U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number 1-14878
GERDAU S.A.
(Exact Name of Registrant as Specified in its Charter)
Federative Republic of Brazil
(Jurisdiction of Incorporation or Organization)
N/A
(Translation of Registrant's name into English)
Av. Farrapos 1811
Porto Alegre, Rio Grande Do Sul - Brazil CEP 90220-005
(Address of principal executive offices) (Zip code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange in
------------------- Which Registered
-------------------------
Preferred Shares, no par value per share,
each represented by American Depositary Shares New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None
The total number of issued shares of each class of stock of GERDAU S.A. as
of December 31, 2002 was:
39,590,941,783 Common Shares, no par value per share
74,527,528,780 Preferred Shares, no par value per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
Indicate by check mark which financial statement item the Registrant has
elected to follow Item 17 Item 18 [X] .
TABLE OF CONTENTS
Page
INTRODUCTION........................................................................... 2
GLOSSARY............................................................................... 3
PART I................................................................................. 6
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.................. 6
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE................................ 6
ITEM 3. KEY INFORMATION........................................................ 6
ITEM 4. INFORMATION ON THE COMPANY............................................. 17
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS........................... 53
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES............................. 64
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...................... 74
ITEM 8. FINANCIAL INFORMATION.................................................. 75
ITEM 9. THE OFFER AND LISTING.................................................. 81
ITEM 10. ADDITIONAL INFORMATION................................................ 86
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............ 92
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES................ 94
PART II................................................................................ 95
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELIQUENCIES........................ 95
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS......................................................... 96
ITEM 15. CONTROLS AND PROCEDURES............................................... 96
ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERT...................................... 96
PART III............................................................................... 97
ITEM 17. FINANCIAL STATEMENTS.................................................. 97
ITEM 18. FINANCIAL STATEMENTS.................................................. 97
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS..................................... 97
CERTIFICATION OF CEO AND CFO
i
INTRODUCTION
Unless otherwise indicated, all references herein (i) to the "Company" or
to "Gerdau" are references to Gerdau S.A., a corporation organized under the
laws of the Federative Republic of Brazil ("Brazil") and its consolidated
subsidiaries, (ii) to "Gerdau non-consolidated" are references to the Brazilian
operations of the Company except Acominas which are carried out directly by
Gerdau S.A. and numerical and financial information for Gerdau non-consolidated
refers exclusively to Gerdau S.A. on a non-consolidated basis and, (iii) to
"Preferred Shares" and "Common Shares" refer to the Company's authorized and
outstanding preferred stock and common stock, designated as acoes preferenciais
and acoes ordinarias, respectively, each without par value. All references
herein to the "real," "reais" or "R$" are to the Brazilian real, the official
currency of Brazil. All references to (i) "U.S. dollars," "dollars" or "U.S.$"
are to United States dollars, (ii) "Canadian dollars" or "Cdn$" are to Canadian
dollars (iii) "billions" are to thousands of millions, (iii) "km" are to
kilometers, and (iv) "tons" denote metric tons. All references herein related to
the subsidiary companies in North America correspond to the new legal names of
these companies after the merger with Co-Steel and subsequent change in names:
Ameristeel Corp. has been renamed to Gerdau AmeriSteel US Inc. ("AmeriSteel"),
Courtice Steel Inc. has been renamed to Gerdau AmeriSteel Cambridge Inc.
("Cambridge") and Gerdau MRM Steel Inc. is now named Gerdau AmeriSteel MRM
Special Section Inc.
The Company has prepared the consolidated financial statements included
herein in conformity with accounting principles generally accepted in the United
States ("U.S. GAAP"). The investments in Sipar Aceros S.A. in Argentina (a 38%
investment) and those of Gallatin Steel Co. in the United States, where Gerdau
Ameristeel holds 50% of the total capital, are not consolidated but accounted
for under the equity method of accounting in such consolidated financial
statements.
Unless otherwise indicated, all information in this Annual Information Form
is given as at December 31st, 2002. Subsequent developments are discussed in
Item 8 - Significant changes.
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
Statements made in this annual report with respect to the Company's current
plans, estimates, strategies and beliefs and other statements that are not
historical facts are forward-looking statements about the Company's future
performance. Forward-looking statements include but are not limited to those
using words such as "believe", "expect", "plans", "strategy", "prospects",
"forecast", "estimate", "project", "anticipate", "may" or "might" and words of
similar meaning in connection with a discussion of future operations or
financial performance. From time to time, oral or written forward-looking
statements may also be included in other materials released to the public. These
statements are based on management's assumption's and beliefs in light of the
information currently available to it. The Company cautions you that a number of
important risks and uncertainties could cause actual results to differ
materially from those discussed in the forward-looking statements, and therefore
you should not place undue reliance on them. You also should not rely on any
obligation of the Company to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. The Company
disclaims any such obligation. Risks and uncertainties that might affect the
Company include, but are not limited to, (i) general economic conditions in the
Company's markets, particularly levels of spending; (ii) exchange rates,
particularly between the real and the U.S. dollar, and other currencies in which
the Company makes significant sales or in which its assets and liabilities are
denominated; and (iii) the outcome of contingencies.
2
GLOSSARY
A$ or Argentinean pesos Currency of Argentina - Pesos
Acominas Aco Minas Gerais S.A. - Acominas
ADR American Depositary Receipt
AmeriSteel Gerdau AmeriSteel US Inc.
ANEEL National electric power agency (Agencia Nacional Energia Eletrica)
Armafer Fabrication shop in Brazil - Armafer Servicos de Construcao Ltda.
BACEN Brazilian Central Bank (Banco Central do Brasil)
Banco Gerdau Banco Gerdau S.A. - Financial institution controlled by Metalurgica
Gerdau S.A.
BCCH Chilean Central Bank
BNDES National bank for social and economic develpoment (Banco Nacional do
Desenvolvimento Economico e Social)
Bovespa Sao Paulo Stock Exchange (Bolsa de Valores de Sao Paulo)
Bovespa Fix Debenture trading system of Bovespa
Brazilian Corporate Law Law number 6,404/76 and complements
Brazilian GAAP Accounting Practices Adopted in Brazil
CADE Administrative Council for Economic Defense (Conselho Administrativo
de Defesa Economica)
Canadian Dollar Canadian Currency
CBLC Bovespa's clearing house (Companhia Brasileira de Liquidacao e
Custodia)
Cd$ Canadian Currency - Canadian dollar
CDI Interbank deposit rates (Certificado de Deposito Interbancario)
Central Bank Brazilian Central Bank (Banco Central do Brasil)
Clps$ or Chilean pesos Currency of Chile - Pesos
CIF Cost, Insurance and Freight
CMR Reference Basket of Currencies in Chile
COFINS Tax for Social Security Financing (Contribuicao para o Financiamento
da Seguridade Social)
Comercial Gerdau Gerdau's retail arm in Brazil. Comercial Gerdau Ltda. - Merged into
Gerdau S.A.
Common shares Ordinary shares with voting right.
Cosinor Companhia Siderurgica do Nordeste. Merged into by Metalurgica Gerdau
S.A.
CPMF Provisional Contribution on Financial Activities (Contribuicao
Provisoria sobre Movimentacao Financeira)
CSN Companhia Siderurgica Nacional
CST Companhia Siderurgica de Tubarao
CVM Brazilian Securities Commission (Comissao de Valores Mobiliarios)
DFESA Dona Francisca Energetica S.A.
Dollar US Currency
DRI plant Able to produce sponge iron to be used in its crude steel production
using iron ore and charcoal as its main raw materials
EAF Electric Arc Furnace
Eletrobras State-owed utility holding company. Brasilian Eletricity Company
(Centrais Eletricas Brasileiras S.A. - Eletrobras)
FINSOCIAL Social Investment fund (Fundo de Investimento Social)
FOB Free on board
3
FUNRURAL Rural Workers' Assistance Fund (Contribuicao ao Fundo de
Assistencia ao Trabalhador Rural)
GDP Gross Domestic Product
Gerdau Aconorte Siderurgica Aconorte S.A.- Merged into Gerdau S.A.
Gerdau Acos Finos Piratini Gerdau Acos Finos Piratini S.A. - Merged into Gerdau S.A.
Gerdau AmeriSteel Gerdau AmeriSteel Corporation.
Gerdau AmeriSteel Cambridge Gerdau AmeriSteel Cambridge Inc. (former Gerdau Courtice Steel Inc.)
Gerdau AmeriSteel MRM Special Gerdau AmeriSteel MRM Special Sections Inc. (former Gerdau MRM Steel
Sections Inc.)
Gerdau AmeriSteel Perth Amboy Gerdau AmeriSteel Perth Amboy Inc.
Gerdau AmeriSteel Sayreville Gerdau AmeriSteel Sayreville Inc.
Gerdau AZA Gerdau Aza S.A.
Gerdau Cosigua Companhia Siderurgica da Guanabara - Cosigua (today Gerdau S.A.)
Gerdau Laisa Gerdau Laisa S.A
Gerdau Metalicos Unit of Gerdau S.A responsible for steel scrap purchasing
Gerdau Previdencia Privada Gerdau S.A. pension plan administrator
Gerdau Usiba Usina Siderurgica da Bahia S.A. - Merged into Gerdau S.A.
IBS Brazilian Steel Institute (Instituto Brasileiro de Siderurgia)
ICMS State Value Added Tax on Sales and Services (Imposto sobre
Circulacao de Mercadorias e Servicos)
IGP-M General Market Price Index (Indice Geral de Precos de Mercado -
IGP-M)
IISI International Iron and Steel Institute
IMF International Monetary Fund
INDAC INDAC - Industria Comercio e Administracao S.A. - Holding company
that controls Metalurgica Gerdau S.A.
INPC National Index for Consumer Prices (Indice Nacional de Precos ao
Consumidor - INPC)
INSS National Institute of Social Security (INSS). Social security
contributions levied on employees payroll (Contribuicoes
Previdenciarias)
IPCA National Extended Consumer Price Index (Indice Nacional de precos ao
Consumidor Amplo - IPCA)
IRPJ Corporate Income Tax (Imposto de Renda Pessoa Juridica - IRPJ)
Latibex Segment of Madrid Stock Exchange listing Latin American companies
MAE A private non-profit institution, created under ANEEL<180>s rules,
responsible for electric energy purchase and sale transactions.
(Mercado Atacadista de Energia Eletrica - MAE)
Mandatory Dividend Minimum dividend that must be paid as per Company's bylaw.
MCF Formal Exchange Market in Chile
MCI Informal Exchange Market in Chile
MP Provisional measure (Medida Provisoria)
OEM Original Equipment Manufacturer
OTC Over-the-counter market
Pains Companhia Siderurgica Pains. - Merged into Gerdau S.A.
Peso/ Pesos Currency of Argentina, Uruguay and Chile
Petrobras Brasilian Petroleum Company (Petroleo Brasileiro S.A. - PETROBRAS)
PFIC Passive Foreign Investment Comapny
PGQ Gerdau's quality program (Programa Gerdau de Qualidade)
PIB Brazilian gross domestic product (Produto Interno Bruto)
4
PIS Contribution to employees' profit participation program (Programa de
Integracao Social - PIS)
Preferred shares Preferred shares without voting right
Programa Metas Goal Program
QEF Qualified electing fund
R$, real or reais Brazilian Currency - real
RAC Additional contracted remuneration (Remuneracao Adicional Contratada)
Real Plan Brazil's latest economic stabilization plan
SDE Economic Law Department (Secretaria de Direito Economico - SDE)
SEAE Economic Surveillance Department of the Ministry of Finance
(Secretaria de Acompanhamento Economico - SEAE)
SEC Securities and Exchange Commission
Seiva Seiva S.A. Florestas e Industrias
Siderbras Former Brazilian Federal Government Steel Holding
Sipar Sipar Aceros S.A.
Sipsa Sociedad Industrial Puntana S.A
TJLP Long-Term Interest Rate (Taxa de Juros a Longo Prazo)
Tons Metric tons
TR Referencial Rate (Taxa Referencial)
UFIR Fiscal reference unit (Unidade Fiscal de Referencia)
US$ or dollar or United States US Currency - dollar
dollar
USGAAP Generally Accepted Accounting Principals in the United States
Uy$ or Uruguayan pesos Currency of Uruguay - Pesos
5
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable, as the Company is filing this Form 20-F as an annual
report.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable, as the Company is filing this Form 20-F as an annual
report.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
U.S. GAAP PRESENTATION
The selected financial information for the Company included in the
following table should be read in conjunction with, and is qualified in its
entirety by, the U.S. GAAP financial statements of the Company and "Operating
and Financial Review and Prospects" appearing elsewhere herein. The consolidated
financial data for the Company as of December 31, 2002, 2001 and 2000, are
derived from the U.S. GAAP financial statements included elsewhere herein.
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
STATEMENT OF INCOME DATA: 2002 2001 2000 1999 1998
------------- -------------- ------------- -------------- --------------
Net sales 3,264,926 2,401,138 2,771,376 1,760,693 1,969,236
Cost of sales (2,349,636) (1,722,228) (2,059,015) (1,141,076) (1,399,354)
------------- -------------- ------------- -------------- --------------
Gross profit 915,290 678,910 712,361 619,617 569,882
Sales and marketing expenses (112,645) (105,801) (112,195) (86,007) (101,386)
General and administrative expenses (221,895) (181,108) (213,143) (157,755) (175,457)
------------- -------------- ------------- -------------- --------------
Operating income 580,750 392,001 387,023 375,855 293,039
Interest expense and exchange loss (424,147) (238,269) (243,477) (222,414) (151,739)
Interest income 100,350 55,002 57,324 64,166 86,897
Other non-operating income (expense) (18,178) (7,853) 2,165 5,196 18,798
Equity pickup on non-consolidated company (10,057) 18,324 33,962 (4,903) -
------------- -------------- ------------- -------------- --------------
Income before income taxes and minority 228,718 219,205 236,997 217,900 246,995
interest
Provision for income taxes:
Current (27,065) (40,981) (36,725) (17,456) (38,460)
Deferred 20,507 (13,666) (8,899) (3,080) (13,843)
------------- -------------- ------------- -------------- --------------
Income before minority interest 222,160 164,558 191,373 197,364 194,692
Minority interest 9,667 2,795 (2,815) 328 (844)
------------- -------------- ------------- -------------- --------------
Net income available to common and
preferred shareholders 231,827 167,353 188,558 197,692 193,848
============= ============== ============= ============== ==============
Basic earnings per shares (i)
Common 1.57 1.06 1.20 1.27 1,24
Preferred 1.57 1.17 1.32 1.38 1,40
Diluted earnings per shares (i)
Common 1.57 1.06 1.20 1.27 1,24
Preferred 1.57 1.17 1.31 1.37 1,39
Cash dividends declared per shares (i)
Common 0.52 0.45 0.42 0.35 0.25
Preferred 0.52 0.50 0.46 0.38 0.28
Number of common shares outstanding at 39,590,941,783 39,382,020,386 33,070,107,530 19,691,010,193 19,691,010,193
year-end (ii) ============== ============== ============== ============== ==============
Number of preferred shares outstanding at 74,527,528,780 74,109,685,986 74,109,685,986 37,054,842,993 37,054,813,723
year-end (ii) ============== ============== ============== ============== ==============
6
(i) Per share information has been retroactively restated to reflect in
all periods presented the effect of: (a) the 2 for 1 split approved in
April 2000, (b) the bonus of 3 shares per each 10 shares hold approved
in April 2003, and (c) the reverse stock split of 1 share per 1,000
share hold approved in April 2003
(ii) The information in quantity of shares presented above is as of the end
of each year and has not been modify to reflect the modification in
quantity of shares due to the decisions indicated in (i) above.
AS OF DECEMBER 31,
---------------------------------------------------------------
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
BALANCE SHEET DATA: 2002 2001 2000 1999 1998
----------- ----------- ---------- ----------- -----------
Cash 40,457 27,832 12,433 9,570 10,938
Restricted cash 15,001
Short-term investments 367,748 306,065 290,449 364,492 338,930
Net working capital (1) (63,579) 250,636 196,596 235,993 503,931
Property, plant and equipment 2,084,895 1,384,463 1,542,609 1,568,051 1,279,218
Total assets 4,086,349 2,952,677 3,231,758 3,215,542 2,559,396
Short term debt 1,104,793 567,491 688,586 655,551 274,818
Long term debt, less current 794,571 630,636 717,830 739,315 224,309
portion
Long term parent company - 461 77 49,511 205,484
Debentures - short term - 2,018 2,413 2,505 3,505
Debentures - long term 200,766 94,204 113,349 81,613 172,978
Shareholders' equity 865,010 1,032,720 1,065,659 1,022,744 1,205,325
Capital 843,959 838,214 838,214 836,551 836,551
(1) Total current assets less total current liabilities
DIVIDENDS AND DIVIDEND POLICY
The authorized total capital stock of the Company is comprised of Common
and Preferred Shares. As of December 31, 2002, 39,590,941,783 Common Shares and
74,527,528,780 Preferred Shares were issued and outstanding by the Company.
Subsequent developments, such as stock bonus and reverse split, are discussed in
Item 8 - Significant changes.
DIVIDENDS
The following table sets forth the dividends paid to holders of the
Company's Common Shares and Preferred Shares since 1998 in reais and in U.S.
dollars translated from reais at the Commercial Rate as of the date of payment.
Dividend per share figures have been retroactively adjusted for all period
presented to reflect: (a) a share split of 2 shares per each shared hold
approved in 2002, (b) a share bonus of 3 shares per each share hold approved in
April 2003 and (c) a reverse stock split of 1 share to each 1000 shares hold
approved in April 2003.
DATE OF R$ PER 1,000 R$ PER 1,000 US$ PER 1,000 US$ PER 1,000
PERIOD PAYMENT COMMON SHARES PREFERRED SHARES COMMON SHARES PREFERRED SHARES
1st half/1998* July 27, 98 0.1731 0.1904 0.1484 0.1633
2nd half/1998* Feb. 23, 99 0.2062 0.2268 0.1024 0.1127
1st half/1999* Aug. 03, 99 0.2423 0.2665 0.1326 0.1458
2nd half/1999* Feb. 29, 00 0.3812 0.4193 0.2155 0.2371
1st half/2000* Aug. 15, 00 0.2869 0.3156 0.1589 0.1748
2nd half/2000* Feb. 15, 01 0.5092 0.5602 0.2570 0.2827
1st half/2001* Aug. 15, 01 0.3062 0.3368 0.1224 0.1347
2nd half/2001* Feb. 19, 02 0.7385 0.8123 0.3045 0.3350
1st half/2002* Aug. 15, 02 0.5385 0.5385 0.1687 0.1687
2nd half/2002* Feb. 18, 03 1.2538 1.2538 0.3494 0.3494
1st quarter/ May 15/03 0.5000 0.5000 0.1706 0.1706
2003*
* Payment of interest on capital stock.
The Brazilian Corporate Law generally requires the bylaws of each Brazilian
corporation to specify a minimum percentage of the profits for each fiscal year
that must be distributed to shareholders as dividends. Under
7
the Company's bylaws, such percentage has been fixed as an amount equal to
no less than 30% of the adjusted net income for distribution for each fiscal
year (the "Mandatory Dividend").
Dividends with respect to a fiscal year are payable from (i) retained
earnings from prior periods and (ii) after-tax income for said period, after
allocating the income to the legal reserve and other reserves ("Adjusted Net
Income"). For conversion of the dividends paid by the Company from reais into
dollars, the Custodian will use the relevant Commercial Market exchange rate on
the date said dividends are made available to shareholders in Brazil. Under the
Brazilian Corporate Law, a Brazilian company is required to maintain a legal
reserve, to which it must allocate 5% of net income determined in accordance
with Brazilian Corporate Law for each fiscal year until such reserve reaches an
amount equal to 20% of the company's capital stock. On December 31, 2002, in
accordance with Brazilian GAAP, Gerdau's non-consolidated legal reserve totaled
R$ 127.6 million (U.S.$ 36.1 million translated as the exchange rate at
year-end) or 9.6% of total capital stock of R$ 1,335.1 million (U.S.$ 377.9
million translated as the exchange rate at year-end).
According to the Law 9,457, holders of preferred shares in a Brazilian
Corporation are entitled to receive dividends at least 10% greater than
dividends paid on Common Shares, unless one of three exceptions described in the
Law are met. Gerdau S.A. pays equal dividends on Preferred Shares and on Common
Shares since the approval of the 100% tag along policy in April 2002. Gerdau
S.A.'s executive management presented a proposal at the 2002 shareholders'
meeting, to grant both Common Shares and Preferred Shares a 100% tag along right
which has been approved. Shareholders approved this measure and the right was
extended to all shareholders that the new Brazilian Corporate Law required only
for minority holders of Common Shares (and at only 80% of the consideration paid
to the controlling shareholders).
Under the recent amendments to the Brazilian Corporate Law, by extending
the tag along right to minority shareholders the Company will no longer need to
comply with the requirement to pay an additional 10% premium on dividends paid
to preferred shareholders. Upon approval and effectiveness of the amendments to
the Company's bylaws to provide for the tag-along as described above, the
Company will pay the stated 30% (bylaw) of Adjusted Net Profit to all
shareholders, and no premium to preferred shareholders. As a result, dividends
on net income as from January 1, 2002 were not subject to the requirement to pay
at least additional 10% to Preferred shareholders than to Common shareholders.
As a general requirement, shareholders who do not reside in Brazil must
have their Brazilian company investment registered with the Central Bank in
order to be eligible for conversion into foreign currency of dividends, sales
proceeds or other amounts related to their shares for remittance outside Brazil.
Preferred Shares underlying the ADRs will be held in Brazil by the Custodian as
agent for the Depositary. The holder of Preferred Shares will be the registered
owner on the records of the Registrant for Preferred Shares.
Payments of cash dividends and distributions, if any, will be made in
Brazilian currency to the Custodian, on behalf of the Depositary, which will
then convert such proceeds into U.S. dollars and will cause said U.S. dollars to
be delivered to the Depositary for distribution to holders of ADRs. If the
Custodian is unable to immediately convert the Brazilian currency received as
dividends into U.S. dollars, the amount of U.S. dollars payable to holders of
ADRs may be adversely affected by any devaluation or depreciation of the
Brazilian currency related to the U.S. dollar that may occur before such
dividends are converted and remitted. Dividends in respect of the Preferred
Shares paid to holders who are not Brazilian residents, including holders of
ADRs, are not subject to Brazilian withholding tax.
INTEREST ON CAPITAL STOCK
Law 9,249, of December 1995, provides that a company may pay interest on
capital stock to shareholders as an addition or as an alternative to dividends
at the Company's discretion. A Brazilian Corporation is entitled to pay its
shareholders (and set off against the Mandatory Dividend for each fiscal year)
interest on capital stock up to the limit of the TJLP (Long-Term Interest Rate).
The payment of interest as described herein would be subject to a 15%
withholding income tax. See "Item 10 - Taxation"
8
DIVIDEND POLICY
The Company currently intends to pay dividends on its outstanding Preferred
Shares at the amount of its required distributions for any particular fiscal
year, subject to any determination by the Board of Directors that such
distributions would be inadvisable in view of the Company's financial condition.
As a policy, although not required to do so by its bylaws, the Company pays
dividends or interest on capital stock twice a year. As of March 31st, 2003, the
Board of Directors approved a new policy for dividend and interest on capital
stock payouts to shareholders to be made on a quarterly basis.
The changes that took place between the end of the 2002 fiscal year and the
filing of this document, concerning Dividends and Dividend Policy, are described
in "Item 8 - Significant Changes".
EXCHANGE RATES
BRAZIL
There are two legal foreign exchange markets in Brazil, the Commercial
Market and the Floating Market. The Commercial Market is reserved primarily for
foreign trade transactions and transactions that generally require previous
approval from Brazilian monetary authorities, such as the purchase and sale of
registered investments by foreign individuals and related remittances of funds
abroad. Purchases of foreign exchange in the Commercial Market may be carried
out only through a financial institution in Brazil authorized to buy and sell
currency in that market. The Commercial Rate is the commercial exchange rate for
Brazilian currency into U.S. dollars, as reported by the Central Bank. The
Floating Rate is the prevailing exchange rate for Brazilian currency into U.S.
dollars, which applicable to transactions to which the Commercial Rate does not
apply. Prior to the implementation of the "Real Plan", the Commercial Rate and
the Floating Rate differed significantly at times. Since the introduction of the
real, the two rates have not differed significantly, although there can be no
assurance that there will not be significant differences between the two rates
in the future. Both the Commercial Rate and the Floating Rate are reported by
the Central Bank on a daily basis.
Both the Commercial Rate and the Floating Rate are negotiated freely but
have been strongly influenced by the Central Bank. After the implementation of
the Plano Real, the Brazilian Central Bank initially allowed the real to float
with minimal intervention. On March 6, 1995, the Central Bank announced that it
would intervene in the market and buy or sell U.S. dollars, establishing a
trading band in which the exchange rate between the real and the U.S. dollar
could fluctuate.
The following table sets forth information on prevailing Commercial Rates
for the periods indicated.
Exchange Rates
reais per U.S.$ 1.00(1)
Year Average Price
1998 Average 1.1609
1999 Average 1.8133
2000 Average 1.8293
2001 Average 2.3519
2002 Average 2.9189
Source: Brazilian Central Bank
9
EXCHANGE RATES EXCHANGE RATES
---------------------- -----------------------
reais per US$ 1.00 reais per U.S.$ 1.00(1)
YEAR MONTH HIGHEST RATE LOWEST RATE
2002 January 2.4384 2.2932
2002 February 2.4691 2.3482
2002 March 2.3663 2.3236
2002 April 2.3689 2.2709
2002 May 2.5296 2.3770
2002 June 2.8593 2.5413
2002 July 3.4285 2.8147
2002 August 3.3275 2.8883
2002 September 3.8949 3.0286
2002 October 3.9552 3.5936
2002 November 3.6797 3.5035
2002 December 3.7980 3.4278
2003 January 3.6623 3.2758
2003 February 3.6580 3.4930
2003 March 3.5637 3.3531
2003 April 3.3359 2.8898
2003 May 3.0277 2.8653
Source: Economatica
The exchange for the real and the U.S. dollar has increased in recent years
due to a number of factors related to the Brazilian and the world economy. The
rate reached R$ 3.5333 (Ptax) on December 31, 2002, after having varied between
a high of R$ 3.7980 and a low of R$ 3.4278 during that month. The table above
shows prices for the U.S. dollar against the real over the year 2002 and the
first five months of 2003. As of June 12, 2003 the exchange rate for the US
dollar against the real was R$ 2.8620 (Ptax). As a result of global instability
and, especially, the proximity of elections in Brazil with possibilities of the
victory of a leftist party, during 2002 investments in the country were reduced
and demand for the dollar increased to the point where the exchange rate in
October 2002 reached nearly R$ 4.00. For this reason, the Central Bank was
forced to intervene a number of times in the months before the election, selling
dollars on the market to meet the growing demand and maintain the exchange rate
within acceptable levels. The election of Luiz Inacio Lula da Silva, the
indications that the government formed by his leftist party would continue many
of the policies and decisions of the previous government and the naming of his
ministry brought calm to the market and resulted in reductions to the exchange
rate.
As of the beginning of 2003, the Brazilian Central Bank has a new
president, Henrique Meirelles, appointed by the government of Luiz Inacio Lula
da Silva and expected to continue the same strategy as Arminio Fraga did during
the previous term.
The Company will make all cash distributions related to the Preferred
Shares in Brazilian currency. Accordingly, exchange rate fluctuations may affect
the U.S. dollar amounts received by the holders of Preferred ADRs on conversion
by the Depositary of such distributions. Fluctuations in the exchange rate
between the real and the U.S. dollar may also affect the U.S. dollar equivalent
of the price in reais of the Preferred Shares on the Brazilian stock exchanges.
Brazilian law provides that whenever there is a serious imbalance in
Brazil's balance of payments or serious factors that enable such imbalance to be
foreseen, temporary restrictions may be imposed on remittances of foreign
capital abroad. For approximately nine months in 1989 and early 1990, for
example, the amounts were subsequently released to maintain Brazil's foreign
currency reserves, in accordance with Brazilian Government directives. There can
be no assurance that similar measures will not be taken by the Brazilian
Government in the future.
10
CHILE
According to the Compendium of the Chilean Central Bank (BCCH), `Formal
Exchange Market' (MCF) shall mean that made up by banks and some other
non-banking institutions that which are expressly authorized by BCCH.
In addition, there is also the so-called Informal Exchange Market (or
Extrabanking Market), where stockbrokers also operate, as well as exchange
offices and other non-banking financial institutions. Banks, however, are also
authorized to operate in this market, which is why prices on the two markets
tend to be very closely aligned.
Currently, there is almost no difference between the two markets, but the
BCCH's charter provides that the bank may determine that some operations be
carried out in the Formal Exchange Market, through a well-grounded agreement
adopted by the majority of all members of the Board. The regulations in force,
for instance, define that transfers of funds abroad must be carried out by an
MCF entity (regardless of whether the purchase of foreign currency was made on
the MCF or MCI).
AGREED DOLLAR
Each day, the BCCH publishes the so-called "agreed dollar" in force the day
prior to the corresponding publication. It is determined on the basis of a
reference basket of currencies (CRM) made up of 80% of USD, 15% EUR and 5% JPY.
In addition, the CRM will be corrected daily by a factor of 0.008099% until
January 9, 2004. When the exchange bands were applied in Chile, the agreed
dollar was the core of the band, but today, this dollar is published merely
because there are some operations (Treasury bonds and some BCCH bonds) paid in
pesos and adjusted according to the variation of said type of dollar. Some
analysts also use it to set the "balance" value of the nominal exchange rate,
but it is used less and less.
OBSERVED DOLLAR
The observed dollar is the average of transactions carried out in the MCF
and not corresponding to inter-bank transactions, that is to say, these are
transactions having a "real" demand and offer components of the day prior to
that when the rate is applied. For example, the observed dollar for tomorrow
will be published today (by the BCCH) after 6:00 PM. This type of dollar is used
to determine the adjustment of several credit operations expressed in dollars
but payable in pesos (dollar adjustable pesos) and some fixed-income instruments
issued by companies or the BCCH. It is also used in the forward exchange market
in order to settle agreements using the compensation mechanism (versus physical
delivery).
The table below shows the year by year variation of observed dollar and the
annual average values in pesos for each year.
EXCHANGE RATES
pesos per U.S.$ 1.00
Year Observed
dollar
1998 Average 460.2900
1999 Average 508.7800
2000 Average 539.4900
2001 Average 634.9400
2002 Average 690.5500
Source: Chilean Central Bank (BCCH)
11
URUGUAY
The following table sets forth, for each period indicated, the average of
exchange rates for U.S. $1.00 expressed in Peso based upon the rate in
Cotizacion Interbancario - Dolar Billete announced by the Instituto Nacional de
Estadisticas of the Republic Uruguay.
EXCHANGE RATES
pesos per U.S.$ 1.00
Year
1998 Average 10.4728
1999 Average 11.3392
2000 Average 12.0994
2001 Average 13.3191
2002 Average 21.2545
Source: Republica Oriental ~el Uruguay - Instituto
Nacional de Estadisticas
CANADA
The following table sets forth, for each period indicated, the average of
exchange rates for U.S. $1.00 expressed in Canadian dollars based upon the Bank
of Canada Noon Rate and generally reflecting the exchange rates for transactions
of Cdn$1 million or more.
EXCHANGE RATES
Cdn$ per U.S.$ 1.00
Year
1998 Average 1.4800
1999 Average 1.4858
2000 Average 1.4852
2001 Average 1.5484
2002 Average 1.5704
Source: Bank of Canada
B. CAPITALIZATION AND INDEBTEDNESS
Not required.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not required.
D. RISK FACTORS
POLITICAL AND ECONOMIC CONDITIONS
The year 2002 ended with a very tense global situation, especially in terms
of the forthcoming war. In the first months of 2003, this situation became
progressively worse, leading to conflict between the United States and Iraq, in
which a number of other European and Asian countries became involved, despite
the opposition of the UN.
12
The Brazilian economy has been affected by frequent and occasionally
drastic intervention by the Brazilian Government, which has often changed
monetary, credit, tariff and other policies to influence the course of the
Brazilian economy. CHANGES IN POLICY INVOLVING TARIFFS, EXCHANGE CONTROLS,
REGULATORY POLICY AND TAXATION COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS AND
FINANCIAL RESULTS, AS COULD INFLATION, DEVALUATION, SOCIAL INSTABILITY AND OTHER
POLITICAL, ECONOMIC OR DIPLOMATIC DEVELOPMENTS AND THE BRAZILIAN GOVERNMENT'S
RESPONSE TO SUCH DEVELOPMENTS.
In recent years, Chile has faced a number of external shocks, which has
affected its growth, such as low export commodity prices, high oil prices and
greater exchange volatility as the result of the Argentinean crisis, which also
affected capital flows to the region. This worsening of the external environment
is responsible for most of the lower growth rate of the country, along with the
impact of domestic issues, including the long debate about labor and tax reforms
during 2001, which helped to generate instability among domestic investors.
The Uruguayan economy grew continuously from 1982 to 1998. From 1999 to
2002, the economy suffered the negative impacts of Brazil's devaluation in
January 1999, with important restrictions exports from Uruguay to Brazil, and
lower Argentinean investments in Uruguay. At the end of 2001, Argentina's
devaluation heavily affected tourism and investment from Argentina.
INFLATION; EFFECTS OF THE ECONOMIC STABILIZATION PROGRAM AND CHANGE OF CURRENCY.
Brazil experienced extremely high and generally unpredictable rates of
inflation for several years. For this reason, the federal government developed a
series of mechanisms to protect the value of assets. The main instruments have
been inflation indices with particular attention to the INPC (National Index for
Consumer Prices). With the end of high inflation and the newly acquired status
of stable economy, Brazil changed its inflation tracking reference by
instituting the IPCA (Extended Consumer Price Index). This index has been used
to set inflation targets with the IMF and for domestic purposes. Inflation in
Brazil, as stated by the INPC, was 2,489.11% in 1993 and 929.32% in 1994. After
1994, inflation reached lower levels. From 1999 on, the IPCA became the
reference. Inflation in Brazil was 22.41% in 1995, 9.56% in 1996, 5.22% in 1997,
1.66% in 1998, 8.94% in 1999, 5.97% in 2000 and 7.7% in 2001. In 2002, the
inflation as calculated by this index reached 12.5%. Inflation, as well as
governmental efforts to reduce it have had historically significant negative
effects on the Brazilian economy in general, and on the profitability and
results of operations of the Company in particular. In an attempt to reduce
inflation, the government has at times imposed wage and price controls, and
reduced government spending, among other measures. Inflation, as well as
governmental measures against it, combined with public speculation about
possible future actions, has also contributed to economic uncertainty in Brazil
and to heightened volatility in the Brazilian securities markets. Furthermore,
the government's desire to control inflation and to reduce budget deficits may
cause it to take actions that may slow or halt Brazilian economic growth. A
significant increase in inflation in Brazil could have serious adverse
consequences on the Company.
Chile has managed to control inflation with rates not exceeding 4.5% during
the last years and an inflation of 2.8% in 2002, which reflects the stability of
the Chilean economy. Inflation in Chile is measured against the variation of the
consumer price index every month. This indicator reflects the price variation of
a consumption basket set by the Central Bank of Chile.
EFFECTS OF CURRENCY DEVALUATIONS AND EXCHANGE RATE FLUCTUATIONS.
The value of various South American currencies, including currencies in the
countries in which the company operates, when compared to each other and to the
United States and Canadian dollars, has fluctuated significantly and can be
expected to continue to do so. In Brazil, the recent successive crises in the
international financial markets have created a significant threat to the
stability of the Brazilian currency and, on January 18th, 1999 led to the
Central Bank's announcement that the real would trade freely in foreign-exchange
markets, with the Central Bank intervening only to limit wide swings in its
value. THESE FLUCTUATIONS MAY HAVE SIGNIFICANT EFFECTS ON RESULTS OF THE
COMPANY'S OPERATIONS AND FINANCIAL CONDITION IN BRAZIL AND ON ITS CONSOLIDATED
FINANCIAL STATEMENTS, WHICH ARE REPORTED IN U.S. DOLLARS.
The Company maintains assets denominated in reais, in U.S. and Canadian
dollars, and in Chilean, Uruguayan and Argentinean pesos, and it regularly
experiences gains and losses due to exchange movements between such currencies
and the U.S. dollar. At the same time, the Company has loans contracted in
Brazil and indexed to the U.S.
13
dollar and to other currencies, which also suffer the impact of the
exchange rates between these currencies and the real. AS A RESULT, THE COMPANY
MAY BE EXPOSED TO SIGNIFICANT EXCHANGE LOSSES/GAINS FROM FURTHER DEVALUATION OF
THE BRAZILIAN REAL AND/OR OTHER CURRENCIES AGAINST THE U.S. DOLLAR. THE
COMPANY'S NET SALES, GROSS PROFIT AND OPERATING MARGINS MAY ALSO BE INFLUENCED
BY CHANGES IN EXCHANGE RATES. Because the company's U.S. GAAP financial
statements are presented in U.S. dollars, net sales and other financial
statement accounts (including net income) could be adversely affected by a
devaluation of a local currency relative to the U.S. dollar.
CONTROLS AND RESTRICTIONS ON U.S. DOLLAR REMITTANCES.
Brazilian law provides that, whenever there exists or is a serious risk of
a material imbalance in Brazil's balance of payments, the government may, for a
limited period of time, impose restrictions on the remittance to foreign
investors of the proceeds of their investments in Brazil. This situation did
occur for approximately six months in 1989 and early 1990, as did the imposition
of a restriction on the conversion of the Brazilian currency into foreign
currencies. Such restrictions could hinder or prevent the Custodian or holders
who have surrendered ADRs for the underlying Preferred Shares from converting
dividends, distributions or proceeds from the sale of such Preferred Shares into
U.S. dollars and remitting such U.S. dollars abroad. HOLDERS OF ADRS COULD BE
AFFECTED BY DELAYS IN, OR REFUSALS TO GRANT ANY REQUIRED GOVERNMENTAL APPROVALS
FOR CONVERSION OF BRAZILIAN CURRENCY PAYMENTS AND REMITTANCES ABROAD IN RESPECT
OF THE PREFERRED SHARES UNDERLYING THE ADRS.
DEVELOPMENTS IN OTHER EMERGING MARKET COUNTRIES
The Brazilian securities markets are, to varying degrees, influenced by
economic and market conditions in other emerging markets. Although economic
conditions are different in each country, investors' reaction to developments in
one country can have effects on the securities of issuers in other countries.
For example, in December 1994, the government of Mexico sharply devalued the
peso and allowed its value to float, triggering an economic crisis in Mexico
which negatively affected the securities markets in many Latin American
countries, including Brazil. In 2001, the worsening of the economic crisis in
Argentina had a materially adverse effect on the Brazilian economy and on its
securities markets, and led to the adoption of Government policies that may have
further adverse effects on both economic growth and on the Brazilian securities
markets. THERE CAN BE NO ASSURANCE THAT THE BRAZILIAN SECURITIES MARKETS OR
ECONOMY WILL NOT CONTINUE TO BE AFFECTED BY EVENTS (INCLUDING ECONOMIC CRISES OR
CURRENCY FLUCTUATIONS) ELSEWHERE, ESPECIALLY IN EMERGING MARKETS, OR THAT SUCH
EFFECTS WILL NOT AFFECT THE COMPANY'S BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATION OR PROSPECTS OR THE VALUE OF THE SHARES OR ADRS.
In Chile, there has been a process of expansion into international markets
through a successful policy of business and financial diversification, a low and
homogenous rate scheme, greater freedom for the entry of capital and, recently,
a floating foreign exchange rate policy. The downturn of the international
economy has generated a major impact in terms of exchange rates and entry of
capital. ALTHOUGH THE HIGH EXCHANGE RATE HAS BENEFITED THE EXPORTING SECTOR, IT
IS ALSO TRUE THAT THE INSTABILITY HAS INTRODUCED UNDESIRABLE ELEMENTS, SINCE THE
BEST LONG-TERM SITUATION FOR THESE SECTORS IS TO HAVE A HIGH AND STEADY EXCHANGE
RATE.
RISK FACTORS RELATIVE TO THE COMPANY AND TO THE STEEL SECTOR
INTEGRATION OF COMPANIES ACQUIRED
During the last few years, Gerdau has expanded through significant
acquisitions such as that of Ameristeel in 1999, the acquisition of the
Cartersville mill 2001, the acquisition of a controlling interest in Acominas
during 2002 and the reverse takeover, at the end of 2002, of Co-Steel of Canada,
an operation that involved only the exchange of capital stock.
The integration of the business and opportunities of the entities acquired
into Gerdau S.A. involves risks. These risks include the difficulty of
integrating the business, management, operations, products, and services into
our existing businesses and the related expenses, which may include unexpected
expenses, necessary to achieve such integration. Completion of the transactions
and the required integration will require a substantial amount of management's
time. Diversion of management's attention from the existing businesses, as well
as problems that can arise in connection with the integration of the operations,
may have an impact on revenues and results of operations.
14
Integration may result in additional expenses, which could reduce profitability.
GERDAU MAY NOT SUCCEED IN ADDRESSING THESE RISKS OR ANY OTHER PROBLEMS
ENCOUNTERED IN CONNECTION WITH THE ACQUISITIONS. THE COMPANY MAY NOT
SUCCESSFULLY INTEGRATE THE BUSINESSES, MANAGEMENT, OPERATIONS, OR PRODUCT OR
REALIZE ANY OF THE ANTICIPATED BENEFITS OF THE ACQUISITIONS.
THE CYCLICAL NATURE OF THE STEEL INDUSTRY
THE CYCLICAL NATURE OF THE STEEL INDUSTRY AND NEGATIVE ECONOMIC CONDITIONS
IN THE MARKETS WHERE GERDAU OPERATES MAY CAUSE FLUCTUATIONS IN THE REVENUE AND
PROFITABILITY. The steel industry is highly cyclical in nature and is affected
by prevailing economic conditions in the major world economies. Gerdau is
particularly sensitive to trends in cyclical industries such as the
construction, appliance, machinery and equipment, and transportation industries,
which are significant markets for Gerdau products. In addition, certain of our
customers have been affected by the recession in Brazil, North America and
Uruguay which may in the future result in defaults in the payment of accounts
receivable owned to the Company.
Events or conditions having an effect on the steel industry in general
could occur. Such events or conditions could include, for example, a further
economic downturn in the market where we operate, an increase in production
resulting in over-supply in the markets in which we will operate, changes in the
relations between the currencies of the countries where Gerdau operates and
other currencies which facilitate imports by competitors to the markets, or an
increase in competition, or other events or conditions that Gerdau cannot
predict. Any such event or condition could have an effect on the financial
condition or results of operations.
SUPPLY OF ELECTRICAL POWER
Steel production is a process that consumes a lot of electric power,
especially in the melt shops with electric arc furnaces. Electricity is a
significant cost in the production process, as is natural gas, which is used in
certain mills. THE INTERRUPTION OF THE SUPPLY OF ENERGY WOULD HAVE SERIOUS
CONSEQUENCES ON THE PRODUCTION PROCESS WITH ELECTRIC ARC FURNACE MELT SHOPS, AS
THERE IS NO ALTERNATIVE ENERGY SOURCE THAT COULD BE USED.
Acominas is practically self-sufficient in terms of electricity. HOWEVER,
ENERGY RATIONING (AS OCCURRED IN 2001 IN BRAZIL, WHEN CONSUMPTION TARGETS WERE
DEFINED BY THE FEDERAL GOVERNMENT), OR ANY OTHER PROBLEM, SUCH AS BAD WEATHER
AND ACCIDENTS WITH TRANSMISSION TOWERS AND LINES THAT MAY REDUCE OR INTERRUPT
THE DELIVERY OF ELECTRICITY, WOULD FORCE ACOMINAS TO REDUCE ITS PRODUCTION PLANS
TO LEVELS COMPATIBLE WITH ITS INTERNAL GENERATION.
In North America, most of the operations have long-term electricity supply
contracts with either major utilities or energy suppliers. ALTHOUGH EACH OF THE
PLANTS CAN USE OIL AS AN ALTERNATE FUEL WHEN NATURAL GAS HAS BEEN INTERRUPTED,
ANY INTERRUPTION IN THE SUPPLY OF ELECTRICAL ENERGY, WHETHER SCHEDULED OR
UNSCHEDULED, COULD AFFECT COSTS, REVENUES AND EARNINGS.
CONSIDERING THE RELEVANCE OF ENERGY TO THE COST OF THE FINISHED PRODUCTS,
INCREASES IN ENERGY PRICES THAT GERDAU MAY BE UNABLE TO PASS TO ITS SALES PRICES
MAY AFFECT THE PROFITABILITY OF THE COMPANY.
COSTS RESULTING FROM THE ENFORCEMENT OF ENVIRONMENTAL LEGISLATION
The Company's industrial plants are required to comply with a number of
laws and regulations at the federal, state and municipal levels in all the
countries in which it operates, in addition to environmental and operational
regulations. SHOULD THE LEGISLATION BECOME MORE DEMANDING IN THE FUTURE,
EXPENDITURES ON FIXED ASSETS AND COSTS OF COMPLIANCE MAY INCREASE AND HAVE A
NEGATIVE IMPACT ON THE COMPANY'S FINANCIAL CONDITIONS AND ON THE STEEL SECTOR AS
A WHOLE. All Gerdau units are currently in compliance with local legislation.
CONSOLIDATION OF THE STEEL MARKET
The Gerdau Group has a substantial part of its business abroad. It is
therefore subject to competition in these markets. In recent times, the steel
sector has been undergoing a process of consolidation with the resulting
15
creation of companies with great production capacity. This can represent an
important competitive differential and the Group, following this tendency,
merged its North American assets with those of Co-Steel. This merger, in the 4th
quarter of 2002, created Gerdau AmeriSteel, the 2nd largest producer of long
steel and the 3rd largest producer of crude steel in North America.
The US market has been undergoing an important consolidation process of its
steel companies. In order to improve its market conditions, Gerdau has had to
increase its participation in it. THE CONSOLIDATION OF THE STEEL MARKET MAY LEAD
TO THE CREATION OF STRONG COMPETITORS AND MAY HAVE AN IMPACT ON GERDAU'S
OPERATIONS.
TARIFF BARRIERS AGAINST EXPORTS
TARIFF BARRIERS ARE A RISK FACTOR FOR THE OPERATIONS OF STEEL COMPANIES IN
GENERAL. . ALTHOUGH Gerdau is not affected as other competitors from defensive
moves (anti-dumping measures and higher tariffs) since its business strategy is
to produce locally and therefore is not exposed to restrictions to exports some
of its operations targeted to exportation might be affected.
ACOMINAS, AS AN EXPORTER OF SLABS, BILLETS AND BLOOMS, IS MORE EXPOSED AND
PROTECTIONIST MEASURES, SUCH AS THOSE ADOPTED OR WHICH MAY BE ADOPTED IN THE
COUNTRIES TO WHICH IT EXPORTS.
GERDAU MAY BE AFFECTED BY THE DECREASE OF IMPORT TARIFFS IN BRAZIL AND BY
THE IMPOSITION OF HIGHER IMPORT DUTIES OR NON-TARIFF BASED PROTECTIVE MEASURES
ABROAD SPECIALLY IN RELATION TO THE OPERATIONS OF ACOMINAS.
IMPORTS
Imports from other countries which may at times be considered as dumping
given that products enter the market at very low prices with which local
products cannot compete.
DESPITE THE HIGH COST OF FREIGHT ASSOCIATED WITH TRANSPORTING STEEL BAR
PRODUCTS, GERDAU AMERISTEEL AND OTHER NORTH AMERICAN STEEL PRODUCERS HAVE
EXPERIENCED SIGNIFICANT AND, IN SOME CASES, UNFAIR COMPETITION FROM FOREIGN
FINISHED STEEL BAR PRODUCERS DURING THE PAST SEVERAL YEARS. Due to unfavorable
foreign economic conditions and excess capacity, imports of steel bar products
to the U.S. and Canadian markets are at historically high levels and often at
prices below their production and export costs, with a corresponding negative
impact on domestic prices.
ACCIDENTS
THE PRODUCTION PROCESS IN THE STEEL SECTOR IN GENERAL CARRIES A CERTAIN
LEVEL OF RISK, AND AS A RESULT IT IS EXTREMELY IMPORTANT THAT COMPANIES MAINTAIN
GOOD INSURANCE AND RISK MANAGEMENT POLICIES. Non-consolidated Gerdau insures its
assets with coverage for fire, lightning, explosion, molten material leakage and
electrical damage, in accordance with the degree of risk involved. Acominas, an
integrated mill with greater risk exposure, invests heavily in risk management
and also contracts operational risk insurance, with All Risks coverage for
material damage, in addition to coverage for Business Interruption in case of
interruptions to production.
In Chile, Argentina and Uruguay, operational risk insurance is contracted
with All Risks coverage for material damage, in addition to coverage for
Business Interruption in case of interruptions in production. All Risks coverage
is also contracted for the North American operations.
THE COMPANY MAY BE AFFECTED BY THE DISRUPTION OF PRODUCTION IN ITS MILLS IF
ACCIDENTS INVOLVING THE FURNACES OR THE ROLLING MILLS HAPPEN.
16
PENSION FUND PLANS
The assets that support the pension funds for employees of all Gerdau
companies may suffer the impact of a downturn in the financial markets (the
devaluation of stock-based investments) or the decrease in interest rates paid
to fixed income assets. This may have a significantly adverse impact in the
liability of the Companies.
In North America, the pension plans are underfunded and continued adverse
market conditions may require Gerdau AmeriSteel to make cash payments and reduce
the cash available for the business. GERDAU AMERISTEEL MAY HAVE TO MAKE
SUBSTANTIAL CASH PAYMENTS TO FUND THE UNDERFUNDED PENSION PLANS IF MARKET
CONDITIONS DO NOT IMPROVE OVER THE NEXT FISCAL YEAR, WHICH WOULD REDUCE THE CASH
AVAILABLE FOR CASH INVESTMENT.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT
Gerdau S.A. is a Brazilian company registered on November 11, 1961. The
main executive office are located at Av. Farrapos, 1811, Porto Alegre RS -
Brazil and the telephone number is +55 (51) 3323 2000.
Gerdau started its operations in 1901, with the Pontas de Paris nail
factory located in Porto Alegre, Brazil. In 1969, the business changed its name
to Metalurgica Gerdau S.A., and is today the holding company that controls
Gerdau S.A. In 102 years of activity, the Gerdau Group has made a seminal
contribution to the history of Brazilian industry.
