Form 20-F - Gerdau GERDAU

Transcrição

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
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
[X]
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, 2001 was:
39,382,020,386 Common Shares, no par value per share
74,109,685,986 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 ................................................................................................................................................................
1
PART I..................................................................................................................................................................................
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS................................
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE ..................................................................
ITEM 3. KEY INFORMATION..........................................................................................................................
ITEM 4. INFORMATION ON THE COMPANY.............................................................................................
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS ....................................................
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES ......................................................
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS ..................................
ITEM 8. FINANCIAL INFORMATION...........................................................................................................
ITEM 9. THE OFFER AND LISTING................................................................................................................
ITEM 10. ADDITIONAL INFORMATION.....................................................................................................
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..............
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..................................
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PART II.................................................................................................................................................................................
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELIQUENCIES ..............................................
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS......................................................................................................................................
ITEM 15. ..............................................................................................................................................................
ITEM 16. ..............................................................................................................................................................
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PART III................................................................................................................................................................................
ITEM 17. FINANCIAL STATEMENTS...........................................................................................................
ITEM 18. FINANCIAL STATEMENTS...........................................................................................................
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS .............................................................................
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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, and (ii) to "Prefe rred Shares" and "Common Shares" refer to the Company's authorized and outstanding
preferred stock and common stock, designated as ações preferenciais and ações ordinárias, 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) "billions" are to thousands of
millions, (iii) "km" are to kilometers, and (iv) "tons" denote metric tons.
The Company has prepared the consolidated financial statements included herein in conformity with accounting
principles generally accepted in the United States ("U.S. GAAP").
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.
F-1
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,
2001, 2000 and 1999, are derived from the U.S. GAAP financial statements included elsewhere herein. The financial
statements as of December 31, 2001, 2000 and 1999 have been audited by Arthur Andersen S/C.
Statement of income data:
Net sales
Cost of sales
Gross profit
Sales and marketing expenses
General and administrative expenses
Operating income
Interest expense and exchange loss
Interest income
Other non-operating income (expense)
Equity pickup on non-consolidated company
Income before income taxes and minority interest
Provision for income taxes:
Current
Deferred
Income before minority interest
Minority interest
Net income available to common and preferred
shareholders
Basic earnings per 1,000 shares
Common
Preferred
Diluted earnings per 1,000 shares
Common
Preferred
Cash dividends declared per 1,000 shares
Common
Preferred
Number of common shares outstanding
2
2001
2,320,530
(1,641,620)
678,910
(105,801)
(181,108)
392,001
(238,269)
55,002
(7,853)
18,324
219,205
For the years ended December 31,
(expressed in thousands of U.S. dollars)
2000
1999
1998
2,676,714
1,720,988
1,885,061
(1,964,353)
(1,101,371)
(1,315,179)
712,361
619,617
569,882
(112,195)
(86,007)
(101,386)
(213,143)
(157,755)
(175,457)
387,023
375,855
293,039
(243,477)
(222,414)
(151,739)
57,324
64,166
86,897
2,165
5,196
18,798
33,962
(4,903)
236,997
217,900
246,995
1997
1,824,108
(1,296,453)
527,655
(107,199)
(198,083)
222,373
(54,359)
31,626
17,330
216,970
(40,981)
(13,666)
164,558
2,795
(36,725)
(8,899)
191,373
(2,815)
(17,456)
(3,080)
197,364
328
(38,460)
(13,843)
194,692
(844)
(17,335)
(21,710)
177,925
(21,182)
167,353
188,558
197, 692
193,848
156,743
1.38
1.52
1.56
1.72
1.65
1.79
3.22
3.54
2.76
3.10
1.38
1.52
1.55
1.70
1.65
1.78
3.06
3.35
2.69
3.00
0.58
0.65
0.55
0.60
1.20
1.27
0.76
0.81
0.68
0.74
39,382,020,386
33,070,107,530
19,691,010,193
19,691,010,193
19,314,516,379
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Balance sheet data:
Cash
Short-term investments
Net working capital (1)
Property, plant and equipment
Total assets
Short term debt
Long term debt, less current portion
Long term parent company
Debentures – short term
Debentures – long term
Shareholders’ equity
2001
27,832
306,065
250,636
1,384,463
2,952,677
567,491
630,636
461
2,018
94,204
1,032,720
As of December 31,
(expressed in thousands of U.S. dollars)
2000
1999
1998
12,433
9,570
10,938
290,449
364,492
338,930
196,596
235,993
503,931
1,542,609
1,568,051
1,279,218
3,231,758
3,215,542
2,559,396
688,586
655,551
274,818
717,830
739,315
224,309
77
49,511
205,484
2,413
2,505
3,505
113,349
81,613
172,978
1,065,659
1,022,744
1,205,325
1997
4,331
296,204
566,149
1,158,688
2,238,418
181,044
207,137
184,708
3,512
126,268
1,153,562
(1) Total current assets less total current liabilities
Dividends and Dividend Policy
The authorized capital stock of the Company is comprised of Common and Preferred Shares. As of December
31, 2001, 39,382,020,386 Common Shares and 74,109,685,986 Preferred Shares of the Company were issued and
outstanding.
Dividends
The following table sets forth the dividends paid to holders of the Company’s Common Sh ares and Preferred
Shares since 1997 in Reais and in U.S. dollars translated from reais at the Commercial Market rate as of the date of
payment.
Period
1st half/1997
2nd half/1997*
1st half/1998*
2nd half/1998*
1st half/1999*
2nd half/1999*
1st half/2000*
2nd half/2000*
1st half/2001*
2nd half/2001*
Date of
Payment
08/19/97
02/26/98
07/27/98
02/23/99
08/03/99
02/29/00
08/15/00
02/15/01
08/15/01
02/19/02
R$ per 1,000
Common Shares
0.2690
0.42180
0.45
0.5360
0.6300
0.9910
0.3730
0.6620
0.3980
0.9600
R$ per 1,000
Preferred Shares
0.2959
0.46398
0.495
0.5896
0.6930
1.0901
0.4103
0.7282
0.4378
1.0560
U.S.$ per 1,000
Common Shares
0.24692
0.37334
0.38897
0.4435
0.3447
0.5604
0.2066
0.3341
0.1715
0.4137
U.S.$ per 1,000
Preferred Shares
0.27161
0.41067
0.42787
0.4878
0.3791
0.6164
0.2272
0.3675
0.1887
0.4551
* Represents payments of interest on equity
The Brazilian Corporate Law generally requires the by-laws 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 the Company’s
By-laws, such percentage has been fixed as an amount equal to not less than 30% of the Adjusted Net Income available
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 such period, after allocating such income to the legal reserve and other reserves (“Adjusted Net Income”). For
conversion of the dividends paid by the Company from reais to dollars, the Custodian will use the relevant Commercial
Market exchange rate on the date such dividends are made available to shareholders in Brazil. See “Exchange Rates”.
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, 2001, in accordance with Brazilian
GAAP, Gerdau S.A.’s legal reserve totaled R$ 87.4 million (U.S.$ 37.7 million) or 6.62% of total capital stock of R$
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1,320.1 million (U.S.$ 568.9 million).
According to Law 9,457, holders of preferred shares in a Brazilian corporation (including the Preferred Shares)
are entitled to receive dividends at least 10% greater than dividends paid on Common Shares unless there is a provision
for a fixed minimum dividend on preferred shares based on capital. The Company has no such provision and, accordingly,
pays dividends on Preferred Shares 10% higher than those paid on Common Shares. The Gerdau S.A. executive
management presented a proposal at the shareholders' year-end meeting which has been approved to grant both Common
Shares and Preferred Shares a 100% tag along right with the control block of Common Shares. This measure was
approved by shareholders on April 30, 2002, and it will extend to all shareholders a right 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 by-laws
to provide for the tag-along as described above, the Company will pay the stated 30% (By -Law) of Adjusted Net Profit to
all shareholders, without any premium to preferred shareholders.
As a general requirement, shareholders who are not residents of Brazil must have their investment in a Brazilian
company registered with the Central Bank to have dividends, sales proceeds or other amounts related to their shares
eligible for conversion into foreign currency for remittance outside Brazil. Preferred Shares underlying the ADSs 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 Depositary for the 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 such 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 in relation to the U.S. dollar that occurs
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 ADSs, are not subject to Brazilian withholding tax.
Interest on Equity
Law 9,249 of December 1995 provides that a company, at its discretion, may pay interest on equity to
shareholders as an addition or an alternative to dividends. A Brazilian corporation is entitled to pay (and set off against
the Mandatory Dividend for each fiscal year) to its shareholders as interest on equity up to the limit of the TJLP (LongTerm Interest Rate). The payment of interest as described herein is subject to a 15% withholding income tax. See “Item
10 E - Taxation”.
Dividend Policy
The Company currently intends to pay dividends on its outstanding Preferred Shares in 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 law,
the Company pays dividends or interest on capital twice a year.
Exchange Rates
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 prior
approval from Brazilian monetary authorities, such as the purchase and sale of registered investments by foreign persons
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 Market
rate is the commercial selling rate for Brazilian currency into U.S. dollars, as reported by the Central Bank. The "Floating
Market rate" is the prevailing selling rate for Brazilian currency into U.S. dollars which applies to transactions to which
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the Commercial Market rate does not apply, as reported by the Central Bank. Prior to the implementation of the Real
Plan, the Commercial Market rate and the Floating Market 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 Market rate and the Floating Market rate are
reported by the Central Bank on a daily basis .
Both the Commercial Market rate and the Floating Market rate are freely negotiated but have been subject to
limited intervention by the Central Bank. After implementation of the Real Plan, the Central Bank initially allowed the
real to float with minimal intervention.
On January 18, 1999, the Central Bank officially announced its new policy to allow the real’s value to be
determined by the foreign exchange markets, intervening only to limit wide swings in the value of the currency. The
pressure on the real during the beginning of March that same year caused the government to drop the managed band
exchange rate system and to adopt a free floating exchange rate system. Following the adoption of this system and with
the designation of a new Central Bank president, Armínio Fraga, as well as other macro-economic factors, the real
strengthened so that on December 31, 1999, the exchange rate was R$ 1.79 per US$ 1.00. Since that date, however, it has
declined against the Dollar. On December 31, 2000 the Commercial Market rate was R$ 1.9554 per U.S.$ 1.00 and on
December 31, 2001, the exchange rate was R$ 2.32 per US$ 1.00. The year of 2001 was strongly influenced by the
economic and political crises in Argentina. The real fluctuated heavily against the U.S. dollar. By the end of the year,
however, the financial situation of Brazil as perceived by economic agents caused the Brazilian currency to recover and
regain value. Since then it has fluctuated well within the ratios considered stable by the financial markets. The net
devaluation in the period was 18.67%. On April 30, 2002 the rate was R$ 2.36 per U.S.$ 1.00.
The following table sets forth information on prevailing Commercial Market rates for the periods indicated.
Exchange Rates
Reais per U.S.$ 1.00
Year
1997
1998
1999
2000
2001
Average Price
1.0784
1.1609
1.8133
1.8293
2.3504
Average
Average
Average
Average
Average
Year
2001
2001
2001
2001
2001
2001
Month
July
August
September
October
November
December
Exchange Rates
Reais per US$ 1.00
Lowest Rate
2.3249
2.4463
2.5590
2.6866
2.4604
2.2930
Exchange Rates
Reais per U.S.$ 1.00
Highest Rate
2.5979
2.5585
2.8007
2.7828
2.6820
2.4672
Source: Economática
The Company will make any 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 ADSs on
conversion by the Depositary of such distributions into U.S. dollars for payment to holders of Preferred ADSs.
Fluctuations in the exchange rate between reais and the U.S. dollar may also affect the U.S. dollar equivalent of the reais
price 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 it to foresee such imbalance, temporary restrictions may be imposed on remittances of foreign capital
abroad. For approximately nine months in 1989 and early 1990, for example, to maintain Brazil’s foreign currency
reserves, the amounts were subsequently released in accordance with Brazilian Government directives. There can be no
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assurance that similar measures will not be taken by the Brazilian Government in the future.
B. CAPITALIZATION AND INDEBTEDNESS
Not required.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not required.
D. RISK FACTORS
Factors Relating to Brazil and to the Company
Political and Economic Condition
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 Brazil's
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.
Brazil’s latest economic stabilization plan (the “Real Plan”) which effectively reduced inflation since the
introduction of the new currency, the real, in July 1994, does not contain any wage or price controls, and has been
supported by the government of President Fernando Henrique Cardoso, who was Finance Minister at the time of the
adoption of the Real Plan. Although President Cardoso has stated his intention to continue to support the market and
privatization measures of recent years, there is no guarantee that the actions taken by the Brazilian Government will be
continued or will be successful.
Brazil experienced a financial and economic crisis in the first quarter of 1999 following the financial and economic
crisis in Asia. In response, the Government adopted economic measures to protect the Real Plan and the stability of the
Brazilian currency. The effects of these measures are exp ected to continue in force during 2002.
The highlights of these measures include the approval of an increase in the CPMF (temporary financial transaction
contribution) from 0.30% to 0.38%, (ii) a R$ 8.7 billion cut in the Federal Budget, (iii) an increase in the COFINS
(contribution for the financing of Social Security) from 2% to 3%, (iv) an increase from 20% to 40% in the percentage of
funds the Federal Administration transfers to the States, (v) a reduction in spending for state-run companies of R$ 2.7
billion and (vi) an increase in the FEF (fiscal stabilization fund). Furthermore, the Federal Administration is currently
attempting to have Congress approve a Tax Reform bill. A Social Security reform bill proposed by the Federal
Administration was voted and approved by Congress, in 1999.
These reforms have re-established the international financial community's confidence in Brazil which, combined
with the decrease in tax rates, have allowed for the resumption of economic growth.
The Brazilian economy, however well it has performed, is still part of the greater world economy and is not immune
to the adverse effects that may spill over from its neighbors or other related economies in the world.
Inflation; Effects of 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 reference for inflation tracking by instituting
the IPCA (National Extended Consumer Price Index). This index has been used for setting 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 and 5.97% in 2000. In 2001, the inflation as
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calculated by this index reached 7.67%, slightly above the upper limit margin of 7% as defined by the Brazilian monetary
authorities.
Inflation, as well as governmental efforts to combat inflation, have historically had significant negative effects on
the Brazilian economy generally and on the profitability and results of operations of the Company in particular. In an
attempt to control inflation, the Government has at times imposed wage and price controls, and reduced Government
spending among other measures. Inflation, as well as governmental measures to combat inflation, 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 make actions that may slow or halt Brazilian economic growth. A significant increase in
inflation in Brazil could have serious adverse consequences on the Company.
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 the Canadian dollar, 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 18, 1999 led to the Central Bank’s
announcement that the real would trade freely on foreign-exchange markets, with the Central Bank intervening only to
limit wide swings in the real’s value. See “Risk Factors – Factors Relating to Brazil and to the Company – Political and
Economic Condition.” These fluctuations may have significant effects on the Company’s results of operations and
financial condition and on its consolidated financial statements, which are denominated in U.S. dollars.
The Company maintains assets denominated in reais and, to a lesser extent, in U.S. and Canadian dollars, 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. 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 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. The Company’s sales denominated in the currencies of Brazil, Canada,
Uruguay, Chile, Argentina and the United States represented 63.6%, 8.9%, 0.7%, 2.7%, 0.6% and 23.5%, respectively, of
the Company’s consolidated gross sales for the year ended December 31, 2001. Because the Company’s U.S. GAAP
financial statements are denominated 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 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 ADSs for the underlying Preferred
Shares from converting dividends, distributions or the proceeds from the sale of such Preferred Shares into U.S. dollars
and remitting such U.S. dollars abroad. Holders of ADSs could be adversely 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 ADSs.
Developments in Other Emerging Market Countries
The Brazilian securities markets are, to varying degrees, influenced by economic and market conditions in other
emerging market countries. 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. Last year,
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
7
- 7 --1
economy will not continue to be affected negatively by events (including economic crises or currency fluctuations)
elsewhere, especially in emerging markets, or that such effects will not adversely affect the Company's business, financial
condition, results of operation or prospects or the value of the Shares or ADSs.
Since the end of 1997, and in part icular during 2001, investors have been demonstrating a high level of concern
regarding the risk in investing in emerging economies due to the economic problems faced by many these countries,
including Argentina. Consequently, on certain occasions, Brazil has faced significant U.S. dollar outflows as Brazilian
companies faced higher financing costs, both in domestic and international markets. Moreover, the companies are, in a
way, inhibited to access the international capital markets.
In addition, the Brazilian Government has exercised and continues to exercise substantial influence over many
aspects of the private sector. The Brazilian Government owns or controls many companies, including some of the largest
in the country. Government action in the future could have a significant effect on economic and market conditions in
Brazil, affecting prices and returns on Brazilian securities. There can be no assurance that future economic or market
developments in Brazil will not impact the Company's results of operations.
Political and Economic impacts on the Company's operations
The most notable effect of the current instability of the financial markets in Brazil on the Company would be that
of the impact of additional devaluation of the Brazilian currency. Although the Brazilian operating units have costs based
on the real, they nonetheless do have processes that are influenced or determined by international pricing, i.e., in U.S.
dollars such as pig iron, an important metallic input, and iron ore. Furthermore, the devaluation of the real could impact
significantly other sectors of the economy and affect the sales of the Gerdau mills. A resulting negative side effect would
be the increase in the inflation figures: the impact of dollar-related price references has the effect of contaminating local
prices and causing a reduction in consumption and a decrease in GDP growth (see item 11, "Quantitative and Qualitative
Disclosures about Market Risks").
It is not possible, however, to predict how these measures will affect the business, financial condition, results of
operations, cash flows and overall prospects of the Company. This or future economic slowdowns could have a material
adverse effect on the Company’s business, financial condition, results of operations, cash flows and overall prospects .
Risk factors relative to the Company
Costs Resulting from the Enforcement of Environmental Legislation
The Company's plants are required to comply with a range of laws and regulations at the federal, state and
municipal levels in addition to environmental and operational regulations. Should the legislation become more
demanding, expenditures on fixed assets and the cost to comply with this legislation may increase in the future and have a
negative impact on the Company's financial conditions.
Supply of Electrical Power
Historically, the generation of electrical power in Brazil has been the target of annual investments of about US$
13 billion. The reduction in these investments made by the Federal Government of Brazil in the nineties (a decade in
which investments were reduced to about US$ 7 billion), the increase in the annual consumption throughout that same
period of about 5%, and the lack of high capacity transmission lines between the regions in which energy is abundant and
those that are lacking energy led to the crisis that hit the southeast, center-west and northeast regions of Brazil. As a
consequence, on June 1, 2001, the Federal Government published Provisional Measure 2152-2 ("MP"), that deals with
the rationing of electric usage. The MP and the Resolution nr. 8, dated May 25, 2001 (the "Resolution"), were prepared
and issued by the Power Crisis Management Chamber and subjected the Company to a consumption goal as of June 2001,
equivalent to 75% and 80% of the average monthly consumption of May, June and July of 2000, for semi-integrated mills
located in the southeast and northeast regions, and integrated plants in the abovementioned regions, respectively. The
Power Crisis Management Commission decreed the end of the rationing in March 2002. The Company did not exceed its
consumption goals and, as a consequence, did not suffer penalties and/or power outages. Management believes that the
reduction in the consumption of energy did not have a material adverse effect on the business, its financial condition or its
8
- 8 --1
results of operations. In addition, the threat of an increase in electricity tariffs did not materialize although this could
happen in the medium term. Power and electricity represents approximately 9% of the Company’s total production cost.
Currently, the Company believes that a significant concern is Brazil’s ability to invest in power generation capacity in
order to avoid future risks including a new period of rationing, power outages and tariff increments, among others.
Market Concentration
Under Brazilian law, all activities that lead to market concentration involving at least one company with annual
gross revenues of at least R$ 400 million or in control of at least a 20% market share must be reported to the authorities
responsible for economic protection which, regardless of the approval of the transaction, may impose fines as a result of
not presenting the appropriate documents on a timely basis. Any company that has more than 20% in the several different
markets in which it operates may have its acquisitions questioned by the CADE - – Conselho Administrativo de Defesa
Econômica, (Economic Defense Administrative Council) responsible for the analysis and decision on acts that indicate
anticompetitive practices in any market.
Level of Indebtedness and Restrictive clauses to Funding
On December 31st, 2001, the level of indebtedness of the Group including contracts for funding in local and
foreign currencies and debentures less cash and cash equivalents was less than its net worth (net debt to equity ratio of
91%).
The Company has entered into several loan contracts in addition to other forms of funding, such as the issuance
of debentures, in an approximate total amount of US$ 1.3 billion (as of December 2001). Some of these contracts have
restrictive clauses such as (i) issuance of debentures and golden shares and adding debt without the prior consent of the
National Bank for Social and Economic Development - (exception made for loans for the regula r operation of the
borrower with the sole purpose of replacing of material); (ii) constitution of guarantees as collateral of any kind of
operation with other creditors without providing to the BNDES the same guarantees; (iii) the creation of liens on assets
with exception made for those already pledged at the date of the signing of the respective contract unless the same
conditions are extended to the holders of debentures , exception made for (a) any lien on capital goods placed at the time
of their purchase as collateral, (b) liens on commercial goods to guarantee short term debt to be paid through the revenues
generated by the sale of these goods, (c) liens on promissory notes and (d) liens given as legal guarantees; (iv) the
payment of dividends in cash in excess of 30% of the Net Profit of each period adjusted in accordance with art. 202 of
law 6.404/76 if after the payment of such excess: (a) the long term liability exceeds more than 1.5 times the net worth; or
(b) current assets are less than current liabilities; (v) payment of dividends or any other form of statutory participation in
the profits of the corporation if it is delinquent in the payment of the interest and the principal of the debentures; (vi)
voluntary pre -payment of long-term debt without making the proportional buyout of debentures still outstanding in the
market, except if these payments are for the replacement of long term debt with long term debt at a lower cost (lower
interest rates, same interest rates or better conditions for the Company); (vii) encumbrance, transference, assignment or
any form of disposal of quotas and/or the subscription owned or to be owned that may jeopardize directly or indirectly the
controlling shareholders' ownership position; (viii) maintain INDAC – Indústria, Comércio e Administração S/A as the
direct or indirect controlling entity of voting shares of the Company . Furthermore, many debt contracts require that the
Company have, throughout the validity of these contracts, levels of capitalization and of current liquidity as determined
by the parties.
