**U.S.SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 20-F/A**

 

**o****       REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**OR**

 

**ý****                ANNUAL REPORT PURSUANT TOSECTION 13 OR 15 (d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thefiscal year ended December 31, 2004**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 TO15 (d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commissionfile number 1-15184**

 

**SADIA S.A.**

(Exact Name ofRegistrant as specified in its Charter)

 

**N/A**

(Translation ofRegistrant’s Name into English)

 

**FederativeRepublic of Brazil**

(Jurisdiction ofIncorporation or Organization)

 

**Rua Fortunato Ferraz, 659**

**Vila Anastácio, São Paulo, SP**

**05093-901,Brazil**

(Address ofPrincipal Executive Offices) (Zip Code)

 

Securitiesregistered pursuant to Section 12(b) of the Exchange Act:

 

Preferred Shares,no par value per share, represented by American Depositary Shares

Name of eachexchange on which registered: The New York Stock Exchange

Securitiesregistered pursuant to Section 12(g) of the Act:

**None**

 

Securities forwhich there is a reporting obligation pursuant to Section 15(d) of the Act: **None**

 

The total numberof outstanding shares by Sadia S.A., by class, as of December 31, 2004, was asfollows:

 

**257,000,000common shares, no par value per share**

**425,695,712preferred shares, no par value per share**

** **

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934, during the preceding 12 months (or during a shorterperiod, during which the Registrant was required to file such report, and (2)has been subject to such filing requirements for the past 90 days.

| Yes  ý | No o |
|------------------|------|

 

Indicate by checkmark, which item of the financial Statements the Registrant has elected tofollow:

| Item 17 o | Item 18 ý |
|-----------|----------------|

 

Please send copiesof notices and communications from the Securities and Exchange Commission to:

**RossKaufman**

**GreenbergTraurig, LLP**

**200 ParkAvenue**

**New York,New York 10166**

 

 

----

 

**CONTENTS**

 
| **GENERAL**                                                                            | ** ** |
|----------------------------------------------------------------------------------------|------------|
| **PART I**                                                                             | ** ** |
| ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND  ADVISERS                         |       |
| ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                        |       |
| ITEM 3. KEY INFORMATION                                                                |       |
| A. Selected Financial Data                                                             |       |
| B. Capitalization and  Indebtedness                                                    |       |
| C. Reasons for the offer and  use of proceeds                                          |       |
| D.  Risk Factors                                                                       |       |
| ITEM 4. INFORMATION ON THE COMPANY                                                     |       |
| A. History and Development  of the Company                                             |       |
| B.  Business Overview                                                                  |       |
| C. Organizational  Structure                                                           |       |
| D. Property,  Plant and Equipment                                                      |       |
| ITEM 5. OPERATING AND FINANCIAL REVIEW  AND PROSPECTS                                  |       |
| A. Operating Results                                                                   |       |
| B. Liquidity and Capital Resources                                                     |       |
| C. Research and Development,  patents and licenses                                     |       |
| D. Trend Information                                                                   |       |
| E. Off- balance sheet  arrangements                                                    |       |
| F. Tabular disclosure of  contractual obligations                                      |       |
| G. Safe Harbor                                                                         |       |
| ITEM 6. DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                    |       |
| A. Directors and Senior Management                                                     |       |
| B. Compensation                                                                        |       |
| C. Board Practices                                                                     |       |
| D. Employees                                                                           |       |
| E. Share Ownership                                                                     |       |
| ITEM 7. MAJOR SHAREHOLDERS AND  RELATED PARTY TRANSACTIONS                             |       |
| A. Major Shareholders                                                                  |       |
| B. Related Party Transactions                                                          |       |
| C. Interests of Experts and  Counsel                                                   |       |
| ITEM 8. FINANCIAL INFORMATION                                                          |       |
| A. Consolidated Statements and  Other Financial Information                            |       |
| B. Significant Changes                                                                 |       |
| ITEM 9. THE OFFER AND LISTING                                                          |       |
| A. Offer and listing details                                                           |       |
| B. Plan of Distribution                                                                |       |
| C. Markets Update                                                                      |       |
| D. Selling Shareholders                                                                |       |
| E. Dilution                                                                            |       |
| F. Expenses of Issue                                                                   |       |
| ITEM 10. ADDITIONAL INFORMATION                                                        |       |
| A. Share Capital                                                                       |       |
| B. Memorandum and Articles of  Association                                             |       |
| C. Material Contracts                                                                  |       |
| D. Exchange Controls                                                                   |       |
| E. Taxation                                                                            |       |
| F. Dividends and Paying Agents                                                         |       |
| G. Statement of Experts                                                                |       |
| H. Documents on Display                                                                |       |
| I. Subsidiary Information                                                              |       |
| ITEM 11. QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |       |
| ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       |       |
| **PART II**                                                                            | ** ** |
| ITEM 13. DEFAULTS, DIVIDENDS  ARREARAGES AND DELINQUENCIES                             |       |
| ITEM 14. MATERIAL MODIFICATIONS  TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |       |
| ITEM 15. CONTROL AND PROCEDURES                                                        |       |
| ITEM 16.                                                                               |       |
| A. Audit Committee Financial  Expert                                                   |       |
| B. Code of Ethics                                                                      |       |

 

----

 
| C. Principal Account Fees and  Services                                    |       |
|----------------------------------------------------------------------------|------------|
| D. Exemptions from the  Listing Standards and for Audit Committees         |       |
| E. Purchases of Equity  Securities by the Issuer and Affiliated Purchasers |       |
| **PART III**                                                               | ** ** |
| ITEM 17. FINANCIAL STATEMENTS                                              |       |
| ITEM 18. FINANCIAL STATEMENTS                                              |       |
| ITEM 19. FINANCIAL  STATEMENTS AND EXHIBITS                                |       |
| Financial Statements                                                       |       |
| Exhibit 1.01 Sadia by laws                                                 |       |
| Exhibit 12.01 Certification by the  Company’s CEO                     |       |
| Exhibit 12.02 Certification by the  Company’s CFO                     |       |
| Exhibit 13.01 Certification pursuant  to 18 U.S.C. Section 1350            |       |
| Exhibit 13.02 Certification pursuant  to 18 U.S.C. Section 1350            |       |

 

This Amendment No. 1 on Form 20-F/A is being filedsolely to amend the description of environmental issues affecting the Company’sactivities, in Item 4; to amend the Operating and Financial Review andProspects, principally with respect to the discussion of liquidity and capitalresources; to restate the scope and content of control and procedures describedin Item 15; and to amend notes 3(e) and (g) and note 14 of the Company’sfinancial statements, included in itsAnnual Report on Form 20-F for the fiscal year ended December 31, 2004, whichwas filed on July 7, 2005. 

 

No other changes are beingmade to the Annual Report, as originally filed, although Exhibits 12.01, 12.02,13.01 and 13.02 have been refiled in their current form. The Annual Report, asamended by this amendment, continues to speak as of the date of its originalfiling, and the Company has not updated the disclosure as of a later date.”

 

----

 

# **GENERAL**

# ** **

*Unlessotherwise indicated, all references contained herein, to the “Company”, to “Sadia”,or to “Sadia Group” are references to Sadia S.A., a corporation organized underthe laws of the Federative Republic of Brazil (“Brazil”), and its consolidatedsubsidiaries: Sadia International Ltd.; Sadia GmbH; Rezende Marketing eComunicação Ltda., Rezende Óleo Ltda., and Concórdia S.A. Corretora de ValoresMobiliários, Câmbio e Commodities.*

 

*Presentation of Certain Financial Information*

 

References to “preferredshares” and “common shares” refer to the Company’s authorized and outstandingpreferred stock and common stock, designated as “*açõespreferenciais*” and “*ações**ordinárias*”, respectively, each without par value. Allreferences herein to the *“real,” “reais” or “R$”*are to the *real,* the official currency of Brazilsince July 1, 1994. All references to (i) “U.S. dollars”, “dollars” or “US$”refer to United States dollars, (ii) “km” to kilometers, and (iii) “tons” tometric tons.

 

***Forward-Looking Statements***

 

This annual report contains certain forward-looking statements asdefined in Section 21E of the U.S. Securities Exchange Act of 1934 with respectto the financial condition, results of operations and business achievements/performance of Sadia and certain of the plans and objectives of management ofthe Company with respect thereto. These statements may generally, but notalways, be identified by the use of words such as “should”, “expects”, “estimates”,“believes” or similar expressions. Such statements include, but are not limitedto, statements under the following headings: (i) Item 4. Information on theCompany; and (ii) Item 5. Operating and Financial Review and Prospects. Thisannual report also contains forward-looking statements attributed to certainthird parties relating to their estimates regarding the growth of markets anddemand for products. By their nature, forward-looking statements involve riskand uncertainty because they reflect the Company’s current expectations andassumptions as to future events and circumstances that may not prove accurate:the factors discussed in Item 3. Key Information — Risk Factors, among others,could cause the Company’s actual financial condition, results of operations andbusiness achievements/ performance to differ materially from the estimates madeor implied in such forward-looking statements.

 

# **PART I**

# ** **

## ***ITEM 1***.  IDENTITY OFDIRECTORS, SENIOR MANAGEMENT AND ADVISERS

## *** ***

Notapplicable.

 

## ***ITEM 2***. OFFER STATISTICS AND EXPECTED TIMETABLE

## *** ***

Notapplicable.

 

## ***ITEM 3***. KEY INFORMATION

## *** ***

**A.Selected Financial Data**

** **

U.S. GAAP Presentation

 

The selected financial information for the Company included in thefollowing table should be read in conjunction with, and is qualified in itsentirety by reference to, the U.S. GAAP financial statements of the Company and“Operating and Financial Review and Prospects” appearing elsewhere herein. Theconsolidated financial data for the Company as of December 31, 2004, 2003,2002, 2001 and 2000 are derived from the audited U.S. GAAP financialstatements, which differ in certain respects from accounting practices adoptedin Brazil (defined as Brazilian GAAP). Brazilian GAAP is determined by therequirements of Law No. 6,404, dated December 15, 1976, as amended (Braziliancorporate law), and the rules and regulations of the *Comissão deValores Imobiliários*, or CVM, the Brazilian Securities Commission.

 

1

----

 

**SADIAS.A.**

CONSOLIDATEDSTATEMENTS OF INCOME

Years endedDecember 31, 2004, 2003, 2002, 2001 and 2000

(In thousands of *reais*- R$, except numbers of shares and per share amounts)

 
| ** **                                                                         | ** ** | **2004**      | ** ** | **2003**      | ** ** | **2002**      | ** ** | **2001**      | ** ** | **2000**      | ** ** |
|------------------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                                         | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| **Gross Operating Revenue**                                                        | ** ** | **7,117,318** | ** ** | **5,717,525** | ** ** | **4,654,752** | ** ** | **3,977,137** | ** ** | **3,257,944** | ** ** |
| Value-added tax on sales                                                           |       | (880,010      | )          | (535,337      | )          | (417,280      | )          | (293,280      | )          | (316,919      | )          |
| Sales deductions                                                                   |       | (128,083      | )          | (100,471      | )          | (98,402       | )          | (81,387       | )          | (59,749       | )          |
| **Net Operating Revenue**                                                          | ** ** | **6,109,225** | ** ** | **5,081,717** | ** ** | **4,139,070** | ** ** | **3,602,470** | ** ** | **2,881,276** | ** ** |
| Cost of goods sold                                                                 |       | (4,292,650    | )          | (3,673,011    | )          | (2,903,152    | )          | (2,322,691    | )          | (2,167,016    | )          |
| **Gross Profit**                                                                   | ** ** | **1,816,575** | ** ** | **1,408,706** | ** ** | **1,235,918** | ** ** | **1,279,779** | ** ** | **714,260**   | ** ** |
| Operating expenses:                                                                |       |          |       |          |       |          |       |          |       |          |       |
| Selling                                                                            |       | (1,144,482    | )          | (916,671      | )          | (828,690      | )          | (720,761      | )          | (563,025      | )          |
| General and administrative                                                         |       | (52,462       | )          | (54,207       | )          | (49,133       | )          | (54,029       | )          | (51,603       | )          |
| Other operating expense, net                                                       |       | 15,398        |       | (36,819       | )          | (12,773       | )          | (17,136       | )          | (9,174        | )          |
| Total operating expenses                                                           |       | (1,181,546    | )          | (1,007,697    | )          | (890,596      | )          | (791,926      | )          | (623,802      | )          |
| **Operating Income**                                                               | ** ** | **635,029**   | ** ** | **401,009**   | ** ** | **345,322**   | ** ** | **487,853**   | ** ** | **90,458**    | ** ** |
| Interest expense                                                                   |       | (691,465      | )          | (450,198      | )          | (317,755      | )          | (201,210      | )          | (187,268      | )          |
| Interest income and other, net                                                     |       | 570,839       |       | 459,750       |       | 266,462       |       | 144,635       |       | 190,519       |       |
| Foreign currency exchange loss, net                                                |       | 72,719        |       | 60,970        |       | 2,701         |       | (171,377      | )          | (72,775       | )          |
| **Income before income tax and equity income of  investees and minority interest** | ** ** | **587,122**   | ** ** | **471,531**   | ** ** | **296,730**   | ** ** | **259,901**   | ** ** | **20,934**    | ** ** |
| Income tax benefit (expense):                                                      |       |          |       |          |       |          |       |          |       |          |       |
| Current benefit (expense)                                                          |       | (32,969       | )          | (39,072       | )          | 34,631        |       | (38,895       | )          | (867          | )          |
| Deferred tax benefit (expense)                                                     |       | (63,130       | )          | 40,099        |       | (46,786       | )          | (12,161       | )          | (20,954       | )          |
| Total income tax benefit (expense)                                                 | ** ** | **(96,099**   | **)**      | **1,027**     | ** ** | **(12,155**   | **)**      | **(51,056**   | **)**      | **(21,821**   | **)**      |
| **Income (loss) before equity income of investees  and minority interest**         |       | 491,023       |       | 472,558       |       | 284,575       |       | 208,845       |       | (887          | )          |
| Equity income (loss) of investees                                                  |       | (1,385        | )          | 361           |       | (650          | )          | 43            |       | (5,093        | )          |
| Minority interest                                                                  |       | (137          | )          | 349           |       | 337           |       | 439           |       | 496           |       |
| Income (loss) before cumulative effect of accounting change                        |       | —        |       | 473,268       |       | 284,262       |       | 209,327       |       | (5,484        | )          |
| Cumulative effect of accounting change, net of tax                                 |       | —        | ** ** | **—**    |       | —        |       | (5,843        | )          | —        |       |
| **Income (loss) before cumulative effect of  accounting change**                   | ** ** | **489,501**   | ** ** | **473,268**   | ** ** | **284,262**   | ** ** | **203,484**   | ** ** | **(5,484**    | **)**      |
|                                                                               |       |          |       |          |       |          |       |          |       |          |       |
| Net income (loss) applicable to preferred stock                                    |       | 316,045       |       | 305,564       |       | 183,533       |       | 131,378       |       | (3,420        | )          |
| Net income (loss) applicable to common stock                                       |       | 173,456       |       | 167,704       |       | 100,729       |       | 72,106        |       | (2,064        | )          |
| **Net Income (loss)**                                                              | ** ** | **489,501**   | ** ** | **473,268**   | ** ** | **284,262**   | ** ** | **203,484**   | ** ** | **(5,484**    | **)**      |
|                                                                               |       |          |       |          |       |          |       |          |       |          |       |
| Basic and diluted earnings (loss) per thousand shares in R$:                       |       |          |       |          |       |          |       |          |       |          |       |
| Preferred                                                                          |       | 742.42        |       | 717.80        |       | 431.14        |       | 308.62        |       | (8.03         | )          |
| Common                                                                             |       | 674.93        |       | 652.54        |       | 391.94        |       | 280.56        |       | (8.03         | )          |
|                                                                               |       |          |       |          |       |          |       |          |       |          |       |
| Weighted average number of shares outstanding:                                     |       |          |       |          |       |          |       |          |       |          |       |
| Preferred                                                                          |       | 425,695,712   |       | 425,695,712   |       | 425,695,712   |       | 425,695,712   |       | 425,695,712   |       |
| Common                                                                             |       | 257,000,000   |       | 257,000,000   |       | 257,000,000   |       | 257,000,000   |       | 257,000,000   |       |
|                                                                               |       |          |       |          |       |          |       |          |       |          |       |
| **Dividends paid per thousand shares in R$:**                                      | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| **Preferred**                                                                      | ** ** | **234.70**    | ** ** | **170.08**    | ** ** | **106.89**    | ** ** | **69.75**     | ** ** | **38.50**     | ** ** |
| **Common**                                                                         | ** ** | **213.30**    | ** ** | **154.61**    | ** ** | **97.18**     | ** ** | **63.41**     | ** ** | **35.00**     | ** ** |

 

2

----

 

**SADIAS.A.**

CONSOLIDATEDBALANCE SHEET

Years endedDecember 31, 2004, 2003, 2002, 2001 and 2000

(In thousands of *reais* - R$)

 
| ** **                                                                         | ** ** | **2004**      | ** ** | **2003**      | ** ** | **2002**      | ** ** | **2001**      | ** ** | **2000**      | ** ** |
|------------------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Cash and cash equivalents and investments in debt and held-to-maturity  securities |       | 1,917,192     |       | 1,957,753     |       | 1,249,783     |       | 346,354       |       | 220,814       |       |
| Total Current Assets                                                               |       | 4,052,867     |       | 3,726,386     |       | 2,817,467     |       | 1,598,128     |       | 1,335,843     |       |
| Investments in debt and held-to-maturity securities                                |       | 436,782       |       | 1,158,586     |       | 760,857       |       | 609,767       |       | 745,471       |       |
| Property, plant and equipment, net                                                 |       | 947,175       |       | 829,003       |       | 860,070       |       | 857,653       |       | 889,436       |       |
| **Total Assets**                                                                   | ** ** | **5,830,973** | ** ** | **6,149,453** | ** ** | **4,975,627** | ** ** | **3,325,305** | ** ** | **3,202,793** | ** ** |
| ** **                                                                         | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| Total Current Liabilities                                                          |       | 2,766,719     |       | 2,969,833     |       | 2,591,383     |       | 1,335,176     |       | 1,699,863     |       |
| Short-term debt and current portion of  long-term debt                             |       | 1,738,835     |       | 2,030,752     |       | 2,052,068     |       | 910,386       |       | 1,381,123     |       |
| Long-term debt                                                                     |       | 1,031,375     |       | 1,366,836     |       | 1,205,160     |       | 889,767       |       | 526,413       |       |
| **Total Shareholders’ Equity**                                                | ** ** | **1,838,364** | ** ** | **1,521,585** | ** ** | **1,057,759** | ** ** | **967,181**   | ** ** | **853,778**   | ** ** |

 

The exchange rates ofreal amounts into U.S. dollars for the years ended December 31, 1999, 2000,2001, 2002, 2003, 2004 and December 2004 through May 2005 are shown in thetable below:

 
| ** ** | ** ** | **Commercial Selling Exchange Rates (R$/US$)****** | ** ** |
|------------|------------|----------------------------------------------------|------------|
| ** ** | ** ** | **High**                                           | ** ** | **Low** | ** ** | **Average** | ** ** | **End of period** | ** ** |
| **2000**   |       | 1.9847                                             |       | 1.7234 |   | 1.8295 |   | 1.9554 |   |
| **2001**   |       | 2.8007                                             |       | 1.9357 |   | 2.3522 |   | 2.3204 |   |
| **2002**   |       | 3.9552                                             |       | 2.2709 |   | 2.9309 |   | 3.5333 |   |
| **2003**   |       | 3.6623                                             |       | 2.8219 |   | 3.0715 |   | 2.8892 |   |
| **2004**   |       | 3.2051                                             |       | 2.6544 |   | 2.9257 |   | 2.6544 |   |
| **Dec-04** |       | 2.7867                                             |       | 2.6544 |   |   |   |   |   |
| **Jan-05** |       | 2.7222                                             |       | 2.6248 |   |   |   |   |   |
| **Feb-05** |       | 2.6320                                             |       | 2.5621 |   |   |   |   |   |
| **Mar-05** |       | 2.7621                                             |       | 2.6011 |   |   |   |   |   |
| **Apr-05** |       | 2.6598                                             |       | 2.5195 |   |   |   |   |   |
| **May-05** |       | 2.5146                                             |       | 2.3784 |   |   |   |   |   |

 

*Source: Brazilian Central Bank*

 

**B.Capitalization and Indebtedness**

** **

Not Applicable.

 

**C.Reasons for the offer and use of proceeds**

** **

Not Applicable.

 

**D.Risk Factors**

** **

**Risks Relating to Brazil**

 

***The Brazilian government hasexercised, and continues to exercise, significant influence over the Brazilianeconomy. Brazilian political and economic conditions have a direct impact onthe company’s business and the market price of the preferred shares.***

 

3

----

 

The Brazilian governmentfrequently intervenes in the Brazilian economy and occasionally makes drasticchanges in policy. The government’s actions to control inflation and affectother policies have often involved wage and price controls, currencydevaluations, capital controls, and limits on imports, among other things. TheCompany’s business, financial condition and results of operations may beadversely affected by changes in policy including tariffs, exchange controlsand other matters, as well as factors such as currency fluctuations, inflation,price instability, interest rates, tax policy, and other political, diplomatic,social and economic developments in or affecting Brazil.

 

Prior to 1995, Brazilexperienced extremely high rates of inflation (2,567.46% in 1993). Inflation,along with governmental measures to combat inflation, has had significantnegative effects on the Brazilian economy in general. Beginning in December1993, the Brazilian government introduced an economic stabilization plan calledthe *Real* Plan. The primaryobjectives of the *Real* Plan wereto reduce inflation and develop an environment for sustainable economic growth.

 

On July 1, 1994, theBrazilian government introduced the new currency, the *real*.Since the introduction of the *real*, Brazil’sinflation rate has been substantially lower than in previous periods. Theannual rates of inflation, as measured by the general price index (IGP-M) ofFundação Getúlio Vargas, were:

 
| **IGP-M - Rate of Inflation (%)****** | ** ** |
|---------------------------------------|------------|
| **Year**                              | ** ** | **Rate of Inflation %** | ** ** |
| 2000                                  |       | 9.95 |   |
| 2001                                  |       | 10.38 |   |
| 2002                                  |       | 38.32 |   |
| 2003                                  |       | 8.71 |   |
| 2004                                  |       | 12.41 |   |

 

*Source: Bloomberg*

 

There can be no assurancethat the lower levels of inflation of the last years will continue. Brazil mayexperience high levels of inflation in the future. Future governmental actions,including actions to adjust the value of the *real*,may trigger increases in inflation. Accordingly, periods of substantialinflation may in the future have material adverse effects on the Brazilianeconomy, the Brazilian financial markets and on the Company’s business,financial condition and results of operations.

 

***Fluctuations in the value of Brazil’scurrency against the value of the U.S. dollar may result in uncertainty in theBrazilian economy and the Brazilian securities market, which may adverselyaffect the Company’s financial condition and results of operations and,consequently, the market value of the preferred shares and ADSs.***

* *

Because of inflationarypressures, the Brazilian currency has been devalued periodically during thelast four decades. Throughout this period, the Brazilian government hasimplemented various economic plans and has taken several exchange ratepolicies, including sudden devaluations, periodic mini-devaluations duringwhich the frequency of adjustments has ranged from daily to monthly, floatingexchange rate systems, exchange controls and dual exchange rate markets.Although over long periods, devaluations of the Brazilian currency generallyhave correlated with the rate of inflation in Brazil, devaluations over shorterperiods have resulted in significant fluctuations in the exchange rate betweenthe Brazilian currency and the U.S. dollar and other currencies.

 

In addition, fluctuationsin the value of the *real* relativeto the U.S. dollar can affect the market value of the ADSs. Devaluation of the *real* may reduce the U.S. dollar value of distributions anddividends on the ADSs and may also reduce the market value of the preferredshares and the ADSs.

 

***Restrictions on the movement ofcapital out of Brazil may hinder investors’ ability to receive dividends andother distributions as well as the proceeds of any sale of preferred shares.***

* *

The Brazilian governmentmay impose temporary restrictions on the conversion of Brazilian currency intoforeign currencies and on the remittance to foreign investors, of proceeds frominvestments in Brazil. Brazilian law permits the government to impose theserestrictions whenever there is a serious imbalance in Brazil’s balance ofpayments or reasons to foresee a serious imbalance.

 

Government restrictionson capital outflow may hinder or prevent the custodian in Brazil, or ifinvestors have exchanged ADSs for the underlying preferred shares, fromconverting the proceeds relating to the preferred shares into U.S. dollars andremitting those proceeds abroad. Investors could be adversely affected bydelays in obtaining any

 

4

----

 

required governmentalapproval for conversion of Brazilian currency payments and remittances abroadin respect of the preferred shares underlying the ADSs. In addition, theBrazilian government may institute a more restrictive exchange control policyin the future.

 

Currently, in order toremit the proceeds of distributions on, and gains with respect to, thepreferred shares to the U.S., the depositary must register with the CentralBank the amount invested by non-Brazilians in the preferred shares underlyingthe ADSs. The depositary will register its interest in the preferred shares asa foreign investment with the Central Bank. The Central Bank will issue acertificate of foreign capital registration in the name of the depositary, underwhich the custodian will, assuming the continued availability of foreignexchange, be able to convert dividends and other Brazilian currency-denominateddistributions from the Company into U.S. dollars and remit such U.S. dollarsabroad to the depositary for distribution to the foreign investor.

 

***Developments in other emerging markets may adversely affect the marketprice of the preferred shares and ADSs***

*** ***

The market price or thepreferred shares and ADSs may be adversely affected by declines in the internationalfinancial markets and world economic conditions. The Brazilian securitiesmarket is, to varying degrees, influenced by economic and market conditions inother emerging market countries, especially those in Latin America. Althougheconomic conditions may differ in each country, investors’ reaction todevelopments in one country can have an effect on the securities markets andthe securities of issuers in other countries, including Brazil.

 

Accordingly, adversedevelopments in emerging market countries could lead to a reduction in bothdemand and the market price for the preferred shares and ADSs. These events maydiscourage international investment in Brazil and, more directly, may hurt themarket price of the Company’s preferred shares and ADSs.

 

***Enforcement of civil liabilities may be difficult***

*** ***

The Company is organizedunder the laws of Brazil. All of the Company’s directors and officers and manyof its advisors reside in Brazil and substantially all of the assets of thesepersons and of the Company are located in Brazil. As a result, it may not bepossible to effect service of process upon these persons within the UnitedStates or other jurisdictions outside of Brazil. Similarly, it may not bepossible to enforce, judgments of non-Brazilian courts, including judgmentspredicated on civil liability under the U.S. securities laws against theCompany or its directors and officers.

 

Brazilian counsel hasadvised the Company that Brazilian courts will enforce judgments of U.S. courtsfor civil liabilities predicated on the U.S. securities laws only if thejudgment satisfies certain requirements imposed by the Brazilian federalsupreme court. The foreign judgment will be enforceable in Brazil if:

 

•      Itfulfills all formalities required for its enforceability under the laws of thecountry that granted the foreign judgment;

 

•      Itis for the payment of a certain sum of money;

 

•      Itwas issued by a competent court after service of process was properly made onthe Company in the jurisdiction where the judgment was awarded;

 

•      Itis not subject to appeal;

 

•      Itis authenticated by a Brazilian consular office in the country where it wasissued and is accompanied by a sworn translation into Portuguese; and

 

•      Itis not contrary to Brazilian national sovereignty, public policy or goodmorals, and does not contain any provision that for any reason would not beupheld by the courts of Brazil.

 

Brazilian counselhas also advised the Company that:

 

•      Asa plaintiff, a holder may bring an original action predicated on the U.S.securities laws in Brazilian courts and that Brazilian courts may enforceliabilities in such actions against the Company, its directors, and certain ofits officers and advisors;

 

•      Ifa holder resides outside Brazil and owns no real property in Brazil, suchholder must provide a bond to guarantee court costs and legal fees inconnection with litigation in Brazil; and

 

5

----

 

•      Brazilianlaw limits the ability of a judgment creditor of the Company to satisfy ajudgment against the Company by attaching certain of our assets.

 

***Political uncertainty during elections can influencevolatility in capital markets and generate political instability in the shortrun***

 

Dueto democratic diversity in Brazil, during election periods, political debatesamong the candidates and election pools generate uncertainty. This affects thevolatility of interest rates, exchange rates and stock market quotes, which mayinfluence the Company’s results. Despite this negative situation, the unstableenvironment generated by elections tends to be short-term.

 

**Risks Relating to the Company’s Business**

 

***The business involves breeding of animals and meatprocessing***

 

The Company’s operationsinvolve raising animals, which is subject to a variety of risks, includingdisease, contamination, consumer health concerns and adverse weatherconditions. Meat is subject to contamination during processing anddistribution. Contamination during processing could affect a large number ofthe Company’s products and therefore could have a significant impact on itsoperations. The Company’s sales are dependent on consumer preferences, and theloss of consumer confidence in the products sold by Brazilian producers becauseof disease or contamination could affect the Company’s results of operations.

 

***Grains are the most representative isolated component of COGS and areexposed to the volatility of the commodity markets***

 

The Brazilian foodstuffsindustry, like the processed feed industry in other countries, has been characterizedby cyclical periods of higher prices and profitability, followed byoverproduction, leading to periods of lower prices and lower profitability. TheCompany believes that domestic prices and export prices for its product lineare likely to remain volatile and subject to cyclical variation. There can beno assurance that the Company’s results will not be adversely affected byfuture downturns in market prices. The largest single component of the Company’scost of sales is the cost of ingredients used in the preparation of feed. Theprice of most of the Company’s food ingredients is subject to significantvolatility resulting from weather, the size of harvests, transportation andstorage costs, governmental agricultural policies, currency exchange rates andother factors.

 

***Environmental issues and new regulation requirements canaffect costs***

 

Brazilian food producers,including the Company, are subject to stringent federal, state and localenvironmental laws and regulations concerning, among other things, humanhealth, the handling and disposal of wastes and discharges of pollutants to theair and water. In view of the possibility of unanticipated regulatory or otherdevelopments, particularly as environmental laws become more stringent both inBrazil and worldwide, the amount and timing of future expenditures required tomaintain compliance could vary substantially from their current levels andcould adversely affect the availability of funds for other capital expendituresand other purposes.

 

***Competition in both domestic and foreign livestock and foodprocessing sector is very strong***

 

The Company facessignificant competition from other Brazilian producers in the domestic marketsin which it sells its products, and from other world producers as well in theexport markets in which it sells its products. Other major verticallyintegrated Brazilian producers compete with the Company. To varying degrees,these companies have substantial financial resources and strengths inparticular product lines and regions. The Company expects that it will continueto face strong competition in every market and that existing or new competitorsare likely to broaden their product lines and to extend their geographic scope.Accordingly, there can be no assurance that the Company’s performance will notbe adversely affected by increased competition.

 

***Increasing protectionist measures among Brazil’s tradepartners’ countries can restrict exports of livestock and meat processingcompanies***

 

Due to the growingshare of the Brazilian livestock, pork and poultry sector in the internationalmarket, companies are increasingly being affected by measures taken byimporting countries in order to protect local producers. Because of thecompetitiveness of Brazilian companies, certain countries have raised severalrestrictions to prevent the entrance of Brazilian livestock products. Outcomessuch as quota restrictions or import suspensions in a certain country orregion, can affect substantially the sector’s export volumes and consequentlythe Company’s export performance as

 

6

----

 

well as the results ofits operations.

 

***FMDCases in Brazil can indirectly affect pork sales and adversely impact theresults of the Company***

 

Although the detected Footand Mouth Disease (FMD) cases in the northeast region of Brazil in the pasthave affected only cattle, hogs can be contaminated. The Company’s animalbreeding facilities are located in Santa Catarina and Minas Gerais States,internationally recognized FMD free regions. No assurance can be given,however, that the Company will not be affected by FMD, directly, or throughlimitations on exports.

 

***AvianInfluenza***

 

In 2003, by a jointeffort of the Ministry of Agriculture, the Ministry of Health and the Ministryof the Environment, Brazil implemented a program to monitor and test birds withpotential to carry the Avian Influenza virus (AI) from the South Pole.

 

Moreover, in addition tothe animal health requirements, which are part of the National Poultry HealthProgram, the following preventive measures have been already adopted:tightening controls at ports and airports for tourists and visitors arrivingfrom Asia, prohibition to import paddy rice from Asian countries, prohibitionsfor visitors from Asia to visit Brazilian poultry farms, and new restrictiveimport requirements for imported poultry genetics.

 

No assurance can begiven, that the Company will not be affected by AI, directly, or throughlimitations on exports.

 

**Risksrelating to Sadia S.A.**

 

***The Company is controlled by a Group of Shareholders and theinterests of the controlling group may conflict with those of othershareholders***

 

The Company is controlled by a group of shareholders under the Company’sshareholders’ agreement. The preferred shares and the ADSs are not entitled tovote at meetings of shareholders, except in limited circumstances. This means,among other things, that preferred shareholders are not entitled to vote oncorporate transactions, including mergers or consolidations of the Company withother companies. In addition, the controlling shareholders have the ability todetermine the outcome of any action requiring shareholder approval, includingtransactions such as corporate reorganizations, change of control transactionsand the timing and payment of future dividends. For more information, see Item7 – “Major shareholders and related party transactions”.

 

***If the Company loses any of its largest clients, or if theysignificantly reduce the amount they purchase from the Company, its revenue andoperating income could be materially adversely affected***

 

The Company’s ten largestcustomers in 2004 accounted for approximately 20% of the Company’s totaldomestic sales and approximately 10% of its total gross sales. As a result, ifthe Company loses any of its ten largest customers or they reduce significantlythe amount they purchase from the Company, the Company’s revenue and operatingincome could be materially adversely affected. The Company has been developingnew client oriented policies to reduce the concentration of revenues with asmall number of clients and to spread the related concentration risk.

 

***The Company’s ability to export could be adversely affectedby port labor disputes and disruptions and by import restrictions***

 

The Company’s ability toexport is dependent, in part, on factors beyond its control, including the lackof transport facilities due to strikes or other causes, or the enactment ofBrazilian laws or regulations restricting exports in general or its products inparticular. In addition, regulatory authorities in various countries have inthe past imposed, and in the future may impose, import restrictions on Brazil’sexports, based on health and sanitary standards. Any of these could affect theCompany’s revenue and operating income.

 

7

----

 

## ***ITEM 4***. INFORMATION ON THE COMPANY

## *** ***

**A.History and Development of the Company**

** **

Sadia’s activities areconcentrated in the agro industrial and food processing segments. The Company’scentral administrative headquarters is located at Rua Fortunato Ferraz, 659,Vila Anastácio, São Paulo, State of São Paulo, Zip Code 05093-901, Brazil,telephone number (55 11) 3649-3552, and the Company’s website iswww.sadia.com.br or www.sadia.com and e-mail address is grm@sadia.com.br.Materials posted on the website are not deemed incorporated by reference intothis annual report nor made a part hereof.

 

The Company is the leaderin all of the markets in which it operates within Brazil (see “Market Share”).Sadia is the largest slaughterer and distributor of poultry and pork products,as well as the largest domestic exporter of poultry, according to the BrazilianChicken Exports Association (ABEF). Sadia Group is also the largest distributorof frozen and refrigerated meat-based products (according to AC Nielsen). SadiaGroup has 40,600 employees (December 31, 2004).

 

The level ofverticalization adopted by Sadia ensures control at all stages of productionand distribution of products. The Company’s operations include breeding farmsfor poultry and hog grandparent and parent stock, hatcheries, pork breedingcenters, slaughterhouses, processing units, animal feed production plants,representative offices and distribution centers. Sadia introduced the vertical integrationof poultry and hog breeding, which was initially adopted in the west of SantaCatarina State. This system is still utilized by the Company. It consists of apartnership between the company and the rural producers, with a view toobtaining animals for slaughter, raised in highly productive breedingconditions and controlled hygienic-sanitary conditions. Sadia produces one-daychicks and piglets and supplies them to out-growers, along with feed,transport, technical and veterinary assistance.

 

The Company has 11 plantswithin Brazil, and distributes its product line of approximately 1,000 itemsthrough distribution and sales centers spreaded throughout Brazil, LatinAmerica, the Middle East, Asia and Europe. The table below shows the Company’sproduction capacity:

 
| ** **                                | ** ** | **Production Capacity** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **2004**                | ** ** | **2003** | ** ** |
| ** **                                | ** ** | **Capacity**            | ** ** | **Production** | ** ** | **Production** | ** ** |
|                                      |       |                    |       |   |   |   |   |
| Poultry Slaughtering (Million heads/year) |       | 614.4                   |       | 572.9 |   | 501.0 |   |
| Hog Slaughtering (Million heads/year)     |       | 3.9                     |       | 3.5 |   | 3.9 |   |
| Processed Products (Thousand tons/year)   |       | 721.0                   |       | 666.7 |   | 550.0 |   |
| Animal Feed (Thousand tons/year)          |       | 4,464.0                 |       | 4,169.1 |   | 3,765.8 |   |

 

**CompanyOverview**

 

Sadia S.A. began in 1944,with the acquisition by Attilio Fontana of the meatpacker Concórdia Ltda.,located in the municipality of the same name, in the Western part of the stateof Santa Catarina, Brazil. At the time, the Company consisted of a wheat milland an unfinished slaughterhouse for hogs.

 

Over the course of its60-year history, the Company evolved based on two key strategies: thediversification of its portfolio of food products, and investment in quality.

 

At the end of the 1980sand the beginning of the 1990s, the Company’s policy of expansion gave way torationalization of management and cost structures through reduction by mergerof a number of companies in the Sadia Group. Sadia began the 1990s having thecontrolling ownership in 21 companies, and began to concentrate its operationsin the production of processed meat products.

 

From 1997 forward,management has continued the reorganization of the Sadia Group and hasimplemented the strategy of concentrating on higher value-added processedproducts.

 

8

----

 

In 1997, the Company soldits cattle slaughterhouse in Barra do Garças, state of Mato Grosso, foursoybean processing facilities (crushing and refining), 12 purchasing andwarehousing centers (for grains), and also transformed its Várzea Grandeslaughterhouse, state of Mato Grosso, into a plant for the production of processedmeat products. In addition, the transport of the products, which had been madeby a fleet of owned vehicles, was outsourced to specialized transportationcompanies.

 

In July 1998, Sadia wasmerged with two of its subsidiaries, Sadia Frigobrás S.A. and Sadia ConcórdiaS.A., so that all of the activities of the Sadia Group were concentrated in asingle listed company, Sadia S.A. This resulted from a gradual process ofreorganization with a view to simplifying the Sadia Group structure, increasingvisibility to capital markets, and achieving gains in scale through thereduction of general and administrative expenses and tax costs.

 

In December 1999, Sadiaacquired the capital stock of Granja Rezende S.A. (primarily a producer anddistributor of poultry and pork products) and its wholly owned subsidiariesRezende Alimentos Ltda., Rezende Óleo Ltda. and Rezende Marketing ComunicaçõesLtda.

 

Immediately following theacquisition of Granja Rezende, the Company decided to sell Granja Rezende’ssoybean crushing and oil manufacturing plant and administrative complex.

 

During 2000, thesubsidiary Rezende Alimentos Ltda. was converted from a limited liabilitycompany into a corporation and the subsidiary’s name was changed to SadiaAlimentos S.A. On December 29, 2000, the then parent was merged into SadiaAlimentos S.A., whose name was then changed to Sadia S.A. The purpose of themerger was to permit an operational and administrative rationalization, and theutilization of tax loss carry forwards. In August 2002, Granja Rezende S.A. wasmerged into Sadia, aiming at cost reduction both through standardization andthrough rationalization of the administrative and operational activities aswell as by resulting reflections of financial and fiscal nature.

 

In April 2001, the Companylisted its American Depositary Receipts (ADRs) program on the New York StockExchange, providing investors an alternate channel to buy its stocks. In June2001, the Company adhered to the level one corporate governance with Bovespacertifying its commitment to transparency and fair disclosure of information.

 

In the second half of2001, Sadia and Sun Valley, U.K. based subsidiary of Cargill Foods, formed apartnership. This partnership gave rise to Concordia Foods Ltd., Worcester, UK.In January 2005 the partnership between Sadia and Sun Valley was discontinued,the legal entity is being phased out. Sadia U.K. Ltd., assumed the operationsonce performed by Concordia Foods Ltd.

 

In August 2001, Sadiaopened a distribution center (DC) in Jundiaí, São Paulo, to supply the SãoPaulo state region, considered the largest market in Brazil. The Jundiaí DC, isa technological milestone for the Company with 20,000 square meters of area.The Company invested R$ 23 million in facilities and IT structure.

 

In May 2002, Sadia GmbHand its subsidiary, Laxness F.C.P.A. Lda. (Laxness) were created, aiming toleverage exports to the European market. In February 2005 Laxness changed itsname to Wellax Food Logistics C.P.A.S.U. Ltd (Wellax).

 

In November 2004, theCompany opened a distribution center in Ponta Grossa, state of Paraná, givingthe Company greater capacity and efficiency in its export processes.

 

In January 2005, Sadiaacquired 100% of the ownership interest of Só Frango Produtos AlimenticiosLtda. (Só Frango), a company based in Brasilia with a total capacity forslaughtering 150,000 chickens per day (at the time of the acquisition). InApril 2005, Só Frango was merged into Sadia.

 

9

----

 

**GROUPSTRUCTURE – December 2004**

 

 

The Sadia Group iscurrently composed of sixteen companies, as shown in the chart above.

 

Sadia concentrates allproduction, slaughtering, distribution and product sales activities withinBrazil. Sadia International Ltd. is one of the Company’s smaller vehicles forsales outside Brazil, and is a shareholder of the ‘Churrascaria Beijing’steakhouse, which was established in Beijing in partnership with Sky Dragon, acompany linked to the Chinese Ministry of Agriculture. Rezende Óleo and Rezende Mkt. eComunicações Ltda. are non-operational. Sadia GmbH. is a holding thatcontrols Wellax Food Logistics C.P.A.S.U. Lda., an offshore company responsiblefor the largest part of Sadia’s export operations. Sadia Alimentos is asubsidiary of Sadia International, established in 2003 aiming to developcommercial operations in the Argentine market. Sadia Uruguay and Sadia Chileare each responsible for the distribution and sales of Sadia’s products intheir respective countries. Nordfin Holding Limited owns 40% of Sadia Chile.Concórdia CVMCC is a brokerage firm authorized to operate in accordance withcurrent Brazilian legislation.

 

**B.Business Overview**

** **

**Business Strategy**

 

Sadia’sstrategy for maintaining its leadership in the Brazilian food market andgaining share in the international market is to capitalize on the Company’scompetitive advantages in its principal segments of operation.

 

TheCompany believes that in order to continue its accelerated growth, it will haveto expand its activities, either by acquisition or by expansion in its currentfacilities. Sadia has a well developed expansion plan that is being put inpractice that will generate long-term results.

 

***SóFrango***

 

InJanuary 3, 2005 Sadia acquired 100% of Só Frango Produtos Alimentícios Ltda (“SóFrango”), for US$26.5 million, to be paid in full with the Company’s ownresources. Só Frango is active in poultry slaughtering and processing as wellas in the production of animal feed meal. Its product line ranges from wholechicken, special frozen and chilled cuts to sausages and cold cut meats.

 

With1,700 employees, Só Frango generated R$ 220 million in gross revenues in 2004and has a slaughtering capacity of 150 thousand chickens/day. Sadia intends toexpand this capacity over the next five years to 400 thousand chickens/day,which should generate two thousand new direct jobs in the acquired company andaround twelve

 

10

----

 

thousandindirect jobs. All operations with out growers and suppliers, as well as Só Frango’sjob positions, will be maintained. Sadia expects that half of Só Frango’sproduction will be sold to the domestic market and the rest will be exported,similar to Sadia’s operations’ model in the poultry segment.

 

Throughthis acquisition, Sadia strengthens its presence in the central region ofBrazil close to raw material producers and to Brazil’s main centers ofconsumption. Sadia now represents 14% of Brazilian chicken production,broadening its market leadership.

 

***UberlandiaComplex***

 

Uberlândia complex willreceive investments of over R$ 400 million aiming to increase the capacity ofall of its production lines. Sadia will invest R$ 185 million, the integratedout growers will invest R$ 180 million, and R$ 36 million will invested inlogistics.

 

The R$ 185 million isdistributed as follows: R$ 44 million will be directed to pork production,increasing the slaughter capacity form 700 thousand heads to 1.6 million heads.Chicken production will receive R$ 46 million to increase the slaughter capacityfrom 43 million heads to 88 million heads. The turkey line will receive R$ 35million to increase its currently capacity of 7 million heads to 11 millionheads. Sadia will also invest R$ 44 million in the construction of a new feedplant, R$ 7.5 million to expand the production of processed products and R$ 8million in the storage of grains.

 

The Uberlândia complexwill also receive Sadia ́s second margarine plant. An investment of R$ 60million that will be operational in the second semester of 2006.

 

***ParanáState Complex***

 

In March 2005, Sadiainaugurated the Ponta Grossa Distribution Center. An investment of R$ 30million directed towards the storing of export products. This investment is inline with the Company ́s strategy of concentrating the major export lines in thestate of Paraná.

 

**The Company’s Operation**

 

The Company’s operationsare organized into three segments: “processed products” (frozen andrefrigerated products and margarines), “poultry” (chickens and turkeys) and “pork”.

 

Of the Company’s totalgross operating revenue in 2004, 47% was derived from the processed productssegment, poultry 41%, pork 8%, and 4% from other activities, such as the grainand by-products segment, hog and poultry breeding, boiled beef parts and resaleof products.

 

The activities related tothe grains and by-products currently consist of the crushing of soy to obtainthe meal used as a raw material in the production of feed for the Company’sstock and that of the integrated producers.

