 25,044 1, % 31,057 Midwest North and Northeast Southeast South YoY (+50%) (+41%) (+8%) (+24%) Heringer 2007 Annual Report 13

14 In 2007, Heringer posted 13.2% market share in the domestic market Evolution of the Market Share The market share of Heringer in the local market in 2007 reached 13.2%, against a market share of 11.7% in the previous year. This result is a consequence of the strategic and commercial actions of the Company, with an increase in the number of mixture units, strategic location of our units, close contact with the rural producers, the offer of aggregate services and an increase in the range of specialty products. 13.2% 12.7% 12.7% 11.8% 12.1% 13.4% 15.2% +150 BP 13.2% 11.7% 9.2% 1Q 2Q 3Q 4Q Note: to calculate Market Share, it hasn't been considered 7.7 ktons of sales to Paraguay Source: ANDA and Heringer 14 Heringer 2007 Annual Report

15 T Brazilian Market Consumption by Region 1.8% 11.0% 29.7% 29.9% 27.6% Total Brazilian Market: 24.6 MM of Tonnes Heringer 2007 Annual Report 15

16 Production Capacity The seasonalized (1) annual production capacity evolved adequately, supporting the growth in demand. We reached a seasonalized production capacity of approximately 3.5 million tons, as compared to 3.0 million tons at the end of During the year, various investments were realized, including constructions of new units and the expansion of others, which resulted in an increase of approximately 19% of installed capacity, opening space for increasing the offer to the market, according to the table below (in thousands of tons) ,977 3,360 3, Q07 2Q07 3Q07 9M07 4Q Units 13 Units 15 Units Absorption of the capacity of Bebedouro (1) Expansion at Manhuaçú and Três Corações Rio Brilhante and Bom Jesus de Goiás New units: owned unit in Ourinhos - SP and leased unit in Rio Grande do Sul (1) Production Capacity Adjusted to the Seasonality: to determine the production capacity in our production units, we consider the seasonality existent in the demand for fertilizers and establish an index of utilization of the installed nominal capacity in each unit. In this context, the month with the largest volume of delivery represents index 1, and the index in the other months is established by dividing the delivery volume for that month by the delivery volume of the month representing index 1. The indices applied to obtain the Production Capacity Adjusted to the Seasonality represent the average of the past six years. Consequently, the production capacity of each production unit could be altered if there is a change in the distribution of the production volume during the year. Finally, we worked with an index of 85.0% for utilization of the installed capacity, mainly due to the non-programmed stoppages. 16 Heringer 2007 Annual Report

17 Specialty Products The strategy of the Company to increase the participation of specialty products in the total volume delivered presented results. The participation of specialty products was 22% of the total volume sold, while in 2006 the participation was 20% of the volume. Proportion of Delivered Volume (Delivered Volume in thousand tonnes) 80% 20% (1) , ,461 78% 22% , ,264 Commodity Specialty + 29% + 49% + 33% Specialty products grew above the other company's products average. Below some of those products Mixed Mineral Fertilizer with foliage application Micro-nutrients on 100% of the NPK granules Boosts usage of Urea (1) Measurement criterion changed from gross revenue to volume delivered. Under the previous criterion, specialty products accounted for 18% in Heringer 2007 Annual Report 17

18 Financial Gross Sales Revenue In 2007, the gross revenue was 59% higher than in 2006, totaling R$2,305 million. Part of this increase can be explained by an average sales price which was 19.5% higher than that of the same period of the previous year. The increase in prices is in line with the policy and capacity to repass prices of raw materials in the market. In 2007, sales volume growth was 33%, well above the growth in the overall market of 17% year on year During the year, the volume sold by Heringer increased 33% in relation to 2006, almost twice the market growth. This increase was fostered by the new units which started to operate in 2007, which permitted Heringer to have access to new markets with adequate competitiveness and distribution structures. Sales Volume (thousand tons) Gross Billings (R$ million) +33% 3, % -9% -20% +59% 2,305 2,202 1,993 2,461 1,645 1, % 1, Heringer 2007 Annual Report

19 Adjusted Gross Profit For the purpose of more adequately presenting its effective operational margin, the Company has been reclassifying, on a pro forma basis, the gain from exchange variations (appreciation of the local currency versus the U.S. dollar) on inventories effectively sold in the period, currently recorded in the caption "Financial Income and Expenses" in the financial statements prepared in accordance with the Brazilian accounting practices (BRGAAP). The reclassification amounted to R$30.9 million in 2007 and R$3.9 million in It should be pointed out that the aforementioned pro forma reclassification among groups does not impact the result of the net income for the year. The Cost per ton (restated by the positive exchange variation) suffered an increase of 18.0%, mainly due to the increase in the costs of raw materials. Even so, Heringer was able to improve its gross sales margin, demonstrating, in this period, the capacity to repass prices to the market. Paranaguá Unity (PR) Adjusted Gross Profit (R$ million) Adjusted Gross Margin (% of Net Income) % 11.0% 12.1% % +110 BP % Heringer 2007 Annual Report 19

20 Adjusted EBITDA Reconciliation between adjusted EBITDA and net income In millions of reais Net income for the period Total income tax and social contribution charge Financial (income), net (33.6) (7.5) Non-operating expenses (income), net 1.0 (0.2) Depreciation and amortization EBITDA Expenses with IPO 11.1 COFINS lawsuit Reversal of provision for contingencies (6.4) Alteration in the compliance with the bonus targets (4.0) Reclassification of the exchange variation on inventories sold Adjusted EBITDA Viana Unity (ES) 20 Heringer 2007 Annual Report

21 As with the gross profit, it is important to include some adjustments to show adequately the improvement in the operating performance of the Company, since some non-recurring factors, in addition to the foreign exchange variation, had an impact on the EBITDA. In the 4th quarter of 2006, there was a favorable outcome in a lawsuit relating to COFINS, which generated a reversal of the provision for contingencies in the amount of R$10.4 million, of which R$6.4 million was non-financial and R$4.0 million financial. In December 2006, there was a change in the criterion for compliance with the targets of the bonuses granted by suppliers abroad, with a positive impact on EBITDA of R$4.0 million. In 2007, adjusted EBITDA amounted to R$125.3 million, corresponding to (i) the exclusion of non-recurring expenses related to IPO in the amount of R$11.1 million, incurred in the first six-month period and (ii) the reclassification among the groups of R$30.9 million, referring to the exchange variation gain on inventories sold in the period (see comment on adjusted gross profit above). Adjusted EBITDA in millions of reais and Adjusted EBITDA margin as % of Net Revenue % +140% % % 3.7% +180 BP Extraordinary items 2006 (COFINS/Bonuses) Extraordinary item 2007 (Expenses with IPO) "Pro-Forma" Reclassification of exchange variation Heringer 2007 Annual Report 21

22 Adjusted Net Income The same adjustments effected in the EBITDA of 2006 and 2007 were applied to the net income to maintain comparability, except for the exchange variation which only transited between the financial income and cost of products sold groups, therefore before net income. The only adjustment to Net Income in 2007 was to the expenses with the IPO, incurred in the 1 st six-month period, in the amount of R$7.3 million, net of income tax and social contribution. Net income in millions of reais and net margin as % of Net Revenue % +135% % 3.8% +190% % +130 BP 45.5 (40.3) -3.1% Extraordinary items 2006 (COFINS R$6.7 millions / Bonuses R$2.6 millions, both after tax) Extraordinary item 2007 (Expenses with IPO) "Pro-Forma" Reclassification of exchange variation 22 Heringer 2007 Annual Report

23 Working Capital The Company s working capital reflects the seasonality of the business. The increase in the level of inventories is explained by the strategy of the Company to utilize good opportunities for anticipating, purchases of raw materials at the end of the year. By adopting this measure, the Company forms an inventory with competitive prices to serve the demand of the 1 st quarter of Q06 1Q07 2Q06 2Q07 Receivables days (23) (38) Inventory days (1) (17) Payable days (5) Working capital days 23 4 (19) (50) 3Q06 3Q07 4Q06 4Q07 Receivables days (13) (1) Inventory days (1) (3) Payable days (12) (13) Working capital days (4) (8) (1) Inventory Days, net of advance from customers Heringer 2007 Annual Report 23