Should any events of default as defined by these contracts occur, the Company could face the acceleration of the
maturity of this debt as well as other contracts. The acceleration of the maturity of debt and other contracts might result in
the Company’s inability to honor its commitments
Consolidation of the Steel market abroad
Market Consolidation
The 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 creation of companies with
greater production capacity. This can represent an important increase in competition. The Group may be forced to decide
to acquire other companies or their assets, which may represent the outlay of substantial financial resources. There are no
9
- 9 --1
guarantees that the Group will have the financial resources to make these acquisitions should they become necessary or
desirable.
Protectionist Measures
The measures imposed by the U.S. Administration and by the European Union to protect their domestic markets
against the import of certain cheap steel products, do not impact directly the operations of Gerdau in Brazil due to the fact
that exports to these countries are negligible. The Gerdau units in the U.S. operate independently and do not require any
type of steel inputs from Brazil.
Argentine Crisis
Due to the economic crisis in Argentina, long steel demand in that country was reduced by roughly 50% as of the
second half of 2001. The impact of this crisis on the Group’s activity level is limited because the Argentine operations
represent less than 2% of Gerdau’s total sales. In order to adapt to the new economic reality, Gerdau has: i) adjusted its
production to the local demand, ii) restricted credit, and iii) promoted a financial and corporate restructuring of its
Argentine business.
The restructuring occurred in March 2002, as follows: Gerdau transferred its 71.77% stake in Sociedad Industrial
Puntana S.A. – SIPSA to its partner Sipar Aceros S.A.. Gerdau maintains its stake of 38.18% in Sipar, whereas Sipsa
becomes an integral subsidiary of Sipar. This new structure further reduced Gerdau’s exposure to the eventual impact o f
any additional currency devaluation in Argentina and allows for better synergies between the two companies.
The significant devaluation of the Argentine peso vis -à-vis the US dollar generated a loss of US$ 21.4 million in
Gerdau's business in the last quarter of 2001; in the first quarter of 2002, there was an additional loss of US$ 7.0 million.
Moreover, the restructuring promoted in March generated a US$ 1.8 million loss.
ITEM 4.
INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Gerdau is part of an industrial conglomerate, which began in 1901 with the acquisition by the Gerdau family of a
nail factory located in Porto Alegre, in the Southern region of Brazil. In 1969, the business changed its name to
Metalúrgica Gerdau S.A., which today controls Gerdau S.A.
With the objective of assuring the supply of raw material, immediately after the end of World War II, Siderúrgica
Riograndense S.A., a steel producer also located in Porto Alegre, was acquired. The Company's output was increased
through, among other things, the construction of a new mill. In the second half of the 1960s, the Company began to
expand and diversify its activities.
The expansion involved the acquisition of existing companies (which increased the Company's market share)
and the construction of new plants, in Brazil and abroad. The first company acquired was Indústria de Arames São Judas
Tadeu S.A., in São Paulo, which is today known as "Comercial Gerdau". Comercial Gerdau, through a network of 70
branches, covers all of Brazil for retail sales of product. Subsequently, the Group expanded with various steel mills,
drawing mills and factories for the production of strands, steel cables, soldered wire mesh and similar products located in
principal Brazilian and foreign markets.
In order to assure competitive advantages in each region in which the Company operates, the Company adopted a
principal strategy of acting through medium-sized companies situated in the heart of the economic regions capable of
supplying raw materials originating in the same areas in which the final products were sold. See "Business Strategy".
In the beginning of 1995, a corporate restructuring program was initiated to simplify the structure resulting from
the process of expansion and development through acquisition and establishment of companies, with the purpose of
10
- 10 --1
improving the transparency of operations, achieving greater acceptance in the modern Brazilian capital markets and
enhancing the conditions for access to international capital markets.
The restructuring began with a public exchange offer of preferred shares of the former Companhia Siderúrgica da
Guanabara-Cosigua (today Gerdau S.A.) held by the controlling shareholders in exchange for shares held by minority
shareholders in the following affiliated companies: Siderúrgica Guaira S.A.(“Guaira”), Siderúrgica Açonorte S.A.
(“Açonorte”) and Cia. Siderúrgica Pains (“Pains”). This transaction was conducted through the São Paulo Stock
Exchange in February 1995 and the widespread acceptance of this process by the shareholders of these companies
permitted the continuation of the restructuring process by merger, during the period of February 1995 through June 1997,
of 28 companies then comprising the Gerdau group. In January 1999 Comercial Gerdau was also merged into Gerdau
S.A. All of the steel mill operations of Gerdau, installed in Brazil and abroad, are concentrated in Gerdau S.A.
B. BUSINESS OVERVIEW
Gerdau S.A. is a producer of long ordinary and specialty steel through its industrial units located in Brazil and its
subsidiaries in Uruguay, Chile, Canada, Argentina and the United States, with installed production capacity of 7.3
million tons of crude steel (not including Açominas and Cartersville), 7.0 million tons of rolled product (not including
Açominas, Cartersville and Sipar) and 0.9 million tons of drawn products. The Company produces steel based on the
mini-mill concept, whereby steel is produced in electric arc furnaces, starting with scrap and pig iron acquired mainly in
the region where each mill operates (the so-called mini-mill concept). Gerdau also operates plants capable of producing
steel starting with iron ore in blast furnaces and through the direct reduction process. Gerdau's products are manufactured
with a wide range of specifications, intended to satisfy a large spectrum of consuming groups.
The three principal markets in which the Company operates are the civil construction, manufacturing and
agricultural and breeding sectors. Last year, the first two represented approximately 98% of the total sales volume of the
Company measured in tons. In 2001, Gerdau produced 6.1 million tons of crude steel, of which 3.5 million (not
including Açominas’ production) were produced in Brazil (13.0% of national production) and 2.6 million tons through its
subsidiaries abroad. In the segment of long rolled steel, Gerdau is the largest Brazilian producer, with approximately
44.5% of total production.
For the fiscal year ended December 31, 2001, the Company achieved consolidated net sales in the amount of
U.S.$ 2.3 billion, generating consolidated net income of U.S.$ 167.3 million.
Business Strategy
Gerdau's principal business focus is the decentralized production of long steel products using electric arc
furnaces ("EAF") mini-mills employing continuous casting technology. Plants are sized and located in order to fit in the
local economy and access markets efficiently. This strategy was a response to the geographical dimensions of Brazil, its
limited infrastructure and high freight costs, which motivated growth of a business focused on selling products where raw
materials were readily accessible. From the mid 1970s through the early 1990s, Gerdau concentrated on improving its
market share in Brazil through a combination of increasing the production capacity of its existing facilities and through
strategic acquisitions, typically of distressed mini-mills where the Company's principal contribution would be
management skills rather than capital. Gerdau has increased its share of Brazilian long steel production from 14.1% of
total tonnage produced in 1975 to 44.5% in 2001. The Company's share of Brazilian crude steel production grew from
6.3% to 13.0% during the same period. See, "Production Process - Domestic Steel Production." Gerdau's strategy has
been implemented through the following acquisitions:
• Domestic acquisitions: In the 1960s the Company acquired a mill in Pernambuco in Northeast Brazil. In the 1970s
it acquired two mills (Alagoas and Paraná) and constructed its largest mill in Rio de Janeiro. Gerdau's structure
further developed as a result of its participation in Brazil's privatization auctions in the late 1980s and early 1990s. In
the first phase of privatizations, it acquired Barão de Cocais mill in 1988 and Usina Siderúrgica da Bahia S.A.-Usiba
(“Usiba”) in 1989. In the second, broader phase of privatizations, Gerdau acquired Companhia Siderúrgica do
Nordeste ("Cosinor") in 1991 and Aços Finos Piratini S.A. (“Piratini”), a specialty steel maker, in part in order to
enter the market for high-value-added products. Gerdau has increased productivity of these privatized mills
significantly since the acquisition (as measured in metric tons of crude steel per man-year) by reducing the number of
employees and investing in technological upgrades of processes and equipment. Through these investments and
11
- 11 --1
business management, Gerdau has been successful in significantly improving the profitably of these businesses and
achieving cost efficiencies and productivity improvements within a relatively short time after acquisition. In 1994,
the Company acquired Pains, a steel mill located in Divinópolis, Minas Gerais State, through the acquisition of Korf
Gmbh, a German corporation. Gerdau has substantially divested itself of other assets acquired through Korf that were
unrelated to Gerdau's core business, the production of long ordinary steel. The Pains acquisition was the subject of
antitrust proceedings in Brazil that were later successfully settled. In the second half of 1997, Gerdau acquired a
participation in the capital of Açominas, a Brazilian producer of semi-finished products. Gerdau purchased additional
interests in Açominas since the first acquisition in 1997 and at the end of 2001 held 37.9% of this company. More
recently, on December 7th , 2001, Gerdau made an offer of R$ 426.7 million (US$ 177.7 million) for an additional
stake in Açominas at an auction sponsored by the Brazilian Central Bank. The transaction was fully concluded on
February 19, 2002, and as a result, Gerdau currently holds 54.14% of Açominas. Additionally, on February 8, 2002,
Gerdau also formalized an agreement to acquire the 24.8% stake that Natsteel (of Singapore) has in Açominas.
According to the terms of the agreement, Gerdau may exercise its right to purchase Natsteel's stake by September 9,
2002.
•
Overseas Acquisitions: Gerdau has grown outside Brazil through strategic acquisitions. In 1981, the Company
acquired Siderúrgica Laisa S.A. in Uruguay (now known as Gerdau Laisa S.A.), as its first steel manufacturing
company outside Brazil. This was followed in 1989 by the acquisition of Courtice Steel Inc. (now known as Gerdau
Courtice Steel Inc.) in Canada and, in 1992, by the acquisition of Siderúrgica Aza S.A. (now known as Gerdau Aza
S.A.) in Chile. In May 1995, Manitoba Rolling Mills Inc., a profitable steel division affiliated with the Canam
Manac Group located in Selkirk, Canada, was acquired by Gerdau. Gerdau assumed managerial control on June 1,
1995, and renamed the facility Gerdau MRM Steel Inc. In December, 1997, the Company acquired control of Sipsa
of Argentina, a rolling mill with a production capacity of 75,000 tons of rolled products, in order to increase its
presence in an already important export market. In May 1998, the Company concluded an agreement to acquire a
one-third interest in an Argentine rolling mill, Sipar, as well as to transfer to the controllers of Sipar a one third
interest in Sipsa. On September 27, 1999 Gerdau acquired from Kyoei Steel Ltd. of Osaka, Japan 88% of FLS
Holdings Inc. , which in turn holds 85% of the shares of Ameristeel Corp., headquartered in Tampa, Florida, USA.
In 2000, Gerdau acquired the remaining 12% of FLS Holding Inc. and increased its participation in Sipsa to 72% and
in Sipar to 38%. By the end of 2001, Ameristeel acquired from Birmingham Southeast the operating assets of one of
its units for US$ 48.8 million. This steel mill is located in Cartersville, Georgia, and it is now the seventh steel mill
owned by Ge rdau in North America. More recently, Gerdau has promoted the financial and corporate restructuring of
its operations in Argentina to adapt to the new economic reality of that country. At the end of March, its stake of
71.77% in Sociedad Industrial Puntana S.A. – SIPSA was transferred to its partner Sipar Aceros S.A. This generated
losses of US$ 1.8 million, recorded as a non-operating expense. With this operation, Gerdau maintains its stake of
38.18% in Sipar, whereas Sipsa becomes an integral subsidiary of Sipar. This new structure is expected to allow for
better synergies between the companies in Argentina. This should maximize business opportunities, enhance results
and minimize the impact of the fluctuation of the peso vis-à-vis other currencies.
Along with the acquisitions, the Company's strategy evolved to also include downstream investment through the
addition of drawn products and specialty steels, permitting the diversification of its products. Having achieved a major
and stable market positioning in the production of long steel products, the extent of downstream diversification is under
review, to assure that the Company is invested in value-added products.
The table below shows the Company's various domestic acquisitions and their respective improvements in
production volumes and financial results.
COMPANY- Date of Purchase
AÇONORTE - December/1969
Production of Crude Steel (in 1,000 tons)
Revenue (US$ millions)
Net income (US$ millions)
GUAÍRA - December/1971
12
Fiscal Year
Prior to
Fiscal Years following Purchase
Purchase
1
2
3
1969
1970
1971
35.1
44.8
49.1
ND
ND
ND
0.6
1.2
1.4
1971
19.9
ND
1972
34.0
5.8
1973
43.2
11.2
4
5
1972
59.6
13.3
1.8
1973
102.8
31.6
5.9
1974
114.3
52.9
5.4
1974
44.5
18.3
1975
42.9
13.3
1976
41.5
13.9
- 12 --1
0.02
0.4
1.4
2.0
1.1
1.0
COMESA - January/1974
1973
4.7
0.9
(1.7)
1974
11.9
4.5
0.4
1975
7.0
4.6
0.1
1976
14.3
6.2
0.4
1977
16.1
6.8
0.7
1978
16.8
8.3
0.7
HIME - February/1985
1984
200.2
47.7
(5.0)
1985
192.1
ND
ND
1986
1987
188.3 Merged into Cosigua
68.9 (presently Gerdau S.A.)
(0.4)
USIBA - October/1989
1989
336.4
101.8
(19.2)
1990
315.9
78.8
(12.6)
1991
310.0
72.9
1.7
1992
330.2
91.6
(3.1)
PIRATINI February/1992
1991
171.9
66.8
(21.0)
1992
141.4
61.3
(5.1)
1993
178.2
94.1
1.4
1994
1995
192.4 Merged into Riograndense
164.6 (presently Gerdau S.A.)
2.3
10/92 to
09/93
438.2
138.8
2.6
10/93 to
12/94
502.7
253.0
2.6
1995
1996
343.5
219.1
4.5
385.5 Merged into Gerdau S.A.
193.6
6.0
PAINS - February/1994
1993
377.9
96.6
2.3
1994
401.4
167.4
1.2
1997
Future
The Company will continue to implement its strategy over the near and medium-term, by undertaking the
following steps:
•
Financial Management: Given the high cost of financing in Brazil and the current trend toward
consolidation in the steel industry worldwide, the Company's medium-term strategy is to consolidate its
existing acquisitions and reduce financial expenses. This will be achieved through a financial strategy to
extend the tenor of its existing debt in order to increase cash flow available for reinvestment without
substantially increasing overall leverage of the Company. The intention is to fund capital expenditures
increasingly out of cash flow, with the exception of strategic expansions required to maintain or establish
market share in a profitable market segment. The focus is first on increasing the efficiency and profitability
of existing operations and limiting allocation of capital for acquisitions to only the most important
opportunities.
•
Cost Management : The Company will continue to concentrate on securing adequate and reliable steel scrap
supplies and adjusting its production levels to minimize variable costs of production. While the Company
has the flexibility to switch production from the domestic market to exports, depending on market demand,
domestic sales generally have been more profitable than export sales and it is likely in the future to focus
heavily on regional sales for each of its companies. Nonetheless, the historical volatility of the Brazilian
economy has made it a management priority that Gerdau maintain a high degree of production and market
flexibility in order to quickly adapt to changing market conditions.
The acquisition of Cartersville (installed capacity of 726 thousand tons of crude steel per year in the USA) and
the increase of the investment in Açominas also constitute important steps for the future development of the Company's
business.
13
- 13 --1
Industry Overview - Worldwide and Brazil
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 the domestic steel industry by forming
Companhia Siderúrgica Nacional ("CSN"), a flat steel producer, and Companhia Vale do Rio Doce, an iron ore producer.
During almost 50 years of state control, the Brazilian flat steel sector was coordinated on a national basis under a steel
monopoly, Siderbrá s. The state had far less involvement in the non-flat sector, which has traditionally been made up of
smaller private sector companies such as Gerdau. As a result of the debt crisis of the 1980s, the Brazilian government's
access to foreign capital became severely restricted and further investment in the state steel sector was reduced. For a
general discussion as the Brazilian economic environment, see "Item 3.D - Risk Factors."
In 1990, the Brazilian government selected the steel industry as the first industry to become privatized. Starting
in 1991, the larger integrated flat steel producers, which had operated as semi-autonomous companies under the control of
Siderbrás, were individually privatized. Today, the Brazilian steel industry is composed of 12 companies, with an
installed annual capacity of approximately 33 million tons, producing a full range of flat, non-flat, carbon, stainless and
specialty steel. The flat steel industry is currently dominated by the producers that before privatization used to belong to
Siderbrás, such as CSN, while Gerdau has become the leading producer of long steel products.
Brazil exports a great part of its steel production. In 2001, the Brazilian steel industry exported 9.3 million tons,
while it imported only 1.1 million tons. Steel imports in 2001 represented 6.1% of domestic apparent steel consumption
(defined as domestic sales plus imports).
Brazil's production of crude steel rose from 20.6 million tons in 1990 to 26.7 million tons in 2001. In 2001,
Brazil accounted for over 51.6% of total steel production in Latin America, with production over two times that of
Mexico, the second largest producer in Latin America, and approximately 29.7% of U.S. production.
Crude steel products comprise non-finished ingots, billets, blooms and slabs produced at the melting and casting
stage of the production process. Rolled products are higher value-added products manufactured from crude steel at the
intermediate stage of production in rolling mills. Long rolled products include wire rod, rebars, profiles, and round,
square and flat bars.
All information concerning the steel industry contained herein was obtained from either IBS (the Brazilian Steel
Institute) reports or IISI (International Institute for the Steel Industry) and was not prepared specifically for Gerdau. This
information is publicly available and is presented in a standardized format. IBS is comprised of Brazilian steel
companies, and Gerdau is included among them as an associated member.
The following table shows historical crude steel production (in millions of tons) and related data for the periods
indicated:
World
U.S.
South
America
Mexico
Brazil
89.7
79.7
84.3
88.8
91.2
95.2
95.5
98.5
98.7
97.4
100.7
89.7
29.3
30.9
32.3
33.8
35.0
34.6
35.9
37.0
36.1
34.6
39.1
37.6
8.7
8.0
8.5
9.2
10.3
12.1
13.2
14.2
14.2
15.3
15.7
13.5
20.6
22.6
23.9
25.2
25.7
25.1
25.2
26.2
25.8
25.0
27.9
26.7
Brazil - % of
World Production
(millions of tons)
1990
770.5
1991
733.6
1992
719.7
1993
727.5
1994
725.2
1995
752.3
1996
750.0
1997
798.9
1998
777.2
1999
788.3
2000
829.6
2001
831.8
Source: IBS / IISI
14
2.7
3.1
3.3
3.5
3.5
3.3
3.4
3.3
3.4
3.2
3.4
3.2
- 14 --1
The following table shows historical rolled steel production (in millions of tons) in Brazil for the periods indicated.
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source: IBS
Rolled Products - Brazil
Flat
Long
(millions of tons)
Total
8.8
9.4
10.1
10.0
10.7
10.6
11.0
11.3
10.4
10.1
11.2
10.7
14.8
14.9
15.9
16.5
17.4
16.1
16.7
17.4
16.4
16.8
18.2
18.1
6.0
5.5
5.8
6.5
6.7
5.5
5.7
6.1
6.0
6.7
7.0
7.4
Consumption
Real GDP in Brazil grew at a rate of 1.5% in 2001 (based on preliminary data) and 4.5% and 0.8% in 2000 and
1999, respectively. Total domestic steel sales increased by over 33.9% from 11,725 million tons in 1995 to 15,696
million tons in 2001. Brazilian industrial production grew in all of the steel intensive sectors of the economy, especially
capital goods and consumer durables.
Historically, the Brazilian steel industry has been affected by substantial fluctuations in domestic demand for
steel. Although national per capita demand varies with GDP, fluctuations in steel demand tend to be more pronounced
than changes in economic activity. For purposes of comparison, the following table sets forth global steel apparent
consumption from 1993 through 2000, the most recent year for which statistics are available.
Apparent Steel Consumption of Finished Steel
World
US
South America
(millions tons of finished steel products)
1993
1994
1995
1996
1997
1998
1999
2000
2001
614.1
619.8
656.0
651.8
701.7
691.6
700.3
761.6
*
90.8
103.1
100.0
107.0
113.4
119.8
116.4
120.0
*
18.9
20.9
22.1
23.1
26.6
25.7
22.6
24.7
*
Mexico
Brazil
7.5
8.8
5.9
8.1
9.7
10.6
10.9
11.3
*
10.6
12.1
12.0
13.0
15.3
14.5
14.1
15.8
16.7
* 2001 data are not available
Source: IISI
Production Costs
Brazil is one of the world's lowest cost producers of steel. Brazil's advantages include a relatively inexpensive
and abundant supply of raw ma terials, as well as low labor costs. Brazil also has the benefit of a relatively large internal
market. These advantages are offset to some extent by such factors as dependence on imported coal, high internal costs of
financing and restricted availability of electric energy.
15
- 15 --1
Production Process
In 2001, the Company was the largest manufacturer of long-rolled steel products and the fourth largest crude
steel producer in Brazil. The Company offers over 34,000 products in the commodity steel, rolled steel, dra wn steel and
specialty steel segments of the steel market. In 2001, the Company produced 3,470 thousand metric tons of crude steel in
Brazil (not including Açominas’ production) and 2,580 thousand metric tons of crude steel abroad.
Domestic Steel Production
The Company's production of steel has increased steadily since 1991 mainly due to the acquisition of several
steel companies and increases in the installed capacity of the Company's steel mills. Comparing the production capacities
in 1992 and 2001, on the table below, the increase is notable:
Production Capacity
(million of tons)
Crude Steel
7.3
3.9
2001
1992
Long rolled products Drawn products
7.0
0.9
3.3
0.8
In 2001, 57.4%, or 3.5 million tons of the Company's crude steel was produced in Brazil (excluding Açominas)
and 42.6%, or 2.6 million tons, was produced by the Company's subsidiaries located in Canada, Chile, Uruguay and the
United States; while 57.1%, or 3.3 million tons, of the Company's long rolled products was produced in Brazil (excluding
Açominas), 42.9%, or 2.5 million tons, was produced outside Brazil (excluding Sipar). All of the Company's drawn
products are produced in Brazil.
According to IBS data, in 1975 Brazilian steel production equaled 8.3 million tons of crude steel and 3.6 million
tons of long rolled products. In the same year Gerdau companies produced 525 thousand tons of crude steel and 506
thousand tons of long rolled products, 6.3% and 14.1%, respectively.
The table below sets forth, for the periods indicated, a comparison of the annual production of crude and long
rolled steel for Brazil and for Gerdau S.A. and the percentage of crude and long rolled steel production attributable to the
Company:
Output - Gerdau S.A. non-consolidated and Brazil (in millions of tons)
*
Crude Steel
Long Rolled Products
Brazil
Gerdau S.A.
Gerdau S.A.
