12

Sadia S.A. Publicly-held Company Statements of consolidated added value Years ended December 31, 2005 and 2004 (In thousands of Reais)

			Consolidated
			2005	2004
Revenues/Income			8,439,424	7,441,580
- Wealth generated by operations			8,232,688	7,188,285
		Sale of products, goods and services	8,232,688	7,188,285
- Wealth from third parties			206,736	253,295
		Other operating results	(6,643)	21,468
		Financial income	361,165	289,343
		Equity in earnings of subsidiaries	(148,776)	(51,155)
		Other nonoperating results	990	(6,361)
Raw materials acquired from third parties			(4,046,583)	(3,410,708)
Services rendered by third parties			(1,429,735)	(1,280,820)
Added value to be distributed			2,963,106	2,750,052
Distribution of added value:
- Human resources			994,309	842,458
- Interest on third-party capital			91,445	289,345
- Government			1,022,339	988,321
- Shareholders (Dividends)			198,419	148,310
Retention:			656,594	481,618
		Depreciation/Amortization/Depletion	194,659	189,595
		Retained profits	457,701	290,563
		Others	4,234	1,460

See the accompanying notes to the financial statements.

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

	Shareholdings in % at
	2005	2004
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
Churrascaria Beijing Brazil Ltd. (*)	50.00	50.00
Concórdia Foods Ltd. (*)	50.00	50.00
Sadia UK Ltd.	100.00	100.00
Concórdia S.A. C.V.M.C.C.	99.99	99.99
Empresa Matogrossense de Alimentos Ltda. (**)	100.00	-
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 GmbH	100.00	100.00
Wellax Food Logistics C. P. A. S. U. Lda.	100.00	100.00
Sadia Foods GmbH	100.00	100.00
Qualy B. V.	100.00	100.00
Sadia Japan Ltd.	100.00	100.00
(*) Joint-Ventures
(**) Acquired of controlling on September 9, 2005 (see note 9)

21

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

Reconciliation of shareholders’ equity and net income between the Company and consolidated is as follows:

	Net income			Shareholders' equity
	2005	2004		2005	2004
Company's financial statements	647,403	445,301		2,228,040	1,792,175
Elimination of unrealized profits on inventories in intercompany operations, net of taxes	(4,391)	(14,327)		(18,718)	(24,123)
Reversal of the elimination of unrealized results in inventories, net of taxes, resulting from intercompany operations at December 31, 2004 and 2003	14,327	7,762		14,327	9,796
Consolidated financial statements	657,339	438,736		2,223,649	1,777,848

22

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

4	Long and short-term investments

		Interest % (annual average)		Parent company		Consolidated
				2005	2004	2005	2004
	Short-term investments
	Local currency
	Investment funds	18.12		362,971	224,728	401,931	575,304
	Austrian Bonds indexed in Reais	16.30		278,040	-	278,040	-
	Treasury bills - LFT	18.12		-	176,555	-	176,555
	Others	7.65		97	89	97	89
				641,108	401,372	680,068	751,948
	Foreign currency
	Investment funds	9.25		-	-	1,613,682	836,055
	Interest-bearing current accounts	4.04		-	-	87,959	350,796
	Currency swap contracts			18,041	29,479	18,041	29,479
	Interest rate swap contracts			-	-	2,576	-
				18,041	29,479	1,722,258	1,216,330
	Total short-term			659,149	430,851	2,402,326	1,968,278
	Long-term investments
	Local currency
	National Treasury Certificate - CTN	12.00		25,710	22,479	25,710	22,479
	Treasury bills - LFT	18.12		39,347	-	39,347	-
	Austrian Bonds indexed in Reais	16.30		-	237,748	-	237,748
				65,057	260,227	65,057	260,227
	Foreign currency
	Currency Swap contracts			-	22,020	-	22,020
				-	22,020	-	22,020
	Total long-term			65,057	282,247	65,057	282,247

23

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

Long-term investments as of December 31, 2005 mature as follows:

	Maturity
	2008	39,347
	2010 onwards	25,710
		65,057

The investment fund portfolio in local currency is composed mainly of post-fixed Bank Deposit Certificates, National Treasury Securities and investment funds. The investment fund portfolio in foreign currency is composed mainly of investments in dual currency, which have differentiated profitability according to the strike negotiated, and structured notes issued by first-tier American and European banks, pegged to securities of first-tier Brazilian companies and banks.

5	Accounts receivable

		Parent company		Consolidated
		2005	2004	2005	2004
	Foreign:
	Subsidiaries	79,566	422,374	-	-
	Customers	151,266	76,394	260,545	175,546
	Advance on delivered export contracts	(19,102)	-	(19,102)	-
	Total of foreign	211,730	498,768	241,443	175,546
	Domestic customers	278,791	201,132	278,799	201,141
	(-) Discounted receivables	-	-	-	(17,830)
	(-) Allowance for doubtful accounts	(9,367)	(7,043)	(10,627)	(9,252)
		481,154	692,857	509,615	349,605

24

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

The changes in the allowance for doubtful accounts are as follows:

	Parent company		Consolidated
	2005	2004	2005	2004
Balance at the beginning of the year	(7,043)	(30,461)	(9,252)	(33,769)
Amounts charged to expense	(3,496)	(5,898)	(4,234)	(7,143)
Write offs	1,172	29,316	2,859	31,660
Balance at the end of the year	(9,367)	(7,043)	(10,627)	(9,252)

The Company and its subsidiaries abroad (Sadia International Ltd and Wellax Food Comércio de Produtos Alimentares Lda.) entered into an agreement for sale of its receivables with an outside financial institution up to the maximum amount of US$130 million, with interest rate of 0.375% p.a. + LIBOR. Credit insurance covering 90% of the value of the receivable was taken out with third parties and the beneficiaries in the event of default are the contracting financial institutions. At December 31, 2005 e 2004, the receivable assigned was approximately US$100 million. During the year ended December 31, 2005, the Company received approximately R$1,840 million (R$1,500 million in 2004) in cash funds and incurred expenses of R$8 million (R$4 million in 2004) with respect to this agreement. The Company also assigned receivables to a Credit Assignment Investment Fund (FIDC), administered by Concórdia S.A. Corretora de Valores Móbiliarios, Cambio e Commodities. As of December 31, 2005, the net equity of this fund was R$ 231,197 (R$ 195,604 at December 31, 2004), of which R$ 190,350 (R$ 162,138 at December 31, 2004) was represented by acquisitions of the Company’s receivables on the domestic market, with a discounted cost equivalent to 95% of the CDI per senior quota. The assignment of the receivables is made without right of recourse, and the eventual losses from default for Sadia are limited to the value of the subordinated quotas, which at December 31, 2005, represented R$17,150 (R$ 13,006 at December 31, 2004). For other domestic accounts receivables, the Company has credit insurance, which guarantees a compensation, in case of delinquency, of 85% to customers with pre-approved credit and of 60% to the new customers or with a credit limit below R$ 50.