In order to compensate for the shortage of raw material immediately after
the end of World War II, Gerdau acquired Siderurgica Riograndense S.A., a steel
producer also located in Porto Alegre. In February of 1948 the Gerdau Group
began its steel operations anticipating the successful technological model of
the mini mill, characterized by the production of steel in electric arc furnaces
(EAF) using steel scrap as raw material, and based on a regional sales strategy
to ensure more competitive operating costs. The growth of the market encouraged
the installation in 1957 of a second Riograndense unit in the city of Sapucaia
do Sul (state of Rio Grande do Sul), consolidating the Group's inclination
towards steel producing. In 1962, the steady growth in nail production led to
the construction of a larger and more advanced factory in Passo Fundo (state of
Rio Grande do Sul). Currently, Gerdau is the largest world manufacturer of
nails, with more than 1,000 items made available to customers at 100 thousand
sales points.
In 1967, the Company's expansion route reached the state of Sao Paulo, in
the southeast of Brazil, with the purchase of Fabrica de Arames Sao Judas Tadeu,
a producer of nails and wires. It was later renamed Comercial Gerdau and became
the distribution channel for steel products in Brazil, with 68 branches and 04
flat steel service centers strategically located within the national territory.
In June of 1969. Gerdau took a step towards the Brazilian northeast and
began producing steel in the state of Pernambuco at Siderurgica Aconorte. In
1971 the construction of the Cosigua mill began in Rio de Janeiro initially as a
joint venture with the German group August Thyssen Huette. Eight years later
Gerdau became the major shareholder of Cosigua, currently the largest mini mill
in Latin America. In December of 1971, Gerdau acquired control of Siderurgica
Guaira, a pioneer in steel production in the state of Parana. Furthermore, a new
company, Seiva S.A. Florestas e Industrias, was started. Seiva's business is
reforestation for use in the furniture industry, celulose and steel industries.
Since then, Gerdau has spread out all over Brazil through a series of
acquisitions and new operations. Gerdau currently owns 10 steel mills, including
Acominas, which has installed production capacity of 3.0 million tons of crude
steel per year.
In addition to its industrial units and stores, Gerdau operates 09 rebar
fabricating facilities. In January 2003, the Group became the major shareholder
of the Dona Francisca hydroelectric plant (state of Rio Grande do Sul) with a
stake of 51.8% of the total capital stock of the Dona Francisca Energetica SA
company.
17
The process of international expansion began in 1980 with the acquisition
of the Laisa mill, in Uruguay, and in 1989 with the acquisition of Gerdau
AmeriSteel Cambridge (formerly Courtice Steel), in Canada (Cambridge, Ontario).
In 1992, Gerdau acquired control of Indac and AZA, in Chile; soon after, these
two companies were merged into one, Gerdau AZA. Throughout the time, Gerdau
increased its international presence by acquiring units in Argentina and
especially in North America - Gerdau AmeriSteel MRM Special Sections and
AmeriSteel. In October 2002, Gerdau carried out a reverse takeover operation and
merged its assets in North America with those of Co-Steel from Canada. As a
result, Gerdau AmeriSteel was created, and is currently the second largest North
American long steel producer.
Gerdau also owns 09 fabricating facilities in Brazil (Armafer), 05
downstream operations and 08 scrap yards. In South America it owns 03
fabricating facilities in Chile, Argentina and Uruguay. In North America, its
has 15 rebar fabricating facilities in addition to 12 units manufacturing higher
value-added products and special sections such as super light beams, elevator
guide rails and epoxy coated steel. In addition, it operates 13 steel scrap
recycling operations in this region.
In 1995, Gerdau began a corporate restructuring process. During this phase,
completed in 1997, the 28 companies then comprising the Gerdau Group were
merged: The six publicly listed companies were consolidated into two: Gerdau
S.A. and the holding Metalurgica Gerdau S.A., which translated into greater
transparency for the stock market.
Gerdau S.A. has been publicly listed in Brazil since 1980, and in March of
1999, it was listed on the New York Stock Exchange (NYSE). In June of 2001
Gerdau joined the Sao Paulo Stock Exchange's Corporate Governance Program (Level
1). In December of 2002 it was listed on the Latibex, a section of the Madrid
Stock Exchange devoted to Latin American companies and traded in Euros. Gerdau
AmeriSteel is listed on the Toronto Stock Exchange, in Canada.
This steady growth process, which began in Brazil in 1901, made of the
Gerdau Group the 14th largest world producer of steel in 2002, according to the
IISI.
B. BUSINESS OVERVIEW
All comments in this item are structured in the following order: Gerdau
non-consolidated, Acominas, South America and North America operations.
Gerdau is a producer of long steel focused is on the production of steel
mostly through mini mills and on the distribution of steel products through its
own network including, 68 branches of Comercial Gerdau in Brazil. Throughout the
years, the company has consolidated itself in the domestic market, and currently
has a 47.8% market share in the production of long steel in Brazil.
Following the acquisition of Laisa (Uruguay), in 1980, Gerdau developed a
strong presence in both South and North America through its industrial units in
Argentina, Chile, the United States and Canada. Currently, Gerdau Laisa is the
only steel producer in Uruguay, with a 93% market share in the rebar market in
that country. In Argentina, Gerdau has a 38% stake in Sipar Aceros, one of the
major local steel suppliers. In Chile, Gerdau owns a modern plant built in 1999.
It has an annual production capacity of 360 thousand tons of crude steel and 440
thousand tons of rolled products. Gerdau entered North America in 1989 with the
acquisition of Gerdau AmeriSteel Cambridge, in Canada. It later acquired Gerdau
AmeriSteel MRM Special Sections located in Manitoba, also in Canada. In 1999,
Gerdau entered the competitive U.S. market with the acquisition of 85% of
AmeriSteel, which at the time had four industrial units. Currently, one single
enterprise, Gerdau AmeriSteel, consists of the three Canadian units, the seven
US units and the Gallatin Mill (a joint venture of 50% with Dofasco). This was
accomplished through a reverse takeover operation with Co-Steel of Canada. See
"Item 4 - Companies in Brazil and Abroad".
The three main markets in which Gerdau operates are: (i) civil
construction, with the supply of rebar, merchant bars, nails and meshes; (ii)
industrial, with the supply of products for machinery and agricultural
implements, tools and other industrial products; and (iii) agriculture, with the
supply of wires and posts. In North
18
America, Gerdau AmeriSteel MRM Special Sections also supplies customers
with special sections, including elevator guide rails and super light beams.
Gerdau provides its customers with higher value-added products at 27 rebar
fabricating facilities (9 Armafer service centers in Brazil, 3 in South America
and 15 Fabshops in North America) and flat steel service centers (4 in Brazil).
BUSINESS STRATEGY
Gerdau's strategy is focused on the decentralized production of long steel
with electric arc furnace (EAF) mini mills employing continuous casting
technology. Additionally, Gerdau has three integrated mills and Acominas. Plants
are sized and located to meet the needs of local markets and access customers
efficiently. This strategy was a response to the geographical dimensions of
Brazil and the United States, related to transportation and high freight costs.
As a result, Gerdau is prepared to supply its customers and to purchase raw
materials locally. From 1970 to 1990, Gerdau concentrated on increasing its
market share in Brazil by increasing its installed capacity and by acquiring
existing mills. Typically, Gerdau looked for mills facing administrative
problems, where the Company's main contribution would be management skills
rather than capital. Currently, Gerdau is the third largest producer of crude
steel in Brazil, considering the combined production of Gerdau S.A. and
Acominas.
Abroad, especially in North America, Gerdau has increased its market share
by acquiring mills which, like their Brazilian counterparts, required
administrative adjustments rather than capital. Throughout the years, Gerdau has
increased its share in the North American market. It is currently the second
North American long steel producer, with an installed capacity of 5.9 million
tons of crude steel per year and 5.5 million tons of rolled products per year.
Also in North America, Gerdau's industrial units are geographically distributed
to supply local markets along the East Coast in the U.S. and in Eastern and
mid-eastern Canada. As a result of the merger with Co-Steel, completed in
October 2002, the Gerdau AmeriSteel has 10 long steel units.
Acquisitions and greenfield projects in Brazil:
1969 - Acquisition of Gerdau Aconorte in Pernambuco;
1971 - Construction of Gerdau Cosigua in Rio de Janeiro. Gerdau Cosigua is
the largest mini mill in Latin America, with an installed capacity of 1.4
million tons per year. Acquisition of Gerdau Guaira, a producer of steel pioneer
in the state of Parana;
1981 - Construction of Gerdau Cearense in Alagoas and of Gerdau Araucaria
in Parana; 1985 - Acquisition of Hime, in Rio de Janeiro; 1988 - Acquisition
through a privatization auction of the Barao de Cocais mill, in Minas Gerais;
1989 - Acquisition through a privatization auction of Gerdau Usiba, in Bahia,
the only direct reduction (DRI) plant in Brazil;
1991 - Acquisition of Cosinor in Pernambuco, as part of the Brazilian
privatization process.
1992 - Acquisition through a privatization auction of Gerdau Acos Finos
Piratini in Rio Grande do Sul. With Acos Finos Piratini, Gerdau entered the
specialty steel segment and began to supply new markets, such as that of the
automotive sector;
1994 - Acquisition of the Pains mill, later renamed Gerdau Divinopolis, a
traditional producer of rebar in the state of Minas Gerais;
1997 - Participation in Acominas, together with NatSteel and the Clube dos
Empregados (Employees' Investment Club). Along the years Gerdau purchased
additional stakes in Acominas. In October 2002 Gerdau became the major
shareholder of the company, after the acquisition of a 17.7% stake of the former
Banco Economico and of a 24.8% stake of NatSteel.
Acquisitions Abroad:
1980 - Acquisition of Gerdau Laisa in Uruguay;
1989 - Acquisition of Gerdau AmeriSteel Cambridge in Canada;
1992 - Acquisition of Indac and AZA in Chile; later, these two companies
were merged to become Gerdau AZA. In 1999, Gerdau AZA built an entirely new
plant;
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1995 - Acquisition of Gerdau AmeriSteel MRM Special Sections in Canada.
With this acquisition, the Group entered the special sections market and
strengthened its position in Canada;
1997 - Acquisition of Sipsa in Argentina, a rolling mill with a capacity of
75 thousand tons per year;
1998 - Agreement to acquire a one-third interest in another Argentinean
rolling mill, Sipar, as well as to transfer to the controllers of Sipar a one
third interest in Sipsa. As a result of this agreement, Gerdau held a 72% stake
in Sipsa and 38% in Sipar. Later, after a corporate restructuring in Argentina,
Sipsa was incorporated by Sipar, while Gerdau retained its 38% stake in Sipar;
1999 - Acquisition of AmeriSteel., in the United States, through FLS Holdings;
2001 - Acquisition of Republic Technologies International LLC assets through
AmeriSteel, in the United States;
2002 - Merger of Gerdau's assets in North America with those of Co-Steel in
the United States, creating the Gerdau AmeriSteel, the second largest long steel
producer in North America and third largest crude steel in that region.
In addition to these acquisitions, Gerdau has also been focusing on
improving its product mix by offering its customers higher value-added products
at its service centers for the civil construction and flat steel sectors, as
well as in its downstream operations located in Brazil and North America.
By contrast, Acominas, located in Brazil, is an integrated mill, which
employs coke to produce 3.0 million tons of crude steel per year in the state of
Minas Gerais. Acominas produces semi-finished products (slabs, blooms and
billets) and heavy structural shapes (installed rolling capacity of 440 thousand
tons per year). Acominas also has a rolling mill located in the state of Sao
Paulo, where 300 thousand tons of common long steel products are rolled every
year, including shapes, rebars and merchant bars.
Acominas is the world's largest exporter of billets; 67% of the company's
sales are exported, especially to Southeast Asia. The company's gross revenue is
on the order of US$ 600 million. Acominas was privatized in September of 1993,
and the Gerdau Group is today the company's major individual shareholder. As a
producer of semi-finished products, Acominas has always been guided by the
effort to improve the quality of products and to reduce cost and expenses to
increase the operating margin.
FUTURE
In broad terms, the Gerdau Group will continue to guide its business by
principles related to financial and cost management, as described below:
Financial perspective: Given the high cost of financing in Brazil and the
current trend toward consolidation in the United States steel industry,
Gerdau is working to consolidate its recent acquisitions and reduce
financial expenses. The company's strategy to achieve this goal is based on
increasing cash-flow and reduce the current indebtedness level.
Cost perspective: Gerdau continues to concentrate on reducing costs of raw
materials and on adjusting its production levels. In Brazil, Gerdau
non-consolidated has the flexibility to switch between domestic sales and
exports. Although domestic sales have been more profitable, the company is
capable of quickly adapting to new market conditions.
As already mentioned, Gerdau has a 47.8% market share of the long steel
market in Brazil. The Company can no longer expand its share of the domestic
market through the acquisition of other companies. Expansion may occur only
through the increase in the installed capacity of existing plants or greenfield
projects. Gerdau has been focusing its efforts on improving its product mix and
on providing services that add value to the company and customers. The Company
has been working to improve its strategy of providing services through its 9
Armafer rebar fabricating facilities, 4 service centers for flat steel, 5
downstream operations (1 elevator guide, 2 welded mesh factories and 2 drawing
mills).
Gerdau`s joining in Acominas enabled the company to invest approximately
US$ 250 million in technology. These investments were on technological updates,
cost reduction, productivity increases and greater flexibility to balance
production and demand. New investments of about US$ 130 million are under way to
verticalize production. A structural profile rolling mill has already been
implemented and a wire rod rolling mill is
20
being installed. The strategy will be to focus on a more sophisticated product
line and to expand the production of industrial products, based on the two
principles, return on investment and maintenance of indebtedness levels that
are compatible with the Company's cash flow.
Abroad, as well as in Brazil, Gerdau has been adding value to its products.
In Chile, starting in 2002, Gerdau AZA began to provide rebar fabricating
services to the civil construction sector, following the same strategy of
increasing the product mix that has been employed in Brazil and North America.
In North America, these service centers have been consolidated for some time,
but the segment gained strength after Gerdau acquired AmeriSteel. In North
America, Gerdau has 15 rebar fabricating facilities and 12 downstream operations
(3 epoxy coating, 2 rail spikes plants, wire, 1 mesh and nails, 2 cold drawn
mills, 2 elevator guide rails and 2 super light beams). These units are
geographically distributed to delivery products easily and reduce cost. In
addition to improving product mix, after the merger with Co-Steel, Gerdau
expects that it will be able to capture the synergies initially planned for
North America. As early as three months after the merger, the Company realized
that the expected gains resulting from adjustments in administration, production
and sales, projected at about US$ 23 million when the deal was completed, were
too conservative. In the past years, the U.S. steel sector has been facing a
strong market consolidation process. Gerdau AmeriSteel is continuously
monitoring opportunities and in the case new opportunities arise in the future,
it is ready to negotiate new partnerships, mergers or acquisitions.
INDUSTRY OVERVIEW
Since the 1940s, steel has been of vital importance to the Brazilian
economy. As a result of an interruption of steel supplies during World War II,
the Brazilian government began developing a domestic steel industry by creating
Companhia Siderurgica Nacional (CSN), a flat steel producer, and Companhia Vale
do Rio Doce, an iron ore producer. During almost 50 years, the Brazilian flat
steel sector was controlled by the state under a steel monopoly, Siderbras. On
the other hand, the state had far less involvement in the non-flat sector, which
has traditionally been made up of smaller private companies. As a result of the
economic crisis of the 1980s, the Brazilian government's access to foreign
capital became severely restricted and investment of the state in the steel
sector was reduced.
In 1990, the Brazilian government selected the steel industry as the first
to be privatized. Starting in 1991, the largest steel producers, which had
always operated as semi-autonomous companies under the control of Siderbras,
were individually privatized. Today, the Brazilian steel industry is composed of
12 companies.
Differently from Gerdau, Acominas was a state-owned company when it began
operation at its Presidente Arthur Bernardes mill in 1986. In September of 1993,
Acominas was privatized amidst fierce competition between large economic groups
in the best-attended auction in the history of the Brazilian steel industry.
Gerdau initially acquired 6.1% of the total capital stock in Acominas and
currently has a 78.9% stake.
In the United States, steel companies are much older than in Brazil. Among
the largest producers of steel in that country three are worthy of mention:
United States Steel (USX), Nucor Steel, and Gerdau AmeriSteel . Currently, these
are the largest U.S. steel producers.
USX, founded in 1901 as the largest enterprise of its kind ever, produced
2.8 million tons of steel in 2001. Throughout the years, USX has responded to a
series of economic changes and market opportunities by diversifying its products
and periodically restructuring its business. Currently, after 102 years, it
still holds its mark as the largest integrated mill in the United States. By
contrast, Nucor started operations in the automotive sector, and after several
changes began to build its first steel mill in 1968. Currently Nucor operates 09
mills in the United States, with an annual production of 11.2 million tons of
steel.
The North American steel industry is highly cyclical and competitive. The
industry is affected by global production capacity, the prevailing levels of
steel imports and tariffs, general economic conditions and the strength of the
U.S. dollar. Trends and developments in other cyclical industries such as
construction, appliance, transportation, machinery and equipment, and consumer
and industrial packaging, which are significant markets for steel products, also
affect the steel industry. Recent trends in the steel industry, in particular a
wave of consolidation
21
and the introduction of tariffs, have strengthened the
competitive positioning of the North American market participants.
PRODUCTION OF CRUDE STEEL
Million tons
WORLD NORTH AMERICA SOUTH AMERICA BRAZIL
1993 727.5 112.4 33.8 25.2
1994 725.1 115.4 35.0 25.7
1995 752.3 121.8 34.6 25.1
1996 750.0 123.4 35.9 25.2
1997 798.9 128.3 37.0 26.2
1998 777.2 128.8 36.1 25.8
1999 788.3 129.0 34.6 25.0
2000 847.1 134.0 39.1 27.9
2001 833.8 118.7 37.4 26.7
2002 886.7 122.6 40.8 29.6
Source: IISI - Steel Statistical Yearbook , December 2002
The world crude steel production in 2002 reached 886.7 million tons, with a
growth of 22% in the past 09 years. In North America, production reached 122.6
million tons, 94.2 million of which were produced in the United States. In South
America, Brazil is the largest crude steel producer, with 29.6 million tons,
which means a 3.3% worldwide and a 72.5% stake in South America.
Where world production of steel is concerned, data from the International
Iron and Steel Institute (IISI) show great variation in the performance of
different countries. On the one hand, among the largest world steel producers,
China and Turkey recorded a growth of over 10% over the previous year. Germany,
Italy and Spain, on the other hand, presented zero growth 2001 over 2002. In
Brazil, the 10.8% growth was related to the refurbishing of some blast furnaces
and to the resumption of production following a period of energy rationing in
the Southeast and the Northeast parts of Brazil.
PRODUCTION OF HOT ROLLED PRODUCTS - LONG STEEL
Million tons
WORLD NORTH AMERICA SOUTH AMERICA BRAZIL
1993 289.9 31.8 9.9 6.2
1994 293.5 34.0 10.1 6.3
1995 299.8 34.7 9.1 5.2
1996 291.9 35.9 9.5 5.4
1997 305.2 37.8 10.1 5.8
1998 300.2 36.8 10.1 5.8
1999 305.1 37.8 10.1 6.4
2000 327.3 37.7 10.8 6.6
2001 260.7 34.5 11.1 7.0
2002 283.9 35.5 11.3 7.2
Source: IISI - Steel Statistic Yearbook 2002 and IISI Extarnet.
Production of long steel does not include tubes.
22
PRODUCTION OF HOT ROLLED PRODUCTS - FLAT STEEL
Million tons
WORLD NORTH AMERICA SOUTH AMERICA BRAZIL
1993 301.3 61.8 13.1 10.1
1994 316.7 65.5 14.2 10.7
1995 339.4 67.4 14.3 10.6
1996 343.2 71.5 15.1 11.0
1997 368.4 72.8 16.1 11.3
1998 352.8 72.7 14.8 10.4
1999 371.7 78.3 14.5 10.1
2000 425.0 85.5 15.9 11.2
2001 349.5 78.7 15.0 10.6
2002 366.6 80.3 16.2 11.4
Source: IISI - Steel Statistic Yearbook 2002 and IISI Extarnet.
The world production of hot rolled products is basically divided into two
broad categories, long steel and flat steel. Gerdau operates in the long steel
sector, and, since the merger with Co-Steel, has a 50% stake in Gallatin Steel,
a producer of flat steel with a capacity to manufacture 1.4 million tons of
crude steel per year, and the same volume of rolled products. Gallatin Steel is
a joint venture with Dofasco, in Canada. In the past years, the world production
of long steel products has decreased in approximately 2%, while the production
of flat steel products increased about 22% between 1993 and 2002. The Brazilian
production of long and flat steel accounts for approximately 3% of the world
output, and Brazil is the largest producer of steel in Latin America.
APPARENT STEEL CONSUMPTION
Million tons of finished products
WORLD NORTH AMERICA SOUTH AMERICA BRAZIL
1993 614.1 110.3 18.9 10.6
1994 621.3 127.8 20.9 12.1
1995 656.9 120.8 22.1 12.0
1996 652.8 130.8 23.1 13.0
1997 703.1 141.2 26.6 15.3
1998 693.2 150.1 25.6 14.5
1999 707.0 147.3 22.6 14.1
2000 766.8 154.2 26.0 15.8
2001 771.2 136.6 26.6 16.7
2002 829.5 131.4 27.5 16.5
Source: IISI - Steel Statistical Yearbook December 2002 and IISI Extranet.
The data presented above refers to the apparent consumption of finished
steel products in the past years. Between 1993 and 2002 worldwide the apparent
consumption grew by 35.1%; in North America, this growth corresponded to 19.1%;
in South America to 45.5%; and in Brazil to 55.7%. Still, the per capita
consumption of finished steel in Brazil - 96.9 kg - is much lower than in other
regions. In Canada and in the United States, for example, per capita steel
consumption is 489.1 and 372.8 kg, respectively (year 2001 data) and in Hong
Kong consumption is at 1,217.9 kg per inhabitant. This reveals a strong
potential for growth in the Brazilian market.
BRAZILIAN DOMESTIC SALES AND IMPORTS
Thousand tons
INTERNAL SALES IMPORTS APPARENT CONSUMPTION
1998 13,611 872 14,483
1999 13,435 643 14,078
2000 14,938 822 15,760
2001 15,692 1,002 16,694
2002 15,833 674 16,507
23
Source: IBS - Estatisticas da Siderurgia
Apparent consumption is calculated by adding domestic sales and imports
minus exports. In Brazil, the demand for steel products is almost entirely met
by local companies. In 2002, apparent consumption reached 16.5 million tons, of
which only 673.8 thousand tons were imported. The historical series represented
above clearly shows the relatively small volume of imports.
PRODUCTION AND APPARENT CONSUMPTION OF CRUDE STEEL IN THE UNITED STATES
Million tons
APPARENT CONSUMPTION PRODUCTION PRODUCTION DEFICIT
1993 104.4 88.8 15.6
1994 117.5 91.2 26.3
1995 112.6 95.2 17.4
1996 119.4 95.5 23.9
1997 123.6 98.5 25.1
1998 134.6 98.7 35.9
1999 127.5 97.4 30.1
2000 132.9 101.8 31.10
2001 114.3 90.1 24.2
2002* 118.9 92.4 26.5
Source: IISI - Steel Statistical Yearbook December 2002 and website.
* 2002 apparent consumpiton is a preliminary data.
A different situation occurs in the United States, where a large part the
steel for consumption is imported. As shown in the graph above, the United
States produce approximately 80% of its steel (approximately 92.0 thousand tons
per year). Therefore, Section 201 was more effective preventing the entry of
low-cost imports into the United States rather than to curb the purchase of
steel, given that the country depends on steel produced in other regions of the
world.
Imposed in March of 2002, the decisions relating to Section 201 have not
had a strong impact on the scenario for Brazilian producers in terms of the
export of finished products. The export of hot and cold rolled coils and slabs
had already been restricted by previous regulations. Section 201 simply ruled
out the possibility of exploring other niches. In short, in terms of flat steel,
what Section 201 meant for Brazilian companies was the impossibility of resuming
the growth in the supply of these products to the United States. However, no
significant barriers restricted the search for new markets for other types of
products.
Where long steel is concerned, the exports of wire rod were already
restricted. The largest impact was on slab exports, since the quota imposed on
Brazilian producers (2.5 million tons), although coherent with the historical
average, was enough to satisfy the needs of Acominas, CST, CSN, Usiminas and
Cosipa.
Still, it is important to stress that the higher import tariffs imposed by
the U.S. on steel products had no impact on Gerdau's Brazilian operations.
Section 201 favored Gerdau's U.S. operations, given Gerdau's policy of producing
and selling its output in local markets.
Acominas (a major exporter of semi-finished products) negotiated part of
the quota alloted by the United States with other Brazilian exporters of slabs
(billets are exempt). Structural steel is exempt from Section 201, but the
importation of these products in the United States is restricted by previous
anti-dumping duties and country-specific tariffs.
24
US REBAR IMPORTS
Thousand tons
IMPORTS OF REBAR
2001
January 127.7
February 115.3
March 138.3
April 142.2
May 161.4
June 167.7
July 190.7
August 185.6
September 148.6
October 154.2
November 177.4
December 49.3
2002
January 139.1
February 290.5
MARCH 45.3
SECTION 201 WAS
IMPLEMENTED
April 66.3
May 86.5
June 100.2
July 203.1
August 116.8
September 91.3
October 45.8
November 60.9
December 29.3
Source: Foreign Trade Statistics - US Census Bureau website
In the United States, more than one year after the implementation of
Section 201, the volume of steel imports has decreased and the average price of
steel has increased. The chart above shows a decrease in rebar imports in the
past two years. In February 2002 alone, rebar imports reached 291 thousand tons;
after the imposition of tariffs of 15%, the volume dropped to 29 thousand tons
in December of 2002. The price of rebar has also shown some improvement,
according to data from Foreign Trade Statistics. In the first quarter of 2002,
the average price per ton was about US$ 240. In the final quarter of the same
year, the average price had reached about US$ 250 per ton. A similar trend was
also observed for flat products, with tariffs of 30%, and wire rod, on which
specific tariffs were imposed on some countries. The over-the-quota tariffs
imposed on Brazil, for example, ranges from 74 to 95%, and to Canada from 4 to
10%. Over-the-quota tariffs for Indonesia were established at 4%; for Mexico
20%; for Moldova 369%; for Trinidad 11%; and for Ukraine 116%.
COMPANY OVERVIEW
PRODUCTION PROCESS
Gerdau's production process is based on the mini-mill concept. In Brazil,
Gerdau owns six electric arc furnace (EAF) mills and three integrated units -
two with blast furnace and one with natural gas direct reduction of iron (DRI)
process. Acominas is an integrated mill producing steel with a blast furnace.
All units located abroad are EAF mini mills.
Mini-mills are smaller and offer several advantages over the integrated
steel producers:
25
1- lower capital cost;
2- lower operating risks due to the low concentration of capital and
production capacity in a single production unit;
3- the proximity of production units to input sources;
4- the proximity to the markets and the ease of adjustments in production
levels;
5- less expensive inputs, mainly due to the use of steel scrap instead of
iron ore and coke, which are employed by the larger integrated mills; and
6- more efficient management structure due to the relative simplicity of
the production process and less management levels required.
The Company's production process consists of sourcing, melting, casting,
rolling and drawing. The basic difference in production processes involves the
melting process, as described below:
EAF PRODUCTION
After charging the EAF with a predetermined mixture of raw materials (e.g.,
scrap and pig iron or sponge iron), electric power is applied following a
computer-controlled melting profile. The mixture of raw material varies from 60%
of steel scrap and 40% of pig iron to 90% of steel scrap and 10% of pig iron in
Brazil and South America, depending on prices and local availability. Gerdau
believes that these measures optimize the use of available scrap without causing
demand pressure. All of Gerdau's mini mills in North America utilize 100% steel
scrap loads.
BLAST FURNACE INTEGRATED PRODUCTION
Integrated production starts at the blast furnace, in which liquid steel is
produced by reducing iron ore through the reaction of charcoal, coke or a
combination of both with oxygen. After this step, the molten steel is tapped
into a ladle furnace where alloys are added and the steel is refined.
DIRECT REDUCTION (DRI)
The process of direct reduction replaces the need for a blast furnace. In
DRI, the reduction of iron ore is accomplished by a process of natural gas
reacting with the iron ore and very hot air, producing what is known as sponge
iron, which will then be loaded into an electric arc furnace along with some
scrap.
PRODUCTION COSTS
Brazil is one of the world's lowest cost producers of steel. Brazil's
advantages include the abundant supply of raw materials, as well as low labor
costs. Gerdau's mills also benefit from the relatively large internal market,
where most of its non-consolidated sales are carried out. However, Gerdau has
very little self-generation of electricity, depending on local suppliers to
operate its 9 Brazilian units. "See Item 4 - Energy"
Although its production process differs slightly from that of other Gerdau
units in Brazil, Acominas has one of the lowest production costs in the world.
The company has competitive costs in terms of raw materials (especially ores,
mainly due to its proximity to sources), labor (in comparison to the rest of the
world) and energy (since it generates around 3/4 of the electricity it needs).
Acominas is also self-sufficient in terms of fuel, since it employs 100% of the
gases generated in the productive process. The company's industrial park has
been undergoing technological update, which has significantly contributed to cut
costs. In addition, a strong culture of cost control has contributed toward the
maintenance of a cost level that remains a competitive advantage despite the
pressure of inflation. Also worth mentioning are the constant monitoring
procedures in the use of charcoal, due to the fact that Acominas depends on
external sources for this input.
26
In South America, the cost of steel scrap and limestone is relatively low
in Uruguay; also advantageous in that country are the availability of
electricity and the low labor cost due to recent currency devaluations. In
Chile, iron ore and scrap for the steel sector are abundant. In addition, the
cost of sourcing is also advantageous in Chile if compared to other countries in
the region.
In North America steel scrap is Gerdau AmeriSteel's primary input and its
availability is a major factor in the company`s ability to operate. Gerdau
operates 13 scrap-recycling operations in North America. Gerdau AmeriSteel's
scrap needs is secured in the open market. Various domestic and foreign firms
supply other important inputs or operating supplies required for Gerdau
AmeriSteel's business, including refractory, ferroalloys and carbon electrodes.
Gerdau AmeriSteel has historically obtained adequate quantities of such raw
materials and supplies at competitive market prices to allow for efficient mill
operations. Gerdau AmeriSteel is not dependent on any one supplier as a source
for any particular material and believes there are adequate alternative
suppliers available in the marketplace should the need to replace an existing
one arise.
Access to attractively priced electric power and natural gas is an
important competitive cost advantage for a mini mill. Gerdau AmeriSteel
purchases its power from utilities under interruptible service contracts. Under
such contracts, the utilities provide service at substantially less than firm
tariff rates in return for the right to curtail power deliveries during peak
demand periods. Such interruptions usually occur with sufficient notice to allow
Gerdau AmeriSteel to adjust production in an orderly manner. Open access to
competitively priced supply of natural gas enables Gerdau AmeriSteel to secure
adequate supplies at competitive prices. Although deregulation of both natural
gas and wholesale electricity may afford opportunities for lower costs resulting
from competitive market forces, price for both of these energy sources have
become more volatile in the recent past and may continue to be.
STEEL PRODUCTION
The process of steel production encompasses three major stages: first, the
production of liquid steel or crude steel; second, the rolling of products; and
third, drawing, the stage in which rolled products go through further finishing
processes that add value to the final product.
MELTING PROCESS
Liquid steel (blast furnace mills) or crude steel (mini mills or DRI mills)
are produced using one of the processes described earlier (see "Production
Process"). The molten or crude steel is transferred to the EAF (mini-mills and
DRI) or to the conversor (blast furnace), where adjustments are made and scrap
and ferroalloys are added following the chemical specifications of the type of
steel being produced. To produce high-alloy steel, or specialty steel, the ladle
is taken to a vacuum degasing unit to remove carbon, oxygen and gases. After the
production process is completed, the still hot product undergoes a process of
continuous casting to produce the following semi-finished items:
Billets: Billets are square section, long steel bars which serve as input
produce wire rod, rebars, merchant bars, shapes, etc.
Blooms: Blooms, which are also square in shape, are larger than billets but
not longer as the billets, and are used to manufacture springs, forged parts,
shapes and seamless tubes, among others.
Slabs: Slabs are narrow bars of small height, similar to billets in length.
They are used in the production of hot and cold coil, heavy slabs, profiling and
oxy-cutting, etc.
These products may be cast using different processes, such as continuous
casting, mechanical cutting or oxy-cutting, or cooling in molds, a conventional
casting system that employs cooling beds. Although this conventional system is
not widely used in Brazil, it is still employed at Acominas. However, that may
represent a competitive advantage, since Acominas is the only mill manufacturing
these products, and as a result has captive customers.
27
ROLLING PROCESS
In the rolling process, the steel produced in the melt shop and shaped as
billets, blooms or slabs is reheated in furnaces and then rolled and used in the
production of a wide range of products, such as wire rod, rebars, merchant bars,
springs, forged parts, shapes and seamless tubes, hot and cold coils, heavy
slabs, profiling and oxy-cutting, among others.
DRAWING PROCESS
Rolled products are used as inputs for products that can be molded without
reheating. At this stage, wire rod is used to produce wires of various shapes
and thickness, such as welding wires, barbed and barbless fencing wires,
galvanized wires, concrete reinforcing wire, and other wires. Wire is also an
input for other products such as wire meshes, chains, nails and clamps.
PRODUCT LINE
Gerdau provides its customers with a wide range of products within the
following major lines:
CRUDE STEEL
Semi-finished products have relatively low added value. Billets are
Gerdau's main crude steel product. Acominas also produces blooms and slabs,
although in smaller quantities. In 2002, 15% of the semi-finished products
manufactured at Acominas consisted of blooms, 20% of slabs and 65% of billets.
On the other hand, Gerdau's other mills in Brazil and abroad only sell the
excess output as billets, since margins are lower.
ROLLED PRODUCTS
A major portion of Gerdau's production is rolled products. In 2002, common
steel rolled products accounted for 64.2% of the Group's consolidated sales
(35.6% by companies abroad and the remaining 28.6% by companies in Brazil, with
24.3% going to the domestic market and 4.3% to exports). The main rolled
products include rebars, merchant bars and profiles.
DRAWN PRODUCTS
As products of higher added value, drawn items have higher margins. Drawn
products include barbed and barbless fencing wires, galvanized wires, fences,
concrete reinforcing wire mesh, nails and clamps. Drawn products account for
8.4% of the Company's consolidated sales and 19.4% of non-consolidated sales.
These products are not exported, and are usually sold to the industrial, civil
construction and agricultural sectors.
SPECIALTY STEEL
Specialty or high-alloy steel requires advanced manufacturing processes and
normally includes some degree of customization. At the Gerdau Acos Finos
Piratini mill, Gerdau produces specialty and stainless steel used in tools and
machinery (e.g. cold, hot and high-speed steels), chains, fasteners, railroad
spikes and special coil steel.
In the United States, Gerdau AmeriSteel MRM Special Sections produces
special section profiles, such as grader blades, smelter bars, light rails,
superlight I-beams and elevator guide rails with direct application in the
production line of its clients and with lower operational costs.
FLAT PRODUCTS
Flat products are produced at Acominas and accounted for 20% of the output
of semi-finished products in 2002. Comercial Gerdau sells flat steel products
from other manufacturers and processes these products according to the needs of
customers at the 04 flat steel service centers. After the creation of Gerdau
AmeriSteel, this line of products was also made available in North America
through Gallatin Steel, a joint venture of 50% with Dofasco, from Canada.
Gallatin Steel has an installed capacity of 1.4 million tons of crude steel per
year and 1.4 million tons of flat products per year.
28
PRODUCTION CAPACITY
GROWTH OF INSTALLED PRODUCTION CAPACITY
Million tons
CRUDE STEEL ROLLED PRODUCTS DRAWN PRODUCTS
1992 3.9 3.3 0.8
2002* 13.7 10.8 0.9
* Includes 12 months of Acominas and Co-Steel
In the past decade, Gerdau's production of crude steel increased by 251.3%,
while the production of rolled products increased 227.3%. This is mainly the
result of a well-structured process of expansion and internationalization.
GERDAU'S INSTALLED PRODUCTION CAPACITY
Thousand tons
ANNUAL CAPACITY ANNUAL CAPACITY
CRUDE STEEL ROLLED PRODUCTS
ACOMINAS* 3,000 740
GERDAU 4,374 4,071
Aconorte 230 270
Acos Finos Piratini 310 380
Barao de Cocais 330 198
Cearense 120 120
Cosigua 1,404 1,510
Divinopolis 600 456
Guaira 390 167
Riograndense 390 470
Usiba 600 500
BRAZIL 7,374 4,811
AZA 360 440
Laisa 70 72
SOUTH AMERICA 430 512
Cambridge 326 295
Cartersville 780 544
Charlotte 417 363
Jackson 607 544
Jacksonville 580 558
Knoxville 413 454
MRM Special Sections 349 299
Perth Amboy* 817 907
Sayreville* 726 544
Whitby* 872 998
NORTH AMERICA 5,887 5,506
CONSOLIDATED 13,691 10,829
* Includes 12 months of Acominas and Co-Steel.
Gerdau currently has an installed production capacity of 13.7 million tons
of crude steel per year and 10.8 million tons of rolled products per year. When
Siderurgica Riograndense, the first steel plant of Gerdau Group, was acquired in
1948, it produced 3.0 thousand tons of steel - this means that in 55 years
Gerdau's production increased from 3.0 thousand tons to 9.3 million tons, and
from one single mill to 22 units spread throughout Brazil, South America and
North America.
29
In 2002, Gerdau's consolidated production reached 8.8 million tons of crude
steel and 6.7 million tons of rolled products. From the crude steel total, 62.6%
were produced at the 9 units in Brazil and at Acominas; 33.9% were produced in
North America through Gerdau AmeriSteel ; and 3.5% were produced at the other
mills in South America. From the total production of rolled products, 53.8% were
produced in Brazil, 41.8% in North America, and 4.4% in other southern American
countries. It should be noted that the difference between the installed
production capacity and the production in 2002 results from the merger concluded
in October between Gerdau's North American assets and Co-Steel, and the
production of the resulting company was consolidated only in the fourth quarter
of the last year ending. The same occurred with Acominas, annual capacity of 12
months and production consolidated of 10 months.
SOURCING
The productive process at Gerdau is based on the mini mill concept.
Therefore, the main raw materials employed both in Brazil and abroad are scrap
and pig iron. Electric arc furnaces are loaded with a mixture containing from
60% of steel scrap and 40% of pig iron to 90% of steel scrap and 10% of pig iron
in Brazil and South America, depending on prices and local availability. Gerdau
believes that these measures optimize the use of available steel scrap without
causing demand pressure. All of Gerdau's mini-mills in the North America operate
mostly at 100% scrap loads.
The units in Brazil employ scrap and pig iron purchased from local
suppliers. The Company believes that this strategy minimizes transportation
costs. Gerdau non-consolidated has a network of 2,000 thousand scrap suppliers
that deliver their materials to the Company's yard. Gerdau believes it is the
largest buyer of scrap in Brazil. The pig iron used in the electric arc furnaces
is produced at Gerdau's pig iron mills, located in Contagem, state of Minas
Gerais, and part of it is bought from third parties. In 2002, Gerdau
non-consolidated produced 83% of its pig iron needs. Finally, the iron ore
employed at the DRI mill is bought from several Brazilian mining companies.
Due to the nature of the raw-materials employed by Gerdau non-consolidated,
the Company usually does not establish long term supply contracts for its 9
Brazilian units; the scrap employed by Gerdau is mostly generated by a process
of obsolescence, and the other raw materials are purchased using reais and the
costs of inputs are not so affected as much by currency fluctuations. In 2002,
Gerdau non-consolidated five main suppliers were responsible (excluding energy
and scrap suppliers) for approximately 21% of the purchases. The ten main
suppliers (including energy suppliers and excluding scrap suppliers) accounted
for 26% of Gerdau purchases. The largest Gerdau non-consolidated, scrap supplier
supplies approximately 2.0% of the Company's needs.
Acominas has a different strategy to deal with the sourcing and
availability of raw materials, and establishes long-term contracts to ensure
supply. In the case of iron ore, Acominas has contracts with both large mining
companies and small and medium suppliers strategically located close to the
mill. The company's main raw materials include: (i) charcoal, imported from
Canada, Australia and the United States; (ii) ferroalloys, of which at least 90%
are purchased in the domestic market; and (iii) iron ore, Acominas' most
strategic raw material, considering the mill's proximity to the sources which
supply this input. These raw materials account for more than 60% of all Acominas
purchases.
In South America, Gerdau AZA, like Gerdau non-consolidated, does not have
long-term contracts with suppliers, and therefore is exposed to market
fluctuations. There are approximately 100 steel scrap suppliers in Chile. In
Uruguay, 100% of the steel scrap used at Laisa is purchased in its domestic
market. Laisa is the only significant buyer of steel scrap in Uruguay. In 2002
it bought 46.0 thousand tons of steel scrap.
Gerdau AmeriSteel has historically obtained adequate quantities of raw
materials and supplies at competitive market prices to allow for permit
efficient mill operations. Gerdau AmeriSteel is not dependent on any one
supplier as a source for any particular material and believes there are adequate
alternate suppliers available in the marketplace should the need to replace an
existing one arise. Gerdau AmeriSteel operations also include 13 scrap recycling
operations that allow for flexibility on the purchase of scrap.
30
METALLIC INPUTS
The main metallic input at Gerdau is the scrap used in electric arc
furnaces. Also important are pig iron, iron ore (used in blast furnaces and in
the DRI plant), and ferroalloys. The Brazilian mills normally use a mixture of
scrap and pig iron due to the low yield of steel scrap in Brazil. In North
America, by contrast, mini-mills normally use 100% steel scrap.
Steel scrap accounts for approximately 15% of Gerdau's non-consolidated
costs, and between 35% and 40% in North America. Although international steel
scrap prices are determined by the U.S. domestic market (as the United States is
the main exporter of scrap), the price of steel scrap in Brazil varies region by
region, depending upon regional demand and transportation costs. Gerdau
non-consolidated is the largest consumer of steel scrap in Brazil. However, with
over 2,000 scrap suppliers in Brazil, no single steel scrap supplier provides
more than 2.0% of the total required by Gerdau's Brazilian units.
SCRAP
There are two broad classifications of steel scrap: (i) obsolescence scrap,
i.e., steel from various sources, ranging from beer cans to car bodies and white
goods; and (ii) industrial scrap, i.e., factory stampings, steel turnings, and
even scrap generated by the Company's own production processes. From the scrap
used by Gerdau non-consolidated, 70% is obsolescence scrap and 30% is industrial
scrap, purchased directly from the industrial centers generating it. In North
America, differently from Brazil, most of the scrap used is industrial.
In Brazil, the largest portion of the steel scrap consumed by the Gerdau
non-consolidated is bought in the State of Sao Paulo, the balance being evenly
distributed among the other areas in which the Company's mills are located.
Obsolescence scrap is usually delivered to the mills by scrap suppliers. In
regions where it does not have a steel mill, the Company has scrap collection
yards, where scrap is collected and compacted for transportation by third
parties. The price of scrap in Brazil varies by region, depending upon regional
supply and demand and upon transportation costs. Each month, based on market
conditions, the Company's purchasing director sets the maximum price for scrap
(by category of scrap and region) to be paid by Company representatives. Due to
large number of suppliers, and consequently to the strong competition between
them, prices tend to be higher in the southeast, the most industrialized region
of Brazil. However, given that the Company's facilities are evenly distributed
throughout Brazil, Gerdau is able to take advantage of lower prices in the other
regions without incurring high transportation costs.
A leader in recycling in Latin America, Gerdau Metalicos, the branch in
charge of collecting and supplying scrap to the industrial units, re-utilizes
millions of tons of scrap in Brazil every year. This accounts for significant
gains in terms of optimized processes, reduced energy consumption, increased
productivity and increasingly more competitive operating costs. It should be
noted that a ton of steel produced from scrap employs only one third of the
power required to generate one ton of steel using iron ore. In the past 10
years, Gerdau non-consolidated invested US$ 30 million in the collection,
transportation, storage and processing of scrap. Gerdau Metalicos operates
directly in the purchase of scrap from companies all over the country, through a
network that has over 2,000 suppliers, generating thousands of jobs. Gerdau
Metalicos has storage yards (collection points) for scrap in strategic locations
in Brazil. In addition, it employs several moving presses that travel Brazil
preparing scrap for transportation to the mills. All of Gerdau Metalicos'
industrial units have recycling yards with state-of-the art equipment to process
scrap using presses and stationary and mobile shears. It also has two shredders,
one of which is the megashredder installed at Gerdau Cosigua, in Rio de Janeiro,
capable of processing 300 cars per hour.
In Chile, the price of scrap varies especially according to demand, as well
as depending on the region and transportation costs. Gerdau AZA is the largest
consumer of scrap in Chile, using about 80% of the scrap generated in the
country. In Uruguay, 90% of the scrap used by Gerdau Laisa is obsolescence scrap
delivered to the mill by scrap dealers.
Steel scrap is Gerdau AmeriSteel's primary raw material and comprises
approximately 30% to 45% of its cost of sales, depending on the mill and product
mix. Scrap availability is a major factor in the ability of the companies to
operate. Scrap is a commodity and its availability is price driven. Gerdau
AmeriSteel's Jackson and Jacksonville mills each have on site dedicated scrap
processing facilities that supply a significant share of their requirements. The
Gerdau AmeriSteel MRM Special Sections receives a significant amount of its
scrap from Mandak and Porter scrap collection and processing yards. In addition,
the former Co-Steel operation added another
31
07 scrap recycling locations, including 2 shredders. In total, Gerdau
AmeriSteel has 13 scrap recycling locations. As not all the scrap consumed by
Gerdau AmeriSteel comes from its own scrap yards, the remaining requirements are
secured in the open market either directely by company's personnel or by dealers
who procure and aggregate scrap as a business.
In North America all of Gerdau AmeriSteel's production facilities are mini
mills. The operating results are strongly linked to the cost of steel scrap and
scrap substitutes, which are the primary input for the mini mill facilities.
Steel scrap prices are relatively higher during winter months due to the impact
of weather on collection and supply efforts. Realized selling prices for the end
products cannot always be adjusted in the short-term to recover the cost of
increases in steel scrap prices, but generally tend to reflect increases or
decreases in these prices. Approximately half of all steel products in North
America currently are made in electric arc furnaces that utilize steel scrap.
The increasing rate of steel scrap consumption has placed upward pressure on the
price of steel scrap. The availability and prices of scrap are subject to market
forces and governmental regulation largely beyond the company's control,
including demand by North American and international steel producers, freight
costs, and speculation.
PIG IRON AND SPONGE IRON
Brazil is a net exporter of pig iron. Most Brazilian pig iron is produced
in the state of Minas Gerais by a large number of small producers. Pig iron is a
substitute for scrap, and in Brazil it is usually mixed with scrap due to the
low quality of the scrap. Mills in the U.S. operate with 100% scrap. In Brazil,
the price of pig iron is related to the cost of charcoal, an important input,
and the most volatile cost item in the production of pig iron. When the price of
charcoal is seasonally high, coke can be used as a substitute which, although
more expensive, provides a higher yield in pig iron production. Iron ore, the
main component of pig iron, is widely available in Brazil, which is among the
world's leading producers and exporters of iron ore. Gerdau non-consolidated
purchases iron ore from several different regional suppliers. Approximately 17%
of the Company's pig iron requirements are bought from third parties. In
purchasing, the Company seeks to preserve the flexibility resulting from a large
number of suppliers in order to avoid becoming overly dependent upon a small
number of large suppliers.
The Company produces sponge iron at its industrial unit located in the
state of Bahia (USIBA). The entire production of this input is used by USIBA.
In Brazil there are no contracts for the supply of pig iron and
negotiations are carried out in the spot market, that is, agreements are made
concerning the amount of pig iron to be supplied and as the raw material is
delivered, the price may fluctuate based on the price of the product in the
international market, given that approximately 60% of the production is
exported. If a company does not accept the prices practiced in the international
market it may not be able to secure supply of this raw material. In the rainy
season the cost of producing pig iron increases significantly due to the
shortage of charcoal, a vital input in the production of pig iron, which
represents 65% of the total cost of production.
In Chile, the entire production of pig iron belongs to Compania Siderurgica
Huachipato, located 550 km to the south of Santiago. Gerdau AZA, depending on
its needs and on the specifications of the steel to be produced, purchases this
pig iron. Pig iron corresponds to approximately 6% of the total metallic input
used by this unit.
IRON ORE
The iron ore used by non-consolidated Gerdau is directed to the production
of pig iron at the Barao de Cocais and Divinopolis units, in the state of Minas
Gerais, and to the production of sponge iron at the Gerdau Usiba unit, in Bahia.
By contrast, Acominas is an integrated mill which employs iron ore as the
main metallic input to produce steel. Iron ore used is of fine-grain quality,
which is transformed into sinter at a sintering unit. The ore lump is directly
loaded into the blast furnace. To this, pre-reduced iron ore pellets are added,
increasing productivity. These raw materials are purchased from suppliers
located close to Acominas, which means reduced transportation and
32
storage costs. The consumption of these three inputs in 2002 reached 1.6
tons per ton of pig iron produced. The liquid steel produced in the blast
furnace was the main raw material used in the melt shop in 2002, comprising
84.3% of the metallic input. Steel scrap accounted for 13.1 %, and pig iron for
2.6%.
OTHER INPUTS
In addition to scrap, pig iron and sponge iron, Gerdau non-consolidated
employs other inputs for the production of steel, although in smaller amounts,
such as ferroalloys, electrodes, furnace refracting materials, oxygen, nitrogen
and other industrial gases and limestone. All these inputs are readily available
in Brazil. Additional inputs associated with the production of pig iron are
charcoal, used at blast furnace mills, and natural gas, employed at the DRI
unit.
The cost of additional materials used in the steel refining process
accounts for approximately 10% of the total production cost of a ton of crude
steel. Since these materials are widely available in Brazil, the prices of
Gerdau's non-consolidated products at its 09 Brazilian units have very low
sensitivity to changes in the price of these materials.
At Acominas, important raw materials and inputs also include charcoal, iron
ore and pellets. Mineral coal is employed in the production of siderurgical
coke, which is the main agent in the reduction of sinter. It is used as a powder
injected directly into the blast furnace to reduce the consumption of steel coke
and consequently the cost of pig iron production. Iron ore and pellets are
employed to produce pig iron.
Ferroalloys are used to produce steel with special properties for use in
specific applications. Oxygen, nitrogen, and argon are used in some production
processes and acquired from a supplier installed inside the mill's grounds.
Additionally, gases generated in the production of coke, pig iron, and steel are
cleansed and used to generate electric power at Acominas.