Brazil
Gerdau S.A.
Gerdau S.A.
non-consolidated
non-consolidated
(%)
(%)
1990
20,567
1991
22,617
1992
23,934
1993
25,207
1994
25,747
1995
25,076
1996
25,237
1997
26,153
1998
25,760
1999
24,996
2000
27,865
2001
26,718
Source: IBS/Gerdau
*
2,374.0
2,090.3
2,427.5
2,588.2
3,039.4
2,752.7
2,877.9
3,051.4
2,974.2
3,270.5
3,495.9
3,470.1
11.5
9.2
10.1
10.3
11.8
11.0
11.4
11.7
11.6
13.1
12.5
13.0
5,921
5,533
5,741
6,477
6,618
5,434
5,661
6,158
6,047
6,672
7,000
7.425
1,900.8
1,804.7
2,084.9
2,268.0
2,673.8
2,455.6
2,528.6
2,781.4
2,753.1
3,054.9
3,250.3
3,301.4
See also, - “Competition.”
16
- 16 --1
31.1
32.6
36.3
35.0
40.4
45.1
44.7
45.2
46.0
45.8
46.4
44.5
Gerdau S.A.'s production process is based mostly on the mini-mill concept. It has six electric arc furnace
("EAF") mills, two small integrated units and one direct reduction iron ("DRI") plant.
Mini-mills are smaller mills which offer several advantages over the larger integrated steel producers, including:
(i) lower capital costs; (ii) lower operational risks due to the avoidance of a concentration of capital and production
capacity in a single production unit; (iii) the proximity of production units to raw material sources; (iv) the proximity to
the local markets and the ease of adjustments in production levels; (v) less expensive raw material costs, principally due
to the use of steel scrap instead of iron ore and coke, which are employed by the larger integrated mills; and (vi) more
efficient management structure due to the relative simplicity of the production process and lower manning levels required.
The Company's production process consists of (i) sourcing, (ii) melting, (iii) casting, (iv) rolling and (v) drawing.
Sourcing
The Company's mini-mills (which have annual crude steel production capacities ranging from 70,000 tons to 1.4
million tons) use steel scrap and pig iron produced from within a radius of 120 to 300 miles and manufacture primarily
products for consumption within the region in wh ich the mill is located. This production strategy has the advantage of
minimizing transportation costs of raw materials and final products and allows capacity adjustments to be made in
relatively small increments. The Company acquires its main raw materia l, steel scrap for use in its electric arc furnaces,
from an extensive network of more than 4,500 suppliers. The Company believes it is the largest purchaser of steel scrap
in Brazil. Iron ore for use in its blast furnaces and DRI plant is bought from several Brazilian mining companies. Pig iron,
for use in its electric arc furnaces, is produced by the Company or bought from third parties. In 2001, the Company
produced approximately 70% of its pig iron consumption needs.
Liquid Steel Production
Liquid steel is produced in electric arc furnaces, energy optimizer furnaces or in a blast furnace/converter
combination. After charging the electric arc furnace with the predetermined mixture of raw materials (i.e., scrap, pig iron
or DRI), electric power is applied following a computer-controlled melting profile. The Company's mixture of raw
material varies from 60% steel scrap and 40% pig iron to 90% steel scrap and 10% pig iron, depending upon prices and
local availability. The Company believes that these ratios optimize the use of available steel scrap without causing
demand pressure in the relevant steel scrap markets. In the blast furnace/converter combination, liquid steel is produced
by reducing iron ore by burning charcoal, coke or a combination of both with oxygen. DRI is a process that replaces the
blast furnace and reduces the amount of iron ore used by injecting hot natural gas, producing what is commonly known as
sponge iron, which will then be placed into an electric arc furnace or a converter.
The molten steel is then tapped into the ladle furnace where it is refined according to customer specification.
Ferro-alloys are added in the ladle furnace according to the chemical specifications of the grade of steel being produced.
In the case of high-alloy steel, or specialty steel, the ladle is taken to a vacuum degasification unit to remove carbon,
oxygen and gases.
Continuous Casting
The liquid steel is transferred from the ladle furnace into a continuous casting machine from which it emerges as
a continuous square strand of steel that is cut into pre-determined lengths, called billets. In the continuous casting
machine, the liquid steel is poured into a mold and cooled from the outside in, so that a solidified shell is formed around
the molten metal as it emerges from the mold, allowing it to hold its shape.
Downstream Processing
The billets are transferred to a rolling mill to produce finished, rolled or drawn products. The billets are reheated,
reduced in diameter and then rolled into finished reinforcing concrete bars ("rebars"), bars, shapes, and wire rod. These
products then are allowed to cool uniformly. Drawn products are created by drawing wire rod, without reheating,
producing 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 the input for other products such as wire meshes, chains,
nails and clamps.
17
- 17 --1
Set forth below is a brief description of the Company's main product lines and the markets they serve:
Crude Steel - Crude steel has a relatively low value-added process. The Company's main crude steel product is
continuously cast billets, most of which is consumed by the Company in the manufacture of finished products and
specialty steels. During 2001, billets accounted for 1.6% of the Company's domestic sales and 28.2% of export sales, as
measured by weight.
Rolled Steel - Billets are used to manufacture rolled products such as wire rod, rebars, profiles and round, square and flat
bars. In 2001, common steel rolled products accounted for 56.4% of the Company's domestic sales, 68.1% of export sales
and 100% of the sales of the subsidiaries abroad, as measured by weight. The main market for the Company's domestic
sales of rebars is Brazil's civil construction market, which uses finished steel products for a variety of purposes including
water dams, port docks and facilities, bridges, highways, tunnels and commercial and residential building construction.
Drawn Steel -These are high value added products and include wires of various shapes and thicknesses, welding wires,
barbed and barbless fencing wires, galvanized wires, concrete reinforcing wire mesh, nails and clamps. These products
are sold to the manufacturing, the civil construction and the agriculture sector. In 2001, drawn products accounted for
21.0% of the Company's domestic sales and 2.6% of exports, as measured by weight.
Specialty Steel - Specialty or high-alloy steel requires advanced manufacturing processes and normally includes some
degree of customization. The Company produces specialty steel, which includes stainless steel, used for the
manufacturing of tools and machinery (e.g. cold, hot and high-speed steels), chains, fasteners, railroad spikes and special
spring steel, at the Piratini plant. Specialty steel products are mainly consumed by Brazil's manufacturing sector,
including the automotive and mechanical industries. In 2001, production at the Piratini plant represented approximately
31.7% of the Brazilian long specialty steel production. Each level of processing adds value to the simple crude steel
product and as the product goes through incremental refining processes, it commands a significantly higher price in the
market. Specialty steel accounted for 7.6% of domes tic sales and 1.1% of exports in the same year, as measured by
weight.
The following is a description of several of the products produced by the Company:
CIVIL CONSTRUCTION PRODUCTS
GG-50, CA-60 and CA-25 concrete reinforcing bars (rebars)
Annealed wire
Ribbed welded wire mesh for reinforced concrete
Transfer bars
POP columns and meshes
Stirrups and supports
Structural profiles
Fabricated rebar
Casa Fácil Gerdau (rolled steel structure for low-income housing)
INDUSTRIAL PRODUCTS
Hot rolled flat, round and square bars
Cold drawn round, square and hexagonal bars
Blooms
Angles
Channel, I-beam, T-Shapes and W-beams
Ribbed T profile
Elevator guide rails
Star profile
Slabs
18
- 18 --1
Tribar
Wire rod
Rolled and continuous cast billets
Steel railroad 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 electric fences
Wire rope for corrals
Wire and wire rope for agricultural products
Galvanized wire
Plastic-coated galvanized wire
Chain link fences
NAILS
Bulk nails - construction
Bulk nails - carpentry
Bulk nails - packaging
SPECIALTY STEELS
Engineering steels (carbon and alloyed)
Round and square rolled bars
Wire rod
Forged bars
Cold -finished products
Heat treatment
Tool steels
Forged bars and blooms
Round, square and flat rolled bars
Stainless steels
Round and square rolled bars
Wire rod
Forged bars
Cold -finished
19
- 19 --1
Foreign Subsidiaries' Steel Production
The Company's production of steel abroad has grown steadily between 1981 and 1999, through acquisitions and
increases in the production capacity of its foreign facilities. In acquiring foreign businesses, the Company has maintained
its focus on the mini-mill-based production of long common steel products, but also seeks undervalued or underperforming steel mills. The Company believes that due to the large capital investment required to build a steel mill and
the existing global oversupply of steel, acquisitions are the preferred means of expansion outside Brazil.
The following table sets forth, for the periods indicated, the production of crude steel and rolled products of the
Company's production facilities abroad (in thousands of tons):
LAISA
(Uruguay)
Year
Crude
Steel
AZA
(Chile)
Long
Crude
Rolled
Steel
Products
1993
29.0 29.0
34.0
1994
28.9 28.3
41.8
1995
33.7 29.2
62.7
1996
43.5 36.1
72.8
1997
45.9 39.3
79.5
1998
51.4 45.2
80.4
1999
45.4 41.6
140.9
2000
43.7 40.1
216.5
2001
41.2 37.3
244.2
* October through December
COURTICE
(Canada)
Long
Rolled
Products
25.0
27.9
54.3
68.1
75.9
75.7
122.2
200.6
225.7
Crude
Steel
227.0
234.0
245.0
244.5
201.1
259.8
260.4
281.8
294.4
MRM
(Canada)
Long
Rolled
Products
190.0
199.2
182.2
206.2
176.3
220.5
250.6
269.1
274.6
Crude
Steel
156.4
273.8
310.3
294.9
290.6
304.8
321.4
Long
Rolled
Products
142.4
258.0
277.9
265.0
261.3
270.2
277.8
SIPSA
(Argentina)
AMERISTEEL
(USA)
Crude
Steel
Crude
Steel
-
Long
Rolled
Products
39.0
38.5
37.9
29.4
453.9*
1,761.2
1,678.8
Long
Rolled
Products
405.9*
1,655.7
1,640.3
Laisa. In 1981, the Company acquired the Laisa mini-mill, located in Uruguay. Laisa has been profitable for the last 12
years and is the largest producer of long steel products in Uruguay. Laisa has a production capacity of 70,000 tons of
crude steel and 72,000 tons of rolled steel per annum. Laisa is the only domestic steel producer in Uruguay. Production
statistics are based on Laisa's production and sales added to Uruguayan imports. Import data are provided by the Customs
of Uruguay and the Bank of the Republic, its financial agent. These two institutions report to the Ministry of Economy.
Aza. In 1992, the Company acquired the Aza mini-mill, located in Chile. In January 1999, a second steel plant began
operations in Chile. The new mill, in conjunction with the continuing upgrading of existing facility, increased total annual
capacity to 360 thousand tons of crude steel and 440 thousand tons of rolled steel per year. The discrepancy between
figures related to crude steel and long rolled products is due to the fact that the Company dedicates an old long rolled
products unit to the production of shapes and profiles. Based on official import statistics furnished by the Chilean
Government (part of the market is supplied by imports) and information obtained from other producers (there are no
official statistics about each company's production), the Company believes that it controls approximately 35% of the
market.
Courtice. The Company acquired the Courtice mini-mill, located in Canada, in 1989. At that time Courtice had incurred
losses for the previous three years and offered the Company an opportunity to gain valuable managerial and technical
experience competing within the highly competitive North American market. Courtice is now a profitable unit with a
production capacity of 305,000 tons of crude steel and 280,000 tons of rolled steel per annum.
MRM. MRM was acquired in June 1995. In 1995, as a result of its presence in the Canadian market, Gerdau became
aware of an opportunity to acquire MRM, historically a profitable production facility and a quality producer of special
shapes and other rolled products complementary to Courtice's product line. In 2001, MRM had a production capacity of
355,000 tons of crude steel and 300,000 tons of rolled steel per annum.
Sipsa. At the end of 1997 Gerdau acquired Sociedad Industrial Puntana S.A., a rolling mill installed in Argentina, with a
production capacity of 75,000 tons of rolled products, with a view to increasing its presence in an important market to
which it already exported steel products. In 1998, Gerdau transferred one third of its shares to Sipar reducing its stake to
67%. In 2000 Gerdau increased its participation to 72%. More recently the Argentine operation was restructured. See
“Business Strategy”.
20
- 20 --1
Ameristeel. On September 27, 1999 Gerdau acquired from Kyoei Steel Ltd. of Osaka, Japan, 88% of FLS Holdings Inc.
which in turn holds 85% of the shares of Ameristeel Corp., headquartered in Tampa, Florida, USA. In 2000, Gerdau
acquired the remaining 12% of FLS Holding Inc.. Ameristeel is engaged in the manufacture and sale of long steel
products from recycled scrap raw material and has an installed capacity of nearly 2,040,000 tons of crude steel per annum
and 1,841,000 tons of rolled steel. Steel operations are conducted in four non union manufacturing facilities located
respectively in the states of Florida, Tennessee (two) and North Carolina, eighteen “rebar fabrication shops”, two
operations for manufacturing rail spikes and one for producing nails and welded wire mesh. More recently, by the end of
2001, Ameristeel acquired from Birmingham Southeast the operating assets of a unit located in Cartersville, Georgia. This
new unit is now the fifth plant of Ameristeel, and added 726 thousands tons of crude steel capacity and 544 thousands
tons of rolling capacity.
Other Businesses
The Company owns pine forests and eucalyptus forests. The Company has planted these forests since 1971. The
forests allow the Company to obtain certain tax advantages.
Eucalyptus is used as a raw material for the production of charcoal. Charcoal is used in the blast furnaces for pig
iron production.
Availability of Raw Materials
Due to the nature of its business operations, Gerdau S.A. does not usually enter into long-term supply contracts
with its suppliers and is therefore subject to fluctuations in the prices and availability of these items. In 2001, the five
largest suppliers accounted for approximately 15% of Gerdau S.A.’s total purchases, and the ten largest suppliers
(including energy) accounted for approximately 20% of purchases. In that period, the largest supplier of steel scrap to
Gerdau S.A. accounted for approximately 2.0% of Gerdau S.A.’s steel scrap purchases.
Metallic Inputs
The principal raw metallic input materials used in the Company's steel making activities are steel scrap, pig iron,
iron ore (used in the blast furnaces at the Divinópolis and Barão de Cocais facilities and at Usiba's - Simões Filho - DRI
plant), and ferro-alloys.
The Company uses a mixture of steel scrap and pig iron or DRI for the production of steel. Pig iron is used
because of the relative scarcity of good quality steel scrap in the Brazilian market (in the United States, by contrast, minimill steel makers usually use 100% steel scrap input).
As a mini-mill operator using electric arc furnace technology, Gerdau's principal input is steel scrap, which
accounted for approximately 19% of cost of goods sold of Gerdau S.A. during 2001. Although international steel scrap
prices are determined in the U.S. domestic market (as the United States is the principal exporter of scrap), the price of
steel scrap in Brazil varies region by region, depending upon regional supply, demand and transportation costs. Gerdau is
the largest consumer of steel scrap in Brazil, and in some markets, Gerdau consumes the vast majority of steel scrap
supply. However, with over 4,500 scrap suppliers in Brazil, no single steel scrap supplier has provided more than 2.0% of
total requirements of Gerdau S.A.
Scrap
There are two broad classifications of steel scrap: obsolescence scrap (ranging from tin drinking cans to car
bodies to white goods) and industrial scrap (factory stampings, steel turnings, etc.). Obsolescence scrap, on average,
accounts for approximately 65% of Gerdau S.A.'s steel scrap purchases, and is acquired through steel scrap dealers.
Industrial scrap, which on average accounts for approximately 35% of Gerdau S.A.'s steel scrap purchases, is purchased
directly from the industrial centers generating the scrap. Industrial steel scrap is also generated by the Company's own
production processes. Steel scrap remains readily available in the Brazilian market, both from obsolescence scrap and
industrial scrap.
The largest portion of the steel scrap consumed by the Company is bought in the State of São Paulo, the balance
being evenly distributed among the other areas in which the Company's mills are located. Obsolescence scrap is usually
21
- 21 --1
delivered to the steel mill by a scrap dealer. In regions where it does not have a steel mill, the Company has scrap
collection centers, where scrap is collected and compacted for transport by third parties (by rail or road) to the nearest
mill.
The price of scrap in Brazil varies by region, depending upon regional supply and demand and 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 a greater level of competition among scrap
purchasers and despite a greater supply of scrap in the heavily industrialized Southeast region of Brazil (including the
States of São Paulo and Rio de Janeiro), prices there tend to be higher than in other regions. However, because the
Company's facilities are evenly distributed throughout Brazil, the Company is able to take advantage of lower prices in
the other regions without incurring high transportation costs.
Pig Iron and Sponge Iron
Brazil is a net exporter of pig iron. The majority of Brazilian pig iron is produced in the State of Minas Gerais by
a relatively large number of small producers. Pig iron is a substitute for scrap. In Brazil, the price of pig iron is related to
the cost of charcoal, an important and the most volatile cost 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. Brazil is among the world's leading
producers and exporters of iron ore. The Company purchases its iron ore from several different regional suppliers.
The Company's sponge iron production unit is its USIBA (Simões Filho) DRI plant. The Company consumes all
of its pig iron and sponge iron production in its own meltshops. Approximately 30% of Gerdau S.A.'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.
Other Inputs
Brazil is an exporter of the alloys used in the Company's steel mills and all such materials are purchased in
Brazil. Other significant inputs (electrodes, furnace refracting materials, oxygen, nitrogen and other industrial gases and
limestone) are readily available in Brazil. Additional inputs associated with the production of pig iron and DRI at the
Company's steel mills are charcoal (at Barão de Cocais, Divinópolis and Contagem) and natural gas at USIBA (Simões
Filho).
The cost of the basket of additional materials used in the steel refining process accounts for approximately 10%
of the total production cost of a metric ton of crude steel. Therefore, the final prices of the Company's products are
relatively insensitive to changes in the price of these materials. Furthermore, these materials are widely available in the
Brazilian market.
Energy
The production of steel is an energy intensive process and electric energy costs constitute a significant portion of
the steel production costs per metric ton, accounting for approximately 9% of the total cost of goods sold in 2001.
Gerdau produces crude steel through three different process: (i) based on scrap and electric furnaces (70% of the
Brazilian process); (ii) based on iron ore and blast furnaces (20% of the Brazilian production); and (iii) based on the DRI
process, which uses natural gas to reduce iron ore and an electric arc furnace to produce crude steel.
The purchase of electrical energy and natural gas is made through long term supply agreements between each
producing unit and the authorized public utility company of its region. Demand and consumption are agreed upon by the
parties annually. The Brazilian Federal Government, through ANEEL (National Electric Power Agency), establishes the
prices which each public utility company may charge its customers, and varies according to each consumer class. The
consumers are classified according to their use (commercial, industrial, residential) and level of demand (tension and
volume). After the enactment of Law 9,074 of July 7, 1995, consumers with demands higher than 3,000 KW (kilowatts)
and tensions higher than 69 KV (kilovolt) may buy electrical energy from concessionaires of other regions.
22
- 22 --1
Any significant suspension of electrical power to the Company may have a negative impact on its business, its
financial condition and the results of its operations and future prospects.
On June, 2001, Provisional Measure No. 2152-2 was adopted providing for electrical power rationing in Brazil.
The MP and Resolution No. 8, dated May 25th , 2001 (the Resolution) issued by the Câmara de Gestão da Crise de Energia
Elétrica (Electrical Power Crisis Management Chamber), subjected the Company, as of June 2001, to a consumption
target level of 75% (seventy-five percent) of its average monthly consumption throughout the months of May, June and
July of 2000, for semi-integrated mills in the Southeast and Northeast regions, and an 80% target for integrated mills in
the same regions. Gerdau was able to balance correctly its energy supply problem and meet the goals determined by the
Government through February 2002, when electricity rationing ended.
As a means to minimize the impact of the power constraints in its output, Gerdau has decided to re-allocate
production among its units in the country and to utilize the full capacity of its integrated mills as they consume less
electricity. In the locations in which there has been reduction in consumption of electricity, there has been an induced
idling of capacity. As a result of this measure, the Company has received credits in certain locations such as, for instance,
in Rio de Janeiro, and was able to transfer these credits to other regions. As the rationing of electrical power was not
extended to the Southern states, the plants located there were able to increase output to compensate for the reduction in
the other regions.
The acquisition of natural gas is done through long term contracts between the plant and the public utility in the
region with demand and supply being adjusted between the parties on an annual basis.
The natural gas sector is controlled by the state governments and each one determines its own policies. Some
state governments set up companies to perform these responsibilities, some have joint ventures with other companies and
some allow for concessions to private companies.
The Federal Government determines the price that Petrobrás will charge the public utility companies, which must
define their rates according to the customer class schedule. As of the end of 1994, the prices in reais for natural gas have
remained stable and have undergone a small reduction in US dollar terms . The price in 2001was approximately US$ 0.06
for each cubic meter.
Coke and charcoal are bought from private companies at market prices with no government interference.
Due to the geographical dispersion of its steel plants, the Company operates with supplies from different regional
utilities and does not depend exclusively on any single supplier. The Company also consumes significant volumes of
natural gas especially at its operation in Bahia - Simões Filho unit - where sponge-iron is produced. Coke and charcoal are
also utilized as energy sources for the production of crude steel in other units of the Company.
The following sets forth the average costs for the Company's electricity in Brazil for the periods indicated:
U.S.$ per MW/hour
1996
1997
1998
1999
2000
2001
31.80
31.60
30.80
22.60
23.00
21.87
Sales and Marketing
Approximately 98% of the Company's shipments have historically been to the civil construction and
manufacturing sectors. Although evenly dispersed, the Company's domestic sales are higher in the South and
Southeastern Brazil. These regions account for over 75% of Brazil's GDP. The Company has a wide domestic customer
base of over 130,000 customers (based on customers making at least one purchase in the last twelve months), none of
23
- 23 --1
which account for more than 2% of the Company's total sales in Brazil and the top ten domestic customers represented
less than 10% of Gerdau's domestic steel sales.
The geographic distribution of the Company's sales has remained relatively constant. Generally, the geographic
diversity of the Company's production facilities has supported the diversification of its sales distribution. Consistent with
the Company's strategy of increasing profitability within Brazil through increased profit margins, the Company has been
shifting its sales focus to higher value-added products, such as drawn products and specialty long steel products.
