August 15, 2008
To Arantes Alimentos Ltda.
Attn.: Mr. Aderbal Luiz Arantes Junior
Ref.: Report on the Limited Review n. 45264526-20082008-7
(Translation of the report originally issued in the Portuguese language)
Dear Sir,
We hereby forward you the Financial Statements as of June 30, 2008 and 2007 of Arantes
Alimentos Ltda., together with the Report on the Limited Review.
Sincerely Yours,
Luiz Cláudio Fontes
LCF/CPN/EPO
Arantes Alimentos Ltda.
Financial Statements together with the Report
on the Limited Review
June 30, 2008 and 2007
1/27
Report on the limited review of the
financial statements
(Translation of the report originally issued in the Portuguese language. See
Note 24 to the financial statements).
To the management and unit holders of Arantes Alimentos Ltda.:
1.
We have performed a limited review of the balance sheets (parent company
and consolidated) of Arantes Alimentos Ltda. and its subsidiaries as of June
30, 2008 and 2007, and the related income statements, statements of
changes in net equity, statements of changes in financial position and
statements of cash flow for the semesters then ended, prepared under the
responsibility of the Company’s management.
2.
We conducted our audit in accordance with the Brazilian auditing standards
established by the Brazilian Institute of Independent Auditors (IBRACON), and
it primarily consisted in applying analytical review procedures on the financial
data and in investigating the criteria adopted by the persons in charge of the
accounting and financial departments of the Company in preparing the
financial statements. Considering that the present review do not represent an
audit in accordance with the independent audit standards for financial
statements applicable in Brazil, we are not expressing an opinion about the
aforementioned financial statements.
3.
Based on our opinion, we are not aware of any significant changes that must
be made to the financial statements mentioned in paragraph 1, so that they
are in compliance with the accounting practices adopted in Brazil, which are
subject to the changes introduced by Law n. 11.638.
2/27
4.
As pointed out in Note 1, the Company maintains the manufacturing unit of
Canarana leased and it acquires all of the meat production of Pontes Lacerda,
from related companies, in accordance with the agreements that stipulate the
financial conditions between the parties. The values of such operations could
have been different, should they have been entered by and between the
Company and companies owned by third parties, at usual market conditions.
5.
As pointed out in Note 2, on December 28, 2007, Law n. 11.638, effective as
from January 1, 2008, was promulgated. Such Law has changed, revoked,
and introduced new provisions to Law n. 6.404/76 (Corporation Law), which
given rise the changes in the accounting practices adopted in Brazil. Although
the above Law has already been made effective, some of the changes
introduced by it depend on their being standardized by the regulating agencies
in order to be fully applied by the companies. Thus, during this transition
phase, the Company has observed the guidance issued by CVM in preparing
the financial statements. Therefore, the information presented might require
adjustments when of the process of standardization of Law n. 11.638.
São José do Rio Preto (SP),
August 15, 2008.
Auditores Independentes
Luiz Cláudio Fontes
Partner - accountant
accountant
3/27
Arantes Alimentos Ltda.
Balance sheets as of June 30, 2008 and 2007
(Translation of the original issued in Portuguese)
(In thousands of Reais)
ASSETS
Consolidated
Parent company
Notes
Current assets
Cash and cash equivalents
Accounts receivable from clients
Inventories
Taxes recoverable
Advances to suppliers
Other asset accounts
Total current assets
2008
2007
2008
5
6
7
8
-
87,881
165,721
101,208
13,798
1,903
11,121
381,632
64,359
45,178
18,017
21,166
1,084
2,873
152,677
243,017
166,112
105,054
14,130
2,182
11,185
541,680
Noncurrent assets
Long-term assets
Taxes recoverable
Contractual rights
Other noncurrent asset accounts
Deferred IRPJ and CSLL
8
10
-
11,772
6,277
62
1,351
19,462
-
11,772
6,277
143
1,351
19,543
Investment in subsidiary
Investments - other
Property, plant and equipment
11
12
2,424
2,075
290,252
234,890
2,075
293,267
Intangible assets
Deferred assets
12
-
Total noncurrent assets
35,766
2,162
332,679
352,141
234,890
234,890
37,793
2,162
335,297
354,840
Total assets
733,773
387,567
896,520
The explanatory notes are an integral part of these financial statements.
4/27
Arantes Alimentos Ltda.
Balance sheets as of June 30, 2008 and 2007
(Translation of the original issued in Portuguese)
(In thousands of Reais)
LIABILITIES AND NET EQUITY
Parent company
Notes
2008
2007
Consolidated
2008
Current liabilities
Loans and financing
Accounts payable to suppliers
Accounts payable due to operating investments
Labor and social liabilities
Taxes payable
Other liability accounts
Total current liabilities
13
14
15
16
17
-
189,020
47,631
11,810
7,982
28,965
23,692
309,100
106,228
18,604
38,384
5,413
14,176
4,458
187,263
189,874
48,009
11,810
9,462
29,193
24,498
312,846
Noncurrent liabilities
Loans and financing
Accounts payable due to operating investments
Taxes payable
Deferred revenue
Deferred income tax and social tax on net income
Provision for negative equity
Provision for contingencies
Total noncurrent liabilities
13
15
17
11
18
266,895
12,030
835
14,590
4,973
6,667
305,990
99,904
12,600
2,796
15,759
131,059
426,909
12,030
835
14,590
10,627
464,991
Net equity
Capital stock
Adjustments of equity evaluation
Retained earnings
Total net equity
19
19
19
42,128
31,270
45,285
118,683
14,528
33,591
21,126
69,245
42,128
31,270
45,285
118,683
733,773
387,567
896,520
Total liabilities and net equity
The explanatory notes are an integral part of these financial statements.