In Chile, some inputs, such as electrodes, refractories, ferroalloys and
limestone are imported, mainly from Brazil and Argentina. Other materials, such
as oxygen, nitrogen and natural gas are purchased in the local market.
The North American operations also use additional inputs. Various domestic
and foreign firms supply other important raw materials or operating supplies
required for the business, including refractories, ferroalloys and carbon
electrodes, which are readily available in the open market. Gerdau AmeriSteel
has historically obtained adequate quantities of such raw materials and supplies
at competitive market prices to permit efficient mill operations. The company is
not dependent on any one supplier as a source for any particular material and
believes there are adequate aternative suppliers available in the marketplace
should the need arise to replace an existing one.
ENERGY
The production of steel is an energy intensive process, especially in EAF
mills. Power constitutes a significant portion of steel production costs,
together with the natural gas used in some mills.
At Gerdau non-consolidated, electricity accounted for 9.5% of total
production costs in 2002. The purchase of power and natural gas is made through
long term supply contracts, signed between each of the 09 units in Brazil in the
condition of captive customer and the authorized public utility company of its
region, with demand and consumption being agreed upon by the parties annually.
The Brazilian Federal Government, through ANEEL (Electric Energy National
Agency), establishes the prices that each authorized public utility company may
charge its customers, which varies according to consumer class (commercial,
industrial, residential) and level of demand (tension and volume). After Law
9,074 was passed in July 7, 1995, consumers with demand higher than 3,000 KW
(kilowatts) and tension higher than 69 KV (kilovolt) may buy electric power from
concessionaires in other regions. Any interruption in the supply of electricity
to Gerdau may have a negative impact on the Company's business.
In case electricity supply is interrupted, no alternate energy options are
available at most Gerdau units, due to the high volume and tension required by
these plants to operate. In such cases, the facts and their consequences
33
are discussed with the respective energy concessionaires, and the operating
capacity is kept at emergency levels to preserve people staff and equipment.
In the case of rationing, decisions and norms are implemented by the
Government's regulatory agency. A direct interference in the Company's results
may occur, with a consequent reduction in production to adapt to the
availability of electricity and readjustments in the shipments schedule. . Some
small units of Gerdau non-consolidated may choose, as an alternative, to use
generators to compensate for the energy shortage, increasing costs.
Historically, the generation of electric power in Brazil has been the
target of annual investments of about US$ 13 billion. The reduction in these
investments made by the Brazilian government in the 1990s, the increase of about
5% in the annual consumption in the same period, and the lack of high capacity
transmission lines between the regions in which electricity is abundant and
those that are lacking led to the crisis that hit the southeast, midwest and
northeast regions of Brazil in 2001. During the period of electric power
rationing in Brazil. Gerdau non-consolidated overcame the crisis by shifting
production among the several industrial units, and by rationalizing the use of
electricity. These measures resulted in efficiency and productivity gains, and
were incorporated to the production process even after the critical period was
over.
In Brazil, 82% of the electric power is generated by hydroelectric plants,
with the remaining 18% generated at thermal, wind and nuclear stations. The
country's water reservoirs are currently at normal levels, so that Gerdau
non-consolidated believes that new rationings, such as in 2001, will not occur.
The measures taken by the company during the period of crisis were incorporated
and continue to be employed, translating into efficiency and productivity gains.
The power distribution market is serviced by 64 state or private concessionaires
that distribute electric power to the whole country. According to ANEEL, the
market grows at an annual rate of 4.5%, and it is expected to break the mark of
100 thousand MW in 2008.
Medium term government planning foresees the need of investments in the
order of R$ 6 to 7 billion per year to expand the Brazilian energy matrix to
meet consumer demand. In the future, some changes will occur in the structure of
energy investments, including the installation of thermoelectric centrals
powered by natural gas, which require less time and resources for implementation
than hydroelectric plants. On the other hand, the amount of energy imported from
Argentina, Venezuela and Bolivia will increase. Finally, the electricity network
in southern and northern Brazil will soon be interconnected.
By contrast, Acominas is practically self-sufficient in terms of
electricity. The power generated internally at the mill, including that
generated at three turbo-generators and at the blast furnace`s top rotor shaft
corresponds to 76% of the power requirements at the Ouro Branco mill.
In Chile, Chilectra Metropolitana S.A. is the current supplier of Gerdau
AZA through a long-term contract. Electricity accounted for approximately 19% of
production costs in 2002. Another important energy input is the natural gas
supplied by Metrogas S.A., also through long-term contracts. In Uruguay there is
only one power supplier, and since Gerdau Laisa is the largest consumer in that
country it is able to negotiate fair prices for the energy it purchases (US$
20.6 per megawatt/hour in 2002). In 2003 Gerdau Laisa will replace fuel oil with
natural gas.
Electricity and natural gas combined represented approximately 15% to 22%
of Gerdau AmeriSteel's conversion costs. Access to attractively priced electric
power and natural gas is an important competitive cost advantage to a mini mill.
Open access to competitively priced supply of natural gas enables Gerdau
AmeriSteel to secure adequate supplies at competitive prices. Although
deregulation of both natural gas and wholesale electricity may afford
opportunities for lower costs resulting from competitive market forces, price
for both of these energy sources have become more volatile in the recent past
and may continue to be.
The company also has long-term oxygen contracts. It believes that the
current market price of oxygen is approximately equal to the cost contained in
the supply contracts.
Former Co-Steel's operations have long-term contracts with major utilities
for the supply of electricity. These contracts typically have two components to
them, a firm portion, which supplies a base load for each plant's
34
rolling mill and auxiliary services and an interruptible portion, which
supplies the electric arc furnace`s load. The interruptible portion of the
contract represents 60% to 70% of the total load and, for the most part, is
based on a spot market price of electricity at the time it is being used and as
such former Co-Steel mills have significant exposure to the electricity spot
market.
COMPANIES IN BRAZIL AND ABROAD
GROWTH OF PRODUCTION
Thousand tons
CRUDE STEEL OUTPUT ROLLED PRODUCTS OUTPUT
1980 1,303 1,182
1982 1,185 1,079
1984 1,556 1,402
1986 1,963 1,828
1988 2,056 1,662
1990 2,564 2,070
1992 2,677 2,313
1994 3,344 2,929
1996 3,513 3,097
1998 3,661 3,398
2000 7,065 5,836
2002* 11,500 8,800
* 2002 figures include 12 months of Acominas and Co-Steel.
Gerdau's production has been growing as a result of the construction and
acquisition of strategically located units (state-owned companies privatized in
Brazil and private companies abroad) that increased production and facilitated
the Company's expansion strategy, the relationship with suppliers and the
proximity with customers. "See Item 4 - Business Strategy"
PRODUCTION OF CRUDE STEEL BY COMPANY
Thousand tons
GERDAU
AMERISTEEL
GERDAU MRM
GERDAU ACOMINAS LAISA AZA AMERISTEEL SPECIAL AMERISTEEL GERDAU
CAMBRIDGE SECTIONS AMERISTEEL
1993 2,588.2 - 29.0 34.0 227.0 - - -
1994 3,039.4 - 28.9 41.8 234.0 - - -
1995 2,752.7 - 33.7 62.7 245.0 156.4 - -
1996 2877.9 - 43.5 72.8 244.5 273.8 - -
1997 3051.4 - 45.9 79.5 201.1 310.3 - -
1998 2974.2 - 51.4 80.4 259.8 294.9 - -
1999 3,270.5 - 45.4 140.9 260.4 290.6 453.9 -
2000 3,495.9 - 43.7 216.5 281.8 304.8 1,761.2 -
2001 3,470.1 - 41.2 244.2 294.4 321.4 1,678.8 -
2002* 3,602.9 1,901.1 45.6 266.3 - - - 2,984.8
* Output of Acominas consolidated since February 2002.
35
PRODUCTION OF ROLLED STEEL PER COMPANY
Thousand tons
GERDAU
AMERISTEEL
GERDAU MRM
GERDAU ACOMINAS LAISA AZA AMERISTEEL SPECIAL AMERISTEEL GERDAU
CAMBRIDGE SECTIONS AMERISTEEL
1993 2,268.0 - 29.0 25.0 190.0 - - -
1994 2,673.8 - 28.3 27.9 199.2 - - -
1995 2,455.6 - 29.2 54.3 182.2 142.4 - -
1996 2,528.6 - 36.1 68.1 206.2 258.0 - -
1997 2,781.4 - 39.4 75.9 176.3 277.9 - -
1998 2,753.1 - 45.2 75.7 220.5 265.0 - -
1999 3,054.9 - 41.6 122.2 250.6 261.3 405.8 -
2000 3,250.3 - 40.1 200.6 269.1 270.2 1,655.7 -
2001 3,301.4 - 37.3 225.7 274.6 277.8 1,640.3 -
2002* 3,335.5 278.9 39.7 253.6 - - - 2,807.7
* Output of Acominas consolidated since February 2002.
In 2002, Gerdau's production of crude steel grew by 45.5%, and the
production of rolled products increased 16.6%. These substantial increases
resulted from the consolidation of Acominas since March 2002 and from the merger
between Gerdau's North American assets and Co-Steel in the last quarter, which
resulted in the creation of Gerdau AmeriSteel. Production data for the newly
formed company consolidate the operating figures from Gerdau AmeriSteel MRM
Special Sections, Gerdau AmeriSteel Cambridge and AmeriSteel, as well as
production figures from Gerdau AmeriSteel Perth Amboy and Gerdau AmeriSteel
Sayreville for the last quarter of 2002. The tables above show the growth in
production of crude steel and rolled products at each unit in the past decade.
GERDAU S.A.
Gerdau non-consolidated has 9 mills in Brazil, distributed throughout the
country. In the state of Rio Grande do Sul, Gerdau owns the Gerdau Acos Finos
Piratini and the Gerdau Riograndense units. In Parana, Gerdau owns Gerdau
Guaira; in Rio de Janeiro, Gerdau Cosigua; in Minas Gerais, the units of Barao
de Cocais and Divinopolis; in Bahia, Gerdau Usiba; in Pernambuco, Gerdau
Aconorte; and in Ceara, Gerdau Cearense. In addition to the industrial units,
Gerdau also owns Comercial Gerdau, a network that distributes its own steel
products and resells flat products from other manufacturers. Comercial Gerdau
has 68 stores and 04 flat steel service centers. Finally, Gerdau has 9 Armafer
rebar fabricating facilities and 5 downstream operations.
ACOMINAS
Acominas has an annual production capacity of 3.0 million tons of crude
steel and 740 thousand tons of rolled products. The company is a large exporter
of semi-finished products, especially billets, but it also sells slabs and
blooms abroad. In the domestic market, it sells smaller volumes of rolled
products such as merchant bars and rebars. Starting in 2002, Acominas began to
produce heavy structural shapes at a rolling mill recently installed at the Ouro
Branco mill. A second wire rod rolling mill is under construction, with an
installed production capacity of 550 thousand tons per year. The new equipment
is scheduled to begin operation at the end of the year 2003.
GERDAU LAISA
In 1980, the Company acquired the Laisa mini mill, in Uruguay. Gerdau Laisa
has been profitable in the past years, and it is the only long steel producer in
Uruguay. Gerdau Laisa has an annual production capacity of 70.0 thousand tons of
crude steel and 72.0 thousand tons of rolled products. Production statistics are
based on Gerdau Laisa's sales added to Uruguayan imports. According to Gerdau
Laisa it supplies 93% of the rebar market in Uruguay.
GERDAU AZA
In 1992, the Company acquired the AZA mini mill, in Chile. In January 1999,
Gerdau AZA's second mill began operations. The two units, Renca and Colina, have
an annual production capacity of 360 thousand tons of crude steel and 440
thousand tons of rolled steel. The difference in the output of crude steel and
long rolled products
36
is due to the fact that Gerdau AZA still operates an old profile rolling
mill equipment at the Renca unit, which was not deactivated following the
inauguration of the new plant in 1999. Although no official statistics are
available in Chile, Gerdau AZA believes its share in the domestic long steel
market is about 39%.
SIPAR
In December 1997, Gerdau entered the Argentinean market through Sipsa, a
rolling mill with a production capacity of 75.0 thousand tons per year. In May
1998, Gerdau closed a deal to acquire one third of the total capital stock at
Sipar, another Argentinean rolling mill, in exchange for one third of Sipsa's
capital stock. Gerdau has then two rolling mills in Argentina, with a 71.8%
stake in Sipsa and 38.2% in Sipar. More recently Gerdau underwent a financial
and corporate restructuring of its operations in Argentina to adapt to the new
economic environment in that country and Gerdau currently holds a 38.2% stake in
Sipar, and Sipsa became an integral subsidiary of Sipar; it is expected that
this will maximize business opportunities, improve results and minimize the
impact of the fluctuation of the local peso against other currencies.
GERDAU AMERISTEEL
In September 1999 Gerdau acquired from Kyoei Steel Ltd., of Japan, 75% of
AmeriSteel (Florida, U.S.). At that time, AmeriSteel operated 4 mills in the
East Coast: one unit in Florida, two in Tennessee, and one in North Carolina. In
2000, Gerdau acquired an additional 12% from Kyoei, increasing its stake in
AmeriSteel to 87%. In December 2001, AmeriSteel acquired a steel mill located in
Cartersville, state of Georgia.
In October 2002 Gerdau closed a deal to merge its assets in North America -
that is, AmeriSteel, Gerdau AmeriSteel Cambridge (formerly Gerdau Courtice
Steel, acquired in 1989), and Gerdau AmeriSteel MRM Special Sections (formerly
Gerdau MRM Steel, acquired in 1995) - with Co-Steel, creating Gerdau AmeriSteel.
Gerdau AmeriSteel has an annual production capacity of 5.9 million tons of
crude steel and 5.5 million tons of rolled products. It is the second largest
producer of long steel in North America. Since the deal was completed, Gerdau
AmeriSteel's shares have been traded on the Toronto Stock Exchange under the
ticker symbol GNA.
The transaction combined complementary operations. The result was a better
product mix, a solid financial base and a consistent growth platform on which
the Company could stand to strive for the leadership in the North American steel
industry. Co-Steel issued 146,588,194 ordinary shares to acquire the North
American subsidiaries of Gerdau S.A. After the transaction was completed,
Co-Steel became Gerdau AmeriSteel, with approximately 198 million ordinary
shares. Co-Steel's shareholders were handed 26% of Gerdau AmeriSteel's shares,
while Gerdau S.A. and the other AmeriSteel minority shareholders hold 74% of the
new company..
After the merger of Gerdau and Co-Steel, the legal name of the North
American companies changed. Since the beginning of 2002, the former Gerdau
companies in North America have been renamed as follows:
- Gerdau AmeriSteel MRM Special Sections Inc., formerly Gerdau MRM Steel
Inc.
- Gerdau AmeriSteel Cambridge Inc., formerly Gerdau Courtice Steel Inc.
- Gerdau AmeriSteel US Inc., formerly AmeriSteel Corporation.
PRODUCTS
Civil Construction
GG-50, CA-60 and CA-25 concrete reinforcing bars (rebar)
Annealed wire
Ribbed welded wire mesh for reinforced concrete
Transfer bars
POP columns and meshes
Truss frames
Structural shapes
Fabricated rebar
37
Industrial Products
Hot rolled flat, round and square bars
Cold drawn round, square and hexagonal bars
Blooms
Angles
Channel, I-beams, T-Shapes and W-beams
Ribbed T profile
Elevator guide rails
Star profile
Slabs
Tribar
Wire rod
Rolled and continuous cast billets
Railroad cross ties
SPECIAL SECTION PROFILES (MANUFACTURED IN CANADA)
Grader blades
Smelter bars
Light rails
Superlight I-beams
Elevator guide rails
Metallurgy
Complete line of wires for industrial applications, welding and wire ropes
Agricultural Products
Oval-shaped wire and barbed wire
High-Strength steel fence posts
Staples for fences
Cercafix post-spacing wire
Wire and posts for electrified fences
Wire rope for corrals
Wire and wire rope for agricultural products
Galvanized wire
Plastic-coated galvanized wire
Welded wire fences
Nails
Bulk nails - construction
Bulk nails - carpentry
Bulk nails - packaging
Specialty Steel
Round and square rolled bars
Wire rod
Forged bars
Cold-finished products
With or without heat treatment
Tools Steel
Forged bars and blooms
Round, square and flat rolled bars
STAINLESS STEELS
Round and square rolled bars
Wire rod
Forged bars
38
Cold-finished
Flat Steel Products (manufactured by Gallatin Steel)
Hot rolled coils
Hot rolled bands
Hot rolled pickle & oiled
Hot rolled slit coils
SALES AND MARKETING
CONSOLIDATED SALES PER PRODUCT LINE
Thousand tons
2002 2001 2000 1999 1998
TOTAL 8,783.4 6,378.9 6,442.3 4,506.1 3,756.5
SEMI-FINISHED PRODUCTS 1,613.7 181.2 247.6 109.6 119.8
Domestic market 408.1 54.4 53.5 29.0 41.6
Exports 1,205.6 126.8 194.1 80.6 78.2
LONG STEEL 5,707.3 4,775.4 4,734.9 3,151.1 2,540.5
Domestic market 2,131.7 1,887.9 1,891.6 1,740.8 1,727.4
Exports 386.8 314.4 329.3 308.0 102.2
Abroad 3,188.8 2,573.1 2,513.8 1,102.3 710.9
SPECIALTY STEELS 272.9 259.9 263.8 212.8 168.2
Domestic market 269.6 254.9 250.5 208.8 157.5
Exports 3.3 5.0 13.3 4.0 10.7
DRAWN PRODUCTS 767.4 713.3 706.3 661.0 648.5
Domestic market 763.7 701.8 693.9 651.6 631.4
Exports 3.7 11.5 12.4 9.4 17.1
FLAT STEEL 422.1 449.1 489.7 371.6 279.5
Domestic market 422.1 449.1 489.7 371.6 279.5
(resale)
CONSOLIDATED SHIPMENTS BY REGION
Thousand tons
2002 2001 2000 1999 1998
TONS TONS TONS TONS TONS
BRAZIL 5,594.6 3,805.8 3,928.5 3,403.8 3,045.6
North America 2,884.3 2,294.0 2,264.1 927.1 505.5
South America 304.5 279.1 249.7 175.2 205.4
ABROAD 3,188.8 2,573.1 2,513.8 1,102.3 710.9
TOTAL 8,783.4 6,378.9 6.442,3 4,506.1 3,756.5
BRAZILIAN OPERATIONS
Gerdau's operations in Brazil, through Gerdau non-consolidated and
Acominas, accounted for 63.7% of the consolidated shipments in 2002. Brazilian
sales in 2002 reached 5.6 million tons (70.8% from Gerdau non-consolidated and
29.1% from Acominas). Gerdau non-consolidated, through its Brazilian Long Steel
operation, services more than 14,0 thousand customers (considering customers who
made at least one purchase in the last 12 months), none of which accounts for
more than 2% of total sales. The ten largest customers account for less than 12%
of local sales.
39
In 2002, Gerdau non-consolidated, with its 09 steel mills, delivered to its
customers 4.0 million tons of steel products; 97.4% of sales were destined to
the civil construction and industrial sectors, and the remaining volume to the
agricultural sector.
The Company's Business Units are defined along product lines or market
characteristics, and their aim is to establish commercial strategies with a
national perspective. The Brazilian Long Steel operation has the following
Business Units:
GERDAU CONSTRUCAO CIVIL (GC) - CIVIL CONSTRUCTION
GERDAU INDUSTRIA (GI) - INDUSTRIAL
GERDAU PRODUTOS AGROPECUARIOS (GPA) - AGRICULTURAL PRODUCTS
GERDAU PREGOS (GP) - NAILS
GERDAU PRODUTOS METALURGICOS (GPM) - METALLURGICAL PRODUCTS
GERDAU EXPORTACAO (GEX) - EXPORTS
COMERCIAL GERDAU (CG) - RETAIL
Each Business Unit has national coverage with a centralized sales policy
and local execution. Business Units with the most sales to a particular customer
are allocated responsibility for Company relations with that customer. More than
50% of the production negotiated by Business Units is distributed through
channels such as Comercial Gerdau, the largest distribution channel with 68
stores all over Brazil. Last year, Comercial Gerdau served 155 thousand
customers (customers who made at least one purchase in 2002). Additionally this
network is supported by 6,000 independent distributors, resulting in a
comprehensive coverage of the Brazilian territory. Sales in the distribution
network and to final industrial and civil construction consumers are made
through Company employees and authorized representatives selling on commission.
The Company provides these representatives with product catalogs and computer
terminals linked to Gerdau's information system (Internet and SAP R/3), fax and
telephone equipment.
Gerdau non-consolidated delivers its products directly to customers,
through third companies with supervision of the Gerdau team, in order to
minimize delays. Currently, 70% of the orders are delivered on schedule. Sales
trends in both the domestic and export markets are forecast monthly based on the
last three months' Gerdau non-consolidated historical data. Gerdau
non-consolidated uses its own information system to remain informed of market
developments so that it can respond swiftly to fluctuations in demand. Gerdau
considers its flexibility to shift between markets and the ability to monitor
and adapt to changes in demand thereby keeping inventory levels at a minimum as
keys to success.
The Gerdau Acos Finos Piratini mill is considered to be independent from
the Brazilian Long Steel operation in terms of sales and production. Its focus
is on specialty steel for mechanical construction, tools and stainless steel
products. Of the volume manufactured, 80% is destined to the automotive segment.
To meet the continuous need for innovation, Gerdau Acos Finos Piratini is
constantly developing new products in partnership with its customers. As a
result, in fiscal year 2002, it introduced high cleanliness steels for
application in bearings, steel for off-shore cables, and stampable steel for
screws.
NON-CONSOLIDATED SALES PER REGION
% of sales to the domestic market
REGION 1998 1999 2000 2001 2002
South 25.5% 20.9% 25.3% 26.4% 27.1%
Southeast 49.7% 52.2% 51.2% 49.3% 47.9%
Northeast 15.6% 15.7% 14.1% 14.9% 15.6%
Center west 6.0% 7.9% 4.9% 5.3% 5.2%
North 3.2% 3.3% 4.5% 4.1% 4.2%
TOTAL 100% 100% 100% 100% 100%
Of sales to the domestic market, 47.9% were made to the southeast, which
includes the states of Sao Paulo and Rio de Janeiro, the economically most
developed. Southern Brazil, were Gerdau Riograndense and Gerdau Acos Finos
Piratini are located, accounted for 27.1% of non-consolidated domestic sales in
2002. Together, sales to the
south, southeast and northeast, not including Acominas, represent 90.6% of
the Brazilian operations sales to the domestic market.
By contrast, Acominas is strongly geared towards exports. Its sales in the
domestic market include finished products such as merchant bars and rebars, and
are made directly to customers. Acominas has an installed production capacity of
740.0 thousand tons of rolled products, a volume that is sold almost in its
entirety in Brazil. In 2002, a new rolling mill with a capacity to produce 440
thousand tons of heavy structural shapes began operating. For the coming year,
after the equipment is adjusted and operating normally, Acominas hopes to
increase its sales of this product. The completion of a new wire rod rolling
mill equipment is scheduled for the end of 2003, with installed production
capacity of 550.0 thousand tons per year.
RETAIL
Through Comercial Gerdau, Gerdau non-consolidated sells its products all
over Brazil, through a network of 68 stores and 04 flat steel service centers.
In addition to Gerdau products, Comercial Gerdau resells flat products of others
producers unaffiliated with the Company. Sales of flat steel products in 2002
reached 422.1 thousand tons. On the other hand, Acominas, due to the nature of
its products (semi-finished) and market (large customers) does not count on a
retail distribution network.
Among Gerdau's South American companies, Gerdau AZA in Chile uses a network
of 150 independent distributors to sell its products, and Gerdau Laisa, in
Uruguay, sells its products directly to small-consumers at differentiated
prices.
EXPORTS
Historically, Gerdau exports only its surplus production, based on its
policy to supply local markets. Thanks to this position, the tariffs and
barriers imposed on exporters by Section 201 in the United States have not
impacted Gerdau's non-consolidated business, and in a way even favored the
Company's North American operations.
Export marketing activities are coordinated by the Business Unit
responsible for selling the Company's exportable products and are conducted (i)
primarily on FOB (Free on Board) basis, (ii) at sight against letters of credit
opened by customers in more than 30 countries throughout the world and (iii)
directly to clients in neighboring countries and indirectly through trading
companies.
In spite of dealing primarily in commodity products such as rebar, Gerdau
is aware of the importance of quality control. In order to ensure the
satisfaction of end-users around the world with products purchased indirectly
from Gerdau, the Company sends technicians from time to time to check the
quality of products shipped to customers.
Due to its emphasis on exports, Acominas sells its entire production in the
form of semi-finished products such as billets, blooms and slabs. Billet sales
in 2002 (12 months) reached 925.0 thousand tons; slab sales reached 286.4
thousand tons; and bloom sales reached 217.8 thousand tons. A significant
portion of the production at Acominas is destined to the Asian markets, and even
after Section 201 the company still supplies the U.S. market, since no tariffs
were imposed on the import of billets and the quotas established for flat steel
were sufficient to ensure the maintenance of supply. Most of Acominas sales to
foreign markets are made directly. Approximately 20% of sales are made through
trading companies.
Foreign operations are primarily devoted to supplying the respective
domestic markets of the countries in which they are located, with the exception
of the Canadian operations, which sell almost 50% of their production in the
United States. Approximately 35% of Gerdau AmeriSteel Cambridge sales are
generated by customers in the United States, predominantly around the Great
Lakes region. The customer base is typically 65% service centers, 25%
fabricators, and 10% OEMs. Gerdau AmeriSteel MRM Special Sections sells
approximately 65% of its production to customers in the U.S. market with the
remainder being sold in Canada. Approximately 80% of its
production is sold directly to OEMs. The Canadian operations market their
products in the United States through direct sales to customers which are
invoiced in the same terms as Canadian customers but in U.S. dollars.
FOREIGN OPERATIONS
In South America, Gerdau AZA sold 265.6 thousand tons of finished products
in 2002. This means a 12.2% increase compared to 2001. In 2002 merchant bar
sales to the metal-mechanic sector felt the impact of increased competition due
to the imports that entered Chile. In this segment, Gerdau AZA has a market
share of more than 50%. Rebar sales for the civil construction sector increased
in 2002 and the company has a market 50% share in this market. In 2002 the
demand for rebar increased by 6.0% due to important investments made in
infrastructure. Since the end of 2000, Gerdau AZA has a business unit known as
AZAonLine, which services customers in Chile through the Internet. This was the
first e-commerce initiative in the steel sector in Chile. Currently, customers
can follow their orders on the Internet, as well as product inventories, credit
and payment status. They can also visualize their purchase records, generate
quality certificates and place orders.
Gerdau Laisa in Uruguay has 3,000 registered customers that can be
categorized as retail, wholesale and consumers, and who distribute Laisa's
products all over the country. Uruguayan customers also count with an e-business
channel.
Gerdau AmeriSteel products are generally sold to steel service centers,
fabricators, or directly to OEMs east of the Mississippi River. The products are
used in a variety of industries, including the construction, mining, automotive,
commercial, cellular and electrical transmission, metal building manufacturing
and equipment manufacturing industry. Gerdau AmeriSteel also sells fabricated
rebar to contractors performing work in both private (commercial) and public
(road, bridge and other construction or infrastructure) projects.
In the rebar fabrication business, the market areas it covers are those
east of the Mississippi River, with plants located in, or near, most major
cities in the eastern United States. Gerdau AmeriSteel long-standing strategy is
to have its production facilities located in close proximity to the job-site it
supplies, so the company can provide quick response time to satisfy their
reinforcing steel needs.
In the year ended December 31, 2002, on a pro forma basis, Gerdau
AmeriSteel sold products to over 1,000 customers. Given the diversity of its
products and markets, no one customer comprises 3% or greater of the
consolidated net sales. The five largest customers comprised 8% of total
consolidated pro forma net sales in the period.
In general, sales of mill finished products to U.S. customers are centrally
handled by employees in the Tampa sales office, and sales to Canadian customers
are centrally handled by employees in the Whitby sales office. Gerdau Ameristeel
also has sales offices in Perth Amboy, where rod sales are handled, and Selkirk,
where sales of special sections are handled. Sales representatives take orders,
schedule mill production and manage inventory. Gerdau AmeriSteel has about 50
employees dedicated to marketing and sales, a quarter of which are located in
the field, near its customers. Each of Gerdau AmeriSteel's sales representatives
has immediate access to inventory and production schedules at all mills, which
enables them to provide customers with "one stop shopping" and to service a
customer's needs from the most convenient and/or cost effective source in the
company. Metallurgical service representatives at the mills provide technical
support to the sales force but are not considered sales representatives.
In general, sales of cold drawn, rod and super light beam products are
handled by sales representatives located at Gerdau AmeriSteel's relevant
facilities. The fabricated rebar and elevator guide rails are generally sold
through a bidding process in which employees at the facilities work closely with
each customer to establish its product requirements, shipping schedule and
price.
43
TERMS OF SALES
Gerdau non-consolidated's usual terms of sale are 21 days for Brazilian
domestic sales, which are made CIF (Cost Insurance and Freight). Domestic
customers making purchases of more than the equivalent to US$ 10,774 per month
are subject to a centralized credit approval process. As a consequence of these
policies, the Company's bad debt write-offs (which are made after 12 months) are
an insignificant percentage of Gerdau's consolidated accounts receivable. At
Acominas, payment of domestic purchases is at sight (or within 7 days). Deferred
payment through bank draft is also accepted. Sales to the foreign market are
paid to Acominas immediately using letters of credit.
Gerdau AmeriSteel's credit terms to customers are generally determined
based on market conditions and customs. Gerdau AmeriSteel's business is
seasonal, with orders in the June and September quarters tending to be stronger
than the March and December quarters due primarily to weather related slowdowns
in construction activity.
All Gerdau companies (in Brazil and abroad) accept both immediate and
deferred payment for purchase of their products, the latter in accordance with
ordinary commercial terms used in each region, determined seasonally. Presently,
most sales are made with a maximum sales payment term of 30 days.
COMPETITION
Shipping, freight and demurage costs are a major barrier to imports and,
since Gerdau non-consolidated operates primarily in the common long rolled
product business where profit margins are relatively small, the incentive for
foreign competitors to enter the Brazilian market is low. In the domestic
market, no single company competes against Gerdau across all its product range.
Gerdau non-consolidated believes that its business diversification and
decentralization provide a competitive edge over its major competitors, whose
operations are more centralized.
MAJOR BRAZILIAN PRODUCERS OF LONG STEEL
Thousand tons
COMPANY PRODUCTION MARKET SHARE
Gerdau + Acominas* 3,660.3 47.8%
Belgo Mineira 2,734.2 35.7%
V&M do Brasil 441.9 5.8%
Acos Villares 420.8 5.5%
Barra Mansa 366.7 4.8%
Other 28.0 0.4%
TOTAL 7,651.9 100%
Source: IBS - Informe Estatistico Preliminar - January 2003
* Acominas figures include 12 months of production
Gerdau is the largest Brazilian long steel producer, with a 47.8% market
share. Belgo Mineira is the second largest producer in the Brazilian market.
Originally, Belgo Mineira was an integrated steel company but now it also has
minimill plants. Gerdau's strategy is focused on the decentralized production of
long steel with electric arc furnace (EAF) market-mills employing continuous
casting technology. Additionally, Gerdau has three integrated mills and
Acominas. Gerdau has plants located near steel scrap suppliers, port facilities,
and the markets they serve, thereby incurring low freight costs.
By contrast, Acominas is an almost exclusive supplier of blooms and billets
to the domestic market, with a well-defined market and a loyal customer base.
The slab market is more competitive due to the presence of CST, and more
recently of Cosipa. In foreign markets, Acominas faces strong competition from
Eastern European suppliers (Russia, Ukraine, Italy and Japan) for higher quality
products. The company is highly competitive due to its tradition and to the
quality of its products, to the guaranteed delivery schedules and technical
assistance provided to customers. As a result, Acominas has a diversified
customer list, and counts on traditional customers in all markets in which it
operates.
In South America, the main barriers faced by Gerdau AZA sales are freight
and transportation costs and the availability of products when compared to
imports. In the Chilean domestic market, CAP - Compania Acero Del Pacifico has a
share of almost 48%. Gerdau AZA's market share is 39% and imports account for
13% of total sales.
43
In Uruguay, Gerdau Laisa's main competitors are two local rolling mills, in
addition to imports coming from Brazil, Argentina and Eastern Europe.
Gerdau AmeriSteel competes with numerous foreign and domestic producers,
including both integrated and minimill producers. Some of its competitors have
greater financial and capital resources and some continue to invest heavily to
achieve increased production efficiencies and improved product quality.
Competition is based on price, quality, and the ability to meet customers'
product specifications and delivery schedules. In addition, in the case of
certain product applications, steel competes with a number of other materials
such as plastic, aluminum, and composite materials. Gerdau AmeriSteel may be
adversely affected by excess industry capacity, the potential for currently
idled facilities to be restarted, and excess supply of some products and a
number of potential steel substitutes. The highly competitive nature of the
industry may in the future exert downward pressure on prices for certain
products.
The Gerdau AmeriSteel market area encompasses Canada and the United States,
predominantly throughout the eastern seaboard and the midwest. The products of
Gerdau AmeriSteel MRM Special Sections are often shipped greater distances,
including overseas, due to their specialized nature. AmeriSteel experiences
substantial competition in the sale of each of its products from numerous
competitors in its geographic markets. Rebar, merchant bars, and structural
shapes are commodity steel products, for which price is the primary competitive
factor. Due to the high cost of freight relative to the value of steel products,
competition from non-regional producers is somewhat limited. Proximity to
customers of distribution warehouses together with competitive freight costs and
low-cost manufacturing processes are key to maintaining margins on concrete
reinforcing bar and merchant bar products. Except in unusual circumstances, the
customer's delivery expense is limited to freight charges from the nearest
competitive mill and the supplier absorbs any incremental freight charges.
Despite the high cost of freight associated with transporting steel bar
products, many North American steel producers have experienced significant and,
in same cases, unfair competition from foreign finished steel bar producers
during the past several years. Due to unfavorable foreign economic conditions
and excess capacity, imports of steel bar products to the U.S. and Canadian
markets are at historically high levels and often at prices below their
production and export costs, with a corresponding negative impact on domestic
prices. Despite favorable anti-dumping rulings on rebar from several countries
early in 2001 by the United States International Trade Commission, imports of
rebar into the U.S. have continued at very high levels.
In March, 2002, President Bush imposed tariffs and quotas on certain steel
products imported into the United States. Duties were imposed for three years
and will decline over that period. Gerdau AmeriSteel believes its principal
competitors include Ispat Sidbec Inc., Stelco Inc. and Ivaco Inc. in Canada and
Bayou Steel Corporation, Commercial Metals Corporation, Marion Steel Company,
NorthStar Steel Company, Nucor Corporation, Roanoke Eletric Steel Corporation,
Sheffield Steel and Steel Dynamics in the United States. Despite the commodity
characteristics of the rebar and merchant bar markets, the company believes that
to some extent it distinguishes itself from competitors to some extent due to
its product quality, consistent delivery performance, capacity to service large
orders, and ability to fill most orders quickly from inventory. Gerdau
AmeriSteel believes that it produces the largest range of bar products and
shapes east of the Mississippi River and considers it an important competitive
advantage in a market in which its customers are looking to fulfill all of their
requirements from a few key suppliers. Moreover, although construction and
infrastructure projects are generally nonrecurring in nature, the steel
fabricators, distributors, and service centers that supply many of these
projects tend to be long-time customers of the company.
Gerdau AmeriSteel Perth Amboy is party to a United States wire rod
anti-dumping and countervailing duty case against a number of countries and
steel producers. The U.S. Department of Commerce (DOC) has made a preliminary
determination of injury against certain countries and producers with respect to
both anti-dumping and countervailing duties. The DOC has made preliminary
determinations of countervailing and anti-dumping duties against certain
countries and producers that range from 7% to 369%. Although there have been
recent increases in rod pricing as a result of these duties a considerable
amount of imported rod continues to enter U.S. markets.
The tariffs imposed in the United States and any similar actions taken in
Canada may not have a positive
45
impact on the North American steel industry and may not reduce the volume
or negative impact of unfairly priced imports. Global overcapacity, a strong
U.S. dollar, the strength of the North American economy relatively to the rest
of the world, numerous exemptions under the tariffs, the short term (three
years) duration of the tariffs, the decline in tariff rates after the first
year, and the disparity of tariff rates across different product lines are all
factors that may negate any benefits of the tariffs. For instance, in the bar
products market, which is subject to lower tariffs, the benefit of slightly
increased selling prices was offset by increased scrap costs as demand for scrap
increased due to the higher volumes of other steel production which benefited
from higher tariffs.
ENVIRONMENTAL MANAGEMENT
Gerdau's units are required to comply with a set of environmental laws and
regulations that are constantly evolving. These laws and regulations cover
atmospheric emissions, disposal of effluents in surface and ground waters, noise
control, waste management (generation, handling, storage, transportation and
disposal of classified substances) and remediation of contaminated areas. These
laws and regulations vary and depend on the geographical location of each plant.
Their scope may be federal, state or municipal.
Gerdau's operations generate certain types of waste and byproducts such as
slag, scale and EAF dust, in addition to other less relevant waste, which are
classified according to their degree of hazardousness and must be adequately
controlled and disposed of following the applicable environmental laws and
regulations. In the countries where Gerdau operates, certain environmental laws
and regulations establish the payment of duties to cover costs relative to
treatment, control, investigation and cleaning up of contaminated property, even
if this contamination was unintentional or resulted from previous practices.
These duties also apply in case of ownership of the disposal site. Whenever the
Company is aware of the need to adjust to environmental requirements, it
conducts the necessary surveys and allocates resources for this purpose. The
cost of such cleaning up or remediation is currently not expected to result in
any material impact in the financial position of Gerdau.
In Brazil and South America, resources were allocated for investments in
and investigation of locations with a potential for contamination and for the
remediation of areas in which contamination was confirmed. The main investments
made in 2002 were related to the construction of dedicated industrial landfills
at Gerdau Cosigua and Guaira (in Rio de Janeiro and Curitiba, Brazil,
respectively) and to the remediation of locations that had been contaminated by
the previous owner at the Sao Jose dos Campos (Brazil) mill.
At Gerdau Cosigua, state laws require that Mandatory Annual Audits be
performed. The Company uses these audits as a tool in the process of renewal of
its licenses and permits. At Gerdau Riograndense, in the state of Rio Grande do
Sul, a thorough investigation of all local activities was performed regarding
the potential effects on the atmosphere, waters, and ground and the impact on
the region affected and on the most sensitive surrounding ecosystems. The full
report, including all findings, was prepared by Gerdau's Brazilian units in
partnership with North American consulting firm ERM-Environmental Research
Management and Brazilian universities. This report was forwarded to the
appropriate governmental agencies. The entire process was monitored by
non-governmental organizations, and the results demonstrated the absence of
sensitive contamination that could justify other types of intervention besides
the control of emission sources and the systematic monitoring of emissions.
At Gerdau Laisa, in Uruguay, and at Gerdau Aconorte, in Recife, Brazil, new
exhaust and gas treatment systems were installed at the EAF, meeting local
requirements and implementing a stricter standard than that established by the
legal limits of local regulations.
All of Gerdau's mills in South America, including Brazil, have up-to-date
environmental licenses and permits and have authorization to operate according
to local environmental laws and regulations. Having such permits is mandatory in
order to obtain financial resources from Brazilian financing agents.
Gerdau's mills in Brazil play an active role in the management of surface
water resources in the regions in which they operate, working together with
official agencies through new participatory models involving government, users,
and society.
Like all other Brazilian mills, Acominas has allocated resources for the
installation of new atmospheric emissions control systems in its sintering and
raw material handling operations. The Ouro Branco mill holds all the
45
necessary permits to operate and dispose of its industrial wastes, without
any major conditional circumstances at the present moment. The mill is currently
in the process of renewing its environmental license. In the case of the state
of Minas Gerais, where the mill is located, this license is valid for four
years. As part of the requirements to renew this license, the mill has to
elaborate an environmental performance report (Environmental Performance Audit
Report, RADA). The renewal of environmental licenses for all the mills located
in Minas Gerais - Acominas, Gerdau Divinopolis and Gerdau Barao de Cocais - was
dependent on the elaboration of a RADA.
Some of the operations in the United States are in charge of the
remediation of certain locations where EAF dust has been generated and disposed
of. In general, remediation cost estimates are based on assessments of each
location and on the nature of the activities developed, and the characteristics
of the remediation work to be carried out. For such assessments, Gerdau may hire
external consultants and service providers to help determine these
characteristics.
In 2000, Gerdau AmeriSteel Perth Amboy and Gerdau AmeriSteel Sayreville
took part in the U.S. Environmental Protection Agency's (EPA) Steel Minimill
Audit Initiative Program. The two mills performed comprehensive multi-media
self-audits. The results of these audits were forwarded to the EPA along with a
list of corrective actions that are expected to be implemented by the end of the
first semester in 2003. [please see http://www.costeel.com/html/annualreport/
00annualreport.pdf]
The presence of radioactive materials in iron scrap may present significant
health and safety risks for workers and the public in general. In addition, the
cost of cleaning the contaminated material and the loss of revenue resulting
from stoppages in production may have a significant economic impact. Usually,
radioactive materials are found in sealed sources such as measuring instruments
or equipment from hospitals or decommissioned nuclear thermoelectric facilities.
Gerdau has sophisticated systems to detect radiation in all its mini mills
in the countries in which it operates. This equipment is used to monitor all
incoming scrap. If any radioactive material is detected in the scrap received by
the Company, the contaminated items are adequately disposed of. The cost of
cleaning in these cases is significantly higher in case the material is
identified after having gone through the melt shop furnaces.
Although Gerdau counts on several detection devices in all its plants, a
source of radioactive scrap may occasionally not be detectable. In July 2001,
for example, a small amount of cesium was received from scrap suppliers and was
accidentally melted at the Gerdau Ameristeel Jacksonville (USA) furnace. The
activities at the mill were interrupted for 25 days until approximately 700 tons
of contaminated material had been removed and the equipment cleaned. As a result
of this accident, Gerdau revised its radiation detection systems to reduce the
risk of a similar accident in the future.
There is no guarantee that unforeseen changes will not occur, such as the
issuing of new laws or mandatory policies. All industrial units are required to
have legal licenses and permits. Any such licenses or permits may be subject to
change under specific circumstances. In addition, the Company may be required to
obtain additional operating licenses or governmental approval and may eventually
incur additional costs.
The environmental management systems implemented at the industrial units
are meant to ensure that the requirements stemming from new legal demands and
interested parties are adequately met.
The units in Chile and Cambridge, Canada, have already earned ISO 14001
certification. Other units are currently preparing to apply for this
certificate.
MAINTENANCE AND TECHNOLOGY
Due to the severe operating conditions in steel mills, regular maintenance
of equipment is a significant ongoing expense, comprising approximately 8.3% of
the Gerdau non-consolidated cost of goods sold for the year ended December 31,
2002. The Company employs specialized maintenance teams, each with
responsibility for a particular area of production. In Chile, the maintenance of
equipment and machinery involves significant levels of costs, comprising about
8.0% of the cost of the finished product in December 2002. In Argentina, this
amount comprises 3% of the cost of goods sold.
46
At Acominas, the average cost of maintenance in 2002 accounted for 15% of
the production cost of finished rolled products, demonstrating the effectiveness
of preventive maintenance to preserve facilities and equipment and to guarantee
operational continuity. The company has made a considerable effort to update its
processes and systems and to verticalize its product line, with an investment of
US$ 415 million between 1999 and 2002. The aim of this effort is the achievement
of optimal financial results. The existing technological lag in relation to
so-called "world-class companies" is reduced with each new investment, and the
projects currently under consideration will definitely eliminate this gap,
making the company, which is already extremely competitive in world markets,
become a world leader in its segment.
Gerdau AmeriSteel's annual melting capacities are based on the best
historical months of production, annualized and assuming 18 days downtime per
year for maintenance and holidays. Although it is normally advantageous to run
the mills at full production levels to achieve the lowest unit costs, producing
to targeted inventory levels balances production with marketing and gives
management flexibility to limit maintenance delays and other downtime.
As is usual for mini-mill steel makers, Gerdau does not have any formal
research and development program, since steel-making technology is readily
available for purchase. However, the Company is continuously implementing
improvements and technological developments. Over the past years, the Company
has introduced modern technologies in its mini mills, such as high power
transformers, water-cooled side walls and roofs, oxygen lance manipulators, slag
foaming and ladle furnaces. In its rolling mills, the Company has introduced
automatic furnace control, continuous rolling mills, high speed finishing
blocks, tempcore and thermex heat treatment, stelmor wire rod processing,
automatic tying machines and slit rolling. Most sophisticated production
equipment used by the Company is supplied by international machinery builders
and steel technology companies. Such suppliers generally enter into technology
transfer agreements with the purchaser and provide extensive technical support
and staff training in connection with the installation and commissioning of the
equipment. Gerdau has entered into technology transfer agreements with Nippon
Steel, Sumitomo Steel, Thyssen, Daido Steel and BSW.
EMPLOYEES
NUMBER OF EMPLOYEES AS OF DECEMBER 2002
GERDAU S.A. ACOMINAS SOUTH NORTH AMERICA TOTAL
AMERICA
9,152 3,826 456 4,592 18,026
As of December 31, 2002, the Company had 18,026 employees considering all
of its industrial units. From this total, 72.0% are in Brazil and the remainder
in units in South and North America, with 456 and 4,592 employees, respectively.
The number of employees in Brazil has grown considerably in the last year due to
the full consolidation of Acominas, which currently employs 3,826 workers. In
North America, the increase in the number of employees results from the
incorporation of employees from the former Co-Steel to Gerdau AmeriSteel .
Additional information regarding employees matters are described in Item 6
- Directors, Senior Management and Employees.
OTHER BUSINESSES
SEIVA S.A. - FLORESTAS E INDUSTRIAS
Seiva was created on December 29, 1971 with the aim to implement
reforestation projects as established by decree 1134/70. The development,
implementation, and maintenance of reforestation projects are carried out by
Seiva's 47 employees (as of December 2002).
The Company owns pine and eucalyptus forests. Since 1971, Gerdau has been
planting these forests, which translates into tax advantages and fulfillment of
environmental requirements applicable to users of charcoal
48
furnaces. Eucalyptus wood is used as raw material in the production of
coal, employed in blast furnaces of units producing pig iron.
DONA FRANCISCA ENERGETICA S.A.
Dona Francisca Energetica S.A. (DFESA) is a company that generates
electricity through the Dona Francisca hydroelectric power station located in
central Rio Grande do Sul. It has a nominal capacity of 125 MW.
DFESA is a company whose objective is to meet the obligations of Dona
Francisca shareholders concerning the operation, maintenance and optimal use of
the energy potential at the Dona Francisca Hydroelectric Plant.
Along with the state utility Companhia Estadual de Energia Eletrica - CEEE,
Dona Francisca shareholders participate in a consortium (Consorcio Dona
Francisca) constituted in accordance with contract number CEEE/9700295 of March
13, 1997. Dona Francisca Energetica has , after the acquisition of an additional
interest in early 2003 by Gerdau S.A., the following shareholders: Gerdau S.A.
(51.8%), Companhia Paranaense de Energia - COPEL (23.0%), Celesc (23.0%), and
Engevix (2.2%).
BRADLEY STEEL PROCESSORS INC.
It is a 50% joint venture with Buhler Industries Inc., which processes
super light beams.
SSS/MRM GUIDE RAIL
It is a 50% joint venture with Monteferro S.p.A., which processes MRM's
guide rail sections for elevator manufactures.
GALLATIN STEEL
Gallatin Steel's steel-making plant is located in Gallatin County,
Kentucky, 40 miles southwest of Cincinnati, on a 1,000-acre site that Gallatin
Steel owns. The location is convenient to barge, rail, and highway
transportation. Gallatin operates a direct current twin-shell electric arc
furnace with a ladle arc refining unit, a thin slab caster, a high-speed tandem
rolling mill and a cut-to-length operation. Gallatin is a 50% joint venture with
Canadian steel maker Dofasco. Gallatin Steel is the only Gerdau AmeriSteel mill
that produces flat rolled sheet, which is used in the construction, automotive,
appliance, machinery, equipment and packaging industries.
C. ORGANIZATIONAL STRUCTURE
CAPITAL STRUCTURE
DISTRIBUTION OF SHARES
(% of participation in total capital as of December 31, 2002)
SHAREHOLDER ORDINARY SHARES TOTAL SHARES
Metalurgica Gerdau and other Gerdau 89.78% 51.48%
Companies
Brazilian Institutional Investors 0.02% 12.95%
Foreign Institutional Investors 1.48% 18.94%
Public 8.72% 16.63%
The figure above presents the distribution of shares at Gerdau S.A. as of
December 31, 2002. Of the Company's total capital stock 48.5% was held by
institutional investors, of which 13.0% were Brazilian investors. Foreign
institutional investors held a 18.9% stake and small investors, 16.6%. Gerdau
S.A. is controlled by the Gerdau family through the holding company Metalurgica
Gerdau S.A. and other companies. In December 2002, Metalurgica Gerdau S.A. held
44.9% of Gerdau S.A., and Santa Felicidade Comercio, Importacao e Exportacao de
Produtos Siderurgicos Ltda., other companies of Gerdau family held the remaining
6.6% of the 51.5% controlling block.
48
The changes that took place between the end of fiscal year 2002 and the
filing of this document concerning the distribution of shares are described in
"Item 8 - Significant Changes."
SHAREHOLDER STRUCTURE - MAIN COMPANIES
In 1995, Gerdau underwent a restructuring process, completed in 1997. As
part of this process, 28 companies then comprising the Gerdau group were merged.
In addition, the six publicly listed companies were consolidated into two:
Gerdau S.A. and the holding Metalurgica Gerdau S.A., which resulted in greater
transparency in the relationship with the capital market.