The following table, sets forth, for the periods indicated, the Company's annual sales of crude steel, long rolled,
drawn steel products and specialty steel products as measured by weight :
Sales Distribution by Product Line (in tons):
1997
TOTAL
1998
1999
2000
2001
3,657,941
3,810,808
4,566,418
6,487,784
6,427,755
117,075
37,299
79,776
119,764
41,579
78,185
109,694
29,093
80,601
246,575
53,503
193,072
180,625
54,393
126,232
2,488,512
1,662,931
86,745
738,836
2,594,771
1,727,384
102,212
765,175
3,211 ,347
1,740,771
294,097
1,176,479
4,781,327
1,884,212
321,859
2,575,256
4,824,743
1,887,877
304,142
2,632,724
SPECIALTY STEEL PRODUCTS
Domestic market
Exports
172,272
150,889
21,383
168,280
157,531
10,749
212,845
208,843
4,002
263,845
250,498
13,347
259,927
254,918
5,009
DRAWN PRODUCTS
Domestic market
Exports
651,907
631,987
19,920
648,515
631,378
17,137
660,953
651,540
9,413
706,356
693,939
12,416
713,324
701,789
11,535
FLAT PRODUCTS (RESALE)
Domestic market
228,175
228,175
279,478
279,478
371,579
371,579
489,681
489,681
449,136
449,136
SEMI FINISHED
Domestic market
Exports
COMMON LONG PRODUCTS
Domestic market
Exports
Abroad
Domestic.
The Company's sales and marketing efforts in Brazil are organized into the following Business Units: (1) Civil
construction, (2) Manufacturing, (3) Agricultural products, (4) Nails, (5) Metallurgical products (chains, wires, staples
and others), (6) Specialty steels, (7) Exports, (8) Retail and (9) Forestry. The "Business Units" are responsible for the
sales and marketing of the Company's products. The Business Units are organized along product lines rather than
regional or geographic divisions in order to provide a specialized and knowledgeable sales and marketing effort for each
market segment and to enhance the responsibilities of the Company to each such market segment.
Each Business Unit has national coverage with a centralized sales policy and localized execution. Business Units
with the most sales to a particular customer are allocated responsibility for Company relations with that customer. On
average, approximately 65% of sales in Brazil are made through Company employees (including Comercial Gerdau
employees) and the balance through authorized representatives selling on a commission basis. The Company provides
these representatives with product catalogs and other sales material, computer terminals linked to Gerdau's information
system and fax and telephone equipment. Representatives cover the Brazilian countryside where customer orders are, on
average, smaller. Including Comercial Gerdau's 70 sales outlets, the Company has approximately 200 points of sale in
Brazil.
The Company's sales approach is to develop a close partnership with the client. As a result of its strong customer
orientation, Gerdau has proactively developed products to suit client needs, established a brand image, and achieved very
high standards for its products.
24
- 24 --1
The Company's wide base of customers provides the Company with an extensive database as to trends in the
market and the ability to support price levels in the market, which provides it with a competitive advantage relative to its
domestic competitors and imports.
Domestic sales have an average order period of eight days, and Gerdau arranges the delivery of goods directly to
its customers in order to minimize delays. Sales trends in both the domestic and export markets are forecast monthly
based on the past three months' historical data. Gerdau employs its own extensive data systems to remain informed of
market developments so that it can respond swiftly to fluctuations. Gerdau considers its flexibility to shift between
markets and the ability to monitor and adapt to changes in market demand, thereby keeping inventory levels at a
minimum, as the keys to success.
Export and Foreign Operations Marketing
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 otherwise indirectly through trading companies.
Despite of dealing primarily in commodity products such as rebars, Gerdau is very conscious 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 from time to time sends technicians to check directly the quality of products shipped to
clients.
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. The Canadian operations market their products in the United States through direct sales to customers which are
invoiced on the same terms as Canadian customers but in U.S. dollars.
Retail
Comercial Gerdau is the Company's retail arm in Brazil. It sells a full range of steel products, not only those
made by the Company. The Company is able to use the sales information generated by Comercial Gerdau as a market
barometer by which to formulate production and marketing strategies. Sales of products of producers unaffiliated with the
Company accounted for approximately half of Comercial Gerdau's 2001 physical sales and 7.4% of the Company's total
sales. Gerdau believes the extensive information available to its sales force concerning its customers along with its
strategy of forming strong customer relationships to be its main competitive advantage in the sale and marketing of its
products.
Terms of Sale
The Company's usual terms of sale are 21 days for domestic sales, which are made CIF (Cost Insurance and
Freight). Domestic customers making purchases of more than the equivalent of U.S.$ 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.
All Gerdau companies (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,
the majority of the sales are made with a maximum sales term of 30 days.
Facilities
Gerdau S.A. (the parent company) operates nine steel mills and four other industrial plants (two drawing mills,
one welded wire mesh factory and a pig iron plant) installed in Brazil and on a scale established as a result of the regional
markets in which they operate.
25
- 25 --1
In the Southeast region of Brazil, the largest market in the country, the Company operates Gerdau Cosigua (melt
shop, rolling mills, drawing mills and nail factory) in the State of Rio de Janeiro; Gerdau Barão de Cocais, Gerdau
Divinópolis, with melt shops and rolling mills, and Gerdau Contagem (production of pig iron) in the State of Minas
Gerais; and two drawing mills and a factory for welded wire meshes and strands in the State of São Paulo.
In the South region, the second largest market in Brazil, the Company has three mills: Gerdau Riograndense
(melt shop, rolling mills, drawing mills and nail factory) and Gerdau Aços Finos Piratini (melt shop and rolling mills for
manufacture of specialty steels) in the State of Rio Grande do Sul, and Gerdau Guaíra (melt shop and rolling mill) in the
State of Paraná.
The Northeast region is supplied by three other units, Gerdau Açonorte (melt shop, rolling mills, drawing mills
and nail factory) in the State of Pernambuco; Gerdau Usiba (melt shop, rolling mill and drawing mill) in the State of
Bahia; and Gerdau Cearense (melt shop and rolling mill) in the State of Ceará.
The largest of the Company's operating units is Gerdau Cosigua, located in the Southeast State of Rio de Janeiro.
It has an installed production capacity of 1,404,000 tons of crude steel per annum (see Item 4.D for location, installed
capacity and type of facility of each Company unit).
In addition, as of December 2001, Gerdau had a participation of 37.90% in the capital of Açominas, a Brazilian
producer of semi-finished products located in the Southeast state of Minas Gerais. Açominas has an installed production
capacity of 3.0 million tons of crude steel per annum.
Competition
Shipping, freight and port loading costs are a major barrier to imports and, since the Company operates primarily
in the ordinary long rolled product business where the 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 the
Company across all its product range. The Company's diversification and decentralization of its business gives it, Gerdau
believes, a competitive edge over its major competitors, who have more centralized operations.
In the domestic market, the largest producers of long rolled steel (the sector in which Gerdau competes) are as
follows:
Company
Production (1,000 metric tons)
Gerdau S.A.
Belgo Mineira
V&M do Brasil
Villares
Barra Mansa
Other
Total
% of total
3,301.4
2,632.1
445.0
397.1
351.5
297.9
7,425.0
44.5
35.4
6.0
5.4
4.7
4.0
100.0
Source: IBS/Gerdau
Gerdau S.A. (the parent company) has its industrial units located in the main consuming regions of the country,
while its competitors have their mills concentrated mainly in the Southeast region. As the following table shows, Gerdau
has more than 80% of its sales in the most developed regions as indicated below:
Gerdau S.A. - Regional Sales Distribution (% of sales in the domestic market)
South
Southeast
Northeast
Midwest
North
1996
22.3
53.1
13.8
7.7
3.1
1997
26.2
51.9
13.2
5.5
3.2
26
1998
25.5
49.7
15.6
6,0
3.2
1999
20.9
52.2
15.7
7.9
3.3
2000
25.3
51.2
14.1
4.9
4.5
2001
26.4
49.3
14.9
5.3
4.1
- 26 --1
Belgo Mineira Group is the second largest producer in the Brazilian market and has its production facilities
concentrated in the Southeast region. Belgo Mineira was originally an integrated steel company but today it also has
mini-mills plants. Gerdau is essentially a mini-mill-based company, with plants located near steel scrap supply, port
facilities, and the markets they serve, thereby incurring low freight costs.
The Mercosul tariff and non-tariff protection for the countries that have subscribed to the Treaty of Asunción
(signed on March 26, 1991 by Argentina, Brazil, Uruguay and Paraguay) is in place. Import duties have therefore been
phased out in the steel segment. Gerdau does not expect the elimination of trade tariffs to adversely affect its operations or
financial results. The competitive advantages of Brazilian steel producers are based primarily upon costs and abundant
supply of labor, energy and raw materials. Gerdau believes that its average production cost at its facilities in Brazil is
competitive with costs of other producers in Brazil and worldwide.
In 2001, Gerdau was the 4th largest Brazilian crude steel producer (operations in the country). The ten largest Brazilian
crude steel producers were:
Company
Tonnage
(1,000 tons)
4,784
4,620
4,048
3,470
2,668
2,460
2,355
786
601
500
426
26,718
CST
Usiminas
CSN
GERDAU
Belgo Mineira
Cosipa
Açominas
Acesita
Villares
V&M do Brasil
Other
Total
Source: IBS
% of total
17.9
17.3
15,2
13.0
10.0
9.2
8.8
2.9
2.3
1.9
1.5
100.0
In 2001, the largest Brazilian producers of rolled steel were:
Usiminas
CSN
GERDAU
Belgo Mineira
Cosipa
Acesita
V&M do Brasil
Villares
Barra Mansa
Other
Total
Source: IBS
Flat Products
1,000 tons
3,901
3,754
2,436
556
10.647
% of total
36.6
35.3
22.9
5.2
100.0
Long Products
1,000 tons
% of total
3,318
44.7
2,632
35.4
445
6.0
397
5.4
352
4.7
281
3.8
7,425
100.0
Environmental Standards
The Gerdau Group produces steel with the strong commitment to protect the atmosphere, the waters, the la nd and
the green areas in which it has a presence. It invests in acoustic protection and in the development of an environmental
awareness in the community. Its eco-efficiency practices are comparable to the best in the world and utilize the shared
management method with its employees involved in environmental education programs.
27
- 27 --1
The performance of the units is tracked and evaluated by an Environmental Management System. This allows for
the management of outcomes and to reach new levels of sustainability.
In the last five years Gerdau has invested US$ 100 million in updating its environmental preservation
technologies. In 2001, investments totaled US$ 15 million.
Gerdau's mills are equipped with high efficiency solid particle and gas air filtering systems.
Industrial waters are treated and re-circulated within closed circuit systems all inside the perimeter of the plants.
At present, the re-circulation rate efficiency reaches the mark of 95%. This level of efficiency meets stringent water
protection standards. Part of the 5% remaining water evaporates during the manufacturing process whereas the volume
that is returned to the rivers meets all quality requirements as determined by specific regulations. In many cases, the
quality surpasses that of the water collected.
Largest steel scrap recycler in Latin America and one of the largest in the world, Gerdau companies re-utilize 5.3
million metric tons of scrap per year. They transform this input into new steel products to be used by the civil
construction, industrial, autoparts and agricultural sectors.
The Company has rigorous management and control systems for steel scrap. This reduces the amount of residues
in the electric furnaces and improves thermal efficiency. It also has radioactivity detectors to avoid contamination of the
productive process by radioactive scrap.
All the industrial residues are controlled and managed at the source such as reduction, recycling, reutilization and
storage. Historically, the Gerdau Group conducts scientific research in partnerships with universities in order to better
develop uses for scrap, slag and meltshop dust for other productive processes. These by-products replace with great
advantage other natural raw materials and reduce the environmental impact resulting from the extraction of these inputs
from nature.
Slag from the melt shop is being widely utilized in the pavement of highways as a substitute for soil and
lintstone. Scale, for instance, is an important element in the production of cement. This year new research has been
started to find ways to mix dust with clay for the ceramic industry.
Environmental Improvements:
1.
The main investments in environment were made at mills in Brazil, Chile, Canada and the United States.
2.
Three new dust collecting systems increased the level of environmental protection at the mills located in Charlotte,
Barão de Cocais and Divinópolis. At Gerdau MRM Steel, improvements were made in the dust collecting system. In
Uruguay, at Gerdau Laisa, new equipment will begin operating in 2003.
3.
For the protection of water supplies, the Company has installed water collection and treatment units at Riograndense,
enhanced the existing unit at Cosigua and upgraded the re-circulation system at Gerdau Aza, in Chile.
4.
New landfill areas with control of soil conditions have enhanced the care at Cosigua and Guaíra. Guaíra has
concluded a noise reduction program at its rolling mill. At Charlotte, new lower levels of noise have been attained at
the scrap yard.
Green Areas
This fiscal year, Gerdau inaugurated a 3,800 seedling native species forest at Cosigua, located in Rio de Janeiro,
as homage to Curt Johannpeter, who commanded a decisive phase of the expansion of the Gerdau Group business. In
Canada, Gerdau MRM Steel planted 1.8 thousand seedlings of local species such as Colorado Blue Spruces and Willows.
Gerdau Laisa plant has enlarged its green belt, adding five hectares.
28
- 28 --1
Environmental control
Environmental control in Brazil is a regional rather than national matter, and different environmental standards
are imposed by the different state authorities. Gerdau seeks to work with the relevant environmental authorities to achieve
compliance with all applicable standards at a reasonable cost and in a reasonable timeframe.
The Company's overseas subsidiaries were in substantial compliance with applicable environmental regulations
upon their acquisition and continue to operate in accordance with applicable standards.
Gerdau believes that each of its facilities is in substantial compliance with the environmental regulations
applicable to it.
Maintenance and Technology
Due to the severe operating conditions in steel mills, regular maintenance of equipment is a significant ongoing
expense comprising approximately 8% of the Company's cost of goods sold for the year ended December 31, 2001. The
Company employs specialized maintenance teams, each with responsibility for a particular area of production.
As is usual for mini-mill steel makers, the Company 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 typing 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
The Company's labor costs vary in accordance with each region within Brazil. The Company believes its wages
are competitive within the regional markets in which each facility is located. Personnel wage expenses (direct labor cost)
accounted for approximately 14% of the total cost of goods sold.
As of December 31, 2001, the Company had 12,405 employees (this number does not include Açominas and
Sipar), comprising 8,631 engaged in Brazil, and 3,774 abroad.
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 childcare.
Gerdau seeks to maintain good working conditions in Company plants and as a consequence has what it believes
is a comparatively low employee turnover rate. Due to the high value it places on employee training, the Company
attempts to manage any necessary production curtailments through the timing of vacations, rather than workforce
reductions.
The Company has not in the past experienced strikes and believes that it generally has good relations with its
employees. The Company has not lost a day's production due to labor disputes in the last 40 years. The Company is,
however, a party to litigation initiated by current or former employees involving dis putes over employee benefits. See
"Item 8 – Financial Information - Legal Proceedings".
C. ORGANIZATIONAL STRUCTURE
29
- 29 --1
Gerdau S.A. is a producer of long common and specialty steel products through its industrial units located in
Brazil and its subsidiaries in Uruguay, Chile, Canada, Argentina and in the United States, with installed production
capacity of 7.3 million tons of crude steel (not including Açominas or Cartersville), 7.0 million tons of rolled product
(not including Açominas, Cartersville and Sipar) and 0.9 million tons of drawn products. The Company produces steel
based on the mini-mill concept, whereby steel is produced in electric arc furnaces, starting with scrap and pig iron
acquired mainly in the region where each mill operates (the so-called mini-mill concept). Gerdau also operates plants
capable of producing steel starting with iron ore in blast furnaces and through the direct reduction process. Gerdau's
products are manufactured with a wide range of specifications, intended to satisfy a la rge spectrum of consuming groups.
The three principal markets in which the Company operates are the civil construction, manufacturing and
agricultural and breeding sectors. Last year, the first two represented approximately 98% of the total sales volume of the
Company measured in tons. In 2001, Gerdau produced 6.1 million tons of crude steel, of which 3.5 million (not including
Açominas’ production) were produced in Brazil (13.0% of national production) and 2.6 million tons through its
subsidiaries abroad. In the segment of long rolled steel, Gerdau is the largest Brazilian producer, with approximately
44.5% of total production.
The following chart shows the corporate structure of the principal companies of Gerdau as of December 31, 2001:
Shareholding Structure – Main Companies
(Direct and indirect % of participation)
MET. GERDAU
S.A.
51
GERDAU S.A.
38
100
Açomin
as
100
Gerdau
Internacional
Armafe
r
96
Seiva
100
GTL
100
Courtice
100
Laisa
100
MRM
100
Aza
72
85
AmeriSteel
Sipsa
38
Sipar
The following table shows the main companies and investments held directly or indirectly by Gerdau S.A. as of
December 31, 2001:
Company
Gerdau Laisa S.A. ("Laisa")
Gerdau Aza S.A. ("Aza")
Gerdau Courtice Steel Inc. ("Courtice")
Gerdau MRM Steel Inc. ("MRM")
Seiva S.A. Florestas e Indústrias ("Seiva")
Armafer Serviços de Construção Ltda. ("Armafer")
30
Country
Uruguay
Chile
Canada
Canada
Brazil
Brazil
Participation (%)
99
99
100
100
96
100
- 30 --1
Aços Minas Gerais S.A. - Açominas ("Açominas")
Sociedad Industrial Puntana S.A. - Sipsa ("Sipsa")
Sipar Laminacion de Aceros ("Sipar")
Ameristeel Corp (“Ameristeel”)
Gerdau GTL Spain S.L. (“GTL”)
Brazil
Argentina
Argentina
USA
Spain
38
72
38
85
100
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:
Capacity (Thousands of tonnes per annum)
Pig Iron
Sponge Iron
Crude
Steel
Rolled
Steel
Drawn
Steel
TOTAL GERDAU
1.356
7.304
6.979
897
BRAZIL
GERDAU S.A.
Barão de Cocais - MG
Charqueadas - RS
Curitiba - PR
Divinopolis - MG
Maracanaú - CE
Recife - PE
Rio de Janeiro - RJ
Sapucaia do Sul - RS
Simões Filho - BA
Contagem
Cotia - SP
Cumbica -SP
São J. dos Campos -SP
1.356
1.356
330
336
450
240
-
4.174
4.174
330
310
390
500
120
230
1.404
390
500
-
3.971
3.971
198
380
167
456
120
270
1.510
470
400
-
897
897
91
284
172
25
72
130
123
-
3.130
360
360
70
70
305
305
355
355
2.040
435
635
562
408
3.008
440
440
72
72
280
280
300
300
75
75
1.841
363
499
544
435
-
ABROAD
AZA
Santiago – Renca/Colina (Chile)
LAISA
Montevideo (Uruguay)
COURTICE
Cambridge (Canada)
MRM
Selkirk (Canada)
SIPSA
Villa Mercedez (Argentina)
AMERISTEEL
Charlotte-NC (USA)
Jackson-TN (USA)
Jacksonville-FL (USA)
Knoxville-TN (USA)
-
Type of Facility
Blast furnace / LD converter / Rolling mill
EAF minimill / Rolling mill
EAF minimill/Rolling mill
Blast furnace / EOF converter / Rolling mill
EAF minimill / Rolling mil / Drawing mill / Nails clamps factory
EAF minimill / Rolling mill / Drawing mill / Nails clamps factory
EAF minimill / Rolling mill / Drawing mill / Nails clamps factory
DRI plant / EAF minimill / Rolling mill / Drawing mill
Blast furnace
Drawing mill
Wire meshes factory
Drawing mill
Rolling mill
Notes: (1) An "EAF" or electric arc furnace mini-mill produces crude steel using scrap steel and pig iron as its principal
raw materials; (2) A "blast furnace" or "DRI" mill is, in addition, able to produce pig iron or sponge iron to be used in its
crude steel production using iron ore and charcoal or natural gas as its main raw materials
31
- 31 --1
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 2.9% in 1996, 3.9% in 1997, 0.2% in 1998, 0.8% in 1999, 4.5% in 2000 and 1.5% in
2001 (based on preliminary data).
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.”
Inflation (INPC base)
Inflation (IGP-M)
Devaluation (R$ vs. U.S.$)
January to April
2002
2.71%
1.07%
1.81%
Year ended December 31,
2001
2000
9.44%
5.27%
10.37%
9.96%
18.67%
9.30%
1999
8.43%
20.10%
48.36%
The devaluation of the Brazilian currency in 2001 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 terroris t attack in September 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.
32
- 32 --1
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 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 in the segments that compose the Brazilian Gross Domestic Product (“PIB”). The table below shows the
quarterly sales volumes for the principal consuming segments of the Company’s products in the last three years:
Sales Volume per Market Segment – Gerdau S.A. non-consolidated (1,000 tons):
2001
Quarter
First
Second
Third
Fourth
Total
2000
Civil
Construction
Manufacturing
451.9
464.5
459.4
396.0
1,771.8
509.2
492.9
457.2
471.5
1,930.8
1999
Other
Civil
Construction
Manufacturing
28.0
28.7
22.3
24.2
103.3
429.3
436.3
470.3
463.4
1,799.4
450.4
461.8
552.7
553.1
2,018.0
Other
Civil
Construction
Manufacturing
Other
28.8
27.1
28.6
26.7
111.1
442.8
436.0
482.7
428.6
1,790.0
351.1
370.8
403.0
389.5
1,514.4
24.1
21.8
25.9
27.6
99.4
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:
2001
100.0%
(70.7%)
29.3%
(4.6%)
(7.8%)
16.9%
7.2%
Net Sales Revenue
Cost of Goods Sold
Gross Profit
Sales Expenses
General and Administrative Expenses
Operating Profit
Net Income
Fiscal year ending December 31,
2000
100.0%
(73.4%)
26.6%
(4.2%)
(7.9%)
14.4%
7.0%
1999
100.0%
(64.0%)
36.0%
(5.0%)
(9.2%)
21.8%
11.5%
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,
2001
2000
1999
Percentage Variation
2001-2000
2000-1999
Net Sales Revenue
Civil Construction
Manufacturing
Other
Total
1,098,908
1,029,975
191,646
2,320,530
1,270,101
1,163,835
242,778
2,676,714
839,326
663,613
218,049
1,720,988
(13.5%)
(11.5%)
(21.1%)
(13.3%)
51.3%
75.4%
11.3%
55.5%
Cost of Goods Sold
Civil Construction
Manufacturing
Other
Total
(793,832)
(730,039)
(117,749)
(1,641,620)
(932,085)
(854,101)
(178,167)
(1,964,353)
(521,940)
(487,467)
(91,964)
(1,101,371)
(14.8%)
(14.5%)
(33.9%)
16.4%
78.6%
75.2%
93.7%
78.4%
Gross Profit
Civil Construction
Manufacturing
Other
Total
305,077
299,936
73,897
678,910
338,015
309,735
64,611
712,361
317,386
176,146
126,085
619,617
(9.7%)
(3.2%)
14.4%
(4.7%)
6.5%
75.8%
(48.8%)
15.0%
Operating Profit
33
- 33 --1
Civil Construction
Manufacturing
Other
Total
Financial Income
Financial Expense
Total
160,380
179,920
51,701
392,001
183,642
168,278
35,103
387,023
183,304
144,930
47,621
375,855
(12.7%)
6.9%
47,3%
1.3%
0.2%
16.1%
(26.3%)
3.0%
55,002
(238,269)
57,324
(243,477)
64,166
(222,414)
(4.0%)
(2.1%)
(10.7%)
9.5%
167,353
188,558
(11.2%)
(4.6%)
197,692
The following table shows cost accounting for goods sold during 2001, 2000 and 1999 expressed in percentage
of net sales revenue (all under US GAAP):
Total direct costs
2001
51%
14%
65%
Total indirect costs
Total costs
5%
7%
9%
9%
5%
35%
100%
Raw materials
Direct labor costs
Indirect labor costs
Third party services
Depreciation
Power and electricity
Other
Breakdown of Costs of Goods Sold
2000
1999
53%
53%
13%
14%
66%
67%
5%
7%
9%
8%
4%
33%
100%
3%
11%
6%
8%
5%
33%
100%
Fiscal year ended December 31, 2001 compared to fiscal year ended December 31, 2000
Net Sales Revenue
The consolidated net revenue of US$ 2.3 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 U.S.$ 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 16.4% reaching US$ 1.6 billion. This reduction is explained by the devaluation of the
Brazilian currency and by gains in productivity that were 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 29.3% from 26.6%.