25

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

6	Inventories

	Parent company		Consolidated
	2005	2004	2005	2004
Finished goods and products for sale	307,445	348,125	349,360	386,584
Livestock and poultry for slaughter and sale	386,561	351,980	386,561	351,980
Raw materials	127,963	188,298	129,245	189,158
Work in process	38,336	71,484	38,336	71,484
Packaging materials	36,702	35,206	36,702	35,206
Storeroom	22,776	18,566	22,776	18,566
Products in transit	8,608	7,564	9,341	7,791
Advances to suppliers	13,599	47	13,599	47
Imports in transit	6,570	3,855	6,570	3,855
	948,560	1,025,125	992,490	1,064,671

7	Recoverable taxes

	Parent company		Consolidated
	2005	2004	2005	2004
ICMS	160,227	79,729	162,060	81,791
IPI	48,820	53,272	48,853	53,626
Income and social contribution taxes	44,051	30,819	48,679	33,753
COFINS	3,419	61,924	3,748	61,932
PIS	3,663	12,623	3,663	12,623
Others	56	56	109	76
	260,236	238,423	267,112	243,801
Short-term portion	140,212	151,237	147,088	156,615
Long-term portion	120,024	87,186	120,024	87,186

26

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

	a.	Value-added tax on sales and services - ICMS
		Composed of credits generated by the commercial operations and by the acquisition of property, plant and equipment, of a number of the Company’s units and can be offset with taxes of the same nature.
	b.	Excise tax - IPI
		Composed of amounts arising from the following operations: presumed credit on packaging and inputs, presumed credit for reimbursement of PIS/PASEP and COFINS on exportations and export incentives, which can be compensated with other federal taxes.
	c.	Income and social contribution taxes
		Correspond to income tax withheld at source on short-term financial investments and income tax and social contributions paid in advance that can be offset with federal taxes and contributions.
	d.	Social contributions - PIS/COFINS
		Composed of credits arising from non-cumulative collection of PIS and COFINS, which can be compensated with other federal taxes.
8	Related party transactions
		Related party transactions refers to mainly sales operations between the Company and its subsidiaries, which were performed under normal market conditions for similar types of operations. The balance sheet and income statement transactions between related parties are shown below:

27

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

	2005	2004
Accounts receivable
Wellax Food Logistics C. P. A. S. U. Lda.	59,190	410,848
Sadia International Ltd.	2,440	43
Sadia Alimentos S.A.	1,161	688
Sadia Uruguay S.A.	831	656
Qualy B.V.	14,396	8,411
Sadia Chile S.A.	1,548	1,728
	79,566	422,374
Interest on shareholders' equity
Concórdia C.V.M.C.C.	4,548	4,028
	4,548	4,028
Loans
Wellax Food Logistics C. P. A. S. U. Lda.	95,063	-
Sadia International Ltd.	(253)	(286)
Empresa Matogrossense de Alimentos Ltda.	659	-
Rezende Óleo Ltda.	848	830
Concórdia S.A. CCVMCC	4	-
Rezende Marketing e Comunicação Ltda.	56	53
	96,377	597
Advances from subsidiaries
Wellax Food Logistics C. P. A. S. U. Lda.	(857,699)	(133,565)
Sadia International Ltd.	(2,015)	(5,426)
	(859,714)	(138,991)
Sales
Wellax Food Logistics C. P. A. S. U. Lda.	2,240,660	2,056,363
Sadia International Ltd.	71,391	75,274

28

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

	2005	2004
Sadia Chile S.A.	16,493	11,175
Sadia Alimentos S.A.	11,999	9,112
Sadia Uruguay S.A.	4,536	4,984
Só Frango Produtos Alimentícios Ltda.	1,291	-
	2,346,370	2,156,908
Goods Purchase
Só Frango Produtos Alimentícios Ltda.	16,030	-
	16,030	-
Net financial result
Wellax Food Logistics C. P. A. S. U. Lda.	22,536	-
Sadia International Ltd.	320	9,000
	22,856	9,000

9	Investments

			Net income		Investment
		Shareholder's	(loss) for	Equity	balances
Investments	Ownership	equity	the period	result	2005	2004
Sadia GmbH	100.00	902,143	424,186	283,027	902,143	619,116
Sadia International Ltd.	100.00	93,445	5,060	(6,014)	93,445	99,459
Concórdia S.A. CVMCC	99.99	53,678	7,979	11,602	53,678	46,624
Empresa Matogrossense de Alimentos Ltda.	100.00	1,350	-	-	1,350	-
Rezende Óleo Ltda.	100.00	1,138	(413)	(413)	1,138	1,551
Rezende Market e Comun. Ltda.	99.91	(25)	(4)	(4)	-	-
Só Frango Produtos Alimentícios Ltda.	-	-	-	5,654	-	-
Total in subsidiaries				293,852	1,051,754	766,750
Goodwill				-	54,076	-
Other investments				-	1,445	1,384
Total investments of the Parent Company				293,852	1,107,275	768,134

29

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

					Investment balances
Investments	Ownership	Shareholder's equity	Net income (loss) for the period	Equity result	2005	2004
Other investments of subsidiaries/affiliates				-	21,615	17,877
Investments eliminated on consolidation				(442,628)	(1,051,754)	(766,751)
Total consolidated investments				(148,776)	77,136	19,260

The changes in the investments are as follows:

						Dividends /	Shareholding result
	Acquisition	Amortization	Capital Increase	Negative Equity	Merger	Interest on shareholders' equity	Operational	Non Operational
Sadia G.m.b.H.	-	-	-	-	-	-	283,027	-
Sadia International Ltd.	-	-	-	-	-	-	(6,014)	-
Concórdia S.A. CVMCC	-	-	-	-	-	(4,548)	7,979	3,623
Rezende Óleo Ltda.	-	-	-	-	-	-	(413)	-
Rezende Marketing e Comunicação Ltda.	-	-	-	4	-	-	(4)	-
Só Frango Produtos Alimentícios Ltda.	7,837	-	17,527	-	(31,018)	-	5,654	-
Empresa Matogrossense de Alimentos Ltda.	1,350	-	-	-	-	-	-	-
	9,187	0	17,527	4	(31,018)	(4,548)	290,229	3,623
Goodwill	70,560	(16,484)	-	-	-	-	-	-
Other Investments	61	-	-	-	-	-	-	-
	79,808	(16,484)	17,527	4	(31,018)	(4,548)	290,229	3,623

The accumulated income from equity interest on the consolidated financial statements is represented by translation losses of R$152,399 and a non-operating income of R$3,623. On January 3, 2005 the Company acquired 100% of the shares of Só Frango Produtos Alimentícios Ltda. The acquisition generated goodwill in the amount of R$ 62,505, which will be amortized within 3 years based on the expected profitability of the investment.

30

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

	In the Extraordinary General Meeting held on April 29, 2005, the incorporation of the wholly owned subsidiary Só Frango Produtos Alimentícios Ltda. was approved by the shareholders of Sadia S.A., with the aim of obtaining operating and corporate benefits, amongst others, resulting in a significant economy of scale due to the decrease in expenses arising from centralizing and rationalizing administrative and operational activities. On September 9, 2005 Sadia S.A. acquired 100% of the quotas representing the capital of the company Matogrossense de Alimentos Ltda., located in Lucas do Rio Verde, where the Company’s new industrial complex will be established. In the acquisition, goodwill in the amount of R$8,055, was paid, which will be amortized as from the start-up of operations, forecasted for 2007.
10	Property, plant and equipment

			Parent company
		Annual	Cost	Depreciation	Residual amount
		average %	2005	2005	2005	2004
	Lands	-	63,828	-	63,828	55,360
	Buildings	4	713,259	(329,512)	383,747	348,541
	Machinery and equipment	15	986,194	(540,122)	446,072	328,062
	Installations	10	218,585	(121,767)	96,818	77,392
	Vehicles	27	12,387	(7,807)	4,580	4,666
	Breeding stock	-	219,159	(114,145)	105,014	108,065
	Forestation and reforestation	-	23,013	(5,919)	17,094	12,731
	Others	-	2,891	(1,267)	1,624	452
	Construction in progress	-	408,354	-	408,354	163,011
	Advances to suppliers		44,264	-	44,264	14,579
			2,691,934	(1,120,539)	1,571,395	1,112,859