 

The Company exportsaround 1,000 different products to approximately 100 countries. Sadia currentlyproduces a range of products that includes: frozen, refrigerated, salted andsmoked pork cuts, lard, bacon, ingredients for “feijoada” (a Brazilian pork andbean stew); frozen and refrigerated pork and chicken giblets; whole frozen andseasoned chickens; frozen and refrigerated poultry cuts and parts; marinatedand partially cooked chicken parts; whole frozen and seasoned turkeys; frozenand seasoned turkey cuts and parts; breaded chicken parts; raw, cooked andsmoked hams; “tender” gammons, hams, cold cuts and related products; “Parma-type”hams; smoked chickens and turkeys; cooked and smoked turkey hams andturkey-based cold cuts; partially cooked and frozen products, such as beef,turkey and chicken meatballs; beef, turkey and chicken-based hamburgers; pork,turkey and chicken based frankfurters; sausages; bolognas; salamis; coppa;turkey-based hams; cold cuts in general; chicken, meat and pork-based patés;beef, poultry and fish-based frozen ready-made dishes and pasta; frozenready-made foods for heating and serving as meals and snacks, such as breadedpoultry, fish and appetizers, frozen pizzas and refrigerated fresh pasta;margarine and refrigerated desserts.

 

11

----

 

The following tables present sales volumes and gross operating revenue(prepared and presented in accordance with U.S. GAAP) for the years endedDecember 31, 2004, 2003 and 2002.

 
| ** **                | ** ** | **Sales Volumes (tons)****** | ** ** |
|---------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Domestic Market**       | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Processed Products        |       | 581,213                      |       | 529,663 |   | 503,612 |   |
| Poultry                   |       | 105,826                      |       | 100,419 |   | 143,941 |   |
| Pork                      |       | 49,426                       |       | 47,760 |   | 103,488 |   |
| **Total Domestic Market** | ** ** | **736,465**                  | ** ** | **677,842** | ** ** | **751,041** | ** ** |
|                      |       |                         |       |   |   |   |   |
| **Exports**               |       |                         |       |   |   |   |   |
| Processed Products        |       | 84,059                       |       | 39,936 |   | 25,347 |   |
| Poultry                   |       | 692,192                      |       | 524,419 |   | 494,035 |   |
| Pork                      |       | 79,052                       |       | 103,689 |   | 88,312 |   |
| **Total Exports**         | ** ** | **855,303**                  | ** ** | **668,044** | ** ** | **607,694** | ** ** |
| ** **                | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Consolidated**          | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Processed Products        |       | 665,272                      |       | 569,599 |   | 528,959 |   |
| Poultry                   |       | 798,018                      |       | 624,838 |   | 637,976 |   |
| Pork                      |       | 128,478                      |       | 151,449 |   | 191,800 |   |
| **Total**                 | ** ** | **1,591,768**                | ** ** | **1,345,886** | ** ** | **1,358,735** | ** ** |

** **
| ** **                | ** ** | **Gross Operating Revenue (Thousand R$)****** | ** ** |
|---------------------------|------------|-----------------------------------------------|------------|
| ** **                | ** ** | **2004**                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Domestic Market**       |       |                                          |       |   |   |   |   |
| Processed Products        |       | 2,946.4                                       |       | 2,523.7 |   | 1,931.5 |   |
| Pork                      |       | 154.9                                         |       | 129.8 |   | 197.7 |   |
| Poultry                   |       | 415.4                                         |       | 356.0 |   | 374.7 |   |
| Other (*)                 |       | 207.9                                         |       | 178.7 |   | 222.9 |   |
| **Total Domestic Market** | ** ** | **3,724.6**                                   | ** ** | **3,188.2** | ** ** | **2,726.8** | ** ** |
|                      |       |                                          |       |   |   |   |   |
| **Exports**               |       |                                          |       |   |   |   |   |
| Processed Products        |       | 405.6                                         |       | 284.9 |   | 183.1 |   |
| Pork                      |       | 429.8                                         |       | 443.0 |   | 318.8 |   |
| Poultry                   |       | 2,488.7                                       |       | 1,787.4 |   | 1,385.5 |   |
| Other (*)                 |       | 68.6                                          |       | 14.0 |   | 40.6 |   |
| **Total Exports**         | ** ** | **3,392.7**                                   | ** ** | **2,529.3** | ** ** | **1,928.0** | ** ** |
|                      |       |                                          |       |   |   |   |   |
| **Consolidated**          |       |                                          |       |   |   |   |   |
| Processed Products        |       | 3,352.0                                       |       | 2,808.6 |   | 2,114.6 |   |
| Pork                      |       | 584.7                                         |       | 572.8 |   | 516.5 |   |
| Poultry                   |       | 2,904.1                                       |       | 2,143.4 |   | 1,760.2 |   |
| Other (*)                 |       | 276.5                                         |       | 192.7 |   | 263.5 |   |
| **Total**                 | ** ** | **7,117.3**                                   | ** ** | **5,717.5** | ** ** | **4,654.8** | ** ** |

 

----

*(*)Other: Grains and by-products, boiled beef parts, pig and chicken breeding andresale of products*

 

12

----

 

The following tablepresents the breakdown of gross operating revenue in percentage terms bysegment, for the years ended December 31, 2004, 2003, and 2002:

** **
| ** **         | ** ** | **Gross Operating Revenue by Segment (%)****** | ** ** |
|--------------------|------------|------------------------------------------------|------------|
| ** **         | ** ** | **2004**                                       | ** ** | **2003** | ** ** | **2002** | ** ** |
| Processed Products |       | 47                                             | %          | 49 | % | 45 | % |
| Poultry            |       | 41                                             | %          | 37 | % | 38 | % |
| Pork               |       | 8                                              | %          | 10 | % | 11 | % |
| Other*             |       | 4                                              | %          | 4 | % | 6 | % |

* *

----

*(*)Other: Grains and by-products, boiled beef parts, pig and chicken breeding andresale of products*

 

***Processed Products***

 

As a result of the Company’s strategy of concentrating on highervalue-added, higher margin products, the processed products segment resultsincreased significantly as from the second half of the 1990s. Production rosefrom 239 thousand tons in 1994 to 665 thousand tons in 2004. Sales of processedproducts accounted for 47% of the Company’s gross operating revenues in 2004.

 

Sadia operates eightplants that manufacture processed products, seven of which are dedicated tomeat processing and one to margarine production. These plants are located closeto their suppliers of raw materials or to the main domestic centers ofconsumption.

 

Sadia’s processedproducts segment comprises a wide range of products, including: frozen products(hamburgers, breaded products, ready-made dishes and pizzas), refrigeratedproducts (hams, sausages, frankfurters, bolognas, salamis, cold cuts, productportions and refrigerated pasta) and margarine the majority of which are soldunder the Sadia brand.

 

Processed products in thedomestic market, accounted for 87,9% of the total sales of this segment, withthe remaining 12.1% directed towards exports. The segment has grown 19% ascompared to 2003.

 

Most of the raw materialsused by Sadia derive from meats and soy oil produced by the Company. Bycontrast, selected suppliers, who are subject to inspection by the FederalAgriculture Ministry, produce all beef that is processed by the Company.

 

Sadia believes that itsuse of chicken meat as a raw material for processed products should growsubstantially for two reasons: (i) the increase in the range of chicken-basedproducts such as breaded products, and (ii) an increasing share for this kindof meat in the composition of other processed products, such as sausages,frankfurters and bolognas. The development of specialized products (boiled androasted products) for the institutional and foreign markets should alsocontribute to the increase in chicken production.

 

The following tablepresents gross operating revenue from sales of processed products for the yearsended December 31, 2004, 2003, and 2002.

** **
| ** **       | ** ** | **Gross Operating Revenues — Processed  Products (Million R$)****** | ** ** |
|------------------|------------|--------------------------------------------------------------------------|------------|
| ** **       | ** ** | **2004**                                                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Frozen**       | ** ** | **574.1**                                                                | ** ** | **482** | ** ** | **415.7** | ** ** |
|             |       |                                                                     |       |   |   |   |   |
| **Refrigerated** | ** ** | **2,777.9**                                                              | ** ** | **2,326.6** | ** ** | **1,698.9** | ** ** |
|             |       |                                                                     |       |   |   |   |   |
| **Total**        | ** ** | **3,352.0**                                                              | ** ** | **2,808.6** | ** ** | **2,114.6** | ** ** |

 

***Poultryand Pork***

 

In 2004, Sadia’s sales ofnon-processed products reached R$ 3,488.7 million, and accounted for 49% of theCompany’s total gross operating revenue. Among such products, chicken is themost significant, accounting for 68% of total sales of the non-processedproducts in 2004, followed by pork and turkey, which accounted for 17% and 15%of

 

13

----

 

sales, respectively. TheCompany exports significant amounts of fresh meat, which in 2004, accounted forapproximately 86% of total export revenue.

 

Sadia operates sevenchicken slaughterhouses. Three are located in the State of Paraná, two in theState of Santa Catarina, one in the State of Minas Gerais, and one in the Stateof Mato Grosso. The Company also operates three turkey slaughterhouses, one in SantaCatarina State, one in Minas Gerais State and one in Parana State, and fiveslaughterhouses for hogs, two in Parana State, one in Santa Catarina State, onein Minas Gerais State and one in Rio Grande do Sul State. The table below showsslaughtering volumes of the Company for the years ended December 31, 2004,2003, and 2002 in millions of units:

 

** **
| ** ** | ** ** | **Slaughtering Volumes (Million Heads)****** | ** ** |
|------------|------------|----------------------------------------------|------------|
| ** ** | ** ** | **2004**                                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Poultry    |       | 572.9                                        |       | 501.0 |   | 469.6 |   |
| Hogs       |       | 3.5                                          |       | 3.9 |   | 3.9 |   |

 

The following table shows gross operating revenue from non-processedproducts, for the years ended December 31, 2004, 2003, and 2002.

 
| ** **        | ** ** | **Gross Operating Revenues – Poultry and Pork (Million R$)****** | ** ** |
|-------------------|------------|-----------------------------------------------------------------------|------------|
| ** **        | ** ** | **2004**                                                              | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Poultry**       | ** ** | **2,903.9**                                                           | ** ** | **2,143.4** | ** ** | **1,760.2** | ** ** |
| Whole             |       | 1,206.9                                                               |       | 740.8 |   | 751.9 |   |
| Parts             |       | 1,583.9                                                               |       | 1,298.5 |   | 923.6 |   |
| By-products/Other |       | 113.3                                                                 |       | 104.1 |   | 84.7 |   |
| **Pork**          | ** ** | **584.7**                                                             | ** ** | **572.8** | ** ** | **516.5** | ** ** |
| **Total**         | ** ** | **3,488.8**                                                           | ** ** | **2,716.3** | ** ** | **2,276.7** | ** ** |

 

***ProductionProcess***

 

*Processed Products*

 

The Company uses specialcuts of pork, chicken and turkey, as well as selected and shaped fragments forthe production of hams, sausages, frankfurters, bologna, hamburgers, pressedham and related products. Seasonings and secondary raw materials are applied toeach product type or line, according to established formulas, in order toensure consistency, color, texture and flavor. The presentation of finalproducts is achieved by shaping, casing, cooking and freezing in specialmachines. Products are then subjected to quality controls and distributed tothe consumer market after having been packaged, labeled and boxed.

 

The raw material formargarine is crude soybean oil, which is subjected to refining and bleachingprocesses. Fats are obtained by hydrogenating bleached oil. Both of thesematerials are deodorized in order to prepare the “blend”. The process iscompleted by the preparation of an emulsion, the cooling and crystallization ofthe product, placing into containers, and the packing of these into boxes.

 

*Poultry*

 

The production processfor poultry consists of four stages. The first two entail direct investment bythe Company in grandparent and parent stock. The third relates to thecommercial stock of birds, and involves the direct participation of integratedfarmers, and the last is the slaughtering process.

 

The Company importsgrandparent stock from the United States in the form of eggs that are hatchedin Sadia’s hatcheries and then raised on Company owned farms. These birdsproduce parent stock that are also raised on Company owned farms, and that inturn produce eggs. The operation involves nine hatchery centers, six of whichproduce “one-day-chicks” and three “one-day-turkeys”. The “one-day-chicks” aresupplied to third-party out growers. Sadia operates a similar system forturkeys, importing eggs to produce grandparent stock that in turn producesparent stock that are raised on Company owned farms. The Company is notdependent on any foreign supplier for its genetic resources, nor does it faceany barriers to their development.

 

14

----

 

The “one-day-chicks”produced by parent stock are supplied to integrated out growers who areresponsible for raising the birds. The Company has contracts with approximately6,600 out growers, to which it provides feed, technical and veterinaryassistance to allow such out growers the outgrowing process up to the time thebirds reach slaughtering age, which for chickens is normally 36 days (at aweight of 2.0 kg). There are no employment agreements between Sadia and the outgrowers, who generally carry out this activity in order to supplement theirincome. Most out growers farm on a small scale and raise six flocks per year(each flock consists of approximately 14,000 chickens). The Company remains theowner of the birds, and at the end of each production cycle, pays an outgrowingcommission fee based on a performance index that is calculated as a function ofindicators such as bird mortality, feed to meat conversion ratio and averageweight. The fee paid to the integrated farmers covers the outgrowing costs, rawmaterials, labor and their net profit.

 

Poultry are slaughteredthrough a process by which they are electrically stunned. They are then bled bypuncturing of major blood vessels. After heating to a temperature of 55/60oC,they are plucked and gutted by automatic machines. The gutting process issubject to health control and inspection. The carcasses are then moved forcooling or freezing at respective temperatures of 6oC and –12/-18oC,and are then packaged according to the required standards of the Serviço deInspeção de Produtos Animais (SIPA – Animal based Product Inspection Agency).At this stage, the whole birds are either distributed to the consumer market asfresh meat or used as raw material in processed products.

 

*Pork*

 

TheCompany produces grandparent, parent and piglet stock on its own farms. Ninetypercent of the parent stock produced by Sadia is supplied to integrated outgrowers who receive feed, medicine and technical assistance by way of support.These parent animals produce hogs that are sold to Sadia for slaughter, afterthe fattening process is completed. The remaining of the parent stock producedby the Company is sold to piglet producers, who also receive feed, medicine andtechnical assistance. Sadia repurchases the piglets at market prices anddistributes them to integrated out growers, who after the fattening processsell such pigs to Sadia for slaughtering.

 

The hogs are slaughteredthrough a process in which they are bled after being stunned electrically.After heating to a temperature of 60/64oC, their bristles areremoved by automatic machines. The animals are then dried, flamed, brushed andgutted, which process is subject to health inspection. After cooling to atemperature of 5oC, the carcasses are cut up and processed.

 

***Seasonal Nature of Business***

 

*Chicken and Pork*

 

Not seasonal in nature.

 

*Turkeys*

 

Turkey productionactivities are seasonal in nature with respect to “whole turkeys”, whoseproduction is concentrated in the second half of the year, with a higher volumeof sales in the fourth quarter because of Christmas holidays.

 

*Processed products*

 

Processed products areseasonal only in the celebration products, with a higher volume of sales in thefourth quarter.

 

***Raw Materials***

 

The Company owns tenanimal feed plants with an installed capacity of 4.5 million tons per year, avolume sufficient to supply all the animal feed requirements of its breedingoperations. The basic raw materials used in animal feed production are corn andsoybeans, in a mix that contains preservatives and micronutrients. Sadiasupplies the basic animal feed to its out growers and sells the remainder onthe spot market.

 

Sadia purchases corn andsoybeans from rural producers, small merchants, cooperatives, large scaletraders and through auctions organized by the Brazilian government, as well asoccasionally from Argentina. Most of the production of these raw materials isconcentrated in the States of Santa Catarina, Paraná, Rio Grande do Sul, Goiásand Mato Grosso. Grains are received in sacks or in bulk, and are then weighed.A sample is taken to measure humidity and impurities in the grain. Afterapproval, the grain is unloaded into a hopper for cleaning and drying. Grain isthen sieved

 

15

----

 

in order to eliminate theresidues that accompany it. After selection and cleaning, the grain is milledand mixed with the other ingredients of the feed.

 

The Company acquires beeffor its production of frozen and refrigerated processed products, and boiledbeef parts. Other inputs, such as prepared animal intestines (for casing),seasonings and other ingredients, cardboard boxes, plastic bags (for packagingand labels), and veterinary medicines (for poultry and hog breeding), areacquired from many different sources, both at home and abroad.

 

*Costs and Operating Expenses*

 

The Company’s principalcosts of production are incurred in *reais* andconsist of grains, corn and soybeans, packaging, and labor. While input costsare *reais* denominated, the internationalcommodity prices (grains and packaging) tend to follow international prices andare influenced by exchange rate fluctuations. The Company operates with anaverage idle capacity of 20% in processed product lines but can be at fullcapacity depending on the market demand. Due to the flexibility in productionlines and to the diversity of the equipment present in the Company’s twelveplants, production can be adapted and reformulated, depending on the Company’sneeds to face a determined segment demand, night and weekend shifts as well assupply partnerships are broadly used to reduce bottlenecks during theproduction process.

 

*Corn*

 

Duringseveral years, Brazil’s corn prices used to be determined only by domesticsupply. Production was mainly on relatively small properties and had a lowlevel of mechanization. However, during 2002, due to the *real*currency depreciation and the improvement of several local producers, part oftheir crop was shifted to the international market. Therefore, Brazilian cornprices went up to adjust to international prices.

 

InBrazil, there are around 20 different regions where buyers can bid for theproduct. Corn prices tend to be influenced by local supply, but internationalprices also influence local quotes, according to crop expectations among themain world producers (U.S.A., China and Argentina) and the level ofinternational storage in the main consuming countries (Europe and Japan).

 

The following chart setsforth Sadia’s average monthly buying price of corn for the period betweenJanuary~~,~~ 1994 and January 31, 2005:

 

 

According to CONAB’sFebruary 2005 Report, it is expected that the 2004/05 Brazilian corn crop productionwill decrease in 7.5% compared to last year’s, mainly due to a 4.1% reductionin the planted area. This reduction is the consequence of the delay inharvesting the first crop which led to a reduction in price, and the higherprofitability of soy at the moment of planting, thus leading to thesubstitution of area planted from corn to soy.

 

16

----

 

Differently than corn, thesoy crop is expected to grow 14.6% compared to last year’s. This wouldrepresent an increase of 6.7% in productivity reversing the inefficiency of the2003/04 crop.

 

The western region of thesouthern states of Brazil continues to suffer the results of the drought that hasbeen reducing the production of grains in this region. It is expected thatthese states will have a reduction of 24% of their soy harvest.

 

*Soybean*

 

Soybean producers inBrazil have been increasing their productivity during the last several yearsand Brazil has become the second largest producer in the world. Soybeanproduction is substantially mechanized and grains are cultivated on largeproperties. Producers are well organized and production is oriented to theexport market. Production is also spread over several regions among thesouthern, southeastern and central region of the country, and prices areregionally given by local supply. However, international prices tend to influencelocal prices when foreign demand and supply are unbalanced.

 

The following chart setsforth Sadia’s average monthly buying price of soybeans for the period betweenJanuary~~,~~ 1994 and January 31, 2005:

 

 

***Marketing***

 

Sadia’s brand name isconsidered one of the Company’s most valuable assets. The Company maintains anactive marketing program using both electronic and printed media.

 

The Company incurredadvertising expenses of R$121,435, R$96,845, and R$82,154, during the yearsended December 31, 2004, 2003, and 2002, respectively.

 

Marketing expenses arerelated to investments in advertising of specific campaigns for the launch ofhigher value-added products and for the reinforcement of Sadia’s brand name.

 

***Logistics***

 

Sadia’s logistics systemand distribution channels are two of the Company’s main competitive advantages.The Company has taken many initiatives to keep sustaining its leadership, whichincludes partnerships, information technology investments and the developmentof new processes.

 

17

----

 

*Distribution*

* *

Sadia maintains salesrepresentation offices in Germany, England, Russia, Japan, China, the UnitedArab Emirates, Argentina, Uruguay, Chile, Venezuela and Turkey.

 

Within the Brazilianmarket, Sadia sells its finished products to wholesale and retail outlets, aswell as to institutional clients. For the year ended December 31, 2004, theCompany sold through approximately 300,000 points of sale throughout Brazil. 

 

Sadia’s distributionstrategy is supported by direct sales to customers, thereby avoidingconcentration among a few large customers.

 

In 2004, 54% of exportswere sold to approximately 10 long-standing customers. All of these customershave imported increasing quantities of the Company’s products over the last tenyears. European countries corresponded to 29% of export sales in 2004 against38.4% in 2003. Exports to emerging markets, such as Russia and other formerSoviet Union countries, have also been growing consistently, mainly due to porkand chicken exports. The America region, which comprises North, Central andSouth America, represented 11% in 2004 against 5% in 2003, mainly due to theexpansion of exports to Andean countries.

 

*Transport*

* *

Sadia uses trucks as theprimary method of distributing its products in Brazil. The Company’sdistribution system is handled by a network of approximately 1,600 refrigeratedhired vehicles, which service customers directly throughout Brazil. 

 

Distribution by truck ismade by refrigerated vehicles, given the perishable nature of the food products,whose shelf life is approximately 30 days. In the case of stoppage of transportby virtue of a general strike, the result would be a complete loss of theproducts in transit and lack of supply for the points of sale if the period ofinterruption is greater than 30 days, an outcome the Company considers remote.As an alternative to highway transport, supply could be effected by air,although this would increase the freight cost by more than 20 times. In thecase of a sector strike, the impact would be minimized because the Company hasmanufacturing units producing the same products located in different regions ofthe country.

 

*Shipment of Exports*

* *

The Company ships 45% ofits exports through the port of Paranaguá, in the State of Paraná, and35%through the ports of São Francisco do Sul and Itajaí, both in the State ofSanta Catarina.

 

In the port of Paranaguá,the Company has two refrigerated warehouses with a storage capacity ofapproximately nine thousand tons. These warehouses have a “drive in” storage systemand only operate with palleted cargoes. This system allows the warehouses toreceive two thousand tons of products per day per warehouse and to load twothousand tons per day onto pallets.

 

Since one of thewarehouses is located in the wharf area, the Company has priority in themooring of ships arriving at the port of Paranaguá, thereby avoiding possiblecost increases due to delays in loading cargo.

 

The Company ships itscargoes in “full container” or conventional “reefer” vessels for palleted cargo.

 

***Sales***

*** ***

The Company adapted itssales structure and commercial policies to the large chain, wholesale (cash andcarry), regional mid-size clients, traditional retail (small retail),institutional and distributor channels. The sales force was unified in a singlemanagement group, making it possible for the big retail chains to be servicedby an account manager, with the support of coordinators, promoters andre-stockers.

 

For medium and smallretailers, the Company instituted a telemarketing service, which complementsthe market work of the sales force and also counts on local distributors. 

 

***Sustainability and Environment***

*** ***

Brazilian environmentalregulations have their principles established in the Federal Constitution, withconcurrent jurisdiction among the Brazilian federal government, the states andthe municipalities to regulate the subject.

 

18

----

 

The public administrationat each such level of government is responsible for the supervision and controlof pollution in any form, as well as for the preservation of forests, hydraulicresources and the fauna and flora. The integration of all of the federal, stateand municipal agencies responsible for the protection and improvement ofenvironmental quality is undertaken by the National Environmental System(SISNAMA).

 

Sadia, as a producer offoodstuffs using a wide range of industrial processes, especially its meatproduct lines which require slaughter of animals, is therefore subject tocompliance with all of the legal requirements, covering environmental risksthat are customary in these processes, such as rules governing treatment ofliquid effluents, solid organic waste, particulate suspension and odors. TheCompany is careful to respect the environment at all stages of the productionchain, including its activities in the field, the design of packaging(developed with a view to reducing the quantity of raw materials used) andadapting the same to recycling processes. In addition to simply treating residues,Sadia invests in minimizing the generation of these by optimizing processes andadopting stringent procedures for controlling the emission of wastes andeffluents. Sadia’s expenditures related to meeting environmental requirementsand in process optimization amounted to R$ 13.3 million in 2004, R$ 15.8million in 2003 and R$ 3.7 million in 2002.

 

The Chapecó industrialfacility is certified by ISO-14001 certification, recognized by the BureauVeritas Qualité Internationale (BVQI) since 1999. The conclusion of the processto adjust the Paranaguá plant to the ISO 14001 regulations by the end of 2003resulted in its certification by the BVQI. This certification, attests theconformity of environmental management systems to the ecosystem in which itoperates and assures a world recognized certification that acts as a guaranteeof environmental quality, which is required by many countries as a prerequisitefor trade relations. 

 

Other achievements in2003 comprise the New Effluent Treatment Technologies Project. Studies arebeing conducted in partnership with the Federal University of Santa Catarina(UFSC) and the Hannover University in Germany. Their purpose is to adopt theuse of new techniques for purifying water during the final phase of treatment. 

 

During 2003, SadiaParanaguá won the first place in the state of Paraná in the national prize forConservation and Rational Use of Energy 2002-2003, run by the Ministry of Minesand Energy and the National Confederation of Industry (CNI), in themanufacturing category, electric energy division. The unit was also classifiedin second place in the national contest. 

 

The Toledo plant alsoplaced in the state stage of the contest, in the environmental educationcategory. In August, the Chapecó unit received the Fritz Müller trophy from theSanta Catarina Environmental Foundation in recognition of its work in favor ofsustainable development. The Riparian Buffer Zone Reforestation Projectrecovered and repopulated riverside fauna in the region near the Francisco Beltrãofacility. Some 250 thousand seedlings were planted and more than 2 millionhatchery fish were introduced.

 

In December 2004, Sadiacreated the Sadia Sustainability Institute. The Institute is a non-profitorganization that focuses on promoting sustainable development as well asprojects that involve the preservation of natural resources, technologicalresearch and dissemination and environmental education for local communities.Another objective of the Institute is to implement the Sadia Sustainable SwineProduction Program (3S Program), which consists in selling Carbon CertifiedEmission Reductions under the Clean Development Mechanism signed at the KyotoTreaty. These bio-digesters will be used in swine waste management andtreatment and will also reduce Greenhouse Gas (GHG) emissions. The revenue fromcarbon assets will be used to enhance environmental and social conditions atoutsourced swine farms.

 

***HumanResources***

*** ***

The Company ended 2004with 40,600 employees compared with 34,432 employees in 2003. Gross operatingrevenue per employee was R$ 175,300 in 2004, an increase of 6% as compared to2003.

 

In 2003, the SadiaCorporate University (UniS) project was implemented. It is a way for theCompany to conduct and systematize a process of education and learning that isin line with its strategic and long-term objectives. During 2004, UniS offeredMBA programs for 136 employees compared to 35 in 2003. UniS maintained thepartnership Sadia already had with the State University of Campinas and signedagreements with professors from the University of São Paulo and the GetúlioVargas Foundation. Besides the UniS’ MBA programs, the Company has an agreementwith the Dom Cabral Foundation for training executives. Through UniS, Sadiabelieves the understanding of the business will be more efficientlydisseminated and better employed through concrete action designed to generatevalue.

 

The Company distributes5% of its operating earnings to eligible employees with at least one year ofservice, excluding equity accounting adjustments, income tax and socialcontributions. In 2004, the amount corresponded to R$

 

19

----

 

24.8 million, withpremiums of a minimum of 1.19 times the salary of each employee, for profitsharing bonus for good departmental performance. 

 

The Company believes itmaintains satisfactory relations with its employees, and there have been nostrikes or significant labor disputes in recent years. Current collectivebargaining agreements have a term of one year, and are negotiated between theCompany and workers’ unions, with such agreements negotiated separately foreach industrial unit. The agreement reached with the local or regional unionapplies to the employees of a given unit, whether they are members of the unionor not.

 

*Employee Benefits*

* *

Sadia contributes 0.75%of its payroll to the Attílio Fontana Foundation (FAF), a private pension fund.Employees contribute 1.5% of their payroll. As of January 2003 the Companybegan to adopt new supplementary social security plans under the definedcontribution modality for all employees hired by Sadia and its subsidiaries.Under the terms of the regulations, plans are funded on an equitable basis sothat the portion paid by the Company is equal to the payment made by theemployee in accordance with a contribution scale based on salary bands thatvary between 1.5% and 6% of the employees’ remuneration, observing acontribution limit that is updated annually.

 

One of the ten largestemployers in Brazil, the Company spent R$ 53.2 million on benefits during 2004,consisting of meals served, medical assistance, maintenance of day carecenters, life insurance and transportation expenses.

 

***Total Quality Program***

*** ***

The Company maintains aquality control program, called “Total Quality Management” (TQM). The TQMprogram’s objectives are: (i) to ensure high standards of quality byimplementing a rigorous inspection program of raw materials and finishedproducts; (ii) to ensure that Company executives stay informed of product and serviceperformance; and (iii) to achieve the highest possible level of customersatisfaction.

 

Sadia’s centrallaboratory is responsible for inspecting the Company’s products, and developsand implements new methods for examining food materials for chemical andbiological contamination. It also examines raw materials used in developingproducts. The Laboratory also controls the environment of plants, as well aswater and wastewater treatment facilities.

 

The Company has a seriesof toll-free lines, and encourages customers to use these in order to providefeedback on its products and services, which is passed to the Company’scommercial area. This procedure provides Sadia with the information that itrequires in order to correct or improve its quality control process.

 

**Investments**

** **

In 2004, Sadia investedR$246 million in operations. Of this amount, 37.8% was allocated to processedproducts, 37% to poultry, 4% to pork, 11.8% in logistics, and 9.4% ininformation technology. These resources allowed the Company to launch 57products. In 2003, Sadia invested R$ 110.2 million in operations.

 

***InvestmentPlans***

*** ***

The Company’s investmentplans for the year 2005 totals R$ 500 million. Of this amount, the processedproducts segment will receive R$ 411.7 million, directed towards improvementson processing equipment; marketing, logistics and distribution will receive R$52.9 million; information technology R$ 26.8 million and other corporatedepartments will receive R$ 8.6 million in investments. 

 

The Company expects tofund its investment plan with available cash flow generated from operations. 

 

**Principalmarkets where the Company competes**

** **

In 2004 Sadia had anaverage of 48% of its gross operating revenues provided from exports. Thisratio was 44% and 41% for 2003 and 2002, respectively. The table set forthbelow presents the main regions of the world where the Company has commercialrelations and the discussion that follows describes the main trends andexpectations for its markets. This information has been prepared and presentedin accordance with Brazilian GAAP that is adjusted for U.S.

 

20

----

 

GAAP presentation. Referto Note 19 of the consolidated financial statements for details on the primarydifferences between Brazilian GAAP and U.S. GAAP.

 
| ** **                                                                | ** ** | **Exports Gross Operating Revenues  (Thousand R$)** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                                            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Europe                                                                    |       | 985,746                                             |       | 912,252 |   | 581,936 |   |
| Middle East                                                               |       | 802,935                                             |       | 632,991 |   | 542,748 |   |
| Asia                                                                      |       | 602,202                                             |       | 353,731 |   | 291,948 |   |
| South America                                                             |       | 387,130                                             |       | 130,322 |   | 50,944 |   |
| Emerging markets (mainly Russia and other former Soviet Union  countries) |       | 806,520                                             |       | 630,332 |   | 491,804 |   |
| Adjustments for U.S. GAAP presentation                                    |       | (191,869                                            | )          | (130,349 | ) | (31,383 | ) |
| **Total**                                                                 | ** ** | **3,392,664**                                       | ** ** | **2,529,279** | ** ** | **1,927,997** | ** ** |

 

Europe is a largepurchaser of poultry cuts and processed products and received 29% of Sadia’sexports. The Company maintains a traditional presence in the Middle East, withmarket leadership and a strong brand recognition. Arabic countries primarilyconsume whole birds of low weight (up to 1.4 kilograms) and processed products.With respect to Eurasia, which comprises the Caucasus region and Russia, Sadiaexports mainly pork and poultry cuts. The main exports to Asia are specialpoultry cuts, pork carcasses and cuts. In the Americas, sales are concentratedprimarily in processed products, poultry parts and whole birds. Secondarymarkets include regions with great potential for growth in the medium term.

 

**MarketShare**

** **

Sadia is the Brazilianleader in frozen and refrigerated processed products according to AC Nielsen’ssurveys. Its market position is supported by significant investments in itsbrand, its distribution channels and in quality control.

 
| ** **                      | ** ** | **Brazilian Market Share 2004** | ** ** |
|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **Position**                    | ** ** | **Market Share by Revenue (%)** | ** ** |
| Frozen Processed Products       |       | 1st                             |       | 44.60 |   |
| Refrigerated Processed Products |       | 1st                             |       | 29.50 |   |
| Margarine                       |       | 1st                             |       | 32.90 |   |

 

*Source: AC Nielsen*

* *

In order to maintain itsmarket share, the Company will continue to concentrate on launchings of highervalue-added products. In 2004, Sadia launched 57 products, against 53 productsin 2003 and 56 products in 2002.

 

***ProcessedProducts***

*** ***

Sadia is the domesticleader in processed products, according to AC Nielsen, with a 44.6% marketshare of frozen products and a 29.5% share of refrigerated products.

 

Sadia has also assumedthe leadership in the domestic margarine market, according to AC Nielsen, witha market share of 32.9% in 2004. 

 

21

----

 

***Poultry***

*** ***

In 2004, the Company hada 13.6% share of domestic chicken production, and a 27.9% share of theBrazilian poultry export market. Sadia introduced turkey production to theBrazilian market in 1973, when its consumption was virtually non-existent.Today the market is shared with other competitors, but Sadia is still in theleadership, with 66.2% of total sales in 2004. 

 

***Pork***

** **

Approximately 70% ofSadia’s pork production is used in its processed products segment. Theremainder is sold as fresh meat cuts in the domestic and international markets.According to the Brazilian Pork Producers Association, in 2004, the Company hada 10.4 % share of domestic pork production, and a 19.7% share of the Brazilianpork export market according to ABIPECS. 

 

**BrazilianFood Sector Regulation**

** **

The Brazilian Ministry ofAgriculture regulates Sadia’s activities, more specifically, by the Secretariade Defesa Agropecuária (SDA), Agricultural and Cattle Breeding DefenseSecretary, under the Animal Products Inspection Department (DIPOA). The latteris responsible for the issuance of regulations, conduct of inspections andlegal support in respect to the livestock, animal breeding, food processing andany other activity involving animal related affairs in the Brazilian territory.

 

**MarketOverview – Domestic and International Markets**

** **

The growth potential ofthe Brazilian market, and its low input costs are attractive to internationalentrants. The main barrier to such companies has nevertheless been the need tobuild a wide ranging refrigerated distribution chain, and a network ofintegrated producers. The prices of the sector’s principal raw materials, cornand soybeans, are strongly influenced mainly by climate conditions.

 

The following analysiswas prepared based on information mainly gathered from: USDA (United States Departmentof Agriculture), CONAB (Brazilian National Supply Company), ABEF (BrazilianPoultry Exporters Association) and ABIPECS (Brazilian Pork Meat ExportersAssociation) and AC Nielsen reports.

 

***Processed Products***

*** ***

Consumption of processedproducts is influenced by several factors, including the increase in consumerincome, and efforts related to the development of products, with a view tomeeting consumer demand for more sophisticated products. 

 

The processed productssegment is divided into three categories: frozen products, refrigeratedproducts and margarines.

 

*Frozen Processed Products*

* *

In 2004, the Brazilianmarket for frozen processed products accounted for sales of US$ 374.8 million.Approximately 80% of this total is attributable to the two largest companies,Sadia and Perdigão.

 

Consumption of frozenproducts is less sensitive to variations in income among the population. Thisis explained by the fact that higher income groups consume a large proportionof the total volume of the segment.

 
| ** **               | ** ** | **Frozen Processed Products – Domestic Market** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|
| ** **               | ** ** | **2004**                                             | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Sales (US$ Million) |       | 375                                                  |       | 358 |   | 284 |   | 294 |   | 300 |   |
| Change %                 |       | 4.6                                                  | %          | 26.0 | % | (3.2 | )% | (1.9 | )% | 1.9 | % |
| Volume (Thousand tons)   |       | 135                                                  |       | 127 |   | 107 |   | 92 |   | 74 |   |
| Change %                 |       | 6.1                                                  | %          | 18.3 | % | 17.2 | % | 23.4 | % | 1.8 | % |

 

*Source: AC Nielsen*

 

22

----

 

Due to thecharacteristics of frozen processed products with production concentrated amonga small number of companies, and supply aimed at a more restricted group of consumersthe Company believes that volume sales of frozen processed products willmaintain their growth trend, although at rates below the 10.6% annual averageregistered between 2000 and 2004. In any case, since the market for frozenprocessed products is still far from mature in Brazil, the Company believesthat its medium and long-term prospects are highly positive based on the trendover the preceding years.

 

*Refrigerated Processed Products*

* *

In 2004, the Brazilianmarket for refrigerated processed products accounted for sales of US$ 1,503million. The two largest companies in this market together accounted forapproximately 55% of net sales, according to AC Nielsen, with the remainingshare being split among a large number of small companies. 

 
| ** **               | ** ** | **Refrigerated Processed Products – Domestic Market** | ** ** |
|--------------------------|------------|------------------------------------------------------------|------------|
| ** **               | ** ** | **2004**                                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Sales (US$ Million) |       | 1,503                                                      |       | 1,313 |   | 955 |   | 1,113 |   | 1,403 |   |
| Change %                 |       | 14.5                                                       | %          | 37.5 | % | (14.2 | )% | (20.7 | )% | 7.4 | % |
| Volume (Thousand tons)   |       | 676                                                        |       | 627 |   | 583 |   | 575 |   | 569 |   |
| Change %                 |       | 7.7                                                        | %          | 7.6 | % | 1.3 | % | 1.1 | % | 1.7 | % |

* *

*Source: AC Nielsen*

* *

*Margarine*

 

In 2004, the Brazilianmarket for Margarine accounted for sales of US$ 511.2 million. The threelargest producers accounted for 83% of the market.

 
| ** **               | ** ** | **Margarine – Domestic Market** | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| ** **               | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Value (US$ Million) |       | 511                                  |       | 479 |   | 363 |   | 353 |   | 419 |   |
| Change %                 |       | 6.7                                  | %          | 31.9 | % | 3.0 | % | (15.9 | )% | (6.4 | )% |
| Volume (Thousand tons)   |       | 286                                  |       | 273 |   | 263 |   | 249 |   | 245 |   |
| Change %                 |       | 4.7                                  | %          | 4.0 | % | 5.4 | % | 1.5 | % | 1.1 | % |

* *

*Source: AC Nielsen*

** **

***Poultry***

*** ***

*DomesticMarket*

* *

The Brazilian poultrymarket is a complex sector where a few large companies share the market withsmall producers. According to ABEF’s 2004 annual report, the four largestchicken producers in Brazil were responsible for 37.62% of the whole Brazilianproduction in 2004. The low concentration in the market increases competitionon whole poultry and parts. Prices are subject to supply and demand imbalances.

 

Many of these smallcompanies operate under low quality standards because of the large number of producersand government difficulties to inspect producers on a regular basis.Additionally, there is widespread belief that tax evasion practices among theseproducers reduce their cost levels as compared to regulated companies in themarket. 

 

After six years of growthin per capita consumption, there was a 3.4% drop during 2003. This situation isexplained by the reduction of average income, due to the decrease in consumers’purchasing power in the period. In 2004 there was an increase of 2.7% in theper capita consumption of chicken meat, the poultry production reached a recordhigh of 8.4 million metric tons , a hike of 10% from the previous year. Most ofthis was due to expressive increases in exports.

 

23

----

 

 

*Source: IBGE(Brazilian Institute of Geography and Statistics Studies) / USDA*

* *

For 2005, USDA expects anincrease of up to 5% in the Brazilian broiler production reaching 8.8 milliontons. This level of production would reflect a higher employment rate andconsumer purchasing power, additional federal funding for social programs tofight hunger and the continued exploitation of AI in Asia and Mad Cow Disease(BSE) in North America.

 

*InternationalMarket*

* *

USDA’s Livestock andPoultry: World Market and Trade Report forecasts a record level of 6.5 milliontons in the broiler meat exports by major exporting countries. The broiler meatimports by major countries are forecasted at 4.2 million tons, an increase of8% from 2004. China, the European Union, Japan, Mexico, Russia and Saudi Arabiaare expected to account for about 75% of the world broiler meat imports.

 

Russia, the worldwideleader in broiler meat imports, is expected to continue expanding its broilerproduction. Even though Russia has seen double digit gains in production thesepast years, in 2005 its broiler meat imports are forecast to grow 3%. 

 

In 2004, Japan’s AIrelated bans on Thailand, China and the United States caused imports to drop by16%, and allowed Brazil to capture 51% of the Japanese import market. USDA doesnot see any indication that Japan will lift AI-related restrictions on Chineseand Thai fresh broiler meat, but agreed to lift its bans on cooked poultrymeat. In 2005, Japanese broiler meat imports are forecasted to have only a slightincrease of 2% from 2004 as bans on imports of fresh poultry from China andThailand continue. USDA forecasts a 2% drop in broiler meat consumption asconsumers shift from broiler to pork meat. This fact had already been seen inthe previous year as Japanese broiler consumption dropped 7%, while porkconsumption rose by 8 %.

 

Just like Japan, USDAforesees only a slight increase of 2% for Saudi Arabia’s broiler meat imports,totaling 443 thousand tons. In 2004, Brazil exported 333 thousand tons of broilermeat to Saudi Arabia, a 15% increase from the previous year, making it the topexporter to this middle-east country. France, the second largest supplier toSaudi Arabia, faced a 26% decline due to declines in French production and thecontinued appreciation of the Euro. 

 

USDA projects that theEuropean Union (EU) broiler meat imports will remain the same in 2005 at 380thousand tons. Most of it is due to domestic production expansion, satisfyingthe growth in domestic demand.

 

In 2005, Chinese broilermeat imports are projected to reach 450 thousand tons, a 150% increase from theprevious year, due to the lifting of the AI related ban on U.S. poultry meat.The United States is the only country that can sell poultry meat products fordirect consumption in China’s retail sector. 

 

24

----

 

Brazilian broiler exportshad an excellent year in 2004. They increased by 26% in volume, reaching 2.4million tons and 44% increase in value, which represents more than US$ 2.6billion dollars. These numbers have consolidated Brazil as the number onebroiler exporter in the world. 

 

The strategy of Brazilianexporters in focusing on higher value products is confirmed by the 20% increaseof the broiler average price, reaching US$ 1,167 per ton.

 

Saudi Arabia was Brazil’slargest single importer in 2004, accounting for 13.72% of all Brazilian broilerexports. Japan followed in second with 13.33%. The EU came in third, with11.46%. Russia was the fourth largest market for Brazilian broiler exportersaccounting for 7.9%. On September 20, 2004 the Russian Government banned allBrazilian meat imports due to a FMD breakout in the Amazon State. This ban waspartially lifted on November 16, 2004 when it allowed exports from the state ofSanta Catarina, the largest broiler exporter state in Brazil and the secondlargest in production. The ban was further lifted on March 2005 when six morestates were allowed to export.

 

In 2004, after Chinabanned broiler meat imports from Thailand, Canada and the United States, totalBrazilian broiler meat exports to China grew by more than 400% to more than 60thousand tons.

 
| ** **     | ** ** | **Brazilian Broiler Exports – Volume Destination  (Thousand tons)** | ** ** |
|----------------|------------|--------------------------------------------------------------------------|------------|
| ** **     | ** ** | **2004**                                                                 | ** ** | **2003** | ** ** | **Var. 04/03 (%)** | ** ** |
| European Union |       | 278                                                                      |       | 308 |   | (10 | ) |
| Middle East    |       | 750                                                                      |       | 614 |   | 22 |   |
| Mercosul       |       | 1                                                                        |       | 8 |   | (90 | ) |
| África    |       | 181                                                                      |       | 121 |   | 49 |   |
| Ásia      |       | 628                                                                      |       | 460 |   | 37 |   |
| Russia         |       | 192                                                                      |       | 202 |   | (5 | ) |
| Others         |       | 395                                                                      |       | 210 |   | (89 | ) |
| **Total**      | ** ** | **2,425**                                                                | ** ** | **1,922** | ** ** | **26** | ** ** |

* *

*Source: Adapted from ABEF – 2004 Annual Report*

* *

USDA’s Livestock andPoultry: World Market and Trade Report projects an increase of 6% in Brazilianbroiler exports. However, the USDA’s Global Agriculture Information Network(GAIN) Report for Brazil also indicates that the major constraints that couldadversely affect Brazilian broiler production and exports in 2005 would be theappreciation of the *real*, andhigher interest rates combined with higher production costs which would lead toa decrease in the producer’s profit margins.