Gross profit totaled U.S.$ 678.9 million, a 4.7% decrease when compared to 2000.
Operating Income
Operating income of U.S.$ 392.0 million was slightly lower than last year. The reduction in operating expenses
was enough to compensate the reduction in gross profit. Moreover, operating margin went to 16.9%, up from 14.5%.
Financial Expenses and Financial Revenue
Net financial expenses decreased 1.6% reaching U.S.$ 183.3 million. This decrease can be explained by the
higher amount of exchange losses accounted for in the period (U.S.$ 50.3 million in 2000 versus U.S.$ 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 U.S.$
325 million of its debt exposure during 2001.
34
- 34 --1
Equity Pickup
Equity pickup reached U.S.$ 18.3 million in 2001, down from U.S.$ 34.0 million in 2000. The reduction
occurred due to the lower results obtained by Açominas 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 U.S.$ 54.6 million exceeded by U.S.$ 9 million the provision in the
previous year due to better results of the Brazilian operations.
Net Income
Net income of U.S.$ 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 Açominas.
Fiscal year ended December 31, 2000 compared to fiscal year ended December 31, 1999
Net Sales Revenue
The consolidated net revenue of US$ 3.2 billion increased 55.5% due to the growth of shipments and in prices.
Shipments were especially affected by an increase in the Brazilian industrial activity and the consolidation of Ameristeel
throughout the whole year. Quantitatively, physical sales went up 41.4% reaching 6.5 million tons. As for prices, an
increase of 10.0% brought the average prices up to US$ 415 from US$ 377.
Cost of Sales and Gross Profits
Gross profits went up 15.0% reaching US$ 712.4 million, on the other hand gross margin went down to 26.6%
from 36.0%. This reduction is explained by an increase in prices of some raw materials in Brazil, such as scrap, which
had hit the bottom in 1999. Another factor that contributed for the narrowing in margins was the consolidation in full of
AmeriSteel, a company with higher production costs than those in Brazil.
Operating Income
If on the one hand margins were tight in 2000, on the other, general and administrative expenses, as a percentage
of sales, went down almost 120 basis points to 8.0%. Sales and marketing expenses also decreased from 5.0% of net sales
to 4.2%. As a result, operating income of US$ 387.0 million was 3.0% greater than the US$ 375.9 million registered in
1999.
Financial Expenses and Financial Revenue
Although cost of funding and exchange losses were lower in 2000, net financial expenses increased by 17.6%.
This happened because the average indebtedness level in 1999 was lower than in 2000. In fact, during the second half of
1999, the indebtedness grew substantially due to the acquisition of Ameristeel and a capital injection in Açominas. Both
investments were partially financed with third-party capital. It is important to mention that the Company’s debt increased
not only as a consequence of these new loans but also due to the consolidation of the already existing debt of Ameristeel.
Equity Pickup
Due to the substantial recovery obtained by Açominas, equity pickup reached U.S.$. 34.0 million up from a
negative equity pickup of U.S.$. 4.9 million in 1999.
35
- 35 --1
Non Operational Revenue.
The non-operating income of U.S.$ 2.2 million in 2000 is mainly due to gains resulting from the disposal of
fixed assets.
Provision for Income Tax
In 2000, the provision for income tax of U.S.$ 45.6 million exceeded, by more than U.S.$ 25 million, the amount
provided in the previous year. In 1999 income taxes were positively affected by the devaluation of Real.
Net Income
Net income of U.S.$ 188.6 million decreased 4.6% in 2000 compared to 1999. The result was negatively affected
by increases in provision for income taxes and by changes in the cost structure, due to the consolidation of Ameristeel,
and increases of raw material prices in Brazil.
B. LIQUIDITY AND CAPITAL RESOURCES
The net cash generated by operating activities totaled U.S.$ 300.4 million, U.S.$ 225.5 million and U.S.$ 297.5
million for the years ended December 31, 1999, 2000 and 2001, respectively, totaling U.S.$ 823.4 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 U.S.$ 1,586.1 million in the period, contributing U.S.$ 811.2 million in 1999, U.S.$
421.8 million in 2000 and U.S.$ 353.1 in 2001, toward the Company’s liquidity needs. Sales of disposed fixed assets
generated total proceeds of U.S.$ 34.8 million for the years of 1999, 2000 and 2001.
In 2001, the main uses of capital resources were: U.S.$ 244.0 million in fixed assets, U.S.$ 436.6 million in short
and long term debt payments and U.S.$ 70.9 million in payment of dividends. In 2000, the main uses of capital resources
were: U.S.$ 264.8 million in fixed assets, U.S.$ 348.4 million in short and long-term debt payments and U.S.$ 66.0
million in payment of dividends. In 1999, the main uses of capital resources were: U.S.$ 433.4 million in fixed assets,
U.S.$ 235.3 million in short and long-term debt payments and U.S.$ 37.4 million in payment of dividends.
The amount of resources invested in fixed assets from 1999 to 2001 (U.S.$ 942.2 million) was used for
modernization and technological update of the Company’s industrial plants and subsidiaries.
From December 31, 2000 to December 31, 2001 net working capital increased by U.S.$ 54.0 million, from U.S.$
196.6 million in 2000 to U.S.$ 250.6 million in 2001. This increase was primarily due to a decrease in current liabilities.
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, and, depending on market conditions, for short-term financial investments.
The balance of loans totaled U.S.$ 1,198.1 million and U.S.$ 1,406.5 million at December 31, 2001 and 2000,
respectively. On the same dates, the balance of short-term financial investments and cash totaled U.S.$ 333.9 million and
U.S.$ 302.9 million, respectively.
Total debt reached U.S.$ 1,294.3 million in 2001, down from U.S.$ 1,522.3 million in 2000. Net debt decreased
from U.S.$ 1,219.4 million in 2000, to U.S.$ 960.4 million in 2001 due to the devaluation of the Brazilian currency, debt
payments and gains from swap operations. Net financial expenses were, respectively, U.S.$ 186.2 million and U.S.$
183.3 million in 2000 and 2001, respectively.
The following table lists the indebtedness profile of the Company as of December 31, 2001 and 2000 (in
thousands of U.S. dollars):
2001
36
2000
- 36 --1
Short Term:
Short-term debt:
Debt denominated in reais
Debt denominated in foreign currency
Total short term debt
Current portion of long-term debt:
Total current portion of long-term debt
Debentures
Short-term debt plus current portion of long-term debt
and debentures
Long Term:
Long-term debt, less current portion:
Total long term debt
Debentures
Subtotal
Long-term debt, parent company
Long-term debt, plus debentures and parent company
Total debt
Short-term investments and cash
Net debt:
372
370,967
371,339
515
371,535
372,050
45,342
150,810
196,152
2,018
49,276
267,260
316,536
2,413
569,509
690,999
141,833
488,803
630,636
94,204
724,840
461
725,301
1,294,810
333,897
960,913
198,733
519,097
717,830
113,349
831,179
77
831,256
1,522,255
302,882
1,219,373
On December 31, 2001 the Company’s indebtedness was subject to the following terms and conditions:
Short term:
In 2001, the Company’s short-term debt remained stable at US$ 371.3 million. This short-term debt is subject to
interest rates ranging from 2.0% to 11.02% per year, plus monetary restatement or variation of exchange rates.
Additionally, the Company will have to pay the current portion of long-term debt and debentures in the amount
of U.S.$ 196.1 million, of which U.S.$ 45.3 million relates to financing in reais and U.S.$ 150.8 million relates to
financing in foreign currencies.
Long term:
Long-term debt totaled U.S.$ 725.3 million on December 31, 2001. U.S.$ 630.6 million of this debt is
comprised of loans from financial institutions of which U.S.$ 141.8 million of which is denominated in reais, with a cost
ranging from 9.25% to 11.86% plus monetary restatement (TJLP) per year and U.S.$ 488.8 million is denominated in
foreign currency, with a cost of monetary restatement plus interest which varies from 3.0% to 11.02% per year. Of the
total long term debt, U.S.$ 94.2 million refers to debentures denominated in reais, with an interest cost which varies from
TR+ 8% to 19.0% per year as of December 31, 2001 (see Note 10 to the financial statements) and US$ 461 thousand
refers to debt with Gerdau S.A..
Of the loans denominated in foreign currency, U.S.$ 488.8 million, or approximately 27.0% of the principal,
were contracted by the Company in Brazil and 73.0% of the principal amount by the Company’s foreign subsidiaries.
In January 1999, the Company assumed the debt related to the Eurobonds issued by Metalúrgica 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 Econômico e Social - BNDES (“BNDES”) financing,
37
- 37 --1
Eurobonds issued by Metalúrgica 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).
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) 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.
2.
3.
4.
5.
6.
Current liquidity ratio of 1.0 or greater;
Debt service coverage ratio greater than 1.0;
Interest coverage greater than 2.0,
Total debt over EBITDA less than 2.75 until September 2002 and 2.0 after September 2002.
Term debt over capitalization not greater than 0.55 through December 31, 2001 and not greater than 0.4
after this date.
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 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 Brazilian
Corporate Law and at December 31, 2001, management believes that the Company was in full compliance regarding such
debt covenants and other conditions of the debt described above.
On December 31, 2001, the Company’s long-term debt and debentures (including current portion) totaled U.S. $
921.4 million. Of this balance, U.S. $ 283.9 million (30.8%) was denominated in Brazilian reais and U.S. $ 637.5 million
(69.2%).was denominated in U.S. dollars.
The Company has entered into arrangements to swap its foreign currency exchange rate exposure inherent to this
debt. As of December 2001, the total amount swapped was U.S.$ 225.6 million. Part of the Company’s cash flow from
operations is denominated in Brazilian reais and U.S. dollars. See “Currency Remeasurement – Revenue Denomination
and Exchange Rate Devaluations.” 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.
The Company’s long-term indebtedness to financial institutions will be amortized as follows:
U.S.$ million
2003
172.1
2004
238.7
2005
139.3
2006
49.1
2007 and t hereafter
31.4
Total
630.6
38
- 38 --1
Reserve for Contingencies.
On December 31, 2001, the reserve for probable and reasonably estimable contingencies totaled U.S.$ 55.2
million. This is partially backed by legal escrow accounts controlled by the corresponding courts totaling U.S.$ 26.7
million as of that same date.
Investments
In order to face the increasing demand for steel products in the markets in which the Company is directly or
indirectly conducts business, Gerdau invested during 2001 to increase output capacity, to make improvements in existing
plants and to update them technologically as well as to create new products. These investments totaled US$ 119.8 million,
of which US$ 80.1 million was spent in plants located in Brazil and US$ 39.7 million in plants abroad.
In addition to the investments above, Ameristeel spent US$ 48.8 million to acquire the operating assets of
Carterville, one of Birmingham Southeast’s plant.
Gerdau also made an offer of R$ 426.6 million reais for an additional stake in Açominas at an auction sponsored
by the Brazilian Central Bank. The transaction was fully concluded on February 19, 2002, and as a result Gerdau
currently holds 54.14% of Açominas. Additionally, on February 8, 2002 Gerdau also formalized an agreement to acquire
the 24.8% stake that Natsteel (of Singapore) has in Açominas. According to the terms of the agreement, Gerdau may
exercise its right to purchase Natsteel's stake by September 9, 2002.
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.
Currency Translation
Foreign Currency Translation
The Company, which carries out the majority of its business in Brazilian reais, and, to a lesser extent, in U.S. and
Canadian dollars and Chilean, Uruguayan and Argentine pesos, has selected the United States dollar as its reporting
currency. The U.S. dollar amounts presented have been remeasured/translated following the guidelines established in
Statement of Financial Accounting Standards (“SFAS”) No.52, “Foreign Currency Translation” on the basis of audited
financial statements expressed in the local currency of each of the countries. Under SFAS No.52, there are two methods
of translation: the current rate method and the monetary/non-monetary method.
In the case of the Company and subsidiaries whose local currency is the functional currency (Chile, Canada,
United States and Argentina), the current rate method of translation has been used. This method involves the translation
of assets and liabilities at the exchange rate in effect at the end of each period. Average exchange rates have been applied
for the translation of the accounts that make up the results of periods. In this case, translation adjustments are recorded as
a separate component of shareholders’ equity.
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.
39
- 39 --1
IN THOUSANDS OF US$
Brazilian
Real
2001
2000
1999
1,749,414
2,106,759
1,535,342
%
Canadian
Dollar
63.6
66.6
74.7
244,151
253,671
244,800
Uruguayan
Peso
%
8.9
8.0
11.9
18,114
20,387
24,998
%
Chilean
Peso
%
0.7
0.6
1.2
76,060
73,173
46,362
2.7
2.3
2.2
Argentinean
Peso
16,711
32,014
41,504
%
U.S.
Dollar
0.6
1.1
2.0
647,422 23.5
676,533 21.4
163,165 7.9
%
Total
2,751,872
3,162,537
2,056,171
The Company’s costs of sales denominated in currencies of Brazil, United States, Canada, Uruguay, Chile and
Argentina represented 30.9%, 18.9%, 7.3%, 0.5%, 1.7% and 0.5%, 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).
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLO YEES
A. DIRECTORS AND SENIOR MANAGEMENT
The management of the Company is conducted by the Board of Directors (Conselho de Administração) and by
the Executive Officers (Diretoria). Overall strategic direction of the Company is provided by the Board of Directors,
which is comprised of three members and three substitutes who must be both residents of Brazil and shareholders of the
Company. Board members are elected at the annual ordinary general meeting of holders of Common Shares for a one
year-term. Day-to-day management is delegated to the Executive Officers of the Company, which are appointed by the
Board of Directors for a one-year-term.
The following table sets forth information with respect to the members of the Board and Directors of the
Company.
BOARD
Name
Jorge Gerdau Johannpeter
Germano H. Gerdau Johannpeter
Klaus Gerdau Johannpeter
Frederico C. Gerdau Johannpeter
Carlos João Petry
Expedito Luz
Age*
65
69
66
59
60
50
Position
Chairman/President
Board Substitute/Vice-President
Board Member/ Vice-President
Board Member
Year Initially
Appointed
1973
1973
1973
1973
1975
2001
Age*
59
54
51
57
41
54
50
55
38
48
Title
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Current Position
Held Since
1981
1987
1987
2001
2000
1992
1994
1998
2001
1997
EXECUTIVE OFFICERS
Name
Sirleu José Protti
João Aparecido de Lima
Osvaldo Burgos Schirmer
Domingos Somma
Carlos Bier Johannpeter
Érico Teodoro Sommer
Luiz Alberto Morsoletto
Júlio Carlos L. Prato
Cláudio Johannpeter
Joaquim Guilherme Bauer
40
- 40 --1
Francesco Saverio Merlini
João Carlos Salin Gonçalves
Heitor Luis Beninca Bergamini
Cláudio Mattos Zambrano
Elias Pedro Vieira Manna
Gerson Marcos Venzon
Paulo Roberto Perlotti Ramos
Manoel Vitor de Mendonça Filho
Nestor Mundstock
59
55
44
54
46
46
49
44
50
Director
Director
Director
Director
Director
Director
Director
Director
Director
1998
1999
1999
2000
2000
2000
1996
2001
2001
* As of December 31,2001.
The following is a brief biography of each of the Company's Directors and Executive Officers:
JORGE GERDAU JOHANNPETER. Mr. Jorge Johannpeter, has been working for the Gerdau Companies 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. He received a degree in Law from the Federal
University of Rio Grande do Sul.
GERMANO H. 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
Companies in 1983. He received a degree in Business Administration from the Getúlio Vargas Foundation
KLAUS GERDAU JOHANNPETER. Mr. Klaus Johannpeter has worked for the Gerdau Companies with his brothers
since 1954. Mr. Klaus Johannpeter became an Executive Officer in 1973 and was appointed Vice-President of the
Gerdau Companies in 1983. He received a degree in Civil, Electrical and Mechanical Engineering from the Federal
University of Rio Grande do Sul.
FREDERICO C. GERDAU JOHANNPETER. Mr. Frederico Johannpeter has worked for the Gerdau Companies with
his brothers since 1961. Mr. Frederico Johannpeter became an Executive Officer in 1973 and was appointed VicePresident of the Gerdau Companies in 1983. He received a degree in Business Administration from the Federal University
of Rio Grande do Sul.
CARLOS JOÃO PETRY. Mr. Petry has worked for the Gerdau Companies since 1965. In 1975, he was appointed to the
Board of Directors and in 2000 he was named Vice-President of Brazilian Operations. Mr. Petry received a degree in
Philosophy from the Federal University of Rio Grande do Sul.
EXPEDITO LUZ. Mr. Luz has worked for Gerdau since 1976. He was appointed to the Board of Directors in 2001. Mr.
Expedito Luz received a degree in Law from the Federal University of Rio Grande do Sul 1975 and a Master in Law from
the Columbia Law School in 1981.
SIRLEU JOSÉ PROTTI. Mr. Protti joined the Company in 1967 and became Executive Officer in 1981. He is currently
the Managing Director of the Brazilian Long Steel Operations. Mr. Protti received a degree in Economics from the
Catholic Pontiff University of Rio Grande do Sul, in 1966.
JOÃO APARECIDO DE LIMA. Mr. Lima joined the Company in 1974 and became an Executive Officer in 1987. He
is currently the Human Resource Director. Mr. Lima received a degree in Brazilian Literature from the University of São
Paulo, in 1971, and in Psychology from IMS, in 1974.
OSVALDO BURGOS SCHIRMER. Mr. Schirmer joined the Company in 1986 and became Financial Director in 1987.
Mr. Schirmer received a degree in Business Administration from the Federal University of Rio Grande do Sul, in 1973,
and in Industrial Agronomy Administration from the Illinois University, in 1975 and an M.B.A. in Finance and
International Business from the Southern Illinois University, in 1977.
DOMINGOS SOMMA. Mr. Somma joined the Company in 1980 and became an Executive Officer in 1988. He is
currently the Executive Director of the Brazilian Long Steel Operations. Mr. Somma received a degree in Economics
from the Mackenzie University, in 1968.
41
- 41 --1
CARLOS BIER JOHANNPETER. Mr. Carlos Johannpeter joined the Company in 1976. In 1991, Mr. Carlos
Johannpeter became Executive Officer of the Gerdau Steel for Industry. Mr. Carlos Johannpeter currently is the
Managing Director of Business Departments. He received a degree in Law from the Federal University of Rio Grande do
Sul.
LUIZ ALBERTO MORSOLETTO. Mr. Morsoletto joined the Company in 1983 and has been an Executive Officer of
the Gerdau Divinópolis Industrial Unit. Mr. Morsoletto received a degree in Metallurgical Engineering from the Mauá
Engineering School -SP, in 1975.
JÚLIO CARLOS L. PRATO. Mr. Prato joined the Company in 1969 and became an Executive Officer in 1992 and is
currently the Executive Director of the Industrial Units located in the Northeast region of Brazil. Mr. Prato received a
degree in Metallurgical Engineering from the Federal University of Rio Grande do Sul, in 1969.
CLÁUDIO JOHANNPETER. Mr. Cláudio Johannpeter joined the Company in 1982. In 1997, Mr. Cláudio Johannpeter
became Executive Officer and is currently the Executive Director of the Industrial Units. Mr. Cláudio Johannpeter
received a degree in Metallurgical Engineering from the Federal University of Rio Grande do Sul in 1990.
ÉRICO TEODORO SOMMER. Mr. Sommer joined the Company in 1975 and became an Executive Officer in 1992.
He is currently the Engineering Director. Mr. Sommer received a degree in Electrical Engineering from the Federal
University of Rio Grande do Sul in 1970.
JOAQUIM GUILHERME BAUER. Mr. Bauer has worked for the Company since 1982. In 1997, Mr. Bauer became
Director of the Gerdau Steel for Industry Business Unit. Mr. Bauer received a degree in Metallurgical Engineering from
the Federal University of Rio Grande do Sul, in 1977.
FRANCESCO SAVÉRIO MERLINI. Mr. Merlini joined the Company in 1977 and became an Executive Officer in
1998. He is currently the Director of the Gerdau Rio de Janeiro Industrial Unit. Mr. Merlini received a degree in welding
techniques from the Cuyo National University of Argentina in 1970.
JOÃO CARLOS SALIN GONÇALVES . Mr. Gonçalves joined the Company in 1969 and became an Executive Officer
in 1999. He is currently the Metal Supplies Director. Mr. Gonçalves received a degree 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 Director of the Comercial Gerdau (Retail Unit). Mr. Bergamini received a degree in
Economics from the Catholic Pontiff University of Rio Grande do Sul in 1982.
CLÁUDIO MATTOS ZAMBRANO. Mr. Zambrano joined the Company in 1970 and became an Executive Officer in
2000. He is currently the Director of the Gerdau Aços Finos Piratini Industrial Unit. Mr. Zambrano received a degree in
Mechanical Engineering from the Catholic Pontiff University of 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 Commercial Director for Specialty Steel Products. Mr. Manna received degrees in Operational
Mechanical Engineering, Mechanical Engineering and Civil Engineering, from the Catholic Pontiff University of 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 Director of Gerdau’s Civil Construction Business Division. Mr. Venzon received a degree in Economics
from the Federal University of Rio Grande do Sul in 1977 and a Masters degree in Engineering Economics from the
Federal University of Santa Catarina in 1980.