24 Cash Flow Net cash used in operating activities The net cash used in operating activities was R$301.8 million in 2007, against a cash generation of R$99.1 million in A major part of the cash was invested in compliance with the Company s strategy of utilizing good opportunities for anticipating the purchase of raw materials at the end of the year, forming an inventory with competitive prices to comply with the demand of the 1 st quarter of With regard to accounts payable, the Company chose using an instrument to finance imports - FINIMP, when the interest rate of the import financing - FINIMP was considered to be more attractive than the interest imputed in the term prices of international suppliers. Furthermore, it opted for payments on sight to local suppliers, avoiding the high interest embedded in the prices. Consequently, the amount of accounts payable remained almost uniform in relation to the previous year, even considering a higher volume of purchases during In compensation, there was an increase in the amount of financing (the account loans and financing in the balance sheet corresponds to 96% of FINIMP loans, for the purchase of inventories). Cash used in investment activities As an alternative to some interest imputed in the term prices of international suppliers, the Company used the instrument of financing imports (the Brazilian Financing Program for Imports - FINIMP), when the interest rate of the financing was more attractive than the rate embedded in the term prices of these suppliers. When analyzing supplier days in isolation, there was a decrease of 38 days in the year. However, if the value of the financing (FINIMP) is added to the balance of suppliers in 2007, because this refers to inventories and not to CAPEX, the accounts payable days would increase from 71 days to 121 days. During 2007, the Company consistently improved its working capital. The cash used in investment activities was R$107.3 million in 2007 and R$29.7 million in This variation arose mainly from (i) construction work at the leased units of Bom Jesus de Goiás-GO, Rio Brilhante-MS and Porto Alegre-RS; conclusion of the construction work at the unit of Ourinhos-SP; (iii) start of the construction at the unit of Iguatama- MG and in the own unit of Catalão-GO, as well as construction work at the plant of SSP Simple Super Phosphate in the unit of Paranaguá-PR; (iv) expansion at the units of Manhuaçu-MG, Três Corações-MG and Paranaguá-PR and (v) purchase of machinery and equipment, and maintenance of facilities in various plants of the Company. 24 Heringer 2007 Annual Report

25 Cash used in financing activities The cash originating from financing activities was R$350.6 million, of which R$203.2 million arose from capital increases, mainly from the Initial Public Offering (IPO) that occurred in April The remaining resources mainly originated from financing of import of raw materials, as explained in the above paragraph on operating activities. Human Resources At December 31, 2007, the Company had approximately 2,300 employees. The payroll, comprising remuneration, social security charges and benefits, totaled approximately R$64.7 million. The salaries of the employees are calculated based on legislation, and the remuneration is comprised of base salary (nominal) and variable portion, including overtime, and additional allowances for night work, risk premiums, commissions on production and bonuses. We administer the benefits policy as advantages which we offer to our employees, for the purpose of providing them with safety and welfare, both in the internal and external environment. We extend to our employees a package of benefits, including medical assistance, life insurance, child daycare assistance, meals and transportation. The Company also has an employees profit sharing program (PLR) through which it distributes to its employees 10% of the adjusted net income adjusted for possible prior-year accumulated losses. The Company distributes, before the end of the year, one nominal salary as an advance, which does not depend on the generation of profits. The employees hired during the year receive a participation proportional to the period of service. Permanent Assets At December 31, 2007, the Company had R$207.3 million in investments, which was basically represented by investments in its own properties. The Company had 15 units, of which eight were own units, six were rented and one was outsourced. Research and Development The Company invested in technology for the development of its products. It has two Research and Development Centers destined to ensure more efficiency and better results from the products, CEPEC and CEMAP. Additionally, the Research and Development Centers allow us to develop stronger relationships with producers, as well as to produce and sell more efficient fertilizers. CEPEC Centro Experimental de Extensão e Pesquisa Cafeeira (Experimental Center for Coffee Crop Extension and Research) Eloy Carlos Heringer, an initiative of our Company in partnership with MAPA, operates in Martins Soares-MG since 1994 and is considered as a national reference in technological development for mountain coffee growing, receiving annually approximately 1000 rural and technical producers at its meetings on results of researches. CEMAP Centro de Manejo e Adubação de Pastagens (Center of Management and Fertilization of Pastures), located in our production unit of Viana-ES, organizes visits and meetings with cultivators, researchers, livestock breeders and technicians with the objective of disclosing the results and knowledge generated there. The center has an area of 31.0 hectares (ha) of pasture, where 18 ha are designated for the production system, which simulates the reality of the countryside, where different levels of fertilization are tested, and in 2 ha different species of Forage plants are planted so that the nutritional requirement of each plant can be known and demonstrated. Under the coordination of a Research Supervisor, CEMAP has received more than 1,500 visitors since its creation, among them, researchers, teachers and university students, producers and all the network of Heringer do Brasil representatives, and realized 180 lecturers in various Brazilian states, such as Bahia, Espírito Santo, Rio de Janeiro, São Paulo, Minas Gerais, Goiás, Mato Grosso, Mato Grosso do Sul and Paraná. In 2006, we developed the product FH Micro Total, which is a line of products developed through an innovative production process in which micronutrients are added to the fertilizer grains, increasing substantially the efficiency of the fertilizers. Currently, we make Heringer 2007 Annual Report 25

26 In addition to the investments already effected in our production units, in order for them to be adapted to the environmental legislation, we have made various additional investments in our production units, as preventive and anticipatory measures. We have an environmental management system which permits us to develop and implement a policy and objectives which take into consideration legal requirements and information about significant environmental aspects. Shareholders Rights available the Micro Total technology to all our product formulations, considering that its process results in more productivity for its consumers if compared to the conventional formulations. In 2007, we launched the product FH Nitro Mais, which is a nitrogeneous fertilizer which can be applied in plantation coverage, even in unfavorable conditions, due to the low volatility of its nitrogen. We also released the product FH Café, the first fertilizer of the Company for leaf application. It is a mixed mineral fertilizer easy to apply, with excellent absorption of micro nutrients, essential for the development of the coffee plant, besides being highly soluble and compatible with the main pesticides. Environment We are in conformity with the legislation and current environmental rules, and environmental matters are considered and observed in the project, construction and operation phases of our mixture units. All production units need authorization by the regulatory agencies to operate and are subject to continuous supervision. In accordance with the Company s By-laws, shareholders are entitled to receive an annual mandatory dividend that is not lower than 25% of the net income for the year, after the offset of accumulated losses, if any, and decreased or increased by the following amounts: (i) amount appropriated to the constitution of a legal reserve; (ii) amount appropriated to the formation of reserves for contingencies or reversal of the same reserves constituted in prior years; (iii) amount resulting from the reversal of the unrealized revenue reserve formed in prior years, under the terms of article 202, item II of the Brazilian Corporation Law. Relationship with External Auditors In compliance with CVM Instruction nº 381/03, the Company did not obtain from the independent auditors or persons related to them any service other than the external audit services in Additionally, the policy adopted by the Company complies with the principles that preserve the independence of the Auditor, with regard to the contracting of audit services, in accordance with criteria accepted internationally, namely: the auditor should not audit his own work, hold a managerial position in his client or promote his client s interests. Final Conclusions Fertilizantes Heringer remains, in this context, focused on the search for excellence in every area in which it operates, through the work and dedication of its entire team, with the objective of always offering to its customers quality products and services. The Management 26 Heringer 2007 Annual Report

27 Specialized Products Getting the most out of urea use Micronutrients in every NPK granule High yield and efficiency with the best cost-benefit ratio A compound inorganic foliar fertilizer Improved technology, higher yield The basis for a successful coffee crop The best choice for your robusta coffee Cultivating profits Heringer 2007 Annual Report 27

28 Healthier plants, better results At the root of a high-tech citrus crop Phosphate fertilizer with different solubility levels The maximum growth from your eucalyptus Highly soluble and exceptionally pure, ensuring excellent results Custom-made for cattle feed At the root of a high-tech fruit crop 28 Heringer 2007 Annual Report

29 Financial Statements Financial Statements at December 31, 2007 and 2006 and Report of Independent Auditors (A free translation of the original in Portuguese) Heringer 2007 Annual Report 29

30 Balance Sheets At December 31 In thousands of reais Assets Note Current assets Cash and banks 20,627 9,605 Financial investments 3 97, ,443 Trade accounts receivable 4 315, ,457 Inventories 5 539, ,048 Taxes recoverable 6 54,551 68,195 Deferred taxes 7(a) 6,924 12,937 Other 24,101 14,932 1,059, ,617 Non-current assets Long-term receivables Trade accounts receivable 4 1,843 7,784 Taxes recoverable 6 25,636 5,000 Deferred taxes 7(a) 1,820 6,245 Judicial deposits 9 7,898 7,615 Properties held for sale 10 12,939 13,697 50,136 40,341 Permanent assets Investments Property, plant and equipment ,065 84,741 Deferred charges 13 3, ,288 84, , ,221 Total assets 1,294, ,838 The accompanying notes are an integral part of these financial statements. 30 Heringer 2007 Annual Report