31

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

		Consolidated
	Annual	Cost	Depreciation	Residual amount
	average %	2005	2005	2005	2004
Lands	-	64,031	-	64,031	55,465
Buildings	4	713,957	(330,012)	383,945	349,193
Machinery and equipment	15	988,805	(541,494)	447,311	329,324
Installations	10	218,843	(121,859)	96,984	77,539
Vehicles	27	13,554	(8,063)	5,491	5,104
Breeding stock	-	219,159	(114,145)	105,014	108,065
Forestation and reforestation	-	23,013	(5,919)	17,094	12,731
Others	-	4,266	(2,065)	2,201	1,192
Construction in progress	-	409,378	-	409,378	163,011
Advances to suppliers	-	44,564	-	44,564	14,579
		2,699,570	(1,123,557)	1,576,013	1,116,203

We present the changes in the cost of property, plant and equipment below:

	Position in 12.31.2004	Acquisitions	Disposal	Tranfers	Position in 12.31.2005
Lands	55,465	8,567	(976)	975	64,031
Buildings	653,424	21,789	(23,091)	61,835	713,957
Machinery and equipment	818,414	51,011	(24,057)	143,437	988,805
Breeding stock	162,490	56,669	-	-	219,159
Installations	186,790	3,828	(3,342)	31,567	218,843
Vehicles	14,781	2,580	(3,596)	(211)	13,554
Forestation and reforestation	19,768	3,262	(2,389)	2,372	23,013
Others	3,141	11,442	(128)	(10,189)	4,266
Construction in progress	163,011	464,390	(20)	(218,003)	409,378
Advances to suppliers	14,579	18,611	(306)	11,680	44,564
Total Cost of Acquisition	2,091,863	642,149	(57,905)	23,463	2,699,570

32

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

a.	The construction in progress is mainly represented by projects related to the expansion and modernization of industrial units.
b.	In accordance with CVM Deliberation 193/96 the interest incurred in the period arising from financing of projects for modernization and expansion of the industrial units has been recorded in the respective costs of the construction in progress in the amount of R$16,852 (R$11,206 at December 31, 2004).
c.	The Company sold the old administrative center of Granja Rezende for R$17,300, generating a gain of R$165, recorded in nonoperating income.

11	Deferred charges

		Parent company
		Cost	Amortization	Residual value
	Rate	2005	2005	2005	2004
Software implementation	25	158,556	(87,851)	70,705	46,690
Product development	20	13,722	(2,429)	11,293	2,350
Reorganization expenses	20	5,126	-	5,126	-
Others	20	530	(167)	363	100
		177,934	(90,447)	87,487	49,140
		Consolidated
		Cost	Amortization	Residual value
	Rate	2005	2005	2005	2004
Software implementation	25	161,694	(88,342)	73,352	47,042
Product development	20	13,722	(2,429)	11,293	2,351
Reorganization expenses	20	5,126	-	5,126	-
Others	20	705	(283)	422	129
		181,247	(91,054)	90,193	49,522

33

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

12	Loans and financing - Short-term

		Parent company		Consolidated
		2005	2004	2005	2004
	Short-term
	Foreign currency
	Net working financing composed of prepayment subject to LIBOR variation for 1-month deposits (4.39% in December 2005) plus interest of 0.10% p.a., guaranteed by its own investments	-	-	329,976	276,496
	Advanced collection relating to the receivables sold, with no interest	-	-	54,376	36,061
	Export financing composed of prepayment subject to interest rate of 4.20% p.a., guaranteed by promissory notes or sureties	23,735	26,972	23,735	26,972
	Credit lines for the development of foreign trade, with interest rates of 5.76% p.a., guaranteed by promissory notes or sureties	-	-	4,871	35,887
	Currency swap contracts	3,522	15,424	3,522	15,424
	Interest rate swap contracts	76	1,150	76	1,256
		27,333	43,546	416,556	492,096
	Local currency
	Rural credit lines and working capital loans with interest of 8.75% p.a.	167,751	155,118	167,751	155,118
	Currency swap contracts	106,180	130,543	106,180	130,543
		273,931	285,661	273,931	285,661
		301,264	329,207	690,487	777,757

34

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

	Parent company		Consolidated
	2005	2004	2005	2004
Short-term portion of the long-term debt
Foreign currency
IFC (International Finance Corporation) funding in foreign currency for investment in property, plant and equipment, of which R$23,325 is subject to interest at the rate of 9.05% p.a., guaranteed by real estate mortgages	23,325	129,222	23,325	129,222
Export financing composed of prepayment in amount of R$123,815 subject to LIBOR variation for 6-month deposits (4.7% in December 2005) and interest of 8.2% p.a. and an amount of R$212,634 of a line focused on the incentive for foreign trade activities, plus annual interest of 5.69% p.a., guaranteed by promissory notes or sureties	123,815	236,874	336,449	238,824
BNDES (National Bank for Economic and Social Development), credit lines for investments and exports, composed as follows: FINEM in the amount of R$10,335 subject to the weighted average of exchange variation of currencies traded by BNDES - UMBNDES and fixed interest of 3.50% p.a. and FINAME in the amount of R$621 subject to the weighted average of exchange variation of currencies traded by BNDES-UMBNDES and fixed interest of 3.%, guaranteed by mortgage bonds and real estate mortgage	10,956	32,380	10,956	32,380
Financing subject to LIBOR variation for 1-month deposits (4.39% in December 2005) plus interest from 0.10% p.a., guaranteed by its own titles	145,719	160,833	145,719	160,833
	303,815	559,309	516,449	561,259

35

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

Local currency
BNDES (National Bank for Economic and Social Development), credit lines for investments and exports, composed as follows: FINAME in the amount of R$ 8,538 subject to the Long-Term Interest Rate -TJLP (9.75% p.a. in December 2005) and interest of 4.45% p.a., FINAME-EXIM in the amount of R$ 139,321 subject to TJLP (9.75% p.a. in December 2005) and interest of 3.97% p.a. and FINEM in the amount of R$ 17,366 subject to TJLP (9.75% p.a. in December 2005) and interest of 3.50% p.a., guaranteed by mortgage bonds and real estate mortgages	165,225	271,036	165,225	271,036
PESA - Special Aid for Agribusiness payable in installments, subject to IGPM variation and annual interest of 9.89%, guaranteed by sureties	5,549	5,458	5,549	5,458
Others subject to interest rate from 4% to 14% p.a.	6,957	34	6,957	34
	177,731	276,528	177,731	276,528
Short-term portion of long-term debt	481,546	835,837	694,180	837,787
Total short-term	782,810	1,165,044	1,384,667	1,615,544

At December 31, 2005 the weighted average interest in short-term loans was 6.90% p.a. (7.06% p.a. at December 31, 2004).