PAULO ROBERTO PERLOTT RAMOS. Mr. Paulo Ramos joined the Company in 1976 and became an Executive
Officer in 1995. He is currently the Director of Gerdau’s Exports Business Division. Mr. Paulo Ramos received a degree
in Mechanical Engineering and Business from the Federal University of Rio Grande do Sul.
42
- 42 --1
MANOEL VITOR DE MENDONÇA FILHO. Mr. Vitor joined the Company in 1983 and became an Executive Officer
in 2001 and is currently the Executive Director of the Industrial Units located in the South region of Brazil. Mr. Vitor
received a degree in Metallurgical Engineering from the Federal University of Minas Gerais in 1982.
NESTOR MUNDSTOCK. Mr. Mundstock joined the Company in 1975 and 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 received a
degree in Metallurgical Engineering from Fluminense Federal University, in 1975.
There are no pending legal proceedings to which any Board member or Executive Officer of the Company is a
party adverse to the Company.
All of the Executive Officers of the Company are appointed in such capacities by the Board of Directors to serve
for one-year terms, which are renewable at the pleasure of the Board of Directors.
Family relationship
Jorge Gerdau Johannpeter, Germano H. Gerdau Johannpeter, Klaus Gerdau Johannpeter and Frederico C. Gerdau
Johannpeter are brothers. Carlos Bier Johannpeter is Jorge Gerdau Johannpeter’s son and Cláudio Johannpeter is Klaus
Gerdau Johannpeter’s son.
B. COMPENSATION
Gerdau has been gradually introducing a variable portion of employee compensation. In 2001, variable
compensation for all employees totaled U.S.$ 16.6 million. For managers and directors the company has the “RAC”
(Additional Contracted Remuneration). For other employees the Company has the “Programa Metas” (Goals Program)
and Participation Programs. All employees receive additional compensation, according to the score obtained in PGQ
(Gerdau’s Quality Program). Total compensation for managers and directors in 2001 totaled US$ 7.2 million.
Employee Pension Plan
The Company and affiliates co-sponsor a contributory pension plan covering substantially all Brazilian-based
employees (the “Domestic Plan”). The Domestic Plan is principally a defined benefit plan with certain limited defined
contributions. Additionally, the Company's Canadian and American subsidiaries sponsor defined benefit plans (the
“Canadian Plans” and the “American Plans”) covering substantially all of their employees. Contributions to the Domestic
Plan for defined contribution participants are based on a specified percentage of employees’ compensation and totalled
US$ 955.4 thousand in 2001, US$ 1,626.8 thousand in 2000 and US$ 1,560 thousand in 1999. Contributions to the
Domestic Plan for defined benefit participants and contributions to the Canadian Plan are based on actuarially determined
amounts.
The Domestic Plan is administered by Gerdau - Sociedade de Previdência Privada, which was established by the
Group for this purpose. Plan assets of the Domestic Plan consist of investments in bank certificates of deposit, equity and
debt securities and investment funds. In ten years of existence, Gerdau Previdência Privada’s net worth has reached U.S.$
62.2 million, with 100% of its capital being contributed by affiliated Brazil-based Companies. Gerdau's Domestic Plan
provides its employees with an opportunity to increase their future income by means of basic no-contribution and
supplementary plans, an optional contribution plan, retirement, pension and savings plans.
Total pension expense for 2001, 2000 and 1999 was US$ 7,659 thousand, US$ 5,354 thousand and US$ 8,058
thousand, respectively.
C. BOARD PRACTICES
Name
Chairman and President since 1973.
Vice-President and a Board Substitute since 1973.
43
- 43 --1
Carlos João Petry
Expedito Luz
Board Member since 1975 and a Vice-President since 2000.
Board Member since 2001.
Alberto Monteiro de Queiroz
José A. Cruz Módena
Peter Wilm Rosenfeld
Audit Committee Member since April 2001.
Managing Director of the Brazilian Long Steel Operations since 2001.
Human Resource Director since 1987.
Financial Director since 1987.
Executive Director of the Brazilian Long Steel Operations since 2001.
Managing Director of Business Departments since 2000.
Engineering Director since 1992.
Director of Divinopolis’ plant since 1994.
Executive Director of Northeast units since 1998.
Executive Director of Industrial Units since 2001
Director of Gerdau Steel for Industry since 1997.
Director of Cosigua’s plant since 1998.
Metal Supplies Director since 1999.
Director of Comercial Gerdau since 1999.
Director of Aços Finos Piratini since 2000.
Commercial Director for specialty steel products since 2000.
Director of Gerdau’s Civil Construction since 2000.
Director of Gerdau’s Exports Division since 1996.
Executive Director of the Industrial Units located in the south region since 2001.
Sirleu José Protti
Domingos Somma
Paulo Roberto Perlott Ramos
Manoel Vitor de Mendonça
Filho
Nestor Mundstock
Executive Director of the Industrial Units located in the central region since 2001.
* All people listed above are elected at the annual ordinary general meeting of holders of Common Shares for a one-year
term, and in the event of termination of their mandate, they are entitled only to statutory employment benefits under
applicable law, without any special severance.
D. EMPLOYEES
As of December 31, 2001, the Company had 12,405 employees, in line with the total of employees in the
previous year. The following table sets forth information with respect to geographic distribution of Gerdau’s employees:
1998
1999
2000
2001
Brazil
8,639
8,495
8,436
8,631
Abroad
1,335
3,526
3,904
3,774
Total
9,974
12,021
12,340
12,405
The number of employees engaged abroad sharply increased, from 1998 to 1999, due to the acquisition of
Ameristeel.
E. SHARE OWNERSHIP
The following chart indicates the individual holdings of Gerdau S.A. Preferred and Common Shares by each
director. The list of directors that hold shares of the Company 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 rights in any form, i.e., stock options
or securities of the Company.
44
- 44 --1
Name
Common Shares
% Preferred Shares
%
44,574
73,106
-
1.690.478
34,338,652
0.05%
85,688
44,774
-
2,009,374
5,366.478
0.01%
314,968
32
-
-
-
-
1,629,124
1,560,000
1,560,000
-
-
-
1,560,000
1,560,000
-
Domingos Somma
24,274
2,786,164
-
1,870,350
5,576,380
0.01%
154,956
-
1,560,000
1,505,956
1,992,436
-
2,700,000
-
-
17,811,464
1,689,014
0.02%
-
-
-
959,820
1,759,480
1,560,000
-
28,314
-
-
2,340,580
1,560,000
-
-
-
1,560,000
1,732,566
1,560,000
-
50,310
-
2,003,768
-
Carlos João Petry
Expedito Luz
Sirleu José Protti
Paulo Roberto Perlotti Ramos
Manoel Vitor de Mendonça Filho
Nestor Mundstock
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED-PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth certain information as of December 31, 2001 with respect to (i) any person known
to the Company to be the owner of more than 5% of the Company's outstanding shares of voting Common Shares, (ii) any
person known to the Company to be the owner of more than 5% of the Company's outstanding shares of Preferred Shares
and (iii) the total amount of the Company's voting Common Shares and Preferred Shares owned by the executive officers
and directors of the Company as a group.
As of December 31, 2001, 39,382,020,386 Common Shares and 74,109,685,986 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.
The Gerdau family, through its holdings in Indac - Indústria, Administração e Comércio S.A., Grupo Gerdau
Empreendimentos Ltda. and Gersul Empreendimentos Imobiliários Ltda., controls Metalúrgica Gerdau S.A. holding,
collectively, 71.8% of the voting capital and 23.9% of the total capital. Individually, Indac - Indústria, Administração e
Comércio 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 Imobiliários Ltda. holds 13.9% of the voting capital and 4.6% of the total capital of
Metalurgica Gerdau S.A..
45
- 45 --1
Shareholder
Common Shares
Metalúrgica Gerdau S.A.
32,677,464,100
BNDES Participações S.A. – BNDESPAR
2,714,970,110
Clube de Investimentos HRP
915,084
Santa Felicidade Com. Imp. Exp. Prods. Sid. Ltda.*
936,949,502
Gersul Empreendimentos Imobiliários S.A.*
747,214,768
Grupo Gerdau Empreendimentos Ltda.*
547,570,932
Indac
236,648,440
Members of the Board of Directors and Executive
6,307,160
Board as a group (17 persons)
* Controlled by or affiliated with Metalúrgica Gerdau S.A.
%
83.0
6.9
2.4
1.9
1.4
0.6
-
Preferred Shares
21,043,082718
4.244,518,064
2,999,759,664
6,270,673
91,264,330
%
28.4
5.7
4.0
0.1
Metalúrgica Gerdau S.A. and its controlled companies hold 85% 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.
B. RELATED-PARTY TRANSACTIONS
The most significant transactions of the Company with its related parties are with Banco Gerdau, Fundação
Gerdau, Haras Joter Ltda. and , Metalúrgica Gerdau.
Banco Gerdau, a wholly owned subsidiary of Metalúrgica Gerdau, has established an investment fund for the
exclusive use of the Company. The fund’s investments consist of fixed-income security. There are borrowings of the
Company from its parent company, Metalúrgica Gerdau, and borrowings of Fundação Gerdau and Haras Joter Ltda. from
Gerdau S.A.. These borrowings are denominated in Brazilian Reais and bear interest at the average in terest rate defined
by the Company for its inter-company loans and other financial transactions. Usually the Company’s inter-company rate
is established according to the market average rate. For further information about transactions with related parties, see
Note 6 of the financial statements.
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
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 Contribuição Provisória sobre
Movimentação Financeira (“CPMF”), Fundo de Participação e Integração Social ("PIS"), Contribuição Social para o
Financiamento da Seguridade Social ("COFINS"), Contribuições Previdenciárias (“INSS”), Fundo de Investimento
Social ("FINSOCIAL"), Contribuição ao Fundo de Assistência ao Trabalhador Rural (“FUNRURAL”), Contribuição
Social Sobre o Lucro, and the Income Tax, Imposto de Renda Pessoa Jurídica (“IRPJ”), as well as the state value added
tax, Imposto Sobre Circulação de Mercadorias e Serviços ("ICMS"). The questions raised in all of these matters but for
the INSS have already been ruled on by the Brazilian Supreme Court, establishing precedents for the lower courts.
Therefore, although in some cases the outcome is highly predictable, because the relevant disputes have not been
concluded, the contingent liability in respect of these taxes remains on the books of the Company in the aggregate amount
of U.S.$ 27.1 as of December 31, 2001 (CPMF – US$ 5.8 million, PIS/COFINS – U.S.$ 3.9 million, INSS – U.S.$ 7.7
million, FINSOCIAL – U.S.$ 3.1 million, FUNRURAL – U.S.$ 0.049 million, Contribuição Social Sobre o Lucro –
U.S.$ 1.1 million, IRPJ – U.S.$ 4.4 million, ICMS – U.S.$ 0.4 million and others U.S.$ 0.7 million).
46
- 46 --1
The aggregate amount equivalent to U.S.$ 12.4 million has been paid to the courts to be held in judicial escrow
pending the outcome of the above disputes; therefore, the actual amount to be paid in the event that the Company is
completely unsuccessful in such tax disputes would not be greater than U.S.$ 9.8 million.
Along with other electricity consumers, the Company has challenged the constitutionality of "compulsory loans"
required to be made to the state-owned utility holding company Eletrobrás (Empréstimo Compulsório Eletrobras sobre
Energia Elétrica) by its customers. The current amount in dispute by the Company is the equivalent of U.S.$ 21.7
million, including an aggregate amount of the equivalent of U.S.$ 11.2 million that has been paid into court (where it is
held in judicial escrow pending the outcome of the relevant disputes). In 2001, the amounts under dispute and in judicial
escrow were reduced to U.S.$ 21.5 million and U.S.$ 3.0 million, respectively, due the termination of three major law
suits. 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 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.
During the last year, the Company received several tax assessments concerning INSS (social security
contributions levied on employees payroll). Among other subjects, the Fiscal Authorities are questioning irregularities in
payments concerning vacation premium established by collective agreement, labor accident insurance, profit sharing
programs, directors fees, additional indemnity on dismissals, as well as regarding employees of outsourced services´
companies, due to the Company’s alleged legal joint and several liability.
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,
2001 should not exceed U.S.$ 6.3 million.
Most of these labor lawsuits are characterized by multiple ex-employee 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) the correction of dangerous working conditions,
(iv) the 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.
The Company believes, based in part on advice from legal counsel, that the reserve for contingencies of U.S.$
55.2 million as of December 31, 2001, 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 not have a material effect on the consolidated financial position as of December 31, 2001 or the results of
future operations or cash flows.
B. SIGNIFICANT CHANGES
There were no significant changes nor have any relevant facts occurred after the date of the financial statements
included in this annual report.
47
- 47 --1
ITEM 9.
THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Price Information
The table below presents, for the indicated periods, the minimum and maximum closing prices for Preferred
Shares on the São Paulo Stock Exchange. The prices are expressed in nominal reais as of the period end date. The sales
prices included on the two following tables were also translated into U.S. dollars, but please note that the “high” and
“low” quote in U.S. dollars in a given period may not be in the same month of the “high” and “low” prices expressed in
reais due to the influence of the foreign exchange rate.
Closing Sale Prices
Nominal Reais per 1,000 Preferred U.S. Dollars per
Shares
Shares
High
Low
High
27.50
8.55
25.05
24.90
7.30
19.39
50.30
7.30
27.51
58.00
14.99
32.36
23.80
13.06
11.84
1997
1998
1999
2000
2001
1,000
Closing Sale Prices
Nominal Reais per 1,000 Preferred U.S. Dollars per1,000
Shares
Shares
High
Low
High
1999
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2000
First Quarter
Second Quarter*
Third Quarter
Fourth Quarter
2001
First Quarter
Second Qu arter
Third Quarter
Fourth Quarter
2002
First Quarter
Preferred
Low
8.22
5.53
5.54
7.65
4.81
Preferred
Low
18.00
29.50
34.00
50.30
7.30
18.45
24.80
31.30
9.94
16.67
17.98
27.51
5.54
10.70
13.24
16.00
58.00
45.00
26.90
22.40
45.00
16.99
21.98
14.99
32.36
25.80
14.90
12.12
25.89
9.17
12.16
7.65
23.38
20.19
17.49
23.80
16.81
15.37
13.06
13.30
11.84
9.24
7.05
9.66
8.24
6.57
4.81
4.92
29.01
22.02
12.41
9.55
The sales prices included on the following table were translated into U.S. dollars in accordance with the Commercial
Market rate of exchange for each corresponding date quoted.
Closing Sale Prices
Nominal Reais per 1,000 Preferred U.S. Dollars per1,000
Shares
Shares
High
Low
High
2001
January
February
March
April
23.38
20.90
19.91
20.19
48
16.81
17.95
17.65
17.75
11.84
10.54
9.37
9.24
- 48 --1
Preferred
Low
8.67
8.67
8.24
8.16
May
June
July
August
September
October
November
December
2002
January
February
March
April
20.05
18.01
17.49
17.40
16.31
19.00
23.80
23.47
15.37
15.95
14.65
16.15
13.06
13.30
18.11
21.40
9.02
7.73
7.02
7.05
6.36
6.96
9.56
9.66
6.57
6.69
5.91
6.39
4.81
4.92
6.75
9.22
26.75
27.90
29.01
32.60
22.02
23.32
26.50
27.00
11.07
11.60
12.41
14.19
9.55
9.63
11.23
11.75
* The Board of Directors of the Company authorized a 2-for-1 stock split of its Common and Preferred stock, which was
approved in the General and Extraordinary Shareholders’ Meeting held on April 28, 2000. The additional shares resulting
from the split were distributed by Banco Itaú S.A., the transfer agent, two days after approval, for shares traded in Brazil,
and seven days after the approval for ADSs, to shareholders of record on April 28, 2000, at which time the shares were
traded on a split-adjusted basis.
The following table presents, for the months indicated, the high and low prices for the ADRs as indicated in the
Over-the-Counter Market until March 10, 1999, when the Company upgraded its ADSs to level II. For periods subsequent
to this date, the table presents the negotiated prices on the New York Stock Exchange.
US$ Price
Low
6.81
6.75
7.56
4.70
1998
1999
2000
2001
High
21.81
27.00
31.25
11.90
US$ Price
1999
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2000
First Quarter
Second Quarter*
Third Quarter
Fourth Quarter
2001
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2002
First Quarter
Low
High
6.75
10.25
13.13
17.75
10.25
18.50
18.50
27.00
25.88
9.13
12.13
7.56
31.25
26.25
15.00
13.00
8.09
6.50
4.68
4.70
11.75
11.90
7.60
10.00
9.50
12.43
* 2-for-1 stock split of common and preferred stock on April 28,2000.
US$ Price
2000
July
August
September
October
November
December
49
Low
High
12.13
12.75
12.31
9.88
8.38
7.56
13.94
15.00
14.38
13.00
10.31
9.63
- 49 --1
2001
January
February
March
April
May
Jun
July
August
September
October
November
December
2002
January
February
March
April
8.50
8.70
8.09
7.81
6.50
6.55
5.77
6.26
4.68
4.70
6.60
8.75
11.75
10.85
9.85
11.90
9.16
8.04
7.60
7.21
6.60
7.10
9.75
10.0
9.50
9.53
11.10
11.70
11.35
11.90
12.43
14.05
B. PLAN OF DISTRIBUTION
Not required.
C. MARKETS
Trading on the Brazilian Stock Exchanges
Of Brazil's stock exchanges, the São Paulo Stock Exchange has been the most significant in recent years. During
2001, the São Paulo Stock Exchange accounted for almost the totality of the trading value negotiated in Brazil.
The São Paulo Stock Exchange is a non-profit entity owned by its member brokerage firms. Trading on the São
Paulo Stock Exchange is limited to member brokerage firms and a limited number of authorized non-members. The São
Paulo Stock Exchange 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 automated system of the
São Paulo Stock Exchange. There is also trading in the so-called After-Market, only through the automated system of the
São Paulo Stock Exchange, from 6:45 p.m. to 19:30 p.m. Only shares that were traded during the regular trading session
of the day may be traded in the After-Market of the same day.
There are no specialists or market makers for the Company's shares on the São Paulo Stock Exchange. The
Comissão de Valores Mobilários (the "CVM" or the "Brazilian Securities Commission") and the São Paulo Stock
Exchange have discretionary authority to suspend trading in shares of a particular issuer under certain circumstances.
Trading in securities listed on the São Paulo Stock Exchange may be effected off the exchange under certain
circumstances, although such trading is very limited.
On December, 2001, the aggregate market capitalization of the companies listed on the São Paulo Stock
Exchange was approximately US$ 185.4 billion. Although any of the outstanding shares of a listed company may trade on
the São Paulo Stock Exchange, 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 São Paulo Stock Exchange tend to overstate the liquidity of the Brazilian
equity securities market. The Brazilian equity securities market 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, named Companhia
Brasileira de Liquidação e Custódia – 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 São Paulo Stock Exchange.
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Trading on the São Paulo Stock Exchange 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 Banco Central do Brasil (the "Central
Bank"), 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 Law no. 6,385 dated December 7, 1976, as
amended (the "Brazilian Securities Law") and the Brazilian Corporate Law (Law no. 6,404 dated December 15, 1976, as
amended) (the "Brazilian Corporate Law").
Law 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 CVM into an autonomous governmental agency linked to the Ministry of Finance, with legal
independence and separate assets and liabilities; (ii) the requirement of greater disclosure by listed companies; (iii) the
tag-along right to minority common shareholders in the event of change in 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 his alternate (considering that until April 2005, the representative of such
shareholders will be chosen out of a three-name list prepared by controlling shareholders); (v) the right of the minority
common shareholders to also elect one board member; and (vi) the preferred shares will only be traded in the stock
market if they have at least one of the rights mentioned below: (a) priority in the receipt of dividends corresponding to at
least 3% of the shares’ net worth based on the last approved balance sheet of the company; (b) 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
change in the control of the company. The By-Laws of existing listed companies shall be modified to conform to the new
provisions mentioned above, by March 1, 2003.
Under the Brazilian Corporate Law, a comp any is either listed, a "companhia aberta", such as the Company, or
private, a "companhia fechada". All listed companies are registered with the CVM and are subject to reporting
requirements. A company registered with the CVM may have its securities traded either on the São Paulo Stock
Exchange or in the Brazilian over-the-counter markets ("Brazilian OTC"). The shares of a listed company, including the
Company, may also be traded privately subject to certain limitations.
There are certain cases in which the disclosure of information to the CVM, the São Paulo Stock Exchange, or
even to the public is required. These include (i) the direct or indirect acquisition by an investor of at least 5% (five
percent) of any class or type of shares representing the capital stock of a listed company, (ii) the sale of shares which
represents the transfer of control of a listed company and (iii) the occurrence of a material event to the corporation.
Recently CVM issued Instruction Nº 361, of March 5, 2002, which regulates the tender offers mainly when the
following events occur: (i) delisting of public companies; (ii) increase in the equity interest by the controlling shareholder;
and (iii) transfer of control of a public company.
To be listed on the São Paulo Stock Exchange, a company must apply for registration with the CVM and the São
Paulo Stock Exchange. Once this exchange has admitted a company to listing and the CVM has accepted its registration
as a listed company, its securities may be traded in the São Paulo Stock Exchange, as long as the company complies with
the minimum requirements of this exchange.
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 in the Brazilian OTC. The CVM requires that it be given notice of all trades carried out
in the Brazilian OTC by the respective intermediaries.
Trading in securities on the São Paulo Stock Exchange may be suspended at the request of a company in
anticipation of the announcement of a material event. Trading may also be suspended on the initiative of the exchange or
the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding
a material event or has provided inadequate responses to the inquiries by the CVM or the exchange.
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The Brazilian securities markets are governed principally by Brazilian Securities Law, by Brazilian Corporate
Law and by regulations issued by the CVM and the Conselho Monetário Nacional (the "National Monetary Council").
These laws and regulations, among others, 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 U.S. securities markets or markets in
certain other jurisdictions.
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.
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 has been registered with the Central Bank.
In Brazil, there is a mechanism available to foreign investors interested in trading directly on the São Paulo Stock
Exchange. Until March 2000, this mechanism was known as Annex IV Regulations, in a reference to the Annex IV of
Resolution No. 1,289 of the National Monetary Council (the "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 (the "2,689 Regulation").