 

In contrast to the localmarket, poultry export business in Brazil has grown rapidly since the mid 90’s.This can be explained by the production shift of large Brazilian companies’exports, as well as by the competitiveness of Brazilian poultry. Recentsanitary problems in the main producing countries such as the BSE cases inEurope, AI problems in Thailand and both BSE and AI cases in the United Stateshave changed the world broiler trade framework. The reduced competition frommajor exporting countries affected by sanitary issues and the competitive costof Brazilian poultry meat favors Brazil as the most competitive exporter ofquality poultry cuts and mechanically de-boned chicken meat. Additionally,several new markets in Europe, Africa and the Middle East have opened toBrazilian chicken, and the number of markets which Brazil has access to hasrisen from 122 to 134 in 2004, according to ABEF’s 2004 annual report.

 
| ** **      | ** ** | **World Broiler Balance (Thousand tons)** | ** ** |
|-----------------|------------|-------------------------------------------|------------|
| ** **      | ** ** | **2004(p)**                               | ** ** | **2005(f)** | ** ** |
| ** **      | ** ** | **Production**                            | ** ** | **Consumption** | ** ** | **Exports** | ** ** | **Production** | ** ** | **Consumption** | ** ** | **Exports** | ** ** |
| United States   |       | 15,285                                    |       | 13,087 |   | 2,163 |   | 15,762 |   | 13,524 |   | 2,279 |   |
| Brazil          |       | 8,408                                     |       | 5,957 |   | 2,451 |   | 8,830 |   | 6,235 |   | 2,595 |   |
| European Union  |       | 7,640                                     |       | 7,196 |   | 824 |   | 7,720 |   | 7,270 |   | 830 |   |
| China           |       | 9,860                                     |       | 9,799 |   | 241 |   | 9,990 |   | 10,190 |   | 250 |   |
| Japan           |       | 1,124                                     |       | 1,708 |   | — |   | 1,130 |   | 1,734 |   | — |   |
| Other           |       | 13,243                                    |       | 15,509 |   | 469 |   | 11,781 |   | 16,366 |   | 553 |   |
| **World Total** | ** ** | **55,560**                                | ** ** | **53,256** | ** ** | **6,148** | ** ** | **57,481** | ** ** | **55,319** | ** ** | **6,507** | ** ** |

* *

*Source:Livestock and Poultry: World Market and Trade – April 2005, USDA, BroilerSummary Selected Countries*

 

----

*(p)preliminary (f) forecast*

 

25

----

 
| ** **           | ** ** | **World Broiler Imports  (Thousand tons)** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2004(p)**                                | ** ** | **2005(f)** | ** ** |
| Russia               |       | 930                                        |       | 960 |   |
| Japan                |       | 582                                        |       | 595 |   |
| European Union       |       | 380                                        |       | 380 |   |
| Saudi Arabia         |       | 435                                        |       | 443 |   |
| China                |       | 180                                        |       | 450 |   |
| Hong Kong            |       | 244                                        |       | 200 |   |
| United Arab Emirates |       | 180                                        |       | 182 |   |
| Other Countries      |       | 994                                        |       | 1,027 |   |
| **World Total**      | ** ** | **3,925**                                  | ** ** | **4,237** | ** ** |

* *

*Source:Livestock and Poultry: World Market and Trade – April 2005, USDA, BroilerSummary Selected Countries*

* *

----

*(p)preliminary (f) forecast*

 

***Pork***

** **

*Domestic Environment*

* *

Processing companies aresubject to the same problems of those in the poultry market, unfair competitionwith small and low quality producers . Although these problems influenceproduct quality, there is still very low perception by part of the populationof the risks involved and price dumping is broadly practiced. According toABIPECS 2004 annual report, the four largest pork producers in Brazil wereresponsible for 30.86% of the whole Brazilian production in 2004.

 

* *

*Source:ABIPECS*

* *

Brazilian pork breedingand slaughtering is increasing its productivity efficiency year after year.Measured by the average birth rate of piglets, productivity doubled since the1970’s, the birth rate reached 24 animals per female and at 160 days old,animals weigh 100 kg in average, ready to be slaughtered. Research has alsocontributed to reduce fat by 31%, cholesterol by 10% and calories by 14% inpork produced in Brazil. This enhancement allows for a better productivity ofprime cuts, more meat per carcass as well as more nutritious, and healthiermeat. The following table presents information on production indicators of thesegment in the last five years.

 

26

----

 

USDA forecasts a porkproduction of nearly 2.7 million tons in 2005, which would mean a 3% increasefrom last years’ production. The increase is due to higher demand from bothexport and domestic markets. It is said that the central west region of Brazilgiven last years’ investments be responsible for most of this increase.

** **
| ** **                  | ** ** | **Brazilian Pork Production** | ** ** |
|-----------------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| Sow Number (Thousand)       |       | 2,402                         |       | 2,486 |   | 2,871 |   |
| Slaughtered (Million Heads) |       | 33.9                          |       | 34.5 |   | 37.7 |   |
| Production (Thousand tons)  |       | 2,679                         |       | 2,698 |   | 2,872 |   |
| Exports (Thousand tons)     |       | 508                           |       | 496 |   | 476 |   |
| Imports (Thousand tons)     |       | 2                             |       | 1 |   | 1 |   |

 

*Source:ABIPECS 2004 Annual Report*

* *

Brazilian pork productionhas been decreasing over the last couple of years. In 2004, pork productiondecreased 1.7% due to higher average slaughtering weight. The productionattained about 2.68 million tons, almost the same volume as in 2003. Theproduction wasn’t lower because of the continuation of the expansion in thestates of Mato Grosso and Goiás. From 2002 to 2003 there was a decrease of 6 %in pork production. 

 

As demand levels havebeen decreasing in the last several years, the sales efforts of Brazilianproducers have been oriented to the export market, which accounted for 19% oftotal tons produced in 2004.

 

*InternationalMarket*

* *

The international trade market framework for pork has passed throughsignificant changes since BSE and AI outbreaks appeared in late 2003 and early2004. The change in consumption habits from beef and poultry meat basedproducts to pork meat can positively affect growth in both pork production andconsumption in the near term. Nevertheless, there is an increasing awarenessthat meat trade flows are becoming largely dictated by sanitary conditions andregulations. Exporters worry that market access, driven by trade policy, aswell as veterinary and food safety controls, can become easily susceptible tonon-tariff trade barriers, especially when those controls are not based ontechnical criteria. Within this very uncertain environment, exporting countriesare trying to maintain a competitive position in lucrative markets. At the sametime, importing countries are seeking to ensure fairness for their domesticproducers, while also safeguarding the health and economic needs of theirconsumers. 

 

Pork production in China,EU and United States is expected to be slightly less than 80 million tons in2005. It is forecasted that these three nations will be responsible for 86% ofproduction in major producing countries, which is projected to be nearly 94 milliontons.

 

USDA forecasts world porkexports by major exporting countries to have an increase of 2% in 2005,reaching a record of 4.6 million tons. It also predicts that the EU, thelargest exporter, will see a slight decrease in total exports from nearly 1.35million tons in 2004 to 1.3 million in 2005. The United States will maintainits position as the second largest exporter in 2005, reaching exports of nearlyone million tons in 2005. 

 
| ** **     | ** ** | **World Pork Balance (Thousand tons)** | ** ** |
|----------------|------------|----------------------------------------|------------|
| ** **     | ** ** | **2004 (p)**                           | ** ** | **2005 (f)** | ** ** |
| ** **     | ** ** | **Production**                         | ** ** | **Consumption** | ** ** | **Exports** | ** ** | **Production** | ** ** | **Consumption** | ** ** | **Exports** | ** ** |
| China          |       | 47,350                                 |       | 47,038 |   | 383 |   | 49,675 |   | 49,325 |   | 450 |   |
| European Union |       | 21,200                                 |       | 19,900 |   | 1,350 |   | 21,100 |   | 19,825 |   | 1,300 |   |
| United States  |       | 9,312                                  |       | 8,818 |   | 988 |   | 9,364 |   | 8,869 |   | 1,036 |   |
| Brazil         |       | 2,600                                  |       | 1,979 |   | 621 |   | 2,670 |   | 2,030 |   | 640 |   |
| Russia         |       | 1,725                                  |       | 2,199 |   | 1 |   | 1,760 |   | 2,259 |   | 1 |   |
| Japan          |       | 1,271                                  |       | 2,570 |   | — |   | 1,260 |   | 2,613 |   | — |   |
| Other          |       | 7,798                                  |       | 8,139 |   | 1,103 |   | 7,723 |   | 8,153 |   | 1,525 |   |
| **World**      | ** ** | **91,256**                             | ** ** | **90,643** | ** ** | **4,446** | ** ** | **93,552** | ** ** | **93,074** | ** ** | **4,556** | ** ** |

* *

*Source:Livestockand Poultry: World Market and Trade – April2005, , USDA, Pork Summary SelectedCountries*

* *

----

*(p)preliminary (f) forecast*

 

27

----

 

According to USDA, globalpork exports are forecasted to increase 2.5% in 2005 reaching a record high of4.6 million tons. 

 

Japan is expected toremain as the world’s largest pork importer in 2005, importing over 1.3 milliontons, slightly above the previous year. The top five suppliers of pork to Japanin 2004 were Canada, Chile, China, Denmark, and the United States. In 2004,Japan signed a Free Trade Agreement (FTA) with Mexico, which will beimplemented starting in April 2005. Therefore an increase in Japanese porkimports from Mexico is expected. 

 

Despite USDA having forecasted a growth of about 2% in Russian domesticpork production, imports are expected to increase 5% in 2005 to 500 thousandtons. Imports of pork decreased 23% in 2004 as compared to 2003, due to severalfactors: a temporary ban on Brazilian pork due to food and mouth diseaseproblems (FMD), rising pork import prices, and problems with Russia’sadministration of its TRQ regime. 

 
| ** **      | ** ** | **World Pork Imports  (Thousand tons)** | ** ** |
|-----------------|------------|-----------------------------------------|------------|
| ** **      | ** ** | **2004(p)**                             | ** ** | **2005 (f)** | ** ** |
| Japan           |       | 1,302                                   |       | 1,325 |   |
| United States   |       | 499                                     |       | 542 |   |
| Russia          |       | 475                                     |       | 500 |   |
| Mexico          |       | 458                                     |       | 495 |   |
| Hong Kong       |       | 332                                     |       | 335 |   |
| South Korea     |       | 220                                     |       | 260 |   |
| Canada          |       | 105                                     |       | 100 |   |
| China           |       | 71                                      |       | 100 |   |
| Other Countries |       | 332                                     |       | 347 |   |
| **World Total** | ** ** | **3,794**                               | ** ** | **4,004** | ** ** |

* *

*Source:Livestockand Poultry: World Market and Trade – April2005, USDA, Pork Summary SelectedCountries*

* *

----

*(p)preliminary (f) forecast*

* *

In the beginning of 2005, the Russian government published theresolutions that renew the poultry quota and beef and pork tariff rate quotas(TRQs) for 2005. The Russian TRQ establishes country specific quotas for theEU, Paraguay, United States and a general quota for all other countries. In2004, difficulties with Russia’s licensing administration kept quotaallocations from being filled. USDA expects similar problems in 2005. Asprocessed pork is not under the TRQ, imports of this kind of meat pork haveincreased. 

 
| ** **     | ** ** | **Russian Pork TRQ 2005 (Thousand tons)** | ** ** |
|----------------|------------|-------------------------------------------|------------|
|           |       |                                      |       |
| European Union |       | 236                                       |       |
| United States  |       | 54                                        |       |
| Paraguay       |       | 1                                         |       |
| Other          |       | 177                                       |       |
| **Total**      | ** ** | **467**                                   | ** ** |

* *

*Source:GOR Resolutions at GAIN Report USDA – February 2005*

* *

Hong Kong pork importsare forecasted to grow by 1% in 2005. Hong Kong pork imports have usually twoends, consumption and smuggled shipments to China. However, China isundertaking measures to combat smuggling through Hong Kong, which could lead toa decrease in Hong Kong’s pork imports. Hong Kong prohibits imports of freshpork from China but is working on a protocol that would allow imports ofChinese chilled pork that could create greater competition with other pork suppliers.

 

Brazilian pork meatexports broke a new record in 2004. Sales of US$ 774 million, an increase of40.5% as compared to 2003. Shipments amounted to 507.7 thousand tons, anincrease of 2.4% as compared to 2003. Brazil has been increasingly shifting exportsto higher valued pork cuts and these products now compromise 75% of exports. 

 

From total Brazilian porkproduction volume in 2004, 19% was exported. Russia accounted for more than 57%of this volume. Under the 2005 Russian quota system, Brazilian pork will stillcompete for a share of the 177 thousand

 

28

----

 

tons quota reserved for “othercountries”, a considerably lower amount as compared to the 288 thousand tonsshipped in 2004. 

 

Hong Kong was the secondlargest destination of Brazilian pork meat accounting for 11% of all shipments.

 

In 2004 exports toUkraine increased an impressive 33,760% reaching 33 thousand tons, making itthe third largest market for Brazilian pork exports.

 
| ** **       | ** ** | **Brazilian Pork Exports** | ** ** |
|------------------|------------|----------------------------|------------|
| ** **       | ** ** | **Thousand tons**          | ** ** | **Thousand US$** | ** ** |
| ** **       | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Destinations** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Russia           |       | 288.1                      |       | 57 | % | 313.9 |   | 63 | % | 449,339 |   | 58 | % | 351,627 |   | 64 | % |
| Hong Kong        |       | 57.9                       |       | 11 | % | 60.7 |   | 12 | % | 72,110 |   | 9 | % | 61,444 |   | 11 | % |
| Others           |       | 48.8                       |       | 10 | % | 39.3 |   | 8 | % | 75,140 |   | 10 | % | 40,447 |   | 7 | % |
| Ukraine          |       | 32.5                       |       | 6 | % | 96 |   | 0 | % | 52,024 |   | 7 | % | 78 |   | 0 | % |
| Argentina        |       | 28.2                       |       | 6 | % | 38.5 |   | 8 | % | 45,173 |   | 6 | % | 45,499 |   | 8 | % |
| Singapore        |       | 16.3                       |       | 3 | % | 15.3 |   | 3 | % | 27,076 |   | 3 | % | 21,978 |   | 4 | % |
| South Africa     |       | 12.4                       |       | 2 | % | 8.2 |   | 2 | % | 17,696 |   | 2 | % | 8,757 |   | 2 | % |
| Uruguai          |       | 9.6                        |       | 2 | % | 9.7 |   | 2 | % | 12,494 |   | 2 | % | 9,752 |   | 2 | % |
| Albania          |       | 5.2                        |       | 1 | % | 3.8 |   | 1 | % | 8,251 |   | 1 | % | 4,412 |   | 1 | % |
| Bulgaria         |       | 5                          |       | 1 | % | 2.3 |   | 0 | % | 9,014 |   | 1 | % | 2,987 |   | 1 | % |
| Georgia          |       | 3.6                        |       | 1 | % | 4 |   | 1 | % | 5,733 |   | 1 | % | 3,856 |   | 1 | % |
| **Total**        | ** ** | **507.7**                  | ** ** | **100** | **%** | **495.8** | ** ** | **100** | **%** | **774,050** | ** ** | **100** | **%** | **550,837** | ** ** | **100** | **%** |

* *

*Source:ABIPECS – Em Foco Dezembro 2004*

* *

**C.Organizational Structure**

** **

See Item 4. CompanyOverview – Group Structure.

 

**D.Property, Plant and Equipment**

** **

In 2004, the Companyoperated twelve plants, which include eight units for poultry production, fiveunits for pork, ten units for animal feed, two units for crushing of soybeansand eight units for processed products. Some plants are multi-operational,including several integrated activities. The Company has sixteen distributionand commercial centers and nine representative offices and distribution centersabroad.

 

**OperatingUnits**

** **

The table below listsSadia’s operating units and its principal activities:

 
| **State** | ** ** | **City**           | ** ** | **Address**                                                                        | ** ** | **Principal activity**                                                                   |
|-----------|------------|--------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|
| **MG**    |       | Uberlândia    |       | Avenida Cel. Jose Teófilo Carneiro 1001  Rua Francisco Bernardes de Assis 200 |       | Raising and slaughtering chickens, turkeys and hogs, processed  products and animal feed |
| **MT**    |       | Várzea Grande |       | Alameda Júlio Muller, 1850                                                    |       | Raising and slaughtering chickens, processed products and animal feed                    |
| **PR**    |       | Dois Vizinhos      |       | Avenida Paraná 2323                                                           |       | Raising and slaughtering chickens; animal feed and crushing of  soybean.                 |

 

29

----

 
| **PR** |   | Francisco Beltrão |   | Avenida Attílio Fontana, s/no, Km 4                              |   | Raising and slaughtering chickens and turkeys and animal feed                            |
|--------|--------|------------------------|--------|----------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|
| **PR** |   | Toledo                 |   | Avenida Senador Atílio Fontana, 4040                                  |   | Raising and slaughtering chickens and hogs; processed products; animal  feed and soy oil |
| **PR** |   | Ponta Grossa           |   | Rua Leopoldo Froes, 1001                                                   |   | Pizzas and pasta, Miss Daisy, processed products                                         |
| **PR** |   | Paranaguá         |   | Avenida Senador Attílio Fontana, 1501 –  Colônia Santa Rita |   | Margarine                                                                                |
| **RJ** |   | Duque de Caxias        |   | Estrada Venâncio PereiraVeloso, 1479                                  |   | Processed products                                                                       |
| **RS** |   | Três Passos       |   | Rua José Bonifácio, 300                                          |   | Raising and slaughtering hogs and animal feed                                            |
| **SC** |   | Chapecó           |   | Avenida Senador Attílio Fontana, 600E                                 |   | Raising and slaughtering chickens and turkeys, animal feed and  processed products       |
| **SC** |   | Concórdia         |   | Rua Senador Attílio Fontana, 86                                       |   | Raising and slaughtering chickens and hogs, processed products and  animal feed          |
| **MT** |   | Campo Verde            |   | Avenida Senador Attílio Fontana 1800                                  |   | Animal feed                                                                              |

 

**Distributionand Commercial Centers**

** **

The table below listsSadia’s distribution and commercial centers and the corresponding region ofactivity:

 
| **State** | ** ** | **City**           | ** ** | **Address**                                                                                                     | ** ** | **Region of Activity** |
|-----------|------------|--------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|------------------------|
| **AM**    |       | Manaus             |       | Bairro  Chapada - Manaus – AM. Avenida Djalma Batista 1019, CEP: 69050-010                                 |       | North Region           |
| **BA**    |       | Salvador           |       | Granjas  Rurais Presidente Vargas, s/n° - Km 5,5, Trevo 32. Bairro Campinas de Pirajá  CEP: 41290-000 |       | Northeast Region       |
| **CE**    |       | Fortaleza          |       | Anel  Viário de Fortaleza, km 8,2, Pajuçara, Maracanaú                                           |       | Northeast Region       |
| **DF**    |       | Brasília      |       | SIA  33 - lote 150/200 CEP: 71200-030                                                                           |       | Federal District       |
| **MG**    |       | Belo Horizonte     |       | Rua  das Canárias, 223 - Bairro Jardim Atlântico   CEP: 31560-050                                |       | Southeast Region       |
| **MS**    |       | Campo Grande       |       | Rodovia  BR 163, km 04, n° 6689 - Cidade Morena - Zona Rural, CEP: 79064-000                               |       | Central region         |
| **MT**    |       | Várzea Grande |       | Alameda  Júlio Müller, 1650 Bairro Porto Velho - Várzea Grande                                   |       | Central Region         |
| **PA**    |       | Belém         |       | Rua  dos Pariquis, 2999 - Cremação – Belém                                                  |       | North Region           |

 

30

----

 
| **PE** |   | Recife         |   | Avenida  Vinte de Janeiro, 958- Bairro Boa Viagem                                          |   | Northeast Region                                 |
|--------|--------|----------------|--------|--------------------------------------------------------------------------------------------|--------|--------------------------------------------------|
| **PR** |   | Curitiba       |   | Rua  Carneiro Lobo, 468 - 4o andar Batel - CEP: 80240-240                             |   | South Region                                     |
| **RJ** |   | Rio de Janeiro |   | Avenida  Dona Tereza Cristina, 1478 Bairro Capivari - Duque de Caxias - RJ CEP:  25243-620 |   | Southeast Region                                 |
| **RS** |   | Porto Alegre   |   | Rua  Paul Zivi, 400 Bairro Jardim, São Pedro - CEP: 91040-240                         |   | South Region                                     |
| **SC** |   | Itajaí    |   | Rua  Otto Hoier, 134 São Vicente - CEP: 88308-100                                     |   | South Region                                     |
| **SP** |   | São Paulo |   | Rua  Fortunato Ferraz, 529/659 - Vila Anastácio                                       |   | Southeast Region                                 |
| **SP** |   | Jundiaí   |   | Avenida.  José Benatti, s/no, Gleba 3 CEP: 013213-085 – Jundiaí, SP         |   | Southeast Region and São Paulo State Region |
| **ES** |   | Vitória   |   | Rodovia.  Civit II - Distrito Carapina - Serra - ES                                        |   | Southeast Region                                 |

 

**Environmentalissues affecting the Company’s activities**

** **

As a poultry and hoglivestock and slaughtering company, Sadia’s activity impacts on environmentalissues, especially related to water resources pollution, animal treatment anddeforestation. However, the Company takes all measures to comply with theBrazilian environmental regulations. 

 

As a way of ensuring thesustainability of its activities, Sadia has strict policies for reducingconsumption of water and uses biomass to substitute fuel oil and gas togenerate thermal energy. All its units have water resources treatmentfacilities to avoid the contamination of water tables and rivers near theunits. The Company also strictly supervises the activities taken by the poultryand hog out growers. The Company has a program for being self sufficient infirewood, maintaining legal forest reserves for all of its manufacturing units.These areas total 17 thousand hectares and supply 65% of the Company’s firewoodrequirements.

 

TheCompany utilizes firewood in its productive process under the Brazilianenvironmental legal requirements and authorized by the IBAMA (Instituto Brasileirodo Meio Ambiente e dos Recursos Naturais Renovaveis), the BrazilianEnvironmental and Renewable Natural Resources Institute.  This firewood comes from the Company’s ownedforest land and from third parties, and is used as fuel to warm up the boiler.

 

The onlyenvironmental requirement for Sadia related to its owned forest land is tomaintain at least 20% of the Company’s forest land as native forest.  Sadia is in compliance with such requirement.

 

Moreover,the Company has a program for being self sufficient in firewood, maintainingforest land for all of its manufacturing units. These areas total 17 thousand hectares and supply 65% of the Company’scurrent firewood requirements.

 

## ***ITEM 5***. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

## *** ***

The following discussionshould be read in conjunction with the Company’s consolidated financialstatements and notes thereto, and other financial information includedelsewhere in this annual report.

 

**Company-related Factors**

** **

Sadia has implemented thefollowing measures as a way to simplify its administrative and corporatestructure and improvement of tax efficiencies:

 

***Corporate Reorganization***

*** ***

In July 1998, SadiaConcórdia S.A. was merged into Sadia Frigobrás S.A., and changed its name, sothat all of the operational activities of the organization were consolidatedinto a single public company: Sadia. The initiative resulted from a gradualprocess of corporate reorganization with a view to simplifying its structureand improving economies of scale, through the reduction of administrative andtax costs.

 

***Organizational Structure***

*** ***

In 2000, the Companyorganized its activities in three macro processes so as to create demand, toreach demand and manage the Company, in order to simplify structures andachieve higher efficiency in the decision making

 

31

----

 

process, aiming at astronger synergy with the marketing and international areas. Implemented in thesecond half of 2000, this change continues to have a positive impact on the mixof products traded in the domestic market, hence increasing profitability.

 

**Discussionon Critical Accounting Policies**

** **

Critical accountingpolicies are those that are considered important, complex or subjective by theCompany’s management to the understanding of the Company’s financial conditionand results, as well as estimates about the effect of matters that areuncertain. To provide an accurate understanding about how the Company’smanagement interprets these variables, considering future events, the nextparagraphs will present and discuss these critical accounting policies:

 

***Allowance for Doubtful Accounts***

*** ***

The collectibility of theaccounts receivable is based on a combination of factors. In circumstanceswhere management is aware of a specific customer’s inability to meet itsfinancial obligations, a specific allowance against amounts due is recorded toreduce the net recognized receivable to the amount that is likely to becollected. In addition, an allowance is recorded based on the length of timereceivables are past due and historical experiences.

 

***Inventory***

*** ***

At December 31, 2004, theCompany’s inventory amounted to R$1,176.5 million, with an average turnover of99 days (87days in 2003). The main reasons for the variance were the increasein the livestock and poultry ready to be slaughtered as well as moreinventories of finished goods. The Company updates its inventories on a monthlybasis due to the large number of items that are maintained. Grain inventoriespolicies involve anticipated purchases on an average of 100 days with theobjective of reducing commodity market impacts on costs. Inventories are statedat lower of cost or market using the average cost method.

 

***Impairment of Long-Lived Assets***

*** ***

The Company is requiredto assess potential impairments to its long lived assets, which are primarilyproperty, plant and equipment. If impairment indicators are present, theCompany must measure the fair value of the assets in accordance with SFAS 144 “Accountingfor the Impairment of Disposal of Long Lived Assets” to determine ifadjustments are to be recorded.

 

***Contingencies***

*** ***

The Company is party tocertain legal proceedings arising in the normal course of business and isrequired to assess the likelihood of any adverse judgments or outcomes to thesematters as well as potential ranges of probable losses. A determination of theamount of reserves required for these contingencies are made after considerableanalysis of each individual issue. These reserves may change in the future dueto changes in the Company’s assumptions, the effectiveness of strategies orother factors beyond the Company’s control.

 

***Deferred Tax Assets***

*** ***

As of December 31, 2004,the Company had approximately R$76.9 million of net deferred tax assets.

 

The realization of thisasset is based upon estimates of future taxable income. In preparing estimatesof future taxable income, the Company used the same assumptions and projectionsused in its internal three year forecasts. Based on these projections, theCompany estimates that the loss carry forwards will be fully utilized withinthree years. For more information see Note 16 of the Company’s ConsolidatedFinancial Statements.

 

***PensionPlan***

*** ***

The Company accounts forits defined benefit pension plan in accordance with SFAS No. 87, which requiresthat amounts recognized in financial statements be determined on an actuarialbasis. A substantial portion of the Company’s pension amounts relate to itsdefined benefit plan. SFAS No. 87 and the policies used by the Company, notablythe use of a calculated value of plan assets (which is further describedbelow), generally reduced the volatility of pension income (expense) fromchanges in pension liability discount rates and the performance of the pensionplan’s assets.

 

32

----

 

Themost significant element in determining the Company’s pension income (expense)in accordance with SFAS No. 87 is the expected return on plan assets. Thecompany has assumed that the expected long-term rate of return on plan assetswill be 12.4%. The assumed long-term rate of return on assets is applied to acalculated value of plan assets, which recognizes changes in the fair value ofplan assets in a systematic manner over every year. This produces theexpected return on plan assets that is included in pension income (expense).The difference between this expected return and the actual return on planassets is deferred. The net deferral of past asset gains (losses) affects thecalculated value of plan assets and, ultimately, future pension income(expense).

 

Atthe end of each year, the Company determines the discount rate to be used todiscount plan liabilities. The discount rate reflects the current rate at whichthe pension liabilities could be effectively settled at the end of the year.The Company considers a conservative position to estimate this rate, based onfuture expected salary increases and life expectancy of participants. AtDecember 31, 2004, the Company determined this rate to be 11.3%.

 

***Recently Issued Accounting Standards***

*** ***

In December 2004, theFASB issued FASB Statement No. 123 (revised 2004), share-based payment, whichaddresses the accounting for transactions in which an entity exchanges itsequity instruments for goods or services, with a primary focus on transactionsin which an entity obtains employee services in share-based paymenttransactions. This statement is a revision to Statement 123 and supersedes APBOpinion No. 25, Accounting for Stock Issued to Employees, and its relatedimplementation guidance. This statement will be effective for the Company as ofJanuary 1, 2006.

 

In December 2004, theFASB issued FASB Statement No.151, inventory costs, which clarifies theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage). Under this statement, such items will berecognized as current period charges. In addition, the statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. This statement will beeffective for the Company for inventory costs incurred on or after January 1,2006.

 

In December 2004, theFASB issued FASB Statement No. 153, exchanges of non-monetary assets, whicheliminates an exception in APB 29 for non-monetary exchanges of similarproductive assets and replaces it with a general exception for exchanges ofnon-monetary assets that do not have commercial substance. This statement willbe effective for the Company for non-monetary asset exchanges occurring on orafter January 1, 2006.

 

In March 2005, the FASBissued FIN 47, “Accounting for Conditional Asset Retirement Obligations, aninterpretation of FASB Statement No.143” (“FIN 47”), which requires an entityto recognize a liability for the fair value of a conditional asset retirementobligation when incurred if the liability’s fair value can be reasonablyestimated. FIN47 is effective for fiscal years ending after December15, 2005.

 

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”)which replaces Accounting Principles Board Opinions No. 20 “Accounting Changes”and SFAS No.3, “Reporting Accounting Changes in Interim Financial Statements—AnAmendment of APB Opinion No.28.” SFAS 154 provides guidance on the accountingfor and reporting of accounting changes and error corrections. It establishesretrospective application, or the latest practicable date, as the requiredmethod for reporting a change in accounting principle and the reporting of a correctionof an error. SFAS 154 is effective for accounting changes and corrections oferrors made in fiscal years beginning after December15, 2005.

 

**BrazilianEconomic Environment**

** **

Sadia’s results ofoperations and its financial condition are dependent on Brazil’s generaleconomic condition and particularly on (i) economic growth and inflation andtheir impact on people’s purchasing power, (ii) financing costs and theavailability of financing, and (iii) exchange rates between Brazilian andforeign currencies. The following table sets forth Brazilian Gross DomesticProduct (GDP) growth, inflation and the devaluation of Brazilian currencyagainst the U.S. dollar and interest rate changes for the periods shown.

 

33

----

 
| ** **                      | ** ** | **Selected Economic Indicators (%)** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Real GDP growth (1)             |       | 5.20                                 |       | (0.20 | ) | 1.54 |   | 1.51 |   | 4.20 |   |
| Inflation (2)                   |       | 12.41                                |       | 8.71 |   | 38.32 |   | 10.38 |   | 9.95 |   |
| Nominal Exchange Rate Variation |       | (8.13                                | )          | (18.20 | ) | 52.27 |   | 19.15 |   | 9.30 |   |
| Real Interbank Rate (3)         |       | 5.35                                 |       | 7.56 |   | (13.49 | ) | 8.64 |   | 5.77 |   |

 

----

*(1) Source: IBGE*

*(2) Source: IGP-M, as publishedby the Fundação Geúulio Vargas*

*(3) CDI (Interbank Rate) – IGP-Minflation rate); Source: Bloomberg*

* *

The Brazilianeconomy has been affected by interventions on the part of the government, whichhas made repeated changes in its monetary, credit, tariff and other policies,in order to influence the direction of the national economy. The changes inpolicies involving foreign exchange and tax rates could have a significantimpact on the Company’s business and its operating results, in the same way asinflation, currency devaluation, social instability and other political,economic and diplomatic issues, and the reaction of the Brazilian government tothese issues.

 

***Inflation and Real Plan Effects***

*** ***

Inflation hastraditionally had a negative effect on the Brazilian economy in general in pastyears, and on the profitability and operating results of the Company inparticular. In an attempt to control inflation, the government has at timesimposed wage and price controls, and reduced its spending. Inflation and themeasures adopted by the government, combined with public speculation about itsfuture decisions, have also contributed to periods of uncertainty in theeconomy, as well as to increased volatility in the Brazilian securitiesmarkets. In addition, the government’s desire to control inflation and reducebudget deficits may cause it to make actions that slow Brazilian economicgrowth.

 

After the implementationof the *Real* Plan, which was basedon an exchange rate anchor (*reais*x U.S. dollar), inflation rates declined and stabilized at low levels. This neweconomic environment increased the purchasing power of part of the population,which were used to high inflation levels and did not have access to financialinstruments to reduce their monetary losses due to high inflation. Consumergoods and income experienced a growth and credit availability increased.According to the IGP- M Brazilian inflation amounted to 868.30% in 1994, 15.25%in 1995, 9.20% in 1996, 7.74% in 1997, 1.78% in 1998, 20.1% in 1999, 9.95% in2000, 10.38% in 2001, 38.32% in 2002 8.71% in 2003 and 12.41% in 2004.

 

***Exchange Rate Effects***

*** ***

From March 1995 untilJanuary 1999, the Brazilian Central Bank managed a semi-fixed exchange ratepolicy based on the establishment of an annual exchange rate fluctuation targetat the beginning of each year, setting both a wide limit or “band”, and a muchnarrower band, in order to effect a gradual devaluation by means of thisexchange rate band system. The Central Bank bought or sold U.S. dollars in themarket in order to ensure that the exchange rate remained within establishedlimits.

 

In an attempt to stem theincreasing capital outflows and concerns about the commitment of certain stategovernments to the fiscal austerity proposal, on January 13, 1999, Brazilianmonetary authorities halted their intervention to maintain the previous systemof exchange rate bands underpinned by a specific rate and allowed the *real*’s value to be determined by the foreign exchangemarkets, intervening only to limit wide swings in the value of the currency.

 

Since then, the exchangerate market has been operating under a floating rate regime and the CentralBank has implemented an inflation target policy, using local interest rates toadjust demand. A resulting negative side-effect of this policy can be reflectedin high interest rate levels, increasing cost of capital to the Company andraising uncertainty in the financial markets about the capacity of Brazil topay its debts, increasing the sovereign risk. A floating exchange rate can alsobe pressured by the deterioration of these fundamentals, affecting dollarrelated price references, which has the negative effect of contaminating localprices and causing reduction in consumption and a decrease in GDP growth.

 

Although the Company uses*reais* as its functional currency, arelevant portion of its assets, liabilities and revenues are dollardenominated. In December 2004, R$ 3,392.7 million (47.7%) of the Company’sgross revenues were mainly collected in U.S. dollars, coming from exportproceeds; R$ 1,257.3 million of its assets were dollar denominated, mainlyattributable to bank and government debt securities, cash and accountsreceivable from foreign

 

34

----

 

market clients. TheCompany’s total debt subject to exchange rate variation amounted to R$ 1,744.7million at December 31, 2004.

 

The devaluation of the *real* influences the amount available fordistribution to the Company’s shareholders when measured in U.S. dollars.Considering that the Company has subsidiaries abroad, the volatility of the *real* creates foreign exchange gains andlosses, which are included in the Company’s foreign currency exchange gain(loss), net account in results of operations. In 2004, on a consolidated basis,the Company recorded foreign exchange gain (including gains from foreigncurrency swaps) of R$ 72.7 million.

 

**A.Operating Results**

** **

The following tablesummarizes certain selected financial data of the Company’s statements ofincome, expressed as percentages of net operating revenue, for the years asshown.

 
| ** **                            | ** ** | **Financial Statements  (% of Net Operating Revenues)** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                            | ** ** | **2004**                                                | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net operating revenue                 |       | 100.0                                                   |       | 100.0 |   | 100.0 |   |
| Cost of goods sold                    |       | (70.2                                                   | )          | (72.7 | ) | (70.1 | ) |
| Gross profit                          |       | 29.8                                                    |       | 27.3 |   | 29.9 |   |
|                                  |       |                                                    |       |   |   |   |   |
| Selling expenses                      |       | (18.7                                                   | )          | (18.0 | ) | (20.0 | ) |
| General and administrative expenses   |       | (0.9                                                    | )          | (1.1 | ) | (1.1 | ) |
| Other operating income(expenses), net |       | 0.3                                                     |       | (0.7 | ) | (0.3 | ) |
| Total operating expenses              |       | (19.3                                                   | )          | (19.8 | ) | (21.5 | ) |
|                                  |       |                                                    |       |   |   |   |   |
| Operating income                      |       | 10.4                                                    |       | 7.9 |   | 8.3 |   |

 

The following tablesummarizes certain items of the Company’s statements of income for the years asshown.

 
| ** **                             | ** ** | **Segments Net Operating Revenue** | ** ** |
|----------------------------------------|------------|------------------------------------|------------|
| ** **                             | ** ** | **(Thousand R$)**                  | ** ** |
| ** **                             | ** ** | **2004**                           | ** ** | **2003** | ** ** | **2002** | ** ** |
| Processed products                     |       | 2,764,194                          |       | 2,412,989 |   | 1,818,464 |   |
| Poultry                                |       | 2,986,062                          |       | 2,275,888 |   | 1,907,479 |   |
| Pork                                   |       | 593,345                            |       | 559,578 |   | 478,989 |   |
| Other                                  |       | 35,621                             |       | 43,669 |   | 33,911 |   |
| Adjustments for U.S. GAAP presentation |       | (269,997                           | )          | (210,407 | ) | (99,773 | ) |
| **Total**                              | ** ** | **6,109,225**                      | ** ** | **5,081,717** | ** ** | **4,139,070** | ** ** |

 

35

----

 
| **Depreciation expense**                                                                  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Processed products                                                                        |       | (48,708     | )          | (54,069     | )          | (46,747     | )          |
| Poultry                                                                                   |       | (56,682     | )          | (54,653     | )          | (49,056     | )          |
| Pork                                                                                      |       | (11,003     | )          | (14,565     | )          | (13,309     | )          |
| Other                                                                                     |       | (973        | )          | (961        | )          | (880        | )          |
| Total depreciation expense allocated to Segments                                          |       | (117,366    | )          | (124,248    | )          | (109,992    | )          |
| Depreciation allocated to administrative expenses                                         |       | (12,743     | )          | (12,814     | )          | (12,493     | )          |
| Adjustments for U.S. GAAP presentation                                                    |       | 31,043      |       | 37,801      |       | 30,349      |       |
| **Total depreciation expense**                                                            | ** ** | **(99,066** | **)**      | **(99,261** | **)**      | **(92,136** | **)**      |
| ** **                                                                                | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| **Segment operating income**                                                              | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Processed products                                                                        |       | 274,197     |       | 268,483     |       | 57,618      |       |
| Poultry                                                                                   |       | 260,393     |       | 198,410     |       | 235,217     |       |
| Pork                                                                                      |       | 70,902      |       | 36,593      |       | 39,655      |       |
| Other                                                                                     |       | (3,765      | )          | 8,189       |       | 6,440       |       |
| Adjustments for U.S. GAAP presentation                                                    |       | 33,302      |       | (110,666    | )          | 6,392       |       |
| **Total operating income**                                                                | ** ** | **635,029** | ** ** | **401,009** | ** ** | **345,322** | ** ** |
|                                                                                      |       |        |       |        |       |        |       |
| Interest expense                                                                          |       | (413,461    | )          | (449,408    | )          | (317,719    | )          |
| Interest income and other                                                                 |       | 309,454     |       | 481,609     |       | 263,342     |       |
| Foreign currency exchange gain (loss), net                                                |       | 20,672      |       | 52,833      |       | (40,632     | )          |
| Adjustments for U.S. GAAP presentation                                                    |       | 35,428      |       | (14,512     | )          | 46,417      |       |
| **Income before income taxes, equity income or  loss of investees and minority interest** | ** ** | **587,122** | ** ** | **471,531** | ** ** | **296,730** | ** ** |

 
| ** **                               | ** ** | **Consolidated Assets (Thousand R$)** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Segment assets**                       |       |                                  |       |   |   |   |   |
| Processed products                       |       | 491,982                               |       | 449,860 |   | 468,610 |   |
| Poultry                                  |       | 380,708                               |       | 348,312 |   | 362,567 |   |
| Pork                                     |       | 108,060                               |       | 109,750 |   | 124,222 |   |
| Other                                    |       | 76,910                                |       | 49,535 |   | 54,537 |   |
| Adjustments for U.S. GAAP presentation   |       | (110,485                              | )          | (128,454 | ) | (149,866 | ) |
| **Total property, plant and equipment**  | ** ** | **947,175**                           | ** ** | **829,003** | ** ** | **860,070** | ** ** |
|                                     |       |                                  |       |   |   |   |   |
| **Reconciling items - corporate assets** |       |                                  |       |   |   |   |   |
| Cash and cash equivalents                |       | 2,406,125                             |       | 2,610,961 |   | 2,315,136 |   |
| Accounts and notes receivable, net       |       | 349,605                               |       | 453,936 |   | 374,708 |   |
| Inventories                              |       | 1,172,736                             |       | 920,564 |   | 877,366 |   |
| Other corporate assets                   |       | 739,691                               |       | 544,748 |   | 639,369 |   |
| Adjustments for U.S. GAAP presentation   |       | 105,156                               |       | 661,787 |   | (240,888 | ) |
| **Total consolidated assets**            |       | **5,830,973**                         | ** ** | **6,149,453** | ** ** | **4,975,627** | ** ** |

 

36

----

 
| **Capital  Expenditures (Thousand R$)** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
|-----------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Processed products                      |       | 93,220      |       | 45,056      |       | 48,419      |       |
| Poultry                                 |       | 91,179      |       | 43,799      |       | 37,498      |       |
| Pork                                    |       | 9,759       |       | 5,709       |       | 17,960      |       |
| Other                                   |       | 52,286      |       | 15,656      |       | 17,475      |       |
| Adjustments for U.S. GAAP presentation  |       | (7,340      | )          | (4,470      | )          | (9,230      | )          |
| **Total segment capital expenditures**  | ** ** | **239,104** | ** ** | **105,750** | ** ** | **112,122** | ** ** |

 

The information above has been prepared and presented in accordancewith Brazilian GAAP that is adjusted for U.S. GAAP presentation. Refer to Note19 to consolidated financial statements for details on primary differencesbetween Brazilian GAAP and U.S. GAAP.

 

The following table setsforth components of the Company’s cost of goods sold, expressed in percentage,for the years as shown.

 
| ** **                   | ** ** | **Composition of Cost  of Goods Sold (%)** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|
| ** **                   | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Raw Materials                |       | 78                                         |       | 78 |   | 76 |   |
| Labor                        |       | 12                                         |       | 11 |   | 12 |   |
| Depreciation                 |       | 2                                          |       | 3 |   | 3 |   |
| Other                        |       | 9                                          |       | 9 |   | 10 |   |
| **Total cost of goods sold** | ** ** | **100**                                    | ** ** | **100** | ** ** | **100** | ** ** |

 

**Structureand Profitability of the Company’s Operations**

** **

***Period ended December 31, 2004 compared with December 31,2003***

*** ***

The following discussionpresents comparisons of results of operations for the twelve-month period endedDecember 31, 2004 and 2003.

 

*GrossOperating Revenue*

* *

The year of 2004 wascharacterized by great volatility of costs and exchange rates, which frustratedour hopes of achieving higher results in terms of profitability. However, Sadiaknew how to take advantage of the slow, but consistent recovery of consumptionon the domestic scenario and volatility in the global poultry market due to theAI crisis in Asia. Gross operating revenues at R$7.1 billion, increased 24.5%over 2003, despite the devaluation of the dollar having affected their value inBrazilian *reais.* The Company broke new salesrecords with total sales volumes 18.3% over those registered in 2003. Whatdrove revenues was, above all, a robust rise in sales volumes, which requiredstrong, mobilized efforts, and improved operating results.

 

In the domestic market,even though the recovery of employment levels was slow to affect theconsumption of non-durable goods, Sadia recorded constant growth in terms of revenuesthroughout 2004. The launching of products that are increasingly better suitedto consumers’ needs, the exploration of the Sadia brand name, and theenhancement of services related to our various distribution channels guaranteedsales performance above the country’s average rate of growth.

 

*DomesticMarket*

* *

Domestic sales grew 8.6%over 2003, and gross revenues increased 16.8%. Considering the difficulties inpassing increasing costs to sales prices, the growth in revenues is directlyrelated to an improved mix and the stepping up of sales to new channels. In theprocessed foods segment, sales were 9.7% greater than in 2003, and revenuesgrew 16.7%. The mix of traditional product items deserves special attention,with a recovery in the consumption of convenience products in the second halfof 2004. In the poultry segment, sales volumes increased 5.4% and revenues grew16.7%. The greatest portion of production continued to be directed to theexport market. The pork line of products,

 

37

----

 

whose sales increased 3.5%, generated revenues 19.3% higher than in2003. The segment was benefited by the recovery of prices, in an environment ofreduced supply.

 

*Export Market*

 

In terms of exports, even with the 8.1% appreciation of the Brazilian *real* compared to the U.S. dollar in 2004,export revenues increased 34.1% and accounted for a 49% share of totalrevenues. Export volumes were 28% higher than those in 2003.

 

With the AI epidemic in Asia, which reduced the world supply ofpoultry, international prices rose substantially in the first quarter of 2004.With the gradual reestablishment of supply, the entrance of new players in themarket, and the trend in consumption to replace poultry with other kinds ofmeat, the high point of the cycle was interrupted in the region.

 

In Europe, competition conditions remained stable, since norestrictions were placed on processed products from countries affected by AI.Sadia took advantage of opportunities that opened up for Brazilian products,expanding its presence in the Asian region. During the year, gross revenues forthe export market increased 34.1% over 2003. Regarding the processed productsline, the 42.4% growth in revenues reflects the Company’s efforts to increaseits share of higher value-added products in the export market, as well. Thegrowth in revenues is also the result of the stepping up of business activitiesin new markets in South America, which made it possible to increase sales ofproducts that were previously under represented in the export mix, such asbolognas, salamis and margarines. The pork segment, negatively affected by theRussian government’s establishment of quotas, represented a 3% decrease inrevenues. The distribution of Sadia’s exports has remained well balanced amongthe principal regions of the world. The more than 1,000 items exported aredeveloped according to the features of each market.

 

Europe, which received 23% of exports, is a large purchaser of poultrycuts and processed products. In the Middle East, the Company maintains itstraditional presence in the principal areas of the region, with marketleadership and brand recognition. Arabic countries primarily consume wholebirds of low weight (up to 1.4 kg) and processed products. With respect toEurasia, which comprises the Caucasus region and Russia, Sadia exports mainlypork and poultry cuts. The main exports to Asia are special poultry cuts, porkcarcasses and cuts. In the Americas, sales are concentrated principally onprocessed products, poultry parts and whole birds. Secondary markets includeregions with great potential for growth in the medium term.

 

*Processed Products*

 

In the domestic market the Company increasedits sales volumes in 9.7% reaching 581 thousand tons. Revenues reached R$2,946.4 million an increase of 16.7% compared to 2003. Processed productscomprised 79% of revenues in the domestic market in 2004, in line with theCompany’s focus on higher added value products.

 

Export revenues had an impressive rise of42.4% and 110.5% in volumes in 2004. They reached R$ 405.6 million and 84thousand tons accounting for 12% of exports revenues.

 

*Poultry*

 

In 2004, domestic revenues of poultry were up16.7%, generating R$ 415.4 million. Volumes also saw an increase this year,reaching 106 thousand tons.

 

In foreign markets, Sadia increased itspoultry revenues by 39.2%, to R$ 2,488.7 million. This number comprised 73.4%of all exports. Poultry volumes in the foreign markets were also up, reaching692 thousand tons, an increase of 32% as compared to 2003.

 

*Pork*

 

Volumes had a slight increase in the domesticmarket in 2004. From 47.7 thousand tons in 2003, volumes reached 49.4 thousandtons in 2004. Revenues had a better development, with an increase of 19.3% ascompared to 2003 reaching R$ 154.9 million.

 

Exports had a different development. Revenuesand volumes, both suffered with the Russian bans on meat imports and the quotaregime, decreasing 3% and 23.8%, respectively.