36

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

13	Loans and financing - Long-term

		Parent company		Consolidated
		2005	2004	2005	2004
	Foreign currency
	Export financing composed of prepayment, payable in amount of R$372,780 in installments up to 2010, subject to LIBOR variation for 6-month deposits (4.7% in December 2005) plus annual interest of 8.2% p.a, and a line focused on the incentive for foreign trade in amount of R$1,212,113, subject to LIBOR variation for 6-month plus interest of 5.69% p.a., guaranteed by promissory notes or sureties	372,780	657,258	1,584,893	924,965
	Financing subject to LIBOR variation for 1-month deposits (4.39% in December 2005) plus interest of 0.10% p.a., guaranteed by its own titles	145,719	160,833	145,719	160,833
	IFC (International Finance Corporation) for investments in property, plant and equipment, in amount of R$23,325 subject to interest at the rate of 9.05% p.a., guaranteed by real estate mortgages	23,325	129,222	23,325	129,222
	BNDES (National Bank for Economic and Social Development), payable from 2006 to 2013, composed as follows: FINEM in the amount of R$29,046 subject to the weighted average of the exchange variation of currencies traded by BNDES - UMBNDES and fixed interest of 3.50% p.a. and FINAME in the amount of R$40,704 subject to the weighted average of the exchange variation of currencies traded by BNDES - UMBNDES and fixed annual interest of 3% p.a. guaranteed by mortgage bonds and real estate mortgages	69,750	66,677	69,750	66,677
	Currency swap contracts	3,334	5,281	3,334	5,281
		614,908	1,019,271	1,827,021	1,286,978

37

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

Local currency
BNDES (National Bank for Economic and Social Development), credit lines for investments and exports, payable from 2006 to 2012, composed as follows: FINAME in the amount of R$225,684 subject to the Long-Term Interest Rate -TJLP (9.75% p.a. in December 2005) and interest of 4.45% p.a., FINAME-EXIM in the amount of R$139,321 subject to TJLP and interest of 3.97% p.a. and FINEM in the amount of R$37,654 subject to TJLP and interest of 3.50% p.a., guaranteed by mortgage bonds and real estate mortgages		402,659	436,309	402,659	436,309
PESA - Special Aid for Agribusiness payable from 2006 to 2020, subject to IGPM variation and annual interest of 9.89%, guaranteed by sureties		131,831	129,310	131,831	129,310
Currency swap contracts		7,009	65,174	7,009	65,174
Others subject to interest rate from 4% to 14% p.a.		40,187	21,846	40,187	21,846
		581,686	652,639	581,686	652,639
		1,196,594	1,671,910	2,408,707	1,939,617
Short-term portion of long-term debt		(481,546)	(835,837)	(694,180)	(837,787)
Total long-term		715,048	836,073	1,714,527	1,101,830

The noncurrent portions of financings at December 31, 2005 mature as follows:

	Parent company	Consolidated
Maturity
2007	130,531	196,753
2008	135,570	135,570
2009	116,755	116,755
2010 onwards	332,192	1,265,449
	715,048	1,714,527

38

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

	On December 29, 2005, the Company made early settlement in the amount of US$27,500 thousand referring to the financing agreement with the International Finance Corporation (IFC). The Company has revealed its intention to settle the remaining balance of R$23.325 in the short term, and, accordingly, there will be no restrictions with respect to the distribution of dividends in addition to the mandatory minimum dividend required by law, when one of the consolidated financial indexes (current liquidity, long-term indebtedness and total indebtedness) does not meet the agreed ratio levels.
14	Pension plans for employees
	In addition to the pension plan, the Company’s human resources policy offers the following benefits: · Payment of the penalty in connection with the Government Severance Indemnity Fund for Employees upon retirement; · Payment of a bonus for time of service; · Payment of indemnification for termination of service; and · Payment of indemnification for retirement. These benefits are due in one single payment upon the employee’s retirement or termination of service, and the amounts are computed by actuarial calculations.
15	Commitments and contingencies
	Commitments
	The Company has non-cancelable leasing agreements for industrial units that expire over the next three years. These leasing are subject to renewal for 4 more years and do not require any penalty if the Company does not renew them. The Company does not pay execution costs, such as maintenance and insurance. The rental expenses totaled R$33,110 in 2005 (R$27,512 in 2004).

39

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

The table below shows the future payments related to the leasing agreement at December 31, 2005:

2006	65,200
2007	65,200
2008	34,200
Total	164,600

In addition the Company signed purchase agreements for production purposes (packaging) in the approximate amount of R$360 million on December 31, 2005, payable until 2010.

Contingencies

The Company and its subsidiaries have several on going claims of a labor, civil and tax nature, resulting from its normal business activities. The respective provisions for contingencies were constituted based on the opinion of the Company’s legal counsel, which considered that unfavorable outcomes are likely. The Company’s management believes that the provision for contingencies shown below is sufficient to cover any losses arising from legal proceedings.

	Parent company		Consolidated
	2005	2004	2005	2004
Tax proceedings	39,810	31,521	42,217	33,618
Civil proceedings	13,281	11,746	13,281	11,746
Labor proceedings	16,447	13,594	16,449	13,620
	69,538	56,861	71,947	58,984

40

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

The changes in the provision for contingencies are presented as follows:

		Position in 2004	Additions	Disposals	Monetary updates	Position in 2005
	Tax proceedings	33,618	11,296	(3,552)	855	42,217
	Civil proceedings	11,746	4,861	(5,248)	1,922	13,281
	Labor proceedings	13,620	1,036	(782)	2,575	16,449
		58,984	17,193	(9,582)	5,352	71,947

Tax litigation
The main tax contingencies involve the following cases:
a.	Income and social contribution taxes on net income
	Provision for income and social contribution taxes on net income amounting to R$9,159, of which R$6,120 recorded on the acquisition of the subsidiary Granja Rezende (incorporated in 2002), R$2,222 on withholding income tax on investments of Granja Rezende and R$817 for other provisions.
b.	Value - Added tax on sales and services - ICMS
	The Company is a defendant in several administrative cases involving ICMS, mainly in the States of São Paulo, Rio de Janeiro and Amazonas (SUFRAMA), totaling a probable contingency estimated at R$20,223.

41

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

c.	Other tax contingencies
	Several cases related to payment of IOF (Tax on Financial Operations), PIS (Social Integration Program Tax), COFINS (Tax for Social Security Financing) and others totaling a provision of R$12,835.
The Company has other contingencies of a tax nature with a claimed amount of R$479,891, which were assessed as possible losses by the legal advisors and by the Management of the Company and, therefore, no provision was recorded. On November 9, 2005, the Supreme Court declared by a majority of votes that Law 9718/98 was unconstitutional, which changed the calculation basis of PIS and COFINS, including operating and financial income. This decision affects only the taxpayers whose actions have been judged, however, this decision indicates that the court suits that have the same objective will also be successful. The Company has a court suit questioning the increase in the basis, however, it has been calculating and paying these taxes in accordance with the law. If the Company had already received a final decision, the credit to be recognized in the financial statements would be approximately R$60 million.
Civil litigation
Represents principally proceedings involving claim for indemnification for losses and damages, including pain and suffering, arising from work-related accidents and consumer relations. The Company has other contingencies of a civil nature with a claimed amount of R$50,242, which were assessed as possible losses by the legal advisors and by Management and, therefore, no provision was recorded.