CAPITAL STRUCTURE - MAIN COMPANIES
(Direct and indirect % of participation)
GERDAU S.A. STAKE - TOTAL CAPITAL
Shareholers
Metalurgica Gerdau S.A. 45%
Other 55%
SEIVA S.A. STAKE - TOTAL CAPITAL
Shareholders
Gerdau S.A. 96%
Other 4%
ACOMINAS S.A. STAKE - TOTAL CAPITAL
Shareholders
Gerdau S.A. 79%
Other 21%
GERDAU INTERNACIONAL LTDA. STAKE - TOTAL CAPITAL
Shareholders
Gerdau S.A. 100%
GERDAU AZA S.A. STAKE - TOTAL CAPITAL
Shareholders
Gerdau Internacional 100%
GERDAU LAISA S.A. STAKE - TOTAL CAPITAL
Shareholders
Gerdau Internacional 99%
Other 1%
SIPAR ACEROS S.A. STAKE - TOTAL CAPITAL
Shareholders
Gerdau Internacional 38%
Other 62%
GERDAU AMERISTEEL CORP. STAKE - TOTAL CAPITAL
Shareholders
Gerdau Internacional 74%
Other 26%
49
GERDAU AMERISTEEL US INC STAKE - TOTAL CAPITAL
Shareholders
Gerdau AmeriSteel Corp. 100%
GERDAU AMERISTEEL MRM SPECIAL SECTIONS STAKE - TOTAL CAPITAL
Shareholders
Gerdau AmeriSteel Corp. 100%
GERDAU AMERISTEEL CAMBRIDGE. STAKE - TOTAL CAPITAL
Shareholders
Gerdau AmeriSteel Corp. 100%
GERDAU AMERISTEEL PERTH AMBOY STAKE - TOTAL CAPITAL
Shareholders
Gerdau AmeriSteel Corp. 100%
GERDAU AMERISTEEL SAYREVILLE STAKE - TOTAL CAPITAL
Shareholders
Gerdau AmeriSteel Corp. 100%
GALLATIN STEEL STAKE - TOTAL APITAL
Shareholders
Gerdau AmeriSteel Corp. 50%
The table below shows the main companies and investments maintained
directly or indirectly by Gerdau as of December 31, 2002:
STAKE IN STAKE IN
COMPANY VOTING TOTAL CAPITAL
COUNTRY CAPITAL
Armafer Servicos de Construcao Ltda. Brazil 100% 100%
Gerdau GTL Spain (GTL) Spain 100% 100%
Gerdau AZA S.A. Chile 100% 100%
Aceros COX S.A. Chile 100% 100%
Gerdau Internacional Empreendimentos Brazil 100% 100%
Ltd.
Seiva S.A - Florestas e Industrias Brazil 100% 96%
Gerdau Laisa S.A. Uruguay 99% 99%
Aco Minas Gerais - Acominas Brazil 79% 79%
Gerdau AmeriSteel Corp. Canada 74% 74%
AmeriSteel Corp. USA 74% 74%
Ameristeel Bright Bar Inc. USA 74% 74%
Gerdau AmeriSteel Cambridge Inc. Canada 74% 74%
Gerdau AmeriSteel MRM Special Sections Canada 74% 74%
Inc.
Gerdau AmeriSteel Perth Amboy Inc. USA 74% 74%
Gerdau AmeriSteel Sayreville Inc. USA 74% 74%
Gallatin Steel Co. USA 50% 50%
Sipar Laminacion de Aceros (Sipar) Argentina 38% 38%
Sociedad Industrial Puntana S.A. - Sipsa Argentina 38% 38%
Dona Francisca Energetica S.A. Brazil 22% 22%
50
D. PROPERTY, PLANTS AND EQUIPMENT
The principal properties of Gerdau consist of installations for the
production of steel, rolled products and drawn products. The following is a list
identifying the location, capacity and type of installation, as well as the
types of products manufactured:
51
LOCATION OF PLANTS, CAPACITIES, EQUIPMENT AND PRODUCTS
(thousand tons/year)
CAPACITY CAPACITY CAPACITY
LOCATION OF PLANTS PIG IRON AND CAPACITY ROLLED DRAWN
SPONGE IRON CRUDE STEEL PRODUCTS PRODUCTS EQUIPMENT PRODUCTS
Billets, blooms,
slabs, rebar,
merchant bars,
metallic rail ties
ACOMINAS - 3,000 740 - Integrated with blast furnace and structural shapes
GERDAU - Brazil 1,356 4,374 4,071 897 - -
EAF mini-mill, rolling mill, Rebar, merchant bars,
Aconorte - 230 270 91 drawing mill, nail and clamp wire rod, drawn
factory products and nails
Barao de Cocais 330 330 198 - Integrated/blast furnace, LD Rebar, merchant bar
converter and rolling mill
Cearense - 120 120 - EAF mini-mill, rolling mill Rebar, merchant bar
EAF mini-mill, rolling mill, Rebar, merchant bars,
Cosigua drawing mill, nail and clamp wire rod, drawn
- 1,404 1,510 284 factory products and nails
Integrated/blast furnace,
Divinopolis EOF converter and rolling
336 600 456 - mill Rebar, merchant bar
Guaira - 390 167 - EAF mini-mill, rolling mill Billet, rebar,
merchant bar
Piratini - 310 380 - EAF mini-mill, rolling mill Specialty steels
EAF mini-mill, rolling mill, Rebar, merchant bars,
Riograndense - 390 470 172 drawing mill, nail and clamp wire rod, drawn
factory products and nails
Integrated with DRI, EAF
Usiba 450 600 500 - mini-mill, rolling mill, Rebar, merchant bars,
drawing mill wire rod, drawn
products
Contagem 240 - - 25 Blast furnace Pig iron
Cotia - - - 72 Drawing mill Wire
Cumbica - - - 130 Mesh factory and drawing mill Welded mesh and wire
Sao Jose dos Campos - - - 123 Drawing mill Wire
BRAZIL 1,356 7,374 4,811 897 - -
AZA - 360 440 - EAF mini-mill, rolling mill Rebar, merchant bar
Laisa - 70 72 - EAF mini-mill, rolling mill Rebar, merchant bar
SOUTH AMERICA - 430 512 - - -
Cartersville - 780 544 - EAF mini-mill, rolling mill Merchant bar
Charlotte - 417 363 - EAF mini-mill, rolling mill Rebar, merchant bar
Jacksonville - 580 558 - EAF mini-mill, rolling mill Rebar and wire rod
Knoxville - 413 454 - EAF mini-mill, rolling mill Rebar
W. Tennessee - 607 544 - EAF mini-mill, rolling mill Rebar, merchant bar
Lasco - 872 998 - EAF mini-mill, rolling mill Rebar, merchant bar
and profiles s
Raritan - 817 907 - EAF mini-mill, rolling mill Wire rod products
Sayerville - 726 544 - EAF mini-mill, rolling mill Rebar, merchant bar
Cambridge - 326 295 - EAF mini-mill, rolling mill Rebar, merchant bar
MRM Special Sections - 349 299 - EAF mini-mill, rolling mill Special sections
NORTH AMERICA - 5,887 5,506 - - -
GERDAU TOTAL 1,356 13,691 10,829 897 - -
52
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
BRAZILIAN ECONOMIC ENVIRONMENT.
Gerdau's results and its financial condition are dependent on Brazil's
general economic condition and particularly on (i) economic growth and its
impact on steel demand, (ii) financing costs and the availability of financing,
and (iii) exchange rates between Brazilian and foreign currencies.
For many years, Brazil experienced high rates of inflation the effect of
which was a progressive decline in purchasing power for the vast majority of the
Brazilian population. During periods of high inflation, effective salaries and
wages tend to fall because the frequency and size of salary and wage adjustments
for inflation usually do not offset the actual rate of inflation. Since the
introduction of the real in July 1994, the rate of inflation in Brazil has
decreased dramatically (see table below). In addition, there has been economic
growth after the implementation of the Real Plan, with GDP in Brazil increasing
by 0.2% in 1998, 0.8% in 1999, 4.4% in 2000, 1.4% in 2001and 1.5% in 2002.
Under Brazilian GAAP and corporate law, the UFIR (Fiscal Reference Unit)
was used as the index in high inflation times for inflation adjustment in the
preparation of financial statements for periods through December 31, 1995.
However, Federal Law 9,249, enacted on December 26, 1995, abolished the prior
Brazilian price-level restatement system effective January 1, 1996 for corporate
law purposes and for reporting public companies, although the CVM allows
companies to prepare financial statements in accordance with the constant
currency method and any general price index may be used for such restatement.
The following table sets forth Brazilian inflation and the devaluation of
Brazilian currency against the U.S. dollar for the periods shown. For a
discussion on the decision of the Central Bank, in January, 1999, to allow the
real to float freely in the foreign exchange markets and its subsequent
devaluation, see "Item 10.D. Exchange Controls - Exchange Rates."
January to April Year ended December 31,
----------------- ---------------------------------------
2003 2002 2001 2000
---- ---- ---- ----
Inflation (INPC base) 6.84% 14.74% 9.44% 5.27%
Inflation (IGP-M) 7.24% 25.30% 10.37% 9.96%
Devaluation (R$ vs. (18.21%) 52.27% 18.67% 9.30%
U.S.$)
The devaluation of the Brazilian currency in 2002 was a consequence of the
interaction of a few key variables. Noteworthy are the impact of the imbalances
of the economy of Brazil's largest trading partner Argentina along with
incidents such as the terrorist attack in September 2001, in the United States
which made some international investors look for more secure markets.
The impact of devaluation on Gerdau's business is essentially the
possibility of further reducing revenues due to a slowdown of the Brazilian
economy as a result of an increase in domestic interest rates. However, it is
important to note that Gerdau S.A. has almost 40% of its operations abroad,
which provides it with a natural protection. This ensures some counter balancing
effect that minimizes the impact of any devaluation of the real on the
operational side and that of the U.S. dollar-based portion of the Gerdau S.A.'s
indebtedness.
EFFECTS ON DEMAND.
During the high inflation period there was a gap in frequency as well as in
readjustment indices between price increases and corresponding salary raises,
which eroded purchasing power. This gap was significantly reduced by the recent
low inflation indices and increased consumer demand.
The recent devaluation of the Brazilian currency has had a significant
impact on the economy. Nonetheless, the expected negative impact - i.e., higher
inflation, negative GDP - was not as severe as anticipated. In fact, the
53
recovery process was significantly faster than it was thought possible. This,
however, is no guarantee of future performance of the country's economy.
SEASONAL VARIATION
The Company's sales are not subject to meaningful seasonal variation. Its
performance is more dependent on the development of the segments that compose
the GDP in the countries where Gerdau operates. In terms of shipments, in
Brazil, the second and third quarters are stronger than the others. In North
America, the influence in demand is marked by the winter period. Increased
consumption of electrical power and heating sources (i.e., natural gas)
compounded by the harshness of weather conditions, contributes to increase
costs, decrease construction and therefore affects the Company's sales.
RESULTS OF OPERATIONS
The table below contains information expressed in percentage of different
lines per net sales revenue, under U.S. GAAP, for the following years:
------------------------------------------------------------------------------------------
Fiscal year ending December 31,
2002 2001 2000
------------------------------------------------------------------------------------------
Net Sales Revenue 100.0% 100.0% 100.0%
Cost of Goods Sold (71.9%) (71.7%) (74.3%)
Gross Profit 28.0% 28.3% 25.7%
Sales Expenses (3.5%) (4.4%) (4.1%)
General and Administrative Expenses (6.8%) (7.5%) (7.7%)
Operating Profit 17.8% 16.3% 14.0%
Net Income 7.1% 7.0% 6.8%
------------------------------------------------------------------------------------------
The table below contains information about revenues and expenses, under
U.S. GAAP, per market segment for the following years:
-------------------------------------------------------------------------------------------
Fiscal Year Ended on December 31, Percentage Variation
2002 2001 2000 2002-2001 2001-2000
-------------------------------------------------------------------------------------------
Net Sales Revenue
Civil Construction 1,469,217 1,137,081 1,270,101 33.7% (13.5%)
Manufacturing 1,567,164 1,065,753 1,163,835 52.7% (11.5%)
Other 228,545 198,304 242,778 19.2% (21.1%)
-------------------------------------------------------------------------------------------
Total 3,264,926 2,401,138 2,676,714 40.7% (13.3%)
-------------------------------------------------------------------------------------------
Cost of Goods Sold
Civil Construction (1,057,336) (832,811) (932,085) 33.2% (14.8%)
Manufacturing (1,127,825) (765,886) (854,101) 54.5% (14.5%)
Other (164,475) (123,531) (178,167) 39.7% (33.9%)
-------------------------------------------------------------------------------------------
Total (2,349,636) (1,722,228) (1,964,353) 43.1% 16.4%
-------------------------------------------------------------------------------------------
Gross Profit
Civil Construction 411,880 304,270 338,015 35.0% (9.7%)
Manufacturing 439,339 299,867 309,735 46.5% (3.2%)
Other 64,071 74,773 64,611 (13.3%) 14.4%
-------------------------------------------------------------------------------------------
Total 915,290 678,910 712,361 34.8% (4.7%)
-------------------------------------------------------------------------------------------
Operating Profit
Civil Construction 261,337 160,380 183,642 62.9% (12.7%)
Manufacturing 278,760 179,920 168,278 54.9% 6.9%
Other 40,653 51,701 35,103 (21,4%) 47,3%
-------------------------------------------------------------------------------------------
Total 580,750 392,001 387,023 48.15% 1.3%
-------------------------------------------------------------------------------------------
Financial Income 100,350 55,002 57,324 (82.4%) (4.0%)
Financial Expense (424,147) (238,269) (243,477) (78.0%) (2.1%)
-------------------------------------------------------------------------------------------
Total 231,827 167,353 188,558 38.5% (11.2%)
-------------------------------------------------------------------------------------------
54
The following table shows cost for goods sold, excluding freight costs,
during 2002, 2001 and 2000 expressed in percentage of net sales revenue:
-----------------------------------------------------------------------------------------
Breakdown of Costs of Goods Sold
2002 2001 2000
-----------------------------------------------------------------------------------------
Raw materials 53% 51% 53%
Direct labor costs 13% 14% 13%
-----------------------------------------------
Total direct costs 66% 65% 66%
Indirect labor costs 5% 5% 5%
Third party services 7% 7% 7%
Depreciation 9% 9% 9%
Power and electricity 10% 9% 8%
Other 3% 5% 4%
-----------------------------------------------
Total indirect costs 34% 35% 33%
-----------------------------------------------
Total costs 100% 100% 100%
-----------------------------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2001
Results of the year of 2002 reflected the consolidation of Acominas and of
the Co-Steel operations since their respective dates of acquisition. Other
factors that have contributed to the performance of the year were the improved
level of activity at Acominas after the accident that happened in March and
lasted until September, the better conditions of the Chilean market and the
increase in exports.
NET SALES REVENUE
Net consolidated revenues in 2002 reached US$ 3.3 billion from US$ 2.4
billion in 2001, presenting a growth of 35.9%, resulted from an increase of
37.7% in physical sales and a decrease of 1.8% in average prices. The average
net price was US$ 371.7/ton in 2002, down from US$ 378.6/ton in 2001. Roughly
59% of net revenue came from Brazilian and 41% came from the Company's foreign
operations. The consolidation of Acominas and Co-steel represents22.6% of the
consolidated volume of sales.
COST OF SALES AND GROSS PROFITS
The effort to reduce costs and to improve productivity of equipment has
compensated for the increase in the prices of certain raw materials throughout
the year. The main culprits were scrap and pig iron. This allowed for a gross
margin of 28.03% in the year of 2002, compared to 28.27% in 2001. Gross profit
reached US$ 915.3 million in 2002 from US$ 678.9 million in 2001, an increase of
34.8%. During the year 2002 some subsidiaries in North America reassessed the
useful life of certain property reducing depreciation expense by approximately
US$ 3.2 million.
OPERATING INCOME
Lower operating expenses (sales and marketing expenses, general and
administrative expenses) resulted in a higher operating income in 2002 against
2001. Operating income reached US$ 580.8 million in 2002, an increase of 48.2%
compared to the last year. Operating margin went to 17.79%, up from 16.32%.
FINANCIAL EXPENSES AND FINANCIAL REVENUE
Net financial expenses increased 76.7% reaching US$ 323.7 million. This
increase can be explained by the higher amount of net exchange loss accounted in
the period (US$ 131.7 million in 2002 versus US$ 71.8 million in 2001) and the
higher indebtedness resulting from the consolidation of the Co-Steel operations
and the purchase of a stake in Acominas. The stronger devaluation of the real
was the main reason for the increase in the exchange losses.
55
EQUITY PICKUP
The negative equity pickup of US$ 10.1 million in 2002 was mainly caused by
the losses in Dona Francisca Energetica S.A. and Sipar Acersos S.A..
PROVISION FOR INCOME TAX
In 2002, the provision for income tax of US$ 6.6 million represents a
decrease of US$ 48.1 million with respect to the loss recorded in 2001. The main
reasons for the decrease are increased amount of tax benefits resulting from
distribution of interest on capital stock, the recognition of deferred tax
income through the reversal of valuation allowance at Acominas and higher levels
of non-taxable income.
NET INCOME
The consolidated net income reached R$ 231.8 million in 2002, a result
38.5% greater than that of the last year, with net margin was 7.10% up from
6.96% in 2001. It is worthwhile mentioning that the Brazilian operations
contributed with US$ 209.7 million, North America with US$ 11.1 million and
South America with US$ 11.0 million.
FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2000
NET SALES REVENUE
The consolidated net revenue of US$ 2.4 billion decreased 13.3 % mainly due
to the devaluation of the real and to lower prices in the United States. Roughly
60% of net revenue comes from Brazilian operations, and the real devalued 18.7%
during the year. The average net price in the United States was U.S.$ 375/ton
down from US$ 388/ton. Physical sales reached 6.4 million tons in line with the
previous year.
COST OF SALES AND GROSS PROFITS
Cost of sales decreased 16.3% reaching US$ 1.7 billion. This reduction is
explained by the devaluation of the Brazilian currency and by gains in
productivity achieved due to technological updating and the reallocation of
production among the several plants in Brazil. Especially due to these gains,
gross margin went up to 28.27% from 25.70%. Gross profit totaled US$ 678.9
million, a 4.7% decrease when compared to 2000.
OPERATING INCOME
Operating income of US$ 392.0 million was slightly higher than last year.
The reduction in operating expenses was enough to compensate the reduction in
gross profit. Moreover, operating margin went to 16.32%, up from 13.96%.
FINANCIAL EXPENSES AND FINANCIAL REVENUE
Net financial expenses decreased 1.6% reaching US$ 183.3 million. This
decrease can be explained by the higher amount of exchange losses accounted for
in the period (US$ 50.3 million in 2000 versus US$ 71.8 million in 2001). The
stronger devaluation of the real was the main reason for the increase in
exchange losses. The exchange losses would have been higher if the Company had
not taken protection through use of swap contracts in the amount of US$ 325
million of its debt exposure during 2001.
56
EQUITY PICKUP
Equity pickup reached US$ 18.3 million in 2001, down from US$ 34.0 million
in 2000. The reduction occurred due to the lower results obtained by Acominas as
a consequence of the 40-day shut-down of the blast furnace for refurbishment and
technological updating.
PROVISION FOR INCOME TAX
In 2001, the provision for income tax of US$ 54.6 million exceeded by US$ 9
million the provision in the previous year due to better results of the
Brazilian operations.
NET INCOME
Net income of US$ 167.3 million decreased 11.2% in 2001 compared to 2000.
Results were adversely affected by: i) the devaluation of the Brazilian
currency, ii) lower results in North America and iii) lower results from the
subsidiary Acominas.
B. CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are both (1) important to the
portrayal of the financial condition and results of the Company and (2) require
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. As the number of variables and assumptions affecting the possible
future resolution of the uncertainties increase, those judgments become even
more subjective and complex. In connection with the preparation of the financial
statements included in this annual report, management has relied on variables
and assumptions derived from historical experience and various other factors
that management deems reasonable and relevant. Although these estimates and
assumptions are reviewed by management in the ordinary course of business, the
portrayal of the financial condition and results of operation often requires
management to make judgments regarding the effects of matters that are
inherently uncertain on the carrying value of our assets and liabilities. Actual
results may differ from those estimated under different variables, assumptions
or conditions. In order to provide an understanding about how management forms
its judgments about future events, including the variables and assumptions
underlying the estimates we have included comments related to each critical
accounting policy described as follows:
o revenue recognition and allowance for doubtful accounts;
o future income taxes;
o pension and post-retirement benefits;
o environmental liabilities; and
o derivative financial instruments
The consolidated financial statements presented in this annual report were
prepared according to accounting principles generally accepted in the United
States of America. The preparation of the financial statements included in this
annual report, necessarily involves certain assumptions, which are derived from
historical experience and various other factors deemed reasonable and relevant.
Although management reviews these estimates and assumptions in the ordinary
course of business, the portrayal of the financial condition and results of
operation of the Company often requires management to make judgments regarding
the effects on the financial condition and results of operations of matters that
are inherently uncertain. Actual results may differ from those estimated under
different variables, assumptions or conditions.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company recognizes revenues from sales and the allowance for estimated
costs associated with returns from these sales when the product is shipped and
title transferred to the buyer. Provisions are made for estimated product
returns and customer claims based on estimates and actual historical experience.
If the historical data used in the estimates does not reflect future returns and
claims trends, additional provisions may be necessary. An allowance for doubtful
accounts is maintained for estimated losses resulting from the inability of
customers to make
57
required payments. If the financial condition of customers was to
deteriorate, resulting in the impairment of their ability to make payments,
additional allowance may be required.
FUTURE INCOME TAXES
The liability method of accounting for income taxes is used whereby future
income taxes arising from temporary differences between the book value of assets
and liabilities and their respective tax value. Future income tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.. A valuation allowance is recorded to the extent the
recoverability of the future income tax assets is considered more likely than
not. Future taxable income may be higher or lower from estimates taking into
account when determining the need for and the amount of the valuation allowance.
PENSION AND POST-RETIREMENT BENEFITS
The Company accrues its obligations under employee benefit plans and the
related costs, net of plan assets, adopting the following policies:
o The cost of pensions and other retirement benefits earned by employees
is actuarially determined using the projected benefit method prorated
on service and management's best estimate of expected plan investment
performance for funded plans, salary escalation, retirement ages of
employees and expected health care costs. The discount rate used for
determining the liability for future benefits is an estimate of the
current interest rate at the balance sheet date on high quality fixed
income investments with maturities that match the expected maturity of
obligations;
o Pension assets are valued at fair market value;
o Past service costs from plan amendments are amortized on a
straight-line basis over the average remaining service period of
employees active at the date of amendment;
o The excess of the net actuarial gain or loss over 10% of the greater
of the benefit obligation and the fair value of plan assets is
amortized over the average remaining service period of the active
employees;
o A plan curtailment will result if there has been a significant
reduction in the expected future service of present employees. A net
curtailment loss is recognized when the event is probable and can be
estimated, a net curtailment gain is deferred until realized.
In accounting for pension and post-retirement benefits several statistical
and other factors, which attempt to anticipate future events are used in
calculating the expense and liability related to the plans. These factors
include assumptions about the discount rate, expected return on plan assets,
future increase in health-care costs and rate of future compensation increases.
In addition, actuarial consultants also use subjective factors such as
withdrawal, turnover and mortality rates to estimate these factors. The
actuarial assumptions used by the Company may differ materially from actual
results due to changing market and economic conditions, regulatory events,
judicial rulings, higher or lower withdrawal rates or longer or shorter life
spans of participants.
ENVIRONMENTAL LIABILITIES
The Company has reserved for potential environmental liabilities based on
the best estimates of potential clean-up and remediation estimates for known
environmental sites. The Company employs a staff of environmental experts to
manage all phases of its environmental programs, and uses outside experts where
needed. These professionals develop estimates of potential liabilities at these
sites based on projected and known remediation costs. This analysis requires the
Company to make significant estimates, and changes in facts and circumstances
could result in material changes in the environmental accrual.
Derivatives and Financial Instruments
The Company applies SFAS No.133, "Accounting for Derivative Instruments and
Hedging Activities" as amended and interpreted.
58
Derivative financial instruments include cross-currency interest rate swaps
entred into by the companies operating in Brazil mainly to swap fixed-rate debt
denominated or indexed into U.S. dollars to reais variable rate debt. The swaps
are recognized on the balance sheet at fair value and adjustments to fair value
are recorded through income. Such cross-currency interest rate swaps are not
traded derivatives and have been entered with different financial institutions
in Brazil. The Company values such instruments considering quotations obtained
from market participants and following a internally developed methodology that
considers the forward rate of exchange of the real against the U.S. dollar and
interest rates in Brazilian reais which are prevailing as of the date of
measurement. The Company understands that quotations obtained are reasonable
when compared with information on similar financial instruments trated in the
Bolsa de Mercadorias & Futuros (BM&F) and that the internally developed
valuation methodology is consistent with methodologies used by other
participants in the swap market in Brazil and its results reasonably reflects
the amount that would be paid or received to settle the swap on the valuation
date. However, intense volatility in the foreign exchange and interest rate
markets in Brazil observed during 2002 has determined significant changes in
forward rates and interest rates over very short periods of time generating
significant changes in the fair value of such cross-currency interest rate swaps
over a short- period of time. Therefore, the fair value recognized in our
financial statements may not necessarily represent the amount of cash that we
would received or pay, as appropriate, if we settle the transaction on December
31, 2002. As of December 31, 2002 the unrealized gain on cross-currency interest
rate swaps amounted to US$ 51,858.
C. LIQUIDITY AND CAPITAL RESOURCES
The net cash generated by operating activities totaled US$ 266.7 million,
US$ 395.4 million and US$ 350.5 million for the years ended December 31, 2000,
2001 and 2002, respectively, totaling US$ 1,012.6 million. Net cash generated by
operating activities was one of the main sources of liquidity utilized by the
Company. Short and long-term financing agreements aggregated US$ 1,885.4 million
in the period, contributing US$ 421.8 million in 2000, US$ 377.6 million in 2001
and US$ 1,086.0 million in 2002, toward the Company's liquidity needs. Sales of
disposed fixed assets generated total proceeds of US$ 48.7 million for the years
of 2000, 2001 and 2002.
In 2002, the main uses of capital resources were: US$ 185.9 million in
fixed assets, US$ 824.9 million in short and long term debt payments and US$
74.3 million in payment of dividends. In 2001, the main uses of capital
resources were: US$ 244.0 million in fixed assets, US$ 436.6 million in short
and long-term debt payments and US$ 64.4 million in payment of dividends. In
2000, the main uses of capital resources were: US$ 264.8 million in fixed
assets, US$ 348.4 million in short and long-term debt payments and US$ 58.9
million in payment of dividends. The amount of resources invested in fixed
assets from 2000 to 2002 (US$ 694.7 million) was used for modernization and
technological update of the Company's industrial plants and subsidiaries.
From December 31, 2001 to December 31, 2002 net working capital decreased
by U.S.$ 314.2 million, from US$ 250.6 million in 2001 to negative amount of US$
63.6 million in 2002. This decrease was primarily due to a increase in current
liabilities, mainly short-term debt, current portion of long-term debt and trade
accounts payable caused by the consolidation of Acominas and Co-Steel.
INDEBTEDNESS AND FINANCIAL STRATEGY
The loans taken by the Company are basically intended to finance
investments in fixed assets, both for the modernization and technological update
of the plants and for the expansion of installed capacity, for the financing of
working capital, for the purchasing of stakes in other companies such as
Acominas, and, depending on market conditions, for short-term financial
investments.
The balance of loans totaled US$ 1,899.4 million and US$ 1,198.1 million at
December 31, 2002 and 2001, respectively. On the same dates, the balance of
short-term financial investments and cash totaled US$ 423.2 million and U.S.$
333.9 million, respectively.
59
Total debt reached US$ 2,100.1million in 2002, up from US$ 1,294.3 million
in 2001. Net debt increased from US$ 960.4 million in 2001, to US$ 1,676.9
million in 2002 due to mainly short-term debt and current portion of long-term
debt caused by the consolidation of Acominas and Co-Steel.
Net financial expenses were, respectively, US$ 183.3 million and US$ 323.8
million in 2001 and 2002, respectively.
The following table lists the indebtedness profile of the Company as of
December 31, 2002 and 2001 (in thousands of US dollars):
2002 2001
-----------------------------
SHORT TERM:
Short-term debt:
Debt denominated in reais 42,974 372
Debt denominated in foreign currency 664,404 370,967
-----------------------------
Total short term debt 707,378 371,339
Current portion of long-term debt:
Debt denominated in reais 84,569 45,342
Debt denominated in foreign currency 312,846 150,810
-----------------------------
Total current portion of long-term debt 397,415 196,152
Debentures - 2,018
Short-term debt plus current portion of 1,104,793 569,509
long-term debt and debentures
LONG TERM:
Long-term debt, less current portion:
Debt denominated in reais 118,248 141,833
Debt denominated in foreign currency 676,323 488,803
-----------------------------
Total long term debt 794,571 630,636
Debentures 200,766 94,204
-----------------------------
SUBTOTAL 995,337 724,840
Long-term debt, parent company - 461
-----------------------------
Long-term debt, plus debentures and parent 995,337 725,301
company
-----------------------------
TOTAL DEBT 2,100,130 1,294,810
Short-term investments and cash 423,206 333,897
-----------------------------
NET DEBT: 1,676,924 960,913
=============================
On December 31, 2002 the Company's indebtedness was subject to the following
terms and conditions:
SHORT TERM:
In 2002, the Company's short-term debt went up to US$ 707.4 million. Of
this total, US$ 43.0 were relates to financing in reais and US$ 664.4 million
relates to financing in foreign currencies. Additionally, the Company will have
to pay the current portion of long-term debt and debentures in the amount of US$
397.4 million, of which US$ 84.6 million relates to financing in reais and US$
312.8 million relates to financing in foreign currencies.
LONG TERM:
Long-term debt totaled US$ 995.3 million on December 31, 2002. US$ 794.6
million of this debt is comprised of loans from financial institutions of which
US$ 118.3 million of which is denominated in reais and US$ 676.3 million is
denominated in foreign currency. Of the total long-term debt, US$ 200.8 million
refers to debentures denominated in reais.
Of the loans denominated in foreign currency, U.S.$ 676.3 million,
approximately 32.8% were contracted by the Company in Brazil and 67.2% by the
Company's foreign subsidiaries.
60
Long-term debt cost information is described at the note 13 of the
Financial Statements - "Long-term debt and debentures". For additional
information, see Item 11 - Quantitative and qualitative disclosures about market
risks.
On August 9, 2002 the Company issued Debentures in the amount of R$ 300
million, with maturity on November 1, 2011. The Debentures are denominated in
Brazilian reais and bear variable interest based on the CDI (Brazilian Interbank
deposit rates). The Company is required to fulfill the following covenants:
1. To maintain the ratio between its Consolidated debt and consolidated
EBITDA (EBITDA as per Gross profit minus Sales and marketing expenses
minus General and administrative expenses plus Depreciation and
amortization) at no more than 4.0x;
2. To maintain the Consolidated EBITDA (EBITDA as per Gross profit minus
Sales and marketing expenses minus General and administrative expenses
plus Depreciation and amortization) to Net Financial Expenses ratio
(EBITDA/Consolidated Net Financial Expenses ratio) at least at 2.0x.
In January 1999, the Company assumed the debt related to the Eurobonds
issued by Metalurgica Gerdau, for U.S.$ 130.0 million, maturing on May 26, 2004,
which were partially redeemed on May 26, 1999.
The Company is subject to limitations on the incurrence of indebtedness,
the granting of encumbrances on its properties and on the payment of dividends
under certain circumstances, under the instruments defining creditors rights for
its debentures, its Banco Nacional de Desenvolvimento Economico e Social - BNDES
("BNDES") financing, Eurobonds issued by Metalurgica Gerdau S.A. in 1996 and
assumed by the Company and scheduled to mature in 2004, and due to the
acquisition of Ameristeel.
The Company's public debentures prohibit the payment of dividends in excess
of 30% of distributable net profits, if after giving effect to such
distributions the Company's long-term liabilities exceed more than 1.5 times its
net worth and its current assets are less than its current liabilities.
The 1996 Eurobonds limit consolidated financial indebtedness to no greater
than four times Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA as per Gross profit minus Sales and marketing expenses minus General and
administrative expenses plus Depreciation and amortization).
The Company's indebtedness to the BNDES requires that the current liquidity
ratio (consisting of current assets divided by current liabilities) be at least
1.3 and that financial debt divided by Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA as per Gross profit minus Sales and
marketing expenses minus General and administrative expenses plus Depreciation
and amortization) be less than five. These agreements also contain negative
covenants, subject to customary exceptions.
Gerdau Steel, Inc., the Canadian subsidiary of Gerdau S.A. responsible for
the financing of the acquisition of Ameristeel, is required to fulfill the
following covenants:
1. Current liquidity ratio of 1.0 or greater;
2. Debt service coverage ratio greater than 1.0;
3. Interest coverage greater than 2.0,
4. Total debt over EBITDA less than 2.75 until September 2002 and 2.0
after September 2002.
5. Term debt over capitalization not greater than 0.55 through December
31, 2001 and not greater than 0.4 after this date.
6. Tangible net worth of Canadian companies in the Group greater than
$110 million plus 50% of cumulative consolidated net income.
The Company agrees to furnish a copy of the debt instruments described
herein to the Securities and Exchange Commission upon request.
All covenants described above are based on financial statements prepared in
accordance with local Corporate Laws, for the operations contracted by the
Brazilian companies and by the companies abroad, such as
61
Gerdau Steel Inc. As per December 31, 2002 management believes that the
Company was in full compliance regarding such debt covenants and other
conditions of the debt described above.
On December 31, 2002, the Company's long-term debt and debentures
(including current portion) totaled US$ 1,392.8 million. Of this balance, US$
347.5 million (24.9%) was denominated in Brazilian reais and US$ 1,045.3 million
(75.1%) was denominated in U.S. dollars.
With the purpose of protecting itself from the fluctuations of the
Brazilian currency against the U.S. dollar and changes in interest rates on its
debt in foreign currency incurred in Brazil, Gerdau entered into cross-currency
interest rate swaps through which Gerdau receives U.S. dollars, generally
accruing interest at fixed rates, and pays Brazilian reais accruing interest at
rates based on the CDI (Brazilian Interbank deposit rates). As of December 2002,
the total amount swapped was US$ 973.2 million of which US$ 188.9 million has
been treated, pursuant to EITF No. 02-02 on a combined basis as if the loans had
been originally denominated in reais pursuant Part of the Company's cash flow
from operations is denominated in Brazilian reais and U.S. dollars. See Note 19
- Derivatives Instruments. Such cash flows from operations may be utilized to
service this debt. There can, however, be no assurance that cash flows from
operations will be sufficient to service the foreign currency denominated debt
obligations, which are denominated principally in U.S. dollars. Consequently,
there can be no assurance that exchange rate fluctuations will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See Item 3.D - Key Information.
The Company's long-term indebtedness to financial institutions will be
amortized as follows:
U.S.$ million
2004 367.2
2005 268.1
2006 72.6
2007 79.3
2008 and thereafter 208.2
=====
TOTAL 995.4
=====
RESERVE FOR CONTINGENCIES.
On December 31, 2002, the reserve for probable and reasonably estimable
contingencies totaled US$ 60.5 million. This is partially backed by legal escrow
accounts controlled by the corresponding courts totaling US$ 13.4 million as of
that same date.
INVESTMENTS
In 2002, the principal expansion move was the merger of the Group's North
American operations with those of Co-Steel. The operation, concluded in October,
resulted in the creation of Gerdau AmeriSteel, the second largest producer of
long steel in the region. The transaction involved seven Gerdau units - two in
Canada and five in the United States - and Co-Steel's three mills and its stake
in the steel-maker Gallatin. The Group holds 74% of the new Company, with other
shareholders retaining 26%.
During 2002, the Group's investments totaled US$ 558.8 million, of which
66.8% went towards the acquisitions/disposition of investments and 33.2% to
additions to property, plant and equipment.
One of the highlights for the year was the new position of Acominas, in
which the Group is now the majority stakeholder with a qualified majority under
the terms of the stockholders' agreement. In February, an agreement was reached
to purchase an additional interest belonging to Agropecuaria Senhor do Bonfim, a
company controlled by Banco Economico and to Natsteel, a company that was part
of the controlling block. With these two additional acquisitions consummated in
February 2002 and October 2002 Gerdau stake reached 78.9%, giving important
competitive advantages in terms of operating flexibility and the privileged
location of the mill in Ouro Branco, state of Minas Gerais, Brazil.
62
In the United States, the Gerdau Group purchased a drawing mill from
Republic Technologies International LLC in a public auction. Located in
Cartersville, Georgia, the mill has the annual capacity to process 60,000 metric
tons of round, square, flat and hexagonal cold drawn bars for industry.
BASIS OF PRESENTATION
The following analysis is based on and should be read in conjunction with
the Company's U.S. GAAP financial statements, including the notes thereto,
included elsewhere in this Registration Statement. For certain purposes, such as
filing financial statements with the Brazilian Securities Commission, and
determining dividend payments and tax liabilities in Brazil, the Company has
been and will continue to be subject to the requirements of Brazilian GAAP, and
the Company will continue to prepare financial statements in Brazil in
accordance with Brazilian GAAP. The information included in this section
(revenues and expenditures) will be presented in dollars according to U.S. GAAP
(Notes 2.1 and 2.2 to the financial statements) and should be analyzed in
conjunction with the financial statements, where the criteria for translation
into dollars of revenues and expenditures as well as the effects of the
translation are presented.
REVENUE DENOMINATIONS AND EXCHANGE RATE DEVALUATIONS
The table below lists the amount of gross revenue from sales denominated in
Brazilian reais, Canadian dollars, Uruguayan, Chilean and Argentinean pesos and
U.S. dollars in the years indicated.
IN THOUSANDS OF US$
Brazilian Canadian Uruguayan Chilean Argentinean U.S.
Real % Dollar % Peso % Peso % Peso % Dollar % Total
2002 2,525,302 68.9 338,841 9.2 19,628 0.5 83,935 2.3 - - 697,214 19.0 3,664,920
2001 1,749,414 63.6 244,151 8.9 18,114 0.7 76,060 2.7 16,711 0.6 647,422 23.5 2,751,872
2000 2,106,759 66.6 253,671 8.0 20,387 0.6 73,173 2.3 32,014 1.1 676,533 21.4 3,162,537
The Company's costs of sales denominated in currencies of Brazil, United
States, Canada, Uruguay and Chile represented 38.7%, 16.0%, 7.7%, 0.3% and 1.5%,
respectively, of the Company's consolidated gross revenue from sales for the
year ended December 31, 2001. Since the Company's U.S. GAAP financial statements
are denominated in U.S. dollars, sales and other financial statement accounts
could be adversely affected by a devaluation of a local currency in relation to
the U.S. dollar.
In order to minimize the effect of exchange rate variations on its
liabilities, the Company has contracted swap transactions, which were translated
into Brazilian reais on the contract date, and are linked to CDI (Interbank
deposit rates).
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Payments due by period
Contractual Obligations Less than More than 5
Total 1 year 1-3 years 3-5 years years
Long-Term Debt Obligations 1,392,752 397,415 635,313 239,591 120,433
including debentures
Operating Lease Obligations 84,351 13,242 20,174 12,840 38,095
Total 1, 477,103 410,657 655,487 252,431 158,528
63
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Gerdau announced its new corporate governance on July 8, 2002 aiming at the
broadening the Group's management skills, meeting the demands resulting from
growth and greater global competitiveness, guaranteeing the succession process
without losing accumulated experience, and increasing disclosure with
shareholders and capital markets.
Seeking to build on its relationship with the market and in keeping up with
the best practices in corporate governance, the management of the business is
now the responsibility of the Gerdau Executive Committee. This major change to
the Company's management structure provides an administrative link between the
Board of Directors and the Business' operations.
Gerdau's management is now structured in the following manner:
BOARD OF DIRECTORS: The Board of Directors is responsible for determining
the broad direction of the Group's business, and may have up to ten members.
Three independent members are part of the Group's decision-making process.
CORPORATE EXECUTIVE COMMITTEE: Business is carried out by the Gerdau
Executive Committee, the link between the Board of Directors and the Group's
operations. Its activities are divided into five business operations, defined on
the basis of product line and/or geographical location: Long Steel Products
Brazil; Specialty Steel; Acominas; North America and; South America. Each
committee member - president and vice presidents - is also responsible for the
main functional processes operating vertically throughout the Group, such as
finance, accounting, human resources and planning. Committee members work
together so as to encourage a greater synergy between operations, and
individually with a focus on the management of each business and of functional
processes, so as to maximize results.
PROCESSES: The Processes consist of Operational Processes and Support
Processes. Operational Processes are those directly connected with the end
purposes of the business, such as Marketing and Sales, Industrial Processes,
Purchasing, Logistics and Transport and Scrap Purchasing. Support Processes are
those which provide backup for the range of processes involved in running of the
business as a whole: Strategic Planning - Corporate and Operations, Corporate
Communications and Community Relations, Human Resources and Organizational
Development, Legal, Finances and Investor Relations, Holdings, Accounting and
Audit, Quality Management Systems and Information Technology.
BUSINESS OPERATIONS: The Business Operations are managed by executive
officers under the following structure: Acominas; Long Steel Products Brazil;
Specialty Steel; North America; South America; Gerdau Forestry (Gerdau
Florestal) and; Gerdau Bank (Banco Gerdau). The Executive President is the
President of the Gerdau Executive Committee and of the Board of Directors, and
the Executive Vice Presidents are also members of the Gerdau Executive
Committee. The Business Operations also have the support of a group of 19
executive officers responsible for the Company's operations in Brazil.
EXCELLENCE AND STRATEGY COMMITTEES: The Strategy Committee was created to
provide operational support, and consists of executives who contribute to the
achievement of growing levels of operational performance. The committee analyzes
the Group's current situation and growth opportunities, as well as defining a
long-term business focus. The Excellence Committees provide support for
functional processes, aiming at of seeking best management practices and
encouraging the exchange of know-how between the Group's units.
The Group's decision-making process and general strategies are guided by
the Board of Directors, which may consist of up to ten members, of which three
are independent. The members of the Board of Directors are elected at the
Shareholders Meeting of voting stock holders for a one-year term. The daily
administration of the Company is performed as a whole by the Gerdau Executive
Committee, with the support of 19 additional executive officers responsible for
the Company's operations in Brazil. The members of the Gerdau Executive
Committee and other executive officers are elected at the Board of Directors
meeting for a one-year term, renewable by the Board.
64
Gerdau has no agreement of any kind with shareholders, clients, suppliers or
other parties regarding the election of its administrators.
There are no pending legal proceedings to which any Board Member or
Executive Officer of the Company is a party against to the Company.
The following table sets forth information with respect to the members of
the Board of Directors, the Gerdau Executive Committee and other executive
officers of the company.
BOARD OF DIRECTORS
YEAR
NAME AGE POSITION INITIALLY
APPOINTED
Jorge Gerdau Johannpeter 66 Chairman/President 1983
Germano Hugo Gerdau Johannpeter 70 Vice President 1983
Klaus Gerdau Johannpeter 67 Vice President 1983
Frederico Carlos Gerdau 60 Vice President 1983
Johannpeter
Affonso Celso Pastore 63 Independent Board Member 2002
Oscar de Paula Bernardes Neto 56 Independent Board Member 2002
Andre Pinheiro de Lara Resende 51 Independent Board Member 2002
Expedito Luz 51 General Secretary 2002
EXECUTIVE OFFICERS
CURRENT
NAME AGE TITLE POSITION
HELD SINCE
Jorge Gerdau Johannpeter 66 Chairman/President 1983
Frederico Carlos Gerdau 60 Senior Executive Vice President 1983
Johannpeter
Carlos Joao Petry 61 Senior Executive Vice President 2002
Andre Bier Johannpeter 39 Executive Vice President 2002
Paulo Fernando Bins de 57 Executive Vice President 2002
Vasconcellos
Osvaldo Burgos Schirmer 52 Executive Vice President and IR 2002
Director
Claudio Johannpeter 39 Executive Vice President 2002
Domingos Somma 58 Executive Vice President 2002
Sirleu Jose Protti 60 Executive Officer 1981
Joao Aparecido de Lima 55 Executive Officer 1987
Expedito Luz 51 Executive Officer 1989
Erico Teodoro Sommer 55 Executive Officer 1992
Luiz Alberto Morsoletto 51 Executive Officer 1994
Paulo Roberto Perlotti Ramos 50 Executive Officer 1996
Joaquim Guilherme Bauer 49 Executive Officer 1997
Julio Carlos Lhamby Prato 56 Executive Officer 1998
Francesco Saverio Merlini 60 Executive Officer 1998
Joao Carlos Salin Goncalves 56 Executive Officer 1999
Heitor Luis Beninca Bergamini 45 Executive Officer 1999
Carlos Bier Johannpeter 39 Executive Officer 2000
Claudio Mattos Zambrano 55 Executive Officer 2000
Elias Pedro Vieira Manna 47 Executive Officer 2000
Gerson Marcos Venzon 47 Executive Officer 2000
Nestor Mundstock 51 Executive Officer 2001
Andre Felipe Gueiros Reinaux 39 Executive Officer 2002
Dirceu Tarcisio Togni 53 Executive Officer 2002
The following is a brief biography of each of the Company Directors and
Executive Officers:
65
JORGE GERDAU JOHANNPETER - Mr. Jorge Johannpeter has been working for the Gerdau
Group since 1954. Mr. Jorge Johannpeter and his brothers, Germano, Klaus and
Frederico, started as apprentices. Mr. Jorge Johannpeter became an Executive
Officer in 1973 and was appointed President in 1983. Since 2002, after the
implementation of the new Corporate Governance structure, Mr. Jorge Johannpeter
became the President of the Board and of the Gerdau Executive Committee. He has
a degree in Law awarded by the Federal University of Rio Grande do Sul.
GERMANO HUGO GERDAU JOHANNPETER - Mr. Germano Johannpeter has been working with
his brothers since 1951. Mr. Germano Johannpeter became an Executive Officer in
1973 and was appointed Vice President of the Gerdau Group in 1983. He has a
degree in Business Administration awarded by Getulio Vargas Foundation.
KLAUS GERDAU JOHANNPETER - Mr. Klaus Johannpeter has been working for the Gerdau
Group with his brothers since 1954. Mr. Klaus Johannpeter became an Executive
Officer in 1973 and was appointed Vice President of the Gerdau Group in 1983. He
graduated with a degree in Civil, Electrical and Mechanical Engineering from the
Federal University of Rio Grande do Sul.
FREDERICO CARLOS GERDAU JOHANNPETER - Mr. Frederico Johannpeter has been working
for the Gerdau Group with his brothers since 1961. Mr. Frederico Johannpeter
became an Executive Officer in 1973 and was appointed Vice President of the
Gerdau Group in 1983 and under the new Corporate Governace structure he became a
member of the Gerdau Executive Committee. He graduated with a degree in Business
Administration from the Federal University of Rio Grande do Sul and holds
masters degree in Business, Finance, Costs and Investments from the University
of Koln, Germany.
AFFONSO CELSO PASTORE - Mr. Pastore was elected as an Independent Board Member
in 2002. He holds a degree in Economics from the University of Sao Paulo and a
PhD title in Economics from the same University. Mr. Affonso Pastore is also
Professor at the Getulio Vargas Foundation in Rio de Janeiro and independent
econmics advisor. Mr. Affonso Pastore was the Secretary of Sao Paulo Treasury
and President of Brazilian Central Bank.
OSCAR DE PAULA BERNARDES NETO -Mr. Bernardes was elected as an External Board
Member in 2002. He received a degree in Chemical Engineering from the Federal
University of Rio de Janeiro and Business Administration from the University of
the Rio de Janeiro State. Mr. Bernardes is the owner and director of LID - Latin
America Internet Development Group and member of the consultive board of
Telesystem International Wireless (TIW) in Brazil. He is also member of the
boards of Bunge Alimentos, Seara and Serrana, all companies of the Bunge Group,
and board member of RBS (media network), CheckForte, Satipel and Alcoa in
Brasil, and Delphi Corp. in the United States.
ANDRE PINHEIRO DE LARA RESENDE - Mr. Lara Resende was elected Independent Board
Member in 2002. He graduated in Economics from the Pontificia Universitas
Catolica in Rio de Janeiro and holds a masters degree from the Postgraduate
School of Economics of the Getulio Vargas Foundation and a PhD from the
Massachusetts Institute of Technology in Cambridge, Massachusetts, US. Mr. Lara
Resende is also a member of the Board of Alps Funds. He was formerly President
of the Brazilian Development Bank (BNDES), Special Advisor to the President of
Brazil, Managing Partner of Banco Matrix S.A., Brazil's Chief Foreign Debt
Negotiator, Executive President of Companhia Siderurgica Tubarao (CST),
Executive Vice President and member of the Board of Unibanco - Uniao de Bancos
Brasileiros S.A., Director of Brasil Warrant Administracao de Bens e Empresas
Ltda., member of the Board of Directors of Cia. Ferro Brasileiro S.A., member of
the Board of Directors of Lojas Americanas S.A., Managing Partner of Banco de
Investimento Garantia and Manager of Public Debt and Open Market of the
Brazilian Central Bank.
EXPEDITO LUZ - Mr. Expedito Luz has been working for Gerdau since 1976 and since
1989 he is an Executive Officer of the Legal Department. He was appointed to the
Board of Directors in 2001 and under the new Corporate Governance structure he
is now General Secretary of the Board and of the Gerdau Executive Committee. Mr.
Expedito Luz graduated in Law from the Federal University of Rio Grande do Sul
in 1975 and holds a Master degree in Law from the Columbia Law School since
1981.
66
CARLOS JOAO PETRY - Mr. Petry has been working for the Gerdau Group since 1965.
In 1975, he was appointed to the Board of Directors and was later named Vice
President. Mr. Petry graduated in Philosophy from the Federal University of Rio
Grande do Sul.
ANDRE BIER JOHANNPETER - Mr. Andre Johannpeter has been working for the Gerdau
Group since 1980. He was recently given the position of Executive Vice President
of the Gerdau Executive Committee, responsible for the North American operations
and Information Technology processes. Mr. Andre Johannpeter graduated in
Business Administration from the Pontificia Universitas Catolica in Rio Grande
do Sul.
CLAUDIO JOHANNPETER - Mr. Claudio Johannpeter joined the Company in 1982. In
1997, he became Executive Officer and is currently an Executive Vice President,
responsible for the Industrial Units. He graduated in Metallurgical Engineering
from the Federal University of Rio Grande do Sul in 1990.
OSVALDO BURGOS SCHIRMER - Mr. Schirmer joined the Company in 1986 and was named
Financial Executive Officer in 1987. Since 1994, Mr. Schirmer has also been
responsible for Gerdau Bank (Banco Gerdau). He was recently been promoted to the
position of Executive Vice President, Investor Relations Director of Gerdau S.A
and is responsible for the South America operations of Gerdau S.A. Mr. Schirmer
graduated in Business Administration from the Federal University of Rio Grande
do Sul, in 1973, and holds an MBA in Industrial Agronomy Administration from
Illinois University. He is the only executive officer who, before joining the
Gerdau Group, was a director of the Ioschpe-Maxion Group, a holding company that
controls companies in the auto parts and railroad equipment sectors.
PAULO FERNANDO BINS DE VASCONCELLOS - Mr. Vasconcellos joined the Company in
1972. He was recently appointed Executive Vice President overseeing Global
Marketing and Sales, Scrap Purchasing and Quality Management Technology. He is
also in charge of the Acominas Company in the state of Minas Gerais. Mr.