5/27
Arantes Alimentos Ltda.
Income statements
for the semester ended June 30, 2008 and 2007
(Translation of the original issued in Portuguese)
(In thousands of Reais)
Parent company
2008
Gross operating revenues from sales
Sales of products
In domestic market
In foreign market
2007
Consolidated
2008
458,322
139,698
598,020
135,524
121,374
256,898
481,989
139,698
621,687
(15,217)
(56,660)
(71,877)
(4,525)
(17,910)
(22,435)
(16,913)
(60,924)
(77,837)
Net operating revenue
526,143
234,463
543,850
Cost of products sold
Gross income
(425,356)
(183,798)
(436,165)
100,787
50,665
107,685
(24,160)
(26,765)
635
(72)
(52,582)
55,803
(1,845)
(4,801)
(53,787)
(8,919)
(22,999)
(892)
(72)
(19,753)
18,078
154
(34,403)
(25,276)
(31,847)
553
(72)
(54,514)
56,306
(1,845)
(56,695)
47,000
16,262
50,990
(1,623)
45,377
16,262
(5,520)
45,470
(15,556)
1,351
(14,205)
(5,593)
(5,593)
(15,649)
1,351
(14,298)
31,172
10,669
31,172
Deductions from sales
Returns and discounts
Taxes on sales
Operating revenues (expenses)
Administrative and general expenses
Selling expenses
Tax expenses
Remuneration of the board of directors
Financial expenses
Financial revenues
Other net operating revenues (expenses)
Income from equity holding
Operating income
Non-operating income
Other revenues (expenses)
Income before taxes
Current income tax and social tax on net income
Deferred income tax and social tax on net income
Net income for the semester
The explanatory notes are an integral part of these financial statements.
6/27
Arantes Alimentos Ltda.
Statements of changes in net equity
for the semester ended June 30, 2008 and 2007
(Translation of the original issued in Portuguese)
(In thousands of Reais)
Adjustments of
equity evaluation
Capital stock
Balances as of December 31, 2006
Retained
earnings
Total
9,230
9,099
10,245
28,574
5,298
-
24,704
(212)
-
212
10,669
5,298
24,704
10,669
Balances as of June 30, 2007
14,528
33,591
21,126
69,245
Balances as of December 31, 2007
42,128
32,126
22,376
96,630
856
31,172
(1,942)
(978)
(6,199)
31,172
(1,942)
(978)
(6,199)
Capital increase
Constitution of evaluation adjustments and net of tax effects
Realization of evaluation adjustments and net of tax effects
Net income for the semester
Realization of evaluation adjustments and net of tax effects
Net income for the semester
Prior year's adjustments
Interest on own capital
Distribution of profits
Balances as of June 30, 2008
42,128
(856)
31,270
45,285
118,683
The explanatory notes are an integral part of these financial statements.
7/27
Arantes Alimentos Ltda.
Statements of cash flow
for the semesters ended June 30, 2008 and 2007
(Translation of the original issued in Portuguese)
(In thousands of Reais)
Parent company
2008
2007
Consolidated
2008
Operating activities
31,172
10,669
31,172
15,204
(1,794)
(328)
(172)
44,082
1,761
641
13,071
15,584
(85,080)
(77,252)
942
(575)
(8,989)
30,467
(10,885)
25,121
4,973
12,710
(17,238)
(6,421)
(6,019)
5,213
1,540
(5,615)
50,984
3,148
(2,676)
(81,946)
(78,418)
977
(414)
(9,096)
28,521
(10,885)
25,131
13,567
(64,486)
35,987
(67,929)
Net loans receivable from related parties
Additions to contractual rights
Additions to investments
Additions to property, plant and equipment
Additions to intangible assets
Additions to deferred assets
(3,806)
(3,450)
(78,337)
(717)
32,700
(168,567)
-
(3,806)
(1,458)
(78,358)
(1,992)
(717)
Net cash applied in investing activities
(86,310)
(135,867)
(86,331)
Loans obtained from third parties, net of payment
Capital increase
Distribution of profits and interest on own capital
67,750
(7,177)
130,612
5,298
-
225,897
(7,177)
Net cash generated by (used in) financing activities
60,573
135,910
218,720
Increase (decrease) in cash and cash equivalents
(90,223)
36,030
64,460
Cash and cash equivalents at the beginning of the semester
178,104
28,329
178,557
87,881
64,359
243,017
Net income for the semester
Reconciliation of net income to net cash provided
by operating activities
Depreciation and amortization
Deferred income tax
Prior years's adjustments
Equity adjustments
(1,794)
(328)
44,634
Changes in assets and liabilities
Accounts receivable
Inventories
Taxes recoverable
Advances to suppliers
Other current and noncurrent asset accounts
Accounts payable to suppliers
Accounts due to operating investments
Tax, social and labor liabilities
Provision for negative equity
Other accounts payable
Net cash used in operating activities
Cash flow from investing activities
Cash flow from financing activities
Cash and cash equivalents at the end of the semester
The explanatory notes are an integral part of these financial statements.