The 2,689 Regulation, which became effective on March 31, 2000, sets forth new rules about foreign portfolio
investments in Brazil. Foreign investments registered under Annex IV Regulations had to be conformed to the 2,689
Regulation by September 30, 2000. Such new 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 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 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
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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 an electronic registration
with the Central Bank. Foreign investments registered under Annex IV Regulations had to be conformed to the new rules
of capital registration by September 30, 2000.
Resolution No. 1,927 of the National Monetary Council, which is the Amended and Restated Annex V to
Resolution No. 1,289 (the "Annex V Regulations"), provides for the issuance of depositary receipts in foreign markets in
respect of shares of Brazilian issuers. The ADSs have been approved under the Annex V Regulations by the Central
Bank and the CVM. Accordingly, the proceeds from the sale of the ADSs by ADR holders outside Brazil are free of
Brazilian foreign investment controls and holders of the ADSs 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 ADSs (the "Depositary"), and is maintained by Banco Itaú S.A. (the "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 ADSs into foreign currency and remit the proceeds abroad. In
the event that a holder of Preferred ADSs exchanges Preferred ADSs 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 ADSs.
Restrictions on the remittance of foreign capital abroad could hinder or prevent the Custodian, as custodian for the
Preferred Shares represented by Preferred ADSs or holders who have exchanged Preferred ADSs for Preferred Shares
from converting dividends, distributions or the proceeds from any sale of Preferred Shares into U.S. dollars and remitting
such U.S. dollars abroad. Holders of Preferred ADSs 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 ADSs.
Exchange Rates
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 prior
approval from Brazilian monetary authorities, such as the purchase and sale of registered investments by foreign persons
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 Market
rate is the commercial selling rate for Brazilian currency into U.S. dollars, as reported by the Central Bank. The "Floating
Market rate" is the prevailing selling rate for Brazilian currency into U.S. dollars which applies to transactions to which
the Commercial Market rate does not apply, as reported by the Central Bank. Prior to the implementation of the Real
Plan, the Commercial Market rate and the Floating Market 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 Market rate and the Floating Market rate are
reported by the Central Bank on a daily basis.
Both the Commercial Market rate and the Floating Market rate are freely negotiated but have suffered minor
intervention by the Central Bank. After implementation of the Real Plan, the Central Bank initially allowed the real to
float with minimal intervention.
On January 18, 1999, the Central Bank officially announced its new policy to allow the real’s value to be
determined by the foreign exchange markets, intervening only to limit wide swings in the value of the currency. The
pressure on the real during the beginning of March that same year caused the government to drop the managed band
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exchange rate system and to adopt a free floating exchange rate system. Following the adoption of this system and with
the designation of a new Central Bank president, Armínio Fraga, as well as other macro-economic factors, the real has
strengthened so that on December 31, 1999, the exchange rate was R$ 1.79 per US$ 1.00. Since that date it has declined
against the Dollar. On December 31, 2000 the Commercial Market rate was R$ 1.9554 per U.S.$ 1.00 and on December
31, 2001, the exchange rate was R$ 2.32 per US$ 1.00. The year of 2001 was strongly influenced by the economic and
political crises in Argentina. The real fluctuated heavily against the U.S. dollar. By the end of the year, however, the
financial situation of Brazil as perceived by economic agents caused the Brazilian currency to recover and regain value.
Since then it has fluctuated well within the ratios considered stable by the financial markets. The net devaluation in the
period was of 18.67%. On April 30, 2002 the rate was R$ 2.36 per U.S.$ 1.00.
The following table sets forth information on prevailing Commercial Market rates for the periods indicated.
Year
1997
1998
1999
2000
2001
Exchange Rates
reais per U.S.$ 1.00(1)
Average Price
1.0784
1.1609
1.8133
1.8293
2.3504
Average
Average
Average
Average
Average
Year
2001
2001
2001
2001
2001
2001
Month
July
August
September
October
November
December
Exchange Rates
Reais per US$ 1.00
Lowest Rate
2.3249
2.4463
2.5590
2.6866
2.4604
2.2930
Exchange Rates
reais per U.S.$ 1.00 (1)
Highest Rate
2.5979
2.5585
2.8007
2.7828
2.6820
2.4672
Source: Economática
The Company will make any 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 ADSs on
conversion by the Depositary of such distributions into U.S. dollars for payment to holders of Preferred ADSs.
Fluctuations in the exchange rate between reais and the U.S. dollar may also affect the U.S. dollar equivalent of the reais
price 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 it to foresee such imbalance, temporary restrictions may be imposed on remittances of foreign capital
abroad. For approximately nine months in 1989 and early 1990, for example, to maintain Brazil’s foreign currency
reserves, the amounts were subsequently released 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.
E. TAXATION
The following summary contains a description of the principal Brazilian and U.S. federal income tax
consequences of the purchase, owners hip and disposition of a Preferred Share and Preferred ADS, 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 of such
securities. In particular, this summary deals only with holders that will hold Preferred Shares or Preferred ADSs as
"capital assets" within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the "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 ADSs 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 U.S. dollar, persons liable for alternative minimum tax or persons that own or are treated as owning 10% or
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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 U.S. holders or Preferred Shares of Preferred ADSs. 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 ADSs 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 ADSs by a holder that is not domiciled in Brazil for purposes 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 U.S. 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 nonBrazilian 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 ADSs 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 ADSs to another nonBrazilian holder are not subject to Brazilian tax.
The withdrawal of Preferred Shares in exchange for Preferred ADSs is not subject to Brazilian tax. The deposit
of Preferred Shares in exchange for Preferred ADSs 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 the Preferred Shares are not so registered,
the deposit of Preferred Shares in exchange for Preferred ADSs 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 U.S. 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 São
Paulo Stock Exchange. Non-Brazilian holders are subject to withholding tax at the rate of 10% on gains realized on sales
or exchanges in Brazil of Preferred Shares that occur on the São Paulo Stock Exchange unless such sale is made under
the 2,689 Regulation. Gains realized arising from transactions on the São 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
São 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 São 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
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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 ADSs 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 nonBrazilian holder of the Preferred ADSs 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 other words, gains realized by such holder on the sale or exchange in Brazil that occur in the spot market of
shares traded on a Brazilian stock exchange will be taxed at a rate of 10% (to be increased to 20% as of January 1, 2002,
in accordance with the same Law). Law 9,959 also provides that such rate of 10% on gains realized on the sale or
exchange in Brazil of Preferred Shares, that occur on the São Paulo Stock Exchange, will be increased to 20% for
transactions carried out on or after January 1, 2002.
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 ADSs will be subject to Brazilian income taxation at the rate of 15%, unless such sale or assignment is
performed within the São Paulo Stock Exchange, in which the gains are exempt from withholding income tax .
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 Net Worth.
Distributions of interest on net worth 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 ADSs, 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%. Since 1996, such payments have been tax deductible by the Company. Since 1997, the payments
have also been deductible in determining social welfare contributions and income tax by the Company as long as the
payment of a distribution of interest is approved at the Company's General Meeting. The distribution of interest on
shareholders' equity may be determined by the Board of Directors of the Company alone. No assurance can be given that
the Board of Directors of the Company will not determine that future distributions of profits be made 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 ADSs 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 ADSs.
Pursuant to Decree 2,219 of May 2, 1997, and Ordinance no. 5 of January 21, 1999, issued by Ministry of
Finance, the amount in reais resulting from the conversion of the proceeds received by a Brazilian entity from a foreign
investme nt in the Brazilian securities market (including those in connection with the investment in the Preferred Shares or
Preferred ADSs and those made under the 2,689 Regulation) is subject to a transaction tax ("IOF"), although at present
the rate of such tax is 0%. The Minister of Finance is empowered to establish the applicable IOF tax rate. Under Law
8,894 of June 21, 1994, such IOF tax rate may be increased at any time to a maximum of 25%, but any such increase will
only be applicable to transactions occurring after such increase becomes effective.
Pursuant to Law 9,311 of October 24, 1996, the Contribuição Provisória sobre Movimentação Financeira (the
"CPMF tax") was levied at a rate of 0.2% on all fund transfers in connection with financial transactions in Brazil.
Pursuant to Law 9,539, the CPMF tax is payable until February 1999. Pursuant to Constitutional Amendment 21, of
March 18, 1999, the collection of the CPMF was extended for an additional period of 36 months. This payment of the
CPMF tax was required as of June 17, 1999. The CPMF tax rate was 0.38% during the first 12 months, and would be
0.30% for the remaining period. But in December 2000, Constitutional Amendment 31 increased the rate to 0.38% as of
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March 2001. Although the CPMF tax is set to expire on June 16, 2002, 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. Additionally, when the non-Brazilian holder remits the
proceeds from the sale or assignment of Preferred Shares by means of a foreign exchange transaction, the CPMF tax will
be levied on the amount to be remitted abroad in Brazilian reais. If it is necessary to perform any exchange transaction in
connection with Preferred ADSs or Preferred Shares, it will bear the CPMF tax.
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 ADSs 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 ADS, or purchased in Brazil and deposited with the Depositary in
exchange for a Preferred ADS, will be equal to their purchase price (in U.S. dollars) paid by the purchaser. The
Registered Capital for Preferred Shares that are withdrawn upon surrender of Preferred ADSs, will be the U.S. dollar
equivalent of (i) the average price of the Preferred Shares on the São 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 U.S. 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 registration of Registered
Capital, which may delay remittances abroad. Such a delay may adversely affect the amount, in U.S. dollars, received by
the non-Brazilian holder.
U.S. Federal Income Tax Considerations
As used below, a "U.S. holder" is a holder of a Preferred Share or Preferred ADS that is, for U.S. 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 U.S.
federal income tax on a net income basis in respect of the Preferred Shares or Preferred ADSs (including a nonresident
alien individual or foreign corporation whose income with respect to a Preferred Share or Preferred ADS is effectively
connected with the conduct of a U.S. trade or business). The following discussion assumes that the Preferred Shares and
Preferred ADSs are held as capital assets.
In general, for U.S. federal income tax purposes, a holder of an American Depository Receipt ("ADR")
evidencing an ADS will be treated as the beneficial owner of the Preferred Share(s) represented by the applicable ADS.
Taxation of Dividends.
In general, a distribution made with respect to a Preferred Share or Preferred ADS (which for this purpose will
include distributions of interest on equity) will, to the extent made from the current or accumulated earnings and profits of
the Company, as determined under U.S. federal income tax principles, constitute a dividend for U.S. 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 U.S. holder's tax basis in the Preferred Share or Preferred
ADS on which it is paid and thereafter as capital gain. As discussed below, the term "dividend" means a distribution that
constitutes a dividend for U.S. 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 ADS will be subject to U.S. federal income taxation as foreign source
dividend income and will not be eligible for the dividends received deduction generally allowed to U.S. corporations. A
dividend paid in Brazilian currency will be includible in the income of a U.S. holder at its value in U.S. dollars calculated
by reference to the prevailing spot market exchange rate in effect on the day it is received by the U.S. holder or, in the
case of a dividend received in respect of Preferred ADSs, on the date the dividend is received by the Depositary, whether
57
- 57 --1
or not the dividend is converted into U.S. dollars. Any gain or loss realized on a subsequent conversion or other
disposition of the Brazilian currency will be treated as U.S. source ordinary income or loss. In the case of a U.S. holder
that is not a United States person, the currency gain or loss will be U.S. source income only if the currency is held by a
qualified business unit of the U.S. holder in the United States.
Subject to generally applicable limitations under U.S. federal income tax law, the Brazilian withholding tax will
be treated as a foreign income tax eligible for credit against a U.S. holder's U.S. 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 U.S. holder may elect not to claim a credit for any of its foreign taxes and deduct all of those taxes in
computing taxable income.
Taxation of Capital Gains.
A deposit or withdrawal of Preferred Shares by a holder in exchange for a Preferred ADS will not result in the
realization of gain or loss for U.S. federal income tax purposes.
A U.S. holder generally will recognize capital gain or loss upon a sale or other disposition of a Preferred Share or
Preferred ADS held by the U.S. holder or the Depositary in an amount equal to the difference between the U.S. holder's
adjusted basis in the Preferred Share or Preferred ADS (determined in U.S. dollars) and the U.S. 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 U.S. 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 U.S. 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 U.S. holder on the sale or other disposition of a
Preferred Share or Preferred ADS generally will be treated as U.S. source income for U.S. foreign tax credit purposes.
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 ADS 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 U.S. holder may not be able to use the foreign tax credit for that Brazilian tax unless it can apply the credit against
U.S. 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 U.S. resident in whole or in part as a foreign source loss.
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, get 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 ConsiderationsTaxation 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
58
- 58 --1
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, (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 (iv) the interest charge generally
applicable to underpayments of tax would be imposed in respect of the tax attributable to each prior 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. In general, if the Company is treated as a PFIC, the rules described in the second sentence of this paragraph
can be avoided by a U.S. holder making, in the first year the U.S. holder owns Preferred Shares or Preferred ADSs while
the Comp any is treated as a PFIC, an election to treat the Preferred Shares or Preferred ADSs as shares in a qualified
electing fund ("QEF"). In that event, the U.S. holder must include in income each year his pro rata share of the
Company's ordinary earnings and net capital gains, whether or not distributed. In general, distributions of such previously
taxed income are not taxable. A U.S. holder's basis in the Preferred Shares or Preferred ADSs increases by amounts
included in income pursuant to a QEF election and decreases by any nontaxable distributions. A QEF election is
available only if the Company provides certain information to its shareholders, including the amount of its ordinary
earnings and net capital gains computed generally in accordance with U.S. federal income tax rules, and the Company
presently does not intend to make those computations or to provide that information. Alternatively, a U.S. holder may
elect to be subject to a mark-to-market regime for stock in a PFIC. The mark-to-market rules, effective for taxable years
of U.S. holders beginning after December 31, 1997, also would apply to the exclusion of the rules described in the second
sentence of this paragraph, except generally to the extent that the Company is a PFIC at any time while a U.S. holder has
owned Preferred Shares or Preferred ADSs and the U.S. holder has not made either the mark-to-market election or an
election under current law to treat the Company as a QEF. Under the mark-to-market rules, a U.S. holder may elect
mark-to-market treatment for its Preferred Shares or Preferred ADSs, provided the Preferred Shares or Preferred ADSs,
for purposes of these rules, constitute "marketable stock" pursuant to Treasury regulations that have yet to be
promulgated. A U.S. holder electing the mark-to-market regime generally would treat any gain recognized under markto-market treatment or on an actual sale of Preferred Shares or Preferred ADSs as ordinary income and would be allowed
an ordinary deduction for any decrease in the value of Preferred Shares or Preferred ADSs in any taxable year and for any
loss recognized on an actual sale, but only to the extent, in each case, of previously included mark-to-market income not
offset by previously deducted decreases in value. A U.S. holder's basis in Preferred Shares or Preferred ADSs would
increase or decrease by gain or loss taken into account under the mark-to-market regime. A mark-to-market election is
generally irrevocable.
Information Reporting and Backup Withholding .
A U.S. holder of a Preferred Share or Preferred ADS will generally be subject to information reporting to the
U.S. 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 ADS paid within the United States, or
through certain U.S. 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 U.S. federal income tax
liability, and a U.S. 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 U.S. holders generally are exempt from backup withholding and information
reporting on payments made within the United States, a holder that is not a U.S. holder may be required to comply with
applicable certification procedures to establish that it is not a U.S. person in order to avoid the application of U.S.
information reporting requirements and backup withholding.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable
H. DOCUMENTS ON DISPLAY
All the documentation concerning the Company may be found and inspected at the Company’s headquarters, at
1811 Farrapos Av., Porto Alegre, Rio Grande do Sul, Brazil.
59
- 59 --1
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company does have some exposure to market risks related but not limited to exchange rate (Brazilian reais,
Canadian dollars vis -à-vis the U.S. dollar) indexed assets, and interest rate-based financial instruments. During the year of
2001, the fluctuation in the exchange rate of the real versus the U.S. dollar devalued 18.67% (the U.S. dollar rate for reais
on December 31, 2000 was R$ 1.9554 per US$ 1.00 and on December 31, 2001 the rate was R$ 2.3204 per US$ 1.00).
The Company’s market risk exposure comes mainly from its financing contracts. Furthermore, currency devaluation
(exchange rate risk), increases in inflation and interest rates can impact on the Company’s financing capabilities and its
cash flow.
The Company has a Eurobond, issued on May 24, 1996 for a total of US$ 130 million and it will mature in May
24, 2004. This bond is fully protected against any currency variations of the US$ against the real. Besides the Eurobond
operation, other derivatives hedges were entered into during 2001 and at December 31, 2001 the total amount outstanding
was US$ 225.6 million (See Item 5, Indebtedness and Financial Strategy). Gerdau S.A. does not rely on imported raw
materials and for this reason does not need to protect itself against international prices for its inputs. The company’s raw
material are mostly produced locally (steel scrap and pig iron) and these items do not fluctuate in line with international
prices.
The Company maintains assets denominated in reais and, to a lesser extent, in U.S. and Canadian dollars,
Chilean, Uruguayan and Argentine 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. 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 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. The Company’s sales denominated in the currencies of
Brazil, Canada, Uruguay, Chile, Argentina and the United States represented 63.6%, 8.9%, 0.7%, 2.7%, 0.6% and 23.5%,
respectively, of the Company’s consolidated gross sales for the year ended December 31, 2001. Because the Company’s
U.S. GAAP financial statements are denominated 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.
Intending to minimize the effect of exchange rate variations on its liabilities, the Company has entered into swap
transactions, which were translated into Brazilian reais on the contract date, and are linked to CDI (Interbank deposit
rates). Swap contracts are as follows:
Company and consolidated
Amount
In proportion
Description
(US$000)
to CDI - %
Contract date
02.12.2001
02.12.2001
07.18.2001
03.30.2001
10.04.2001
12.05.2001
07.16.2001
07.18.2001
Eurobonds
Eurobonds
Eurobonds
Imports
Imports
Imports
Prepayment
Prepayment
50,000
50,000
30,000
9,515
32,556
12,559
30,710
10,236
84.5
87.0
103.7
100.0
100.0
100.0
80.3
92.8
Maturity
05.20.2004
05.20.2004
05.20.2004
10.04.2004
06.25.2002
12.23.2002
03.01.2006
03.01.2006
On December 31, 2001, the level of indebtedness of the Company including contracts for funding in local and foreign
currencies and debentures less cash and cash equivalents was less than its net worth (net debt to equity ratio of 91%).
Debt maturities are as follows:
60
- 60 --1
2002
2003
2004
2005
2006
2007 thereafter
45,714
TJLP +
36,907
TJLP +
28,640
TJLP +
24,073
TJLP +
21,288
TJLP +
6,751
TJLP +
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
TOTAL
LIABILITIES
Denominated in Brazilian currency (reais)
BNDES
Average interest rate
Debentures
24,649
T JLP +
187,549
3.00%
2,018
13,156
81,047
96,222
CDI
CDI
CDI
461
461
Parent company
22.87%
Denominated in U.S. dollars
Eurobonds
1,848
92,303
Import financing
11.125%
68,346
38,726
11.125%
15,087
237
LIBOR +
2.36%
LIBOR +
2.36%
LIBOR +
2.36%
LIBOR +
2.36%
25,224
17,985
18,108
8,051
Export financing
LIBOR +
Pre-export financing
6.821%
5,493
94,151
122,395
1,087
6.821%
6.821%
6.821%
6.821%
5,493
LIBOR +
3.72%
Companies abroad
404,057
LIBOR +
78,438
LIBOR +
84,599
LIBOR +
106,979
LIBOR +
26,729
LIBOR +
2.50%
2.50%
2.50%
2.50%
2.50%
Denominated in Cdn$ dollars
Machinery and other financing
70,456
LIBOR +
701,275
16,809
LIBOR +
2.50%
TOTAL
569,509
16,809
172,056
238,737
152,496
49,104
6,751
106,157
1,294,810
ASSETS
Denominated in Brazilian currency (reais)
Cash
Investments
340
76,378
CDI
Denominated in U.S. dollars
Cash
Investments
340
76,378
27,492
27,492
229,687
229,687
3.50%
Protectionist Measures
The measures imposed by the U.S. Administration and by the European Union to protect their domestic markets
against the import of certain cheap steel products, do not directly impact the operations of Gerdau in Brazil due to the fact
that exports to these countries are negligible Gerdau units in the U.S. operate independently and do not require any type
of steel inputs out of Brazil.
Argentine Crisis
61
- 61 --1
Due to the economic crisis in Argentina, long steel demand in that country was reduced by roughly 50% as of
the second half of 2001. The impact of this crisis on the Company’s activity level is limited because the Argentine
operations represent less than 2% of Gerdau’s total sales. With a view to adapting to the new economic reality, Gerdau
has: i) adjusted its production to the local demand, ii) restricted credit, and iii) promoted a financial and corporate
restructuring.
The restructuring occurred in March 2002, as follows: Gerdau transferred its 71.77% stake in Sociedad Industrial
Puntana S.A. – SIPSA to its partner Sipar Aceros S.A.. Gerdau maintains its stake of 38.18% in Sipar, and Sipsa becomes
an integral subsidiary of Sipar. This new structure further reduced Gerdau’s exposure to the eventual impact of any
additional currency devaluation in Argentina and is expected to allow for better synergies between the two companies.
The significant devaluation of the Argentine peso vis -à-vis the US dollar generated a loss of US$ 21.4 million in
Gerdau's business in the last quarter of 2001; in the first quarter of 2002, there was an additional loss of US$ 7.0 million.
Moreover, the restructuring promoted in March generated a US$ 1.8 million loss.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELIQUENCIES
Not applicable.
62
- 62 --1
PART II
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15.
Not applicable.
ITEM 16.
Not applicable.
63
- 63 --1
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, 2001, 2000 and 1999
Page
Report of Independent Public Accountants
F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000
F-2
Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999
F-4
Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2001, 2000 and
1999
F-5
Consolidated Statement of Cash Flows for the years ended December 31, 2001, 2000 and 1999
F-6
Notes to Consolidated and Combined Financial Statements
F-8
(b) List of Exhibits
None.
64
- 64 --1
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/ Frederico C. Gerdau Johannpeter
Name:
Title :
Vice President
By: /s/ Osvaldo Burgos Schirmer
Name:
Title:
Chief Financial Officer
Dated: April 30th , 2002
65
- 65 --1
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
share holders’ 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– 1
GERDAU S.A.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 and 2000
(in thousands of U.S. Dollars)
_______
ASSETS
2001
Current assets
Cash and cash equivalents
Trade accounts receivable, net
Inventories
Deferred income taxes
Other
Total current assets
$
Non-current assets
Property, plant and equipment, net
Judicial deposits
Equity investments
Investments at cost
Other
Total assets
$
The accompanying notes are an integral part of these
consolidated balance sheets.
