2004 Gerdau Annual Report
2004 Gerdau Annual Report
2004 Gerdau Annual Report
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Steel to shape the world<br />
<strong>2004</strong> <strong>Annual</strong> <strong>Report</strong>
Steel to<br />
shape the world<br />
The <strong>Gerdau</strong> Group manufactures steel to turn dreams into<br />
reality. Like the dream born in 1901, through the entrepreneurial<br />
spirit of German immigrant João <strong>Gerdau</strong>, who founded what is<br />
now the 13th largest steel company in the world.<br />
A dream currently shared by 24,000 people powered by the<br />
conviction that it is possible to overcome limits, generate<br />
sustainable development and improve the quality of life. This<br />
transformation capacity is in the people, in the steelmaking<br />
process and in the use of steel.<br />
Steel that is found in houses, buildings, bridges, vehicles, roads,<br />
airports, telephone and electricity towers, dams and countless<br />
other applications, making the world a better place.
Steel Mills – 26<br />
Downstream Operations – 21<br />
Fabricated Reinforcing Steel Facilities – 44<br />
Flat Steel Service Facilities – 6<br />
Comercial <strong>Gerdau</strong> Retail Stores – 69<br />
Scrap Collection and Processing Units – 24<br />
Solid Pig Iron Production Units – 2<br />
Iron Ore Extraction Areas – 3<br />
Private Port Terminals – 2<br />
Equity Investments – 2
Profile<br />
Brazil<br />
The <strong>Gerdau</strong> mills in Brazil produced 54.2% of the total steel<br />
output of the <strong>Gerdau</strong> Group in <strong>2004</strong> , the equivalent to<br />
7.3 million metric tons. The Brazilian facilities include six market<br />
mills (which buy raw materials, mainly iron scrap, in the same<br />
region where they sell their products), four integrated mills,<br />
eight downstream operations and 11 fabricated reinforcing<br />
steel facilities. For raw material procurement/purchasing,<br />
the Group has eight scrap collection and processing units,<br />
two industrial facilities for the production of solid pig iron<br />
and iron ore reserves. It also owns two port terminals, in the<br />
states of Espírito Santo and Bahia. One advantage to <strong>Gerdau</strong><br />
customers is Comercial <strong>Gerdau</strong>, a distributor of long and flat<br />
steel, with 69 retail stores in the main economic hubs and six<br />
facilities that provide thermal cutting services for flat steel.<br />
United States<br />
The U.S. facilities accounted for 33% of <strong>Gerdau</strong> steel<br />
production in <strong>2004</strong>. <strong>Gerdau</strong> Ameristeel operates 11 steel<br />
mills in the U.S. and a joint venture that produces long steel,<br />
Gallatin Steel. <strong>Gerdau</strong> Ameristeel also encompasses the<br />
operations in Canada and features 29 fabricated reinforcing<br />
steel facilities, 10 downstream operations and nine scrap<br />
collection and processing units. These figures include<br />
important assets acquired in <strong>2004</strong>, such as North Star Steel<br />
units and the Gate City, RJ Rebar and Potter Form & Tie<br />
fabricated reinforcing steel facilities pro-rated to the date<br />
when they were acquired.<br />
Canada<br />
A leader in the long steel market, <strong>Gerdau</strong> Ameristeel produced<br />
1.3 million metric tons of steel in <strong>2004</strong>. It owns three mills in<br />
the provinces of Ontario and Manitoba, which are focused<br />
on the civil construction and industrial sectors. Furthermore,<br />
it holds a 50% stake in two elevator guide units and in one<br />
industrial facility that manufactures superlight I beams.<br />
<strong>Gerdau</strong> Ameristeel also operates seven units specializing in<br />
the collection and processing of scrap, its main raw material.<br />
Chile<br />
<strong>Gerdau</strong> AZA produced 371,000 metric tons of steel in <strong>2004</strong>.<br />
It operates two mills, in Colina and Renca, each catering to a<br />
specific economic segment, civil construction and industry,<br />
respectively. To add value to its products, the <strong>Gerdau</strong> Group<br />
relies on Armacero to supply welded mesh and fabricated<br />
rebar for civil construction. In addition, fabricated reinforcing<br />
steel facilities are operated by Matco. Also part of the Group<br />
are Aceros Cox, a distributor specializing in the industrial<br />
segment, and Sack, another major distribution channel.<br />
Uruguay<br />
Located in the capital city Montevideo, <strong>Gerdau</strong> Laisa<br />
produced 58,000 metric tons of steel in <strong>2004</strong>. The facility<br />
supplements its product line with items manufactured in<br />
the Group’s Brazilian mills to fully meet customer demand.<br />
Laisa focuses on the civil construction segment and its main<br />
product is fabricated rebar.<br />
Gross Revenues - R$ 23.4 billion<br />
BRAZIL<br />
CANADA AND<br />
THE UNITED STATES<br />
ARGENTINA, CHILE<br />
AND URUGUAY<br />
4.4%<br />
40.4% 55.2%<br />
Consolidated Sales - 12.6 million metric tons<br />
Look up the location of <strong>Gerdau</strong> facilities in the Americas.<br />
Argentina<br />
The <strong>Gerdau</strong> Group leads the management of the Sipar<br />
rolling mill, located in the province of Santa Fé. The Group<br />
has a 38.2% equity investment in Sipar. The unit’s output<br />
reached 214,000 metric tons of rolled products in <strong>2004</strong>. As<br />
a result, the company has become one of the main suppliers<br />
in the long steel segment. Sipar provides superior quality<br />
services to customers through Siderco, a distributor of<br />
steel products and supplier of fabricated rebar for the civil<br />
construction sector.<br />
BRAZIL<br />
CANADA AND<br />
THE UNITED STATES<br />
ARGENTINA, CHILE<br />
AND URUGUAY<br />
4.1%<br />
43.1%<br />
52.8%
<strong>2004</strong> <strong>Annual</strong> <strong>Report</strong><br />
Highlights<br />
The most important events of <strong>2004</strong><br />
Consolidated numbers<br />
Economic, environmental and social performance<br />
Message from the chairman<br />
Impressive performance in <strong>2004</strong> and positive perspectives for 2005<br />
Strategic vision<br />
Conviction that growth will continue in the Americas<br />
Corporate governance<br />
Management model aligned with the world’s best market practices<br />
04<br />
04<br />
06<br />
08<br />
10<br />
Business<br />
Increased demand for steel drives results<br />
Finance<br />
Capital Markets<br />
Production<br />
Sales and Markets<br />
Investments<br />
Social<br />
Commitment to the development of employees and communities<br />
People and Teams<br />
Community<br />
The environment<br />
Ecoefficient practices to protect the air, water and soil<br />
Environmental Management System<br />
Environmental Performance<br />
Education for the Environment<br />
Steel production<br />
Find out how steel is produced at <strong>Gerdau</strong> facilities<br />
Timeline<br />
More than 100 years of history<br />
Glossary<br />
Definitions for technical terms employed in the report<br />
Financial statements<br />
Detailed information on financial performance<br />
18<br />
20<br />
24<br />
30<br />
34<br />
40<br />
44<br />
46<br />
51<br />
56<br />
58<br />
59<br />
62<br />
64<br />
66<br />
68<br />
70
Highlights<br />
The most important events of <strong>2004</strong><br />
Net income reaches R$ 3.3 billion, a growth of 165.8%, and gross revenues reach R$ 23.4 billion,<br />
48.3% higher than in 2003.<br />
In the United States, the acquisition of North Star Steel assets in late <strong>2004</strong> consolidates the<br />
strategy of increasing the geographic reach of sales into the U.S. Midwest. The US$ 308 million<br />
deal encompasses four long steel producing mills, two scrap collection and processing units,<br />
three wire rod processing facilities and a producer of grinding balls for the mining industry.<br />
The expansion in South America is also noteworthy, with the establishment of a strategic<br />
alliance in Colombia in December, when the Group signed an agreement to acquire 59.8% of<br />
the assets of Grupo Diaco, with an annual output capacity of 460,000 metric tons of steel.<br />
The highlight in Brazil is the construction of two new mills and the expansion of the Ouro<br />
Branco unit, in the state of Minas Gerais. The investment program in Brazil may reach<br />
US$ 2.4 billion by 2007. The new industrial facility in the state of São Paulo and the new specialty<br />
Consolidated Numbers<br />
Economic, environmental and social performance<br />
Metalúrgica <strong>Gerdau</strong> S.A.<br />
Dividends (R$ per share)<br />
<strong>Gerdau</strong> S.A.<br />
Dividends (R$ per share)<br />
Metalúrgica <strong>Gerdau</strong> S.A.<br />
Dividend Yield (%)<br />
<strong>2004</strong><br />
5.22<br />
<strong>2004</strong><br />
2.91<br />
<strong>2004</strong><br />
7.8<br />
2003<br />
2002<br />
2.07<br />
1.68<br />
2003<br />
2002<br />
1.19<br />
0.90<br />
2003<br />
2002<br />
6.2<br />
12.4<br />
2001<br />
1.48<br />
2001<br />
0.58<br />
2001*<br />
17.0<br />
2000<br />
0.68<br />
2000<br />
0.44<br />
2000<br />
7.9<br />
0.00 1.00 2.00 3.00 4.00 5.00 6.00<br />
Amounts are adjusted to payments and calculated based on<br />
the current number of outstanding shares.<br />
Dividends paid on preferred shares.<br />
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50<br />
Amounts are adjusted to payments and calculated based on<br />
the current number of outstanding shares.<br />
Dividends paid on preferred shares.<br />
0 2 4 6 8 10 12 14 16 18<br />
* Supplementary, non-recurring dividend.<br />
Dividend yield is the ratio between the dividend paid per<br />
share and the share price on the last day of the year.<br />
Metalúrgica <strong>Gerdau</strong> S.A.<br />
Average <strong>Annual</strong> Market Value (million R$)<br />
<strong>Gerdau</strong> S.A.<br />
Average <strong>Annual</strong> Market Value (million R$)<br />
Metalúrgica <strong>Gerdau</strong> S.A. Consolidated<br />
Return on Equity (%)<br />
<strong>2004</strong><br />
3,691<br />
<strong>2004</strong><br />
10,876<br />
<strong>2004</strong><br />
48.5<br />
2003<br />
2002<br />
692<br />
1,329<br />
2003<br />
2002<br />
4,638<br />
2,789<br />
2003<br />
2002<br />
29.2<br />
27.5<br />
2001<br />
413<br />
2001<br />
1,600<br />
2001<br />
19.1<br />
2000<br />
478<br />
2000<br />
1,835<br />
2000<br />
18.8<br />
0 1,000 2,000 3,000 4,000 5,000<br />
Market value is calculated as share price multiplied by the<br />
number of shares outstanding in the period.<br />
0<br />
2,000 4,000 6,000 8,000 10,000 12,000 14,000<br />
Market value is calculated as share price multiplied by the<br />
number of shares outstanding in the period.<br />
0 10 20 30 40 50 60<br />
Return on equity (ROE) is the ratio between consolidated net income<br />
and consolidated equity.
04 05 h i g h l i g h t s<br />
steel facility in the state of Rio de Janeiro focus on the Brazilian market, whereas the Ouro<br />
Branco unit supplies the international market.<br />
The environmental management policy gains momentum with US$ 25 million invested in the<br />
upgrade of air, water and soil protection technologies.<br />
The two publicly traded companies in Brazil – Metalúrgica <strong>Gerdau</strong> S.A. and <strong>Gerdau</strong> S.A. –<br />
distribute R$ 433.9 million (+152.1%) and R$ 858.8 million (+144.5%), respectively, to shareholders<br />
in <strong>2004</strong>. In addition, <strong>Gerdau</strong> Ameristeel, responsible for North American operations, begins<br />
paying dividends in the beginning of 2005, for an initial distribution of R$ 16.2 million.<br />
Social projects in the fields of formal education, scientific research, the arts, entrepreneurship,<br />
volunteer work, total quality, health, sports and community services receive investments of<br />
R$ 36.5 million.<br />
<strong>2004</strong><br />
2003<br />
2002<br />
2001<br />
2000<br />
<strong>Gerdau</strong> S.A.<br />
Dividend Yield (%)<br />
3.9<br />
6.1<br />
6.1<br />
Dividend yield is the ratio between the dividend paid per share<br />
and the share price on the last day of the year.<br />
7.1<br />
6.8<br />
0 1 2 3 4 5 6 7 8<br />
Social Responsibility (million R$) <strong>2004</strong> 2003<br />
Total investment in social projects 36.5 22.5<br />
Formal education 4.4 2.8<br />
Education for entrepreneurship 3.8 1.9<br />
Education for scientific research 1.5 1.4<br />
Education for total quality 2.3 2.6<br />
Education for volunteer work 0.4 0.2<br />
The arts 18.7 10.9<br />
Health 3.0 1.1<br />
Sports 1.0 0.8<br />
Community action 0.6 0.1<br />
Other 0.8 0.7<br />
<strong>2004</strong><br />
2003<br />
2002<br />
2001<br />
2000<br />
<strong>Gerdau</strong> S.A. Consolidated<br />
Return on Equity (%)<br />
17.3<br />
16.6<br />
24.3<br />
27.5<br />
46.6<br />
0 10 20 30 40 50<br />
Return on equity (ROE) is the ratio between consolidated net income<br />
and consolidated equity.<br />
Environmental Management <strong>2004</strong> 2003<br />
Reuse of industrial water 96.7 96.0<br />
(% of total consumption)<br />
Emission of greenhouse gasses 550 n.a.*<br />
(kg of co 2 per metric ton of<br />
steel produced)<br />
Use of by-products internally or in other 66.0 n.a.*<br />
sectors of the economy<br />
(% of total volume generated)<br />
*Not available.<br />
Exchange Rate<br />
Year R$ =US$<br />
<strong>2004</strong> 2.6544 1.00<br />
2003 2.8892 1.00<br />
2002 3.5333 1.00
Message from<br />
the Chairman<br />
An excellent year for steelmaking<br />
World steel consumption reached its highest peak ever in <strong>2004</strong>. Global production<br />
topped the billion metric ton mark, boosted mainly by the growth in demand in China<br />
and the United States. As a result, the average dollar price of steel exported by <strong>Gerdau</strong><br />
from Brazil rose 62.4%. Prices increased primarily due to rising raw material costs – in<br />
many cases by over 50% – and maritime freight charges. In this context, the <strong>Gerdau</strong><br />
Group’s net income totaled R$ 3.3 billion, up 165.8% from the previous fiscal year, with<br />
gross revenues up 48.3% to R$ 23.4 billion.<br />
Meeting the growing demands of the market<br />
Throughout the year, the <strong>Gerdau</strong> Group increased production to ensure that it could<br />
fully meet its customers’ needs and expanded its presence in major markets in the<br />
Americas.<br />
Four mills were acquired from North Star Steel in the United States for US$ 308 million,<br />
of which US$ 181 million consisted of working capital. The investment expanded the<br />
company’s geographical coverage toward the Midwestern U.S. and added 1.6 million<br />
metric tons to the Group’s annual installed capacity.<br />
A strategic alliance was established in Colombia to gradually take over control of the<br />
Diaco Group, which has a production capacity of 460,000 metric tons of steel per year.<br />
This initiative will allow the <strong>Gerdau</strong> Group to reach a position of leadership in that<br />
national market. The initial investment in this project was US$ 68.5 million.<br />
Low indebtedness allows for new investments<br />
The <strong>Gerdau</strong> Group’s production capacity has doubled in five years to 16.4 million metric<br />
tons per year, and should reach 21 million metric tons by 2007, with the investment of<br />
US$ 3.2 billion in the construction, expansion and modernization of the Group’s industrial<br />
facilities. Of this total, US$ 2.4 billion will be invested in Brazil, where annual production<br />
capacity will grow over 50%, from 7.6 to 11.7 million metric tons. Units in other countries<br />
in the Americas will receive US$ 800 million during the same period.<br />
The investment program will be based on cash generation and on the leverage allowed<br />
by the Group’s current financial position. Operating cash generation (EBITDA) of<br />
R$ 5.5 billion has allowed a significant reduction of debt levels. At the end of <strong>2004</strong>,<br />
net debt was just 0.7 times EBITDA, well below the limit of 2.5 times determined by<br />
the Group’s policy. In addition, the net interest paid-per-metric- ton-sold was R$ 22.36,<br />
approximately half that of the previous fiscal year.<br />
Strategic investment decisions are based on the principle of balancing growth and<br />
profitability. For this reason, annual dollar returns of at least 15% on capital invested are<br />
always required of the Group’s acquisition and expansion projects. This goal has been<br />
consistently achieved for both acquisitions and industrial plant expansions after the<br />
investments mature.
06 07 MESsage<br />
Commitment to economic, social and environmental sustainability<br />
Balancing economic, social and environmental demands is part of the Group’s values. With<br />
this vision, the Group works to continue offering growing dividends each year. The <strong>Gerdau</strong><br />
companies in Brazil have a policy of distributing 30% of adjusted net income each year. The<br />
absolute value of dividends has yielded shareholders an average of 6% per year for <strong>Gerdau</strong> S.A.<br />
and 10.3% for Metalúrgica <strong>Gerdau</strong> S.A. since 2000.<br />
In the social area, community development is supported through a range of projects aimed<br />
mainly at sharing knowledge, optimizing the ability of people to transform their own world and<br />
creating a culture of personal development and learning in and around all the units. In total,<br />
the Group takes part in more than one hundred initiatives to help improve the quality of life in<br />
our communities.<br />
The environmental aim is to reach increasingly demanding levels of ecoefficiency. All the steel<br />
mills are undergoing international ISO 14001 certification. A total of US$ 25 million was invested<br />
in <strong>2004</strong> to upgrade air, water and soil protection equipment and to promote programs that<br />
encourage environmental awareness among our employees and communities.<br />
A positive perspective for 2005<br />
The current international conditions indicate a continued high level of steel consumption in<br />
2005, with prices tending to stabilize. The price of steel in international markets is directly linked<br />
to raw material volumes, with iron ore and coal as the defining factors. These components are<br />
also strongly influenced by international freight costs. We believe that there is no possibility of<br />
a significant increase in the supply of these raw materials in the next two years.<br />
Another important consideration is “inefficient steel,” or steel produced at non-competitive<br />
costs or with government subsidies. This has been a recurring theme in the debates at the<br />
International Iron and Steel Institute (IISI) since before the global steel boom of the last few<br />
years, and is under negotiation in the Organization for Economic Co-operation and Development<br />
(OECD). The belief is that, as new, more competitive production capacity comes on line, the<br />
inefficient mills will leave the market. In this context, the <strong>Gerdau</strong> Group strives to be a worldclass<br />
company with a long-term vision.<br />
Thank you<br />
The results presented in this report were only possible because of the commitment and<br />
responsibility of each of our employees, the work of our teams and their daily attitude of<br />
servicing the needs of the market. The <strong>Gerdau</strong> Group also thanks its investors, shareholders,<br />
suppliers, communities and especially its customers.<br />
Jorge <strong>Gerdau</strong> Johannpeter<br />
Chairman
Strategic Vision<br />
Conviction that growth will continue in<br />
the Americas<br />
From the extreme south of the Americas to the plains of<br />
Canada: this is where the <strong>Gerdau</strong> Group intends to build its<br />
growth, focused on the long steel sector.<br />
The <strong>Gerdau</strong> Group has the strategic vision of being a worldclass<br />
international steel company. Guided by this goal, the<br />
Group strives to consolidate its place as a major player<br />
in this field of steelmaking. As a result of the logistical<br />
requirements of its products, <strong>Gerdau</strong> understands that it<br />
is more important to have a significant market share in<br />
the Americas than to have production capacity scattered<br />
around the world.<br />
Since the 1980s, the Group has invested in internationalization,<br />
expanding its operations in South and North America to<br />
become the largest producer of long steel in the region. Its<br />
growth policy is guided by investment in assets that add<br />
value and significant returns for shareholders and that<br />
allow the Group to continue its growth, always committed<br />
to its characteristic levels of financial security.<br />
In comparison with the markets where it operates, the<br />
<strong>Gerdau</strong> Group has achieved outstanding performance for<br />
its mills, through their logistical criteria, proximity to raw<br />
materials and management in line with international best<br />
practices.<br />
This performance is based on the efficiency of our teams,<br />
which have contributed decisively to the expansion of the<br />
business, so that the <strong>Gerdau</strong> Group can continue to achieve<br />
improved positions in regional markets over the coming<br />
years.
08 09 S T R AT e G I C v i s i o n<br />
The <strong>Gerdau</strong> Group is a world-class company<br />
Throughout its history, the <strong>Gerdau</strong> Group has<br />
developed the skill of boosting productivity in the<br />
companies of which it takes control, especially<br />
through the sharing of best management practices<br />
and investment in the technological upgrade of<br />
industrial installations. This can be seen in the<br />
turnaround of results at the units that became<br />
<strong>Gerdau</strong> Ameristeel Cambridge (Canada), <strong>Gerdau</strong><br />
AZA (Chile), <strong>Gerdau</strong> Aços Especiais Piratini (Brazil),<br />
<strong>Gerdau</strong> Usiba (Brazil) and <strong>Gerdau</strong> Açominas – Ouro<br />
Branco (Brazil).<br />
<strong>Gerdau</strong> is now among the world-class companies of<br />
the international steel sector, according to a study<br />
by World Steel Dynamics, a major steel consultancy<br />
group. <strong>Gerdau</strong> stands out for its profitability in the<br />
fiscal periods from 2000 to <strong>2004</strong>, its environmental<br />
and safety record, its success in alliances, mergers,<br />
acquisitions and joint ventures, and its performance<br />
in the capital market over the last three years.<br />
GERDAU AMERISTEEL CAMBRIDGE, CANADA (ABOVE), AND GERDAU AÇOMINAS – OURO BRANCO,<br />
STATE OF MINAS GERAIS, BRAZIL (BELOW): POSITIVE RESULTS
Corporate<br />
Governance<br />
Management model aligned with the world’s best market practices<br />
Governance structure<br />
The <strong>Gerdau</strong> Group’s corporate governance structure is based on a Board of Directors, an<br />
Executive Committee – which is assisted by a Strategy Committee and Excellence Committees<br />
and coordinates the work of the Officers – and a Board of Auditors.<br />
The Board of Directors is comprised of eight members whose primary responsibility is to<br />
develop the <strong>Gerdau</strong> Group corporate strategy. This includes defining the direction of the<br />
business, acceptable levels of risk and growth policies. The Board has three independent<br />
members who, through their external insights and experience, help lead the decision-making<br />
process.<br />
Board meetings are held at least four times a year. The Group’s Executive Officers are invited<br />
to present and discuss strategic issues relevant to their areas of operation to provide the<br />
independent Board members with a better understanding of the Group’s operations and<br />
market conditions.<br />
Business management is the responsibility of the Officers, through an Executive Committee<br />
that coordinates the daily business operations and acts as a liaison between operations and<br />
the Board of Directors. There are five business operations, defined according to product line<br />
and/or geographical location of the units: <strong>Gerdau</strong> Long Steel (Brazil), <strong>Gerdau</strong> Specialty Steel<br />
(Brazil), <strong>Gerdau</strong> Açominas – Ouro Branco (Brazil), <strong>Gerdau</strong> Ameristeel (Canada and the United<br />
States) and <strong>Gerdau</strong> South America (Argentina, Chile and Uruguay).<br />
Each of the nine Executive Committee members – a president and eight vice presidents – is<br />
responsible for specific processes and/or business operations. The processes are: sales and<br />
marketing, industrial, logistics and transportation, raw materials, procurement, operational<br />
planning, human resources and organizational development, finance and investor relations,<br />
accounting and audit, legal, management technology, planning and strategic management,<br />
business development, information technology, and corporate communications.<br />
To assist the Board of Directors in the planning of the Group’s strategy, the Strategy Committee<br />
includes Executive Committee members and the officers in charge of the main operations. The<br />
Excellence Committees provide support to the business operations and functional processes<br />
by encouraging debate and exchanging best practices.<br />
The Board of Auditors was created five years ago at the two publicly traded companies in Brazil<br />
and includes representatives elected by minority shareholders. Among other responsibilities,
10 11 corporate GOVernance<br />
they are in charge of monitoring the actions of the Board of Directors and controlling the<br />
accounting operations of both companies.<br />
The corporate governance structure at the <strong>Gerdau</strong> Group follows the model below:<br />
Strategy Committee<br />
Excellence Committees<br />
Board of Directors<br />
Officers<br />
Executive Committee<br />
Business Operations<br />
Board of Auditors<br />
Functional Processes<br />
<strong>Gerdau</strong> Long<br />
Steel Brazil<br />
<strong>Gerdau</strong><br />
Specialty Steel<br />
<strong>Gerdau</strong> Açominas<br />
– Ouro Branco<br />
<strong>Gerdau</strong><br />
Ameristeel<br />
<strong>Gerdau</strong><br />
South America<br />
<strong>Gerdau</strong> companies<br />
“<strong>Gerdau</strong> Group” refers to all the companies that form the <strong>Gerdau</strong> economic group and that<br />
are controlled by the same shareholders.<br />
The two publicly traded companies controlled by the Group in Brazil – <strong>Gerdau</strong> S.A. and<br />
Metalúrgica <strong>Gerdau</strong> S.A. – are part of the level 1 corporate governance program of the São<br />
Paulo Stock Exchange (Bovespa). This program establishes a set of standards for trading in<br />
capital markets, such as the level of transparency in the disclosure of information and the<br />
number of shares in the hands of minority shareholders.<br />
<strong>Gerdau</strong> Açominas S.A. is a non-public company that is responsible for the Group’s steelmaking<br />
operations in Brazil. However, it is committed to upholding the same reporting standards<br />
as those of the publicly traded companies. <strong>Gerdau</strong> Açominas S.A. has a six-member Board<br />
of Directors. One of these members is appointed by the Açominas employee stockholding<br />
association (Clube de Participação Acionária dos Empregados da Açominas – CEA). The Board<br />
members hold quarterly meetings. The management of <strong>Gerdau</strong> Açominas is carried out<br />
through an Executive Committee that coordinates three business operations: <strong>Gerdau</strong> Long<br />
Steel, <strong>Gerdau</strong> Specialty Steel and <strong>Gerdau</strong> Açominas – Ouro Branco.<br />
In North America, the <strong>Gerdau</strong> Ameristeel Corporation was created in October 2002 through a<br />
merger between the <strong>Gerdau</strong> Group’s operations in the region and those of Co-Steel. The <strong>Gerdau</strong><br />
Ameristeel Board of Directors is comprised of nine members, five of them independent. The<br />
Board holds quarterly meetings. <strong>Gerdau</strong> Ameristeel created committees focused on specific<br />
areas: audit, human resources, corporate governance, safety, health and the environment.
Board of Directors. From left to right: Oscar de Paula Bernardes Neto, Board Member; Germano H. <strong>Gerdau</strong> Johannpeter, Vice Chairman;<br />
Jorge <strong>Gerdau</strong> Johannpeter, Chairman; Klaus <strong>Gerdau</strong> Johannpeter, Vice Chairman; André de Lara Resende, Board Member;<br />
Carlos J. Petry, Vice Chairman; Frederico C. <strong>Gerdau</strong> Johannpeter, Vice Chairman; Affonso Celso Pastore, Board Member
12 13 corporate GOVernance<br />
Business management is under the responsibility of an Executive Committee that operates<br />
based on industrial process and/or geographic region.<br />
In Argentina, Chile and Uruguay, governance is the responsibility of Operating Committees,<br />
which report to the <strong>Gerdau</strong> Executive Committee.<br />
Shareholders’ meetings<br />
Once a year, the general shareholders’ meeting brings together the shareholders of the<br />
Group’s companies to analyze and approve financial statements and management reports,<br />
decide on the allocation of net income, confirm or supplement the distribution of dividends<br />
or interest on capital stock, and elect Board of Directors and Board of Auditors members.<br />
Additional shareholders’ meetings may be scheduled to deal with specific topics not covered<br />
in the general meetings and which require approval by shareholders.<br />
At <strong>Gerdau</strong> Ameristeel, the structure is similar to that described above with an annual<br />
shareholder meeting and special shareholder meetings. However, these meetings have<br />
specific agendas and are adapted to the business and legal systems of North America.<br />
Relationship with independent auditors<br />
The policy ruling the hiring of independent auditors for services not related to external audits<br />
is based on the following: auditors should not audit their own work, carry out management<br />
functions on behalf of the client, or promote the client’s interests. These guidelines are<br />
followed by <strong>Gerdau</strong>’s publicly traded companies for the hiring of independent auditors and<br />
services not related to external audits, in accordance with security and exchange commission<br />
regulations.<br />
Risk management<br />
The <strong>Gerdau</strong> Group is developing actions to improve risk management practices in its<br />
operations. Integrated risk management is an initiative that fosters best corporate governance<br />
practices, formalizes risk planning and defines the responsibilities of areas such as process<br />
management, internal audit and other relevant areas. The implementation of an integrated<br />
system translates into safer monitoring of potential risks and existing controls in each<br />
business process.<br />
The integrated Risk Management project, which is overseen by the Board of Auditors, is<br />
based on internationally recognized methodologies that comply with the United States
Sarbanes-Oxley Act. This law improves the disclosure of information and the commitment<br />
of management to internal controls and must be followed by foreign companies listed on<br />
United States stock exchanges. Both <strong>Gerdau</strong> S.A. and <strong>Gerdau</strong> Ameristeel must comply with<br />
the legal requirements, including those issued by the United States Securities and Exchange<br />
Commission (SEC), the regulating government body for the capital markets in the United<br />
States. For foreign companies with stocks traded in the North American market, the deadline<br />
for compliance with the provisions of the Sarbanes-Oxley Act is July 15, 2006. At the <strong>Gerdau</strong><br />
Group, the process will be completed in 2005.<br />
These initiatives will ensure the development of the Group’s corporate governance and<br />
risk management processes, improve safety for the operations and increase the quality of<br />
information disclosure and financial reports to the capital markets. They will also ensure that<br />
international requirements are met.<br />
Operational and administrative restructuring<br />
Since December <strong>2004</strong>, the <strong>Gerdau</strong> Group has been working to restructure its companies in<br />
Brazil and other South American countries. The importance of this work is underscored by the<br />
plan to increase the Group’s presence in South America (see Investments section). Through<br />
restructuring, we hope to obtain greater strategic advantages and improve the operating and<br />
management efficiency in South America. For that, efforts will be focused on the specialization<br />
of different units and business operations. This will be a decisive step in the development of<br />
alternatives for the future growth of the <strong>Gerdau</strong> Group.<br />
On December 3, <strong>2004</strong>, the Board of Directors at <strong>Gerdau</strong> S.A. authorized the implementation<br />
of corporate restructuring measures for the Group’s companies in Brazil and other Latin<br />
American countries in continuation of a process that began two years earlier with the merger<br />
between <strong>Gerdau</strong> S.A. and Aço Minas Gerais S.A. – Açominas. This restructuring resulted in the<br />
creation of <strong>Gerdau</strong> Açominas S.A. in Brazil.<br />
On December 29, the first step in the restructuring process was taken when the dormant<br />
holding of <strong>Gerdau</strong> Participações S.A. was capitalized with the shares of <strong>Gerdau</strong> Açominas S.A.<br />
and a portion of the shares of <strong>Gerdau</strong> Internacional Empreendimentos Ltda. held by <strong>Gerdau</strong><br />
S.A., representing 91.5% and 22.8%, respectively of the capital stock for those companies.<br />
The shares transferred to <strong>Gerdau</strong> Participações S.A. correspond to the direct or indirect<br />
participating interest of <strong>Gerdau</strong> Internacional Empreendimentos Ltda. in the capital stock of<br />
<strong>Gerdau</strong> Chile Inversiones Ltda., <strong>Gerdau</strong> Laisa S.A. and Sipar Aceros S.A.<br />
With the support of independent consultants, management is currently finalizing studies<br />
to establish the definitive shareholding structure. The restructuring involves the creation of<br />
distinct companies, one for each business operation, involving the operations in Brazil and<br />
other South American countries. The new companies will have different operational focuses,<br />
such as: long steel, specialty steel, slabs, blooms and billets and distribution services. The<br />
new companies will be created after the conclusion of studies and approval by the Board of<br />
Directors and shareholders of the companies involved.
14 15 corporate GOVernance<br />
The shareholders of publicly traded companies in Brazil and abroad will not be affected by<br />
the restructuring. Shareholders will keep their current position and their rights and values<br />
will be preserved.<br />
Currently, the structure of the companies that are part of the <strong>Gerdau</strong> Group 1 is as follows 2 :<br />
Metalúrgica <strong>Gerdau</strong> S.A.<br />
99.0%<br />
Banco <strong>Gerdau</strong> S.A.<br />
<strong>Gerdau</strong> S.A.<br />
44.8% (75.8% of voting shares)<br />
100.0%<br />
97.1%<br />
72.1%<br />
22.8%<br />
<strong>Gerdau</strong><br />
Participações S.A.<br />
91.5%<br />
Seiva S.A.<br />
Florestas e Indústrias<br />
<strong>Gerdau</strong> Internacional<br />
Empreendimentos Ltda.<br />
<strong>Gerdau</strong> Açominas S.A.<br />
66.5%<br />
<strong>Gerdau</strong> Ameristeel<br />
Corporation<br />
100.0%<br />
<strong>Gerdau</strong> Chile<br />
Inversiones Ltda.<br />
<strong>Gerdau</strong> Ameristeel US Inc.<br />
100.0%<br />
100.0%<br />
<strong>Gerdau</strong> Laisa S.A.<br />
<strong>Gerdau</strong> Ameristeel<br />
MRM Special Sections Inc.<br />
100.0%<br />
38.2%<br />
Sipar Aceros S.A.<br />
<strong>Gerdau</strong> Ameristeel<br />
Perth Amboy Inc.<br />
100.0%<br />
<strong>Gerdau</strong> Ameristeel<br />
Sayreville Inc.<br />
Gallatin Steel Company<br />
100.0%<br />
50.0%<br />
1. Metalúrgica <strong>Gerdau</strong> stands for all the<br />
operations included in its consolidated financial<br />
statements.<br />
2. Minus minority interests.
Board of Directors<br />
Chairman<br />
Jorge <strong>Gerdau</strong> Johannpeter<br />
Vice Chairmen<br />
Germano H. <strong>Gerdau</strong> Johannpeter<br />
Klaus <strong>Gerdau</strong> Johannpeter<br />
Frederico C. <strong>Gerdau</strong> Johannpeter<br />
Carlos J. Petry<br />
Board Members<br />
Affonso Celso Pastore<br />
André de Lara Resende<br />
Oscar de Paula Bernardes Neto<br />
Secretary General<br />
Expedito Luz<br />
<strong>Gerdau</strong> Executive Committee<br />
President<br />
Jorge <strong>Gerdau</strong> Johannpeter<br />
Vice Presidents<br />
Frederico C. <strong>Gerdau</strong> Johannpeter<br />
Senior Vice President<br />
Carlos J. Petry<br />
Senior Vice President<br />
André B. <strong>Gerdau</strong> Johannpeter<br />
Claudio <strong>Gerdau</strong> Johannpeter<br />
Domingos Somma<br />
Filipe Affonso Ferreira<br />
Osvaldo B. Schirmer<br />
Ricardo Gehrke<br />
Secretary General<br />
Expedito Luz<br />
Board of Auditors<br />
Metalúrgica <strong>Gerdau</strong> S.A.<br />
Carlos Roberto Schroder<br />
Domingos Matias Urroz Lopes<br />
Mário Magalhães de Sousa<br />
Substitutes<br />
Pedro Floriano Hoerde<br />
Ruben Rohde<br />
Valmir Pedro Rossi<br />
<strong>Gerdau</strong> S.A.<br />
José Antônio Cruz de Módena<br />
Peter Wilm Rosenfeld<br />
José Bernardo de Medeiros Neto<br />
Substitutes<br />
Rudolfo Teodoro Tanscheit<br />
Tranquilo Paravizi<br />
Brazil<br />
<strong>Gerdau</strong> Açominas S.A.<br />
Board of Directors<br />
Chairman<br />
Jorge <strong>Gerdau</strong> Johannpeter<br />
Vice Chairmen<br />
Germano H. <strong>Gerdau</strong> Johannpeter<br />
Klaus <strong>Gerdau</strong> Johannpeter<br />
Frederico C. <strong>Gerdau</strong> Johannpeter<br />
Carlos J. Petry<br />
Board Member<br />
Marco Antônio Pepino<br />
Substitutes<br />
Claudio <strong>Gerdau</strong> Johannpeter<br />
Expedito Luz<br />
Osvaldo B. Schirmer<br />
Ruy Lopes Filho<br />
Guilherme Rocha Murgel de Rezende<br />
Secretary General<br />
Expedito Luz<br />
Officers<br />
President<br />
Jorge <strong>Gerdau</strong> Johannpeter<br />
Vice Presidents<br />
Frederico C. <strong>Gerdau</strong> Johannpeter<br />
Senior Vice President<br />
André B. <strong>Gerdau</strong> Johannpeter<br />
Claudio <strong>Gerdau</strong> Johannpeter<br />
Osvaldo B. Schirmer<br />
Business Operations<br />
<strong>Gerdau</strong> Long Steel Brazil<br />
Ricardo Gehrke<br />
Executive Vice President<br />
Business Operations<br />
<strong>Gerdau</strong> Açominas – Ouro Branco<br />
Luiz André Rico Vicente<br />
Executive Vice President<br />
Business Operations<br />
<strong>Gerdau</strong> Specialty Steel<br />
Cláudio Mattos Zambrano<br />
Executive Director
16 17 corporate GOVernance<br />
Executive Officers<br />
Alfredo Huallem<br />
André Felipe G. Reinaux<br />
André Pires de Oliveira Dias<br />
Cláudio Mattos Zambrano<br />
Dirceu Tarcisio Togni<br />
Érico Teodoro Sommer<br />
Expedito Luz<br />
Fladimir B. Lopes Gauto<br />
Francesco S. Merlini<br />
Francisco Deppermann Fortes<br />
Geraldo Toffanello<br />
Gerson Marcos Venzon<br />
Guilherme C. <strong>Gerdau</strong> Johannpeter<br />
Heitor L. B. Bergamini<br />
João A. de Lima<br />
João Carlos Salin Gonçalves<br />
Joaquim de Souza Gomes<br />
Joaquim G. Bauer<br />
José Maurício Werneck Guimarães da Silva<br />
Julio Carlos Lhamby Prato<br />
Luiz Alberto Morsoletto (in memoriam)<br />
Luiz Augusto Polacchini<br />
Manoel Vitor Mendonça Filho<br />
Moacir Curi Meneguzzi<br />
Nestor Mundstock<br />
Omar de Oliveira Fantoni<br />
Paulo Ricardo Tomazelli<br />
Paulo Roberto Perlott Ramos<br />
Ruy Lopes Filho<br />
Sirleu José Protti<br />
Tadeu Petterle<br />
Canada and the United States<br />
<strong>Gerdau</strong> Ameristeel Corp.<br />
Board of Directors<br />
Chairman<br />
Jorge <strong>Gerdau</strong> Johannpeter<br />
Board Members<br />
Arthur Scace<br />
André B. <strong>Gerdau</strong> Johannpeter<br />
Frederico C. <strong>Gerdau</strong> Johannpeter<br />
Joseph J. Heffernan<br />
J. Spencer Lanthier<br />
Kenneth W. Harrigan<br />
Michael D. Sopko<br />
Phillip E. Casey<br />
Officers<br />
President and CEO<br />
Phillip E. Casey<br />
Vice President and COO<br />
André B. <strong>Gerdau</strong> Johannpeter<br />
Vice Presidents<br />
Andre Beaudry<br />
Anthony S. Read<br />
Arlan Piepho<br />
Carl Czarnik<br />
Donald R. Shumake<br />
Edward C. Woodrow<br />
Glen A. Beeby<br />
Gregory Bott<br />
James S. Rogers<br />
Jerry Goodwald<br />
J. Neal McCullohs<br />
Mark Quiring<br />
Matthew C. Yeatman<br />
Michael Christy<br />
Michael Mueller<br />
Paulo Fernando Bins de Vasconcellos<br />
Robert L. Bullard<br />
Robert Thompson<br />
Roger Paiva<br />
Tom J. Landa - CFO<br />
Wilburn G. Manuel<br />
William E. Rider<br />
Yuan Wang<br />
Chile<br />
<strong>Gerdau</strong> Aza S.A.<br />
Hermann Von Mühlenbrock S.<br />
General Manager<br />
Uruguay<br />
<strong>Gerdau</strong> Laisa S.A.<br />
José Pedro Sintas García<br />
Executive Director<br />
Equity Investment<br />
Argentina<br />
Sipar Aceros S.A.<br />
Amaury Cordeiro de Oliveira<br />
Executive Director
Business<br />
Increased demand for steel drives results<br />
Finance<br />
Results<br />
Indebtedness<br />
Financial operations<br />
Capital Markets<br />
Publicly traded companies in Brazil<br />
Publicly traded company in Canada<br />
Relationship with shareholders, investors and analysts<br />
Production<br />
Brazil<br />
Argentina, Chile and Uruguay<br />
Canada and the United States<br />
Sales and Markets<br />
Brazil<br />
Argentina, Chile and Uruguay<br />
Canada and the United States<br />
Investments<br />
Main initiatives in <strong>2004</strong><br />
Investment program for the coming years<br />
20<br />
24<br />
30<br />
34<br />
40
Finance<br />
Impressive performance in <strong>2004</strong><br />
Results<br />
In <strong>2004</strong>, the <strong>Gerdau</strong> Group’s gross revenues grew 48.3% from R$ 15.8 billion in 2003,<br />
reaching R$ 23.4 billion. Increased international steel consumption was boosted<br />
mainly by the economic growth of China and the United States. This scenario elevated<br />
international steel prices. For the <strong>Gerdau</strong> Group, the average dollar value per metric<br />
ton exported from Brazil increased 62.4%. In addition, the improved performance of<br />
South American operations, the consolidation of the new industrial units in North<br />
America and the recovery of economic growth in Brazil contributed significantly to<br />
the positive consolidated performance. As a result of this favorable scenario, net sales<br />
increased 46.6% to R$ 19.6 billion. Consolidated net income was R$ 3.3 billion, up from<br />
R$ 1.3 billion in the previous year – an increase of 165.8%.<br />
Net margins (ratio between net income and net sales revenue) grew to 17.1% in <strong>2004</strong><br />
from 9.4% in 2003, and gross margins increased 7.3 percentage points to 31.9%.<br />
Operating expenses (sales, general and administrative) represented 7.7% of net sales<br />
revenue in <strong>2004</strong> against 9.4% in 2003, and totaled R$ 1.5 billion.<br />
EBITDA (earnings before interest, taxes, depreciation and amortization) increased<br />
108.4%, reaching R$ 5.5 billion.<br />
Net financial expenses (financial expenses minus financial revenues), excluding<br />
foreign exchange effects and monetary variations, totaled R$ 253.1 million. Considering<br />
foreign exchange revenues of R$ 119.2 million and monetary variation expenses of<br />
R$ 14.5 million, the interest paid in the year was R$ 148.4 million.<br />
In <strong>2004</strong>, the Group’s investments outside Brazil, converted into Brazilian currency,<br />
reflected the 8.1% devaluation of the U.S. dollar in relation to the real. The foreign<br />
exchange effect is accounted for in the equity pick-up line of the balance sheet, which<br />
also includes, among others, amortization of goodwill in the period. As a result, a<br />
negative balance of R$ 344.6 million was recorded for equity pick-up in <strong>2004</strong>.<br />
Indebtedness<br />
Net debt (gross debt minus cash and cash equivalents and short-term investments)<br />
was reduced by 22.4% from R$ 5.3 billion to R$ 4.1 billion. The average life of debt<br />
increased from 2.6 to 4.2 years in <strong>2004</strong>.<br />
Gross debt in <strong>2004</strong> was R$ 6.1 billion compared to R$ 6.3 billion in 2003 (a reduction<br />
of 3%). Short-term debt also decreased by 17.6% to R$ 2 billion. Long-term debt was<br />
R$ 4.1 billion (+6.4%), which reflects the lengthening of debt maturity and translates<br />
into higher flexibility for business management. From the total debt, 18.6% is in<br />
Brazilian currency, 38.7% is pegged to the U.S. dollar, and the remaining 42.7% comes<br />
from the Group’s operations outside Brazil.
20 21 f i n a n c e<br />
Even with the acquisition of new assets in <strong>2004</strong>, the net interest (financial<br />
expenses minus financial revenue, excluding currency exchange variation)<br />
per metric ton sold was R$ 22.36, almost half the amount recorded in the<br />
previous year. This indicates that the <strong>Gerdau</strong> Group’s expansion did not<br />
compromise profitability or operating performance during the year.<br />
In December, the balance of cash, cash equivalents and financial<br />
investments was R$ 2 billion, of which 69.5% (R$ 1.4 billion) was indexed<br />
to the U.S. dollar. The financial resources invested in <strong>2004</strong> almost doubled<br />
in relation to 2003, reflecting a growth in cash generation.<br />
The strong generation of operating cash (EBITDA) resulted in improved<br />
debt payment capacity and availability to undertake new commitments to<br />
expand the business. In <strong>2004</strong>, the ratio between net debt and EBITDA was<br />
0.7, well below the limit of 2.5 established in the Group’s indebtedness<br />
policy.<br />
Net Sales Revenue in <strong>2004</strong><br />
(million R$)<br />
13,367<br />
7,307<br />
5,570<br />
19,597<br />
9,976<br />
8,857<br />
+46.6%<br />
+36.5%<br />
+59.0%<br />
Financial operations<br />
In June, <strong>Gerdau</strong> Açominas S.A., the company responsible for the Group’s<br />
steel operations in Brazil placed the second tranche of its Export Receivable<br />
Notes program. This was important to lengthen the company’s debt<br />
profile. The operation yielded US$ 128 million with maturity in eight years<br />
and an annual interest rate of 7.321%. The transaction was completed in<br />
parallel with a derivative instrument (US Treasury Lock), which reduced<br />
the effective cost to 6.798% per year.<br />
In October, a US$ 110 million operation in euro commercial papers, with<br />
maturity on October 12, 2005 and annual interest of 3%, was concluded.<br />
In December, <strong>Gerdau</strong> Açominas S.A. obtained a US$ 240 million loan to<br />
upgrade the Ouro Branco mill (state of Minas Gerais) as part of the plant’s<br />
expansion project. The guarantee for the operation was given by Nippon<br />
Export and Investment Insurance (NEXI), a credit agency associated<br />
with the Japanese government. The NEXI guarantee covers 97.5% of the<br />
political risk and 95% of the commercial risk. That means that both the<br />
risks related to the Brazilian policy for payments sent to foreign countries<br />
(political risk) and the risks related to compliance with commitments<br />
undertaken by the company (commercial risk) are covered. The total term<br />
for this loan is seven years, including two years of grace and five years for<br />
amortization. The operation, called an untied loan, is unique in that it is<br />
not linked to the origin of the equipment supplied. In addition, the loan<br />
does not require any additional guarantee from the company and there is<br />
no link with imports or receivables from exports.<br />
BRAZIL<br />
490 764 +55.9%<br />
2003<br />
<strong>2004</strong><br />
CANADA AND<br />
THE UNITED STATES<br />
ARGENTINA, CHILE<br />
AND URUGUAY<br />
Net Income in <strong>2004</strong> - R$ 3.3 Billion<br />
BRAZIL<br />
CANADA AND<br />
THE UNITED STATES<br />
ARGENTINA, CHILE<br />
AND URUGUAY<br />
5.2%<br />
26.8%<br />
68.0%
Financial Indicators <strong>2004</strong> 1 2003<br />
Firm value 2 /EBITDA 3 3.3x 5.4x<br />
Net debt/EBITDA 0.7x 2.0x<br />
Net debt/Total capitalization 34.2% 52.1%<br />
EBITDA/Net financial expenses 4 21.8x 5.2x<br />
Net income/Net equity 42.5% 26.0%<br />
1. The improvement of indicators is due to the positive performance in <strong>2004</strong> which is reflected, for example, in the increase in EBITDA and net income as well as in the reduction<br />
of net debt and net financial expenses.<br />
2. Firm value: market value less net debt (<strong>Gerdau</strong> S.A. Consolidated).<br />
3. EBITDA: earnings before interest, taxes, depreciation and amortization.<br />
4. Net financial expenses: financial expenses minus financial revenue, excluded foreign exchange effects and monetary variation.<br />
Distribution of Value-added<br />
Metalúrgica <strong>Gerdau</strong> S.A. Consolidated<br />
Total: R$ 10 billion<br />
Distribution of Value-added<br />
Metalúrgica <strong>Gerdau</strong> S.A. Consolidated<br />
Governments: R$ 4.1 billion<br />
GOVERNMENTS<br />
EMPLOYEES<br />
FUNDING<br />
INSTITUTIONS<br />
SHAREHOLDERS<br />
REINVESTMENT<br />
OF PROFIT<br />
9.6%<br />
4.0%<br />
23.7%<br />
21.8%<br />
40.9%<br />
FEDERAL TAXES AND<br />
CONTRIBUTIONS<br />
FEDERAL SOCIAL<br />
OBLIGATIONS<br />
STATE TAXES AND<br />
CONTRIBUTIONS<br />
MUNICIPAL TAXES<br />
AND CONTRIBUTIONS<br />
7.1%<br />
0.9%<br />
27.0%<br />
65.0%<br />
Distribution of Value-added<br />
Metalúrgica <strong>Gerdau</strong> S.A. Consolidated<br />
Employees: R$ 2.2 billion<br />
SALARIES<br />
BENEFITS<br />
TRAINING<br />
PROFIT SHARING<br />
1.3%<br />
17.6%<br />
12.9%<br />
68.2%<br />
One century of profits<br />
For more than 100 years the <strong>Gerdau</strong> Group has believed that growth and profitability must be balanced. Our<br />
results are the ultimate proof that we follow this policy. Throughout its history, the <strong>Gerdau</strong> Group has always<br />
recorded positive results, even in adverse economic scenarios. Ethical values, well trained employees, professional<br />
management, financial seriousness, industrial and commercial competitiveness – all have been at the foundation of<br />
a solid and safe expansion. Today, the <strong>Gerdau</strong> Group works to retain its position as one of the most profitable and<br />
efficient steelmakers in the world.
22 23 f i n a n c e<br />
Consolidated Cash Flow<br />
Metalúrgica <strong>Gerdau</strong> S.A.<br />
(in thousand R$)<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
NET INCOME FOR YEAR 1,437,075 575,179 3,341,097 1,256,874<br />
EQUITY PICKUP (1,342,842) (610,001) 344,628 281,240<br />
PROVISION FOR CREDIT RISK - - 7,647 20,618<br />
GAIN IN FIXED ASSET DISPOSAL - - 9,058 10,056<br />
GAIN/LOSS IN LIQUIDATION OF INVESTMENTS (170,953) (1,445) (164,058) (1,556)<br />
MONETARY AND EXCHANGE VARIATION 5,198 5,563 (94,087) 136,349<br />
DEPRECIATION AND AMORTIZATION 145 149 766,819 605,045<br />
INCOME TAX AND SOCIAL SECURITY CONTRIBUTION 47,393 8,420 505,551 (441,456)<br />
INTEREST ON DEBT 778 14 412,152 593,308<br />
CONTINGENCIES/LEGAL ESCROW (940) 18 4,351 562<br />
CHANGES IN TRADE ACCOUNTS RECEIVABLE - - (720,363) (167,134)<br />
CHANGES IN INVENTORIES - - (1,402,408) (207,267)<br />
CHANGES IN CONTRACTORS 58 (27) 477,292 187,227<br />
OTHER ACCOUNTS IN OPERATING ACTIVITIES (33,737) 8,656 (100,288) 74,557<br />
Net cash provided by operating activities (57,825) (13,474) 3,387,391 2,348,423<br />
FIXED ASSETS ACQUISITION/DISPOSAL - - (1,173,491) (873,039)<br />
DEFERRED CHARGES - - (18,006) (7,246)<br />
INVESTMENTS ACQUISITION/DISPOSAL 155,144 5,097 362,905 (67,005)<br />
ACQUISITION OF ASSETS - - (924,457) -<br />
PROCEEDS FROM DIVIDENDS/INTEREST ON CAPITAL STOCK 351,884 185,108 - -<br />
Cash applied to investments 507,028 190,205 (1,753,049) (947,290)<br />
FIXED ASSETS SUPPLIERS - - 144,573 2,196<br />
WORKING CAPITAL FINANCING (7,778) (7,015) (133,006) (334,804)<br />
DEBENTURES (586) (423) 85,305 (347,456)<br />
PROCEEDS FROM FIXED ASSETS FINANCING - - 762,766 454,989<br />
PAYMENTS OF FIXED ASSETS FINANCING - - (677,357) (541,308)<br />
PAYMENT OF INTEREST ON FINANCING - - (379,801) (414,409)<br />
INTER-COMPANY LOANS 2,839 (2,506) 35,944 (16,937)<br />
CAPITAL INCREASE/TREASURY STOCK (14,441) (7,049) 451,704 (24,151)<br />
PAYMENT OF DIVIDENDS/INTEREST ON CAPITAL STOCK AND STATUTORY PARTICIPATIONS (358,623) (198,413) (853,710) (423,399)<br />
Net cash provided by financial activities (378,589) (215,406) (563,582) (1,645,279)<br />
Change in cash balance 70,614 (38,675) 1,070,760 (244,146)<br />
Cash Balance<br />
AT THE BEGINNING OF THE PERIOD 25,186 63,861 1,015,726 1,420,236<br />
UPDATE OF INITIAL CASH BALANCE - - (82,541) (173,736)<br />
INITIAL BALANCE OF COMPANIES CONSOLIDATED IN THE YEAR - - - 13,372<br />
AT THE END OF THE PERIOD 95,800 25,186 2,003,945 1,015,726
Capital Markets<br />
Outstanding return for shareholders<br />
The <strong>Gerdau</strong> Group is committed to cost-effective growth that does not compromise future<br />
profitability for shareholders. The company works to guarantee the continuity of its business.<br />
In the past five years, the absolute annual yield of dividends has been on average 6% for<br />
<strong>Gerdau</strong> S.A. shareholders and 10.3% for Metalúrgica <strong>Gerdau</strong> S.A. shareholders. Additionally,<br />
the Group seeks to enhance the liquidity of its shares by adopting new corporate governance<br />
practices and by joining important stock exchanges around the world. In <strong>2004</strong>, for example,<br />
<strong>Gerdau</strong> Ameristeel, the company responsible for the Group’s operations in North America, was<br />
listed on the New York Stock Exchange (NYSE). Through these actions, we have established a<br />
strong relationship with our 89.2 thousand shareholders, partners in the construction of the<br />
company’s future.<br />
Publicly traded companies in Brazil<br />
Metalúrgica <strong>Gerdau</strong> S.A. and <strong>Gerdau</strong> S.A. distributed a stock bonus to shareholders in <strong>2004</strong>.<br />
This initiative translated into an increase in the number of shares available and therefore<br />
created more opportunities for access to the stock. The operation resulted from the issuing of<br />
new shares to incorporate R$ 1.7 billion in reserves to the capital stock of <strong>Gerdau</strong> S.A. and<br />
R$ 384.0 million to the capital stock of Metalúrgica <strong>Gerdau</strong> S.A.<br />
The number of <strong>Gerdau</strong> S.A. shares was doubled to 296.7 million. The number of Metalúrgica<br />
<strong>Gerdau</strong> S.A. shares was also doubled to 83.2 million (30% distributed as bonus and 70% by<br />
stock split). At the end, each investor had more shares, reflecting the percent increase of each<br />
company.<br />
In December, <strong>Gerdau</strong> placed a public offering to sell common shares from its two publicly<br />
traded companies in Brazil. The aim was to increase liquidity and appreciation of these<br />
shares in the capital market. The auction offered 10.1% of the common shares of Metalúrgica<br />
<strong>Gerdau</strong> S.A. and 10% of the common shares of <strong>Gerdau</strong> S.A., the equivalent of 2.8 million and<br />
10.3 million shares, respectively. The Metalúrgica <strong>Gerdau</strong> S.A. shares belonged to Gersul<br />
GERDAU AMERISTEEL RINGS THE<br />
OPENING BELL AT THE NEW YORK STOCK<br />
EXCHANGE (NYSE). FROM LEFT TO RIGHT:<br />
NOREEN CULHANE, NYSE EXECUTIVE<br />
VICE PRESIDENT; ANDRÉ JOHANNPETER,<br />
GERDAU AMERISTEEL VICE PRESIDENT<br />
AND COO; ROBERT BRITZ, NYSE PRESIDENT<br />
AND CO-COO; PHILLIP CASEY, GERDAU<br />
AMERISTEEL PRESIDENT AND CEO; TOM<br />
LANDA, GERDAU AMERISTEEL VICE<br />
PRESIDENT AND CFO; AND OSVALDO<br />
SCHIRMER, GERDAU GROUP FINANCIAL<br />
EXECUTIVE VICE PRESIDENT AND INVESTOR<br />
RELATIONS DIRECTOR<br />
SOURCE: nyse
24 25 capital markets<br />
Empreendimentos Imobiliários Ltda., the Group’s controlling block holding<br />
company. The <strong>Gerdau</strong> S.A. shares belonged to Metalúrgica <strong>Gerdau</strong> S.A. and Santa<br />
Felicidade Comércio, Importação e Exportação de Produtos Siderúrgicos Ltda., a<br />
fully owned subsidiary of Metalúrgica <strong>Gerdau</strong> S.A. The operation resulted in the<br />
sale of 1.4 million Metalúrgica <strong>Gerdau</strong> S.A. shares (equivalent to R$ 75.1 million)<br />
and 10.3 million <strong>Gerdau</strong> S.A. shares (R$ 412.1 million).<br />
During <strong>2004</strong>, payments made to the shareholders of Metalúrgica <strong>Gerdau</strong> S.A.<br />
totaled R$ 433.9 million (+ 152.1%), and R$ 858.8 million (+ 144.5%) to the<br />
shareholders of <strong>Gerdau</strong> S.A. This represents a dividend yield (on December<br />
31) of 7.8% for Metalúrgica <strong>Gerdau</strong> S.A. and 6.1% for <strong>Gerdau</strong> S.A. In <strong>2004</strong>, the<br />
appreciation of shares corresponded to 122.7% and 66.2%, respectively.<br />
Payment of dividends and interest on capital stock is based on the net income<br />
for the year. At Metalúrgica <strong>Gerdau</strong> S.A., net income reached R$ 1.4 billion<br />
(R$ 17.42 per share) and at <strong>Gerdau</strong> S.A., R$ 2.8 billion (R$ 9.59 per share).<br />
The volume of Metalúrgica <strong>Gerdau</strong> S.A. shares traded increased 260.4% at the<br />
São Paulo Stock Exchange, reaching R$ 2.1 billion. There were 63,200 trades, up<br />
195.1% over the previous year. The average daily trading increased from<br />
R$ 2.2 million in 2003 to R$ 7.2 million.<br />
In <strong>2004</strong>, the trading volume for <strong>Gerdau</strong> S.A. shares at the São Paulo Stock<br />
Exchange was R$ 7.2 billion, the equivalent of 224,000 trades. This was an<br />
increase of 185.2% and 116.2%, respectively. Consequently, the average daily<br />
trading reached R$ 25.9 million, against R$ 9.8 million in the previous year.<br />
The trading of <strong>Gerdau</strong> S.A. American Depository Receipts (ADRs) on the New<br />
York Stock Exchange totaled US$ 1.3 billion, equivalent to a daily average of<br />
US$ 5.1 million. At the Madrid Stock Exchange (Latibex), the company’s shares<br />
were traded daily for a volume of € 6.2 million.<br />
Performance of Metalúrgica <strong>Gerdau</strong> S.A. Shares in Brazil (GOUA4)<br />
800<br />
700<br />
600<br />
500<br />
400<br />
300<br />
200<br />
100<br />
JAN-00<br />
JAN-01 JAN-02 JAN-03 JAN-04<br />
METALÚRGICA GERDAU S.A.<br />
IBOVESPA<br />
Dollar-deflated data / Basis 100 / Source: Economática
Performance of <strong>Gerdau</strong> S.A. Shares in Brazil (GGBR4)<br />
800<br />
700<br />
600<br />
500<br />
400<br />
300<br />
200<br />
100<br />
JAN-00<br />
JAN-01 JAN-02 JAN-03 JAN-04<br />
GERDAU S.A.<br />
IBOVESPA<br />
Dollar-deflated data / Basis 100 / Source: Economática<br />
Performance of <strong>Gerdau</strong> S.A. ADRs in the U.S.A. (GGB)<br />
800<br />
700<br />
600<br />
500<br />
400<br />
300<br />
200<br />
100<br />
JAN-00<br />
JAN-01 JAN-02 JAN-03 JAN-04<br />
GERDAU S.A. ADRS<br />
DOW JONES<br />
Dollar-deflated data / Basis 100 / Source: Economática<br />
Performance of <strong>Gerdau</strong> Ameristeel Corp. Shares in Canada (GNA)<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
OCT-02 OCT-03 OCT-04<br />
GERDAU AMERISTEEL CORP.<br />
TS300 INDEX<br />
Quotes start October 28 2002 / Data in Cdn$ / Basis 100 / Source: Bloomberg
26 27 capital markets<br />
Publicly traded company in Canada<br />
The debut of <strong>Gerdau</strong> Ameristeel on the New York Stock Exchange (NYSE) in <strong>2004</strong> translated into a new level<br />
of liquidity for its shares. Starting in October, when trading of Ameristeel stock at the NYSE began, until<br />
the end of December, trading volume reached US$ 107.5 million, representing an average daily volume of<br />
US$ 2.6 million. In addition, the listing in the U.S. increased the trading volume on the Toronto Stock Exchange,<br />
where <strong>Gerdau</strong> Ameristeel has been listed since 2002. In the first nine months of <strong>2004</strong>, the average daily<br />
trading volume on the Toronto Stock Exchange was US$ 871,000. Taking into consideration the trades at the<br />
NYSE, this volume reached US$ 5.9 million in the last quarter.<br />
<strong>Gerdau</strong> Ameristeel is the second <strong>Gerdau</strong> Group company listed on the main world financial center. <strong>Gerdau</strong><br />
S.A., one of the Group’s publicly traded companies in Brazil, was listed in 1999.<br />
<strong>Gerdau</strong> Ameristeel carried out two capital increase operations in <strong>2004</strong>. In April, 26.8 million common shares<br />
were purchased by <strong>Gerdau</strong> Ameristeel’s parent company, <strong>Gerdau</strong> S.A., for Cdn$ 4.90 per share, for a total of<br />
US$ 100 million, generating resources for equipment financing, working capital, and debt payment.<br />
In November, <strong>Gerdau</strong> Ameristeel issued a public offering of 78.8 million common shares to raise<br />
US$ 370 million. This was the Company’s first international fund raising effort through the issuance of new<br />
shares. The aim of the operation was to secure funds for the acquisition of North Star Steel assets, increase<br />
the shareholder base in the United States and increase the liquidity of shares.<br />
After these operations, <strong>Gerdau</strong> S.A. had increased its stake in <strong>Gerdau</strong> Ameristeel to 66.5%.<br />
The company’s net revenues, adjusted to Brazilian accounting practices, reached R$ 8.9 billion in <strong>2004</strong>,<br />
with a profit of R$ 896.3 million. As a result, the Board of Directors decided for the quarterly payment<br />
of dividends to shareholders starting in 2005. In March, individuals holding shares on February 16, 2005,<br />
received US$ 0.02 per share in dividends. This amount refers to the first quarter of 2005, and totals<br />
US$ 6.1 million.<br />
Relationship with shareholders, investors and analysts<br />
The <strong>Gerdau</strong> Group’s relationship with shareholders, investors and analysts is guided by disclosure and<br />
fast response to market demands. In <strong>2004</strong>, six meetings were held with Apimec, the Association of<br />
Market Analysts and Investment Brokers. The meetings, broadcast in real time through the Internet and<br />
available for replay until the end of the quarter, attracted 870 people. <strong>Gerdau</strong>’s investor relations team<br />
held 280 individual meetings with market professionals in Brazil, North America and Europe. It organized<br />
eight conference calls to discuss quarterly results in both Portuguese and English, attracting over 800<br />
participants.<br />
Total Shareholder Return (Steel Companies) - 1997 to <strong>2004</strong> (%)<br />
METALÚRGICA GERDAU<br />
GERDAU<br />
BELGO<br />
1,016.0<br />
CSN<br />
782.0<br />
USIMINAS<br />
236.0<br />
COMMERCIAL METALS<br />
170.0<br />
NUCOR<br />
105.0<br />
STEEL DYNAMICS<br />
98.0<br />
1,513.0<br />
1,605.0<br />
Total shareholder return reflects the<br />
dollar increase in the value of shares for<br />
the period indicated, assuming that the<br />
dividends distributed were reinvested in<br />
shares of the same company.<br />
Source: Bloomberg and Economática<br />
Period from December 31 1996 to<br />
December 31 <strong>2004</strong>
Shareholder Base<br />
The geographic distribution of the <strong>Gerdau</strong> Group shareholder base in <strong>2004</strong> was as follows:<br />
%<br />
Metalúrgica <strong>Gerdau</strong> S.A. <strong>Gerdau</strong> S.A. <strong>Gerdau</strong> Ameristeel Corp.<br />
BRAZIL 89.2 77.2 66.5<br />
NORTH AMERICA 8.7 18.5 33.5<br />
EUROPE 1.3 3.4 -<br />
OTHER 0.8 0.9 -<br />
100.0 100.0 100.0<br />
*Source: Shareholder records from the custodian bank and São Paulo Stock Exchange. All holders of ADRs are considered to be North-American.<br />
The Brazilian Securities and Exchange Commission was duly informed of equity investments representing more than 5% of the voting stock.<br />
Number of Shares<br />
The total number of Metalúrgica <strong>Gerdau</strong> S.A. shares on December 31, <strong>2004</strong> was 82,486,790 (27,722,930 common shares and 54,763,860 preferred<br />
shares). At <strong>Gerdau</strong> S.A., the total number of shares on the same date was 295,134,822 (102,936,448 common shares and 192,198,374 preferred<br />
shares). <strong>Gerdau</strong> Ameristeel Corp. had 304,028,122 common shares on December 31, <strong>2004</strong>.<br />
Stock Quotes<br />
São Paulo Stock Exchange (Bovespa)<br />
Metalúrgica <strong>Gerdau</strong> S.A.<br />
<strong>Gerdau</strong> S.A.<br />
R$ <strong>2004</strong> 2003 2002 2001 2000 <strong>2004</strong> 2003 2002 2001 2000<br />
HIGH 67.40 30.41 11.58 6.18 6.97 51.34 29.02 12.01 7.28 8.14<br />
LOW 29.54 10.48 5.93 3.86 4.29 24.29 10.09 6.87 3.88 4.01<br />
YEAR-END 67.40 30.27 11.58 5.70 5.19 47.50 28.57 11.35 6.53 5.09<br />
In million R$<br />
Market cap 5,559.6 2,684.1 1,131.1 664.5 679.6 14,018.9 8,887.6 3,751.1 2,308.9 1,939.8<br />
Dividend-adjusted. Source: Economática<br />
New York Stock Exchange (Nyse)<br />
<strong>Gerdau</strong> S.A. - ADR<br />
In US$ <strong>2004</strong> 2003 2002 2001 2000<br />
HIGH 18.20 10.23 5.39 4.50 5.96<br />
LOW 7.96 3.11 2.65 1.80 3.03<br />
YEAR-END 18.00 10.11 3.42 3.74 3.27<br />
In million US$<br />
Market cap 5,340.7 2,755.3 1,013.8 1,102.0 964.7<br />
Source: Bloomberg<br />
Madrid Stock Exchange (Latibex)<br />
<strong>Gerdau</strong> S.A. - DR<br />
In € <strong>2004</strong> 2003 2002* 2001 2000<br />
HIGH 19.95 16.77 7.32 - -<br />
LOW 7.21 5.73 6.42 - -<br />
YEAR-END 13.06 16.77 6.90 - -<br />
In million €<br />
Market cap 2,530.7 1,624.8 - - -<br />
*Starting December 2nd 2002. Source: Bloomberg
28 29 capital markets<br />
Toronto Stock Exchange<br />
<strong>Gerdau</strong> Ameristeel Corp.<br />
In Cdn$ <strong>2004</strong> 2003 2002* 2001 2000<br />
HIGH 8.35 4.76 3.30 - -<br />
LOW 4.15 1.39 1.87 - -<br />
YEAR-END 8.08 4.69 2.31 - -<br />
In million Cdn$<br />
Market cap 2,384.9 929.0 457.6 - -<br />
*Starting October 28 2002. Source: Bloomberg<br />
Indicators per Share<br />
Metalúrgica <strong>Gerdau</strong> S.A.<br />
<strong>Gerdau</strong> S.A.<br />
In million R$ <strong>2004</strong> 2003 2002 2001 2000 <strong>2004</strong> 2003 2002 2001 2000<br />
DIVIDEND PAID 434 172 140 123 57 859 351 266 164 125<br />
NET INCOME 1,437 575 434 253 218 2,831 1,137 799 464 393<br />
ADJUSTED NET<br />
INCOME 1,365 546 412 234 174 2,690 1,080 763 461 382<br />
%<br />
PAY-OUT 31.8 31.5 34.0 52.6 32.8 31.9 32.5 34.9 35.6 32.5<br />
YIELD 7.8 6.2 12.4 17.0 7.9 6.1 3.9 7.1 6.8 6.1<br />
In R$<br />
EARNINGS PER SHARE 17.42 13.88 20.87 12.18 10.48 9.59 7.68 7.00 4.09 3.46<br />
Equity value<br />
per share 35.90 47.58 75.80 63.90 55.71 20.58 27.89 28.86 23.66 20.84<br />
*Includes the payment of a supplementary non-recurring dividend.<br />
<strong>Gerdau</strong> shares have been traded in units since 2003. Previous data refer to lots of one thousand shares.<br />
Pay-out: Dividend divided by annual adjusted net income.<br />
Yield: Per share dividend divided by non-dividend adjusted price of share on the last day of the year.<br />
Long-term relationship with shareholders<br />
Generate value for shareholders. This has been our philosophy for decades. Since 1977, the <strong>Gerdau</strong> Group’s publicly traded<br />
companies in Brazil have been distributing at least 30% of the yearly adjusted net income as dividends or interest on<br />
capital stock.<br />
In 2002, the Group extended the tag-along right to minority common and preferred shareholders, that is, the right to<br />
receive 100% of the amount paid to the shares of the control group in case the control on the company is sold.