8/27
Notes to the financial statements for the semester
ended June 30, 2008 and 2007
(In thousands of Reais)
1. Operating context
Arantes Alimentos Ltda. and its subsidiaries develop the following operating
activities:
a)
Arantes Alimentos Ltda.
Arantes Alimentos is a wholly domestic capital Company. It commenced its
activities in February 2005 and mainly operates in processing and trading in
natura beef cattle products, including frozen and chilled products. Besides, it
produces and sells sub-products arising from its main beef cattle processing
activities, including raw leather, edible viscera and residues. The Company
also purchases in natura beef cattle products from other Brazilian producers
for resale. As from 2008, with the purpose of diversifying its manufacturing
and aggregating a higher value to its products, the Company started the
manufacture of beef by-products, also operating in the cured meat business.
The company operates in the domestic and foreign market and its main clients
are large food distributors and retail chains.
The sales to the domestic market, in the first semester of 2008, represented
77% (53% in 2007) and sales to the foreign market represented 23% (47% in
2007), mainly to Russia, the European Common Market, and countries in the
Middle East.
In 2008, the beef cattle season was marked by a reduction in the supply of
steers. However, the perspective of suspending regular shipments to Europe,
as from February, caused a “run” to the Brazilian beef, which explains the
good sales performance for such market during the first quarter. The prices,
already strongly pressured by the valorization of the Real currency, forced a
decrease in sales to the foreign market. Nevertheless, the domestic market
rather easily absorbed the new prices; thus reducing foreign participation in
the Company’s turnover in the first semester.
9/27
The daily slaughter performed in the first semester of 2008 was 3,154 heads
of cattle (1,663 in the same period of 2007) in its plants operating in the
States listed below:
States
Goiás
Mato Grosso
Maranhão
Minas Gerais
Municipalities
Cachoeira Alta, Jataí e Santa Fé de Goiás
Canarana e Nova Monte Verde
Imperatriz
Unaí e Belo Horizonte
The Santa Fé de Goiás (GO) and Imperatriz (MA) units are leased
from third parties, whereas the Canarana (MT) unit is leased from
a related party.
The Company acquires cattle from cattle raisers, who have cattle tracing
systems, which guarantees the quality of the animals slaughtered that are
directly brought from the field without intermediaries, with total control of
their origin. At the same time, the Company seeks to tighten its partnerships
with suppliers that work with state-of-the-art genetic development, thus
assuring the quality characteristics of our products.
So as to obtain a high productivity ratio, the Company projected its facilities
with a modern production system of the beef cattle industry, where all the
processes are synchronized, thus providing quality and agility in the delivery
deadlines for its products. It has its own laboratories for the macrobiotic
monitoring of the environment and of the meat, where samples of the
products are analyzed.
The technology for preparing meat and its derivatives are state-of-the art and
enable the Company to meet the needs of the most finical markets in the
world. The entire slaughter, deboning, packing, transportation, and distribution
processes are rigorously monitored by quality control by means of modern
audit systems, which are in accordance with the international standards of
corporate management. Because it is concerned with the environment, the
Company developed a modern system of effluents that guarantees the quality
of wastewater.
The administrative center of the Company is in the municipality of São José
do Rio Preto (SP). It has 2,559 collaborators in its staff across its units and
uses the integrated managerial system called SAP/R3 for processing
information.
10/27
b)
Olcav Indústria de Carnes Ltda.
Ltda.
Olcav Indústria de Carnes Ltda was acquired by Arantes Alimentos in October
2007. It has a beef by-product manufacturing and commercialization tradition
and also operates in the cured meet and cold cut business, with several
brands, the main ones of which are Éder and Buona Itália, among others. So
as to develop its activities, the Company has two manufacturing plants
located in the municipalities of São Paulo and São Caetano do Sul, both in the
state of São Paulo, and it also has a staff made of 326 collaborators.
c)
Fiamo Administração de Bens Ltda.
Fiamo was acquired by Arantes Alimentos in October 2007. The main
business activity of Fiamo is to hold interest in ventures and other domestic or
foreign Companies, as a partner, shareholder or unit holder.
d)
Arantes International Ltd.
Arantes International Ltd was established by Arantes Alimentos in 2008 in
Grand Cayman, with the specific purpose of obtaining and applying financial
funds abroad.
2. Preparation and presentation of the financial statements
The individual and consolidated financial statements were prepared in
accordance with the accounting practices adopted in Brazil and they are
presented in accordance with the pronouncement issued by the Brazilian
Institute of Independent Auditors (IBRACON) on the presentation and
disclosure of the financial statements - NPC n. 27 and Resolution CVM n.
488, both dated October 03, 2005.
New presentation and disclosure standards for the financial statements
On December 28, 2007, Law n. 11.638/07, which changes certain provisions
of the Corporation Law (Law n. 6.404 dated December 15, 1976), was
promulgated. In general terms, the new Law requires the reconciliation of the
accounting practices accepted in Brazil with certain international accounting
standards.