31 Liabilities and shareholders' equity Note Current liabilities Suppliers: Domestic 20,801 65,448 Foreign , ,943 Loans and financing , ,863 Salaries and social charges 13,405 5,008 Taxes payable 1,225 2,939 Advances from customers 64,552 42,674 Interest on own capital 17(d) 5,169 Other 34,071 22, , ,496 Non-current liabilities Long-term liabilities Loans and financing 15 8,702 3,356 Provision for contingencies 16 1,620 1,469 Taxes payable ,325 4,834 Shareholders' equity 17 Capital 429, ,944 Capital reserves 17,033 16,256 Revenue reserves 46,013 31, , ,508 Total liabilities and shareholders' equity 1,294, ,838 The accompanying notes are an integral part of these financial statements. Heringer 2007 Annual Report 31

32 Statements of Income Years Ended December 31 In thousands of reais unless otherwise indicated Note Gross sales revenues 2,305,355 1,454,366 Taxes and other sales deductions (44,517) (28,397) Net sales revenues 2,260,838 1,425,969 Cost of sales (2,017,227) (1,273,369) Gross profit 243, ,600 Operating income (expenses) Selling (148,737) (107,895) General and administrative (37,938) (31,899) Complementary profit sharing of employees 23 (6,103) Other operating income, net 19 23,392 39,388 (169,386) (100,406) Operating profit before financial result 74,225 52,194 Financial income (expenses) 18 Financial income 198,249 99,723 Financial expenses (164,677) (92,212) 33,572 7,511 Operating profit 107,797 59,705 Non-operating income (expenses), net (1,009) 231 Profit before taxes 106,788 59,936 Income tax and social contribution 7(b) Current (18,830) (9,077) Deferred (10,438) (5,381) (29,268) (14,458) Net income for the year 77,520 45,478 Net income per share at the end of the year - R$ The accompanying notes are an integral part of these financial statements. 32 Heringer 2007 Annual Report

33 Statements of Changes in Shareholders Equity Years Ended December 31 In thousands of reais unless otherwise indicated Capital reserves Revenue reserves Note Capital Special goodwill reserve Tax incentive - PSDl Subventions for investments Tax incentive - ADENE Donations Legal Retention of profits Retained earnings At January 1, ,944 4, ,173 3, ,145 Net income for the year 45,478 45,478 Tax incentives 17(b) 12,007 (6,538) 5,469 Proposed appropriation of net income: Legal reserve 17(c) 2,274 (2,274) Interest on own capital (R$0.10 per share) 17(d) and (f) (14,584) (14,584) Constitution of reserve for retention of profits 17(g) 25,861 (25,861) Total At December 31, ,944 16, ,447 25, ,508 Merger of parent company and investor 17(a) 52 3,058 3,110 Capital increase: 17(a) With reserves 50,622 (3,058) (16,236) (20) (5,447) (25,861) Through public share offering 176, ,800 Through issue of supplementary lot of shares 26,363 26,363 Constitution of the tax incentive reserve 17(b) Net income for the year 77,520 77,520 Tax incentives 17(b) 16,095 (13,538) 2,557 Proposed appropriation of net income: Legal reserve 17(c) 3,876 (3,876) Interest on own capital (R$0.37 per share) 17(d) and (f) (17,969) (17,969) Constitution of reserve for retention of profits 17(g) 42,137 (42,137) At December 31, ,781 16, ,876 42, ,827 The accompanying notes are an integral part of these financial statements. Heringer 2007 Annual Report 33

34 Statements of Changes in Financial Position Years Ended December 31 In thousands of reais Composition of financial resources provided by operations Net income for the year 77,520 45,478 Expenses (income) not affecting working capital: Depreciation 8,654 6,412 Amortization of goodwill 386 Residual value of property, plant and equipment disposals 1,277 1,362 Provision for (reversal of) losses on properties held for sale 368 (1,437) Long-term deferred income tax and social contribution 4,425 4,537 Provision for (reversal of) contingencies, net 69 (8,338) Interest on long-term liabilities 82 1,389 Financial resources provided by operations 92,781 49,403 Financial resources were provided by Operations 92,781 49,403 From shareholders Capital increase 203,163 Net assets merged 52 From third parties Tax incentives - PSDI 2,557 5,469 Tax incentive related to income tax reduction - ADENE 938 Financing 7,531 Transfer from long-term receivables to current assets 7,582 6,720 Total funds provided 314,604 61,592 Financial resources were used for Long-term receivables 1,534 4,028 Property, plant and equipment 107,255 13,009 Deferred charges 412 Interest on own capital 17,969 14,584 Transfer from current assets to long-term receivables 20,636 3,000 Transfer from long-term to current liabilities 2,191 16,602 Total funds used 149,997 51,223 Increase in working capital 164,607 10,369 Change in working capital Current assets 375, ,932 Current liabilities (211,075) (94,563) Increase in working capital 164,607 10,369 The accompanying notes are an integral part of these financial statements. 34 Heringer 2007 Annual Report

35 Statements of Cash Flows Years Ended December 31 In thousands of reais Cash flows from operating activities Net income for the year 77,520 45,478 Expenses (income) not affecting cash and banks: Depreciation 8,654 6,412 Amortization of goodwill 386 Gain (loss) on sales of property, plant and equipment 975 (232) Provision for (reversal of) loss on property held for sale 368 (1,437) Deferred income tax and social contribution 10,438 5,381 Provision for (reversal of) contingencies, net 69 (8,338) Interest and financial charges, net 82 1,389 Decrease (increase) in assets Trade accounts receivable (57,947) 19,855 Inventories (380,885) 17,658 Taxes recoverable (6,992) (7,269) Related parties 2,183 Other (9,169) 1,585 Judicial deposits (283) (754) Properties held for sale 390 2,440 Increase (decrease) in liabilities Suppliers 9, Salaries and social charges 8, Taxes payable (1,720) 2,196 Advances from customers 21,878 23,432 Interest on own capital 5,169 Other 11, Provision for contingencies (12,728) Net cash provided by (used in) operating activities (301,798) 99,141 The accompanying notes are an integral part of these financial statements. Heringer 2007 Annual Report 35

36 Statements of Cash Flows Years Ended December 31 In thousands of reais Cash flow from investment activities Purchase of property, plant and equipment (107,255) (13,009) Additions to deferred charges (412) Proceeds from sales of property, plant and equipment 302 1,594 Net cash used in investment activities (107,365) (11,415) Cash flow from financing activities Loans and financing 161,819 63,171 Capital increase 203,163 Capital reserve - Tax incentive - PSDI 2,557 5,469 Capital reserve - Tax incentive - ADENE 938 Distribution and payment of interest on own capital (17,969) (14,584) Other 52 Cash flow from financial activities 350,560 54,056 Net increase (decrease) in cash, banks and financial investments: (58,603) 141,782 Cash, banks and financial investments At the beginning of the year 177,048 35,266 At the end of the year 118, ,048 Net increase (decrease) in cash, banks and financial investments (58,603) 141,782 The accompanying notes are an integral part of these financial statements. 36 Heringer 2007 Annual Report

37 Note to the Financial Statements Years Ended December 31 In thousands of reais unless otherwise indicated 1 - OPERATIONS The principal activity of Fertilizantes Heringer S.A. (the "Company"), which was 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, 2007, the Company, which is headquartered in Viana in the State of Espírito Santo, Brazil, owned and operated industrial units in Viana, in the State of Espírito Santo; in Paulínia and Ourinhos, 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; Catalão, in the State of Goiás; Rondonópolis, in the State of Mato Grosso; Rio Brilhante, in the State of Mato Grosso do Sul; Bom Jesus de Goiás, in the State of Goiás; and Porto Alegre, in the State of Rio Grande do Sul. The Company also operates a third-party industrial unit in Bebedouro, in the State of São Paulo. The construction of the plant "SSP - Simple Super Phosphate" in Paranaguá commenced in May 2007, with the operating activities anticipated to commence in the second half of In October 2007, the construction commenced at the future units of Iguatama, in the State of Minas Gerais, and Catalão - State of Goiás, and operations are expected to commence in the second half of The industrial unit of Rosário do Catete, in the State of Sergipe, benefits from a state tax incentive agreement originally granted to the Company in September 2003, also known as PSDI ("Programa Sergipano de Desenvolvimento Industrial" - The Sergipe Program for Industrial Development), which provides tax relief equivalent to 92% of the Value-Added Tax on Sales and Services (ICMS) due in respect of products manufactured by this unit. This benefit has a term of 10 years and expires in On January 31, 2007, the Extraordinary General Meeting of shareholders approved the merger, as of December 31, 2006, of the parent company Heringer Participações Ltda. (Participações) and the investor BSSF Fertilizantes Holding Ltda. (BSSF), under the terms of the protocols of merger approved by the quotaholders of these companies. The basis for the merger was the financial statements at December 31, 2006 (Notes 13 and 17(a)). On April 10, 2007 the Brazilian Securities Commission (CVM) granted the Company registration as a listed company, which permits it to trade its issued common shares on the New Market of the São Paulo Stock Exchange (BOVESPA) (Note 17(a)). 2 - SIGNIFICANT ACCOUNTING PRACTICES The financial statements were approved by the Company's Board of Directors on February 18, The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, based on the regulations of Brazilian Corporation Law (Law 6404 and subsequent amendments applicable to the financial statements for the year ended December 31, 2007), the standards and instructions of the Brazilian Securities Commission (CVM), the technical pronouncements issued by the Institute of Independent Auditors of Brazil (IBRACON) and the resolutions of the Federal Accounting Council Heringer 2007 Annual Report 37