 

38

----

 

*Sales Deductions and Value Added Tax on Sales*

 

Value-added tax on sales consist of ICMS, theSocial Contribution on Sales (Cofins) and the contribution to the SocialIntegration Program (PIS), and amounted to R$ 880.0 million, 64.4% above the R$535.3 million reached in 2003. Total sales deductions increased by 27.% fromDecember 31, 2003 to December 31, 2004, from R$ 100.5 million to R$ 128million. Sales deductions and VAT ratio as a percentage of gross operatingrevenues were at 14.2% in 2004 and 11.1% in 2003.

 

*Cost of Goods Sold*

 

Costs increased 16.9% over 2003, reaching R$4,292.7 million. Grain prices showed a falling trend throughout the year, butcost items related to packaging remained pressured. Grain inventory management,better mix of products sold and operational process controls guaranteed grossprofits of R$ 1.8 billion, corresponding to a gross margin of 29.3% in 2004, ascompared to 27.3% in 2003.

 

*Selling Expenses*

 

Sadia’s selling expenses were R$ 1,144million in 2004, 24.9% higher than in 2003. As a percentage of net revenues in 2004this represented 18.7% and 18.0% in 2003. This growth can be explained by theadditional efforts in advertising because in 2004 Sadia launched its campaigncelebrating its 60 year anniversary.

 

*General and Administrative Expenses*

 

Administrative expenses remained at reducedlevels, less than 0.9% of net revenues.

 

*Other Operating Expenses, Net*

 

Other operational net results accounted for a revenue of R$15.4 millionin 2004 as compared to an expense of R$36.8 million in 2003. This change isrepresented by reversals of civil and fiscal provisions in the net amount of R$3 million in 2004 as compared to civil and fiscal contingencies provided andprovisions made for losses in assets of R$46 million in 2003.

 

*Interest Expense*

 

Interest expense in 2004 amounted to R$ 691.5 million, 53.6% above theR$ 450.2 million accounted for in 2003. This increase of R$ 241.3 million wasmainly due to losses of R$110 million on the sales of Brazilian bonds, higherinterest rates in U.S. dollar denominated debt and a larger total debt for theyear of 2004 as compared to 2003. The increase in expense is also due to higherlosses in swap contracts as compared to 2003.

 

*Interest Income*

 

Interest income in 2004 amounted to R$ 570.8 million, 24% above the R$459.8 million accounted for in 2003. This increase is mainly due to totalgrowth in financial assets of 26.6% in 2004.

 

*Foreign Currency Exchange Gain (Loss), Net*

 

Foreign exchange currency gain of R$ 72.7 million reported in 2004 wasprimarily attributable to the 8.1% appreciation of Brazilian currency againstthe U.S. dollar, which is net of a R$ 50.7 million exchange rate loss resultedfrom the translation of investments denominated in foreign currencies.

 

*Net Income*

 

Net income of R$ 489.5 million in 2004 was 3.4% higher than that postedin 2003 and represented a return on equity of 26.6%.

 

*Income Tax*

 

The Company reported an income tax expense of R$ 96.1 million in 2004,against a benefit of R$ 1.0 million in the previous year. This is mainlybecause a significant portion of taxable income in 2004 was generated in Brazilwhile in 2003 the earnings were primarily generated abroad which arenon-taxable.

 

39

----

 

***Period endedDecember 31, 2003 compared with December 31, 2002***

 

The following discussion presents comparisons of results of operationsfor the twelve-month periods ended December 31, 2003 and 2002. Additionally,the discussions on December 31, 2002 and 2001 results of operations arepresented afterwards.

 

*Gross Operating Revenue*

 

In 2003, Sadia ́s gross operating revenues posted a 22.8% increase over2002, reaching R$ 5,717.5 million. Despite the decline observed in thepurchasing power of consumers in 2003, domestic sales grew 16.9% compared to2002. Such increase was primarily due to a greater efficiency in the commercialprocess, rationalization of the product portfolio, growth of the sales mix andrecovery of prices. The Company also maintained its leadership in the frozen,refrigerated, poultry and pork segments, reaching the first position in themargarine segment, from second in 2002. Domestic sales accounted for 55.8% oftotal revenues. Gross revenues from exports were up by 31.2%, because of anincrease in sales to Europe and emerging markets. During 2003 the Company sold1,345,886 tons, 7.8% percent above the 1,358,735 tons sold during 2002.

 

*Domestic Market*

 

Revenues from domestic sales reached R$ 3,188.2 million, 16.9% abovethe R$ 2,726.8 million obtained in 2002. During 2003, volume sold decreased9.7%, from 751,041 tons in 2002 to 677,842 tons in 2003 (including grains andby-products, boiled beef parts, pig and chicken breeding and resale ofproducts) while weighted average sales prices rose 37.5%. The Company enteredinto negotiations with its major customers and was successful in passing alongprice increases in order to recover profitability of domestic sales.

 

*Export Market*

 

Even with the appreciation of the *real*against the dollar in 2003 and the raising of protectionist barriers in someinternational market regions, revenues increased 31.2%, from R$ 1,928.0 millionin 2002 to R$ 2,529.3 million in 2003. Export sales as a percentage of grossrevenues increased from 44.7 % in 2002 to 49.6% in 2003 and volumes soldreached 668 thousand tons, 9.9% over the 608 thousand tons shipped in 2002.This performance resulted from diversifying destinations and increasing exportsof processed products.

 

*Processed Products*

 

During the year, the Company continued to increase sales of its highervalue added products. Sales in the domestic market were R$ 2,523.7 millionduring 2003, reaching 529,663 tons, up 30.7% and 5.2%, respectively, ascompared to 2002, mainly due to increases in sales prices.

 

Revenues from exports of processed products rose 55.6%, from R$ 183.1million in 2002 to R$ 284.9 million, in 2003, in connection with higher volumesexported (57.5% higher as compared to 2002, from 25 thousand tons in 2002 to 40thousand tons in 2003). There were no significant increases in the averagesales price of exported processed products during 2003.

 

*Poultry*

 

The Company maintained the strategy of increasing export sales, whichresulted in a decline in the domestic sales volumes of 30.2% during 2003. Therecovery of prices and the improvement in the mix during the year resulted in totalrevenues of R$ 356.0 million which were only 5% lower than total sales revenuesin 2002 of R$ 374.7.

 

Poultry exports totaled R$ 1.8 billion, 29% higher than 2002.Unfavorable climate conditions in Europe and sanitary problems in Asia reducedthe worldwide stocks of chicken, contributing to a recovery of internationalprices and an increase in demand for poultry from unaffected regions, likeBrazil.

 

*Pork*

 

There was a 53.8% decline in domestic sales volume caused by theredirection of production towards exports, from 103 thousand tons in 2002, to48 thousand tons in 2003. The continuing strong supply of animals in a downturning domestic economy reduced revenues, which were 34.3% lower than in 2002,dropping from R$ 197.7 million in 2002 to R$ 129.8 million in 2003.

 

40

----

 

Export volumes amounted to 104 thousand tons, 17.4% higher than the 88thousand tons reached in 2002, while sales grew by 39%, from R$ 318.8 millionin 2002 to R$ 443.0 million in 2003. Such performance was due to the recoveryof the international prices of carcasses and a greater demand by the Russianmarket caused by the expectation of the establishment of import quotas.

 

*Sales Deductions and Value Added Tax on Sales*

 

Value-added tax on sales consist of ICMS, the Social Contribution onSales (Cofins) and the contribution to the Social Integration Program (PIS),and amounted to R$ 535.3 million, 28.3% above the R$ 417.3 million reached in2002. Total sales deductions increased by 2.1% from December 31, 2002 toDecember 31, 2003, from R$ 98.4 million to R$ 100.5 million. Sales deductionsand VAT ratio as a percentage of gross operating revenues were stable at 11.6%in 2003 and 2002.

 

*Cost of Goods Sold*

 

In 2003, cost of goods sold was R$ 3,673.0 million, versus R$ 2,903.2in 2002, and 26.8% higher than in 2002, and represented 71.6% of net revenues,versus 69.3% in the previous year. This increase of 2.3 percentage points ismainly due to higher average prices of packaging material and grains. Averagecorn market prices increased by 7.9% above year 2002. The average costs ofsoybeans for the Company in 2003 were 20.8% above 2002-year average marketprices. The Company maintained its inventory policy that involves advancepurchases, aimed at alleviating commodity market impacts on its costs.

 

*Selling Expenses*

 

Sales expenses of R$ 916.7 million were 10.6% higher than the R$ 828.7million in 2002. These expenses represented 18% of net revenues, 2 percentagepoints below the ratio registered in 2002. This is a result of lower domesticfreight costs, gains in scale in export activities and more efficiency in theuse of sales force.

 

*General and Administrative Expenses*

 

In 2003, general and administrative expenses totaled R$ 54.2million,representing 1.1% of net revenues, versus R$ 49.1 million in 2002, when theyrepresented 1.2% of net revenues. This is in accordance with certain expensecutting initiatives taken over the year that resulted in lower fees paid toconsulting firms and technical assistance.

 

*Other Operating Expenses, Net*

 

Other operating expenses, net of R$ 36.8 in 2003 are 188.3% higher thanthe R$ 12.8 million posted in 2002. The increase is primarily attributable tothe recognition of PIS and Cofins accrual on foreign exchange gains reported in2003, which amounted R$ 23.0 million in 2003 and R$ 4.9 million in  2002.

 

*Interest Expense*

 

Interest expense in 2003 amounted R$ 450.2 million, 41.8% above the R$317.8 million accounted in 2002. This increase in expense of R$ 132.4 millionwas mainly due to higher losses in swap contracts as compared to 2002.

 

*Interest Income*

 

Interest income increased from R$ 266.5 million in 2002 to R$ 459.8million in 2003. This 72.5% change was mainly due to increased volume ofshort-term investments in connection with higher cash surplus and gains on thesales of Brazilian bonds.

 

*Foreign Currency Exchange Gain (Loss), Net*

 

Foreign exchange currency gain of R$ 60.9 million reported in 2003 wasprimarily attributable to the 15% appreciation of Brazilian currency againstthe U.S. dollar, which is net of a R$ 63.4 million exchange rate loss resultedfrom the translation of investments denominated in foreign currencies.

 

*Income Tax*

 

The Company reported an income tax benefit of R$ 1.0 million in 2003,against an expense of R$ 12.2 million in the previous year. This is mainlybecause a significant portion of earnings generated abroad were non-taxable in2003. In addition, the Company took higher deductibility of interest attributedto shareholders’ equity.

 

41

----

 

*Net Income*

 

Based on the aspects described above, the net income increased 64.6% toR$ 473.3 million in 2003, against R$ 284.3 million in 2002.

 

**B.Liquid**ity and Capital Resources

** **

**Liquidity and Sources of Funding**

 

The Company’s principal cash requirements include: (i) debt repayment,(ii) investments in property, plant and equipment, raising efficiency levelsand optimization of processes; and (iii) payment of dividends and interest onequity to shareholders. The Company’s primary sources of liquidity havetraditionally consisted of cash generated from operations and short-term andlong-term debt. Sadia believes that these sources of funds, together with ourcash and cash equivalents will continue to be adequate to meet the Company’scurrently anticipated capital requirements.

 

The net cash generated by operating activities totaled R$221.4 million,R$ 902.2 million and R$ 293.9 million for the years ended December 31, 2004,2003, and 2002, respectively. Short-term and long-term debt presented a totalnet decrease of R$ 590.5 million in 2004, an increase of R$ 575.1 million in2003 and an increase of R$ 1,457.1 million in 2002. Sales of disposed fixedassets generated total proceeds of R$ 2.9 million, R$ 8.7 million and R$ 7.5million, for the years ended 2004, 2003, and 2002 respectively. Net operatingcash used in the purchase of property, plant and equipment totaled R$ 239.1million, R$ 105.8 million and R$ 112.1 million for the years ended 2004, 2003,and 2002. Payment of dividends of R$ 131.2 million, R$ 95.6 million and R$ 73.8million for the years ended 2004, 2003, and 2002. Investment in equityinvestees R$ 1.1 million, R$ 2.9 million and R$ 2.9 million for the years ended2004, 2003, and 2002.

 

Thechanges that occurred in the net cash provided by operating activities in 2003in relation to 2002 and 2004 were due to the following:

 

Changesin 2004 relative to 2003:

 

Changesin Recoverable Taxes and Other Assets were higher than 2003 due to changes inthe COFINS legislation in 2004. The new legislation allowed companies to netthe sum of the COFINS tax obligations generated from sales and the COFINS taxcredits generated in the purchase of raw materials. Moreover, as sales fromexported goods do not generate COFINS tax obligations, the Company, as anexporter, had a positive net sum in the Recoverable Taxes and Other Assetsaccount.

 

Inventorieswere higher in 2004 than 2003,such increase being attributable to lower than expected demand in the domesticmarket during 2003. Additionally, the Company was stimulated to stock up ongrains during the end of 2004 as their prices were lower than their 2003 value.

 

Changesin Accrued Interest, Net was larger than its 2003 value due to changes in theCompany’s finance strategy in 2004, which started focusing on less volatilesecurities associated therefore with lower interest rates.

 

Changesin Social Charges, Taxes Payable, Other Liabilities’ account was larger thanits 2003 value due to payment of the Employee Bonus.

 

*Changes in 2003 relative to 2002:*

 

Changesin Recoverable Taxes and Other Assets were due to a final favorable judicialdecision in which it was ruled that the Company had paid export duties inexcess of that required by law, generating a tax credit in 2002. These taxcredits were then partially utilized and recovered in 2003 with other taxobligations.

 

The lowprices of grains in the last quarter of 2003, compared to those in the lastquarter of 2002, allowed inventory value at December 31, 2003 to be lower thanits value on December 31, 2002.

 

Accruedinterest, net was larger in 2003 than its 2002 value as the Company increasedsignificantly in 2003 hedge operations with Foreign Currency and Interest RateSwap Contracts. Moreover, accrued interest increased in 2003 due to the effectsof overall higher interest rates incurred compared to 2002. Among otherreasons, overall interest rates increased in 2003 as the Company changed to afinance strategy focused on debt securities with higher volatility.

 

Social charges,taxes payable, other liabilities’ account was larger in 2003 than its 2002value due to Sadia’s provision for the Employee Bonus in 2003.

 

**Indebtedness and Financial Strategy**

 

The loans taken by the Company are basically intended to financeexports and for investments in fixed assets, both for the modernization andtechnological update of the plants, for the financing of working capital, and,depending on market conditions, for financial investments.

 

At the end of 2004, the Company’s total interest-bearing debt stood atR$ 2,770.2 million, representing a 18% decrease as compared with the total debtof R$ 3,393.1 million at December 31, 2003. At the same time, at December 31,2004 financial short-term assets were: cash and cash equivalents, R$764.2 millionand R$ 1,818.1 million at December 31, 2003, held-to-maturity securities, notavailable and R$ 37.9 million at December 31, 2003 and available for sale debtsecurities at R$1,153 million and R$ 101.8 million at December 31, 2003. Thelong-term financial assets were: available for sale debt securities at R$ 436.8million and R$1,158.6 million at December 31, 2003. In December 31, 2004foreign currency and interest rate swap contracts represented R$ 103.1 millionin current assets and R$ 28.4 million in other assets.

 

Considering all financial assets and liabilities at December 31, 2004,total net debt stood at R$ 525.8 million, equivalent to 29% of shareholders’equity and R$ 329.9 million at December 31, 2003.

 

Following the normal course of operations, the amounts maturing in theshort run can be settled or re-negotiated for the next period. The Company usestrade finance for its working capital needs because it is available at a lowercost, since lenders perceive that the exchange risk is mitigated by the link toU.S. dollar exports.

 
| ** **                                          | ** ** | **Liquidity (Thousand R$)** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| Working capital from commercial banks               |       | 761,103                     |       | 1,256,015 |   |
| Trade accounts receivable domestic credit  facility |       | 162,138                     |       | 106,345 |   |
| Trade accounts receivable export credit facility    |       | 120,810                     |       | — |   |
| Bank borrowings, secured by accounts  receivable    |       | 17,830                      |       | — |   |
| **Total**                                           | ** ** | **1,061,881**               | ** ** | **1,362,360** | ** ** |

 

42

----

 

Working capital from commercial banks primarily relates to exportfinancing and pre-export advances, of which R$744,423 in 2004, R$1,168,022 in2003 are denominated in U.S. dollars with interest at Libor (2,775% p.a. atDecember 31, 2004) plus interest at the rate from 0.10% p.a. to 4.48% p.a. in2004 interest at the rate from 3.03% p.a. to 5.11% p.a. in 2003.

 

On May 12, 2003, the Company entered into anagreement to sell, from time to time, up to R$150,000 of its domesticreceivables to a special purpose entity, organized as an investment fund. Thereceivables sold are subject to a discount rate that should not be lower than95% of the average rate of Brazilian interbank certificate deposits (17.7% p.a.at December 31, 2004). Through December 31, 2004, the Company received cashproceeds of R$2,249,000 from the sales of domestic receivables under thisagreement and incurred in interest expenses of R$23,000 for the year endedDecember 31, 2004. Based on the structure of this transaction, the agreementhas been accounted for as a financing by the Company. As of December 31, 2004,the accounts receivable for this finance pledged as collateral were R$162,138.

 

OnAugust 27, 2004 the Company entered into an Insured Receivables PurchaseAgreement to discount the export receivables with a revolving credit of US$ 100million and a discount rate of 0.7%. The receivables sold are accounted for asaccounts receivable and financing. During the year ended December 31, 2004, theCompany received cash proceeds of approximately R$1,500 million and incurredexpenses of R$4 million in connection with the Insurance Receivable PurchaseAgreement.

 

At December 31, 2004 and 2003, the weighted average interest rates onshort-term debt were 7.06% p.a. and 5.19% p.a., respectively.

 

43

----

 

**Long-Term Debt**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **Long-term Debt  (Thousand R$)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| **Foreign debt (denominated in U.S. dollars):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | ** **                        | ** ** | ** ** | ** ** |
| IFC- International Finance Corporation (for  investment in property, plant and equipment) due in installments through  2008, R$93,586 interest at fixed rate of 8.52% p.a. and R$35,636 at fixed  rate of 9.05% p.a., secured by the related fixed assets with a carrying value  of R$67,664                                                                                                                                                                                                                                                                |       | 129,222                           |       | 177,605 |   |
| Export financing, due in installments  through 2010, interest at Libor (2.775% p.a. in December 2004) plus interest  rate of 5.60% p.a., guaranteed by promissory notes or sureties issued by the  Company.                                                                                                                                                                                                                                                                                                                                                 |       | 924,965                           |       | 1,196,174 |   |
| **Local debt (denominated in R$):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | ** **                        | ** ** | ** ** | ** ** |
| BNDES- due in installments through 2009,  R$436,309 subject to long- term interest rate- TJLP (9.75% p.a. in 2004) plus  interest rate ranging from 3.30% p.a. to 3.89% p.a. and R$66,677 subject to  weighted average exchange rate variations on currencies held by BNDES-  UMBNDES (7.41% p.a. in 2004) plus interest at the rates ranging from 3.5%  p.a. to 3.86% p.a., secured by the branch facilities of Duque de Caxias,  Uberlândia, Francisco Beltrão, Paranaguá and Faxinal dos Guedes units with a  carrying value of R$227,345 |       | 502,986                           |       | 523,170 |   |
| PESA - Special Aid Program for Agribusiness  payable in installments from 2005 to 2020, subject to the – General Price  Index –Market – IGP-M (12.42% p.a. in 2004) plus interest rate of 9.76% p.a.,  secured by investments in debt securities with a carrying value of R$22,479  and sureties.                                                                                                                                                                                                                                            |       | 129,310                           |       | 114,233 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                              |       |   |   |
| **Other**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **21,846**                        | ** ** | **19,570** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                              |       |   |   |
| **Total**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **1,708,329**                     | ** ** | **2,030,752** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                              |       |   |   |
| Less current portion of long- term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | (676,954                          | )          | (663,916 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                              |       |   |   |
| **Long- Term portion**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **1,031,375**                     | ** ** | **1,366,836** | ** ** |

 

The Company is subject to certain restrictivecovenants contained in the IFC agreement. These covenants include a restrictionon the payment of dividends in excess of the mandatory amount (see Note 15)without the prior agreement of the IFC. During 2003, the Company paid dividendsin excess of that allowed under the IFC agreement. Consequently, such debt iscallable should the IFC so desire. Therefore, the Company reclassified in 2003the long-term portion of the IFC debt amounting to R$153 million from long-termdebt to short-term debt, situation that was maintained for 2004 in the amountof R$129 million. There were no restrictions to the payments of dividends madein 2002 as they were in accordance with the mandatory amount. Payments ofdividends on future distributable income in excess of the mandatory amount willrequire approval of the IFC prior to such payments until such time that theCompany meets the financial ratio.

 

**C.Research a**nd Development, patents and licenses

** **

Sadia invested R$10.1 million, R$ 6.5 million and R$ 7.3 million, forthe years ended December 31, 2004, 2003, and 2002, respectively, in researchand development activities. During the past five years, the R&D departmenthas developed seven new product families (refrigerated pasta, pizzas,fish-based products, ready-made dishes, sweet pies, frozen desserts and breadedproducts), as well as improving existing products.

 

During 2004, Sadia launched 57 products mainly in the lines of ready toeat dishes, margarines, breaded, hams and Miss Daisy Desserts.

 

Investments in R&D have also brought benefits to the area of animalbreeding, achieving improvements in the quality of meat, the productionprocess, and reducing feed conversion rates. Between 1975 and 2004, theduration of the chicken production cycle was reduced from 59.3 days to 35.8days for each 1.7 kg bird. During the same period, chicken weight increasedfrom 1.7 kg to 2.0 kg for slaughtering. Similarly, the feed conversion rate decreased from 2.4 kg to 1.8 kg perkg of chicken. Between 1975 and 2004, the duration of the pork production cyclewas reduced from 179 days to 147 days for each 100 kg animal. During the sameperiod, slaughtered hog weight increased from 94 kg to 116 kg. In a similarway, the feed conversion rate decreased from 3.6 kg to 2.7 kg of feed per kg ofpork. During the same period, the percentage of pork meat per carcass increasedfrom 46% to 58.0%.

 

44

----

 

**D.Trend Info**rmation

** **

This section discusses the main concerns and trends that drove theCompany’s strategic planning in 2004 and those expected for 2005.

 

Considering recent developments in the Brazilian macro economicenvironment and the livestock and processed food sector, the Company expects tohave its operations affected most significantly by the following factors:

 

**Foreign Market Protectionist Measures**

 

The Company expects that new regulations can continue to be issued byforeign importer countries to protect its local producers. Since a relevantpart of the Company’s revenues comes from the export operations, the raising ofprotectionist barriers can affect its operations.

 

In July 2002, the EU Sanitary Commission issued a new regulationincreasing the duties for imported fresh chicken. During the second semester of2002, 100% of Brazilian chicken exported to Europe was required to be testedfor forbidden antibiotic Nitrofuran, increasing export sales costs.

 

In November 2003, a panel was established in the World TradeOrganization (WTO) on request of Brazil and Thailand against the change inclassification of salted poultry done by the EU. With this change, Braziliansalted poultry was classified as frozen and thus, had an increase of 15.4% advalorem in its duty rate. A preliminary ruling by the WTO favored Brazil andThailand in the panel. Even though the final WTO decision has not yet beenreleased, it is not expected to be greatly different from the preliminaryruling.

 

The Russian government had also introduced a quota regime on pork andpoultry meat imports that should be effective until 2006.

 

These initiatives can reduce competitiveness of the Company’s productsin such markets; however the Brazilian government, associated with local andinternational entities, normally negotiates the terms of such measures in orderto mitigate its negative effects.

 

**E.Off- balance sh**eet arrangements

** **

The Company has no off-balance sheet arrangements that have or arereasonably likely to have a current or future effect on its financialcondition, changes in financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources that ismaterial to investors.

 

**F.Tabular disclosur**e of contractual obligations

** **

TheCompany has long term purchase contracts with suppliers that are oriented forproduction purposes (packing and industrial units). At December, 2004, thebalance of contractual obligations is as follows:

 
| ** **                                                                                                                     | ** **   | **Contractual Obligations – Payments Due By Period (Thousand R$)** | *** *** |
|--------------------------------------------------------------------------------------------------------------------------------|--------------|-------------------------------------------------------------------------|--------------|
| *** ***                                                                                                                   | *** *** | **Less than  1 year**                                                   | ** **   | **1 - 3  years** | ** ** | **3 - 5  years** | ** ** | **More than 5  years** | ** ** | **Total** | ** ** |
| Long-Term Debt Obligations                                                                                                     |         | 676,954                                                                 |         | 784,508 |   | 62,047 |   | 184,820 |   | 1,708,329 |   |
| Capital (Finance) Lease Obligations                                                                                            |         | —                                                                  |         | — |   | — |   | — |   | — |   |
| Operating Lease Obligations                                                                                                    |         | 31,200                                                                  |         | 62,400 |   | — |   | — |   | 93,600 |   |
| Purchase Obligations                                                                                                           |         | 58,000                                                                  |         | 174,000 |   | 116,000 |   | 0 |   | 348,000 |   |
| Other Long-Term Liabilities Reflected on  the Company’s Balance Sheet under the GAAP of the primary financial  statements |         | —                                                                  |         | — |   | — |   | — |   | — |   |
| **Total**                                                                                                                      | ** **   | **766,154**                                                             | ** **   | **1,020,908** | ** ** | **178,047** | ** ** | **184,820** | ** ** | **2,149,929** | ** ** |

 

45

----

 

Sadiadoes not have any contractual purchase obligations associated with its animalfeed requirements.

 

The long-term debt obligations are described under the note 12 of theconsolidated financial statements.

 

**G.Safe Harbo**r

** **

See “Forward Looking Statements”.

 

## ***ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES***

## *** ***

**A.Directo**rs and Senior Management

** **

**Executive Officers and Members of the Boardof Directors**

 

The management of the Company is carried out by the board of directorsand its executive officers. Pursuant to Sadia’s by-laws, the board of directorsis composed of 7 to 11 members that must be residents in Brazil. Members of theboard of directors are elected at the ordinary general meeting of shareholdersfor a one-year term, and may be re-elected. Upon electing the members of theboard, the meeting must designate the chairman from among those elected. Theboard will then, in a subsequent meeting, elect one or more vice-chairmen, anddesignate a secretary of the board. According to Sadia’s by-laws, the board ofdirectors must elect between 7 and 20 executive officers for a one-year term.In the annual shareholder’s meeting, held in April 29, 2005 new board memberswere elected. The board of directors is composed of five members who representthe controlling shareholder group, and six market professionals.

 

The following table sets forth information with respect to the membersof the board of directors and the executive officers of the Company.

 

**Board of Directors**

 

The Company’s board of directors is presently composed of elevenmembers listed below, who were elected at the ordinary general meeting held onApril 29th, 2005.

 
| **NAME**                                                                 | ** ** | **ACADEMIC BACKGROUND**                                                                                                                                                   | ** ** | **EXPERIENCE**                                                                                                                                                                                             | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Walter Fontana Filho  (Chairman of the Board)**Birth  Date: 12/07/1953 |       | Undergraduate and graduate degree in Economics from Pontificia  Universidade Católica; specialization in Business Marketing from Fundaçao  Getúlio Vargas. |       | Member of the board of directors and designated Chairman in April  2005. He was CEO from 1994 to 2005, with previous experience as Commercial  Vice President Director and Domestic Commercial Director. . |       |
|                                                                     |       |                                                                                                                                                                      |       |                                                                                                                                                                                                       |       |
| **Eduardo  Fontana d’Ávila**Birth  Date: 02/28/1954            |       | Undergraduate degree in Engineering from Mackenzie University;  graduate degree in Business Administration from Fundaçao Getúlio Vargas.                        |       | Member of the board of directors. He was Industrial Director until  2005. Has been with the Company since 1977 always directed towards industrial  production.                                             |       |
| ** **                                                               |       |                                                                                                                                                                      |       |                                                                                                                                                                                                       |       |
| **Osório  Henrique Furlan**Birth  Date: 07/31/1922                  |       | Undergraduate degree in Law from Faculdade de Direito Bragança  Paulista.                                                                                            |       | Member of the board. Sadia’s first executive president, member of the  São Paulo Commercial Association and former Transbrasil Airlines  vice-president, 1964 to 1975.                           |       |
|                                                                     |       |                                                                                                                                                                      |       |                                                                                                                                                                                                       |       |
| **Romano  Ancelmo Fontana Filho**Birth  Date: 04/07/1944                 |       | Undergraduate degree in Business Administrator from Universidade  Mackenzie.                                                                                              |       | Member of the board. Previously Chairman of the board and former IT  and Human Resources Director from 1976 to 1994.                                                                                       |       |

 

46

----

 
| **Alcides Lopes Tápias**Birth Date: 09/16/1942                       |   | Undergraduate degree in Business Administration from Universidade  Mackenzie; Graduate degree in Law from Faculdades Metropolitanas Unidas.                        |   | Member of the board since 2002. Former Banco Bradesco Executive  Vice-President, President of FEBRABAN (Brazilian Bank Federation) and member  of the National Monetary Council. Former Industry, Trade and Development  Minister (July, 2001). |   |
|---------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                      |   |                                                                                                                                                               |   |                                                                                                                                                                                                                                            |   |
| **Everaldo Nigro dos Santos**Birth  Date: 07/12/1939                      |   | Undergraduate degree in Engineering from Universidade Mackenzie; MBA  from the Centre d ́Études Industrielles.                                            |   | Member of the board since 2004. Former CEO of Alcan Latin America,  1997 to 1999.                                                                                                                                                               |   |
|                                                                      |   |                                                                                                                                                               |   |                                                                                                                                                                                                                                            |   |
| **Francisco  Silvério Morales  Céspede**Birth  Date: 06/21/1947 |   | Undergraduate and graduate degree in Business Administration from  Fundação Getúltio Vargas.                                                        |   | Member of the board since 2004. CFO of São Paulo Alpargatas S/A;  member of the board of Santista Têxtil S/A and former CFO and member of the  board of Monsanto do Brasil.                                                           |   |
|                                                                      |   |                                                                                                                                                               |   |                                                                                                                                                                                                                                            |   |
| **Marise  Pereira Fontana  Cipriani**Birth  Date: 09/28/1957              |   |                                                                                                                                                               |   | Member of the board since 2001. CEO of SolVista,Inc., USA and  Chairman of the board of Transbrasil Foundation S.A.                                                                                                                             |   |
|                                                                      |   |                                                                                                                                                               |   |                                                                                                                                                                                                                                            |   |
| **Norberto Fatio**Birth  Date: 08/25/1941                                 |   | Undergraduate degree in Business Administration from Fundação  Getúltio Vargas.                                                                     |   | Member of the Board since 2004. Commercial and marketing executive  experience at Unilever, Danone, Bunge Alimentos, Kibon, Fleischmann Royal  Nabisco and Sé Supermercados.                                                               |   |
|                                                                      |   |                                                                                                                                                               |   |                                                                                                                                                                                                                                            |   |
| **Sérgio  Fontana dos Reis**Birth Date: 06/16/1958                   |   | Undergraduate degree in Architecture from Universidade de São Paulo;  graduate degree in Business Administration from Fundação Getúlio Vargas. |   | Member of the board since 1991. Former President of Attílio Fontana  Foundation from 1996 to 1998.                                                                                                                                         |   |
|                                                                      |   |                                                                                                                                                               |   |                                                                                                                                                                                                                                            |   |
| **Vicente Falconi Campos**Birth Date: 09/30/1940                          |   | Undergraduate degree in Engineering from Universidade Federal de  Minas Gerais; PhD from Colorado School of Mines.                                                 |   | Member of the board since 2002. Brazilian Government Consultant at  the energy crisis management committee; member of the board of AMBEV.                                                                                                       |   |

 

**Executive Officers**

 

The Company’s management team consists of professionals with extensiveexperience in the Brazilian food sector. There are currently no members of thefounding family serving in executive capacities. The executive officers areresponsible for the execution of decisions of the board of directors andday-to-day management of the Company. Below is a short résumé of the keymembers of Sadia’s executive management team:

 
| **NAME**                                                                       | ** ** | **ACADEMIC BACKGROUND**                                                                                                                                                            | ** ** | **EXPERIENCE**                                                                                                                                | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Gilberto Tomazoni**Date Joined Sadia: 03/26/1983  Birth Date: 08/28/1958     |       | Undergraduate degree in Engineering from Universidade Federal de  Santa Catarina; graduate degree in Management Development from Fundação de  Ensino do Desenvolvimento. |       | Chief Executive Officer.  Previous experience within the Company includes industrial, sales (local and  foreign markets) and marketing areas. |       |
|                                                                           |       |                                                                                                                                                                               |       |                                                                                                                                          |       |
| **Adílson Serrano Silva**Date Joined Sadia: 08/09/1991  Birth: 10/14/1948 |       | Undergraduate degree in Business Administration from Faculdade  Senador Flaquer; graduate degree from Fundaçao Getúlio Vargas.                                           |       | Human Resources Director. Previous experience with human resources at  Cofap, Eletroradiobrás, VASP and Linhas Corrente.                 |       |

 

47

----

 
| **Alexandre de Campos**Date Joined Sadia: 01/03/1999  Birth Date: 09/22/1970                  |   | Undergraduate degree in Business Administration from Faculdades  Tibiriçá; graduate degree in Marketing from Escola Superior de Propaganda e  Marketing.                                                       |   | International Sales Director. Previous experience with foreign trade  at General Electric and Perdigão.                                                                                                                                                     |   |
|-----------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                          |   |                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                             |   |
| **Alfredo  Felipe da Luz  Sobrinho**Date Joined Sadia: 08/04/1971  Birth Date: 08/31/1945     |   | Undergraduate degree in Law from Centro de Ensino Universidade  Brasilia.                                                                                                                                                |   | Institutional Relations and Legal Director. Previous member of the  Board of Directors, and Vice President of Marketing, Sales and Services of  Transbrasil; former President of ABIPECS and President of the Attílio  Francisco Xavier Fontana Foundation. |   |
|                                                                                          |   |                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                             |   |
| **Antonio Paulo Lazzaretti**Date Joined Sadia: 11/04/1972  Birth Date: 07/24/1947             |   | Undergraduate degree in Chemical Engineering from the Universidade  Federal do Rio Grande do Sul; with specialization in Business Administration  from Fundaçao Candido Mendes.                                     |   | Technology and Quality Control Director. Former industrial director  and manager for the Company. Previously worked for Renner Hermann.                                                                                                                          |   |
|                                                                                          |   |                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                             |   |
| **Claudio Lemos  Pinheiro**Date Joined Sadia: 08/01/1981  Birth Date: 08/04/1951              |   | Undergraduate degree in Business Administration from Universidade  Católica de Pelotas; extention in Business Administration from Universidade  de Sao Paulo; MBA from J. L. Kellogg Graduate School of Management. |   | Administrative Director and Controller. Experience within Sadia in  the financial, IT and controlling areas.                                                                                                                                                     |   |
|                                                                                          |   |                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                             |   |
| **Ernest Sícoli Petty**Date Joined Sadia: 02/2005  Birth Date: 07/04/1968                |   | Undergraduate degree in Agriculture Engineering from Universidade de  Sao Paulo; Executive MBA in Business Administration from BSP/University of  Toronto.                                                               |   | Supply Director. Previous experience in the food and agribusiness  sectors at Pepsico, Cargill and Seara.                                                                                                                                                        |   |
|                                                                                          |   |                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                             |   |
| **Flávio Luis Fávero**Date Joined Sadia: 24/07/1985  Birth Date: 12/11/1963         |   | Undergraduate degree in Chemical Engineering from the Universidade do  Sul; graduate degree in Management Development from Universidade de Santa  Catarina.                                                              |   | Production Director – Processed Products. Previous experience within  Sadia includes Total Quality Coordinator, and Production Manager.                                                                                                                     |   |
|                                                                                          |   |                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                             |   |
| **Flávio Riffel Schmidt**Date Joined Sadia: 02/04/1979  Birth Date: 03/23/1953           |   | Undergraduate degree in Business Administration and Accounting from  Universidade do Vale dos Sinos.                                                                                                                     |   | Information Technology Director. Previous experience includes  finance, planning and control departments at Sadia.                                                                                                                                               |   |
|                                                                                          |   |                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                             |   |
| **Gilberto Meirelles Xandó  Baptista**Date Joined Sadia: 03/1983  Birth Date: 08/24/1965 |   | Undergraduate degree in Business Administration from Getúlio Vargas  Foundation; specialization in Business Administration from CEAG-FGV and  Universidade de Sao Paulo.                                            |   | Commercial Director – Local Markets. Former Marketing Director with  experience in controlling, sales and marketing areas within Sadia.                                                                                                                     |   |
|                                                                                          |   |                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                             |   |
| **Guillermo Henderson  Larrobla**

Date Joined Sadia: 01/04/1999Birth  Date: 03/11/1956       |   | Undergraduate degree in Mechanical Engineering from Universidade  Federal do Rio Grande do Sul; marketing management specialist from  Universidade de Blumenau.                                                          |   | International Middle East Sales Director. Previous experience with  Seara Alimentos (Bunge Group).                                                                                                                                                               |   |
|                                                                                          |   |                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                             |   |
| **José Augusto  Lima de Sá**Date Joined Sadia: 08/11/2004  Birth Date: 06/14/1953   |   | Undergraduate degree in Business Administration from Fundaçao Getúlio  Vargas; extension courses at Harvard and Wharton business schools.                                                                      |   | Foreign Comercial Director** **Experience of more than 20  years in foreign trade. Former CEO and Chairman of Frangosul.                                                                                                                                    |   |

 

48

----

 
| **Luiz Gonzaga Murat Júnior**Date Joined Sadia: 01/08/1994  Birth Date: 10/17/1953       |   | Undergraduate degree in Business Administration from Fundaçao Getúlio  Vargas; graduate degree in Agricultural Economics from Stanford University.                                             |   | Chief Financial Officer, Director of Investor Relations. Experience  in finance and accounting within Perdigão, Bahia Sul Celulose and Suzano  Feffer. Board Member of IBEF - Institute of Finance, and Abrasca - The  Brazilian Association of Listed Companies. |   |
|-----------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                          |   |                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                                   |   |
| **Paulo Francisco Alexandre  Striker**Date Joined Sadia: 1984  Birth Date: 10/23/1954         |   | Undergraduate degree in Business Administration and Civil Engineering  from Universidade Mackenzie; specialization in Business Administration from  JUSE Institute (Japan) and Fundaçao Dom Cabral. |   | Logistics Director. Former trade marketing manager and brand  management/ strategic planning manager.                                                                                                                                                                  |   |
|                                                                                          |   |                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                                   |   |
| **Ricardo  Fernando Thomas  Fernandez**Date Joined Sadia: 1986  Birth Date: 10/25/1963        |   | Undergraduate degree in Business Administration from Universidade do  Oeste de Santa Catarina; specialization in Enterprise Management at Fundaçao  Dom Cabral.                                     |   | Director of Grains. Experience in grains and supply areas.                                                                                                                                                                                                             |   |
|                                                                                          |   |                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                                   |   |
| **Roberto Banfi**Date Joined Sadia: 07/13/1998  Birth Date: 02/21/1947                        |   | Undergraduate degree in Accounting from H.E.C. Lausanne; MBA from  Stanford Business School.                                                                                                             |   | International Sales Director. Previous experience includes working  for Bonfiglioli - Cica, Cicatrade and Swift Armour as Director; and Marketing  Manager and Coordinator for Mercosur in the sales area of RMB-Refinações de  Milho do Brasil.             |   |
|                                                                                          |   |                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                                   |   |
| **Ronaldo Kobarg Müller**Date Joined Sadia: 02/22/1984  Birth Date: 11/11/1959           |   | Undergraduate degree in Chemical Engineering from Fundaçao  Educacional da Região de Blumenau; graduate degree in Management Development  from Universidade Federal de Santa Catarina.         |   | Poultry Production Officer. Experience within the Company as Total  Quality Coordinator and Production Manager.                                                                                                                                                        |   |
|                                                                                          |   |                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                                   |   |
| **Sérgio Carvalho Mandin  Fonseca**Date Joined Sadia: 08/01/2003  Birth Date: 09/12/1957 |   | Undergraduate degree in Production Engineering from Universidade de  Sao Paulo; MBA from the University of California.                                                                                   |   | Domestic Sales Director. Former retail director at the Martins  Distribution Company and experience at La Fonte Metalurgy, Souza Cruz  Cigarrete Company.                                                                                                              |   |
|                                                                                          |   |                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                                                   |   |
| **Valmor Savoldi**Date Joined Sadia: 12/26/1977  Birth Date: 01/28/1954                       |   | Undergraduate degree in Agricultural Engineering; specialization in  Management Development from Universidade Federal de Santa Catarina.                                                                 |   | Supply Director. Former experience within the Company includes the  areas of agriculture, production, poultry and pork processing, total quality  and sales.                                                                                                           |   |

 

In 2005 Sadia acquired a directors and officers liability insurance(D&O), in order to protect all its executives against legal actions thatmay arise from financial loss caused to third parties.

 

There are no pending legal proceedings, involving either board membersor executive officers that could prevent any of these from carrying out theirduties.

 

The Company has an audit committee, composed by members of the board,which serves to monitor the activities of the executive officers, election ofindependent auditors and to examine the Company’s financial statements. Thefiscal committee is composed of three members and three substitute members, whoare elected at the ordinary general meeting, with a mandate until the ordinarygeneral meeting of the following year.

 

The Fiscal Council, whose creation was authorized by the companyby-laws and which possesses legally binding powers, was set up in 2004 by thegeneral shareholders’ meeting with three plenary members and three alternates,each with a one-year term of office. The council’s main function is to ensurethe transparency and accuracy of the Company’s financial statements.

 

49

----

 

**Family relationship**

 

Certain members of the board are related. Mr. Sérgio Fontana dos Reis, Ms.Marise Pereira Fontana Cipriani, Mr. Walter Fontana, Romano Ancelmo FontanaFilho and Eduardo Fontana d’Ávila are cousins.

 

**B. Compe****nsation**

 

For the year ended December 31, 2004, the aggregate compensation paidby Sadia to all members of the board of directors and executive officers forservices in all areas was approximately R$ 12.9 million, not including relatedtaxes or social security contributions. For the year ended December 31, 2003,the amount paid was approximately R$ 11.1 million.

 

The Company has also granted health assistance and life insurance asbenefits to its executive officers.

 

During 2003, the Company terminated the stock award plan for itsdirectors, who received a portion of their annual bonus in shares of preferredstock that were purchased in the market by the Company in the director’s name.Based on the number of preferred shares each director had received under thisplan, which totaled 711,000 preferred shares at the termination date.

 

For the year 2003, the Company developed a variable compensationprogram for officers and management aimingto consolidate several challenging targets. This program, called GVS (SadiaValue Generation), uses value generation metrics considering, among otherthings, cost reduction, expense containment and revenue growth. The amount paid to each participant dependson the extent to which his performance indicators have been achieved. Inthe event of the termination of the mandate of a director or an executiveofficer, they are entitled only to statutory employment benefits underapplicable law, without any special severance.

 

In April 2005, the shareholders’ meeting approved the Executive StockOption Plan. The plan is intended to grant to company executives options to buypreferred, nominative shares issued by SADIA S.A., available in the treasury,in accordance with CVM Instructions 10/1980 and 390/2003. The objective of suchiniative is to motivate plan participants, directing their behavior andlong-term vision, stimulating their sense of ownership and commitment to theorganization, in keeping with the interests of company shareholders. The optionexercise price (note that participants will not be entitled to any discountand/or negative goodwill) will be determined based on the average stockquotation from the last three (3) trading sessions on the São Paulo StockExchange (BOVESPA) prior to the date of grant, and updated by the accumulatedconsumer price index (“INPC”) between the date of grant and the date of theexercise of the option by the executive. The blocked period, during which the participant may not exercise thestock option (referred to as the “Vesting [Period]”), will be three (3) yearsas of the date of the granting of the option.  The maximum deadline forthe exercise of the option will be five (5) years after it has been granted.

 

**C.Boar**d Practices

** **

Sadia has five standing committees: a taxation committee, an auditcommittee, a finance committee, a compensation committee and a Disclosure Policy Committee. Thecommittees are composed of members of the board who dedicate themselves to thedevelopment of the long run strategy of specific areas of the Company.

 

**Taxation Committee**

 

This committee is responsible to identify cost reduction opportunitiesthrough the evaluation of the tax regulations, its changes and impacts on theCompany’s operations. This committee is composed of three effective members:Roberto Romano Ancelmo Fontana Filho (coordinator), Francisco Silvério MoralesCéspede and Osório Henrique Furlan.

 

**Audit Committee**

 

The audit committee, which is equivalent to a U.S. auditcommittee, provides assistance to the Company’s board of directors in mattersinvolving the Company’s accounting, internal controls, financial reporting andcompliance. The audit committee is empowered to recommend the appointment ofindependent auditors to the board of directors and to review the compensationof, and coordinate with, the Company’s independent auditors. The auditcommittee also evaluates the effectiveness of the Company’s internal financialand accounting controls. The audit committee is

 

50

----

 

comprised of three members elected by the board of directors for aone-year term of office. The current members of the audit committee areFrancisco Silvério Morales Céspede (coordinator), Alcides Lopes Tápias andNorberto Fatio. All members of the audit committee satisfy the audit committeemembership independence requirements set forth by the SEC and the NYSE.Francisco Silvério Morales Céspede has been determined by the board to be anaudit committee “financial expert” within the meaning of the rules adopted bythe SEC relating to the disclosure of financial experts on audit committees inperiodic filings pursuant to the U.S. Securities Exchange Act of 1934.

 

**Finance Committee**

 

Responsible for the medium and long-term management of the financialstrategy of the Company. This committee is charged with development of theCompany’s hedge policy, project financing, capital markets, capital structureand cash management directions, and is composed of three members: Alcides LopesTápias (coordinator), Everaldo Nigro dos Santos and Walter Fontana Filho.