The Company already has started to render its financial statements uniform, in
accordance with the new law. The main changes to be given emphasis on are
the commercial leasing agreements that before the publication of such law
were not recorded in the equity accounts.
The Company evaluated the assets and liabilities which should be adjusted to
Present Value and considered the effects as immaterial. During the year, the
Company will keep improving the calculations and assumptions used in order
to fully comply with the new law.
11/27
3. Summary of the main accounting practices
a)
Accounting estimates
When preparing the financial statements in compliance with the accounting
practices adopted in Brazil, the management makes use of assumptions and
judgments for determining the value and the recording of accounting
estimates. Material assets, liabilities and other operations that are subject to
such estimates include the definition of the useful life span of property, plant
and equipment, allowances for doubtful accounts, inventories, allowances for
contingences, deferred tax assets, and assessing asset-based and debt-based
derivative instruments. The settlement of the transactions involving those
estimates may result in amounts that are different from the estimated ones,
due to the imprecision inherent to the process of determining such amounts.
b)
Financial investments
They are recorded at acquisition cost, increased by the income earned and the
losses incurred up to the balance sheet date, adjusted at market value, when
the latter is the lowest.
c)
Allowance for possible loan losses and bonus
It is calculated with basis on trade notes overdue for more than 180 days. The
provision for financial bonus granted to clients is recorded with basis on the
agreements in force on the date of the financial statements.
d)
Inventories
The finished products and products in process inventories, as well as the
inventories of packing materials and other materials are valued at their average
production cost or acquisition cost, which is lower than their realization or
market value.
The bovine inventories (livestock) are recorded at average acquisition cost.
12/27
e)
Investments
Investments
The investments in subsidiaries are evaluated according to the equity
accounting method. The other investments are evaluated at acquisition cost
and, whenever necessary, they are reduced by a provision for losses.
f)
Property, plant and equipment
The property, plant and equipment are stated at their historic acquisition cost,
increased by spontaneous reevaluations performed on different dates for a
significant portion of the assets recorded in the property, plant and equipment,
based on reports issued by a specialized company. The management of the
Company decided to maintain the surplus value arising from the revaluations,
the contra-entry of which is recorded in the net equity as Adjustments of
Equity Evaluation.
Depreciation is calculated according to the straight-line method, in accordance
with the estimated economic useful life at the annual rates pointed out in Note
12.
g)
Other current and noncurrent assets
They are stated at their realization or cost value, including, when applicable,
the income earned until the balance sheet dates.
h)
Current and noncurrent liabilities
They are stated at known or computable values, plus the corresponding
translation adjustments and monetary variations or financial charges, when
applicable.
i)
Contingent assets and liabilities and legal liabilities
The accounting practices for recording and disclosing contingent assets and
liabilities and legal liabilities are the following:
Contingent assets are recognized only when there is collateral security or
favorable judicial decisions transited in rem judicatam. The contingent assets
with probable success are only disclosed in explanatory notes;
Contingent liabilities are provisioned when the losses are evaluated as
probable and the amounts involved are measurable with sufficient
assurance. The contingent liabilities evaluated as remote losses are only
disclosed in explanatory notes and the contingent liabilities evaluated as
remote losses are not provisioned nor disclosed;
Legal tax liabilities are recorded as long-term liabilities, regardless of the
evaluation of the possibility of success of the claims in which the Company
has called into question the unconstitutionality of taxes.
13/27
j)
Income tax and social contribution tax
Current taxes
They are recorded with basis on the taxable income, in compliance with the
legislation and rates in force.
Deferred taxes
Deferred income tax and social tax on net income are constituted on the
reevaluation reserves.
The deferred income tax and social tax assets are constituted on the
temporary differences of the amortization of the goodwill generated in
acquiring the subsidiaries.
k)
Consolidation
Consolidation
The ownership interest held among the consolidated companies, the balances
of accounts receivable and payable, the revenues and the expenses among the
companies are eliminated from the financial statements of Arantes Alimentos
Ltda. Due to the lack of unrealized profits in the intercompany operations, the
net equity of the parent company is equal to the consolidated one.
The subsidiaries, directly included in the consolidation above mentioned, are
Olcav and Fiamo and Arantes International Ltd.
4. EBITDA calculation (unaudited)
(unaudited)
Income before provision for income tax
(+) Depreciations
(+) Non-operating income
(+) Net financial income
EBITDA value
Percentage of the EBITDA value/net revenue
Consolidated
2008
2007
45,,470
16,,262
45
16
15,584
1,761
5,520
(1,792)
1,675
64,,782
19,,69
698
64
19
8
11.91%
8.40%
14/27
5. Cash and cash equivalents
Cash and banks
Financial investments
company
Parent c
ompany
2008
15,689
72,192
87,,881
87
2007
21,629
42,730
64,,359
64
Consolidated
2008
15,928
227,089
243,,017
243
The elevated balance of financial investments as of June 30, 2008 occurred
due to the release of the funds obtained when Arantes International Ltd issued
Eurobonds on June 2008.
The financial investments correspond to Bank Deposit Certificates (CDB-DI),
which are post-fixed and yield in average 100% of the amount of the variation
of such certificates.