38 (CFC). The effects of Law 11638, of December 28, 2007, which alters certain provisions of Law 6404/76 are described as subsequent events in Note 25. The financial statements for December 31, 2006 were reclassified for comparison purposes with those for the year ended December 31, The reclassification refers to judicial deposits in the amount of R$2,435 reclassified from the account "Judicial Deposits" to the account "Provision for contingencies". In the preparation of the financial statements, it is necessary to use estimates to record certain assets, liabilities and other transactions. Therefore, the financial statements include various estimates related to the allowance for doubtful accounts, selection of the useful lives of property, plant and equipment, estimate of the market value of the properties for sale, provisions necessary for contingent liabilities, income tax and other liabilities. The actual results may, therefore, differ from those estimated. The statements of cash flows, which are presented as supplemental information, have been prepared in accordance with IBRACON Accounting Standard and Procedure nº 20 (NPC 20). The significant accounting practices adopted in the preparation of the financial statements are defined below: (a) Determination of net income and revenue recognition Net income is determined on the accrual basis of accounting. The Company recognizes revenue and the associated cost of sales at the time its product is delivered to its customer or when the title and the associated risks are transferred to the customer. Revenue is recognized when the customer takes delivery of the product either upon delivery to its carrier (FOB) or premises (CIF). Sales are principally made on cash or credit terms. Certain sales are also made 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. Bonuses from the purchases of raw materials, granted by the suppliers, are recognized as "other operating income" in the results for the year, to the extent that the Company becomes entitled to receive the bonuses, through compliance with the pre-established purchase volumes and other parameters. Freight expenses related to the purchases of raw and indirect materials are appropriated to "cost of sales" on the sale of the products. Freight expenses related to the delivery of the products, as well as commission expenses on sales, are recorded as "operating expenses", when incurred. (b) Financial investments Financial investments are recorded at cost, plus accrued earnings up to the balance sheet date. (c) Current assets and long-term receivables The allowance for doubtful accounts is constituted for the accounts receivable considered as probable losses by management and in an amount considered sufficient to cover expected losses on the realization of these receivables. The allowance is based on an analysis of the credit history of the default customers, on the guarantees offered, and on the recommendations of legal counsel and specialized collection agencies. 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 imports in transit are stated at disbursement values and the individual accumulated cost of imports, respectively. Other assets and receivables are stated at cost or realizable values, including accrued earnings, when applicable. 38 Heringer 2007 Annual Report

39 (d) Permanent assets Permanent assets are stated at cost, combined with the following aspects: The investment in an associated company (not significant) is stated at cost (Note 11) and other investments are presented at cost net of provisions for losses. The depreciation of property, plant and equipment is calculated on the straight-line basis (Note 12). The amortization of deferred expenses is effected in accordance with the periods in which the related economic benefits are expected (Note 13). (e) Loans and financing Loans and financing are restated based on monetary and exchange rate variations, plus charges incurred up to the balance sheet dates. (f) Income tax and social contribution on net income Income tax (25%) and social contribution on net income (9%) are determined taking into consideration their nominal rates and, together, total 34%. Deferred tax assets and liabilities arising from tax losses, the negative basis of social contribution on net income and temporary differences are fully recognized as their realization is considered probable. Accumulated tax losses can be carried forward indefinitely, but can only be offset up to a limit of 30% of the taxable income for the year. (g) Other liabilities The liability related to the remuneration of employees, mainly vacation pay and payroll charges, is provisioned when it becomes due. (h) Employee profit sharing plan The Company has a program for the distribution of profit sharing benefits to its employees, through which it distributes 10% of net income, pursuant to a Union agreement (Note 23). The liability is recognized on the accrual basis. (i) 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. (j) Derivative financial instruments The Company carries out transactions with derivative financial instruments, which are contracted for the purpose of mitigating the effects of the volatility of foreign currencies, principally on its purchases of imported products, and does not use such instruments for speculative purposes. Losses and gains on transactions with derivatives are recognized monthly in the results, considering the paper curve. The unrealized gain (loss) represents the difference between the value of the instrument, in accordance with the curve, and its fair market value. (k) Tax incentives The industrial unit of Rosário do Catete, in the State of Sergipe, benefits from a state tax incentive agreement originally granted to the Company in September 2003, also known as PSDI ("Programa Sergipano de Desenvolvimento Industrial"), which provides tax relief equivalent to 92% of the ICMS tax due in respect of products manufactured by this unit. The benefit is recorded as follows: (i) the portion of the tax credit equivalent to the amounts invested by the Company in property, plant and equipment is recorded in the account "Capital reserve - tax support - PSDI", in shareholders' equity and (ii) the portion related to the Heringer 2007 Annual Report 39

40 benefit exceeding the above mentioned investments is recorded in "Other operating income". This benefit has a term of 10 years and expires in 2013 (Note 17(b)). Withholding tax reduction: As from 2007, the Company started to obtain the tax benefit of a reduction of 75% of the income tax payable, which has been granted by the Northeast Development Agency (ADENE). The benefit, which is determined based on the exploitation profit, was granted in March 2006, for a period of 10 years and covers the unit located in Rosário do Catete - State of Sergipe. This benefit cannot be distributed to the shareholders and, for this reason, is recorded as a reduction of income tax payable with a corresponding entry to "Capital Reserve - Tax Incentive - ADENE", which may only be used to absorb losses or for a capital increase (Note 17(b)). (l) Net income per share Net income per share is calculated based on the number of outstanding shares at the balance sheet date. 3 - FINANCIAL INVESTMENTS Quota Investment Fund ("FIQ FH") 23, Bank Deposit Certificates (CDB) 74, ,327 Capitalization securities , , TRADE ACCOUNTS RECEIVABLE Local customers 396, ,949 Foreign customers Rural Credit transactions (i) (40,563) (19,168) Vendor transactions (i) (3,051) (11,354) Allowance for doubtful accounts (36,579) (33,480) 317, ,241 Current assets (315,345) (251,457) Long-term receivables (ii) 1,843 7,784 (i) The Company has agreements with financial institutions related to Vendor and Rural Credit transactions (cash sales with direct financing to the purchaser with a guarantee from the Company) aimed at preferred customers. The balances are classified as a reduction of the trade accounts receivable account because the Company guarantees these transactions. Possible losses are considered at the time of the constitution of the allowance for doubtful accounts. (ii) Long-term accounts receivable consist of renegotiated credits with certain customers (mainly in 2005) who experienced temporary financial difficulties. The receivables are guaranteed by Rural Certificates, real estate mortgages, agricultural chattel mortgages and/or sureties. The Quota Investment Fund ("FIQ FH") is managed by a first rate financial institution and has daily liquidity. The Company has opted for a conservative investment strategy and, consequently, the remuneration of the Fund is linked to the variation of Interbank Deposit Certificates (CDIs). The Bank Deposit Certificates (CDBs) are denominated in reais, with profitability linked to the Interbank Deposit Certificates (CDIs) variation, and have immediate liquidity. 40 Heringer 2007 Annual Report

41 5 - INVENTORIES Raw and packaging materials 356, ,111 Imports in transit 124,439 28,744 Advances to suppliers 57, Warehouse 2,242 2, , , TAXES RECOVERABLE Value-added Tax on Sales and Services (ICMS) (i) 44,929 42,144 Provision for discount on sale of ICMS credits (i) (520) (520) Corporate Income Tax (IRPJ) 19,004 9,470 Social Contribution on Net Income (CSL) 5,951 3,358 Social Contribution on Revenues (COFINS) 7,824 13,492 Social Integration Program (PIS) 1,698 3,039 Withholding Tax (IRRF) on financial investments 1,301 2,212 80,187 73,195 Current assets (54,551) (68,195) Long-term receivables (ii) 25,636 5,000 (i) The provision for discount on the sale of ICMS credits corresponds to the loss of R$4,000 expected on the sale of the credits. Accumulated ICMS credits will be used in the acquisition of the property, plant and equipment and inputs for production, besides being used in the usual operations of the Company. On the financial statement date, the Company had the approval of the State authorities of São Paulo and Minas Gerais to transfer credits in the amount of R$28,417. (ii) Long-term receivables mainly relate to the portion of ICMS expected to be realized in 2009 and Heringer 2007 Annual Report 41