 

**Human Resources and Compensation Committee**

 

Responsible for conducting the human resources planning and strategy ofSadia, among others, its basic functions are: evaluate executives performance,training and hiring policies, salary and bonus policy and succession plans forsenior management. The members are: Eduardo Fontana d’Ávila (coordinator), Everaldo Nigrodos Santos and Vicente Falconi Campos.

 

**Disclosure Policy Committee**

 

This committee’s primaryfunction is to enforce Sadia’s Disclosure Policy related to materialinformation, consisting of the Chairman of the Board of Directors, the CEO andthe Investor Relations Director.

 

**D.Empl**oyees

** **

At December 31, 2004 the Company had 40,600 employees.

 

**E.Share O**wnership

** **

On March 31, 2005 the board members and executive directors of thecompany (excluding those that are part of the shareholders’ agreement) held, asa group, 8,717,746 common shares and 10,417,251 preferred shares, correspondingto 3.39% and 2.45% of the amount of outstanding shares of each class,respectively.

 

For more details on ownership and any relationship among majorshareholders, see “Item 7. Major Shareholders.”

 

## ***ITEM7. MAJO***RSHAREHOLDERS AND RELATED PARTY TRANSACTIONS

## *** ***

**A.Major**Shareholders

** **

**Shareholders Agreement**

 

Members of the family of the founder, Mr. Attilio Fontana, establisheda shareholders’ agreement in May 1977, amended in October 1999, when it wasextended until May 2010. The agreement strives to regulate the relationshipbetween the family groups regarding the purchase and sale of shares betweenthemselves and with third parties as well as to establish principles and rulesfor the exercise of block voting rights, investment policy and remuneration ofcapital. The agreement is reviewed every three years. Any family member whowishes to dispose of his/her shareholding must provide a right of first refusalto all parties to the shareholders’ agreement.

 

The Company’s shareholders’ agreement, was composed of 52 participants,in December 2004 and controls 68.9% of Sadia’s voting shares. Sadia S.A. votingand non-voting capital stock is listed on the Bovespa stock exchange,

 

51

----

 

where it is among the most actively traded stocks, representing 51.0%of the total volume traded among the food sector stocks.

 

**Restrictions on Foreign Investment**

 

According to Sadia’s by-laws, 51% of the voting capital of the Companymust be held by Brazilian citizens. The right to convert dividend payments andproceeds from the sale of preferred shares into foreign currency and to remitsuch amounts outside Brazil is subject to exchange control restrictions andforeign investment legislation which generally are subject to severalmechanisms that permits a foreign investor to trade directly in Bovespa.

 

Until March 2000, this mechanism was known as the Annex IV Regulations,in a reference to Annex IV of Resolution No. 1,289 of the National MonetaryCouncil (the “Annex IV Regulations”). Currently, this mechanism is regulated byResolution No. 2,689, of January 26, 2000, of the National Monetary Council andby Instruction No. 325, of January 27, 2000, of the CVM, as amended (the “2,689Regulation”). The 2,689 Regulation, which became effective on March 31, 2000,sets forth new rules concerning foreign portfolio investments in Brazil.

 

Foreign investments registered under Annex IV Regulations had to beconformed to the 2,689 Regulation by September 30, 2000. Such rules allowforeign investors to invest in almost all of the financial assets and to engagein almost all transactions available in the Brazilian financial and capitalmarkets, if some requirements are fulfilled.

 

In accordance with the 2,689 Regulation, foreign investors areindividuals, legal entities, mutual funds and other collective investmentsresident, domiciled or headquartered abroad. The 2,689 Regulation prohibits theoffshore transfer or assignment of the title of the securities, except in thecases of (i) corporate reorganization effected abroad by a foreign investor or(ii) inheritance.

 

Pursuant to the 2,689 Regulation, foreign investors must: (i) appointat least one representative in Brazil with powers to perform actions relatingto the foreign investment; (ii) fill in the appropriate foreign investorregistration form; (iii) obtain registration as a foreign investor with CVM;and (iv) register the foreign investment with the Central Bank.

 

The securities and other financial assets held by the foreign investorpursuant to the 2,689 Regulation must be registered or maintained in depositaccounts or under the custody of an entity duly licensed by the Central Bank orby the CVM or be registered in register, clearing and custody systemsauthorized by the Central Bank or by the CVM. In addition, securities tradingis restricted to transactions carried out in exchanges or organizedover-the-counter markets licensed by the CVM.

 

All investments made by a foreign investor under the 2,689 Regulationwill be subject to an electronic registration with the Central Bank. ResolutionNo. 1,927 of the National Monetary Council, which is the Amended and RestatedAnnex V to Resolution No. 1,289 (the “Annex V Regulations”), provides for theissuance of depositary receipts in foreign markets in respect of shares ofBrazilian issuers. The ADSs have been approved under the Annex V Regulations bythe Central Bank and the CVM. Accordingly, the proceeds from the sale of theADSs by ADR holders outside Brazil are free of Brazilian foreign investmentcontrols and holders of the ADSs will be entitled to favorable tax treatment.According to the 2,689 Regulation, foreign investments registered under Annex VRegulations may be transferred to the new investment system created byResolution No. 2,689 and vice-versa, with due regard to the conditions setforth by the Central Bank and by the CVM.

 

Payments of dividends and other cash distributions by the Companyrelating to the preferred shares underlying the Preferred ADRs will be made inBrazilian currency to the custodian, in its capacity as representative of thedepositary, which will then convert such proceeds into U.S. dollars and willthen remit such U.S. dollars to the depositary for distribution to holders ofthe related preferred ADSs. If the custodian is not immediately able to convertthe dividends in Brazilian currency to U.S. dollars, then the holders of thepreferred ADSs may be adversely affected by devaluation or other fluctuations inexchange rates, before it is possible to convert and remit these dividends.Fluctuations in the exchange rate between the *real*and the U.S. dollar may also affect the value in U.S. dollars, equivalent tothe price in *reais*, of the preferred sharestraded on Brazilian stock exchanges.

 

**Share Position**

 

The following table contains certain information as of March 31, 2005with respect to (i) any person known to the Company to be the beneficial ownerof more than 5% of the Company’s outstanding shares of voting common shares,(ii) any person known to the Company to be the beneficial owner of more than 5%of the Company’s outstanding shares of preferred shares and (iii) thetotal number of the Company’s voting common shares and preferred shares ownedby the executive officers and directors of the Company as a group.

 

52

----

 
| ** **                                                                                                                                | ** ** | **Share Position at March 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                | ** ** | **Common Shares**                    | ** ** | **Preferred Shares** | ** ** |
| ** **                                                                                                                                | ** ** | **Amount**                           | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Sunflower Participações S/A                                                                                                     |       | 32,018,789                           |       | 12.46 |   | — |   | — |   |
| Ósório  Henrique Furlan                                                                                                         |       | 14,378,172                           |       | 5.59 |   | 557,127 |   | 0.13 |   |
| Attílio Francisco Xavier Fontana Foundation  Private Social Security Fund of the Sadia employees, controlled by 23,000  participants |       | 24,998,558                           |       | 9.73 |   | 8,230,000 |   | 1.93 |   |
| Bradesco Vida  e Previdência S.A.                                                                                                    |       | 18,191,148                           |       | 7.08 |   | — |   | — |   |
| Executive Directors (not part of the  shareholders’ agreement)                                                                       |       | 11,915                               |       | 0.00 |   | 4,413,051 |   | 1.04 |   |

 

*Sunflower Participações*is a holding company composed of several family members and is part of the shareholdersagreement. The breakdown is as follows:

 
| ** **                     | ** ** | **Sunflower Participation at March 31, 2005** | ** ** |
|--------------------------------|------------|-----------------------------------------------|------------|
| ** **                     | ** ** | **Common  Shares  Beneficially  Owned**       | ** ** | **% of  Sunflower** | ** ** | **Preferred  Shares  Beneficially  Owned** | ** ** | **%** | ** ** |
| Maria  Aparecida Cunha Fontana |       | 14,084,143                                    |       | 43.99 |   | — |   | — |   |
| Walter  Fontana Filho          |       | 6,739,660                                     |       | 21.05 |   | — |   | — |   |
| Attílio  Fontana Neto     |       | 5,716,562                                     |       | 17.85 |   | — |   | — |   |
| Vânia Cunha  Fontana      |       | 5,478,424                                     |       | 17.11 |   | — |   | — |   |
| **Total**                      | ** ** | **32,018,789**                                | ** ** | **100.00** | ** ** | **—** | ** ** | **—** | ** ** |

** **

**B.Related P**arty Transactions

** **

The Company has operating transactions with Sadia International andWellax, which are both the Company’s vehicles for sales outside Brazil. Wellaxis also acting as a financial entity of the Company by obtainingexport-financing loans from international banks and investing the proceeds indebt securities.

 

Concórdia CVMCC is a brokerage firm that is responsible for identifyingthe optimal alternatives of investments for the cash surplus generated by theCompany and its subsidiaries.

 

**C.Interests of**Experts and Counsel

** **

*Not Applicable.*

 

## ***ITEM8. FINANCI***ALINFORMATION

## *** ***

**A.Consolidated**Statements and Other FinancialInformation

** **

See “Item 18. Financial Statements”

 

**Legal Proceedings**

 

The Company and its subsidiaries are parties to certain legalproceedings in the normal course of business, including administrative andjudicial tax disputes, civil and labor proceedings. Provisions taken by theCompany in its financial statements in connection with such proceedings reflecta reasonable estimate of probable losses as determined

 

53

----

 

by the Company’s management based on legal advice. Additionally, theCompany constitutes judicial deposits to serve as guaranties during the disputeof the discussion of its proceedings, when this procedure is required tosuspend the enforcement of the claim.

 

In the opinion of management, except as set forth below, there are nolegal proceedings in which the Company or any of its subsidiaries is a party,or to which any of their respective properties are subject, that are not presentlyprovided for, which, either individually or in the aggregate, may have amaterial adverse effect on the results of operations or financial position ofthe Company.

 

***Labor Disputes***

 

The Company is involved in 1,720 labor proceedings none of which is materialin amount. The Company established a reserve amount of R$ 13.6 million, totreat these issues. These disputes involve matters ranging from overtimeclaims, wrongful termination and claims involving work conditions.

 

***Civil Disputes***

 

Sadia is involved in a series of civil proceedings all of which are inthe ordinary course of business. At December 31, 2004 the Company provisionedan aggregate amount of approximately R$11.7 million relative to the expectedsettlement for these proceedings. The proceedings considered material to Sadiarefer to ex-employees’ claims for indemnification due to health problems thatevolved after resignation (ex-employees allege they developed occupationaldiseases related to the activities they used to perform during the work periodin Sadia, and workplace accidents) in the amount of R$ 5.8 million. Inaccordance with Brazilian law, notwithstanding that the Company pays anadditional salary to cover the risks involved in those activities, consideredrisky and extraordinary, these claims, when legally challenged, are treated ascivil issues, because they involve indemnity claims. The Company is alsodisputing with ex-integrated poultry out growers claims for indemnification inthe amount of R$ 3.9 million, relative to termination of contracts due to highproduction costs.

 

***Tax Disputes***

 

The Company is involved in tax litigation, as both plaintiff anddefendant, in which it contests the payment of certain taxes or requests asrelief the confirmation of the applicability of tax credits, as describedbelow:

 

*The Company is a defendant in the followingcases*

 

i. Income tax:

 

In order to cover several tax contingencies, which are individually notmaterial, Granja Rezende (merged into the Company in August 2002) hasestablished several reserves aggregating R$ 6.9 million.

 

ii. ICMS (Value added tax on Sales and Services):

 

a)             Thestate of Sao Paulo is seeking to collect value added tax (ICMS) on customsdischarge of certain imported products. A reserve of R$ 3.5 million was createdto cover probable losses to be settled;

 

b)             Thestate of Rio de Janeiro is seeking to collect value added tax (ICMS) on certaintransactions as the state has asserted that some merchandise sold was supportedby incorrectly completed invoices (issuer: Rezende – Uberlândia; receiver:several customers in the state of Rio de Janeiro). A reserve of R$ 2.8 millionwas established to cover an eventual liability;

 

c)             Thestate of Mato Grosso is seeking to collect value added tax (ICMS) due todifferences found in monthly deductions on ICMS values charged from third partyfreights by tax substitution. Of the total tax amount sought, the Company waspartially successful in reducing the contingency to R$ 0.8 million, which isbeing paid by a 60 month amortization plan agreed with the state. The reservewas adjusted from R$ 1.4 million to R$ 0.8 million;

 

d)             Thestate of Mato Grosso is seeking to collect value added tax (ICMS) due toimproperly procedures to prove that certain credits could be unwound onpurchases made in the Manaus free zone. A reserve of R$ 5.5 million has beenestablished to cover the eventual liability;

 

54

----

 

e)             Thestate of Rondônia is seeking to collect value added tax (ICMS) on certainproducts. The state has asserted that the Company has not issued the invoicesfrom third party warehouses. A reserve of R$ 0.55 million has been establishedto cover the eventual liability;

 

f)              Thestate of Sao Paulo is seeking to collect credits on value added tax (ICMS) usedto offset the electric energy consumed by the Company freezers and on theacquisition of some telecom services. A reserve of R$ 2.5 million has beenestablished to cover the eventual liability;

 

iii. National Institute of Social Security (INSS)

 

The National Institute of Social Security (INSS) requires thecollection of contributions on salaries of third parties rendering services incivil construction work at Granja Rezende, due to joint liability, amounting toR$ 3.10 million. The Company is claiming the contribution from thoseresponsible for the construction.

 

iv. Other tax contingencies

 

***The Company as aplaintiff***

 

The Company is a plaintiff in several judicial and administrativematters, intending to recover improperly paid taxes or challenging those thatit believes were improperly charged. Based on estimates of its legal counselthese claims are considered probable or possible positive outcomes.

 

***Dividends andDividend Policy***

 

The authorized capital stock of the Company is composed of common sharesand preferred shares. As of December 31, 2004, the Company’s capital stock wascomposed of 257,000,000 common shares and 426,000,000 preferred shares.

 

*Dividends Distributed*

 

The following table sets out the dividends paid to shareholders of theCompany’s preferred shares since 2000 in historical Brazilian currency and U.S.dollars translated from historical Brazilian currency at the commercialexchange rate on the date of payment of the same dividends.

 
| ** ** | ** ** | **Dividend Historical Payments** | ** ** |
|------------|------------|----------------------------------|------------|
| **Period** | ** ** | **Description**                  | ** ** | **Payment  Date** | ** ** | **R$per  1,000  Preferred  Shares** | ** ** | **R$per  1,000  Common  Shares** | ** ** | **US$per 1,000  Preferred  Shares** | ** ** | **US$per 1,000  Common  Shares** | ** ** | **US$per  ADR** | ** ** |
| **2000**   |       | Dividends                        |       | 8/18/2000 |   | 11.00 |   | 10.00 |   | 6.05 |   | 5.50 |   | — |   |
|       |       | Dividends                        |       | 2/20/2001 |   | 37.40 |   | 34.00 |   | 18.64 |   | 16.95 |   | — |   |
| **2001**   |       | Interests on  Equity             |       | 8/22/2001 |   | 27.54 |   | 24.99 |   | 10.92 |   | 9.91 |   | 0.33 |   |
|       |       | Interests on  Equity             |       | 2/14/2002 |   | 75.90 |   | 69.00 |   | 31.30 |   | 28.46 |   | 0.94 |   |
| **2002**   |       | Dividends                        |       | 8/16/2002 |   | 17.60 |   | 16.00 |   | 5.57 |   | 5.06 |   | 0.17 |   |
|       |       | Interests on  Equity             |       | 2/14/2003 |   | 63.50 |   | 57.73 |   | 17.36 |   | 15.78 |   | 0.52 |   |
|       |       | Interests on  Equity             |       | 2/21/2003 |   | 20.37 |   | 18.52 |   | 5.65 |   | 5.13 |   | 0.17 |   |
| **2003**   |       | Interests on  Equity             |       | 8/15/2003 |   | 60.69 |   | 55.17 |   | 20.28 |   | 18.43 |   | 0.61 |   |
|       |       | Interests on  Equity             |       | 2/16/2004 |   | 133.28 |   | 121.16 |   | 45.86 |   | 41.69 |   | 1.38 |   |
| **2004**   |       | Interests on  Equity             |       | 8/17/2004 |   | 66.20 |   | 60.18 |   | 22.07 |   | 20.07 |   | 0.66 |   |
|       |       | Interests on  Equity             |       | 2/16/2005 |   | 113.84 |   | 103.49 |   | 43.92 |   | 39.92 |   | 0.44 |   |
|       |       | Interests on  Equity             |       | 3/14/2005 |   | 11.16 |   | 10.15 |   | 4.06 |   | 3.69 |   | 0.04 |   |

 

55

----

 

*Calculation of Distributable Amount*

 

At each annual general shareholder’s meeting, the board of directorsmust recommend the manner of allocation of the Company’s income from thepreceding fiscal year. According to Brazilian corporate law, the net income ofa company after deduction of income tax and social contributions relative tothe same fiscal year, and net of any losses accumulated in prior fiscal years,and amounts allocated to employee and management profit-shares, will representthe net income of the Company, following (i) the deduction of amounts allocatedto the constitution of the legal reserve, (ii) the deduction of amountsallocated to the constitution of other reserves, following the principlesestablished by the Company and in accordance with the applicable legislation(as hereinafter discussed), and (iii) the increase by the reversion of reservesconstituted in previous fiscal years. This net income will be available fordistribution to shareholders (thus constituting the adjusted net profit,designated here as the distributable amount) in any fiscal year.

 

***Legal Reserve***

 

According to Brazilian corporate law, the Company is required tomaintain a legal reserve to which it must allocate 5% of its net income in eachfiscal year, until the amount of this reserve is equal to 20% of the paid-inshare capital, or until the sum of this reserve and all other capital reservesreaches 30% of the paid-in share capital. Net losses, if any, may be debitedagainst the legal reserve.

 

***Discretionary Reserve***

 

According to Brazilian corporate law, the Company may decide to assignon a discretionary basis a portion of the net income to the limit establishedin its by-laws (with such reserves collectively designated as discretionaryreserves). The Company’s by-laws established a special fund for research anddevelopment to which it may allocate up to 15% of its net income per year,until the amount of this fund is equivalent to 10% of its paid-in share capital.

 

***Contingency Reserve***

 

According to Brazilian corporate law, the Company may also decide toassign a portion of the net income to a contingency reserve against likelylosses in future fiscal years. Any amount thus assigned in a previous year mustbe (i) reversed in the fiscal year in which the loss was envisaged, if thisloss does not effectively occur, or (ii) debited, if the foreseen eventactually materializes. At the present time, Sadia has no contingency reserve.There are no clearly defined rules on the extension of the future period forwhich a loss may be foreseen for the purposes of constituting a contingencyreserve. Its determination thus depends on circumstances and the nature of eachparticular event, and will be decided at the discretion of the board ofdirectors.

 

***Investment Project Reserve***

 

According to Brazilian corporate law, a portion of the net income mayalso be assigned for any discretionary appropriations for plant expansions orany other investment projects, the amount of which is based on the capitalbudget previously presented by management and approved by shareholders.Following the conclusion of the corresponding investment projects, the Companymay withhold the relevant appropriation until the shareholders vote to transferall or part of the capital reserve or retained earnings. The Company’s by-lawseffective as of March 31, 2000, contains provisions for a special expansionreserve, to which at least 15% and at most 60% of the net income (formerly 5%and 15%, respectively) must be allocated each year, until the amount of thisreserve is equivalent to 70% of its paid-in share capital (from former 30%).

 

***Unrealized Income Reserve***

 

According to Brazilian corporate law, if the amount of unrealizedincome (according to the definition below) in any fiscal year exceeds theallocated amount (i) of the legal reserve, (ii) of the discretionary reserves,(iii) of the contingency reserve and (iv) of the investment project reserve,the excess amount may be allocated to an unrealized income reserve. Unrealizedincome in any fiscal year will represent the sum (i) of monetary correction ofthe balance sheet (until 1995) during the fiscal year, (ii) income fromsubsidiaries or associated companies for the fiscal year in question, (iii)income from installment sales to be received after the end of the subsequentfiscal year.

 

***Fiscal Incentive Investment Reserve***

 

According to the terms of Brazilian tax legislation, a portion of netincome may also be assigned to a fiscal incentive investment reserve foramounts corresponding to the Company’s income tax deductions generated bycredits for certain investments that are approved by the government. Thereserve may only be used to acquire shares in companies that are developingspecific projects that are approved by the government.

 

56

----

 

Brazilian corporate law states that all discretionary allocations ofnet income including discretionary reserves, the contingency reserve, theunrealized income reserve and the investment project reserve, will be subjectto approval by shareholders at the annual meeting, and may be transferred tothe Company’s capital or used to pay dividends in subsequent fiscal years. Thefiscal incentive investment reserve and the legal reserve are also subject toapproval by shareholders at the annual meeting and may be transferred to theCompany’s capital, but may not be used to pay dividends in subsequent fiscalyears.

 

The calculation of the net income of the Company, and the allocationsto reserves in any fiscal year, are determined on the basis of financialstatements prepared in accordance with Brazilian corporate law and BrazilianGAAP, which differs from the financial statements prepared in accordance withUnited States generally accepted accounting principles. The financialstatements presented herein were prepared in accordance with U.S. GAAP, andwhile the allocations to reserves and the dividends are reflected in theseconsolidated financial statements, investors will not be able to calculate theamounts of these allocations, or of dividends due, on the basis of the sameconsolidated financial statements.

 

***Mandatory Dividends***

 

As established in its by-laws, Sadia is required to distribute toshareholders in lieu of dividends relative to each fiscal year ended December31, an amount of no less than 28% of the distributable amount (the mandatorydividend) in any given fiscal year (an amount of which shall include anyinterest on shareholders’ equity paid and any preferential dividends paid onpreferred shares during the same fiscal year). In addition to the mandatorydividend, the board of directors may recommend the payment of dividends toshareholders from other legally available resources, according to the terms ofsuch law. Any payment of interim dividends or interest on shareholders’ equitywill be deducted from the amount of the mandatory dividend for the same fiscalyear. In accordance with Brazilian corporate law, if the board of directorsdecides, prior to the annual shareholders’ meeting, that the payment of themandatory dividends for the preceding fiscal year is not advisable, due to thefinancial condition of the Company, then there will be no requirement to paysuch mandatory dividends. Such a decision must be reviewed by an auditcommittee, and reported to shareholders and to the CVM. If a mandatory dividendis not paid, any retained earnings must be allocated to a special reserveaccount. If the Company does not incur the expected losses that led to thewithholding of the mandatory dividend, then the Company will be required to paythe proper mandatory dividend.

 

***Priority of the Preferred Shares in thePayment of Dividends***

 

On May 5, 1997, an amendment to Brazilian corporate law was approved(Law No. 9,457), that included the requirement that companies whose by-laws donot include provisions for the distribution of fixed or minimum dividends,whether cumulative or not, pay dividends on their preferred shares that are atleast 10% greater than the corresponding dividends on their common shares. Inaccordance with the Company’s by-laws, and subject to the calculation of themandatory dividends for any particular fiscal year, the holders of thepreferred shares will be entitled to minimum annual non-cumulative preferreddividends for an amount equal to 28% of the share capital attributable to thepreferred shares, prior to the distribution of dividends to the holders of thecommon shares. After having paid these minimum annual non-cumulative preferreddividends, the holders of the common shares will receive the same amount ofdividend per share as that of the preferred shares. Once this condition hasbeen met, any additional dividends declared by the Company with regard to anyparticular fiscal year will be divided between the holders of the common sharesand the preferred shares, with the latter receiving an amount 10% greater thanthe former.

 

***Other Rights of Preferred Shares***

 

The Company’s by-laws do not contain provisions for the conversion ofpreferred shares into common shares. In addition, there are no provisions forthe redemption of shares associated with the preferred shares. The preferredshares take priority in procedures related to the liquidation of the Company,without entitlement to any other form of compensation for existingshareholders. Holders of preferred shares are not entitled to vote at thegeneral meeting of the Company’s shareholders. If, however, the preferreddividends are not paid for three successive years, the preferred shares willacquire the right to vote, until the payment of these dividends is made.

 

***Payment of Dividends***

 

In accordance with Brazilian corporate law, the Company is required tohold an annual shareholders’ meeting by April 30 of each year, during which anannual dividend will be declared In addition, interim dividends may be declaredby the board of directors. According to Brazilian corporate law, dividends mustgenerally be paid to the holders of the relevant shares within 60 days of thedate of declaration of the same dividend, unless a resolution of shareholdersestablishes another date of payment, which in both cases, must occur before theend of the fiscal year in

 

57

----

 

which the dividend was declared. The Company’s by-laws require that anannual general shareholders’ meeting be held within four months of the end ofeach fiscal year. At this meeting, among other things, an annual dividend maybe declared by decision of the shareholders and at the recommendation of theexecutive officers, as approved by the board of directors. The payment ofannual dividends is based on the financial Statements relating to the fiscalyear ending December 31. According to the Company’s by-laws, dividends will bepaid to shareholders within 60 days of the date of declaration of the dividend,which must be effected before the end of the fiscal year in which the samedividend was declared. The requirement for mandatory dividends may be met throughpayments either in the form of dividends or of interest on shareholders’equity. The Company is not required to adjust the amount of the dividend forinflation for the period from the end of the last fiscal year to the date ofdeclaration of the same dividend. It is therefore possible that the amount,expressed in r*eais*, of the dividends paid toholders of preferred shares or common shares will be reduced due to inflation.Shareholders have up to three years from the date of payment of the dividend todemand payment of these as they relate to shares held by the same party, afterwhich time the Company will be free from any obligation to make such payments.

 

Payments of cash distributions by the Company relating to the preferredshares underlying the preferred ADRs will be made in Brazilian currency to thecustodian, in its capacity as representative of the depositary, which will thenconvert such proceeds into U.S. dollars and will then remit the same U.S.dollars to the depositary for distribution to holders of the related ADRs (See “Descriptionof American Depositary Receipts”). Dividends paid to shareholders that are notBrazilian residents, including holders of preferred ADRs, are exempt fromwithholding of Brazilian income tax at source, except with regard to incomeprovisioned before 1996, which is subject to retention of 15% in lieu ofBrazilian taxation.

 

Shareholders that are not resident within Brazil must register with theBrazilian Central Bank so that the dividends resulting from sales, or otheramounts, may be remitted in foreign currency outside Brazil. The preferredshares underlying the ADRs are maintained within Brazil by the custodian, whichacts as agent for the depositary, which appears in the Company’s register asthe beneficial owner of the shares.

 

***Notional Interest Charge Attributed toShareholders’ Equity***

 

Brazilian companies are permitted to pay limited additional amounts toholders of equity securities and treat such payments as an expense forBrazilian income tax purposes. The amount of any such interest payment toholders of equity securities is generally limited in respect of any particularyear to (i) retained earnings for such year plus 50% of the pre-tax profits forsuch year multiplied by (ii) the *Taxa de Juros de LongoPrazo*interest rate (Long-Term Interest Rate -TJLP), which is theofficial rate for governmental long-term loans. The additional payment may takethe form of supplemental dividends to shareholders. A 15% withholding tax ispayable by the Company upon distribution of the notional interest amount. In1996, the withholding tax was payable by the Company and was accrued andcharged to income. In 1997, the withholding tax was paid by the Company onbehalf of the shareholders. Such payments are also deductible for socialcontribution purposes.

 

Under Brazilian law, the Company is obliged to distribute toshareholders an amount sufficient to ensure that the net amount received byshareholders after payment by the Company of Brazilian withholding taxes inrespect of the distribution of notional interest, is at least equal to themandatory distribution.

 

***Dividend Policy***

 

The Company currently plans to pay dividends or interest onshareholders’ equity on its preferred and common shares to the amount of thedistributions required in any fiscal year, subject to the determination by theboard of directors that such distributions are inadvisable due to the financialcondition of the Company. In accordance with its policy, the Company paysdividends twice a year, although the law does not require it to do so.

 

**B.Signific**ant Changes

** **

No significant change has occurred since the date of the annualfinancial statements included in this annual report.

 

58

----

 

## ***ITEM9. THE OF***FERAND LISTING

## *** ***

**A.Offer an**d listing details

** **

On December 31, 2004, the Company’s share capital consisted of257,000,000 common shares and 426,000,000 preferred shares. Of the two types ofshares traded in the market, only common shares carry voting rights. Under theterms of the Company’s by-laws, however, specific rights attach to thenon-voting preferred shares. The Company’s common shares and preferred sharesare publicly traded in Brazil on Bovespa, under the ticker symbols SDIA3 andSDIA4, respectively. In accordance with Brazilian law, a company is entitled topurchase up to 10% (ten percent) of its own stock traded on Brazilian stockexchanges. See “Item 7. Major shareholders and Related Party Transactions” andItem 4.A, organizational chart, for more information.

 

The Company’s most liquid shares are non-voting preferred shares, and30.9% (December 2004) of these are owned by foreign investors. The Company hasno current plans to change its ownership structure.

 

In June 2001, the Company adhered to the “Level 1 of CorporateGovernance Requirements.” in Bovespa, certifying its commitment to transparencyand fair disclosure of information.

 

To become aLevel 1 company, an issuer must agree to:

 

•                  ensure thatshares of the issuer representing 25% of its total capital are effectivelyavailable for trading;

 

•                  adopt offeringprocedures that favor widespread ownership of shares whenever making a publicoffering;

•                  comply withminimum quarterly disclosure standards;

 

•                  comply with thedisclosure of shareholders agreement and stock options programs;

 

•                  provide anannual calendar with corporate events

 

•                  provide cashflow statements

 

•                  follow stricterdisclosure policies with respect to transactions made by controllingshareholders, directors and officers involving securities issued by the issuer;

 

In April 2001, the Company listed its American Depositary Receipts(ADRs) program on the New York Stock Exchange, providing investors an alternatechannel to buy its stocks.

 

The Company’sand preferred shares also have also been traded on the LATIBEX, under theticker symbol XSDI since November 2004. The LATIBEX is an electronic marketcreated in 1999 by the Madrid stock exchange in order to enable trading ofLatin American equity securities in euro denomination.

 

**PriceInformation**

 

The table below presents, for the indicated periods, the minimum andmaximum prices for the preferred shares on Bovespa in Brazilian *reais*. These prices were then converted into U.S. dollars atthe official exchange rate of the respective day. Please note that the high andlow quote in U.S. dollars in a given period may not be in the same month of thehigh and low prices expressed in *reais* due tothe influence of the foreign exchange rate.

 
| ** ** | ** ** | **Preferred Shares Price -Year (Thousand Shares)** | ** ** |
|------------|------------|----------------------------------------------------|------------|
| ** ** | ** ** | **R$**                                             | ** ** | **U.S. Dollars** | ** ** |
| ** ** | ** ** | **High**                                           | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| **2000**   |       | 1,660                                              |       | 860 |   | 922 |   | 464 |   |
| **2001**   |       | 1,430                                              |       | 940 |   | 724 |   | 351 |   |
| **2002**   |       | 1,360                                              |       | 1,010 |   | 385 |   | 321 |   |
| **2003**   |       | 3,980                                              |       | 1,130 |   | 386 |   | 335 |   |
| **2004**   |       | 5,980                                              |       | 3,560 |   | 2,253 |   | 1,139 |   |

* *

*Source: Bloomberg*

 

59

----

 
| ** **     | ** ** | **Preferred Shares Price -Quarter (Thousand Shares)** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|
| ** **     | ** ** | **R$**                                                | ** ** | **U.S. Dollars** | ** ** |
| ** **     | ** ** | **High**                                              | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| **2001**       | ** ** | ** **                                            |       | ** ** |   | ** ** |   | ** ** |   |
| First Quarter  |       | 1,430                                                 |       | 1,140 |   | 724 |   | 588 |   |
| Second Quarter |       | 1,290                                                 |       | 1,060 |   | 571 |   | 428 |   |
| Third Quarter  |       | 1,180                                                 |       | 940 |   | 472 |   | 351 |   |
| Fourth Quarter |       | 1,360                                                 |       | 1,000 |   | 546 |   | 372 |   |
| **2002**       |       |                                                  |       |   |   |   |   |   |   |
| First Quarter  |       | 1,310                                                 |       | 1,200 |   | 555 |   | 496 |   |
| Second Quarter |       | 1,360                                                 |       | 1,050 |   | 577 |   | 382 |   |
| Third Quarter  |       | 1,150                                                 |       | 1,010 |   | 401 |   | 321 |   |
| Fourth Quarter |       | 1,360                                                 |       | 1,030 |   | 385 |   | 259 |   |
| **2003**       |       |                                                  |       |   |   |   |   |   |   |
| First Quarter  |       | 1,360                                                 |       | 1,130 |   | 386 |   | 335 |   |
| Second Quarter |       | 1,500                                                 |       | 1,160 |   | 521 |   | 348 |   |
| Third Quarter  |       | 2,680                                                 |       | 1,480 |   | 925 |   | 523 |   |
| Fourth Quarter |       | 3,980                                                 |       | 2,540 |   | 1,378 |   | 876 |   |
| **2004**       |       |                                                  |       |   |   |   |   |   |   |
| First Quarter  |       | 4,740                                                 |       | 3,980 |   | 1,667 |   | 1,357 |   |
| Second Quarter |       | 4,330                                                 |       | 3,560 |   | 1,379 |   | 1,139 |   |
| Third Quarter  |       | 5,690                                                 |       | 4,050 |   | 1,970 |   | 1,328 |   |
| Fourth Quarter |       | 5,980                                                 |       | 4,890 |   | 2,253 |   | 1,704 |   |

* *

*Source: Bloomberg*

 
| ** **      | ** ** | **Preferred Shares Price – Last Five Months  (Thousand Shares)** | ** ** |
|-----------------|------------|-----------------------------------------------------------------------|------------|
| ** **      | ** ** | **R$**                                                                | ** ** | **U.S. Dollars** | ** ** |
| ** **      | ** ** | **High**                                                              | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| **December-04** |       | 5,980                                                                 |       | 5,320 |   | 2,253 |   | 1,947 |   |
| **January-05**  |       | 5,950                                                                 |       | 4,980 |   | 2,187 |   | 1,897 |   |
| **February-05** |       | 5,230                                                                 |       | 4,790 |   | 2,002 |   | 1,852 |   |
| **March-05**    |       | 5,030                                                                 |       | 4,300 |   | 1,998 |   | 1,604 |   |
| **April-05**    |       | 4,450                                                                 |       | 3,900 |   | 1,676 |   | 1,491 |   |
| **May-05**      |       | 3,940                                                                 |       | 3,560 |   | 1,646 |   | 1,437 |   |

* *

*Source: Bloomberg*

 

The Company’s preferred shares were listed in the form of ADRs on theNew York Stock Exchange (NYSE) in April 2001. The following tables present, forthe periods indicated, the high and low prices for the ADRs. Each ADRrepresents 10 preferred shares.

 
| ** ** | ** ** | **ADR Price -Year (Thousand Shares)** | ** ** |
|------------|------------|---------------------------------------|------------|
| ** ** | ** ** | **High**                              | ** ** | **Low** | ** ** |
| **2001**   |       | 5.750                                 |       | 3.583 |   |
| **2002**   |       | 5.667                                 |       | 2.660 |   |
| **2003**   |       | 13.917                                |       | 3.183 |   |
| **2004**   |       | 22.413                                |       | 11.35 |   |

* *

*Source: Bloomberg*

 

60

----

 
| ** **     | ** ** | **ADR****Price -Quarter (Thousand Shares)** | ** ** |
|----------------|------------|---------------------------------------------|------------|
| ** **     | ** ** | **High**                                    | ** ** | **Low** | ** ** |
| **2001**       |       |                                        |       |   |   |
| First Quarter  |       | N/A                                         |       | N/A |   |
| Second Quarter |       | 5.750                                       |       | 4.750 |   |
| Third Quarter  |       | 4.783                                       |       | 3.583 |   |
| Fourth Quarter |       | 5.517                                       |       | 3.777 |   |
| **2002**       |       |                                        |       |   |   |
| First Quarter  |       | 5.583                                       |       | 4.917 |   |
| Second Quarter |       | 5.667                                       |       | 3.737 |   |
| Third Quarter  |       | 4.767                                       |       | 2.837 |   |
| Fourth Quarter |       | 3.967                                       |       | 2.660 |   |
| **2003**       |       |                                        |       |   |   |
| First Quarter  |       | 4.030                                       |       | 3.183 |   |
| Second Quarter |       | 5.333                                       |       | 3.633 |   |
| Third Quarter  |       | 9.157                                       |       | 5.197 |   |
| Fourth Quarter |       | 13.917                                      |       | 8.917 |   |
| **2004**       |       |                                        |       |   |   |
| First Quarter  |       | 16.550                                      |       | 13.500 |   |
| Second Quarter |       | 14.400                                      |       | 11.350 |   |
| Third Quarter  |       | 19.867                                      |       | 13.250 |   |
| Fourth Quarter |       | 22.413                                      |       | 17.120 |   |

* *

*Source: Bloomberg*

 
| ** **      | ** ** | **ADR Price – Last Five Months(Thousand Shares)** | ** ** |
|-----------------|------------|--------------------------------------------------------|------------|
| ** **      | ** ** | **High**                                               | ** ** | **Low** | ** ** |
| **December-04** |       | 22.41                                                  |       | 19,53 |   |
| **January-05**  |       | 22.02                                                  |       | 19.00 |   |
| **February-05** |       | 20.74                                                  |       | 18.50 |   |
| **March-05**    |       | 18.85                                                  |       | 15.94 |   |
| **April-05**    |       | 16.96                                                  |       | 14.85 |   |
| **May-05**      |       | 16.56                                                  |       | 14.45 |   |

* *

*Source: Bloomberg*

 

As of April 31, 2004 there were approximately 5 U.S. beneficial ownersof the ADSs (based on their addresses only), representing approximately 2.2 %of the total preferred shares.

 

**B.Plan of Dist**ribution

** **

The information required for this item was included in the RegistrationStatement on Form 20-F filed on June 25, 2004 (Commission file no. 1-15184) andin the subsequent annual reports on Form 20-F.

 

**C.Markets U**pdate

** **

**Trading on the Brazilian Stock Exchanges**

 

Of Brazil’s stock exchanges, *Bovespa* hasbeen the most significant in recent years. During 2004, the Bovespa accountedfor almost the total of the trading value negotiated in Brazil.

 

Bovespa is a non-profit entity owned by itsmember brokerage firms. Trading on Bovespa is limited to member brokerage firmsand a limited number of authorized non-members. Bovespa currently has two openoutcry trading sessions each business day, from 10:00 a.m. to 1:00 p.m and from2:00 p.m. to 4:45 p.m. Trading is also conducted between 10:00 a.m. and 5:00p.m. on the automated system. There is also trading in the so-calledafter-market, only

 

61

----

** **

through theautomated system of Bovespa, from 5:45 p.m. to 7:00 p.m. Only shares that weretraded during the regular trading session of the day may be traded in theafter-market of the same day.

 

There are no specialists or market makers for the Company’s shares onBovespa. The CVM and Bovespa have discretionary authority to suspend trading inshares of a particular issuer under certain circumstances. Trading insecurities listed on Bovespa may be effected off the exchange under certaincircumstances, although such trading is very limited.

 

In December 2004, the aggregate market capitalization of the companieslisted on Bovespa Index was approximately US$ 241.9 billion. Although any ofthe outstanding shares of a listed company may trade on Bovespa, in most casesless than half of the listed shares are actually available for trading by thepublic, the remainder being held by small groups of controlling persons thatrarely trade their shares. For this reason, data showing the total marketcapitalization of Bovespa tend to overstate the liquidity of the Brazilianequity securities market. The Brazilian equity securities market is relativelysmall and illiquid compared to major world markets.

 

Settlement of transactions is effected three business days after thetrade date without adjustment of the purchase price for inflation. Payment forshares is made through the facilities of a separate clearinghouse, named *Companhia Brasileira deLiquidação e Custódia*****(CBLC), which maintains accountsfor member brokerage firms. The seller is ordinarily required to deliver theshares to the exchange on the second business day following the trade date. TheCBLC is controlled by clearing agents, such as member brokerage firms andbanks, and Bovespa.

 

Trading on Bovespa by non-residents of Brazil is subject to certainlimitations under Brazilian foreign investment legislation.

 

***Regulation of BrazilianSecurities Markets***

 

The Brazilian securities markets are regulated by the CVM, which hasauthority over stock exchanges and the securities markets in general, and bythe Brazilian Central Bank, which has, among other powers, licensing authorityover brokerage firms and regulates foreign investment and foreign exchangetransactions. The Brazilian securities market is governed by Law no. 6,385dated December 7, 1976, as amended (Brazilian securities law) and the Braziliancorporate law (Law no. 6,404 dated December 15, 1976, as amended) (Braziliancorporate law).

 

Law 10,303 of October 31, 2001, amended Law no 6,385/76 and Law no6,404/76. The most important changes were (i) the conversion of CVM into anautonomous governmental agency linked to the Ministry of Finance, with legalindependence and separate assets and liabilities; (ii) the requirement ofgreater disclosure by listed companies; (iii) the tag-along right to minoritycommon shareholders in the event of change in control of a listed company; (iv)the right of preferred shareholders with non-voting rights or restricted votingrights representing at least 10% of the total stock of a listed company toelect one board member and his alternate (by April 2005, the representative ofsuch shareholders is to be chosen out of a three-name list prepared bycontrolling shareholders); (v) the right of the minority common shareholders toalso elect one board member; and (vi) the preferred shares will only be tradedin the stock market if they have at least one of the rights mentioned below:(a) priority in the receipt of dividends corresponding to at least 3% of the shares’net worth based on the last approved balance sheet of the company; (b) theright to receive dividends at least 10% higher than the dividend assigned toeach common share; or (c) the tag-along right in the event of change in thecontrol of the company.

 

Under the Brazilian corporate law, a company is either listed, a *companhia aberta*, such as the Company, orprivate, a *companhiafechada*. Alllisted companies are registered with the CVM and are subject to reportingrequirements. A company registered with the CVM may have its securities tradedeither on Bovespa or in the Brazilian over-the-counter markets (Brazilian OTC).The shares of a listed company, including the Company, may also be tradedprivately subject to certain limitations.

 

There are certain cases in which the disclosure of information to theCVM, Bovespa, or even to the public is required. These include (i) the director indirect acquisition by an investor of at least 5% (five percent) of anyclass or type of shares representing the capital stock of a listed company,(ii) the sale of shares which represents the transfer of control of a listedcompany and (iii) the occurrence of a material event to the corporation.

 

CVM issued Instruction No 361, of March 5, 2002, which regulates tenderoffers mainly when the following events occur: (i) delisting of publiccompanies; (ii) increase in the equity interest by the controlling shareholder;and (iii) transfer of control of a public company.

 

62

----

 

To be listed on Bovespa, a company must apply for registration with theCVM and Bovespa. Once this exchange has admitted a company to listing and theCVM has accepted its registration as a listed company, its securities may betraded in Bovespa, as long as the company complies with the minimumrequirements of this exchange.

 

The Brazilian OTC consists of direct trades between individuals inwhich a financial institution registered with the CVM serves as intermediary.No special application, other than registration with the CVM, is necessary forsecurities of a listed company to be traded in the Brazilian OTC. The CVMrequires that it be given notice of all trades carried out in the Brazilian OTCby the respective intermediaries.

 

Trading in securities on Bovespa may be suspended at the request of acompany in anticipation of the announcement of a material event. Trading mayalso be suspended on the initiative of the exchange or the CVM, among otherreasons, based on or due to a belief that a company has provided inadequateinformation regarding a material event or has provided inadequate responses tothe inquiries by the CVM or the exchange.

 

The Brazilian securities markets are governed principally by Braziliansecurities law, by Brazilian corporate law and by regulations issued by the CVMand the *ConselhoMonetário Nacional*(National Monetary Council). These laws and regulations, among others, providefor disclosure requirements, restrictions on insider trading and pricemanipulation, and protection of minority shareholders. Although many changesand improvements have been introduced, the Brazilian securities markets are notas highly regulated and supervised as the U.S. securities markets or markets incertain other jurisdictions.

 

**D. Selling Sh**areholders

 

Not Applicable.

 

**E.Dilution**

** **

Not Applicable.

 

**F.Expenses o**f Issue

** **

Not Applicable.

 

## ***ITEM 10.***ADDITIONAL INFORMATION

## *** ***

**A. Share**Capital

** **

Not Applicable.

 

**B. Memoran**dum andArticles of Association

** **

Not Applicable.

 

**C. Materia**l Contracts

** **

Not Applicable.

 

**D. Exchange**Controls

** **

There are two foreign exchange markets in Brazil: the commercial rateexchange market (commercial market) and the tourism rate exchange market(tourism market). Most trade and financial foreign exchange transactions,

 

63

----

 

including transactions relating to the purchase or sale of shares orthe payment of dividends with respect to shares, are carried out in thecommercial market. Purchases of foreign currencies in the commercial market maybe carried out only through a financial institution in Brazil licensed to dealin foreign exchange. The tourism market rate generally applies to transactionsto which the commercial market rate does not apply, like travels abroad. Sincethe introduction of the *real*, thetwo rates have not differed materially, although there could be substantialdifferences between the two rates in the future. In both markets, rates arefreely negotiated but may be strongly influenced by Central Bank intervention.

 

Brazilian law provides that, whenever there is a significant imbalancein Brazil’s balance of payments or reasons to foresee such an imbalance,temporary restrictions may be imposed on remittances of foreign capital abroad.For approximately six months in 1989 and early 1990, for example, aiming atpreserving Brazil’s foreign currency reserves, the Brazilian government frozeall dividend and capital repatriations that were owed to foreign equityinvestors and held by the Central Bank. These amounts were subsequentlyreleased in accordance with Brazilian Government directives. There can be noassurance, however, that the Brazilian Government may not take similar measuresin the future.