Vasconcellos graduated in Metallurgical Engineering.
DOMINGOS SOMMA - Mr. Somma joined the Company in 1980 and became an Executive
Officer in 1988. He is currently the Executive Vice President of Brazilian Long
Steel operations. Mr. Somma graduated in Economics from Mackenzie University in
1968.
SIRLEU JOSE PROTTI - Mr. Protti joined the Company in 1967 and became an
Executive Officer in 1981. He is currently the Executive Director of the
Brazilian Long Steel operations. Mr. Protti graduated in Economics from the
Pontificia Universitas Catolica in Rio Grande do Sul in 1966.
JOAO APARECIDO DE LIMA - Mr. Lima joined the Company in 1974 and became an
Executive Officer in 1987. He is currently the Human Resources Executive
Director. Mr. Lima graduated in Brazilian Literature from the University of Sao
Paulo in 1971.
ERICO TEODORO SOMMER - Mr. Sommer joined the Company in 1975 and became an
Executive Officer in 1992. He is currently the Engineering Executive Director.
Mr. Sommer graduated in Electrical Engineering from the Federal University of
Rio Grande do Sul in 1970.
LUIZ ALBERTO MORSOLETTO - Mr. Morsoletto joined the Company in 1983 and has been
an Executive Officer of the Gerdau Divinopolis Industrial Unit. Mr. Morsoletto
graduated in Metallurgical Engineering from the Maua Engineering School, state
of Sao Paulo, in 1975.
PAULO ROBERTO PERLOTTI RAMOS - Mr. Ramos joined the Company in 1976 and became
an Executive Officer in 1995. He is currently the Commercial Director for Gerdau
Acos Finos Piratini Mr. Ramos graduated in Mechanical Engineering and Business
from the Federal University of Rio de Janeiro.
JOAQUIM GUILHERME BAUER - Mr. Bauer joined the Company in 1982. In 1997, Mr.
Bauer became an Executive Officer of Gerdau's Industrial Steel Business Unit.
Mr. Bauer graduated in Metallurgical Engineering from the Federal University of
Rio Grande do Sul, in 1977.
67
JULIO CARLOS LHAMBY PRATO - Mr. Prato joined the Company in 1969, became an
Executive Officer in 1992 and is currently the Executive Director of the
Industrial Units. Mr. Prato graduated in Metallurgical Engineering from the
Federal University of Rio Grande do Sul in 1969.
FRANCESCO SAVERIO MERLINI - Mr. Merlini joined the Company in 1977 and became an
Executive Officer in 1998. He is currently the Director of the Gerdau Cosigua
Industrial Unit, Rio de Janeiro. Mr. Merlini graduated in welding techniques
from the Cuyo National University of Argentina in 1970.
JOAO CARLOS SALIN GONCALVES - Mr. Goncalves joined the Company in 1969 and
became an Executive Officer in 1999. He is currently the Metal Supplies
Director. Mr. Goncalves graduated in Metallurgical Engineering from the Federal
University of Rio Grande do Sul in 1969.
HEITOR LUIS BENINCA BERGAMINI - Mr. Bergamini joined the Company in 1985 and
became an Executive Officer in 1999. He is currently the Executive Director of
the retail unit Comercial Gerdau. Mr. Bergamini graduated in Economics from the
Pontificia Universitas Catolica in Rio Grande do Sul in 1982.
CARLOS BIER JOHANNPETER - Mr. Carlos Johannpeter joined the Company in 1976 and
became an Executive Officer in 1991. Mr. Carlos Johannpeter graduated in Law
from the Federal University of Rio Grande do Sul.
CLAUDIO MATTOS ZAMBRANO - Mr. Zambrano joined the Company in 1970 and became an
Executive Officer in 2000. He is currently the Executive Director of Gerdau Acos
Finos Piratini Industrial Unit. Mr. Zambrano graduated in Mechanical Engineering
from the Pontificia Universitas Catolica in Rio Grande do Sul in 1970, and in
Business Administration from the same university in 1975.
ELIAS PEDRO VIEIRA MANNA - Mr. Manna joined the Company in 1988 and became an
Executive Officer in 2000. He is currently the Executive Director of Gerdau
Industrial Business (GI). Mr. Manna graduated in Operational Mechanical
Engineering, Mechanical Engineering and Civil Engineering, from Pontificia
Universitas Catolica in Rio Grande do Sul in 1977, 1981 and 1982 respectively.
He also received a Masters degree in Materials Engineering from the Federal
University of Santa Catarina in 1982.
GERSON MARCOS VENZON - Mr. Venzon joined the Company in 1982 and became an
Executive Officer in 2000. He is currently the Executive Director of Gerdau's
Business Unit. Mr. Venzon graduated in Economics from the Federal University of
Rio Grande do Sul in 1977 and holds a Masters degree in Production Engineering -
Especialized in Economic Enginnering Economics from the Federal University of
Santa Catarina, 1980. Mr. Gerson Venzon holds also a degree in Marketing from
the Federal University of Rio Grande do Sul.
NESTOR MUNDSTOCK - Mr. Mundstock joined the Company in 1975, became an Executive
Officer in 2001 and is currently the Executive Director of the Industrial Units
located in the Central region of Brazil. Mr. Mundstock graduated in
Metallurgical Engineering from Fluminense Federal University in 1975.
ANDRE FELIPE GUEIROS REINAUX - Mr. Reinaux joined the Company in 1984 and became
an Executive Officer in 2002. He is currently the Executive Director of the
Industrial Units located in the Northern region of Brazil. Mr. Reinaux graduated
in Mechanical Engineering.
DIRCEU TARCISIO TOGNI - Mr. Togni joined the Company in 1974 and became
Executive Officer in 2002. He is currently the Executive Director of the
Industrial Units located in the Southern region of Brazil. Mr. Togni graduated
in Mechanical Engineering.
FAMILY RELATIONSHIP
Jorge Gerdau Johannpeter, Germano Hugo Gerdau Johannpeter, Klaus Gerdau
Johannpeter and Frederico Carlos Gerdau Johannpeter are siblings. Carlos Bier
Johannpeter and Andre Bier Johannpeter are Jorge Gerdau Johannpeter's sons and
Claudio Johannpeter is Klaus Gerdau Johannpeter's.
68
B. COMPENSATION
Gerdau's remuneration policy is to pay base salaries similar to the market
median, with total cash payments (base salary + variable) above market median.
The variable remuneration, which totaled US$ 64.1 million in 2002, is paid to
all employees and calculated on the basis of the results achieved by the teams,
as contracted at the beginning of each period.
In 2002, Gerdau non-consolidated paid a total of US$ 8.5 million to its
executives in salaries and variable remuneration. The variable remuneration for
executives is based on the overall performance of Gerdau S.A., on the basis of
obtained EBTDA (as defined for purposes of computation of variable remuneration)
versus planned EBTDA (as defined for purposes of computation of variable
remuneration), on the performance of the unit to which the executive is related,
and on personal performance. Each of these factors corresponds to one third of
the variable remuneration.
The Company and other related companies in the Group co-sponsor
contributory pension plans (the "Brazilian Plans") covering substantially all
employees based in Brazil, including Acominas as from its consolidation. The
Brazilian Plans are mainly defined benefit plans with certain limited defined
contributions. Additionally, the Company's Canadian and American subsidiaries,
including Co-Steel, sponsor defined benefit plans (the "North American Plans")
covering the majority of their employees. Contributions to the Brazilian Plans
and the North American Plans are based on actuarially determined amounts.
Contributions to the Brazilian Plans for defined contribution participants
are based on a specified percentage of employees' compensation and totaled $ 634
in 2002, $ 955 in 2001 and $1,596 in 2000. Contributions to defined contribution
retirement plans of employees of the subsidiaries in the United States and
Canada amounted to $ 8,200, $ 1,100 and $ 429 in 2002, 2001 and 2000,
respectively.
The subsidiaries in North America also have a voluntary savings plan
available to substantially all of their employees. Under this plan, the Company
contributes amounts based upon a percentage of the savings paid into the plan by
employees. The Company matches 50% of the employees' contributions up to 4% of
employees' salaries. Costs under this plan for the period ended December 31,
2002 were $1.9 million (2001- $1.8 million).
Gerdau's contributions to the Gerdau Plan in 2002 totaled US$ 19.3
thousand. This sum refers only to that portion of contributions for executives,
whose benefits are in no way different from those offered to the other employees
of the Company.
C. BOARD PRACTICES
The following table sets forth information with respect to the practices of
the Board of Directors, the Gerdau Executive Committee and other executive
officers of the company.
NAME CURRENT POSITION
Jorge Gerdau Johannpeter President of the Board of Directors and of the Gerdau
Executive Committee and Executive President since 1983.
Germano Hugo Gerdau Johannpeter Member of the Board of Directors since 1983.
Klaus Gerdau Johannpeter Member of the Board of Directors since 1983.
Member of the Board of Directors and Senior Executive Vice
Frederico Carlos Gerdau President since 1983, responsible for accounting, auditing,
Johannpeter holdings, legal processes and Gerdau Forestry (Gerdau
Florestal).
Affonso Celso Pastore Independent member of the Board of Directors since 2002.
Oscar de Paula Bernardes Neto Independent member of the Board of Directors since 2002.
Andre Pinheiro de Lara Resende Independent member of the Board of Directors since 2002.
Expedito Luz Legal Executive Officer since 1988. General Secretary of the
Board and the Gerdau Executive Committee since 2002.
69
Carlos Joao Petry Senior Executive Vice President since 2002, responsible for
human resources, Purchasing, logistics and transport.
Andre Bier Johannpeter Executive Vice President responsible for North American
operations and Information Technology processes since 2002.
Executive Vice President responsible for Acominas, global
Paulo Fernando Bins de Marketing and Sales, Scrap Purchasing and Quality Management
Vasconcellos Technology since 2002.
Executive Vice President responsible for South American
operations since 2002, Investor Relations Executive Officer
Osvaldo Burgos Schirmer since 2001, responsible for Gerdau Bank (Banco Gerdau) since
1994.
Executive Vice President responsible for operations of mills
Claudio Johannpeter for long and specialty steel and for industrial processes in
Brazil and other countries since 2002.
Domingos Somma Executive Vice President responsible for Long Steel
Operation in Brazil since 2002.
Sirleu Jose Protti Executive Officer for Long Steel Operation Brazil since 2002.
Joao Aparecido de Lima Executive Officer for Human Resources since 1987.
Erico Teodoro Sommer Executive Officer for Engineering since 1992.
Luiz Alberto Morsoletto Industrial Executive Officer for Divinopolis unit since 1994.
Paulo Roberto Perlotti Ramos Commercial Executive Officer for Gerdau Acos Finos Piratini
since 2002.
Joaquim Guilherme Bauer Executive Officer for Gerdau Industrial Business Unit since
1997.
Julio Carlos Lhamby Prato Executive Officer for Industrial Business Units since 2002.
Francesco Saverio Merlini Executive Officer for Cosigua since 1998.
Joao Carlos Salin Goncalves Metal Supplies Director since 1999.
Heitor Luis Beninca Bergamini Executive Officer for Comercial Gerdau since 1999.
Carlos Bier Johannpeter Executive Officer for Business Units since 2000.
Claudio Mattos Zambrano Executive Officer for Gerdau Acos Finos Piratini since 2000.
Elias Pedro Vieira Manna Executive Officer of Gerdau Industrial Business since 2002.
Gerson Marcos Venzon Executive Officer for Business Units since 2002
Nestor Mundstock Executive Officer for Gerdau Central region since 2001.
Andre Felipe Gueiros Reinaux Executive Officer for Gerdau Northern region since 2002.
Dirceu Tarcisio Togni Executive Officer for Gerdau Southern region since 2002.
Jose Antonio Cruz de Modena Effective Member of the Board of Auditors since 2002.
Peter Wilm Rosenfeld Effective Member of the Board of Auditors since 2002.
Alberto Monteiro de Queiroz Netto Effective Member of the Board of Auditors since 2002.
Rudolfo Teodoro Tanscheit Substitute Member of the Board of Auditors since 2002.
Tranquilo Paravizi Substitute Member of the Board of Auditors since 2002.
Jose Silva Correa Substitute Member of the Board of Auditors since 2002.
All individuals listed above are elected at the Shareholders' Meeting for a
one-year term, and are entitled, in the event of termination of their term, only
to statutory employment benefits under applicable law, without any special
severance.
BOARD OF AUDITORS AND REMUNERATION & SUCCESSION COMMITTEE
Gerdau S.A. does not have an audit committee, but, since April 2000, has
elected a board of auditors (conselho fiscal) with the aim of improving its
relationship with the capital market and shareholders, and in accordance with
the Brazilian corporate law 6.404/76. The role of this board is to monitor and
verify the actions of directors and their legal duties, provide opinion and
official statements on the administration's annual report, provide opinion
concerning the proposals of administrative board members, denounce errors or
fraud, call meetings whenever necessary and analyze financial statements. The
Gerdau S.A. board of auditors has three members, two of which were appointed by
the controlling group and one elected by minority common shareholders.
The Board of Auditors elected at the Shareholder's Meeting of 2002 has the
following members:
70
Effective
Jose Antonio Cruz de Modena
Peter Wilm Rosenfeld
Alberto Monteiro de Queiroz Netto (elected by minority shareholders)
Substitutes
Rudolfo Teodoro Tanscheit
Tranquilo Paravizi
Jose Silva Correa (elected by minority shareholders)
Board of auditors members are elected at the ordinary shareholders' meeting
for one-year terms, and they may be reelected. As stated in article 162 of law
6.404/76, board of auditors member must have held office for at least 3 years as
business administrators or as board's of auditors member. The board of auditors,
at the request of any of its members, may ask independent auditors to provide
explanations or information and to investigate specific facts.
On April 10, 2003, the SEC published the final ruling on how foreign
companies with securities listed on US stock exchanges must comply with the
provisions of the Sarbanes-Oxley Act, as it relates to audit committees. The Act
requires all companies to comply with a series of enhanced requirements.
The ruling determines that foreign companies may decide to implement an
Audit Committee as defined by the Act and SEC rules or, when a Board of Auditors
is established in accordance with local regulations, to use the existing Board
of Auditors.
There are differences between the responsibilities under the audit
committee as per the Act and those of the Board of Auditors under Brazilian law.
The differences are the Committee's power to determine (hire and fire) the
external auditors and that the Brazilian law defines as a non-transferable
decision of the Board of Directors. Hence, the SEC's ruling accepts that when
there is a restriction to delegate power of decision, the Board of Auditors
provide the Board with an advisory.
The Company is currently evaluating the changes necessary for its current
board of auditors to be in compliance with the expanded requirements of the Act.
Under the rulings of the SEC, foreign private issuers should comply with the
audit committee requirements by July 2005.
With the new corporate governance structure introduced in 2002, a Strategy
Committee was created, consisting of executives who help to reach higher levels
of operational performance. Excellence Committees were established with the aim
of supporting the functional processes so as to seek best management practices
and encourage the sharing of know-how between the units. Based on the same
concept, Gerdau has also established a Remuneration & Succession Committee,
which guides executive remuneration practices and consists of:
Frederico Carlos Gerdau Johannpeter
Carlos Joao Petry
Joao Aparecido de Lima
Affonso Celso Pastore
Oscar de Paula Bernardes Neto
71
D. EMPLOYEES
The following table sets forth information with respect to the geographic
distribution of Gerdau's employees:
-------------------------------------------------------
DIRECT BRAZIL ABROAD TOTAL
-------------------------------------------------------
1998 8,639 1,172 9,811
1999 8,495 3,361 11,856
2000 8,436 3,654 12,090
2001 8,631 3,565 12,196
2002 12,978 5,048 18,026
-------------------------------------------------------
-------------------------------------------------------
OUTSOURCED BRAZIL ABROAD TOTAL
-------------------------------------------------------
2002 6,487 194 6,681
-------------------------------------------------------
As of December 31, 2002, the Company had 18,026 employees considering all
of its industrial units. From this total, 72% are in Brazil and the remainder in
units in South and North America, with 456 and 4,592 employees, respectively.
The number of employees in Brazil has grown considerably in the last year due to
the full consolidation of Acominas, which currently employs 3,826 workers. In
North America, the increase in the number of employees results from the
incorporation of employees from the former Co-Steel to Gerdau AmeriSteel Corp.
As unions in Brazil are organized on a regional rather than a national
basis, the Company has no nationally applicable agreements with its workers.
Gerdau believes that its employee pay and benefit structure is comparable to
general market rates. Gerdau also provides its employees with fringe benefits
such as health and child care.
Gerdau non-consolidated seeks to maintain good working conditions in
Company plants and as a consequence has what it believes to be a comparatively
low employee turnover rate. Due to a strong emphasis on employee training, the
Company attempts to manage any necessary production curtailments through the
timing of vacations, rather than workforce reductions. In Brazil, the Gerdau
non-consolidated has not experienced in the past strikes and believes that its
relations with employees are good. The Company has not lost a day's production
due to labor disputes in the past 40 years.
Acominas has maintained a good relationship with the unions representing
its employees. It follows a policy of reward and recognition (PAR - Acominas
Program for results-based compensation, mapping of competencies and evaluation
of performance) that is in accordance with the best practices of the market in
which it operates, and its 3,826 employees are supported by a modern benefits
policy - including health plan; private pension fund; group life insurance;
meals; etc. To increase the satisfaction of employees and to protect the Company
from labor claims, Acominas created an "Equal Representation Committee for
Solution of Individual Labor Grievances" which has representatives from the
Company and the unions representing its employees. The Committee works as an
antechamber for labor justice. The stability of its personnel is the main proof
that employees consider the human resources management system at Acominas to be
satisfactory. On the other hand, with the installation of new equipment at the
Ouro Branco mill (heavy structural shapes and wire-rod rolling mill equipment),
new employees have been hired. This has meant improvement in socio-economic
conditions in the cities surrounding the mill, and has made of Acominas a major
promoter of regional development.
Gerdau AmeriSteel Corp. has been and continues to be proactive in
establishing and maintaining a climate of good employee relations. Ongoing
initiatives include organizational development skills training, team-building
programs, opportunities for participation in employee involvement teams, and an
"open book" system of management. Gerdau AmeriSteel Corp. believes high employee
involvement is a key factor in the success of its operations. Compensation
programs are designed to make employees' financial interest congruous with those
of Gerdau AmeriSteel's shareholders.
Gerdau AmeriSteel currently employs 4,592 employees. From this total about
1,000 are represented by the unions under a number of collective bargaining
agreements. The agreements with the mill employees have different expiration
dates beginning February 2004.
72
Former Co-Steel employee relations policies are designed to achieve and
maintain good relations between the company and its employees. Employee benefits
include extensive medical and dental coverage and life and disability insurance.
The company also provides pension and post-retirement benefits to qualified
employees.
E. SHARE OWNERSHIP
The following chart indicates the individual holdings of Gerdau S.A.
Preferred and Common Shares by each director and executive officer, as of
December 31st 2002. The list of executive officers that hold shares of the
company as indicated below do not own 1% or more of the company's capital in
each stock class. The company does not provide employees any additional right in
any form, i.e., stock options or securities of the company.
--------------------------------------------------------------------------------------------
NAME COMMON SHARES % PREFERRED SHARES %
--------------------------------------------------------------------------------------------
Jorge Gerdau Johannpeter* 44,574 - 1,690,478 -
Frederico Carlos Gerdau
Johannpeter* 44,774 - 5,366,478 0.01%
Carlos Joao Petry 314,968 - 11,229,124 0.02%
Expedito Luz 32 - 1,560,000 -
Sirleu Jose Protti - - 60,000 -
Joao Aparecido de Lima - - 1,560,000 -
Osvaldo Burgos Schirmer - - 60,000 -
Domingos Somma 24,274 - 1,870,350 -
Carlos Bier Johannpeter 2,786,164 0.01% 11,376,380 0.02%
Erico Teodoro Sommer - - 1,560,000 -
Luiz Alberto Morsoletto - - 3,505,956 -
Julio Carlos Lhamby Prato - - 60,000 -
Andre Bier Johannpeter 2,786,164 0.01% 11,382,982 0,02%
Claudio Johannpeter 2,700,000 0.01% 23,611,464 0.03%
Joaquim Guilherme Bauer - - 1,689,014 -
Francesco Saverio Merlini - - 60,000 -
Joao Carlos Salin Goncalves - - 60,000 -
Claudio Mattos Zambrano 28,314 - 840,580 -
Elias Pedro Vieira Manna - - 60,000 -
Gerson Marcos Venzon - - 860,000 -
Paulo Roberto Perlott Ramos - - 232,566 -
Nestor Mundstock 50,310 - 503,768 -
Paulo Fernando Bins de
Vasconcellos 3,762 - 273,204 -
Andre Felipe Gueiros Reinaux - - 1,530,000 -
Dirceu Tarcisio Togni - - 265,400 -
* The Gerdau family controls Metalurgica Gerdau S.A. through its holdings
in Indac - Industria, Administracao e Comercio S.A., Grupo Gerdau
Empreendimentos Ltda. and Gersul Empreendimentos Imobiliarios Ltda., holding,
collectively, 71.8% of the voting capital and 23.9% of the total capital.
Individually, Indac - Industria, Administracao e Comercio S.A. holds 32.3% of
the voting capital and 10.8% of the total capital of Metalurgica Gerdau S.A.,
Grupo Gerdau Empreendimentos Ltda. holds 25.6% of the voting capital and 8.5% of
the total capital of Metalurgica Gerdau S.A., and Gersul Empreendimentos
Imobiliarios Ltda. holds 13.9% of the voting capital and 4.6% of the total
capital of Metalurgica Gerdau S.A..
The changes that took place between the end of the 2002 fiscal year and the
filing of this document, concerning Directors, Senior Management and Employees,
are described in Item 8 - Significant Changes.
73
ITEM 7. MAJOR SHAREHOLDERS AND RELATED-PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
As of December 31, 2002, 39,590,941,783 Common Shares and 74,527,528,780
Preferred Shares were issued and outstanding. Of the two kinds of shares traded
in the market, only the Common Shares have voting rights. Under the terms of the
company's by-laws, however, specific rights are assured to the non-voting
Preferred Shares.
---------------------------------------------------------------------------------------------
SHAREHOLDER COMMON SHARES % PREFERRED SHARES %
---------------------------------------------------------------------------------------------
Metalurgica Gerdau S.A. 32,995,481,401 83.3 18,197,604,558 24.4
BNDES Participacoes S.A. - BNDESPAR 2,923,891,507 7.4 4,842,794 -
Santa Felicidade Com. Imp. Exp. Prods. Sid.
Ltda.* 936,949,502 2.4 2,999,759,664 4.0
Gersul Empreendimentos Imobiliarios S.A.* 747,214,768 1.9 - -
Grupo Gerdau Empreendimentos Ltda.* 547,679,662 1.4 7,705,453 -
Indac Ind. Adm. e Comercio S.A.* 236,648,440 0.6 - -
Members of the Board of Directors and
Executive Officers as a group (24 members) 8,783,336 - 81,267,744 0.1
* Controlled by or affiliated with Metalurgica Gerdau S.A.
The above table sets forth certain information as of December 31, 2002 with
respect to (i) any person known to the company to be the owner of more than 5%
of the company's outstanding Common Shares, (ii) any person known to the company
to be the owner of more than 5% of the company's outstanding Preferred Shares
and (iii) the total amount of the company's Common Shares and Preferred Shares
owned by the executive officers and directors of the company as a group.
Metalurgica Gerdau S.A. and its controlled companies hold 83.3% of the
voting capital of Gerdau S.A. and, consequently, have the ability to control the
company's Board of Directors and the direction and other operations of the
Company.
The changes made between the end of the 2002 fiscal year and the filing of
this document, concerning Major Shareholders, are described in Item 8 -
Significant Changes.
B. RELATED-PARTY TRANSACTIONS
Operations of the company with its related parties consist of (i) loans and
(ii) commercial operations with controlled and related parties.
(i) Gerdau S.A. maintains loans with some of its controlled and related
parties by means of loan contracts, which are repaid under conditions
similar to those on the open market. Contracts between related and
controlled parties in Brazil are updated according to the weighted
market average rate. Contracts with the Group's companies abroad are
repaid with charges (LIBOR + 3% p.a.) and updated according to
exchange rate variation.
(ii) The commercial operations of Gerdau S.A. with its controlled and
related parties basically consist of transactions involving purchase
and sale of inputs and products. These transactions are performed
under the same conditions and terms as those current for transactions
with non-related third parties. The commercial operations also include
payments for the use of the Gerdau brand and payments related to loan
guarantees.
74
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The Company's financial statements are included in Item 18.
LEGAL PROCEEDINGS
TAX MATTERS
As is the case with many other industrial companies in Brazil, the company
is engaged in several disputes with Brazilian taxation authorities. The
principal disputes involve the Federal taxes Contribuicao Provisoria sobre
Movimentacao Financeira (CPMF), Fundo de Participacao e Integracao Social (PIS),
Contribuicao Social para o Financiamento da Seguridade Social (COFINS),
Contribuicoes Previdenciarias (INSS), Fundo de Investimento Social (FINSOCIAL),
Contribuicao ao Fundo de Assistencia ao Trabalhador Rural (FUNRURAL),
Contribuicao Social Sobre o Lucro, as well as the state Value Added Tax, Imposto
Sobre Circulacao de Mercadorias e Servicos (ICMS). Some of the questions raised
in these matters have already been ruled on by the Brazilian Supreme Court,
establishing precedents for the lower courts.
Because the relevant disputes have not been concluded, although in some
cases the outcome is highly predictable, the contingent liability in respect of
these and other taxes remains on the company's books in the aggregate amount of
US$ 22.2 million as of December 31, 2002 (CPMF: US$ 2.0 million, PIS/COFINS: US$
2.7 million, INSS: US$ 5.6 million, FINSOCIAL: US$ 2.0 million, FUNRURAL: US$
0.06 million, Contribuicao Social Sobre o Lucro: US$ 0.9 million, Corporate
Income Tax (IRPJ): US$ 4.7 million, ICMS: US$ 3.1 million and others US$ 0.9
million).
The aggregate amount equivalent to US$ 12.2 million has been paid to the
courts to be held in judicial escrow pending the outcome of the above disputes:
the actual amount to be paid in the event of the company being completely
unsuccessful in such tax disputes would therefore not be greater than US$ 10.0
million.
Along with other electricity consumers, the company has challenged the
constitutionality of the "compulsory loans" required to be made to the
state-owned utility holding company Eletrobras by its customers (Emprestimo
Compulsorio Eletrobras Sobre Energia Eletrica). The current amount in dispute by
the company is the equivalent of US$ 14.3 million, including an aggregate amount
of the equivalent of US$ 1.3 million that has been paid into court (where it is
held in judicial escrow pending the outcome of the relevant disputes). The
company has established a reserve relating to "compulsory loans" since: (i) in
March 1995 the Brazilian Supreme Court decided against the interests of the
company as it relates to this matter; (ii) even though the payment to Eletrobras
was in the form of a loan, the repayment to the company will most probably be
made in the form of Eletrobras shares; and (iii) based on currently available
information, the Eletrobras shares will most likely be worth less than 5% of the
amount payable if the repayment were to be made in cash. Although the
constitutionality of the charge has been sustained by the Brazilian Supreme
Court, several issues are still pending, including the amounts to be paid by the
company.
MATTERS RELATED TO SOCIAL SECURITY
During the last year, Gerdau S.A. non-consolidated instituted four lawsuits
intending to annul several tax assessments concerning INSS (social security
contributions levied on employees' payroll). Among other subjects, the Tax
Authorities questioned irregularities on payments concerning labor accident
insurance and disability compensation, as well as concerning employees of
outsourced service companies, the later due to the company's legal joint and
several liability.
75
The total amount in dispute is deposited in escrow (US$ 3.2 million). The
company estimates a probable favorable outcome for one of the lawsuits, which
corresponds to 13.5% of the amount deposited. A possible loss is estimated for
62.3% of the amount in dispute, and a probable unfavorable outcome for 24.2% of
the total deposited.
Acominas recently received two assessments levying social contributions.
INSS disagrees with the company's procedure for adjusting the currency
devaluation of credits, compensated with regular debits of social security
contributions, as well as the procedure of profit-sharing payments to employees.
The company expects a possible and probable favorable outcome, respectively. The
amounts levied corresponded, in December of 2002, to US$ 1.9 million.
ANTITRUST MATTERS
There is currently one antitrust proceeding pending against Gerdau
non-consolidated. It refers to a complaint brought by two Sao Paulo civil
constructors' unions alleging that Gerdau and the other long steel producers in
Brazil were dividing clients among themselves, therefore breaking antitrust
laws.
After investigations conducted by the Department of Economic Law (SDE) and
based on some public hearings, the Secretary's opinion was that a cartel
existed. This conclusion was also backed by a previous opinion of the Department
of Economic Monitoring (SEAE).
The proceeding will now be followed by a final stage at the Administrative
Council for Economic Defense (CADE), who will decide the case.
Gerdau denies it has practiced any kind of anticompetitive conduct and
believes the SDE investigations did not follow due process of law and that SDE
officials instructed some witnesses. Furthermore, the SDE's opinion was taken
before Gerdau had the chance to respond to the final allegations, indicating the
SDE's biased judgment of the case. The same understanding also applies to the
SEAE's opinion, which has no economic content and is based exclusively on the
witnesses. Gerdau is fighting and will continue to fight against antitrust
authorities to have its constitutional rights respected.
Based on the arguments presented before the relevant authorities, Gerdau
believes that it should be successful in this proceeding, at least at court
level. Therefore, no provision has been made for any amount.
According to applicable Brazilian legislation, fines of up to 30% of
relevant gross revenue in the previous fiscal year may be levied upon the
company and, if it is proved that there is personal liability of an officer,
such officer may be levied a fine of 10-50% of the fine applied to the company.
There is no precedent of fines in the country in excess of 4%: in a similar case
regarding flat steel companies, the fine was 1%. The relevant companies are
currently fighting the penalty in court.
LABOR MATTERS
The company is also party to a number of lawsuits by ex-employees,
including personal injury claims. As to the claims directly referring to
compliance with labor laws, it is very difficult to estimate the value of such
employees' lawsuits, because plaintiffs in Brazil generally make several
alternative or complementary claims in a single lawsuit, only a few of which
ever result in an award. Additionally, in the company's experience the
plaintiffs in these suits tend to exaggerate the amounts of their claims.
Nevertheless, the company has estimated the probable loss amount for each
lawsuit. The company estimates that the total probable loss involved in these
ex-employees' lawsuits as of December 31, 2002 should not exceed US$ 7.1
million.
Most of these labor lawsuits are characterized by ex-employee multiple
demands arising from Brazilian legislation providing for additional payments
over and above the employee's former base salary. These suits include, among
other things, demands for (i) overtime, (ii) night work, (iii) correction for
dangerous working conditions, (iv) reduction of fines levied due to termination
and (v) requests to fine the company for late payment of termination payments.
Also, some ex-employees sue the company in torts because of personal injury
resulting from labor accidents. The accounting treatment adopted by the company
for the above amounts in dispute is to accrue for each contingency when the
amounts are probable and reasonably estimable.
76
NO MATERIAL EFFECT
The company believes, based in part on advice from legal counsel, that the
reserve for contingencies of US$ 60.5 million as of December 31, 2002, is
sufficient to meet probable and reasonably estimable losses in the event of
unfavorable rulings in the aforementioned matters. As such, the company believes
that the ultimate resolution of such matters will have no material effect on the
consolidated financial position as of December 31, 2002 or the results of future
operations or cash flows.
B. SIGNIFICANT CHANGES
The following significant changes were made between the disclosure of
results on December 31, 2002 and the filing of this document:
BUSINESS NAMES OF THE COMPANIES IN NORTH AMERICA
After the merger of Gerdau's North American assets with those of Co-Steel,
changes were made to the business names of the companies in that region. As of
the beginning of 2003, the former Gerdau companies in North America are named as
follows:
Gerdau AmeriSteel MRM Special Sections Inc., formerly Gerdau MRM Steel Inc.
Gerdau AmeriSteel Cambridge Inc., formerly Gerdau Courtice Steel Inc.
Gerdau AmeriSteel US Inc., formerly AmeriSteel Corporation.
DIVIDEND PAYMENT
The Board of Directors of Gerdau S.A. approved the quarterly payment of
dividends on March 31, 2003. As of this date, the Company will pay dividends on
a quarterly basis. The first payment, in the form of interest on capital stock,
was made to shareholders on May 15, 2003, to the sum of R$ 0.65 per lot of 1,000
shares.
BOARD OF AUDITORS' MEMBERS (CONSELHO FISCAL)
On April 30, 2003, the shareholders' meeting installed the Board of
Auditors for the fiscal year ending on December 31st, 2003. It will be composed
of three (03) effective members and (03) substitutes. On this same meeting the
following individuals were elected:
Effective
Jose Antonio Cruz de Modena
Peter Wilm Rosenfeld
Jose Bernardo de Medeiros Neto (elected by minority shareholders)
Substitutes
Rudolfo Teodoro Tanscheit
Tranquilo Paravizi
Alfredo Tostes Bello da Silva (elected by minority shareholders)
The members of the Board of Auditors were elected for a one-year term and
may be reelected by the Board.
STOCK DIVIDEND AND REVERSE SPLIT
The shareholders' meeting held on April 30, 2003, approved the proposals
for a payment of a stock bonus and a reverse split of the Company's shares.
Gerdau S.A. shareholders received a stock bonus based on a transfer of R$ 400
million in reserves to the capital stock account of Gerdau S.A., resulting in
the issuance of new shares. With this operation, there was an increase of 30% to
148.4 million in the number of Gerdau S.A. shares outstanding. After the stock
bonus issuance, the shares of the Company were grouped (reverse split). As a
result, shares are traded in units, and no longer in lots of one thousand
shares.
STOCK DIVIDEND OF 30%
An increase of 30% of Capital Stock was approved due to the transfer of
Reserves for Working Capital and Investments. This allowed for the issuance of
three (03) new shares for each ten (10) existing shares.
77
REVERSE SPLIT
Gerdau S.A.'s capital stock reverse split has been approved. Each lot of
one thousand shares were replaced by one new share. Shareholders' positions were
adjusted accordingly as to maintain the original stake. As of the reverse split,
share prices started to be quoted as units and no longer as lots of one thousand
shares.
After the reverse split and the stock bonus, the new shares were credited
by the Depositary agent - Banco Itau S.A., to each and every individual record
of shareholders. Trading as of May 2, 2003 were made Ex-dividend stock and
Ex-reverse split.
Per share data in this annual report has been retroactively restated to
reflect the effects of the stock dividend and reverse split approved in April
30, 2003.
TRADING ON EXCHANGES OUTSIDE BRAZIL
As in Brazil, ADRs traded on the New York Stock Exchange were adjusted for
the changes approved by the shareholders at the Shareholders' meeting held on
April 30th, 2003.
As of May 13, 2003, the ratio of ADRs traded in the United States went to 1
(one) ADR for each 1 (one) preferred share (1:1 ratio).
After the stock dividend and the reverse split, the price quoted for ADRs
was adjusted and on May 13, 2003, were quoted at US$10.90 (opening price) on the
New York Stock Exchange. At the Madrid Stock Exchange - Latibex -, the changes
became effective as of May 2, 2003, given that each trade done at the Madrid
Exchage is done directly with the Sao Paulo Stock Exchange.
The fraction resulting from the stock dividend and reverse split relating
to the ADRs will be paid back through the depositary agent in the United States
- The Bank of New York.
INCREASE OF CAPITAL STOCK
The shareholders' meeting held on April 30th, 2003 approved the increase in
the capital stock to R$ 1,735,656,174.86 up from R$ 1.335.120.134,51, by means
of the capitalization of Reserves for Working Capital and Investments of R$
400,536,040, with a stock dividend of 34,235,541,169 new shares issued of which:
11,877,282,535 common stock, and 22,358,258,634 preferred shares which were
granted to shareholders based on shares types existing on April 30th, 2003.
NUMBER OF SHARES
After the approvals granted at the Shareholders' meetings of April 30th,
2003, the capital structure of Gerdau S.A. changed to:
Total shares: 148,354,011
Common shares: 51,468,224
Preferred Shares: 96,885,787
MAJOR SHAREHOLDERS
As of April 30, 2003, 51,468,224 Common Shares and 96,885,787 Preferred
Shares were issued and are outstanding. Of the two kinds of shares traded in the
market, only the Common Shares have voting rights. Under the terms of the
Company's by-laws, however, specific rights are assured to the non-voting
Preferred Shares.
Shareholder Common Shares % Preferred Shares %
Metalurgica Gerdau SA 42,894,125 83.34 23,656,885 24.42
BNDES Participacoes SA - BNDESPAR 3,801,058 7.39 1,971,391 2.03
Santa Felicidade Com Imp Exp Prods Sid Ltda.* 1,218,034 2.37 3,899,687 4.03
Gersul Empreendimentos Imobiliarios S.A.* 971,379 1.89 - -
Grupo Gerdau Empreendimentos Ltda.* 712,050 1.38 10,702 0.01
Indac Ind. Adm. e Comercio S.A.* 307,642 0.60 - -
78
Members of the Board of Directors and Executive Board as a group (24 persons) 7,792 0.02 98,110 0.10
* Controlled by or affiliated with Metalurgica Gerdau S.A.
STATUTORY LIMIT FOR NEW SHARE ISSUANCE
The shareholders'meeting of Gerdau S.A.on April 30th, 2003, based on the
reverse split according to Resolution 145/2003-AGE (Extraordinary
Shareholders'meeting) approved the statutory limit for new share issuance by
means of a deliberation of the Board of Directors, to 240,000,000 common shares
and 480,000,000 preferred shares.
STOCK OPTION PLAN
The General Shareholders' meeting held on April 30th, 2003, approved the
change in article 4th, of the by-laws and included a new 2nd paragraph with the
following text and consequent renumbering of the ensuing paragraphs:
ART. 4(0), SS. 2(0) - Within the limits of the authorized capital stock,
the Board may, based on a program approved by the Shareholders' meeting, grant a
stock option to the administrators, employees or individuals that provide
services to the Company or to companies under its control.
It also approved the creation of the referred program which constitutes a
new form of remuneration of executives and hereby instituting a program
denominated "Long term incentive Program", also approved and the document will
be filed with the Company. It authorizes also the concession by the
Administration, on April 9th, 2003, with retroactive date of January 1st, 2003,
of 683,936 options, at a price of R$ 23.88 (twenty-three reais and eighty-eight
cents) per share (ex-stock dividend and ex-reverse split as referred to in nrs.
145 and 146/2003-AGE), of which 280,785 in the regular program with a five-year
(5) mandatory holding period and, exceptionally this first year, 403,151
additional options with a (3) three-year mandatory holding period.
SHARE OWNERSHIP
The following chart indicates the individual holdings of Gerdau S.A.
Preferred and Common Shares by each director, as of April 30, 2003. The list of
directors that hold shares of the Company as indicated below do not own 1% or
more of the Company's capital in each stock class.
NAME COMMON SHARES % PREFERRED SHARES %
Jorge Gerdau Johannpeter 57 0,00 2.295 0,00
Frederico Carlos Gerdau
Johannpeter 58 0,00 7.073 0,01
Carlos Joao Petry 409 0,00 14.597 0,02
Expedito Luz - - 3.068 0,00
Sirleu Jose Protti - - 78 0,00
Joao Aparecido de Lima - - 2.028 0,00
Osvaldo Burgos Schirmer - - 8.008 0,01
Domingos Somma 31 0,00 2.431 0,00
Erico Teodoro Sommer - - 2.028 0,00
Luiz Alberto Morsoletto - - 4.557 0,00
Julio Carlos Lhamby Prato - - 78 0,00
Andre Bier Johannpeter 3.622 0,01 14.797 0,02
Claudio Johannpeter 3.510 0,01 30.694 0,03
Joaquim Guilherme Bauer - - 2.195 0,00
Francesco Saverio Merlini - - 78 0,00
Joao Carlos Salin Goncalves - - 78 0,00
Claudio Mattos Zambrano 36 0,00 1.092 0,00
Elias Pedro Vieira Manna - - 78 0,00
79
Gerson Marcos Venzon - - 1.118 0,00
Paulo Roberto Perlott Ramos - - 302 0,00
Nestor Mundstock 65 0,00 654 0,00
Paulo Fernando Bins de
Vasconcellos 4 0,00 355 0,00
Andre Felipe Gueiros Reinaux - - - -
Dirceu Tarcisio Togni - - 345 0,00
Paulo Ricardo Tomazelli - - 83 0,00
TOTAL 7.792 0,02 98.110 0,10
DIRECTORS
At the Board of Directors meeting on April 30, 2003, Mr. Paulo Ricardo
Tomazelli was elected director of Gerdau S.A. Mr. Tomazelli has worked for the
Company since 1986, and, in 2003, became Executive Officer of the Gerdau
Agricultural Products (GPA) and Gerdau Nails (GP) Business Units. Mr. Paulo
Tomazelli is graduated from the Metallurgical Engineering School of Federal
University of Rio Grande do Sul (1984), and holds a Master's Degree in Corrosion
and Protection of Materials from the same university (1985) and Specialization
in Marketing from the IOB (1996). As of April 30,2003, Mr. Carlos Bier
Johannpeter is no longer Director of Gerdau S.A..
DONA FRANCISCA ENERGETICA S.A.
In January 2003, Gerdau non-consolidated increased its investment in the
energy sector by acquiring 119.8 million shares in Dona Francisca Energetica
S.A., or 30% of the company's capital stock, for R$ 20.0 million plus the
outstanding net value corresponding to the participation of Inepar Energia S.A.
in credits held by Dona Francisca Energetica S.A. at the wholesale electric
power market (MAE) on September 30, 2002. Gerdau S.A. already held a 21.8% stake
in the capital stock of Dona Francisca Energetica S.A.; with this acquisition,
the Company now owns 51.8% of the energy company's capital stock. Dona Francisca
Energetica S.A. operates in the field of power generation through the Dona
Francisca Hydroelectric plant, which has an installed capacity of 125 MW and is
located in central Rio Grande do Sul.
DEBT REFINANCING
Gerdau Ameristeel Corporation announced on June 9, 2003 that it intends to
raise $400 million through a private offering of Senior Notes due 2011.
Contemporaneously with the offering of Senior Notes, the company also intends to
enter into a senior secured credit facility providing commitments of $350
million. Gerdau Ameristeel will use the net proceeds of the offering of Senior
Notes and the initial draw-down under the senior secured credit facility to
repay debt under its existing credit facilities. Once the company completes the
refinancing, it plans to reorganize its subsidiaries to more efficiently
integrate its operations and bring its U.S. operations within the same U.S.
group.
CHANGES IN THE GERDAU EXECUTIVE COMMITTEE
The Board of Directors aproved on June 2003 a few changes on Gerdau's
organizational structure.
Mr. Paulo F. Bins de Vasconcellos was appointed Vice President of Gerdau
Ameristeel for the Northeastern operations. He will have direct responsibility
of the Perth Amboy and Sayreville plants, and will report to the CEO of Gerdau
Ameristeel, Phil Casey. Also Mr. Vasconcellos will represent Gerdau on the
Management Committee of Gallatin Steel Co. Due to these new responsibilities at
Gerdau Ameristeel, Mr. Vasconcellos relieved of his duties at the Executive
Committee at Gerdau.
Mr. Carlos J. Petry, Senior Vice President, will be responsible for the
Technological Process Global Coordination together with his current
responsibilities as Human Resources, Procurement and Logistics/Transportation
processes.
Mr. Claudio Gerdau Johannpeter, Executive Vice President, will be
responsible for the Acominas Business Operation while maintaining his current
responsibilities with Specialty Steels and the Global Industrial Process.
80
Mr. Domingos Somma, Executive VicePresident, has been appointed member of
the Gerdau Executive Committee and is now responsible for the orientation of the
Metallics Global Process, cumulatively with his current role as Vice President
of Long Steel Brazil Operations.
Mr. Ruy Lopes Filho was appointed Leader of the Marketing and Sales
Process, along with his current position as Director of Planning and will report
directly to Jorge Gerdau Johannpeter, responsible for the Global Orientation of
this Process.
With these decisions, the Gerdau Executive Committee will be composed by
the following members:
Jorge Gerdau Johannpeter - President
Frederico C. Gerdau Johannpeter - Senior Executive Vice President
Carlos J. Petry - Senior Executive Vice President
Andre Bier Gerdau Johannpeter - Executive Vice President
Claudio Gerdau Johannpeter - Executive Vice President
Domingos Somma - Executive Vice President
Osvaldo Burgos Schirmer - Executive Vice President
Expedito Luz - General Secretary
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
PRICE INFORMATION
The following table presents high and low closing prices in Brazilian reais
for Gerdau S.A. Preferred Shares (GGBR4) on the Sao Paulo Stock Exchange
(BOVESPA) for the indicated periods, as well as the high and low closing prices
is US dollars (PTAX) for the same period.
CLOSING SALE PRICES GGBR4 - ANNUAL BASIS
Dividend-adjusted
BRAZILIAN REAIS PER US DOLLARS PER
YEAR 1,000 PREFERRED SHARES 1,000 PREFERRED SHARES
HIGH (R$) LOW (R$) HIGH (US$) LOW (US$)
1999 19.92 2.83 10.89 2.12
2000 23.57 11.62 13.15 5.87
2001 21.08 11.23 10.23 4.01
2002 34.78 19.90 13.17 2.26
2003 (to March) 32.99 28.59 9.74 7.85
Source: Economatica
CLOSING SALE PRICES GGBR4 - QUARTERLY BASIS
Dividend-adjusted
BRAZILIAN REAIS PER US DOLLARS PER
YEAR 1,000 PREFERRED SHARES 1,000 PREFERRED SHARES
HIGH (R$) LOW (R$) HIGH (US$) LOW (US$)
2001
1st quarter 20.21 14.22 10.23 6.84
2nd quarter 17.67 13.01 8.09 5.56
3rd quarter 15.65 11.23 6.53 4.01
4th quarter 21.09 11.49 8.95 4.21
2002
1st quarter 27.44 19.90 11.71 8.63
2nd quarter 31.53 24.83 13.17 8.88
3rd quarter 32.20 24.39 10.66 6.26
81
4th quarter 34.78 24.39 9.82 6.51
2003
1st quarter 32.99 28.59 9.74 7.85
Source: Economatica
CLOSING SALE PRICES GGBR4 - MONTHLY BASIS
Dividend-adjusted
BRAZILIAN REAIS PER US DOLLARS PER
YEAR 1,000 PREFERRED SHARES 1,000 PREFERRED SHARES
HIGH (R$) LOW (R$) HIGH (US$) LOW (US$)
2002
January 25.48 19.90 10.59 8.63
February 26.32 21.34 10.99 8.81
March 27.44 23.72 11.71 10.08
April 30.50 24.83 13.17 10.81
May 31.53 25.38 12.45 10.22
June 29.78 25.11 11.34 8.88
July 29.82 25.25 10.48 7.86
August 32.20 26.20 10.66 7.87
September 31.43 24.39 10.29 6.26
October 32.38 24.39 8.88 6.51
November 34.78 29.54 9.82 8.01
December 32.87 29.73 9.51 7.83
2003
January 33.70 29.20 9.96 8.02
February 33.60 29.80 9.39 8.20
March 32.99 29.12 9.37 8.45
Source: Economatica
On April 2000, the Board of Directors authorized a 2-for-1 stock split of
its Common and Preferred shares, which was approved at the Shareholders'
Meeting. The additional shares resulting from the split were distributed to
shareholders of record on April 28, 2000 by the transfer agent, Banco Itau S.A.,
two days after approval for shares traded in Brazil, and seven days after
approval for ADRs, as of which time the shares were traded on a split-adjusted
basis.
The following table presents high and low prices for Gerdau S.A. ADRs as
negotiated on the New York Stock Exchange (NYSE) since March 10, 1999, when the
company upgraded its ADRs to level II.
CLOSING SALE PRICES GGB - ANNUAL BASIS
Dividend-adjusted
US Dollars per
YEAR 1,000 PREFERRED SHARES
HIGH (US$) LOW (US$)
1999 (from March 10, 1999) 13.50 4.22
2000 15.50 7.88
2001 11.69 4.68
2002 14.00 6.90
2003 (to March 31, 2003) 9.88 8.09
Source: Bloomberg
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CLOSING SALE PRICES GGB - QUARTERLY BASIS
Dividend-adjusted
US Dollars per
YEAR 1,000 PREFERRED SHARES
HIGH (US$) LOW (US$)
2001
1st quarter 11.69 8.10
2nd quarter 9.26 6.60
3rd quarter 7.44 4.68
4th quarter 9.80 4.99
2002
1st quarter 12.43 9.55
2nd quarter 14.00 9.25
3rd quarter 10.91 6.90
4th quarter 9.97 6.95
2003
1st quarter 9.88 8.09
Source: Bloomberg
CLOSING SALE PRICES GGB - MONTHLY BASIS
Dividend-adjusted
US Dollars per
YEAR 1,000 PREFERRED SHARES
HIGH (US$) LOW (US$)
2002
January 11.13 9.58
February 11.79 9.55
March 12.43 11.10
April 14.00 11.71
May 13.36 11.35
June 12.06 9.25
July 10.91 8.48
August 10.86 8.65
September 10.53 6.90
October 9.15 6.95
November 9.97 8.65
December 9.66 8.31
2003
January 9.88 8.09
February 9.31 8.35
March 9.65 8.81
Source: Bloomberg
B. PLAN OF DISTRIBUTION
Not required.
C. MARKETS
TRADING ON THE BRAZILIAN STOCK EXCHANGES
The BOVESPA is a non-profit entity owned by its member brokerage firms.
Trading on the BOVESPA is limited to member brokerage firms and a limited number
of authorized non-members. The BOVESPA currently has two open outcry trading
sessions each business day, from 11:00 a.m. to 1:30 p.m. and from 2:30 p.m. to
5:45 p.m. Trading is also conducted between 11:00 a.m. and 6:00 p.m. on the
BOVESPA automated system. There is also
83
trading on the so-called After-Market, only through the BOVESPA automated
system, from 6:45 p.m. to 7:30 p.m. Only shares that were traded during the
regular trading session of the day may be traded on the After-Market of the same
day.
There are no specialists or market makers for the company's shares on the
BOVESPA. The Brazilian Securities Commission (Comissao de Valores Mobilarios:
CVM) and the BOVESPA have discretionary authority to suspend trading in shares
of a particular issuer under certain circumstances. Trading in securities listed
on the BOVESPA may be effected off the exchange under certain circumstances,
although such trading is very limited.