42

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

	Labor claims
	The company is involved in approximately 1,780 labor claims. These labor lawsuits refer mainly to claims for overtime, and health exposure and hazard claims, none of which involve a significant amount on an individual basis. The total amount involved is R$35,920, for which the provision in the amount of RS16,449 was recorded based on historical information, representing the best estimate for probable losses.
	Court deposits
	Whenever necessary the Company has made court deposits, as follows:

		Parent company		Consolidated
		2005	2004	2005	2004
	Tax proceedings	63,641	63,800	63,641	63,800
	Labor proceedings	13,611	11,120	13,611	11,120
	Civil proceedings	1,038	2,178	1,144	2,284
		78,290	77,098	78,396	77,204

16	Shareholders’ equity
a.	Capital
	Subscribed and paid-in capital is represented by the following shares with no par value, at December 31, 2005 and 2004:

	2005	2004
Common shares	257,000,000	257,000,000
Preferred shares	426,000,000	426,000,000
Total shares	683,000,000	683,000,000
Preferred shares in treasury	(2,504,288)	(304,288)
Total outstanding shares	680,495,712	682,695,712

43

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

b.	Statutory reserves
	Legal reserve In compliance with article 193 of Law 6404/76, the reserve was recorded at the rate of 5% of the net profit for the year, up to the limit of 20% of the capital. Research and development reserve It is recorded at the rate of 5% of the net profit for the year, up to the limit of 10% of capital. Expansion reserve It is recorded with at least 15% and with a maximum of 60% of the net profit for the year, up to the limit of 70% of capital.
c.	Treasury stock
	The Company’s treasury stock consists of 2,504,288 preferred shares acquired at R$10,377 for future sale and/or cancellation. At December 31, 2005 the market value corresponded to R$16,103.
d.	Shareholders’ remuneration
	On December 15, 2005, in an extraordinary general meeting, the right for preferred shares to be included in a potential public offering for sale of the Company’s control was approved, and the shareholders holding preferred shares were guaranteed a minimum price equal to 80% of the amount paid for a share with voting rights, which is part of the controlling block, substituting/excluding item b) of article 12 of the by-laws that grants an advantage for receipt of dividends by holders of preferred shares at least 10% higher than those attributed to the holders of common shares, therefore making equal the remunerations attributed to the common and preferred shares in terms of dividends. This approval was ratified in a Special Meeting of Preferred Shares Holders by 57.12% of the total number of preferred shares holders.

44

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

The corporate bylaws determine the distribution of a minimum dividend of 28% of the net income for the year, adjusted in accordance with article 202 of Law 6404/76. The minimum dividend was paid or credited as interest on own capital. The Company calculated interest on own capital based on the long-term interest rate (TJLP) in force in the year, as shown below:

		2005	2004
Net income for the year		647,403	445,301
	Legal Reserve	(32,370)	(22,265)
Basis		615,033	423,036
Distribuition to shareholders:
-	Interest on shareholders' equity (net of withholding tax of R$ 8.397) paid in advance on August 17, 2005.	47,580	-
-	Interest on shareholders' equity (net of withholding tax of R$ 17.814) recorded at December 31, 2005, to be paid on February 16, 2006.	100,947	-
-	Dividends recorded in December 31, 2005 to be paid on March 16, 2006	26,621	-
-	Interest on shareholders' equity (net of withholding tax of R$ 22.242), paid relatively to 2004.	-	126,068
	TOTAL	175,148	126,068
	Percentage in relation to the basis	28.48%	29.80%
	Interest on shareholders' equity by 1,000 shares in Reais:
	Preferred	R$259.87	R$191.21
	Common	R$253.29	R$173.82

45

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

e.	Market value
	The market value of Sadia S.A. shares according to the average quotation of shares traded on the São Paulo Stock Exchange - BOVESPA, corresponded to R$6.43 per thousand shares at December 31, 2005 (R$5.98 at December 31, 2004). Net equity on that date was R$3.27 per thousand shares (R$2.63 at December 31, 2004).
f.	Shareholders composition
	Shareholders composition, until the natural person level, of Sadia S.A, which have more than 5% of ordinary stock, at December 31, 2005.

Shareholders	CS	%	PS	%	Total	%
Fundação Attilio F. X. Fontana	24,998,558	9.73%	-	-	24,998,558	3.66%
Osório Henrique Furlan	14,948,969	5.82%	-	-	14,948,969	2.19%
Sunflower Participações S.A. (*)	32,018,789	12.46%	-	-	32,018,789	4.69%
Others shareholders' (*)	104,713,344	40.74%	29,962,661	7.03%	134,676,005	19.71%
Oppenheimer Developing Markets Fund	-	-	24,431,000	5.73%	24,431,000	3.58%
Others shareholders'	80,320,340	31.25%	369,102,051	86.65%	449,422,391	65.80%
Treasury stock	-	-	2,504,288	0.59%	2,504,288	0.37%
Total	257,000,000	100.00%	426,000,000	100.00%	683,000,000	100.00%
(*) Shareholders' agreement participants

46

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

Shareholders composition of Sunflower Participações S.A. at December 31, 2005:

Shareholders	CS	%	PS	%	Total	%
Maria Aparecida Cunha Fontana	14,084,143	43.99%	-	-	14,084,143	43.99%
Attilio Fontana Neto	5,716,562	17.85%	-	-	5,716,562	17.85%
Walter Fontana Filho	6,739,660	21.05%	-	-	6,739,660	21.05%
Vânia Cunha Fontana	5,478,424	17.11%	-	-	5,478,424	17.11%
TOTAL	32,018,789	100.00%	-	-	32,018,789	100.00%

Stocks in possession of the Controllers, Advisory Board, Directors and the Fiscal Council of the Sadia S.A.

At December 31, 2005

	CS	% CS	PS	% PS	Total	% Total
Controlling shareholders	136,732,133	53.20%	41,973,939	9.85%	178,706,072	26.16%
Board of directors members (*)	19,864,334	7.73%	9,101,201	2.14%	28,965,535	4.24%
Officers (*)	11,915	-	4,956,929	1.16%	4,968,844	0.73%
Fiscal council	1,629	-	528	-	2,157	-
Total	156,610,011		56,032,597		212,642,608
(*)Excludes shareholders who are members of the controlling group

47

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

At December 31, 2004

		CS	%	PS	%	Total	%
	Controlling shareholders	175,228,263	68.18	53,880,648	12.65	229,108,911	33.54
	Members of the Board of Directors (*)	5,478,334	2.13	6,004,296	1.41	11,482,630	1.68
	Officers (*)	29,457	0.01	4,548,865	1.07	4,578,322	0.67
	Fiscal council	1,629	0.00	528	0.00	2,157	0.00
	Total	180,737,683		64,434,337		245,172,020
	(*)Excludes shareholders who are members of the controlling group

Outstanding stocks of Sadia S.A. at December 31, 2005:

		CS	%	PS	%	TOTAL	%
	Outstanding stocks	120,267,867	46.80%	381,521,773	89.56%	501,789,640	73.47%
	Total	257,000,000	100.00%	426,000,000	100.00%	683,000,000	100.00%

17	Stock Option plan
	In the Ordinary and Extraordinary General Meeting of April 29, 2005 the stock option plan was approved in its first phase for the Company’s officers. The plan comprises nominative preferred shares issued by the Company available in treasury and has the long-term aim of stimulating the feeling of ownership and commitment to the Company by the participants, and, thus, is in line with the shareholder’s interests. The plan will be managed by a Management Committee, composed of the Chief Executive Officer and the Human Resources Committee of the Board of Directors.

48

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

	The price for exercising the purchase options does not include any discount and will be based on the average value of the quotation for the share in the last three days of trading on the São Paulo Stock Exchange prior to the grant date, updated by the accumulated National Consumer Price Index (INPC) between the grant date of exercising the option. The vesting period, during which the participant cannot exercise his/her right to purchase the shares, will be three years as from the option granting date. The participant will be able to fully or partially exercise his/her purchase rights after the vesting period within a maximum period of 2 years, and only after this period has expired will he/she lose the right to the options not exercised.
	The composition of the options granted is presented as follows:

		Date			Price of shares
	Grant date	Start	Final	Number of shares	Price on the Grant date	Updated - INPC	Market 12/31/05
	06/24/05	06/23/08	06/23/10	2,200,000	5	4.63	6.43

	Since the Company has treasury shares earmarked for the stock option plan, the difference between the market value and the updated price for the year will not affect the Company’s results.
18	Employees’ profit sharing
	The Company grants its employees a profit sharing plan, which depends on attaining specific targets, established and agreed to at the beginning of each year. This plan has been approved by Administration Council of the Company and it has been registered by a formal agreement with the unions.