Steel Output<br />
(thousand metric tons)<br />
12,343<br />
6,976<br />
5,020<br />
13,448<br />
7,284<br />
5,736<br />
+9.0%<br />
+4.4%<br />
+14.3%<br />
Production<br />
Growing efficiency levels<br />
Achieve world-class operating levels and strive for maximum<br />
industrial process efficiency. Following this principle, the<br />
<strong>Gerdau</strong> Group is constantly allocating resources toward the<br />
technological upgrading of its steel mills, employee training,<br />
cost reduction and increased workplace safety.<br />
BRAZIL<br />
428<br />
347 +23.5%<br />
2003<br />
<strong>2004</strong><br />
CANADA AND<br />
THE UNITED STATES<br />
Output of Rolled Product<br />
(thousand metric tons)<br />
BRAZIL<br />
9,045<br />
3,890<br />
4,776<br />
379<br />
2003<br />
10,274<br />
4,339<br />
5,451<br />
484<br />
<strong>2004</strong><br />
CANADA AND<br />
THE UNITED STATES<br />
CHILE AND<br />
URUGUAY<br />
+13.6%<br />
+11.5%<br />
+14.2%<br />
+27.9%<br />
ARGENTINA, CHILE<br />
AND URUGUAY<br />
Brazil<br />
Long steel<br />
<strong>Gerdau</strong> mills produced 10.2% more steel than in the previous<br />
year. Melt shops and rolling mills also increased their<br />
operational efficiency. In <strong>2004</strong>, there was an improvement<br />
of more than 20% in the number of billets that are rolled<br />
between rolling errors. The Group is also currently performing<br />
the technological upgrading of its drawing mills, which will<br />
allow for a productivity gain of 27% when the units reach<br />
their planned operational performance.<br />
Specialty steel<br />
The specialty steel segment, directed primarily at the<br />
automotive industry, also reported a positive performance<br />
for the year. Productivity increased 15.5%; the output of rolled<br />
products grew 19.4%, and of forged products, 16.5%. The new<br />
electric furnace at <strong>Gerdau</strong> Aços Especiais Piratini (state of<br />
Rio Grande do Sul) began operating at the beginning of the<br />
year, increasing the unit’s melt shop capacity.
30 31 p r o d u c t i o n<br />
From scrap to steel<br />
GERDAU DIVINÓPOLIS (STATE OF<br />
MINAS GERAIS) SCRAP YARD<br />
Each year, the <strong>Gerdau</strong> Group recycles nearly 11 million metric tons of scrap to produce steel. As a result,<br />
it is one of the largest recyclers in the world. For society, the use of scrap in the steelmaking process<br />
represents an important contribution to improve quality of life. It reduces the volume of material disposed<br />
of in landfills and generates jobs through an extensive chain of small and medium-sized entrepreneurs<br />
dedicated to this activity.<br />
For the <strong>Gerdau</strong> Group, the use of iron scrap means an optimized production process, increased productivity<br />
and reduced energy consumption and operating costs.
Improved efficiency<br />
EMPLOYEES GATHERED IN EMBU DAS ARTES<br />
(STATE OF SÃO PAULO) FOR THE 1 ST QUALITY<br />
IMPROVEMENT STORY CONTEST<br />
More than 200 employees from <strong>Gerdau</strong> units in Brazil participated in the 1 st National Meeting<br />
of Quality Improvement Story Teams in July <strong>2004</strong>. The purpose of the event was to recognize the<br />
projects that improved production, safety, and quality.<br />
The 15 teams that took part in the meeting were chosen among 767 Quality Improvement Story<br />
Teams from all over the country. At the event, a judging commission formed by employees from<br />
different areas of the <strong>Gerdau</strong> Group elected the three groups that most stood out among the<br />
participants.<br />
<strong>Gerdau</strong> Cearense (state of Ceará), for example, was able to increase the daily operating hours of its<br />
rolling mill equipment by 4.4%, a figure that represents an additional production day per month.<br />
A project at <strong>Gerdau</strong> Aços Especiais Piratini (Rio Grande do Sul) resulted in a 65% reduction in the<br />
amount of material wasted during the rolling process. <strong>Gerdau</strong> Açonorte (Pernambuco) increased<br />
the daily operating hours of the equipment used for nail production by 5%.<br />
The goal for 2005 is to hold an international meeting with representatives from all the <strong>Gerdau</strong><br />
Group units in North and South America.
32 33 p r o d u c t i o n<br />
<strong>Gerdau</strong> Açominas – Ouro Branco<br />
In <strong>2004</strong>, the Ouro Branco mill produced 3.0 million metric tons of<br />
liquid steel, maintaining its 2003 performance by continuously<br />
striving for operational regularity in the various production stages.<br />
This work philosophy allowed the steel mill to make important<br />
advances which resulted in higher productivity and product quality<br />
as well as the enhanced safety of people and equipment.<br />
The mill also recorded a 22.5% growth in the output of structural<br />
shapes to meet increased demand. In <strong>2004</strong>, it began to produce<br />
wire rod – 186,000 metric tons destined for the industrial sector.<br />
Argentina, Chile and Uruguay<br />
In Uruguay, <strong>Gerdau</strong> Laisa reached record figures in <strong>2004</strong>. The mill<br />
increased its output of billets to 58,000 metric tons (+ 24%) and of<br />
rolled products to 48,000 metric tons (+17%). It also surpassed its<br />
goal to reduce losses at the rolling mill.<br />
The output at <strong>Gerdau</strong> AZA in Chile grew 23.4% compared to the<br />
previous year, reaching a total of 371,000 metric tons. The rolling<br />
mills at Renca and Colina also reported increased productivity.<br />
In Argentina, the output of rolled products at Sipar grew 17.7%<br />
compared to 2003. The overall industrial productivity grew 40%<br />
(ton/man/year).<br />
Canada and the United States<br />
The 14 steel mills belonging to <strong>Gerdau</strong> Ameristeel, the company<br />
responsible for operations in Canada and the United States,<br />
established goals to improve efficiency and reduce costs in <strong>2004</strong>.<br />
Electricity consumption in the furnaces dropped 4.3% in relation<br />
to 2003, a significant achievement that helped counterbalance the<br />
increased cost of the input during the year.
Sales and Markets<br />
Capacity to meet growing market demands<br />
Physical Sales by Geographic Region<br />
(thousand metric tons)<br />
BRAZIL<br />
12,144<br />
6,587<br />
5,141<br />
416<br />
2003<br />
12,561<br />
<strong>2004</strong><br />
CANADA AND<br />
THE UNITED STATES<br />
Physical Sales by Product Line<br />
12.6 million metric tons<br />
SLABS, BLOOMS AND BILLETS<br />
COMMON LONG ROLLED<br />
PRODUCTS<br />
SPECIAL ROLLED PRODUCTS<br />
DRAWN PRODUCTS<br />
FLAT STEEL<br />
6,630<br />
520<br />
+3.4%<br />
+0.6%<br />
5,411 +5.3%<br />
6.3% 7.9%<br />
3.0%<br />
18.2%<br />
64.6%<br />
+25.0%<br />
ARGENTINA, CHILE<br />
AND URUGUAY<br />
The <strong>Gerdau</strong> Group participates in the life of millions of people. Rebar, bars,<br />
profiles, wire rod, wires and a range of other steel products are transformed<br />
into houses, buildings, bridges, roads, airports, automobiles, transmission<br />
towers and household appliances. The Group also participates in rural<br />
life, producing steel for fences and farming machinery and equipment,<br />
among other applications.<br />
In <strong>2004</strong>, the recovery of the international market and an increase in<br />
demand in the countries where the <strong>Gerdau</strong> units are located led to an<br />
increase in sales performance. The <strong>Gerdau</strong> Group sold 12.6 million metric<br />
tons during the year, representing a 3.4% increase compared to the<br />
previous year.<br />
Brazil<br />
The steelmaking industry benefited from a strong demand in the Brazilian<br />
economy. The Gross Domestic Product (GDP) increased 5.2%, leveraged by<br />
the growth of civil construction, industry and agriculture.<br />
As a result, the national market absorbed 18.3 million metric tons of<br />
steel. From this total, 3.9 million were sold by the <strong>Gerdau</strong> Group – an<br />
increase of 15% in relation to 2003. To meet domestic market needs, the<br />
Group redirected a portion of the volume normally exported from Brazil.<br />
International sales dropped 14.4% in relation to 2003 to a total of<br />
2.7 million metric tons. Despite this result, shipments to 72 countries<br />
during the year represented 41.5% of the overall sales of the facilities in<br />
Brazil, generating a revenue of US$ 1.1 billion, a figure 39% higher than<br />
that of the previous year. This performance in the international market is<br />
also related to <strong>Gerdau</strong>’s strategy of serving distinct markets, safeguarding<br />
its units from the protectionist measures currently effective in certain<br />
countries.<br />
In the civil construction sector, the domestic demand for products such as<br />
<strong>Gerdau</strong> rebar, reinforcing mesh and truss frames increased 12.7% during<br />
the year. <strong>Gerdau</strong> products were used in major construction projects:<br />
the Recife airport (state of Pernambuco), the Congonhas airport (São<br />
Paulo), the Irapé hydroelectric power station (Minas Gerais) and the Iberê<br />
Camargo museum (Rio Grande do Sul), among others. The <strong>Gerdau</strong> Group’s<br />
top seller in Brazil – the GG 50 rebar – is destined for civil construction.<br />
Since 1992, the <strong>Gerdau</strong> brand has been imprinted onto the rebar, which<br />
is certified by the National Institute of Metrology, Standardization and<br />
Industrial Quality (Inmetro). The certification, based on best international
34 35 sales an d mar kets<br />
practices, guarantees the quality of the steel.<br />
The Group also provides special services to go along with its products, delivering fabricated<br />
rebar based on each customer’s specific needs. In this way, the steel arrives at the construction<br />
site ready for use. The deliveries are made in identified lots that streamline the verification of<br />
receipt, storage and use. The service increases the productivity and quality of the structures<br />
while also eliminating steel losses in structural frames, which can be as high as 15% in<br />
conventional practices (see box “Suited to the customer’s taste”).<br />
In the industrial sector, the demand for <strong>Gerdau</strong> products – wire rod, wires, bars, profiles,<br />
angles and welded products – grew 11.6%. In <strong>2004</strong>, angle bars and profiles of certain gauges<br />
were also imprinted with the <strong>Gerdau</strong> brand for the first time, allowing the customer to verify<br />
the quality of the product at sales outlets. This practice will be extended to other types of<br />
profiles during 2005.<br />
The Group was able to fully meet the demands of its specialty steel customers, despite the<br />
significant growth of the automotive industry and the rise in auto parts exports. It increased<br />
Suited to the customer’s taste<br />
The <strong>Gerdau</strong> Group develops custom-made solutions<br />
for its civil construction customers in the Americas.<br />
The fabricated reinforcing steel facilities, for<br />
example, use automated technology that increases<br />
productivity by approximately 30% in the assembly<br />
of readymade reinforcing structures, eliminates<br />
losses from surplus and reduces final construction<br />
costs. With this solution, rebar is delivered at<br />
the construction site ready for use based on the<br />
customer’s specific structural plan. Deliveries can be<br />
based on a timetable established by the construction<br />
company, allowing for a higher level of organization<br />
at the construction sites and enhancing the safety<br />
of users. The <strong>Gerdau</strong> Group already has 44 units<br />
specializing in this service in Brazil, Argentina, Chile,<br />
the United States and Uruguay.<br />
FABRICATED REINFORCING STEEL FACILITY IN THE<br />
UNITED STATES (ABOVE) AND THE INAUGURATION OF<br />
THE SANTA CATARINA UNIT (TO THE RIGHT)
its delivery volume by 22.6% and destined 98% of all production to the domestic market.<br />
Through these and other actions, the <strong>Gerdau</strong> Group has increasingly reinforced its participation<br />
in international production chains – <strong>Gerdau</strong> steel is currently used in vehicles manufactured<br />
by the major assemblers worldwide (see box “Cars drive innovation”).<br />
In Brazil, there was a 4.7% increase in the sale of products for the agricultural sector compared<br />
to 2003, including wire, wire rope, posts and other items.<br />
Based on the current scenario, GDP growth in 2005 should surpass that of <strong>2004</strong> by 3.7%,<br />
which will have a positive impact on domestic steel consumption.<br />
Cars drive innovation<br />
The <strong>Gerdau</strong> Group keeps up to speed with the innovations in the automotive<br />
industry. <strong>Gerdau</strong> Aços Especiais Piratini (state of Rio Grande do Sul), for example,<br />
has one of the most modern laboratories in Latin America for the development of<br />
steel products, with equipment that allows technicians to simulate production and<br />
forming processes and analyze the degree of steel purity in detail.<br />
With these resources, it is possible to develop the improvements to better serve<br />
our customers. In fact, it is through the very partnership with consumers that<br />
<strong>Gerdau</strong> is able to create innovations in products and processes. Sales, marketing<br />
and technical support teams verify customer needs by maintaining constant<br />
contact with auto parts manufacturers and assemblers. The suggestions are then<br />
forwarded to the engineers in the research and development area, who work with<br />
customers to create and test new solutions. The Group also establishes partnerships<br />
with universities and research centers, as well as technology transfer agreements<br />
with consultants and other specialty steel producers in Europe and Asia who are<br />
internationally recognized in the sector. Over 40 innovations have been placed on<br />
the market during the past four years as a result of this work.<br />
It is for this reason that the <strong>Gerdau</strong> Group is increasingly present in international<br />
production chains. Today, its steel is found in vehicles made by Mercedes-Benz,<br />
Caterpillar, Toyota, General Motors, Ford, Fiat, Volvo, Scania, Honda and Volkswagen,<br />
among others, both in Brazil and abroad.<br />
THE GERDAU AÇOS ESPECIAIS PIRATINI (STATE<br />
OF RIO GRANDE DO SUL) LABORATORY: ONE<br />
OF THE MOST MODERN IN LATIN AMERICA, IT<br />
FEATURES ULTRASOUND EQUIPMENT (ABOVE) AND<br />
THERMOMECHANICAL SIMULATORS (TO THE RIGHT)
36 37 sales an d mar kets<br />
Support operations for steelmaking in brazil<br />
COMERCIAL GERDAU<br />
The largest steel distributor in Brazil, Comercial <strong>Gerdau</strong> sells the most complete line of <strong>Gerdau</strong><br />
long steel products along with flat steel products manufactured by other steel companies in<br />
the country. In <strong>2004</strong>, it serviced over 155,000 customers for a gross revenue of R$ 2.1 billion,<br />
representing a growth of more than 30% compared to the previous year.<br />
Comercial <strong>Gerdau</strong> currently operates 69 retail stores that cover the entire market. More<br />
than products, it provides the market with solutions such as the fabricated reinforcing steel<br />
facilities located outside construction sites that rigorously follow the structural design<br />
specifications of each project.<br />
The company offers an entire line of products through its six flat steel distribution facilities,<br />
including roofs, sheets, strips and structural shapes, among others, in addition to plasma, laser<br />
and oxy-cutting systems – state-of-the-art thermal cutting technologies designed primarily<br />
for industry and metallic construction.<br />
Banco <strong>Gerdau</strong><br />
Banco <strong>Gerdau</strong> (<strong>Gerdau</strong> Bank) is a financial institution that operates with the Group’s business<br />
in Brazil. The institution began operations in 1994 as a multiple bank with the mission of<br />
developing financial products and services that increase the business success and satisfaction<br />
of customers and suppliers. The bank has granted over R$ 4 billion in loans during its 10 years<br />
of operations.<br />
In <strong>2004</strong> , it assisted 1,240 customers. The volume of financing granted grew from<br />
R$ 514.7 million in 2003 to R$ 735.0 million, representing a 42.8% increase. The bank’s assets<br />
portfolio increased from R$ 79.5 million to R$ 135 million. The sum managed by the bank in<br />
the form of fixed income investment funds reached a total of R$ 1.6 billion, 44.6% higher than<br />
in 2003.<br />
<strong>Gerdau</strong> Florestal<br />
<strong>Gerdau</strong> Florestal owns 144 thousand hectares of pine and eucalyptus forests.<br />
With 24,000 hectares of pine plantations in the states of Santa Catarina and Mato Grosso do<br />
Sul, <strong>Gerdau</strong> Florestal sold 1.6 million cubic meters of timber in <strong>2004</strong>, maintaining the same<br />
volume as that of the previous year.<br />
It also dedicates 120,000 hectares to eucalyptus forests. In <strong>2004</strong> , <strong>Gerdau</strong> Florestal planted<br />
15 million seedlings on 13,600 hectares, the main highlight of the US$ 11.5 million investment<br />
plan implemented during the year. The unit also completed the expansion of the seedling<br />
nursery, increasing its production capacity from 15 million seedlings per year to 20 million and<br />
guaranteeing <strong>Gerdau</strong> Florestal self-sufficiency in highly productive genetic material.<br />
<strong>Gerdau</strong> Florestal also develops the Forest Farmer Program. Since 1998, small rural landowners<br />
have been encouraged to grow eucalyptus trees, receiving seedlings, raw materials and<br />
technical support. Currently, 777 farmers participate in the project, caring for a planted area
THE CONSTRUCTION OF THE<br />
LEE ROY SELMON EXPRESSWAY<br />
IN TAMPA, FLORIDA EMPLOYS<br />
GERDAU STEEL<br />
of over 12,200 hectares. In <strong>2004</strong> alone, they planted more than 1,500 hectares. It<br />
is estimated that another 7,000 hectares will be incorporated into the program<br />
by 2007.<br />
Argentina, Chile and Uruguay<br />
The units in Argentina, Chile and Uruguay recorded a growth in sales, thanks to<br />
the expansion of their domestic markets. They were responsible for the sale of<br />
520,400 metric tons of steel products during the year, 25% more than in 2003.<br />
The increase is due to the economic growth currently taking place in the three<br />
countries, which drove sales up in various sectors such as civil construction and<br />
industry.<br />
The 9% increase in GDP in Argentina in <strong>2004</strong> reflected the country’s economic<br />
recovery, which was also observed during the previous year. This good phase<br />
had positive repercussions on the steelmaking market, increasing the demand<br />
for steel in civil construction and industry. The Sipar rolling mill, in which the<br />
<strong>Gerdau</strong> Group has a 38.2% equity investment, increased its sales volume by 16.6%<br />
to 218,800 metric tons. The prospects for the upcoming year are also optimistic,<br />
with an estimated 6% increase in GDP and a gradual recovery of infrastructure<br />
projects and industrial activity.<br />
The Chilean economy grew 6% in <strong>2004</strong> and maintained a sustainable pace of<br />
growth. In the steelmaking market, the highlight was the rebar, with a 36.9%<br />
increase in sales due to investments in infrastructure – especially in the country’s<br />
urban road network – and housing constructions. In 2005, it is expected that the
38 39 sales an d mar kets<br />
GDP growth rate will remain the same as that of <strong>2004</strong>, reflecting a positive<br />
prospect for the Chilean industry. This may increase the sales of the wire rod and<br />
shapes produced by <strong>Gerdau</strong> AZA.<br />
In <strong>2004</strong>, Uruguay achieved important economic growth with a 12% increase in<br />
its GDP. This recovery had a positive impact on the purchasing power of the<br />
population, which enjoyed an average salary increase of 10.7%. Consequently,<br />
there was a significant increase in the sale of products by <strong>Gerdau</strong> Laisa, the<br />
Group’s unit in the country. The main highlight was the 21% increase in the sale<br />
of rebar – a product used in civil construction – in relation to 2003. For 2005, the<br />
Group expects to increase its sales in the national and international markets<br />
based on the country’s economic growth, estimated at 5% of the GDP, and its<br />
solid export performance.<br />
Canada and the United States<br />
The year <strong>2004</strong> was a positive one for the North American economy. The United<br />
States and Canada registered economic growth of 4.4% and 2.8%, respectively,<br />
in relation to the previous year. <strong>Gerdau</strong> Ameristeel, the Group’s company in the<br />
region, felt the effects of this growth. The high demand for steel, combined with<br />
low import volumes, led to an increase in both the pressure to meet domestic<br />
market needs and margins during most of the year. The fourth quarter marked<br />
a return to a more typical pattern of demand, with a rise in imports and larger<br />
inventories. Nevertheless, all of the North American operations together<br />
recorded a 5.3% growth in the volume of physical sales in comparison to 2003,<br />
with a total of 5.4 million metric tons of steel.<br />
Although the demand was strong in all economic segments in <strong>2004</strong>, wire rod<br />
and civil construction products benefited most from this trend. The year was<br />
marked by new ventures in the shopping center and commercial building sector.<br />
The housing sector also reported growth. For example, in the fourth quarter of<br />
<strong>2004</strong> alone, investments in housing grew 6% in the United States and 1.7% in<br />
Canada.<br />
Industry in the United States is also experiencing a positive phase. In <strong>2004</strong><br />
companies invested more to keep up with economic growth, leading to the<br />
acquisition of capital goods from North American and foreign suppliers. This<br />
industrial growth meant a higher demand for <strong>Gerdau</strong> products.<br />
It is projected that the U.S. economy will continue to grow in 2005, although at<br />
a slower pace. The market projection is that the GDP will grow at an annual rate
Investments<br />
Growing profitability and productivity<br />
Increase the competitiveness of our operations and reduce<br />
risks in the different markets where we operate. This is the goal<br />
of our investments: generating value. Each year, the company<br />
invests in increasing the installed capacity of its units and<br />
supplying customers with products that follow rigorous technical<br />
specifications and present superior quality. Because it operates in a<br />
capital-intensive sector, the Group invests heavily in the expansion<br />
of its units and in the acquisition of new assets with medium to<br />
long-term maturity. For this reason, the Group’s decisions are<br />
guided by the conviction that the investments it makes should not<br />
only generate profitability in line with the Group’s historical levels,<br />
but should also result in growing productivity.<br />
Main initiatives in <strong>2004</strong><br />
<strong>Gerdau</strong> invested a total of US$ 771.7 million in <strong>2004</strong>, 161.9% more<br />
than in the previous year. One of the main strategic advances made<br />
by the Group was the purchase of the steelmaking assets of North<br />
Star Steel from Cargill Incorporated for US$ 308 million. With this<br />
investment, the geographic coverage of <strong>Gerdau</strong> Ameristeel – the<br />
company responsible for the Group’s operations in North America<br />
– expanded into the Midwestern United States. <strong>Gerdau</strong>’s annual<br />
installed capacity in the region increased by 26.2% for a total of<br />
8.3 million metric tons, and by 23.3% for rolled products for a total<br />
of 7.6 million metric tons.<br />
Investments by Region in <strong>2004</strong> - US$ 771.7 million<br />
BRAZIL<br />
CANADA AND<br />
THE UNITED STATES 42.2%<br />
56.5%<br />
ARGENTINA, CHILE<br />
AND URUGUAY<br />
1.3%
40 41 i n v e s tm e n t s<br />
The purchase included four long steel mills in the states<br />
of Minnesota, Iowa, Kentucky and Texas. It also included<br />
three wire rod processing plants in Texas and Tennessee,<br />
in addition to a unit that produces grinding balls for the<br />
mining industry in Minnesota and two scrap collection and<br />
processing units located in Iowa and Minnesota.<br />
Throughout the year, <strong>Gerdau</strong> Ameristeel also increased the<br />
supply of products with higher value added by acquiring 12<br />
fabricated reinforcing steel facilities in the United States. Of<br />
these, six were owned by Potter Form & Tie Co. and another<br />
six by Gate City Steel and RJ Rebar. The investment created<br />
synergy with the North Star Steel industrial plants due to<br />
the proximity of the units.<br />
In South America, the <strong>Gerdau</strong> Group entered into yet another<br />
country: Colombia. It formed a strategic alliance to become<br />
the controlling shareholder of the Diaco Group in a process<br />
of staggered acquisition of the shares held by the Mayagüez<br />
Group and The Latinamerican Enterprise Steel Holding. The<br />
transaction involved two steel mills – a profile and rebar<br />
producer and a specialty steel producer – three rolling<br />
units and a fabricated reinforcing steel facility. The initial<br />
investment for this project was US$ 68.5 million. In 2005,<br />
the <strong>Gerdau</strong> Group will become the owner of 59.8% of the<br />
Diaco Group’s capital stock, making it the largest long steel<br />
producer in Colombia. In addition, the <strong>Gerdau</strong> units in Chile,<br />
Uruguay and Argentina received US$ 10.3 million to upgrade<br />
their facilities.<br />
The Group invested US$ 325.6 million in Brazil in <strong>2004</strong>.<br />
Nearly a third of this value, US$ 100.2 million, was used to<br />
expand the Ouro Branco mill (state of Minas Gerais). The<br />
Group also invested US$ 77.9 million in the construction<br />
of the <strong>Gerdau</strong> São Paulo (state of São Paulo) mill. Another<br />
highlight was the modernization of <strong>Gerdau</strong> Cosigua (Rio de<br />
Janeiro), involving investments of US$ 21.0 million.<br />
THE NORTH STAR STEEL MILL IN CALVERT CITY, KENTUCKY, U.S.A.,<br />
JOINED THE GERDAU GROUP AT THE END OF <strong>2004</strong><br />
THE TUTA UNIT, A SHAPE AND REBAR PRODUCER IN COLOMBIA,<br />
IS ONE OF THE INDUSTRIAL PLANTS IN THE ALLIANCE WITH THE<br />
DIACO GROUP
Investment program for the coming years<br />
The <strong>Gerdau</strong> Group will invest US$ 3.2 billion in the Americas through 2007.<br />
The largest part, equal to US$ 2.4 billion, is planned for operations in Brazil.<br />
The Group’s installed steel production capacity in Brazil will grow by 4.1 million<br />
metric tons (+55%) over a three-year period, from 7.6 million metric tons to<br />
11.7 million metric tons per year.<br />
The units in North America will receive US$ 740 million and the facilities located<br />
in Argentina, Chile and Uruguay, US$ 60 million.<br />
Key projects in Brazil<br />
<strong>Gerdau</strong> São Paulo (state of São Paulo): The construction of the new rebar<br />
production unit for civil construction is in its final phase (see box “Countdown<br />
in São Paulo”).<br />
<strong>Gerdau</strong> Aços Especiais Rio (state of Rio de Janeiro): A new specialty steel mill will<br />
be constructed and is scheduled to start operations in 2007. Designed to serve<br />
the automotive industry, it will have an annual installed capacity of 800,000<br />
metric tons of steel and 500,000 metric tons of rolled products.<br />
<strong>Gerdau</strong> Açominas – Ouro Branco (state of Minas Gerais): The annual capacity<br />
of the mill will increase from 3 million metric tons to 4.5 million metric tons in<br />
2007. The Ouro Branco investment program also includes an additional phase<br />
for expansion of this facility. The studies relating to this second phase will begin<br />
after the conclusion of the current investment.<br />
<strong>Gerdau</strong> Usiba (state of Bahia): By 2007, the investment program will expand<br />
the mill’s annual capacity to approximately 640,000 metric tons per year. The<br />
program also involves an increase in the rolling mill capacity during the period.<br />
<strong>Gerdau</strong> Aços Especiais Piratini (Rio Grande do Sul): The production capacity of<br />
rolled products for the automotive industry will increase from 390,000 metric<br />
tons per year to 500,000 metric tons per year before the end of 2005.<br />
<strong>Gerdau</strong> Cearense (state of Ceará): A 50% increase in the annual production<br />
of rolled products, from 100,000 metric tons to 150,000 metric tons, will be<br />
achieved ahead of schedule in 2005. Increasing productivity in the industrial<br />
area and the quality of products destined for civil construction and industry is<br />
part of the investment program.<br />
<strong>Gerdau</strong> Riograndense (Rio Grande do Sul): In 2006, improvements in the melt<br />
shop processes will create an additional production capacity of 60,000 metric<br />
tons of steel per year, reaching approximately 560,000 metric tons.
42 43 i n v e s tm e n t s<br />
Countdown in São Paulo<br />
CONSTRUCTION WORK AT THE<br />
STEEL MILL IN ARAÇARIGUAMA<br />
(STATE OF SÃO PAULO)<br />
The <strong>Gerdau</strong> Group steel mill in São Paulo is set to start operations in July 2005. The rolling<br />
phase, when steel is transformed into the final product, is scheduled to begin in 2006. The<br />
R$ 750 million investment will be applied in two stages. The first, which is scheduled for<br />
completion in two years, involves an investment of R$ 500 million. In the second stage,<br />
R$ 250 million will be invested.<br />
Located in Araçariguama – 50 kilometers away from the capital of São Paulo – the unit<br />
will have a total annual installed capacity of 1.3 million metric tons of steel and 1.2 million<br />
metric tons of rebar for the civil construction sector. In the first phase, the melt shop will<br />
have an annual installed capacity of 900,000 metric tons of steel, while the rolling mill<br />
will have an annual installed capacity of 600,000 metric tons of rebar. The concept of<br />
ecoefficiency was a highlight of the project with the installation of the most modern<br />
technologies to protect the water, air and soil.
Social<br />
Commitment to the development of<br />
employees and communities<br />
People and Teams<br />
People management<br />
Attracting talent<br />
Training and development<br />
Total workplace safety<br />
Benefits<br />
Career management and succession<br />
Organizational climate<br />
Community<br />
Social highlights<br />
46<br />
51
People and Teams<br />
Teams that add value to the business<br />
More than 24,000 people work for the <strong>Gerdau</strong> Group. Regardless<br />
of nationality, they work together toward the same objective and<br />
strategy: consolidate the <strong>Gerdau</strong> Group as an international, worldclass<br />
company.<br />
They share values and knowledge by combining technical, industrial<br />
and commercial expertise and integrating the best aspects of each<br />
business operation.<br />
They also search the market for the most efficient examples of<br />
management, performing global benchmarking research, even in<br />
other sectors of the economy. All of these actions are designed<br />
to add value to the business through teams and leaders who are<br />
committed to outstanding performance. We know, however, that<br />
this is not a short term job. We therefore continuously invest in the<br />
development of our professionals, in attracting talent and in the<br />
quality of life of employees and their families.<br />
People management<br />
To keep people motivated, the <strong>Gerdau</strong> Group challenges its<br />
employees to surpass limits and become the leaders of change. The<br />
goals are established by teams and managers together, reinforcing<br />
the spirit of team work and the feeling that each individual is<br />
responsible for results (see box “Participative management”).<br />
Outstanding performance is recognized and rewarded through<br />
various compensation programs based on results.<br />
Another important tool used to increase motivation is internal<br />
communication, which encourages the involvement of people<br />
in the Group’s challenges and the feeling of belonging to the<br />
organization. These practices favor the construction of a long-term<br />
bond based on mutual respect.<br />
Attracting talent<br />
The <strong>Gerdau</strong> Group works continuously to develop future leaders<br />
and attract talents from the market. The emphasis on developing<br />
leaders is reflected in its program for interns and trainees. Over<br />
1,200 youth work side-by-side with experienced professionals<br />
absorbing new knowledge and quickly becoming prepared to take<br />
on new responsibilities.
46 47 People and teams<br />
The Group also searches for developed professionals that can contribute<br />
immediately to the business. Another important program is strategic<br />
recruiting, which <strong>Gerdau</strong> uses to seek senior level professionals to fill<br />
strategic positions.<br />
Distribution by Region - 24,148 Employees<br />
BRAZIL<br />
Training and development<br />
The <strong>Gerdau</strong> Group has a specific leadership program that is designed<br />
to improve the efficiency of team management and achieve world-class<br />
performance. One of the subjects addressed is coaching, which develops<br />
each team’s potential to achieve superior results.<br />
CANADA AND<br />
THE UNITED STATES<br />
ARGENTINA, CHILE<br />
AND URUGUAY<br />
3.7%<br />
29.8%<br />
66.5%<br />
The Group also offers full scholarships for MBA and MS programs at the<br />
world’s top educational institutions. Another way of expanding the global<br />
vision of its employees is through intellectual and cultural exchange<br />
within Group operations. This program fosters the <strong>Gerdau</strong> culture and<br />
Participative management<br />
The <strong>Gerdau</strong> Group has developed programs to encourage self-management<br />
among employees for nearly 10 years. Through the Operator-Focused<br />
Management Program, the professionals themselves are responsible for<br />
the performance of their cells (teams organized by process in the industrial<br />
operation). The program gives operators greater autonomy and also reduces<br />
hierarchical levels, while increasing the transparency of communication.<br />
Cell management is shared with operators. As part of an annual rotation<br />
process, they take on the control of processes such as safety, maintenance,<br />
environment and costs in addition to the continued exercise of their normal<br />
daily activities. In Brazil, approximately 30% of the industrial unit employees<br />
perform this type of role. In this way, the leaders can more effectively<br />
perform their important function of managing and developing teams.<br />
By receiving more information and participating in the management of<br />
their cell, operators are encouraged to suggest improvements. This process<br />
is happening in all <strong>Gerdau</strong> units. These are simple proposals that reduce<br />
costs. Take the example of <strong>Gerdau</strong> Riograndense (state of Rio Grande do<br />
Sul). Based on the suggestion of an employee, the unit was able to reduce<br />
the use of a raw material and achieve an annual saving of R$ 100,000.<br />
With participative management, the teams become more autonomous,<br />
responsible, proactive and knowledgeable of the processes. The results<br />
are reflected in the <strong>Gerdau</strong> Group performance and in the satisfaction of<br />
employees, who are able to manage their own professional success.<br />
GERDAU CEARENSE (STATE OF CEARÁ) EMPLOYEES<br />
PARTICIPATE IN THE SELF-MANAGEMENT PROGRAM
7<br />
5<br />
3<br />
1<br />
Workplace Safety<br />
(total frequency rate*)<br />
4.4 4.1<br />
2003 <strong>2004</strong><br />
* Accident frequency rates with time loss per<br />
million man hours worked (includes employees<br />
and service providers).<br />
the best practices adopted at the different units (see box “A bridge between<br />
the Americas”). Each year, <strong>Gerdau</strong> Group employees undertake missions to learn<br />
management practices by visiting different units. In addition, more than 40<br />
professionals work outside their country of origin.<br />
Total workplace safety<br />
For the <strong>Gerdau</strong> Group, no emergency situation, production requirement or result<br />
can justify safety risks for our employees or service providers. It is for this reason<br />
that the Total Safety System exists. It involves a strict set of practices that are<br />
currently shared by all units and it operates on three major fronts:<br />
1. Development of the Zero Accident culture by engaging the leadership and<br />
involving all professionals. This work is performed through continuous awareness<br />
raising, training and team involvement.<br />
2. Use of safety management methodologies to benchmark against international<br />
standards: The methodology is based on the structuring of a system that<br />
guarantees the safety of people through preventive actions. Dozens of practices<br />
are evaluated using this system, ranging from leadership and administration<br />
to critical task analysis and procedures, preparation for emergencies, individual<br />
protection equipment, health control, industrial hygiene and even off job safety.<br />
A bridge between the Americas<br />
The <strong>Gerdau</strong> Group constructed bridges of knowledge connecting<br />
the employees of its units in the Americas. Each year, different<br />
groups of professionals exchange experiences with colleagues<br />
from other countries, seeking to learn about new cultures, improve<br />
management practices and achieve increased operational results.<br />
It is an opportunity to learn about the <strong>Gerdau</strong> Management<br />
System and its practical application. It also works as an internal<br />
benchmarking method, since the group visits help facilitate dialogue<br />
between employees, who learn to speak the same management<br />
language and adopt similar practices.<br />
These employees, in turn, share information within their own<br />
units (the multiplier effect). The exchange is an opportunity to<br />
internationalize professionals, who are able to have contact with<br />
the different cultures and practices adopted by their colleagues in<br />
other countries.<br />
U.S. EMPLOYEES VISIT A UNIT IN BRAZIL
48 49 People and teams<br />
3. Investment in new protection materials and industrial equipment in addition<br />
to the modernization of existing equipment.<br />
All of this work is audited periodically by an external consulting firm and<br />
internal teams. Both evaluate the strong points and areas for improvement<br />
in the system, and each unit elaborates action plans, thereby promoting the<br />
continuous improvement of safety practices.<br />
Benefits<br />
The <strong>Gerdau</strong> Group benefits program is designed to contribute to the quality of<br />
life of employees and their families. It is adjusted based on the local markets,<br />
laws and business operations.<br />
Career management and succession<br />
The <strong>Gerdau</strong> Group encourages the professional growth of employees in the<br />
organization, preparing them to occupy strategic positions by means of<br />
development programs. Individual development plans are designed together<br />
with the professionals, with goals and the evaluation of results to help employees<br />
achieve their professional aspirations and meet operational demands.<br />
We take pride<br />
Pride to work for the <strong>Gerdau</strong> Group. This is the feeling that<br />
inspires the majority of employees from all units. The 370<br />
professionals that work in Chile for <strong>Gerdau</strong> AZA are among<br />
the most satisfied to work for the Group. The perception<br />
was confirmed by an opinion poll performed in <strong>2004</strong>. Over<br />
92% of all employees said they were happy to be working at<br />
the unit. The favorability index, which counts the number<br />
of positive results in relation to the total number of poll<br />
questions, was also impressive: 79.7%. The rate is the highest<br />
among all operations in the Americas. In the poll, employees<br />
emphasized factors such as safety, work stability and good<br />
relations with the leadership and other colleagues, in<br />
addition to the availability of training.<br />
AN EMPLOYEE’S CHILD VISITS GERDAU AZA IN CHILE
Organizational climate<br />
Each year, the <strong>Gerdau</strong> Group performs an opinion poll with employees to evaluate whether<br />
people management practices are meeting the expectations of professionals and generating<br />
the desired results. In <strong>2004</strong>, over 85.5% of the professionals in the Americas participated in<br />
the poll, and 79.9% stated that they were happy to be working for the <strong>Gerdau</strong> Group (see box<br />
Staff <strong>2004</strong> 2003<br />
EMPLOYEES 24,148 20,160<br />
OUTSOURCING 9,468 8,852<br />
TRAINEES AND INTERNS 1,241 908<br />
DEPENDENTS 41,259 36,517<br />
NUMBER OF WOMEN WHO WORK AT THE COMPANY 1,657 N.A. 1<br />
% OF LEADERSHIP POSITIONS OCCUPIED BY WOMEN 10.9 N.A. 1<br />
% OF EMPLOYEES OVER 45 YEARS OLD 29.0 32.1<br />
AVERAGE TIME WITH THE COMPANY (IN YEARS) 12.0 10.2<br />
Training and development <strong>2004</strong> 2003<br />
INVESTMENTS (MILLION R$) 28.0 22.7<br />
TOTAL NUMBER OF TRAINING HOURS (MILLION) 2 1.5 N.A. 1<br />
NUMBER OF TRAINING HOURS PER EMPLOYEE 2 89 N.A. 1<br />
Workplace safety <strong>2004</strong> 2003<br />
INVESTMENTS (MILLION R$) 16.2 11.2<br />
Benefits <strong>2004</strong> 2003<br />
MEALS (MILLION R$) 33.4 24.3<br />
TRANSPORTATION (MILLION R$) 33.7 24.6<br />
PROFIT SHARING (MILLION R$) 283.6 249.4<br />
HEALTH (MILLION R$) 161.7 100.8<br />
PRIVATE PENSIONS (MILLION R$) 96.1 46.6<br />
1. Not available<br />
2. Does not include <strong>Gerdau</strong> Ameristeel data
50 51 c o m m u n i t y<br />
JUNIOR ACHIEVEMENT<br />
PARTICIPANTS: AN<br />
INTERNATIONAL PROJECT<br />
SUPPORTED BY THE GERDAU<br />
GROUP THAT TEACHES<br />
ENTREPRENEURIAL PRACTICES<br />
TO MORE THAN 4 MILLION<br />
YOUTH AROUND THE WORLD<br />
Community<br />
Building a more just world<br />
The sustainability of the <strong>Gerdau</strong> Group is not only found in its<br />
business management, the efficiency of its employees and in the<br />
protection of the environment but it also extends beyond the<br />
walls of its facilities, because business success is directly linked<br />
to the development of communities. It is for this reason that<br />
the <strong>Gerdau</strong> Group supports social initiatives in all the countries<br />
where it operates. They are projects that primarily encourage the<br />
dissemination of knowledge, maximizing the ability of people to<br />
transform and generating an environment of growth near the<br />
<strong>Gerdau</strong> Group facilities.<br />
This focus on social action translates into more than 100 programs<br />
supported by the <strong>Gerdau</strong> Group. In <strong>2004</strong>, these programs involved<br />
R$ 36.5 million in resources and benefited more than 6.5 million<br />
people in the Americas. Since 2005, the management of these<br />
initiatives was handed over to a dedicated structure: the <strong>Gerdau</strong><br />
Institute. The <strong>Gerdau</strong> Institute was created to consolidate the<br />
Group’s policies and guidelines in the area of social responsibility<br />
and coordinate projects that contribute even further to improving<br />
quality of life. It also seeks to engage and encourage partnerships<br />
with other public and private organizations in an effort to optimize<br />
resources and multiply the results of social actions. The institute<br />
promotes volunteer work among its employees, encouraging their<br />
commitment to solving society’s challenges.<br />
The <strong>Gerdau</strong> Group also makes investments to ensure that the<br />
projects become self-sustainable, both from a financial point of<br />
view and in terms of management capacity. This requires satisfied<br />
people with a good quality of life both inside and outside the<br />
company.
Social highlights<br />
Some activities developed in <strong>2004</strong><br />
A fund for social action<br />
In Brazil, an initiative of the <strong>Gerdau</strong> Group has served as a<br />
model for other companies, entities and governments: the<br />
<strong>Gerdau</strong> Professionals Pro-Childhood Fund, a project that<br />
raises the awareness of employees about donating resources<br />
to charitable entities, focused on assisting underprivileged<br />
youth. Created five years ago, the fund raises resources<br />
through tax-deductible donations. Employees use an<br />
Intranet system to select how much they want to contribute<br />
and to which project. Last year alone, the fund received over<br />
R$ 4.6 million in donations, with contributions from both<br />
the Group and its employees. The funds were used to directly<br />
assist approximately 19,000 children and adolescents from<br />
101 Brazilian entities located in 34 cities. The Pro-Childhood<br />
Movement was one of them. It is a non-profit organization<br />
that uses art and education to promote the inclusion of 810<br />
needy boys and girls from the Metropolitan Region of Recife<br />
(state of Pernambuco).<br />
THE GERDAU PROFESSIONALS PRO-CHILDHOOD FUND<br />
CONTRIBUTES TO THE SOCIAL INCLUSION OF BOYS<br />
AND GIRLS IN RECIFE (STATE OF PERNAMBUCO)<br />
The recipe that works<br />
The Prato Popular program brings meals and social<br />
engagement to needy communities in Brazil. At the end<br />
of 2003, the <strong>Gerdau</strong> Group started its first low-income<br />
restaurant in the State of Rio Grande do Sul near the <strong>Gerdau</strong><br />
Riograndense mill. Since then, two other restaurants have<br />
been opened to the public, one in the city of Charqueadas<br />
(state of Rio Grande do Sul) and another in Maracanaú<br />
(Ceará). Some 3,500 people have access to the meals<br />
subsidized by the Group with the initiative. Besides a<br />
balanced meal, the communities assisted began to use the<br />
space as a community center that offers courses and lectures<br />
with themes of social interest (such as alcoholism and drugs)<br />
as well as hairdressing and dental hygiene sessions.<br />
THE PRATO POPULAR RESTAURANT ASSISTS SOME<br />
3,500 PEOPLE IN BRAZIL
52 53 c o m m u n i t y<br />
Champions of the future<br />
<strong>Gerdau</strong> AZA is committed to the future of sports in Chile.<br />
To encourage the development of champions, the Group<br />
grants one scholarship each year to a talented athlete with<br />
low income. The candidates are chosen by a team comprised<br />
of athletes, specialized technicians and sports journalists.<br />
The selection criteria are technical skill, the level of the<br />
tournaments competed in, results obtained in competitions<br />
during the year, family income and school performance.<br />
Last year, 42 athletes competed for a scholarship of over<br />
R$ 20,000 to fund their training during the year. The resources<br />
are used to improve the quality of the athlete’s training,<br />
meals, transportation and study. The award can be extended<br />
for one more year if the athlete is successful in his or her<br />
competitions. This was the case of the Judo fighter Erwin<br />
Guzmán Pino, who won the <strong>2004</strong> scholarship and will have<br />
it extended through 2005.<br />
JUDO FIGHTER ERWIN GUZMÁN PINO RECEIVES THE<br />
GERDAU AZA SCHOLARSHIP IN CHILE<br />
Holding hands with the community<br />
The social priority of Sipar, the rolling mill located in<br />
Argentina, is to work together with the institutions and<br />
population of Pérez, a city of 22,000 people. The <strong>Gerdau</strong> Group<br />
currently has a 38.2% equity investment in Sipar. Among the<br />
unit’s community actions, we highlight its support for public<br />
service providers, such as the police and firefighters, and City<br />
Hall, in addition to the maintenance of a public square and<br />
cycle lane. The company also contributes to the development<br />
of local schools and charitable entities, such as the Red Cross,<br />
Liga de Ayuda contra el Cáncer (League in the Fight Against<br />
Cancer - Lalcec), Ilar, an institution created to rehabilitate<br />
people with special needs and Asociación Rosarina de Lucha<br />
contra la Poliomelitis (Association in the Fight Against<br />
Poliomyelitis - ARLPI).<br />
SIPAR, IN ARGENTINA, INTEGRATES<br />
EMPLOYEES, FAMILY MEMBERS AND THE<br />
COMMUNITY OF PÉREZ
From work to school<br />
<strong>Gerdau</strong> Laisa brings the philosophy of total quality to the<br />
schools of Uruguay. The 5S at School project promotes<br />
environmental management improvements at the six<br />
teaching institutions located near the mill. The efforts are<br />
focused on the fifth and sixth grade classes, with children<br />
between the ages of 10 and 11. In <strong>2004</strong>, 540 boys and girls<br />
attended lectures on industry, quality and 5S. They received<br />
the booklets “5S at School” and “5S in the Backpack” and<br />
learned to put the organizational rules of this management<br />
tool to practice. <strong>Gerdau</strong> Laisa also contributes to improving<br />
the infrastructure of the schools involved, an activity that<br />
benefits 4,200 students.<br />
URUGUAYAN STUDENTS RECEIVE BACKPACKS FROM THE<br />
5S AT SCHOOL PROGRAM PROMOTED BY GERDAU LAISA<br />
Children with wings<br />
NIÑOS CON ALAS BRINGS NEEDY CHILDREN FROM<br />
URUGUAY A NEW PERSPECTIVE ON LIFE<br />
Niños con Alas (Children with Wings) is a program that<br />
transforms the lives of low income children in Uruguay. The<br />
project is organized by a non-governmental organization<br />
with the same name that since 2001 has received the<br />
support of <strong>Gerdau</strong> Laisa, a mill located in the capital city<br />
of Montevideo. With the program, individuals and private<br />
companies sponsor children for a period of six years, offering<br />
them a brighter future. The sponsored children receive<br />
balanced meals and high quality education in a private<br />
teaching institution and participate in extracurricular<br />
activities such as foreign language classes and sports. In<br />
addition to receiving school materials and a uniform, they<br />
also receive a yearly tuition from <strong>Gerdau</strong> Laisa, which appoints<br />
an employee to follow the child’s progress. This professional<br />
delivers the donations and also takes the sponsored child<br />
to see movies, plays, and have fun in amusement parks. The<br />
program helps rescue the citizenship of school-aged boys<br />
and girls, giving them the best development opportunities.
54 55 c o m m u n i t y<br />
House of hope<br />
The home of Maria Andrews and her five children is made<br />
of <strong>Gerdau</strong> Ameristeel material and the effort of Cartersville<br />
unit employees in the United States. The U.S. citizen is one<br />
of the individuals who received aid through the Habitat<br />
for Humanity program, which provides job opportunities<br />
and housing to families experiencing financial difficulties.<br />
<strong>Gerdau</strong> Ameristeel, in addition to construction tools and<br />
materials, provides volunteer work of nearly 50 employees<br />
who dedicated more than 1,000 hours of their free time<br />
to the project. Many of these individuals spent less time<br />
with their own families so that Maria Andrews and her<br />
children would have a home by Christmas, <strong>2004</strong>. They<br />
were able to deliver a four-bedroom house at half the<br />
cost of a conventional project. The savings were possible<br />
through the use of materials donated by sponsors, such as<br />
<strong>Gerdau</strong> Ameristeel, and through the volunteer labor of the<br />
Cartersville steel mill employees. The North American units<br />
stand out for their community work. Last year alone, more<br />
than 2,000 <strong>Gerdau</strong> employees became involved in social<br />
initiatives in Canada and the United States.<br />
VOLUNTEER WORK ENGAGES GERDAU AMERISTEEL<br />
CARTERSVILLE EMPLOYEES IN THE UNITED STATES<br />
Running for life<br />
<strong>Gerdau</strong> Ameristeel employees in Cambridge, Canada, made<br />
running a doubly healthy habit. In addition to their own personal<br />
development, the employees are also fostering the health of the<br />
community. In Canada, various campaigns promote physical<br />
activities as fundraising events for hospitals and cancer prevention<br />
foundations. Roxane Beyette, quality control coordinator at the<br />
<strong>Gerdau</strong> Ameristeel Cambridge mill, participated in the Weekend to<br />
End Breast Cancer in September <strong>2004</strong>. Besides walking 60 kilometers<br />
(about 37 miles), Beyette and her mother Kathy cultivated seasonings<br />
and made candies, which were sold before the walk at locally-held<br />
parties. Beyette earned Cdn$ 2,000 with the initiative. Bruno Manella,<br />
another <strong>Gerdau</strong> employee, was even more creative: he had his hair<br />
cut off in order to raise money for the campaign. He auctioned off<br />
the opportunity to cut his hair to his colleagues. With initiatives such<br />
as this one, more than 4,500 participants raised Cdn$ 14.7 million for<br />
the prevention and treatment of breast cancer. A team from the unit<br />
also participated in “Run for the Cure,” a different campaign. The<br />
event occurs at the same time in 40 different Canadian cities and<br />
benefits the Canadian Breast Cancer Foundation.<br />
ROXANE BEYETTE (TO THE RIGHT),<br />
QUALITY CONTROL COORDINATOR AT<br />
GERDAU AMERISTEEL CAMBRIDGE IN<br />
CANADA AND HER MOTHER KATHY<br />
WORKED HARD IN THE CAMPAIGN TO<br />
FIGHT BREAST CANCER
The<br />
Environment<br />
Ecoefficient practices to protect<br />
the air, water and soil<br />
Environmental Management System<br />
Environmental Performance<br />
Raw materials<br />
Water<br />
Air<br />
Soil<br />
Energy<br />
Biodiversity<br />
Education for the Environment<br />
58<br />
59<br />
62
Environmental<br />
Management System<br />
<strong>Gerdau</strong> units follow world-recognized<br />
standards<br />
Protect the environment with future generations in mind. This is<br />
a daily concern for the <strong>Gerdau</strong> Group, which produces thousands<br />
of metric tons of steel per year with a commitment to reducing<br />
the environmental impact of its operations. It is also expressed<br />
in its environmental policy, elaborated based on the international<br />
ISO 14001 standard and enforced by its 24,000 employees.<br />
The environmental management system involves the analysis of<br />
over 13,000 industrial processes along the entire production line,<br />
from raw material collection to steel distribution. It translates<br />
the principles of the <strong>Gerdau</strong> Group into well-defined rules and<br />
objectives that enable the analysis of air, water and soil protection<br />
Distribution of Investment in the Environment by<br />
Geographic Region - US$ 25 million in <strong>2004</strong><br />
BRAZIL<br />
10.3%<br />
CANADA AND<br />
THE UNITED STATES<br />
CHILE AND URUGUAY<br />
31.8%<br />
57.9%<br />
Distribution of Investment in the Environment by<br />
Subject - US$ 25 million in <strong>2004</strong><br />
AIR<br />
WATER<br />
SOIL<br />
ISO 14001<br />
VARIOUS<br />
2.5%<br />
3.6%<br />
20.2%<br />
14.0% 59.7%
58 59 environmental management<br />
measures – fundamental for the continued achievement of increased<br />
ecoefficiency rates. This monitoring gives the Group a detailed view of<br />
the impacts that each activity has on nature – no matter how small – and<br />
allows it to develop projects to improve the performance of the units.<br />
The environmental management system also directly engages employees<br />
by encouraging them to send suggestions via the Intranet, thereby<br />
increasing their commitment to the results obtained.<br />
Environmental<br />
Performance<br />
Technologies ensure outstanding performance<br />
Raw materials<br />
Reuse is currently one of the best ways of guaranteeing the sustainability<br />
of our planet. For the <strong>Gerdau</strong> Group, this is more than a principle because<br />
recycling is actually part of the business: approximately 65% of the<br />
production in the Americas requires iron scrap. The recycling effort is also<br />
present at the end of the industrial process – 66.2% of the by-products<br />
generated are reused by other economic segments, reducing the use of<br />
natural resources.<br />
Water<br />
The <strong>Gerdau</strong> Group does its part to preserve water resources. Currently,<br />
96.7% of processed water from its units is reused, drastically reducing<br />
the need for collection. This rate results from a set of important practices,<br />
especially recirculation. This process collects the industrial water and<br />
recycles it in the production process. This means that only 3.3% of the<br />
water used in steel production is collected from the rivers. This collection<br />
is necessary because approximately 1.8% of the water used evaporates<br />
and 1.5% returns to the rivers after being treated inside the mills.<br />
Another initiative involves the capture of rain water through rainwater<br />
collection systems that are currently being modernized or expanded.<br />
SYSTEMS FOR PROCESS WATER TREATMENT AND RECIRCULATION<br />
ARE PRESENT IN ALL GERDAU STEEL MILLS<br />
By-product Disposal<br />
3.8 million metric tons<br />
REUSED<br />
BY-PRODUCTS 1<br />
2.5 MILLION<br />
NON RE-USED<br />
BY-PRODUCTS 2<br />
1.3 MILLION<br />
33.8%<br />
66.2%<br />
1. Secondary products of the industrial process reused or recycled either<br />
internally or externally.<br />
2. Secondary products of the industrial process stored in deposits specifically<br />
designed for this purpose.
In <strong>2004</strong>, the <strong>Gerdau</strong> Group invested US$ 3.5 million in actions<br />
designed to preserve water resources.<br />
Water Consumption - 1.5 billion m 3<br />
CAPTURED WATER<br />
3.3%<br />
RECIRCULATED<br />
WATER<br />
96.7%<br />
Air<br />
Maintaining air quality is a <strong>Gerdau</strong> Group priority. In <strong>2004</strong>, it<br />
was the area that most received investments (US$ 14.9 million),<br />
ranging from the technological upgrading of dust filtration<br />
systems to improvements in the melt shop furnaces, also designed<br />
to improve air quality. The dust removal systems are technologies<br />
developed to efficiently capture the solid particles emitted during<br />
the steel production process and are based on world-recognized<br />
best practices. Another measure is the use of natural gas as a<br />
substitute for oil in heating processes. This effort is in line with the<br />
Kyoto Protocol as it reduces greenhouse gas emissions. The Group’s<br />
carbonic gas emission rate per metric ton of steel produced was<br />
550 kilograms, as determined by the IPCC Guidelines for National<br />
Greenhouse Gas Inventories, a world reference for the indicator.<br />
The number represents the average consolidated emission rate of<br />
the <strong>Gerdau</strong> Group – including market and integrated mills. That<br />
means that the Group’s average is much lower than the worldwide<br />
average of 1.6 tons for the sector, according to 2003 data supplied<br />
by the International Iron and Steel Institute (IISI).<br />
Soil<br />
Care for the soil is also a concern for the <strong>Gerdau</strong> Group, involving<br />
continuous investments in improving storage conditions that<br />
translate into increasingly safer practices for raw material, product<br />
and by-product stocking.