 

**E. Taxa**tion

** **

The following summary contains a description of the principal Brazilianand U.S. federal income tax consequences of the ownership and disposition of apreferred share and a preferred ADR. It does not purport to be a comprehensivedescription of all the tax considerations that may be relevant to a decision topurchase those securities. In particular, this summary deals only with holdersthat will hold preferred shares or preferred ADRs as capital assets and doesnot address the tax treatment of a holder that may be subject to special taxrules, like a bank, an insurance company, a dealer in securities, a person thatwill hold preferred shares or preferred ADRs in a hedging transaction or as aposition in a straddle or conversion transaction for tax purposes, a personthat has a functional currency other than the U.S. dollar, a person liable foralternative minimum tax, a partnership (or other entity treated as apartnership for U.S. federal income tax purposes) or a person that owns or istreated as owning 10% or more of the voting shares of the company. Eachprospective purchaser of a preferred share or preferred ADR should consult hisown tax advisers as to the personal tax consequences of his investment, whichmay vary for investors in different tax situations.

 

The summary is based upon tax laws of Brazil and the United States andapplicable regulations, judicial decisions and administrative pronouncements asin effect on the date hereof. Those authorities are subject to change or newinterpretations, possibly with retroactive effect. Although there is no incometax treaty between Brazil and the United States at this time, the taxauthorities of the two countries have had discussions that may culminate in atreaty. No assurance can be given, however, as to whether or when a treaty willenter into force or how it will affect the U.S. holders of preferred shares orpreferred ADRs. This summary is also based upon the representations of thedepositary and on the assumption that each obligation in the deposit agreementrelating to the preferred ADRs and any related documents will be performed inaccordance with its terms.

 

**BrazilianTax Considerations**

 

The following discussion summarizes the material Brazilian taxconsequences of the acquisition, ownership and disposition of preferred sharesor preferred ADSs by a holder that is not domiciled in Brazil for purposes ofBrazilian taxation and, in the case of a holder of preferred shares which hasregistered its investment in such securities with the Central Bank as a U.S.dollar investment (in each case, a non-Brazilian holder). The following discussiondoes not specifically address all of the Brazilian tax considerationsapplicable to any particular non-Brazilian holder, and each non-Brazilianholder should consult his or her own tax advisor concerning the Brazilian taxconsequences of an investment in any of such securities.

 

64

----

 

***Taxation of Dividend***

 

Dividends paid with respect to income earned since January 1, 1996,including dividends paid in kind (i) to the depositary in respect of thepreferred shares underlying the preferred ADSs or (ii) to a non-Brazilianholder in respect of preferred shares, are not subject to any withholding taxin Brazil. The current tax legislation eliminated the then existing 15%withholding tax on dividends paid to companies, resident individuals ornon-residents in Brazil. Accordingly, dividends with respect to profitsgenerated on or after January 1, 1996 are not subject to withholding tax inBrazil. Dividends related to profits generated until December 31, 1993 will besubject to Brazilian withholding tax of 25%. Dividends related to profitsgenerated between January 1, 1994 and December 31, 1995 will be subject toBrazilian withholding tax of 15%, if distributed expenses on dividends paid asinterest on equity, are neither deductible from the calculation basis ofcorporate income tax nor from the social contribution on income.

 

***Taxation of Gains***

 

Gains realized outside Brazil, until December 31st, 2003, bya non-Brazilian holder on the disposition of Preferred ADSs to anothernon-Brazilian holder are not subject to Brazilian tax. From January 1st,2004 on, investments made in permanent assets by non resident are subject tothe payment of income tax over capital gains. The gain will be charged at a 15%or 25% rate if the beneficiary is a tax haven country resident or from on anyjurisdiction where taxing rates are below 20%. The taxable capital gain iscalculated on the difference from the selling value of the asset and thedeclared value to Brazilian Central Bank (in foreign currency) by the time ofregistration. As of January 1, 2005 operations of stock, mercantile and futureexchange are subjected to a withholding tax at a rate of 0,005% according toLaw nr. 11,033 of December 21, 2004. This value is deductible from withholdingtax paid upon capital gains. Pursuant the same act stock operations held by anindividual with a monthly value up to R$ 20,000 will be exempt of thewithholding tax.

 

The withdrawal of preferred shares in exchange for Preferred ADSs isnot subject to Brazilian tax. The deposit of preferred shares in exchange forPreferred ADSs is not subject to Brazilian tax if the preferred shares areregistered by the investor or its agent under the 2,689 Regulation. In theevent the preferred shares are not so registered, the deposit of preferredshares in exchange for Preferred ADSs may be subject to Brazilian tax at therate of 15% or 25%. On receipt of the underlying preferred shares, anon-Brazilian holder who qualifies under the 2,689 Regulation will be entitledto register the U.S. dollar value of such shares with the Central Bank asdescribed below.

 

Non-Brazilian holders are subject to tax in Brazil on gains realized onsales of preferred shares that occur abroad or on the proceeds of a redemptionof, or a liquidating distribution with respect to, preferred shares. When thepreferred shares are registered under the 2,689 Regulation, the non-Brazilianholder cannot transfer or assign them abroad. As a general rule, non-Brazilianholders are subject to a withholding tax imposed at a rate of 15% or 25% ongains realized on sales or exchanges of preferred shares that occur in Brazilto or with a resident of Brazil, outside of Bovespa. From January 2004, on thistaxation is also applicable to gains accrued in transactions conducted bynon-Brazilian holders. Non-Brazilian holders are subject to withholding tax atthe rate of 20% on gains realized on sales or exchanges in Brazil of preferredshares that occur on Bovespa unless such sale is made under the 2,689 Regulation.Gains realized arising from transactions on Bovespa by an investor under the2,689 Regulation are not subject to tax (except as described below). The gainrealized as a result of a transaction on Bovespa is the difference between theamount in Brazilian currency realized on the sale or exchange and theacquisition cost measured in Brazilian currency, without any correction forinflation, of the shares sold. The gain realized as a result of a transactionthat occurs other than on Bovespa will be the positive difference between theamount realized on the sale or exchange and the acquisition cost of thepreferred shares, both such values to be taken into account in *reais.*There are grounds, however, to holdthat the gain realized should be calculated based on the foreign currencyamount registered with the Central Bank. There can be no assurance that thecurrent preferential treatment for holders of preferred ADSs and for certainnon-Brazilian holders of preferred shares under the 2,689 Regulation will continuein the future or that such treatment will not be changed in the future. As ofJanuary 1, 2000, the preferential treatment under the 2,689 Regulation is nolonger applicable if the non-Brazilian holder of the preferred ADSs orpreferred shares is resident of a tax haven, *i.e*.,countries which do not impose income tax or where such tax is imposed at a ratelower than 20% in accordance with Law No. 9,959, of January 27, 2000. In otherwords, gains realized by such holder on the sale or exchange in Brazil thatoccur in the spot market of shares traded on a Brazilian stock exchange will betaxed at a rate of 20%. Any exercise of preemptive rights relating to thepreferred shares will not be subject to Brazilian taxation. Any gain on thesale or assignment of preemptive rights relating to the preferred shares by thedepositary on behalf of holders of preferred ADSs will be subject to Brazilianincome taxation at the rate of 15% or 25%, unless such sale or assignment isperformed within Bovespa, and with the investments registered under 2,689Resolution or Annex V from Central Bank, in which the gains are exempt fromwithholding income tax. Any gain on the sale or assignment of preemptive rightsrelating to preferred shares, will be subject to Brazilian income tax at thesame rate applicable to the sale or disposition of preferred shares. Themaximum rate of such tax is currently 15%, except for non-resident holdersdomiciled in tax haven countries, where rates are 25%.

 

65

----

 

***Notional Interest Charge Attributed toShareholder’s Equity***

 

Distributions of interest on equity in respect of the preferred sharesas an alternative form of payment to shareholders who are either Brazilianresidents or non-Brazilian residents, including holders of ADSs, are subject toBrazilian withholding tax at the rate of 15%. In case the non-Brazilianresident is a tax haven country resident or is under the jurisdiction of aregion where tax rate is below 20%, he will be entitled to pay a rate of 25%.Since 1996, such payments have been tax deductible by the Company. Since 1997,the payments have also been deductible in determining social contributions andincome tax by the Company as long as the payment of a distribution of interestis approved at the Company’s general meeting. The board of directors of theCompany alone may determine the distribution of interest on shareholders’equity. No assurance can be given that the board of directors of the Companywill not determine that future distributions of profits be made by means ofinterest on shareholders’ equity instead of by means of dividends.

 

***Other Brazilian Taxes***

 

There are no Brazilian inheritance, gift or succession taxes applicableto the ownership, transfer or disposition of preferred shares or preferred ADSsby a non-Brazilian holder except for gift and inheritance taxes which arelevied by some States of Brazil on gifts made or inheritances bestowed byindividuals or entities not resident or domiciled in Brazil or domiciled withinthe state to individuals or entities resident or domiciled within such state inBrazil. There are no Brazilian stamps, issue, registration or similar taxes orduties payable by holders of preferred shares or preferred ADSs.

 

Pursuant to Decree number, 2,219 of May 2, 1997, and Ordinance no. 5 ofJanuary 21, 1999, issued by the Ministry of Finance, the amount in *reais* resulting from the conversion of the proceeds receivedby a Brazilian entity from a foreign investment in the Brazilian securitiesmarket (including those in connection with the investment in the preferredshares or preferred ADSs and those made under Regulation nr. 2,689, whichsubstituted Annex IV Regulations) is subject to a financial transaction tax(IOF), although at present the rate of such tax is 0%. The Minister of Financeis empowered to establish the applicable IOF tax rate. Under Law nr 8,894 ofJune 21, 1994, such IOF tax rate may be increased at any time to a maximum of25%, but any such increase will only be applicable to transactions occurringafter such increase becomes effective.

 

Pursuant to Law number, 9,311 of October 24, 1996, the *Contribuição Provisória sobre Movimentação Financeira* (CPMF)was levied at a rate of 0.2% on fund transfers in connection with financialtransactions in Brazil. Pursuant to Law 9,539, the CPMF tax was payable untilFebruary 1999. Pursuant to Constitutional Amendment 21, of March 18, 1999, thecollection of the CPMF was extended for an additional period of 36 months. Thispayment of the CPMF tax was required as of June 17, 1999. The CPMF tax rate was0.38% during the first 12 months, and would be 0.30% for the remaining period.But in December 2000, Constitutional Amendment number 31 increased the rate to0.38% as of March 2001. By May 28, 2002, Constitutional Amendment number 37determined that CPMF must be charged until December 31, 2004. Finally, theConstitutional Amendment number 42, approved in 2003, extended the CPMF taxuntil December 31, 2007.

 

The responsibility for the collection of the CPMF tax is borne by thefinancial institution that carries out the relevant financial transaction.Additionally, when the non-Brazilian holder remitted the proceeds from the saleor assignment of preferred shares by means of foreign exchange transactions,the CPMF tax was levied on the amount to be remitted abroad in Brazilian r*eais*. However, since April, 2002 this taxhas not been charged on stock transactions. If it is necessary to perform anyexchange transaction in connection with Preferred ADSs or preferred shares, itwill bear the CPMF tax.

 

***Registered Capital***

 

The amount of an investment in preferred shares held by a non-Brazilianholder who qualifies and registered with the CVM under the Annex IV Regulationswhich was converted into Annex of 2,689 Resolution as of June 2000, or in ADSsheld by the depositary representing such holder, as the case may be, iseligible for registration with the Central Bank; such registration (the amountso registered is referred to as Registered Capital) allows the remittanceabroad of foreign currency, converted at the commercial exchange rate, acquiredwith the proceeds of distributions on, and amounts realized with respect todisposition of, such preferred shares. The registered capital for preferredshares purchased in the form of a preferred ADSs, or purchased in Brazil anddeposited with the depositary in exchange for a preferred ADS, will be equal totheir purchase price (in U.S. dollars) paid by the purchaser. The RegisteredCapital for preferred shares that are withdrawn upon surrender of preferredADSs, will be the U.S. dollar equivalent of (i) the average price of thepreferred shares on the Brazilian stock exchange on which the greatest numberof such preferred shares was sold on the day of withdrawal, or (ii) if no preferredshares were sold on such day, the average price of

 

66

----

 

preferred shares that were sold in the fifteen trading sessionsimmediately preceding such withdrawal. The U.S. dollar value of the preferred sharesis determined on the basis of the average commercial exchange rate quoted bythe Central Bank on such date (or, if the average price of preferred shares isdetermined under clause (ii) of the preceding sentence, the average of suchaverage quoted rates on the same fifteen dates used to determine the averageprice of the preferred shares).

 

A non-Brazilian holder of preferred shares may experience delays ineffecting the registration of registered capital, which may delay remittancesabroad. Such a delay may adversely affect the amount, in U.S. dollars, receivedby the non-Brazilian holder.

 

**US Federal Income Tax Considerations**

 

As used below, a “U.S.holder” is a beneficial owner of a Preferred Share or Preferred ADR that is,for U.S. federal income tax purposes, (i) a citizen or resident alienindividual of the United States, (ii) a corporation (or an entity treated as acorporation) organized under the law of the United States, any State thereof orthe District of Columbia, (iii) an estate, the income of which is subject toU.S. federal income tax without regard to its source, or (iv) a trust if (1) acourt within the United States is able to exercise primary supervision over theadministration of the trust, and one or more United States persons have theauthority to control all substantial decisions of the trust, or (2) the trustwas in existence on August 20, 1996 and properly elected to continue to betreated as a United States person.  Forpurposes of this discussion, a “non-US holder” is a beneficial owner of aPreferred Share or Preferred ADR that is (i) a nonresident alien individual,(ii) a corporation (or an entity treated as a corporation) created or organizedin or under the law of a country other than the United States or a politicalsubdivision thereof or (iii) an estate or trust that is not a U.S. holder.  If a partnership (including for this purposeany entity treated as a partnership for U.S. federal tax purposes) is abeneficial owner of a Preferred Share or Preferred ADR, the U.S. federal taxtreatment of a partner in the partnership generally will depend on the statusof the partner and the activities of the partnership.  A holder of a Preferred Share or PreferredADR that is a partnership and partners in that partnership should consult theirown tax advisers regarding the U.S. federal income tax consequences of holdingand disposing of Preferred Shares or Preferred ADRs.

 

***Nature of Preferred ADRs for U.S. FederalIncome Tax Purposes***

 

In general, for U.S.federal income tax purposes, a holder of a Preferred ADR will be treated as theowner of the underlying Preferred Shares. Accordingly, except as specifically noted below, the tax consequencesdiscussed below with respect to Preferred ADRs will be the same for PreferredShares in the Company, and exchanges of Preferred Shares for Preferred ADRs,and Preferred ADRs for Preferred Shares, generally will not be subject to U.S.federal income tax.

 

***Taxationof Dividends***

 

U.S. holders: Ingeneral, subject to the passive foreign investment company rules discussedbelow, a distribution on a Preferred ADR (including for this purpose adistribution of interest on shareholders’ equity) will constitute a dividendfor U.S. federal income tax purposes to the extent that it is made from theCompany’s current or accumulated earnings and profits as determined under U.S.federal income tax principles.  If adistribution exceeds the Company’s current and accumulated earnings andprofits, it will be treated as a non-taxable reduction of basis to the extentof the U.S. holder’s tax basis in the Preferred ADR on which it is paid, and tothe extent it exceeds that basis it will be treated as a capital gain.  For purposes of this discussion, the term “dividend”means a distribution that constitutes a dividend for U.S. federal income taxpurposes.

 

The gross amount of anydividend on a Preferred ADR (which will include the amount of any Braziliantaxes withheld) will be subject to U.S. federal income tax as foreign sourcedividend income.  The amount of a dividendpaid in Brazilian currency will be its value in U.S. dollars based on theprevailing spot market exchange rate in effect on the day that the U.S. holderreceives the dividend or, in the case of a dividend received in respect of aPreferred ADR, on the date the Depositary receives it, whether or not thedividend is converted into U.S. dollars. Any gain or loss realized on a conversion or other disposition of theBrazilian currency generally will be treated as U.S. source ordinary income orloss.  Any Brazilian withholding tax willbe treated as a foreign income tax eligible for credit against a U.S. holder’sU.S. federal income tax liability, subject to generally applicable limitationsunder U.S. federal income tax law.  Forpurposes of computing those limitations separately under current law forspecific categories of income, a dividend generally will constitute foreignsource “passive income” or, in the case of certain holders, “financial servicesincome” for purposes of the current foreign tax credit limitation rules.  For taxable years beginning after December31, 2006, “financial services income” generally will be treated as “generalcategory income,” and “passive income” generally will be treated as “passivecategory income.”  A U.S. holder will bedenied a foreign tax credit with respect to Brazilian income tax withheld fromdividends received with respect to the underlying Preferred Shares representedby the

 

67

----

 

PreferredADRs to the extent the U.S. holder has not held the Preferred ADRs for at least16 days of the 30-day period beginning on the date which is 15 days before theex-dividend date or to the extent the U.S. holder is under an obligation tomake related payments with respect to substantially similar or relatedproperty.  Any days during which a U.S.holder has substantially diminished its risk of loss on the Preferred ADRs arenot counted toward meeting the 16-day holding period required by the statute.The rules relating to the determination of the foreign tax credit are complex,and you should consult with your own tax advisers to determine whether and towhat extent you would be entitled to this credit.  You should consult your tax adviser withrespect to the determination of the foreign tax credit limitation, as therelevant rules are complex and are scheduled to change in future years.  Alternatively, any Brazilian withholding taxmay be taken as a deduction against taxable income.  A dividend will not be eligible for thecorporate dividends received deduction.

 

Subject tocertain exceptions for short-term and hedged positions, any dividend that anindividual receives on a Preferred ADR before January 1, 2009 will be subjectto a maximum tax rate of 15% if the dividend is a “qualified dividend.”  A dividend on a Preferred ADR will be aqualified dividend if (i) the Preferred ADRs are readily tradable on anestablished securities market in the United States, and (ii) the Company wasnot, in the year prior to the year the dividend was paid, and is not, in theyear the dividend is paid, a passive foreign investment company (“PFIC”), aforeign personal holding company (“FPHC”) or a foreign investment company (“FIC”).  The Preferred ADRs are listed on the New YorkStock Exchange and will qualify as readily tradable on an establishedsecurities market in the United States so long as they are so listed.  Based on existing guidance, it is notentirely clear whether a dividend on a Preferred Share will be treated as aqualified dividend, because the Preferred Shares themselves are not listed on aU.S. exchange.  Based on the Company’saudited financial statements and relevant market and shareholder data, theCompany does not believe that it was a PFIC, FPHC or FIC for U.S. federalincome tax purposes for its 2003 or 2004 taxable year.  Effective for taxable years of foreigncorporations beginning after December 31, 2004, the rules relating to FPHCs andFICs are repealed.  Based on the Company’saudited financial statements and its current expectations regarding the valueand nature of its assets, the sources and nature of its income, and relevantmarket and shareholder data, the Company does not anticipate becoming a PFICfor its 2005 taxable year.  The U.S.Treasury has announced its intention to promulgate rules pursuant to whichholders of stock of non-US corporations, and intermediaries through whom thestock is held, will be permitted to rely on certifications from issuers toestablish that dividends are treated as qualified dividends.  Because those procedures have not yet beenissued, it is not clear whether the Company will be able to comply withthem.  Special limitations on foreign taxcredits apply to dividends subject to the reduced rate of tax.  Holders of Preferred ADRs should consulttheir own tax advisers regarding the availability of the reduced dividend taxrate in the light of their own particular circumstances.

 

Non-U.S. holders: Adividend paid to a non-U.S. holder on a Preferred ADR will not be subject toU.S. federal income tax unless the dividend is effectively connected with theconduct of trade or business by the non-U.S. holder within the United States(and is attributable to a permanent establishment or fixed base the non-U.S.holder maintains in the United States if an applicable income tax treaty sorequires as a condition for the non-U.S. holder to be subject to U.S. taxationon a net income basis on income from the Preferred ADR).  A non-U.S. holder generally will be subjectto tax on an effectively connected dividend in the same manner as a U.S.holder.  A corporate non-U.S. holder mayalso be subject under certain circumstances to an additional “branch profitstax,” the rate of which may be reduced pursuant to an applicable income taxtreaty.

 

***Taxationof Capital Gains***

 

U.S. holders. Subject tothe passive foreign investment company rules discussed below, on a sale orother taxable disposition of a Preferred ADR, a U.S. holder will recognizecapital gain or loss in an amount equal to the difference between the U.S.holder’s adjusted basis in the Preferred ADR and the amount realized on thesale or other disposition, each determined in U.S. dollars.  Any gain a U.S. holder recognizes generallywill be U.S. source income for U.S. foreign tax credit purposes, and, subjectto certain exceptions, any loss will generally be a U.S. source loss.  If a Brazilian tax is withheld on a sale orother disposition of a Preferred Share, the amount realized will include thegross amount of the proceeds of that sale or disposition before deduction of theBrazilian tax.  The generally applicablelimitations under U.S. federal income tax law on crediting foreign income taxesmay preclude a U.S. holder from obtaining a foreign tax credit for anyBrazilian tax withheld on a sale of a Preferred Share.

 

In general, any adjustednet capital gain of an individual in a taxable year ending before January 1,2009 is subject to a maximum tax rate of 15%. In subsequent years, the maximum tax rate on the net capital gain of anindividual will be 20%.  The deductibilityof capital losses is subject to limitations.

 

Non-U.S. holders. Anon-U.S. holder will not be subject to U.S. federal income tax on a gainrecognized on a sale or other disposition of a Preferred ADR unless (i) thegain is effectively connected with the conduct of trade or business by thenon-U.S. holder within the United States (and is attributable to a permanentestablishment or fixed base that the non-U.S. holder maintains in the UnitedStates if an applicable income tax treaty so requires as a condition for

 

68

----

 

thenon-U.S. holder to be subject to U.S. taxation on a net income basis on incomefrom the Preferred ADR), or (ii) in the case of a non-U.S. holder who is anindividual, the holder is present in the United States for 183 or more days inthe taxable year of the sale or other disposition and certain other conditionsapply.  Any effectively connected gain ofa corporate non-U.S. holder may also be subject under certain circumstances toan additional “branch profits tax”, the rate of which may be reduced pursuantto an applicable income tax treaty.

 

***PassiveForeign Investment Company Rules***

 

A special set of U.S.federal income tax rules applies to a foreign corporation that is a PFIC forU.S. federal income tax purposes.  Asnoted above, based on the Company’s audited financial statements and relevantmarket and shareholder data, the Company believes it was not a PFIC for U.S.federal income tax purposes for its 2003 or 2004 taxable year.  However, because the determination of whetherthe Company is a PFIC is based upon the composition of its income and assetsfrom time to time, it is possible that the Company will become a PFIC for anyfuture taxable year.  In addition, basedon the Company’s audited financial statements and its current expectationsregarding the value and nature of its assets, the sources and nature of itsincome, and relevant market and shareholder data, the Company does notanticipate becoming a PFIC for its 2005 taxable year.

 

The PFIC rules aredesigned generally to eliminate any benefits of deferral of U.S. federal incometax that a U.S. holder could derive from investing in a corporation that isorganized outside the United States (a “foreign corporation”).  In general, a foreign corporation is a PFICif at least 75% of its gross income for the taxable year is passive income orif at least 50% of its assets for the taxable year produce passive income orare held for the production of passive income. In general, passive income for this purpose means, with certaindesignated exceptions, dividends, interest, rents, royalties (other thancertain rents and royalties derived in the active conduct of trade orbusiness), annuities, net gains from dispositions of certain assets, net foreigncurrency gains, income equivalent to interest, income from notional principalcontracts and payments in lieu of dividends. The determination of whether a foreign corporation is a PFIC is afactual determination made annually and is therefore subject to change.  Subject to certain exceptions pursuant tocertain elections that generally require the payment of tax, once stock in aforeign corporation is stock in a PFIC in the hands of a particular shareholderthat is a United States person, it remains stock in a PFIC in the hands of thatshareholder.

 

If the Company istreated as a PFIC, contrary to the tax consequences described in “U.S. FederalIncome Tax Considerations - Taxation of Dividends” and “U.S. Federal Income TaxConsiderations - Taxation of Capital Gains” above, a U.S. holder that does notmake an election described in the next two paragraphs would be subject tospecial rules with respect to (i) any gain realized on a sale or otherdisposition of a Preferred ADR and (ii) any “excess distribution” by theCompany to the U.S. holder (generally, any distribution during a taxable yearin which distributions to the U.S. holder on the Preferred ADR exceed 125% ofthe average annual taxable distributions that the U.S. holder received on thePreferred ADR during the preceding three taxable years or, if shorter, the U.S.holder’s holding period for the Preferred ADR). Under those rules, (i) the gain or excess distribution would beallocated ratably over the U.S. holder’s holding period for the Preferred ADR, (ii)the amount allocated to the taxable year in which the gain or excessdistribution is realized would be taxable as ordinary income and (iii) theamount allocated to each of those years, with certain exceptions, would besubject to tax at the highest tax rate in effect for that year, and theinterest charge generally applicable to underpayments of tax would be imposedin respect of the tax attributable to of those years.  A U.S. holder who owns a Preferred ADR duringany year that the Company is a PFIC must file Internal Revenue Service Form8621.

 

The special PFIC rulesdescribed above will not apply to a U.S. holder if the U.S. holder makes atimely election to treat the Company as a “qualified electing fund” (“QEF”) inthe first taxable year in which the U.S. holder owns a Preferred ADR and theCompany is a PFIC and if the Company complies with certain reportingrequirements. Instead, a shareholder of a QEF generally is currently taxed on apro-rata share of the Company’s ordinary earnings and net capital gain treatedas ordinary income and long-term capital gain, respectively.  Neither that ordinary income nor any actualdividend from the Company would qualify for the 15% maximum tax rate ondividends described above if the Company is a PFIC in the taxable year that theordinary income is realized or the dividend is paid or in the preceding taxableyear.  The Company has not yet determinedwhether, if it were a PFIC, it would make the computations necessary to supplyU.S. holders with the information needed to report income and gain pursuant toa QEF election. It is, therefore, possible that U.S. holders would not be ableto make or retain that election in any year that the Company is a PFIC.  Although a QEF election generally cannot berevoked, if a U.S. holder makes a timely QEF election for the first taxableyear that it owns a Preferred ADR and the Company is a PFIC (or is treated ashaving done so pursuant to any of certain elections), the QEF election will notapply during any later taxable year in which the Company does not satisfy thetests to be a PFIC.  If a QEF election isnot made in that first taxable year, an election in a later year will generallyrequire the payment of tax and interest, and in certain circumstances theelection may cease to be available at a later date.

 

Instead of a QEFelection, a U.S. holder of stock in a PFIC that is considered marketable stockcould elect to

 

69

----

 

markthe stock to market annually, recognizing as ordinary income or loss each yearan amount equal to the difference as of the close of the taxable year betweenthe fair market value of the stock and the U.S. holder’s adjusted basis in thestock. Losses would be allowed only to the extent of the net mark-to-market gainpreviously included in income by the U.S. holder under the election for priortaxable years. A U.S. holder’s adjusted basis in the Preferred ADRs will beadjusted to reflect the amounts included or deducted with respect to themark-to-market election. If the mark-to-market election were made, the rulesstated in the second preceding paragraph would not apply for periods covered bythe election. A mark-to-market election will not apply during any later taxableyear in which the Company does not satisfy the tests to be a PFIC. In general,the Preferred ADRs will be considered to be marketable stock if the PreferredADRs trade, other than in *de minimis*quantities, on at least 15 days during each calendar quarter. There is nocertainty, however, that the Preferred Shares will be considered to be “marketablestock” for these purposes unless and until the Internal Revenue Servicedesignates the Bovespa as having rules adequate to carry out the purposes ofthe PFIC rules. There can be no assurance that the Internal Revenue Servicewill make that designation.

 

***InformationReporting and Backup Withholding***

 

Dividends paid on, andproceeds from the sale or other disposition of a Preferred ADR to a U.S.holder, generally may be subject to information reporting requirements and maybe subject to backup withholding at the rate of 28% unless the U.S. holderprovides an accurate taxpayer identification number or otherwise demonstratesthat they are exempt.  The amount of anybackup withholding collected from a payment to a U.S. holder will be allowed asa credit against the U.S. holder’s U.S. federal income tax liability and mayentitle the U.S. holder to a refund, provided that certain required informationis submitted to the Internal Revenue Service.

 

A non-U.S. holder generally will be exemptfrom these information reporting requirements and backup withholding tax butmay be required to comply with certain certification and identificationprocedures in order to establish its eligibility for exemption.

 

**F. Dividends** and PayingAgents

** **

Not Applicable.

 

**G. Stateme**nt ofExperts

** **

Not Applicable.

 

**H. Documents o**n Display

** **

The Company makes its filings in electronicform under the EDGAR filing system of the U.S. Securities and ExchangeCommission. Its filings are available through the EDGAR system at www.sec.gov.Sadia’s SEC filings, including this annual report and the exhibits thereto, arealso available for inspection and copying at the public reference facilitiesmaintained by the Securities and Exchange Commission. Information can beobtained either on the SEC website (www.sec.gov) or by phone 1-800-SEC-0330.Company documents and statutory information are also available at Sadia’swebsite (www.sadia.com.br). Information regarding legal issues can be obtainedfrom the Company’s U.S. legal counsel, Greenberg, Traurig LLP, at1-212-801-9380.

 

The Company has, in compliance with New York Stock Exchange CorporateGovernance Rule 303A.11, provided on its website a summary of how its corporategovernance practices differ from those followed by U.S. domestic companiesunder the New York Stock Exchange listing standards.

 

**I. Subsidiar**yInformation

** **

Not Applicable.

 

70

----

 

## ***ITEM 11. QUAN***TITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

## *** ***

**Quantitativeinformation about market risk**

 

The main market risks the Company faces are interest rate, exchangerate and commodity price risks which arise from adverse changes in marketconditions and could represent a potential loss. Sadia mitigates some of theserisks through the use of derivatives instruments.

 

In the beginning of 2004, Sadia implemented a department to controloverall exposure of financial assets and liabilities; counterparty and creditrisk; legal risk; and disseminate risk culture within the Company. Thefinancial department has incorporated a Hedging and Investment Policy which wasreviewed and approved by the finance committee. These policies prohibitspeculative trading and oblige the company to diversify its counterparties.Sadia periodically provides reports to senior management about potential risksand actions taken to mitigate these.

 

***Foreign Currency andInterest Rate Risk***

 

The foreign currency and interest rate swap contracts that are enteredinto by the Company are effective to mitigate the potential foreign currencyexchange losses which would be generated by U.S. dollar denominated liabilitiesin the event of *real* devaluationand the potential risk associated with rises in interest rates. The exportsales in U.S. dollars also serve to mitigate the potential losses in the eventof a devaluation. The Company does not use these swap contracts for trading orspeculative purposes. See note 17 of the consolidated financial Statements fordiscussion of the accounting policies for derivatives and other financialinstruments.

 

Foreign currency denominated liabilities as of December 31, 2004,consisted of debt denominated in U.S. dollars. The Company’s net debt foreigncurrency exposure (U.S. dollar denominated debt less foreign currency andinterest rate swaps contracts) was negative R$ 115 million at December 31,2004. At December 31, 2004 foreign currency and interest rate swap contractstotally hedged the exposure arising from U.S. dollar denominated debt.

 

At December 31, 2004 and 2003 the notional amounts of the outstandingcontracts of foreign currency and interest rate swaps were R$ 1,358,855 and R$1,274,700 and the measurement of these contracts at fair value resulted inlosses of R$ 109,523 and R$ 53,090, respectively. The fair values of theCompany’s foreign currency and interest rate swap contracts were estimatedbased on quoted market prices of comparable contracts.

 

As of December 31, 2004, approximately 54% of the Company’s cash, cashequivalents and investments in debt securities were denominated in U.S.dollars.

 

The table below provides information on Company’s foreign currency asof December 31, 2004.

 

71

----

 
| ** **                                                             | ** ** | **Instruments Denominated in U.S. Dollars (Million R$)** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **After  2010** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** | **Average  Annual  Interest  Rate** | ** ** |
| ***Assets:***                                                          | * *   | * *                                                 | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Cash and cash equivalents:                                             |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Denominated in U.S. dollars                                            |       | 421.2                                                    |       | — |   | — |   | — |   | — |   | — |   | 421.2 |   | 421.2 |   | 1.80 | % |
| Investments:                                                           |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Denominated in U.S. dollars                                            |       | 836.1                                                    |       | — |   | — |   | — |   | — |   | — |   | 836.1 |   | 836.1 |   | 6.27 | % |
| **Total cash, cash equivalents and  Investments**                      | ** ** | **1,257.3**                                              |       | **—** |   | **—** |   | **—** |   | **—** |   | **—** |   | **1,257.3** |   | **1,257.3** |   |   |   |
|                                                                   |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ***Liabilities:***                                                     | * *   | * *                                                 | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Short-term debt:                                                       |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Denominated in U.S. dollars                                            |       | 744.6                                                    |       | — |   | — |   | — |   | — |   | — |   | 744.6 |   | 755.0 |   | 1,04 | % |
| Long-term debt:                                                        |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Denominated in U.S. dollars                                            |       | 400.4                                                    |       | 469.2 |   | 69.4 |   | 67.3 |   | 57.3 |   | 57.3 |   | 1,120.9 |   | 1,165.5 |   | 7.02 | % |
| **Total short and long-term debt**                                     | ** ** | **1,145.0**                                              |       | **469.2** |   | **69.4** |   | **67.3** |   | **57.3** |   | **57.3** |   | **1,865.5** |   | **1,920.5** |   |   |   |
|                                                                   |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Foreign currency and interest Rate swap  contracts notional Amount** | ** ** | **1,358.9**                                              |       | **141.1** |   | **12.9** |   | **9.4** |   | **—** |   | **—** |   | **1,522.2** |   | **109.5** |   |   |   |

 

Average Paying Rate in r*eais*98% CDI

Average Receiving Rate in U.S. dollars 4.94% p.a.

 

The Company incurred most of this debt principally to take advantage ofthe opportunities that arise due to interest rate differentials between r*eal* denominated financial instruments(cash and cash equivalents) and its foreign currency export credits. TheCompany believes that given its level of assets and resources, it should havesufficient cash and sources of working capital to meet its debt service.

 

Foreign currency denominated contracts constituting export prepaymentsgenerally cannot be prepaid, since they are intended to be amortized using theproceeds from designated export shipments. The amortization can be accelerated,provided that the corresponding export shipment is itself accelerated. Suchprepayments, however, are subject to paying the lenders an indemnity forbreakage costs, which often may make prepayments expensive. Other foreigncurrency denominated financings, undertaken through the Company’s offshoresubsidiaries, provides elective prepayment without premium or penalty.

 

72

----

 

The percentage of the Company’s debt subject to fixed and floating interestrates is as follows:

 
| ** **                  | ** ** | **Sadia’s Debt Breakdown –  December 31, 2004 (%)** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------|------------|
|                        |       |                                                          |       |
| **Floating rate debt**      |       |                                                          |       |
| Denominated in U.S. dollars |       | 50.2                                                          |       |
| Denominated in *reais*      |       | 21.6                                                          |       |
| **Fixed rate debt**         |       |                                                          |       |
| Denominated in U.S. dollars |       | 17.2                                                          |       |
| Denominated in *reais*      |       | 11.0                                                          |       |
| **Total**                   |       | 100                                                           |       |

 

Sadia’s floating interest rate exposure is primarily subject to thevariations of Libor as it relates to U.S. dollar denominated debt and to thevariations of the TJLP, an annual long-term interest rate that includes aninflation factor and is determined quarterly by the Central Bank and otherexchange variation. On December 31, 2004, the TJLP was equivalent to 9.75% peryear.

 

The interest rate on Company’s cash and cash equivalents denominated inr*eais* is based primarily onInterbank Deposit Certificates, or CDI rate, the benchmark interest rate set bythe interbank market on a daily basis.

 

The table below provides information about Sadia’s significant interestrate sensitive instruments. For variable interest rate debt, the rate presentedis the weighted average rate calculated as of December 31, 2004.

 
| ** **                                                           | ** ** | **Interest Rate Sensitive Instruments (Thousand R$)** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                              | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **After  2009** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** | **Average  Annual  Interest  Rate** | ** ** |
| **Assets:**                                                          |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents:                                           |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Denominated in*reais*                                                |       | 84.5                                                  |       | — |   | — |   | — |   | — |   | — |   | 84.5 |   | 84.5 |   |   |   |
| Denominated in*reais*                                                |       | 258.4                                                 |       | — |   | — |   | — |   | — |   | — |   | 258.4 |   | 258.4 |   | 100% of CDI |   |
| Denominated in U.S. dollars                                          |       | 70.4                                                  |       | — |   | — |   | — |   | — |   | — |   | 70.4 |   | 70.4 |   |   |   |
| Denominated in U.S. dollars                                          |       | 350.8                                                 |       | — |   | — |   | — |   | — |   | — |   | 350.8 |   | 350.8 |   | 1.80 | % |
|                                                                 |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments in debt securities:                                      |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Denominated in*reais*                                                |       | 317.0                                                 |       | 414.3 |   | — |   | — |   | — |   | 22.5 |   | 753.7 |   | 753.7 |   | 11.44 | % |
| Denominated in U.S. dollars                                          |       | 836.0                                                 |       |   |   |   |   |   |   |   |   |   |   | 836.1 |   | 836.1 |   | 7.27 | % |
| **Total cash, cash equivalents and  Investments in debt securities** | ** ** | **1,917.2**                                           |       | **414.3** |   | ** ** | ** ** | ** ** | ** ** | ** ** |   | **22.5** |   | **2,354.0** |   | **2,354.0** |   | ** ** |   |
|                                                                 |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities:**                                                     |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Short-term debt:**                                                 |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Fixed rate**                                                       |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Denominated in*reais*                                                |       | 155.1                                                 |       | — |   | — |   | — |   | — |   | — |   | 155.1 |   | 155.1 |   | 8.75 | % |
| Denominated in U.S. dollars                                          |       | 280.4                                                 |       | — |   | — |   | — |   | — |   | — |   | 280.4 |   | 280.4 |   | 1.04 | % |

 

73

----

 
| **Floating Rate**                                                                                |       |        |   |       |   |       |   |       |   |       |   |       |   |        |   |        |   |       |    |
|--------------------------------------------------------------------------------------------------|------------|-------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|-------------|--------|-------------|--------|------------|---------|
| Denominated in*reais*                                                                            |       | 162.1       |   |       |   |       |   |       |   |       |   |       |   | 162.1       |   | 162.1       |   | 95% CDI    |    |
| Denominated in U.S. dollars                                                                      |       | 464.3       |   |       |   |       |   |       |   |       |   |       |   | 464.3       |   | 474.7       |   | 2.86       | %       |
| **Total short-term debt**                                                                        | ** ** | **1,061.9** |   | **—** |   | **—** |   | **—** |   | **—** |   | **—** |   | **1,061.9** |   | **1,072.3** |   |       |    |
| **Long-term debt:**                                                                              |       |        |   |       |   |       |   |       |   |       |   |       |   |        |   |        |   |       |    |
| **Fixed rate**                                                                                   |       |        |   |       |   |       |   |       |   |       |   |       |   |        |   |        |   |       |    |
| Denominated in*reais*                                                                            |       | 5.5         |   | 3.9        |   | 4.7        |   | 4.7        |   | 4.7        |   | 127.5      |   | 151.0       |   | 151.0       |   | IGP-M+9.32 | %       |
| Denominated in U.S. dollars                                                                      |       | 161.6       |   | 12.3       |   | 12.1       |   | 9.9        |   | 0.0        |   | 0.0        |   | 195.9       |   | 195.9       |   | 7.02       | %       |
| **Floating rate**                                                                                |       |        |   |       |   |       |   |       |   |       |   |       |   |        |   |        |   |       |    |
| Denominated in* reais*                                                                      |       | 271.0       |   | 142.3      |   | 15.0       |   | 8.0        |   |       |   |       |   | 436.3       |   | 436.3       |   | TJLP+3.82  | %  |
| Denominated in U.S. Dollars                                                                      |       | 238.8       |   | 456.9      |   | 57.3       |   | 57.3       |   | 57.3       |   | 57.3       |   | 924.9       |   | 969.6       |   | 4.60       | %       |
| **Total long-term debt**                                                                         | ** ** | **676.9**   |   | **615.5**  |   | **89.1**   |   | **79.9**   |   | **62.0**   |   | **184.8**  |   | **1,708.2** |   | **1,752.9** |   |       |    |
| **Total debt**                                                                                   | ** ** | **1,738.8** |   | **615.5**  |   | **89.1**   |   | **79.9**   |   | **62.0**   |   | **184.8**  |   | **2,770.1** |   | **2,825.2** |   |       |    |
|                                                                                             |       |        |   |       |   |       |   |       |   |       |   |       |   |        |   |        |   |       |    |
| **Foreign currency and interest rate swap  contracts notional amount *- reais* to U.S. Dollars** | ** ** | **1,358.9** |   | **141.0**  |   | **12.9**   |   | **9.4**    |   | **—** |   | **—** |   | **1,522.2** |   | **109.5**   |   | 98%CDI     |    |

 
| Average Paying Rate in r*eais*    |   | 98% CDI    |
|-----------------------------------|--------|------------|
| Average Receiving Rate in dollars |   | 4.94% p.a. |

 

***Credit risks***

 

The Company is subject to credit risks related to customer accountsreceivable, financial investments and derivative contracts. Credit risks fromaccounts receivable are minimized by the pulverization of the customerportfolio, in which no group is responsible for more than 10% of the Company’sconsolidated revenues. Risks associated with financial instruments are lessenedby hiring first-line financial institutions, subject to the limitationspre-established by the Credit and Finance Committees.

 

***Grain purchase price risk***

 

The Company’s operations are exposed to the volatility in prices ofgrain (corn and soybean) used in the preparation of fodder for its breedingstock, where the price variation results from factors beyond the control ofmanagement, such as climate, the size of the harvest, transport and storagecosts and government agricultural policies, among others.

 

The Company does not enter into future or options contracts to protectitself against changes in the commodities price; however it maintains a riskmanagement strategy based on its inventory policy through physical control,which includes acquisition of grains with fixed and non-fixed prices.

 

74

----

 

## ***ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITYSECURITIES***

## *** ***

Not Applicable.

 

# **PART II**

# ** **

## ***ITEM 13. DEFA***ULTS, DIVIDENDS ARREARAGES ANDDELINQUENCIES

## *** ***

None.

 

## ***ITEM 14. MATERI***AL MODIFICATIONS TO THE RIGHTSOF SECURITY HOLDERS AND USE OF PROCEEDS

## *** ***

Not Applicable.

 

## ***ITEM 15. CONT***ROL AND PROCEDURES

 

An evaluationas of December 31, 2004 was carried out under the supervision and with theparticipation of the Company’s management including its Chief Executive Officerand our Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures as defined inRule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.  Based on the evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the design andoperation of the Company’s disclosure controls and procedures are effective toensure that information required to be disclosed in the reports that theCompany files and submits under the Exchange Act is (i) recorded, processed,summarized and reported as and when required and (ii) accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, to allow timely decisions regarding required disclosure asof the end of the Company’s most recent fiscal year.  No changes in the Company’s internal controlsover financial reporting occurred during the period covered by this report thatmaterially affected, or are reasonably likely to materially affect theCompany’s internal controls over financial reporting. 

 

Furthermore, there were no significant changes in the Company’sinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

The certifications required by this Item have been filed as Exhibits12.01 and 12.02.

 

A.                                    Management’s annual report on internal control over financial reporting

 

Not applicable.

 

B.                                      Attestation report of the registered publicaccounting firm

 

Not applicable.

 

C.                                      Changes in internal control over financial reporting.

 

Not applicable.

 

## ***ITEM 16***.

## *** ***

**A. Audit Comm**itteeFinancial Expert

** **

The Board of Directors of the Company has determined that FranciscoSilvério Morales Céspede is an audit committee financial expert within themeaning of Sarbanes-Oxley and related regulations. The audit committee isalready fully in compliance with the requirements of Sarbanes-Oxley. See Item6.C. Board Practices-Audit Committee. The Company has, in compliance with NewYork Stock Exchange Corporate Governance Rule 303A.11, provided on

 

75

----

 

its website a summary of how its corporate governance practices differfrom those followed by U.S. domestic companies under the New York StockExchange listing standards, at www.sadia.com.br.

 

**B. Code of Et**hics

** **

While the Company more than ten years ago adopted a written “GeneralConduct Directives”, it has not yet adopted a specific “Code of Ethics”relating to the conduct of its principal executive officer, principal financialofficer, principal accounting officer or other officers who perform similarroles.  All senior executives operate onthe basis of trust, and consistent with such Directives, and there is open discussionbetween the Chairman and the other directors and among the senior management ofthe Company.  The Company has in place aplan to develop such a code of ethics over the next 12 months.

 

**C. Principal**Account Feesand Services

** **

**Auditand Non-Audit Fees**

 

The following table sets forth the fees billed to the Company by itindependent auditors, during the fiscal years ended December 31, 2004 and 2003:

 
| ** **         | ** ** | **Audit Fees (Thousand R$)** | ** ** |
|--------------------|------------|------------------------------|------------|
| ** **         | ** ** | **2004**                     | ** ** | **2003** | ** ** |
| Audit fees         |       | 502                          |       | 969 |   |
| Audit-related fees |       | 280                          |       | 144 |   |
| Tax-fees           |       |                         |       | 114 |   |
| **Total fees**     | ** ** | **782**                      |       | **1,227** |   |

 

Audit fees in the above table are theaggregate fees billed by KPMG *AuditoresIndependentes* for 2004, and Ernst and Young *Auditores Independentes* S.S. for 2003 inconnection with the audit of the Company’s annual financial statements andreview of the Company’s quarterly financial information.

 

Audit-related fees in the above table are theaggregate fees billed by KPMG for providing due diligence services. Tax fees inthe above table are fees billed for tax compliance and tax advice.

 

**AuditCommittee Pre-Approval Policies and Procedures**

 

The Company’s Audit Committee has established pre-approval andprocedures for the engagement of its independent auditors for audit andnon-audit services.

 

The Audit Committee reviews the scope of the services to be provided,before their commencement, in order to ensure that there are no independenceissues and the services are not prohibited services as defined bySarbanes-Oxley Act of 2002.