42 7 - INCOME TAX AND SOCIAL CONTRIBUTION (a) Composition of deferred taxes Income tax losses and negative basis of social contribution carryforwards 3,634 11,776 Temporary differences Allowance for doubtful accounts 2,804 3,042 Unrealized (gains) losses on financial instruments (1,096) 2,199 Provision for sales commissions 1,581 1,665 Provision for losses on the realization of properties for sale Amortized goodwill of the investor BSSF 760 Other Total deferred income tax and social contribution 8,744 19,182 Current assets (6,924) (12,937) Long-term receivables 1,820 6,245 Deferred income tax and social contribution assets arising from tax loss and the negative basis of social contribution carryforwards and temporary differences between the tax and accounting bases are recorded taking into consideration the probable realization of these taxes. The realization of temporary differences will occur on the effective payment of the related provisions, when the amounts will become deductible in the determination of the taxes. 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. The actual results may differ from those estimates. The assets, net of the deferred tax liabilities, are expected to be realized as follows: , ,924 5, ,037 8,744 19,182 The utilization of the tax credits in the amount of R$1,037, expected for 2010, will depend on the realization of the provisions from which they originated. 42 Heringer 2007 Annual Report

43 (b) Reconciliation of income tax and social contribution The reconciliation of the amounts of income tax and social contribution presented in the statement of income with the amounts computed at nominal rates is as follows: Profit before income tax and social contribution 106,788 59,936 Nominal tax rates 34% 34% Income tax and social contribution at nominal rates (36,308) (20,378) Effects of permanent exclusions (additions) on tax calculation Interest on own capital 6,110 4,958 Development program and technological innovation 360 Other Total income tax and social contribution expense (29,268) (14,458) Current (18,830) (9,077) Deferred (10,438) (5,381) Total income tax and social contribution (29,268) (14,458) Heringer 2007 Annual Report 43

44 8 - TRANSACTIONS AND BALANCES WITH RELATED PARTIES The transactions carried out between the Company and related parties refer to commercial operations, including the leasing of a property, and are summarized as follows: Accounts receivable Dalton Dias Heringer 1, Other accounts receivable Dalton Dias Heringer 234 Gross sales Dalton Dias Heringer 1,609 1,694 Juliana Heringer Rezende ,626 1,699 range from R$4.00 to R$6.00 per head of cattle to be placed on the property, depending on the age of the animals. In 2007, the amount of R$18 was recorded in other operating income. Leasehold improvements amounted to R$1,126 at December 31, The term of the lease is five years and is expected to expire in 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. The accounts receivable arise from the sale of the Company's products in the normal course of business. Similar third-party transactions are used as the basis for the prices, which take into account the product volumes and characteristics. Other accounts receivable basically arise from advances for the purchase of eucalyptus logs used in the construction process of the industrial units. Prices contracted are based on those practiced with third parties. Cost of sales Dalton Dias Heringer (1,355) (1,273) Juliana Heringer Rezende (13) (1) Other operating income (1,368) (1,274) Dalton Dias Heringer Purchases Dalton Dias Heringer On September 26, 2006, the Company entered into a lease agreement for one of its rural properties with the shareholder Dalton Dias Heringer, with the objective of exploring a cattle breeding business with up to 1000 head of cattle. The property, which is located in the State of Tocantins, is recorded in "Properties held for sale" in the amount of R$5,840. After the leasehold improvements to be funded by the Company have been concluded, the monthly lease payments will 9 - JUDICIAL DEPOSITS Taxes (i) 5,912 5,997 Civil (iii) 1,394 1,169 Social security (ii) Labor (iv) ,898 7,615 Judicial deposits mainly arise from lawsuits related to the following matters: (i) Tax - Mainly refers to discussions related to the payment and offset of federal taxes in prior years. (ii) Social security - refers to amounts relating to injunctions obtained by the Social Security Authorities, which claim that the Company has not complied with certain legal formalities for completing the social security forms.. (iii) Civil - the principal processes are related to claims from customers and the judicial deposits were made to initiate declaratory actions proving the inexistence of debts. (iv) Labor - Mainly comprised of claims by employees relating to severance compensation. 44 Heringer 2007 Annual Report

45 10 - PROPERTIES HELD FOR SALE Rural properties 12,495 12,632 Land and urban properties 1, Machinery, farming implements and agricultural equipment 1,066 1,231 Vehicles Provision for losses on realization (1,782) (1,414) 12,939 13,697 Properties held for sale refer to assets received from customers in settlement of accounts receivable. The provision for losses on realization is recorded for the cases in which the amount received in payment is higher than that expected on realization. Rural properties include the lease agreement with the shareholder Dalton Dias Heringer (Note 8) INVESTMENTS The Company holds a 0.08% interest in the capital of the associated company Fertifós Administração e Participação S.A., which was acquired in 1992, and the investment is stated at cost. All the other investments are fully provided for PROPERTY, PLANT AND EQUIPMENT Cost % Accumulated depreciation Net Net Land 6,064 6,064 7,190 Annual depreciation rates Buildings 57,806 (5,568) 52,238 41, Vehicles 3,256 (1,095) 2,161 1, Machinery, equipment and industrial installations 48,985 (10,352) 38,633 17, Furniture and fixtures 3,757 (1,388) 2,369 1, Computers and software 14,739 (6,556) 8,183 7, Others 2,236 (254) 1, Advances to suppliers 24,026 24,026 Construction in progress 46,409 46,409 6, ,278 (25,213) 182,065 84,741 Heringer 2007 Annual Report 45

46 The depreciation for 2007 allocated to cost of sales amounted to R$5,541 ( R$3,652) and to operating expenses, R$3,113 ( R$2,760). Certain property, plant and equipment assets are pledged in guarantee for financing operations (Note 15) DEFERRED CHARGES 2007 Cost Amortization Net Loss on merger of investor - goodwill 3,058 (386) 2,672 Expenses with reorganization ,470 (386) 3,084 Construction in progress refers mainly to (i) the expansion of the Paranaguá unit; (ii) improvements to equipment acquired in 2004 relating to the construction of the "SSP - Super Simple Phosphate" production unit in Paranaguá-PR; (iii) conclusion of the new unit of Ourinhos-SP; (iv) improvements in the units of Três Corações-MG, Manhuaçu-MG and Rosário do Catete-SE; (v) improvements to the unit II leased in Rondonópolis-MT and (vi) construction of an own unit in Catalão-GO and of the new unit in Iguatama-MG, expected to commence operations in the first half of Advances to suppliers refer, mainly, to the purchase of equipment to be used in the future plant "SSP - Simple Super Phosphate" At January 1 84,741 79,506 Additions 107,255 13,009 Depreciation (8,654) (6,412) Residual value of asset disposals (1,277) (1,362) At December ,065 84,741 The loss on the merger of the investor - goodwill arose from the goodwill paid by BSSF on the subscription of shares in the Company, in the amount of R$8,994, which is presented net of a provision for loss on realization in the amount of R$5,936. The goodwill was based on the perspective of future profitability of the Company and, for this reason, it was reduced to the tax benefit amount that will be generated on its amortization over a ten-year term. The amortization term corresponds to the expectation of the generation of future results originally estimated by the investor, supported by an appraisal report prepared by specialists SUPPLIERS The majority of raw materials are acquired from foreign suppliers. At December 31, 2007, amounts due in foreign currency corresponded to US$208,893 thousand ( US$147,775 thousand). 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 20(c)). 46 Heringer 2007 Annual Report

47 15 - LOANS AND FINANCING Import financing (i) Interest rate Variable ( US$157,072 thousand; US$47,767 thousand) Libor % p.a. ( LIBOR % p.a.) 278, ,127 Fixed US$3,626 thousand % p.a. 7,753 Industrial credit certificates - BNDES (ii) URTJLP variation and 6.3% p.a. ( URTJLP variation and 9.3% p.a.) 12,817 5,451 Working capital (iii) US$5,496 thousand Exchange variation +2.8% p.a. 11,750 Fixed credit for refinancing of trade notes receivable from rural producers (iv) TJLP + 4% p.a. 2, , ,219 Current liabilities (282,336) (125,863) Long-term liabilities 8,702 3,356 LIBOR (London Interbank Offered Rate) - at December 31, 2007 the rate was 4.60% p.a., negotiated semi-annually ( %). TJLP (Long-term Interest Rate) - Fixed quarterly by the National Monetary Council and published by the Brazilian Central Bank. It is calculated based on inflation targets and risk premiums. At December 31, 2007, the TJLP was 6.25% ( %) p.a. URTJLP - The National Bank for Economic and Social Development (BNDES) index based on TJLP. Heringer 2007 Annual Report 47