60 61 environmental performance<br />
Energy<br />
The steelmaking sector is known for its intensive use of energy. For this reason,<br />
the management of this resource is a permanent concern. Although the Group’s<br />
total energy consumption has grown, the specific consumption necessary for the<br />
production of steel fell, showing increased efficiency in the use of this input.<br />
Energy Consumption <strong>2004</strong><br />
7<br />
5<br />
3<br />
Electricity Consumption<br />
(million MWh)<br />
6.4<br />
7.0<br />
OXYGEN (in Nm 3 ) 794,654,254<br />
NATURAL GAS (in Nm 3 ) 662,312,728<br />
DIESEL FUEL (in l) 6,246,022<br />
LUBRICANTS AND GREASES (kg) 1 2,656,484<br />
1. Does not include data from <strong>Gerdau</strong> Ameristeel and <strong>Gerdau</strong> AZA.<br />
1<br />
2003 <strong>2004</strong><br />
Biodiversity<br />
The maintenance of green belts around the steel mills represents a commitment<br />
to nature and to the quality of life of the community. The <strong>Gerdau</strong> Group dedicates<br />
8,000 hectares of its total area of 16,900 hectares for the preservation of green<br />
areas. Of this total, 5,500 hectares are set apart for the preservation of native<br />
forest to protect the local ecosystems.<br />
700<br />
500<br />
300<br />
Specific Consumption of Electricity<br />
(KWh per metric ton of steel produced)<br />
541.7 522.5<br />
100<br />
2003 <strong>2004</strong><br />
Chilean students receive the recycling scrap! guide<br />
The first school guide on scrap recycling was published<br />
in Chile in <strong>2004</strong> by <strong>Gerdau</strong> AZA together with the nongovernmental<br />
organization Casa de la Paz (House for<br />
Peace). The material is directed at elementary and high<br />
school teachers and is designed to promote the inclusion<br />
of the topic into different curriculum subjects. In addition<br />
to information about the steelmaking sector, in which<br />
scrap is a major raw material, the guide proposes a series<br />
of activities to be developed in the classroom: teachers<br />
and students can have a hands-on experience about the<br />
importance of scrap recycling for the preservation of the<br />
environment. What’s more, <strong>Gerdau</strong> AZA sets an example by<br />
producing 100% of its steel from scrap.<br />
The 1,500 copies of the guide’s first edition were given out<br />
in less than three months. The material was distributed at<br />
various schools in the Metropolitan Region of Santiago and<br />
forwarded to the National Environmental Commission and<br />
environmental organizations. The next edition is currently<br />
being prepared for distribution in 2005.<br />
BOOKLET TEACHES ELEMENTARY AND HIGH SCHOOL STUDENTS IN CHILE ABOUT RECYCLING
Education for<br />
the Environment<br />
Encouraging ecological awareness<br />
Care with the water, air, soil and green areas depends on<br />
the awareness of employees and the community. This is<br />
why environmental education actions are fundamental<br />
for preserving natural resources and have been receiving<br />
increasing attention. In <strong>2004</strong>, more than 50,000 people,<br />
including employees, service providers and community<br />
members participated in events such as lectures and courses<br />
designed to encourage the preservation of nature.<br />
The Group increased the number of employee training hours<br />
in the environment more than eight fold in relation to the<br />
previous year. For the external public, the Group increased<br />
the number of training hours by 26.1%. In all, <strong>Gerdau</strong> Group<br />
professionals and the community had over 300,000 hours of<br />
training in ways to preserve the environment.<br />
Promoting awareness on environmental issues is also a<br />
way of encouraging the sustainable development of the<br />
regions where the <strong>Gerdau</strong> Group has units and establishing<br />
a commitment with customers, shareholders, suppliers and<br />
the community.<br />
100<br />
70<br />
40<br />
10<br />
Hours of Environmental<br />
Training - Employees<br />
(thousand hours)<br />
9<br />
80<br />
2003 <strong>2004</strong><br />
250<br />
200<br />
150<br />
100<br />
50<br />
Hours of Environmental<br />
Training - Community<br />
(thousand hours)<br />
177<br />
224<br />
2003 <strong>2004</strong>
62 63 education FOR THE environment<br />
ISO 14001 mobilizes employees<br />
The <strong>Gerdau</strong> Group has a priority goal in environmental management: to<br />
obtain the ISO 14001 certification for its 26 steel mills. The mission involves<br />
employees from various units in the Americas. <strong>Gerdau</strong> AZA in Chile and<br />
<strong>Gerdau</strong> Ameristeel Cambridge in Canada already have been awarded this<br />
recognition of good environmental practices. In Brazil, <strong>Gerdau</strong> Açominas<br />
– Ouro Branco (state of Minas Gerais), <strong>Gerdau</strong> Cosigua (Rio de Janeiro)<br />
and <strong>Gerdau</strong> Aços Especiais Piratini (Rio Grande do Sul) have obtained the<br />
certification. These three units account for more than 60% of the Group’s<br />
capacity in the country.<br />
The ISO 14001 standard was created to help companies identify, prioritize<br />
and manage environmental risks as part of their daily practices. To obtain<br />
this recognition, the <strong>Gerdau</strong> Group implemented the Campaign for ISO<br />
14001 Certification in Brazil to encourage employees, service providers<br />
and partner companies from the units to improve their environmental<br />
management practices.<br />
COUNTER-CLOCKWISE: OBTAINING THE CERTIFICATION IS A<br />
SOURCE OF PRIDE FOR EMPLOYEES FROM GERDAU COSIGUA<br />
(STATE OF RIO DE JANEIRO), GERDAU AÇOMINAS – OURO<br />
BRANCO (MINAS GERAIS) AND GERDAU AÇOS ESPECIAIS<br />
PIRATINI (RIO GRANDE DO SUL)
Steel Production<br />
Find out how steel is produced at <strong>Gerdau</strong> facilities<br />
Integrated<br />
Mills<br />
Iron Ore Blast Furnace Converter<br />
Ladle<br />
Market<br />
Mills<br />
Steel<br />
Scrap<br />
Electric Arc<br />
Furnace<br />
Ladle Furnace<br />
Pig Iron<br />
Nail<br />
Machine<br />
Drawn<br />
Wire<br />
Drawing<br />
Unit<br />
Welding<br />
Manufacturing<br />
Process<br />
Galvanizing<br />
Unit<br />
Nails<br />
Welding Wires<br />
and Wires for Electrodes<br />
Barbed<br />
Wire<br />
Oval-Shaped<br />
Wire<br />
Galvanized<br />
Wire<br />
CA-60<br />
Rebar<br />
Annealed<br />
Wire
64 65 steel production<br />
Raw Material<br />
Melt Shop<br />
Rolling<br />
Drawing<br />
Nail Factory<br />
<strong>Gerdau</strong> Products<br />
Ladle<br />
Billets<br />
Reheating<br />
Furnace<br />
Continuous<br />
Caster<br />
Wire Rod<br />
Laying<br />
Head<br />
Finishing<br />
Unit<br />
Rolling<br />
Mill<br />
Cooling<br />
Bed<br />
Ribbed Reinforcing<br />
Mesh<br />
Structural<br />
Profiles<br />
Bars and GG 50<br />
Profiles<br />
Rebar
Timeline<br />
More than 100 years of history<br />
German immigrant João<br />
<strong>Gerdau</strong> and his son Hugo<br />
found the first <strong>Gerdau</strong><br />
Group unit, the Pontas de<br />
Paris Nail Factory in the<br />
city of Porto Alegre in the<br />
state of Rio Grande do Sul.<br />
Curt Johannpeter, Hugo’s<br />
son-in-law, leads <strong>Gerdau</strong><br />
through a decisive stage<br />
in the expansion of the<br />
company’s business. In<br />
1947, <strong>Gerdau</strong> becomes a<br />
limited liability company<br />
listed on the Porto Alegre<br />
Stock Exchange.<br />
The Group develops<br />
its culture of social<br />
responsibility, creating<br />
the <strong>Gerdau</strong> Foundation<br />
with programs in<br />
the areas of health,<br />
education, housing and<br />
social assistance for<br />
employees and their<br />
family members.<br />
<strong>Gerdau</strong> heads toward<br />
the northeastern region<br />
of Brazil, initiating steel<br />
production in the state<br />
of Pernambuco with the<br />
Açonorte mill.<br />
1901<br />
1946<br />
1963<br />
1969<br />
1907<br />
1948<br />
1967<br />
1971<br />
The business started by João<br />
<strong>Gerdau</strong> is divided into two<br />
independent companies:<br />
Hugo directs the Pontas<br />
de Paris Nail Factory and<br />
his brother, Walter, takes<br />
charge of the furniture<br />
manufacturing business,<br />
Móveis <strong>Gerdau</strong>, also located<br />
in Porto Alegre. Later on, in<br />
1930, the two brothers take<br />
part in the creation of the<br />
Manufacturing Industry<br />
Center of Rio Grande do<br />
Sul (CINFA), which later<br />
becomes the Federation of<br />
Industries of Rio Grande do<br />
Sul (FIERGS).<br />
The <strong>Gerdau</strong> Group<br />
enters the steelmaking<br />
business with the<br />
Group’s Riograndense<br />
steel mill in Porto Alegre.<br />
The Riograndense<br />
mill pioneers the<br />
technological concept<br />
of the market mill,<br />
employing scrap metal<br />
as raw material and<br />
focusing operations<br />
on regional marketing<br />
and sales, and more<br />
competitive operating<br />
costs.<br />
The company’s<br />
expansion route<br />
reaches the<br />
southeastern region<br />
of Brazil with the<br />
acquisition of the<br />
São Judas Tadeu wire<br />
factory, a nail and wire<br />
manufacturer in the<br />
state of São Paulo.<br />
Construction of the<br />
Cosigua mill begins<br />
in the city of Rio de<br />
Janeiro as part of a<br />
joint venture with<br />
the German group<br />
August Thyssen<br />
Huette. This is<br />
also the year in<br />
which the <strong>Gerdau</strong><br />
Group enters the<br />
steel distribution<br />
business with the<br />
first Comercial<br />
<strong>Gerdau</strong> store in São<br />
Paulo.
66 67 t i m e l i n e<br />
The <strong>Gerdau</strong><br />
Group’s process of<br />
internationalization<br />
begins with the<br />
acquisition of the<br />
Laisa steel mill in<br />
Uruguay.<br />
The Group acquires<br />
control of the AZA steel<br />
mill in Chile, currently<br />
<strong>Gerdau</strong> AZA. The Group<br />
launches the GG 50 rebar,<br />
the first in the country to<br />
bear a brand name and a<br />
guarantee of quality.<br />
<strong>Gerdau</strong> starts to produce<br />
steel in the United States<br />
with the acquisition<br />
of Ameristeel. In the<br />
same year, the shares of<br />
<strong>Gerdau</strong> S.A., one of the<br />
Group’s public companies<br />
in Brazil, are listed on the<br />
New York Stock Exchange<br />
(NYSE).<br />
The Group merges<br />
its North American<br />
operations with Co-Steel.<br />
The move results in<br />
the creation of <strong>Gerdau</strong><br />
Ameristeel, with 11 steel<br />
mills and 29 steel service<br />
facilities.<br />
1980 1992<br />
1999<br />
2002<br />
1989<br />
1998<br />
2001<br />
<strong>2004</strong><br />
International growth<br />
advances into North<br />
America with the<br />
acquisition of Courtice<br />
Steel, currently <strong>Gerdau</strong><br />
Ameristeel Cambridge,<br />
located in the province<br />
of Ontario (Canada). In<br />
1995, <strong>Gerdau</strong> strengthens<br />
its position in Canada<br />
by acquiring a second<br />
industrial plant, MRM<br />
Steel, in the province of<br />
Manitoba.<br />
In Argentina, <strong>Gerdau</strong><br />
becomes a shareholder<br />
of the Sipar Aceros S.A.<br />
rolling mill.<br />
The <strong>Gerdau</strong> Group<br />
completes 100 years of<br />
activity, reaching the<br />
8.4 million metric ton<br />
mark for steel production<br />
capacity and R$ 551 million<br />
in net income.<br />
Year of expansion<br />
in the Americas. The<br />
highlight in Brazil is the<br />
construction of two new<br />
mills and the expansion<br />
of the Ouro Branco unit,<br />
in the state of Minas<br />
Gerais. In Colombia, it<br />
becomes a shareholder<br />
of the Diaco and Del<br />
Pacífico mills. In North<br />
America, <strong>Gerdau</strong> acquires<br />
the assets of North Star<br />
Steel. <strong>Gerdau</strong> Ameristeel<br />
shares are listed on the<br />
NYSE.
Glossary<br />
Definitions for technical terms employed<br />
in the report<br />
A<br />
ADRs<br />
ADRs, or American Depositary<br />
Receipts, are securities issued in<br />
the U.S. capital market to represent<br />
shares of non-U.S. companies. These<br />
securities were created to give<br />
foreign companies access to the<br />
North American capital market.<br />
Amortization<br />
Accounting procedure by which<br />
the original cost value of an<br />
asset with limited life or of an<br />
intangible asset is gradually<br />
written off as expense, reducing<br />
the value of the asset. In the case<br />
of fixed assets, the term used is<br />
“depreciation” and for goods such<br />
as natural resources, “exhaustion.”<br />
Assets<br />
Any goods with commercial or<br />
exchange value belonging to a<br />
society, institution or individual.<br />
B<br />
Bars and profiles<br />
Product category encompassing<br />
shapes used to manufacture diverse<br />
products such as agricultural<br />
machinery and equipment,<br />
furniture, steel grating, etc.<br />
Benchmark<br />
Standard of excellence.<br />
Billet<br />
Steel section (usually square)<br />
resulting from continuous casting<br />
or rolling of larger sections. Used<br />
as material for the production<br />
of long steel products.<br />
Blast furnace<br />
A large steel stack lined with<br />
refractory brick used in integrated<br />
steel mills to produce pig iron.<br />
By-product<br />
Desirable or undesirable secondary<br />
product of the industrial process.<br />
C<br />
Coke<br />
A raw material used in the blast<br />
furnace to produce pig iron.<br />
Coke is produced from charcoal<br />
through a process known as<br />
coking. Coking removes the<br />
volatile components of charcoal.<br />
Common share<br />
Security representing the smallest<br />
portion of capital stock in a<br />
corporation, providing voting rights.<br />
Continuous casting<br />
Process during which liquid steel<br />
is solidified. Steel may be cast<br />
into various shapes and gauges to<br />
produce billets, slabs or blooms.<br />
Controlling block<br />
Ownership by a shareholder or<br />
group of shareholders of the largest<br />
portion of shares with voting<br />
rights in a company, which entails<br />
the power of decision-making.<br />
Corporate governance<br />
System by which corporations<br />
are managed and supervised,<br />
involving the relationship between<br />
shareholders/quota holders, board<br />
of directors, executive board,<br />
independent auditors and fiscal<br />
council. Good corporate governance<br />
practices are aimed at increasing<br />
the value of a company’s shares,<br />
facilitating the access of companies<br />
to capital resources and contributing<br />
to their continuity (Brazilian Institute<br />
for Corporate Governance definition).<br />
D<br />
Dividend<br />
Amount distributed to shareholders<br />
in cash for each share.<br />
Drawing<br />
Cold process by which wire rod<br />
is transformed into wire.<br />
Dust removal<br />
A highly efficient system for<br />
filtering the tiny solid particles<br />
resulting from steelmaking.<br />
E<br />
EBITDA<br />
Earnings Before Interest, Taxes,<br />
Depreciation and Amortization.<br />
It is calculated as gross profit<br />
minus sales, general and<br />
administrative expenses,<br />
depreciation and amortization.<br />
Ecoefficiency<br />
Capacity to carry out processes<br />
with the least negative impact<br />
on the environment.<br />
Electric arc furnace<br />
Furnace used to manufacture<br />
steel primarily from steel scrap.<br />
Employs electricity through an<br />
electric arc to melt raw materials.<br />
Equity pickup<br />
Realization of equity changes in a<br />
controlled or subsidiary company in<br />
the results of the parent company.<br />
Euro commercial paper<br />
Short or medium term securities<br />
that are issued by companies in<br />
international financial markets.<br />
F<br />
Flat rolled steel<br />
Product category including<br />
products such as plates and strips.<br />
Flat steel is used in the exterior<br />
of cars, home appliances, etc.<br />
G<br />
Galvanized steel<br />
Steel coated with a thin layer of zinc<br />
that provides resistance against<br />
corrosion for use in applications<br />
exposed to the environment, such as<br />
automotive parts, cans and fencing.<br />
GGB<br />
Ticker symbol for <strong>Gerdau</strong> S.A. ADRs<br />
on the New York Stock Exchange.<br />
GGBR4<br />
Ticker symbol for <strong>Gerdau</strong> S.A.<br />
preferred shares on the São<br />
Paulo Stock Exchange.<br />
GNA<br />
Ticker symbol for <strong>Gerdau</strong><br />
Ameristeel shares on the<br />
New York Stock Exchange.<br />
GOAU4<br />
Symbol for Metalúrgica <strong>Gerdau</strong><br />
S.A. preferred shares on the<br />
São Paulo Stock Exchange.<br />
Gross debt<br />
Amount referring to bank loans<br />
plus issued debentures.<br />
Gross margin<br />
Equivalent to gross income<br />
divided by net sales revenues.<br />
Gross margin is expressed as<br />
a percentage representing the<br />
amounts of net sales revenues<br />
that produced gross income.<br />
Gross revenues<br />
Total sales before cost of<br />
materials and services.<br />
I<br />
Indebtedness<br />
Composition of long and short<br />
term debt resulting from<br />
loans and debentures.<br />
Integrated mill<br />
A mill employing iron ore to<br />
manufacture steel. It is usually<br />
comprised of a pellet mill and<br />
coking unit, a blast furnace,<br />
melt shop and rolling mill.<br />
L<br />
Ladle furnace<br />
Furnace that receives the liquid<br />
steel produced at the electric arc<br />
furnace for chemical refining.<br />
Level 1 Corporate Governance,<br />
Bovespa<br />
Set of conduct rules for companies,<br />
managers and controlling<br />
shareholders, which contribute<br />
to the appreciation of shares and<br />
other assets issued by a company.<br />
Level 1 Companies are committed to<br />
improving disclosure to the market<br />
and shareholding dispersion.
68 69 G L O S S a r y<br />
Liquidity<br />
Ability of an asset to be<br />
converted into cash quickly.<br />
Long steel<br />
Steel product in which one<br />
dimension (length) is predominant.<br />
Includes bars, profiles, wire rod,<br />
rebar, structural shapes and wires.<br />
The line of long steel products<br />
is <strong>Gerdau</strong>’s main product line.<br />
M<br />
Majority shareholder<br />
Individual or group holding a<br />
sufficient number of voting<br />
shares to control a company.<br />
Market mills<br />
Steel mills focused on purchasing<br />
raw material and selling their<br />
production in the same region<br />
in which they are installed.<br />
Melt shop<br />
In a steel mill, the location where<br />
steel is actually produced.<br />
Minority shareholder<br />
Individual or group holding a<br />
number of shares that is not<br />
sufficient to control the company.<br />
N<br />
Net debt<br />
Gross debt minus cash and<br />
financial applications.<br />
Net income<br />
Profit after taxes and<br />
minority participations.<br />
Net margin<br />
Equivalent to net income<br />
divided by net sales revenues.<br />
Net margin is expressed as a<br />
percentage representing the<br />
amounts of net sales revenues<br />
that produced net income.<br />
Net sales revenue<br />
Gross revenues minus sales<br />
taxes, freight and discounts.<br />
O<br />
Oxy-cutting<br />
Cutting method for metallic<br />
parts. It is used to cut scrap<br />
and billets or slabs in the<br />
continuous casting process.<br />
P<br />
Pellet<br />
Small iron ore body, usually spherical,<br />
used as input in the blast furnace.<br />
Pig iron<br />
Produced in the blast furnace,<br />
pig iron results from the<br />
chemical reduction of iron<br />
ore with charcoal or coke.<br />
Preferred share<br />
Security representing the<br />
smallest portion of capital<br />
stock in a corporation, providing<br />
privileges in terms of dividend<br />
distribution and reimbursement<br />
of capital in case of dissolution.<br />
In general, preferred stock holders<br />
do not have voting rights.<br />
Productivity<br />
Ratio between what is produced<br />
and the necessary resources for<br />
production. In the steel industry, one<br />
of the most widely used productivity<br />
indicators is ton/man/year (t/m/y).<br />
Publicly traded company<br />
Company whose shares are<br />
registered with the Securities<br />
and Exchange Commission,<br />
distributed among a certain<br />
number of shareholders and<br />
negotiable in stock exchanges<br />
or over-the-counter market.<br />
R<br />
Rebar<br />
A steel rod with ridges for use<br />
in reinforced concrete.<br />
Receivables<br />
Accounts receivable less bad debts.<br />
Recycling<br />
Process through which iron scrap<br />
is re-used to produce steel.<br />
Ribbed reinforcing mesh<br />
Grid frame made of ribbed rebar used<br />
in the construction of concrete slabs.<br />
ROE<br />
Return on Equity. ROE is the ratio<br />
between net income and net<br />
equity. It reflects shareholder<br />
return on investment.<br />
Rolled product<br />
Product resulting from the rolling<br />
process, in which raw material<br />
is successively compressed<br />
until acquiring the desired<br />
shape and dimensions.<br />
Rolling<br />
Cold or hot mechanical process<br />
that changes the cross-sectional<br />
dimensions or shape of steel<br />
produced in the melt shop.<br />
Rolling block<br />
Rolling equipment, including a set<br />
of cages assembled as a single<br />
structure, used in the high-speed<br />
production of high quality wire rod.<br />
S<br />
Sarbanes-Oxley<br />
A law enacted by the U.S.<br />
Congress to protect investors from<br />
accounting fraud in corporations.<br />
The rules and regulations of the<br />
Sarbanes-Oxley Act amend and<br />
supplement the preexisting laws<br />
ruling publicly traded companies.<br />
Scrap<br />
Iron material that is reprocessed<br />
for steel production.<br />
Shareholders’ equity<br />
Shareholders’ net worth capital<br />
invested in a company.<br />
Slab<br />
A steel product that serves as<br />
the basis for the production<br />
of plates and strips.<br />
Specialty long steel<br />
Long steel produced with specific<br />
physical characteristics required<br />
for special applications, such<br />
as in the automotive, oil, tools<br />
and machinery industries.<br />
Steel<br />
An iron alloy with carbon content<br />
not more than 1.5%, which may<br />
also contain other elements that<br />
alter the physical properties.<br />
Stock bonus<br />
Shares of stock given to current<br />
shareholders in addition to<br />
dividends. May also be a security<br />
that entitles to the subscription of<br />
new shares issued by a company<br />
within the limit of capital increase<br />
authorized in the by-laws.<br />
Structural shapes<br />
Category of steel product<br />
including I and H beams and<br />
wide flange beams. Used in<br />
buildings, industrial installations,<br />
bridge reinforcements, etc.<br />
Sustainability<br />
Sustainability (or sustainable<br />
development) is the balance between<br />
economic, environmental and social<br />
aspects to avoid compromising<br />
the future growth of a company.<br />
T<br />
Total quality<br />
Management methodology<br />
in which quality is viewed as<br />
synonymous with the satisfaction<br />
of a company’s stakeholders:<br />
customers, employees, shareholders,<br />
suppliers and the community.<br />
W<br />
Wire rod<br />
Round steel product obtained<br />
from the rolling process. Wire rod<br />
is usually drawn and used in the<br />
production of wire, screws and nails.
<strong>2004</strong><br />
Financial<br />
Statements<br />
Detailed information on financial performance<br />
Metalúrgica <strong>Gerdau</strong> S.A.<br />
<strong>Gerdau</strong> S.A.<br />
<strong>Gerdau</strong> Açominas S.A.<br />
72<br />
108<br />
144
Metalúrgica <strong>Gerdau</strong> S.A.<br />
Balance Sheet at December 31<br />
(In thousands of reais)<br />
Assets Company Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Current Assets<br />
Cash and cash equivalents ........................................................... note 5 95,800 25,186 2,003,945 1,015,726<br />
Trade accounts receivable ............................................................. note 6 - - 2,564,192 1,561,083<br />
Inventories................................................................................... note 7 - - 4,236,642 2,336,598<br />
Tax credits................................................................................... note 8 11,247 16,113 251,858 137,810<br />
Deferred income tax and social contribution on net income.............. note 9 - - 329,797 117,106<br />
Dividends receivable..................................................................... 120,508 62,086 - -<br />
Other accounts receivable ............................................................. 3,801 4,095 267,058 264,504<br />
Total current assets......................................................................... 231,356 107,480 9,653,492 5,432,827<br />
Long-term Receivables<br />
Related parties............................................................................. note 21 - 3,390 1,231 30,509<br />
Eletrobrás loans............................................................................ 372 372 10,584 10,584<br />
Deposit for future investment in subsidiaries................................... note 4 - - 182,158 -<br />
Deferred income tax and social contribution on net income.............. note 9 9,702 10,830 623,722 812,105<br />
Compulsory deposits and other...................................................... note 10 2,817 3,553 245,391 228,287<br />
Total long-term receivables............................................................ 12,891 18,145 1,063,086 1,081,485<br />
Permanent Assets<br />
Investments ................................................................................. note 11 3,018,021 2,029,479 112,547 463,224<br />
Fixed assets.................................................................................. note 12 1,593 1,738 7,928,973 7,380,838<br />
Deferred charges.......................................................................... note 13 - - 33,858 20,467<br />
Total permanent assets.................................................................... 3,019,614 2,031,217 8,075,378 7,864,529<br />
Total assets......................................................................................... 3,263,861 2,156,842 18,791,956 14,378,841<br />
The accompanying notes are an integral part of these financial statements.
72 73<br />
METALÚRGICA GERDAU S.A.<br />
Liabilities and Shareholder’s Equity Company Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Current Liabilities<br />
Trade accounts payable.................................................................. 63 4 1,921,424 1,191,065<br />
Financing..................................................................................... note 14 - - 2,027,865 2,461,299<br />
Debentures................................................................................... note 15 - 624 2,986 3,651<br />
Taxes and contributions payable.................................................... note 18 2,247 3,537 391,185 178,442<br />
Related parties............................................................................. note 21 266 - - -<br />
Deferred income tax and social contribution on net income.............. note 9 - - 180,166 35,721<br />
Salaries payable............................................................................ 4,218 7,364 259,919 156,289<br />
Dividends payable......................................................................... note 23 158,374 73,524 338,972 165,722<br />
Other accounts payable................................................................. 10,630 9,037 222,741 231,854<br />
Total current liabilities.................................................................... 175,798 94,090 5,345,258 4,424,043<br />
Long-term Liabilities<br />
Financing..................................................................................... note 14 - - 3,490,374 3,396,085<br />
Debentures................................................................................... note 15 - - 573,504 423,956<br />
Provision for contingencies............................................................ note 20 664 1,800 240,964 223,015<br />
Deferred income tax and social contribution on net income.............. note 9 85,540 44,315 699,119 532,263<br />
Post-employment benefits.............................................................. note 22 - - 294,478 278,870<br />
Other accounts payable................................................................. 40,825 44,541 292,664 263,689<br />
Total long-term liabilities............................................................... 127,029 90,656 5,591,103 5,117,878<br />
Minority Interest.................................................................... - - 4,894,561 2,864,824<br />
Shareholders’ Equity<br />
Capital......................................................................................... note 23 1,664,000 1,280,000 1,664,000 1,280,000<br />
Capital reserves............................................................................ 10,842 10,659 10,842 10,659<br />
Revenue reserves.......................................................................... 1,285,632 680,877 1,285,632 680,877<br />
Retained earnings......................................................................... 560 560 560 560<br />
Total shareholders’ equity.............................................................. 2,961,034 1,972,096 2,961,034 1,972,096<br />
Shareholders’ Equity Including Minority Interest.................................. - - 7,855,595 4,836,920<br />
Total liabilities and shareholders’ equity.................................... 3,263,861 2,156,842 18,791,956 14,378,841<br />
The accompanying notes are an integral part of these financial statements.
Statement of Income<br />
Years Ended December 31<br />
(In thousands of reais)<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
GROSS SALES REVENUES................................................................... note 26 - - 23,407,573 15,782,967<br />
Taxes on sales............................................................................... - - (2,456,568) (1,427,585)<br />
Freight and discounts..................................................................... - - (1,353,743) (988,421)<br />
___________ ___________ ___________ ___________<br />
Net Sales Revenues........................................................ - - 19,597,262 13,366,961<br />
COST OF SALES AND/OR SERVICES RENDERED.................................... - - (13,352,238) (10,076,740)<br />
___________ ___________ ___________ ___________<br />
GROSS PROFIT...................................................................... - - 6,245,024 3,290,221<br />
SELLING EXPENSES........................................................................... - - (455,175) (448,131)<br />
FINANCIAL INCOME.......................................................................... note 17 10,239 11,900 249,261 86,754<br />
FINANCIAL EXPENSES....................................................................... note 17 (6,852) (5,616) (397,642) (708,130)<br />
GENERAL AND ADMINISTRATIVE EXPENSES<br />
Management fees.......................................................................... (3,168) (2,957) (50,654) (35,256)<br />
General expenses........................................................................... (28,891) (27,036) (1,000,299) (769,245)<br />
EQUITY IN THE EARNINGS (LOSSES) OF SUBSIDIARIES<br />
AND ASSOCIATED COMPANIES...................................................... note 11 1,342,842 610,001 (344,628) (281,240)<br />
OTHER OPERATING INCOME (EXPENSES), NET.................................... 96 367 191,043 17,208<br />
___________ ___________ ___________ ___________<br />
Operating Profit........................................................... 1,314,266 586,659 4,436,930 1,152,181<br />
NON-OPERATING INCOME (EXPENSES), NET....................................... 170,953 1,445 144,102 (6,162)<br />
___________ ___________ ___________ ___________<br />
Profit Before Taxes and Profit Sharing......................... 1,485,219 588,104 4,581,032 1,146,019<br />
PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION<br />
ON NET INCOME.......................................................................... note 9<br />
Current......................................................................................... (2,624) (3,305) (957,000) (314,614)<br />
Deferred........................................................................................ (42,352) (6,663) (238,405) 454,470<br />
MANAGEMENT PROFIT SHARING....................................................... note 24a (3,168) (2,957) (44,530) (29,001)<br />
___________ ___________ ___________ ___________<br />
Net Income Before Minority Interest........................ 1,437,075 575,179 3,341,097 1,256,874<br />
___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________<br />
MINORITY INTEREST......................................................................... ___________ (1,904,022) ___________ (681,695)<br />
NET INCOME FOR THE YEAR................................................. ___________ 1,437,075 ___________ 575,179<br />
Net income per share - R$......................................................... ___________<br />
17.42 ___________<br />
13.88<br />
Net equity per share - R$.......................................................... ___________<br />
35.90 ___________<br />
47.58<br />
The accompanying notes are an integral part of these financial statements.
74 75<br />
METALÚRGICA GERDAU S.A.<br />
Statement of Changes in Financial Position<br />
Years Ended December 31<br />
(In thousands of reais)<br />
Company<br />
Consolidated<br />
Financial Resources Were Provided By<br />
Operations:<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Net income for the year............................................................ 1,437,075 575,179 3,341,097 1,256,874<br />
Expenses (income) not affecting working capital<br />
Depreciation and amortization.............................................. 145 149 766,819 605,045<br />
Cost of permanent asset disposals........................................ 79,158 8,771 360,815 42,201<br />
Equity in the (earnings) losses of subsidiaries and associated<br />
companies...................................................................... note 11 (1,342,842) (610,001) 344,628 281,240<br />
Gain on sale of shares by subsidiary...................................... note 11 (125,969) - - -<br />
Foreign exchange effects on working capital of<br />
foreign companies........................................................... - - (86,946) (120,202)<br />
Monetary variations on long-term debt.................................. 3,707 4,653 (131,822) (11,085)<br />
Third parties:<br />
Monetary variations on long-term receivables....................... - - (526) (5,107)<br />
___________ ___________ ___________ ___________<br />
From operations.............................................................. 51,274 (21,249) 4,594,065 2,048,966<br />
___________ ___________ ___________ ___________<br />
Capital increase........................................................................ - - 493,181 -<br />
Treasury shares........................................................................ note 23 (14,441) (7,049) (41,477) (24,152)<br />
Increase (decrease) in long-term liabilities.................................. 32,666 (2,334) 768,045 675,463<br />
Contributions to capital reserves ............................................... 183 - 16,246 66,302<br />
Working capital of consolidated companies................................ - - - 53,198<br />
Working capital - purchase of assets......................................... - - 669,446 -<br />
Dividends not included in income for the year............................. 404,325 173,643 - 459<br />
Total funds provided..................................................... 474,007 143,011 6,499,506 2,820,236<br />
Financial Resources Were Used for<br />
Investments ................................................................................. 3,214 5,119 41,619 80,402<br />
Purchase of assets........................................................................ - - 924,457 -<br />
Fixed assets.................................................................................. - - 1,262,707 843,462<br />
Deferred charges.......................................................................... - - 18,654 7,246<br />
Increase (decrease) in long-term receivables................................... (5,254) 576 (13,500) 518,612<br />
Dividends/interest on equity ......................................................... note 23 433,879 172,100 966,119 354,015<br />
Total funds used............................................................. 431,839 177,795 3,200,056 1,803,737<br />
Changes in Working Capital ..................................... 42,168 (34,784) 3,299,450 1,016,499<br />
___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________<br />
Working capital............................................................................<br />
At the beginning of the year...................................................... 13,390 48,174 1,008,784 (7,715)<br />
At the end of the year............................................................... 55,558 13,390 4,308,234 1,008,784<br />
___________ ___________ ___________ ___________<br />
Changes in Working Capital ............................ 42,168 (34,784) 3,299,450 1,016,499<br />
___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________<br />
The accompanying notes are an integral part of these financial statements.
Statement of Changes<br />
in Shareholders’ Equity<br />
(In thousands of reais)<br />
Capital reserves Revenue reserves<br />
Premium Investments Total<br />
on issue and working Retained shareholders’<br />
Capital of shares Other Total Legal capital Total earnings equity<br />
At December 31, 2002 640,000 8,686 1,973 10,659 79,181 845,666 924,847 560 1,576,066<br />
Net income for the year - - - - - - - 575,179 575,179<br />
Capital increase through<br />
capitalization of reserve note 23 640,000 - - - - (640,000) (640,000) - -<br />
Treasury shares note 23 - - - - - (7,049) (7,049) - (7,049)<br />
Distribution proposed for<br />
the <strong>Annual</strong> General Meeting<br />
Legal reserve note 23 - - - - 28,759 - 28,759 (28,759) -<br />
Reserve for investments<br />
and working capital - - - - - 374,320 374,320 (374,320) -<br />
Dividends/interest on equity note 23 - - - - - - - (172,100) (172,100)<br />
At December 31, 2003 1,280,000 8,686 1,973 10,659 107,940 572,937 680,877 560 1,972,096<br />
Net income for the year - - - - - - - 1,437,075 1,437,075<br />
Capital increase note 23 384,000 - - - - (384,000) (384,000) - -<br />
Investment incentives - - 183 183 - - - - 183<br />
Treasury shares note 23 - - - - - (14,441) (14,441) - (14,441)<br />
Distribution proposed for<br />
the <strong>Annual</strong> General Meeting<br />
Legal reserve note 23 - - - - 71,855 - 71,855 (71,855) -<br />
Reserve for investments<br />
and working capital - - - - - 931,341 931,341 (931,341) -<br />
Dividends/interest<br />
on equity note 23 - - - - - - - (433,879) (433,879)<br />
At December 31, <strong>2004</strong> 1,664,000 8,686 2,156 10,842 179,795 1,105,837 1,285,632 560 2,961,034<br />
The accompanying notes are an integral part of these financial statements.
76 77<br />
METALÚRGICA GERDAU S.A.<br />
Statement of Cash Flows<br />
Years Ended December 31<br />
(In thousands of reais)<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Net income for the year..................................................................... 1,437,075 575,179 3,341,097 1,256,874<br />
Equity in the (earnings) losses of subsidiaries and associated companies.. note 11 (1,342,842) (610,001) 344,628 281,240<br />
Provision for credit risks.................................................................... - - 7,647 20,618<br />
Gain on disposal of fixed assets......................................................... - - 9,058 10,056<br />
Gain (loss) on disposal of investments................................................ (170,953) (1,445) (164,058) (1,556)<br />
Monetary and exchange variations..................................................... 5,198 5,563 (94,087) 136,349<br />
Depreciation and amortization........................................................... 145 149 766,819 605,045<br />
Income tax and social contribution on net income............................... 47,393 8,420 505,551 (441,456)<br />
Interest on debt................................................................................ 778 14 412,152 593,308<br />
Contingencies/judicial deposits ......................................................... (940) 18 4,351 562<br />
Changes in trade accounts receivable................................................. - - (720,363) (167,134)<br />
Changes in inventories...................................................................... - - (1,402,408) (207,267)<br />
Changes in trade accounts payable..................................................... 58 (27) 477,292 187,227<br />
Other operating activity accounts....................................................... (33,737) 8,656 (100,288) 74,557<br />
___________ ___________ ___________ ___________<br />
Net cash provided by (used in) operating activities.......................... (57,825) (13,474) 3,387,391 2,348,423<br />
___________ ___________ ___________ ___________<br />
Acquisition/disposal of fixed assets.................................................... - - (1,173,491) (873,039)<br />
Increase in deferred charges.............................................................. - - (18,006) (7,246)<br />
Acquisition/disposal of investments.................................................... 155,144 5,097 362,905 (67,005)<br />
Purchase of assets............................................................................ - - (924,457) -<br />
Receipt of dividends/interest on equity .............................................. 351,884 185,108 - -<br />
___________ ___________ ___________ ___________<br />
Net cash provided by (used in) investing activities........................... 507,028 190,205 (1,753,049) (947,290)<br />
___________ ___________ ___________ ___________<br />
Suppliers of fixed assets.................................................................... - - 144,573 2,196<br />
Working capital financing.................................................................. (7,778) (7,015) (133,006) (334,804)<br />
Debentures ..................................................................................... (586) (423) 85,305 (347,456)<br />
Permanent asset financing................................................................. - - 762,766 454,989<br />
Payment of permanent asset financing................................................ - - (677,357) (541,308)<br />
Payment of financing interest............................................................. - - (379,801) (414,409)<br />
Loans with related parties ................................................................. 2,839 (2,506) 35,944 (16,937)<br />
Capital increase/treasury shares......................................................... note 23 (14,441) (7,049) 451,704 (24,151)<br />
Payment of dividends/interest on equity and profit sharing............... (358,623) (198,413) (853,710) (423,399)<br />
___________ ___________ ___________ ___________<br />
Net cash used in financing activities............................................... (378,589) (215,406) (563,582) (1,645,279)<br />
___________ ___________ ___________ ___________<br />
Changes in cash and cash equivalents............................................ 70,614 (38,675) 1,070,760 (244,146)<br />
___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________<br />
Cash and cash equivalents<br />
At the beginning of the year.......................................................... note 5 25,186 63,861 1,015,726 1,420,236<br />
Restatement of opening balance.................................................... - - (82,541) (173,736)<br />
Opening balance of consolidated companies for the year................. - - - 13,372<br />
At the end of the year................................................................... note 5 95,800 25,186 2,003,945 1,015,726
Notes to the Financial Statements<br />
at December 31, <strong>2004</strong> and 2003<br />
(All amounts in thousands of reais unless otherwise indicated)<br />
1 - Operations<br />
Metalúrgica <strong>Gerdau</strong> S.A. is a holding company in the <strong>Gerdau</strong> Group, which is principally dedicated to the production of common and special<br />
steel and to the sale of general steel products (flat and long), in plants located in Brazil, Uruguay, Chile, Canada, Argentina and the United<br />
States of America.<br />
The <strong>Gerdau</strong> Group has an installed capacity of 16.4 million tons of crude steel per year, basically producing steel in electrical furnaces, from<br />
scrap and pig iron purchased, for the most part, in the region near each plant (mini-mill concept). <strong>Gerdau</strong> also operates plants which are<br />
capable of producing steel from iron ore (through blast furnaces and direct reduction) and has a unit used exclusively to produce special<br />
steels. It is the largest scrap recycling group in Latin America and is among the largest in the world.<br />
The industrial sector is the most important market, including manufacturers of consumer goods such as vehicles and household and<br />
commercial equipment that basically use profiled steel in various available specifications. The next most important market is the civil<br />
construction sector, which demands a high volume of rebars and wires for concrete. There are also numerous customers for nails, staples<br />
and wires, commonly used in the agribusiness sector.<br />
2 - Presentation of the Financial Statements<br />
The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, which are based<br />
on the provisions of Brazilian Corporate Law, together with the rules established by the Brazilian Securities Commission (CVM).<br />
A statement of cash flows (company and consolidated), prepared under the indirect method, is being presented as supplementary information<br />
in order to provide additional information.<br />
3 - Significant Accounting Practices<br />
a) Cash and cash equivalents - financial investments are recorded at cost plus income accrued up to the balance sheet date, applying the<br />
interest rates agreed with the financial institutions, and do not exceed market value;<br />
b) Trade accounts receivable - are stated at realizable values, and accounts receivable from foreign customers are adjusted based on the<br />
exchange rates effective at the balance sheet date. The provision for credit risks is calculated based on a credit risk analysis, which includes<br />
the history of losses, the individual situation of each customer and the economic group to which they belong, the collateral and guarantees<br />
and the legal advisors’ opinion, and is considered sufficient to cover eventual losses on realization;<br />
c) Inventories - are stated at the lower of market value and average production or purchase cost;<br />
d) Investments in subsidiary and associated companies - are recorded on the equity method of accounting. The equity in the earnings or loss<br />
is recorded in an income statement account;<br />
e) Fixed assets - are recorded at cost, net of depreciation. Depreciation is calculated on the straight-line basis, at the rates stated in Note<br />
12, which take into consideration the estimated useful lives of the assets. Interest on financing obtained to finance construction in progress<br />
is added to the cost of the constructions;<br />
f) Deferred charges - amortization is calculated on the straight-line basis at rates determined based on the production of the implemented<br />
projects in relation to their installed capacities;<br />
g) Financing - are stated at the contract value plus the contracted charges, including interest and monetary or foreign exchange variations.<br />
Swap contracts, which are linked to the loan agreements, are classified together with the related loans;<br />
h) Income tax and social contribution on net income - current and deferred income tax and social contribution on net income are calculated<br />
in conformity with current legislation;<br />
i) Other current and long-term assets and liabilities - are recorded at their realizable amounts (assets) and at their known or estimated<br />
amounts plus accrued charges and indexation adjustments (liabilities), when applicable;<br />
j) Related parties - loan agreements between Brazilian companies are restated by the weighted average interest rate for market funding.<br />
The agreements with foreign companies are restated by charges (LIBOR plus 3% p.a.) plus foreign exchange variation. Sales and purchases<br />
of inputs and products are made under terms and conditions similar to those of unrelated third parties;<br />
k) Determination of the results of operations - the results of operations are determined on the accrual basis of accounting;<br />
l) Use of estimates - the preparation of financial statements requires estimates to record certain assets, liabilities and other transactions.<br />
The Company’s financial statements therefore include various estimates related to the useful lives of fixed assets, provisions necessary for<br />
contingent liabilities, for income tax and other similar matters. Actual results may differ from those estimated;<br />
m) Environmental investments - expenses related to compliance with environmental regulations are considered as cost of production or<br />
capitalized when incurred; and<br />
n) Translation of foreign currency balances - asset and liability balances of transactions in foreign currency are translated to local currency<br />
(R$) at the foreign exchange rate in effect at the balance sheet date (<strong>2004</strong> - US$ 1.00 = R$ 2.6544 and 2003 - US$ 1.00 = R$ 2.8892).
78 79<br />
METALÚRGICA GERDAU S.A.<br />
4 - Consolidated Financial Statements<br />
a) The consolidated financial statements at December 31, <strong>2004</strong> include the accounts of Metalúrgica <strong>Gerdau</strong> S.A. and the directly or indirectly<br />
controlled subsidiaries listed below:<br />
Percentage Shareholders’<br />
Consolidated company ownership equity<br />
<strong>Gerdau</strong> S.A...................................................................................................................................................................... 100 6,073,856<br />
<strong>Gerdau</strong> Participações S.A.................................................................................................................................................. 100 4,887,726<br />
<strong>Gerdau</strong> Açominas S.A....................................................................................................................................................... 100 4,766,046<br />
<strong>Gerdau</strong> Ameristeel Corporation and subsidiaries*............................................................................................................... 100 3,622,636<br />
<strong>Gerdau</strong> Internacional Empreendimentos Ltda. - Grupo <strong>Gerdau</strong>............................................................................................. 100 2,785,282<br />
<strong>Gerdau</strong> GTL Spain S.L....................................................................................................................................................... 100 2,761,750<br />
<strong>Gerdau</strong> Steel Inc. ............................................................................................................................................................ 100 2,351,341<br />
Axol S.A.......................................................................................................................................................................... 100 476,156<br />
<strong>Gerdau</strong> Chile Inversiones Ltda........................................................................................................................................... 100 476,126<br />
Indústria Del Acero S.A. - Indac......................................................................................................................................... 100 476,063<br />
<strong>Gerdau</strong> Aza S.A. ............................................................................................................................................................. 100 421,401<br />
Santa Felicidade Com. Imp. e Exp. de Produtos Siderúrgicos Ltda......................................................................................... 100 388,298<br />
Seiva S.A. - Florestas e Indústrias...................................................................................................................................... 100 202,143<br />
Itaguaí Com. Imp. e Exp. Ltda. ......................................................................................................................................... 100 193,964<br />
Sipar Aceros S.A. ............................................................................................................................................................ 38 78,037<br />
Margusa - Maranhão Gusa S.A. ........................................................................................................................................ 100 73,714<br />
<strong>Gerdau</strong> Laisa S.A. ............................................................................................................................................................ 100 51,897<br />
Aramac S.A. ................................................................................................................................................................... 100 49,355<br />
GTL Equity Investments Corp. ........................................................................................................................................... 100 49,286<br />
Banco <strong>Gerdau</strong> S.A............................................................................................................................................................ 100 33,618<br />
Açominas Com. Imp. Exp. S.A. - Açotrading........................................................................................................................ 100 22,583<br />
Florestal Rio Largo Ltda.................................................................................................................................................... 100 18,174<br />
Aceros Cox Comercial S.A................................................................................................................................................. 100 10,110<br />
<strong>Gerdau</strong> Açominas Overseas Ltda. ..................................................................................................................................... 100 7,914<br />
Florestal Itacambira S.A.................................................................................................................................................... 100 7,650<br />
Siderco S.A...................................................................................................................................................................... 38 6,958<br />
GTL Financial Corp........................................................................................................................................................... 100 4,931<br />
GTL Trade Finance Inc. .................................................................................................................................................... 100 27<br />
Dona Francisca Energética S.A. ........................................................................................................................................ 52 (16,350)<br />
*Subsidiaries:<br />
<strong>Gerdau</strong> Ameristeel MRM Special Sections Inc. (100%), <strong>Gerdau</strong> USA Inc. (100%), Ameristeel Bright Bar Inc. (100%), <strong>Gerdau</strong> Ameristeel US Inc. (100%), <strong>Gerdau</strong> Ameristeel Perth Amboy<br />
Inc. (100%), Gallatin Steel Company (50%) e <strong>Gerdau</strong> Ameristeel Sayreville Inc. (100%).<br />
b) The more significant accounting practices used in preparing the consolidated financial statements are as follows:<br />
I) Metalúrgica <strong>Gerdau</strong> S.A. and its subsidiaries adopt consistent practices to record their operations and value their assets and liabilities. The<br />
financial statements of foreign subsidiaries were translated using the exchange rate in effect at the balance sheet date and were adjusted<br />
to conform with accounting practices adopted in Brazil;<br />
II) Asset, liability and income statement balances arising from transactions between consolidated companies have been eliminated; and<br />
III) Holdings of minority shareholders in subsidiaries are shown separately.<br />
c) During the year, the following transactions occurred:<br />
I) On February 16, <strong>2004</strong>, the subsidiary <strong>Gerdau</strong> Ameristeel Corporation signed a sale and purchase agreement for the acquisition of all assets<br />
of Potter Form & Tie Co., headquartered in Belvidere, Illinois, in the United States of America. The acquisition price was US$ 11 million,<br />
equivalent to R$ 31,995 on that date;<br />
II) On April 16, <strong>2004</strong>, the subsidiary <strong>Gerdau</strong> S.A., through its indirect subsidiary <strong>Gerdau</strong> Steel Inc., acquired 26,800,000 shares of <strong>Gerdau</strong><br />
Ameristeel Corporation through a capital increase of Cdn$ 131 million, equivalent to R$ 283,937 on that date. After this transaction, <strong>Gerdau</strong><br />
S.A. held, indirectly, 72% of <strong>Gerdau</strong> Ameristeel Corporation;
III) The Extraordinary General Meeting of shareholders of the subsidiary <strong>Gerdau</strong> S.A. held on June 30, <strong>2004</strong> approved the merger of the<br />
subsidiary GTL Brasil Ltda., without the issue of new shares. The net assets transferred to <strong>Gerdau</strong> S.A. as a result of the merger, are as<br />
follows:<br />
Assets<br />
Current assets.................................................................................................................................................................................................................... 534<br />
____________<br />
Long-term receivables......................................................................................................................................................................................................... 8<br />
____________<br />
Permanent assets<br />
Investments<br />
Seiva S.A. - Florestas e Indústrias................................................................................................................................................................................... 17,883<br />
<strong>Gerdau</strong> Açominas S.A.................................................................................................................................................................................................... 333,257<br />
(-) Negative goodwill - <strong>Gerdau</strong> Açominas S.A.................................................................................................................................................................. ____________ (280,882)<br />
Total permanent assets................................................................................................................................................................................................................ ____________<br />
70,258<br />
Total assets................................................................................................................................................................................................................................... ____________<br />
70,800<br />
Liabilities<br />
Current liabilities................................................................................................................................................................................................................ 1,495<br />
Long-term liabilities............................................................................................................................................................................................................ ____________ 4,591<br />
Total liabilities..................................................................................................................................................................................................... ____________<br />
6,086<br />
Total net assets.................................................................................................................................................................................................... ____________<br />
64,714<br />
IV) On October 15, <strong>2004</strong>, the subsidiary <strong>Gerdau</strong> S.A. announced to the market that the indirect subsidiary <strong>Gerdau</strong> Ameristeel Corporation<br />
obtained the confirmation of its registration with the Canadian securities regulatory authorities for the public offer of 70 million common<br />
shares. <strong>Gerdau</strong> S.A., through its subsidiary <strong>Gerdau</strong> Steel Inc., acquired 35,000,000 and 4,381,000 common shares on October 20, <strong>2004</strong> and<br />
November 18, <strong>2004</strong>, respectively, in the total amount of US$ 185 million, equivalent to R$ 528,787 on those dates. The transaction initially was<br />
a capital increase in <strong>Gerdau</strong> Steel Inc., through the issue of 817,969 common shares. Subsequently, on December 28, <strong>2004</strong>, <strong>Gerdau</strong> S.A. paid<br />
up capital in <strong>Gerdau</strong> Internacional Empreendimentos Ltda. (the company that holds the investments abroad) through the transfer of 817,969<br />
common shares of <strong>Gerdau</strong> Steel Inc. in the amount of R$ 499,430. Following this transaction, Metalúrgica <strong>Gerdau</strong> S.A. held, indirectly, 66.5%<br />
of <strong>Gerdau</strong> Ameristeel Corporation.<br />
V) On October 28, <strong>2004</strong>, the subsidiary <strong>Gerdau</strong> S.A., through its indirect subsidiary <strong>Gerdau</strong> Ameristeel Corporation, announced the signature<br />
of a sale and purchase agreement for the acquisition of the assets of Gate City Steel Inc. and RJ Rebar Inc. (cutting and folding of rebars,<br />
with and without epoxy covering), headquartered in Indianapolis, Indiana, in the United States of America. The acquisition price was US$ 16<br />
million (R$ 42,470 at December 31, <strong>2004</strong>);<br />
VI) On October 29, <strong>2004</strong>, the subsidiary Armafer Serviços de Construção Ltda. was merged by the subsidiary <strong>Gerdau</strong> Açominas S.A., and the<br />
net assets of R$ 44,744 were recorded, replacing the investment account, without capital increase. The objectives of the transaction were to<br />
reduce administrative expenses and improve operating synergy;<br />
VII) On November 1, <strong>2004</strong>, the subsidiary <strong>Gerdau</strong> S.A., through its indirect subsidiary <strong>Gerdau</strong> Ameristeel Corporation, purchased the fixed<br />
assets and working capital of four mills producing long steel, three processing units of wire rods and one producer of steel grinding balls for<br />
the mining industry owned by North Star Steel, announced on September 9, <strong>2004</strong>. The price paid for these assets was US$ 266 million (R$<br />
706,070 at December 31, <strong>2004</strong>), in cash. <strong>Gerdau</strong> Ameristeel Corporation also paid an additional US$ 52 million (R$ 138,029 at December 31,<br />
<strong>2004</strong>) as an adjustment in the purchase price due to fluctuations in working capital up to the transaction date;<br />
VIII) On December 23, <strong>2004</strong>, the <strong>Gerdau</strong> Group reached an agreement with the Mayaguez Group and The Latinamerican Enterprise Steel<br />
Holding, majority shareholders of Diaco S.A., the largest Colombian producer of steel and rebars, and Siderúrgica del Pacífico S.A. - Sidelpa,<br />
the only producer of special steel in that country, for the scheduled acquisition of their holdings in these companies. Initially, US$ 69 million<br />
(R$ 182,158 at December 31, <strong>2004</strong>) were invested, recorded as “deposit for future investment in subsidiaries” in long-term receivables. The<br />
Mayagüez Group, which will remain as a Diaco shareholder for a maximum eight-year period, formed a strategic partnership with the<br />
<strong>Gerdau</strong> Group for the development of the Colombian steel industry; and<br />
IX) On December 3, <strong>2004</strong>, the Board of Directors of the subsidiary <strong>Gerdau</strong> S.A. authorized the company’s management to implement corporate<br />
restructuring measures to obtain greater strategic advantages, as well as greater operating and management efficiency, arising from the<br />
specialization and location of the different business units and areas of the <strong>Gerdau</strong> Group. The efforts will be concentrated in the main<br />
activities, focused operations and gain of critical mass within each of the activity areas. Also, this restructuring will consider solutions for the<br />
Group’s future growth. On December 29, <strong>2004</strong>, the first act of this process was completed, with the capital increase of the holding company<br />
<strong>Gerdau</strong> Participações S.A. through the shares held in <strong>Gerdau</strong> Açominas S.A. and part of the quotas in <strong>Gerdau</strong> Internacional Empreendimentos<br />
Ltda.. held by <strong>Gerdau</strong> S.A., representing, respectively, 91.5% and 22.8% of those companies’ capital. The capital of <strong>Gerdau</strong> Participações S.A.<br />
was also increased by the direct and indirect investments held by <strong>Gerdau</strong> Internacional Empreendimentos Ltda. in <strong>Gerdau</strong> Chile Inversiones<br />
Ltda., <strong>Gerdau</strong> Laisa S.A. and Sipar Aceros S.A. The final corporate restructuring model has not yet been finished and will be implemented as<br />
the management proposals are approved by the Board of Directors. Accordingly, additional measures should be implemented during this<br />
year and they will be advised, as soon as they occur.
80 81<br />
METALÚRGICA GERDAU S.A.<br />
d) The financial statements of the jointly-owned subsidiary Dona Francisca Energética S.A., and the jointly-owned indirect subsidiaries<br />
Gallatin Steel Company and Sipar Aceros S.A., were consolidated proportionally based on the direct or indirect interest of the parent company<br />
in the capital of these subsidiaries.<br />
The amounts of the financial statements of these companies are shown as follows:<br />
Dona Francisca Gallatin Sipar Aceros S.A.<br />
Energética S.A.<br />
______________________<br />
Steel Company<br />
______________________<br />
Consolidado *<br />
_____________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Assets<br />
Current assets........................................................................ 116,627 111,782 586,106 290,036 144,251 85,185<br />
Long-term receivables............................................................. 128,427 129,889 - - - 2,863<br />
Permanent assets.................................................................... __________ 180,984 __________ 191,728 __________ 612,762 __________ 736,223 __________ 18,929 __________ 19,109<br />
Total assets...................................................................... __________<br />
426,038 __________<br />
433,399 __________<br />
1,198,868 __________<br />
1,026,259 __________<br />
163,180 __________<br />
107,157<br />
Liabilities<br />
Current liabilities.................................................................... 29,381 28,522 131,580 152,134 80,787 40,252<br />
Long-term liabilities................................................................ 413,006 423,722 54,190 230,651 4,356 4,212<br />
Shareholders’ equity................................................................ (16,349) (18,845) 1,013,098 643,474 78,037 62,693<br />
__________ __________ __________ __________ __________ __________<br />
Total liabilities........................................................................ 426,038 433,399 1,198,868 1,026,259 163,180 107,157<br />
__________ __________ __________ __________ __________ __________<br />
__________ __________ __________ __________ __________ __________<br />
Statement of operations<br />
Gross sales revenues............................................................... 44,987 37,189 2,384,065 1,260,130 437,864 296,651<br />
Sales deductions..................................................................... (2,207) (3,952) (11,215) (14,157) (87,259) (62,398)<br />
__________ __________ __________ __________ __________ __________<br />
Net sales revenues.................................................................. 42,780 33,237 2,372,850 1,245,973 350,605 234,253<br />
Cost of sales........................................................................... (19,424) (19,520) (1,626,650) (1,194,150) (285,566) (188,139)<br />
__________ __________ __________ __________ __________ __________<br />
Gross profit............................................................................ 23,356 13,717 746,200 51,823 65,039 46,114<br />
Selling expenses..................................................................... - - (6,224) (5,336) (4,987) (2,259)<br />
General and administrative expenses........................................ (2,110) (2,251) (45,010) (33,376) (19,876) (12,762)<br />
Other financial income (expenses)............................................ (17,882) (20,743) (14,030) (22,620) (8,101) 2,681<br />
Other operating income (expenses)........................................... - - - - (76) (3,346)<br />
__________ __________ __________ __________ __________ __________<br />
Operating profit (loss)............................................................. 3,364 (9,277) 680,936 (9,509) 31,999 30,428<br />
Non-operating income (expenses), net...................................... 380 3,790 10,225 (1,367) 759 (2,889)<br />
Provision for income tax and social contribution........................ (1,249) 1,871 (797) - (10,188) (7,425)<br />
__________ __________ __________ __________ __________ __________<br />
Net income (loss) for the year............................................................ 2,495 (3,616) 690,364 (10,876) 22,570 20,114<br />
__________ __________ __________ __________ __________ __________<br />
__________ __________ __________ __________ __________ __________<br />
* includes the subsidiary Siderco<br />
e) The Company and its direct and indirect subsidiaries have goodwill and negative goodwill balances, which are being amortized as the<br />
assets that generated them are realized or based on the realization of the projected future income, limited to ten years, as follows:<br />
Amortization<br />
period Company Consolidated<br />
Goodwill included in the investments accounts<br />
Balance at December 31, 2003............................................................................................. - 432,077<br />
(+) Goodwill recorded in the period...................................................................................... 1,502 308,899<br />
(-) Reversal of goodwill based on the adjustment in purchase price (Margusa - Maranhão Gusa S.A.) - (5,258)<br />
(-) Write-off of goodwill as a result of the merger of the subsidiary GTL Brasil........................... - (280,882)<br />
(-) Foreign exchange adjustment .......................................................................................... - (36,361)<br />
(-) Amortization for the year................................................................................................ up to 10 years ______________ (1,502) __________________ (365,621)<br />
Balance at December 31, <strong>2004</strong> (based on expectation of future profitability)............................ - 52,854<br />
Analysis of the goodwill by<br />
Margusa - Maranhão Gusa S.A........................................................................................ - 24,728<br />
Dona Francisca Energética S.A......................................................................................... - 19,512<br />
Armacero Industrial y Comercial Ltda............................................................................... - 457<br />
Distribuidora Matco S.A.................................................................................................. - 6,066<br />
Salomon Sack S.A.......................................................................................................... ______________- __________________ 2,091<br />
- 52,854
Amortization<br />
period Company Consolidated<br />
Goodwill included in the fixed asset accounts<br />
Balance at December 31, 2003...................................................................................................... - 239,740<br />
(-) Foreign exchange adjustment.................................................................................................... - (14,860)<br />
(-) Amortization for the year.......................................................................................................... up to 10 years ______________- __________________ (79,921)<br />
Balance at December 31, <strong>2004</strong> (based on undervaluation of assets)................................................. - 144,959<br />
The goodwill mainly resulted from the assets of the subsidiary <strong>Gerdau</strong> Ameristeel US Inc.<br />
Negative goodwill included in the fixed asset accounts<br />
Balance at December 31, 2003...................................................................................................... - (272,130)<br />
(-) Amortization for the year.......................................................................................................... ______________- __________________ 28,853<br />
Balance at December 31, <strong>2004</strong> (based on overvaluation of assets)................................................... up to 10 years - (243,277)<br />
The negative goodwill arises from the assets of the subsidiary <strong>Gerdau</strong> Açominas S.A.<br />
The goodwill recorded in the investment accounts, calculated on the subsidiary <strong>Gerdau</strong> Ameristeel US Inc., were reviewed in respect of their<br />
amortization period and projected profitability. The remaining balance was amortized in accordance with accounting practices adopted in<br />
Brazil, and based on the current scenario and performance of the subsidiary <strong>Gerdau</strong> Ameristeel Corporation.<br />
The equity accounting loss in the consolidated statement of income refers, basically, to the effect of the devaluation of the U.S. dollar on the<br />
foreign investments, to goodwill amortization for the year and to the tax incentive reserves arising from the reduction of income tax on the<br />
exploitation profit of the subsidiaries <strong>Gerdau</strong> Açominas S.A. and Margusa - Maranhão Gusa S.A., both located in the Northeastern region of<br />
Brazil, as well as to benefits arising from state tax financing.<br />
5 - Cash and Cash Equivalents<br />
Company<br />
Consolidated<br />
_______________________________ ______________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Cash and banks................................................................................................ 98 23 337,767 125,596<br />
Financial investment fund.................................................................................. - - 527,102 326,551<br />
Fixed income securities...................................................................................... 95,702 25,163 1,101,388 364,116<br />
Equities............................................................................................................ - - 37,688 199,463<br />
_____________ _____________ _____________ _____________<br />
95,800 25,186 2,003,945 1,015,726<br />
_____________ _____________ _____________ _____________<br />
_____________ _____________ _____________ _____________<br />
Of the existing balance, R$ 1,004,550 - consolidated (R$ 518,315 - consolidated in 2003) refers to investments in U.S. dollars.<br />
6 - Trade Accounts Receivable<br />
Consolidated<br />
_____________________________<br />
<strong>2004</strong> 2003<br />
Customers in Brazil...................................................................................................................................................................... 880,557 568,968<br />
Brazilian exports receivable.......................................................................................................................................................... 543,954 235,442<br />
Receivables from customers of overseas companies........................................................................................................................ 1,232,095 835,212<br />
Provision for credit risks............................................................................................................................................................... ____________ (92,414) ____________ (78,539)<br />
____________<br />
2,564,192 ____________<br />
1,561,083
82 83<br />
METALÚRGICA GERDAU S.A.<br />
7 - Inventories<br />
Consolidated<br />
_________________________________<br />
<strong>2004</strong> 2003<br />
Finished products......................................................................................................................................................................... 1,728,652 868,147<br />
Work in process........................................................................................................................................................................... 679,167 323,373<br />
Raw materials.............................................................................................................................................................................. 1,112,467 586,311<br />
Storeroom materials..................................................................................................................................................................... 649,892 517,010<br />
Advances to suppliers................................................................................................................................................................... ____________ 66,464 ____________ 41,757<br />
____________<br />
4,236,642 ____________<br />
2,336,598<br />
The inventories are covered against fire and overflow. Coverage is determined based on the amounts and the risks involved.<br />
8 - Tax Credits<br />
Company<br />
Consolidated<br />
______________________________ ________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Value-Added Tax on Sales and Services (ICMS).................................................... 9 9 99,819 90,820<br />
Social Contribution on Revenues (COFINS) to offset............................................. - - 56,302 -<br />
Social Integration Program (PIS) to offset............................................................ - - 36,730 4,759<br />
Excise Tax (IPI) ................................................................................................. - - 3,310 6,358<br />
Income tax and social contribution on net income............................................... 11,232 16,076 46,396 30,435<br />
Tax on Added Value (IVA).................................................................................. - - 1,861 487<br />
Other............................................................................................................... 6 28 7,440 4,951<br />
_____________ _____________ _____________ _____________<br />
11,247 16,113 251,858 137,810<br />
_____________ _____________ _____________ _____________<br />
_____________ _____________ _____________ _____________<br />
9 - Income Tax and Social Contribution on Net Income<br />
a) Analysis of the income tax and social contribution expense:<br />
Profit before income tax and social contribution, after statutory<br />
Company<br />
__________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
__________________________________________ _________________________________________<br />
IR CS Total IR CS Total<br />
profit sharing..................................................................... 1,482,051 1,482,051 1,482,051 585,147 585,147 585,147<br />
Statutory rates ...................................................................... 25% 9% 34% 25% 9% 34%<br />
Income tax and social contribution expense at statutory rates... (370,513) (133,385) (503,898) (146,287) (52,663) (198,950)<br />
Tax effects on:<br />
- equity in earnings (losses) ................................................ 335,711 120,856 456,567 152,500 54,900 207,400<br />
- interest on equity............................................................. (685) (247) (932) 46 17 63<br />
- permanent differences (net) ............................................. 2,297 990 3,287 (13,801) (4,680) (18,481)<br />
___________ ___________ ___________ ___________ ___________ ___________<br />
Income tax and social contribution expense............................. (33,190) (11,786) (44,976) (7,542) (2,426) (9,968)<br />
___________ ___________ ___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________ ___________ ___________<br />
Current.............................................................................. (2,070) (554) (2,624) (2,575) (730) (3,305)<br />
Deferred............................................................................ (31,120) (11,232) (42,352) (4,967) (1,696) (6,663)<br />
IR - Corporate income tax.<br />
CS - Social contribution on net income.