 

**D. Exemptions fro**m theListing Standards and for Audit Committees

** **

Not Applicable

 

**E. Purchases of** EquitySecurities by the Issuer and Affiliated Purchasers

** **

Not Applicable

 

# **PART III**

# ** **

## ***ITEM17. FINANC***IALSTATEMENTS

## *** ***

The Company has responded to Item 18 in lieu of responding to thisitem.

 

76

----

 

## ***ITEM18. FI***NANCIALSTATEMENTS

## *** ***

Reference is made to Item 19 for a list of all financial Statementsfiled as part of this Annual Report.

 

## ***ITEM19. FINANCIAL***STATEMENTSAND EXHIBITS

## *** ***

**Financial Statements**

 
| Report of Independent Auditors                                                                                                                                                                                                      |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                |   |
| Consolidated Balance Sheets as of December 31, 2004 and 2003                                                                                                                                                                        |   |
|                                                                                                                                                                                                                                |   |
| Consolidated Statements of Income for Years Ended December 31, 2004,  2003 and 2002                                                                                                                                                 |   |
|                                                                                                                                                                                                                                |   |
| Consolidated Statements of Changes in Shareholders’ Equity for the Years  Ended December 31, 2004, 2003 and 2002                                                                                                               |   |
|                                                                                                                                                                                                                                |   |
| Consolidated Statements of Cash Flows for the Years Ended December  31, 2004, 2003 and 2002                                                                                                                                         |   |
|                                                                                                                                                                                                                                |   |
| Notes to Consolidated Financial Statements                                                                                                                                                                                          |   |
|                                                                                                                                                                                                                                |   |
| All schedules  for which provision is made in the applicable accounting regulation of the  Securities and Exchange Commission are not required under the related  instructions or are inapplicable and therefore have been omitted. |   |

** **

**List of Exhibits**

 

1.01Sadia by laws  (Incorporatedby reference to the Company’s annual report on Form 20-F filed with the SEC onJuly 12, 2005.)

 

2.01 Deposit Agreement dated as of December 30, 2002, by and amongSadia S.A., The Bank of New York as Depositary and the Owners and Holders ofAmerican Depositary Receipts (such agreement is incorporated by reference tothe Registration Statement on Form F-6 relating to the ADSs (File No.333-102013) filed with the Commission on December 19, 2002.

 

2.02 The total amount of long-term debt of the Company authorized underany instrument does not exceed 10% of the total assets of the Company and itssubsidiaries, on a consolidated basis. The Company undertakes to furnish to the SEC all other instrumentsrelating to long-term debt of the Company and its subsidiaries upon request ofthe SEC.

 

12.01Certification by the Company’s Chief Executive Officer required by Item 15

 

12.02Certification by the Company’s Chief Financial Officer required by Item 15

 

13.01Certification pursuant to 18 U.S.C. Section 1350.

 

13.02Certification pursuant to 18 U.S.C. Section 1350.

 

**SIGNATURES**

 

The Company hereby certifies that it meets all of the requirements forfiling on Form 20-F/A andthat it has duly caused and authorized the undersigned to sign this AnnualReport on its behalf.

 

**SADIA S.A.**

 

Date: November 11,2005

 

 
| By:                            | /s/ Gilberto Tomazoni          |   | By: | /s/ Luiz Gonzaga Murat Jr. |
|--------------------------------|--------------------------------|--------|-----|----------------------------|
| Name:Gilberto Tomazoni         | Name: Luiz Gonzaga Murat Jr.   |
| Title: Chief Executive Officer | Title: Chief Financial Officer |

 

77

----

**Financial Statements**

 

78

----

 
| *** *** | ***Consolidated Financial  Statements***                 |
|--------------|----------------------------------------------------------|
| *** *** | *** ***                                             |
| *** *** | ***Sadia  S.A.***                                        |
| *** *** | *** ***                                             |
| *** *** | ***Years ended December 31,  2004, 2003 and 2002*** |

 

----

 

# **SADIA S.A.**

# ** **

## ***CONSOLIDATED FINANCIAL STATEMENTS***

 

### **Contents**

###  

| Report of  Independent Registered Public Accounting Firm  (KPMG Auditores  Independentes)                                   |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                        |   |
| Report of  Independent Registered Public Accounting Firm  (Ernst & Young Auditores Independentes S.S.)             |   |
|                                                                                                                        |   |
| Consolidated Balance  Sheets as of December 31, 2004 and 2003                                                          |   |
|                                                                                                                        |   |
| Consolidated  Statements of Income for Years Ended December 31, 2004, 2003 and 2002                                    |   |
|                                                                                                                        |   |
| Consolidated  Statements of Changes in Shareholders’ Equity for the Years Ended  December 31, 2004, 2003 and 2002 |   |
|                                                                                                                        |   |
| Consolidated Statements  of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002                            |   |
|                                                                                                                        |   |
| Notes to  Consolidated Financial Statements                                                                                 |   |

 

----

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors and Shareholders of

Sadia S.A.

 

We have audited the accompanying consolidated balance sheet of SadiaS.A.****and subsidiaries (the “Company”) as of December 31, 2004 andthe related consolidated statements of income, changes in shareholders’ equity,and cash flows for the year then ended. These consolidated financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Sadia S.A.and subsidiaries as of December 31, 2004, and the results of theiroperations and cash flows for the year then ended, in conformity with generallyaccepted accounting principles in the United States.

 

KPMG

Auditores Independentes

 

/s/ KPMG Auditores Independentes

São Paulo, Brazil

July 07, 2005

 

1

----

 

**REPORT OF INDEPENDENT****REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors and Shareholders of

Sadia S.A.

 

We have audited the accompanying consolidated balance sheet of SadiaS.A.****as of December 31, 2003, and therelated consolidated statements of income, changes in shareholders’ equity, andcash flows for each of the two years in the period ended December 31,2003. These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position of SadiaS.A. at December 31, 2003, and the consolidated results of its operationsand its cash flows for each of the two years in the period ended December 31,2003, in conformity with U.S. generally accepted accounting principles.

 

ERNST & YOUNG

Auditores IndependentesS.S.

 

/s/ Sergio Ricardo Romani

Sergio Ricardo Romani

Partner

 

São Paulo, Brazil

February 3, 2004

 

2

----

 

### **SADIA S.A.**

###  

CONSOLIDATEDBALANCE SHEETS

December 31, 2004and 2003

(In thousands of Reais –R$, except share amounts)

 
| ** **                                         | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|----------------------------------------------------|------------|-----------|------------|-----------|------------|
| Assets                                             |       |      |       |      |       |
| Current assets:                                    |       |      |       |      |       |
| Cash and cash  equivalents                         |       | 764,178   |       | 1,818,054 |       |
| Held-to-maturity  securities                       |       | —    |       | 37,945    |       |
| Available-for-sale  securities                     |       | 1,153,014 |       | 101,754   |       |
| Foreign currency  and interest rate swap contracts |       | 103,100   |       | 69,325    |       |
| Accounts and  notes receivable, net                |       | 612,169   |       | 576,903   |       |
| Inventories                                        |       | 1,176,496 |       | 899,838   |       |
| Recoverable  taxes                                 |       | 155,891   |       | 140,249   |       |
| Deferred income  taxes                             |       | 20,372    |       | 54,672    |       |
| Others current  assets                             |       | 67,647    |       | 27,646    |       |
| Total current  assets                              |       | 4,052,867 |       | 3,726,386 |       |
|                                               |       |      |       |      |       |
| Property, plant  and equipment, net                |       | 947,175   |       | 829,003   |       |
|                                               |       |      |       |      |       |
| Other assets:                                      |       |      |       |      |       |
| Equity investees                                   |       | 5,330     |       | 8,485     |       |
| Available-for-sale  securities                     |       | 436,782   |       | 1,158,586 |       |
| Foreign currency  and interest rate swap contracts |       | 28,362    |       | 87,857    |       |
| Judicial  deposits                                 |       | 77,204    |       | 75,078    |       |
| Recoverable  taxes                                 |       | 87,186    |       | 74,219    |       |
| Deferred income  taxes                             |       | 56,554    |       | 72,807    |       |
| Intangible  assets                                 |       | 26,508    |       | 29,513    |       |
| Prepaid pension  plan                              |       | 49,316    |       | 26,254    |       |
| Others                                             |       | 63,689    |       | 61,265    |       |
| Total other  assets                                |       | 830,931   |       | 1,594,064 |       |
|                                               |       |      |       |      |       |
| Total assets                                       |       | 5,830,973 |       | 6,149,453 |       |

 

3

----

 
| ** **                                                                                               | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Liabilities and  Shareholders’ equity                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current  liabilities:                                                                                    |       |       |       |       |       |
| Short -term debt                                                                                         |       | 1,061,881  |       | 1,362,360  |       |
| Current portion  of long-term debt                                                                       |       | 676,954    |       | 663,916    |       |
| Foreign currency  and interest rate swap contracts                                                       |       | 172,802    |       | 83,847     |       |
| Suppliers                                                                                                |       | 483,566    |       | 357,969    |       |
| Salaries and  social charges payable                                                                     |       | 22,181     |       | 17,420     |       |
| Taxes payable                                                                                            |       | 38,055     |       | 60,221     |       |
| Dividends  payable                                                                                       |       | 82,797     |       | 87,963     |       |
| Accrued vacation  payable                                                                                |       | 65,959     |       | 53,042     |       |
| Accrued employee  bonus                                                                                  |       | 51,048     |       | 142,315    |       |
| Other                                                                                                    |       | 111,476    |       | 140,780    |       |
| Total current  liabilities                                                                               |       | 2,766,719  |       | 2,969,833  |       |
|                                                                                                     |       |       |       |       |       |
| Long-term  liabilities                                                                                   |       |       |       |       |       |
| Long-term debt                                                                                           |       | 1,031,375  |       | 1,366,836  |       |
| Foreign currency  and interest rate swap contracts                                                       |       | 68,183     |       | 126,425    |       |
| Provision for  legal proceedings and labor claims                                                        |       | 58,984     |       | 68,005     |       |
| Taxes payable                                                                                            |       | —     |       | 31,236     |       |
| Accrued employee  benefit liability                                                                      |       | 48,388     |       | 45,013     |       |
| Other                                                                                                    |       | 18,800     |       | 20,520     |       |
| Total long-term  liabilities                                                                             |       | 1,225,730  |       | 1,658,035  |       |
|                                                                                                     |       |       |       |       |       |
| Minority  interest                                                                                       |       | 160        |       | —     |       |
|                                                                                                     |       |       |       |       |       |
| Shareholders’  equity:                                                                              |       |       |       |       |       |
| Preferred  shares, no par value, 426,000,000 shares authorized, issued and outstanding  in 2004 and 2003 |       | 627,055    |       | 627,055    |       |
| Common shares,  no par value, 257,000,000 shares authorized, issued and outstanding in 2004  and 2003    |       | 372,945    |       | 372,945    |       |
| Preferred shares  in treasury, at cost                                                                   |       | (198       | )          | (198       | )          |
| Appropriated  retained earnings                                                                          |       | 767,441    |       | 470,450    |       |
| Unappropriated  retained earnings                                                                        |       | 71,121     |       | 26,922     |       |
| Accumulated  other comprehensive income (loss)                                                           |       | —     |       | 24,411     |       |
| Total  shareholders’ equity                                                                         |       | 1,838,364  |       | 1,521,585  |       |
| Total  liabilities and shareholders’ equity                                                         |       | 5,830,973  |       | 6,149,453  |       |

 

See notes to theConsolidated Financial Statements.

 

4

----

 

**SADIA S.A**

 

CONSOLIDATEDSTATEMENTS OF INCOME

Years ended December 31,2004, 2003 and 2002

(In thousands of Reais -R$, except numbers of shares and per share amounts)

 
| ** **                                                                    | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|-------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                          |       |        |       |        |       |        |       |
| Gross operating  revenue                                                      |       | 7,117,318   |       | 5,717,525   |       | 4,654,752   |       |
|                                                                          |       |        |       |        |       |        |       |
| Value-added tax  on sales                                                     |       | (880,010    | )          | (535,337    | )          | (417,280    | )          |
| Sales deductions                                                              |       | (128,083    | )          | (100,471    | )          | (98,402     | )          |
| Net operating  revenue                                                        |       | 6,109,225   |       | 5,081,717   |       | 4,139,070   |       |
| Cost of goods  sold                                                           |       | (4,292,650  | )          | (3,673,011  | )          | (2,903,152  | )          |
| Gross profit                                                                  |       | 1,816,575   |       | 1,408,706   |       | 1,235,918   |       |
|                                                                          |       |        |       |        |       |        |       |
| Operating  expenses:                                                          |       |        |       |        |       |        |       |
| Selling                                                                       |       | (1,144,482  | )          | (916,671    | )          | (828,690    | )          |
| General and  administrative                                                   |       | (52,462     | )          | (54,207     | )          | (49,133     | )          |
| Other operating  income (expenses), net                                       |       | 15,398      |       | (36,819     | )          | (12,773     | )          |
| Total operating  expenses                                                     |       | (1,181,546  | )          | (1,007,697  | )          | (890,596    | )          |
|                                                                          |       |        |       |        |       |        |       |
| Operating income                                                              |       | 635,029     |       | 401,009     |       | 345,322     |       |
|                                                                          |       |        |       |        |       |        |       |
| Interest expense                                                              |       | (691,465    | )          | (450,198    | )          | (317,755    | )          |
| Interest income  and other, net                                               |       | 570,839     |       | 459,750     |       | 266,462     |       |
| Foreign currency  exchange gain, net                                          |       | 72,719      |       | 60,970      |       | 2,701       |       |
| Income before  income taxes, equity income of investees and minority interest |       | 587,122     |       | 471,531     |       | 296,730     |       |
|                                                                          |       |        |       |        |       |        |       |
| Income tax  benefit (expense)                                                 |       |        |       |        |       |        |       |
| Current benefit  (expense)                                                    |       | (32,969     | )          | (39,072     | )          | 34,631      |       |
| Deferred tax  benefit (expense)                                               |       | (63,130     | )          | 40,099      |       | (46,786     | )          |
| Total income tax                                                              |       | (96,099     | )          | 1,027       |       | (12,155     | )          |
| Income before  equity income of investees and minority interest               |       | 491,023     |       | 472,558     |       | 284,575     |       |
|                                                                          |       |        |       |        |       |        |       |
| Equity income  (loss) of investees                                            |       | (1,385      | )          | 361         |       | (650        | )          |
| Minority  interest                                                            |       | (137        | )          | 349         |       | 337         |       |
|                                                                          |       |        |       |        |       |        |       |
| Net income                                                                    |       | 489,501     |       | 473,268     |       | 284,262     |       |
|                                                                          |       |        |       |        |       |        |       |
| Net income  applicable to preferred shares                                    |       | 316,045     |       | 305,564     |       | 183,533     |       |
| Net income  applicable to common shares                                       |       | 173,456     |       | 167,704     |       | 100,729     |       |
| Net income                                                                    |       | 489,501     |       | 473,268     |       | 284,262     |       |
|                                                                          |       |        |       |        |       |        |       |
| Basic and  diluted earnings per thousands shares in R$:                       |       |        |       |        |       |        |       |
| Preferred                                                                     |       | 742.42      |       | 717.80      |       | 431.14      |       |
| Common                                                                        |       | 674.93      |       | 652.54      |       | 391.94      |       |
|                                                                          |       |        |       |        |       |        |       |
| Weighted average  number of shares outstanding:                               |       |        |       |        |       |        |       |
| Preferred                                                                     |       | 425,695,712 |       | 425,695,712 |       | 425,695,712 |       |
| Common                                                                        |       | 257,000,000 |       | 257,000,000 |       | 257,000,000 |       |

 

Seenotes to the Consolidated Financial Statements.

 

5

----

 

**SADIA S.A.**

 

CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY

Years ended December 31,2004, 2003 and 2002

(In thousands of Reais-R$ and shares)

 
| ** **                                                                                                                                      | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                                                                                                            |       |      |       |      |       |      |       |
| Preferred shares                                                                                                                                |       |      |       |      |       |      |       |
| At the beginning  of the year (426,000 shares)                                                                                                  |       | 627,055   |       | 439,939   |       | 439,939   |       |
| Capital increase  without issue of shares                                                                                                       |       | —    |       | 187,116   |       | —    |       |
| At the end of  the year (426,000 shares)                                                                                                        |       | 627,055   |       | 627,055   |       | 439,939   |       |
| Common shares                                                                                                                                   |       |      |       |      |       |      |       |
| At the beginning  of the year (257,000 shares)                                                                                                  |       | 372,945   |       | 260,061   |       | 260,061   |       |
| Capital increase  without issue of shares                                                                                                       |       | —    |       | 112,884   |       | —    |       |
| At the end of  the year (257,000 shares)                                                                                                        |       | 372,945   |       | 372,945   |       | 260,061   |       |
| Treasury shares                                                                                                                                 |       |      |       |      |       |      |       |
| At the beginning  of the year (304 shares)                                                                                                      |       | (198      | )          | (198      | )          | (198      | )          |
| At the end of  the year (304 shares)                                                                                                            |       | (198      | )          | (198      | )          | (198      | )          |
| Retained earnings                                                                                                                               |       |      |       |      |       |      |       |
| Appropriated  retained earnings                                                                                                                 |       |      |       |      |       |      |       |
| At the beginning  of the year                                                                                                                   |       | 470,450   |       | 468,413   |       | 308,954   |       |
| Used to increase  capital                                                                                                                       |       | —    |       | (300,000  | )          | —    |       |
| Transfer from  unappropriated retained earnings                                                                                                 |       | 296,991   |       | 302,037   |       | 159,459   |       |
| At the end of  the year                                                                                                                         |       | 767,441   |       | 470,450   |       | 468,413   |       |
| Unappropriated  retained earnings                                                                                                               |       |      |       |      |       |      |       |
| At the beginning  of the year                                                                                                                   |       | 26,922    |       | 6,145     |       | (41,992   | )          |
| Net income                                                                                                                                      |       | 489,501   |       | 473,268   |       | 284,262   |       |
| Transfer to  appropriated retained earnings                                                                                                     |       | (296,991  | )          | (302,037  | )          | (159,459  | )          |
| Dividends /  interest on capital                                                                                                                |       |      |       |      |       |      |       |
| Preferred                                                                                                                                       |       | (95,756   | )          | (97,143   | )          | (49,500   | )          |
| Common                                                                                                                                          |       | (52,553   | )          | (53,311   | )          | (27,166   | )          |
| At the end of  the year                                                                                                                         |       | 71,121    |       | 26,922    |       | 6,145     |       |
| Accumulated  other comprehensive income (loss)                                                                                                  |       |      |       |      |       |      |       |
| At the beginning  of the year                                                                                                                   |       | 24,411    |       | (116,601  | )          | 417       |       |
| Adjustment to  unrealized gain (loss) on available-for sale securities                                                                          |       | (36,989   | )          | 213,656   |       | (177,085  | )          |
| Income tax  benefit (expense)                                                                                                                   |       | 12,578    |       | (72,644   | )          | 60,067    |       |
| At the end of  the year                                                                                                                         |       | —    |       | 24,411    |       | (116,601  | )          |
| Total  shareholders’ equity                                                                                                                |       | 1,838,364 |       | 1,521,585 |       | 1,057,759 |       |
|                                                                                                                                            |       |      |       |      |       |      |       |
| Comprehensive  income:                                                                                                                          |       |      |       |      |       |      |       |
| Net income                                                                                                                                      |       | 489,501   |       | 473,268   |       | 284,262   |       |
| Unrealized gain  (loss) on available-for-sale securities, net of taxes (R$12,577, R$72,644 and  R$60,067 for 2004, 2003 and 2002, respectively) |       | (24,411   | )          | 141,012   |       | (117,018  | )          |
| Reclassification  adjustment for loss (gain) included in net income, net of tax (R$23,681 in  2003)                                             |       | 110,000   |       | (45,969   | )          | —    |       |
| Comprehensive  income                                                                                                                           |       | 537,690   |       | 568,311   |       | 167,244   |       |

 

See notes to theConsolidated Financial Statements.

 

6

----

 

# **SADIA S.A.**

# ** **

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

Years ended December 31,2004, 2003 and 2002

(In thousands of Reais-R$)

 
| ** **                                                                         | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Cash  flows from operating activities:**                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         |       | 489,501    |       | 473,268    |       | 284,262    |       |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |       |       |       |       |       |       |
| Minority  interest                                                                 |       | 137        |       | (349       | )          | (337       | )          |
| Loss (gain) on  sale of securities                                                 |       | 110,000    |       | (69,650    | )          | —     |       |
| Foreign currency  exchange (gains), net                                            |       | (72,719    | )          | (60,970    | )          | (2,701     | )          |
| Equity income or  loss of investees                                                |       | 1,385      |       | (361       | )          | 650        |       |
| Depreciation                                                                       |       | 99,066     |       | 99,261     |       | 92,136     |       |
| Deferred income  taxes                                                             |       | 63,130     |       | (40,099    | )          | 46,786     |       |
| Pension plan                                                                       |       | (23,062    | )          | (7,295     | )          | (6,220     | )          |
| Provision for  (reversal of) contingencies                                         |       | (9,021     | )          | 10,732     |       | 484        |       |
| Loss from sale  of property, plant and equipment                                   |       | 21,777     |       | 38,517     |       | 10,700     |       |
| Changes in  operating assets and liabilities:                                      |       |       |       |       |       |       |       |
| Accounts and  notes receivable                                                     |       | (35,266    | )          | (107,949   | )          | (91,130    | )          |
| Inventories                                                                        |       | (276,658   | )          | (39,244    | )          | (175,479   | )          |
| Recoverable  taxes and other assets                                                |       | (68,029    | )          | 15,789     |       | (128,697   | )          |
| Judicial  deposits                                                                 |       | (2,126     | )          | (6,034     | )          | (12,331    | )          |
| Suppliers                                                                          |       | 125,597    |       | 110,793    |       | 71,449     |       |
| Accrued  interest, net                                                             |       | (25,399    | )          | 297,974    |       | 162,192    |       |
| Social charges,  taxes payable, other liabilities                                  |       | (176,895   | )          | 187,829    |       | 42,170     |       |
| **Net  cash provided by operating activities**                                     |       | 221,418    |       | 902,212    |       | 293,934    |       |
| **Cash  flows from investing activities:**                                         |       |       |       |       |       |       |       |
| Proceeds from  sale of property, plant and equipment                               |       | 2,857      |       | 8,728      |       | 7,530      |       |
| Purchase of  property, plant and equipment                                         |       | (239,104   | )          | (105,750   | )          | (112,122   | )          |
| Investment in  equity investees                                                    |       | (1,088     | )          | (2,942     | )          | (2,933     | )          |
| Held-to-maturity  investments:                                                     |       |       |       |       |       |       |       |
| Purchases                                                                          |       | (2,747     | )          | (61,027    | )          | (805,968   | )          |
| Maturities                                                                         |       | 36,447     |       | 722,669    |       | 132,992    |       |
| Available-for-sale  debt securities:                                               |       |       |       |       |       |       |       |
| Purchases                                                                          |       | (1,893,844 | )          | (1,388,487 | )          | (61,529    | )          |
| Maturities and  sales                                                              |       | 1,543,873  |       | 807,533    |       | 71,391     |       |
| **Net  cash provided by (used in) investing activities**                           |       | (553,606   | )          | (19,276    | )          | (770,639   | )          |
| **Cash  flows from financing activities:**                                         |       |       |       |       |       |       |       |
| Short-term debt                                                                    |       |       |       |       |       |       |       |
| Issuances                                                                          |       | 801,112    |       | 2,119,594  |       | 1,466,623  |       |
| Repayments                                                                         |       | (1,119,073 | )          | (1,997,073 | )          | (967,434   | )          |
| Long-term debt                                                                     |       |       |       |       |       |       |       |
| Issuances                                                                          |       | 675,703    |       | 1,574,677  |       | 561,208    |       |
| Repayments                                                                         |       | (948,196   | )          | (1,122,088 | )          | (323,852   | )          |
| Dividends/interest  on capital paid                                                |       | (131,234   | )          | (95,588    | )          | (73,794    | )          |
| **Net  cash provided by (used in) financing activities**                           |       | (721,688   | )          | 479,522    |       | 662,751    |       |
|                                                                               |       |       |       |       |       |       |       |
| Net change in  cash and cash equivalents                                           |       | (1,053,876 | )          | 1,362,458  |       | 186,046    |       |
| Cash and cash  equivalents at beginning of year                                    |       | 1,818,054  |       | 455,596    |       | 269,550    |       |
| Cash and cash  equivalents at end of year                                          |       | 764,178    |       | 1,818,054  |       | 455,596    |       |

 

See notes to Consolidated Financial Statements.

 

7

----

 

# **SADIA S.A.**

# ** **

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

Years ended December 31,2004, 2003 and 2002

(In thousands of Reais -R$, unless otherwise indicated)

 

**1.****                  Operations**

 

Sadia S.A. (together with its consolidatedsubsidiaries, “Sadia” or “the Company”) is incorporated under the laws of theFederative Republic of Brazil. Sadia S.A.’s shares are traded on the São PauloStock Exchange.

 

The Company’s principalbusiness is the production and distribution of poultry and pork products. TheCompany’s operations include feed facilities, hatcheries, poultry farms forgrandparent and parent stock, pork breeding centers, poultry and pork processingunits, sales offices and distribution centers. Presently Sadia’s operations areorganized into three main business segments: “Processed Products” (sausage,ham, chicken nuggets, margarine, frozen meals, pizza and pasta among othersimilar products), “Poultry” (chickens and turkeys) and “Pork”.

 

Although the economicsituation in Brazil has remained stable in recent years, a return to higherlevels of inflation and currency fluctuations could adversely affect theCompany’s operations. The appreciation and devaluation of the Brazilian *real*in relation to the U.S. dollar has had significanteffects on the Company’s financial statements. The exchange rate of theBrazilian *real* (“R$”) to the U.S. dollar wasR$3.5333=US$1.00 at December 31, 2002, R$2.8892=US$1.00 at December 31,2003 and R$2.6544=US$1.00 at December 31, 2004.

 

**2.****                  Presentationof the Consolidated Financial Statements**

 

a)                 Basis ofpresentation

 

Theconsolidated financial statements have been prepared in accordance with U.S.generally accepted accounting principles (“US GAAP”), which differs in certainrespects from accounting principles generally accepted in Brazil (“BrazilianGAAP”), which the Company uses to prepare its statutory consolidated financialstatements as filed with the Brazilian Securities Commission – CVM (“Comissãode Valores Mobiliários”).

 

8

----

 

b)                Consolidationprocedures

 

Theconsolidated financial statements include the accounts of Sadia and itscontrolled subsidiaries (ownership interest greater than 50%). The portion ofequity and net income attributable to shareholders’ other than Sadia isreflected as minority interest in the consolidated financial statements.Investments in entities in which the Company does not control but has significantinfluence over, are accounted for on the equity method. All significantintercompany accounts and transactions are eliminated in consolidation.

 

The following subsidiaries were included in theconsolidated financial statements for the years ending December 31:

 
| ** **                                           | ** ** | **Ownership %** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|
| ** **                                           | ** ** | **2004**        | ** ** | **2003** | ** ** |
|                                                 |       |            |       |   |   |
| **Sadia  International Ltd.**                        | ** ** | **100,00**      | **%**      | **100,00** | **%** |
| Sadia Uruguay S.A.                                   |       | 100,00          | %          | 100,00 | % |
| Sadia Alimentos S.A.                                 |       | 0,01            | %          | 0,01 | % |
| Sadia Chile S.A.                                     |       | 60,00           | %          | 60,00 | % |
| Sadia Alimentos S.A.                                 |       | 99,99           | %          | 99,99 | % |
| Sadia Itália S.R.L.                             |       | —          |       | 99,99 | % |
| Sadia UK. Ltd.                                       |       | 100,00          | %          | 100,00 | % |
| **Concórdia S.A. C.V.M.C.C.**                   | ** ** | **99,99**       | **%**      | **99,99** | **%** |
| **Rezende Óleo Ltda.**                          | ** ** | **100,00**      | **%**      | **100,00** | **%** |
| Rezende Marketing e Comunicações Ltda.     |       | 0,09            | %          | 0,09 | % |
| **Rezende Marketing e Comunicações Ltda.** | ** ** | **99,91**       | **%**      | **99,91** | **%** |
| **Sadia G.m.b.H.**                                   | ** ** | **100,00**      | **%**      | **100,00** | **%** |
| Wellax Food  Logistics C. P. A. S. U. Lda.           |       | 100,00          | %          | 100,00 | % |
| Sadia Foods  G.m.b.H.                                |       | 100,00          | %          | — |   |
| Qualy B. V.                                          |       | 100,00          | %          | — |   |
| Sadia Japan Ltd.                                     |       | 100,00          | %          | — |   |

 

9

----

 

**3.****                  SignificantAccounting Policies**

 

a)                 Use ofestimates

 

**The preparation of financialstatements in accordance with**U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect theamounts reported in the financial statements and accompanying notes.Significant items subject to such estimates and assumptions include thecarrying amount and recoverability of property, plant and equipment, valuationallowances for receivables, recoverability of deferred income tax assets,provisions for contingencies and the determination of the fair value ofderivatives. Actual results could differ from those estimates.

** **

**b)**              Cash and cash equivalents

** **

Cash equivalents are highly liquid investments withmaturity of three months or less when purchased. For purpose of theconsolidated statements of cash flow, the Company considers all highly liquiddebt instruments with original maturities of three months or less to be cashequivalents.

 

c)               Available-for-saleand held-to-maturity securities

 

**Management determines theappropriate classification of the debt securities at the time of purchase andreevaluates such designation as of each balance sheet date. Available-for-salesecurities are carried at fair value, with the unrealized gains and lossesreported in other comprehensive income. Interest on securities classified asavailable-for-sale is included in interest income and other, net. The specificidentification method is used to determine the cost of securities sold, withrealized gains and losses included in interest income and other, net.**

** **

Investmentsare classified as held-to-maturity when the Company has the intention andability to hold the securities to maturity. Held-to-maturity securities arecarried at amortized cost with realized gains and losses reported in interestincome and other, net.

 

Indetermining if and when a decline in market value below amortized cost isother-than-temporary, management evaluates the market conditions, offeringprices and other key measures for the investments in debt securities. When sucha decline in value is deemed to be other-than-temporary, an impairment loss isrecognized in the operating results to the extent of the decline.

 

10

----

 

d)              Accountsand notes receivable

 

Trade accounts receivable are recorded at the invoicedamount and do not bear interest. The allowance for doubtful accounts is theCompany’s best estimate of the amount of probable credit losses in the Company’sexisting accounts receivable. Account balances are charged off against theallowance after all means of collection have been exhausted and the potentialfor recovery is considered remote. The Company does not have any off-balance-sheetcredit exposure related to its customers.

 

e)               Inventories

 

Processed products,livestock (excluding breeders), work-in-progress, raw materials and suppliesand other are valued at the lower of cost (average method) or market. Cost forfinished goods and work-in-progress includes purchased raw materials, labor andmanufacturing and production overhead, which are related to the purchase andproduction of inventories. Costs of poultry and hog breeders are included ininventory which includes the allocated costs of feed, medicines and labor.These costs are accumulated in inventory of approximately six months, until thebreeders start the production cycle. The breeders, which are accumulated inbatchs in case of poultry, have an estimated production of offspring and afterthey start the production cycle, their accumulated costs are amortized based onthe actual numbers of offspring produced over the total estimated production.The Company periodically reviews the estimated number of offspring to beproduced by the batch and revises itsestimate accordingly. The amortization is allocated to poultry and hogproduction costs. The productive life of breeders varies from  15 to 30months. Normal losses in hog stock and poultry are inventoried and abnormallosses in stock are expensed immediately as cost of goods sold.

 

f)                 Property,plant and equipment

 

Property, plant and equipment are stated at cost ofacquisition or construction, including interest cost incurred on qualifyingexpenditures during the construction period of the major production facilities.Expenditures that materially extend the useful lives of the existing facilitiesand equipment are capitalized. Depreciation is computed principally by thestraight-line method over estimated useful lives of 25 years for buildings, 5to 10 years for machinery and equipment, 10 years for installations and 4 yearsfor vehicles.

 

g)              Accountingfor the Impairment of Long-Lived Assets

 

The Company reviews itsproperty, plant and equipment for possible impairment whenever events orchanges in circumstances indicate that the carrying value of an asset or groupof assets may not be recoverable on the basis of undiscounted future cashflows. The reviews are carried out at the lowest level of groups of assets towhich the Company is able to attribute identifiable future cash flows. If thecarrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying amount ofthe asset exceeds the fair value of the asset. These reviews to date have not indicated the needto recognize any impairment losses, except for the impairment recorded in 2003as described in note 10.

 

11

----

 

h)              Environmentalmatters

 

Our productionfacilities and also our forestry activities are both subject to Governmentenvironmental regulations. We diminish the risks associated with environmentalmatters, through operating procedures and controls and investments in pollutioncontrol equipment and systems. We believe that no provision for losses relatedto environmental matters is currently required, based on existing Brazilianlaws and regulations.

 

i)                  Interestattributed to shareholders’ equity

 

Brazilian corporationsare permitted to attribute interest on shareholders’ equity, which isdeductible for statutory income tax purposes. The Company elected to pay suchinterest to its shareholders on December 31, 2004, 2003 and 2002 andaccrued the amount due with a direct charge to shareholders’ equity in a mannersimilar to a dividend. The distribution to the shareholders is subject towithholding income tax at the rate of 15%, and the amount of interest onshareholders’ equity attributable to dividends must be net of such withholdingincome tax.

 

j)                  Revenuesand expenses

 

The Company recognizes revenue when products areshipped and the customer takes ownership and assumes risk of loss, collectionof the relevant receivable is probable, persuasive evidence of an arrangementexists and the sales price is fixed or determinable.

 

Shipping and handling costs are classified as sellingexpenses and totaled R$495,870, R$394,820 and R$370,014 for the years ended December 31,2004, 2003 and 2002, respectively.

 

Research and development costs are charged to expenseas incurred and totaled R$10,130, R$6,510 and R$7,296 for the years ended December 31,2004, 2003 and 2002, respectively.

 

The cost of advertising isexpensed as incurred. The Company incurred advertising expenses of R$121,435,R$96,845 and R$82,154 during the years ended December 31, 2004, 2003 and2002, respectively.

 

12

----

 

k)               Foreign currency transactions

 

Transactions in foreigncurrency are recorded at the prevailing exchange rate at the time of therelated transactions. Foreign currency denominated monetary assets andliabilities are translated using the exchange rate at the balance sheet date.Exchange differences are recognized in the statements of income as they occur.

 

l)                  Incometaxes

 

Income taxes are accounted for under the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax credit carryforwards. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.

 

m)            Earningsper share

 

Basic earnings per share is calculated in accordancewith FASB Statement No. 128, *Earnings per Share,*for each class of shares, taking into account that the preferred shares areentitled to a dividend 10% greater than that of the common shares. Thecomputation has been made as if the net income for each year would be fullydistributed. Earnings may be used to increase capital or otherwiseappropriated; consequently such earnings would no longer be available asdividends. Therefore, there is no assurance that preferred shareholders willreceive the 10% premium on undistributed earnings. The unit of one thousandshares is used because this is the basis for quotation and trading on the SãoPaulo Stock Exchange. The Company has no dilutive securities outstanding.

 

Since the preferred and common shareholders havedifferent dividend and liquidation rights, basic earnings per share has beencalculated using “two-class” method. The “two-class” method is an earningallocation formula that determines earnings per share for preferred and commonshares according to the dividends to be paid as required by the Company’sby-law and participation rights in undistributed earning.

 

13

----

 

n)              Accountingfor Derivative Instruments and Hedging Activities

 

In accordance withSFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities,” as amended by SFAS No. 137, “Accounting for DerivativeInstruments and Hedging Activities – Deferral of the Effective Date of FASBStatement No. 133,” and SFAS No. 138, “Accounting for CertainDerivative Instruments and Certain Hedging Activities,” the Company records allforeign currency and non-fixed price grain purchase derivatives in the balancesheet as either assets or liabilities measured at fair value.  Adjustments to fair value for foreigncurrency derivatives are included in foreign currency exchange gain (loss), neton the statement of income. Adjustments to the fair value of non-fixed grainpurchase derivatives are included in interest income and other, net on thestatement of income.  The Company has notdesignated any derivative as held for hedging purposes for any periodspresented.

 

o)              Reclassifications

 

A reclassificationof sales incentives and discounts from selling expenses to sales deduction inaccordance with the provisions of *EITF 01-09Accounting for Consideration Given by a Vendor to a Customer (including areseller of the vendor’s products)*for the years ended December 31, 2003 and 2002 amounting toR$59,126 and R$48,065, respectively, has been made to conform to the currentyear presentation.

 

p)                 RecentlyIssued Accounting Standards

 

In December 2004, the FASB issued FASB Statement No. 123(revised 2004), *Share-Based Payment*,which addresses the accounting for transactions in which an entity exchangesits equity instruments for goods or services, with a primary focus ontransactions in which an entity obtains employee services in share-basedpayment transactions. This Statement is a revision to Statement 123 andsupersedes APB Opinion No. 25, *Accountingfor Stock Issued to Employees,* and its related implementationguidance. This Statement will be effective for the Company as of January 1,2006. The Company currently does not have any share-based payments that arewithin the scope of this statement.

 

14

----

 

In December 2004, the FASB issued FASB StatementNo.151, *Inventory Costs*, whichclarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). Under this Statement,such items will be recognized as current-period charges. In addition, theStatement requires that allocation of fixed production overheads to the costsof conversion be based on the normal capacity of the production facilities.This Statement will be effective for the Company for inventory costs incurredon or after January 1, 2006. The Company anticipates no significant impacton its Financial Statements by applying Statements 151.

 

In December 2004, the FASB issued FASB Statement No. 153,*Exchanges of Nonmonetary Assets*,which eliminates an exception in APB 29 for nonmonetary exchanges of similarproductive assets and replaces it with a general exception for exchanges ofnonmonetary assets that do not have commercial substance. This Statement willbe effective for the Company for nonmonetary asset exchanges occurring on orafter January 1, 2006. The Company anticipates no significant impact onits Financial Statements by applying Statements 153.

 

In March 2005, the FASBissued FIN 47, “Accounting for Conditional Asset Retirement Obligations, aninterpretation of FASB Statement No.143” (“FIN 47”), which requires an entityto recognize a liability for the fair value of a conditional asset retirementobligation when incurred if the liability’s fair value can be reasonablyestimated. FIN 47 is effective for fiscal years ending after December 15,2005.

 

In May 2005, the FASBissued SFAS No.154, “Accounting Changes and Error Corrections” (“SFAS 154”)which replaces Accounting Principles Board Opinions No. 20 “AccountingChanges” and SFAS No. 3, “Reporting Accounting Changes in InterimFinancial Statements—An Amendment of APB Opinion No. 28.” SFAS 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. It establishes retrospective application, or the latestpracticable date, as the required method for reporting a change in accountingprinciple and the reporting of a correction of an error. SFAS 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.

 

15

----

 

q)                 RecentlyAdopted Accounting Standards

 

In June 2001, FASB Statement No.143, *Accounting for Asset Retirement Obligations,*wasissued. Statement 143 requires the Company to record the fair value of an assetretirement obligation as a liability in the period in which it incurs a legalobligation associated with the retirement of tangible long-lived assets thatresult from the acquisition, construction, development, and/or normal use ofthe assets. The Company also would record a corresponding asset that isdepreciated over the life of the asset. Subsequent to the initial measurementof the asset retirement obligation, the obligation would be adjusted at the endof each period to reflect the passage of time and changes in the estimatedfuture cash flows underlying the obligation. The Company was required to adoptStatement 143 on January 1, 2003. The adoption of Statement 143 had no effecton the Company’s financial statements.

 

In December 2002, FASB Statement No.148, *Accounting for Stock-Based Compensation – Transitionand Disclosure, an amendment of FASB Statement No. 123,*wasissued. This Statement amends FASB Statement No.123, *Accounting for Stock-Based Compensation,* to providealternative methods of transition for a voluntary change to the fair valuemethod of accounting for stock-based employee compensation. In addition,Statement 148 amends the disclosure requirements of Statement 123 to requireprominent disclosures in both annual and interim financial statements. TheCompany currently does not have any share-based payments that are within thescope of this Statement.

 

In May 2003, FASB Statement No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity,*was issued*.* This Statement establishes standards forthe classification and measurement of certain financial instruments withcharacteristics of both liabilities and equity. The Statement also includesrequired disclosures for financial instruments within its scope. For theCompany, the Statement was effective for instruments entered into or modifiedafter May 31, 2003 and otherwise became effective as of January 1,2004, except for certain mandatorily redeemable financial instruments. Forcertain mandatorily redeemable financial instruments, the Statement will beeffective for the Company on January 1, 2005. The effective date has beendeferred indefinitely for certain other types of mandatorily redeemablefinancial instruments. The Company currently does not have any financialinstruments that are within the scope of this Statement.

 

16

----

 

In December 2003, FASB Statement No. 132(revised), *Employers’ Disclosures aboutPensions and Other Postretirement Benefits,*was issued. Statement132 (revised) prescribes employers’ disclosures about pension plans and otherpostretirement benefit plans; it does not change the measurement or recognitionof those plans. The Statement retains and revises the disclosure requirementscontained in the original Statement 132. It also requires additionaldisclosures about the assets, obligations, cash flows, and net periodic benefitcost of defined benefit pension plans and other postretirement benefit plans.The new annual disclosure requirements became effective for the Company as ofthe year ended December 31, 2004. The Company’s disclosures in note 18incorporate the requirements of Statement 132 (revised).

 

In December 2003, the FASB issued FASBInterpretation No. 46 (revised December 2003), *Consolidation of Variable Interest Entities*,which addresses how a business enterprise should evaluate whether it has acontrolling financial interest in an entity through means other than votingrights and accordingly should consolidate the entity.  The Company applies FIN 46R to variableinterests in VIEs created after December 31, 2003. For variable interestsin VIEs created before January 1, 2004, the Interpretation will be appliedbeginning on January 1, 2005. For any VIEs that must be consolidated underFIN 46R that were created before January 1, 2004, the assets, liabilitiesand noncontrolling interests of the VIE initially would be measured at theircarrying amounts with any difference between the net amount added to thebalance sheet and any previously recognized interest being recognized as thecumulative effect of an accounting change. If determining the carrying amountsis not practicable, fair value at the date FIN 46R first applies may be used tomeasure the assets, liabilities and noncontrolling interest of the VIE.

 

The Company assessed the impact of applying FIN 46Rand concluded that it does not have Variable Interest Entities that are withinthe scope of this Interpretation.

 

17

----

 

**4.****                   Cashand Cash Equivalents**

 
| ** **                             | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
|                                   |       |       |       |       |       |
| **Local  currency**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and bank  accounts                |       | 84,536     |       | 91,540     |       |
| Investment funds  of variable earnings |       | 258,345    |       | 890,585    |       |
| Other                                  |       | 89         |       | 156        |       |
|                                   |       | 342,970    |       | 982,281    |       |
| **Foreign  currency**                  |       |       |       |       |       |
| Cash and bank  accounts                |       | 70,412     |       | 137,959    |       |
| Interest-bearing  current account      |       | 350,796    |       | 697,814    |       |
|                                   |       | 421,208    |       | 835,773    |       |
|                                   |       | 764,178    |       | 1,818,054  |       |

 

**5.****                   Available-for-SaleDebt and Held-to-Maturity Securities**

 

On December 30, 2003, theCompany transferred a portion of its available-for-sale debt securitiesportfolio to investment funds managed by a third-party and no gain wasrecognized at the transfer date. On May 14, 2004, the Company ultimately soldall of its holdings of Brazil Brady Bonds, including those securities held bythird party investment funds. The Company received gross proceeds ofapproximately R$935 million, and recorded a loss of approximately R$110,000.

 

During 2004, the Companychanged its strategy and started to invest in Credit Linked Notes (CLN), whichare debt securities issued by highly rated American and European banks indexedin Reais with Inter Deposit Rates. These securities are collaterized by highlyBrazilian banks and companies’ debt securities. Such CLN securities, as well asthe other debt securities held by the foreign investment funds are classifiedas available-for-sale at December 31, 2004.