Although any of the outstanding shares of a listed company may trade on the
BOVESPA, in most cases less than half of the listed shares are actually
available for trading by the public, the remainder being held by small groups of
controlling persons that rarely trade their shares. For this reason, data
showing the total market capitalization of the BOVESPA tend to overstate the
liquidity of the Brazilian equity securities market, which is relatively small
and illiquid compared to major world markets.
Settlement of transactions is effected three business days after the trade
date without adjustment of the purchase price for inflation. Payment for shares
is made through the facilities of a separate clearinghouse, the Brazilian
Clearing and Depository Corporation (Companhia Brasileira de Liquidacao e
Custodia: CBLC), which maintains accounts for member brokerage firms. The seller
is ordinarily required to deliver the shares to the exchange on the second
business day following the trade date. The CBLC is controlled by clearing
agents, such as member brokerage firms and banks, and the BOVESPA.
Trading on the BOVESPA by non-residents of Brazil is subject to certain
limitations under Brazilian foreign investment legislation.
REGULATION OF BRAZILIAN SECURITIES MARKETS
The Brazilian securities markets are regulated by the Brazilian Securities
Commission (CVM), which has authority over stock exchanges and the securities
markets generally, and by the Brazilian Central Bank (BACEN), which has, among
other powers, licensing authority over brokerage firms and regulates foreign
investment and foreign exchange transactions. The Brazilian securities market is
governed by the Brazilian Securities Law (Law no. 6,385 dated December 7, 1976,
as amended) and the Brazilian Corporate Law (Law no. 6,404 dated December 15,
1976, as amended).
Law no. 10,303 of October 31, 2001, amended Law no. 6,385/76 and Law no.
6,404/76. The most important changes were (i) the conversion of the CVM into an
autonomous governmental agency linked to the Ministry of Finance, with legal
independence and separate budget, assets and liabilities; (ii) the requirement
of greater disclosure by listed companies; (iii) the tag-along right for
minority common shareholders in the event of transfer of control of a listed
company; (iv) the right of preferred shareholders with non-voting rights or
restricted voting rights representing at least 10% of the total stock of a
listed company to elect one board member and substitute (considering that until
April 2005, the representative of such shareholders shall be chosen from a
three-name list prepared by controlling shareholders); (v) the right of the
minority common shareholders to also elect one board member; and (vi) that
preferred shares shall only be traded on the stock market if they have at least
one of the rights mentioned below: (a) priority over dividends corresponding to
at least 3% of the shares' net worth based on the last approved balance sheet of
the company; (b) the right to receive dividends at least 10% higher than the
dividend assigned to each common share; or (c) the tag-along right in the event
of transfer of control of the company.
Under the Brazilian Corporate Law, a company is either listed, such as
Gerdau S.A., or not listed. All listed companies must apply for registration
with the CVM and one of the Brazilian Stock Exchanges and are subject to ongoing
reporting requirements. A listed company may have its securities traded either
on the BOVESPA or on the Brazilian over-the-counter markets (Brazilian OTC). The
shares of a listed company, including Gerdau S.A., may also be traded privately
subject to certain limitations as per CVM regulation.
There are certain cases requiring disclosure of information to the CVM, the
BOVESPA, or even the public. These include (i) the direct or indirect
acquisition by an investor of at least 5% (five percent) of any class or type of
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shares representing the capital stock of a listed company, (ii) the sale of
shares which represents the transfer of control of a listed company and (iii)
the occurrence of a material event to the corporation.
On March 5, 2002, the CVM issued Regulation no. 361, which regulates tender
offers if one of the following events occurs: (i) delisting of companies; (ii)
increase in the equity interest of the controlling shareholder; or (iii)
transfer of control of a listed company.
The Brazilian OTC consists of direct trades between individuals in which a
financial institution registered with the CVM serves as intermediary. No special
application, other than registration with the CVM, is necessary for securities
of a listed company to be traded on the Brazilian OTC. The CVM must be notified
of all trades carried out on the Brazilian OTC by the company's respective
intermediaries.
The trading of a company's securities on the BOVESPA may be suspended in
anticipation of a material announcement. Trading may also be suspended on the
initiative of the BOVESPA or the CVM on the basis of a belief that a company has
provided inadequate information regarding a material event, has provided
inadequate response to the inquiries by the CVM or the exchange, or for other
reasons.
The laws and regulations regarding the Brazilian Securities Market provide
for disclosure requirements, restrictions on insider trading and price
manipulation, and protection of minority shareholders. Although many changes and
improvements have been introduced, the Brazilian securities markets are not as
highly regulated and supervised as the US securities markets or those in certain
other jurisdictions.
TRADING ON EXCHANGES OUTSIDE BRAZIL
In addition to the BOVESPA, Gerdau shares are traded on two other
exchanges:
NEW YORK STOCK EXCHANGE
The year 1999 was an important milestone for Gerdau on the international
stock market. On March 10, Gerdau S.A. obtained registration for the launch of
Level II ADRs, and began trading on the New York Stock Exchange. Under the GGB
symbol, these Level II ADRs have been traded in virtually every session since
that first day. From March to December 1999, the dollar value of the shares
increased by 201.4%. In 2002, 14.0 million shares were traded, moving US$ 144.1
million, for a daily trading volume of US$ 569,700.
LATIBEX - MADRID STOCK EXCHANGE
As of December 2, 2002, Gerdau S.A. preferred shares have been traded on
the Latibex, the sector of the Madrid Stock Exchange devoted to Latin American
companies traded in Euros. Following approval by the CVM and the Brazilian
Central Bank, this date marked the beginning of the Depositary Receipts (DR)
Program for preferred shares issued by the company in Spain, and listed on the
Latibex. The shares are traded in Spain under the symbol XGGB in the form of
DRs, where each DR corresponds to 1 preferred share. This participation on the
Latibex boosted the company's visibility in the European market and brought
increased liquidity to its shares on the BOVESPA, as each unit traded in Madrid
generates an operation in Brazil, whereby shares are traded on the BOVESPA
The changes made between the end of the 2002 fiscal year and the filing of
this document, concerning The Offer and Listing, are described in "Item 8 -
Significant Changes".
85
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The information required for this item was included in the Registration
Statement on Form 20-F dated February 3, 1999 (Commission file number 0-29956)
and in the subsequent annual reports on Form 20-F dated July 14, 1999 and dated
June 29, 2000 (Commission file number 1-14878) for the years ended December 31,
1998 and 1999, respectively.
TAG ALONG RIGHT
On April 30, 2002, the Company's Shareholders' Meeting approved a change to
the Company's by-laws (Art. 4, ss.5) concerning the rights of Preferred Shares.
As part of this alteration, a 100% tag-along right was approved. Therefore, all
Common and Preferred shares now have the right to be included in a potential
public offer for the transfer of control. In addition, the change guarantees
that the amount paid for Preferred Shares is the same as that paid for the
Ordinary Shares in the controlling block.
The new Brazilian Corporate Law (no. 10,302 issued October 31, 2001) has
introduced changes concerning the rights of minority shareholders. One of these
changes refers to the obligation, in case of transfer of control, of the new
controlling entity to make a public offer for the acquisition of voting shares
for an amount equivalent to at least 80% of the price paid for each voting share
in the controlling block.
It should be noted that GERDAU has gone beyond the legal requirements in
protecting minority shareholders: the Company has established that all minority
shareholders of Common Shares and all owners of Preferred Shares have the right
to receive 100% of the amount paid to the shares in the controlling block.
C. MATERIAL CONTRACTS
Not applicable.
D. EXCHANGE CONTROLS
There are no restrictions on ownership or voting of the company's capital
stock by individuals or legal entities domiciled outside Brazil. The right to
convert dividend payments and proceeds from the sale of the company's capital
stock into foreign currency and to remit such amounts outside Brazil is subject
to restrictions under foreign investment legislation which generally requires,
among other things, that the relevant investment have been registered with the
Central Bank.
In Brazil, there is a mechanism available to foreign investors interested
in trading directly on the Sao Paulo Stock Exchange. Until March 2000, this
mechanism was known as Annex IV Regulations, in reference to the Annex IV of
Resolution No. 1,289 of the National Monetary Council ("Annex IV Regulations").
Currently, this mechanism is regulated by Resolution No. 2,689, of January 26,
2000, of the National Monetary Council and by Instruction No. 325, of January
27, 2000, of the CVM, as amended ("2,689 Regulation").
The 2,689 Regulation, which became effective on March 31, 2000, sets forth
new rules about foreign portfolio investments in Brazil. Such rules allow
foreign investors to invest in almost all of the financial assets and to engage
in almost all transactions available in the Brazilian financial and capital
markets, provided that some requirements are fulfilled. In accordance with the
2,689 Regulation, foreign investors are individuals, legal entities, mutual
funds and other collective investments resident, domiciled or headquartered
abroad. The 2,689 Regulation prohibits
86
the offshore transfer or assignment of the title of the securities, except
in the cases of (i) corporate reorganization effected abroad by a foreign
investor or (ii) inheritance.
Pursuant to the 2,689 Regulation, foreign investors must: (i) appoint at
least one representative in Brazil with powers to perform actions relating to
the foreign investment; (ii) fill in the appropriate foreign investor
registration form; (iii) obtain registration as a foreign investor with the CVM;
and (iv) register the foreign investment with the Central Bank.
The securities and other financial assets held by the foreign investor
pursuant to the 2,689 Regulation must be registered or maintained in deposit
accounts or under the custody of an entity duly licensed by the Central Bank or
by the CVM or be registered in register, clearing and custody systems authorized
by the Central Bank or by the CVM. In addition, securities trading is restricted
to transactions carried out in exchanges or organized over-the-counter markets
licensed by the CVM.
All investments made by a foreign investor under the 2,689 Regulation will
be subject to electronic registration with the Central Bank.
Resolution No. 1,927 of the National Monetary Council, which is the Amended
and Restated Annex V to Resolution No. 1,289 ("Annex V Regulations"), provides
for the issuance of depositary receipts in foreign markets in respect of shares
of Brazilian issuers. The ADRs have been approved under the Annex V Regulations
by the Central Bank and the CVM. Accordingly, the proceeds from the sale of the
ADRs by ADR holders outside Brazil are free of Brazilian foreign investment
controls and holders of the ADRs will be entitled to favorable tax treatment.
According to the 2,689 Regulation, foreign investments registered under Annex V
Regulations may be transferred to the new investment system created by
Resolution No. 2,689 and vice-versa, with due regard to the conditions set forth
by the Central Bank and by the CVM.
A foreign investment registration has been made in the name of The Bank of
New York, as Depositary for the Preferred ADRs ("Depositary"), and is maintained
by Banco Itau S.A. ("Custodian") on behalf of the Depositary. Pursuant to the
registration, the Custodian and the Depositary are able to convert dividends and
other distributions with respect to the Preferred Shares represented by
Preferred ADRs into foreign currency and remit the proceeds abroad. In the event
of a holder of Preferred ADRs exchanging Preferred ADRs for Preferred Shares,
such holder will be entitled to continue to rely on the Depositary's
registration of foreign investment for only five business days after such
exchange, following which such holder must seek to obtain its own registration
with the Central Bank. Thereafter, unless the Preferred Shares are held pursuant
to the 2,689 Regulation by a foreign investor, such holder may not be able to
convert into foreign currency and remit outside Brazil the proceeds from the
disposition of, or distributions with respect to, such Preferred Shares, and
such holder generally will be subject to less favorable Brazilian tax treatment
than a holder of Preferred ADRs.
Restrictions on the remittance of foreign capital abroad could hinder or
prevent the Custodian, as custodian for the Preferred Shares represented by
Preferred ADRs or holders who have exchanged Preferred ADRs for Preferred Shares
from converting dividends, distributions or the proceeds from any sale of
Preferred Shares into US dollars and remitting such US dollars abroad. Holders
of Preferred ADRs could be adversely affected by delays in, or refusal to grant
any required government approval for conversions of Brazilian currency payments
and remittances abroad of the Preferred Shares underlying the Preferred ADRs.
EXCHANGE RATES
BRAZIL
There are two legal foreign exchange markets in Brazil, the Commercial
Market and the Floating Market. The Commercial Market is reserved primarily for
foreign trade transactions and transactions that generally require previous
approval from Brazilian monetary authorities, such as the purchase and sale of
registered investments by foreign individuals and related remittances of funds
abroad. Purchases of foreign exchange in the Commercial Market may be carried
out only through a financial institution in Brazil authorized to buy and sell
currency in that market. The Commercial Rate is the commercial exchange rate for
Brazilian currency into U.S. dollars, as reported by the Central Bank. The
Floating Rate is the prevailing exchange rate for Brazilian currency into U.S.
dollars which
87
applicable to transactions to which the Commercial Rate does not
apply. Prior to the implementation of the "Real Plan", the Commercial Rate and
the Floating Rate differed significantly at times. Since the introduction of the
real, the two rates have not differed significantly, although there can be no
assurance that there will not be significant differences between the two rates
in the future. Both the Commercial Rate and the Floating Rate are reported by
the Central Bank on a daily basis. See Item 3 - Key Information.
The rate of exchange for the real and the U.S. dollar has increased in
recent years due to a number of factors in the Brazilian and world economy. The
rate reached R$ 3.5333 (Ptax) on December 31, 2002, after having varied between
a high of R$ 3.7980 and a low of R$ 3.4278 during that month. As of June 12,
2003 the price for the US dollar against the real was R$ 2.8620 (Ptax). As a
result of global instability and, especially, the proximity of elections in
Brazil with possibilities of the victory of a leftist party, investments in the
country were reduced and demand for the dollar increased to the point where the
exchange rate in October reached nearly R$ 4.00. For this reason, the Central
Bank was forced to intervene a number of times in the months before the
election, selling dollars on the market to meet the growing demand and maintain
the exchange rate within acceptable levels. The election of Luiz Inacio Lula da
Silva, the indications that the government formed by his leftist party would
continue many of the policies and decisions of the previous government and the
naming of his ministry brought calm to the market and resulted in reductions to
the exchange rate.
As of the beginning of 2003, the Brazilian Central Bank has a new
president, Henrique Meirelles, appointed by the government of Luiz Inacio Lula
da Silva and expected to continue the same strategy as Arminio Fraga did during
the previous term.
The Company will make all cash distributions related to the Preferred
Shares in Brazilian currency. Accordingly, exchange rate fluctuations may affect
the U.S. dollar amounts received by the holders of Preferred ADRs on conversion
by the Depositary of such distributions. Fluctuations in the exchange rate
between the real and the U.S. dollar may also affect the U.S. dollar equivalent
of the price in reais of the Preferred Shares on the Brazilian stock exchanges.
E. TAXATION
The following summary contains a description of the principal Brazilian and
US federal income tax consequences of the purchase, ownership and disposition of
a Preferred Share and Preferred ADR, but it does not purport to be a
comprehensive description of all the tax considerations that may be relevant to
a decision to purchase any such securities. In particular, this summary deals
only with holders that will hold Preferred Shares or Preferred ADRs as "capital
assets" within the meaning of Section 1221 of the Internal Revenue Code of 1986,
as amended ("Code"), and does not address the tax treatment of a holder that may
be subject to special tax rules, such as banks, insurance companies, dealers in
securities, persons that will hold Preferred Shares or Preferred ADRs in a
hedging transaction or as a position in a "straddle" or "conversion transaction"
for tax purposes, persons that have a "functional currency" other than the US
dollar, persons liable for alternative minimum tax or persons that own or are
treated as owning 10% or more of the voting shares of the company. Prospective
purchasers of any of such securities should consult their own tax advisors as to
the personal tax consequences of their investment, which may vary for investors
in different tax situations.
The summary is based upon tax laws of Brazil and the United States and
regulations thereunder as in effect on the date hereof, which are subject to
change (possibly with retroactive effect). Although there is at present no
income tax treaty between Brazil and the United States, the tax authorities of
the two countries have had discussions that may culminate in such a treaty. No
assurance can be given, however, as to whether or when a treaty will enter into
force or how it will affect the US holders or Preferred Shares of Preferred
ADRs. This summary is also based upon the representations of the Depositary and
on the assumption that each obligation in the Deposit Agreement relating to the
Preferred ADRs and any related documents will be performed in accordance with
its terms.
BRAZILIAN TAX CONSIDERATIONS
The following discussion summarizes the material Brazilian tax consequences
of the acquisition, ownership and disposition of Preferred Shares or Preferred
ADRs by a holder that is not domiciled in Brazil for purposes
88
of Brazilian taxation and, in the case of a holder of Preferred Shares
which has registered its investment in such securities with the Central Bank as
a US dollar investment (in each case, a "non-Brazilian holder"). The following
discussion does not specifically address all of the Brazilian tax considerations
applicable to any particular non-Brazilian holder, and each non-Brazilian holder
should consult his or her own tax advisor concerning the Brazilian tax
consequences of an investment in any of such securities.
TAXATION OF DIVIDENDS
Dividends paid with respect to income earned since January 1, 1996,
including dividends paid in kind (i) to the Depositary in respect of the
Preferred Shares underlying the Preferred ADRs or (ii) to a non-Brazilian holder
in respect of Preferred Shares, are not subject to any withholding tax in
Brazil. The current tax legislation eliminated the then existing 15% withholding
tax on dividends paid to companies, resident individuals or non-residents in
Brazil. Accordingly, dividends with respect to profits generated on or after
January 1, 1996 are not subject to withholding tax in Brazil. Dividends related
to profits generated prior to December 31, 1993 will be subject to Brazilian
withholding tax of 25%. Dividends related to profits generated between January
1, 1994 and December 31, 1995 will be subject to Brazilian withholding tax of
15%.
TAXATION OF GAINS.
Gains realized outside Brazil by a non-Brazilian holder on the disposition
of Preferred ADRs to another non-Brazilian holder are not subject to Brazilian
tax. The withdrawal of Preferred Shares in exchange for Preferred ADRs is not
subject to Brazilian tax. The deposit of Preferred Shares in exchange for
Preferred ADRs is not subject to Brazilian tax provided that the Preferred
Shares are registered by the investor or its agent under the 2,689 Regulation.
In the event of the Preferred Shares not being so registered, the deposit of
Preferred Shares in exchange for Preferred ADRs may be subject to Brazilian tax
at the rate of 15%. On receipt of the underlying Preferred Shares, a
non-Brazilian holder who qualifies under the 2,689 Regulation will be entitled
to register the US dollar value of such shares with the Central Bank as
described below.
Non-Brazilian holders are not subject to tax in Brazil on gains realized on
sales of Preferred Shares that occur abroad or on the proceeds of a redemption
of, or a liquidating distribution with respect to, Preferred Shares. When the
Preferred Shares are registered under the 2,689 Regulation, the non-Brazilian
holder cannot transfer or assign them abroad. As a general rule, non-Brazilian
holders are subject to a withholding tax imposed at a rate of 15% on gains
realized on sales or exchanges of Preferred Shares that occur in Brazil to or
with a resident of Brazil, outside of the Sao Paulo Stock Exchange.
Non-Brazilian holders are subject to withholding tax at the rate of 20% on gains
realized on sales or exchanges in Brazil of Preferred Shares that occur on the
Sao Paulo Stock Exchange unless such sale is made under the 2,689 Regulation.
Gains realized arising from transactions on the Sao Paulo Stock Exchange by an
investor under the 2,689 Regulation are not subject to tax (except as described
below). The "gain realized" as a result of a transaction on the Sao Paulo Stock
Exchange is the difference between the amount in Brazilian currency realized on
the sale or exchange and the acquisition cost measured in Brazilian currency,
without any correction for inflation, of the shares sold. The "gain realized" as
a result of a transaction that occurs other than on the Sao Paulo Stock Exchange
will be the positive difference between the amount realized on the sale or
exchange and the acquisition cost of the Preferred Shares, both such values to
be taken into account in reais. There are grounds, however, to hold that the
"gain realized" should be calculated based on the foreign currency amount
registered with the Central Bank. There can be no assurance that the current
preferential treatment for holders of Preferred ADRs and for certain
non-Brazilian holders of Preferred Shares under the 2,689 Regulation will
continue in the future or that such treatment will not be changed in the future.
As of January 1, 2000, the preferential treatment under the 2,689
Regulation is no longer applicable if the non-Brazilian holder of the Preferred
ADRs or Preferred shares is resident of a tax haven - i.e., countries which do
not impose income tax or where such tax is imposed at a rate lower than 20% - in
accordance with Law No. 9,959, of January 27, 2000. In this case, gains realized
by such holder on the Sao Paulo Stock Exchange are subject to 20% income tax.
Any exercise of preemptive rights relating to the Preferred Shares will not be
subject to Brazilian taxation. Any gain on the sale or assignment of preemptive
rights relating to the Preferred Shares by the Depositary on behalf of holders
of Preferred ADRs will be subject to Brazilian income taxation at the rate of
15%, unless such sale or assignment is performed within the Sao Paulo Stock
Exchange, in which case the gains are exempt from withholding income tax.
88
Any gain on the sale or assignment of preemptive rights relating to
Preferred Shares, will be subject to Brazilian income tax at the same rate
applicable to the sale or disposition of Preferred Shares. The maximum rate of
such tax is currently 15%.
INTEREST ON CAPITAL STOCK
Distributions of interest on capital stock in respect of the Preferred
Shares as an alternative form of payment to shareholders who are either
Brazilian residents or non-Brazilian residents, including holders of ADRs, are
subject to Brazilian withholding tax at the rate of 15%. In the case of
non-Brazilian residents that are residents of a tax haven, the income tax rate
is 25%. Currently, such payments are tax deductible by the company, in
determining social welfare contributions and income tax. No assurance can be
given that the company will not distribute profits by means of interest on
shareholders' equity instead of by means of dividends.
OTHER BRAZILIAN TAXES
There are no Brazilian inheritance, gift or succession taxes applicable to
the ownership, transfer or disposition of Preferred Shares or Preferred ADRs by
a non-Brazilian holder except for gift and inheritance taxes which are levied by
some states of Brazil on gifts made or inheritances bestowed by individuals or
entities not resident or domiciled in Brazil or domiciled within the state to
individuals or entities resident or domiciled within such state in Brazil. There
are no Brazilian stamp, issue, registration or similar taxes or duties payable
by holders of Preferred Shares or Preferred ADRs. A financial transaction tax
("IOF tax") may be imposed on a variety of transactions, including the
conversion of Brazilian currency into foreign currency (e.g., for purposes of
paying dividends and interest). The IOF tax rate on such conversions is
currently 0%, but the Minister of Finance has the legal power to increase the
rate to a maximum of 25%. Any such increase will be applicable only
prospectively. IOF may also be levied on transactions involving bonds or
securities ("IOF/Titulos") even if the transactions are effected on Brazilian
stock, futures or commodities exchanges. The rate of the IOF/Titulos with
respect to Preferred Shares and ADRs is currently 0%. The Minister of Finance,
however, has the legal power to increase the rate to a maximum of 1.5% of the
amount of the taxed transaction per day of the investor's holding period, but
only to the extent of gain realized on the transaction and only on a prospective
basis. In addition to the IOF tax, a temporary tax applies to all fund transfers
in connection with financial transactions in Brazil ("CPMF tax"). Pursuant to
Law 9,311, of October 24, 1996, and Constitutional Amendment 37, of June 12,
2002, the CPMF tax will be levied at a rate of 0.38% until December 31, 2003,
and at a rate of 0.08% from January 1 to December 31, 2004. The CPMF tax was
initially set to expire on February 1998, however, its collection has been
extended for additional periods throughout the past years. Accordingly, the
Brazilian Congress is discussing the possibility of converting this tax into a
permanent tax. The responsibility for the collection of the CPMF tax is borne by
the financial institution that carries out the relevant financial transaction.
Under Constitutional Amendment 37, when the non-Brazilian holder remits funds
exclusively in connection with the purchase, sale or assignment of Preferred
Shares, the CPMF tax will not be levied.
REGISTERED CAPITAL
The amount of an investment in Preferred Shares held by a non-Brazilian
holder registered with the CVM under the 2,689 Regulation, or in ADRs held by
the Depositary representing such holder, as the case may be, is eligible for
registration with the Central Bank. Such registration (the amount so registered
is referred to as "Registered Capital") allows the remittance abroad of foreign
currency, converted at the Commercial Market rate, acquired with the proceeds of
distributions on, and amounts realized with respect to disposition of, such
Preferred Shares. The Registered Capital for Preferred Shares purchased in the
form of a Preferred ADR, or purchased in Brazil and deposited with the
Depositary in exchange for a Preferred ADR, will be equal to their purchase
price (in US dollars) paid by the purchaser. The Registered Capital for
Preferred Shares that are withdrawn upon surrender of Preferred ADRs, will be
the US dollar equivalent of (i) the average price of the Preferred Shares on the
Sao Paulo Stock Exchange on the day of withdrawal, or (ii) if no Preferred
Shares were sold on such day, the average price of Preferred Shares that were
sold in the fifteen trading sessions immediately preceding such withdrawal. The
US dollar value of the Preferred Shares is determined on the basis of the
average Commercial Market rates quoted by the Central Bank on such date (or, if
the average price of Preferred Shares is determined under clause (ii) of the
preceding sentence, the average of such average quoted rates on the same fifteen
dates used to determine the average price of the Preferred Shares). A
non-Brazilian holder of Preferred Shares may experience delays in effecting the
89
registration of Registered Capital, which may delay remittances abroad. Such a
delay may adversely affect the amount, in US dollars, received by the
non-Brazilian holder.
US FEDERAL INCOME TAX CONSIDERATIONS
As used below, a "US holder" is a holder of a Preferred Share or Preferred
ADR that is, for US federal income tax purposes, (i) an individual citizen or
resident of the United States, (ii) a corporation organized under the laws of
the United States, any State thereof or the District of Columbia, or (iii) any
other person or entity that is subject to US federal income tax on a net income
basis in respect of the Preferred Shares or Preferred ADRs (including a
nonresident alien individual or foreign corporation whose income with respect to
a Preferred Share or Preferred ADR is effectively connected with the conduct of
a US trade or business). The following discussion assumes that the Preferred
Shares and Preferred ADRs are held as capital assets. In general, for US federal
income tax purposes, a holder of an American Depository Receipt ("ADR")
evidencing an ADR will be treated as the beneficial owner of the Preferred
Share(s) represented by the applicable ADR.
TAXATION OF DIVIDENDS
In general, a distribution made with respect to a Preferred Share or
Preferred ADR (which for this purpose will include distributions of interest on
capital stock) will, to the extent made from the current or accumulated earnings
and profits of the company, as determined under US federal income tax
principles, constitute a dividend for US federal income tax purposes. If a
distribution exceeds the amount of the company's current and accumulated
earnings and profits, it will be treated as a non-taxable return of capital to
the extent of the US holder's tax basis in the Preferred Share or Preferred ADR
on which it is paid and thereafter as capital gain. As discussed below, the term
"dividend" means a distribution that constitutes a dividend for US federal
income tax purposes.
The gross amount of any dividend paid (which will include any amounts
withheld in respect of Brazilian taxes) with respect to a Preferred Share or
Preferred ADR will be subject to US federal income taxation as foreign source
dividend income and will not be eligible for the dividends received deduction
generally allowed to US corporations. A dividend paid in Brazilian currency will
be includible in the income of a US holder at its value in US dollars calculated
by reference to the prevailing spot market exchange rate in effect on the day it
is received by the US holder or, in the case of a dividend received in respect
of Preferred ADRs, on the date the dividend is received by the Depositary,
whether or not the dividend is converted into US dollars. Any gain or loss
realized on a subsequent conversion or other disposition of the Brazilian
currency will be treated as US source ordinary income or loss. In the case of a
US holder that is not a United States person, the currency gain or loss will be
US source income only if the currency is held by a qualified business unit of
the US holder in the United States. Subject to generally applicable limitations
under US federal income tax law, the Brazilian withholding tax will be treated
as a foreign income tax eligible for credit against a US holder's US federal
income tax liability. For purposes of the computation of the foreign tax credit
limitation separately for specific categories of income, any dividends generally
will constitute foreign source "passive income" or, in the case of certain
holders, "financial services income."
Alternatively, a US holder may elect not to claim a credit for any of its
foreign taxes and deduct all of those taxes in computing taxable income.
Recently enacted U.S. federal income tax legislation reduces the rate of
U.S. federal income tax payable by noncorporate taxpayers on dividends paid by
certain non-U.S. corporations to 15% (or, with respect to dividends that
otherwise would be taxed at the 10% or 15% rates, to 5%, except for taxable
years beginning after December 31, 2007, for which the tax is eliminated). The
reduced rates apply for purposes of both the regular tax and the alternative
minimum tax. A dividend paid by a non-U.S. corporation qualifies for the reduced
rate of tax if the stock on which the dividend is paid is readily tradable on an
established securities market in the United States. The new legislation does not
define "regularly tradable" or an "established securities market" for this
purpose, although the legislative history indicates that a share of stock is
treated as readily tradable on an established securities market if an ADR backed
by the share is so tradable. Based on similar provisions in U.S. federal income
tax law, the New York Stock Exchange, where Preferred ADSs trade, should qualify
as an "established securities market". Even if the Preferred ADSs are so
tradable at the time a dividend is paid, to qualify for the reduced rates, a
shareholder must hold the share of stock on which the dividend is paid for more
than 60 days during the 120-day period beginning 60
90
days before the ex-dividend date, disregarding for this purpose any period
during which the taxpayer has an option to sell, is under a contractual
obligation to sell or has made (and not closed) a short sale of substantially
identical stock or securities, is the grantor of an option to buy substantially
identical stock or securities or, pursuant to Treasury regulations, has
diminished its risk of loss by holding one or more other positions with respect
to substantially similar or related property. The 60-day and 120-day periods are
extended to 90 days and 180 days in the case of preferred stock. In addition, to
qualify for the reduced rates, the taxpayer must not be obligated to make
related payments with respect to positions in substantially similar or related
property. Payments in lieu of dividends from short sales or other similar
transactions will not qualify for the reduced rates, although it is possible
that individual taxpayers who receive such payments from their brokers may treat
the payments as dividends to the extent the payments are reported to them as
dividend income on their Forms 1099-DIV received for calendar year 2003, unless
they know or have reason to know that the payments are in fact payments in lieu
of dividends rather than actual dividends. A taxpayer that receives an
extraordinary dividend eligible for the new reduced tax rates must treat any
loss on the sale of the stock as a long-term capital loss to the extent of the
dividend. For purposes of determining the amount of a taxpayer's deductible
investment interest expense, a dividend is treated as investment income only if
the taxpayer elects to treat the dividend as not eligible for the new reduced
rates. Special limitations on foreign tax credits with respect to dividends
subject to the reduced rates apply to reflect the reduced rates of tax. The new
reduced tax rates on dividends apply to taxable years beginning after December
31, 2002 and before January 1, 2009.
TAXATION OF CAPITAL GAINS
A deposit or withdrawal of Preferred Shares by a holder in exchange for a
Preferred ADR will not result in the realization of gain or loss for US federal
income tax purposes. A US holder generally will recognize capital gain or loss
upon a sale or other disposition of a Preferred Share or Preferred ADR held by
the US holder or the Depositary in an amount equal to the difference between the
US holder's adjusted basis in the Preferred Share or Preferred ADR (determined
in US dollars) and the US dollar amount realized on the sale or other
disposition. If a Brazilian tax is withheld on the sale or disposition of a
share, the amount realized by a US holder will include the gross amount of the
proceeds of that sale or disposition before deduction of the Brazilian tax.
Capital gain recognized by certain non-corporate US holders is taxed at a
maximum tax rate of 20% in respect of property held more than one year. Capital
gain, if any, realized by a US holder on the sale or other disposition of a
Preferred Share or Preferred ADR will generally be treated as US source income
for US foreign tax credit purposes.
Recently enacted U.S. federal income tax legislation reduces the maximum
rate of U.S. federal income tax that noncorporate taxpayers pay on adjusted net
capital gain to 15% (or, with respect to adjusted net capital gain that
otherwise would be taxed at the 10% or 15% rates, to 5%, except for taxable
years beginning after December 31, 2007, for which the tax is eliminated). The
reduced rates apply for purposes of both the regular tax and the alternative
minimum tax. The lower rates of 8% and 18% for assets held more than five years
were eliminated. The new legislation applies to taxable years ending on or after
May 6, 2003 and before January 1, 2009, after which the maximum tax rate on
adjusted net capital gain for noncorporate taxpayers will be 20%.
Consequently, in the case of a disposition of a Preferred Share that is
subject to Brazilian tax imposed on the gain (or, in the case of a deposit, in
exchange for a Preferred ADR or a Preferred Share that is not registered under
the 2,689 Regulation, on which a Brazilian capital gains tax is imposed - see
"Brazilian Tax Considerations-Taxation of Gains"), the US holder may not be able
to use the foreign tax credit for that Brazilian tax unless it can apply the
credit against US tax payable on other income from foreign sources in the
appropriate income category, or, alternatively, it may take a deduction for the
Brazilian tax if it elects to deduct all of its foreign income taxes. In
general, any loss will be sourced to the taxpayer's residence (as specially
defined in Section 865(g) of the Code), subject to certain exceptions that can
treat a loss recognized by a US resident in whole or in part as a foreign source
loss.
91
PASSIVE FOREIGN INVESTMENT COMPANY RULES
Based upon the nature of its current and projected income, assets and
activities, the Company does not expect the Preferred Shares or Preferred ADSs
to be considered shares of a passive foreign investment company ("PFIC") for
U.S. federal income tax purposes. In general, a foreign corporation is a PFIC if
at least 75% of its gross income for the taxable year (or, in general, a
preceding taxable year in which the taxpayer owned stock in the corporation) is
passive income or if at least 50% of its assets for the current year (or , in
general, a preceding year in which the taxpayer owned stock in the corporation)
produce passive income or are held for the production of passive income. In
general, passive income for this purpose means, with certain designated
exceptions, dividends, interest, rents, royalties, annuities, net gains from
dispositions of certain assets, net foreign currency gains, income equivalent to
interest, income from notional principal contracts and payments in lieu of
dividends. The determination of whether the Preferred Shares or Preferred ADSs
constitute shares of a PFIC is a factual determination made annually , and
therefore the Company's failure to constitute a PFIC at one time is subject to
change. Subject to certain exceptions, once a U.S. holder's Preferred Shares or
Preferred ADSs are treated as shares of a PFIC, they remain shares in a PFIC.
If the Company is treated as a PFIC, contrary to the discussion in "U.S.
Federal Income Tax Considerations--Taxation of Dividends" and "--U.S. Federal
Income Tax Considerations--Taxation of Capital Gains" above, a U.S. holder would
be subject to special rules with respect to (i) any gain realized on the sale or
other disposition of Preferred Shares or Preferred ADSs and (ii) any "excess
distribution" by the Company to the U.S. holder (generally, any distribution
during a taxable year in which distributions to the U.S. holder on the Preferred
Shares or Preferred ADSs exceed 125% of the average annual taxable distributions
the U.S. holder received on the Preferred Shares or Preferred ADSs during the
proceeding three taxable years or, if shorter, the U.S. holder's holding period
for the Preferred Shares or Preferred ADSs). Under those rules, (i) the gain or
excess distribution would be allocated ratably over the U.S. holder's holding
period for the Preferred Shares or Preferred ADSs, (ii) the amount allocated to
the taxable year in which the gain or excess distribution is realized would be
taxable as ordinary income and (iii) the amount allocated to each prior year,
with certain exceptions, would be subject to tax at the highest tax rate in
effect for that year, and the interest charge generally applicable to
underpayments of tax would be imposed in respect of the tax attributable to each
such year. A U.S. holder who owns Preferred Shares or Preferred ADSs during any
year the Company is a PFIC must file Internal Revenue Service Form 8621.
The special PFIC rules described above will not apply to a U.S. holder if
the U.S. holder makes a timely election to treat the Company as a "qualified
electing fund" in the first taxable year in which the U.S. holder owns a
Preferred Share or Preferred ADS and if the Company complies with certain
reporting requirements. Instead, a shareholder of a qualified electing fund is
required for each taxable year to include in income a pro rata share of the
ordinary earnings of the qualified electing fund as ordinary income and a pro
rata share of the net capital gain of the qualified electing fund as long-term
capital gain, subject to a separate election to defer payment of taxes, which
deferral is subject to an interest charge. Any ordinary income inclusion, as
well as any actual dividend that otherwise would qualify for the 15% maximum tax
rate prescribed by recently enacted U.S. federal income tax legislation, will
not qualify for that rate if the foreign corporation is a PFIC in either the
taxable year of the dividend or the preceding taxable year. Any net capital gain
inclusion should qualify for the new 15% rate on adjusted net capital gain. The
Company has not yet determined whether, if it were a PFIC, it would make the
computations necessary to supply U.S. holders with the information needed to
report income and gain pursuant to a QEF election. It is, therefore, possible
that U.S. holders would not be able to make that election if the Company became
a PFIC. Assuming the election is available, the QEF election is made on a
shareholder-by-shareholder basis and generally can be revoked only with the
consent of the Internal Revenue Service, or IRS. A shareholder makes a QEF
election by attaching a completed IRS Form 8621, including the PFIC annual
information statement, to a timely filed U.S. federal income tax return and by
filing that form with the IRS Service Center in Philadelphia, Pennsylvania. Even
if a QEF election is not made, a shareholder in a PFIC who is a U.S. person must
file a completed IRS Form 8621 every year. Although a QEF election generally
cannot be revoked, if a U.S. holder made a timely QEF election for the first
taxable year it owned a Preferred Share or Preferred ADS and the Company is a
PFIC, the QEF election ceases to apply in any later taxable year in which the
Company does not satisfy the tests to be a PFIC. If that election is not made in
that first taxable year, an election in a later year generally will require the
payment of tax and interest, and in certain circumstances the election may cease
to be available at a later date.
92
In lieu of a QEF election, a U.S. holder of stock in a PFIC that is
considered marketable stock could elect to mark the stock to market annually,
recognizing as ordinary income or loss each year an amount equal to the
difference as of the close of the taxable year between the fair market value of
the holder's PFIC stock and the adjusted basis in the PFIC stock. Losses would
be allowed only to the extent of net mark-to-market gain previously included in
income by the U.S. holder under the election for prior taxable years. If the
mark-to-market election were made, then the rules set forth in the second
preceding paragraph would not apply for periods covered by the election. In
general, our stock will be marketable stock within the meaning of the Treasury
regulations if its is traded, other than in de minimis quantities, on at least
15 days during each calendar quarter.
INFORMATION REPORTING AND BACKUP WITHHOLDING
A US holder of a Preferred Share or Preferred ADR will generally be subject
to information reporting to the US Internal Revenue Service ("IRS") and to
"backup withholding" at the rate of 31% with respect to dividends paid on or the
proceeds of a sale or other disposition of a Preferred Share or Preferred ADR
paid within the United States, or through certain US related financial
intermediaries unless such holder (i) is a corporation or comes within certain
other exempt categories, and demonstrates this fact when so required, or (ii)
provides a correct taxpayer identification number, certifies that it is not
subject to backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. Any amount withheld under these
rules will be creditable against the holder's US federal income tax liability,
and a US holder may obtain a refund of any excess amounts withheld by filing the
appropriate claim for refund with the IRS. While holders that are not US holders
generally are exempt from backup withholding and information reporting on
payments made within the United States, a holder that is not a US holder may be
required to comply with applicable certification procedures to establish that it
is not a US person in order to avoid the application of US information reporting
requirements and backup withholding.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
The Company makes its filings in electronic form under the EDGAR filing
system of the U.S. Securities and Exchange Commission. Its filings are available
through the EDGAR system at www.sec.gov. In addition, the Company's filings are
available to the public over the internet at Gerdau's website at
www.gerdau.com.br. Such filings and other information on its website are not
incorporated by reference in this Annual Report. You may request a copy of this
filing, and any other report, at no cost, by writing to or telephoning us at the
following address: Av. Farrapos, 1811 - Porto Alegre/RS - 90.220-005 - BRASIL or
+55 (51) 3323 2703 or inform@gerdau.com.br
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Gerdau is exposed to various market risks, mainly changes in foreign
currency exchange rates and volatility in interest rates. Market risk is the
potential loss arising from adverse changes in market rate and prices. Gerdau
enters into derivatives and other financial instruments to manage and reduce the
impact of fluctuations in foreign currency exchange rates and interest rates.
Gerdau has established policies and procedures for risk assessment and the
approval, reporting and monitoring the derivative financial activities.
Gerdau's short-term investments trading securities, which consist mainly of
fixed-term private obligations and government securities, are not subject to
equity risk.
92
FOREIGN EXCHANGE RISK
Gerdau is exposed to fluctuations in foreign exchange rate movements
because substantially all of its revenues generated from other than
North-american subsidiaries are in reais, while a significant portion of its
debt is denominated in or indexed to U.S. dollars. Gerdau enters into derivative
financial instruments to manage and reduce the impact of changes in foreign
currency exchange rates in respect of its dollar-denominated or indexed debt. As
of December 31, 2002, derivative activities consisted basically of foreign
currency swaps. The table below provides information about Gerdau's significant
exchange rate risk sensitive instruments as of December 31, 2002 as well as the
related financial instruments acquired to mitigate such potential risk.
The Company's estimate of the fair value of the financial instruments,
which include long-term debt, approximates with their recognized book value.
1- Financial instruments indexed to U.S. dollars excluding from United States subsidiaries
--------------------------------------------------------------------------------------------------------------------
Maturity
-------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter TOTAL
--------------------------------------------------------------------------------------------------------------------
GERDAU AND ACOMINAS
Indebtedness from Brazilian Reais functional currency operations
Eurobonds
Outstanding amount 1,446 33,470 - - - - 34,916
Average interest rate FX+11.1% FX+11.1%
--------------------------------------------------------------------------------------------------------------------
Import financing
Outstanding amount 99,809 20,718 5,401 20,477 348 - 146,753
Average interest rate FX+6.8% FX+6.8% FX+6.8% FX+6.8% FX+6.8%
--------------------------------------------------------------------------------------------------------------------
Export financing
Outstanding amount 299,220 32,500 22,500 15,000 - - 369,220
Average interest rate FX+7.7% FX+7.7% FX+7.7% FX+7.7%
--------------------------------------------------------------------------------------------------------------------
Secured Export Notes
Outstanding amount 42,702 - - - - - 42,702
Average interest rate FX+10.5%
--------------------------------------------------------------------------------------------------------------------
Working capital and other
financing
Outstanding amount 162,273 - 71,432 - - - 233,705
Average interest rate FX+9.7% FX+9.7%
--------------------------------------------------------------------------------------------------------------------
Cross-currency interest rate swap contracts
--------------------------------------------------------------------------------------------------------------------
Notional amount 226,917 524,527 24,921 7,902 - - 784,267
Average interest received in US$ FX+7.9% FX+3.7% FX+7.4% FX+7.4%
Average interest paid in R$ (%
of CDI) 30.5% 84.3% 92.4% 87.3%
--------------------------------------------------------------------------------------------------------------------
Other assets denominated in U.S. dollar
--------------------------------------------------------------------------------------------------------------------
Cash equivalents 22,977 - - - - - 22,977
Average interest rate -
Short-term Investments 259,388 - - - - - 259,388
Average interest rate 4.0%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Total Brazilian debt indexed
to U.S. dollars, net of
cross-currency Swaps and other
assets denominated in such 96,168 (437,839) 74,412 27,575 348 (239,336)
currency
--------------------------------------------------------------------------------------------------------------------
93
CANADIAN SUBISIDIARIES
Indebtedness from Canadian dollars functional currency operations
--------------------------------------------------------------------------------------------------------------------
Debentures
Principal amount - - - - 56,056 - 56,056
Average interest rate 6.5%
--------------------------------------------------------------------------------------------------------------------
Machinery and other financing
Principal amount 22,157 30,577 - - - - 52,734
Average interest rate LIBOR+4.5% LIBOR+4.5%
--------------------------------------------------------------------------------------------------------------------
Total Canadian debt indexed to 22,157 30,577 56,056 108,790
U.S. dollars
--------------------------------------------------------------------------------------------------------------------
CHILEAN SUBISIDIARIES
Indebtedness from Chilean pesos functional currency operations
Machinery and other financing
Principal amount 14,320 13,038 7,412 1,416 20,170 608 56,964
Average interest rate LIBOR+7.0% LIBOR+7.0% LIBOR+7.0% LIBOR+7.0% LIBOR+7.0% LIBOR+7.0%
--------------------------------------------------------------------------------------------------------------------
Total Chilean debt indexed to 14,320 13,038 7,412 1,416 20,170 608 56,964
U.S. dollars
--------------------------------------------------------------------------------------------------------------------
Footnote: At December 31, 2002 of the total of US$ 1,077.5 million of U.S.
dollar denominated debt from the Brazilian operations, approximately
US$ 973.2 million were swapped into obligations denominated in reais
of which US$ 188.9 million has been treated pursuant to EITF No. 02-02
on a combined basis as if these loans had been originally denominated
in reais an accrued an interbank interest rate (CDI).
INTEREST RATE RISK
The interest rates charged on our debt related to the North American operations
are predominantly variable, the majority of which is based on LIBOR (London
Interbank Offered Rate). In November 1999, Gerdau Canada hedged $68 million of
its debt via interest rate swaps that in effect resulted in fixed interest rates
on the notional amount. Under two separate swap arrangements, the notional
amounts declined on predetermined dates by predetermined amounts. The first swap
ran for a period of three years and terminated on November 4, 2002. The second
swap terminates September 2004. The notional amount swapped is currently $17
million. In late 2001, Gerdau USA hedged $55 million of its debt via interest
rate swaps that in effect result in a fixed interest rate on $55 million for a
period of four to five years. As a result, Gerdau USA has reduced its exposure
to fluctuations in interest rates with the result being that approximately 33%
of the US operations' debt is subject to changes in interest expense due to
fluctuations of interest rates in the markets. A 10% change in interest rates
would result in a change in annual interest expense of less than $0.5 million.
The value of our interest rate swaps changes from period to period due to
changes in the swap yield curve relative to the swap yield curve at the swap's
inception, and adjusted for the shortening duration. Generally the market value
of the swap instrument will decline as interest rates remain lower than
previously forecasted and will increase in value as interest rates rise faster
the previously anticipated. The U.S. operations recognize the changes in these
mark-to-market valuations through other comprehensive income in accordance with
FAS 133, "Accounting for Derivative Instruments and Hedging Activities." The
Canadian swap does not qualify for hedge treatment under FAS 133, therefore the
mark-to-market gains and losses are reflected in net income.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
94
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELIQUENCIES
Not applicable.
95
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15.
The Company carried out an evaluation under the supervision of its
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of its disclosure controls and
procedures. There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and
the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based upon and as of the date
of our evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures are effective to
provide reasonable assurance that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
Gerdau S.A. has created a Disclosure Committee composed of the Investor
Relations Director, Osvaldo Schirmer, the Accounting Director, Geraldo
Toffanello and the Legal Director of the Company, Expedito Luz. This Committee
oversees and reviews all materials legally required to be disclosed, along with
all data necessary to support the aforementioned documents. This committee meets
at regular intervals in order to review all data.
Furthermore, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Please see Exhibit 12.01 and 12.02 for the certifications required by this Item.
ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERT
Not applicable.
96
PART III
ITEM 17. FINANCIAL STATEMENTS
The Company has responded to Item 18 in lieu of responding to this item.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of all financial statements filed
as part of this Annual Report.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
PAGE
Report of Independent Accountants F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-3
Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Comprehensive Income for the years ended December 31, 2002, 2001 F-6
and 2000
Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31,
2002, 2001 and 2000 F-7
Consolidated Statement of Cash Flows for the years ended December 31, 2002, 2001 and 2000
F-8
Notes to Consolidated and Combined Financial Statements F-10
(B) LIST OF EXHIBITS
12.01 Certification of the Chief Executive Officer under Item 15.
12.02 Certification of the Chief Financial Officer under Item 15.
13.01 Certification pursuant to 18 U.S.C. Section 1350.
13.02 Certification pursuant to 18 U.S.C. Section 1350.
97
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
GERDAU S.A.
By: /s/ Jorge Gerdau Johannpeter
----------------------------
Name: Jorge Gerdau Johannpeter
Title: Chief Executive Officer
By: /s/ Osvaldo Burgos Schirmer
---------------------------
Name: Osvaldo Burgos Schirmer
Dated: June 30, 2003 Title: Chief Financial Officer
98
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Gerdau S.A.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of comprehensive income, of cash flows and of
changes in shareholders' equity present fairly, in all material respects, the
financial position of Gerdau S.A. and its subsidiaries at December 31, 2002, and
the results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion. The financial statements of the Company as at December
31, 2001 and for the years ended December 31, 2001 and 2000, prior to the
revisions described in Note 10 "Goodwill" and in Note 21 "Segment information"
and the retroactive restatement of the information on earnings per share
described in Note 17 "Earnings per Share", were audited by other accountants who
have ceased operations. Those accountants expressed an unqualified opinion on
those financial statements in their report dated January 28, 2002.
As disclosed in Note10 " Goodwill", the Company changed the manner in which it
accounts for goodwill and other intangible assets upon adoption on January 1,
2002 of the accounting guidance of Statement of Financial Accounting Standards
No. 142 ("SFAS No. 142") "Goodwill and Intangible Assets".
As discussed above, the financial statements of the Company as of December 31,
2001, and for years ended December 31, 2001 and 2000 were audited by other
accountants who have ceased operations. As described in the "Earnings Per Share"
note and in the "Segment Information" note, these financial statements have been
revised to retroactively reflect the effect in earnings per share of a stock
bonus and a reverse stock split and the change in the composition of the
Company's reportable segments, respectively. As described in the "Goodwill"
note, these financial statements have also been revised to include the
transitional disclosures required by SFAS No. 142. We audited the adjustments
described in the "Earnings Per Share" and the "Segment Information" notes that
were applied to restate the 2001 and 2000 financial statements. We also audited
the adjustments in the transitional disclosures in the "Goodwill" note. In our
opinion, all such adjustments are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 financial statements of the Company other than with respect to
such adjustments and, accordingly, we do not express an opinion or any other
form of assurance on the 2001 and 2000 financial statements taken as a whole.
PricewaterhouseCoopers Auditores Independentes
Porto Alegre, Brazil
February 18, 2003 except for Note 17 and Note 24 which are dated as of April 30,
2003.