48 (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. Payments are due from 180 to 270 days from the date of the bill of lading and were guaranteed by receivables and trade bills at December 31, 2007, which represented 27% of the amount financed. There are no guarantees for the remaining amount. (ii)industrial credit certificates - Refer to credit lines with BNDES in 2007 for the construction and expansion of the units of Ourinhos-SP and Manhuaçu-MG, respectively, which are guaranteed by the unit of Três Corações-MG. In 2007, the unit of Paranaguá-PR was also the object of financing and, in prior years, the units of Viana-ES and Rosário do Catete-SE. These financings are secured by the properties financed. (iii)working capital - Consisted of two agreements with financial institutions, fully settled in (iv) Fixed credit for refinancing of trade notes receivable from rural producers - referred to a credit line provided in 2005 by a financial institution with funds from the Workers' Assistance Fund -(FAT). The financing was fully settled in The maturities of long-term amounts are as follows: 16 - CONTINGENCIES (a) Analysis of provision for contingencies and judicial deposits The Company is party to legal and administrative lawsuits in Brazil arising in the normal course of its business. The provisions for probable losses arising from these proceedings are estimated and updated by management, based on the opinion of the Company's external legal advisors. The liabilities and judicial deposits relating to the contingencies were as follows: Nature of contingency: Contingencies Judicial deposits Net Net Tax (i) 3,458 (1,982) 1,476 1,469 Labor (ii) 276 (276) Social Security (iii) 409 (265) 144 Long-term receivables/liabilities 4,143 (2,523) 1,620 1, , ,137 1, , , ,633 8,702 3,356 The liabilities and judicial deposits in respect of contingencies relate to: (i) Tax - principally refers to the inclusion of other operating revenues in the PIS calculation basis, established by Law 9718/98, amounting to R$1,458, and to the change in the computation methodology of COFINS from a cumulative to non-cumulative basis, established by Law 10833/03, amounting to R$1,894, which are both supported by judicial deposits of the same amounts. (ii) Labor - mainly comprised of claims by employees relating to severance payments, which are supported by judicial deposits. (iii) Social security - refers to amounts relating to injunctions obtained by the Social Security Authorities, which claim that the Company has not complied with certain legal formalities for completing the social security forms. 48 Heringer 2007 Annual Report

49 (b) Changes in the provision On January 1 1,469 21,146 Additions 157 3,202 Judicial deposit (88) Reversal to income following favorable judicial decisions (COFINS) (11,540) Transfer of PIS and COFINS to "taxes payable" in current liabilities (12,728) Interest and monetary variations 82 1,389 On December 31 1,620 1,469 On November 27, 1998, Brazilian Law 9718/98 was enacted which increased the base for both PIS and COFINS for 1999 (which began to be applicable to other revenues and not only to billings), while at the same time increasing the rate for COFINS from 2% to 3%. Supported by its legal advisors, the Company contested this law, and the amounts being contested were provided for and those relating to the rate increase were deposited in an escrow account with the courts. In November 2006, the Company received a final unappealable court decision in its favor, which ruled that the COFINS tax on the expanded base was unconstitutional. The Company, therefore, reversed the provision of R$11,540 to the results for Also in 2006, the Company withdrew its claim contesting the increase in the COFINS rate from 2% to 3% and offset the judicial escrow deposit of R$4,894 against the corresponding provision. (c) Possible losses not recorded The Company is also a party to tax, social security, labor, administrative and civil lawsuits, which involve possible risks of loss, based on the opinion of management and the Company's legal advisors, and for which there is no provision recorded, as shown below. The amounts presented have been indexed by the official interest (SELIC) rate or, when applicable, correspond to the determinations of the external legal counsel: Tax (i) 28,178 26,034 Social security (ii) 8,013 3,996 Labor (iii) 2,337 1,703 Civil (iv) 1, These contingencies relate to: 39,586 32,015 (i) Tax - refers to PIS credits offset in prior years, amounting to R$12,044, as well as to challenges relating to payments and offset of other federal taxes in prior years. (ii) Social security - mainly comprised of amounts relating to injunctions obtained by the Social Security Authorities, claiming that the Company has not complied with certain legal formalities for completing the social security forms. (iii) Labor - mainly comprised of claims by employees relating to severance payments. (iv) Civil - primarily related to claims by customers. (d) Acquisition of tax credits and their utilization for offset against taxes due In February 2003, the Company was granted a tax credit arising from federal tax overpayments, which originated from a final and unappealable court decision more than two years previously, in an amount defined in the records. A credit assignment agreement was formalized, filed in the Registry of Titles and Documents, and the substitution of the asset was also requested and approved by the Federal Court. The decision regarding the substitution was also final an unappealable. As from that date, the Company unequivocally owned the tax credit, definitely recognized as being its property and with no possibility of questioning by the Government, since the Courts have already issued final decisions, both as to the amount of the tax overpayment and to the substitution of the asset. Heringer 2007 Annual Report 49

50 Offset of tax credits against taxes due The offset of the tax credit against federal taxes payable amounting to R$64,554, generated by the Company's operations, was carried out in the period from January to December Immediately thereafter, and to comply with requirement for the offset, the Company requested the cancellation of the execution process of the Government's claim, since the offset of the tax credits with related debts of the same nature already represented the realization of credits that the Company held with the Government. The offset therefore extinguished the tax debt of the Company, pursuant to the provisions of paragraph 2 of article 74 of Law 9430/96, with wording provided by Law 10637/02, subject to subsequent ratification. As a result of the above, the extinction of the tax debts became effective at the time of offset, which was, immediately. Therefore, the utilization of the tax credits of which the Company was the sole owner was concluded in 2003, through the offset and consequent settlement/ extinguishment of the tax debts. As a consequence, the discount obtained on the purchase of the tax credits, in the amount of R$15,300, was considered as realized. The discount was recognized in the result of that year based on the position of the company s legal advisors, who considered the chances of success to be probable in the event of any questioning by the tax authorities. Tax Assessment notices issued by the Revenue Secretariat of Brazil Federal Later, in April 2005, the Federal Revenues Secretariat of Brazil, based on a supposed legal veto to the offset made at the time of article 74 of Law 9430/96 and intending to apply this standard retroactively to Law 11051, published on 12/29/2004, filed a tax assessment against the Company rejecting the offset realized. Considering the flagrant disrespect of the legal regulations in effect at the time of the offset, which authorized the Company to effect the offset, and in order to safeguard the interests of its shareholders, the Company was obliged to contest this assessment, supported by the opinion of specialized legal advisors. Furthermore, on October 6, 2006, the Federal Revenue Secretariat of Brazil, also based on a regulation issued after the time in which the offset was effected, (Law 11051/04), filed a tax assessment notice to impose a fine in the amount of R$56,440, corresponding to 75% of the principal amount of the credits offset. The Company is also defending this assessment at the administrative level and, in the opinion of its legal advisors, the risk of loss is considered to be remote. Process of enforcement of final and unappealable decision and limitation period In the event that the final court decision is to deny the offset of the tax credits, even though the Company's legal advisors still consider the probable outcome to be favorable to the Company, the Company will again attempt to secure the right to offset its tax credits via its own legal proceedings. This will be possible because, as the legal advisors sustain, the five year limitation period for the execution of the court sentence started on May 8, 1998, when the final unappealable decision was issued, and was interrupted on July 1 of the same year, when the execution of the sentence was initiated. Furthermore, as already mentioned above, to comply with the requirement for the offset, the cancellation of the execution process of the government s claim was requested and this cancellation request was registered and ratified by the competent judge. As regards the ratification, the execution is currently suspended considering the existence of a special appeal regarding the decision that denied the possibility of the deduction of the total amount of the credit due, because the payment of a supposed debit in the amount of R$200 was suspended at the time of the offset. Supporting the understanding that the limitation period has been interrupted, a federal judge decided, when reviewing the Company's request on this matter, that there is no doubt regarding the duration of the limitation period, also considering that the suspension of the enforcement of the tax credits, as a result of the appeal, occurred after the decision 50 Heringer 2007 Annual Report