Profit before income tax and social contribution, after statutory<br />
Consolidated<br />
__________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
__________________________________________ _________________________________________<br />
IR CS Total IR CS Total<br />
profit sharing..................................................................... 4,536,502 4,536,502 4,536,502 1,117,018 1,117,018 1,117,018<br />
Statutory rates....................................................................... 25% 9% 34% 25% 9% 34%<br />
Income tax and social contribution expenses at statutory rates.. (1,134,126) (408,285) (1,542,411) (279,255) (100,532) (379,787)<br />
Tax effects on:<br />
- tax rate difference for foreign companies........................... (96,019) 91,649 (4,370) 38,906 (14,169) 24,737<br />
- equity in earnings (losses)................................................. (86,157) (31,017) (117,174) (70,310) (25,312) (95,622)<br />
- interest on equity............................................................. 90,350 32,526 122,876 88,569 31,885 120,454<br />
- foreign exchange effect.................................................... 29,731 2,676 32,407 72,863 26,231 99,094<br />
- recovery of deferred tax assets.......................................... 270,770 48,109 318,879 305,724 117,027 422,751<br />
- permanent differences (net).............................................. (34,333) 28,721 (5,612) (38,028) (13,743) (51,771)<br />
___________ ___________ ___________ ___________ ___________ ___________<br />
Income tax and social contribution expense............................. (959,784) (235,621) (1,195,405) 118,469 21,387 139,856<br />
___________ ___________ ___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________ ___________ ___________<br />
Current.............................................................................. (789,638) (167,362) (957,000) (240,313) (74,301) (314,614)<br />
Deferred............................................................................ (170,146) (68,259) (238,405) 358,782 95,688 454,470<br />
IR - Corporate income tax.<br />
CS - Social contribution on net income.<br />
b) Analysis of the deferred income tax and social contribution assets and liabilities, at statutory rates:<br />
Assets<br />
_________________________________________________________________________________________________________________________<br />
Company<br />
Consolidated<br />
___________________________________________________________ ____________________________________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
____________________________ _____________________________ _____________________________ _____________________________<br />
IR CS TOTAL IR CS TOTAL IR CS TOTAL IR CS TOTAL<br />
Income tax losses.................... 3,572 - 3,572 4,499 - 4,499 431,440 - 431,440 462,096 - 462,096<br />
Social contribution losses........ - 5,023 5,023 - 5,260 5,260 - 69,255 69,255 - 94,826 94,826<br />
Provision for contingencies...... 117 42 159 345 124 469 48,846 17,465 66,311 41,133 14,680 55,813<br />
Benefits to employees............. - - - - - - 101,474 - 101,474 95,839 - 95,839<br />
Commissions/other.................. - - - - - - 156,345 2,343 158,688 80,178 1,492 81,670<br />
Amortized goodwill................. 948 - 948 602 - 602 7,391 2,319 9,710 9,696 3,274 12,970<br />
Provision for losses................. ________- ________- ________- ________- ________- ________- ________ 87,595 ________ 29,046 ________ 116,641 ________ 94,462 ________ 31,535 ________ 125,997<br />
________ 4,637 ________ 5,065 ________ 9,702 ________ 5,446 ________ 5,384 ________ 10,830 ________ 833,091 ________ 120,428 ________ 953,519 ________ 783,404 ________ 145,807 ________ 929,211<br />
Current.................................. - - - - - - 271,204 58,593 329,797 90,981 26,125 117,106<br />
Long-term.............................. 4,637 5,065 9,702 5,446 5,384 10,830 561,887 61,835 623,722 692,423 119,682 812,105<br />
Liabilities<br />
_________________________________________________________________________________________________________________________<br />
Company<br />
Consolidated<br />
___________________________________________________________ ____________________________________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
____________________________ _____________________________ _____________________________ _____________________________<br />
IR CS TOTAL IR CS TOTAL IR CS TOTAL IR CS TOTAL<br />
Accelerated depreciation......... - - - - - - 576,176 823 576,999 426,751 854 427,605<br />
Amortized negative goodwill/<br />
deferred capital gain.......... 68,903 16,637 85,540 38,590 5,725 44,315 121,116 31,265 152,381 98,263 22,326 120,589<br />
Inflationary/exchange effect..... ________- ________- ________- ________- ________- ________- ________ 115,934 ________ 33,971 ________ 149,905 ________ 19,790 ________- ________ 19,790<br />
________ 68,903 ________ 16,637 ________ 85,540 ________ 38,590 ________ 5,725 ________ 44,315 ________ 813,226 ________ 66,059 ________ 879,285 ________ 544,804 ________ 23,180 ________ 567,984<br />
Current.................................. - - - - - - 146,195 33,971 180,166 35,721 - 35,721<br />
Long-term.............................. 68,903 16,637 85,540 38,590 5,725 44,315 667,031 32,088 699,119 509,083 23,180 532,263
84 85<br />
METALÚRGICA GERDAU S.A.<br />
The tax benefits recognized on income tax and social contribution loss carryforwards, as well as on the provision for losses, both in the<br />
Company and consolidated, are supported by projections of future taxable income adjusted to present values, based on technical feasibility<br />
studies, approved by management. These studies, which consider the history of the Company’s and its subsidiaries’ profitability and the<br />
maintenance of the current profitability in the future, permitted the recognition of an additional benefit for the year of R$ 318,879<br />
(R$ 422,751 - 2003) in subsidiaries, whose estimated recovery is shown in item “c” below. Other credits, based on temporary differences,<br />
mainly tax contingencies, were maintained according to their estimate of realization.<br />
c) Estimated recovery of deferred income tax and social contribution assets:<br />
Company<br />
__________________________________<br />
Consolidated<br />
__________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Up to <strong>2004</strong>....................................................................................................... - - 329,797 117,106<br />
2005................................................................................................................ - 4,967 65,829 134,554<br />
2006................................................................................................................ - 2,161 65,120 126,773<br />
2007................................................................................................................ - 1,784 86,693 128,414<br />
2008................................................................................................................ 4,297 1,918 132,680 151,321<br />
2009................................................................................................................ 5,405 - 173,548 91,669<br />
2010 to 2012................................................................................................... - - 99,852 145,083<br />
2013 to 2014................................................................................................... - - - 34,291<br />
_____________ _____________ _____________ _____________<br />
9,702 10,830 953,519 929,211<br />
_____________ _____________ _____________ _____________<br />
_____________ _____________ _____________ _____________<br />
10 - Compulsory Deposits and Other<br />
Company<br />
__________________________________<br />
Consolidated<br />
__________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Compulsory deposits......................................................................................... 318 - 30,767 16,421<br />
Receivables under contract................................................................................ 2,397 2,895 49,893 43,223<br />
ICMS credits on purchases of fixed assets........................................................... - - 72,581 56,270<br />
Income tax incentives........................................................................................ 102 145 10,230 10,314<br />
Prepaid expenses.............................................................................................. - - - 3,036<br />
Assets not for use............................................................................................. - - 45,779 52,614<br />
Prepaid financial expenses and others................................................................ - 513 36,141 46,409<br />
_____________ _____________ _____________ _____________<br />
2,817 3,553 245,391 228,287<br />
_____________ _____________ _____________ _____________<br />
_____________ _____________ _____________ _____________
11 - Investments<br />
Company<br />
__________________________________________________________________________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
____________________________________________________________________________________________________________________________________________ ____________<br />
Subsidiaries Other Total Total<br />
_______________________________________________________________________________________________________________ ____________ ___________ ____________<br />
Santa Felicidade<br />
Banco GLAM Com. Imp. Exp.<br />
<strong>Gerdau</strong> S.A. <strong>Gerdau</strong> S.A. Participações S.A. Prod. Sid. Ltda. Other<br />
_______________________________ ______________ ____________________ __________________ ________________<br />
Investment Goodwill Investment Investment Investment Investment<br />
Opening balance............................................... 1,820,152 - 28,216 106 179,356 134 1,515 2,029,479 1,596,773<br />
Merger/capitalization..................................... - - - (23,396) 23,396 - - - -<br />
Acquisition.................................................... 745 - - - - - 967 1,712 5,119<br />
Goodwill on acquisition of investment............. - 1,502 - - - - - 1,502 -<br />
Sale.............................................................. (76,837) - - - - (116) (2,205) (79,158) (8,771)<br />
Equity in earnings (losses) 1 ............................. 1,228,992 (1,502) 8,625 23,290 83,383 54 - 1,342,842 610,001<br />
Gain on sale of shares by 2 .............................. - - - - 125,969 - - 125,969 -<br />
Dividends/interest on equity........................... _______________ (376,947) _______________ - ______________ (3,564) ____________________ - __________________ (23,806) ________________ (8) _____________ - ____________ (404,325) ____________ (173,643)<br />
Closing balance................................................ _______________<br />
2,596,105 _______________<br />
- ______________<br />
33,277 ____________________<br />
- __________________<br />
388,298 ________________<br />
64 _____________<br />
277 ____________<br />
3,018,021 ____________<br />
2,029,479<br />
Capital............................................................. 3,471,312 - 21,700 - 550,893<br />
Adjusted shareholders’ equity............................ 6,073,856 - 33,618 - 388,298<br />
Net income for the year..................................... 2,831,339 - 8,695 23,291 106,665<br />
Percentage of Interest (%)................................. 42,75% - 99,00% - 100,00%<br />
Common shares/quotas held.............................. 77,975,404 - 1,352,676 - 550,892,935<br />
Preferred shares held ........................................ 48,875,508 - 1,352,676 - -<br />
1 Includes amortization of goodwill.<br />
2 Gain arising from the sale of shares by the subsidiary Santa Felicidade Com. Imp. Exp. Prod. Sid. Ltda. due to the Public Offer of Shares of <strong>Gerdau</strong> S.A.
86 87<br />
METALÚRGICA GERDAU S.A.<br />
Consolidated<br />
__________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
____________________________________________________________ ______________<br />
Investment Goodwill Total Total<br />
<strong>Gerdau</strong> Ameristeel US Inc......................................................................... - - - 281,870<br />
<strong>Gerdau</strong> Ameristeel Corporation.................................................................. - - - 80,470<br />
Margusa - Maranhão Gusa S.A.................................................................. - 24,728 24,728 43,564<br />
Dona Francisca Energética S.A................................................................... - 19,512 19,512 21,951<br />
Armacero Industrial y Comercial Ltda.......................................................... 9,871 457 10,328 10,321<br />
Distribuidora Matco S.A. 1 ......................................................................... 12,400 6,066 18,466 -<br />
Salomon Sack S.A. 1 .................................................................................. 17,873 2,091 19,964 -<br />
Corporate joint ventures............................................................................ 10,036 - 10,036 9,984<br />
Other....................................................................................................... 9,513 - 9,513 15,064<br />
____________________ ____________ ___________ ______________<br />
1<br />
Companies purchased by the indirect subsidiary Industria del Aceros S.A. - Indac.<br />
59,693 52,854 112,547 463,224<br />
____________________ ____________ ___________ ______________<br />
____________________ ____________ ___________ ______________<br />
12 - Fixed Assets<br />
Company<br />
___________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
________________________________________________ ____________<br />
Anual<br />
Accumulated<br />
depreciation<br />
depreciation<br />
rate % Cost and depletion Net Net<br />
Land, buildings and structures................................................... 0 to 4 4,918 (3,325) 1,593 1,738<br />
____________ _________________ ____________ ____________<br />
4,918 (3,325) 1,593 1,738<br />
____________ _________________ ____________ ____________<br />
____________ _________________ ____________ ____________<br />
Consolidated<br />
___________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
________________________________________________ ____________<br />
Anual<br />
Accumulated<br />
depreciation<br />
depreciation<br />
rate % Cost and depletion Net Net<br />
Land, buildings and structures................................................... 0 to 10 3,315,650 (1,083,206) 2,232,444 2,303,169<br />
Machinery, equipment and installations...................................... 5 to 10 7,965,817 (3,639,334) 4,326,483 4,085,090<br />
Furniture and fixtures................................................................ 5 to 10 110,487 (69,690) 40,797 38,005<br />
Vehicles................................................................................... 20 to 33 41,678 (31,112) 10,566 12,369<br />
Electronic data equipment/rights/licenses.................................... 20 to 33 284,837 (188,113) 96,724 94,112<br />
Construction in progress............................................................ - 1,065,583 - 1,065,583 718,810<br />
Forestation/reforestation........................................................... Plano de corte 207,431 (51,055) 156,376 129,283<br />
____________ _________________ ____________ ____________<br />
12,991,483 (5,062,510) 7,928,973 7,380,838<br />
____________ _________________ ____________ ____________<br />
____________ _________________ ____________ ____________<br />
a) Insured amounts - the assets are insured against fire, electrical damage and explosion. The coverage is determined based on the risks<br />
involved. The plants of the North American subsidiaries and the Ouro Branco plant of the subsidiary <strong>Gerdau</strong> Açominas S.A. have coverage for<br />
loss of profits.<br />
b) Capitalization of interest and financial charges - R$ 2,021 was capitalized during the year - consolidated, (R$ (14,711) consolidated<br />
in 2003).<br />
c) Guarantees offered - fixed assets were pledged as collateral for loans and financing in the amount of R$ 688,034 - consolidated (R$ 539,724<br />
consolidated in 2003).
d) Summary of changes in fixed assets:<br />
Company<br />
__________________________________<br />
Consolidated<br />
__________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Balance at the beginning of the year.................................................................. 1,738 1,888 7,380,838 7,581,144<br />
(+) Purchases/sales in the year........................................................................... - - 1,167,022 830,871<br />
(-) Depreciation and depletion in cost of sales..................................................... - - (692,609) (538,286)<br />
(-) Depreciation and depletion in administrative expenses.................................... (145) (150) (69,594) (61,806)<br />
(+) Companies consolidated in the year.............................................................. - - - 289,055<br />
(-) Revaluation reversal..................................................................................... - - - (365,347)<br />
(+) Purchase of North Star and others................................................................ - - 267,948 -<br />
(-) Foreign exchange effect on foreign fixed assets.............................................. _____________- _____________- _____________ (124,632) _____________ (354,793)<br />
Balance at the end of the year........................................................................... _____________<br />
1,593 _____________<br />
1,738 _____________<br />
7,928,973 _____________<br />
7,380,838<br />
13 - Deferred Charges<br />
Consolidated deferred charges comprise pre-operating expenses in the construction of a power plant, as well as reforestation, research,<br />
development and restructuring projects.<br />
14 - Financing<br />
Financing are represented as follows:<br />
Anual<br />
Consolidated<br />
___________________________________<br />
charges <strong>2004</strong> 2003<br />
CURRENT<br />
Working capital financing (R$)............................................................................................................ 8.00% to 14.00% 60,642 95,388<br />
Fixed asset financing (R$)................................................................................................................... 12.00% - 3,054<br />
Investment financing (R$)................................................................................................................... CDI 4,500 4,500<br />
Investment financing (US$)................................................................................................................. US$ 133,955 45,649<br />
Working capital financing (US$).......................................................................................................... 1.36% to 10.50% 1,085,418 1,341,746<br />
Fixed asset financing and others (US$)................................................................................................ US$ - 8,692<br />
Working capital financing (Clp$)......................................................................................................... 0.23% to 0.32% 31,905 30,025<br />
Working capital financing (PA$).......................................................................................................... 4.25% to 10.00% 19,956 -<br />
Current portion of long-term financing................................................................................................ ______________ 691,489 ______________ 932,245<br />
LONG-TERM<br />
2,027,865 2,461,299<br />
Working capital financing (R$)............................................................................................................ 10.02% 28,215 3,812<br />
Fixed asset financing and others (R$).................................................................................................. 4.00% to 9.90% 657,720 627,727<br />
Investment financing (R$)................................................................................................................... IGPM + 8.5% 29,045 35,019<br />
Fixed asset financing and others (US$)................................................................................................ 1.74% to 9.97% 762,338 761,288<br />
Working capital financing (US$).......................................................................................................... 2.95% to 10.75% 2,473,200 2,643,325<br />
Investment financing (US$)................................................................................................................. 4.04% 182,943 -<br />
Working capital financing (Cdn$)........................................................................................................ 2.00% to 3.25% - 164,974<br />
Fixed assets financing (Cdn$).............................................................................................................. 2.00% to 3.25% 3,485 3,837<br />
Working capital financing (Clp$)......................................................................................................... 0.29% to 0.43% 16,254 29,952<br />
Fixed assets financing (Clp$)............................................................................................................... 0.26% to 0.43% 27,000 58,396<br />
Fixed assets financing (PA$)............................................................................................................... 4.25% to 10.00% 1,663 -<br />
(-) Current portion............................................................................................................................. ______________ (691,489) ______________ (932,245)<br />
______________ 3,490,374 ______________ 3,396,085<br />
Total financing................................................................................................................................... ______________<br />
5,518,239 ______________<br />
5,857,384<br />
CDI - Certificate of Interbank Deposit interest rate.<br />
IGPM - General Market Price Index.<br />
Summarized by currency:<br />
Consolidated<br />
___________________________________<br />
<strong>2004</strong> 2003<br />
Brazilian real (R$)............................................................................................................................................................. 780,122 769,500<br />
U.S. dollar (US$)............................................................................................................................................................... 4,637,854 4,800,700<br />
Canadian dollar (Cdn$)..................................................................................................................................................... 3,485 168,811<br />
Argentine peso (PA$)........................................................................................................................................................ 21,619 -<br />
Chilean peso (Clp$)........................................................................................................................................................... ______________ 75,159 ______________ 118,373<br />
______________<br />
5,518,239 ______________<br />
5,857,384
88 89<br />
METALÚRGICA GERDAU S.A.<br />
The schedule for payment of the long-term portion of financing is as follows:<br />
Consolidated<br />
In 2006........................................................................................................................................................................................................ 527,860<br />
In 2007........................................................................................................................................................................................................ 563,896<br />
In 2008........................................................................................................................................................................................................ 565,035<br />
In 2009........................................................................................................................................................................................................ 323,109<br />
In 2010........................................................................................................................................................................................................ 210,048<br />
After 2010.................................................................................................................................................................................................... __________________ 1,300,426<br />
__________________<br />
3,490,374<br />
a) Events during the year<br />
On June 3, <strong>2004</strong>, the placement of the second tranche, of US$ 128 million (equivalent to R$ 339,763 at December 31, <strong>2004</strong>) of a US$ 400 million<br />
Export Notes Receivable program (equivalent to R$ 1,061,760 at December 31, <strong>2004</strong>) was concluded. This joint program between <strong>Gerdau</strong> S.A.<br />
and <strong>Gerdau</strong> Açominas S.A. has an interest rate of 7.321% p.a., maturity in April 2012, a grace period of two years and quarterly amortization<br />
as from July 2006.<br />
b) Guarantees<br />
The loans contracted under the FINAME/BNDES program are guaranteed by the financed assets, in the amount of R$ 180,109. The other loans<br />
are guaranteed by sureties from the controlling shareholders, on which the subsidiary pays a fee of 1% p.a. on the amount guaranteed.<br />
c) Covenants<br />
In replacement of the tangible guarantees usually required, the loans are being contracted with certain financial covenants, as follows:<br />
I) Consolidated interest coverage ratio - measures the debt service payment capacity in relation to EBITDA (Earnings before Interest, Taxes,<br />
Depreciation and Amortization);<br />
II) Consolidated leverage ratio - measures the debt coverage capacity in relation to EBITDA;<br />
III) Required Minimum Net Worth - measures the minimum net worth required in financial agreements; and<br />
IV) Current Ratio (current liquidity ratio) - measures the capacity to comply with short-term obligations.<br />
All the covenants mentioned above are calculated on a consolidated basis, except for item IV which refers to the Company itself, and have<br />
been observed. The penalty for non-compliance is the prepayment of the contracts.<br />
d) Credit lines<br />
The North American subsidiaries have a credit line in the amount of US$ 350 million, equivalent to R$ 929,040 at the balance sheet date,<br />
falling due in June 2008, which can be drawn in U.S. dollars (at the LIBOR rate plus interest between 2.25% and 2.75% p.a. or US Prime/FED<br />
Funds plus interest of 0.5% p.a.) or in Canadian dollars (at the Bankers Acceptance (BA) rate plus interest between 2.35% and 2.85% p.a. or<br />
Canadian Prime plus interest of 1.00% p.a.). The distribution of this credit line among the companies is made in proportion to the working<br />
capital of each North American subsidiary.<br />
The subsidiary <strong>Gerdau</strong> Aza S.A. has a credit line for working capital amounting to Clp$ 28 billion, equivalent to R$ 133,582 at the balance sheet<br />
date, bearing interest of 3.90% p.a., and a credit line for fixed assets in the amount of Clp$ 6 billion, equivalent to R$ 28,625 at the balance<br />
sheet date, bearing interest of 4.50% p.a.<br />
15- Debentures<br />
General Number Anual<br />
_________________________________<br />
Issue meeting Issue In portifolio Maturity rate <strong>2004</strong> 2003<br />
3 rd .............................................. 09.21.1999 9,170 - 07.01.<strong>2004</strong> TJLP + 4% _________- _________ 624<br />
Company................................... _________<br />
- _________<br />
624<br />
Current portion - consolidated.... - 624<br />
<strong>Gerdau</strong> S.A.<br />
3 rd - A e B................................... 05.27.1982 144,000 52,946 06.01.2011 CDI 156,387 73,508<br />
7 th .............................................. 07.14.1982 68,400 6,500 07.01.2012 CDI 121,068 21,628<br />
8 th .............................................. 11.11.1982 179,964 65,811 05.02.2013 CDI 145,878 83,566<br />
9 th .............................................. 06.10.1983 125,640 38,234 09.01.2014 CDI 170,954 29,927<br />
11 th - A and B.............................. 06.29.1990 150,000 97,044 06.01.2020 CDI 98,189 19,249<br />
13 th ............................................ 11.23.2001 30,000 30,000 11.01.2008 CDI less 2% - -<br />
<strong>Gerdau</strong> Ameristeel Corp................ 04.23.1997 125,000 - 04.30.2007 6.50% 232,618 226,021<br />
Debentures held by consolidated<br />
subsidiaries............................... (252,982) (26,916)<br />
Debentures held by the Company.. _________ (95,622) _________-<br />
Total Consolidated................... _________<br />
576,490 _________<br />
427,607<br />
Current portion - consolidated.... 2,986 3,651<br />
Long-term portion- consolidated. 573,504 423,956
The Extraordinary General Meeting of shareholders held on April 30, <strong>2004</strong> approved the cancellation of the 1st issue (7,100 debentures),<br />
which were held in treasury.<br />
The Extraordinary General Meeting (EGM) of the subsidiary <strong>Gerdau</strong> S.A. held on April 29, <strong>2004</strong> approved the cancellation of the 4th issue<br />
(42,000 debentures) and 10th issue debentures (6,450 debentures), which were held in treasury.<br />
The same EGM approved the split of the following debenture issues: 3rd (classes A and B), 7th, 8th, 9th and 11th issues (classes A and B). On<br />
July 1, <strong>2004</strong>, three new debentures were issued for each existing debenture, thus changing their nominal value.<br />
The Extraordinary General Meeting of the subsidiary Seiva S.A. - Florestas e Indústrias held on April 30, <strong>2004</strong> approved the cancellation of the<br />
1st issue debentures, series A and B (12,000 debentures), which were held in treasury.<br />
The Board of Directors’ Meeting of the subsidiary <strong>Gerdau</strong> S.A. held on October 14, <strong>2004</strong> approved the fixed remuneration of the 13th issue<br />
debentures at the CDI interest rate less 2% p.a., during the period from November 1, <strong>2004</strong> to October 31, 2005.<br />
The debentures of <strong>Gerdau</strong> Ameristeel Corporation are convertible into common shares of that subsidiary, up to their maturity date.<br />
The controlling shareholders hold, directly or indirectly, R$ 181,965 at December 31, <strong>2004</strong> (R$ 63,216 in 2003) of the outstanding debentures.<br />
16 - Financial Instruments<br />
a) General comments - Metalúrgica <strong>Gerdau</strong> S.A. and its subsidiaries enter into transactions involving financial instruments, the risks of<br />
which are managed through financial positions and exposure limit controls. All instruments are fully recorded in the books of account and<br />
mainly relate to the instruments listed below:<br />
- financial investments - are recorded at their market value as of the balance sheet date and are explained and presented in Note 5;<br />
- investments - are explained and presented in Note 11;<br />
- related parties - are explained and presented in Note 21;<br />
- financing - are explained and presented in Note 14;<br />
- debentures - are explained and presented in Note 15; and<br />
- financial derivatives - in order to minimize the effects of fluctuations in foreign exchange rates on their liabilities, the subsidiaries <strong>Gerdau</strong><br />
Açominas S.A. and Dona Francisca Energética S.A. entered into swap contracts that were converted into Brazilian reais on the contract date<br />
and linked to changes in the CDI rate and the IGPM, plus additional interest. The subsidiary <strong>Gerdau</strong> Ameristeel Corporation also entered into<br />
swap contracts linked to the London Interbank Offered Rate (LIBOR) plus interest between 6.05% and 6.45% p.a.<br />
The swap contracts are listed below:<br />
Consolidated<br />
___________________________________________________________________________________________<br />
Contract date Purpose Amount (US$ thousand) Rate Maturity<br />
07/16/2001 to 07/05/2002 Prepayment 32,823 85.55% to 100.00% of the CDI 01/13/2005 to 03/01/2006<br />
02/20/2002 Resolution 2770 54,000 106.00% of the CDI 06/20/2005<br />
02/19/2003 Resolution 4131 3,300 85.70% of the CDI 02/04/2005<br />
04/17/2003 Fixed assets 6,316 IGPM + 12.95% 05/16/2005 to 11/16/2010<br />
04/17/2003 Fixed assets 13,095 97.00% to 100.90% of the CDI 05/16/2005 to 11/16/2013<br />
10/30 a 11/03/2003 Bank notes 200,000 LIBOR + interest between<br />
6.09% to 6.13% 07/15/2011<br />
06/26/2003 Investment 55,000 4.86% to 5.40% 09/02/2005 to 10/02/2006<br />
b) Market value - the market values of the financial instruments are as follows:<br />
Company<br />
_____________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
____________________________________ ____________________________________<br />
Book Market Book Market<br />
value value value value<br />
Financial investments........................................................................................ 95,702 95,702 25,163 25,163<br />
Debentures....................................................................................................... - - 624 624<br />
Investments...................................................................................................... 3,018,021 5,979,482 2,029,479 4,199,166<br />
Related parties (assets)..................................................................................... - - 3,390 3,390<br />
Related parties (liabilities) ................................................................................ 266 266 - -<br />
Treasury shares - Note 23.................................................................................. 21,490 45,967 7,049 9,153
90 91<br />
METALÚRGICA GERDAU S.A.<br />
Consolidated<br />
_____________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
____________________________________ ____________________________________<br />
Book Market Book Market<br />
value value value value<br />
Financial investments ....................................................................................... 1,666,178 1,666,178 890,130 890,130<br />
Swap contracts - investments (liabilities)............................................................. 4,500 4,500 12,303 12,303<br />
Securitization financing..................................................................................... 627,908 627,908 303,282 303,282<br />
Import financing............................................................................................... 619,883 619,883 377,534 383,941<br />
Prepayment financing........................................................................................ 808,983 804,724 807,385 818,786<br />
Financing - Resolution 2770.............................................................................. 263,060 256,585 365,573 390,235<br />
ACC (Advances on Export Contracts) financing.................................................... 43,891 43,891 500,118 524,935<br />
Financing - Resolution 4131.............................................................................. 20,893 20,755 24,243 24,468<br />
Bank notes financing......................................................................................... 1,050,835 1,260,376 1,144,601 1,292,733<br />
Fixed asset financing ........................................................................................ 45,837 45,686 93,172 96,069<br />
Other financing................................................................................................. 2,036,949 2,036,949 2,158,241 2,177,487<br />
Debentures....................................................................................................... 576,490 576,490 427,607 427,607<br />
Investments...................................................................................................... 112,547 112,547 463,224 463,224<br />
Related parties (assets)..................................................................................... 1,231 1,231 30,509 30,509<br />
Stock options (liabilities) - note 25..................................................................... - 13,663 - 8,298<br />
The market values of the swap contracts of subsidiaries in Brazil were obtained based on future income projections for each contract,<br />
calculated based on the present value of the forward U.S. dollar + coupon rates (assets) and CDI/IGPM future rates (liabilities) and adjusted<br />
to present value on the balance sheet date, using the projected future CDI/IGPM rate for each maturity. The same methodology is applied for<br />
the calculation of the market values of the swap contracts of the subsidiary <strong>Gerdau</strong> Ameristeel Corporation, using the LIBOR rate.<br />
Swap contracts related to financing contracts are classified together with the related financing, as a contra entry to the “Financial expenses/<br />
income, net” account, and are stated at cost plus accrued charges up to the balance sheet date. Contracts not linked to such financing have<br />
been recorded at their market value under the heading “Other accounts payable”, in long-term liabilities.<br />
The Company believes that the balances of the other financial instruments, which are recognized in the books at net contracted values,<br />
are substantially similar to those that would be obtained if they were negotiated in the market. However, because the markets for these<br />
instruments are not active, differences could exist if they were settled in advance.<br />
c) Risk factors that could affect the Company’s and its subsidiaries’ business<br />
Price risk: this risk is related to the possibility of price variations of the products that the subsidiaries sell or in the raw material prices and<br />
other inputs used in the production process. Since the subsidiaries operate in a commodity market, their sales revenues and cost of sales may<br />
be affected by the changes in the international prices of their products or materials. In order to minimize this risk, the subsidiaries constantly<br />
monitor the price variations in the local and international markets.<br />
Interest rate risk: this risk arises as a result of the possibility of losses (or gains) due to fluctuations in interest rates relating to assets<br />
(investments) and liabilities. In order to minimize possible impacts resulting from interest rate fluctuations, the Company and its subsidiaries<br />
have adopted a policy of diversification, alternating between fixed rates and variable rates (such as LIBOR and the CDI) and periodically<br />
renegotiate contracts to adjust them to market.<br />
Exchange rate risk: this risk is related to the possibility of fluctuations in foreign exchange rates affecting financial expenses (or income)<br />
and the liability (or asset) balance of contracts denominated in a foreign currency. In addition to the foreign investments which are a natural<br />
hedge, the Company and its subsidiaries use “hedge” instruments, usually swaps contracts, as described in item “a” above, to manage the<br />
effects of these fluctuations.<br />
Credit risk: this risk arises from the possibility of the subsidiaries not receiving amounts arising from sales or investments at financial<br />
institutions. In order to minimize this risk, the subsidiaries adopt the procedure of analyzing in detail the financial and equity position of<br />
their customers, establishing a credit limit and constantly monitoring their balances. In relation to financial investments, the Company and
its subsidiaries invest solely in institutions with low credit risk, as assessed by rating agencies. In addition, each institution has a maximum<br />
limit for investment, determined by the Credit Committee.<br />
17 - Financial Expenses/Income, Net<br />
Company<br />
Consolidated<br />
__________________________________ __________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Financial income<br />
Financial investments........................................................................................ 1,227 8,574 136,413 142,746<br />
Interest received............................................................................................... 15 1,674 29,934 69,913<br />
Monetary variations - assets.............................................................................. 1 - 3,327 3,972<br />
Foreign exchange variations - assets................................................................... - - (34,671) (79,356)<br />
Foreign exchange swaps - assets........................................................................ - - 3,915 (62,884)<br />
Other financial income...................................................................................... _____________ 8,996 _____________ 1,652 _____________ 110,343 _____________ 12,363<br />
Total financial income.................................................................................. _____________<br />
10,239 _____________<br />
11,900 _____________<br />
249,261 _____________<br />
86,754<br />
Financial expenses<br />
Interest on debt................................................................................................ (844) (14) (417,041) (593,308)<br />
Monetary variations - liabilities.......................................................................... (5,147) (5,602) (22,983) (29,115)<br />
Foreign exchange variations - liabilities.............................................................. - - 197,607 716,672<br />
Foreign exchange swaps - liabilities.................................................................... - - (44,127) (741,389)<br />
Other financial expenses.................................................................................... _____________ (861) _____________- _____________ (111,098) _____________ (60,990)<br />
Total financial expenses............................................................................... (6,852) (5,616) (397,642) (708,130)<br />
_____________ _____________ _____________ _____________<br />
_____________ _____________ _____________ _____________<br />
18 - Taxes and Social Contributions Payable<br />
Company<br />
__________________________________<br />
Consolidated<br />
__________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Income tax and social contribution on net income............................................... 843 710 202,962 39,600<br />
Social charges on payroll................................................................................... 149 546 49,368 49,021<br />
Value-added tax on sales and services (ICMS)..................................................... - - 32,131 12,865<br />
Social contribution on revenues (COFINS)........................................................... 1,014 2,281 33,622 16,494<br />
Excise tax (IPI).................................................................................................. - - 14,114 2,966<br />
Social integration program (PIS)......................................................................... 220 - 6,903 3,923<br />
Income tax and social contribution withheld at source......................................... - - 8,211 23,787<br />
Taxes payable in installments............................................................................. - - 11,819 15,427<br />
Other............................................................................................................... _____________ 21 _____________- _____________ 32,055 _____________ 14,359<br />
2,247 3,537 391,185 178,442<br />
_____________ _____________ _____________ _____________<br />
_____________ _____________ _____________ _____________<br />
19 - Tax Recovery Program (Refis) and Special Installment Payment Program (Paes)<br />
a) REFIS<br />
On December 6, 2000, the subsidiary <strong>Gerdau</strong> S.A. enrolled in the REFIS program to pay the Social Integration Program (PIS) and the Social<br />
Contribution on Revenues (COFINS) contributions in installments. The balances of these tax liabilities are recorded in Taxes and contributions<br />
payable, in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were<br />
originally divided into 60 installments of which 5 installments are not yet due, are restated by the Long-Term Interest Rate (TJLP) rate, and<br />
are as follows at the year end:<br />
Company and consolidated<br />
__________________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
______________________________________________ ______________________________________________<br />
Principal Interest Total Principal Interest Total<br />
PIS....................................................................... 2,608 2,551 5,159 9,895 6,494 16,389<br />
COFINS................................................................ ______________ 620 ____________ 605 ____________ 1,225 ______________ 2,351 ____________ 1,540 ____________ 3,891<br />
Total.................................................................... ______________<br />
3,228 ____________<br />
3,156 ____________<br />
6,384 ______________<br />
12,246 ____________<br />
8,034 ____________<br />
20,280<br />
Current................................................................ 3,228 3,156 6,384 8,644 5,671 14,315<br />
Long-term............................................................ - - - 3,602 2,363 5,965<br />
Taxes, contributions and other liabilities are paid by the subsidiary <strong>Gerdau</strong> S.A. on their due dates, which is a basic requirement to remain<br />
eligible for the REFIS program.
92 93<br />
METALÚRGICA GERDAU S.A.<br />
As guarantee for this installment payment program, the subsidiary <strong>Gerdau</strong> Açominas S.A. pledged the land and buildings of the Piratini<br />
plant, located in the municipality of Charqueadas, in the state of Rio Grande do Sul, amounting to R$ 78,494.<br />
The total income tax and social contribution credits from third parties offset against fines and interest on the consolidation of the REFIS<br />
debts on December 6, 2000 totaled R$ 57,040 and were purchased for R$ 4,351. The subsidiary’s own tax credits were not used.<br />
The constitutionality of the use of credits of R$ 40,118 of the total purchased is being challenged in court. This is because the Federal Revenue<br />
authorities understand that tax credits must first be used to offset the assignor’s own debts, only transferring the excess to the assignee.<br />
This understanding, based solely on a REFIS Management Committee Resolution, edited subsequently to the subsidiary’s enrollment in the<br />
program, does not comply with the legal order. In fact, the law which established the Program authorized, with no conditions, the purchase<br />
of third party tax credits for offset against own liabilities.<br />
b) PAES<br />
The proportionally consolidated (52%) subsidiary Dona Francisca Energética S.A. enrolled in the PAES, established by Law 10684/03, at the<br />
Federal Revenue Secretariat, to settle Corporate Income Tax (IRPJ), Social Contribution on Net Income (CSLL), Social Integration Program<br />
(PIS) and Social Contribution on Revenues (COFINS) liabilities. The balances of these tax liabilities are recorded in Taxes and contributions<br />
payable, in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were<br />
divided into 180 installments of which 161 are not yet due, are restated by the TJLP and are as follows at the year end:<br />
Consolidated<br />
__________________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
______________________________________________ ______________________________________________<br />
Principal Interest Total Principal Interest Total<br />
IRPJ..................................................................... 20,303 3,160 23,463 21,816 1,255 23,071<br />
CSLL.................................................................... 7,360 1,145 8,505 7,908 455 8,363<br />
PIS....................................................................... 720 112 832 774 45 819<br />
COFINS................................................................ ______________ 3,326 ____________ 518 ____________ 3,844 ______________ 3,574 ____________ 206 ____________ 3,780<br />
Total.................................................................... ______________<br />
31,709 ____________<br />
4,935 ____________<br />
36,644 ______________<br />
34,072 ____________<br />
1,961 ____________<br />
36,033<br />
Current................................................................ 2,364 368 2,732 2,363 136 2,499<br />
Long-term............................................................ 29,345 4,567 33,912 31,709 1,825 33,534<br />
Dona Francisca Energética S.A. pays its taxes, contributions and other liabilities on their due dates, which is a basic requirement to remain<br />
eligible for the PAES program.<br />
20 - Provision for Contingencies<br />
The Company and its subsidiaries are parties in labor, civil, and tax processes. Based on the opinion of its legal advisors, management believes<br />
that the provision for contingencies is sufficient to cover probable and reasonably estimable losses from unfavorable court decisions, and<br />
that the final decisions will not have significant effects on the financial position of the Company at December 31, <strong>2004</strong>.<br />
The balances of the contingencies are as follows:<br />
I) Contingent liabilities provided<br />
Company<br />
Consolidated<br />
_________________________________ _________________________________<br />
a) Tax contingencies <strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Eletrobrás............................................................................ (a.1) - - 50,456 50,456<br />
Finsocial.............................................................................. (a.2) - - 6,898 6,948<br />
ICMS................................................................................... (a.3) - - 17,300 14,346<br />
Social contribution on net income......................................... (a.4) - 198 7,333 40,954<br />
Corporate income tax........................................................... (a.5) - 25 19,993 101,159<br />
INSS.................................................................................... (a.6) - - 24,900 17,375<br />
PIS...................................................................................... (a.7) 469 1,382 2,372 3,739<br />
COFINS............................................................................... (a.7) - - 6,935 6,935<br />
Emergency Capacity Charge.................................................. (a.8) - - 25,563 10,074<br />
Extraordinary Tariff Recomposition ....................................... (a.8) - - 13,037 5,847<br />
FGTS and other tax contingencies.......................................... (a.9) - - 1,503 2,330<br />
(-) Judicial deposits.............................................................. (a.10) _____________- _____________- _____________ (73,938) _____________ (155,138)<br />
469 1,605 102,352 105,025<br />
b) Labor contingencies......................................................... (b.1) - - 49,798 29,609<br />
(-) Judicial deposits.............................................................. (b.2) _____________- _____________- _____________ (10,538) _____________ (10,244)<br />
- - 39,260 19,365<br />
c) Civil contingencies............................................................ (c.1) 195 195 100,559 99,688<br />
(-) Judicial deposits......................................................... (c.2) _____________- _____________- _____________ (1,207) _____________ (1,063)<br />
_____________ 195 _____________ 195 _____________ 99,352 _____________ 98,625<br />
Total liabilities provided........................................ _____________<br />
664 _____________<br />
1,800 _____________<br />
240,964 _____________<br />
223,015<br />
INSS - National Institute of Social Security<br />
FGTS - Government Severance Indemnity Fund for employees
a) Tax contingencies<br />
a.1) Of the total provision, R$ 50,456 (consolidated) refers to the contingency of compulsory loans to Eletrobrás, the constitutionality of<br />
which is being questioned by the subsidiary <strong>Gerdau</strong> S.A. In March 1995, the Federal Supreme Court judged the proceedings against other<br />
taxpayers. Certain of the Company’s proceedings are pending decision, but the outcomes are already foreseeable, in view of the prior<br />
decisions. The subsidiary <strong>Gerdau</strong> S.A. established a provision related to “compulsory loans”, taking into consideration that, although the<br />
payment to Eletrobrás was made as a loan: (i) the reimbursement to the company would probably be in the form of shares of Eletrobrás; (ii)<br />
the conversion will be made based on the net asset book value of the shares; and (iii) based on the current available information, the shares<br />
of Eletrobrás are valued at substantially less than the net asset book value.<br />
a.2) R$ 6,898 (consolidated) relating to the unconstitutionality of the Social Investment Fund (FINSOCIAL). Although the Supreme Court has<br />
confirmed the constitutionality of the tax at the rate of 0.5%, some of the Company’s subsidiaries claims are still pending judgment, most<br />
of them in the Superior Courts.<br />
a.3) R$ 17,300 (consolidated) relating to amounts for Value-Added Tax on Sales and Services (ICMS), the majority of which relates to credit<br />
rights involving the Finance Secretariat and the State Courts of the First Instance in the state of Minas Gerais.<br />
a.4) R$ 7,333 (consolidated) relating to social contribution on net income. The amounts refer to challenges of the constitutionality of the<br />
contribution in 1989, 1990 and 1992. Some proceedings are pending decision, most of them in the Superior Courts.<br />
a.5) R$ 19,993 (consolidated), relating to Corporate Income Tax, challenged at the administrative sphere. Considering the many legal decisions<br />
unfavorable to the unconstitutionality of the limitation of the offset of income tax and social contribution losses to 30% of net income,<br />
the subsidiary <strong>Gerdau</strong> Açominas S.A. decided to no longer deposit in court the amounts related to the matter and requested, in the court<br />
injunction records in which it is the petitioner, the conversion of the amounts deposited in court (R$ 338,992) into tax payments, and started<br />
observing the legal limitation. The legal challenge has been maintained; however, in the event the STF reviews its current guidance and the<br />
subsidiary is successful, it will plead the offset of the amounts overpaid.<br />
a.6) R$ 24,900 (consolidated) on contributions due to the INSS which correspond to suits for annulment by the subsidiary <strong>Gerdau</strong> S.A. with<br />
judicial deposits of practically the whole amount involved, in progress in the Federal Court of the First Instance in the state of Rio de Janeiro.<br />
The provision also includes lawsuits questioning the position of the INSS in terms of charging INSS contributions on profit sharing payments<br />
made by the subsidiary <strong>Gerdau</strong> Açominas S.A., as well as on payments for services rendered by third parties, in which the Institute calculated<br />
charges for the last ten years and assessed the subsidiary because it understands that the company is jointly liable. The assessments were<br />
maintained at the administrative level, and <strong>Gerdau</strong> Açominas S.A. filled annulment actions with the judicial deposit of the corresponding<br />
amount, based on the understanding that the right to assess part of the charge had prescribed and that there is no such liability.<br />
a.7) R$ 469 (Company) and R$ 2,372 (consolidated), relating to contributions for the Social Integration Program (PIS), and R$ 6,935<br />
(consolidated) to the Social Contribution on Revenues (COFINS), in connection with lawsuits questioning the constitutionality of Law 9718,<br />
which changed the calculation basis of these contributions. These suits are in progress in the Federal Regional Court of the 2nd Region and<br />
the Federal Supreme Court.<br />
a.8) R$ 25,563 (consolidated) relating to the Emergency Capacity Charge (ECE), as well as R$ 13,037 (consolidated) relating to the Extraordinary<br />
Tariff Recomposition (RTE), included in the electric energy bills of the subsidiaries’ plants. According to the Company, these charges are<br />
of a tax nature and, as such, are incompatible with the National Tax System provided in the Federal Constitution. For this reason, the<br />
constitutionality of this charge is being challenged in court. The lawsuits are in progress in the Federal Justice of the First Instance of the<br />
states of Pernambuco, Ceará, Minas Gerais, Rio de Janeiro, São Paulo, Paraná, and Rio Grande do Sul, as well as in the Federal Regional Courts<br />
of the 1st and 2nd Regions. The subsidiaries have fully deposited in court the amount of the disputed charges.<br />
a.9) R$ 1,503 (consolidated) relating to a lawsuit brought by the subsidiary <strong>Gerdau</strong> Açominas S.A. regarding the Government Severance<br />
Indemnity Fund for Employees (FGTS) increased charges, which arose from the changes introduced by Complementary Law 110/01. Currently,<br />
the corresponding court injunction is awaiting the judgment of the extraordinary appeal filed by the subsidiary. The amount provided is<br />
fully deposited in court.<br />
a.10) The judicial deposits, representing restricted assets of the subsidiary <strong>Gerdau</strong> S.A., relate to amounts deposited and maintained in<br />
court until the resolution of the related legal matters. The balances of these credits, which at December 31, <strong>2004</strong> amounted to R$ 73,938<br />
(consolidated), are classified as a reduction of the provision for tax contingencies recorded in the books.<br />
b) Labor contingencies<br />
b.1) The Company’s subsidiaries are also defending labor claims, for which there is a provision of R$ 49,573 (consolidated) at December 31,<br />
<strong>2004</strong>. None of these claims refer to individually significant amounts, and the lawsuits mainly involve claims for overtime pay, health hazards<br />
and risk premium, among others.<br />
b.2) The balances of the deposits in court, which totaled R$ 10,313 at December 31, <strong>2004</strong> (consolidated), are classified as a reduction of the<br />
provision for labor contingencies.<br />
c) Civil contingencies<br />
c.1) The Company and its subsidiaries are also defending in court civil claims arising in the normal course of its own and the subsidiaries’<br />
operations, including claims arising from work accidents, in a total amount at December 31, <strong>2004</strong> of R$ 195 (Company) and R$ 100,559<br />
(consolidated) as contingent liability for these claims.
94 95<br />
METALÚRGICA GERDAU S.A.<br />
The provision refers mainly to an issue involving the jointly-owned (52%) subsidiary Dona Francisca Energética S.A. According to a resolution<br />
of the Brazilian Electricity Regulatory Agency (ANEEL), the operations of the subsidiary are restricted to the South of Brazil submarket. Since<br />
some of its transactions were carried out in the remaining submarkets, Dona Francisca Energética S.A. may have to acquire the energy it<br />
sells from third parties. The subsidiary challenges in court the validity of the ANEEL resolution and has obtained a favorable preliminary<br />
injunction.<br />
c.2) At December 31, <strong>2004</strong>, the balances of deposits in court totaled R$ 1,207 (consolidated) and are classified as a reduction of the provision<br />
for contingencies.<br />
II) Contingent liabilities not provided<br />
a) Tax contingencies<br />
a.1) The subsidiary <strong>Gerdau</strong> S.A. is defendant in assessments filed by the state of Minas Gerais demanding ICMS tax payments arising mainly<br />
from the sales of products to commercial exporters. The restated amount of the lawsuits totals R$ 32,848. The Company has not recorded<br />
any provision for contingency in relation to these claims since it considers this tax is not payable, because products for export are exempted<br />
from ICMS.<br />
a.2) The subsidiaries <strong>Gerdau</strong> S.A. and <strong>Gerdau</strong> Açominas S.A. are defendants in assessments filed by the state of Minas Gerais, which demand<br />
ICMS tax payments on the export of semi-finished manufactured products. The subsidiary <strong>Gerdau</strong> Açominas S.A. is also the petitioner of an<br />
annulment action. The total amount demanded is R$ 249,742. The companies have not recorded any provision for contingency in relation to<br />
these claims since they consider this tax is not payable because the products cannot be considered semi-finished manufactured products as<br />
defined by the federal complementary law and, therefore, are not subject to ICMS.<br />
a.3) Also, R$ 68,431 are being demanded due to the understanding of the Federal Revenue Secretariat that the transactions carried out by<br />
the subsidiary <strong>Gerdau</strong> Açominas S.A., under the drawback concession granted by DECEX, were not in conformity with the legislation. <strong>Gerdau</strong><br />
Açominas filed a preliminary administrative defense of the legality of the arrangement, which is pending judgment. Since the tax liability<br />
has not been definitely established, and considering that the arrangement which originated the demand conforms with the assumptions<br />
required for the drawback concession, and also that the concession was granted after analysis by the legal administrative authority, <strong>Gerdau</strong><br />
Açominas S.A. considers an unfavorable outcome to be remote and, for this reason, has not recorded any provision for the contingency.<br />
b) Civil contingencies<br />
b.1) Two civil construction syndicates in the state of São Paulo alleged that the subsidiary <strong>Gerdau</strong> S.A. and other long steel producers in Brazil<br />
divide customers among them, violating the antitrust legislation. After investigations carried out by the National Secretariat of Economic<br />
Law (SDE) and based on public hearings, the SDE is of the opinion that a cartel exists. This conclusion was also supported by an earlier<br />
opinion by the Secretariat for Economic Monitoring (SEAE). The process has now been forwarded to the Administrative Council for Economic<br />
Defense (CADE) for final decision.<br />
The subsidiary <strong>Gerdau</strong> S.A. denies having engaged in any type of anti-competitive behavior and believes, based on information available,<br />
including the opinion of its legal advisors, that the administrative process until now includes many irregularities, some of which are<br />
impossible to resolve. For example, the investigations carried out by SDE did not follow the due legal course and the representatives of the<br />
SDE influenced certain witnesses who testified in the process. In addition, the SDE report was issued before the subsidiary <strong>Gerdau</strong> S.A. had<br />
the chance to reply to the closing arguments, which indicates that there was a bias in the judgment made by the SDE. The same applies to<br />
the SEAE report, which does not analyze the economic issues and is based exclusively on the witnesses’ testimony.<br />
These irregularities, which also reflect non-compliance with the related constitutional provisions, will no doubt affect the administrative<br />
decision by CADE, based on the conclusions presented by the antitrust authorities until now. The subsidiary <strong>Gerdau</strong> S.A. has pointed out and<br />
tried to combat all these irregularities and will continue doing so in relation to the allegations and the irregularities in the administrative<br />
process, believing in a favorable outcome to this process, if not in the administrative sphere, possibly in the judicial sphere.<br />
Because of the above, no provision has been recorded for this case. According to Brazilian legislation, fines of up to 30% of gross revenues in<br />
the prior fiscal years may be applied to the subsidiary <strong>Gerdau</strong> S.A. and, if personal responsibility of an executive is proven, such executive may<br />
be penalized by 10% to 50% of the fine applied to the company. There are no precedents for fines exceeding 4%. In a similar case involving<br />
flat steel companies, the fine was 1%.<br />
b.2) A civil lawsuit has been filed against the subsidiary <strong>Gerdau</strong> Açominas S.A. regarding the termination of a contract for the supply of slag<br />
and indemnities for losses and damages. At December 31, <strong>2004</strong>, the lawsuit amounts to approximately R$ 37,014.<br />
<strong>Gerdau</strong> Açominas S.A. contested all bases for the lawsuit and filed a counterclaim for termination of the contract and indemnity for breach<br />
of contract.<br />
The judge declared the contract to be terminated, since this demand was common to both parties. With regards to the remaining discussion,<br />
the judge understood that both parties were at fault and judged the requests for indemnity unfounded. This decision was maintained by<br />
the Court of Civil Appeals of the State of Minas Gerais (TAMG), and the court decision is based on expert evidence and interpretation of the<br />
contract. The process was in the High Court of Justice (STJ) and was returned to the TAMG for judgment of the appeal requesting clarification<br />
of the decision.<br />
<strong>Gerdau</strong> Açominas S.A. believes that any loss from the case is remote, since it understands that a change in the judgment is unlikely.<br />
b.3) A civil lawsuit has been filed by Sul America Cia. Nacional de Seguros against the subsidiary <strong>Gerdau</strong> Açominas S.A. and Banco<br />
Westdeustsche Landesbank Girozentrale, New York Branch (WestLB), for the payment of R$ 34,383 to settle an indemnity claim, which has<br />
been deposited in court. The insurance company pleads doubt in relation to whom payment should be made and alleges that the subsidiary
is resisting in receiving and settling it. The lawsuit was contested both by the Bank (which claims having no right over the amount deposited,<br />
which resolves the doubt raised by Sul América) and by the subsidiary (which claims that there is no such doubt and that there is justification<br />
to refuse payment since the amount owed by Sul América is higher than the amount involved). Subsequently, Sul América claimed fault in<br />
the Bank’s representation, and this matter is therefore already settled, which resulted in the withdrawal in December <strong>2004</strong> of the amount<br />
deposited. The process should enter the expert evidence phase, mainly for calculation of the amount due. Based on the opinion of its legal<br />
advisors, the subsidiary expects loss to be remote and that the sentence will declare the amount payable within the amount stated in the<br />
pleading.<br />
Also, <strong>Gerdau</strong> Açominas S.A. filed, prior to this lawsuit, a lawsuit for the payment of the amount recognized by the insurance companies. The<br />
lawsuits are pending. The subsidiary expects a favorable outcome in this lawsuit.<br />
The civil lawsuits arise from an accident on March 23, 2002 with the blast furnace regenerators of the Ouro Branco steel mill, which resulted<br />
in the stoppage of several activities, with material damages to the steel mill equipment and loss of profits. The equipment, as well as the<br />
loss of profits arising from the accident, were covered by an insurance policy. The report on the event, as well as the loss claim, was filed with IRB - Brasil<br />
Resseguros S.A., and an advance payment of R$ 62,000 was received in 2002.<br />
In 2002, a preliminary and conservative estimate of indemnities related to the coverage of loss of profits and material damages, in the total<br />
amount of approximately R$ 110,000, was recorded, based on the amount of fixed costs incurred during the period of partial stoppage of<br />
the steel mill activities and the immediate expenses to be incurred to recover the equipment temporarily. This estimate approximates the<br />
advance amount received plus the amount proposed by the insurance company as a complement to settle the indemnity. Subsequently, new<br />
amounts were added to the discussion, as stated in the subsidiary’s plea, although not yet recorded.<br />
Based on the opinion of its legal advisors, the Company considers that losses from other contingencies that may affect the results of<br />
operations or the Company’s consolidated financial position are remote.<br />
III) Contingent assets not recorded<br />
a) Tax contingencies<br />
a.1) The subsidiary <strong>Gerdau</strong> S.A. believes that the realization of certain contingent gains is probable. Among them is a court-order debt<br />
security issued in 1999 in its favor by the state of Rio de Janeiro in the amount of R$ 26,580, arising from an ordinary lawsuit against the noncompliance<br />
with the Loan Agreement for Periodic Execution in Cash under the Special Industrial Development Program (PRODI).<br />
Due to the default by the state of Rio de Janeiro and the non-regulation of Constitutional Amendment 30/00, which granted the government<br />
a ten-year moratorium for payment of securities issued to cover court-order debts not related to food, the realization of this credit is not<br />
expected in <strong>2004</strong> and, also, there is no expectation of realization in 2005 and following years. For this reason, this gain is not recognized in<br />
the financial statements.<br />
a.2) The Company’s subsidiaries have filed several ordinary proceedings relating to the correct basis of calculation of PIS under Complementary<br />
Law 07/70, due to the declarations of unconstitutionality of Decree Laws 2445/88 and 2449/88. The companies expect to recover the taxes<br />
incorrectly paid. The amounts under discussion total R$ 84,245.<br />
a.3) Also, the subsidiaries <strong>Gerdau</strong> S.A., <strong>Gerdau</strong> Açominas S.A. and Margusa - Maranhão Gusa S.A. expect to recover IPI premium credits.<br />
<strong>Gerdau</strong> S.A. and the subsidiary Margusa Maranhão Gusa S.A. have filed administrative appeals for recovery, which are pending judgment.<br />
With regards to the subsidiary <strong>Gerdau</strong> Açominas S.A., the proceedings were directed to the courts, with an unfavorable judgment. Currently,<br />
the process awaits judgment of the appeal filed by the subsidiary. The Company estimates the credits at R$ 394,002 but no accounting<br />
recognition has been made thereof because of uncertainty as to their realization.<br />
21 - Related Parties<br />
a) Analysis of loan balances<br />
Company<br />
Consolidated<br />
__________________________________ __________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
<strong>Gerdau</strong> Açominas S.A........................................................................................ (381) 3,390 - -<br />
Fundação <strong>Gerdau</strong>.............................................................................................. - - 1,305 16,762<br />
<strong>Gerdau</strong> S.A....................................................................................................... 115 - - -<br />
Sipar Aceros S.A. and other............................................................................... _____________- _____________- _____________ (74) _____________ 13,747<br />
Total................................................................................................................ _____________<br />
(266) _____________<br />
3,390 _____________<br />
1,231 _____________<br />
30,509<br />
b) Commercial transactions - the Company paid R$ 300 (R$ 300 in 2003) to the associated company Grupo <strong>Gerdau</strong> Empreendimentos Ltda.<br />
for the use of the <strong>Gerdau</strong> trademark, as well as R$ 502 (R$ 524 in 2003) to the parent company Indac - Ind. Adm. e Comércio S.A. related to<br />
guarantees.<br />
c) Guarantees granted - the Company is the guarantor of the subsidiary GTL Financial Corp., in the amount of US$ 50,000, equivalent<br />
to R$ 132,720 at the balance sheet date. The subsidiary <strong>Gerdau</strong> S.A. is the guarantor of the Euro Commercial Paper program of the subsidiary<br />
GTL Trade Finance Inc., of US$ 110 million, equivalent to R$ 291,984 at the balance sheet date. The subsidiary is also the guarantor of financing<br />
agreements of the subsidiary GTL Financial Corp., of US$ 5,000, equivalent to R$ 13,272, and securitization operations of the subsidiary<br />
<strong>Gerdau</strong> Açominas Overseas Ltda., of US$ 233 million, equivalent to R$ 618,475 on the balance sheet date. The subsidiary <strong>Gerdau</strong> Açominas S.A.<br />
is the guarantor of the vendor financing loan agreement of the associated company Banco <strong>Gerdau</strong> S.A., in the amount of R$ 68,138.
96 97<br />
METALÚRGICA GERDAU S.A.<br />
22 - Post-employment Benefits<br />
Considering all types of benefits to employees granted by the Company, the asset and liability positions at December 31 are as follows:<br />
Company<br />
__________________________________<br />
Consolidated<br />
__________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Pension plan actuarial liability - defined benefit.................................................. - - 154,199 162,719<br />
Actuarial liability with post-employment health benefit........................................ - - 130,283 105,964<br />
Retirement and discharge benefits payable......................................................... - - 9,996 10,187<br />
_____________ _____________ _____________ _____________<br />
Total liabilities.................................................................................................. - - 294,478 278,870<br />
_____________ _____________ _____________ _____________<br />
_____________ _____________ _____________ _____________<br />
Unrecognized actuarial assets............................................................................ 1,964 1,892 165,510 125,107<br />
_____________ _____________ _____________ _____________<br />
_____________ _____________ _____________ _____________<br />
a) Pension plan - defined benefit<br />
The Company and other Group subsidiaries in Brazil are the co-sponsors of defined benefit pension plans that cover substantially all<br />
employees in Brazil (“Açominas Plan” and “<strong>Gerdau</strong> Plan”).<br />
The Açominas Plan is managed by Fundação Açominas de Seguridade Social - Aços, a closed supplementary pension entity to complement<br />
the social security benefits of employees and retired employees of the Ouro Branco unit of <strong>Gerdau</strong> Açominas S.A. The assets of the Açominas<br />
Plan mainly comprise investments in bank deposit certificates, federal public securities, marketable securities and properties.<br />
The <strong>Gerdau</strong> Plan is managed by <strong>Gerdau</strong> - Sociedade de Previdência Privada, a closed supplementary pension entity to complement the social<br />
security benefits of employees and retired employees of the Company of the other units of <strong>Gerdau</strong> Açominas S.A. and other subsidiaries in<br />
Brazil. The assets of the <strong>Gerdau</strong> Plan comprise investments in bank deposit certificates, federal public securities and marketable securities.<br />
Also, the Canadian and American subsidiaries sponsor defined benefit plans (Canadian Plan and American Plan) that cover substantially all<br />
of their employees.<br />
The Canadian and American plans are managed by CIBC Mellon and Wells Fargo, respectively, to complement the social security benefits of<br />
employees of <strong>Gerdau</strong> Ameristeel Corporation and its subsidiaries, The assets of the Plans mainly comprise marketable securities.<br />
The sponsors’ contributions to the pension plans were R$ 13 in <strong>2004</strong> and R$ 11 in 2003 for the Company and R$ 68,288 in <strong>2004</strong> and R$ 63,733<br />
in 2003 for the consolidated.<br />
The current expenses of the defined pension plan are as follows:<br />
Company<br />
Consolidated<br />
__________________________________ __________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Cost of current service....................................................................................... 39 60 49,884 41,261<br />
Interest cost .................................................................................................... 124 700 125,054 110,212<br />
Expected return of plan assets........................................................................... (204) (1,310) (162,001) (122,362)<br />
Amortization of unrecognized liability................................................................. - - 462 467<br />
Amortization of past service costs ..................................................................... - - 778 1,332<br />
Amortization of (gain) loss ................................................................................ (18) - 2,550 2,764<br />
Employees’ expected contribution ..................................................................... _____________- _____________- _____________ (4,383) _____________ (3,576)<br />
Pension plan cost (benefit), net ......................................................................... _____________<br />
(59) _____________<br />
(550) _____________<br />
12,344 _____________<br />
30,098<br />
The reconciliation of the assets and liabilities of the plans is presented below:<br />
Company<br />
Consolidated<br />
__________________________________ __________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Total liabilities ................................................................................................. (7,065) (6,223) (1,790,639) (1,623,000)<br />
Fair value of plan assets.................................................................................... _____________ 14,993 _____________ 12,366 _____________ 1,867,506 _____________ 1,663,567<br />
Net assets........................................................................................................ 7,928 6,143 76,867 40,567<br />
Unrecognized (gains) losses............................................................................... (5,964) (4,251) (96,827) (91,405)<br />
Past service costs ............................................................................................. - - 26,342 7,722<br />
Other .............................................................................................................. _____________- _____________- _____________ 4,929 _____________ 5,504<br />
Total assets (liabilities), net............................................................................... _____________<br />
1,964 _____________<br />
1,892 _____________<br />
11,311 _____________<br />
(37,612)<br />
Actuarial asset ................................................................................................. 1,964 1,892 165,510 125,107<br />
Pension plan liability recorded in balance sheet................................................... _____________- _____________- _____________ (154,199) _____________ (162,719)<br />
Assets (liabilities), net....................................................................................... _____________<br />
1,964 _____________<br />
1,892 _____________<br />
11,311 _____________<br />
(37,612)
Changes in plan assets and actuarial liabilities were as follows:<br />
Company<br />
__________________________________<br />
Consolidated<br />
__________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Changes in benefit<br />
Benefit liabilities at the beginning of the year..................................................... 6,223 6,901 1,623,000 1,554,443<br />
Cost of service.................................................................................................. 39 60 49,884 41,261<br />
Interest cost..................................................................................................... 124 700 125,054 110,212<br />
Actuarial loss (gain) ......................................................................................... 794 (1,336) 88,360 75,148<br />
Payment of benefits......................................................................................... (115) (102) (69,534) (58,588)<br />
Past service costs due to changes in the plan...................................................... - - 10,516 -<br />
Foreign exchange effect on foreign companies.................................................... - - (45,000) (99,476)<br />
Initial liability recognition adjustment................................................................. _____________- _____________- _____________ 8,359 _____________-<br />
Benefit liabilities at the end of the year ........................................................ _____________<br />
7,065 _____________<br />
6,223 _____________<br />
1,790,639 _____________<br />
1,623,000<br />
Company<br />
Consolidated<br />
__________________________________ __________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Changes in plan assets<br />
Fair value of plan assets at the beginning of the year........................................... 12,366 10,515 1,663,567 1,396,928<br />
Return on plan assets........................................................................................ 2,729 1,942 232,043 314,371<br />
Sponsor contributions........................................................................................ 13 11 68,288 63,733<br />
Participant contributions.................................................................................... - - 5,202 4,232<br />
Payment of benefits......................................................................................... (115) (102) (69,534) (58,588)<br />
Foreign exchange effect on foreign companies.................................................... _____________- _____________- _____________ (32,060) _____________ (57,109)<br />
Fair value of plan assets at the end of the year.................................................... _____________<br />
14,993 _____________<br />
12,366 _____________<br />
1,867,506 _____________<br />
1,663,567<br />
The method for calculating the actuarial liability is the Projected Unit Credit Method, as determined by CVM Deliberation 371/2000.<br />
The amount of the actuarial gains and losses to be recognized as income or expense is the unrecognized amount that exceeds, in each period,<br />
the higher of the following limits: (i) 10% of the present value of the total actuarial liability of the defined benefit plan and (ii) 10% of the<br />
fair value of the plan assets. The resulting amount will be amortized annually based on the average remaining years of service estimated for<br />
the employees that participate in the plan.<br />
The table below shows a summary of the assumptions made to calculate and record the defined benefit plan for both the Company and<br />
consolidated:<br />
North american<br />
<strong>Gerdau</strong> Plan Açominas Plan plan<br />
Average discount rate................................................................. 11.30% 11.30% 5.75% - 6.00%<br />
Increase in compensation............................................................ 9.20% 8.675% 2.50% - 4.25%<br />
Expected rate of return on assets................................................. 12.35% 12.35% 7.25% - 8.40%<br />
Mortality chart........................................................................... GAM 83 (-1 year) AT-83 GAM 83<br />
Disabled mortality chart.............................................................. RRB 1944 AT-83 RRB 1977<br />
Turnover rate............................................................................. Based on service Null Based on age<br />
and salary level<br />
and service<br />
(plan experience)<br />
b) Pension plan - defined contribution<br />
The Company and its subsidiaries in Brazil are also the co-sponsors of a defined contribution pension plan administered by <strong>Gerdau</strong> - Sociedade<br />
de Previdência Privada. Contributions are based on a percentage of the compensation of employees.<br />
The foreign subsidiary <strong>Gerdau</strong> AmeriSteel US Inc. has a defined contribution plan, the contributions to which are equivalent to 50% of the<br />
amount paid by the participants, limited to 4% of salary. The other companies do not have this type of pension plan.<br />
The total cost of this plan was R$ 55 in <strong>2004</strong> and R$ 62 in 2003 for the Company and R$ 12,005 in <strong>2004</strong> and R$ 9,827 in 2003 consolidated.<br />
c) Other post-employment benefits<br />
The Company estimates that the amount payable to executives on their retirement or discharge totals R$ 9,996 (consolidated) at December<br />
31, <strong>2004</strong> (R$ 10,187 in 2003 - consolidated).