F-1
The following report is a copy of a report previously issued by
Arthur Andersen S/C, Porto Alegre, Brazil and has not been reissued
by Arthur Andersen S/C. As discussed in the Segment Information
note during 2002 changes were introduced to the Company's
operational structure which modified its reportable segments under
Statement of Financial Standards ("SFAS") No. 131 "Disclosures
About Segments of an Enterprise and Related Information" and the
Company restated comparative information for the years ended
December 31, 2001 and 2000. As discussed in the Earnings Per Share
Note in April 2003 the Company approved both a stock bonus and a
reverse split and, as a result, the Company has adjusted
retroactively earnings per share for the years ended December 31,
2001 and 2000. Additionally, in 2002, as discussed in the Goodwill
note, the Company has presented the transitional disclosures for
2001 and 2000 required by SFAS No. 142. The Arthur Andersen S/C
report does not extend to these adjustments to the 2001 and 2000
consolidated financial statements. The adjustments to the 2001 and
2000 consolidated financial statements were reported on by
PricewaterhouseCoopers Auditores Independentes, Porto Alegre,
Brazil as stated in their report appearing herein.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Gerdau S.A.:
We have audited the accompanying consolidated balance sheets of Gerdau S.A. and
its subsidiaries, translated into U.S. dollars, as of December 31, 2001 and
2000, and the related translated consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the translated financial statements referred to above present
fairly, in all material respects, the financial position of Gerdau S.A. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
Arthur Andersen S/C
Porto Alegre, Brazil
January 28, 2002 except with respect to the matters discussed in Note 24, as to
which the date is March 28, 2002
F-2
GERDAU S.A.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2002 and 2001
(in thousands of U.S. Dollars, except number of shares)
--------------------------------------------------------------------------------
ASSETS
2002 2001
---- ----
Current assets
Cash and cash equivalents $ 40,457 $ 27,832
Restricted cash 15,001 -
Short-term investments 367,748 306,065
Trade accounts receivable, net 361,801 288,842
Inventories 632,806 443,633
Unrealized gains on derivatives 8,712 -
Deferred income taxes 34,585 6,804
Other 63,108 58,354
-------------- ---------------
Total current assets 1,524,218 1,131,530
Non-current assets
Property, plant and equipment, net 2,084,895 1,384,463
Deferred income taxes 98,103 43,866
Judicial deposits 13,391 26,730
Unrealized gains on derivatives 43,146 1,997
Equity investments 112,016 197,611
Investments at cost 9,672 14,851
Goodwill 114,374 114,374
Prepaid pension cost 25,050 -
Other 61,484 37,255
-------------- ---------------
Total assets $ 4,086,349 $ 2,952,677
============== ===============
F-3
GERDAU S.A.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2002 and 2001
(in thousands of U.S. Dollars, except number of shares)
--------------------------------------------------------------------------------
LIABILITIES
2002 2001
----- -----
Current liabilities
Short-term debt $ 707,378 $ 371,339
Current portion of long-term debt 397,415 196,152
Debentures - 2,018
Trade accounts payable 281,855 137,397
Income taxes payable 23,978 12,787
Unrealized losses on derivatives 2,003 -
Deferred income taxes 7,628 2,872
Payroll and related liabilities 53,682 32,504
Dividends (interest on equity) payable 42,288 44,957
Taxes payable, other than income taxes 21,255 24,413
Other 50,315 56,455
------------- -------------
Total current liabilities 1,587,797 880,894
Non-current liabilities
Long-term debt, less current portion 794,571 630,636
Debentures 200,766 94,204
Deferred income taxes 128,416 151,257
Accrued pension and other post-retirement benefits obligation 109,870 38,125
Provision for contingencies 60,498 55,170
Other 30,666 37,274
------------- -------------
-------------
Total non-current liabilities 1,324,787 1,006,666
------------- -------------
-------------
Total liabilities 2,912,584 1,887,560
Minority interest 308,755 32,397
Commitments and contingencies (Note 14)
SHAREHOLDERS' EQUITY (Note 15)
Preferred shares - no par value
74,527,528,780 and 74,109,685,986 shares issued and outstanding at 562,801 558,971
December 31, 2002 and 2001, respectively
Common shares - no par value
39,590,941,783 and 39,382,020,386 shares issued and outstanding at 281,158 279,243
December 31, 2002 and 2001, respectively
Additional paid-in capital 2,086 -
Legal reserve 36,105 56,074
Retained earnings 936,612 762,494
Cumulative other comprehensive loss
- Foreign currency translation adjustment (935,133) (624,062)
- Additional minimum pension liability (16,309) -
- Unrealized loss on cash flow hedge (2,310) -
------------- -------------
Total shareholders' equity 865,010 1,032,720
------------- -------------
Total liabilities and shareholders' equity $ 4,086,349 $ 2,952,677
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
GERDAU S.A.
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 2002, 2001 and 2000
(in thousands of U.S. Dollars, except number of shares and per share amounts)
--------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Sales $ 3,664,920 $ 2,751,872 $ 3,162,537
Less: Federal and state excise taxes (344,654) (311,223) (349,949)
Less: Discounts (55,340) (39,511) (41,212)
----------------- ----------------- -----------------
Net sales 3,264,926 2,401,138 2,771,376
Cost of sales (2,349,636) (1,722,228) (2,059,015)
----------------- ----------------- -----------------
Gross profit 915,290 678,910 712,361
Sales and marketing expenses (112,645) (105,801) (112,195)
General and administrative expenses (221,895) (181,108) (213,143)
----------------- ----------------- -----------------
Operating income 580,750 392,001 387,023
Financial expenses (292,463) (166,496) (193,172)
Foreign exchange gains and losses, net (131,684) (71,773) (50,305)
Financial income 100,350 55,002 57,324
Equity in earnings (losses) of unconsolidated companies, net (10,057) 18,324 33,962
Other non-operating income (expense), net (18,178) (7,853) 2,165
----------------- ----------------- -----------------
Income before income taxes and minority interest 228,718 219,205 236,997
Provision for income taxes (Note 16):
Current (27,065) (40,981) (36,725)
Deferred 20,507 (13,666) (8,899)
----------------- ----------------- -----------------
(6,558) (54,647) (45,624)
----------------- ----------------- -----------------
Income before minority interest 222,160 164,558 191,373
Minority interest 9,667 2,795 (2,815)
----------------- ----------------- -----------------
Net income $ 231,827 $ 167,353 $ 188,558
================= ================= =================
Per share data (in US$)
Basic earnings per share
Preferred $ 1.57 $ 1.17 $ 1.32
Common $ 1.57 $ 1.06 $ 1.20
Diluted earnings per share
Preferred $ 1.57 $ 1.17 $ 1.31
Common $ 1.57 $ 1.06 $ 1.20
Number of weighted-average common shares outstanding after giving retroactive
effect to stock bonus and reverse stock
split (Note 24.c) - Basic 51,343,083 51,196,627 51,196,627
================= ================= =================
Number of weighted-average preferred shares outstanding after giving retroactive
effect to stock bonus and reverse stock
split (Note 24.c) - Basic 96,653,627 96,342,592 96,342,592
================= ================= =================
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
GERDAU S.A.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the years ended December 31, 2002, 2001 and 2000
(in thousands of U.S. Dollars)
--------------------------------------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
Net income as reported in the consolidated statement of income 231,827 167,353 188,558
Foreign Currency Translation Adjustments (311,071) (129,395) ( 79,657)
Pension fund additional minimum liability ( 16,309)
Cash flow hedge ( 2,310)
---------------- ---------------- ----------------
Comprehensive income (loss) for the year ( 97,863) 37,958 108,901
================ ================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
GERDAU S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY for the
years ended December 31, 2002, 2001 and 2000
(in thousands of U.S. Dollars, except share data)
--------------------------------------------------------------------------------
Cumulative
Additional Other
Common Preferred Paid-in Legal Retained Comprehensive
Shares Shares Capital Reserve Earnings income Total
(loss)
Balances as of January 1, 2000 $277,580 $558,971 $ - $ 37,690 $ 563,513 $(415,010) $ 1,022,744
Capital increase with use of reserves 1,663 - - (1,663) - - -
Net income available to Common and - - - - 188,558 - 188,558
Preferred shareholders
Foreign Currency Translation adjustment - - - - - (79,657) (79,657)
Dividends (interest on equity) - $0.42 per - - - - (65,986) - (65,986)
Common share and
$0.46 per Preferred share (*)
Transfer to legal reserve - - - 10,048 (10,048) - -
Balances as of December 31, 2000 $279,243 $558,971 $ - $ 46,075 $ 676,037 $(494,667) $ 1,065,659
Net income available to Common and - - - - 167,353 - 167,353
Preferred shareholders
Foreign Currency Translation adjustment - - - - - (129,395) (129,395)
Dividends (interest on equity) -
$0.45 per Common share and - - - - (70,897) - (70,897)
$0.50 per Preferred share (*)
Transfer to legal reserve - - - 9,999 (9,999) - -
Balances as of December 31, 2001 $279,243 $558,971 $ - $ 56,074 $ 762,494 $(624,062) $ 1,032,720
Capital increase by conversion of 1,915 3,830 - - - - 5,745
debentures
Net income available to Common and - - - - 231,827 - 231,827
Preferred shareholders
Foreign Currency Translation adjustment - - - - - (311,071) (311,071)
Pension fund additional minimum liability - - - - - (16,309) (16,309)
Unrealized loss on cash flow hedge - - - - - (2,310) (2,310)
Excess of sale price over cost on treasury - - 2,086 - - 2,086
stock
Dividends (interest on equity) - $0.52 per
Common share and - - - - (77,678) - (77,678)
$0.52 per Preferred share (*)
Transfer from legal reserve - - - (19,969) 19,969 - -
Balances as of December 31, 2002 $281,158 $562,801 $2,086 $ 36,105 $ 936,612 $(953,752) $ 865,010
(*) After giving retroactive effect to the stock bonus and reverse stock split
described in Note 24.(c)
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
GERDAU S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2002, 2001 and 2000
(in thousands of U.S. Dollars)
--------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities
Net income $ 231,827 $ 167,353 $ 188,558
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 178,805 135,878 140,912
Equity in earnings (losses) on non-consolidated companies, net 10,057 (18,324) (33,962)
Exchange loss on long-term debt 266,594 71,773 50,305
Unrealized gains on derivative instruments (58,772) - -
Minority interest (9,667) (2,795) 2,815
Deferred income taxes (20,507) 13,666 8,899
Loss on dispositions of property, plant and equipment 997 10,395 2,165
Provision for doubtful accounts 1,310 6,743 10,820
Provision for contingencies 20,773 (4,099) 10,253
Changes in assets and liabilities:
Increase in accounts receivable (28,657) (16,948) (62,738)
Increase in inventories (94,477) (57,563) (41,668)
Increase in accounts payable and accrued liabilities (9,632) 66,496 882
Increase in other assets and liabilities (138,196) 22,867 (10,550)
------------- ------------- -------------
Net cash provided by operating activities 350,455 395,442 266,691
------------- ------------- -------------
Cash flows from investing activities
Additions to property, plant and equipment (185,892) (244,021) (264,799)
Proceeds from dispositions of property, plant and equipment 6,029 11,482 13,625
Acquisitions/dispositions of investments, net - 29,850 (50,533)
Cash paid for acquisitions in 2002, mainly Acominas (412,150) - -
Cash acquired in acquisitions 19,954 - -
Purchases of short-term investments (847,806) (282,967) (341,259)
Proceeds from maturities and sales of short-term investments 847,108 223,874 387,234
------------- ------------- -------------
Net cash used in investing activities (572,757) (261,782) (255,732)
------------- ------------- -------------
F-8
GERDAU S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for years ended December 31, 2002, 2001 and 2000
(in thousands of U.S. Dollars)
--------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from financing activities
Cash dividends (interest on equity) paid $ (74,265) $ (64,399) $ (58,851)
Sale of treasury shares 2,318 - -
Increase in restricted cash (6,091) - -
Debt Issuance 1,186,109 377,633 421,769
Repayment of debt (824,880) (436,622) (348,364)
------------- ------------- -------------
Net cash provided by (used in) financing activities 283,191 (123,388) 14,554
------------- ------------- -------------
Effect of exchange rate changes on cash (48,264) 5,127 (22,650)
Increase (decrease) in cash 12,625 15,399 2,863
Cash at beginning of year 27,832 12,433 9,570
------------- ------------- -------------
Cash at end of year $ 40,457 $ 27,832 $ 12,433
============= ============= =============
Supplemental cash flow data Cash paid during the year for:
Interest (net of amounts capitalized) $ 123,680 $ 83,258 $ 137,592
Income taxes 28,003 11,890 25,916
Supplemental disclosure of non cash investing and financial activities:
Purchase consideration, representing 51,503,960 Co-Steel shares at $2.51
per share $ 129,275
Debentures converted into common and preferred shares (Note 15.1) 5,745
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
1 Operations
Gerdau S.A. is a sociedade anonima incorporated as a limited liability
company under the laws of the Federative Republic of Brazil. The principal
business of Gerdau S.A. ("Gerdau") in Brazil and of its subsidiaries in
Argentina, Canada, Chile, the United States and Uruguay (collectively the
"Company") comprise the production of crude steel and related long rolled
products, drawn products and long specialty products. The Company produces
steel based on the mini-mill concept, whereby steel is produced in electric
arc furnaces from scrap and pig iron acquired mainly in the region where
each mill operates. Gerdau also operates plants, including our subsidiary
Aco Minas Gerais S.A. - "Acominas" which produces steel from iron ore in
blast furnaces and through the direct reduction process.
The Company manufacture steel products for use by civil constructors,
manufacturing companies and for agribusiness as well as specialty steel
products. The markets where the Company operates are located in Brazil,
United States, Canada and Chile and, to a lesser extent, in Argentina and
Uruguay.
2 Basis of presentation
2.1 Statutory records
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States ("U.S. GAAP"), which differ in certain aspects from the accounting
practices adopted in Brazil ("Brazilian GAAP") applied by the Company in
the preparation of its statutory financial statements and for other legal
and regulatory purposes. The consolidated financial statements for
statutory purposes are prepared in Brazilian reais.
2.2 Currency remeasurement
The Company has selected the United States dollar as its reporting
currency. The U.S. dollar amounts have been translated or remeasured, as
appropriate, following the criteria established in Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation" from
the financial statements expressed in the local currency of the countries
where Gerdau and each subsidiary operates.
The Company's main operations are located in Brazil, United States, Canada
and Chile. The local currency is the functional currency for those
operations. These financial statements, except for those located in the
United States which already prepare their financial statements in United
Stated dollars, are translated from the functional currency into the United
States dollar. Assets and liabilities are translated at the exchange rate
in effect at the end of each year. Average exchange rates are used for the
translation of revenues, expenses, gains and losses in the statement of
income. Capital contributions and dividends are translated using the
exchange rate as of the date of the transaction. Translation gains and
losses resulting from the translation methodology described above are
recorded directly in "Cumulative other comprehensive loss" within
shareholders' equity. Gains and losses on foreign currency denominated
transactions are included in the consolidated statement of income.
2.3 Controlling shareholder
As of December 31, 2002, the Company's parent, Metalurgica Gerdau S.A.
("MG", collectively with its subsidiaries and affiliates, the
"Conglomerate") owned 44.86% (2001- 47.33%) of the total capital of the
Company. MG's share ownership consisted of 83.34% (2001 - 82.98%) of the
Company's voting common shares and 24.40% (2001- 28.39%) of its non-voting
preferred shares.
F-10
3 Significant accounting policies
The following is a summary of the significant accounting policies adopted
in the preparation of the consolidated financial statements.
3.1 Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned operational subsidiaries, as follows:
Percentage of interest (%)
2002 2001
Aceros Cox S.A. (Chile) 100 100
Aco Minas Gerais S.A. - Acominas and subsidiaries (Brazil) 79 (a)
Armafer Servicos de Construcao Ltda. (Brazil) 100 100
Gerdau AmeriSteel Corporation (Canada) and its subsidiaries: 74 (b)
Gerdau USA Inc. ("GUSA") (USA) 74 100
AmeriSteel Corp. (USA) 74 85
AmeriSteel Bright Bar Inc. (USA) 74 (b)
Gerdau Ameristeel MRM Special Sections Inc. (Canada) 74 100
Gerdau Ameristeel Cambridge Inc. (Canada) 74 100
Gerdau Ameristeel Perth Amboy Inc. (USA) 74 (b)
Gerdau Ameristeel Sayreville Inc. (USA) 74 (b)
Gerdau Aza S.A. (Chile) 100 100
Gerdau Internacional Emprendimentos Ltda. (Brazil) and its wholly owned
subsidiary Gerdau GTL Spain S. L. (Spain) and subsidiaries 100 100
Gerdau Laisa S.A. (Uruguay) 99 99
Seiva S.A. - Florestas e Industrias 96 96
(a) As indicated in Note 4.1 we accounted for our investment in Acominas
following the equity method of accounting as of December 31, 2001
(b) As of December 31, 2001 we had no interest in these companies. We
obtained a participation as a result of our combination with Co-Steel
Inc described in Note 4.2
The consolidated financial statements include all the companies in which
the Company has a controlling financial interest through direct or indirect
ownership of a majority voting interest. The consolidated financial
statements consolidate, in addition to the operational companies presented
in the table above, all the other companies which meet the criteria for
consolidation under US GAAP and which consist of holding companies for its
investments in the operating companies and for financing transactions.
The consolidated financial statements include the results of operations of
Co-Steel Inc. and its subsidiaries (Note 4.2) for the period from October
23,2002 (the date of acquisition). The results of Acominas for the year
ended December 31, 2002 have been accounted for following the equity method
up to February 13, 2002, (the date of acquisition of a controlling
interest) and have been consolidated as from such date. All significant
intercompany balances and transactions have been eliminated on
consolidation.
3.2 Use of estimates
F-11
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Estimates are for, but not limited to,
accounting for the allowance for doubtful accounts, depreciation and
amortization, impairment of long-lived assets, useful lives of assets,
valuation allowances for income taxes and contingencies. Actual results
could differ from those estimates.
3.3 Cash and cash equivalents
Cash and cash equivalents are carried at cost plus accrued interest. Cash
equivalents are considered to be all highly liquid temporary cash
investments, mainly deposits, with original maturity dates of three months
or less.
3.4 Short-term investments
Short-term investments consist of bank certificates of deposit and trading
securities including investments held in a fund administered by a related
party for the exclusive use of the Company (Note 8). The certificates of
deposit and trading securities have maturities ranging from four months to
one year at the time of purchase. Certificates of deposit are stated at
cost plus accrued interest. Trading securities are recorded at fair value
with changes in fair value recognized in the consolidated statement of
income.
3.5 Accounts receivable
Accounts receivable are stated at estimated realizable values. Allowances
are provided, when necessary, in an amount considered by management to be
sufficient to meet probable future losses related to uncollectible
accounts.
3.6 Inventories
Inventories are valued at the lower of cost or replacement or realizable
value. Cost is determined using the average cost method.
3.7 Property, plant and equipment
Property, plant and equipment are recorded at cost, including capitalized
interest incurred during the construction phase of major new facilities.
Interest capitalized on loans denominated in reais include the effect of
indexation of principal required by certain loan agreements. Interest
capitalized on foreign currency borrowings excludes the effects of foreign
exchange gains and losses.
Depreciation is computed under the straight-line method at rates which take
into consideration the useful lives of the related assets: 15 to 30 years
for buildings and improvements, 4 to 15 years for machinery and equipment,
10 years for furniture and fixtures, and 5 years for vehicles and computer
equipment. Assets under construction are not depreciated until they are in
condition to be placed into service. Major renewals and improvements are
capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred. Any gain or loss on the disposal of property and
equipment is recognized on disposal. During the year ended December 31,
2002 certain subsidiaries changed the estimated useful life of certain
buildings and equipment to reflect their updated economic lives. The effect
of this change in an accounting estimate reduced depreciation expense by $
3.2 million.
The Company periodically evaluates the carrying value of its long-lived
assets for impairment. The carrying value of a long-lived asset is
considered impaired by the Company when the anticipated
F-12
undiscounted cash flow from such asset is separately identifiable and less
than its carrying value. In that event, a loss would be recognized based on
the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily using
discounted anticipated cash flows. No impairment losses have been recorded
for any of the periods presented.
3.8 Equity investments
Investments in entities where the Company owns 20% to 50% of the voting
interest or where the Company has the ability to exercise significant
influence are accounted for under the equity method. As of December 31,
2002, the Company's equity investment is comprised of: (a) a 38.18%
interest in the capital of Sipar Aceros S.A. - Sipar, and (b) a 50%
interest in Gallatin Steel Company, Bradley Steel Processors and MRM Guide
Rail. As of December 31, 2001 the equity investments included the 38.18%
interest in the capital of Sipar and a 37.90% interest in Acominas (Note
4.1).
3.9 Investments at cost
Investments at cost consists of investments in entities where the Company
owns less than 20% of the voting interest including tax incentives to be
utilized in government approved projects, stated at cost and reduced by
valuation allowances based on management estimates of realizable values.
3.10 Goodwill
Goodwill represents the cost of investments in excess of the fair value of
net identifiable assets acquired and liabilities assumed.
Effective January 1, 2002, the Company adopted SFAS No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets". Under this new standard, goodwill,
including goodwill recognized for business combinations consummated before
initial application of the standard, is no longer amortized but is tested
for impairment at least annually, using a two-step approach that involves
the identification of "reporting units" and the estimation of fair value.
During the years ended December 31, 2001 and 2000 goodwill resulting from
acquisitions was amortized over 20 to 25 years, the estimated lives of the
related benefits.
During the year ended December 31, 2002 goodwill was tested for impairment
and no impairment charges were recorded.
Had goodwill not been amortized in the years ended December 31, 2001 and
2000 net income would have been $ 171,353 and $ 192,368, respectively.
Earnings per share had goodwill not been amortized for the year ended
December 31, 2001 and 2000 are presented in Note 10.
3.11 Pension and other post-retirement benefits
The Company accrues its obligations under pension and other post-retirement
benefits in accordance with SFAS No. 87, "Employers' Accounting for
Pensions" and SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", respectively.
The cost of pensions and other post-retirement benefits is actuarially
determined using the projected benefit method based on management's best
estimates of expected investment performance for funded plans, salary
increases, retirement ages of employees and expected health care costs.
Assets of funded pension plans are valued at fair value. The excess of the
net actuarial gains or losses over 10% of the greater of the benefit
obligation and the fair value of the assets is amortized over the average
remaining service period of the active employees (corridor approach).
An additional minimum liability is recognized in "Cumulative other
comprehensive loss" in shareholders' equity if the unfunded accumulated
benefit obligation ("ABO") exceeds the fair value of plan assets and this
amount is not covered by the pension liability recognized in the balance
sheet.
F-13
An additional minimum liability has been recognized as of December 31, 2002
in relation to pension plans offered to employees in North America.
3.12 Compensated absences
Compensated absences are accrued over the vesting period.
3.13 Stock Based Compensation Plans
Gerdau Ameristeel Corp maintain stock based compensation plans (Note 23)
although no options were granted during the year ended December 31, 2002.
The Company accounts for the stock-based compensation plans under
Accounting Principles Board Opinion ("APB") No. 25 and related
interpretations. SFAS No. 123 "Accounting for Stock-Based Compensation" as
amended by SFAS No. 148 "Accoounting for Stock-Based Compensation -
Transition and Disclosure" allows companies to continue following the
accounting guidance of APB 25 but requires pro forma disclosures of net
income and earnings per share for the effects on compensation had the
accounting criteria of SFAS No. 123 been adopted. The following table
illustrates the effects on net income and on earnings per share if the fair
value method had been applied.
2002 2001 2000
------------- ------------- -------------
Net income as reported 231,827 167,353 188,558
Stock-based compensation cost (reversal of cost)
included in the determination of net income as 102 (487) 997
reported
Stock-based compensation cost (reversal of cost)
following the fair value method (247) 354 (1,135)
------------- ------------- -------------
Pro-forma net income 231,682 167,220 188,420
============= ============= =============
Earnings per share - basic and diluted
Common - As reported and pro-forma 1.57 1.06 1.20
Preferred- As reported and pro-forma 1.57 1.17 1.32
3.14 Revenue recognition
Revenues from sales of products are recognized when title is transferred
and the client has assumed the risk and rewards of ownership in accordance
with the contractual terms.
3.15 Income taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the application of the
liability method of accounting for income taxes. Under this method, a
company is required to recognize a deferred tax asset or liability for all
temporary differences. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109,
the effect on deferred tax assets and liabilities of changes in tax rates
is recognized in income in the period that includes the enactment date.
Deferred tax assets are reduced through the establishment of a valuation
allowance, as appropriate, if, based on the weight of available evidence,
it is more likely than not that the deferred tax asset will not be
realized.
3.16 Earnings per share
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings Per Share".
F-14
Each share of common and preferred stock entitles the shareholder to
participate in earnings. Through December 31, 2001, in accordance with
Brazilian law and the by-laws of the Company, preferred shareholders were
entitled to receive per-share dividends at least 10% greater than the
per-share dividends paid to common shareholders. As the result of changes
in the Gerdau's by-laws approved in the Shareholders Meeting held on April
30, 2002, effective January 1, 2002, the preferred shareholders are no
longer entitled to the 10% differential dividend and dividends to both
common and preferred shareholders are paid on the same per-share amounts.
In calculating earnings per share ("EPS") through December 31, 2001
preferred stock has been treated as a participating security and the
Company has adopted the two-class method. This method is an earnings
allocation formula that determines earnings per share for each class of
common stock and participating security according to dividends declared and
participation rights to undistributed earnings. Under this method, net
income is first reduced by the amount of dividends declared in the current
period for each class of stock; the remaining earnings are then allocated
to common stock and participating securities to the extent that each
security may share in earnings. The total earnings allocated to each
security (i.e. actual dividends declared and the amount allocated for the
participation feature) is then divided by the weighted average number of
shares outstanding during the period.
Basic EPS excludes dilution, while diluted EPS for the years ended December
31, 2001 and 2000 reflects the potential dilution that could occur if the
convertible debentures were converted into shares. During the year ended
December 31, 2002 all outstanding convertible debentures issued by Gerdau
have been converted into shares. No other instruments are outstanding as of
December 31, 2002, which could have a dilutive effect. In calculating
diluted EPS, interest expense net of tax on the convertible securities is
added back to "Allocated net income available to Common and Preferred
shareholders", with the resulting amount divided by the number of dilutive
shares outstanding. Convertible debentures are considered in the number of
dilutive Common and Preferred shares outstanding. See Note 17.
All EPS data is calculated giving retroactive consideration to the stock
split approved on April 28, 2000 and to the stock bonus and to the reverse
stock split approved on April 30, 2003. EPS is presented on a per share
basis (Note 17).
3.17 Dividends and interest on equity
The Company's By-Laws require it to pay to its Common and Preferred
shareholders annual dividends in the amount of 30% of net income calculated
in accordance with the provisions of the Brazilian Corporate Law. Approval
of the payment of such dividends is granted at the Company's Annual General
Meeting, which must be held on or before April 30 of each year. Dividends
are payable in Brazilian reais and reflected in these financial statements
once declared by the Annual General Meeting.
Brazilian corporations are permitted to distribute interest on equity,
similar to a dividend distribution, which is deductible for income tax
purposes. The amount payable may not exceed 50% of the greater of net
income for the year or retained earnings, as measured under Brazilian
Corporate Law. It also may not exceed the product of the Taxa de Juros
Longo Prazo ("TJLP") (long-term interest rate) and the balance of
shareholders' equity, as measured under Brazilian Corporate Law.
Payment of interest on equity is beneficial to the Company when compared to
making a dividend payment, since it recognizes a tax deductible expense on
its income tax return for such amount. The related tax benefit is recorded
in the consolidated statement of income. Income tax is withheld from the
stockholders relative to interest on equity at the rate of 15%, except for
interest on equity due to the Brazilian government, which is exempt from
tax withholdings.
F-15
3.18 Environmental and remediation costs
Expenditures relating to ongoing compliance with environmental regulations,
designed to minimize the environmental impact of the Company's operations,
are capitalized or charged against earnings, as appropriate. The Company
provides for potential environmental liabilities based on the best estimate
of potential clean-up and remediation estimates for known environmental
sites. Management believes that, at present, each of its facilities is in
substantial compliance with the applicable environmental regulations.
3.19 Advertising costs
Advertising costs included in selling and marketing expenses were $9,386,
$9,144 and $8,966 for the years ended December 31, 2002, 2001 and 2000
respectively. No advertising costs have been deferred at the balance sheet
dates.
3.20 Treasury shares
Common and preferred shares reacquired are recorded under "Treasury stock"
within shareholders' equity at cost. Shares held in treasury that are
subsequently sold are recorded as a reduction in treasury stock at the
average cost of the shares in treasury held at such date. The difference
between the sale price and the average cost is recorded as a reduction or
increase in additional paid-in capital.
3.21 Derivative financial instruments
Derivative financial instruments that do not qualify for hedge accounting
are recognized on the balance sheet at fair value with unrealized gains and
losses recognized in the statement of income.
To qualify as a hedge, the derivative must be (i) designated as a hedge of
a specific financial asset or liability at the inception of the contract,
(ii) effective at reducing the risk associated with the exposure to be
hedged, and (iii) highly correlated with respect to changes in its fair
value in relation to the fair value of the item being hedged, both at
inception and over the life of the contract. We held derivatives which
qualified as hedges only in our subsidiaries in North America.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended, has been adopted effective January 1, 2001. The
effect of initial implementation of the procedures of SFAS No. 133, as of
January 1, 2001, was a gain of US$ 6,074 (net of income tax effects of US$
3,129), and is presented as a reduction of financial expenses in the
statement of income for the year then ended.
3.22 Reclassifications
Certain reclassifications have been made to the financial statements as of
December 31, 2001 and for the years ended December 31, 2001 and 2000 to
conform to the presentation in the current year.
3.23 New accounting pronouncements
The Financial Accounting Standards Board ("FASB") has recently issued the
following SFAS which are effective in periods after December 31, 2002: SFAS
No. 143, Accounting for Asset Retirement Obligations; SFAS No. 145,
Extinguishment of Debt; and SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities.
SFAS No. 143 requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived
asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method. SFASNo. 143 is effective
for fiscal years beginning after September 15, 2002.
F-16
SFAS No. 145 addresses financial accounting and reporting for
extinguishment of debt.
SFAS No. 146 is effective for exit or disposal activities initiated after
December 31, 2002 and generally requires costs associated with exit or
disposal activities (including costs related to involuntary terminations
and contract termination costs) to be recognized when they are incurred,
rather than at the date of a commitment to an exit or disposal plan.
Specifically, costs associated with involuntary terminations are to be
accrued on the date the employees are notified, assuming the period of time
between the notification date and termination date is the lesser of 60 days
or the legally required notification period. Otherwise, these costs are to
be recognized evenly over the period from notification to termination.
Contract termination costs are to be recognized when the contract is
legally terminated or when the economic benefits of the contract are no
longer being realized.
In addition, in November 2002, FASB has issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". This
Interpretation clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
In January 2003 the FASB issued Interpretation No. 46 ("FIN 46")
"Consolidation of Variable Interest Entities". The Interpretation applies
to variable interest entities ("VIEs"), many of which have been referred to
as special purpose entities or SPEs. Under rules prior to FIN 46, a company
generally included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. The FASB
determined that this approach was not effective in identifying controlling
financial interests in entities that are not controlled through voting
interests, or in which the equity investors do not bear the residual
economic risks and rewards. FIN 46 requires a variable interest entity to
be consolidated by a company if that company is the primary beneficiary of
that entity. The primary beneficiary is subject to a majority of the risk
of loss from the VIE's activities, or is entitled to receive a majority of
the VIE's residual returns, or both.
The consolidation requirements of the Interpretation apply immediately to
VIEs created after January 31, 2003 and apply to previously established
entities in the first interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply to all financial statements issued
after January 31, 2003, regardless of when the VIE was established.
The only SPE with which we do business as of December 31, 2002 is, as
further described in Note 13 "Brazilian Steel International Trading", a SPE
created to serve as a vehicle to obtain financing backed by future exports
of Acominas. We are consolidating the SPE since we acquired a controlling
interest in Acominas. Therefore, we do not expect that application of FIN
46 would have any effect as it relates to the existing SPE.
We are evaluating the impact that these recent pronouncement could have on
the financial position and result of operations of the Company.
4 Acquisitions
4.1 Acominas
On February 13, 2002 and October 18, 2002 we acquired an additional 16.12%
and 24.79%, respectively, of voting and total shares of Acominas. The
acquisition in February 2002 increased our interest in the voting stock to
54.0% and we begun to consolidate the financial position, results of
F-17
operations and cash flows since the acquisition date.
The total purchase price, which was paid in cash, was $ 179,042 for the
shares acquired in February 2002 and $ 226,730 for the shares acquired in
October 2002. No goodwill resulted from the acquisitions.
The following table summarizes the estimated fair value of assets acquired
and liabilities assumed at February and October 2002:
February 2002 October 2002
------------------------------------------------
$ $
Current assets 313,023 246,176
Property, plant and equipment 1,280,382 1,167,590
Other assets 79,962 73,312
Current liabilities (363,771) (298,894)
Non-current liabilities (198,915) (273,583)
------------------------------------------------
Net assets acquired 1,110,681 914,601
------------------------------------------------
Percentage acquired 16.12% 24.79%
Purchase price $ 179,042 $ 226,730
================================================
4.2 Co-Steel
On October 23, 2002, the Company and the Canadian steelmaker Co-Steel
combined their North American operations. In the transaction, Co-Steel
acquired all of the issued and outstanding shares of the Gerdau North
America Group (as defined below) in exchange for shares of Co-Steel
representing 74% of the shares of the combined entity. The Gerdau North
America Group is comprised of the operations of Gerdau in Canada (Gerdau
Ameristeel MRM Special Sections Inc, Gerdau Ameristeel Cambridge Inc and
certain holding companies) and in the United States (Ameristeel Corp.,
Ameristeel Bright Bar Inc. and one holding company).
A portion of the shares will be issued to minority shareholders of
AmeriSteel Corp on March 31, 2003 (Note 24). The name of Co-Steel was
changed to Gerdau AmeriSteel Corporation as part of the transaction. For
accounting purposes, the business combination of the Gerdau North America
Group and Co-Steel has been accounted for using the reverse take-over
method of purchase accounting. Gerdau North America is deemed to be the
acquirer and is assumed to be purchasing the assets and liabilities of
Co-Steel since the Company, the original shareholder of the Gerdau North
America Group, became owner of more than 50% of the voting shares of
Co-Steel on a fully diluted basis. The results of operations of Co-Steel
are consolidated from the date of the transaction. The following table
summarizes the estimated fair value of assets acquired and liabilities
assumed at the date of the acquisition. No goodwill resulted from the
acquisition.
Current assets $ 242,252
Current liabilities (130,345)
Property, plant and equipment 389,915
Other assets (177)
Long-term debt (300,082)
Other long-term liabilities (81,386)
Net deferred income taxes 15,768
---------------
Net assets acquired $ 135,945
---------------
Purchase consideration, representing 51,503,960 Co-Steel shares at $2.51 per share $ 129,275
Plus transaction costs 6,670
---------------
$ 135,945
---------------
4.3 Pro-forma results of operations (Unaudited)
The following table presents information on a pro-forma basis as if the
additional interests in Acominas and Co-Steel had been acquired at the
beginning of each of the years presented below:
F-18
2002
------------------
Net sales $ 3,983,576
Net income $ 229,391
Earnings per common and preferred share:
Basic and diluted $ 1.55
2001
------------------
Net income $ 100,057
5 Short-term investments
2002 2001
------------- -------------
Investment funds $ 32,364 $ 50,976
Investment funds administered by Banco Gerdau S.A. (related party) 97,775 76,125
Debt securities 228,758 113,640
Equity securities 8,851 65,324
------------- -------------
$ 367,748 $ 306,065
============= =============
6 Trade accounts receivable, net
2002 2001
------------- -------------
Trade accounts receivable $ 376,940 $ 311,887
Less: allowance for doubtful accounts (15,139) (23,045)
------------- -------------
$ 361,801 $ 288,842
============= =============
7 Inventories
2002 2001
------------- -------------
-------------
Finished products $ 331,926 $ 215,045
Work in process 87,728 62,149
Raw materials 85,682 95,904
Packaging and maintenance supplies 105,833 62,140
Advances to suppliers of materials 21,637 8,395
-------------
------------- -------------
$ 632,806 $ 443,633
============= =============
8 Balances and transactions with related parties
2002 2001
------------- -------------
Short-term investments - Funds administered $ 97,775 $ 76,125
by Banco Gerdau S.A. (i)
Long-term debt - MG (ii) 277 461
Loans and advances to directors $ 1,559 $ 2,648
(i) Banco Gerdau is a wholly owned subsidiary of MG and is the
administrator of investment funds for the exclusive use of Gerdau
and Acominas. The fund's investments consist of time deposits in
major Brazilian banks and treasury bills of the Brazilian
government. Income earned on the Company's investment in the fund
aggregated $9,469 in 2002 and $14,440 in 2001, representing
average yields of 19.0 % and 17.0 %, respectively.
F-19
(ii) Loans from MG as of December 31, 2002 and 2001 are denominated in
Brazilian reais, bear interest at the average composite borrowing
rate of the Conglomerate (23.0% as of December 31, 2002), mature
in May 2003, and can be renewed every six months. Interest expense
related to such loans aggregated $39 in 2002, $20 in 2001 and
$3,081 in 2000, representing average effective rates of 23.0 %,
22.8 % and 19.6%, respectively.
In addition, INDAC - Industria, Administracao e Comercio S.A., holding
company controlled by the Gerdau family and a shareholder of MG acts as
guarantor of some debt assumed by the Company in exchange of a fee of 1%
per year of the amount of debt guaranteed. Average amount of debt
guaranteed during the year ended December 31, 2002 amounted to $ 243,105.
9 Property, plant and equipment, net
2002 2001
------------- -------------
Buildings and improvements $ 714,326 $ 352,653
Machinery and equipment 2,006,922 1,495,911
Vehicles 9,540 13,096
Furniture and fixtures 32,195 33,170
Other 91,649 118,370
------------- -------------
2,854,632 2,013,200
Less: accumulated depreciation (989,415) (833,261)
------------- -------------
1,865,217 1,179,939
Land 122,135 96,276
Construction in progress 97,543 108,248
------------- -------------
Total $ 2,084,895 $ 1,384,463
============= =============
Construction in progress as of December 31, 2002 represents principally
renewals and improvements in the manufacturing facilities of Gerdau and
Acominas in Brazil. The Company capitalized interest on construction in
progress in the amount of $ 10,370 in 2002, $14,228 in 2001 and $20,735 in
2000.
As of December 31, 2002, machinery and equipment with a net book value of $
127,938 was pledged as collateral for certain long-term debt.
10 Goodwill
Goodwill corresponds exclusively to our acquisition of Ameristeel Corp.
During the year ended December 31, 2002 we have not recognized any
additional goodwill as result of our acquisitions. Up to December 31, 2001
goodwill was being amortized on a straight-line basis over 20 to 25 years,
the estimated lives of the related benefit. Had goodwill not been amortized
during the years ended December 31, 2001 and 2000, net income for those
years would have been $ 171,353 and $ 192,368, respectively, and EPS would
have been as follows:
2001 2000
---- ----
Basic earnings per share
Common 1.09 1.22
Preferred 1.20 1.35
Diluted earnings per share
Common 1.09 1.22
Preferred 1.20 1.34
11 Accrued pension and other post-retirement benefits obligation
F-20
11.1 Pension Plans
The Company and other related companies in the Group co-sponsor
contributory pension plans (the "Brazilian Plans") covering substantially
all employees based in Brazil, including Acominas as from its
consolidation. The Brazilian Plans are mainly defined benefit plans with
certain limited defined contributions. Additionally, the Company's Canadian
and American subsidiaries, including Co-Steel, sponsor defined benefit
plans (the "North American Plans") covering the majority of their
employees. Contributions to the Brazilian Plans and the North American
Plans are based on actuarially determined amounts.
Contributions to the Brazilian Plans for defined contribution participants
are based on a specified percentage of employees' compensation and totaled
$ 634 in 2002, $ 955 in 2001 and $1,596 in 2000. Contributions to defined
contribution retirement plans of employees of the subsidiaries in the
United States and Canada amounted to $ 8,200, $ 1,100 and $ 429 in 2002,
2001 and 2000, respectively.
The subsidiaries in North America also have a voluntary savings plan
available to substantially all of their employees. Under this plan, the
Company contributes amounts based upon a percentage of the savings paid
into the plan by employees. The Company matches 50% of the employees'
contributions up to 4% of employees' salaries. Costs under this plan for
the period ended December 31, 2002 were $1.9 million (2001- $1.8 million).
11.1.(a) Brazilian Plans
Net periodic pension cost relating to the defined benefit component of the
Brazilian Plans, which includes in 2002 the pension plan sponsored by
Acominas, was as follows:
2002 2001 2000
------------- ------------- -------------
Service cost $ 4,867 $ 1,989 $ 2,180
Interest cost 14,181 5,037 5,110
Expected return on plan assets (17,825) (4,573) (4,970)
Plan participants' contributions (1,001) - -
Amortization of unrecognized gains and losses, net (1,142) (475) (970)
Amortization of prior service cost 294 - -
Amortization of unrecognized transition obligation 398 865 1,114
------------- ------------- -------------
Net pension expense (benefit) $ (228) $ 2,843 $ 2,464
============= ============= =============
The funded status of the defined benefit components of the Brazilian
Plans was as follows:
2002 2001
-------------- ------------
Plan assets at fair value 184,850 62,222
Projected benefit obligation 135,455 55,597
-------------- ------------
Funded status 49,395 6,625
-------------- ------------
Unrecognized net transition obligation (1,652) 1,757
Unrecognized prior service cost 3,160 -
Unrecognized net gains and losses (37,794) (25,761)
-------------- ------------
Amounts recognized in the balance sheet, net $ 13,109 $ (17,379)
============== ============
Additional information required by SFAS 132 ("SFAS 132") "Employers'
Disclosures about Pensions and Other Postretirement Benefits" for the
Brazilian Plans is as follows:
2002 2001
------------------- -----------------
Change in benefit obligation
Benefit obligation at the beginning of the year $ 55,597 $ 60,329
F-21
Consolidation of Acominas 119,915 -
Service cost 4,867 1,989
Interest cost 14,181 5,037
Actuarial (gain) loss 9,838 (1,642)
Benefits paid (4,453) (721)
Effect of exchange rate changes (64,490) (9,395)
------------------- -----------------
Benefit obligation at the end of the year $ 135,455 $ 55,597
------------------- -----------------
Change in plan assets
Fair value of plan assets at the beginning of the year $ 62,222 $ 55,370
Consolidation of Acominas 159,931 -
Actual return on plan assets 47,691 15,111
Employer contributions 2,750 941
Plan participants' contributions 1,001 -
Benefits paid (4,453) (721)
Effect of exchange rate changes (84,292) (8,479)
------------------- -----------------
Fair value of plan assets at the end of the year $ 184,850 $ 62,222
------------------- -----------------
The assumptions used for the defined benefit component of the Brazilian
Plans are presented below. The rates presented below are nominal rates
and consider an inflation of 5% (4.5% for the years ended December 31,
2001 and 2000).
2002 2001 2000
---- ---- ----
Weighted-average discount rate 10.3% 9.7% 9.7%
Rate of increase in compensation 9.2% 8.7% 8.7%
Long-term rate of return on plan assets 10.3% 9.7% 9.7%
Brazilian Plan assets as of December 31, 2002 include shares of Acominas
and Gerdau in the amount of $ 12,007 and $5,258, respectively.
11.1.(b) North American Plans
The components of net periodic pension cost for the North American Plans
are as follows:
2002 2001 2000
------------- -------------- -------------
Service cost $ 5,606 4,947 4,167
Interest cost 12,830 10,921 10,098
Expected return on plan assets (13,536) (12,258) (11,494)
Amortization of prior service cost 388 282 70
Amortization of unrecognized gains and losses, net 4 (134)
------------- -------------- -------------
Net pension expense $ 5,292 3,758 2,841
============= ============== =============
The funded status of the North American Plans is as follows:
2002 2001
---- ----
Plan assets at fair value $ 206,070 133,827
Projected benefit obligation 301,352 164,260
------------- --------------
Funded status (95,282) (30,433)
Unrecognized prior service cost 2,564 578
Unrecognized transition liability 1,702 1,845
Unrecognized net gains and losses 52,139 16,086
F-22
Additional minimum liability (27,763) -
-----------------------------
Accrued pension liability recognized in the balance $ (66,640) (11,924)
sheet
============= ==============
Additional information required by SFAS N(0) 132 for the North American
Plans is as follows:
2002 2001
------------- -------------
Change in benefit obligation
Benefit obligation at the beginning of the year 164,260 146,934
Acquisition of Co-Steel 111,530
Service cost 5,606 4,947
Interest cost 12,830 10,921
Actuarial loss 13,659 7,777
Benefits paid (8,765) (7,292)
Amendments 2,232 973
------------- -------------
Benefit obligation at the end of the year 301,352 164,260
============= =============
Change in plan assets
Plan assets at the beginning of the year 133,827 140,599
Acquisition of Co-Steel 79,628
Employer contributions 10,142 1,910
Benefits paid (8,765) (7,292)
Actual return on assets (8,762) (1,390)
------------- -------------
Plan assets at the end of the year 206,070 133,827
============= =============
Assumptions used in accounting for the North American Plans were:
2002 2001 2000
---- ---- ----
Weighted-average discount rate 6.5%-6.8% 7%-7.3% 6.5%-7.5%
Rate of increase in compensation 4.3%-4.5% 2.5%-4.5% 2.5%-4.5%
Long-term rate of return on plan assets 7.5%-9.3% 7%-9.3% 7.0%-9.5%
F-23
11.2 Other Post-Retirement Benefits
The subsidiaries in North America currently provide specified health care
benefits to retired employees. Employees who retire after a certain age
with specified years of service become eligible for benefits under this
unfunded plan. The Company has the right to modify or terminate these
benefits.
The components of net periodic pension cost for the post-retirement health
benefits are as follows:
2002 2001 2000
-------------- --------------------------
Service cost 341 247 210
Interest cost 876 586 564
Amortization of unrecognized transition obligation - - (11)
Amortization of unrecognized gains and losses, net - - (18)
-------------- --------------------------
Net post-retirement health expense 1,217 833 745
============== ==========================
The following sets forth the funded status of the post-retirement health
benefits:
2002 2001
----------- -----------
Plan assets at fair value - -
Projected benefit obligation 31,979 9,068
----------- -----------
Funded status (31,979) (9,068)
Unrecognized net gains and losses 690 246
----------- -----------
Accrued post-retirement health benefits recognized in the balance sheet (31,289) (8,822)
=========== ===========
Additional information required by SFAS N(0) 132 for post-retirement
health benefits is as follows:
2002 2001
------------- -------------
Change in the projected benefit obligation
Projected benefit obligation at the beginning of the year 9,068 7,858
Acquisition of Co-Steel 22,049
Service cost 341 247
Benefits paid (1,331) (1,403)
Interest cost 876 586
Plan participants' contributions 532 466
Plan amendments 135
Actuarial loss 444 1,179
------------- -------------
Projected benefit obligation at the end of the year 31,979 9,068
============= =============
Change in plan assets
Plan assets at the beginning of the year - -
Employer contribution 799 937
Plan participants' contributions 532 466
Benefits and administrative expenses paid (1,331) (1,403)
Return on assets - -
------------- -------------
Plan assets at the end of the year - -
============= =============
F-24
Assumptions used in the accounting for the post-retirement health benefits
were:
2002 2001
----------------- ------------------
Weighted-average discount rate 6.5%-6.8% 7.3%
Health care - trend rate - beginning 2003 10.0%-12.0% 8.6%
Health care - trend rate - ending year 2008 5.5% 5.5%-6.0%
The amounts recognized in the balance sheets are as follows:
2002 2001
------------- --------------
Liabilities
Brazilian pension obligation (Gerdau plan) 11,941 17,379
North American pension obligation 66,640 11,924
North American obligation other than pension 31,289 8,822
------------- --------------
Accrued liability related to pension and other benefit obligation 109,870 38,125
============= ==============
Assets
Prepaid pension cost for the Brazilian plans (Acominas plan) 25,050 -
============= ==============
12 Short-term debt
Short-term debt consists of working capital lines of credit and export
advances with interest rates ranging from 3.75% p.a. to 11.13% p.a. for
U.S. dollar denominated debt and with interest rate of TR + 15.49% p.a.
(taxa referencial - a nominal interest rate) for reais denominated debt.
Advances received against export commitments are obtained from commercial
banks with a commitment that the products be exported.
13 Long-term debt and debentures
Long-term debt and debentures consisted of the following as of December 31:
Annual Interest
Rate % 2002 2001
------ ---- ----
Long-term debt, excluding debentures, denominated in Brazilian reais
Working capital 14.4 $ 20,559 $ -
Financing for machinery 9.4 to 15.8 182,258 187,175
Long-term debt, excluding debentures, denominated in foreign
currencies
(a) Long-term debt of Gerdau, Acominas and Gerdau Aza S.A.
Working capital (US$) 3.0 to 8.4 270,185 163,540
Financing for machinery and others (US$) LIBOR+11.02 114,982 161,334
Securitization of export receivables by Acominas (US$) 10.5 42,705
Working capital (Chilean pesos) 5.9 8,428 -
Financing for machinery (Chilean pesos) 5.8 34,216 -
(b) Long-term debt of Canadian companies other than Co-Steel
Bank indebtedness 17,243 -
U.S. Dollar Floating Rate Term Banker's acceptance 61,743 85,855
+ 2.75%
Canadian dollar revolving loan Bank prime rate + 22,157 15,068
1.75%
Other 1,444 1,458
(c) Long-term debt of Gerdau USA Inc. ("GUSA") and subsidiaries
Ameristeel Revolving Credit Agreement 3.8% 100,800 80,000
Ameristeel Term Loan 3.8% 68,750 93,750
Industrial Revenue Bonds 3.8% 36,795 33,315
F-25
Annual Interest
Rate % 2002 2001
------ ---- ----
Ameristeel Bright Bar 6.0% 3,522 3,867
Other 809 1,426
(d) Long-term debt of former Co-Steel group
Bank indebtedness 6,136 -
Canadian dollar revolving loan LIBOR+2% to 5% 30,577 -
U.S. Dollar Fixed Rate Reducing Term Loan 8.9% to 10.9% 105,849 -
U.S. dollar revolving loan 59,767 -
Other 3,061 -
------------- ------------
1,191,986 826,788
Less: current portion (397,415) (196,152)
------------- ------------
Long-term debt, excluding debentures, less current portion $ 794,571 $ 630,636
============= ============
Debentures $ 200,766 $ 96,222
Less: current portion - (2,018)
------------- ------------
Debentures, less current portion $ 200,766 $ 94,204
============= ============
Long-term debt matures in the following years:
2004 $ 367,227
2005 268,086
2006 72,611
2007 31,259
2008 and thereafter 55,388
-----------
$ 794,571
===========
Long-term debt, excluding debentures, denominated in Brazilian reais
Long-term debt denominated in Brazilian reais is indexed for inflation
using the TJLP -fixed by the Government on a quarterly basis - or the TR -
Taxa Referencial (nominal interest reference rate) published by the
Government on a daily basis.