51 that ratified the request for the desistance from the execution process. Despite this, the Company's legal advisors emphasize that, if it is alleged that the limitation period is in progress, because of the suspension of the enforcement process, it would, in fact, still be considered to have been interrupted considering that both the enforcement process and the offset are pending final judgment. Consequently, considering the position of the legal advisors that the likelihood of success in this matter is probable, if the final decision is ultimately not favorable to the Company, it will not prejudice the Company's right to again seek to recover the tax credits to which it is entitled via a special judicial order, thereby reinitiating the enforcement proceedings. In case the Company reclaims its right to offset the tax credits via a special judicial order, because of the impossibility of offset in the manner described above, the recognition in the financial statements should be at the acquisition cost plus monetary restatement and interest, in accordance with the criterion established in the court sentence, up to the limit of the market value, in conformity with the understanding of the Brazilian Securities Commission (CVM), through its official letter 379/07 of November 5, 2007, which was issued in response to the Company's consultation dated October 8, This is also the understanding of the Company's independent auditors. At December 31, 2007, the restated acquisition cost was R$70,441. Current balances of tax credits and of taxes offset If the tax credit had not been offset against federal taxes, the restated amount, at December 31, 2007, based on the criterion established in the court sentence, would have been R$106,362, whereas the debts plus fines and interest would have been R$120,053. The tax credit was the object of a review and calculation by an independent specialist on November 7, 2007, for the base date of September 30, 2007, when an appraisal report was issued determining the value of the credit. Since then, the Company has followed the same calculation methodology adopted by the specialist for the restatement of these credits SHAREHOLDERS' EQUITY (a) Capital According to the Company's by-laws, the Board of Directors may increase the Company's capital up to the limit of R$800,000. At December 31, 2007, capital comprised 48,566,007 nominative common shares, with no par value ( ,460,957 shares, divided into 116,290,000 nominative common shares with no par value and 30,170,957 nominative, preferred shares with voting rights, with no par value and convertible into common shares). At January 31, 2007, the Extraordinary General Meeting approved the merger, as of December 31, 2006, of the parent company Heringer Participações Ltda. (Participações) and the investor BSSF Fertilizantes Holding Ltda. (BSSF), under the terms of the protocols of merger approved by the quotaholders of these companies. The basis for the merger was the financial statements at December 31, The net assets merged of Participações and BSSF were evaluated by independent expert appraisers and amounted to R$52, net of the goodwill in the amount of R$3,058 (Note 13) and the investments that these companies had in the Company. The goodwill referred to above, recorded in the "special goodwill reserve" at the time of the merger was utilized for a capital increase, as approved by the shareholders at the Extraordinary General Meeting held on February 9, At the Extraordinary and Special General Meeting, on February 9, 2007, the shareholders approved the conversion of all the preferred shares of the Company into the same number of nominative common shares with no par value. On March 7, 2007, the Extraordinary General Meeting decided to approve the reverse split of common shares, in the proportion of one share for every four existing shares. Additionally, the Extraordinary General Meetings held on January 31, 2007 and February 9, 2007, and rectified by the Extraordinary General Meeting held on March 7, 2007, approved a capital increase through Heringer 2007 Annual Report 51

52 the capitalization of capital and revenue reserves in the amount of R$50,622. On April 10, 2007, at the Supervisory Board Meeting, the councilors approved the subscription for all the 10,400,000 common shares issued by the Company, all nominative and book entry shares, with no par value, and the increase in capital from R$226,618 to R$403,418, within the limit of authorized capital, in the ambit of the primary offering of the primary distribution of shares. On May 11, 2007, at the Supervisory Board Meeting the councilors approved the public distribution of a supplementary lot of common shares, within the limit of authorized capital, which increased from R$403,418 to R$429,781, through the issue of 1,550,768 common shares, all of them nominative, book entry and with no par value. (b) Capital reserves (i) Tax Incentive - PSDI In compliance with the legislation relating to the tax benefit granted by the State of Sergipe (State Decree nº 22230/03), the amount of R$16,095 ( R$12,007) was appropriated to a capital reserve during the year ended December 31, 2007, of which the amount of R$2,557 ( R$5,469), corresponding to the investments made in the plant of Rosário do Catete-SE, was directly recorded in the specific capital reserve account, denominated "Tax Incentive - PSDI", and the balance of R$13,538 ( R$6,538), was recorded in the result for the year and transferred from retained earnings to a specific capital reserve account. reserve, which will only be available to be used for the absorption of losses or for an increase in capital. (c) Legal reserve The legal reserve is constituted through the appropriation 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 a capital increase or for the absorption of accumulated losses. At the Company's discretion, the legal reserve need not be constituted whenever its balance plus that of the capital reserves, referred to in Law 6404/76, Article 182, paragraph 1, exceed 30% of capital. (d) Interest on own capital In accordance with Law 9249/95, the Company's management approved, at the Board of Directors' meeting held on November 21, 2007, the distribution of R$15,055 to the shareholders, as interest on own capital, calculated based on the Long-term Interest Rate (TJLP). This interest was considered to be part of the minimum mandatory dividend. Additionally, in December 2007, management proposed the distribution of the remaining portion of the minimum mandatory dividends, in the amount of R$2,914, also as interest on own capital. In compliance with tax legislation, the interest on own capital, net of withholding income tax, in the amount of R$15,274 ( R$12,396), corresponding to R$0.31 ( R$0.09) per share, was recorded as financial expenses. However, for purposes of the financial statement, interest on own capital is presented as a distribution of net income for the year, in accordance with CVM Resolution nº 207/96. (ii) Tax Incentive - ADENE As mentioned in Note 2(k), this incentive relates to the unit of Rosário do Catete, in accordance with the exploitation profit. In accordance with the act conceding the incentives, this benefit cannot be distributed to the shareholders and will constitute a specific capital (e) Appropriation of net income In accordance with the Company's by-laws, the shareholders are guaranteed a minimum annual dividend of 25% of the net income for the year, after 52 Heringer 2007 Annual Report

53 the compensation of accumulated losses, if applicable, and increased or decreased by the following: (i) appropriation to legal reserve; (ii) appropriation to reserves for contingencies or reversal of the same reserves recorded in prior years; (iii) amount arising from the reversal of the reserve for profits to be realized recorded in prior years, in accordance with paragraph II, Article 202 of Brazilian Corporation Law. A profit participation of up to one-tenth of the net income for the year may be paid to management, as established in the Company's by-laws. The Company can maintain a statutory profits reserve titled "Investment reserve", with the objective of financing its expansion. This reserve cannot exceed 80% of the subscribed capital. The funds appropriated to this reserve shall be not less than 5% and not more than 75% of the net income remaining after the legal and statutory deductions. The remaining balance of net income for the year after the distribution of dividends and the constitution of statutory reserve, if any, will be allocated as decided by the Shareholders' General Meeting, observing the legal requirements. The proposal for the distribution of dividends and interest on own capital, presented in the financial statements of the Company, was calculated under the terms of the Corporation Law, especially with regard to the provisions in articles 196 and 197, and also took into consideration the specific legislation which deals with the tax benefit granted by the State of Sergipe (Note 17(b)), which does not permit the distribution of incentives granted, under the penalty of the Company losing that benefit. As shown, the dividends paid in the modality of interest on own capital, net of withholding tax, are above the statutory minimum. (g) Retention of profits reserve In compliance with article 196 of Corporation Law, the retention of the remaining profits, after legal appropriations and interest on own capital, in the amount of R$42,137 ( R$25,861), will be proposed to the General Shareholders' Meeting to be utilized for capital increases or for working capital purposes, considering the expansion plans of the Company. (f) Dividends proposed Net income for the year 77,520 45,478 Constitution of the legal reserve (3,876) (2,274) Constitution of the capital reserve - Tax Incentive PSDI (13,538) (6,538) Calculation basis for the dividends 60,106 36,666 Interest on own capital, net of withholding tax 15,274 12,396 Percentage on net income 25.4% 33.8% Heringer 2007 Annual Report 53

54 18 - FINANCIAL INCOME (EXPENSES) Financial income Foreign exchange variations 149,525 77,456 Gains on financial investments 18,582 8,651 Gains on financial instruments (i) 18,193 3,475 Interest on financial assets and discounts obtained 9,635 8,592 Monetary variations 2,285 1,546 Other financial income ,249 99, Financial expenses Foreign exchange variations (70,094) (45,711) Interest on financial liabilities and discounts granted (30,930) (22,108) Losses on financial instruments (i) (45,590) (15,069) Taxes and contributions on financial transactions (17,981) (12,261) Monetary variations (ii) (82) 2,944 Other (7) (164,677) (92,212) (i) Gains and losses on financial instruments refer mainly to swap transactions.. (ii) In 2006, includes the reversal of monetary variations calculated on provision for contingencies in the amount of R$4,347, which were written-off as a result of final and unappealable decision in that year (Note 16(b)). 54 Heringer 2007 Annual Report