49

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

19	Financial result

		Parent company		Consolidated
		2005	2004	2005	2004
	Financial expenses
	Interest	(211,320)	(251,167)	(235,176)	(323,850)
	Monetary variations - Liabilities	(10,570)	(22,322)	(20,379)	(39,623)
	Exchange variations - Liabilities	226,931	119,737	199,039	91,461
	Others	(43,068)	(27,583)	(68,676)	(49,988)
		(38,027)	(181,335)	(125,192)	(322,000)
	Financial income
	Interest	90,668	151,926	218,685	268,940
	Monetary variations - Assets	205	6,429	205	9,892
	Exchange variations - Assets	(121,196)	(114,092)	112,962	(20,111)
	Others	17,711	18,467	29,313	30,622
		(12,612)	62,730	361,165	289,343
		(50,639)	(118,605)	235,973	(32,657)

In the period ended September 30, 2004, with the publication of law 5164/04, management decided to reverse the provision for PIS/COFINS on monetary variations of financial investments, in the gross amount of R$ 26 million, which was recorded in other financial income (R$ 17,0 million, net of taxes). During the second quarter of 2004, the Company sold its Brazilian debt investments (Brazil Global and Brazil C Bearer Bonds). These investments were part of the foreign subsidiaries investment funds portfolio. This operation reduced the exposure of the Company and its subsidiaries to the volatility of these securities. As a result of this operation the Company recorded a loss of approximately R$ 110,000.

50

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

20	Income and social contribution taxes
	Income before the provision for income tax (IR) and social contribution on net income (CSLL) was composed as follows:

		Parent company		Consolidated
		2005	2004	2005	2004
	Local	719,324	517,925	299,766	367,340
	Foreign	-	-	429,254	144,211
		719,324	517,925	729,020	511,551

The composition of income and social contribution taxes is as follows:

		Parent company		Consolidated
		2005	2004	2005	2004
	Local
	Current	(51,384)	(29,910)	(52,239)	(32,056)
	Deferred	(18,817)	(54,295)	(19,189)	(51,955)
		(70,201)	(84,205)	(71,428)	(84,011)
	Foreign
	Current	-	-	248	(248)
	Deferred	(1,720)	11,581	(1,720)	11,581
		(1,720)	11,581	(1,472)	11,333
		(71,921)	(72,624)	(72,900)	(72,678)

51

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

Income and social contribution taxes were calculated at applicable rates and reconciliation with the income and social contribution tax expenses is shown below:

	Parent company		Consolidated
	2005	2004	2005	2004
Income before taxation/profit sharing	719,324	517,925	729,020	511,551
Interest on shareholders' equity	(174,738)	(146,714)	(174,738)	(146,714)
Income before income and social contribuition taxes	544,586	371,211	554,282	364,837
Income and social contribuition taxes at nominal rate - 34%	(185,159)	(126,212)	(188,456)	(124,046)
Adjustment to calculate the effective rate
Permanent differences:
Equity in earnings fo subsidiaries	99,910	35,111	95,421	31,650
Interest on shareholders' equity of subsidiaries	-	-	1,546	1,370
Others	15,048	6,896	20,309	6,767
Provision for income and social contribuition taxes on income of foreign subsidiary	(1,720)	11,581	(1,720)	11,581
Income and social contribuition taxes at effective rate	(71,921)	(72,624)	(72,900)	(72,678)

The composition of deferred income and social contribution taxes is as follows:

	Parent company		Consolidated
	2005	2004	2005	2004
Assets:
Deferred Taxes:
Benefit plan	28,219	28,076	28,219	28,076
Provision for contingencies	23,643	19,333	24,462	20,055
Employees' profit sharing	19,874	16,928	20,163	16,928
Allowance for doubtful accounts	10,256	7,931	10,256	7,209
Tax loss carryforwards and negative basis of social contribution	9,861	19,079	9,861	19,079
Provision for loss on property, plant and equipment	4,417	4,648	4,417	4,648
Summer Plan depreciation	2,834	3,698	2,834	3,698
Goodwill amortization	2,037	-	2,037	-
Others	2,632	3,529	3,795	6,172
Total Assets Deferred Taxes:	103,773	103,222	106,044	105,865
Assets short-term portion	27,223	36,180	29,494	38,823
Assets long-term portion	76,550	67,042	76,550	67,042

52

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

	Liabilities:
	Deferred Taxes:
	Depreciation on rural activities	32,811	11,723	32,811	11,723
	Total Liabilities Deferred Taxes:	32,811	11,723	32,811	11,723
	Liabilities short-term portion	3,321	-	3,321	-
	Liabilities long-term portion	29,490	11,723	29,490	11,723
	Net	70,962	91,499	73,233	94,142

	The Management considers that the deferred assets arising from temporary differences will be realized in proportion to the final solution of the contingencies and to the payment of the liabilities forecast for the employees’ benefit plans. The deferred tax assets arising from tax losses and negative basis of social contribution of R$9,861 in the foreign subsidiary, will be realized over the next three years based on management estimates.
21	Risk management and financial instruments
	The Company’s operations are exposed to market risks, especially in relation to exchange rate variations, credit risk and grain purchase prices. These risks are monitored by the Risk Management Area which uses a specific system to calculate the “VAR -Value at Risk”, and they are permanently monitored by the finance committee, composed of members of the Board of Directors and other finance executives of the Company, who are responsible for defining the Board’s risk management strategy by determining the position and exposure limits. At December 31, 2005 the Value at Risk (VAR) of the financial assets and liabilities, for one year, with a 95% confidence rating, represents R$ 67,122 (non-audited information).

53

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

a.	Exchange rate risk
	The exchange rate risk for loans, financing and any other payables denominated in foreign currency is hedged by short-term investments denominated in foreign currency, with same interest rates, and by derivative financial instruments, such as rate swaps (dollar to CDI), interest rate swap contracts (Libor to pre-fixed or vice-versa) and future market agreements, in addition to foreign receivables from exports, which also reduce exchange variations by serving as a “natural hedge”. The Company, within its hedge strategy, uses currency futures contracts (US dollars, Euros and Pounds), as a form of mitigating exchange rate risk over operating and financial assets and liabilities. The nominal amounts of these contracts are not recorded in the financial statements. The result realized from the futures contracts in 2005 generated a gain of R$152,222 (R$38,899 in 2004), recorded as financial results in positive exchange variances. The results of the operations in the currency futures market, realized and not financially settled and the daily adjustments of currency futures contracts on the Future and Commodities Exchange - BM&F are recorded in the financial statements as “Amounts receivable from futures contracts” and “Amounts payable for futures contracts”. Unearned income from contracted operations with future maturity is not recognized in the financial statements. The market value of these contracts, if they were settled at December 31, 2005, would give a negative result of approximately R$33,120.

54

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

The Company’s exposure to exchange variation (mainly in US dollars) is shown below:

	Consolidated
	2005	2004
Assets and liabilities in foreign currency
Cash and cash equivalents and short-term investments	1,769,241	1,309,414
Amounts receivable from futures contracts	28,287	196,061
Trade accounts receivable	240,191	155,020
Suppliers	(37,697)	(23,655)
Loans and financing	(2,243,577)	(1,779,074)
Amounts payable for futures contracts	(10,702)	(201,616)
Swap contracts (dollar for CDI (*))	172,374	585,206
	(81,883)	241,356
(*) Interbank deposit interest.