98 99<br />
METALÚRGICA GERDAU S.A.<br />
The American Plan includes, in addition to pension benefits, specific health benefits for employees who retire after a certain age and with<br />
a certain number of years of service. The American subsidiary has the right to change or eliminate these benefits, and the contributions are<br />
based on amounts actuarially calculated.<br />
The composition of the net periodic cost for the post-employment health benefits is as follows:<br />
Consolidated<br />
___________________________________<br />
<strong>2004</strong> 2003<br />
Cost of service.................................................................................................................................................................. 3,007 2,542<br />
Interest cost..................................................................................................................................................................... 5,715 6,492<br />
Amortization of past service costs...................................................................................................................................... (563) -<br />
Amortization of (gain) loss................................................................................................................................................. ______________ 80 ______________-<br />
Expense for post retirement health benefits, net.................................................................................................................. ______________<br />
8,239 ______________<br />
9,034<br />
The status of the fund for post-employment health benefits is as follows:<br />
Consolidated<br />
___________________________________<br />
<strong>2004</strong> 2003<br />
Plan assets at market value............................................................................................................................................... - -<br />
Projected benefit liabilities................................................................................................................................................. ______________ (130,559) ______________ (111,390)<br />
Fund status...................................................................................................................................................................... (130,559) (111,390)<br />
Unrecognized gains and losses, net ................................................................................................................................... 8,101 5,426<br />
Past service costs.............................................................................................................................................................. ______________ (7,825) ______________-<br />
Post-retirement health benefit liabilities recorded in thebalance sheet................................................................................... ______________<br />
(130,283) ______________<br />
(105,964)<br />
The changes in plan assets and actuarial liabilities was as follows:<br />
Consolidated<br />
___________________________________<br />
<strong>2004</strong> 2003<br />
Changes in projected benefit liabilities<br />
Projected benefit liabilities at the beginning of the year....................................................................................................... 111,390 112,991<br />
Purchase of North Star...................................................................................................................................................... 23,136 -<br />
Cost of service.................................................................................................................................................................. 3,007 2,542<br />
Interest cost..................................................................................................................................................................... 5,715 6,492<br />
Participant contributions.................................................................................................................................................... 1,946 1,870<br />
Actuarial loss.................................................................................................................................................................... 4,759 3,432<br />
Administrative benefits and expenses paid.......................................................................................................................... (6,639) (6,528)<br />
Foreign exchange effect ................................................................................................................................................... (4,364) (9,409)<br />
Initial liability recognition adjustment................................................................................................................................. ______________ (8,391) ______________-<br />
Projected benefit liabilities at the end of the year................................................................................................................ ______________<br />
130,559 ______________<br />
111,390<br />
Consolidated<br />
___________________________________<br />
<strong>2004</strong> 2003<br />
Changes in plan assets<br />
Plan assets a the beginning of the year.............................................................................................................................. - -<br />
Sponsor contributions........................................................................................................................................................ 4,693 4,658<br />
Participant contributions.................................................................................................................................................... 1,946 1,870<br />
Administrative benefits and expenses paid.......................................................................................................................... ______________ (6,639) ______________ (6,528)<br />
Plan assets at the end of the year....................................................................................................................................... ______________<br />
- ______________<br />
-
The assumptions adopted in the accounting for post-employment health benefits were as follows:<br />
North american plan<br />
Average discount rate ...................................................................................................................................................... 5.75% - 6.00%<br />
Health treatment - rate for the next year............................................................................................................................. 9.50% - 13.00%<br />
Health treatment - rate for cost decrease to be reached from 2010 to 2013.......................................................................... 4.50% to 5.50%<br />
23 - Shareholders’ Equity<br />
a) Capital - authorized capital at December 31, <strong>2004</strong>, comprises 50,000,000 common shares (50,000,000 at December 31, 2003) and<br />
100,000,000 preferred shares (100,000,000 at December 31, 2003), with no par value.<br />
The Extraordinary General Meeting of shareholders held on April 30, <strong>2004</strong> approved the capital increase of R$ 384,000 through the<br />
capitalization of the reserve for investments and working capital, with a bonus of 30% on the shares on that date, representing 12,475,319<br />
new shares (4,158,440 common and 8,316,879 preferred). Also, a split of 70% of these new shares was approved, with the issue of 29,109,076<br />
shares (9,703,025 common and 19,406,051 preferred).<br />
At December 31, <strong>2004</strong>, 27,722,930 common shares (13,861,465 at December 31, 2003) and 55,445,860 preferred shares (27,722,930 at December<br />
31, 2003) are subscribed and paid-up, totaling R$ 1,664,000 (R$ 1,280,000 at December 31, 2003). Preferred shares do not have voting rights<br />
and cannot be redeemed, but have the same rights as common shares in terms of profit sharing.<br />
b) Treasury stock - at December 31, <strong>2004</strong>, the Company had 682,000 preferred shares (137,500 preferred shares in 2003), held in treasury for<br />
subsequent sale in the market or cancellation, totaling R$ 21,490 (R$ 7,049 in 2003).<br />
c) Interest on equity and dividends - the Company calculated interest on equity in accordance with the terms established by Law 9249/95.<br />
The corresponding amount was recorded as financial expenses for tax purposes. For presentation purposes, this amount was recorded as<br />
dividends, not affecting net income. The related tax benefit through the reductions of the income tax and social contribution on net income<br />
charges for the year was R$ 55,250 (R$ 58,514 in 2003). Shareholders are entitled to receive, each year, a minimum mandatory dividend of 30%<br />
of adjusted net income.<br />
The amount of interest on equity and dividends credited for the year was R$ 433,879, shown as follows:<br />
<strong>2004</strong> 2003<br />
Net income for the year..................................................................................................................................................... 1,437,075 575,179<br />
Transfer to legal reserve.................................................................................................................................................... ______________ (71,855) ______________ (28,759)<br />
Adjusted net income......................................................................................................................................................... ______________<br />
1,365,220 ______________<br />
546,420<br />
Distributions during the year<br />
_____________________________________________________________________________________________________<br />
Period Nature R$/share Credit Payment <strong>2004</strong> 2003<br />
1 st quarter......................................................... Interest 1.10 3/30/<strong>2004</strong> 5/18/<strong>2004</strong> 45,368 34,307<br />
2 nd quarter ........................................................ Interest 0.62 6/30/<strong>2004</strong> 8/17/<strong>2004</strong> 51,142 23,287<br />
Dividends 0.46 6/30/<strong>2004</strong> 8/17/<strong>2004</strong> 37,944 -<br />
3 rd quarter......................................................... Interest 0.80 8/13/<strong>2004</strong> 11/17/<strong>2004</strong> 65,990 34,099<br />
Dividends 0.91 11/3/<strong>2004</strong> 11/17/<strong>2004</strong> 75,062 -<br />
4 th quarter ........................................................ Interest - 80,407<br />
Dividends 1.92 2/11/2005 2/22/2005 _________ 158,373 ___________-<br />
Interest on equity and dividends.......................... _________<br />
433,879 ___________<br />
172,100<br />
% interest/dividends paid or credited.................. 32% 31%<br />
Credit per share (R$).......................................... 5,26 4,15<br />
Outstanding shares (thousands).......................... 82,487 41,447<br />
The remaining income for the year was transferred to the statutory reserve for investments and working capital in accordance with the by-laws.<br />
24 - Statutory Profit Sharing<br />
a) The management profit sharing is limited to 10% of net income for the year, after income tax and management fees, as stated in the<br />
Company’s by-laws;<br />
b) The employees’ profit sharing is linked to the attainment of operating goals and was charged to cost of production and general and<br />
administrative expenses, as applicable.
100 101<br />
METALÚRGICA GERDAU S.A.<br />
25 - Long-term Incentive Plans<br />
I) <strong>Gerdau</strong> S.A.<br />
The Extraordinary General Meeting of shareholders held on April 30, 2003 decided, based on a previously agreed plan and within the limit<br />
of the authorized capital, to grant options to purchase preferred shares to management, employees or persons who render services to the<br />
subsidiary or the companies under its control, and approved the formation of the Long-Term Incentive Program that represents a new form<br />
of compensation of the strategic executives of the subsidiary. The options should be exercised in a maximum of five years after the grace<br />
period.<br />
a) Summary of changes in the plan:<br />
Stock options grants (Number of shares)<br />
________________________________________________________________________________<br />
2003 2003 <strong>2004</strong> <strong>2004</strong> Total<br />
Opening balance at December 31, 2003............................................... 403,228 280,840 - - 684,068<br />
Grants in <strong>2004</strong>................................................................................... - - 2,430 171,125 173,555<br />
Share bonus on April 29, <strong>2004</strong>............................................................ __________ 403,229 __________ 280,840 __________ 2,429 __________ 171,125 __________ 857,623<br />
Closing balance at December 31, <strong>2004</strong>................................................. __________<br />
806,457 __________<br />
561,680 __________<br />
4,859 __________<br />
342,250 __________<br />
1,715,246<br />
Exercise price - R$ .............................................................................. 11.94 11.94 30.50 30.50<br />
Grace period....................................................................................... 3 anos - 3 anos -<br />
Grace period....................................................................................... - 5 anos - 5 anos<br />
The subsidiary <strong>Gerdau</strong> S.A. has a total of 1,573,200 preferred shares in treasury at December 31, <strong>2004</strong>, These shares can be used for this<br />
plan.<br />
b) Plan status at December 31<br />
Stock options grants<br />
___________________________________________<br />
<strong>2004</strong> 2003 Average<br />
Total stock options granted........................................................................................................................................... 347,109 1,368,137<br />
Exercise price - R$ ........................................................................................................................................................ 30.50 11.94 15.70<br />
Fair value of options date of grant - R$ per option (*)..................................................................................................... 8.65 3.72 4.72<br />
Average term of option to be exercised (years)................................................................................................................ 3.68 1.82 2.26<br />
(*) Calculated using the Black-Scholes model<br />
The percentage of dilution in interest that the current shareholders may experience if all options are exercised is approximately 0.6%.<br />
II) <strong>Gerdau</strong> Ameristeel Corporation - (“<strong>Gerdau</strong> Ameristeel”)<br />
<strong>Gerdau</strong> Ameristeel Corporation and its subsidiaries have stock compensation plans for their employees, as follows:<br />
a) Former Co-Steel Plan<br />
According to the terms of the Co-Steel Plan, the Stock-Based Option Plan, the company was authorized to grant purchase options to employees<br />
and directors up to the limit of 3,041,335 common shares. The exercise price was based on the closing price of the common shares in the<br />
market on the day prior to the issue of the option. The options have a maximum term of ten years and are granted during various periods, as<br />
determined by the administrator of the plan at the date of the grant, up to April 13, 2008.<br />
b) <strong>Gerdau</strong> AmeriSteel US Inc. (“AmeriSteel”) Plans<br />
According to the terms of the Transaction Agreement relating to the acquisition of Co-Steel, the minority shareholders of AmeriSteel<br />
exchanged their shares and stock options for shares and stock options of Ameristeel at the ratio of 9,4617 shares and stock options for each<br />
share or stock option of AmeriSteel. This exchange occurred on March 31, 2003.<br />
b.1) Stakeholder Plan<br />
In March 2000, the Board of Directors of AmeriSteel a approved long-term incentive plan available to the executive management (Stakeholder<br />
Plan) to assure that the interests of the senior management of AmeriSteel are in line with those of the AmeriSteel shareholders. The awards<br />
are determined by a formula based on the return on employed capital of AmeriSteel in a given year of the plan. The awards are granted and<br />
paid over a period of four years. The participants may choose payment in cash or in shares of AmeriSteel and <strong>Gerdau</strong>, for which a premium<br />
of 25% is given, if chosen. Expenses related to the benefits for the years ended December 31, <strong>2004</strong> and 2003 totaled US$ 1,300 thousand<br />
(R$ 3,450) and US$ 150 thousand (R$ 433), respectively. A premium of approximately US$ 14,000 thousand (equivalent to R$ 37,161) was<br />
recorded at December 31, <strong>2004</strong> and will be granted on March 1, 2005. This premium will be provided in accordance with the payment schedule<br />
established by the plan.
.2) SAR Plan<br />
In July 1999, the Board of Directors of AmeriSteel approved the SAR/Shares Purchase Plan (SAR Plan) available to basically all employees. The<br />
SAR Plan authorizes the sale of 946,170 common shares to the employees during three offer periods, from July to September in 1999, 2002<br />
and 2005. The employees who purchase the shares are rewarded with stock appreciation rights (SARs) equal to four times the number of<br />
shares purchased. SARs at market value were granted at the date of grant, determined based on an independent appraisal at the end of the<br />
prior year. SARs can be exercised at 25% annually as from the date of the grant, to be exercised over a period of ten years as from the date<br />
of the grant.<br />
In July 2002, the Board of Directors of AmeriSteel approved the issue of new purchase options under the SAR Plan, which were granted to the<br />
executive directors, with the exercise price determined by the fair value at the date of grant. A total of 6,244,722 SARs were authorized and<br />
issued. One-third of all awarded options and common shares are vested two years as from the date of concession, and one third after each<br />
subsequent two-year period. The options may be exercised in up to ten years after the date of concession.<br />
At December 31, <strong>2004</strong>, an expense related to this plan of US$ 20,700 thousand, equivalent to R$ 54,946, was recorded in the consolidated<br />
financial statements (at December 31, 2003, an expense of US$ 9,400 thousand, equivalent to R$ 27,158 was recorded).<br />
b.3) Equity Ownership<br />
In September 1996, the Board of Directors of AmeriSteel approved the Equity Ownership Plan of AmeriSteel Corporation (the “Equity<br />
Ownership” Plan), which grants common shares, purchase options for common shares and SARs. The maximum number of shares that may<br />
be issued under this plan is 4,152,286, AmeriSteel granted 4,667,930 incentive stock options and 492,955 common shares under the Equity<br />
Ownership Plan up to December 31, <strong>2004</strong>. One-third of all options and common shares issued become vested two years from the date of the<br />
grant, and one third after each subsequent two-year period. All grants were carried out at the market value of the common shares at the<br />
date of grant, determined based on an independent appraisal at the end of the prior year. The options may be exercised for ten years as from<br />
the date of the grant.<br />
b.4) Purchase Plan<br />
In May 1995, the Board of Directors of AmeriSteel approved an option/purchase plan (the “Purchase Plan”), available to essentially all<br />
employees. The employees who purchased shares were rewarded with options for six times the number of shares purchased. A total of<br />
356,602 shares were sold under the Purchase Plan at a purchase price of US$ 1.12 per share. The options were granted at market value at the<br />
date of the grant, determined based on an independent appraisal at the end of the prior year. A total of 2,139,612 options were granted under<br />
the Purchase Plan. No options are available for future grant. All shares granted can already be exercised, which may occur for ten years as<br />
from the date of the grant.<br />
A summary of the <strong>Gerdau</strong> Ameristeel plans is as follows:<br />
<strong>2004</strong> 2003<br />
___________________________________________ ____________________________________________<br />
Number Weighted average Number Weighted average<br />
of shares exercise price - R$ of shares exercise price - R$<br />
Available at the beginning of the year............................. 3,606,570 17.01 1,367,400 26.87<br />
Exchange of Ameristeel Planfor options of the<br />
<strong>Gerdau</strong> Ameristeel Plan (*)........................................... - - 2,660,601 6.21<br />
Exercised....................................................................... (374,609) 5.04 - -<br />
Cancelled...................................................................... (76,973) 5.10 - -<br />
Expire d ........................................................................ _________________ (321,700) ______________________ 51.65 _________________ (421,431) ______________________ 56.98<br />
Available at the end of the year...................................... _________________<br />
2,833,288 ______________________<br />
15.77 _________________<br />
3,606,570 ______________________<br />
18.52<br />
(*) Exchange mentioned in item “b” above.
102 103<br />
METALÚRGICA GERDAU S.A.<br />
The table below summarizes the information on the purchase options of <strong>Gerdau</strong> Ameristeel shares available at December 31, <strong>2004</strong>:<br />
Quantity exercisable<br />
Available Average Weighted average at december 31,<br />
Exercise price (R$) quantity grace period exercise price - R$ <strong>2004</strong><br />
3.50 to 3.80 ................................................................. 752,829 4.40 3.66 597,086<br />
4.78 to 5.04 ................................................................. 824,536 5.90 4.88 497,369<br />
5.60 to 7.86 ................................................................. 563,923 4.50 11.89 563,923<br />
41.01 to 49.61.............................................................. 342,500 2.10 44.59 342,500<br />
53.25 to 53.49 ............................................................. __________________ 349,500 1.70 53.49 ________________________ 349,500<br />
__________________<br />
2,833,288 ________________________<br />
2,350,378<br />
The effect on net income for the year and shareholders’ equity would have been as follows, had the expenses for the option plans of <strong>Gerdau</strong><br />
S.A. and <strong>Gerdau</strong> Ameristeel Corporation been recorded:<br />
Consolidated<br />
______________________________________________<br />
Net income<br />
Shareholders equity<br />
Balances based on financial statements............................................................................................ 3,341,097 2,961,034<br />
Expenses for the period*................................................................................................................. ___________________ (2,649) ______________________ (8,383)<br />
Proforma balances.......................................................................................................................... ___________________ 3,338,448 ______________________ 2,952,651<br />
*using the fair value method (Black-Scholes model)<br />
26 - Calculation of EBITDA<br />
Consolidated<br />
___________________________________<br />
<strong>2004</strong> 2003<br />
Gross profit...................................................................................................................................................................... 6,245,024 3,290,221<br />
Selling expenses............................................................................................................................................................... (455,175) (448,131)<br />
General and administrative expenses.................................................................................................................................. (1,050,953) (804,501)<br />
Depreciation and amortization........................................................................................................................................... ______________ 766,819 ______________ 605,045<br />
EBITDA............................................................................................................................................................................ ______________<br />
5,505,715 ______________<br />
2,642,634
27 - Information by Geographic Area and Business Segment<br />
Information by geographic area:<br />
Geográphic Área<br />
_________________________________________________________________________________________________________________________________________________________<br />
Brazil South america (*) North america Consolidated<br />
_________________________________ _______________________________ ________________________________ ________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003 <strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Gross sales revenues............................... 12,914,377 9,024,250 1,039,986 652,829 9,453,210 6,105,888 23,407,573 15,782,967<br />
Net sales revenues.................................. 9,975,760 7,306,927 763,865 490,122 8,857,637 5,569,912 19,597,262 13,366,961<br />
Cost of sales........................................... (5,668,217) (4,444,848) (488,120) (325,333) (7,195,901) (5,306,559) (13,352,238) (10,076,740)<br />
Gross profit ........................................... 4,307,543 2,862,079 275,745 164,789 1,661,736 263,353 6,245,024 3,290,221<br />
Selling expenses..................................... (400,317) (407,717) (7,079) (5,140) (47,779) (35,274) (455,175) (448,131)<br />
General and administrative expenses........ (751,200) (554,218) (45,934) (33,492) (253,819) (216,791) (1,050,953) (804,501)<br />
Financial income (expenses), net.............. 33,673 (437,013) (4,491) (3,831) (177,563) (180,532) (148,381) (621,376)<br />
Operating profit (loss)............................. 3,022,950 1,197,824 219,272 120,012 1,194,708 (165,655) 4,436,930 1,152,181<br />
Net income (loss) for the year.................. 2,270,548 1,224,769 174,240 93,379 896,309 (61,274) 3,341,097 1,256,874<br />
EBITDA (**)............................................ 3,657,500 2,256,415 250,983 151,524 1,597,232 234,695 5,505,715 2,642,634<br />
(*) Does not include Brazilian operations,<br />
(**) Income before financial expenses, income tax and social contribution on net income, and depreciation and amortization, as mentioned in Note 26,<br />
The segments shown below correspond to the business units through which the <strong>Gerdau</strong> Executive Committee manages its operations: Long Steel Brazil, Açominas (corresponding to the<br />
operations of the plant located in Ouro Branco, state of Minas Gerais), South America (excluding Brazilian operations) and North America (<strong>Gerdau</strong> Ameristeel):<br />
Information by business segment:<br />
Business sector<br />
________________________________________________________________________________________________________________________________________________________________<br />
Long Brazil Açominas Ouro Branco South America (*) Nort América Consolidated<br />
___________________________ __________________________ ___________________________ ___________________________ ____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003 <strong>2004</strong> 2003 <strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Net sales revenues..................... 7,329,008 5,359,998 2,646,752 1,946,929 763,865 490,122 8,857,637 5,569,912 19,597,262 13,366,961<br />
Identifiable assets (**)............... 4,447,413 3,183,362 3,482,517 3,241,331 668,351 580,385 6,131,526 4,273,441 14,729,807 11,278,519<br />
Capital expenditure.................... 648,070 329,999 265,851 355,984 27,367 22,253 1,156,660 164,803 2,097,948 873,039<br />
Depreciation/amortization........... 235,767 235,878 265,707 120,392 28,251 25,367 237,094 223,408 766,819 605,045<br />
(*) Does not include Brazilian operations,<br />
(**)Identifiable assets: accounts receivable, inventories and fixed assets
104 105<br />
METALÚRGICA GERDAU S.A.<br />
Board of Directors<br />
Chairman<br />
JORGE GERDAU JOHANNPETER<br />
Vice Chairman<br />
GERMANO H. GERDAU JOHANNPETER<br />
KLAUS GERDAU JOHANNPETER<br />
CARLOS JOÃO PETRY<br />
Board members<br />
AFFONSO CELSO PASTORE<br />
ANDRÉ PINHEIRO DE LARA RESENDE<br />
OSCAR DE PAULA BERNARDES NETO<br />
Secretary General<br />
EXPEDITO LUZ<br />
Executive Committee<br />
President<br />
JORGE GERDAU JOHANNPETER<br />
Vice Presidents<br />
FREDERICO C. GERDAU JOHANNPETER, Senior Vice President<br />
CARLOS JOÃO PETRY, Senior Vice President<br />
ANDRÉ BIER JOHANNPETER<br />
CLAUDIO JOHANNPETER<br />
OSVALDO BURGOS SCHIRMER<br />
DOMINGOS SOMMA<br />
FILIPE AFFONSO FERREIRA<br />
RICARDO GEHRKE<br />
Secretary General<br />
EXPEDITO LUZ<br />
Corporate Officers<br />
EXPEDITO LUZ<br />
GERALDO TOFFANELLO<br />
GERALDO TOFFANELLO<br />
Accountant CRC RS No. 31.084<br />
CPF N0. 078.257.060-72
<strong>Report</strong> of Independent Auditors<br />
To the Board of Directors and Shareholders<br />
Metalúrgica <strong>Gerdau</strong> S.A.<br />
1. We have audited the accompanying balance sheets of Metalúrgica <strong>Gerdau</strong> S.A. and the consolidated balance sheets<br />
of Metalúrgica <strong>Gerdau</strong> S.A. and its subsidiaries as of December 31, <strong>2004</strong> and 2003, and the related statements of<br />
income, of changes in shareholders’ equity and of changes in financial position of Metalúrgica <strong>Gerdau</strong> S.A., as well as<br />
the related consolidated statements of income and of changes in financial position, for the years then ended. These<br />
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion<br />
on these financial statements.<br />
2. We conducted our audits in accordance with approved Brazilian auditing standards, which require that we perform<br />
the audit to obtain reasonable assurance about whether the financial statements are fairly presented in all material<br />
respects. Accordingly, our work included, among other procedures: (a) planning our audit taking into consideration<br />
the significance of balances, the volume of transactions and the accounting and internal control systems of the<br />
companies, (b) examining, on a test basis, evidence and records supporting the amounts and disclosures in the financial<br />
statements, and (c) assessing the accounting practices used and significant estimates made by management, as well<br />
as evaluating the overall financial statement presentation.<br />
3. In our opinion, the financial statements audited by us present fairly, in all material respects, the financial position<br />
of Metalúrgica <strong>Gerdau</strong> S.A. and of Metalúrgica <strong>Gerdau</strong> S.A. and its subsidiaries at December 31, <strong>2004</strong> and 2003, and<br />
the results of operations, the changes in shareholders’ equity and the changes in financial position of Metalúrgica<br />
<strong>Gerdau</strong> S.A., as well as the consolidated results of operations and of changes in financial position, for the years then<br />
ended, in accordance with accounting practices adopted in Brazil.<br />
4. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a<br />
whole. The statement of cash flows is presented for purposes of additional analysis and is not a required part of the<br />
basic financial statements. This information has been subjected to the auditing procedures applied in the audit of the<br />
basic financial statements and, in our opinion, is fairly presented in all material respects in relation to the financial<br />
statements taken as a whole.<br />
Porto Alegre, March 4, 2005<br />
Auditores Independentes<br />
CRC 2SP000160/O-5 “F” RS<br />
Carlos Alberto de Sousa<br />
Accountant CRC 1RJ 056561/O-0”S”RS
106 107<br />
METALÚRGICA GERDAU S.A.<br />
Opinion of the Fiscal Council<br />
The Fiscal Council of Metalúrgica <strong>Gerdau</strong> S.A., in performance of its legal and statutory duties, in compliance with<br />
article 163 of Law 6404/76, having examined the Company’s Management <strong>Report</strong>, the individual (parent company)<br />
and consolidated balance sheets and the related statements of income, of changes in shareholders’ equity and of<br />
changes in financial position for the years ended December 31, <strong>2004</strong> and 2003, as well as the distribution of interest<br />
on equity and dividends, and based on the report of PricewaterhouseCoopers Auditores Independentes, is of the<br />
opinion that these accounting statements fairly reflect the Company’s individual and consolidated financial position,<br />
in conformity with current accounting practices, and are in prefect condition to be approved at the Ordinary General<br />
Meeting.<br />
Porto Alegre, March 11, 2005<br />
CARLOS ROBERTO SCHRÖDER<br />
DOMINGOS MATIAS URROZ LOPES<br />
MÁRIO MAGALHÃES DE SOUSA
<strong>Gerdau</strong> S.A.<br />
Balance Sheet at December 31<br />
(In thousands of reais)<br />
Assets Company Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Current Assets<br />
Cash and cash equivalents............................................................. note 5 15,709 177,684 2,041,967 1,017,006<br />
Trade accounts receivable ............................................................. note 6 - - 2,496,808 1,526,176<br />
Inventories .................................................................................. note 7 - - 4,236,642 2,336,598<br />
Tax credits.................................................................................... note 8 32,038 1,844 240,462 120,815<br />
Deferred income tax and social contribution on net income.............. note 9 - - 329,464 116,868<br />
Dividends receivable...................................................................... 147,226 235,459 - -<br />
Other accounts receivable.............................................................. 1,014 102 210,922 217,417<br />
Total current assets......................................................................... 195,987 415,089 9,556,265 5,334,880<br />
Long-Term Receivables<br />
Related parties............................................................................. note 21 - - 1,448 26,979<br />
Eletrobrás loans............................................................................ 8,908 8,908 10,212 10,212<br />
Deposit for future investment in subsidiaries................................... note 4 - - 182,158 -<br />
Deferred income tax and social contribution on net income.............. note 9 42,296 29,686 597,931 789,346<br />
Compulsory deposits and other...................................................... note 10 25,495 25,503 242,570 224,720<br />
Total long-term receivables............................................................. 76,699 64,097 1,034,319 1,051,257<br />
Permanent Assets<br />
Investments.................................................................................. note 11 7,100,464 4,248,312 112,017 461,412<br />
Fixed assets.................................................................................. note 12 - - 7,927,363 7,378,725<br />
Deferred charges........................................................................... note 13 - - 33,858 20,467<br />
Total permanent assets.................................................................... 7,100,464 4,248,312 8,073,238 7,860,604<br />
Total assets........................................................................................ 7,373,150 4,727,498 18,663,822 14,246,741<br />
The accompanying notes are an integral part of these financial statements.
108 109<br />
GERDAU S.A.<br />
Liabilities and Shareholders’ Equity Company Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Current Liabilities<br />
Trade accounts payable.................................................................. 72 - 1,935,953 1,192,428<br />
Financing..................................................................................... note 14 - - 1,968,397 2,414,376<br />
Debentures................................................................................... note 15 - - 2,986 3,027<br />
Taxes and contributions payable..................................................... note 18 6,808 42,455 386,238 171,776<br />
Related parties............................................................................. note 21 164,549 - - -<br />
Deferred income tax and social contribution on net income.............. note 9 - - 180,166 35,721<br />
Salaries payable............................................................................ 622 4,089 255,418 148,626<br />
Dividends payable......................................................................... note 23 280,378 131,916 306,771 154,220<br />
Other accounts payable................................................................. 4,838 11,801 211,739 222,725<br />
Total current liabilities.................................................................... 457,267 190,261 5,247,668 4,342,899<br />
Long-Term Liabilities<br />
Financing..................................................................................... note 14 - - 3,490,374 3,396,085<br />
Debentures................................................................................... note 15 692,476 227,878 915,086 449,039<br />
Related parties............................................................................. note 21 - 20,961 - -<br />
Provision for contingencies ........................................................... note 20 94,882 95,000 240,300 221,212<br />
Deferred income tax and social contribution on net income.............. note 9 54,669 57,530 611,707 484,096<br />
Post-employement benefits ........................................................... note 22 - - 294,478 278,870<br />
Other accounts payable................................................................. - 7,472 251,162 219,393<br />
Total long-term liabilities............................................................... 842,027 408,841 5,803,107 5,048,695<br />
Minority Interest............................................................. - - 1,539,191 726,751<br />
Shareholders’ Equity<br />
Capital......................................................................................... note 23 3,471,312 1,735,656 3,471,312 1,735,656<br />
Capital reserves ........................................................................... 376,672 376,672 376,672 376,672<br />
Revenue reserves.......................................................................... 2,225,872 2,016,068 2,225,872 2,016,068<br />
Total shareholders’ equity............................................................... 6,073,856 4,128,396 6,073,856 4,128,396<br />
Shareholders’ Equity Including<br />
Minority Interest.......................................................... - - 7,613,047 4,855,147<br />
Total liabilities and shareholders’ equity..................................... 7,373,150 4,727,498 18,663,822 14,246,741<br />
The accompanying notes are an integral part of these financial statements.
Statement of Income<br />
Years ended December 31<br />
(In thousands of reais)<br />
Company Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
GROSS SALES REVENUES................................................................... note 26 - 6,087,658 23,407,573 15,782,967<br />
Taxes on sales................................................................................ - (1,068,692) (2,456,568) (1,427,585)<br />
Freight and discounts..................................................................... ____________- ____________ (148,765) ____________ (1,353,743) ____________ (988,421)<br />
Net Sales Revenues.................................................... - 4,870,201 19,597,262 13,366,961<br />
COST OF SALES ............................................................................... ____________- ____________ (3,041,635) ____________ (13,352,238) ____________<br />
(10,076,740)<br />
Gross Profit............................................................... - 1,828,566 6,245,024 3,290,221<br />
SELLING EXPENSES........................................................................... - (312,873) (455,175) (448,131)<br />
FINANCIAL INCOME.......................................................................... note 17 42,326 3,210 209,846 52,029<br />
FINANCIAL EXPENSES....................................................................... note 17 (49,329) (396,812) (385,952) (698,599)<br />
GENERAL AND ADMINISTRATIVE EXPENSES........................................<br />
Management fees.......................................................................... (1,261) (16,323) (43,562) (27,089)<br />
General expenses........................................................................... (42,681) (305,054) (960,264) (736,351)<br />
EQUITY IN THE EARNINGS (LOSSES) OF SUBSIDIARIES<br />
AND ASSOCIATED COMPANIES...................................................... note 11 2,836,486 503,064 (343,116) (299,357)<br />
OTHER OPERATING INCOME (EXPENSES), NET.................................... ____________ 28,057 ____________ 11,123 ____________ 187,866 ____________ 14,489<br />
Operating Profit........................................................ 2,813,598 1,314,901 4,454,667 1,147,212<br />
NON-OPERATING INCOME (EXPENSES), NET....................................... ____________ (1,065) ____________ (26,664) ____________ (24,930) ____________ (7,608)<br />
Profit before Taxes and Profit Sharing................ 2,812,533 1,288,237 4,429,737 1,139,604<br />
PROVISION FOR INCOME TAX AND SOCIAL<br />
CONTRIBUTION ON NET INCOME................................................... note 9<br />
Current......................................................................................... 4 (93,129) (951,201) (308,681)<br />
Deferred........................................................................................ 20,063 (41,569) (202,286) 449,605<br />
MANAGEMENT PROFIT SHARING....................................................... note 24a ____________ (1,261) ____________ (16,323) ____________ (41,363) ____________ (26,043)<br />
Net Income before Minority Interest..................... ____________<br />
2,831,339 ____________<br />
1,137,216 ____________<br />
3,234,887 ____________<br />
1,254,485<br />
MINORITY INTEREST......................................................................... ____________ (403,548) ____________ (117,269)<br />
Net Income for The Year........................................... ____________ 2,831,339 ____________ 1,137,216<br />
Net income per share - R$......................................................... ____________<br />
9.59 ____________<br />
7.68<br />
Net equity per share - R$.......................................................... ____________<br />
20.58 ____________<br />
27.89<br />
The accompanying notes are an integral part of these financial statements.
110 111<br />
GERDAU S.A.<br />
Statement of Changes in Financial Position<br />
Years ended December 31<br />
(In thousands of reais)<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Financial Resources Were Provided by<br />
Operations:<br />
Net income for the year........................................................... 2,831,339 1,137,216 3,234,887 1,254,485<br />
Expenses (income) not affecting working capital<br />
Depreciation and amortization............................................. - 183,832 766,665 604,887<br />
Cost of permanent asset disposals ................................... 76,796 147,999 125,585 33,434<br />
Equity in the (earnings) losses of subsidiaries<br />
and associated companies .......................................... note 11 (2,836,486) (503,064) 343,116 299,357<br />
Foreign exchange effects on working capital<br />
of foreign companies.................................................. - - (54,312) (120,202)<br />
Monetary variations on long-term debt............................. 44,942 1,621 (138,490) (15,737)<br />
Monetary variations on long-term receivables.................... ____________- ____________ (1,493) ____________ (526) ____________ (5,107)<br />
From operations............................................................. ____________ 116,591 ____________ 966,111 ____________ 4,276,925 ____________ 2,051,117<br />
Third parties:<br />
Capital increase.................................................................. - - 493,181 -<br />
Treasury shares................................................................... note 23 (27,036) (17,103) (27,036) (17,103)<br />
Contributions to capital reserves ......................................... - 66,304 16,246 66,304<br />
Increase (decrease) in long-term liabilities............................. 388,245 (422,659) 1,055,900 639,723<br />
Working capital of consolidated companies........................... - - - 53,198<br />
Working capital - operational integration.............................. - 256,530 - -<br />
Working capital - purchase of assets..................................... - - 669,446<br />
Dividends not included in income for the year........................ 748,271 273,781 - 459<br />
Total funds provided................................................................. 1,226,071 1,122,964 6,484,662 2,793,698<br />
Financial Resources Were Used for<br />
Investments .......................................................................... 840,734 156,913 35,395 75,280<br />
Purchase of assets.................................................................. - - 924,457 -<br />
Fixed assets........................................................................... - 263,483 1,262,707 843,461<br />
Deferred charges.................................................................... - 2,304 18,654 7,246<br />
Increase (decrease) in long-term receivables.............................. 12,602 (30,465) (12,039) 506,376<br />
Dividends/interest on equity..................................................... note 23 858,843 351,247 938,872 351,546<br />
Total funds used......................................................................... 1,712,179 743,482 3,168,046 1,783,909<br />
Changes in Working Capital .......................................... ____________ (486,108)<br />
____________ 379,482<br />
____________ 3,316,616 ____________<br />
1,009,789<br />
Working capital<br />
At the beginning of the year................................................ 224,828 (154,654) 991,981 (17,808)<br />
At the end of the year......................................................... ____________ (261,280) ____________ 224,828 ____________ 4,308,597 ____________ 991,981<br />
Changes in Working Capital .......................................... (486,108) 379,482 3,316,616 1,009,789<br />
The accompanying notes are an integral part of these financial statements.
Statement of Changes<br />
in Shareholders’ Equity<br />
(In thousands of reais)<br />
Capital reserves Revenue reserves<br />
Special Investments Total<br />
Investment Law and working Retained shareholders’<br />
Capital incentives 8200/91 Other Total Legal capital Total earnings equity<br />
At December 31, 2002......... 1,335,120 276,606 21,487 12,275 310,368 127,569 1,520,169 1,647,738 - 3,293,226<br />
Net income for the year.............. - - - - - - - - 1,137,216 1,137,216<br />
Capital increase......................... 400,536 - - - - - (400,536) (400,536) - -<br />
Investment incentives................. - 66,304 - - 66,304 - - - - 66,304<br />
Treasury shares.......................... note 23 - - - - - - (17,103) (17,103) - (17,103)<br />
Distribution proposed for the<br />
<strong>Annual</strong> General Meeting<br />
Legal reserve ........................ note 23 - - - - - 56,860 - 56,860 (56,860) -<br />
Reserve for investments and<br />
working capital................. - - - - - - 729,109 729,109 (729,109) -<br />
Interest on equity.................. note 23 - - - - - - - - (351,247) (351,247)<br />
At December 31, 2003....... 1,735,656 342,910 21,487 12,275 376,672 184,429 1,831,639 2,016,068 - 4,128,396<br />
Net income for the year.............. - - - - - - - - 2,831,339 2,831,339<br />
Capital increase......................... note 23 1,735,656 - - - - - (1,735,656) (1,735,656) - -<br />
Treasury shares.......................... note 23 - - - - - - (27,036) (27,036) - (27,036)<br />
Distribution proposed for the<br />
<strong>Annual</strong> General Meeting<br />
Legal reserve ........................ note 23 - - - - - 141,567 - 141,567 (141,567) -<br />
Reserve for investments and<br />
working capital................. - - - - - - 1,830,929 1,830,929 (1,830,929) -<br />
Dividends/interest on equity... note 23 - - - - - - - - (858,843) (858,843)<br />
At December 31, <strong>2004</strong>....... 3,471,312 342,910 21,487 12,275 376,672 325,996 1,899,876 2,225,872 - 6,073,856<br />
The accompanying notes are an integral part of these financial statements.
112 113<br />
GERDAU S.A.<br />
Statement of Cash Flows<br />
Years Ended December 31<br />
(In thousands of reais)<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Net income for the year..................................................................... 2,831,339 1,137,216 3,234,887 1,254,485<br />
Equity in the (earnings) losses of subsidiaries and<br />
associated companies................................................................... note 11 (2,836,486) (503,064) 343,116 299,357<br />
Provision for credit risks.................................................................... - 11,594 7,323 20,705<br />
Gain on disposal of fixed assets......................................................... - 15,928 9,058 10,056<br />
Gain (loss) on disposal of investments ............................................... 1,065 (1,645) 4,382 (111)<br />
Monetary and exchange variations..................................................... (9,556) 82,483 (99,284) 130,790<br />
Depreciation and amortization........................................................... - 183,832 766,665 604,887<br />
Income tax and social contribution on net income............................... (34,703) (12,204) 463,938 (438,731)<br />
Interest on debt................................................................................ 53,277 291,462 406,534 587,143<br />
Contingencies/judicial deposits ......................................................... (110) 4,997 5,295 624<br />
Changes in trade accounts receivable ................................................ - (160,073) (687,562) (180,879)<br />
Changes in inventories ..................................................................... - (106,405) (1,402,408) (207,267)<br />
Changes in trade accounts payable..................................................... 72 11,157 490,458 187,378<br />
Other operating activity accounts....................................................... ____________ (42,524) ____________ 135,319 ____________ (56,428) ____________ 84,468<br />
Net cash provided by (used in) operating activities.......................... ____________ (37,626) ____________ 1,090,597 ____________ 3,485,974 ____________ 2,352,905<br />
Acquisition/disposal of fixed assets.................................................... - (262,887) (1,173,491) (873,039)<br />
Increase in deferred charges.............................................................. - (2,304) (18,006) (7,246)<br />
Acquisition/disposal of investments.................................................... (802,735) (25,488) (37,686) (71,603)<br />
Purchase of assets............................................................................ - - (924,457) -<br />
Receipt of dividends/interest on own capital ...................................... ____________ 833,126 ____________ 38,251 ____________- ____________-<br />
Net cash provided by (used in) investing activities........................... ____________ 30,391 ____________ (252,428) ____________ (2,153,640) ____________ (951,888)<br />
Suppliers of fixed assets.................................................................... - 2,436 144,574 2,196<br />
Working capital financing.................................................................. - 112,645 (136,784) (336,901)<br />
Debentures....................................................................................... 411,560 (426,154) 399,120 (394,340)<br />
Increase in permanent asset financing................................................ - 111,684 762,766 454,989<br />
Payment of permanent asset financing................................................ - (272,111) (677,357) (541,308)<br />
Payment of financing interest............................................................. - (142,343) (372,676) (402,611)<br />
Loans with related parties ................................................................. 196,195 7,574 32,872 (11,316)<br />
Capital increase/treasury shares......................................................... note 23 (27,036) (17,103) 466,146 (17,103)<br />
Payment of dividends/interest on equity and profit sharing................... ____________ (735,459) ____________ (402,793) ____________ (843,493) ____________ (407,910)<br />
Net cash used in financing activities............................................... ____________ (154,740) ____________ (1,026,165) ____________ (224,832) ____________ (1,654,304)<br />
Changes in cash and cash equivalents............................................ ____________<br />
(161,975) ____________<br />
(187,996) ____________<br />
1,107,502 ____________<br />
(253,287)<br />
Cash and cash equivalents<br />
At the beginning of the year.......................................................... note 5 177,684 365,680 1,017,006 1,430,656<br />
Restatement of opening balance.................................................... - - (82,541) (173,735)<br />
Opening balance of consolidated companies for the year................. - - - 13,372<br />
At the end of the year................................................................... note 5 15,709 177,684 2,041,967 1,017,006
Notes to the Financial Statements<br />
at December 31, <strong>2004</strong> and 2003<br />
(All amounts in thousands of reais unless otherwise indicated)<br />
1 - Operations<br />
<strong>Gerdau</strong> S.A. is a holding company in the <strong>Gerdau</strong> Group, which is principally dedicated to the production of common and special steel rods<br />
and sale of general steel products (flat and long), in plants located in Brazil, Uruguay, Chile, Canada, Argentina and the United States of<br />
America.<br />
The <strong>Gerdau</strong> Group has an installed capacity of 16.4 million tons of crude steel per year, basically producing steel in electrical furnaces, from<br />
scrap and pig iron purchased, for the most part, in the region near each plant (mini-mill concept). <strong>Gerdau</strong> also operates plants which are<br />
capable of producing steel from iron ore (through blast furnaces and direct reduction) and has a unit used exclusively to produce special<br />
steels, It is the largest scrap recycling group in Latin America and among the largest in the world.<br />
The industrial sector is the most important market, including manufacturers of consumer goods such as vehicles and household and<br />
commercial equipment that basically use profiled steel in various available specifications. The next most important market is the civil<br />
construction sector, which demands a high volume of rebar and wire for concrete. There are also numerous customers for nails, staples and<br />
wires, commonly used in the agribusiness sector.<br />
2 - Presentation of the Financial Statements<br />
The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, which are based<br />
on the provisions of Brazilian Corporate Law, together with the rules established by the Brazilian Securities Commission (CVM).<br />
A statement of cash flows (company and consolidated), prepared under the indirect method, is being presented as supplementary information<br />
in order to provide additional information.<br />
3 - Significant Accounting Practices<br />
a) Cash and cash equivalents - financial investments are recorded at cost plus income accrued up to the balance sheet date, applying the<br />
interest rates agreed with the financial institutions, and do not exceed market value;<br />
b) Trade accounts receivable - are stated at realizable values, and accounts receivable from foreign customers are adjusted based on the<br />
exchange rates effective at the balance sheet date. The provision for credit risks is calculated based on a credit risk analysis, which includes<br />
the history of losses, the individual situation of each customer and the economic group to which they belong, the collateral and guarantees<br />
and the legal advisors’ opinion, and is considered sufficient to cover eventual losses on realization;<br />
c) Inventories - are stated at the lower of market value and average production or purchase cost;<br />
d) Investments in subsidiary and associated companies - are recorded on the equity method of accounting. The equity in the earnings or loss<br />
is recorded in an income statement account;<br />
e) Fixed assets - are recorded at cost, net of depreciation. Depreciation is calculated on the straight-line basis, at the rates stated in Note 12,<br />
which take into consideration the estimated useful lives of the assets. Interest on financing obtained to finance construction in progress is<br />
added to the cost of the constructions;<br />
f) Deferred charges - amortization is calculated on the straight-line basis at rates determined based on the production of the implemented<br />
projects in relation to their installed capacities;<br />
g) Financing - is stated at the contract value plus the contracted charges, including interest and monetary or foreign exchange variations.<br />
Swap contracts, which are linked to the loan agreements, are classified together with the related loans;<br />
h) Income tax and social contribution on net income - current and deferred income tax and social contribution on net income are calculated<br />
in conformity with current legislation;<br />
i) Other current and long-term assets and liabilities - are recorded at their realizable amounts (assets) and at their known or estimated<br />
amounts plus accrued charges and indexation adjustments (liabilities), when applicable;<br />
j) Related parties - loan agreements between Brazilian companies are restated by the weighted average interest rate for market funding.<br />
The agreements with foreign companies are restated by charges (LIBOR plus 3% p.a.) plus foreign exchange variation. Sales and purchases of<br />
inputs and products are made under terms and conditions similar to those of unrelated third parties;<br />
k) Determination of the results of operations - the results of operations are determined on the accrual basis of accounting;<br />
l) Use of estimates - the preparation of financial statements requires estimates to record certain assets, liabilities and other transactions.<br />
The Company’s financial statements therefore include various estimates related to the useful lives of fixed assets, provisions necessary for<br />
contingent liabilities, for income tax and other similar matters. Actual results may differ from those estimated;<br />
m) Environmental investments - expenses related to compliance with environmental regulations are considered as cost of production or<br />
capitalized when incurred; and<br />
n) Translation of foreign currency balances - asset and liability balances of transactions in foreign currency are translated to local currency<br />
(R$) at the foreign exchange rate in effect at the balance sheet date (<strong>2004</strong> - US$ 1.00 = R$ 2.6544 and 2003 - US$ 1.00 = R$ 2.8892),
114 115<br />
GERDAU S.A.<br />
4 - Consolidated Financial Statements<br />
a) The consolidated financial statements at December 31, <strong>2004</strong> include the accounts of <strong>Gerdau</strong> S.A. and the directly or indirectly controlled<br />
subsidiaries listed below:<br />
Percentage<br />
Shareholders’<br />
Consolidated company ownership equity<br />
<strong>Gerdau</strong> Participações S.A.................................................................................................................. 100 4,887,726<br />
<strong>Gerdau</strong> Açominas S.A....................................................................................................................... 100 4,766,046<br />
<strong>Gerdau</strong> Ameristeel Corporation and subsidiaries*............................................................................... 100 3,622,636<br />
<strong>Gerdau</strong> Internacional Empreendimentos Ltda. - Grupo <strong>Gerdau</strong> ............................................................ 100 2,785,282<br />
<strong>Gerdau</strong> GTL Spain S.L. ..................................................................................................................... 100 2,761,750<br />
<strong>Gerdau</strong> Steel Inc. ............................................................................................................................ 100 2,351,341<br />
Axol S.A.......................................................................................................................................... 100 476,156<br />
<strong>Gerdau</strong> Chile Inversiones Ltda. ......................................................................................................... 100 476,126<br />
Indústria Del Acero S.A. - Indac ........................................................................................................ 100 476,063<br />
<strong>Gerdau</strong> Aza S.A. .............................................................................................................................. 100 421,401<br />
Seiva S.A. - Florestas e Indústrias ..................................................................................................... 100 202,143<br />
Itaguaí Com. Imp. e Exp. Ltda. .......................................................................................................... 100 193,964<br />
Sipar Aceros S.A. ............................................................................................................................. 38 78,037<br />
Margusa - Maranhão Gusa S.A.......................................................................................................... 100 73,714<br />
<strong>Gerdau</strong> Laisa S.A. ............................................................................................................................ 100 51,897<br />
Aramac S.A. .................................................................................................................................... 100 49,355<br />
GTL Equity Investments Corp............................................................................................................. 100 49,286<br />
Açominas Com. Imp. Exp. S.A. - Açotrading........................................................................................ 100 22,583<br />
Florestal Rio Largo Ltda.................................................................................................................... 100 18,174<br />
Aceros Cox Comercial S.A. ............................................................................................................... 100 10,110<br />
<strong>Gerdau</strong> Açominas Overseas Ltd......................................................................................................... 100 7,914<br />
Florestal Itacambira S.A.................................................................................................................... 100 7,650<br />
Siderco S.A. .................................................................................................................................... 38 6,958<br />
GTL Financial Corp. ......................................................................................................................... 100 4,931<br />
GTL Trade Finance Inc. ..................................................................................................................... 100 27<br />
Dona Francisca Energética S.A. ......................................................................................................... 52 (16,350)<br />
* Subsidiaries:<br />
<strong>Gerdau</strong> Ameristeel MRM Special Sections Inc. (100%), <strong>Gerdau</strong> USA Inc. (100%), Ameristeel Bright Bar Inc. (100%), <strong>Gerdau</strong> Ameristeel US Inc. (100%), <strong>Gerdau</strong> Ameristeel Perth Amboy Inc.<br />
(100%), Gallatin Steel Company (50%) e <strong>Gerdau</strong> Ameristeel Sayreville Inc. (100%).<br />
b) The more significant accounting practices used in preparing the consolidated financial statements are as follows:<br />
I) <strong>Gerdau</strong> S.A. and its subsidiaries adopt consistent practices to record their operations and value their assets and liabilities. The financial<br />
statements of foreign subsidiaries were translated using the exchange rate in effect at the balance sheet date and were adjusted to conform<br />
with accounting practices adopted in Brazil;<br />
II) Asset and liability, and income and expense, accounts arising from transactions between consolidated companies have been eliminated; and<br />
III) Holdings of minority shareholders in subsidiaries are shown separately.<br />
c) The following transactions occurred during the year:<br />
I) On February 16, <strong>2004</strong>, the subsidiary <strong>Gerdau</strong> Ameristeel Corporation signed a sale and purchase agreement for the acquisition of all<br />
assets of Potter Form & Tie Co., headquartered in Belvidere, Illinois, in the United States of America. The acquisition price was US$ 11 million,<br />
equivalent to R$ 31,995 on that date;
II) On April 16, <strong>2004</strong>, <strong>Gerdau</strong> S.A., through its indirect subsidiary <strong>Gerdau</strong> Steel Inc., acquired 26,800,000 shares of <strong>Gerdau</strong> Ameristeel Corporation<br />
through a capital increase of Cdn$ 131 million, equivalent to R$ 283,937 on that date. After this transaction, <strong>Gerdau</strong> S.A. held, indirectly, 72%<br />
of <strong>Gerdau</strong> Ameristeel Corporation;<br />
III) The Extraordinary General Meeting of shareholders held on June 30, <strong>2004</strong> approved the merger of the subsidiary GTL Brasil Ltda., without<br />
the issue of new shares. The net assets transferred to <strong>Gerdau</strong> S.A. as a result of the merger, are as follows:<br />
Assets<br />
Current assets.......................................................................................................................................................................................................................... __________ 534<br />
Long-term receivables............................................................................................................................................................................................................... __________ 8<br />
Permanent assets<br />
Investments<br />
Seiva S.A. - Florestas e Indústrias........................................................................................................................................................................................... 17,883<br />
<strong>Gerdau</strong> Açominas S.A............................................................................................................................................................................................................ 333,257<br />
(-) Negative goodwill - <strong>Gerdau</strong> Açominas S.A.......................................................................................................................................................................... __________ (280,882)<br />
Total permanent assets..................................................................................................................................................................................................... __________ 70,258<br />
Total assets...................................................................................................................................................................................................................... __________<br />
70,800<br />
Liabilities<br />
Current liabilities...................................................................................................................................................................................................................... __________ 1,495<br />
Long-term liabilities.................................................................................................................................................................................................................. __________ 4,591<br />
Total liabilities.................................................................................................................................................................................................................. __________<br />
6,086<br />
Total Net Assets............................................................................................................................................................................................................... __________<br />
64,714<br />
IV) On October 15, <strong>2004</strong>, <strong>Gerdau</strong> S.A. announced to the market that the indirect subsidiary <strong>Gerdau</strong> Ameristeel Corporation obtained the<br />
confirmation of its registration with the Canadian securities regulatory authorities for the public offer of 70 million common shares. <strong>Gerdau</strong><br />
S.A., through its subsidiary <strong>Gerdau</strong> Steel Inc., acquired 35,000,000 and 4,381,000 common shares on October 20, <strong>2004</strong> and November 18, <strong>2004</strong>,<br />
respectively, in the total amount of US$ 185 million, equivalent to R$ 528,787 on those dates. The transaction initially was a capital increase in<br />
<strong>Gerdau</strong> Steel Inc., through the issue of 817,969 common shares. Subsequently, on December 28, <strong>2004</strong>, <strong>Gerdau</strong> S.A. paid up capital in <strong>Gerdau</strong><br />
Internacional Empreendimentos Ltda. (the company that holds the investments abroad) through the transfer of 817,969 common shares of<br />
<strong>Gerdau</strong> Steel Inc. in the amount of R$ 499,430. Following this transaction, <strong>Gerdau</strong> S.A. held, indirectly, 66.5% of <strong>Gerdau</strong> Ameristeel Corporation;<br />
V) On October 28, <strong>2004</strong>, <strong>Gerdau</strong> S.A., through its indirect subsidiary <strong>Gerdau</strong> Ameristeel Corporation, announced the signature of a sale and<br />
purchase agreement for the acquisition of the assets of Gate City Steel Inc. and RJ Rebar Inc. (cutting and folding of rebar, with and without<br />
epoxy covering), headquartered in Indianapolis, Indiana, in the United States of America. The acquisition price was US$ 16 million (R$ 42,470<br />
at December 31, <strong>2004</strong>);<br />
VI) On October 29, <strong>2004</strong>, the subsidiary Armafer Serviços de Construção Ltda. was merged by the subsidiary <strong>Gerdau</strong> Açominas S.A., and the<br />
net assets of R$ 44,744 were recorded, replacing the investment account, without capital increase. The objectives of the transaction were to<br />
reduce administrative expenses and improve operating synergy;<br />
VII) On November 1, <strong>2004</strong>, <strong>Gerdau</strong> S.A., through its indirect subsidiary <strong>Gerdau</strong> Ameristeel Corporation, purchased the fixed assets and working<br />
capital of four mills producing long steel, three processing units of wire rods and one producer of steel grinding balls for the mining industry<br />
owned by North Star Steel, announced on September 9, <strong>2004</strong>. The price paid for these assets was US$ 266 million (R$ 706,070 at December<br />
31, <strong>2004</strong>), in cash. <strong>Gerdau</strong> Ameristeel Corporation also paid an additional US$ 52 million (R$ 138,029 at December 31, <strong>2004</strong>) as an adjustment<br />
in the purchase price due to fluctuations in working capital up to the transaction date;<br />
VIII) On December 23, <strong>2004</strong>, the <strong>Gerdau</strong> Group reached an agreement with the Mayaguez Group and The Latinamerican Enterprise Steel<br />
Holding, majority shareholders of Diaco S.A., the largest Colombian producer of steel and rebar, and Siderúrgica del Pacífico S.A. - Sidelpa,<br />
the only producer of special steel in that country, for the scheduled acquisition of their holdings in these companies. Initially, US$ 69 million<br />
(R$ 182,158 at December 31, <strong>2004</strong>) were invested, recorded as “deposit for future investment in subsidiaries” in long-term receivables. The<br />
Mayagüez Group, which will remain as a Diaco shareholder for a maximum eight-year period, formed a strategic partnership with the <strong>Gerdau</strong><br />
Group for the development of the Colombian steel industry; and<br />
IX) On December 3, <strong>2004</strong>, the Board of Directors of <strong>Gerdau</strong> S.A. authorized the Company’s management to implement corporate restructuring<br />
measures to obtain greater strategic advantages, as well as greater operating and management efficiency, arising from the specialization<br />
and location of the different business units and areas of the <strong>Gerdau</strong> Group. The Company’s efforts will be concentrated in its main activities,<br />
focused operations and gain of critical mass within each of the activity areas. Also, this restructuring will consider solutions for the Group’s<br />
future growth. On December 29, <strong>2004</strong>, the first act of this process was completed, with the capital increase of the holding company <strong>Gerdau</strong><br />
Participações S.A. through the shares held in <strong>Gerdau</strong> Açominas S.A. and part of the quotas held in <strong>Gerdau</strong> Internacional Empreendimentos<br />
Ltda. by <strong>Gerdau</strong> S.A., representing, respectively, 91.5% and 22.8% of those companies’ capital. The capital of <strong>Gerdau</strong> Participações S.A. was<br />
also increased by the direct and indirect investments held by <strong>Gerdau</strong> Internacional Empreendimentos Ltda. in <strong>Gerdau</strong> Chile Inversiones Ltda.,<br />
<strong>Gerdau</strong> Laisa S.A. and Sipar Aceros S.A. The final corporate restructuring model has not yet been finished and will be implemented as the<br />
management proposals are approved by the Board of Directors. Accordingly, additional measures should be implemented during this year and<br />
they will be advised, as soon as they occur.