Long-term debt, excluding debentures, denominated in foreign currencies
(a) Gerdau, Acominas and Gerdau AZA S.A.
The debt agreements entered into by Gerdau contain covenants, which require
the maintenance of certain ratios, as calculated in accordance with its
financial statements prepared in accordance with Brazilian GAAP. The
covenants include several financial covenants including ratios on
liquidity, total debt to EBITDA (earnings before interest, taxes,
depreciation and amortization), debt service coverage and interest
coverage, amongst others.
On January 4, 1999, the Company assumed the debt related to Eurobonds of
$130,000 issued by the Company's parent, Metalurgica Gerdau, maturing in
May 2004, in exchange for the then existing debt with the parent. The
Company is subject to certain financial covenants related to the issuance
of these Eurobonds including ratios of total debt to EBITDA computed based
on the financial statements prepared under Brazilian GAAP. GTL Equity
Investments Corp., a wholly owned consolidated subsidiary, reacquired $
96,530 of total Eurobonds issued when some of the bondholders exercised a
put option. Eurobond debt is presented net of the debt repurchased for
under "Financing for machinery and others".
F-26
In December 1999, Acominas Overseas Ltd, a consolidated subsidiary of
Acominas, entered into a agreement with Brazilian Steel International
Trading ("BSIT") a Cayman Islands special purposes company. BSIT obtained a
loan from a syndicate of banks and has used the proceeds to make an advance
payment to Acominas Overseas Ltd. for future exports. Acominas Overseas
Ltd. is required to make exports to a group of designated purchasers and
payment of the exports by such purchaser will be made to BSIT as repayment
of the advance made plus accrued interest. Acominas is obligated under the
terms of the agreement to export exclusively through Acominas Overseas Ltd.
(other than to South America) and to maintain certain minimum volumes of
exports. The financial statements of BSIT are included into the
consolidated financial statements of the Company.
(b) Canadian companies other than Co-Steel
The total authorized facility under the U.S. Dollar Floating Rate Term Loan
is Cdn $97.5 million [$61.7 million] (2001 - Cdn$135 million [$84.8
million]) with a due date of January 15, 2004. Interest rate swap
agreements related to this facility were entered into with a bank as the
counterparty in November 1999 that effectively fixed the rate of interest
on approximately 50% of the balance. The agreement is for $17 million and
bears interest at 6.4% for a term of five years expiring in 2004. The
aggregate fair value of the interest rate swap agreements, which represents
the amount that would be paid by the companies if the agreements were
terminated at December 31, 2002, was $1.2 million (2001 - $2.2 million).
The Canadian companies have a total authorized revolver facility of Cdn $73
million ($46 million) that bear interest at floating market rates
approximating the bank's prime rate (as defined in the agreement) plus
1.75% (2001- 2.25%) or banker's acceptance plus 2.75% (2001- 3.25%). Some
companies have pledged accounts receivable and inventory as collateral. The
revolver facility expires on September 30, 2003 and is renewable through
January 15, 2004.
The Canadian banking agreement contains various restrictive covenants with
respect to maintenance of certain financial ratios. At December 31, 2002,
the companies were not in compliance with certain covenants and requested
and received a waiver of compliance.
In addition, the banking agreement requires additional principal repayments
of 50% of surplus combined cash flow as defined by the banking agreement
for years from 2001 to 2003. Based on the agreement cash flow computations
for 2002, the companies in Canada will be required to make an additional
principal repayment of $4.1 million in 2003.
Collateral for the Canadian credit facility includes: (i) Cdn$350 million
demand debentures given by each of Gerdau Steel Inc., Gerdau MRM Holdings
Inc., Gerdau Ameristeel MRM Special Sections Inc. and Gerdau Ameristeel
Cambridge Inc., granting a first priority fixed charge on real estate,
machinery and equipment, a first priority floating charge on all other
assets and a first priority fixed charge on inventory and accounts
receivable to a maximum of $20 million, (ii) pledges and guaranties of
various companies of the Gerdau group in Canada, and (iii) a guaranty by
Gerdau SA. In addition, an "all risks" insurance policy for full insurable
value on a replacement cost basis has been pledged to the lenders.
(c) Gerdau USA Inc. - GUSA and subsidiaries
The main financial obligation outstanding as of December 31, 2002 is a $285
million credit facility (the "Revolving Credit Agreement"). It is
collateralized by first priority security interests in substantially all
accounts receivable and inventories of GUSA as well as a lien on the
Charlotte Mill property, plant and equipment. The Revolving Credit
Agreement was amended in September 2000 and increased the total facility
from $150 million to $285 million, of which $100 million is a term loan
that amortizes at the rate of 25% per year beginning in December 2001. The
Revolving Credit Agreement matures in September 2005. Loans under the
Revolving Credit Agreement bear interest at a per annum rate equal to one
of several rate options (LIBOR, Fed Funds or Prime Rate, as
F-27
defined in the agreement) based on the facility chosen at the time of
borrowing plus an applicable margin determined by tests of performance from
time to time. The effective interest rate at December 31, 2002 was
approximately 3.8% (2001- 4.2%).
The Revolving Credit Agreement contains certain covenants including the
requirement to maintain financial ratios and limitations on indebtedness,
liens, investments and disposition of assets and dividends. Letters of
credit are subject to an aggregate sublimit of $50 million.
GUSA's industrial revenue bonds ("IRBs") were issued to obtain funding to
construct facilities in Jackson, Tennessee; Charlotte, North Carolina;
Jacksonville, Florida; and Plant City, Florida. GUSA incurred an additional
$3.6 million IRB with the acquisition of a cold drawn facility in June
2002. The interest rates on these bonds range from 50% to 75% of the prime
rate (3.8% to 4.3% at December 31, 2002); $9.4 million of the IRBs mature
in 2003, $3.8 million matures in 2015, $20.0 million matures in 2017, and
$3.6 million matures in 2018. Irrevocable letters of credit issued pursuant
to the Revolving Credit Agreement back the IRBs. As of December 31, 2002,
GUSA had approximately $44.8 million of outstanding letters of credit,
primarily for IRBs and insurance.
The AmeriSteel Bright Bar Loan represents a bank loan of GUSA's
majority-owned subsidiary, secured by machinery and equipment. The loan
matures in 2011 with amortization payments that began in July 2001. The
loan currently bears interest at a rate of approximately 6.0% per year with
the rate having been reset in June 2002 and every three years thereafter
based on prime plus 1%. AmeriSteel is a guarantor of the loan.
In order to reduce its exposure to interest-rate fluctuations, GUSA entered
into interest-rate swap agreements in August and September 2001. The
interest-rate swaps have a notional value of $55 million, with the Company
paying a fixed interest rate and receiving a variable interest rate based
on three-month LIBOR. The underlying hedged instruments are specific
tranches of LIBOR-based revolving credit and term loan borrowings under the
Company's Revolving Credit Agreement. The aggregate fair value of the
effective portion of the interest rate agreements, which represents the
amount that would be paid by GUSA if the agreements were terminated at
December 31, 2002, was $4.6 million. As the hedged transaction occurs, this
amount will be charged as financial expenses.
(d) Former Co-Steel Group
The Co-Steel entities at December 31, 2002, have revolving facilities of
Cdn$133.9 million and Cdn$22.2 million which can be drawn in either
Canadian or U.S. dollars. These facilities come due on January 15, 2004 and
bear interest at the bankers' acceptance rate or LIBOR plus 2% to 5%
depending on debt to EBITDA ratios.
The Fixed Rate Reducing Term Loan at December 31, 2002 was $96.8 million.
This facility is reduced by $59.3 million on January 15, 2004 and then
reduces by $12.5 million on July 15 in each of the years 2004 to 2006 and
bears interest at a fixed rate of 8.9% to 10.9% depending on debt to EBITDA
ratios. The terms of this facility include a make-whole provision (in the
event of prepayment) that requires the Company to pay a penalty if interest
rates had decreased since the original inception of the loan. At December
31, 2002, the amount of the make-whole provision (which was included in the
fair value adjustments related to the acquisition of Co-Steel) was $9.1
million. The facilities are secured by a first charge against substantially
all assets of the former Co-Steel entities.
Debentures
Debentures include seven outstanding issuances of Gerdau and convertible
debentures of Gerdau Ameristeel as follows:
F-28
Issuance Maturity 2002 2001
-------- --------
Third series 1982 2011 $ 15,687 $ 20,240
Fifth series 1989 2005 - 8,116
Seventh series 1982 2012 9,639 6,331
Eighth series 1982 2013 11,733 17,503
Ninth series 1983 2014 23,149 43,280
Eleventh series 1990 2020 4,837 6,236
Thirteenth series 2001 2008 87,765 -
Gerdau Ameristeel's convertible debentures 1997 2007 56,056 -
----------- ----------
208,866 101,706
Less debentures held by consolidated companies
eliminated on consolidation (8,100) (5,484)
----------- ----------
Total 200,766 96,222
----------- ----------
Less: current portion - (2,018)
=========== ==========
Total debentures - long-term $ 200,766 $ 94,204
=========== ==========
(a) Debentures issued by Gerdau
Debentures are denominated in Brazilian reais and bear variable interest at
a percentage of the CDI rate (Certificado de Deposito Interbancario,
interbank interest rate). The annual average nominal interest rates were
19.11% and 16.95% as of December 31, 2002 and 2001, respectively. The
thirteenth series of debentures contain financial covenants which require:
(a) that total consolidated financial debt does not exceed four times
Earnings Before Interest, Taxes, Depreciation and Amortization, as defined
in the agreements, and (b) that consolidated EBITDA should not be lower
than 2.5 times net financial expenses, excluding the foreign exchange gains
and losses and monetary corrections. Prior series of debentures contained
financial covenants which limit distribution of dividends to no more than
30% of distributable net income if consolidated long-term debt exceeds 1.5
times shareholders' equity. All such financial covenants are measured based
on the statutory consolidated financial statements of Gerdau S.A. prepared
under Brazilian GAAP.
As of December 31, 2001, $8,073 of convertible debentures due at various
dates through 2005 were outstanding, which were convertible at the option
of the holder into Common stock and Preferred stock. On June 5, 2002 the
single holder of such convertible debentures exercised its right to convert
and 208,921,397 Common shares and 417,842,794 Preferred shares were issued.
As of December 31, 2002 there are no convertible debentures issued by
Gerdau outstanding.
(b) Debentures issued by Gerdau AmeriSteel Corp.
The unsecured subordinated convertible debentures issued by Gerdau
AmeriSteel Corp. bear interest at 6.5% per annum, mature on April 30, 2007,
and, at the holders' option, are convertible into Common Shares of Gerdau
AmeriSteel Corp. at a conversion price of Cdn$26.25 per share. Under the
terms of the Trust Indenture for the Convertible Debentures, no adjustment
to the conversion price is required if Common Shares are issued in a
customary offering. The debentures are redeemable after April 30, 2002, at
the option of Gerdau AmeriSteel Corp. at par plus accrued interest. Gerdau
AmeriSteel Corp. has the right to settle the principal amount by the
issuance of Common Shares based on their market value at the time of
redemption. The par value of the debentures is Cdn$ 125,000. As part of the
fair value adjustment of the assets and liabilities of Co-Steel the
debentures were revalued based on their trading value on the Toronto Stock
Exchange at the time of the announcement of the merger. The difference
between the par value and the fair value will be amortized through April
30, 2007.
F-29
14 Commitments and contingencies
14.1 Tax and legal contingencies
The Company is party to claims with respect to certain taxes, contributions
and labor. Management believes, based in part on advice from legal counsel,
that the reserve for contingencies is sufficient to meet probable and
reasonably estimable losses in the event of unfavorable rulings, and that
the ultimate resolution will not have a significant effect on the
consolidated financial position as of December 31, 2002, although it may
have significant effect on results of future operations or cash flows.
Included in the reserve for contingencies as of December 31, 2002, are
$14,280 relating to "compulsory loans" required to be made to Eletrobras
("Emprestimo Compulsorio Eletrobras sobre Energia Eletrica"), the
government-owned energy company, by its customers. The Company has, along
with other electricity customers, challenged the constitutionality of these
loans. In March 1995, the Supreme Court decided against the interests of
the Company. Even though the constitutionality of the "compulsory loans"
was sustained by the Supreme Court, several issues remain pending,
including the amounts to be paid by the Company.
The Company has established a provision relating to the "compulsory loans"
as: (i) the Supreme Court has initially decided against the interests of
the Company as it relates to this matter, (ii) even though the payment to
Eletrobras was in the form of a loan, the re-payment to the Company will be
made in the form of Eletrobras shares, and (iii) based on currently
available information, the Eletrobras shares will most likely be worth less
than 5% of the amount that would be paid if the re-payment was to be made
in cash.
Also included in the provision are amounts provided for taxes which are
being contested for a total of $ 15,549. Total provision for taxes being
contested include: $2,039 relating to contested federal social contribution
taxes - "Fundo de Investimento Social" ("FINSOCIAL") -, $3,125 relating to
state value added tax - "Imposto Sobre Circulacao de Mercadorias e
Servicos" ("ICMS")-, $889 relating to "Contribuicao Social Sobre o Lucro",
$2,031 relating to "Contribuicao Provisoria sobre Movimentacao Financeira"
("CPMF"), $4,726 relating to income tax ("Imposto de Renda"), $5,650
relating to social security contribution ("INSS") and $2,739 relating to
contested federal social contribution taxes - "Programa de Integracao
Social", ("PIS") and "Contribuicao para o Financiamento da Seguridade
Social" ("COFINS"). The Company believes that, under the Supreme Court
ruling on PIS, it is entitled to a tax refund, which it has offset against
monthly payments of PIS and COFINS. The amounts offset have been accounted
for as a contingent liability.
The Company is also a party to a number of lawsuits by employees. As of
December 31, 2002, the Company accrued $7,166 relating to such lawsuits.
Additionally, the Company is involved in a number of lawsuits arising from
the ordinary course of business and has accrued $1,940 for these claims.
Judicial deposits, which represent restricted assets of the Company, relate
to amounts paid to the court and held in judicial escrow pending resolution
of related legal matters. The balance as of December 31, 2002 is comprised
of $ 12,102 related to the tax contingencies described above and $1,289
related to the Elletrobras dispute.
There is also one antitrust proceeding pending against Gerdau S.A. It
refers to a complaint brought by two Sao Paulo's civil constructors'
unions alleging that Gerdau S.A. and the other long steel producers in
Brazil were dividing clients among themselves, therefore breaking antitrust
law. After investigations conducted by SDE - Secretaria de Direito
Economico and based on some public hearings, the Secretary's opinion
was that a cartel existed. This conclusion was also backed by an opinion of
SEAE - Secretaria de Acompanhamento Economico that had been previously
presented.
The proceeding will now be followed through its final stage at CADE -
Conselho Administrativo de Defesa Economica, who will decide the case.
Gerdau believes based on all currently available information including
legal counsel advice that it should be successful in this proceeding, if
not at an
F-30
administrative level at least at court level. Therefore, no provision has
been made for any amount. Gerdau is fighting and expects to continue
fighting against the antitrust authorities allegations. According to
applicable Brazilian legislation, fines of up to 30% of relevant gross
revenue in the previous fiscal year may be levied upon the Company and, if
it is proved that there is personal liability of an officer, such officer
may be levied a fine of 10-50% of the fine applied to the company. There is
no precedent of fines in the country in excess of 4%; in a similar case
regarding flat steel companies, the fine was 1%. No provision has been
recorded with respect to this proceeding.
The Company is also involved as plaintiff and defendant in a variety of
routine litigation cases incidental to the normal course of business.
Management believes, based on the opinion of legal counsel, that it has
defense or insurance protection with respect of such litigation and that
any losses therefrom, whether or not insured, would not have a material
adverse effect on the consolidated results of operations or consolidated
financial position of the Company.
14.2 Environmental
As the Company is involved in the manufacture of steel, it produces and
uses certain substances that may pose environmental hazards.
Hazardous waste generated by current and past operations include electric
arc furnace ("EAF") dust. The Company believes that currently meets all
current federal, state and provincial environmental regulations in the
United States and Canada. However, the Company has handled and disposed of
EAF dust through various means, and is responsible for the remediation of
certain sites where such dust was generated and/or disposed. The Company
estimates remediation costs based on its review of each site and the nature
of the anticipated remediation activities to be undertaken. Although the
ultimate costs associated with the remediation are not precisely known, the
Company estimated the total remaining costs as at December 31, 2002 to be
$6.3 million and these costs recorded as a liability at December 31, 2002.
An additional liability of $8.6 million has been recorded in respect of
certain environmental obligations, which were triggered by the change in
control of Co-Steel in certain jurisdictions in which Co-Steel operated.
This liability was recorded at the present value of the estimated future
costs of these obligations.
Considering the uncertainties inherent in determining costs associated with
clean-up, including the time periods over which such costs must be paid,
the extent of contribution by parties which are jointly and severally
liable, and the nature and timing of payments to be made under cost sharing
arrangements, there can be no assurance the ultimate costs of remediation
will not differ from the estimated remediation costs.
The Company is not aware of any environmental remediation cost or liability
in relation to its operations outside United States and Canada.
Future information and developments will require the Company to continually
reassess the expected impact of environmental matters. However, the Company
has evaluated its total environmental exposure based on current available
data and believes that compliance with all applicable laws and regulations
will not have a material impact on the Company's liquidity, consolidated
financial position or results of operations.
14.3 Operating leases
The Company leases certain equipment and real property in North America
under non-cancelable operating leases. Aggregate future minimum payments
under these leases are as follows:
F-31
Year Ending December 31, Amount
2003 $ 13,242
2004 10,757
2005 9,417
2006 6,859
2007 5,981
Thereafter 38,095
--------------------
84,351
====================
14.4 Vendor financing
Gerdau provides guarantees to Banco Gerdau S.A. that finance sales to
selected customers. These sales are recognized at the time the products are
delivered. Under the vendor program, the company is the secondary obligor
to the bank. At December 31, 2002 customer guarantees provided by the
company totaled $ 13,891.
15 Shareholders' equity
15.1 Share capital
As of December 31, 2002, 39,590,941,783 shares of Common stock and
74,527,528,780 shares of Preferred stock were issued and outstanding. The
share capital of the Company is comprised of Common shares and Preferred
shares, all without par value. The authorized capital of the Company is
comprised of 240,000,000,000 Common shares and 480,000,000,000 Preferred
shares. Only the Common shares are entitled to vote. Under the Company's
By-laws, specific rights are assured to the non-voting Preferred shares.
There are no redemption provisions associated with the Preferred shares.
The Preferred shares have preferences in respect of the proceeds on
liquidation of the Company.
The following sets forth the changes in the number of the Company's shares
from January 1, 2000 through December 31, 2002:
Common Preferred Treasury
Shares Shares Stock
Balances as of January 1, 2000 19,691,010,193 37,054,842,993 -
Shares issued in a 2:1 split of shares 19,691,010,193 37,054,842,993 -
------------------- ------------------- ---------------
Balances as of December 31, 2000 and 2001 39,382,020,386 74,109,685,986 -
Acquisition of treasury stock - - 318,017,301
Sale of treasury stock - - (318,017,301)
Shares issued on conversion of debentures 208,921,397 417,842,794 -
------------------ ------------------ ---------------
Balances as of December 31, 2002 39,590,941,783 74,527,528,780 -
================== ================== ===============
15.2 Legal reserve
Under Brazilian law, the Company is required to transfer up to 5% of annual
net income, determined in accordance with the statutory financial
statements prepared under Brazilian GAAP, to a legal reserve until such
reserve equals 20% of paid-in capital. The legal reserve may be utilized to
increase capital or to absorb losses, but cannot be used for dividend
purposes.
F-32
15.3 Statutory reserve
The Board of Directors may propose to the shareholders to transfer at least
5% of net income for each year to a statutory reserve (Reserva de
Investimentos e Capital de Giro - Reserve for investments and working
capital). The reserve will be created only if it does not affect minimum
dividend requirements and its balance may not exceed the amount of paid
in-capital. The reserve may be used for absorbing losses, if necessary, for
capitalization, for payment of dividends or to repurchase shares.
15.4 Dividends
Brazilian law permits the payment of cash dividends from retained earnings
calculated in accordance with the provisions of the Brazilian Corporate Law
and as presented in the statutory accounting records. As of December 31,
2002, the Company's retained earnings corresponds to the balance of the
statutory reserve described in Note 15.3 above which amounts in the
statutory records of the Company to $ 430,240 (translated at the year-end
exchange rate). On April 30, 2003 an amount of R$ 400,536 (equivalent to
US$ 113,70 at the year-end exchange rate) recorded as of December 31, 2002
as part of the statutory reserve has been capitalized.
Aggregate dividends (which consisted exclusively of interest on equity)
declared by the Company were as follows:
2002 2001 2000
---- ---- ----
Common shares $ 26,948 $ 23,046 $ 21,491
Preferred shares 50,730 47,851 44,495
-------------------
--------------------- --------------------- -------------------
Total $ 77,678 $ 70,897 $ 65,986
===================== ===================== ===================
16 Accounting for income taxes
16.1 Analysis of income tax expense
Income tax payable is calculated separately for Gerdau and each of its
subsidiaries as required by the tax laws of the countries in which Gerdau
and its subsidiaries operate.
2002 2001 2000
---- ---- ----
Current tax expense (benefit):
Brazil $ 37,245 $ 34,883 $ 37,058
United States (8,255) (2,236) (3,611)
Canada (2,890) 5,414 3,357
Other countries 965 2,920 (79)
----------- ----------- -----------
27,065 40,981 36,725
----------- ----------- -----------
Deferred tax expense (benefit):
Brazil (32,971) 12,699 2,522
United States 9,598 - 5,321
Canada 830 1,168 (1,955)
Other Countries 2,036 (201) 3,011
----------- ----------- -----------
(20,507) 13,666 8,899
----------- ----------- -----------
Income tax expense $ 6,558 $ 54,647 $ 45,624
=========== =========== ===========
16.2 Income tax reconciliation
A reconciliation of the income taxes in the statement of income to the
income taxes calculated at the Brazilian statutory rates follows:
2002 2001 2000
-----------
Net income before taxes and minority interest $ 228,718 $ 219,205 236,997
Brazilian composite statutory income tax rate 34.00% 34.00% 34.00%
----------- ----------- -----------
Income tax at Brazilian income tax rate $ 77,764 $ 74,530 80,579
F-33
Permanent differences:
Different tax rates (5,448) (1,655) (1,085)
Non-taxable income net of non deductible expenses (17,560) (1,277) (11,244)
Reversal of valuation allowance (12,939)
Benefit of deductible interest on equity paid to (31,001) (24,105) (22,435)
shareholders
- Other, net (4,258) 7,154 (191)
----------- ----------- -----------
Income tax expense $ 6,558 $ 54,647 45,624
=========== =========== ===========
16.3 Tax rates
Tax rates in the principal geographical areas in which the Company operates
were as follows:
2002 2001 2000
---- ---- ----
Brazil
Federal income tax 25.00% 25.00% 25.00%
Social contribution 9.00% 9.00% 9.00%
------------- ----------- -----------
Composite federal income tax rate 34.00% 34.00% 34.00%
============= =========== ===========
United States
Composite federal and state income tax 40.00% 40.00% 40.00%
(approximate)
Canada
Federal income tax 21.84% 21.84% 21.84%
Provincial rate (approximate) 15.16% 15.16% 15.16%
------------- ----------- -----------
Composite income tax rate 37.00% 37.00% 37.00%
============= =========== ===========
Chile
Federal income tax 16.00% 15.00% 15.00%
16.4 Analysis of tax balances
The more significant temporary differences that give rise to the
deferred tax assets and deferred tax liabilities are presented below:
2002 2001
---- ----
Deferred tax assets
Property, plant and equipment $ 39,849 $ 27,403
Net operating loss carryforwards 217,457 1,177
Accrued pension costs 23,722 13,340
Other 56,799 8,750
Valuation allowance on deferred tax assets (205,139)
------------ ------------
Gross deferred income tax assets 132,688 50,670
Deferred tax liabilities
Property, plant and equipment 125,461 145,523
Other 10,583 8,606
------------ ------------
Gross deferred income tax liabilities 136,044 154,129
------------ ------------
Net deferred income tax assets (liabilities) $ (3,356) $ (103,459)
============ ------------
A valuation allowance amounting to $ 306,092 has been recognized on
acquisition in relation to tax loss carryforwards of Acominas. Part of
this amount was released after the acquisition date and as
F-34
there was no goodwill nor intangible assets recognized on acquisition, the
effect was recognized directly through the income statement. No further
valuation allowance have been established to reduce net deferred tax assets
as management believes that realization is more likely than not. Brazilian
tax law allows tax losses to be carried forward indefinitely to be utilized
to offset future taxable income. However, the utilization of tax losses in
a given year is limited to 30% of taxable income.
Deferred tax balances 2002 2001
------------ ------------
Deferred tax assets - current $ 34,585 $ 6,804
Deferred tax assets - non-current 98,103 43,866
------------ ------------
132,688 50,670
Deferred tax liabilities - current 7,628 2,872
Deferred tax liabilities - non-current 128,416 151,257
------------ ------------
136,044 154,129
------------ ------------
Net deferred tax balance (3,356) (103,459)
============ ============
17 Earnings per share (EPS)
Pursuant to SFAS No. 128, the following tables reconciles net income to
the amounts used to calculate basic and diluted EPS. All computations of
EPS presented below have been retroactively adjusted to reflect: (a) a 2
to 1 stock split occurred in 2000, (b) a stock bonus of 3 shares per
each 10 shares hold approved by the Shareholder's Meeting on April 30,
2003, and (c) a 1000 to 1 reverse stock split approved by the
Shareholder's Meeting on April 30, 2003.
2002
------------------------------------------------------
Common Preferred Total
----------------- --------------- --------------
(In thousands, except per share data and percentages)
Basic and diluted numerator
Dividends declared $ 26,948 $ 50,730 $ 77,678
Allocated undistributed earnings (i) 53,477 100,672 154,149
----------------- --------------- --------------
Allocated net income available to Common and Preferred
shareholders $ 80,425 $ 151,402 $ 231,827
================= =============== ==============
Basic and diluted denominator
Weighted-average outstanding shares after giving
retroactive effect to stock bonus and reverse stock 51,343,083 96,653,627
split (Note 24.c)
================= ===============
Earnings per share (in US$) - Basic and diluted $ 1.57 $ 1.57
================= ===============
2001
------------------------------------------------------
Common Preferred Total
---------------- ---------------- ----------------
(In thousands, except per share data and percentages)
Basic numerator
Dividends declared $ 23,046 $ 47,851 $ 70,897
Basic allocated undistributed earnings (i) 31,416 65,040 96,456
---------------- ---------------- ----------------
Allocated net income available to Common and Preferred
shareholders $ 54,462 $ 112,891 $ 167,353
================ ================ ================
F-35
Basic denominator
Weighted-average outstanding shares after giving
retroactive effect to stock bonus and reverse stock 51,196,627 96,342,592
split (Note 24.c)
================ ================
Basic earnings per share (in US$) $ 1.06 $ 1.17
================ ================
2001
------------------------------------------------------
Common Preferred Total
---------------- ---------------- ----------------
(In thousands, except per share data and percentages)
Diluted numerator
Dividends declared $ 23,046 $ 47,851 $ 70,897
Basic allocated undistributed earnings (i) 31,416 65,040 96,456
Diluted allocated undistributed earnings 54,462 112,891 167,353
Convertible securities:
Interest expense on convertible debt, net of tax (ii) 160 300 460
---------------- ---------------- ----------------
Allocated diluted net income available to Common and
Preferred shareholders $ 54,622 $ 113,191 $ 167,813
================ ================ ================
Diluted denominator
Weighted-average basic outstanding shares after giving 51,196,627 96,342,592
retroactive effect to stock bonus and reverse stock
split (Note 24.c)
Convertible securities:
Convertible debentures (ii) 264,000 528,000
---------------- ----------------
Weighted-average diluted outstanding shares after
giving retroactive effect to stock bonus and reverse
stock split (Note 24.c) 51,460,627 96,870,952
================ ================
Diluted earnings per share $ 1.06 $ 1.17
================ ================
2000
------------------------------------------------------
Common Preferred Total
---------------- ---------------- ----------------
(In thousands, except per share data and percentages)
Basic numerator
Actual dividends declared $ 21,491 $ 44,495 $ 65,986
Basic allocated undistributed earnings (i) 39,922 82,650 122,572
---------------- ---------------- ----------------
Allocated net income available to Common and Preferred
shareholders $ 61,413 $ 127,145 $ 188,588
================ ================ ================
Basic denominator
Average outstanding shares after giving retroactive
effect to stock bonus and reverse stock split (Note 51,196,627 96,342,592
24.c)
================ ================
Basic earnings per share $ 1.20 $ 1.32
================ ================
F-36
2000
------------------------------------------------------
Common Preferred Total
---------------- ---------------- ----------------
(In thousands, except per share data and percentages)
Diluted numerator
Dividends declared $ 21,491 $ 44,495 $ 65,986
Basic allocated undistributed earnings (i) 39,922 82,650 122,572
Diluted allocated undistributed earnings 61,413 127,145 188,558
Convertible securities:
Interest expense on convertible debt, net of tax (ii) 227 427 654
---------------- ---------------- ----------------
Allocated diluted net income available to Common and
Preferred shareholders $ 61,640 $ 127,572 $ 189,212
================ ================ ================
Diluted denominator
Weighted-average basic outstanding shares after giving 51,196,627 96,342,592
retroactive effect to stock bonus and reverse stock
split (Note 24.c)
Convertible securities:
Convertible debentures (ii) 366,000 732,000
---------------- ----------------
Weighted-average diluted outstanding shares after
giving retroactive effect to stock bonus and reverse
stock split (Note 24.c) 51,562,627 97,074,592
================ ================
Diluted earnings per share $ 1.20 $ 1.31
================ ================
(i) Through December 31, 2001 the Company calculated earnings per share on
Common and Preferred shares under the "two class method" considering
preferred shareholders were entitled to receive per-share dividends 10%
greater than the per-share dividends paid to Common shareholders.
Undistributed earnings, therefore, were allocated to Common and Preferred
shareholders on a 100 to 110 basis respectively, based upon the number of
shares outstanding at the end of the period and considering items assumed
to be common stock equivalents for purposes of EPS computation. Effective
as from January 1, 2002 the Preferred shareholders no longer have the right
to the 10% differential and both Preferred and Common shareholders receive
dividends on the same basis.
(ii) For purposes of computing diluted EPS, convertible securities are
assumed to be converted into Common and Preferred shares at the beginning
of the period or from the point at which such securities were outstanding.
In accordance with Brazilian Corporate Law, on conversion of convertible
debt, a maximum of 66.67% of the debt can be applied towards the
acquisition of Preferred stock. In calculating diluted EPS, therefore, the
Company has assumed a conversion ratio for convertible securities of 66.67:
33.33 Preferred to Common stock. During the year ended December 31, 2002,
all outstanding convertible securities had been converted into common and
preferred stock; no diluted EPS is presented for the year ended December
31, 2002.
18 Fair value of financial instruments
Pursuant to SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments", the Company is required to disclose the fair value of
financial instruments, including off-balance sheet financial instruments,
when fair values can be reasonably estimated. The Company's estimate of the
fair value of the financial instruments, which include receivables,
accounts payable, long-term debt and the liability component of the
convertible debentures, approximates the carrying value mainly due to their
short maturity.
19 Derivative instruments
The use of derivatives by the Company is limited. Derivative instruments
are used to manage clearly identifiable foreign exchange and interest rate
risks arising out of the normal course of business.
F-37
Gerdau and Acominas
As part of its normal business operations Gerdau and Acominas obtained U.S.
dollar denominated debt generally at fixed rates and are exposed to market
risk from changes in foreign exchange and interest rates. Changes in the
rate of the Brazilian real against the U.S. dollar expose Gerdau and
Acominas to foreign exchange gains and losses which are recognized in the
statement of income as also to changes in the amount of Brazilian reais
necessary to pay such U.S. dollar denominated debt. Changes in interest
rates expose Gerdau and Acominas to changes in fair value on its debt. In
order to manage such risks Gerdau and Acominas enter into derivative
instruments, primarily cross-currency interest rate swap contracts. Under
the swap contracts Gerdau and Acominas have the right to receive on
maturity United States dollars plus accrued interest at a fixed rate and
have the obligation to pay Brazilian reais at a variable rate based on the
CDI rate.
Although such instruments mitigate the foreign exchange and interest rate
risks, they do not necessarily eliminate them. The Company generally does
not hold financial instruments for trading purposes.
All swaps entered into have been recorded at fair value and realized and
unrealized losses are presented in financial expenses in the consolidated
statement of income.
The notional amount of such cross-currency interest rate swaps amounts to $
785,267 ($ 225,576 as of December 31, 2001) and mature between January 2003
and March 2006 (June 2002 and March 2006 as of December 31, 2001) with
Brazilian reais interest payable which varies between 20.30% and 103.70% of
CDI (between 80.30% and 103.70% as of December 31, 2001). Unrealized gains
on swaps outstanding as of December 31, 2002 amounts to $ 51,858 ($ 1,997
as of December 31, 2001) and unrealized losses amount to $ 2,003 (nihil as
of December 31, 2001).
Gerdau Ameristeel Corporation
Gerdau Ameristeel Corp. has entered into certain swaps to manage risks
related to its variable interest rate debt (Note 13).
20 Concentration of credit risks
The Company's principal business is the production and sale of long
ordinary steel products, including: crude steel; long rolled products, such
as merchant bars and concrete reinforcing bars used in the construction
industry; drawn products, such as wires and meshes; and long specialty
steel products, such as tool steel and stainless steel. Approximately 90 %
of the Company's sales during 2002 were made to civil construction and
manufacturing customers.
Approximately 48 % of the Company's consolidated sales are to domestic
Brazilian companies, 47 % to customers in the United States and Canada and
the remainder split between export sales from Brazil and sales of its
foreign subsidiaries located in Chile and Uruguay.
No single customer of the Company accounted for more than 10% of net sales
and no single supplier accounted for more than 10% of purchases in any of
the years presented. Historically, the Company has not experienced
significant losses on trade receivables.
21 Segment information
In July 2002, the Company announced a modification to its management and
corporate governance structure. The modification included the creation of
the Gerdau Executive Committee, which has been assigned responsibility for
managing of the business. The Gerdau Executive Committee is
F-38
comprised of the most senior officers of the Company including the
President of the Gerdau Executive Committee, which is also the Chairman of
the Board of Directors.
As the result of this modification, the Company has modified its reportable
segments under SFAS No. 131 "Disclosures About Segments of an Enterprise
and Related Information" and has defined that its reportable segments
correspond to the business units through which the Gerdau Executive
Committee manages its operations. Segment information for the years ended
December 31, 2001 and 2000 has been restated to conform to the current
presentation.
There are no significant inter-segment sales transactions and operating
income consists of net sales less cost of sales, operating costs and
expenses and financial income and expenses. The identifiable assets are
trade accounts receivable, inventories and property, plant and equipment.
2002
----------------------------------------------------------------------------------------
Total as
Gerdau South North Adjustments and per
Brazil Acominas America America Total reconciliations financial
statements
----------------------------------------------------------------------------------------
Net sales 1,571,136 459,930 113,341 994,348 3,138,755 126,171 3,264,926
Operating income 276,277 10,482 13,989 28,649 329,397 251,353 580,750
Identifiable assets 790,129 962,141 169,248 1,246,435 3,167,953 (88,451) 3,079,502
Interest expenses (279,762) (138,790) (20,993) (26,507) (466,052) 173,589 (292,463)
Income tax (37,949) 11,407 (3,016) 2,188 (27,370) 20,812 (6,558)
Capital 91,072 64,351 5,621 32,806 193,850
expenditures
Depreciation and
amortization (78,502) (34,486) (6,722) (55,620) (175,330)
2001
----------------------------------------------------------------------------------------
Total as
Gerdau South North Adjustments and per
Brazil Acominas America America Total reconciliations financial
statements
----------------------------------------------------------------------------------------
Net sales 1,361,935 220,430 116,863 806,049 2.505.277 (104,139) 2,401,138
Operating income 195,718 28,599 (4,789) 24,430 243,958 148.043 392,001
Identifiable assets 1,003,200 1,402,754 201,472 826,469 3,433,895 (1,316,957) 2,116,938
Interest expenses (179.670) 5,763 (26,074) (69.365) (269,346) 102,850 (166,496)
Income tax (42.222) 34,138 (1.952) 4.001 (6,035) (48,612) (54,647)
Capital 56,324 38,779 14,824 79,091 189,018
expenditures
Depreciation and
amortization (76.620) (21,337) (6,998) (61.416) (166,371)
2000
----------------------------------------------------------------------------------------
Total as
Gerdau Acominas South North Adjustments and per
Brazil America America Total reconciliations financial
statements
-----------------------------------------------------------------------------------------
Net sales 1,593,805 198.762 126,382 920,604 2,839,553 (68,177) 2,771,376
Operating income 208,094 2,189 1,472 250,414 136,609 387,023
38,659
Identifiable assets 1,192,970 559,995 240,455 838,432 2,831,852 (499,486) 2,332,366
Interest expenses (189,220) (12,014) (14,859) (54,555) (270,648) 77,476 (193,172)
F-39
Income tax (31,440) - (1,271) 304 (32,407) (13,217) (45,624)
Capital 148,086 5.621 32.806 203,036
expenditures 16,523
Depreciation and
amortization (101,200) (18,016) (8,526) (58,106) (185,848)
The segment information above has been prepared under Brazilian GAAP. Corporate
activities performed for the benefit of the Group as a whole are not separately
presented and are included as part of the information of Gerdau Brazil. The
Adjustments and Reconciliations column include the differences derived from the
fact that Acominas is consolidated for the full year 2002 and 2001 and
proportionally consolidated in the year 2000 in the segment information above
while is consolidated only as from the date of acquisition of control in the
consolidated financial statements; in addition the following effects are
presented under Adjustments and Reclassifications:
o Net sales are presented net of freight costs while freight costs are
presented as part of Cost of sales in the consolidated financial
statements
o Operating income in the segment information includes financial
expenses, exchange gains and losses and financial income while in the
consolidated financial statements such items are not considered in
determining operating income
o Identifiable assets in the segment information include property, plant
and equipment which are presented on the basis of historical costs of
acquisition while in the consolidated financial statements they
include the effects of property, plant and equipment acquired in
business combinations at fair value
o Interest expense in the segment information include: (a) exchange
variation on foreign currency denominated debt which is presented as a
separate line in the consolidated financial statements, and (b)
exchange interest on certain intercompany debt which is eliminated in
the consolidated financial statements.
Geographic information about the Company presented on the same basis as the
segment information above is as follows:
2002
----------------------------------------------------------------------------------------
Brazil United Canada Other Total Adjustments and Total as
States countries reconciliations per
financial
statements
Net sales 2,031,066 670,702 323,646 113,341 3,138,755 126,171 3,264,926
Identifiable 1,752,270 597,705 648,730 169,248 3,167,953 (88,451) 3,079,502
assets
Long lived assets 1,266,889 373,549 386,493 123,274 2,150,205 (65,310) 2,084,895
Operating income 286,759 12,266 16,383 13,989 329,397 251,353 580,750
2001
----------------------------------------------------------------------------------------
Brazil United Canada Other Total Adjustments and Total as
States countries reconciliations per
financial
statements
Net sales 1,582,365 647,422 158,627 116,863 2,505,277 (104,139) 2,401,138
Identifiable 2,405,954 591,677 234,792 201,472 3,433,895 (1,316,957) 2,116,938
assets
Long lived assets 1,827,422 384,571 140,786 150,181 2,502,960 (1,118,497) 1,384,463
Operating income 224,317 19,488 4,942 (4,789) 243,958 148,043 392.001
2000
----------------------------------------------------------------------------------------
Brazil United Canada Other Total Adjustments and Total as
States countries reconciliations per
financial
statements
Net sales 1,792,567 676,533 244,071 126,382 2,839,553 (68,177) 2,771,376
Identifiable 1,752,965 582,891 255,541 240,455 2,831,852 (499,486) 2,332,366
assets
Long lived assets 1,261,280 367,218 160,736 179,034 1,968,268 (425,659) 1,542,609
Operating income 246,753 22,063 (20,591) 2,189 250,414 136,609 387,023
22 Valuation and qualifying accounts
Year ended December 31, 2002:
Balance
as of Charges Balances
beginning to cost Effect of as of
of the and Exchange Business of the
Description year Payments expenses Reversals Rate changes Combination year
----------- ---- -------- -------- --------- ------------ ----------- ----
Provisions offset
against assets
balances:
Allowance for doubtful $23,045 1,310 (9,216) 15,139
accounts
Valuation allowance
on deferred - - - (12,939) (85,292) 303,370 205,139
Income tax assets
Reserves:
Provision for 55,170 (2,243) 20,773 (21,802) 8,600 60,498
contingencies
F-40
(a) Includes the effect of exchange rates on balances in currencies other than
the United States dollar
Year ended December 31, 2001:
Balance as of Charges (credits) Balances
beginning to costs and Deductions as of end
Description of the year expenses (a) of the year
-------------------------------------- ---------------- -------------------- --------------- ---------------
Provisions offset against assets balances:
Allowance for doubtful accounts $ 19,345 $ 6,743 $ (3,043) $ 23,045
Reserves:
Provision for contingencies 70,395 (4,099) (11,126) 55,170
---------------- -------------------- --------------- ---------------
(a) Includes the effect of exchange rates on balances in currencies other than
the United States dollar
Year ended December 31, 2000:
Balance as of Charges (credits) Balances
beginning to costs and Deductions as of end
Description of the year expenses (a) of the year
-------------------------------------- ---------------- -------------------- --------------- ---------------
Provisions offset against assets balances:
Allowance for doubtful accounts $ 9,318 $ 10,820 $ (793) $ 19,345
Reserves:
Provision for contingencies 87,430 10,253) (27,288) 70,395
---------------- -------------------- --------------- ---------------
(a) Includes the effect of exchange rates on balances in currencies other than
the United States dollar
23 Stock based compensation plans of subsidiaries
Two stock based compensation plans are offered by certain subsidiaries in
North America.
23.1 Former Co-Steel Stock-Based Option Plan ("Former Co-Steel Plan")
Under the Former Co-Steel Plan, grant options could be issued to employees
and directors to acquire
F-41
up to a maximum of 3,041,335 Common Shares. The exercise price was based on
the closing price of Common Shares of the former Co-Steel on the trading
date previous to the date the options are issued. The options have a
maximum term of 10 years and vest over various periods as determined by the
Plan administrator at the time of grant, and are exercisable in
installments.
A summary of share purchase options is as follows:
Weighted Average Aggregate Option
Number of Shares Exercise Price Price (in thousands)
---------------- -------------- --------------------
Balance - December 31, 2002 1,367,400 Cdn$ 14.69 Cdn$ 20,092
The following table summarizes information about share purchase options
outstanding at December 31, 2002:
Weighted Average Weighted
Exercise Price Number Outstanding at Remaining Average Number Exercisable at
Range Cdn$ Dec 31,2002 Contractual Life Exercise Price December 31,2002
---------- ----------- ---------------- -------------- --------------------
Cdn$
18.60 to 19.75 295,500 4.5 years 19.07 295,500
22.00 to 30.625 1,071,900 3.2 years 24.35 1,071,900
23.2 Ameristeel Corporation Plans
AmeriSteel Corporation, has a number of stock compensation plans for its
employees. Under the terms of the Transaction Agreement relating to the
acquisition of Co-Steel, minority shareholders of AmeriSteel will
exchange shares of AmeriSteel stock and options for stock and options of
Gerdau AmeriSteel Corp. at an exchange rate of 9.4617 Gerdau AmeriSteel
shares and options for each AmeriSteel share or option. This exchange is
scheduled to occur by March 31, 2003.
In March 2000, AmeriSteel's Board of Directors approved a long-term
incentive plan available to executive management (the "Stakeholder Plan")
to ensure AmeriSteel's senior management's interest is congruent with
AmeriSteel's shareholders. Awards are determined by a formula based on
AmeriSteel's return on capital employed in a given plan year. Earned
awards vest and are paid out over a period of four years. Participants
may elect cash payout or investments in phantom stock of AmeriSteel and
Gerdau, for which a 25% premium is earned if elected. Benefits charged to
expense under this plan for the years ended December 31, 2002, 2001 and
2000, were $90 thousand, $257 and $300 thousand, respectively.
In July 1999, AmeriSteel's Board of Directors approved a Stock
Purchase/SAR Plan (the "SAR Plan") available to essentially all
employees. The SAR Plan authorizes 100,000 shares of common stock to be
sold to employees during three offering periods, July through September
in each of 1999, 2002 and 2005. Employees who purchase stock are awarded
stock appreciation rights ("SARs") equal to four times the number of
shares purchased. In the 1999 offering period, a total of 42,321 shares
were sold under the SAR Plan at a purchase price of $15.30 per share,
with 28,683 of these shares outstanding as of December 31, 2002. SARs
were granted at fair value at the date of the grant, determined based on
an independent appraisal as of the previous year-end. In the 1999
offering period, a total of 169,284 SARs were granted under the SAR Plan,
with 114,451 of these rights outstanding as of December 31, 2002. In the
2002 offering period, a total of 44,299 shares were sold under the SAR
Plan at a purchase price of $14.45 per share, with 44,299 of these shares
outstanding as of December 31, 2002. SARs were granted at fair value at
the date of the grant, determined based on an independent appraisal as of
the previous year-end. In the 2002 offering period, a total of 177,196
SARs were granted under the SAR Plan, with 177,048 of these rights
outstanding as of December 31, 2002. The SARs become exercisable at the
rate of 25% annually from the grant date and may be exercised for 10
years from the grant date.
In September 1996, AmeriSteel's Board of Directors also approved the
AmeriSteel Corporation Equity Ownership Plan (the "Equity Ownership
Plan"), which provides for grants of common stock, options to purchase
common stock and SARs. The maximum number of shares that can be issued
F-42
under the plan is 438,852. Ameristeel has granted 493,350 incentive stock
options and 52,100 shares of common stock under the Equity Ownership Plan
through December 31, 2002, with 279,553 incentive stock options and
22,006 shares of common stock outstanding at December 31, 2002. All
issued options and shares of issued common stock become one-third vested
two years from the grant date, and one third in each of the subsequent
two years from the grant date. All grants were at the fair market value
of the common stock on the grant date, determined based on an independent
appraisal as of the end of the previous year-end. Options may be
exercised for 10 years from the grant date.
In May 1995, AmeriSteel's Board of Directors approved a Stock
Purchase/Option Plan (the "Purchase Plan") available to essentially all
employees. Employees who purchased stock were awarded stock options equal
to six times the number of shares purchased. A total of 37,689 shares
were sold under the Purchase Plan at a purchase price of $10.63 per
share, with 397 of these shares outstanding as of December 31, 2002. The
options were granted at fair value at the date of the grant, determined
based on an independent appraisal as of the end of the previous year-end.
A total of 226,134 options were granted under the Purchase Plan, with
1,644 of these options outstanding as of December 31, 2002. No options
remain available for future grant. All options outstanding are currently
vested. Options may be exercised for 10 years from the grant date. The
following tables summarize AmeriSteel's stock option activity for the
years ended December 31, 2002 and 2001:
Equity Ownership Plan
--------------------------------------------------------------------
Year Ended December 31,
2002 2001
--------------------------------- ---------------------------------
Number of Weighted-Average Number of Weighted-Average
Shares exercise Price Shares Exercise Price
------------- ------------------ ------------- -----------------
Outstanding, beginning of period 305,840 $ 19.22 204,006 $ 19.22
Granted 58,650 17.00 121,000 13.00
Exercised (17,053) 12.75 (9,631) 13.42
Forfeited (67,884) 14.02 (9,535) 19.31
------------- ------------------ ------------- -----------------
Outstanding, end of period 279,553 $ 17.91 305,840 $ 16.94
------------- ------------------ ------------- -----------------
Options vested at end of period 115,395 $ 18.29 92,977 $ 15.57
------------------ -----------------
Weighted-average fair value of options
granted during the period $ 3.22 $ 2.87
================== =================
Purchase Plan
--------------------------------------------------------------------
Year Ended December 31,
2002 2001
--------------------------------- ---------------------------------
Number of Weighted-Average Number of Weighted-Average
Shares Exercise Price Shares Exercise Price
------------- ------------------ ------------- -----------------
Outstanding, beginning of period 1,824 $ 12.50 3,468 $ 12.50
Granted - - - -
Exercised (180) 12.50 (1,644) 12.50
Forfeited - 12.50 - 12.50
------------- ------------------ ------------- -----------------
Outstanding, end of period 1,644 $ 12.50 1,824 $ 12.50
------------- ------------------ ------------- -----------------
------------- ------------------ ------------- -----------------
Options vested at end of period 1,644 $ 12.50 1,824 $ 12.50
============= ================== ============= =================
The weighted-average remaining contractual life of the options under the
Equity Ownership Plan and the Purchase Plan as of December 31, 2002, is
4.1 years for options granted through 1997 at a
F-43
price between $12.50 and $13.50 per share, and 6.6 years for those options
granted between 1998 and 2000 at a price between $20.00 and $28.00 per
share, and 8.9 years for options granted between 2001 and 2002 at a price
between $13.00 and $17.00 per share. The weighted-average exercise price of
the options under the Equity Ownership Plan as of December 31, 2002 is
$13.21 for options granted through 1997 at a price between $12.50 and
$13.50 per share, $22.17 for those options granted between 1998 and 2000 at
a price between $20.00 and $28.00 per share, and $14.95 for options granted
in 2001 and 2002 at a price between $13.00 and $17.00 per share. The
weighted-average exercise price of the options under the Purchase Plan as
of December 31, 2002 is $12.50.
24 Subsequent events
(a) On January 10, 2003 we received shares representing a 30% interest in
Dona Francisca Energetica for a total consideration of $ 6,076. As a result
of the acquisition the Company owns 52% of total and voting stock of Dona
Francisca Energetica.
(b) On March 31, 2003, under the terms of the Transaction Agreement
relating to the acquisition of Co-Steel, Gerdau Ameristeel Corp. completed
an exchange of minority shares of subsidiary AmeriSteel for shares of
Gerdau AmeriSteel Corp. Minority shareholders of AmeriSteel, mostly
executives and employees, exchanged 1,395,041 shares of AmeriSteel for
13,199,260 shares of Gerdau AmeriSteel, an exchange ratio of 9.4617 to one.
As a result, AmeriSteel became a wholly owned subsidiary of Gerdau
AmeriSteel and the participation of the Company in Gerdau AmeriSteel was
reduced from 74% to 67%.
(c) The Shareholders Meeting held on April 30, 2003 approved a bonus to both
common and preferred shareholders of 3 shares per 10 shares held and also a
reverse stock split of 1 share for each 1,000 shares held.
F-44