Consolidated hedge contracts outstanding at December 31, 2005 with their respective payment schedules are as follows:

	Position
Derivative instruments	12.31.05	2006	2007	2008	2010
Currency swap contracts
Base value - R$	172,374	150,090	12,908	9,376	-
Base value - US$	64,171	56,667	4,347	3,157	-
Receivables/payables
Asset	18,041	18,041	-	-	-
Liability	(120,045)	(109,707)	(5,988)	(4,350)	-
Rate swap contracts
Base value - R$	890,245	585,954	-	-	304,291
Base value - US$	380,333	250,333	-	-	130,000

55

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

		Position
	Derivative instruments	12.31.05	2006	2007	2008	2010
	Amount receivable	2,576	1,507	-	-	1,069
	Amount payable	(76)	(76)	-	-	-
	Futures contracts - US dollars
	Long position - US$	38,000	38,000	-	-	-
	Short position - US$	601,500	601,500	-	-	-
	Future market contracts
	Receivable	28,287	28,287	-	-	-
	Payable	(10,702)	(10,702)	-	-	-

b.	Credit risk
	The Company is potentially exposed to credit risk in relation to its trade accounts receivable, long and short-term investments and derivative instruments. The Company limits the risk associated with these financial instruments by subjecting them to the control of highly rated financial institutions that operate within the limits pre-established by the credit and financing committees. The concentration of credit risk with respect to accounts receivable is minimized due to the spread of its client base, since the Company does not have any customer or group representing 10% or more of its consolidated revenues, as well as granting credits for customers with solid financial and operational ratios. Generally, the Company does not require a guarantee for sales, however it has contracted an insurance credit policy to its domestic receivables.

56

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

c.	Grain purchase price risks
	The Company’s operations are exposed to the volatility in prices of grain (corn and soybean) used in the preparation of animal feed for its breeding stock, where the price variation results from factors beyond the control of management, such as climate, the size of the harvest, transport and storage costs and government agricultural policies, among others. The Company does not enter into futures or options contracts to hedge against fluctuations in the prices of the commodities, however it maintains a risk management strategy, based on physical control, which includes purchase of grain at fixed and fixable prices. The Company has a Grains Committee, composed of the chief executive officer and financial and operational executives. Its aim is to permanently monitor changes in scenarios, establishing limits of authority for purchase or sale.
d.	Estimated market values
	Financial assets and liabilities are presented in the financial statements balance sheet at cost plus accrued income and expenses and are stated according to their corresponding expected realization or settlement. The Company used the following methods and assumptions to estimate the disclosure of the fair value of its financial instruments as of December 31, 2005 and 2004: Cash and cash equivalents: The book values of cash and banks recorded in the balance sheet are similar to the respective fair values. Short-term financial investments: The fair value of short-term financial investments is estimated based on the market quotations of comparable contracts. Accounts receivable and payable: The book values of accounts receivable and payable recorded in the balance sheet are similar to their respective fair values.

57

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

Short and long-term loans and financing: The market values of loans and financing were calculated based on their present value calculated through the future cash flows and using interest rates applicable to instruments of similar nature, terms and risks, or based on the market quotation of these securities. The market values of BNDES financing are similar to the book values, since there are no similar instruments with comparable maturities and interest rates. Exchange and interest rate swap contracts: The fair values of exchange and interest rate swap contracts were estimated based on market quotations for comparable contracts. As of December 31, 2005 the contracted amounts in force totaled R$2,381,603(R$1,808,664 in December 31, 2004) and the valuation of these contracts to fair value would result in losses of R$31,227 (gain of R$47,340 in December 31, 2004). The effective cash settlements of the contracts occur on the respective maturities of each agreement. The Company does not intend to settle these contracts before their maturity. The market values were estimated on the balance sheet date, based on “relevant market information”. Changes in the assumptions may significantly affect these estimates. The book values and the estimated fair values of the Company’s financial instruments as of December 31, 2004 and 2005 are presented in the table below. The fair value of a financial instrument is the amount for which the instrument could be traded between interested parties under current market conditions.

	Consolidated
	2005		2004
	Book value	Market Value	Book value	Market Value
Cash and cash equivalents	196,306	196,306	155,600	155,600
Short-term investments - Local Currency	745,125	745,125	1,012,175	1,012,175
Short-term investments - Foreign Currency	1,722,258	1,723,481	1,238,350	1,251,066
Trade accounts receivable	520,242	520,242	358,857	358,857
Loans and financing	3,099,194	3,085,024	2,717,374	2,712,685
Suppliers	495,758	495,758	487,654	487,654
Futures contracts, net	17,585	17,585	(5,555)	(5,555)

58

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

e.	Financial indebtedness

	Consolidated
	2005			2004
	Currency			Currency
	Local	Foreign	Total	Local	Foreign	Total
Assets
Cash and cash equivalents	149,323	46,983	196,306	84,536	71,064	155,600
Short-term investments	680,068	1,722,258	2,402,326	751,948	1,216,330	1,968,278
Accounts receivable from future contracts	-	28,287	28,287	-	196,061	196,061
Total current assets	829,391	1,797,528	2,626,919	836,484	1,483,455	2,319,939
Long-term investments	65,057	-	65,057	260,227	22,020	282,247
Total long-term assets	65,057	-	65,057	260,227	22,020	282,247
Total Financial Assets	894,448	1,797,528	2,691,976	1,096,711	1,505,475	2,602,186
Liabilities
Short-term financing	451,662	933,005	1,384,667	562,189	1,053,355	1,615,544
Accounts paybles from future contracts	-	10,702	10,702	-	201,616	201,616
Swap contracts - short-term	150,090	(150,090)	-	421,852	(421,852)	-
Total current liabilities	601,752	793,617	1,395,369	984,041	833,119	1,817,160
Long-term Financing	403,955	1,310,572	1,714,527	376,111	725,719	1,101,830
Swap contracts - long-term
	22,284	(22,284)	-	163,354	(163,354)	-
Total noncurrent liabilities	426,239	1,288,288	1,714,527	539,465	562,365	1,101,830
Total Financial liabilities	1,027,991	2,081,905	3,109,896	1,523,506	1,395,484	2,918,990
Net debt	(133,543)	(284,377)	(417,920)	(426,795)	109,991	(316,804)

59

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

22	Insurance (not audited)
	The Company and its subsidiaries have adopted a policy of maintaining insurance coverage at levels that management considers adequate to cover any risks related to liabilities or damages involving their assets. Due to the characteristics of the operations carried out in multiple locations, management takes out insurance for maximum possible loss in a single event, which covers fire, comprehensive general liability and miscellaneous risks (storms, lightning and floods). The Company also takes out insurance for the transportation of goods, personal injury and vehicles.
23	Private pension plan
	a.	Defined benefit plan
		The Company and its subsidiary Concórdia S.A. C.V.M.C.C. are the sponsors of a defined contribution pension plan for employees, managed by Fundação Attílio Francisco Xavier Fontana. The supplementary pension benefit is defined as the difference between (i) the benefit wage (updated average of the last 12 participation salaries, limited to 80% of the last participation salary) and (ii) the amount of the pension paid by the National Institute of Social Security. The supplementary benefit is updated on the same base date and in accordance with the rates applicable to the main activity category of the Company, discounting real gains. The actuarial system is that of capitalization for supplementary retirement and pension benefits and of simple apportionment for supplementary disability compensation. The Company’s contribution is based on a fixed percentage of the payroll of active participants, as annually recommended by independent actuaries and approved by the trustees of Fundação Attilio Francisco Xavier Fontana. At December 31, 2005 and 2004, the parent company’s contributions totaled R$2,044 and R$2,018 respectively, and the consolidated contributions, R$2,097 and R$2,058, respectively.