55 19 - OTHER OPERATING INCOME, NET Bonuses received from suppliers (i) 23,759 22,296 Reversal of the provision for loss contingencies for COFINS (ii) 7,193 Fiscal incentive from the State of Sergipe (iii) 13,538 6,538 Cost of distribution of the Public Share Offering (iv) (11,051) Other, net (2,854) 3,361 23,392 39,388 (i) Bonuses granted by suppliers as a result of the Company's attaining a minimum threshold of purchase volumes, which are recorded upon confirmation by the suppliers. (ii) Refers to the inclusion of other operating income in the COFINS calculation basis which was due to the favorable decision given by the Supreme Court (Note 16(b)), net of lawyers' fees and monetary variations, which were reversed with a corresponding entry to financial expenses (Note 18). (iii) Corresponds to a reduction of 92% of the ICMS payable related to the sales from the Rosário do Catete-SE unit (Note 2(k)). (iv) Refers to expenses with commissions due to the coordinators of the Public Offering of shares and to the expenses related to lawyers, auditors, registration and publicity and the road show with investors in Brazil and abroad FINANCIAL INSTRUMENTS The Company carries out cross currency swap transactions to mitigate risks on accounts payable in US dollars, obtaining protection from the effects of unfavorable exchange rate changes. The financial instruments are recorded in balance sheet accounts, at amounts which approximate fair market values. The fair values of long-term and short-term debt instruments are estimated based on similar instruments available in the market. The Company participates in Vendor and Rural Credit transactions involving financial instruments, which are contracted with financial institutions with the purpose of meeting the financing needs of the Company's major customers on the acquisition of the Company's products. The Company monitors and evaluates its derivative positions on a daily basis and adjusts its strategy in response to market conditions. The Company also periodically reviews the credit limits and creditworthiness of its customers in these transactions. In view of the policies established for derivative financial instruments, management considers the occurrence of non-measurable risk situations to be unlikely. (a) Credit risk The Company's sales policy is closely associated with the credit risk level it is willing to accept in the normal course of its business. The broad base of customer receivables, the customer selectivity procedures, and the monitoring of the financing terms of the sales by business segment and of the individual position limits are procedures that the Company has adopted to mitigate possible problems arising from default on its accounts receivable. The Company also has an allowance for doubtful accounts, amounting to R$36,579 ( R$33,480), corresponding to 9% of the gross balance of outstanding trade accounts receivable from third parties ( %), to cover credit risk. The Company limits its exposure to credit risks associated with banks and financial investments by investing with highly rated financial institutions, within pre-established limits, and contracting derivative instruments only with financially sound counter-parties. In order to meet customer needs for credit sales matched to harvests, the Company utilizes financial instruments to assure liquidity. These instruments are guaranteed by the Company and are recorded in the account "Trade accounts receivable", the carrying values of which do not differ significantly from market values. Heringer 2007 Annual Report 55

56 (b) Interest rate risk This risk arises from the possibility that the Company could incur losses due to fluctuations in interest rates, increasing the financial expenses related to loans and financing obtained in the market. (c) Exchange rate risk This risk refers to the possibility that the Company could incur losses due to fluctuations in exchange rates which increase the amounts involved in foreign currency. At December 31, the liabilities denominated in foreign currency, financial instruments used to mitigate the effects of exchange variations and the net exposure to the exchange rate risks can be summarized as follows: affect the Company's results of operations. In order to mitigate the exchange rate risk, the Company engages in transactions involving financial instruments, contracted with financial institutions, to reduce its exposure to market and currency risks. These financial instruments are derivatives which represent commitments for the future purchase and sale of currencies or indices at contractually agreed dates. At December 31, 2007, operations with derivative instruments contracted by the Company totaled US$19,000 thousand ( US$48,600 thousand), and the results of these operations, which had not yet been liquidated, represented a net loss of R$34 ( R$1,394), recorded in the financial statements as "Other accounts payable". The financial result of all operations with derivative instruments in the year represented a net loss of R$27,397 ( R$11,594). Foreign suppliers: Guaranteed by letters of credit 108,008 92,817 Not guaranteed by letters of credit 262, ,126 Loans and financing Import financing 278, ,880 Working capital 11, , ,573 Instruments used to mitigate the effects of exchange variations (33,655) (103,907) Net exposure 614, , INSURANCE COVERAGE Reflecting the low probability of significant loss, the Company does not have insurance coverage for a majority of its assets. However, pursuant to contractual obligations, the Company has two insurance policies which provide coverage of the production units of Viana-ES and Paranaguá-PR. These policies cover damages caused by fire, lightning and explosion (including electrical damage), the maximum limits for indemnity of which are as follows: (i) for the Viana-ES unit, R$4,600 and (ii) for the Paranaguá unit, R$5,300. Because of the significance of raw material imports to the Company's operations, the foreign exchange rate volatility represents a significant operational risk. If the effects of a devaluation of the Brazilian real are not passed through to customers, significant reductions in gross profit margins could result and, consequently, 22 - MANAGEMENT REMUNERATION In 2007, the amount of the remuneration received by the Company's management was R$1,712 ( R$749), recorded in operating expenses under "General and administrative expenses". 56 Heringer 2007 Annual Report

57 23 - EMPLOYEE PROFIT SHARING The Company has a program for the distribution of profit sharing benefits to employees, through which it distributes 10% of net income, adjusted for possible accumulated losses from prior years. Before the year-end, the Company distributes to its employees, as an advance on the bonus, one monthly salary, irrespective of the generation of net income. In the event net income is generated, the advance is deducted from the profit sharing contribution due. If there is no profit sharing distribution, the advance payment is not discounted. Employees who are hired during the year are granted a proportional participation. In 2007, the total amount of employee profit sharing was R$8,296 ( R$1,618), of which R$2,193 ( R$1,618) related to the advance mentioned above and R$6,103 to the complementary participation computed as a result of the profit presented during the year. In 2006, there was not balance of employee profit sharing due to the offset of the loss of The advance granted as employee profit sharing is treated as an operating cost or expense and classified in the related financial statement accounts and the balance provisioned for the complementary participation of employees in profits or results, net of the advance, is recorded in a specific account in the statement of income for the year STOCK OPTIONS PLAN Under the Company's bylaws and according to a plan approved by the Extraordinary General Meeting, the Company can grant share purchase or subscription options, by a decision of the Supervisory Board, in favor of officers and employees, with no preferential rights to the shareholders. On August 18, 2006, a Share Purchase Option Agreement, which was amended on March 9, 2007, was entered into between the Company and one of its directors, to whom was granted stock options of up to 1% of the share capital before the Public Offering of Shares. According to the terms of the agreement, the options can be exercised in three stages: at the time of the initial Public Offering of the Company's shares and 12 and 24 months thereafter. The strike price of the option will be R$7.92 per share. On February 18, 2008, the purchase option of 244,000 shares of a total of 366,152 shares was exercised. As a result of the partial exercise of the option, the Supervisory Board approved, on the same date, the issue of 244,000 new common shares, with the same rights as the other existing common shares, at the issue price of R$7.92 per common share, totaling R$1,932. The shares issued were fully subscribed by the beneficiary of the purchase option and will be paid as follows: 50,000 shares on February 19, 2008, 72,000 shares on March 6, 2008 and 122,000 shares on April 11, As a result of the issue of these new shares, there will be a dilution of 0,1% in relation to a net equity per share of R$10.14 (considering an increase in the shareholders' equity of R$1,932). If the purchase option for the 122,152 remaining shares were exercised there would be an additional dilution of 0.05%. The market value of the shares issued, considering the quotation of the shares in the São Paulo Stock Exchange (BOVESPA) on the date of the exercising of the option, was R$ Besides the above described plan, the Company does not have any other stock option plans currently in effect. Any new stock option plan would have to be previously approved by a shareholders' general meeting. Heringer 2007 Annual Report 57

58 25 - SUBSEQUENT EVENTS - CHANGES TO THE BRAZILIAN CORPORATION LAW Law was enacted on December 28, 2007, amending certain provisions of Brazilian Corporation Law in relation to certain accounting practices and the format of the financial statements, as from the fiscal year ending December 31, According to the new Law, the issue of accounting standards by CVM for publicly-held companies subject to its regulations should be consistent with international standards. In a release to the market, CVM informs that, in accordance with its preliminary understanding, the accounting standards adopted by the International Accounting Standard Board (IASB) are currently considered the international reference in terms of accounting standards. It is expected that other changes or legal provisions will be the object of regulation by CVM during At this moment, the Company is carrying out studies and evaluating the impacts of this new Law, including with the support of expert third parties, with the objective of having an ample diagnosis to meet the accounting standards of the aforementioned Law, as well as the determinations of the IASB, since the intention of the Company's management is to prepare the financial statements in accordance with international standards as from 2008, thereby in advance of the mandatory date established in the New Market Regulation, which, in its case, would be only as from As from this wide study, Possible effects of changes in the accounting practices will be measured as a result of this ample study. The main alterations, already identified, which should influence the financial statements of the Company are those related to the accounting record of tax incentives and the measurement of financial instruments and their disclosure. However, at present, and in these circumstances, it is not practicable to measure with reasonable assurance the effects of the full adoption of the new Law in terms of the result and shareholders' equity. It should be noted that the Company already voluntarily publishes the Statement of Cash Flows. Paulínia Unity (SP) 58 Heringer 2007 Annual Report