 

18

----

 

The following is asummary of available-for-sale debt and held-to-maturity securities at December31, 2004 and 2003:

 
| ** **               | ** ** | **Available-for-sale debt securities** | ** ** |
|--------------------------|------------|----------------------------------------|------------|
| ** **               | ** ** | **Amortized  Cost**                    | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
| December 31,  2004       |       |                                   |       |   |   |   |   |   |   |
| Investment funds  (1)    |       | 1,153,014                              |       | — |   | — |   | 1,153,014 |   |
| National treasury  notes |       | 199,034                                |       | — |   | — |   | 199,034 |   |
| Austrian Bonds           |       | 237,748                                |       | — |   | — |   | 237,748 |   |
| Total                    |       | 1,589,796                              |       | — |   | — |   | 1,589,796 |   |
|                     |       |                                   |       |   |   |   |   |   |   |
| December 31,  2003       |       |                                   |       |   |   |   |   |   |   |
| National  treasury notes |       | 158,429                                |       | 160 |   | — |   | 158,589 |   |
| Brazil Brady  Bonds      |       | 29,812                                 |       | 798 |   | — |   | 30,610 |   |
| Investment funds  (2)    |       | 1,035,110                              |       | 36,031 |   | — |   | 1,071,141 |   |
| Total                    |       | 1,223,351                              |       | 36,989 |   | — |   | 1,260,340 |   |

 

----

(1)               Largelyrepresented by Credit Linked Notes

(2)               Largelyrepresented by Brazil Brady Bonds

 
| ** **                 | ** ** | **Held-to-maturity securities** | ** ** |
|----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|                       |       |                            |       |   |   |   |   |   |   |
| December 31,  2003         |       |                            |       |   |   |   |   |   |   |
| Bank deposit  certificates |       | 37,945                          |       | — |   | — |   | 37,945 |   |
| Total                      |       | 37,945                          |       | — |   | — |   | 37,945 |   |

 

The amortized cost andestimated fair value of available for sale debt at December 31, 2004, bycontractual maturity, are shown below:

 
| ** **                 | ** ** | **Available for-sale-debt securities** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| **Maturity  periods**      | ** ** | **Amortized  Cost**                    | ** ** | **Estimated  Fair Value** | ** ** |
|                       |       |                                   |       |   |   |
| Due in less than  one year |       | 1,153,014                              |       | 1,153,014 |   |
| Due in one to  three years |       | 414,303                                |       | 414,303 |   |
| Due after five  years      |       | 22,479                                 |       | 22,479 |   |
| Total                      |       | 1,589,796                              |       | 1,589,796 |   |

 

19

----

 

**6.****                  Accountsand Notes Receivable, Net**

 
| ** **                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Customer                                     |       |     |       |     |       |
| Domestic                                     |       | 363,279  |       | 350,974  |       |
| Export, mainly  denominated in U. S. dollars |       | 258,050  |       | 259,557  |       |
| Allowance for  doubtful accounts             |       | (9,160   | )          | (33,628  | )          |
|                                         |       | 612,169  |       | 576,903  |       |

 

The changes in the allowance for doubtful accounts areas follows:

 
| ** **                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |     |       |
| Balance at the  beginning of the year |       | (33,628  | )          | (40,480  | )          | (20,622  | )          |
| Amounts charged  to expense           |       | (1,285   | )          | (4,966   | )          | (20,784  | )          |
| Write offs                            |       | 25,753   |       | 11,818   |       | 926      |       |
| Balance at the  end of the year       |       | (9,160   | )          | (33,628  | )          | (40,480  | )          |

 

On June 6, 2003, theCompany and its wholly owned foreign subsidiaries Sadia International Ltd. andLaxness Food, Comércio de Produtos Alimentares, Lda. entered into a InsuredReceivables Purchase Agreement with a third party financial institution tosell, from time to time, their ownership interests in the Scheduled Receivables(Export Receivables) up to US$55 million on a monthly basis. The sales price ofthe Scheduled Receivables is calculated as their outstanding balances times adiscount rate equal to the Libor rate plus an applicable margin of 2,125%. TheCompany agreed to service and collects the Scheduled Receivables and aninsurance policy was issued by a third party insurance company to the financialinstitution guarantee the collection of 90% of the invoiced amount of anyScheduled Receivable. This Agreement expired on June 6, 2004.

 

OnAugust 27, 2004, the Company renewed the Insured Receivable Purchased Agreementdescribed above with a revolving credit amount of US$100 million and a discountrate of 0.7%. As of December 31, 2004, this agreement is accounted for as asecured financing with such debt outstanding included in short-term debt in theamount of R$120,810.

 

20

----

 

During the year endedDecember 31, 2004, the Company received cash proceeds of approximately R$1,500million (R$700 million in 2003) and incurred expenses of R$4 million (R$2million in 2003) in connection with the Insurance Receivable PurchaseAgreement.

 

During 2004, 2003 and2002, no single customer or group represented more than 10% of consolidatedsales.

 

**7.****                  Inventories**

 
| ** **                       | ** ** | **2004**  | ** ** | **2003** | ** ** |
|----------------------------------|------------|-----------|------------|----------|------------|
|                             |       |      |       |     |       |
| Finished goods                   |       | 389,765   |       | 245,178  |       |
| Live stock and  poultry          |       | 460,045   |       | 391,069  |       |
| Raw materials                    |       | 189,144   |       | 128,544  |       |
| Work in process                  |       | 72,076    |       | 77,357   |       |
| Packing material                 |       | 35,206    |       | 28,766   |       |
| Stock in transit                 |       | 7,791     |       | 6,727    |       |
| Advances to  suppliers           |       | 47        |       | 1,413    |       |
| Supplies in  warehouse and other |       | 22,422    |       | 20,784   |       |
|                             |       | 1,176,496 |       | 899,838  |       |

 

**8.****                  RecoverableTaxes**

 
| ** **                                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                   |       |     |       |     |       |
| Value-added  state sales tax- ICMS                     |       | 81,067   |       | 53,868   |       |
| Federal excise  tax – IPI                         |       | 53,626   |       | 102,519  |       |
| Income tax  withheld at source and advanced income tax |       | 26,393   |       | 35,151   |       |
| COFINS                                                 |       | 61,932   |       | —   |       |
| Other  (principally PIS tax credits on raw material)   |       | 20,059   |       | 22,930   |       |
| Total                                                  |       | 243,077  |       | 214,468  |       |
| Current portion                                        |       | (155,891 | )          | (140,249 | )          |
| Non current  portion                                   |       | 87,186   |       | 74,219   |       |

 

21

----

 

Value-added state salestax- ICMS

 

Composed of creditsgenerated by the commercial operations of a number of the Company’s units andcan be offset with taxes of the same nature.

 

PIS and COFINS

 

Composed of creditsarising from non-cumulative collection of PIS and COFINS, which can becompensated with other federal taxes.

 

Federal excise tax - IPI

 

Federal excise tax - IPIcredits includes the tax credit on packing and other material and the presumedIPI incentive on exports. IPI credits are recognized as a reduction of cost ofraw materials used in the production process of goods produced for export andare available to be utilized against other federal taxes payable.

 

Income tax withheld atsource

 

Income tax withheld atsource represents income tax paid upon redemption of certain investments and isavailable to be utilized against other federal income taxes payable.

 

**9.****                  Property,Plant and Equipment**

 
| ** **                | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------|------------|------------|------------|------------|------------|
| ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Land                      |       | 32,990     |       | 34,784     |       |
| Buildings                 |       | 493,700    |       | 452,009    |       |
| Machinery and  equipment  |       | 778,343    |       | 727,652    |       |
| Installations             |       | 189,042    |       | 169,772    |       |
| Vehicles                  |       | 14,042     |       | 15,719     |       |
| Timber and  reforestation |       | 16,414     |       | 13,155     |       |
| Other                     |       | 48,305     |       | 109,020    |       |
| Construction in  progress |       | 167,057    |       | 99,339     |       |
|                      |       | 1,739,893  |       | 1,621,450  |       |
| Accumulated  depreciation |       | (792,718   | )          | (792,447   | )          |
| Total                     |       | 947,175    |       | 829,003    |       |

 

Interestcapitalized as part of property, plant and equipment was R$11,206, R$4,903 andR$5,768 for the years ended December 31, 2004, 2003 and 2002, respectively.

 

22

----

 

**10.****           AssetsAvailable for Sale**

** **

The Company has assetsavailable for sale that are recorded as other noncurrent assets in the amountof R$18,080 (R$19.730 at December 31, 2003), primarily consist of the GranjaRezende’s administrative complex. At December 31, 2004, Granja Rezende ́sadministrative complex with a carrying amount of R$15 million is net of animpairment loss of R$6 million, included in other operating expenses, net,which was recorded by the Company in 2003 to write down this asset to itsestimated sales value.

 

**11.****           Short-termDebt**

 
| ** **                                          | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-----------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                |       |      |       |      |       |
| Working capital  from commercial banks              |       | 761,103   |       | 1,256,015 |       |
| Trade accounts  receivable domestic credit facility |       | 162,138   |       | 106,345   |       |
| Trade accounts  receivable export credit facility   |       | 120,810   |       | —    |       |
| Bank borrowings,  secured by accounts receivable    |       | 17,830    |       | —    |       |
|                                                |       | 1,061,881 |       | 1,362,360 |       |

 

Working capital fromcommercial banks primarily relates to export financing and pre-export advances,of which R$744,423 in 2004 (R$1,168,022 in 2003) are denominated in U.S.dollars with interest at Libor (2,775% p.a. at December 31, 2004) plus interestat the rate from 0.10% p.a. to 4.48% p.a. in 2004 (interest at the rate from3.03% p.a. to 5.11% p.a. in 2003).

 

On May 12, 2003, theCompany entered into an agreement to sell, from time to time, up to R$150,000of its domestic receivables to a special purpose entity, organized as aninvestment fund. The receivables sold are subject to a discount rate thatshould not be lower than 95% of the average rate of Brazilian interbankcertificate deposits (17.7% p.a. at December 31, 2004). Through December 31, 2004,the Company received cash proceeds of R$2,249,000 from the sales of domesticreceivables under this agreement and incurred in interest expenses of R$23,000for the year ended December 31, 2004. Based on the structure of thistransaction, the agreement has been accounted for as a financing by theCompany. As of December 31, 2004, the accounts receivable for this financepledged as collateral were R$162,138.

 

At December 31, 2004 and2003, the weighted average interest rates on short-term debt were 7.06% and5.19% p.a., respectively.

 

23

----

 

**12.****           Long-termDebt**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |      |       |      |       |
| **Foreign  debt (denominated in U.S. dollars):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |      |       |      |       |
| IFC-  International Finance Corporation (for investment in property, plant and equipment)  due in installments through 2008, R$93,586 interest at fixed rate of 8.52%  p.a. and R$35,636 at fixed rate of 9.05% p.a., secured by the related fixed  assets with a carrying value of R$67,664                                                                                                                                                                                                                                                                                                                            |       | 129,222   |       | 177,605   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |      |       |      |       |
| Export  financing, due in installments through 2010, interest at Libor (2,775% in  December 2004) plus interest rate of 5.60% p.a., guaranteed by promissory  notes or sureties issued by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 924,965   |       | 1,196,174 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |      |       |      |       |
| **Local  debt (denominated in reais):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |      |       |      |       |
| BNDES (National  Development Bank) due in installments through 2009, R$436,309 subject to long-term  interest rate- TJLP (9.75% p.a. in 2004) plus interest rate ranging from  3.30% to 3.89% p.a. and R$66,677 subject to weighted average exchange rate  variations on currencies held by BNDES- UMBNDES (7,41% p.a. in 2004) plus  interest at the rates ranging from 3.5% to 3.86% p.a., secured by the branch  facilities of Duque de Caxias, Uberlândia, Francisco Beltrão, Paranaguá and  Faxinal dos Guedes units with a carrying value of R$227,345, present as  property, plant and equipment. |       | 502,986   |       | 523,170   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |      |       |      |       |
| PESA - Special  Aid Program for Agribusiness payable in installments from 2005 to 2020,  subject to the – General Price Index –Market – IGP-M (12,42% in 2004) plus  interest rate of 9.76% p.a., secured by investments in debt securities with a  carrying value of R$22,479 and sureties.                                                                                                                                                                                                                                                                                                             |       | 129,310   |       | 114,233   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |      |       |      |       |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 21,846    |       | 19,570    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |      |       |      |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 1,708,329 |       | 2,030,752 |       |
| Less current  portion of long- term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | (676,954  | )          | (663,916  | )          |
| Long- term  portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 1,031,375 |       | 1,366,836 |       |

 

24

----

 

The Company is subject tocertain restrictive covenants contained in the IFC agreement. These covenantsinclude a restriction on the payment of dividends in excess of the mandatoryamount (see Note 15) without the prior agreement of the IFC. During 2003, theCompany paid dividends in excess of that allowed under the IFC agreement.Consequently, such debt is callable should the IFC so desire. Therefore, theCompany reclassified in 2003 the long-term portion of the IFC debt amounting toR$153 million from long-term debt to short-term debt, situation that wasmaintained for 2004 in the amount of R$129 million. There were no restrictionsto the payments of dividends made in 2002 as they were in accordance with themandatory amount. Payments of dividends on future distributable income inexcess of the mandatory amount will require approval of the IFC prior to suchpayments until such time that the Company meets the financial ratio.

 

At December 31,2004, long-term debt maturities were as follows:

 
| 2006       |   | 611,420   |   |
|------------|--------|-----------|--------|
| 2007       |   | 91,465    |   |
| 2008       |   | 81,623    |   |
| 2009       |   | 62,047    |   |
| 2010       |   | 58,495    |   |
| Thereafter |   | 126,325   |   |
|       |   | 1,031,375 |   |

 

**13.****           JudicialDeposits**

 

Judicial deposits arerestricted assets of the Company and relate to amounts placed on deposit withthe court and held in judicial escrow, pending resolution of related legalmatters. The aggregate amounts of judicial deposits the Company has made forcertain legal proceedings is approximately R$77 million and R$75 million atDecember 31, 2004 and 2003, respectively.

 

**14.****           Commitmentsand Contingencies**

 

**Commitments**

 

TheCompany has entered into purchase commitments for production purpose (packing)amounting to approximately R$348 million at December 31, 2004 and is payableuntil 2009.

 

25

----

 

**Contingencies**

** **

The Company is party tocertain legal proceedings arising in the normal course of business, and hasmade provisions based on its best estimate of the probable losses that willultimately be incurred. The Company believes that the provisions made aresufficient to cover probable losses. In connection with certain legalproceedings, the Company has made judicial deposits, which will only bereleased upon a favorable legal judgment (see Note 13).

 

The Company’s labor forceis represented by collective bargaining agreements. All collective bargainingagreements are re-negotiated annually.

 

Contingencies classifiedas having a probable risk of loss, for which provisions are recorded underliabilities, have the following balances:

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |
| Tax        |       | 33,618   |       | 36,729   |       |
| Civil      |       | 11,746   |       | 17,706   |       |
| Labor      |       | 13,620   |       | 13,570   |       |
|       |       | 58,984   |       | 68,005   |       |

 

*Taxlitigation*

 

Themain tax contingencies involve the following cases:

 

a)          Income and socialcontribution taxes on net income

 

Provisionfor income and social contribution taxes on net income amounting to R$6,833,recorded on the acquisition of the subsidiary Granja Rezende (incorporated in 2002).

 

b)         State VAT (ICMS)

 

TheCompany is a defendant in several administrative cases involving ICMS, mainlyin the States of São Paulo, Rio de Janeiro and Amazonas (SUFRAMA), totaling aprobable contingency estimated at R$17,543.

 

26

----

 

c)          Other taxcontingencies

 

Severalcases related to payment of IOF (Tax on Financial Operations), PIS (SocialIntegration Program Tax), COFINS (Tax for Social Security Financing) and otherstotaling a probable loss of R$9,242.

 

The Company has other taxcontingencies where the claimed amount is R$454,800, that were assessed aspossible losses by the Company’s legal counsel and management and therefore noprovision was recorded.

 

*Civil litigation*

* *

Theamount provided represents principally proceedings involving claims forindemnification for losses and damages, including pain and suffering, arisingfrom work-related accidents and consumer relations.

 

TheCompany has other civil contingencies where the claimed amount is R$45,654, thatwere assessed as possible losses by the Company’s legal counsel and managementand therefore no provision was recorded.

 

*Labor claims*

* *

There are approximately 1,720 labor claims againstthe Company.  These claims are mainlyrelated to overtime, and health exposure or hazard premiums, none of theamounts provided involve a significant amount on an individual basis.  The total amount of such labor claims amountto R$ 30,267 thousand and a provision of R$ 13,620 thousand has been providedin the accompanying financial statements based on historical information andrepresents the Company’s best estimate of the ultimate loss that will beincurred.

 

 

27

----

 

*Leasing*

* *

TheCompany has a non-cancelable operating lease, for an industrial unit thatexpires over the next three years. The lease contains a renewal option for 4years and does not require any penalty in case the Company does not renew it.The Company does not pay executory costs such as maintenance or insurance.Rental expense during 2004 was R$27,512. There was no leasing expense in 2003and 2002.

 

Futureminimum lease payments under non-cancelable operating lease as of December 31,2004 are:

 
| Year ending  December 31: |   |   |   |
|---------------------------|--------|--------|--------|
| 2005                      |   | 31,200 |   |
| 2006                      |   | 31,200 |   |
| 2007                      |   | 31,200 |   |
| Total                     |   | 93,600 |   |

 

**15.****           Shareholders’Equity**

** **

In accordance withBrazilian Corporate Law, a company is permitted to use appropriated andunappropriated retained earnings to increase capital. Such a capital increasemust be approved by the Company’s Board of Directors. The allocation of thecapital increase between preferred and common shares is proportional to thenumber of shares outstanding. Total appropriated retained earnings of R$300,000in 2003 were used to increase capital.

 

The preferred shareholders may not vote atshareholders meetings but have the right to receive priority in repayment oftheir capital, in the case of liquidation.

 

The Company’s by-laws provide to pay a mandatorydividend to common and preferred shareholders of at least 28% of annual netdistributable income determined in accordance with Brazilian Corporate Law. Asfrom 1997, preferred shareholders are entitled to receive a dividend per share10% higher than common shareholders. During 2004 and in February and March 2005,the Company paid dividends in accordance with the mandatory amount. In 2003,the payments of dividends were in excess of the mandatory amount.

 

28

----

 

Brazilian Corporate Lawpermits the payment of dividends only in *reais*, limitedto the amounts of research and development and expansion reserves ofappropriated retained earnings and unappropriated retained earnings in thefinancial statements prepared in accordance with Brazilian Corporate Law. AtDecember 31, 2004 and 2003 the Company had in its statutory books the followingamounts:

 
| ** **                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Appropriated  retained earnings:  |       |     |       |     |       |
| Research and  development reserve |       | 65,833   |       | 43,568   |       |
| Expansion  reserve                |       | 644,881  |       | 392,420  |       |
| Unappropriated  retained earnings |       | 24,932   |       | 24,932   |       |

 

Dividends paid perthousand shares in**R$ were as follows:

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Preferred  |       | 234,68   |       | 170.08   |       | 106.89   |       |
| Common     |       | 213,34   |       | 154.61   |       | 97.18    |       |

 

The Company elected tocharacterize a portion of the 2004, 2003 and 2002 dividends as interest oncapital (or interest attributable to shareholders’ equity) as discussed in note3 h).

 

Brazilian Corporate Lawand the Company’s by-laws require that annual appropriations be made to certainreserves (appropriated retained earnings). These comprise mainly (a) 5% of netincome (statutory accounts) must be transferred to a legal reserve until suchreserve reaches 20% of capital stock under Brazilian GAAP; (b) appropriation of15% to a research and development reserve which is general reserve for supportdevelopment of the Company’s operations; (c) appropriation from 15% to 60% to aexpansion reserve. The legal reserve cannot be used to distribute dividends toshareholders.

 

The components ofappropriated retained earnings at December 31, 2004 and 2003 were as follows:

 
| ** **                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Legal reserve                     |       | 56,727   |       | 34,462   |       |
| Research and  development reserve |       | 65,833   |       | 43,568   |       |
| Expansion  reserve                |       | 644,881  |       | 392,420  |       |
|                              |       | 767,441  |       | 470,450  |       |

 

29

----

 

Costs or losses are notcharged to appropriated retained earnings and no part of the appropriation istransferred to income.

 

During 2003, the Companyterminated the stock award plan for its Director’s, which received a portion oftheir annual bonus in shares of preferred stock that were purchased in themarket by the Company in the Director’s name. Based on the number of preferredshares each Director had received under this plan, which totaled approximately711,000 preferred shares at the termination date; the Company paid in 2003approximately R$240 to the Directors relating to the increase in the marketvalue of these shares since their purchasing.

 

**16.****            IncomeTaxes**

 

Income before provision for income taxes was asfollows:

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | 410,134  |       | 61,376   |       | 199,590  |       |
| Foreign    |       | 176,988  |       | 410,155  |       | 97,140   |       |
|       |       | 587,122  |       | 471,531  |       | 296,730  |       |

 

A break-down between domestic and foreign income andsocial contribution tax (expense) benefit for the year is as follows:

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic:  |       |     |       |     |       |     |       |
| Current    |       | (32,057  | )          | (38,653  | )          | 34,635   |       |
| Deferred   |       | (57,469  | )          | 40,099   |       | (46,786  | )          |
|       |       | (89,526  | )          | 1,446    |       | (12,151  | )          |
| Foreign:   |       |     |       |     |       |     |       |
| Current    |       | (912     | )          | (419     | )          | (4       | )          |
| Deferred   |       | (5,661   | )          | —   |       | —   |       |
|       |       | (6,573   | )          | (419     | )          | (4       | )          |
|       |       | (96,099  | )          | 1,027    |       | (12,155  | )          |

 

30

----

 

Brazilian income taxesconsist of federal income tax and social contribution. The 2004, 2003 and 2002statutory rates for these taxes were as follows:

 
| Federal income  tax      |   | 25.00 | % |
|--------------------------|--------|-------|---|
| Social  contribution tax |   | 9.00  | % |
| Combined  statutory rate |   | 34.00 | % |

 

Because the Company isengaged in rural activities, certain related investments can be depreciated fortax purposes on an accelerated basis and the resulting tax losses may be offsetagainst profits generated in other activities.

 

The reconciliation ofincome tax at the Brazilian statutory rates to income tax expense follows:

 
| ** **                                                                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                        |       |     |       |     |       |     |       |
| Income before  income taxes                                                                 |       | 587,122  |       | 471,531  |       | 296,730  |       |
| Income tax  expense, at Brazilian statutory taxes rates                                     |       | (199,621 | )          | (160,321 | )          | (100,888 | )          |
| Reversal of  income tax liability on undistributed earnings of foreign subsidiary           |       | —   |       | —   |       | 3,113    |       |
| Others permanent  differences                                                               |       | 5,593    |       | (765     | )          | (2,134   | )          |
| Tax-exempt  income in foreign subsidiary                                                    |       | 65,277   |       | 132,992  |       | 40,756   |       |
| Non-taxable  (nondeductible) foreign currency exchange gain (loss)                          |       | (17,231  | )          | (21,651  | )          | 23,791   |       |
| Benefit from  deductibility of interest attributed to shareholders’ equity (Note 3 h)) |       | 49,883   |       | 50,772   |       | 23,207   |       |
| Income tax  expense                                                                         |       | (96,099  | )          | 1,027    |       | (12,155  | )          |

 

During 2002, the Companyestablished a new foreign subsidiary. Due to a current tax treaty, earningsgenerated by such subsidiary are taxed when actually distributed. As theCompany intends to permanently reinvest the earnings of this foreignsubsidiary, no income tax payment is required. At December 31, 2004, subsidiaryhad cumulative earnings of R$619 million that are not tax effected. If suchcumulative earnings were to be distributed to the Company, approximately R$93million of taxes would be paid.

 

31

----

 

Deferred tax assets and liabilities are comprised ofthe following:

 
| ** **                                                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                                                    |       |     |       |     |       |
| Employee bonus  accrual                                                  |       | 16,928   |       | 47,751   |       |
| Accrued contingencies                                                    |       | 20,055   |       | 24,644   |       |
| Accrued employee  benefit liability                                      |       | 8,268    |       | 5,744    |       |
| Tax loss  carryforwards                                                  |       | 19,079   |       | 27,026   |       |
| Property, plant  and equipment                                           |       | 56,535   |       | 64,051   |       |
| Deferred charges                                                         |       | 6,631    |       | 9,854    |       |
| Other (mainly  timing differences for tax purposes)                      |       | 18,029   |       | 21,979   |       |
| Total deferred  income tax assets                                        |       | 145,525  |       | 201,049  |       |
|                                                                     |       |     |       |     |       |
| Deferred tax  liabilities:                                               |       |     |       |     |       |
| Property, plant  and equipment                                           |       | (34,063  | )          | (33,930  | )          |
| Pension plan                                                             |       | (16,767  | )          | (8,926   | )          |
| Unrealized gains  from foreign currency and interest rate swap contracts |       | (16,484  | )          | (15,361  | )          |
| Unrealized gains  from investments in debt securities                    |       | —   |       | (12,578  | )          |
| Other                                                                    |       | (1,285   | )          | (2,775   | )          |
| Total deferred  tax liabilities                                          |       | (68,599  | )          | (73,570  | )          |
| Net deferred tax  assets                                                 |       | 76,926   |       | 127,479  |       |
| Current portion                                                          |       | (20,372  | )          | (54,672  | )          |
| Non current  portion                                                     |       | 56,554   |       | 72,807   |       |

 

In assessing the realizability of deferred tax assets, managementconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimaterealization of deferred tax assets is dependent upon the generation of futuretaxable income during the periods in which those temporary differences becomedeductible and tax loss carryforwards utilizable. Management considers thescheduled reversal of deferred tax liabilities, projected future taxableincome, and tax planning strategies in making this assessment. Based upon thelevel of historical taxable income and projections for future taxable incomeover the periods in which the deferred tax assets are deductible, managementbelieves it is more likely than not that the Company will realize the benefitsof these deductible differences and tax loss carryforwards at December 31,2004.

 

32

----

 

The Company has notprovided a valuation allowance against the net deferred tax asset as ofDecember 31, 2004 arising out of temporary differences based upon management’sbelief that it is more likely than not that such deferred tax asset will berealized in the future through reversal of the differences and the generationof taxable income by the Company.

 

Loss carryforwards haveno expiration date and are available to offset up to 30% of future taxableincome in any given year. At December 31, 2004, the Company had losscarryforwards of R$49,918 for income tax and R$73,333 for social contributiontax.

 

**17.****           RiskManagement and Financial Instruments**

** **

TheCompany’s operations are exposed to market risks, principally in relation toexchange rate variations, credit risk and grain purchase prices. These risksare monitored by the Risk Management Area that uses a specific system tocalculate the “VAR -Value at Risk”, and permanently monitored by the financecommittee, composed of members of the Board of Directors and other financeexecutives of the Company, who are responsible for defining the Board’s riskmanagement strategy by determining the position and exposure limits.

 

a)Exchange rate risk

 

Since much of Sadia’s debt is denominated in U.S.dollars, the Company minimizes in part the effects of unfavorable exchangemovements by holding cash, cash equivalents and available-for-sale instrumentsdenominated in U.S. dollars. Accordingly, if the *real*devalues against the U.S. dollar and it results in a foreign exchange loss, theCompany records an offsetting gain from these dollar denominated contracts.Additionally to protect against further possible devaluation of the *real,*the Company enters into foreign currency and interestrate swap contracts. The Company does not enter into derivatives contracts forspeculative purposes.

 

33

----

 

b)Credit risk

 

The Company is potentiallyexposed to credit risk in relation to its trade accounts receivable, long andshort-term investments and derivative instruments. The Company limits the riskassociated with these financial instruments by subjecting them to the controlof highly rated financial institutions that operate within the limitspre-established by the credit and financing committees.

 

The concentration of creditrisk with respect to accounts receivable is minimized due to the spread of itsclient base, since the Company does not have any customer or group representing10% or more of its consolidated revenues, as well as granting credits forcustomers with solid financial and operational ratios. Generally, the Companydoes not require a guarantee for domestic accounts receivable.

 

c)Grain purchase price

 

The Company’s operations areexposed to the volatility in prices of grain (corn and soybean) used in thepreparation of fodder for its breeding stock, where the price variation resultsfrom factors beyond the control of management, such as climate, the size of theharvest, transport and storage costs and government agricultural policies, amongothers. The Company does not enter into future or options contracts toprotect itself against changes in the commodities price; however it maintains arisk management strategy based on its inventory policy through physicalcontrol, which includes acquisition of grains with fixed and non-fixed prices.

 

d)Estimated market values

 

The Company used the following methods and assumptionsin estimating the fair value disclosures of its financial instruments atDecember 31, 2004 and 2003:

 

*Cash and cash equivalents:*The carrying amounts reported in the balance sheet for cash and cashequivalents approximate their fair values.

 

*Held-to-maturitysecurities:*The fair value of held-to-maturity securities areestimated based on quoted market prices of comparable contracts. -

 

*Investments in debt securities:*The market values of investments in debt securities were calculated based ontheir present value calculated through the future cash flows and using interestrates applicable to instruments of similar nature, terms and risk, or based onthe market quotations of these securities.

 

34

----

 

*Accounts and notes receivable andaccounts payable:* The carrying amounts reported in thebalance sheet for accounts and notes receivable and accounts payableapproximate their fair values.

 

*Long and short-term debt:*The carrying amounts of short-term debt approximate their fair values. Thecarrying amount of long-term debt approximates their fair values due to thevariable rate nature of the major portion of such debt.

 

*Foreign currency and interestrate swap contracts:* The fair values of foreign currency andinterest rate swap contracts were estimated based on quoted market prices ofcomparable contracts. At December 31, 2004 and 2003 the notional amounts of theoutstanding contracts were R$1,358,855****andR$1,274,700****and the measurement ofthese contracts at fair values resulted in a loss of R$109,523 and R$53,090,respectively. The Company recognizes these contracts on the balance sheet at fairvalue and adjustments to fair value were recorded through income. The actualcash settlements on the contracts occur at times specified in each agreement.The Company intends not to terminate any of these contracts prior to maturity.

* *

Thefollowing table presents the carrying amounts and estimated fair values of theCompany’s financial instruments at December 31, 2004 and 2003. The fair valueof a financial instrument is the amount at which the instrument could beexchanged in a current transaction between willing parties.

 
| ** **                      | ** ** | **2004**             | ** ** |
|---------------------------------|------------|----------------------|------------|
| ** **                      | ** ** | **Carrying  amount** | ** ** | **Fair  value** | ** ** |
|                            |       |                 |       |   |   |
| Financial  assets:              |       |                 |       |   |   |
| Cash and cash  equivalents      |       | 764,178              |       | 764,178 |   |
| Investments in  debt securities |       | 1,589,796            |       | 1,589,796 |   |
| Accounts and  notes receivable  |       | 491,359              |       | 491,359 |   |
| Financial  liabilities:         |       |                 |       |   |   |
| Short-term debt                 |       | 941,071              |       | 951,471 |   |
| Suppliers                       |       | 483,566              |       | 483,566 |   |
| Long–term debt             |       | 1,031,375            |       | 1,075,973 |   |

 

35

----

 

**18.****            SupplementaryRetirement Plan**

 

The Company sponsors adefined benefit pension plan that offers supplementary retirement benefits tothe employees, through Attílio Francisco Xavier Fontana Foundation. The pensionbenefit is generally defined as the difference between (i) 80% of the retiree’saverage salary during the last 36 months indexed to the date of retirement and(ii) the value of the retirement pension paid by the Brazilian social securitysystem. For retired employees the initial pension payment is subsequentlyadjusted upwards to recognize cost of living increases and productivity awardsgranted to active employees. The Company provides for the costs of pensionbenefits based on a fixed percentage of remuneration, as recommended annuallyby independent actuaries. The accumulated benefit obligation related to thispension plan were R$537,420 and R$522,703 at December 31, 2004 and 2003,respectively. The Company expects to contribute approximately R$5,000 to theplan during fiscal year 2005.

 

As of January 1, 2001, the Company began sponsoringtwo new defined benefit plans to its employees and certain employee executives.Such benefit plans generally provide benefits payable as a single lump sum toeligible employees upon retirement. The Company intends to fund these benefitsfrom its operations. The aggregate projected benefit obligation and theaggregate accumulated benefit obligation related to those benefit plans wereR$59,487 and R$54,719, respectively, at December 31, 2004 and R$53,686 andR$49,414, respectively, at December 31, 2003.

 

36

----

 

Information regarding theplans follows:

 
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| **Change  in benefit obligation**               |       |     |       |     |       |
| Benefit  obligation at beginning of year        |       | 615,052  |       | 510,394  |       |
| Net service cost                                |       | 20,810   |       | 14,609   |       |
| Interest cost                                   |       | 67,738   |       | 56,236   |       |
| Participants  contributions (service cost)      |       | 6,194    |       | 5,482    |       |
| Actuarial loss                                  |       | (36,836  | )          | 56,401   |       |
| Benefits paid                                   |       | (32,967  | )          | (28,070  | )          |
| Benefit  obligation at end of year              |       | 639,991  |       | 615,052  |       |
| **Change  in plan assets**                      |       |     |       |     |       |
| Fair value of  plan assets at beginning of year |       | 756,642  |       | 545,683  |       |
| Actual return on  plan assets                   |       | 166,792  |       | 227,029  |       |
| Company  contributions                          |       | 8,295    |       | 6,045    |       |
| Participant  contributions                      |       | 5,933    |       | 5,955    |       |
| Benefits paid                                   |       | (32,967  | )          | (28,070  | )          |
| Fair value of  plan assets at end of year       |       | 904,695  |       | 756,642  |       |
| **Funded  status**                              |       |     |       |     |       |
| Funded status at  end of year                   |       | 264,704  |       | 141,590  |       |
| Unrecognized  transition asset                  |       | (5,649   | )          | (7,531   | )          |
| Unamortized  prior service cost                 |       | 27,318   |       | 29,715   |       |
| Unrecognized net  actuarial gain                |       | (258,937 | )          | (153,020 | )          |
| Net amount recognized                           |       | 27,436   |       | 10,754   |       |

 
| ** **                                                     | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Amounts  recognized in the statement of financial position** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangible asset                                               |       | 26,508     |       | 29,513     |       |
| Prepaid pension  plan                                          |       | 49,316     |       | 26,254     |       |
| Accrued benefit  liability                                     |       | (48,388    | )          | (45,013    | )          |
| Net amount  recognized                                         |       | 27,436     |       | 10,754     |       |

 

37

----

 

The following projectedbenefit payments, which reflect expected future service, as appropriate, areexpected to be paid:

 
| 2005       |   | 25,535  |   |
|------------|--------|---------|--------|
| 2006       |   | 26,648  |   |
| 2007       |   | 27,851  |   |
| 2008       |   | 29,187  |   |
| 2009       |   | 30,517  |   |
| 2010 -2014 |   | 174,606 |   |

 

The pension planweighted-average asset allocation at December 31, 2004 and 2003, by assetcategory, is as follows:

 
| ** **         | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
|               |       |     |       |     |       |
| Debt securities    |       | 53       | %          | 51       | %          |
| Equity  securities |       | 36       | %          | 36       | %          |
| Real estate        |       | 10       | %          | 12       | %          |
| Others assets      |       | 1        | %          | 1        | %          |
|               |       | 100      | %          | 100      | %          |

 

The investment strategy adopted by Attilio FranciscoXavier Fontana Foundation for the pension plans sponsored by the Company is tomaximize the rates of return on plan assets within an acceptable level of riskaiming to minimize the cost of providing pension benefits while maintainingadequate funding levels. Such investment strategy is revised on an annualbasis. The current strategic targets are to have a pension asset portfoliocomprising of 36% equity securities, 53% debts securities (substantiallycomprised of fixed and variable income investment funds) and 10% real state.The plan assets portfolio does not include any hedging, futures or derivativeinstruments.

 

Equity securities atDecember 31, 2004, are entirely represented by 24,998,558 common shares and5,400,000 preferred shares of the Company (24,998,558 common shares and6,970,000 preferred shares at December 31, 2003) with an aggregate fair valueof R$136,242 and R$32,292 at December 31, 2004. During 2004, the plan sold1,570,000 preferred shares of the Company. Dividends paid by the Company onshares held by the plan were R$7,042 for the year ended December 31, 2004(R$7,364 in 2003).

 

38

----

 

The pension plan is oneof the investors in the special purpose entity organized as an investment fundfor which the Company is selling domestic receivables as disclosed in Note 11.During 2003, the pension plan invested approximately R$20 million (2,000quotas) in the investment fund. In return for the amount invested, the pensionplan received shares from the investment fund. As of December 31, 2004 suchinvestment amounted to approximately R$27 million.

 
| ** **                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| **Weighted-average  assumptions** |       |     |       |     |       |
| Discount rate                     |       | 11.3     | %          | 11.3     | %          |
| Expected return  on plan assets   |       | 12.4     | %          | 12.4     | %          |
| Rate of  compensation increase    |       | 7.1      | %          | 7.1      | %          |

 

The Company uses a December 31 measurement date forits plans. In developing the expected rate of return on plan assets, theCompany considered the actuarial assumptions recommended by its independentactuaries, which basically reflect expectations of future returns.

 
| ** **                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Components  of net periodic benefit cost** |       |     |       |     |       |     |       |
| Service cost                                 |       | 20,810   |       | 14,609   |       | 14,424   |       |
| Interest cost                                |       | 67,738   |       | 56,236   |       | 47,167   |       |
| Expected return  on plan assets              |       | (92,401  | )          | (66,521  | )          | (55,589  | )          |
| Amortization of  transition asset            |       | (1,882   | )          | (1,882   | )          | (1,882   | )          |
| Amortization of  prior service cost          |       | 2,397    |       | 2,397    |       | 2,397    |       |
| Recognized net  actuarial gain               |       | (5,049   | )          | —   |       | (996     | )          |
| Net periodic  pension cost (credit)          |       | (8,387   | )          | 4,839    |       | 5,521    |       |

 

**19.Segment and Related Information**

** **

The following information about segments is based uponinformation used by the Company’s management to assess the performance ofoperating segments and decides on the allocation of resources. This approach isrequired by FASB Statement No. 131 *Disclosure about Segmentsof an Enterprise and Related Information*, and has been applied forall periods presented.

 

The Company has three identifiable reportablesegments: Processed products, Poultry and Pork.

 

39

----

 

The Company evaluatessegment performance based on information generated from its statutoryaccounting records prepared in accordance with accounting principles generallyaccepted in Brazil, which has been adjusted for US GAAP in the followingpresentation:

 

a) Segment information

 
| ** **                            | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Net  operating revenue**            |       |      |       |      |       |      |       |
| Processed  products                   |       | 2,764,194 |       | 2,412,989 |       | 1,818,464 |       |
| Poultry                               |       | 2,986,062 |       | 2,275,888 |       | 1,907,479 |       |
| Pork                                  |       | 593,345   |       | 559,578   |       | 478,989   |       |
| Other                                 |       | 35,621    |       | 43,669    |       | 33,911    |       |
| Adjustments for  US GAAP presentation |       | (269,997  | )          | (210,407  | )          | (99,773   | )          |
| Total net  operating revenue          |       | 6,109,225 |       | 5,081,717 |       | 4,139,070 |       |

 

Other net operatingrevenue is primarily attributable to grain and by-products and beef productsoperations.

 
| ** **                                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Depreciation  expense**                          |       |     |       |     |       |     |       |
| Processed  products                                |       | (48,708  | )          | (54,069  | )          | (46,747  | )          |
| Poultry                                            |       | (56,682  | )          | (54,653  | )          | (49,056  | )          |
| Pork                                               |       | (11,003  | )          | (14,565  | )          | (13,309  | )          |
| Other                                              |       | (973     | )          | (961     | )          | (880     | )          |
| Total  depreciation expense allocated to Segments  |       | (117,366 | )          | (124,248 | )          | (109,992 | )          |
| Depreciation  allocated to administrative expenses |       | (12,743  | )          | (12,814  | )          | (12,493  | )          |
| Adjustments for  US GAAP presentation              |       | 31,043   |       | 37,801   |       | 30,349   |       |
| Total  depreciation expense                        |       | (99,066  | )          | (99,261  | )          | (92,136  | )          |

 

40

----

 
| ** **                                                                            | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Segment  operating income**                                                         |       |      |       |      |       |      |       |
| Processed  products                                                                   |       | 274,197   |       | 268,483   |       | 57,618    |       |
| Poultry                                                                               |       | 260,393   |       | 198,410   |       | 235,217   |       |
| Pork                                                                                  |       | 70,902    |       | 36,593    |       | 39,655    |       |
| Other                                                                                 |       | (3,765    | )          | 8,189     |       | 6,440     |       |
| Adjustments for  US GAAP presentation                                                 |       | 33,302    |       | (110,666  | )          | 6,392     |       |
| Total operating  income                                                               |       | 635,029   |       | 401,009   |       | 345,322   |       |
| Interest expense                                                                      |       | (413,461  | )          | (449,408  | )          | (317,719  | )          |
| Interest income  and other                                                            |       | 309,454   |       | 481,609   |       | 263,342   |       |
| Foreign currency  exchange gain (loss), net                                           |       | 20,672    |       | 52,833    |       | (40,632   | )          |
| Adjustments for  US GAAP presentation                                                 |       | 35,428    |       | (14,512   | )          | 46,417    |       |
| Income before  income taxes, equity income or loss of investees and minority interest |       | 587,122   |       | 471,531   |       | 296,730   |       |
|                                                                                  |       |      |       |      |       |      |       |
| **Segment  assets**                                                                   |       |      |       |      |       |      |       |
| Processed  products                                                                   |       | 491,982   |       | 449,860   |       | 468,610   |       |
| Poultry                                                                               |       | 380,708   |       | 348,312   |       | 362,567   |       |
| Pork                                                                                  |       | 108,060   |       | 109,750   |       | 124,222   |       |
| Other                                                                                 |       | 76,910    |       | 49,535    |       | 54,537    |       |
| Adjustments for  US GAAP presentation                                                 |       | (110,485  | )          | (128,454  | )          | (149,866  | )          |
| Total property,  plant and equipment                                                  |       | 947,175   |       | 829,003   |       | 860,070   |       |
|                                                                                  |       |      |       |      |       |      |       |
| Reconciling  items - corporate assets                                                 |       |      |       |      |       |      |       |
| Cash and cash  equivalents                                                            |       | 2,406,125 |       | 2,610,961 |       | 2,315,136 |       |
| Accounts and  notes receivable, net                                                   |       | 349,605   |       | 453,936   |       | 374,708   |       |
| Inventories                                                                           |       | 1,172,736 |       | 920,564   |       | 877,366   |       |
| Other corporate  assets                                                               |       | 739,691   |       | 544,748   |       | 639,369   |       |
| Adjustments for  US GAAP presentation                                                 |       | 105,156   |       | 661,787   |       | (240,888  | )          |
| Total  consolidated assets                                                            |       | 5,830,973 |       | 6,149,453 |       | 4,975,627 |       |
|                                                                                  |       |      |       |      |       |      |       |
| **Capital  expenditures**                                                             |       |      |       |      |       |      |       |
| Processed  products                                                                   |       | 93,220    |       | 45,056    |       | 48,419    |       |
| Poultry                                                                               |       | 91,179    |       | 43,799    |       | 37,498    |       |
| Pork                                                                                  |       | 9,759     |       | 5,709     |       | 17,960    |       |
| Other                                                                                 |       | 52,286    |       | 15,656    |       | 17,475    |       |
| Adjustments for  US GAAP presentation                                                 |       | (7,340    | )          | (4,470    | )          | (9,230    | )          |
| Total segment  capital expenditures                                                   |       | 239,104   |       | 105,750   |       | 112,122   |       |

 

41

----

 

b) Export sales byregion/market

 
| ** **                                                                | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|---------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                                      |       |      |       |      |       |      |       |
| Europe                                                                    |       | 985,746   |       | 912,252   |       | 581,936   |       |
| Middle East                                                               |       | 802,935   |       | 632,991   |       | 542,748   |       |
| Asia                                                                      |       | 602,202   |       | 353,731   |       | 291,948   |       |
| South America                                                             |       | 387,130   |       | 130,322   |       | 50,944    |       |
| Emerging markets  (mainly Russia and other former Soviet Union countries) |       | 806,520   |       | 630,332   |       | 491,804   |       |
| Adjustments for  US GAAP presentation                                     |       | (191,869  | )          | (130,349  | )          | (31,383   | )          |
|                                                                      |       | 3,392,664 |       | 2,529,279 |       | 1,927,997 |       |

 

Revenues are attributedto regions based upon where the products are shipped.

 

All long-livedoperational assets are located in Brazil and assets located outside of Brazilconsist of sales offices located in various countries.

 

The adjustments for USGAAP presentation as demonstrated above comprise differences between theCompany’s statutory accounting records prepared in accordance with BrazilianGAAP and the consolidated financial statements prepared in accordance with U.S.GAAP. The primary differences relate to:

 

a)                Eliminationof assets, liabilities, revenues, costs and expenses of equity method accountedinvestees that are accounted for using the proportional consolidation methodunder Brazilian GAAP;

 

b)               Accelerationof depreciation rates for certain property, plant and equipment items underBrazilian GAAP;

 

c)                Reclassificationsof certain assets, liabilities and income statement lines reported underBrazilian GAAP for the presentation of accompanying consolidated financialstatements in accordance with US GAAP;

 

d)               Accountingfor the transfer of receivables (as disclosed in Note 11) as a financing in theaccompanying consolidated financial statements rather than as a sale asaccounted for under Brazilian GAAP.

 

42

----

 

**20.Supplemental Disclosures of Cash Flow Information**

 
| ** **                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |     |       |
| Income taxes  paid                            |       | 3,070    |       | 3,321    |       | 1,333    |       |
| Interest paid  (including exchange variation) |       | 228,922  |       | 204,871  |       | 146,151  |       |

 

**21. Supplemental Interest Expense and InterestIncome and Other**

 
| ** **                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                    |       |     |       |     |       |     |       |
| Interest  expenses                                                      |       |     |       |     |       |     |       |
| Interest and  charges on *real* debt                                    |       | (154,988 | )          | (293,904 | )          | (167,269 | )          |
| Interest and  charges on U.S. dollar debt                               |       | (398,831 | )          | (101,070 | )          | (113,972 | )          |
| Loss on sale of  securities                                             |       | (110,000 | )          | —   |       | —   |       |
| Other                                                                   |       | (27,646  | )          | (55,224  | )          | (36,514  | )          |
|                                                                    |       | (691,465 | )          | (450,198 | )          | (317,755 | )          |
|                                                                    |       |     |       |     |       |     |       |
| Interest income  and other, net                                         |       |     |       |     |       |     |       |
| Interest income  on cash equivalents and investments in debt securities |       | 540,217  |       | 357,280  |       | 245,798  |       |
| Gain on sale of  securities                                             |       | —   |       | 69,650   |       | —   |       |
| Other                                                                   |       | 30,622   |       | 32,820   |       | 20,664   |       |
|                                                                    |       | 570,839  |       | 459,750  |       | 266,462  |       |

 

**22. Subsequent Events**

 

As communicated to the market on December 22, 2004Sadia S.A., pursuing to improve its presence in the central part of thecountry, acquired on January 3, 2005, 100% of the shares of Só Frango ProdutosAlimentícios Ltda. for US$26,5 million.

 

In January 2005, Sadia S.A. and its joint venturepartner in the investment Concórdia Foods Ltd., which had an objective toattend the retail and food service in the United Kingdon and Ireland, decidedto discontinue the activities of this company. This decision did not generateany obligation to any party. The business previously performed by ConcórdiaFoods Ltd. is now performed by Sadia U.K. Ltd.

 

43

----