60

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

According to the Foundation’s statutes, the sponsoring companies are jointly liable for the obligations undertaken by the Foundation on behalf of its participants and dependents. At December 31, 2005 the Foundation had a total of 21,697 participants (24,174 on December 31, 2004), of which 18,156 were active participants (20,775 on December 31, 2004). Information on the actuarial calculation of the social security plan is presented below:

	2005	2004
Composition of actuarial assets
Present value of the actuarial liabilities	704,529	580,504
Fair value of the actuarial assets	(1,035,000)	(904,695)
Unrecognized actuarial losses	198,896	187,654
Net actuarial assets	(131,575)	(136,537)
Reconciliation of present liabilities value
Liability value at the beginning of the year	580,504	561,366
Gross current cost of services (with interest)	18,442	22,709
Interest in actuarial liabilities	64,139	62,004
Benefits paid during the year	(30,468)	(26,921)
Liabilities - (gains)/losses	71,912	(38,654)
Liabilities value at the end of the year	704,529	580,504
Reconciliation of fair value of assets
Fair value of assetes at the beginning of the year	904,695	756,642
Benefits paid during the year	(30,468)	(26,921)
Participant contribuitions during the year	6,177	5,933
Sponsor contribuitions made during the year	2,154	2,249
Assets earnings for the year	152,442	166,792
Fair value of assetes at the end of the year	1,035,000	904,695
Calculation of (gains)/losses
Value of losses at the beginning of the year	(187,654)	(74,870)
Losses in actuarial liabilities	4,479	-
(Gains)/losses in actuarial liabilities	49,397	(38,654)
Gains in plan assets	(41,850)	(74,391)
(Gains)/losses in employee contribuitions	(753)	261
(Gains)/losses at the end of the year	(176,381)	(187,654)

61

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

				2005	2004
			Actuarial assumptions adopted in the calculation
			Nominal discount rate for actuarial liabilities	11.30%	11.30%
			Expected nominal earnings rate on assets	12.35%	12.35%
			Estimated nominal growth rate for salaries	7.10%	7.10%
			Estimated nominal growth rate for benefits	5.00%	5.00%
			Biometric table of general mortality	AT83
			Biometric table of disability leave	TASA 1927
			Expected rotation rate	3% py
			Probability of applying for retirement	55 years

		The actuarial asset has not been recognized in the sponsor’s financial statements due to the lack of prospects of realization.
	b.	Defined contribution plan
		As from January 1, 2003, the Company began to adopt new supplementary pension plans under the defined contribution modality for all employees hired by Sadia and its subsidiaries. Under the terms of the regulations, plans are funded on an equitable basis so that the portion paid by the Company is equal to the payment made by the employee in accordance with a contribution scale based on salary bands that vary between 1.5% and 6% of the employee’s remuneration, observing a contribution limit that is updated annually. The contributions made by the Company at December 31, 2005 and 2004 totaled R$2,276 and R$1,439 respectively. As of December 31, 2005 this plan had 11,563 participants (11,927 in December 31, 2004).
24	Segment and Related Information
	The following information about segments is based upon information used by the Company’s management to assess the performance of operating segments and decides on the allocation of resources. The Company has three identifiable reportable segments: Processed products, Poultry and Pork. The Company evaluates segment performance based on information generated from its statutory accounting records prepared in accordance with accounting principles generally accepted in Brazil.

	62

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

a.	Segment Information

		2005	2004
	Net Operating Revenue
	Processed Products	3,147,296	2,731,136
	Poultry	3,199,246	2,951,897
	Pork	732,710	586,595
	Others	239,186	37,845
	Total Net Operating Revenue	7,318,438	6,307,473
	Other net operating revenue is primarily attributable to grain and by-products and beef products operations.

		2005	2004
	Depreciation Expenses
	Processed Products	(60,863)	(76,648)
	Poultry	(80,336)	(77,476)
	Pork	(16,853)	(20,647)
	Others	(7,294)	(1,363)
	Total depreciation expenses allocated to segments	(165,346)	(176,134)
	Depreciation allocated to administrative expenses	(12,829)	(13,461)
	Total depreciation expenses	(178,175)	(189,595)
	Segment Operating income
	Processed Products	273,684	274,197
	Poultry	269,766	260,393
	Pork	94,586	70,902
	Others	2,798	(3,764)
	Total operating income	640,834	601,728
	Interest expense	(324,231)	(413,461)
	Interest income	248,203	309,454
	Exchange gains (losses), net	159,602	20,672
	Income before income taxes and social contribution	724,408	518,393

	63

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

		2005	2004
	Segment assets
	Processed Products	626,055	491,982
	Poultry	753,255	459,035
	Pork	147,923	137,798
	Others	138,973	76,910
	Total property, plant and equipment	1,666,206	1,165,725
	Reconciling items - corporate assets
	Cash and cash equivalents	196,306	155,600
	Short-term investments	2,402,326	1,968,278
	Long-term investments	65,057	282,247
	Accounts and notes receivables, net	509,615	349,605
	Inventories	992,490	1,064,671
	Others corporate assets	690,825	739,691
	Total consolidated assets	6,522,825	5,725,817
	Capital expenditures
	Processed Products	194,587	93,220
	Poultry	372,761	146,606
	Pork	26,982	40,145
	Others	91,662	52,286
	Total segment capital expenditures	685,992	332,257

b.	Export sales by region/market

		2005	2004
	Europe	978,318	985,745
	Middle East	1,047,615	802,935
	Asia	635,907	602,201
	Americas	542,151	387,130
	Eurasia (mainly Russia and other former Soviet Union countries)	872,333	806,520
		4,076,324	3,584,531

	64

Sadia S.A. Publicly-held Company Notes to the financial statements (In thousands of Reais)

Revenues are attributed to regions based upon where the products are shipped. All long-lived operational assets are located in Brazil and assets located outside of Brazil consist of sales offices located in various countries.

	65

Sadia S.A.

Board of Directors

Walter Fontana Filho

Chairman

Eduardo Fontana D'Ávila

Member

Osório Henrique Furlan

Member

Alcides Lopes Tápias

Member

Everaldo Nigro dos Santos

Member

Francisco Silverio Morales Cespede

Member

Marise Pereira Fontana Cipriani

Member

Norberto Fatio

Member

Romano Ancelmo Fontana Filho

Member

Sérgio Fontana dos Reis

Member

Vicente Falconi Campos

Member

	66

Sadia S.A.

Officers
Gilberto Tomazoni
Chief Executive Officer
Luiz Gonzaga Murat Júnior	Ernest Sícoli Petty
Chief Financial Officer and Investor Relations Director	Supply Director
Cláudio Lemos Pinheiro	Flávio Luís Fávero
Administrative and Controllership Director	Industrialized Production Director
Flávio Riffel Schmidt	Gilberto Meirelles Xandó Baptista
Information Technology Director	Internal Market Commercial Director
Alfredo Felipe da Luz Sobrinho	Guilhermo Henderson Larrobla
Institutional and Legal Relations Director	International Sales Director
Adilson Serrano Silva	José Augusto Lima de Sá
Human Resources and Management Director	International Relationships Director
Alexandre de Campos	Paulo Francisco Alexandre Striker
International Sales Director	Logistics Director
Antonio Paulo Lazzaretti	Roberto Banfi
Technology and Quality Guarantee Director	International Sales Director
Ricardo Fernando Thomas Fernandes	Valmor Savoldi
Grain Purchase Director	Planning, Logistics and Supplies Director
Sérgio Carvalho Mandin Fonseca	Ronaldo Korbag Muller
National Sales Director	Poultry Production Director

	*	*	*

	67