The financial investments of Arantes International Ltd. in Grand Cayman were
done at the Bradesco Bank in the “Over Night” type of investment, with daily
liquidity.
6. Accounts receivable from clients
Parent
Pare
nt company
2008
Trade notes falling due
Domestic market
Foreign market
Overdue trade notes
From 1 to 30 days
From 31 to 60 days
From 61 to 90 days
Over 90 days
Gross amount receivable
ACE
Allowance for possible
loan losses
Financial bonus
Returned check
2007
Consolidated
Consolida
ted
2008
107,305
81,661
23,438
33,547
107,558
81,661
915
182
1,987
959
1,537
9
69
2,528
973
258
1,987
1,059
193,009
(25,726)
61,127
(15,224)
193,496
(25,726)
(793)
(773)
4
165,,721
165
(726)
45,,17
178
45
8
(894)
(773)
9
166,,112
166
15/27
7. Inventories
Parent company
2008
2007
Finished goods
Products in process
Raw material
Stockroom
Advances for future purchases (*)
39,367
4,493
7,242
6,242
43,864
101,,208
101
12,641
2,969
2,407
18,,017
18
Consolidated
Consolida
ted
2008
40,572
6,325
7,601
6,692
43,864
105,,054
105
(*) They are advances, in the amount of R$43,864, made to
suppliers for acquiring meat from a related party. Part of such
advance has already been made in products in June.
8. Taxes recoverable
ICMS1 recoverable
COFINS2 recoverable
PIS3 recoverable
INSS4 recoverable
CSLL and IRPJ recoverable
Other taxes
Parent company
2008
2007
2008
25,143
19,651
49
1,161
55
252
12
10
311
92
25,
21,
25,570
21,166
Consolidated
Consolidated
2008
25,340
49
55
15
116
327
25,
25,902
Segregation of current and noncurrent
noncurrent assets
Current assets
Noncurrent assets
1
2
3
4
Parent company
2008
2007
13,798
21,166
11,772
25,
21,
25,570
21,166
Consolidated
Consolidated
2008
14,130
11,772
25,
25,902
Value-Added Tax on Sales and Services.
Tax for Social Security Financing.
Social Integration Program.
National Institute of Social Security.
16/27
ICMS
The ICMS creditor balance mainly refers to the ICMS tax asset granted, which
comprises the percentage difference between the nominal bookkeeping rate in
tax records and the effective collection rate in force in the State of origin,
which has been contested by the State of São Paulo; however, the Supreme
Court of the State of São Paulo has already pronounced a decision in favor of
compensating the above-mentioned credits.
The procedure adopted by the Company is supported by the tax legislation in
force, according to the opinion issued by the external and internal legal
advisors.
9. Balances and transactions
transactions with related parties
The balances and the transactions, purchases and sales are performed by the
Company with related parties at market prices and conditions. In the semester
ended June 30, 2008, the balance of advances for acquiring the entire meat
production of the Pontes Lacerda unit correspond to the amount of R$43,864.
10. Contractual rights
The balance as of June 30, 2008 refers to amounts deposited in behalf of: a)
the owner of the cold storage plant, machinery and equipment located in the
city of Imperatriz, in the state of Maranhão, according to the purchase
agreement originally dated June 5, 2007, combined with the contractual
changes performed on July 31, 2007 and August 2, 2007; b) the owner of
the machinery and equipment located in the city of Belo Horizonte in the state
of Minas Gerais, according to the purchase agreement dated February 20,
2008. After fulfilling the commercial conditions established, the amounts
deposited will be used as part of the payment for the acquisition of the
aforementioned goods, which were established in the approximate amount of
R$42 million. Alternatively, such deposits may be used to settle the lease
agreements in force dated August 1, 2007 and February 28, 2008,
respectively.
17/27
11. Investments
Investments
Olcav Indústria
Indústria de Carnes Ltda.: 99.99% of the capital stock units of Olcav
Indústria de Carnes Ltda. were acquired for R$39,300 in October 08, 2007;
Fiamo Administração de Bens Ltda.: 99.99% of the capital stock units of
Fiamo Administração de Bens Ltda. were acquired for R$700 on October 08,
2007.
Arantes International Ltd.:
Ltd. It was established in the first semester of 2008 in
Grand Cayman, with the specific purpose of obtaining and applying financial
resources abroad.
The above-mentioned acquisitions, which resulted in a goodwill in the amount
of R$39,244 are based on the perspective of future profitability, according to
the financial-economic appraisal report and they have been amortized over five
years counted from January 2008 and reached the amount of R$3,974 in the
quarter.
Below, we present the data referring to our investments in our subsidiaries:
Data of the subsidiary
Quantity of shares owned
Percentage of ownership interest held
Net equity
Net income or loss for the period
Equity adjustments
Parent company
06/30/2008
Olcav
Fiamo
199,998
199,998
99.99%
99.99%
161
2,263
104
68
104
68
Arantes Intern.