116 117<br />
GERDAU S.A.<br />
d) The financial statements of the jointly-owned subsidiary Dona Francisca Energética S.A., and the jointly-owned indirect subsidiaries<br />
Gallatin Steel Company and Sipar Aceros S.A., have been consolidated proportionally based on the direct or indirect interest of the parent<br />
company in the capital of these subsidiaries.<br />
The amounts of the financial statements of these companies are shown as follows:<br />
Dona Francisca Gallatin Sipar Aceros S.A.<br />
Energética S.A. Steel Company Consolidated *<br />
________________________________ ________________________________ ________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Assets<br />
Current assets............................................................. 116,627 111,782 586,106 290,036 144,251 85,185<br />
Long-term receivables.................................................. 128,427 129,889 - - - 2,863<br />
Permanent assets......................................................... ___________ 180,984 ___________ 191,728 ___________ 612,762 ___________ 736,223 ___________ 18,929 ___________ 19,109<br />
Total assets................................................................. ___________<br />
426,038 ___________<br />
433,399 ___________<br />
1,198,868 ___________<br />
1,026,259 ___________<br />
163,180 ___________<br />
107,157<br />
Liabilities<br />
Current liabilities......................................................... 29,381 28,522 131,580 152,134 80,787 40,252<br />
Long-term liabilities..................................................... 413,006 423,722 54,190 230,651 4,356 4,212<br />
Shareholders’ equity..................................................... ___________ (16,349) ___________ (18,845) ___________ 1,013,098 ___________ 643,474 ___________ 78,037 ___________ 62,693<br />
Total liabilities............................................................. ___________<br />
426,038 ___________<br />
433,399 ___________<br />
1,198,868 ___________<br />
1,026,259 ___________<br />
163,180 ___________<br />
107,157<br />
Statement of operations<br />
Gross sales revenues.................................................... 44,987 37,189 2,384,065 1,260,130 437,864 296,651<br />
Sales deductions.......................................................... ___________ (2,207) ___________ (3,952) ___________ (11,215) ___________ (14,157) ___________ (87,259) ___________ (62,398)<br />
Net sales revenues....................................................... 42,780 33,237 2,372,850 1,245,973 350,605 234,253<br />
Cost of sales................................................................ ___________ (19,424) ___________ (19,520) ___________ (1,626,650) ___________ (1,194,150) ___________ (285,566) ___________ (188,139)<br />
Gross profit................................................................. 23,356 13,717 746,200 51,823 65,039 46,114<br />
Selling expenses.......................................................... - - (6,224) (5,336) (4,987) (2,259)<br />
General and administrative expenses............................. (2,110) (2,251) (45,010) (33,376) (19,876) (12,762)<br />
Other financial income (expenses)................................. (17,882) (20,743) (14,030) (22,620) (8,101) 2,681<br />
Other operating income (expenses)................................ ___________- ___________- ___________- ___________- ___________ (76) ___________ (3,346)<br />
Operating profit (loss).................................................. 3,364 (9,277) 680,936 (9,509) 31,999 30,428<br />
Non-operating income (expenses), net........................... 380 3,790 10,225 (1,367) 759 (2,889)<br />
Provision for income tax and social contribution............. ___________ (1,249) ___________ 1,871 ___________ (797) ___________- ___________ (10,188) ___________ (7,425)<br />
Net income (loss) for the year....................................... ___________<br />
2,495 ___________<br />
(3,616) ___________<br />
690,364 ___________<br />
(10,876) ___________<br />
22,570 ___________<br />
20,114<br />
* includes the subsidiary Siderco S.A.<br />
e) The Company and its direct and indirect subsidiaries have goodwill and negative goodwill balances, which are being amortized as the<br />
assets that generated them are realized or based on the realization of the projected future income, limited to ten years, as follows:<br />
Amortization<br />
period Company Consolidated<br />
Goodwill included in the investment accounts<br />
Balance at December 31, 2003...................................................................................................... 21,951 432,077<br />
(+) Goodwill recorded in the period............................................................................................... 280,882 307,397<br />
( - ) Reversal of goodwill based on the adjustment in purchase price (Margusa - Maranhão Gusa S.A.).. - (5,258)<br />
( - ) Write-off of goodwill as a result of the merger of the subsidiary GTL Brasil Ltda. ........................ (280,882) (280,882)<br />
( - ) Foreign exchange adjustment.................................................................................................. - (36,361)<br />
( - ) Amortization during the year................................................................................................... up to 10 years ______________ (2,439) __________________ (364,119)<br />
Balance at December 31, <strong>2004</strong> (based on expectation of future profitability)..................................... 19,512 52,854<br />
Analysis of the goodwill by subsidiary:<br />
Margusa - Maranhão Gusa S.A. ............................................................................................... - 24,728<br />
Dona Francisca Energética S.A. ................................................................................................ 19,512 19,512<br />
Armacero Industrial y Comercial Ltda. ...................................................................................... - 457<br />
Distribuidora Matco S.A. ......................................................................................................... - 6,066<br />
Salomon Sack S.A. .................................................................................................................. ______________- __________________ 2,091<br />
19,512 52,854
Amortization<br />
period Company Consolidated<br />
Negative goodwill included in the investment accounts<br />
Balance at December 31, 2003...................................................................................................... (270,949) -<br />
( - ) Amortization during the year.................................................................................................. up to 10 years 28,877 -<br />
( - ) Write-off of negative goodwill as a result of the capitalization of the subsidiary<br />
<strong>Gerdau</strong> Participações S.A. ..................................................................................................... ______________ 242,072 __________________-<br />
Balance at December 31, <strong>2004</strong>...................................................................................................... - -<br />
Goodwill included in the fixed asset accounts<br />
Balance at December 31, 2003...................................................................................................... - 239,740<br />
( - ) Foreign exchange adjustment.................................................................................................. - (14,860)<br />
( - ) Amortization during the year................................................................................................... up to 10 years ______________- __________________ (79,921)<br />
Balance at December 31, <strong>2004</strong> (based on undervaluation of assets)................................................. - 144,959<br />
The goodwill mainly resulted from the assets of the subsidiary <strong>Gerdau</strong> Ameristeel US Inc.<br />
Negative goodwill included in the fixed asset accounts<br />
Balance at December 31, 2003...................................................................................................... - (272,130)<br />
( - ) Amortization during the year................................................................................................... up to 10 years ______________- __________________ 28,853<br />
Balance at December 31, <strong>2004</strong> (based on overvaluation of assets)................................................... - (243,277)<br />
The negative goodwill mainly resulted from the assets of the subsidiary <strong>Gerdau</strong> Açominas S.A.<br />
The goodwill recorded in the investment accounts, calculated on the subsidiary <strong>Gerdau</strong> Ameristeel US Inc., were reviewed in respect of their<br />
amortization period and projected profitability. The remaining balance was amortized in accordance with accounting practices adopted in<br />
Brazil, and based on the current scenario and performance of the subsidiary <strong>Gerdau</strong> Ameristeel Corporation.<br />
The equity accounting loss in the consolidated statement of income refers, basically, to the effect of the devaluation of the U.S. dollar on the<br />
foreign investments, to goodwill amortization for the year and to the tax incentive reserves arising from the reduction of income tax on the<br />
exploitation profit of the subsidiaries <strong>Gerdau</strong> Açominas S.A. and Margusa - Maranhão Gusa S.A., both located in the Northeastern region of<br />
Brazil, as well as to benefits arising from state tax financing.<br />
5 - Cash and Cash Equivalents<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Cash and Banks................................................................................................. 1,347 10 333,720 121,615<br />
Financial investment fund................................................................................... 12,373 174,842 571,745 326,551<br />
Fixed income securities....................................................................................... 1,989 2,832 1,098,814 369,377<br />
Equities............................................................................................................. - - 37,688 199,463<br />
___________ ___________ ___________ ___________<br />
15,709 177,684 2,041,967 1,017,006<br />
___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________<br />
Of the existing balance, R$ 1,004,550 - consolidated (R$ 518,315 - consolidated in 2003) refers to investments in U.S. dollars.<br />
6 - Trade Accounts Receivable<br />
Consolidated<br />
<strong>2004</strong> 2003<br />
Customers in Brazil.......................................................................................................................................................... 812,420 533,631<br />
Brazilian export receivables .............................................................................................................................................. 543,954 235,442<br />
Receivables from customers of overseas companies............................................................................................................. 1,232,095 835,212<br />
Provision for credit risks................................................................................................................................................... ____________ (91,661) ____________ (78,109)<br />
____________<br />
2,496,808<br />
____________<br />
1,526,176
118 119<br />
GERDAU S.A.<br />
7 - Inventories<br />
Consolidated<br />
<strong>2004</strong> 2003<br />
Finished products............................................................................................................................................................ 1,728,652 868,147<br />
Work in progress............................................................................................................................................................. 679,167 323,373<br />
Raw materials................................................................................................................................................................. 1,112,467 586,311<br />
Storeroom materials......................................................................................................................................................... 649,892 517,010<br />
Advances to suppliers...................................................................................................................................................... ____________ 66,464 ____________ 41,757<br />
____________<br />
4,236,642<br />
____________<br />
2,336,598<br />
The inventories are covered against fire and overflow. Coverage is determined based on the amounts and the risks involved.<br />
8 - Tax Credits<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Value-Added Tax on Sales and Services (ICMS)..................................................... - - 99,803 90,804<br />
Social Contribution on Revenues (COFINS) to offset.............................................. - - 56,302 -<br />
Social Integration Program (PIS) to offset............................................................. 24,621 1,786 36,730 4,759<br />
Excise Tax (IPI)................................................................................................... - - 3,310 6,358<br />
Income tax and social contribution on net income................................................ 7,386 58 35,023 13,485<br />
Tax on Added Value (IVA).................................................................................... - - 1,861 487<br />
Other ................................................................................................................ 31 - 7,433 4,922<br />
___________ ___________ ___________ ___________<br />
32,038 1,844 240,462 120,815<br />
___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________<br />
9 - Income Tax and Social Contribution on Net Income<br />
a) Analysis of the income tax and social contribution expense:<br />
Company<br />
____________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
_____________________________________ ____________________________________<br />
IR CS Total IR CS Total<br />
Profit before income tax and social contribution,<br />
after statutory profit sharing............................................... 2,811,272 2,811,272 2,811,272 1,271,914 1,271,914 1,271,914<br />
Statutory rates of tax.............................................................. 25% 9% 34% 25% 9% 34%<br />
Income tax and social contribution expense at statutory rates.... (702,818) (253,014) (955,832) (317,979) (114,472) (432,451)<br />
Tax effects on:<br />
- equity in earnings (losses).................................................... 709,122 255,284 964,406 125,766 45,276 171,042<br />
- interest on capital................................................................ 15,669 5,641 21,310 87,694 31,569 119,263<br />
- permanent differences (net).................................................. ___________ (7,340) ___________ (2,477) ___________ (9,817) ___________ 4,790 ___________ 2,658 ___________ 7,448<br />
Income tax and social contribution expense.............................<br />
___________ 14,633<br />
___________ 5,434<br />
___________ 20,067<br />
___________ (99,729)<br />
___________ (34,969)<br />
___________<br />
(134,698)<br />
Current................................................................................. 4 - 4 (74,640) (18,489) (93,129)<br />
Deferred................................................................................ 14,629 5,434 20,063 (25,089) (16,480) (41,569)<br />
IR - Corporate income tax.<br />
CS - Social contribution on net income.
Consolidated<br />
____________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
_____________________________________ ____________________________________<br />
IR CS Total IR CS Total<br />
Profit before income tax and social contribution,<br />
after statutory profit sharing............................................... 4,388,374 4,388,374 4,388,374 1,113,561 1,113,561 1,113,561<br />
Statutory rates of tax.............................................................. 25% 9% 34% 25% 9% 34%<br />
Income tax and social contribution expense at statutory rates.... (1,097,094) (394,954) (1,492,048) (278,390) (100,220) (378,610)<br />
Tax effects on:<br />
- tax rate difference for foreign companies............................... (96,019) 91,649 (4,370) 38,906 (14,169) 24,737<br />
- equity in earnings (losses).................................................... (85,779) (30,880) (116,659) (74,839) (26,942) (101,781)<br />
- interest on own capital......................................................... 90,100 32,436 122,536 87,887 31,639 119,526<br />
- foreign exchange effect........................................................ 29,731 2,676 32,407 72,863 26,231 99,094<br />
- recovery of deferred tax assets.............................................. 270,770 48,109 318,879 305,724 117,027 422,751<br />
- permanent differences (net).................................................. ___________ (40,554) ___________ 26,322 ___________ (14,232) ___________ (32,015) ___________ (12,778) ___________ (44,793)<br />
Income tax and social contribution expense.............................<br />
___________ (928,845)<br />
___________ (224,642)<br />
___________ (1,153,487)<br />
___________ 120,136<br />
___________ 20,788<br />
___________<br />
140,924<br />
Current................................................................................. (785,225) (165,976) (951,201) (235,130) (73,551) (308,681)<br />
Deferred................................................................................ (143,620) (58,666) (202,286) 355,266 94,339 449,605<br />
IR - Corporate income tax.<br />
CS - Social contribution on net income.<br />
b) Analysis of the deferred income tax and social contribution assets and liabilities, at the statutory rates of tax:<br />
Assets<br />
_________________________________________________________________________________________________________________________<br />
Company<br />
Consolidated<br />
___________________________________________________________ ____________________________________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
____________________________ _____________________________ _____________________________ _____________________________<br />
IR CS Total IR CS Total IR CS Total IR CS Total<br />
Income tax losses.................... 8,655 - 8,655 119 - 119 420,986 - 420,986 457,597 - 457,597<br />
Social contribution losses........ - 3,758 3,758 - 517 517 - 60,651 60,651 - 89,175 89,175<br />
Provision for contingencies...... 12,918 4,651 17,569 12,916 4,650 17,566 48,673 17,403 66,076 40,732 14,536 55,268<br />
Benefits to employees............. - - - - - - 101,474 - 101,474 95,839 - 95,839<br />
Commissions/other.................. - - - - - - 156,148 2,272 158,420 80,071 1,453 81,524<br />
Amortized goodwill................. 1,220 439 1,659 610 220 830 2,314 833 3,147 610 220 830<br />
Provision for losses................. ________ 9,664 ________ 991 ________ 10,655 ________ 9,663 ________ 991 ________ 10,654 ________ 87,595 ________ 29,046 ________ 116,641 ________ 94,462 ________ 31,519 ________ 125,981<br />
________ 32,457 ________ 9,839 ________ 42,296 ________ 23,308 ________ 6,378 ________ 29,686 ________ 817,190 ________ 110,205 ________ 927,395 ________ 769,311 ________ 136,903 ________<br />
906,214<br />
Current.................................. - - - - - - 270,959 58,505 329,464 90,818 26,050 116,868<br />
Long-term.............................. 32,457 9,839 42,296 23,308 6,378 29,686 546,231 51,700 597,931 678,493 110,853 789,346<br />
Liabilities<br />
_________________________________________________________________________________________________________________________<br />
Company<br />
Consolidated<br />
___________________________________________________________ ____________________________________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
____________________________ _____________________________ _____________________________ _____________________________<br />
IR CS Total IR CS Total IR CS Total IR CS Total<br />
Accelerated depreciation......... - - - - - - 576,176 823 576,999 426,751 854 427,605<br />
Amortized negative goodwill.... 40,198 14,471 54,669 42,301 15,229 57,530 50,341 14,628 64,969 55,821 16,601 72,422<br />
Inflationary/exchange effect..... ________- ________- ________- ________- ________- ________- ________ 115,934 ________ 33,971 ________ 149,905 ________ 19,790 ________- ________ 19,790<br />
________ 40,198 ________ 14,471 ________ 54,669 ________ 42,301 ________ 15,229 ________ 57,530 ________ 742,451 ________ 49,422 ________ 791,873 ________ 502,362 ________ 17,455 ________<br />
519,817<br />
Current.................................. - - - - - - 146,195 33,971 180,166 35,721 - 35,721<br />
Long-term.............................. 40,198 14,471 54,669 42,301 15,229 57,530 596,256 15,451 611,707 466,641 17,455 484,096
120 121<br />
GERDAU S.A.<br />
The tax benefits recognized on income tax and social contribution losses, as well as on the provision for losses, both in the Company<br />
and consolidated, are supported by projections of future taxable income adjusted to present values, based on technical feasibility studies,<br />
approved by management. These studies, which consider the history of the Company’s and its subsidiaries’ profitability and the maintenance<br />
of the current profitability in the future, permitted the recognition of an additional benefit for the year of R$ 318,879 (R$ 422,751 - 2003) in<br />
subsidiaries, whose estimated recovery is shown in item “c” below. Other credits, based on temporary differences, mainly tax contingencies,<br />
were maintained according to their estimate of realization.<br />
c) Estimated recovery of deferred income tax and social contribution assets:<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Up to <strong>2004</strong>........................................................................................................ - - - 116,868<br />
2005 ............................................................................................................... - 1,843 329,464 129,587<br />
2006 ................................................................................................................ - 3,201 65,829 124,612<br />
2007 ................................................................................................................ 1,839 6,723 65,120 126,239<br />
2008 ................................................................................................................ 2,298 9,371 71,933 137,865<br />
2009 ................................................................................................................ 18,948 2,495 121,649 91,669<br />
2010 to 2012.................................................................................................... 14,794 6,053 173,548 145,083<br />
2013 to 2014.................................................................................................... 4,417 - 99,852 34,291<br />
___________ ___________ ___________ ___________<br />
42,296 29,686 927,395 906,214<br />
___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________<br />
10 - Compulsory Deposits and Other<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Compulsory deposits.......................................................................................... 15,550 15,558 28,052 16,566<br />
Receivables under contract................................................................................. - - 47,496 40,328<br />
ICMS credits on purchases of fixed assets............................................................ - - 74,978 55,612<br />
Income tax incentives......................................................................................... 9,945 9,945 10,122 10,155<br />
Prepaid expenses............................................................................................... - - - 3,036<br />
Assets not for use.............................................................................................. - - 45,779 52,614<br />
Prepaid financial expenses.................................................................................. - - 36,143 46,409<br />
___________ ___________ ___________ ___________<br />
25,495 25,503 242,570 224,720<br />
___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________
11 - Investments<br />
Company<br />
________________________________________________________________________________________________________________________________________________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
_________________________________________________________________________________________________________________________________________________________________________________________________________________ ___________<br />
Subsidiaries Other Total Total<br />
______________________________________________________________________________________________________________________________________________________________________________________ _________ ___________ ___________<br />
<strong>Gerdau</strong> Itaguaí<br />
<strong>Gerdau</strong> Internacional Com. Imp. Dona Seiva S.A. -<br />
Participa- <strong>Gerdau</strong> Empreend. e Export Francisca Florestas e GTL<br />
ções S.A. 1 Açominas S.A. Ltda. 2 Ltda. Energética S.A. Indústrias Brasil Ltda. 3 Other<br />
_______________ ______________________________ _______________ _________ ______ ____________________________ _______________ ______________________________ _______________<br />
Negative Provision<br />
Investment Investment Goodwill Investment Investment for loss Goodwill Investment Investment Goodwill Investment<br />
_______________ _______________ ____________ _______________ _________ ______ ____________ _____________ _______________ _______________ ____________ _______________<br />
Opening balance.......... 639 2,512,502 (270,949) 1,820,606 98,777 (9,765) 21,951 74,478 - - 30 43 4,248,312 4,410,913<br />
Merger/<br />
capitalization....... 4,879,338 (4,146,662) 242,072 (684,769) 97,132 - - (80,316) (64,714) (280,882) - - (38,801) (805,785)<br />
Acquisition............... 116 - - 528,787 - - - - 26,261 - - - 555,164 513,100<br />
Goodwill on<br />
aquisition of<br />
investment........... - - - - - - - - - 280,882 - - 280,882 -<br />
Sale......................... - - - (15,426) - - - (17,882) - - - - (33,308) (99,199)<br />
Equity in earnings<br />
(losses) 4 ............ 154,920 2,203,954 28,877 358,467 22,783 1,293 (2,439) 23,720 44,913 - (2) - 2,836,486 503,064<br />
Dividends/<br />
interest on<br />
own capital....... _______________ (147,287) _______________ (569,794) ____________ - _______________ - _________ (24,728) ______ ____________ - _____________ - _______________ - _______________ (6,460) ____________ - _______________ (2) _________ - ___________ (748,271) ___________ (273,781)<br />
Closing balance............ _______________<br />
4,887,726 _______________<br />
- ____________<br />
- _______________<br />
2,007,665 _________<br />
193,964 ______ ____________<br />
(8,472) _____________<br />
19,512 _______________<br />
- _______________<br />
- ____________<br />
- _______________<br />
26 _________<br />
43 ___________<br />
7,100,464 ___________<br />
4,248,312<br />
Capital ....................... 15,227,079 - - 2,663,343 145,110 - 66,600 - - -<br />
Adjusted shareholder’s<br />
equity...................... 4,887,726 - - 2,785,282 193,964 - (16,350) - - -<br />
Net income<br />
for the year.............. 154,974 2,483,483 - 404,571 21,719 - 2,495 48,517 55,522 55,522<br />
Holding in capital (%).. 100.00% - - 72.08% 100.00% - 51.82% - - -<br />
Common shares/<br />
quotas held.............. 9,249,199,209 - - 1,919,769,142 145,109,651 - 345,109,212 - - -<br />
1 On December 29, <strong>2004</strong>, the Company increased the capital in <strong>Gerdau</strong> Participações S.A. (previously Siderúrgica Riograndense S.A.) paid through the merger of its total shareholding in the subsidiary <strong>Gerdau</strong> Açominas S.A. (91.5%) and the<br />
equivalent of a 22.8% holding in the subsidiary <strong>Gerdau</strong> Internacional Empreendimentos Ltda., relating to the indirect holding of this company in <strong>Gerdau</strong> Chile Inversiones Ltda., <strong>Gerdau</strong> Laisa S.A. and Sipar Aceros S.A. These investments were<br />
valued at the economic values of their net assets by an expert company based on projections of cash flows, discounted to present values, in the total amount of R$ 15,226,656. The difference between the book value of these investments<br />
and the amount appraised represents an unrealized capital gain of R$ 10,347,318, recorded as a reduction of the corresponding capitalization. The realization of the capital gain will be made in accordance with the realization of the goodwill<br />
recorded by the subsidiary <strong>Gerdau</strong> Participações S.A.<br />
2 Company holder of the investments in foreign subsidiaries.<br />
3 Company merged on June 30, <strong>2004</strong>.<br />
4 Includes amortization of goodwill/negative goodwill.
122 123<br />
GERDAU S.A.<br />
Consolidated<br />
________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
_____________________________________________________ ______________<br />
Investment Goodwill Total Total<br />
<strong>Gerdau</strong> Ameristeel US Inc. ........................................................................ - - - 281,870<br />
<strong>Gerdau</strong> Ameristeel Corporation.................................................................. - - - 80,470<br />
Margusa - Maranhão Gusa S.A................................................................... - 24,728 24,728 43,564<br />
Dona Francisca Energética S.A.................................................................... - 19,512 19,512 21,951<br />
Armacero Industrial y Comercial Ltda.......................................................... 9,871 457 10,328 10,321<br />
Distribuidora Matco S.A. 1 ......................................................................... 12,400 6,066 18,466 -<br />
Salomon Sack S.A. 1 .................................................................................. 17,873 2,091 19,964 -<br />
Corporate joint ventures............................................................................ 10,036 - 10,036 9,984<br />
Other investments..................................................................................... 8,983 - 8,983 13,252<br />
____________________ ____________ ___________ ______________<br />
59,163 52,854 112,017 461,412<br />
____________________ ____________ ___________ ______________<br />
____________________ ____________ ___________ ______________<br />
1<br />
Companies purchased by the indirect subsidiary Industria del Aceros S.A. - Indac.<br />
12 - Fixed Assets<br />
Consolidated<br />
___________________________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
_________________________________________________________ ______________<br />
<strong>Annual</strong><br />
Accumulated<br />
depreciation<br />
depreciation<br />
rate - % Cost and depletion Net Net<br />
Land, buildings and structures.................................................... 0 to 10 3,310,732 (1,079,881) 2,230,851 2,301,431<br />
Machinery, equipment and installations...................................... 5 to 10 7,965,817 (3,639,334) 4,326,483 4,085,090<br />
Furniture and fixtures................................................................ 5 to 10 110,424 (69,644) 40,780 37,979<br />
Vehicles................................................................................... 20 to 33 41,678 (31,112) 10,566 12,369<br />
Eletronics data equipment/rights/licenses.................................... 20 to 33 284,837 (188,113) 96,724 93,764<br />
Construction in progress............................................................ - 1,065,583 - 1,065,583 718,810<br />
Forestation/reforestation........................................................... Felling plan 207,431 (51,055) 156,376 129,282<br />
____________ _________________ ____________ ______________<br />
12,986,502 (5,059,139) 7,927,363 7,378,725<br />
____________ _________________ ____________ ______________<br />
____________ _________________ ____________ ______________<br />
a) Insured amounts - the assets are insured against fire, electrical damage and explosion. The coverage is determined based on the risks<br />
involved. The plants of the North American subsidiaries and the Ouro Branco plant of the subsidiary <strong>Gerdau</strong> Açominas S.A. have coverage for<br />
loss of profits.<br />
b) Capitalization of interest and financial charges - R$ 2,021 was capitalized during the year - consolidated (R$ 1,174 - Company and R$ (14,711)<br />
consolidated in 2003).<br />
c) Guarantees offered - fixed assets were pledged as collateral for loans and financing in the amount of R$ 688,034 - consolidated (R$ 539,724<br />
consolidated in 2003).<br />
d) Summary of changes in fixed assets:<br />
Consolidated<br />
<strong>2004</strong> 2003<br />
Balance at the beginning of the year ................................................................................................................................. 7,378,725 7,597,318<br />
( + ) Purchases/sales for the year...................................................................................................................................... 1,167,372 812,583<br />
( - ) Depreciation and depletion in cost of sales.................................................................................................................. (692,610) (538,286)<br />
( - ) Depreciation and depletion in administrative expenses.................................................................................................. (69,440) (61,648)<br />
( + ) Companies consolidated in the year........................................................................................................................... - 288,898<br />
( - ) Revaluation reversal.................................................................................................................................................. - (365,347)<br />
( + ) Purchase of North Star and others.............................................................................................................................. 267,948 -<br />
( - ) Foreign exchange effect on foreign fixed assets............................................................................................................ __________ (124,632) __________ (354,793)<br />
Balance at the end of the year..........................................................................................................................................<br />
__________<br />
7,927,363<br />
__________<br />
7,378,725
13 - Deferred Charges<br />
Consolidated deferred charges comprise pre-operating expenses in the construction of a power plant, as well as reforestation, research,<br />
development and restructuring projects.<br />
14 - Financing<br />
Financing are represented as follows:<br />
<strong>Annual</strong> _______________________________<br />
Consolidated<br />
charges <strong>2004</strong> 2003<br />
CURRENT<br />
Working capital financing (R$) ........................................................................................................... 8.00% to 14.00% 1,174 48,465<br />
Fixed asset financing (R$)................................................................................................................... 12.00% - 3,054<br />
Investment financing (R$) .................................................................................................................. CDI 4,500 4,500<br />
Investment financing (US$) ................................................................................................................ US$ 133,955 45,649<br />
Working capital financing (US$).......................................................................................................... 1.36% to 10.50% 1,085,418 1,341,746<br />
Fixed asset financing and others (US$) ............................................................................................... US$ - 8,692<br />
Working capital financing (Clp$)......................................................................................................... 0.23% to 0.32% 31,905 30,025<br />
Working capital financing (PA$).......................................................................................................... 4.25% to 10.00% 19,956 -<br />
Current portion of long-term financing................................................................................................ ______________ 691,489 ______________ 932,245<br />
1,968,397 2,414,376<br />
LONG-TERM<br />
Working capital financing (R$)............................................................................................................ 10.02% 28,215 3,812<br />
Fixed asset financing and others (R$).................................................................................................. 4.00% to 9.90% 657,720 627,727<br />
Investment financing (R$)................................................................................................................... IGPM + 8.5% 29,045 35,019<br />
Fixed asset financing and others (US$)................................................................................................ 1.74% to 9.97% 762,338 761,288<br />
Working capital financing (US$).......................................................................................................... 2.95% to 10.75% 2,473,200 2,643,325<br />
Investment financing (US$)................................................................................................................. 4.04% 182,943 -<br />
Working capital financing (Cdn$)........................................................................................................ 2.00% to 3.25% - 164,974<br />
Fixed asset financing (Cdn$)............................................................................................................... 2.00% to 3.25% 3,485 3,837<br />
Working capital financing (Clp$)......................................................................................................... 0.29% to 0.43% 16,254 29,952<br />
Fixed asset financing (Clp$)................................................................................................................ 0.26% to 0.43% 27,000 58,396<br />
Fixed asset financing (PA$)................................................................................................................. 4.25% to 10.00% 1,663 -<br />
(-) Current portion............................................................................................................................. ______________ (691,489) ______________ (932,245)<br />
______________ 3,490,374 ______________ 3,396,085<br />
Total financing................................................................................................................................... ______________<br />
5,458,771 ______________<br />
5,810,461<br />
CDI - Certificate of Interbank Deposit interest rate.<br />
IGPM - General Market Price Index.<br />
Summarized by currency:<br />
Consolidated<br />
__________________________________<br />
<strong>2004</strong> 2003<br />
Brazilian real (R$)............................................................................................................................................................. 720,654 722,577<br />
U.S. dollar (US$)............................................................................................................................................................... 4,637,854 4,800,700<br />
Canadian Dollar (Cdn$)..................................................................................................................................................... 3,485 168,811<br />
Argentine Peso (PA$)......................................................................................................................................................... 21,619 -<br />
Chilean Peso (Clp$)........................................................................................................................................................... ____________ 75,159 ____________ 118,373<br />
____________<br />
5,458,771 ____________<br />
5,810,461<br />
The schedule for payment of the long-term portion of financing is as follows:<br />
Consolidated<br />
In 2006........................................................................................................................................................................................................ 527,860<br />
In 2007........................................................................................................................................................................................................ 563,896<br />
In 2008........................................................................................................................................................................................................ 565,035<br />
In 2009........................................................................................................................................................................................................ 323,109<br />
In 2010........................................................................................................................................................................................................ 210,048<br />
After 2010.................................................................................................................................................................................................... ______________ 1,300,426<br />
______________<br />
3,490,374
124 125<br />
GERDAU S.A.<br />
a) Events during the year<br />
On June 3, <strong>2004</strong>, the Company concluded the placement of the second tranche, of US$ 128 million (equivalent to R$ 339,763 at December<br />
31, <strong>2004</strong>) of a US$ 400 million Export Notes Receivable program (equivalent to R$ 1,061,760 at December 31, <strong>2004</strong>). This joint program with<br />
<strong>Gerdau</strong> Açominas S.A. has an interest rate of 7.321% p.a., maturity in April 2012, a grace period of two years and quarterly amortization as<br />
from July 2006.<br />
b) Guarantees<br />
The loans contracted under the FINAME/BNDES program are guaranteed by the financed assets, in the amount of R$ 180,109. The other loans<br />
are guaranteed by sureties from the controlling shareholders, on which the subsidiary pays a fee of 1% p.a. on the amount guaranteed.<br />
c) Covenants<br />
In replacement of the tangible guarantees usually required, the loans are being contracted with certain financial covenants, as follows:<br />
I) Consolidated interest coverage ratio - measures the debt service payment capacity in relation to EBITDA (Earnings before Interest, Taxes,<br />
Depreciation and Amortization);<br />
II) Consolidated leverage ratio - measures the debt coverage capacity in relation to EBITDA;<br />
III) Required Minimum Net Worth - measures the minimum net worth required in financial agreements; and<br />
IV) Current Ratio (current liquidity ratio) - measures the capacity to comply with short-term obligations.<br />
All the covenants mentioned above are calculated on a consolidated basis, except for item IV which refers to the parent company Metalúrgica<br />
<strong>Gerdau</strong> S.A., and have been observed. The penalty for non-compliance is the prepayment of the contracts.<br />
d) Credit lines<br />
The North American subsidiaries have a credit line in the amount of US$ 350 million, equivalent to R$ 929,040 at the balance sheet date,<br />
falling due in June 2008, which can be drawn in U.S. dollars (at the LIBOR rate plus interest between 2.25% and 2.75% p.a. or US Prime/FED<br />
Funds plus interest of 0.5% p.a.) or in Canadian dollars (at the Bankers Acceptance (BA) rate plus interest between 2.35% and 2.85% p.a. or<br />
Canadian Prime plus interest of 1.00% p.a.). The distribution of this credit line among the companies is made in proportion to the working<br />
capital of each North American subsidiary.<br />
The subsidiary <strong>Gerdau</strong> Aza S.A. has a credit line for working capital amounting to Clp$ 28 billion, equivalent to R$ 133,582 at the balance sheet<br />
date, bearing interest of 3.90% p.a., and a credit line for fixed assets in the amount of Clp$ 6 billion, equivalent to R$ 28,625 at the balance<br />
sheet date, bearing interest of 4.50% p.a.<br />
15- Debentures<br />
General Number <strong>Annual</strong><br />
_________________________________<br />
Issue meeting Issued In portfolio Maturity rate <strong>2004</strong> 2003<br />
3 rd - A and B.................................. 05.27.1982 144,000 52,946 06.01.2011 CDI 156,387 73,508<br />
7 th ................................................. 07.14.1982 68,400 6,500 07.01.2012 CDI 121,068 21,628<br />
8 th ................................................. 11.11.1982 179,964 65,811 05.02.2013 CDI 145,878 83,566<br />
9 th ................................................. 06.10.1983 125,640 38,234 09.01.2014 CDI 170,954 29,927<br />
11 th - A and B................................ 06.29.1990 150,000 97,044 06.01.2020 CDI 98,189 19,249<br />
13 th ............................................... 11.23.2001 30,000 30,000 11.01.2008 CDI less 2% __________- __________-<br />
Company 692,476 227,878<br />
<strong>Gerdau</strong> Ameristeel Corp.................. 04.23.1997 125,000 - 04.30.2007 6.50% 232,618 226,021<br />
Debentures held by<br />
consolidated subsidiaries............. __________ (7,022) __________ (1,833)<br />
Consolidated.............................. __________<br />
918,072 __________<br />
452,066<br />
Current portion.............................. 2,986 3,027<br />
Long-term portion.......................... 915,086 449,039<br />
The Extraordinary General Meeting of shareholders held on April 29, <strong>2004</strong> approved the cancellation of the 4 th issue (42,000 debentures) and<br />
10 th issue debentures (6,450 debentures), which were held in treasury.<br />
The same EGM approved the split of the following debenture issues: 3 rd (classes A and B), 7 th , 8 th , 9 th and 11 th issues (classes A and B). On July<br />
1, <strong>2004</strong>, three new debentures were issued for each existing debenture, thus changing their nominal value.<br />
The Extraordinary General Meeting of the subsidiary Seiva S.A. - Florestas e Indústrias held on April 30, <strong>2004</strong> approved the cancellation of the<br />
1 st issue debentures, series A and B (12,000 debentures), which were held in treasury.<br />
The Board of Directors’ Meeting held on October 14, <strong>2004</strong> approved the fixed remuneration of the 13 th issue debentures at the CDI interest<br />
rate less 2% p.a., during the period from November 1, <strong>2004</strong> to October 31, 2005.<br />
The debentures of <strong>Gerdau</strong> Ameristeel Corporation are convertible into common shares of that subsidiary, up to their maturity date.<br />
The controlling shareholders hold, directly or indirectly, R$ 523,546 at December 31, <strong>2004</strong> (2003 - R$ 88,284) of the outstanding debentures.
16 - Financial Instruments<br />
a) General comments - <strong>Gerdau</strong> S.A. and its subsidiaries enter into transactions involving financial instruments, the risks of which are managed<br />
through financial positions and exposure limit controls. All instruments are fully recorded in the books of account and mainly relate to the<br />
instruments listed below:<br />
- financial investments - are recorded at their market value as of the balance sheet date and are explained and presented in Note 5;<br />
- investments - are explained and presented in Note 11;<br />
- related parties - are explained and presented in Note 21;<br />
- financing - are explained and presented in Note 14;<br />
- debentures - are explained and presented in Note 15; and<br />
- financial derivatives - in order to minimize the effects of fluctuations in foreign exchange rates on their liabilities, the subsidiaries <strong>Gerdau</strong><br />
Açominas S.A. and Dona Francisca Energética S.A. entered into swap contracts that were converted into Brazilian reais on the contract date<br />
and linked to changes in the CDI rate and the General Market Price Index (IGP-M), plus additional interest. The subsidiary <strong>Gerdau</strong> Ameristeel<br />
Corporation also entered into swap contracts, linked to the London Interbank Offered Rate (LIBOR) plus interest of between 6.05% and 6.45% p.a.<br />
The swap contracts are listed below:<br />
Consolidated<br />
Contract date Purpose Amount (US$ thousand) Rate Maturity<br />
07/16/2001 to 05/07/2002 Prepayment 32,823 85.55% to 100.00% of the CDI 01/13/2005 to 03/01/2006<br />
02/20/2002 Resolution 2770 54,000 106.00% of the CDI 06/20/2005<br />
02/19/2003 Resolution 4131 3,300 85.70% of the CDI 02/04/2005<br />
04/17/2003 Fixed assets 6,316 IGPM + 12.95% 05/16/2005 to 11/16/2010<br />
04/17/2003 Fixed assets 13,095 97.00% to 100.90% of the CDI 05/16/2005 to 11/16/2013<br />
10/30 to 11/03/2003 Bank notes 200,000 LIBOR + interest between 6.09% to 6.13% 07/15/2011<br />
06/26/2003 Investment 55,000 4.86% to 5.40% 09/02/2005 to 10/02/2006<br />
b) Market value - the market values of the financial instruments are as follows:<br />
Company<br />
_____________________________________________________________________<br />
<strong>2004</strong><br />
__________________________________<br />
2003<br />
_________________________________<br />
Book Market Book Market<br />
Value Value Value Value<br />
Financial investments........................................................................................ 14,362 14,362 177,674 177,674<br />
Debentures....................................................................................................... 692,476 692,476 227,878 227,878<br />
Investments...................................................................................................... 7,100,464 7,100,464 4,248,312 4,248,312<br />
Related parties (liabilities)................................................................................. 164,549 164,549 20,961 20,961<br />
Stock options (liabilities) - note 25..................................................................... - 8,096 - 5,088<br />
Treasury shares - note 23................................................................................... 44,139 74,727 17,103 21,045<br />
Consolidated<br />
_____________________________________________________________________<br />
<strong>2004</strong><br />
__________________________________<br />
2003<br />
_________________________________<br />
Book Market Book Market<br />
Value Value Value Value<br />
Financial investments ....................................................................................... 1,708,247 1,708,247 895,391 895,391<br />
Swap contracts - investments (liabilities) ............................................................ 4,500 4,500 12,303 12,303<br />
Eurobonds ....................................................................................................... - - 83,235 72,581<br />
Securitization financing..................................................................................... 627,908 627,908 303,282 303,282<br />
Import financing............................................................................................... 619,883 619,883 377,534 383,941<br />
Prepayment financing........................................................................................ 808,983 804,724 807,385 818,786<br />
Financing - Resolution 2770.............................................................................. 263,060 256,585 365,573 390,235<br />
ACC (Advances on Export Contracts) financing.................................................... 43,891 43,891 500,118 524,935<br />
Financing - Resolution 4131.............................................................................. 20,893 20,755 24,243 24,468<br />
Bank notes financing......................................................................................... 1,050,835 1,260,376 1,144,601 1,292,733<br />
Fixed asset financing ........................................................................................ 45,837 45,686 93,172 96,069<br />
Other financing ................................................................................................ 1,977,481 1,977,481 2,111,318 2,130,564<br />
Debentures....................................................................................................... 918,072 918,072 452,066 452,066<br />
Investments...................................................................................................... 112,017 112,017 461,412 461,412<br />
Related parties (assets)..................................................................................... 1,448 1,448 26,979 26,979<br />
Stock options (liabilities) - note 25..................................................................... - 13,663 - 8,298
126 127<br />
GERDAU S.A.<br />
The market values of the swap contracts of subsidiaries in Brazil were obtained based on future income projections for each contract,<br />
calculated based on the present value of the forward U.S. dollar + coupon rates (assets) and CDI/IGPM future rates (liabilities) and adjusted<br />
to present value on the balance sheet date, using the projected future CDI/IGPM rate for each maturity. The same methodology is applied for<br />
the calculation of the market values of the swap contracts of the subsidiary <strong>Gerdau</strong> Ameristeel Corporation, using the LIBOR rate.<br />
Swap contracts related to financing contracts are classified together with the related financing, as a contra entry to the “Financial expenses/<br />
income, net” account, and are stated at cost plus accrued charges up to the balance sheet date. Contracts not linked to such financing have<br />
been recorded at their market value under the heading “Other accounts payable”, in long-term liabilities.<br />
The Company believes that the balances of the other financial instruments, which are recognized in the books at net contracted values,<br />
are substantially similar to those that would be obtained if they were negotiated in the market. However, because the markets for these<br />
instruments are not active, differences could exist if they were settled in advance.<br />
c) Risk factors that could affect the Company’s and its subsidiaries’ business<br />
Price risk: this risk is related to the possibility of price variations of the products that the subsidiaries sell or in the raw material prices and<br />
other inputs used in the production process. Since the subsidiaries operate in a commodity market, their sales revenues and cost of sales may<br />
be affected by the changes in the international prices of their products or materials. In order to minimize this risk, the subsidiaries constantly<br />
monitor the price variations in the local and international markets.<br />
Interest rate risk: this risk arises as a result of the possibility of losses (or gains) due to fluctuations in interest rates relating to assets<br />
(investments) and liabilities. In order to minimize possible impacts resulting from interest rate fluctuations, the Company and its subsidiaries<br />
have adopted a policy of diversification, alternating between fixed rates and variable rates (such as LIBOR and the CDI) and periodically<br />
renegotiate contracts to adjust them to market.<br />
Exchange rate risk: this risk is related to the possibility of fluctuations in foreign exchange rates affecting financial expenses (or income)<br />
and the liability (or asset) balance of contracts denominated in a foreign currency. In addition to the foreign investments which are a natural<br />
hedge, the Company and its subsidiaries use “hedge” instruments, usually swaps contracts, as described in item “a” above, to manage the<br />
effects of these fluctuations.<br />
Credit risk: this risk arises from the possibility of the subsidiaries not receiving amounts arising from sales or investments at financial<br />
institutions. In order to minimize this risk, the subsidiaries adopt the procedure of analyzing in detail the financial and equity position of<br />
their customers, establishing a credit limit and constantly monitoring their balances. In relation to financial investments, the Company and<br />
its subsidiaries invest solely in institutions with low credit risk, as assessed by rating agencies. In addition, each institution has a maximum<br />
limit for investment, determined by the Credit Committee.<br />
17 - Financial Expenses/Income, Net<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Financial income<br />
Financial investments......................................................................................... 18,674 25,392 141,394 139,860<br />
Interest received................................................................................................ 301 26,072 29,928 30,318<br />
Monetary variations - assets............................................................................... 62 1,486 3,325 4,438<br />
Foreign exchange variations - assets.................................................................... 1 (18) (34,671) (79,356)<br />
Foreign exchange swaps - assets ........................................................................ - (62,884) 3,915 (62,884)<br />
Other financial income....................................................................................... 23,288 13,162 65,955 19,653<br />
____________ ____________ ____________ ____________<br />
Total financial income.................................................................................... 42,326 3,210 209,846 52,029<br />
____________ ____________ ____________ ____________<br />
____________ ____________ ____________ ____________<br />
Financial expenses<br />
Interest on debt................................................................................................. (53,662) (291,462) (411,365) (587,143)<br />
Monetary variations - liabilities........................................................................... (743) (23,741) (17,836) (24,018)<br />
Foreign exchange variations - liabilities................................................................ 10,336 393,600 197,607 716,672<br />
Foreign exchange swaps - liabilities..................................................................... - (452,210) (44,127) (741,389)<br />
Other financial expenses..................................................................................... (5,260) (22,999) (110,231) (62,721)<br />
____________ ____________ ____________ ____________<br />
Total financial expenses................................................................................. (49,329) (396,812) (385,952) (698,599)<br />
____________ ____________ ____________ ____________<br />
____________ ____________ ____________ ____________
18 - Taxes and Social Contributions Payable<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Income tax and social contribution on net income................................................ - 9,776 200,862 37,222<br />
Social charges on payroll.................................................................................... 253 196 48,822 48,131<br />
Value-added tax on sales and services (ICMS)...................................................... - - 32,131 12,865<br />
Social contribution on revenues (COFINS)............................................................ 19 110 32,609 14,057<br />
Excise tax (IPI)................................................................................................... - - 14,114 2,966<br />
Social Integration Program (PIS).......................................................................... 1 - 6,683 3,607<br />
Income tax and social contribution withheld at source.......................................... 76 18,058 7,349 23,016<br />
Taxes payable in installments.............................................................................. 6,459 12,883 11,819 15,427<br />
Other ................................................................................................................ - 1,432 31,849 14,485<br />
____________ ____________ ____________ ____________<br />
6,808 42,455 386,238 171,776<br />
____________ ____________ ____________ ____________<br />
____________ ____________ ____________ ____________<br />
19 - Tax Recovery Program (Refis) and Special Installment Payment Program (PAES)<br />
a) REFIS<br />
On December 6, 2000, the Company enrolled in the REFIS program to pay the Social Integration Program (PIS) and the Social Contribution<br />
on Revenues (COFINS) contributions in installments. The balances of these tax liabilities are recorded in Taxes and contributions payable,<br />
in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were originally<br />
divided into 60 installments of which 5 installments are not yet due, are restated by the Long-Term Interest Rate (TJLP) rate, and are as follows<br />
at the year end:<br />
Company and Consolidated<br />
_____________________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
________________________________________ _________________________________________<br />
Principal Interest Total Principal Interest Total<br />
PIS....................................................................... 2,608 2,551 5,159 9,895 6,494 16,389<br />
COFINS................................................................ ______________ 620 ____________ 605 ____________ 1,225 ______________ 2,351 ____________ 1,540 ____________ 3,891<br />
Total....................................................................<br />
______________ 3,228<br />
____________ 3,156<br />
____________ 6,384<br />
______________ 12,246<br />
____________ 8,034<br />
____________<br />
20,280<br />
Current................................................................ 3,228 3,156 6,384 8,644 5,671 14,315<br />
Long-term............................................................ - - - 3,602 2,363 5,965<br />
Taxes, contributions and other liabilities are paid by the Company on their due dates, which is a basic requirement to remain eligible for the<br />
REFIS program.<br />
As guarantee for this installment payment program, the Company pledged the land and buildings of the Piratini plant, located in the<br />
municipality of Charqueadas, in the state of Rio Grande do Sul, amounting to R$ 78,494.<br />
The total income tax and social contribution credits from third parties offset against fines and interest on the consolidation of the REFIS<br />
debts on December 6, 2000 totaled R$ 57,040 and were purchased for R$ 4,351. The Company’s own tax credits were not used.<br />
The constitutionality of the use of credits of R$ 40,118 of the total purchased is being challenged in court. This is because the Federal Revenue<br />
authorities understand that tax credits must first be used to offset the assignor’s own debts, only transferring the excess to the assignee.<br />
This understanding, based solely on a REFIS Management Committee Resolution, edited subsequently to the Company’s enrollment in the<br />
program, does not comply with the legal order. In fact, the law which established the Program authorized, with no conditions, the purchase<br />
of third party tax credits for offset against own liabilities.<br />
b) PAES<br />
The proportionally consolidated (52%) subsidiary Dona Francisca Energética S.A. enrolled in the PAES, established by Law 10684/03, at the<br />
Federal Revenue Secretariat, to settle Corporate Income Tax (IRPJ), Social Contribution on Net Income (CSLL), Social Integration Program (PIS)<br />
and Social Contribution on Revenues (COFINS) liabilities. The balances of these tax liabilities are recorded in Taxes and contributions payable,<br />
in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were divided into<br />
180 installments of which 161 are not yet due, are restated by the TJLP and are as follows at the year end:
128 129<br />
GERDAU S.A.<br />
Consolidated<br />
_______________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
_________________________________________ ________________________________________<br />
Principal Interest Total Principal Interest Total<br />
IRPJ..................................................................... 20,303 3,160 23,463 21,816 1,255 23,071<br />
CSLL.................................................................... 7,360 1,145 8,505 7,908 455 8,363<br />
PIS....................................................................... 720 112 832 774 45 819<br />
COFINS................................................................ 3,326 518 3,844 3,574 206 3,780<br />
______________ ____________ ____________ ______________ ____________ ____________<br />
Total.................................................................... 31,709 4,935 36,644 34,072 1,961 36,033<br />
______________ ____________ ____________ ______________ ____________ ____________<br />
______________ ____________ ____________ ______________ ____________ ____________<br />
Current................................................................ 2,364 368 2,732 2,363 136 2,499<br />
Long-term............................................................ 29,345 4,567 33,912 31,709 1,825 33,534<br />
Dona Francisca Energética S.A. pays its taxes, contributions and other liabilities on their due dates, which is a basic requirement to remain<br />
eligible for the PAES program.<br />
20 - Provision for Contingencies<br />
The Company and its subsidiaries are parties in labor, civil, and tax processes. Based on the opinion of its legal advisors, management believes<br />
that the provision for contingencies is sufficient to cover probable and reasonably estimable losses from unfavorable court decisions, and the<br />
final decisions will not have significant effects on the financial position of the Company at December 31, <strong>2004</strong>.<br />
The balances of the contingencies are as follows:<br />
I) Contingent liabilities provided<br />
Company<br />
Consolidated<br />
____________________________________ ____________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
a) Tax contingencies<br />
Eletrobrás................................................................................ (a.1) 50,456 50,456 50,456 50,456<br />
Finsocial.................................................................................. (a.2) 6,891 6,891 6,898 6,948<br />
ICMS....................................................................................... (a.3) 1,099 1,099 17,300 14,346<br />
Social contribution on net income............................................. (a.4) 7,216 8,978 7,333 40,756<br />
Corporate income tax............................................................... (a.5) 19,993 20,247 19,993 101,134<br />
INSS........................................................................................ (a.6) 12,963 12,954 24,900 17,372<br />
PIS.......................................................................................... (a.7) 1,831 1,831 1,903 2,357<br />
Cofins..................................................................................... (a.7) 6,387 6,387 6,935 6,935<br />
Emergency Capacity Charge...................................................... (a.8) 9,368 9,306 25,563 10,074<br />
Extraordinary Tariff Recomposition............................................. (a.8) 5,283 5,283 13,037 5,847<br />
FGTS and other tax contingencies.............................................. (a.9) 305 299 1,503 2,330<br />
( - ) Judicial deposits................................................................ (a.10) ______________ (34,818) ______________ (36,703) ______________ (73,938) ______________ (155,138)<br />
86,974 87,028 101,883 103,417<br />
b) Labor contingencies............................................................. (b.1) 16,257 16,257 49,573 29,609<br />
( - ) Judicial deposits................................................................ (b.2) ______________ (8,349) ______________ (8,285) ______________ (10,313) ______________ (10,244)<br />
7,908 7,972 39,260 19,365<br />
c) Civil contingencies................................................................ (c.1) - - 100,364 99,493<br />
( - ) Judicial deposits................................................................ (c.2) ______________- ______________- ______________ (1,207) ______________ (1,063)<br />
______________- ______________- ______________ 99,157 ______________ 98,430<br />
Total liabilities provided ..........................................................<br />
______________ 94,882<br />
______________ 95,000<br />
______________ 240,300<br />
______________<br />
221,212<br />
INSS (National Institute of Social Security).<br />
FGTS (Government Severance Indemnity Fund for Employees).<br />
a) Tax contingencies<br />
a.1) Of the total provision, R$ 50,456 (Company and consolidated) refers to the contingency of compulsory loans to Eletrobrás, the<br />
constitutionality of which is being questioned by the Company. In March 1995, the Federal Supreme Court judged the proceedings against the<br />
taxpayers. Certain of the Company’s proceedings are pending decision, but the outcomes are already foreseeable, in view of the prior decisions.<br />
The Company established a provision related to “compulsory loans”, taking into consideration that, although the payment to Eletrobrás was<br />
made as a loan: (i) the reimbursement to the Company would probably be in the form of shares of Eletrobrás; (ii) the conversion will be made<br />
based on the net asset book value of the shares; and (iii) based on the current available information, the shares of Eletrobrás are valued at<br />
substantially less than the net asset book value.
a.2) R$ 6,891 (Company) and R$ 6,898 (consolidated) relating to the unconstitutionality of the Social Investment Fund (FINSOCIAL). Although<br />
the Supreme Court has confirmed the constitutionality of the tax at the rate of 0.5%, some of the Company’s claims are still pending<br />
judgment, most of them in the Superior Courts.<br />
a.3) R$ 1,099 (Company) and R$ 17,300 (consolidated) relating to amounts for Value-Added Tax on Sales and Services (ICMS), the majority of<br />
which relates to credit rights involving the Finance Secretariat and the State Courts of the First Instance in the state of Minas Gerais.<br />
a.4) R$ 7,216 (Company) and R$ 7,333 (consolidated) relating to social contribution on net income. The amounts refer to challenges of the<br />
constitutionality of the contribution in 1989, 1990 and 1992. Some proceedings are pending decision, most of them in the Superior Courts.<br />
a.5) R$ 19,993 (Company and consolidated), relating to Corporate Income Tax, challenged at the administrative sphere. Considering the many<br />
legal decisions unfavorable to the unconstitutionality of the limitation of the offset of income tax and social contribution losses to 30% of<br />
net income, the subsidiary <strong>Gerdau</strong> Açominas S.A. decided to no longer deposit in court the amounts related to the matter and requested at<br />
September 30, <strong>2004</strong>, in the court injunction records in which it is the petitioner, the conversion of the amounts deposited in court (R$ 338,992) into<br />
tax payments, and started observing the legal limitation.<br />
The legal challenge has been maintained; however, in the event the STF reviews its current guidance and the subsidiary is successful, it will<br />
plead the offset of the amounts overpaid.<br />
a.6) R$ 12,963 (Company) and R$ 24,900 (consolidated) on contributions due to the INSS which correspond to suits for annulment by the<br />
Company with judicial deposits of practically the whole amount involved, in progress in the Federal Court of the First Instance in the state<br />
of Rio de Janeiro.<br />
In the consolidated statements, the remaining amount refers to lawsuits questioning the position of the INSS in terms of charging INSS<br />
contributions on profit sharing payments made by the subsidiary <strong>Gerdau</strong> Açominas S.A., as well as on payments for services rendered by third<br />
parties, in which the Institute calculated charges for the last ten years and assessed the company because it understands that the company<br />
is jointly liable. The assessments were maintained at the administrative level, and <strong>Gerdau</strong> Açominas S.A. filled annulment actions with the<br />
judicial deposit of the corresponding amount, based on the understanding that the right to assess part of the charge had prescribed and<br />
that there is no such liability.<br />
a.7) R$ 1,831 (Company) and R$ 1,903 (consolidated), relating to contributions for the Social Integration Program (PIS), and R$ 6,387 (Company)<br />
and R$ 6,935 (consolidated) to the Social Contribution on Revenues (COFINS), in connection with lawsuits questioning the constitutionality<br />
of Law 9718, which changed the calculation basis of these contributions. These suits are in progress in the Federal Regional Court of the 2 nd<br />
Region and the Federal Supreme Court.<br />
a.8) R$ 9,368 (Company) and R$ 25,563 (consolidated) relating to the Emergency Capacity Charge (ECE), as well as R$ 5,283 (Company) and<br />
R$ 13,037 (consolidated) relating to the Extraordinary Tariff Recomposition (RTE), included in the electric energy bills of the companies’ plants.<br />
According to the Company, these charges are of a tax nature and, as such, are incompatible with the National Tax System provided in the Federal<br />
Constitution. For this reason, the constitutionality of this charge is being challenged in court. The lawsuits are in progress in the Federal Justice<br />
of the First Instance of the states of Pernambuco, Ceará, Minas Gerais, Rio de Janeiro, São Paulo, Paraná, and Rio Grande do Sul, as well as in the<br />
Federal Regional Courts of the 1 st and 2 nd Regions. The companies have fully deposited in court the amount of the disputed charges.<br />
a.9) R$ 305 (Company) and R$ 1,503 (consolidated) relating to a lawsuit brought by the subsidiary <strong>Gerdau</strong> Açominas S.A. regarding the Government<br />
Severance Indemnity Fund for Employees (FGTS) increased charges, which arose from the changes introduced by Complementary Law 110/01.<br />
Currently, the corresponding court injunction is awaiting the judgment of the extraordinary appeal filed by the company. The amount<br />
provided is fully deposited in court.<br />
a.10) The judicial deposits, representing restricted assets of the companies, relate to amounts deposited and maintained in court until the<br />
resolution of the related legal matters. The balances of these credits, which at December 31, <strong>2004</strong> amounted to R$ 34,818 (Company) and<br />
R$ 73,938 (consolidated), are classified as a reduction of the provision for tax contingencies recorded in the books.<br />
b) Labor contingencies<br />
b.1) The Company and its subsidiaries are also defending labor claims, for which there is a provision of R$ 16,257 and R$ 49,573 (consolidated)<br />
at December 31, <strong>2004</strong>. None of these claims refer to individually significant amounts, and the lawsuits mainly involve claims for overtime pay,<br />
health hazards and risk premium, among others.<br />
b.2) The balances of the deposits in court, which totaled R$ 8,349 at December 31, <strong>2004</strong> (Company) and R$ 10,313 (consolidated), are classified<br />
as a reduction of the provision for labor contingencies.<br />
c) Civil contingencies<br />
c.1) The Company and its subsidiaries are also defending in court civil claims arising in the normal course of its own and the subsidiaries’<br />
operations, including claims arising from work accidents, in a total amount at December 31, <strong>2004</strong> of R$ 100,364 (consolidated) as contingent<br />
liability for these claims.<br />
The provision refers mainly to the issue involving the jointly-owned (52%) subsidiary Dona Francisca Energética S.A. According to a resolution<br />
of the Brazilian Electricity Regulatory Agency (ANEEL), the operations of the subsidiary are restricted to the South of Brazil submarket. Since
130 131<br />
GERDAU S.A.<br />
some of its transactions were carried out in the remaining submarkets, Dona Francisca Energética S.A. may have to acquire the energy it<br />
sells from third parties. The subsidiary challenges in court the validity of the ANEEL resolution and has obtained a favorable preliminary<br />
injunction.<br />
c.2) At December 31, <strong>2004</strong>, the balances of deposits in court totaled R$ 1,207 (consolidated) and are classified as a reduction of the provision<br />
for contingencies.<br />
II) Contingent liabilities not provided<br />
a) Tax contingencies<br />
a.1) The Company is defendant in assessments filed by the state of Minas Gerais demanding ICMS tax payments arising mainly from the sales<br />
of products to commercial exporters. The restated amount of the lawsuits totals R$ 32,848. The Company has not recorded any provision for<br />
contingency in relation to these claims since it considers this tax is not payable, because products for export are exempted from ICMS.<br />
a.2) The Company and its subsidiary <strong>Gerdau</strong> Açominas S.A. are defendants in assessments filed by the state of Minas Gerais, which demand<br />
ICMS tax payments on the export of semi-finished manufactured products. The total amount demanded is R$ 249,742. The companies have<br />
not recorded any provision for contingency in relation to these claims since they consider this tax is not payable because the products cannot<br />
be considered semi-finished manufactured products as defined by the federal complementary law and, therefore, are not subject to ICMS.<br />
a.3) Also, R$ 68,431 are being demanded due to the understanding of the Federal Revenue Secretariat that the transactions carried out by<br />
the subsidiary <strong>Gerdau</strong> Açominas S.A., under the drawback concession granted by DECEX, were not in conformity with the legislation. <strong>Gerdau</strong><br />
Açominas filed a preliminary administrative defense of the legality of the arrangement, which is pending judgment. Since the tax liability<br />
has not been definitely established, and considering that the arrangement which originated the demand conforms with the assumptions<br />
required for the drawback concession, and also that the concession was granted after analysis by the legal administrative authority, <strong>Gerdau</strong><br />
Açominas S.A. considers an unfavorable outcome to be remote and, for this reason, has not recorded any provision for the contingency.<br />
b) Civil contingencies<br />
b.1) Two civil construction syndicates in the state of São Paulo alleged that <strong>Gerdau</strong> S.A. and other long steel producers in Brazil divide<br />
customers among them, violating the antitrust legislation. After investigations carried out by the National Secretariat of Economic Law (SDE)<br />
and based on public hearings, the SDE is of the opinion that a cartel exists. This conclusion was also supported by an earlier opinion by the<br />
Secretariat for Economic Monitoring (SEAE). The process has now been forwarded to the Administrative Council for Economic Defense (CADE)<br />
for final decision.<br />
<strong>Gerdau</strong> S.A. denies having engaged in any type of anti-competitive behavior and believes, based on information available, including the<br />
opinion of its legal advisors, that the administrative process until now includes many irregularities, some of which are impossible to resolve.<br />
For example, the investigations carried out by SDE did not follow the due legal course and the representatives of the SDE influenced certain<br />
witnesses who testified in the process. In addition, the SDE report was issued before <strong>Gerdau</strong> S.A. had the chance to reply to the closing<br />
arguments, which indicates that there was a bias in the judgment made by the SDE. The same applies to the SEAE report, which does not<br />
analyze the economic issues and is based exclusively on the witnesses’ testimony.<br />
These irregularities, which also reflect non-compliance with the related constitutional provisions, will no doubt affect the administrative<br />
decision by CADE, based on the conclusions presented by the antitrust authorities until now. <strong>Gerdau</strong> S.A. has pointed out and tried to combat<br />
all these irregularities and will continue doing so in relation to the allegations and the irregularities in the administrative process, believing<br />
in a favorable outcome to this process, if not in the administrative sphere, possibly in the judicial sphere.<br />
Because of the above, no provision has been recorded for this case. According to Brazilian legislation, fines of up to 30% of gross revenues<br />
in the prior fiscal years may be applied to the Company and, if personal responsibility of an executive is proven, such executive may be<br />
penalized by 10% to 50% of the fine applied to the Company. There are no precedents for fines exceeding 4%. In a similar case involving flat<br />
steel companies, the fine was 1%.<br />
b.2) A civil lawsuit has been filed against <strong>Gerdau</strong> Açominas S.A. regarding the termination of a contract for the supply of slag and indemnities<br />
for losses and damages. At December 31, <strong>2004</strong>, the lawsuit amounts to approximately R$ 37,014.<br />
<strong>Gerdau</strong> Açominas S.A. contested all bases for the lawsuit and filed a counterclaim for termination of the contract and indemnity for breach<br />
of contract.<br />
The judge declared the contract to be terminated, since this demand was common to both parties. With regards to the remaining discussion,<br />
the judge understood that both parties were at fault and judged the requests for indemnity unfounded. This decision was maintained<br />
by the Court of Civil Appeals of the State of Minas Gerais (TAMG), and the court decision is based on expert evidence and interpretation<br />
of the contract. The process was in the High Court of Justice (STJ) and was returned to the TAMG for judgement of the appeal requesting<br />
clarification of the decision.<br />
<strong>Gerdau</strong> Açominas S.A. believes that any loss from the case is remote, since it understands that a change in the judgment is unlikely.<br />
b.3) A civil lawsuit has been filed by Sul America Cia. Nacional de Seguros against <strong>Gerdau</strong> Açominas S.A. and Banco Westdeustsche Landesbank<br />
Girozentrale, New York Branch (WestLB), for the payment of R$ 34,383 to settle an indemnity claim, which has been deposited in court. The
insurance company pleads doubt in relation to whom payment should be made and alleges that the subsidiary is resisting in receiving and<br />
settling it. The lawsuit was contested both by the Bank (which claims having no right over the amount deposited, which resolves the doubt<br />
raised by Sul América) and by the subsidiary (which claims that there is no such doubt and that there is justification to refuse payment since<br />
the amount owed by Sul América is higher than the amount involved). Subsequently, Sul América claimed fault in the Bank’s representation,<br />
and this matter is therefore already settled, which resulted withdrawal in December <strong>2004</strong> of the amount deposited. The process should enter<br />
the expert evidence phase, mainly for calculation of the amount due. Based on the opinion of its legal advisors, the subsidiary expects loss to<br />
be remote and that the sentence will declare the amount payable within the amount stated in the pleading.<br />
Also, <strong>Gerdau</strong> Açominas S.A. filed, prior to this lawsuit, a lawsuit for the payment of the amount recognized by the insurance companies. The<br />
lawsuits are pending. The subsidiary expects a favorable outcome in this lawsuit.<br />
The civil lawsuits arise from an accident on March 23, 2002 with the blast furnace regenerators of the Ouro Branco steel mill, which resulted<br />
in the stoppage of several activities, with material damages to the steel mill equipment and loss of profits. The equipment, as well as the loss<br />
of profits arising from the accident, were covered by an insurance policy. The report on the event, as well as the loss claim, was filed with<br />
IRB - Brasil Resseguros S.A., and an advance payment of R$ 62,000 was received in 2002.<br />
In 2002, a preliminary and conservative estimate of indemnities related to the coverage of loss of profits and material damages, in the total<br />
amount of approximately R$ 110,000, was recorded, based on the amount of fixed costs incurred during the period of partial stoppage of<br />
the steel mill activities and the immediate expenses to be incurred to recover the equipment temporarily. This estimate approximates the<br />
advance amount received plus the amount proposed by the insurance company as a complement to settle the indemnity. Subsequently, new<br />
amounts were added to the discussion, as stated in the subsidiary’s plea, although not yet recorded.<br />
Based on the opinion of its legal advisors, the Company considers that losses from other contingencies that may affect the results of<br />
operations or the Company’s consolidated financial position are remote.<br />
III) Contingent gains not recorded<br />
a) Tax contingencies<br />
a.1) The Company believes that the realization of certain contingent gains is probable. Among them is a court-order debt security issued in<br />
1999 in favor of the Company by the state of Rio de Janeiro in the amount of R$ 26,580, arising from an ordinary lawsuit against the noncompliance<br />
with the Loan Agreement for Periodic Execution in Cash under the Special Industrial Development Program (PRODI).<br />
Due to the default by the state of Rio de Janeiro and the non-regulation of Constitutional Amendment 30/00, which granted the government<br />
a ten-year moratorium for payment of securities issued to cover court-order debts not related to food, the realization of this credit is not<br />
expected in <strong>2004</strong> and, also, there is no expectation of realization in 2005 and following years. For this reason, this gain is not recognized in<br />
the financial statements.<br />
a.2) <strong>Gerdau</strong> S.A. and its subsidiaries have filed several ordinary proceedings relating to the correct basis of calculation of PIS under<br />
Complementary Law 07/70, due to the declarations of unconstitutionality of Decree Laws 2445/88 and 2449/88. The companies expect to<br />
recover the taxes incorrectly paid. The amounts under discussion total R$ 84,245.<br />
a.3) Also, the Company and its subsidiaries <strong>Gerdau</strong> Açominas S.A. and Margusa - Maranhão Gusa S.A. expect to recover IPI premium credits.<br />
<strong>Gerdau</strong> S.A. and the subsidiary Margusa Maranhão Gusa S.A. have filed administrative appeals for recovery, which are pending judgment.<br />
With regards to the subsidiary <strong>Gerdau</strong> Açominas S.A., the proceedings were directed to the courts, with an unfavorable judgment. Currently,<br />
the process awaits judgment of the appeal filed by the subsidiary. The Company estimates the credits at R$ 394,002 but no accounting<br />
recognition has been made thereof because of uncertainty as to their realization.<br />
21 - Related Companies<br />
a) Analysis of loan balances<br />
Company<br />
Consolidated<br />
___________________________________ ___________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Fundação <strong>Gerdau</strong>.............................................................................................. - (32) 1,304 16,762<br />
Sipar Aceros S.A. and other................................................................................ - 1,677 (122) 13,607<br />
Metalúrgica <strong>Gerdau</strong> S.A. ................................................................................... (115) - 266 (3,390)<br />
<strong>Gerdau</strong> Açominas S.A. ...................................................................................... (51,245) (22,606) - -<br />
GTL Financial Corp. .......................................................................................... ____________ (113,189) ____________- ____________- ____________-<br />
Total....................................................................................................... ____________ (164,549) ____________ (20,961) ____________ 1,448 ____________ 26,979<br />
Financial income (expenses)............................................................................... 5,890 62,497 20,448 70,071
132 133<br />
GERDAU S.A.<br />
b) Commercial transactions<br />
Company - <strong>2004</strong> Company - 2003<br />
________________________________ ______________________________________________________________<br />
Income Accounts Income Accounts<br />
(expenses) receivable Sales Purchases (expenses) receivable<br />
Armafer Serviços de Construção Ltda........................ - - 207 - - -<br />
Aço Minas Gerais S.A. - Açominas ............................ - - 5,112 193,020 - -<br />
Açominas Overseas Ltd. (*)...................................... - - 272,616 - - -<br />
<strong>Gerdau</strong> Laisa S.A. .................................................. - - 585 - - -<br />
<strong>Gerdau</strong> Aza S.A. .................................................... - - 6,027 - - -<br />
Sipar Aceros S.A. ................................................... - - 58,617 - - -<br />
Banco <strong>Gerdau</strong> S.A. ................................................. 287 1,962 - - 399 2,113<br />
Grupo <strong>Gerdau</strong> Empreendimentos Ltda. (**) ............... (600) - - - (600) -<br />
Indac - Ind. Adm. e Comércio S.A. (***).................... (3,345) - - - (7,098) -<br />
(*) Transaction carried out due to securitization operations.<br />
(**) Payments for the use of <strong>Gerdau</strong> trademark.<br />
(***) Payments of guarantees of loans.<br />
c) Guarantees granted - The Company is the guarantor of loan agreements of the jointly-owned subsidiary Dona Francisca Energética S.A.,<br />
in the total amount of R$ 97,275, corresponding to 51.82% of the joint guarantee. The Company is the guarantor of the Euro Commercial<br />
Paper program of the subsidiary GTL Trade Finance Inc., of US$ 110 million, equivalent to R$ 291,984 at the balance sheet date. The Company<br />
is also the guarantor of financing agreements of the subsidiary GTL Financial Corp., of US$ 5,000, equivalent to R$ 13,272, and securitization<br />
operations of the subsidiary <strong>Gerdau</strong> Açominas Overseas Ltda., of US$ 233 million, equivalent to R$ 618,475 on the balance sheet date. The<br />
subsidiary <strong>Gerdau</strong> Açominas S.A. is the guarantor of the vendor financing loan agreement of the associated company Banco <strong>Gerdau</strong> S.A., in<br />
the amount of R$ 68,138.<br />
22 - Post-Employment Benefits<br />
Considering all types of benefits to employees granted by the Company, the asset and liability positions at December 31 are as follows:<br />
Company<br />
Consolidated<br />
___________________________________ ___________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Pension plan actuarial liability - defined benefit .................................................. - - 154,199 162,719<br />
Actuarial liability with post-employment health benefit........................................ - - 130,283 105,964<br />
Retirement and discharge benefits payable......................................................... - - 9,996 10,187<br />
______________ ______________ ______________ ______________<br />
Total liabilities.................................................................................................. - - 294,478 278,870<br />
______________ ______________ ______________ ______________<br />
______________ ______________ ______________ ______________<br />
Unrecognized actuarial assets............................................................................ 352 150 162,928 122,683<br />
______________ ______________ ______________ ______________<br />
a) Pension plan - defined benefit<br />
The Company and other Group subsidiaries in Brazil are the co-sponsors of defined benefit pension plans that cover substantially all<br />
employees in Brazil (“Açominas Plan” and “<strong>Gerdau</strong> Plan”).<br />
The Açominas Plan is managed by Fundação Açominas de Seguridade Social - Aços, a closed supplementary pension entity to complement the<br />
social security benefits of employees and retired employees of the Ouro Branco unit of <strong>Gerdau</strong> Açominas S.A. The assets of the Açominas Plan<br />
mainly comprise investments in bank deposit certificates, federal public securities, marketable securities and properties.<br />
The <strong>Gerdau</strong> Plan is managed by <strong>Gerdau</strong> - Sociedade de Previdência Privada, a closed supplementay pension entity to complement the<br />
social security benefits of employees and retired employees of the Company of the other units of <strong>Gerdau</strong> Açominas S.A. and of other<br />
subsidiaries in Brazil. The assets of the <strong>Gerdau</strong> Plan comprise investments in bank deposit certificates, federal public securities and<br />
marketable securities.<br />
Also, the Canadian and American subsidiaries sponsor defined benefit plans (Canadian Plan and American Plan) that cover substantially all<br />
of their employees.<br />
The Canadian and American plans are managed by CIBC Mellon and Wells Fargo, respectively, to complement the social security benefits of<br />
employees of <strong>Gerdau</strong> Ameristeel Corporation and its subsidiaries. The assets of the Plans mainly comprise marketable securities.<br />
The sponsors’ contributions to these pension plans were R$ 40 in <strong>2004</strong> and R$ 1,508 in 2003 for the Company and R$ 68,258 in <strong>2004</strong> and<br />
R$ 63,708 in 2003 consolidated.