100.00%
(4,973)
(4,973)
(4,973)
Changes in the investments for the
period ended 06/30/08:
Balances as of 31/12/2007
Equity adjustments
Payment of capital
Balances as of 06/30/2008
Olcav
57
104
161
Total
260
172
1,992
2,424
Fiamo
203
68
1,992
2,263
18/27
12. Property, plant and equipment and intangible assets
Parent company
Net
% - Depreciation
Accumulated
rate
Cost
Revaluation depreciation 2008
2008
2007
Land and improvements
20,200
2,948
23,148
17,028
Buildings and constructions
4
96,659
32,965
(4,223)
125,401 110,381
Machinery and equipment
10
111,662
13,190
(10,998)
113,854 101,816
Furniture and fixtures
10
2,364
(271)
2,093
1,395
Computers and peripherals
20
3,013
(737)
2,276
2,021
Vehicles
20
26,672
(4,204)
22,468
1,367
Systems and software
20
1,211
(199)
1,012
882
Property, plant and equipment
261,781
49,103
(20,632)
290,252 234,890
Trademarks and patents
Goodwill
Intangible assets
20
39,740
39,
39,740
-
3,974
3,974
35,766
35,
35,766
-
Consolidated
Consolidated
Land and improvements
Buildings and constructions
Machinery and equipment
Furniture and fixtures
Computers and peripherals
Vehicles
Systems and software
Property, plant and equipment
Trademarks and patents
Goodwill
Intangible assets
% - Depreciation
rate
Cost
20,207
4
96,703
10
117,410
10
2,577
20
3,266
20
26,906
20
1,298
268,,367
268
20
2,027
39,740
41,767
Revaluation
2,948
32,965
13,190
49,
49,103
-
Net
Accumulated
depreciation 2008
23,155
(4,240)
125,428
(14,096)
116,504
(407)
2,170
(913)
2,353
(4,306)
22,600
(241)
1,057
(24,
293,,267
(24,203)
293
3,974
3,974
2,027
35,766
37,
37,793
Reevaluations performed: spontaneous reevaluations supported by report
issued by Serviços Técnicos de Avaliações do Patrimônio e Engenharia S/C
Ltda. (SETAPE) were recorded as of June 30, 2007 and 2006, in accordance
with the accounting practices adopted in Brazil. The net remaining value of the
revaluation as of June 30, 2008 is R$45,860.
19/27
13. Loans and financing
Parent company
Type
Financing of property, plant and equipment
Leasing
FINAME
forr working capital
Loans fo
Loans obtained in US$
Advances for foreign exchange agreement
Prepaid exports
BNDES - Exim6
Bank credit notes - Res. 2770
Loans obtained in R$
Bank credit notes
Export credit notes
Credit notes for exporting
BNDES - Exim
Working capital
Overall total
Breakdown
Current liabilities
Noncurrent liabilities
Composition of noncurrent liabilities
2008
2009
2010
2011
2012
2013
5
6
Annual average interest rate 2008
TJLP5 and interest of 4.3%
p.y.
20,231
-
7,984
28,
28,215
-
Translation adjustments and
interest of 10% per year
75,944
Translation adjustments,
Libor and average Spread of
262,664
3.24% per year
Currency baskets (PTAX
and translation adjustments)
and 6.5% Spread
4,003
Translation adjustments and
fixed interest of 13% per
year
2,388
344,999
100% of the CDI and
average interest of 6% per
year
100% of the CDI and
average interest of 8% per
year
100% of the CDI and
average interest of 5% per
year
Currency baskets (TJLP and
translation adjustments,
TJFPR) and 6.5% Spread
100% of the CDI and
average interest of 15% per
year
2007
24,176
158,347
-
2,609
185,132
37,259
17,000
17,462
-
7,000
-
20,066
4,000
914
82,701
455,915
21,000
206,132
189,020
266,895
455,915
106,228
99,904
206,132
37,486
77,251
65,138
7,387
79.633
266,895
53,105
46,799
99,904
Long-Term Interest Rate.
Credit line provided by the Brazilian Bank for Economic and Social Development (BNDES) for financing exportation.
20/27
Consolidated
Type
Financing of property, plant and equipment
Leasing
FINAME
Loans for working capital:
Loans obtained in US$
Advances for foreign exchange agreement
Prepaid exports
BNDES - Exim
Eurobonds
Bank credit notes - Res. 2770
Loans obtained in R$
Bank credit notes
Export credit notes
Credit notes for exporting
BNDES - Exim
Working capital
Overall total
Breakdown
Current liabilities
Noncurrent liabilities
Composition of noncurrent liabilities
2008
2009
2010
2011
2012
2013
interestt rate
Annual average interes
TJLP and interest of 4.3% per year
Translation adjustments and interest
of 10% per year
Translation adjustments, Libor and
average Spread of 3.24% per year
Currency baskets (PTAX and
translation adjustments) and 6.5%
Spread
Translation adjustments and fixed
interest of 10.25% per year
Translation adjustments and fixed
interest of 13% per year
100% of the CDI and average interest
of 6% per year
100% of the CDI and average interest
of 8% per year
100% of the CDI and average interest
of 5% per year
Currency baskets (TJLP and
translation adjustments, TJFPR) and
6.5% Spread
100% of the CDI and average interest
of 15% per year
2008
20,231
9,412
29,
29,643
75,944
183,069
4,003
238,785
2,388
504,,189
504
37,259
17,462
7,000
20,066
1,164
82,
82,951
616,
616,783
189,874
426,909
616,,783
616
37,905
77,656
65,138
7,387
238,823
426,,909
426
The Advances for Foreign Exchange Agreements (ACC), which correspond to
US$47,706, were used for financing the Company’s export operations.