The current expenses of the defined pension plan are as follows:<br />
Company<br />
Consolidated<br />
___________________________________ ___________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Cost of current service....................................................................................... 111 5,612 49,798 41,068<br />
Interest cost..................................................................................................... 345 14,402 124,782 109,114<br />
Expected return of plan assets........................................................................... (569) (15,297) (161,554) (120,556)<br />
Amortization of unrecognized liability................................................................. - - 462 467<br />
Amortization of past service costs ..................................................................... - - 778 1,332<br />
Amortization of (gain) loss................................................................................. (49) - 2,589 2,764<br />
Employees’ expected contribution...................................................................... ______________- ______________- ______________ (4,383) ______________ (3,576)<br />
Pension plan cost (benefit), net..........................................................................<br />
______________ (162)<br />
______________ 4,717<br />
______________ 12,472<br />
______________<br />
30,613<br />
The reconciliation of the assets and liabilities of the plans is presented below:<br />
Company<br />
Consolidated<br />
___________________________________ ___________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Total liabilities ................................................................................................. (50,196) (44,164) (1,779,443) (1,613,516)<br />
Fair value of plan assets ................................................................................... ______________ 108,988 ______________ 64,759 ______________ 1,844,817 ______________ 1,645,528<br />
Net assets ....................................................................................................... 58,792 20,595 65,374 32,012<br />
Unrecognized (gains) losses............................................................................... (58,491) (20,445) (87,897) (85,274)<br />
Past service costs ............................................................................................. 51 - 26,323 7,722<br />
Other .............................................................................................................. ______________- ______________- ______________ 4,929 ______________ 5,504<br />
Total assets (liabilities), net ..............................................................................<br />
______________ 352<br />
______________ 150<br />
______________ 8,729<br />
______________<br />
(40,036)<br />
Actuarial asset ................................................................................................. 352 150 162,928 122,683<br />
Pension plan liability recorded in balance sheet................................................... ______________- ______________- ______________ (154,199) ______________ (162,719)<br />
Assets (liabilities), net ......................................................................................<br />
______________ 352<br />
______________ 150<br />
______________ 8,729<br />
______________<br />
(40,036)<br />
Changes in plan assets and actuarial liabilities were as follows:<br />
Company<br />
Consolidated<br />
___________________________________ ___________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Changes in benefit liabilities<br />
Benefit liabilities at the beginning of the year .................................................... 44,164 141,739 1,613,516 1,543,659<br />
Cost of service.................................................................................................. 111 5,612 49,798 41,068<br />
Interest cost .................................................................................................... 345 14,402 124,782 109,114<br />
Actuarial loss (gain).......................................................................................... 8,485 (11,789) 86,910 77,637<br />
Payment of benefits .......................................................................................... (2,960) (2,779) (69,419) (58,486)<br />
Past service costs due to changes in the plan ..................................................... 51 - 10,497 -<br />
Effect of merger/operational integration.............................................................. - (103,021) - -<br />
Foreign exchange effect on foreign companies ................................................... - - (45,000) (99,476)<br />
Initial liability recognition adjustment ................................................................ ______________- ______________- ______________ 8,359 ______________-<br />
Benefit liabilities at the end of the year .............................................................<br />
______________ 50,196<br />
______________ 44,164<br />
______________ 1,779,443<br />
______________<br />
1,613,516
134 135<br />
GERDAU S.A.<br />
Company<br />
Consolidated<br />
___________________________________ ___________________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Changes in plan assets<br />
Fair value of plan assets at the beginning of the year................................... 64,759 149,865 1,645,528 1,381,584<br />
Return on plan assets................................................................................ 47,149 67,229 227,308 311,599<br />
Sponsor contributions............................................................................... 40 1,508 68,258 63,708<br />
Participant contributions........................................................................... - - 5,202 4,232<br />
Payment of benefits ................................................................................. (2,960) (2,779) (69,419) (58,486)<br />
Operational integration............................................................................. - (151,064) - -<br />
Foreign exchange effect on foreign companies............................................. - - (32,060) (57,109)<br />
______________ ______________ ______________ ______________<br />
Fair value of plan assets at the end of the year............................................ 108,988 64,759 1,844,817 1,645,528<br />
______________ ______________ ______________ ______________<br />
______________ ______________ ______________ ______________<br />
As a result of the operational integration on November 28, 2003, the assets and liabilities of the <strong>Gerdau</strong> Plan, relating to the employees<br />
transferred to <strong>Gerdau</strong> Açominas S.A., were allocated to the Açominas Plan, and the Supplementary Social Security Secretariat approved the<br />
addition of <strong>Gerdau</strong> Açominas S.A. as a sponsor of the Retirement and Supplementary Retirement Plans managed by <strong>Gerdau</strong> - Sociedade de<br />
Previdência Privada.<br />
The method for calculating the actuarial liability is the Projected Unit Credit Method, as determined by CVM Deliberation 371/2000.<br />
The amount of the actuarial gains and losses to be recognized as income or expense is the unrecognized amount that exceeds, in each period,<br />
the higher of the following limits: (i) 10% of the present value of the total actuarial liability of the defined benefit plan and (ii) 10% of the<br />
fair value of the plan assets. The resulting amount will be amortized annually based on the average remaining years of service estimated for<br />
the employees that participate in the plan.<br />
The table below shows a summary of the assumptions made to calculate and record the defined benefit plan for both the Company and<br />
consolidated:<br />
North American<br />
<strong>Gerdau</strong> plan Açominas plan plan<br />
Average discount rate...................................... 11.30% 11.30% 5.75% - 6.00%<br />
Increase in compensation................................. 9.20% 8.675% 2.50% - 4.25%<br />
Expected rate of return on assets ...................... 12.35% 12.35% 7.25% - 8.40%<br />
Mortality chart................................................ GAM 83 (-1 year) AT-83 GAM 83<br />
Disabled mortality chart................................... RRB 1944 AT-83 RRB 1977<br />
Turnover rate................................................... Based on service Null Based on age and service<br />
and salary level<br />
(plan experience)<br />
b) Pension plan - defined contribution<br />
The Company and its subsidiaries in Brazil are also the co-sponsors of a defined contribution pension plan administered by <strong>Gerdau</strong> - Sociedade<br />
de Previdência Privada. Contributions are based on a percentage of the compensation of employees.<br />
The foreign subsidiary <strong>Gerdau</strong> AmeriSteel US Inc. has a defined contribution plan, the contributions to which are equivalent to 50% of the<br />
amount paid by the participants, limited to 4% of salary. The other companies do not have this type of pension plan.<br />
The total cost of this plan was R$ 149 in <strong>2004</strong> and R$ 2,145 in 2003 for the Company and R$ 11,892 in <strong>2004</strong> and R$ 9,713 in 2003 consolidated.<br />
c) Other post-employment benefits<br />
The Company estimates that the amount payable to executives on their retirement or discharge totals R$ 9,996 (consolidated) at December<br />
31, <strong>2004</strong> (R$ 10,187 in 2003 - consolidated).<br />
The American Plan includes, in addition to pension benefits, specific health benefits for employees who retire after a certain age and with<br />
a certain number of years of service. The American subsidiary has the right to change or eliminate these benefits, and the contributions are<br />
based on amounts actuarially calculated.
The composition of the net periodic cost for the post-employment health benefits is as follows:<br />
Consolidated<br />
_____________________________________<br />
<strong>2004</strong> 2003<br />
Cost of service.................................................................................................................................................................. 3,007 2,542<br />
Interest cost..................................................................................................................................................................... 5,715 6,492<br />
Amortization of past service costs...................................................................................................................................... (563) -<br />
Amortization of (gain) loss................................................................................................................................................. _______________ 80 _______________-<br />
Expense for post retirement health benefits, net.................................................................................................................. _______________<br />
8,239 _______________<br />
9,034<br />
The status of the fund for post-employment health benefits is as follows:<br />
Consolidated<br />
_____________________________________<br />
<strong>2004</strong> 2003<br />
Plan assets at market value................................................................................................................................................ - -<br />
Projected benefit liabilities................................................................................................................................................. _______________ (130,559) _______________ (111,390)<br />
Fund status...................................................................................................................................................................... (130,559) (111,390)<br />
Unrecognized gains and losses, net ................................................................................................................................... 8,101 5,426<br />
Past service costs.............................................................................................................................................................. _______________ (7,825) _______________-<br />
Post-retirement health benefit liabilities recorded in the balance sheet.................................................................................. _______________<br />
(130,283) _______________<br />
(105,964)<br />
The changes in plan assets and actuarial liabilities were as follows:<br />
Consolidated<br />
_____________________________________<br />
<strong>2004</strong> 2003<br />
Changes in projected benefit liabilities<br />
Projected benefit liabilities at the beginning of the year....................................................................................................... 111,390 112,991<br />
Purchase of North Star...................................................................................................................................................... 23,136 -<br />
Cost of service.................................................................................................................................................................. 3,007 2,542<br />
Interest cost..................................................................................................................................................................... 5,715 6,492<br />
Participant contributions.................................................................................................................................................... 1,946 1,870<br />
Actuarial loss.................................................................................................................................................................... 4,759 3,432<br />
Administrative benefits and expenses paid.......................................................................................................................... (6,639) (6,528)<br />
Foreign exchange effect..................................................................................................................................................... (4,364) (9,409)<br />
Initial liability recognition adjustment ................................................................................................................................ _______________ (8,391) _______________-<br />
Project benefit liabilities at the end of the year.................................................................................................................... _______________<br />
130,559 _______________<br />
111,390<br />
Consolidated<br />
_____________________________________<br />
<strong>2004</strong> 2003<br />
Changes in plan assets<br />
Plan assets at the beginning of the year ............................................................................................................................. - -<br />
Sponsor contribution ........................................................................................................................................................ 4,693 4,658<br />
Participant contributions.................................................................................................................................................... 1,946 1,870<br />
Administrative benefits and expenses paid.......................................................................................................................... _______________ (6,639) _______________ (6,528)<br />
Plan assets at the end of the year....................................................................................................................................... _______________<br />
- _______________<br />
-
136 137<br />
GERDAU S.A.<br />
The assumptions adopted in the accounting for post-employment health benefits were as follows:<br />
North American plan<br />
Average discount rate........................................................................................................................................................ 5.75% - 6.00%<br />
Health treatment - rate for the next year............................................................................................................................. 9.50% - 13.00%<br />
Health treatment - rate for cost decrease to be reached from 2010 to 2013.......................................................................... 4.50% to 5.50%<br />
23 - Shareholders’ Equity<br />
a) Capital - authorized capital at December 31, <strong>2004</strong> comprises 240,000,000 common shares (240,000,000,000 at December 31, 2003) and<br />
480,000,000 preferred shares (480,000,000,000 at December 31, 2003), with no par value.<br />
The Extraordinary General Meeting (AGE) of shareholders held on April 29, <strong>2004</strong> approved the capital increase of R$ 1,735,656 through the<br />
capitalization of the reserve for investments and working capital, with a bonus of 100% on the shares on that date, representing 148,354,011<br />
new shares (51,468,224 common and 96,885,787 preferred).<br />
At December 31, <strong>2004</strong>, 102,936,448 common shares (51,468,224 at December 31, 2003) and 193,771,574 preferred shares (96,885,787 at December<br />
31, 2003) are subscribed and paid-up, totaling R$ 3,471,312 (R$ 1,735,656 at December 31, 2003). Preferred shares do not have voting rights and<br />
cannot be redeemed, but have the same rights as common shares in terms of profit sharing.<br />
b) Treasury stock - at December 31, <strong>2004</strong>, the Company had 1,573,200 preferred shares (345,000 preferred shares in 2003) held in treasury for<br />
subsequent sale in the market or cancellation, totaling R$ 44,139 (R$ 17,103 in 2003).<br />
c) Interest on own capital and dividends - the Company calculated interest on own capital in accordance with the terms established by<br />
Law 9249/95. The corresponding amount was recorded as financial expenses for tax purposes. For presentation purposes, this amount was<br />
recorded as dividends, not affecting net income. The related tax benefit through the reduction of the income tax and social contribution on<br />
net income charge for the year was R$ 114,395 (R$ 119,424 in 2003). Shareholders are entitled to receive, each year, a minimum mandatory<br />
dividend of 30% of adjusted net income.<br />
The amount of interest on own capital and dividends credited for the year was R$ 858,843, shown as follows:<br />
<strong>2004</strong> 2003<br />
Net income for the year..................................................................................................................................................... 2,831,339 1,137,216<br />
Transfer to legal reserve.................................................................................................................................................... _______________ (141,567) _______________ (56,860)<br />
Adjustment net income...................................................................................................................................................... 2,689,772 1,080,356<br />
Distributions during the year<br />
Period Nature R$/share Credit Payment <strong>2004</strong> 2003<br />
1 st quarter ........................................................ Interest 0.64 03/30/<strong>2004</strong> 05/18/<strong>2004</strong> 94,443 74,177<br />
2 nd quarter ........................................................ Interest 0.36 06/30/<strong>2004</strong> 08/17/<strong>2004</strong> 106,249 50,440<br />
Dividens 0.29 06/30/<strong>2004</strong> 08/17/<strong>2004</strong> 85,589 -<br />
3 rd quarter......................................................... Interest 0.46 08/13/<strong>2004</strong> 11/17/<strong>2004</strong> 135,762 75,661<br />
Dividens 0.53 11/03/<strong>2004</strong> 11/17/<strong>2004</strong> 156,422 -<br />
4 th quarter ........................................................ Interest - 150,969<br />
Dividens 0.95 02/11/2005 02/22/2005 ___________ 280,378 ___________-<br />
Interest on own capital and dividends............................................................................................................................................................. ___________<br />
858,843 ___________<br />
351,247<br />
% interest/dividends paid or credited............................................................................................................................................................. 32% 33%<br />
Credit per share (R$)..................................................................................................................................................................................... 2.91 2.37<br />
Outstanding shares (thousands)..................................................................................................................................................................... 295,135 148,009<br />
The remaining income for the year was transferred to the statutory reserve for investments and working capital in accordance with the by-laws.<br />
24 - Statutory Profit Sharing<br />
a) The management profit sharing is limited to 10% of net income for the year, after income tax and management fees, as stated in the<br />
Company’s by-laws;<br />
b) The employees’ profit sharing is linked to the attainment of operating goals and was allocated to cost of production and general and<br />
administrative expenses, as applicable.
25 - Long-Term Incentive Plans<br />
I) <strong>Gerdau</strong> S.A.<br />
The Extraordinary General Meeting of shareholders held on April 30, 2003 decided, based on a previously agreed plan and within the limit<br />
of the authorized capital, to grant options to purchase preferred shares to management, employees or persons who render services to the<br />
Company or the companies under its control, and approved the formation of the Long-Term Incentive Program that represents a new form<br />
of compensation of the strategic executives of the Company. The options should be exercised in a maximum of five years after the grace<br />
period.<br />
a) Summary of changes in the plan:<br />
Stock option grants (Number of shares)<br />
__________________________________________________________________<br />
2003 2003 <strong>2004</strong> <strong>2004</strong> Total<br />
Opening balance at December 31, 2003.......................................... 403,228 280,840 - - 684,068<br />
Grants in <strong>2004</strong>............................................................................. - - 2,430 171,125 173,555<br />
Share bonus at April 29, <strong>2004</strong>........................................................ 403,229 280,840 2,429 171,125 857,623<br />
____________ ____________ ____________ ____________ ____________<br />
Closing balance on December 31, <strong>2004</strong>........................................... 806,457 561,680 4,859 342,250 1,715,246<br />
____________ ____________ ____________ ____________ ____________<br />
____________ ____________ ____________ ____________ ____________<br />
Exercise price - R$ ....................................................................... 11.94 11.94 30.50 30.50<br />
Grace period ............................................................................... 3 years - 3 years -<br />
Grace period ............................................................................... - 5 years - 5 years<br />
As mentioned in Note 23b, at December 31, <strong>2004</strong> the Company has a total of 1,573,200 preferred shares in treasury. These shares can be used<br />
for this plan.<br />
b) Plan status at December 31<br />
Stock option grants<br />
______________________________________________<br />
<strong>2004</strong> 2003 Average<br />
Total stock options granted .......................................................................................................................... 347,109 1,368,137 -<br />
Exercise price - R$........................................................................................................................................ 30.50 11.94 15.70<br />
Fair value of options at date of grant - R$ per option (*).................................................................................. 8.65 3.72 4.72<br />
Average term of option to be exercised (years)................................................................................................. 3.68 1.82 2.26<br />
(*) calculated using the Black-Scholes model.<br />
The percentage of dilution in interest that the current shareholders may experience if all options are exercised is approximately 0.6%.<br />
II) <strong>Gerdau</strong> Ameristeel Corporation - (“<strong>Gerdau</strong> Ameristeel”)<br />
<strong>Gerdau</strong> Ameristeel Corporation and its subsidiaries have stock compensation plans for their employees, as follows:<br />
a) Former Co-Steel Plan<br />
According to the terms of the Co-Steel Plan, the Stock-Based Option Plan, the company was authorized to grant purchase options to employees<br />
and directors up to the limit of 3,041,335 common shares. The exercise price was based on the closing price of the common shares in the<br />
market on the day prior to the issue of the option. The options have a maximum term of ten years and are granted during various periods, as<br />
determined by the administrator of the plan at the date of the grant, up to April 13, 2008.<br />
b) <strong>Gerdau</strong> AmeriSteel US Inc. (“AmeriSteel”) Plans<br />
According to the terms of the Transaction Agreement relating to the acquisition of Co-Steel, the minority shareholders of AmeriSteel<br />
exchanged their shares and stock options for shares and stock options of Ameristeel at the ratio of 9.4617 shares and stock options for each<br />
share or stock option of AmeriSteel. This exchange occurred on March 31, 2003.<br />
b.1) Stakeholder Plan<br />
In March 2000, the Board of Directors of AmeriSteel approved a long-term incentive plan available to the executive management (Stakeholder<br />
Plan) to assure that the interests of the senior management of AmeriSteel are in line with those of the AmeriSteel shareholders. The<br />
awards are determined by a formula based on the return on employed capital of AmeriSteel in a given year of the plan. The awards are<br />
granted and paid over a period of four years. The participants may choose payment in cash or in shares of AmeriSteel and <strong>Gerdau</strong>, for which<br />
a premium of 25% is given, if chosen. Expenses related to the benefits for the years ended December 31, <strong>2004</strong> and 2003 totaled US$ 1,300<br />
thousand (R$ 3,450) and US$ 150 thousand (R$ 433), respectively. A premium of approximately US$ 14,000 thousand (equivalent to R$ 37,161)<br />
was recorded at December 31, <strong>2004</strong> and will be granted on March 1, 2005. This premium will be provided in accordance with the payment<br />
schedule established by the plan.
138 139<br />
GERDAU S.A.<br />
b.2) SAR Plan<br />
In July 1999, the Board of Directors of AmeriSteel approved the SAR/Shares Purchase Plan (SAR Plan) available to basically all employees. The<br />
SAR Plan authorizes the sale of 946,170 common shares to the employees during three offer periods, from July to September in 1999, 2002<br />
and 2005. The employees who purchase the shares are rewarded with stock appreciation rights (SARs) equal to four times the number of<br />
shares purchased. SARs at market value were granted at the date of grant, determined based on an independent appraisal at the end of the<br />
prior year. SARs can be exercised at 25% annually as from the date of the grant, to be exercised over a period of ten years as from the date of<br />
the grant.<br />
In July 2002, the Board of Directors of AmeriSteel approved the issue of new purchase options under the SAR Plan, which were granted to the<br />
executive directors, with the exercise price determined by the fair value at the date of grant. A total of 6,244,722 SARs were authorized and<br />
issued. One-third of all awarded options and common shares are vested two years as from the date of concession, and one third after each<br />
subsequent two-year period. The options may be exercised in up to ten years after the date of concession.<br />
At December 31, <strong>2004</strong>, an expense related to this plan of US$ 20,700 thousand, equivalent to R$ 54,946, was recorded in the consolidated<br />
financial statements (at December 31, 2003, an expense of US$ 9,400 thousand, equivalent to R$ 27,158 was recorded).<br />
b.3) Equity Ownership<br />
In September 1996, the Board of Directors of AmeriSteel approved the Equity Ownership Plan of AmeriSteel Corporation (the “Equity<br />
Ownership” Plan), which grants common shares, purchase options for common shares and SARs. The maximum number of shares that may be<br />
issued under this plan is 4,152,286. AmeriSteel has granted 4,667,930 incentive stock options and 492,955 common shares under the Equity<br />
Ownership Plan up to December 31, <strong>2004</strong>. One-third of all options and common shares issued become vested two years from the date of the<br />
grant, and one third after each subsequent two-year period. All grants were carried out at the market value of the common shares at the date<br />
of grant, determined based on an independent appraisal at the end of the prior year. The options may be exercised for ten years as from the<br />
date of the grant.<br />
b.4) Purchase Plan<br />
In May 1995, the Board of Directors of AmeriSteel approved an option/purchase plan (the “Purchase Plan”), available to essentially all<br />
employees. The employees who purchased shares were rewarded with options for six times the number of shares purchased. A total of<br />
356,602 shares were sold under the Purchase Plan at a purchase price of US$ 1.12 per share. The options were granted at market value at the<br />
date of the grant, determined based on an independent appraisal at the end of the prior year. A total of 2,139,612 options were granted under<br />
the Purchase Plan. No options are available for future grant. All shares granted can already be exercised, which may occur for ten years as<br />
from the date of the grant.<br />
A summary of the <strong>Gerdau</strong> Ameristeel plans is as follows:<br />
<strong>2004</strong> 2003<br />
__________________________________________ ______________________________________________<br />
Number Weighted average Number Weighted average<br />
of shares exercise price - R$ of shares exercise price - R$<br />
Available at the beginning of the year............................. 3,606,570 17.01 1,367,400 26.87<br />
Exchange for options of the <strong>Gerdau</strong> Ameristeel Plan (*).... - - 2,660,601 6.21<br />
Exercised options........................................................... (374,609) 5.04 - -<br />
Cancelled options.......................................................... (76,973) 5.10 - -<br />
Expired options.............................................................. ________________ (321,700) _____________________ 51.65 _________________ (421,431) ________________________ 56.98<br />
Available at the end of the year......................................<br />
________________ 2,833,288<br />
_____________________ 15.77<br />
_________________ 3,606,570<br />
________________________<br />
18.52<br />
(*) Exchange mentioned in item “b” above.<br />
The table below summarizes the information on the purchase options of <strong>Gerdau</strong> Ameristeel shares available at December 31, <strong>2004</strong>:<br />
Quantity<br />
Available Average Weighted average exercisable at<br />
Exercise price (R$) quantity grace period exercise price - R$ December 31, <strong>2004</strong><br />
3.50 to 3.80 ................................................................. 752,829 4.40 3.66 597,086<br />
4.78 to 5.04 ................................................................. 824,536 5.90 4.88 497,369<br />
5.60 to 7.86 ................................................................. 563,923 4.50 11.89 563,923<br />
41.01 to 49.61.............................................................. 342,500 2.10 44.59 342,500<br />
53.25 to 53.49.............................................................. ________________ 349,500 1.70 53.49 _________________________ 349,500<br />
________________<br />
2,833,288 _________________________<br />
2,350,378
The effect on net income for the year and shareholders’ equity would have been as follows, had the expenses for the option plans of <strong>Gerdau</strong><br />
S.A. and <strong>Gerdau</strong> Ameristeel Corporation been recorded:<br />
Company<br />
Consolidated<br />
_________________________________________ _________________________________________________<br />
Net Shareholders’ net Shareholders’<br />
income equity income equity<br />
Balances based on financial statements........................... 2,831,339 6,073,856 3,234,887 6,073,856<br />
Expenses for the period (Black-Scholes model)................. ________________ (1,959) ______________________ (4,936) _____________________ (2,649) _________________________ (8,383)<br />
Pro forma balances........................................................ ________________<br />
2,829,380 ______________________<br />
6,068,920 _____________________<br />
3,232,238 _________________________<br />
6,065,473<br />
26 - Calculation of EBITDA<br />
Consolidated<br />
_________________________________________________<br />
<strong>2004</strong> 2003<br />
Gross profit............................................................................................................................................ 6,245,024 3,290,221<br />
Selling expenses..................................................................................................................................... (455,175) (448,131)<br />
General and administrative expenses........................................................................................................ (1,003,826) (763,440)<br />
Depreciation and amortization................................................................................................................. _____________________ 766,665 _________________________ 604,887<br />
EBITDA..................................................................................................................................................<br />
_____________________<br />
5,552,688<br />
_________________________<br />
2,683,537<br />
27 - Information by Geographic Area and Business Segment<br />
Information by geografic area:<br />
Geographic area<br />
______________________________________________________________________________________________________________________________________<br />
Brazil South America (*) North America Consolidated<br />
__________________________________ _______________________________ _________________________________ ______________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003 <strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Gross sales revenues................. 12,914,377 9,024,250 1,039,986 652,829 9,453,210 6,105,888 23,407,573 15,782,967<br />
Net sales revenues.................... 9,975,760 7,306,927 763,865 490,122 8,857,637 5,569,912 19,597,262 13,366,961<br />
Cost of sales............................. (5,668,217) (4,444,848) (488,120) (325,333) (7,195,901) (5,306,559) (13,352,238) (10,076,740)<br />
Gross profit............................... 4,307,543 2,862,079 275,745 164,789 1,661,736 263,353 6,245,024 3,290,221<br />
Selling expenses........................ (400,317) (407,717) (7,079) (5,140) (47,779) (35,274) (455,175) (448,131)<br />
General and administrative<br />
expenses............................. (704,073) (513,157) (45,934) (33,492) (253,819) (216,791) (1,003,826) (763,440)<br />
Financial income<br />
(expenses), net................... 5,948 (462,207) (4,491) (3,831) (177,563) (180,532) (176,106) (646,570)<br />
Operating profit (loss)............... 3,040,687 1,192,855 219,272 120,012 1,194,708 (165,655) 4,454,667 1,147,212<br />
Net income (loss) for the year.... 2,164,338 1,222,380 174,240 93,379 896,309 (61,274) 3,234,887 1,254,485<br />
EBITDA (**).............................. 3,704,473 2,297,318 250,983 151,524 1,597,232 234,695 5,552,688 2,683,537<br />
( * ) Does not include Brazilian operations.<br />
(**) Income before financial expenses, income tax and social contribution on net income, and depreciation and amortization, as mentioned in Note nº 26.<br />
The segments shown following correspond to the business units through which the <strong>Gerdau</strong> Executive Committee manages its operations:<br />
Long Steel Brazil, Açominas (corresponding to the operations of the plant located in Ouro Branco, state of Minas Gerais), South America<br />
(excluding Brazilian operations) and North America (<strong>Gerdau</strong> Ameristeel):
140 141<br />
GERDAU S.A.<br />
Information by business segment:<br />
Business sector<br />
________________________________________________________________________________________________________________________________________________________________<br />
Long Brazil Açominas Ouro Branco South America (*) North America Consolidated<br />
___________________________ __________________________ ___________________________ ___________________________ ____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003 <strong>2004</strong> 2003 <strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Net sales revenue......................... 7,329,008 5,359,998 2,646,752 1,946,929 763,865 490,122 8,857,637 5,569,912 19,597,262 13,366,961<br />
Identifiable assets (**)................. 4,378,419 3,146,342 3,482,517 3,241,331 668,351 580,385 6,131,526 4,273,441 14,660,813 11,241,499<br />
Capital expenditures.................... 648,070 329,999 265,851 355,984 27,367 22,253 1,156,660 164,803 2,097,948 873,039<br />
Depreciation/amortization............ 235,613 235,720 265,707 120,392 28,251 25,367 237,094 223,408 766,665 604,887<br />
( * ) Does not include Brazilian operations.<br />
(**) Identifiable assets: accounts receivable, inventories and fixed assets.
Board of Directors<br />
Executive Committee<br />
Chairman<br />
JORGE GERDAU JOHANNPETER<br />
Vice Chairmen<br />
GERMANO H. GERDAU JOHANNPETER<br />
KLAUS GERDAU JOHANNPETER<br />
FREDERICO C. GERDAU JOHANNPETER<br />
Board Members<br />
AFFONSO CELSO PASTORE<br />
ANDRÉ PINHEIRO DE LARA RESENDE<br />
OSCAR DE PAULA BERNARDES NETO<br />
Secretary General<br />
EXPEDITO LUZ<br />
President<br />
JORGE GERDAU JOHANNPETER<br />
Vice Presidents<br />
FREDERICO C. GERDAU JOHANNPETER, Senior Vice President<br />
CARLOS JOÃO PETRY, Senior Vice President<br />
ANDRÉ BIER JOHANNPETER<br />
CLAUDIO JOHANNPETER<br />
DOMINGOS SOMMA<br />
OSVALDO BURGOS SCHIRMER<br />
FILIPE AFFONSO FERREIRA<br />
RICARDO GEHRKE<br />
Secretary General<br />
EXPEDITO LUZ<br />
Corporate Officers<br />
DIRCEU TARCÍSIO TOGNI<br />
ELIAS PEDRO VIEIRA MANNA<br />
EXPEDITO LUZ<br />
FRANCESCO SAVERIO MERLINI<br />
SIRLEU JOSÉ PROTTI<br />
Clemir Ühlein<br />
Accountant CRC RS N0. 44.845 - S - RJ<br />
CPF N0. 424.614.210-72
142 143<br />
GERDAU S.A.<br />
<strong>Report</strong> of Independent Auditors<br />
To the Board of Directors and Shareholders<br />
<strong>Gerdau</strong> S.A.<br />
1. We have audited the accompanying balance sheets of <strong>Gerdau</strong> S.A. and the consolidated balance sheets of<br />
<strong>Gerdau</strong> S.A. and its subsidiaries as of December 31, <strong>2004</strong> and 2003, and the related statements of income,<br />
of changes in shareholders’ equity and of changes in financial position of <strong>Gerdau</strong> S.A., as well as the related<br />
consolidated statements of income and of changes in financial position, for the years then ended. These financial<br />
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on<br />
these financial statements.<br />
2. We conducted our audits in accordance with approved Brazilian auditing standards, which require that we<br />
perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented<br />
in all material respects. Accordingly, our work included, among other procedures: (a) planning our audit taking<br />
into consideration the significance of balances, the volume of transactions and the accounting and internal<br />
control systems of the companies, (b) examining, on a test basis, evidence and records supporting the amounts<br />
and disclosures in the financial statements, and (c) assessing the accounting practices used and significant<br />
estimates made by management, as well as evaluating the overall financial statement presentation.<br />
3. In our opinion, the financial statements audited by us present fairly, in all material respects, the financial<br />
position of <strong>Gerdau</strong> S.A. and of <strong>Gerdau</strong> S.A. and its subsidiaries at December 31, <strong>2004</strong> and 2003, and the results of<br />
operations, the changes in shareholders’ equity and the changes in financial position of <strong>Gerdau</strong> S.A., as well as the<br />
consolidated results of operations and of changes in financial position, for the years then ended, in accordance<br />
with accounting practices adopted in Brazil.<br />
4. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as<br />
a whole. The statement of cash flows is presented for purposes of additional analysis and is not a required part<br />
of the basic financial statements. This information has been subjected to the auditing procedures applied in the<br />
audit of the basic financial statements and, in our opinion, is fairly presented in all material respects in relation<br />
to the financial statements taken as a whole.<br />
Porto Alegre, March 4, 2005<br />
Auditores Independentes<br />
CRC 2SP000160/O-5 “F” RJ<br />
Carlos Alberto de Sousa<br />
Accountant - CRC 1RJ 056561/O-0<br />
Opinion of the Fiscal Council<br />
The Fiscal Council of <strong>Gerdau</strong> S.A., in performance of its legal and statutory duties, in compliance with Article 163 of Law<br />
6404/76, having examined the Company’s Management <strong>Report</strong>, the individual (parent company) and consolidated balance<br />
sheets and the related statements of income, of changes in shareholders’ equity and of changes in financial position for<br />
the years ended December 31, <strong>2004</strong>, as well as the distribution of interest on equity and dividends, and based on the report<br />
of PricewaterhouseCoopers Auditores Independentes, is of the option that these accounting statements fairly reflect the<br />
Company’s individual and consolidated financial position, in conformity with current accounting practices.<br />
Under these circumstances, the Fiscal Council recommends to the Stockholders the approval of the accounting statements,<br />
which will be submitted to them in the upcoming Ordinary General Shareholders’ Meeting.<br />
Rio de Janeiro, March 14, 2005<br />
JOSÉ ANTÔNIO CRUZ DE MÓDENA<br />
JOSÉ BERNARDO DE MEDEIROS NETO<br />
PETER WILM ROSENFELD
<strong>Gerdau</strong> Açominas S.A.<br />
Balance Sheet at December, 31<br />
(In thousands of reais)<br />
Assets Company Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Current Assets<br />
Cash and cash equivalents ............................................................ note 5 597,950 179,266 763,821 258,327<br />
Trade accounts receivable ............................................................. note 6 1,398,760 829,542 1,269,716 762,045<br />
Inventories................................................................................... note 7 1,732,128 1,172,964 1,742,064 1,179,545<br />
Tax credits ................................................................................... note 8 169,655 96,652 176,067 98,665<br />
Deferred income tax and social contribution on net income ............. note 9 304,190 98,412 304,190 98,412<br />
Other accounts receivable.............................................................. 117,977 147,337 115,965 151,760<br />
Total current assets.......................................................................... 4,320,660 2,524,173 4,371,823 2,548,754<br />
Long-Term Receivables<br />
Related parties ............................................................................ note 19 8,178 - 21,804 -<br />
Eletrobrás loans............................................................................ 1,304 1,304 1,304 1,304<br />
Deferred income tax and social contribution on net income ............. note 9 109,298 385,423 111,719 388,373<br />
Compulsory deposits and other ..................................................... note 10 105,877 53,502 114,811 62,823<br />
Total long-term receivables............................................................. 224,657 440,229 249,638 452,500<br />
Permanent Assets<br />
Investments.................................................................................. note 11 154,372 197,463 43,669 66,638<br />
Fixed assets ................................................................................. note 12 4,866,670 4,397,120 4,924,735 4,504,438<br />
Deferred charges ......................................................................... note 13 23,608 10,515 29,665 12,386<br />
Total permanent assets..................................................................... 5,044,650 4,605,098 4,998,069 4,583,462<br />
Total assets ........................................................................................ 9,589,967 7,569,500 9,619,530 7,584,716<br />
The accompanying notes are an integral part of these financial statements.
144 145<br />
GERDAU AÇOMINAS S.A.<br />
Liabilities and Shareholder’s Equity Company Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Current Liabilities<br />
Trade accounts payable................................................................. 844,851 464,233 848,906 466,675<br />
Financing .................................................................................... note 14 877,613 1,889,592 895,067 1,898,976<br />
Taxes and contributions payable..................................................... note 17 287,503 105,363 291,106 107,126<br />
Deferred income tax and social contribution on net income ............. note 9 149,905 19,790 149,905 19,790<br />
Salaries payable............................................................................ 83,535 64,212 83,667 65,454<br />
Dividends payable......................................................................... note 21 306,197 283,986 306,197 283,986<br />
Related parties ............................................................................ note 19 - 138,309 - 125,320<br />
Other accounts payable................................................................. 98,356 90,208 99,225 91,175<br />
Total current liabilities.................................................................... 2,647,960 3,055,693 2,674,073 3,058,502<br />
Long-Term Liabilities<br />
Financing .................................................................................... note 14 2,079,721 1,412,705 2,083,176 1,424,506<br />
Provision for contingencies ........................................................... note 18 51,993 31,533 51,993 31,645<br />
Post-employment benefits ............................................................ note 20 6,418 7,794 6,418 7,794<br />
Other accounts payable................................................................. 37,829 31,455 37,824 31,949<br />
Total long-term liabilities............................................................... 2,175,961 1,483,487 2,179,411 1,495,894<br />
Shareholders’ Equity<br />
Capital ........................................................................................ note 21 2,340,576 2,340,576 2,340,576 2,340,576<br />
Capital reserves............................................................................ 289,667 98,762 289,667 98,762<br />
Revenue reserves.......................................................................... 2,135,803 60,222 2,135,803 60,222<br />
Retained earnings......................................................................... - 530,760 - 530,760<br />
Total shareholders’ equity............................................................... 4,766,046 3,030,320 4,766,046 3,030,320<br />
Total liabilities and shareholders’ equity..................................... 9,589,967 7,569,500 9,619,530 7,584,716<br />
The accompanying notes are an integral part of these financial statements.
Statement of Income<br />
Years Ended December, 31<br />
(In thousands of reais)<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
GROSS SALES REVENUES .................................................................. 12,964,674 3,164,358 13,090,660 3,174,613<br />
Taxes on sales.............................................................................. (2,300,771) (292,972) (2,305,821) (292,970)<br />
Freights and discounts ................................................................. (627,550) (233,792) (629,425) (233,801)<br />
____________ ____________ ____________ ____________<br />
Net Sales Revenues .............................................................. 10,036,353 2,637,594 10,155,414 2,647,842<br />
COST OF SALES ................................................................................ ____________ (5,828,901) ____________ (1,638,289) ____________ (5,914,999) ____________ (1,647,875)<br />
Gross Profit.......................................................................... 4,207,452 999,305 4,240,415 999,967<br />
SELLING EXPENSES .......................................................................... (396,972) (94,133) (400,301) (94,702)<br />
FINANCIAL INCOME ......................................................................... note 16 81,317 (30,847) 82,364 (29,052)<br />
FINANCIAL EXPENSES ...................................................................... note 16 (59,337) (93,827) (57,529) (94,173)<br />
GENERAL AND ADMINISTRATIVE EXPENSES<br />
Management fees......................................................................... (39,603) (9,460) (40,267) (9,706)<br />
General expenses ......................................................................... (599,077) (164,086) (605,243) (164,334)<br />
EQUITY IN THE EARNINGS (LOSSES) OF SUBSIDIARIES<br />
AND ASSOCIATED COMPANIES...................................................... note 11 10,391 6,458 (10,025) (1,323)<br />
OTHER OPERATING INCOME (EXPENSES), NET.................................... note 22 143,473 (1,068) 145,150 (1,046)<br />
____________ ____________ ____________ ____________<br />
Operating Profit .................................................................. 3,347,644 612,342 3,354,564 605,631<br />
NON-OPERATING INCOME (EXPENSE), NET ........................................ (13,916) 43,127 (13,363) 49,856<br />
____________ ____________ ____________ ____________<br />
Profit Before Taxes and Profit Sharing .......................... 3,333,728 655,469 3,341,201 655,487<br />
PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION<br />
ON NET INCOME.......................................................................... note 9<br />
Current ....................................................................................... (610,180) (142,204) (617,176) (142,357)<br />
Deferred ..................................................................................... (200,462) 346,038 (200,939) 346,173<br />
MANAGEMENT PROFIT SHARING....................................................... note 23 (39,603) (9,460) (39,603) (9,460)<br />
____________ ____________ ____________ ____________<br />
Net Income for yhe Year ..................................................... 2,483,483 849,843 2,483,483 849,843<br />
____________ ____________ ____________ ____________<br />
____________ ____________ ____________ ____________<br />
Net income per share - R$......................................................... ____________<br />
15.65 ____________<br />
5.36<br />
Net equity per share - R$.......................................................... ____________<br />
30.04 ____________<br />
19.10<br />
The accompanying notes are an integral part of these financial statements.
146 147<br />
GERDAU AÇOMINAS S.A.<br />
Statement of Changes in Financial Position<br />
Years Ended December 31<br />
(In thousands of reais)<br />
Company<br />
Consolidated<br />
Financial Resources Were Provided By<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Operations<br />
Net income for the year ........................................................... 2,483,483 849,843 2,483,483 849,843<br />
Expenses (income) not affecting working capital:<br />
Depreciation and amortization.............................................. 485,481 147,273 492,433 148,450<br />
Cost of permanent asset disposals........................................ 74,995 6,435 79,505 6,462<br />
Equity in the (earnings) losses of subsidiaries and associated<br />
companies ..................................................................... note 11 (10,391) (6,458) 10,025 1,323<br />
Foreign exchange effects on working capital of foreign<br />
companies...................................................................... - - (611) (44,901)<br />
Monetary variations on long-term debt.................................. (180,542) (48,893) (180,542) (45,369)<br />
Monetary variations on long-term receivables........................ ____________ (399) ____________ 102 ____________ (399) ____________ 102<br />
From operations.............................................................. ____________ 2,852,627 ____________ 948,302 ____________ 2,883,894 ____________ 915,910<br />
Third parties<br />
Contributions to capital reserves................................................ 190,905 6,950 190,905 6,950<br />
Increase (decrease) in long-term liabilities.................................. 864,334 (82,578) 864,059 (45,516)<br />
Working capital - operational integration................................... - (256,530) - (256,530)<br />
Working capital of merged/consolidated companies.................... 2,451 - - (1,157)<br />
Dividends not included in income for the year............................. 5,613 600 300 -<br />
Total funds provided........................................................................ 3,915,930 616,744 3,939,158 619,657<br />
Financial Resources Were Used For<br />
Investments.................................................................................. 6,441 52,814 148 52,814<br />
Fixed assets.................................................................................. 970,534 393,501 977,457 395,552<br />
Deferred charges.......................................................................... 13,803 1,581 18,654 1,639<br />
Increase (decrease) in long-term receivables................................... (217,730) 274,841 (203,261) 275,079<br />
Dividends/interest on equity ......................................................... note 21 938,662 283,986 938,662 283,986<br />
Total funds used ............................................................................... 1,711,710 1,006,723 1,731,660 1,009,070<br />
Changes in Working Capital........................................... ____________<br />
2,204,220 ____________<br />
(389,979) ____________<br />
2,207,498 ____________<br />
(389,413)<br />
Working capital<br />
At the beginning of the year...................................................... (531,520) (141,541) (509,748) (120,335)<br />
At the end of the year............................................................... 1,672,700 (531,520) 1,697,750 (509,748)<br />
Changes in Working Capital........................................... 2,204,220 (389,979) 2,207,498 (389,413)<br />
The accompanying notes are an integral part of these financial statements.
Statement of Changes<br />
in Shareholders’ Equity<br />
(In thousands of reais)<br />
Capital reserves Revenue reserves<br />
Premium Investments Total<br />
Investment on issue and working Revaluation Retained shareholders’<br />
Capital Incentives of Shares Other Total Legal capital Total reserve earnings equity<br />
At December 31, 2002 1,699,503 65,615 23,822 2,375 91,812 17,730 - 17,730 372,742 255,694 2,437,481<br />
Net income for the year - - - - - - - - - 849,843 849,843<br />
Capital increase 641,073 - - - - - - - - (255,694) 385,379<br />
Investment incentives - 6,950 - - 6,950 - - - - - 6,950<br />
Realization and reversal<br />
of reserve - - - - - - - - (372,742) 7,395 (365,347)<br />
Distribution proposed for<br />
the <strong>Annual</strong> General Meeting:<br />
Legal reserve note 21 - - - - - 42,492 - 42,492 - (42,492) -<br />
Proposed dividends note 21 - - - - - - - - - (283,986) (283,986)<br />
At December 31, 2003 2,340,576 72,565 23,822 2,375 98,762 60,222 - 60,222 - 530,760 3,030,320<br />
Net income for the year - - - - - - - - - 2,483,483 2,483,483<br />
Investment incentives - 190,905 - - 190,905 - - - - - 190,905<br />
Distribution proposed for<br />
the <strong>Annual</strong> General Meeting:<br />
Legal reserve note 21 - - - - - 124,174 - 124,174 - (124,174) -<br />
Reserve for investments<br />
and working capital - - - - - - 1,951,407 1,951,407 - (1,951,407) -<br />
Interest on equity/<br />
proposed dividends note 21 - - - - - - - - - (938,662) (938,662)<br />
At December 31, <strong>2004</strong> 2,340,576 263,470 23,822 2,375 289,667 184,396 1,951,407 2,135,803 - - 4,766,046<br />
The accompanying notes are an integral part of these financial statements.
148 149<br />
GERDAU AÇOMINAS S.A.<br />
Statement of Cash Flows<br />
Years Ended December 31<br />
(In thousands of reais)<br />
Company<br />
Consolidated<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Net income for the year............................................................... 2,483,483 849,843 2,483,483 849,843<br />
Equity in the (earnings) losses of subsidiaries and associated<br />
companies............................................................................. note 11 (10,391) (6,458) 10,025 1,323<br />
Provision for credit risks.............................................................. 5,135 8,461 5,135 8,461<br />
Loss on disposal of fixed assets.................................................... 9,771 1,492 9,843 1,537<br />
Loss on disposal of investment..................................................... 4,227 - 3,574 -<br />
Monetary and exchange variations................................................ (128,671) 85,604 (128,234) 85,398<br />
Depreciation and amortization..................................................... 485,481 147,273 492,433 148,450<br />
Income tax and social contribution on net income.......................... 317,856 (343,445) 318,769 (344,086)<br />
Interest on debt.......................................................................... 177,641 79,159 179,827 79,356<br />
Contingencies/judicial deposits.................................................... 6,469 (4,394) 6,136 (4,509)<br />
Changes in trade accounts receivable............................................ (604,478) 164,479 (541,337) 59,154<br />
Changes in inventories................................................................ (555,229) (106,265) (562,455) (105,083)<br />
Changes in trade accounts payable............................................... 260,590 54,742 264,557 54,381<br />
Other operating activity accounts................................................. 244,071 (21,756) 244,826 (31,452)<br />
____________ ____________ ____________ ____________<br />
Net cash provided by operating activities.................................. 2,695,955 908,735 2,786,582 802,773<br />
____________ ____________ ____________ ____________<br />
Purchase/disposal of fixed assets.................................................. (913,233) (405,273) (919,758) (407,342)<br />
Increase in deferred charges........................................................ (13,803) (1,581) (18,006) (1,639)<br />
Acquisition/disposal of investments.............................................. (7,984) (52,814) 650 (52,814)<br />
Receipt of interest on own capital/profit distribution...................... 900 - - -<br />
____________ ____________ ____________ ____________<br />
Net cash used in investing activities......................................... (934,120) (459,668) (937,114) (461,795)<br />
____________ ____________ ____________ ____________<br />
Suppliers of fixed assets.............................................................. 151,445 8,585 151,022 8,511<br />
Working capital financing............................................................ 219,262 (331,504) 232,498 (290,395)<br />
Permanent asset financing........................................................... 442,306 268,753 442,653 268,881<br />
Payments of permanent asset financing......................................... (892,765) (175,108) (898,300) (175,460)<br />
Payment of financing interest....................................................... (176,594) (104,768) (177,706) (104,973)<br />
Loans with related parties........................................................... (146,502) (19,012) (148,141) (10,695)<br />
Payment of dividends/interest on equity and profit sharing.............. (940,345) (18,226) (939,655) (23,679)<br />
____________ ____________ ____________ ____________<br />
Net cash used in financing activities......................................... (1,343,193) (371,280) (1,337,629) (327,810)<br />
____________ ____________ ____________ ____________<br />
Changes in cash and cash equivalents....................................... 418,642 77,787 511,839 13,168<br />
____________ ____________ ____________ ____________<br />
____________ ____________ ____________ ____________<br />
Cash and short-term investments<br />
At the beginning of the year.................................................... note 5 179,266 101,479 258,327 276,444<br />
Restatement of opening balance............................................... - - (6,345) (31,895)<br />
Opening balance of consolidated/merged companies for the year..... 42 - - 610<br />
At the end of the year............................................................. note 5 597,950 179,266 763,821 258,327
Notes to the Financial Statements<br />
at December, 31 <strong>2004</strong> and 2003<br />
(All amounts in thousands of reais unless otherwise indicated)<br />
1 - Operations<br />
<strong>Gerdau</strong> Açominas S.A. is the company that includes the steel producing assets of the <strong>Gerdau</strong> Group in Brazil and has an installed capacity of<br />
7.6 million tons of crude steel per year. The <strong>Gerdau</strong> Group is dedicated mainly to the production of common and special steel rods and sale of<br />
general steel products (plates and rods), in plants located in Brazil, Uruguay, Chile, Canada, Argentina and the Unites States of America.<br />
The <strong>Gerdau</strong> Group has an installed capacity of 16.4 million tons of crude steel per year, basically producing steel in electrical furnaces, from<br />
scrap and pig iron purchased, for the most part, in the region near each plant (mini-mill concept). <strong>Gerdau</strong> also operates plants which are<br />
capable of producing steel from iron ore (through blast furnaces and direct reduction) and has a unit used exclusively to produce special<br />
steels. It is the largest scrap recycling group in Latin America and among the largest in the world.<br />
The industrial sector is the most important market, including manufacturers of consumer goods, such as vehicles and household and<br />
commercial equipment that basically use profiled steel in various available specifications. The next most important market is the civil<br />
construction sector, which demands a high volume of rebar and wires for concrete. There are also numerous customers for nails, staples and<br />
wires, commonly used in the agribusiness sector.<br />
2 - Presentation of the Financial Statements<br />
The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, which are based<br />
on the provisions of Brazilian Corporate Law, together with the rules established by the Brazilian Securities Commission (CVM).<br />
A statement of cash flows (company and consolidated), prepared under the indirect method, is being presented as supplementary information<br />
in order to provide additional information.<br />
3 - Significant Accounting Practices<br />
a) Cash and cash equivalents - financial investments are recorded at cost plus income accrued up to the balance sheet date, applying the<br />
interest rates agreed with the financial institutions, and do not exceed market value;<br />
b) Trade accounts receivable - are stated at realizable values, and accounts receivable from foreign customers are adjusted based on the<br />
exchange rates effective at the balance sheet date. The provision for credit risks is calculated based on a credit risk analysis, which includes<br />
the history of losses, the individual situation of each customer and the economic group to which they belong, the collateral and guarantees<br />
and the legal advisors’ opinion, and is considered sufficient to cover eventual losses on realization;<br />
c) Inventories - are stated at the lower of market value and average production or purchase cost;<br />
d) Investments in subsidiary and associated companies - are recorded on the equity method of accounting. The equity in the earnings or loss<br />
is recorded in an income statement account;<br />
e) Fixed assets - are recorded at cost, net of depreciation. Depreciation is calculated on the straight-line basis, at the rates stated in Note 12,<br />
which take into consideration the estimated useful lives of the assets. Interest on financing obtained to finance construction in progress is<br />
added to the cost of the constructions;<br />
f) Deferred charges - amortization is calculated on the straight-line basis at rates determined based on the production of the implemented<br />
projects in relation to their installed capacities;<br />
g) Financing - are stated at the contract value plus the contracted charges, including interest and monetary or foreign exchange variations.<br />
Swap contracts, which are linked to the loan agreements, are classified together with the related loans;<br />
h) Income tax and social contribution on net income - current and deferred income tax and social contribution on net income are calculated<br />
in conformity with current legislation;<br />
i) Other current and long-term assets and liabilities - are recorded at their realizable amounts (assets) and at their known or estimated<br />
amounts plus accrued charges and indexation adjustments (liabilities), when applicable;<br />
j) Related parties - loan agreements between Brazilian companies are restated by the weighted average interest rate for market funding.<br />
The agreements with foreign companies are restated by charges (LIBOR plus 3% p.a.) plus foreign exchange variation. Sales and purchases of<br />
inputs and products are made under terms and conditions similar to those of unrelated third parties;<br />
k) Determination of the results of operations - the results of operations are determined on the accrual basis of accounting;<br />
l) Use of estimates - the preparation of financial statements requires estimates to record certain assets, liabilities and other transactions.<br />
The Company’s financial statements therefore include various estimates related to the useful lives of fixed assets, provisions necessary for<br />
contingent liabilities, for income tax and other similar matters. Actual results may differ from those estimated;<br />
m) Environmental investments - expenses related to compliance with environmental regulations are considered as cost of production or<br />
capitalized when incurred; and<br />
n) Translation of foreign currency balances - asset and liability balances of transactions in foreign currency are translated to local currency<br />
(R$) at the foreign exchange rate in effect at the balance sheet date (<strong>2004</strong> - US$ 1.00 = R$ 2.6544 and 2003 - US$ 1.00 = R$ 2.8892).
150 151<br />
GERDAU AÇOMINAS S.A.<br />
4 - Consolidated Financial Statements<br />
a) The consolidated financial statements at December 31, <strong>2004</strong> include the accounts of <strong>Gerdau</strong> Açominas S.A. and the directly controlled<br />
subsidiaries listed below:<br />
Percentage<br />
Shareholders’<br />
Consolidated company ownership equity<br />
Margusa - Maranhão Gusa S.A. ....................................................................................................... 100 73,714<br />
Açominas Com. Imp. Exp. S.A.- Açotrading ....................................................................................... 100 22,583<br />
<strong>Gerdau</strong> Açominas Overseas Ltd. ....................................................................................................... 100 7,914<br />
Florestal Itacambira S.A. .................................................................................................................. 100 7,650<br />
b) The more significant accounting practices used in preparing the consolidated financial statements are as follows:<br />
I) <strong>Gerdau</strong> Açominas S.A. and its subsidiaries adopt consistent practices to record their operations and value their assets and liabilities. The<br />
financial statements of the subsidiary <strong>Gerdau</strong> Açominas Overseas Ltd. were translated using the exchange rate in effect at the balance sheet<br />
date and were adjusted to conform with accounting practices adopted in Brazil; and<br />
II) Asset and liability, and income and expense accounts balances arising from transactions between consolidated companies have been<br />
eliminated.<br />
c) The subsidiary Armafer Serviços de Construção Ltda. was merged on October 29, <strong>2004</strong> and the net assets of R$ 44,744 were recorded<br />
in <strong>Gerdau</strong> Açominas S.A., replacing the investment account, without capital increase. The objectives of the transaction were to reduce<br />
administrative expenses and improve operating synergy.<br />
d) The Company has goodwill which is being amortized in up to three years based on the realization of projected future results, as<br />
follows:<br />
Amortization<br />
Period Company Consolidated<br />
Goodwill in the investment account<br />
Balance at December 31, 2003................................................................................................... 43,564 43,564<br />
(-) Reversal of goodwill based on the adjustment in purchase price<br />
(Margusa - Maranhão Gusa S.A.) ........................................................................................... (5,258) (5,258)<br />
(-) Amortization for the year....................................................................................................... Up to 3 years _________________ (13,578) __________________ (13,578)<br />
Balance at December 31, <strong>2004</strong> (based on expectation of future profiability)................................... _________________<br />
24,728 __________________<br />
24,728<br />
The goodwill arises from the assets of the subsidiary Margusa - Maranhão Gusa S.A.<br />
5 - Cash and Cash Equivalents<br />
Company<br />
Consolidated<br />
_______________________________ _____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Cash and banks .............................................................................................................. 49,758 64,110 49,915 64,969<br />
Financial investment fund ................................................................................................ 548,192 115,156 555,951 115,156<br />
Fixed income securities .................................................................................................... _____________- ____________- ____________ 157,955 ____________ 78,202<br />
_____________<br />
597,950 ____________<br />
179,266 ____________<br />
763,821 ____________<br />
258,327<br />
Fixed income securities and financial investment fund include R$ 165,369 - consolidated (R$ 78,076 - consolidated in 2003) of investments<br />
in U.S. dollars.<br />
6 - Trade Accounts Receivable<br />
Company<br />
Consolidated<br />
_______________________________ _____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Customers in Brazil.......................................................................................................... 792,706 520,274 794,961 522,985<br />
Brazilian export receivables............................................................................................... 675,881 372,717 544,582 302,509<br />
Provision for credit risks .................................................................................................. _____________ (69,827) ____________ (63,449) ____________ (69,827) ____________ (63,449)<br />
_____________<br />
1,398,760 ____________<br />
829,542 ____________<br />
1,269,716 ____________<br />
762,045
7 - Inventories<br />
Company<br />
Consolidated<br />
______________________________ _____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Finished products............................................................................................................. 542,924 356,825 547,126 357,180<br />
Work in process............................................................................................................... 351,139 227,808 351,139 227,808<br />
Raw materials ................................................................................................................. 450,218 287,478 454,801 290,470<br />
Storeroom materials......................................................................................................... 327,666 262,583 328,272 265,635<br />
Advances to suppliers ...................................................................................................... ____________ 60,181 ____________ 38,270 ____________ 60,726 ____________ 38,452<br />
____________<br />
1,732,128 ____________<br />
1,172,964 ____________<br />
1,742,064 ____________<br />
1,179,545<br />
The inventories (company and consolidated) are covered against fire and overflow. Coverage is determined based on the amounts and the<br />
risks involved.<br />
8 - Tax Credits<br />
Company<br />
Consolidated<br />
______________________________ _____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Value-Added Tax on Sales and Services (ICMS)............................................................ 94,547 87,636 97,207 88,631<br />
Social Contribution on Revenues (COFINS) to offset..................................................... 55,579 - 56,302 -<br />
Social Integration Program (PIS) to offset................................................................... 11,130 2,811 11,344 2,812<br />
Excise Tax (IPI) ....................................................................................................... 3,107 6,097 3,310 6,358<br />
Income tax and social contribution on net income....................................................... 2,222 90 4,843 115<br />
Other..................................................................................................................... ____________ 3,070 ____________ 18 ____________ 3,061 ____________ 749<br />
____________<br />
169,655 ____________<br />
96,652 ____________<br />
176,067 ____________<br />
98,665<br />
9 - Income Tax and Social Contribution on Net Income<br />
a) Analysis of the income tax and social contribution expense:<br />
Company<br />
_________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
_________________________________________ __________________________________________<br />
IR CS Total IR CS Total<br />
Profit before income tax and social contribution, after statutory<br />
profit sharing.......................................................................... 3,294,125 3,294,125 3,294,125 646,009 646,009 646,009<br />
Statutory rates of tax.................................................................... 25% 9% 34% 25% 9% 34%<br />
Income tax and social contribution expense at statutory rates.......... (823,531) (296,471) (1,120,002) (161,502) (58,141) (219,643)<br />
Tax effects on:<br />
- equity in earnings (losses).......................................................... 2,598 935 3,533 1,615 581 2,196<br />
- interest on equity....................................................................... 74,824 26,937 101,761 (150) (54) (204)<br />
- recovery of deferred tax assets.................................................... 141,864 48,109 189,973 305,724 117,027 422,751<br />
- permanent differences (net)........................................................ __________ 20,337 __________ (6,244) __________ 14,093 __________ (343) __________ (923) _________ (1,266)<br />
Income tax and social contribution expense................................... __________<br />
(583,908) __________<br />
(226,734) __________<br />
(810,642) __________<br />
145,344 __________<br />
58,490 _________<br />
203,834<br />
Current....................................................................................... (447,281) (162,899) (610,180) (103,857) (38,347) (142,204)<br />
Deferred...................................................................................... (136,627) (63,835) (200,462) 249,201 96,837 346,038<br />
Consolidated<br />
_________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
_________________________________________ __________________________________________<br />
IR CS Total IR CS Total<br />
Profit before income tax and social contribution, after statutory<br />
profit sharing.......................................................................... 3,301,598 3,301,598 3,301,598 646,027 646,027 646,027<br />
Statutory rates of tax.................................................................... 25% 9% 34% 25% 9% 34%<br />
Income tax and social contribution expenses at statutory rates........ (825,400) (297,144) (1,122,544) (161,507) (58,142) (219,649)<br />
Tax effects on:<br />
- equity in earnings (losses).......................................................... (2,506) (902) (3,408) (331) (119) (450)<br />
- interest on equity....................................................................... 74,824 26,937 101,761 - - -<br />
- recovery of deferred tax assets.................................................... 141,864 48,109 189,973 305,724 117,027 422,751<br />
- permanent differences (net)..................................................... __________ 21,844 __________ (5,741) __________ 16,103 __________ 1,471 __________ (307) _________ 1,164<br />
Income tax and social contribution expense.................................. __________<br />
(589,374) __________<br />
(228,741) __________<br />
(818,115) __________<br />
145,357 __________<br />
58,459 _________<br />
203,816<br />
Current.................................................................................. (452,402) (164,774) (617,176) (103,962) (38,395) (142,357)<br />
Deferred................................................................................. (136,972) (63,967) (200,939) 249,319 96,854 346,173<br />
IR - Corporate income tax.<br />
CS - Social contribution on net income.