The financing obtained from the BNDES for acquiring property, plant and
equipment have as guarantee the machinery and equipment acquired with the
above-mentioned financing.
21/27
On June 30, 2008, the financing for acquiring machinery and equipment
(FINAME) were secured by statutory lien from the respective goods acquired
for the contractual amount of R$8,400. The agreements obtained in US
dollars were secured by promissory and exchange notes and guarantees from
partners.
On June 12, 2008, the Company, through its subsidiary Arantes International
Ltd., obtained loans in the amount of US$150 million by means of Eurobonds,
within the term of five years and Coupon of 10.25% per year. The transaction
is secured by the subsidiary and by the parent company.
So that the banks involved in financial agreements are able to monitor the
financial position of the Company’s financial covenants have been used, as
stated below:
I)
Net debt/EBITDA - It states the company’s net indebtedness ratio in
relation to the EBITDA for the last 12 months;
II)
II) EBITDA/net interest expenses - it states the relation of the EBITDA for the
last 12 months in connection with the net interest expenses on the last
day of the period.
The above-mentioned covenants are calculated on the Company’s
consolidated basis and have been fulfilled. The penalties for not fulfilling such
covenants are the possibility of being declared as default by the banks and of
accelerating the maturity of the agreements.
14.
14. Accounts payable to suppliers
Cattle raisers
Sundry suppliers
Parent company
2008
2007
32,886
1,070
14,745
17,534
47,
18,
47,631
18,604
604
Consolidated
2008
32,886
15,123
48,
48,009
15. Accounts payable due to operating investments
Olcav Ind. Carnes Ltda.
Assets in Belo Horizonte
Other
Parent company
2008
2007
9,185
2,625
50,984
11,
50,
11,810
50,984
Consolidated
Consolidated
2008
9,185
2,625
11,
11,810
22/27
Segregation of current and noncurrent liabilities
Current liabilities
Noncurrent liabilities
Parent company
2008
2007
11,810
38,384
12,600
11,
50,
11,810
50,984
Consolidated
Consolidated
2008
11,810
11,
11,810
16. Labor and social
social liabilities
Salaries and charges
Provision for vacation pay and
social security charges
Provision for 13th salary and
social security charges
Other liabilities
Parent company
2008
2007
2,795
1,999
Consolidated
Consolidated
2008
3,228
3,637
2,368
4,429
1,544
6
7,982
1,039
7
5,413
1,799
6
9,462
17. Taxes payable
CSLL collectible
IRPJ7 collectible
ICMS collectible
IRRF8 payable
PIS collectible
COFINS collectible
Other taxes
INSS divided into installments
Parent company
2008
2007
8,072
3,441
22,060
9,287
2,430
1,800
278
156
1,168
3,729
1,729
80
1,529
2,208
40,995
16,
995
16,972
Consolidated
Consolidated
2008
8,074
22,061
2,539
281
1,183
3,792
1,764
1,529
41,
41,223
Segregation of current and noncurrent liabilities
Parent company
2008
Current liabilities
28,965
Noncurrent liabilities
12,030
40,995
995
2007
14,176
2,796
16,972
Consolidated
Consolidated
2008
29,193
12,030
41,
41,223
On June 30, 2008, the existing tax liabilities divided into installments were
R$12,530 for IRPJ/CSLL, R$1,529 for INSS, and R$1,955 for ICMS.
7
8
Corporate Income Tax.
Income Tax Withheld at Source.
23/27
18. Contingencies
Contingencies
Labor and tax claims
The parent Company is a party to 16 claims of labor nature in course. The
Company follows the procedure of making a provision for losses with labor
claims, referring to those claims for which the success is remote. On June 30,
2008, the labor claims with remote success had already been the subject
matter of an agreement between the parties, and the expenses of these
agreements are impacting the income for the period. Accordingly, a provision
for losses with labor claims has not been constituted.
With regard to the tax claims, the parent company is party to 26 tax claims at
the Finance Department of the State of Goiás, among which the possibilities
of success are classified by the Company’s external legal advisors as probable
and possible. Due to the fact that the Company follows the procedure of
making a provision for losses referring to those claims with remote success,
and that as of June 30, 2008 there were not any claims in course with remote
success, according to the opinion of the external lawyers, no provision for
losses was made.
Rural Workers' Assistance and Pension Fund (FUNRURAL)
On May 22, 2007, the Company applied for a writ of mandamus at the
Federal Court located in the state of São Paulo with the purpose of refuting
the constitutionality of certain social taxes (FUNRURAL), which the Company
has been commanded to withhold and pay the INSS on the cattle purchased
from individual cattle raisers. Before the above-mentioned application for the
writ of mandamus, the Company had never withheld neither paid such tax
from the time it started its operations in February 2005.
On June 30, 2008, should there have been a final judicial decision on such
issue, without appeal, the Company would have had a contingency estimated
at R$19.8 million.