152 153<br />
GERDAU AÇOMINAS S.A.<br />
b) Analysis of the deferred income tax and social contribution assets and liabilities, at the statutory rates of tax:<br />
_________________________________________________________________________________________________________________________<br />
Assets<br />
___________________________________________________________<br />
Company<br />
____________________________________________________________<br />
Consolidated<br />
____________________________<br />
<strong>2004</strong><br />
_____________________________<br />
2003<br />
_____________________________<br />
<strong>2004</strong><br />
_____________________________<br />
2003<br />
IR CS Total IR CS Total IR CS Total IR CS Total<br />
Income tax losses.................... 228,735 - 228,735 273,713 - 273,713 230,165 - 230,165 275,506 - 275,506<br />
Social contribution losses ....... - 52,403 52,403 - 83,867 83,867 - 53,060 53,060 - 84,662 84,662<br />
Provision for contingencies ..... 12,071 4,345 16,416 3,998 1,439 5,437 12,405 4,345 16,750 4,353 1,446 5,799<br />
Commissions/other.................. 6,221 2,239 8,460 4,038 1,453 5,491 6,221 2,239 8,460 4,038 1,453 5,491<br />
Amortized goodwill................. 1,094 394 1,488 - - - 1,094 394 1,488 - - -<br />
Provision for losses................. ________ 77,931 ________ 28,055 ________ 105,986 ________ 84,799 ________ 30,528 ________ 115,327 ________ 77,931 ________ 28,055 ________ 105,986 ________ 84,799 ________ 30,528 ________ 115,327<br />
________ 326,052 ________ 87,436 ________ 413,488 ________ 366,548 ________ 117,287 ________ 483,835 ________ 327,816 ________ 88,093 ________ 415,909 ________ 368,696 ________ 118,089 ________ 486,785<br />
Current ................................. 245,685 58,505 304,190 72,362 26,050 98,412 245,685 58,505 304,190 72,362 26,050 98,412<br />
Long-term ............................. 80,367 28,931 109,298 294,186 91,237 385,423 82,131 29,588 111,719 296,334 92,039 388,373<br />
_________________________________________________________________________________________________________________________<br />
Liabilities<br />
___________________________________________________________<br />
Company<br />
____________________________________________________________<br />
Consolidated<br />
____________________________<br />
<strong>2004</strong><br />
_____________________________<br />
2003<br />
_____________________________<br />
<strong>2004</strong><br />
_____________________________<br />
2003<br />
IR CS Total IR CS Total IR CS Total IR CS Total<br />
Inflationary/exchange effect..... ________ 115,934 ________ 33,971 ________ 149,905 ________ 19,790 ________- ________ 19,790 ________ 115,934 ________ 33,971 ________ 149,905 ________ 19,790 ________- ________ 19,790<br />
Current ................................. ________ 115,934 ________ 33,971 ________ 149,905 ________ 19,790 ________- ________ 19,790 ________ 115,934 ________ 33,971 ________ 149,905 ________ 19,790 ________- ________ 19,790<br />
The tax benefits recognized on income tax and social contribution loss carryforwards, as well as on the provision for losses, both in<br />
the Company and consolidated, are supported by projections of future taxable income adjusted to present values, based on technical<br />
feasibility studies, approved by management. These studies, which consider the history of the Company’s and its subsidiaries’ profitability<br />
and the maintenance of the current profitability in the future, permitted the recognition of an additional benefit for the year of R$ 189,973<br />
(R$ 422,751 in 2003) in the Company and consolidated, whose estimated recovery is shown in item “c” below. Other credits, based on<br />
temporary differences, mainly tax contingencies, were maintained according to their estimate of realization.<br />
c) Estimated recovery of deferred income tax and social contribution assets:<br />
Company<br />
Consolidated<br />
_______________________________ _____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Up to <strong>2004</strong> ..................................................................................................................... - 98,412 - 98,412<br />
2005 .............................................................................................................................. 304,190 93,101 304,190 93,101<br />
2006 .............................................................................................................................. 22,128 84,086 22,128 86,411<br />
2007 .............................................................................................................................. 16,979 83,905 19,284 84,178<br />
2008 .............................................................................................................................. 25,367 76,707 25,367 77,059<br />
2009 .............................................................................................................................. 10,947 20,377 11,063 20,377<br />
2010 to 2012 ................................................................................................................. 23,497 27,247 23,497 27,247<br />
2013 to 2014 ................................................................................................................. _____________ 10,380 ____________- ____________ 10,380 ____________-<br />
_____________<br />
413,488 ____________<br />
483,835 ____________<br />
415,909 ____________<br />
486,785<br />
10 - Compulsory Deposits and Other<br />
Company<br />
Consolidated<br />
_______________________________ _____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Compulsory deposits ....................................................................................................... 12,077 187 12,345 833<br />
Receivables under contract............................................................................................... 23,770 20,544 23,770 20,546<br />
ICMS credits on purchases of fixed assets.......................................................................... 69,992 32,722 69,992 32,730<br />
Assets not for use............................................................................................................ - - 8,665 8,665<br />
Income tax incentives....................................................................................................... _____________ 38 ____________ 49 ____________ 39 ____________ 49<br />
105,877 53,502 114,811 62,823<br />
_____________ ____________ ____________ ____________<br />
_____________ ____________ ____________ ____________
11 - Investments<br />
Company<br />
________________________________________________________________________________________________________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
__________________________________________________________________________________________________________________________________________________________________ __________<br />
Subsidiaries Other Total Total<br />
_________________________________________________________________________________________________________________________________ _____________ ____________ __________<br />
Açominas Com. <strong>Gerdau</strong> Florestal<br />
Imp. e Exp. S.A. - Açominas Itacambira Armafer - Serv.<br />
Açotrading Overseas Ltd. S.A. Margusa - Maranhão Gusa S.A. Constr. Ltda. 2 Other<br />
________________ ______________ ______________ _________________________________ _________________ ______________<br />
Investment Investment Investment Investment Goodwill Investment Investment<br />
Opening balance............................................... 22,592 7,504 7,211 53,248 43,564 41,470 3,897 17,977 197,463 29,870<br />
Merger/capitalization ................................... - - - - - (47,066) - 32 (47,034) 108,921<br />
Reversal of goodwill ..................................... - - - - (5,258) - - - (5,258) 52,814<br />
Acquisition ................................................... - - - - - - - 78 78 -<br />
Sale ............................................................. - - - - - - - (4,294) (4,294) -<br />
Equity in earnings (losses) 1 ........................... (9) 410 576 25,643 (13,578) (3,030) - 379 10,391 6,458<br />
Deposit for future capital increase ................. - - - - - 8,626 13 - 8,639 -<br />
Dividends......................................................... ________________ - ______________ - ______________ (137) _________________________________ (5,176) - _________________ - ______________ - _____________ (300) ____________ (5,613) ___________ (600)<br />
Closing balance................................................. ________________ 22,583 ______________ 7,914 ______________ 7,650 _________________________________ 73,715 24,728 _________________ - ______________ 3,910 _____________ 13,872 ____________ 154,372 ___________ 197,463<br />
Capital ............................................................ 17,689 133 5,790 10,702 -<br />
Shareholders’ equity ......................................... 22,583 7,914 7,650 73,714 -<br />
Net income (loss) for the year ........................... (9) 1,019 575 21,860 (3,030)<br />
Percentage of interest (%)................................. 100% 100% 100% 100% -<br />
Common shares/quotas held.............................. 400,000 50,000 158,985 8,615,249 -<br />
Preferred shares held ........................................ - - - 2,086,310 -<br />
1<br />
Includes amortization of goodwill.<br />
2<br />
Company merged on October 29, <strong>2004</strong>.
154 155<br />
GERDAU AÇOMINAS S.A.<br />
Consolidated<br />
____________________________________________________________________<br />
<strong>2004</strong> 2003<br />
_____________________________________________________________ ___________<br />
Investment Goodwill Total Total<br />
Margusa - Maranhão Gusa S.A. ........................................................................... - 24,728 24,728 43,564<br />
MRS Logística S.A. ............................................................................................. 4,772 - 4,772 4,772<br />
Corporate joint ventures ..................................................................................... 10,036 - 10,036 9,984<br />
Other investments .............................................................................................. 4,133 - 4,133 8,318<br />
________________ __________ _________ _________<br />
18,941 24,728 43,669 66,638<br />
________________ __________ _________ _________<br />
________________ __________ _________ _________<br />
12 - Fixed Assets<br />
Company<br />
_______________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
_______________________________________________ ___________<br />
<strong>Annual</strong><br />
Accumulated<br />
depreciation<br />
depreciation<br />
rate - % Cost and depletion Net Net<br />
Land, buildings and structures................................................ 0 to 4 2,385,691 (944,679) 1,441,012 1,508,988<br />
Machinery, equipment and installations.................................. 10 4,571,194 (2,213,718) 2,357,476 2,126,167<br />
Furniture and fixtures............................................................ 10 60,572 (36,584) 23,988 25,110<br />
Vehicles............................................................................... 20 22,848 (18,581) 4,267 4,368<br />
Electronic data equipment/rights/licenses................................ 20 266,201 (177,950) 88,251 85,268<br />
Construction in progress........................................................ - 863,195 - 863,195 582,748<br />
Forestation/reforestation....................................................... Feeling plan 123,431 (34,950) 88,481 64,471<br />
___________ ____________ __________ __________<br />
8,293,132 (3,426,462) 4,866,670 4,397,120<br />
___________ ____________ __________ __________<br />
___________ ____________ __________ __________<br />
Consolidated<br />
_______________________________________________________________________________________<br />
<strong>2004</strong> 2003<br />
_______________________________________________ ___________<br />
<strong>Annual</strong><br />
Accumulated<br />
depreciation<br />
depreciation<br />
rate - % Cost and depletion Net Net<br />
Land, buildings and structures............................................... 0 to 4 2,403,143 (946,302) 1,456,841 1,529,014<br />
Machinery, equipment and installations.................................. 10 4,586,568 (2,220,908) 2,365,660 2,160,821<br />
Furniture and fixtures............................................................ 10 60,657 (36,827) 23,830 25,367<br />
Vehicles............................................................................... 20 23,561 (18,797) 4,764 4,495<br />
Electronic data equipment/rights/licenses................................ 20 266,217 (178,003) 88,214 86,383<br />
Construction in progress........................................................ - 863,704 - 863,704 600,647<br />
Forestation/reforestation....................................................... Feeling plan 156,672 (34,950) 121,722 97,711<br />
___________ ____________ __________ __________<br />
8,360,522 (3,435,787) 4,924,735 4,504,438<br />
___________ ____________ __________ __________<br />
___________ ____________ __________ __________<br />
a) Insured amounts - the assets are insured against fire, electrical damage and explosion. The coverage is determined based on the risks<br />
involved. The Ouro Branco plant has coverage for loss of profits.<br />
b) Capitalization of interest and financial charges - R$ 1,084 was capitalized during the year - Company and consolidated ((R$ 16,715) -<br />
Company and consolidated in 2003).<br />
c) Guarantees offered - fixed assets were pledged as collateral for loans and financing in the amount of R$ 371,494 - Company and consolidated<br />
(R$ 249,924 - Company and consolidated in 2003).
d) Summary of changes in fixed assets:<br />
Company<br />
Consolidated<br />
______________________________ ____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Balance at the beginning of the year................................................................................. 4,397,120 2,825,208 4,504,438 2,825,208<br />
( + ) Purchases/sales for the year...................................................................................... 905,549 387,067 912,003 389,090<br />
( + ) Company merger...................................................................................................... 48,772 - - -<br />
( - ) Depreciation and depletion in cost of sales.................................................................. (423,312) (131,180) (430,213) (132,352)<br />
( - ) Depreciation and depletion in administrative expenses................................................. (61,459) (16,028) (61,493) (16,033)<br />
( - ) Revaluation reversal................................................................................................... - (365,347) - (365,347)<br />
( + ) Operational integration with <strong>Gerdau</strong>.......................................................................... - 1,697,400 - 1,791,555<br />
( + ) Companies consolidated in the year........................................................................... - - - 12,317<br />
____________ ___________ ____________ ___________<br />
Balance at the end of the year.......................................................................................... 4,866,670 4,397,120 4,924,735 4,504,438<br />
____________ ___________ ____________ ___________<br />
____________ ___________ ____________ ___________<br />
13 - Deferred Charges<br />
Deferred charges (Company and consolidated) comprise pre-operating expenses with reforestation, research, development and restructuring<br />
projects.<br />
14 - Financing<br />
Financing are represented as follows:<br />
<strong>Annual</strong> Company Consolidated<br />
_____________________________ __________________________<br />
charges <strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Current<br />
Working capital financing (R$).......................................... 8.00% to 14.00% 523 48,173 1,173 48,173<br />
Fixed asset financing (R$) ................................................ 12.00% - 3,054 - 3,054<br />
Investment financing (R$)................................................. CDI 4,500 4,500 4,500 4,500<br />
Investment financing (US$)............................................... US$ 1,387 45,649 1,387 45,649<br />
Working capital financing (US$)........................................ 1.36% to 10.50% 267,797 921,803 284,601 925,847<br />
Fixed asset financing and others (US$) .............................. US$ - 2,912 - 5,082<br />
Current portion of long-term financing............................... ___________ 603,406 __________ 863,501 __________ 603,406 __________ 866,671<br />
877,613 1,889,592 895,067 1,898,976<br />
Long-term<br />
Working capital financing (R$).......................................... 10.02% 28,215 3,812 28,215 3,812<br />
Fixed asset financing and others (R$)................................. 4.00% to 9.90% 599,817 554,153 603,272 569,124<br />
Investment financing (R$)................................................. IGPM + 8.5% 29,045 35,019 29,045 35,019<br />
Fixed asset financing and others (US$) .............................. 3.09% to 6.00% 619,884 616,837 619,884 616,837<br />
Working capital financing (US$)........................................ 2.95% to 7.34% 1,406,166 1,066,385 1,406,166 1,066,385<br />
(-) Current portion........................................................... ___________ (603,406) __________ (863,501) __________ (603,406) __________ (866,671)<br />
___________ 2,079,721 __________ 1,412,705 __________ 2,083,176 __________ 1,424,506<br />
Total financing................................................................ ___________<br />
2,957,334 __________<br />
3,302,297 __________<br />
2,978,243 __________<br />
3,323,482<br />
CDI - Certificate of Interbank Deposit interest rate.<br />
IGPM - General Market Price Index.
156 157<br />
GERDAU AÇOMINAS S.A.<br />
Summarized by currency:<br />
Company<br />
Consolidated<br />
_______________________________ _____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Brazilian real (R$).................................................................................................... 662,100 648,711 666,205 663,682<br />
U.S. dollar (US$)...................................................................................................... ____________ 2,295,234 ____________ 2,653,586 ____________ 2,312,038 ____________ 2,659,800<br />
____________<br />
2,957,334 ____________<br />
3,302,297 ____________<br />
2,978,243 ____________<br />
3,323,482<br />
The schedule for payment of the long-term portion of financing is as follows:<br />
Company<br />
Consolidated<br />
In 2006...................................................................................................................................................................... 462,261 462,889<br />
In 2007...................................................................................................................................................................... 511,326 511,954<br />
In 2008...................................................................................................................................................................... 522,084 522,712<br />
In 2009...................................................................................................................................................................... 281,148 281,776<br />
In 2010...................................................................................................................................................................... 168,086 168,715<br />
After 2010.................................................................................................................................................................. ____________ 134,816 ________________ 135,130<br />
____________<br />
2,079,721 ________________<br />
2,083,176<br />
a) Events during the year<br />
On June 3, <strong>2004</strong>, the Company concluded the placement of the second tranche, of US$ 128 million (equivalent to R$ 339,763 at December 31,<br />
<strong>2004</strong>), related to a US$ 400 million Export Notes Receivable program (equivalent to R$ 1,061,760 at December 31, <strong>2004</strong>). This joint program<br />
with <strong>Gerdau</strong> S.A. has an interest rate of 7.321% p.a., maturity in April 2012, a grace period of two years and quarterly amortization as from<br />
July 2006.<br />
b) Guarantees<br />
The loans contracted under the FINAME/BNDES program are guaranteed by the financed assets, in the amount of R$ 180,109. The other loans<br />
are guaranteed by sureties from the controlling shareholders, on which the Company pays a fee of 1% p.a. on the amount guaranteed.<br />
c) Covenants<br />
In replacement of the tangible guarantees usually required, the loans are being contracted with certain financial covenants, as follows:<br />
I) Consolidated interest coverage ratio - measures the debt service payment capacity in relation to EBITDA (Earnings before Interest, Taxes,<br />
Depreciation and Amortization);<br />
II) Consolidated leverage ratio - measures the debt coverage capacity in relation to EBITDA;<br />
III) Required Minimum Net Worth - measures the minimum net worth required in financial agreements; and<br />
IV) Current Ratio (current liquidity ratio) - measures the capacity to comply with short-term obligations.<br />
All the covenants mentioned above are calculated on a consolidated basis of the parent company <strong>Gerdau</strong> S.A., except for item IV which refers to<br />
the parent company Metalúrgica <strong>Gerdau</strong> S.A., and have been observed. The penalty for non-compliance is the prepayment of the contracts.<br />
15 - Financial Instruments<br />
a) General comments - <strong>Gerdau</strong> Açominas S.A. and its subsidiaries enter into transactions involving financial instruments, the risks of which<br />
are managed through financial positions and exposure limit controls. All instruments are fully recorded in the books of account and mainly<br />
relate to the instruments listed below:<br />
- financial investments - are recorded at their market value as of the balance sheet date and are explained and presented in Note 5;<br />
- investments - are explained and presented in Note 11;<br />
- related parties - are explained and presented in Note 19;<br />
- financing - are explained and presented in Note 14; and<br />
- financial derivatives - in order to minimize the effects of fluctuations in foreign exchange rates on its liabilities, the Company entered into<br />
swap contracts that were converted into Brazilian reais on the contract date and linked to changes in the CDI rate. The swap contracts are<br />
listed below:<br />
Company and Consolidated<br />
_____________________________________________________________________________________________________________<br />
Contract date Purpose Amount US$ thousand Rate Maturity<br />
07/16/2001 to 05/07/2002 Prepayment 32,823 85.55% to 100.00% of the CDI 01/13/2005 to 03/01/2006<br />
02/20/2002 Resolution 2770 54,000 106.00% of the CDI 06/20/2005<br />
02/19/2003 Resolution 4131 3,300 85.70% of the CDI 02/04/2005
) Market value - the market values of the financial instruments are as follows:<br />
Company<br />
________________________________________________________________<br />
<strong>2004</strong> 2003<br />
______________________________ _____________________________<br />
Book Market Book Market<br />
Value Value Value Value<br />
Financial investments............................................................................................... 548,192 548,192 115,156 115,156<br />
Eurobonds.............................................................................................................. - - 370,342 370,956<br />
Securitization financing............................................................................................ 627,908 627,908 303,282 303,282<br />
Import financing...................................................................................................... 619,883 619,883 377,534 383,941<br />
Prepayment financing............................................................................................... 808,983 804,724 807,385 818,786<br />
Financing - Resolution 2770..................................................................................... 263,060 256,585 365,573 390,235<br />
ACC (Advances on Export Contracts) financing ........................................................... 27,088 27,088 500,118 524,935<br />
Financing - Resolution 4131 .................................................................................... 20,893 20,755 24,243 24,468<br />
Other financing....................................................................................................... 589,519 589,520 553,820 573,067<br />
Investments............................................................................................................ 154,372 154,372 197,463 197,463<br />
Related parties (assets)............................................................................................ 8,178 8,178 - -<br />
Related parties (liabilities)........................................................................................ - - 138,309 138,309<br />
Consolidated<br />
________________________________________________________________<br />
<strong>2004</strong> 2003<br />
______________________________ _____________________________<br />
Book Market Book Market<br />
Value Value Value Value<br />
Financial investments............................................................................................... 713,906 713,906 193,358 193,358<br />
Eurobonds.............................................................................................................. - - 370,342 370,956<br />
Securitization financing............................................................................................ 627,908 627,908 303,282 303,282<br />
Import financing...................................................................................................... 619,883 619,883 377,534 383,941<br />
Prepayment financing............................................................................................... 808,983 804,724 807,385 818,786<br />
Financing - Resolution 2770..................................................................................... 263,060 256,585 365,573 390,235<br />
ACC financing ........................................................................................................ 43,891 43,891 500,118 524,935<br />
Financing - Resolution 4131 .................................................................................... 20,893 20,755 24,243 24,468<br />
Other financing....................................................................................................... 593,625 593,625 575,005 594,251<br />
Investments............................................................................................................ 43,669 43,669 66,638 66,638<br />
Related parties (assets)............................................................................................ 21,804 21,804 - -<br />
Related parties (liabilities)........................................................................................ - - 125,320 125,320<br />
The market values of swap contracts were obtained based on future income projections for each contract, calculated based on the present<br />
value of the forward U.S. dollar + coupon rates (assets) and CDI future rates (liabilities) and adjusted to present value on the balance sheet<br />
date, using the projected future CDI rate for each maturity. Swap contracts related to financing contracts are classified together with the<br />
related financing, as a contra entry to the “Financial expenses/income, net” account, and are stated at cost plus accrued charges up to the<br />
balance sheet date.<br />
The Company believes that the balances of the other financial instruments, which are recognized in the books at the net contracted values,<br />
are substantially similar to those that would be obtained if they were negotiated in the market. However, because the markets for these<br />
instruments are not active, differences could exist if they were settled in advance.<br />
c) Risk factors that could affect the Company’s business<br />
Price risk: this risk is related to the possibility of price variations of the products that the Company sells or in the raw material prices and<br />
other inputs used in the production process. Since the Company operates in a commodity market, its sales revenues and cost of sales may<br />
be affected by the changes in the international prices of its products or materials. In order to minimize this risk, the Company constantly<br />
monitors the price variations in the local and international markets.<br />
Interest rate risk: this risk arises as a result of the possibility of losses (or gains) due to fluctuations in interest rates relating to Company<br />
assets (investments) and liabilities. In order to minimize possible impacts resulting from interest rate fluctuations, the Company has adopted<br />
a policy of diversification, alternating between fixed rates and variable rates (such as LIBOR and the CDI) and periodically renegotiates<br />
contracts to adjust them to market.
158 159<br />
GERDAU AÇOMINAS S.A.<br />
Exchange rate risk: this risk is related to the possibility of fluctuations in foreign exchange rates affecting financial expenses (or income)<br />
and the liability (or asset) balance of contracts denominated in a foreign currency. In order to manage the effects of these fluctuations, the<br />
Company uses “hedge” instruments, usually swap contracts, as described in item “a” above.<br />
Credit risk: this risk arises from the possibility of the Company not receiving amounts arising from sales or credit instruments at financial<br />
institutions. In order to minimize this risk, the Company adopts the procedure of analyzing in detail the financial and equity position of its<br />
customers, establishing a credit limit and constantly monitoring their balances. In relation to financial investments, the Company invests<br />
solely in institutions with low credit risk, as assessed by rating agencies. In addition, each institution has a maximum limit for investment,<br />
determined by the Company’s Credit Committee.<br />
16 - Financial Expenses/Income, Net<br />
Company<br />
Consolidated<br />
____________________________ ____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Financial income<br />
Financial investments............................................................................................... 45,684 42,239 46,699 43,962<br />
Interest received...................................................................................................... 31,265 3,934 29,025 3,962<br />
Monetary variations - assets..................................................................................... 2,410 2,351 2,842 2,351<br />
Foreign exchange variations - assets.......................................................................... (35,422) (81,329) (34,756) (81,329)<br />
Other financial income............................................................................................. 37,380 1,958 38,554 2,002<br />
___________ ___________ ___________ ___________<br />
Total financial income ............................................................................................. ___________<br />
81,317 ___________<br />
(30,847) ___________<br />
82,364 ___________<br />
(29,052)<br />
Financial expenses<br />
Interest on debt....................................................................................................... (180,450) (79,159) (180,231) (79,356)<br />
Monetary variations - liabilities ................................................................................ (18,058) (4,143) (18,464) (4,279)<br />
Foreign exchange variations - liabilities...................................................................... 220,309 274,937 220,342 274,991<br />
Foreign exchange swap - liabilities ........................................................................... (40,741) (275,736) (40,741) (275,736)<br />
Other financial expenses .......................................................................................... (40,397) (9,726) (38,435) (9,793)<br />
___________ ___________ ___________ ___________<br />
Total financial expenses .......................................................................................... (59,337) (93,827) (57,529) (94,173)<br />
___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________<br />
17 - Taxes and Social Contributions Payable<br />
Company<br />
Consolidated<br />
____________________________ ____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Income tax and social contribution on net income....................................................... 138,762 21,792 141,983 21,945<br />
Social charges on payroll.......................................................................................... 46,208 46,759 46,380 47,591<br />
Value-added tax on sales and services (ICMS)............................................................. 32,129 12,563 32,131 12,897<br />
Social contribution on revenues (COFINS)................................................................... 32,485 13,800 32,512 13,904<br />
Excise tax (IPI) ........................................................................................................ 14,114 2,912 14,114 2,966<br />
Social Integration Program (PIS)................................................................................ 6,659 3,575 6,666 3,607<br />
Income tax and social contribution withheld at source................................................. 6,892 2,937 6,912 3,096<br />
Other .................................................................................................................... 10,254 1,025 10,408 1,120<br />
___________ ___________ ___________ ___________<br />
287,503 105,363 291,106 107,126<br />
___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________<br />
18 - Provision for Contingencies<br />
The Company and its subsidiaries are parties in labor, civil, and tax processes. Based on the opinion of its legal advisors, management believes<br />
that the provision for contingencies is sufficient to cover probable and reasonably estimable losses from unfavorable court decisions, and<br />
the final decisions will not have significant effects on the financial position of the Company at December 31, <strong>2004</strong>.
The balances of the contingencies are as follows:<br />
I) Contingent liabilities provided<br />
Company<br />
Consolidated<br />
______________________________ _____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
a) Tax Contingencies<br />
Social contribution on net income.............................................................. (a.1) - 31,660 - 31,660<br />
Corporate income tax............................................................................... (a.1) - 80,887 - 80,887<br />
Emergency Capacity Charge ..................................................................... (a.2) 16,195 743 16,195 768<br />
Extraordinary Tariff Recomposition............................................................. (a.2) 7,754 522 7,754 564<br />
ICMS .................................................................................................... (a.3) 16,201 13,248 16,201 13,248<br />
INSS ..................................................................................................... (a.4) 11,937 4,418 11,937 4,418<br />
FGTS and other tax contingencies.............................................................. (a.5) 1,198 1,273 1,198 1,392<br />
( - ) Judicial deposits................................................................................ (a.6) ____________ (39,012) ____________ (118,252) ____________ (39,012) ____________ (118,326)<br />
14,273 14,499 14,273 14,611<br />
b) Labor contingencies ...................................................................... (b.1) 33,316 13,352 33,316 13,352<br />
( - ) Judicial deposits................................................................................ (b.2) ____________ (1,964) ____________ (1,959) ____________ (1,964) ____________ (1,959)<br />
31,352 11,393 31,352 11,393<br />
c) Civil contingencies......................................................................... (c.1) 7,575 6,704 7,575 6,704<br />
( - ) Judicial deposits................................................................................ (c.2) ____________ (1,207) ____________ (1,063) ____________ (1,207) ____________ (1,063)<br />
____________ 6,368 ____________ 5,641 ____________ 6,368 ____________ 5,641<br />
Total liabilities provided .......................................................................... ____________<br />
51,993 ____________<br />
31,533 ____________<br />
51,993 ____________<br />
31,645<br />
INSS (National Institute of Social Security).<br />
FGTS (Government Severance Indemnity Fund for Employees).<br />
a) Tax Contingencies<br />
a.1) Considering the many legal decisions unfavorable to the unconstitutionality of the limitation of the offset of income tax and social<br />
contribution loss carryforwards to 30% of net income, the Company decided to no longer deposit in court the amounts related to the matter<br />
and requested, in the court injunction records in which it is the petitioner, the conversion of the amounts deposited in court (R$ 338,992) into<br />
tax payments, and started observing the legal limitation. The legal challenge has been maintained; however, in the event the STF reviews its<br />
current guidance and the Company is successful, it will plead the offset of the amounts overpaid.<br />
a.2) R$ 16,195 (Company and consolidated) relating to the Emergency Capacity Charge (ECE), as well as R$ 7,754 (Company and consolidated)<br />
related to the Extraordinary Tariff Recomposition (RTE), included in the electric energy bills of the Company’s plants. According to the<br />
Company, these charges are of a tax nature and, as such, are incompatible with the National Tax System provided in the Federal Constitution.<br />
For this reason, the constitutionality of this charge is being challenged in court. The lawsuits are in progress in the Federal Justice of the First<br />
Instance of the states of Pernambuco, Ceará, Minas Gerais, Rio de Janeiro, São Paulo, Paraná, and Rio Grande do Sul, as well as in the Federal<br />
Regional Courts of the 1 st and 2 nd Regions. The Company has fully deposited in court the amount of the disputed charges.<br />
a.3) R$ 16,201 (Company and consolidated) relating to amounts for Value-added tax on sales and services (ICMS), the majority of which<br />
relates to credit rights involving the Finance Secretariat and the State Courts of the First Instance in the state of Minas Gerais.<br />
a.4) R$ 11,937 (Company and consolidated) refers to lawsuits questioning the position of the National Institute of Social Security (INSS) in<br />
terms of charging INSS contributions on profit sharing payments made by the Company, as well as on payments for services rendered by<br />
third parties, in which the Institute calculated charges for the last ten years and assessed the Company because it understands that the<br />
Company is jointly liable. The assessments were maintained at the administrative level, and the Company filed annulment actions with the<br />
judicial deposits of the related amounts, based on the understanding that the rights to assess part of the charge had prescribed and that<br />
there is no such liability.<br />
a.5) R$ 1,198 (Company and consolidated) relating to a lawsuit regarding the Government Severance Indemnity Fund for Employees (FGTS)<br />
increased charges, which arose from the changes introduced by Complementary Law 110/01. Currently, the corresponding court injunction is<br />
awaiting the judgment of the extraordinary appeal filed by the Company. The amount provided is fully deposited in court.<br />
a.6) The judicial deposits, representing restricted assets of the Company, relate to amounts deposited and maintained in court until the<br />
resolution of the related legal matters. The balances of these credits, which at December 31, <strong>2004</strong> amounted to R$ 39,012 (Company and<br />
consolidated), are classified as a reduction of the provision for tax contingencies recorded in the books.<br />
b) Labor Contingencies<br />
b.1) The Company is also defending labor claims, for which there is a provision of R$ 33,316 at December 31, <strong>2004</strong> (Company and consolidated).<br />
None of these claims refer to individually significant amounts, and the lawsuits mainly involve claims for overtime pay, health hazards and<br />
risk premium, among others.
160 161<br />
GERDAU AÇOMINAS S.A.<br />
b.2) The balances of the deposits in court, which totaled R$ 1,964 at December 31, <strong>2004</strong> (Company and consolidated), are classified as a<br />
reduction of the provision for labor contingencies.<br />
c) Civil Contingencies<br />
c.1) The Company is also defending in court civil claims arising in the normal course of its operations, including at December 31, <strong>2004</strong> claims<br />
arising from work accidents totaling R$ 7,575 (Company and consolidated) as contingent liability for these claims.<br />
c.2) At December 31, <strong>2004</strong>, the balances of deposits in court totaled R$ 1,207 (Company and consolidated) and are classified as a reduction of<br />
the provision for contingencies.<br />
II) Contingent liabilities not provided<br />
a) Tax Contingencies<br />
a.1) <strong>Gerdau</strong> Açominas S.A. is defendant in an assessments filed by the state of Minas Gerais, as well as the petitioner of an annulment action,<br />
relating to the export of semi-finished manufactured products. The total amount demanded is R$ 225,486. The Company has not recorded<br />
any provision for contingency in relation to these claims since it considers this tax is not payable because the products cannot be considered<br />
semi-finished manufactured products as defined by the federal complementary law and, therefore, are not subject to ICMS.<br />
a.2) Also, R$ 68,431 are being demanded due to the understanding of the Federal Revenue Secretariat that the transactions carried out<br />
by the Company, under the drawback concession granted by DECEX, were not in conformity with the legislation. The Company filed a<br />
preliminary administrative defense of the legality of the arrangement, which is pending judgment. Since the tax liability has not been<br />
definitely established, and considering that the arrangement which originated the demand conforms with the assumptions required for the<br />
drawback concession, and also that the concession was granted after analysis by the legal administrative authority, the Company considers<br />
an unfavorable outcome to be remote and, for this reason, has not recorded any provision for the contingency.<br />
b) Civil Contingencies<br />
b.1) A civil lawsuit filed against <strong>Gerdau</strong> Açominas S.A. regarding the termination of a contract for the supply of slag and indemnities for<br />
losses and damages. At December 31, <strong>2004</strong>, the lawsuit amounts to approximately R$ 37,014.<br />
<strong>Gerdau</strong> Açominas S.A. contested all bases for the lawsuit and filed a counterclaim for termination of the contract and indemnity for breach<br />
of contract.<br />
The judge declared the contract to be terminated, since this demand was common to both parties. With regards to the remaining discussion,<br />
the judge understood that both parties were at fault and judged the requests for indemnity unfounded. This decision was maintained by<br />
the Court of Civil Appeals of the State of Minas Gerais (TAMG), and the court decision is based on expert evidence and interpretation of the<br />
contract. The process was in the High Court of Justice (STJ), and returned to the TAMG for judgment of the appeal requesting clarification<br />
of the decision.<br />
The Company believes that any loss from the case is remote, since it understands that a change in the judgment is unlikely.<br />
b.2) A civil lawsuit filed by Sul America Cia Nacional de Seguros against the Company and Banco Westdeustsche Landesbank Girozentrale,<br />
New York Branch (WestLB), for the payment of R$ 34,383 to settle an indemnity claim, which has been deposited in court. The insurance<br />
company pleads doubt in relation to whom payment should be made and alleges that the Company is resisting in receiving and settling<br />
it. The lawsuit was contested both by the Bank (which claims having no right over the amount deposited, which resolves the doubt raised<br />
by Sul América) and by the Company (which claims that there is no such doubt and that there is justification to refuse payment since the<br />
amount owed by Sul América is higher than the amount involved). Subsequently, Sul América claimed fault in the Bank’s representation,<br />
which matter is already settled, which resulted in the withdrawal in December <strong>2004</strong> of the amount deposited. The process should enter the<br />
expert evidence phase, mainly for calculation of the amount due. Based on the opinion of its legal advisors, the Company expects loss to be<br />
remote and that the sentence will declare the amount payable within the amount stated in the pleading.<br />
Also, <strong>Gerdau</strong> Açominas S.A. filed, prior to this lawsuit, a lawsuit for payment of the amount recognized by the insurance companies. The<br />
lawsuits are pending. The Company expects a favorable outcome in this lawsuit.<br />
The civil lawsuits arise from an accident on March 23, 2002 with the blast furnace regenerators of the Ouro Branco steel mill, which resulted<br />
in the stoppage of several activities, with material damages to the steel mill equipment and loss of profits. The equipment, as well as the<br />
loss of profits arising from the accident, were covered by an insurance policy. The report on the event, as well as the loss claim, was filed<br />
with IRB - Brasil Resseguros S.A., and an advance payment of R$ 62,000 was received in 2002.<br />
In 2002, a preliminary and conservative estimate of indemnities related to the coverage of loss of profits and material damages, in the total<br />
amount of approximately R$ 110,000, was recorded, based on the amount of fixed costs incurred during the period of partial stoppage of<br />
the steel mill activities and the immediate expenses to be incurred to recover the equipment temporarily. This estimate approximates the<br />
advance amount received plus the amount proposed by the insurance company as a complement to settle the indemnity. Subsequently, new<br />
amounts were added to the discussion, as stated in the Company’s plea, although not yet recorded.<br />
Based on the opinion of its legal advisors, the Company considers that losses from other contingencies that may affect the results of<br />
operations or the Company’s consolidated financial position are remote.<br />
III) Contingent assets not recorded<br />
a) Tax Contingencies<br />
The Company and its subsidiary Margusa - Maranhão Gusa S.A. expect to recover IPI premium credits. Margusa Maranhão Gusa S.A. has<br />
filed an administrative appeal, which is pending judgment. The Company has filed an injunction requesting the return of credits, which was<br />
judged unfavorably. Currently, the process awaits judgment of the appeal filed by the Company. The Company estimates the credits at<br />
R$ 145,786 (Company) and R$ 160,365 (consolidated) but no accounting recognition has been made thereof because of the uncertainty as to<br />
their realization.
19 - Related Parties<br />
a) Analysis of loan balances<br />
Company<br />
Consolidated<br />
____________________________ ____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
<strong>Gerdau</strong> S.A............................................................................................................. 51,245 22,606 51,245 22,606<br />
Fundação <strong>Gerdau</strong> .................................................................................................... 1,304 16,795 1,304 16,795<br />
Armafer Serviços de Construção Ltda......................................................................... - 652 - -<br />
Seiva S.A. - Florestas e Indústrias.............................................................................. 220 1,657 220 1,657<br />
GTL Brasil Ltda........................................................................................................ - 5,958 - 5,958<br />
Florestal Rio Largo Ltda............................................................................................ (8,302) (4,676) (8,302) (4,676)<br />
Metalúrgica <strong>Gerdau</strong> S.A............................................................................................ 381 (3,390) 381 (3,390)<br />
Açominas Com. Imp. e Export. S.A. - Açotrading......................................................... (13,912) (13,921) - -<br />
GTL Financial Corp................................................................................................... - (173,885) - (173,885)<br />
<strong>Gerdau</strong> Internacional Empreend Ltda. ....................................................................... (23,556) (7) (23,556) (7)<br />
Sipar Aceros S.A. and other....................................................................................... ___________ 798 ___________ 9,902 ___________ 512 ___________ 9,622<br />
TOTAL..................................................................................................................... ___________<br />
8,178 ___________<br />
(138,309) ___________<br />
21,804 ___________<br />
(125,320)<br />
Financial income (expenses)...................................................................................... 41 2,840 (1,017) 2,845<br />
b) Commercial transactions<br />
Company - <strong>2004</strong> Company - 2003<br />
______________________________________________ ______________________________________________<br />
Income/ Accounts Purchases/ Accounts<br />
Sales expenses receivable Sales expenses receivable<br />
<strong>Gerdau</strong> S.A.................................................... - - - 193,020 (5,112) -<br />
Açominas Overseas Ltd. (*).............................. 3,633,608 - 671,485 1,711,861 - 352,549<br />
Armafer Serviços de Construção Ltda. .............. 256 - - 42 - 114<br />
<strong>Gerdau</strong> Laisa S.A. .......................................... 62 - 116 - - 116<br />
<strong>Gerdau</strong> Ameristeel Corporation ....................... - - - 10,506 - -<br />
Sipar Aceros S.A. ........................................... 11 - - 14,337 - 7,509<br />
<strong>Gerdau</strong> AZA.S.A. ............................................ 565 - 105 - - -<br />
Indac - Ind. Adm. e Comércio S.A. (**).............. - (8,154) - - (624) -<br />
(*) Transactions carried out due to securitization operations.<br />
(**) Payments of guarantees of loans.<br />
c) Guarantees granted - The Company is the guarantor of vendor loan agreements of the associated company Banco <strong>Gerdau</strong> S.A., in the total<br />
amount of R$ 68,138 at December 31, <strong>2004</strong>.<br />
20 - Post-Employment Benefits<br />
Considering all types of benefits to employees granted by the Company, the asset and liability positions at December 31 are as follows:<br />
Company<br />
Consolidated<br />
____________________________ ____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Retirement and discharge benefits payable................................................................. ___________ 6,418 ___________ 7,794 ___________ 6,418 ___________ 7,794<br />
Total liabilities........................................................................................................ ___________<br />
6,418 ___________<br />
7,794 ___________<br />
6,418 ___________<br />
7,794<br />
Unrecognized actuarial assets................................................................................... ___________ 161,240 ___________ 121,862 ___________ 161,240 ___________ 121,154<br />
a) Pension plan - defined benefit<br />
The Company and its subsidiaries are the co-sponsors of defined benefit pension plans that cover substantially all employees (“Açominas<br />
Plan” and “<strong>Gerdau</strong> Plan”).<br />
The Açominas Plan is managed by Fundação Açominas de Seguridade Social - Aços, a closed supplementary pension entity to complement<br />
the social security benefits of employees and retired employees of the Ouro Branco unit. The assets of the Açominas Plan mainly comprise<br />
investments in bank deposit certificates, federal public securities, marketable securities and properties.<br />
The <strong>Gerdau</strong> Plan is managed by <strong>Gerdau</strong> - Sociedade de Previdência Privada, a closed supplementay pension entity to complement the social<br />
security benefits of employees and retired employees of the other units of <strong>Gerdau</strong> Açominas S.A. The assets of the <strong>Gerdau</strong> Plan comprise<br />
investments in bank deposit certificates, federal public securities and marketable securities.
162 163<br />
GERDAU AÇOMINAS S.A.<br />
The sponsors’ contributions to these pension plans were R$ 12,911 in <strong>2004</strong> and R$ 8,784 in 2003 for the Company and R$ 12,957 in <strong>2004</strong> and<br />
R$ 8,828 in 2003 consolidated.<br />
Current expenses of the defined pension plan are as follows:<br />
Company<br />
Consolidated<br />
____________________________ ____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Cost of current service............................................................................................. 20,364 11,365 20,511 11,443<br />
Interest cost............................................................................................................ 64,749 34,200 65,213 34,287<br />
Expected return of plan assets.................................................................................. (104,382) (51,170) (105,145) (51,220)<br />
Amortization of (gain) loss ....................................................................................... (3,157) (873) (3,224) (873)<br />
Employees’ expected contribution.............................................................................. (4,383) (3,576) (4,383) (3,576)<br />
___________ ___________ ___________ ___________<br />
Pension plan cost (benefit), net................................................................................. (26,809) (10,054) (27,028) (9,939)<br />
___________ ___________ ___________ ___________<br />
___________ ___________ ___________ ___________<br />
The reconciliation of the assets and liabilities of the plans is presented below:<br />
Company<br />
Consolidated<br />
____________________________ ____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Total liabilities........................................................................................................ (620,166) (527,213) (620,166) (527,977)<br />
Fair value of plan assets........................................................................................... ___________ 873,050 ___________ 771,482 ___________ 873,050 ___________ 771,985<br />
Net assets............................................................................................................... 252,884 244,269 252,884 244,008<br />
Unrecognized (gains) losses...................................................................................... (102,021) (122,407) (102,021) (122,754)<br />
Past service costs..................................................................................................... ___________ 10,377 ___________- ___________ 10,377 ___________-<br />
Total assets, net...................................................................................................... ___________<br />
161,240 ___________<br />
121,862 ___________<br />
161,240 ___________<br />
121,254<br />
Changes in plan assets and actuarial liabilities were as follows:<br />
Company<br />
Consolidated<br />
____________________________ ____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Changes in benefit liabilities<br />
Benefit liabilities at the beginning of the year............................................................. 527,213 333,903 527,977 334,756<br />
Cost of service........................................................................................................ 20,364 11,365 20,511 11,443<br />
Interest cost............................................................................................................ 64,749 34,200 65,213 34,287<br />
Actuarial loss.......................................................................................................... 11,474 57,198 10,962 56,944<br />
Payment of benefits................................................................................................. (14,874) (12,474) (14,874) (12,474)<br />
Past service costs due to changes in the plan.............................................................. 10,171 - 10,377 -<br />
Effect of merger/operational integration..................................................................... ___________ 1,069 ___________ 103,021 ___________- ___________ 103,021<br />
Benefit liabilities at the end of the year..................................................................... ___________<br />
620,166 ___________<br />
527,213 ___________<br />
620,166 ___________<br />
527,977<br />
Company<br />
Consolidated<br />
____________________________ ____________________________<br />
<strong>2004</strong> 2003 <strong>2004</strong> 2003<br />
Changes in plan assets<br />
Fair value of plan assets at the beginning of the year.................................................. 771,482 499,627 771,985 500,079<br />
Return on plan assets............................................................................................... 97,530 120,249 97,780 120,256<br />
Sponsor contributions.............................................................................................. 12,911 8,784 12,957 8,828<br />
Participant contributions.......................................................................................... 5,202 4,232 5,202 4,232<br />
Payment of benefits................................................................................................. (14,874) (12,474) (14,874) (12,474)<br />
Effect of merger/operational integration..................................................................... ___________ 799 ___________ 151,064 ___________- ___________ 151,064<br />
Fair value of plan assets at the end of the year........................................................... ___________<br />
873,050 ___________<br />
771,482 ___________<br />
873,050 ___________<br />
771,985
As a result of the operational integration on November 28, 2003, the assets and liabilities of the <strong>Gerdau</strong> Plan, related to the employees<br />
transferred to <strong>Gerdau</strong> Açominas S.A., were allocated to the Açominas Plan, and the Supplementary Social Security Secretariat approved the<br />
addition of <strong>Gerdau</strong> Açominas S.A. as a sponsor of the Retirement and Supplementary Retirement Plans managed by <strong>Gerdau</strong> - Sociedade de<br />
Previdência Privada.<br />
The method for calculating the actuarial liability is the Projected Unit Credit Method, as determined by CVM Deliberation 371/2000.<br />
The amount of the actuarial gains and losses to be recognized as income or expense is the unrecognized amount that exceeds, in each<br />
period, the higher of the following limits: (i) 10% of the present value of the total actuarial liability of the defined benefit plan and (ii) 10% of<br />
the fair value of the plan assets. The resulting amount will be amortized annually based on the average remaining years of service estimated<br />
for the employees that participate in the plan.<br />
The table below shows a summary of the assumptions made to calculate and record the defined benefit plan for both the Company and<br />
consolidated:<br />
<strong>Gerdau</strong> plan<br />
Açominas plan<br />
Average discount rate ............................................................................................. 11.30% 11.30%<br />
Increase in compensation ........................................................................................ 9.20% 8.675%<br />
Expected rate of return on assets ............................................................................. 12.35% 12.35%<br />
Mortality chart ....................................................................................................... GAM 83 (-1 year) AT-83<br />
Disabled mortality chart........................................................................................... RRB 1944 AT-83<br />
Turnover rate........................................................................................................... Based on service Null<br />
and salary level<br />
b) Pension plan - defined contribution<br />
The Company and its subsidiaries are also the co-sponsors of a defined contribution pension plan administered by <strong>Gerdau</strong> - Sociedade de<br />
Previdência Privada. Contributions are based on a percentage of the compensation of employees. The total cost of this plan was R$ 2,661 in<br />
<strong>2004</strong> and R$ 181 in 2003 for the Company and R$ 2,682 in <strong>2004</strong> and R$ 195 in 2003 consolidated.<br />
c) Other post-employment benefits<br />
The Company estimates that the amounts payable to executives on their retirement or discharge totals R$ 6,418 (Company and consolidated<br />
at December 31, <strong>2004</strong>, (R$ 7,794 in 2003 - Company and consolidated).<br />
21 - Shareholders’ Equity<br />
a) Capital - authorized capital at December 31, <strong>2004</strong> comprises 200,000,000 common shares (200,000,000 at December 31, 2003) and<br />
200,000,000 preferred shares (100,000,000 at December 31, 2003), with no par value.<br />
At December 31, <strong>2004</strong>, 158,633,709 common shares (158,633,709 at December 31, 2003) and 17,798 preferred shares (17,798 at December 31,<br />
2003) are subscribed and paid-up, totaling R$ 2,340,576 (R$ 2,340,576 at December 31, 2003). Preferred shares do not have voting rights and<br />
cannot be redeemed, but have the same rights as common shares in terms of profit sharing.<br />
b) Interest on equity and dividends - the Company calculated interest on equity in accordance with the terms established by Law 9249/95.<br />
The corresponding amount was recorded as financial expenses for tax purposes. For presentation purposes, this amount was recorded as<br />
dividends, not affecting net income. The related tax benefit through the reduction of the income tax and social contribution on net income<br />
charge for the year was R$ 101,761. Shareholders are entitled to receive, each year, a minimum mandatory dividend of 30% of adjusted net<br />
income.<br />
The amount of interest on equity and dividends credited for the year was R$ 938,662, shown as follows:<br />
<strong>2004</strong> 2003<br />
Net income for the year..................................................................................................................................................... 2,483,483 849,843<br />
Realization of revaluation reserve....................................................................................................................................... - 7,395<br />
Transfer to legal reserve.................................................................................................................................................... ___________ (124,174) ___________ (42,492)<br />
Adjusted net income......................................................................................................................................................... ___________<br />
2,359,309 ___________<br />
814,746
164 165<br />
GERDAU AÇOMINAS S.A.<br />
Distributions during the year<br />
Period Nature R$/share Credit Payment <strong>2004</strong> 2003<br />
1 st quarter........................................................................ Interest 0.48 03/30/<strong>2004</strong> 05/18/<strong>2004</strong> 75,915 -<br />
Dividends 0.17 03/30/<strong>2004</strong> 05/18/<strong>2004</strong> 27,288 -<br />
2 nd quarter....................................................................... Interest 0.47 06/30/<strong>2004</strong> 08/17/<strong>2004</strong> 74,884 -<br />
Dividends 0.85 06/30/<strong>2004</strong> 08/17/<strong>2004</strong> 134,536 -<br />
3 rd quarter....................................................................... Interest 0.94 07/31/<strong>2004</strong> 11/17/<strong>2004</strong> 148,498 -<br />
Dividends 1.08 11/03/<strong>2004</strong> 11/17/<strong>2004</strong> 171,344 -<br />
4 th quarter....................................................................... Dividends 1.93 02/11/2005 02/22/2005 _________ 306,197 _________ 283,986<br />
Interest on equity and dividends......................................... _________<br />
938,662 _________<br />
283,986<br />
% interest/dividends paid or credited.................................. 40% 35%<br />
Credit per share (R$)......................................................... 5.92 1.79<br />
Outstanding shares (thousands)......................................... 158,651 158,651<br />
The remaining income for the year was transferred to the statutory reserve for investments and working capital in accordance with the by-laws.<br />
c) Reserve for tax incentives<br />
The Company recorded a reserve for tax incentives in the amount of R$ 190,905 due to the reduction of income tax on the exploitation profit<br />
of the units located in the Northeastern region of Brazil, as well as benefits arising from state tax financing.<br />
22 - Calculation of EBITDA<br />
Consolidated<br />
____________________________<br />
<strong>2004</strong> 2003<br />
Gross profit...................................................................................................................................................................... 4,240,415 999,967<br />
Selling expenses............................................................................................................................................................... (400,301) (94,702)<br />
General and administrative expenses.................................................................................................................................. (645,510) (174,040)<br />
Depreciation and amortization........................................................................................................................................... ___________ 492,433 ___________ 148,450<br />
EBITDA............................................................................................................................................................................ ___________<br />
3,687,037 ___________<br />
879,675<br />
23 - Other Operating Income (Expenses), Net<br />
The amount recorded as operating income (expenses), net mainly refers to the recognition of R$ 102,449 (Company and consolidated)<br />
arising from the favorable outcome obtained in the lawsuit regarding PIS incorrectly paid.<br />
24 - Statutory Profit Sharing<br />
a) The management profit sharing is limited to 10% of net income for the year, after income tax and management fees, as stated in the<br />
Company’s by-laws;<br />
b) The employees’ profit sharing is linked to the attainment of operating goals and was charged to cost of production and general and<br />
administrative expenses, as applicable.
Board of Directors<br />
Chairman<br />
JORGE GERDAU JOHANNPETER<br />
Vice Chairmen<br />
GERMANO H. GERDAU JOHANNPETER<br />
KLAUS GERDAU JOHANNPETER<br />
FREDERICO C. GERDAU JOHANNPETER<br />
CARLOS JOÃO PETRY<br />
Board Member<br />
MARCO ANTÔNIO PEPINO<br />
Secretary General<br />
EXPEDITO LUZ<br />
EXECUTIVE COMMITTEE<br />
President<br />
JORGE GERDAU JOHANNPETER<br />
Vice Presidents<br />
FREDERICO C. GERDAU JOHANNPETER,<br />
Senior Vice President<br />
ANDRÉ BIER JOHANNPETER<br />
CLAUDIO JOHANNPETER<br />
OSVALDO BURGOS SCHIRMER<br />
DOMINGOS SOMMA<br />
FILIPE AFFONSO FERREIRA<br />
RICARDO GEHRKE<br />
Secretary General<br />
EXPEDITO LUZ<br />
Sérgio Braz Domingues<br />
Accountant<br />
CRC RS No. 27.466 - S - MG<br />
CPF No. 204.819.850-34<br />
Corporate Officers<br />
ALFREDO HUALLEM<br />
ANDRÉ FELIPE GUEIROS REINAUX<br />
ANDRÉ PIRES DE OLIVEIRA DIAS<br />
CLÁUDIO MATTOS ZAMBRANO<br />
DIRCEU TARCÍSIO TOGNI<br />
ÉRICO TEODORO SOMMER<br />
EXPEDITO LUZ<br />
FLADIMIR BATISTA LOPES GAUTO<br />
FRANCISCO DEPPERMANN FORTES<br />
GERALDO TOFFANELLO<br />
GERSON MARCOS VENZON<br />
GUILHERME CHAGAS GERDAU JOHANNPETER<br />
HEITOR LUIS BENINCA BERGAMINI<br />
JOAQUIM DE SOUZA GOMES<br />
JOAQUIM GUILHERME BAUER<br />
JOÃO APARECIDO DE LIMA<br />
JOÃO CARLOS SALIN GONÇALVES<br />
JOSÉ MAURÍCIO WERNECK GUIMARÃES DA SILVA<br />
JULIO CARLOS LHAMBY PRATO<br />
LUIZ ALBERTO MORSOLETTO<br />
LUIZ ANDRÉ RICO VICENTE,<br />
Vice President on <strong>Gerdau</strong> Açominas<br />
LUIZ AUGUSTO POLACCHINI<br />
MANOEL VÍTOR DE MENDONÇA FILHO<br />
NESTOR MUNDSTOCK<br />
OMAR DE OLIVEIRA FANTONI<br />
PAULO RICARDO TOMAZELLI<br />
PAULO ROBERTO PERLOTT RAMOS<br />
RUY LOPES FILHO<br />
SIRLEU JOSÉ PROTTI<br />
TADEU PETTERLE
166 167<br />
GERDAU AÇOMINAS S.A.<br />
<strong>Report</strong> of Independent Auditors<br />
To the Board of Directors and Shareholders<br />
<strong>Gerdau</strong> Açominas S.A.<br />
1. We have audited the accompanying balance sheets of <strong>Gerdau</strong> Açominas S.A. and the consolidated balance sheets<br />
of <strong>Gerdau</strong> Açominas S.A. and its subsidiaries as of December 31, <strong>2004</strong> and 2003, and the related statements of<br />
income, of changes in shareholders’ equity and of changes in financial position of <strong>Gerdau</strong> Açominas S.A., as well<br />
as the related consolidated statements of income and of changes in financial position, for the years then ended.<br />
These financial statements are the responsibility of the Company’s management. Our responsibility is to express<br />
an opinion on these financial statements.<br />
2. We conducted our audits in accordance with approved Brazilian auditing standards, which require that we<br />
perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented in<br />
all materials respects. Accordingly, our work included, among other procedures: (a) planning our audit taking into<br />
consideration the significance of balances, the volume of transactions and the accounting and internal control<br />
systems of the companies; (b) examining, on a test basis, evidence and records supporting the amounts and disclosures<br />
in the financial statements, and (c) assessing the accounting practices used and significant estimates<br />
made by management, as well as evaluating the overall financial statement presentation.<br />
3. In our opinion, the financial statements audited by us present fairly, in all material respects, the financial<br />
position of <strong>Gerdau</strong> Açominas S.A. and of <strong>Gerdau</strong> Açominas S.A. and its subsidiaries at December 31, <strong>2004</strong> and<br />
2003, and the results of operations, the changes in shareholders’ equity and the changes in financial position of<br />
<strong>Gerdau</strong> Açominas S.A., as well as the consolidated results of operations and of changes in financial position, for<br />
the years then ended, in accordance with accounting practices adopted in Brazil.<br />
4. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as<br />
a whole. The statement of cash flows is presented for purposes of additional analysis and is not a required part<br />
of the basic financial statements. This information has been subjected to the auditing procedures applied in the<br />
audit of the basic financial statements and, in our opinion, is fairly presented in all material respects in relation<br />
to the financial statements taken as a whole.<br />
Porto Alegre, March 4, 2005<br />
Auditores Independentes<br />
CRC 2SP000160/O-5 “F” MG<br />
Carlos Alberto de Sousa<br />
Accountant CRC 1RJ056561/O-0 - “S” MG
Services to Analysts and Investors<br />
I n v e s t m e n t a n a l y s t s a n d c a p i t a l m a r k e t<br />
institutions may obtain additional information<br />
and copies of this report by contacting the Office<br />
of Investor Relations at:<br />
Av. Farrapos, 1811<br />
CEP 90220-005 – Porto Alegre, RS<br />
Brazil<br />
Phone: +55 (51) 3323.2703<br />
Fax: +55 (51) 3323.2281<br />
Website: www.gerdau.com.br/ri<br />
E-mail: inform@gerdau.com.br<br />
Analysts and investors of <strong>Gerdau</strong> Ameristeel Corp.<br />
must contact the Office of Investor Relations at<br />
the following address:<br />
4221 W. Boy Scout Blvd. – Suite 600<br />
Tampa, FL 33607 – U.S.A.<br />
Phone: +1 (813) 207.2300<br />
Website: www.gerdauameristeel.com<br />
E-mail: ir@gerdauameristeel.com<br />
Shareholder Services<br />
Book-entry shares issued by the listed companies<br />
are held at Banco Itaú S. A. at the following<br />
address:<br />
Superintendência de Serviços para Empresas<br />
Av. Engenheiro Armando de Arruda Pereira, 707<br />
Jabaquara<br />
CEP 04344-902 – São Paulo, SP<br />
Brazil<br />
Phone: +55 (11) 5029.7780<br />
Fax: +55 (11) 5029.1917<br />
For the purposes of exercising rights or obtaining<br />
information concerning the status of shares,<br />
please refer to any branch of the Depositary<br />
Institution (Banco Itaú) or contact Shareholder<br />
Relations at <strong>Gerdau</strong>:<br />
Av. Farrapos, 1811<br />
CEP 90220-005 – Porto Alegre, RS<br />
Brazil<br />
Phone: +55 (51) 3323.2211<br />
Fax: +55 (51) 3323. 2281<br />
Toll free: 0800 702 2001<br />
E-mail: acionistas@gerdau.com.br
Corporate Communications<br />
Av. Farrapos, 1811<br />
CEP 90220-005 - Porto Alegre, RS<br />
Brazil<br />
Phone: +55 (51) 3323.2151<br />
Fax: +55 (51) 3323.2295<br />
gerdau@gerdau.com.br<br />
www.gerdau.com.br<br />
Writing and Coordination<br />
<strong>Gerdau</strong> Group Corporate Communications<br />
Graphic Design and Production Supervision<br />
GAD’ Design<br />
Printing<br />
Impresul Serviço Gráfico e Editora Ltda.<br />
Translation<br />
Scientific Linguagem<br />
Photo Credits<br />
Conception and production of images on the cover and pages 18, 44 and 56: SLM Ogilvy<br />
<strong>Gerdau</strong> archive (pages 41, 53, 54, 55, 64, 65, 66, 67)<br />
Junior Achievement archive (page 51)<br />
Ary Diesendruck (pages 43, 67)<br />
Carlos Alberto Pereira (page 63)<br />
Carlos Levitanus (page 64)<br />
Cláudio Meneghetti (page 18)<br />
Eliana Pereira (page 32)<br />
Eneida Serrano (pages 52, 67)<br />
Felipe Hellmeister (cover, pages 44, 56)<br />
Flávio Luiz Russo (pages 5, 8, 40, 46, 51, 58, 62, 64, 65)<br />
GH Digital (pages 35, 36, 48)<br />
Juliana Maria Carniel (page 63)<br />
Leonid Streliaev (pages 9, 12, 31, 47)<br />
Luis Fernando Arenas (page 41)<br />
Lya Huguet (pages 53, 61)<br />
Mathias Cramer (pages 6, 59)<br />
Matías del Campo (page 49)<br />
New York Stock Exchange, Inc. (page 24)<br />
Osmar de Souza Raposo (page 63)<br />
Rodrigo Antônio Moreira (page 52)<br />
Rosangela Reitz (page 35)<br />
Rudolph Lopez (page 38)<br />
Paper<br />
High whiteness produced by Cia. Suzano from cultivated trees.<br />
Print Run<br />
3,800 copies in Brazilian Portuguese and 1,000 copies in English.<br />
We would like to thank all of those who contributed by supplying information and images for<br />
this publication.<br />
Porto Alegre, May 2005.
<strong>2004</strong> GERDAU <strong>Annual</strong> <strong>Report</strong><br />
Brazil<br />
gerdau@gerdau.com.br<br />
Canada and the United States<br />
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