The constitutionality of the FUNRURAL is currently under review at the
Supreme Court. Currently, 5 of every 10 ministers have voted for the
unconstitutionality of such demand. There were not any divergent opinions on
such issue at the Judiciary on June 30, 2008.
Based on such history and on the opinion of the Company’s external lawyers,
the management believes that the company will win the case. Therefore, a
provision for contingencies referring to such issue was not constituted as of
June 30, 2008 and 2007.
24/27
Provision for labor
labor and social security issues, tax, civil and other issues
The Company has recorded the following provisions for such issues:
Tax claims (1)
Civil claims (2)
Other claims (3)
Parent company
2008
2007
2,496
4,171
6,667
-
Consolidated
Consolidated
2008
2,496
4,171
3,960
10,
10,627
(1) They refer to amounts withheld upon acquiring the companies
Olcav and Fiamo and that have been classified as provision to
cover possible tax inquiries;
(2) It refers to the legal dispute with one of the ex-owners of the
industrial plant at Nova Monte Verde, which was acquired in
June 2007. The amounts were deposited in court and according to the opinion of the Company’s legal advisors - the
possibilities of success are probable;
(3) They refer to cautious provisions made at the subsidiary Olcav.
19. Net equity
a)
Capital stock
stock
The capital stock as of June 30, 2008 is composed of 42,128,282 units, with
nominal value of R$1.00 per unit, totaling the amount of R$42,128 of the
fully paid-in capital stock.
b)
Adjustments of equity evaluation (former reevaluation reserve)
They refer to the evaluation of different items in the property, plant and
equipment of the Company and they are transferred to the retained earnings in
the proportion in which the assets, that were evaluated, are realized due to
depreciation, disposal or write-off.
c)
Dividends
On June 30, 2007, the Company’s unit holders decided to thenceforth pay
quarterly dividends in the amount equivalent to the minimum percentage of
25% of its quarterly net income adjusted according to the Brazilian accounting
practices and Corporation Law.
25/27
20. Corporate succession - liabilities of corporate predecessors
The new Civil Code and the tax and environmental legislations establish that
each and every company or individual acquiring another Entity, or a substantial
part of such entity’s entire assets, becomes responsible for the tax, social
security, labor and environmental liabilities thereof and also for paying for the
employees of the entity acquired the tax, social security, labor and
environmental charges owed which on the date of the acquisition. Thus, the
Company is responsible for complying with all of such liabilities owed and not
paid before the acquisition date. In this regard, the purchase agreements of
the cold storage plants located in the cities of Unaí, Jataí, Nova Monte Verd
and Jundiaí establish that the sellers shall indemnify the Company for each
and every loss relating to tax, social security and labor liabilities that the
Company may have to pay due to liabilities owed by such cold storage plants
before the date they were acquired by the Company. Nevertheless, there are
labor claims filed against the Company by ex-employees of the abovementioned plants before the date such plants were acquired.
The Company purchases and resells the entire production of the plants located
in the city of Pontes e Lacerda in the State of Mato Grosso, according to the
commercial agreement entered into on June 1, 2007 with Vale do Guaporé.
According to the Civil Code, it may be required that the Company pay taxes
owed by Vale do Guaporé. On June 30, 2008, Vale do Guaporé owed social
security taxes to the INSS in the approximate amount of R$6.5 million
(unaudited).
21. Insurance coverage (unaudited
(unaudited)
unaudited)
The Company and its subsidiaries follow the policy of maintaining insurance
coverage for the assets in the property, plant and equipment and for the
inventory items that are subject to risks at amounts considered sufficient to
cover fortuitous losses according to their nature.
22. Financial instruments
The Company and its subsidiaries maintain in its financial statements equitybased and debt-based financial instruments, the evaluation criteria of which
are close to their market values.
26/27
23. Subsequent events
(1)
(2)
(3)
(4)
(4)
On July 24, 2008, an agreement to acquire 100% of the units of Sertanejo
Alimentos S.A. was signed. Such company develops operations referring to
fowl slaughter, incubators and poultry matrix farms. It is headquartered in the
city of Guapiaçu, in the countryside of the state of São Paulo, and its
slaughter capacity is 200,000 chickens per day.
In July 2008, a property was rented in the city of Louveira, in the countryside
of the Sate of São Paulo, and a Product Distribution Center was established,
aiming at the logistics of the cured meat business.
On August 6, 2008, a leasing agreement referring to the IFC - International
Food Company plant, which is located in the city of Itupeva, in the
countryside of the Sate of São Paulo, was entered into with a10-year
duration. The plant mainly manufactures beef jerky (a type of cured beef) and
its main market is the North American one.
In the first fortnight of August 2008, the new branch of the parent company
commenced its activities. It is established in the city of Jundiaí, in the
countryside of the Sate of São Paulo, where formerly were the facilities of
Frigor Hans, a company in the state of São Paulo with a tradition of
manufacturing beef by-products (cured meat), from which the parent company
acquired the furniture and industrial park and the subsidiary Fiamo acquired
the brands and the formulas in April 2008.
24. Explanation added to the translation into the English version
The accompanying financial statements were translated into the English
version from those statements prepared for local purposes. Certain accounting
practices applied by the Company that conform to those accounting practices
adopted in Brazil may not conform to the generally accepted accounting
principles in the countries where these financial statements may be used.
27/27