F– 2
2000
27,832 $
306,065
288,842
443,633
6,804
58,354
1,131,530
12,433
290,449
331,622
458,135
15,605
58,392
1,166,636
1,384,463
43,866
26,730
197,611
14,851
153,626
1,542,609
62,938
31,962
248,352
11,890
167,371
2,952,677
$
3,231,758
GERDAU S.A.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 and 2000
_______
LIABILITIES
2001
Current liabilities
Short-term debt
Current portion of long-term debt
Debentures
Trade accounts payable
Income taxes payable
Payroll and related liabilities
Dividends (interest on equity) payable
Taxes payable, other than income taxes
Other
Total current liabilities
$
Non-current liabilities
Long-term debt, less current portion
Debentures
Long-term debt, parent company
Accrued pension liability
Reserve for contingencies
Other
Total non-current liabilities
Total liabilities
Minority interest
2000
371,339 $
196,152
2,018
137,397
12,787
2,872
32,504
44,957
24,413
56,455
880,894
372,050
316,536
2,413
139,945
608
6,651
40,201
38,546
29,047
24,043
970,040
630,636
94,204
461
151,257
47,158
55,170
27,780
1,006,666
717,830
113,349
77
144,495
40,806
70,395
66,824
1,153,776
1,887,560
2,123,816
32,397
42,283
558,971
558,971
279,243
56,074
762,494
(624,062)
1,032,720
279,243
46,075
676,037
(494,667)
1,065,659
SHAREHOLDERS' EQUITY (Note 13)
Preferred shares - no par value
74,109,685,986 shares issued and outstanding
Common shares - no par value
39,382,020,386 shares issued and outstanding
Legal reserve
Retained earnings
Cumulative other comprehensive loss
Total shareholders' equity
Total liabilities and shareholders' equity
consolidated balance sheets.
F– 3
$
2,952,677
$
3,231,758
GERDAU S.A.
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 2001, 2000 and 1999
(in thousands of U.S. Dollars, except per share amounts)
_______
2001
Sales
Less: federal and state excise taxes
Less: freight and discounts
$
Net sales
Cost of sales
2,751,872
(311,223)
(120,119)
2000
$
3,162,537
(349,949)
(135,874)
1999
$
2,056,171
(282,308)
(52,875)
2,320,530
(1,641,620)
2,676,714
(1,964,353)
1,720,988
(1,101,371)
Gross profit
Sales and marketing expenses
General and administrative expenses
678,910
(105,801)
(181,108)
712,361
(112,195)
(213,143)
619,617
(86,007)
(157,755)
Operating income
Interest expense
Exchange loss
Interest income
Equity pickup on non-consolidated companies
Other non-operating income (expense)
392,001
(166,496)
(71,773)
55,002
18,324
(7,853)
387,023
(193,172)
(50,305)
57,324
33,962
2,165
375,855
(80,478)
(141,936)
64,166
(4,903)
5,196
Income before income taxes and minority interest
219,205
236,997
217,900
(40,981)
(13,666)
(54,647)
(36,725)
(8,899)
(45,624)
(17,456)
(3,080)
(20,536)
164,558
191,373
197,364
2,795
(2,815)
328
167,353
188,558
197,692
Provision for income taxes (Note 14):
Current
Deferred
Income before minority interest
Minority interest
Net income
Net income available to Common and Preferred shareholders
$
167,353
Per share data
Basic earnings per 1,000 shares
Common
Preferred
$
$
Diluted earnings per 1,000 shares
Common
Preferred
$
$
$
188,558
1.38
1.52
1.38
1.52
$
$
$
$
$
197,692
1.56
1.72
$
$
1.65
1.79
1.55
1.70
$
$
1.65
1.78
Number of Common shares outstanding
39,382,020,386
39,382,020,386
39,382,020,386
Number of Preferred shares outstanding
74,109,685,986
74,109,685,986
74,109,685,986
consolidated financial statements.
F– 4
GERDAU S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands of U.S. Dollars, except share data)
Common
Stock
Balances as of January 1, 1999
Translation adjustments
Treasury stock sold
Gain on treasury stock sold
Dividends (interest on equity) - $1.20 per 1,000 Common shares
and $1.27 per 1,000 Preferred shares
Transfer to legal reserve
$
Balances as of December 31, 1999
Capital increase with use of reserves
$
$
$
277,580
1,663
-
$
279,243
-
558,971
-
Legal
Reserve
$
27,831
-
$
-
Exchange effects on equity
277,580
-
Preferred
Stock
558,971
-
$
558,971
-
37,690
(1,663)
-
$
46,075
-
-
-
-
-
-
$
558,971
$
563,513
188,558
(65,986)
$
676,037
167,353
-
(101,072)
(313,938)
-
56,074
$
762,494
$
$
(415,010)
(79,657)
-
$
$
-
(494,667)
(191,243)
$
(624,062)
$
-
1,205,325
197,692
(313,938)
2,858
1,680
(70,873)
-
$
-
61,848
$
(2,858)
2,858
-
Total
-
-
(70,897)
(9,999)
$
Treasury
Stock
-
-
The accompanying notes are an integral part of these consolidated financial statements.
F–5
$
(10,048)
9,999
$
444,873
197,692
1,680
(70,873)
(9,859)
10,048
-
279,243
$
9,859
$
Cumulative
Other
comprehensive
loss
Retained
Earnings
1,022,744
188,558
(79,657)
(65,986)
-
$
1,065,659
167,353
(191,243)
-
61,848
-
(70,897)
-
-
$
1,032,720
GERDAU S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
____
2001
Cash flows from operating activities
Net income
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization
Equity pickup
Exchange loss on long-term debt
Minority interest
Loss on dispositions of property, plant and equipment
Provision for doubtful accounts
Non cash financial revenue
Gain on sale of short-term investments
Changes in assets and liabilities:
Increase in accounts receivable
Increase in inventories
(Increase) decrease in judicial deposits
Increase in accounts payable and accrued liabilities
(Increase) decrease in other current assets
Increase in other non-current assets
Increase in other current and non-current liabilities
Net cash provided by operating activities
Cash flows from investing activities
Additions to property, plant and equipment
Proceeds from dispositions of property, plant and equipment
Acquisition of investments at cost, net of cash acquired of $ 6,960
Purchases of short-term investments
Proceeds from maturities and sales of short-term investments
Translation
Net cash used in investing activities
F– 6
$
2000
1999
167,353 $
188,558 $
197,692
135,878
(18,324)
71,773
(2,795)
28,434
10,395
6,743
(22,859)
(10,107)
(2,210)
140,912
(33,962)
50,305
2,815
15,206
2,165
10,820
(9,595)
(26,602)
82,863
4,903
141,936
(328)
28,278
6,285
2,775
9,100
(22,908)
(16,948)
(57,563)
204
66,496
(12,521)
(12,583)
(18,997)
312,369
(62,738)
(41,668)
(6,340)
826
(6,295)
(15,736)
16,820
225,491
(58,852)
(104,612)
(3,802)
77,838
7,503
(124,201)
55,946
300,416
(244,021)
11,482
15,385
(282,967)
223,874
136,134
(140,113)
(264,799)
13,625
(32,259)
(335,787)
405,414
(16,838)
(230,644)
(433,431)
9,700
(344,534)
(366,170)
253,577
40,462
(840,396)
GERDAU S.A.
for years ended December 31, 2001, 2000 and 1999
____
Cash flows from financing activities
Cash dividends (interest on equity) paid
Sale (purchase) of treasury stock
Receipts of short-term debt
Payments of short-term debt
Proceeds from long-term debt
Repayment of long-term debt
Net cash provided by (used in) financing activities
$
Increase (decrease) in cash
Effect of exchange rate changes on cash
Cash at beginning of year
Cash at end of year
2001
2000
1999
(70,897) $
110,508
(121,270)
242,599
(315,352)
(154,412)
(65,986) $
163,777
(74,957)
257,992
(273,407)
7,419
(37,386)
4,538
516,864
(56,821)
294,295
(178,516)
542,974
17,844
(2,445)
12,433
27,832 $
2,266
597
9,570
12,433 $
2,994
(4,362)
10,938
9,570
83,258 $
11,890
137,592 $
25,916
267,445
15,599
$
Supplemental cash flow data
Cash paid during the year for:
Interest (net of amounts capitalized)
Income taxes
$
consolidated financial statements.
F– 7
1
Nature of operations
Gerdau S.A. is a sociedade anônima incorporated as a limited liability company under the laws of the
Federative Republic of Brazil. The principal business of Gerdau S.A. (“Gerdau”) and its subsidiaries in
Uruguay, Chile, Canada, Argentina and the United States (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,
starting with scrap and pig iron acquired mainly in the region where each mill operates. Gerdau also operates
plants capable of producing steel starting with iron ore in blast furnaces and through the direct reduction
process.
The main markets in which the Company operates are the civil construction, manufacturing, agriculture and
cattle raising sectors, the first two of which represented approximately 94% of the total sales volume of the
Company measured in tons in 2001 (unaudited). These markets are located in Brazil, United States, Canada
and Chile and, to a lesser extent, Uruguay and Argentina.
2
Basis of presentation
The principal accounting policies followed by the Company in the preparation of these financial statements
are summarized below:
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
generally accepted accounting principles in Brazil (“Brazilian GAAP”) and applied by the Company in the
preparation of its statutory financial statements and for other purposes.
Shareholders' equity and results of operations included in these financial statements differ from those
included in the statutory accounting records as a result of (i) the effects of differences between the rate of
devaluation of the Brazilian real against the United States Dollar (“U.S. dollar” or “U.S. $”) and the indices
F–1
mandated for indexation of statutory financial statements through December 1995, and (ii) differences in the
methods of measuring amounts under U.S. GAAP and Brazilian GAAP.
2.2
Currency remeasurement
The Company, which transacts the majority of its business in Brazilian reais, and, to a lesser extent, in U.S.
dollars, Canadian dollars and Chilean pesos, has selected the United States dollar as its reporting currency.
The U.S. dollar amounts for all periods presented have been remeasured/translated following the guidelines
established in Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency
Translation” on the basis of audited financial statements expressed in the local currency of each of the
countries.
The Company’s main operations are located in Brazil, where, as well as for the subsidiaries in Chile, Canada
and Argentina, the local currency is the functional currency. In these cases, the current rate method of
translation has been used. This method involves the translation of assets and liabilities at the exchange rate in
effect at the end of each period. Average exchange rates have been applied for the translation of the accounts
that make up the results of the periods. Translation adjustments are recorded directly in shareholders’ equity.
Gains and losses on foreign currency denominated transactions are included in the consolidated statements of
income.
Due to the economic crisis in Argentina, the long steel demand in that country was reduced by roughly 50%
during the second half of 2001. The impact of this crisis on the Group’s activity level is limited because the
Argentine operations represent less than 2% of the Gerdau’s total sales. For translation purposes Argentine
financial statements were converted using the exchange rate of $1.70 Argentine Peso to US$ 1.00.
2.3
Interest of Parent Company
As of December 31, 2001, the Company’s parent, Metalúrgica Gerdau S.A. (“MG”, collectively with its
subsidiaries and affiliates, the “Conglomerate”) owned 47.33% of the total capital of the Company. MG’s
share ownership consisted of 82.98% of the Company’s common shares and 28.39% of its non-voting
preferred shares.
3
Significant accounting policies
F–2
The following is a summary of the significant accounting policies followed by the Company in the
preparation of the consolidated financial statements.
3.1
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its majorityowned subsidiaries, as follows (ownership percentages as of December 31, 2001):
Percentage ownership
96
100
100
99
99
100
100
85
Seiva S.A. – Florestas e Indústrias
Gerdau GTL Spain S. L.
Armafer Serviços de Construção Ltda.
Gerdau Laisa S.A.
Gerdau Aza S.A.
Gerdau MRM Steel Inc.
Gerdau Courtice Steel Inc.
Ameristeel Corporation
All significant intercompany balances and transactions have been eliminated in consolidation.
3.2
Use of estimates
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 used when accounting for the
allowance for doubtful accounts, depreciation, long-lived assets, income taxes and contingencies. Actual
results could differ from those estimates.
3.3
Cash equivalents
Cash equivalents are considered to be all highly liquid temporary cash investments with original maturity
dates of three months or less.
3.4
Short-term investments consist of bank certificates of deposit and investments held in a related-party fund for
F–3
the exclusive use of the Company (see Note 7). These certificates of deposit and investments have maturities
ranging from four months to one year at the time of purchase and are stated at cost plus accrued interest.
Except for the investments mentioned above, the Company considers as cash equivalents all investments with
original maturities of 90 days or less.
3.5
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using the average cost method.
Inventories of packaging and maintenance supplies are valued at cost.
3.6
Property, plant and equipment are recorded at cost, including capitalized interest and other costs incurred
during the construction phase of major new facilities. Interest on loans denominated in reais includes the
effect of indexation of principal required by some of the loan agreements. Interest 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: 25 years for buildings and improvements, 10 years for machinery and equipment,
10 years for furniture and fixtures, and five years for vehicles and computer equipment. Assets under
construction are not depreciated until they are placed into service. Expenditures for maintenance and repairs
are charged to expense as incurred. Any gain or loss on the disposal of property and equipment is recognized
in the year of disposal.
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 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.
F–4
3.7
Non-current investments
Investments in 20 percent to 50 percent-owned affiliates where the Company does not have effective control
are accounted for under the equity method. Investments in less than 20 percent-owned affiliates are
accounted for under the cost method. As of December 31, 2001, the Company’s equity investment is
comprised of a 37.90% equity interest in the capital of Aço Minas Gerais S.A. – Açominas and a 38.18%
interest in the capital of Sipar Aceros S.A. – Sipar.
3.8
Revenues
Revenues from sales of products and services are recognized when products are shipped or services are
performed. The Company's usual terms of sale are 21 days for domestic sales, which are made CIF (Cost
Insurance and Freight). Domestic customers making purchases of more than the equivalent of U.S.$ 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.
All Gerdau companies (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, the majority of the sales are made with a maximum sales term of 30 days.
3.9
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.
3.10
Income taxes
The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for Income
Taxes”, which requires the application of the comprehensive 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
F–5
on deferred tax assets and liabilities of changes in tax rates is recognized in income for 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.
3.11 Earnings per share
Each share of Common and Preferred stock entitles the shareholder to participate in earnings; however, in
accordance with Brazilian law, Preferred shareholders are entitled to receive per-share dividends of at least
10% greater than the per-share dividends paid to Common shareholders (hereinafter referred to as the
Mandatory Dividend). In calculating earnings per share (“EPS”), preferred stock has been treated as a
participating s ecurity.
In calculating EPS, 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 number of shares outstanding at
the end of the period.
Basic EPS excludes dilution, while diluted EPS reflects the potential dilution that could occur if the
convertible debentures were converted into shares. 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
securities are considered in the number of dilutive Commo n and Preferred shares outstanding. See Note 15.
All EPS data is calculated giving retroactive consideration to stock dividends (Note 13.1) and shares issued
in connection with the transfer of entities and operations to the Company by the controlling shareholder, MG
(Note 2.3).
EPS is disclosed in amounts per 1,000 shares, which corresponds to the minimum number of shares that can
be traded on the Brazilian stock exchanges.
F–6
3.12 Dividends and interest on share capital
The Company's Articles of Incorporation require it to pay 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 received during 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 upon approval (declaration).
Effective January 1, 1996, companies are allowed to declare and distribute tax deductible interest on equity,
determined utilizing the Taxa de Juros Longo Prazo (“TJLP”) (long-term interest rate), up to a maximum of
50% of net income, as calculated in accordance with the Brazilian Corporate Law, or 50% of retained
earnings. Such interest payments are reflected in these financial statements as dividends and are charged to
retained earnings upon payment.
The benefit to the Company, as opposed to making a dividend payment, is a reduction in its income tax
charge equivalent to 33% of such amount. Income tax is withheld from the stockholders relative to interest at
the rate of 15%, except for interest due to the Brazilian government, which is exempt from tax withholdings.
3.13
Pension plans
SFAS No. 87, “Employers’ Accounting for Pensions”, has been applied as of the beginning of the earliest
year presented in these financial statements. The majority of the Company’s employees are covered by
pension plans to which the Company makes contributions based on either a percentage of employees
compensation for defined contribution plans or actuarially determined amounts for participants of the defined
benefit plans. These plans were evaluated by independent actuaries.
3.14 Compensated absences
Vacation expense is fully accrued in the period the employee renders services to earn such vacation.
3.15
Environmental and remediation costs
F–7
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. Capitalization is considered appropriate when the expenditures will continue to provide benefits
to the Company; such expenditures are recorded on the date expended.
Provisions for non-capital
expenditures are charged against earnings at the time they are considered to be probable and reasonably
estimable. Management believes that, at present, each of its facilities is in substantial compliance with the
applicable environmental regulations.
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.
3.16
Advertising costs
Advertising costs are expensed when incurred. Advertising costs included in selling and marketing expenses
were approximately $9,144, $8,966 and $6,000 for the years ended December 31, 2001, 2000 and 1999
respectively. No advertising costs have been deferred at the balance sheet dates herein.
3.17
Accounting for sales of shares by subsidiaries
Gains or losses arising from the sale of shares by subsidiaries are recognized in the Statement of Changes in
Shareholders’ Equity, to the extent that the net book value of the shares owned by the Company after the sale
exceeds or is lower than the net book value per share immediately prior to the sale of the shares.
4
Short-term investments consisted of the following as of December 31:
Investment funds
Investment funds – Banco Gerdau S/A
Fixed revenue securities
Variable revenue securities
$
$
F–8
2001
50,976
76,125
113,640
65,324
306,065
$
$
2000
37,892
84,761
129,565
38,231
290,449
5
Trade accounts receivable consis ted of the following as of December 31:
Trade accounts receivable
Less: allowance for doubtful accounts
2001
311,887 $
(23,045)
288,842 $
2000
350,967
(19,345)
331,622
$
2001
215,045 $
62,149
95,904
62,140
8,395
443,633 $
2000
224,839
68,568
64,255
90,995
9,477
458,135
$
$
2001
76,125 $
461 $
2000
84,761
77
$
$
6
Inventories
Inventories consisted of the following as of December 31:
Finished products
Work in process
Raw materials
Packaging and maintenance supplies
Advances to suppliers of materials
7
$
Balances and transactions with related parties
Balances with related parties at December 31 were as follows:
Short-term investments - Banco Gerdau S.A. (i)
Long-term debt – MG (ii)
(i)
Banco Gerdau, a wholly owned subsidiary of MG, established an investment fund for the exclusive
use of the Company. 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 $14,440 in 2001 and $8,338 in 2000, representing average yields of 17.0 % and 16,9 %,
respectively.
(ii)
Borrowings of the Company with MG as of December 31, 2001 and 2000 are denominated in
Brazilian reais, bear interest at the average composite borrowing rate of the Conglomerate (22.8% as
of December 31, 2001), mature in May 2002, and can be renewed at every six months. Interest
F–9
expense related to such loans aggregated $20 in 2001, $3,081 in 2000 and $4,326 in 1999,
representing average effective rates of 22.8 %, 19.6% and 25.4%, respectively.
8
Property, plant and equipment consisted of the following as of December 31:
Buildings and improvements
Machinery and equipment
Vehicles
Furniture and fixtures
Other
$
Less: accumulated depreciation
Land
Construction in progress
Total
$
2001
352,653 $
1,495,911
13,096
33,170
118,370
2,013,200
(833,261)
1,179,939
96,276
108,248
1,384,463 $
2000
347,286
1,542,887
14,971
38,559
138,845
2,082,548
(859,640)
1,222,908
154,541
165,160
1,542,609
Construction in progress as of December 31, 2001 represents principally renewals and improvements in the
manufacturing facilities of the Company located in Brazil. The Company capitalized interest on construction
in progress in the amount of $14,228 in 2001, $20,735 in 2000 and $11,934 in 1999.
As of December 31, 2001, machinery and equipment with a net book value of approximately $33,546 was
pledged as collateral for certain long-term debt.
9
Accrued pension liability
The Company and other related companies in the Conglomerate co-sponsor a contributory pension plan
covering substantially all Brazilian-based employees (the “Domestic Plan”).
The Domestic Plan is
principally a defined benefit plan with certain limited defined contributions. Additionally, the Company's
Canadian and American subsidiaries sponsor defined benefit plans (the “Canadian Plans” and the “American
Plans”) covering substantially all of their employees. Contributions to the Domestic Plan for defined
F – 10
contribution participants are based on a specified percentage of employees’ compensation and totalled $ 955
in 2001, $1,596 in 2000 and $1,560 in 1999.
Contributions to the Domestic Plan for defined benefit
participants and contributions to the Canadian Plans and American Plans are based on actuarially determined
amounts.
The Domestic Plan is administered by Gerdau - Sociedade de Previdência Privada, which was established by
the Conglomerate for this purpose.
Plan assets of the Domestic Plan consist of investments in bank
certificates of deposit, equity and debt securities and investment funds.
Total pension contributions for 2001, 2000, and 1999 were $ 7,659, $5,354 and $8,058, respectively.
Net periodic pension cost relating to the defined benefit component of the Domestic Plan was as follows:
Service costs of benefits earned during the period
Interest cost on the projected benefit obligation
Actual return on plan assets
Deferred gain on plan assets
Amortization of gain
Amortization of unrecognized transition obligation
Net pension expense
$
$
2001
1,989 $
5,037
(15,111)
10,538
(475)
865
2,843 $
2000
2,180
5,110
(8,940)
3,970
(970)
1,114
2,464
$
$
1999
2,073
4,182
(16,505)
13,108
(597)
1,123
3,384
The funded status of the defined benefit components of the Domestic Plan as of December 31 was at follows:
2001
Actuarial present value of accumulated benefit obligation:
Vested benefits
Non vested benefits
Accumulated benefit obligation
Future projected salary increase
Projected benefit obligation
Plan assets at fair value
Projected benefit obligation in excess of plan assets
Unrecognized net transition obligation
Unrecognized net gain
Accrued pension liability recognized in the balance sheet
$
$
2000
1999
21,510 $
4,609
21,023
5,263
26,119
29,478
55,597
62,222
(6,625)
(1,757)
25,761
17,379 $
26,286
34,043
60,329
55,370
4,959
(3,127)
16,498
18,330
$
$
11,188
11,352
22,540
29,277
51,817
52,214
(397)
(4,557)
23,281
18,327
Additional information required by SFAS nº 132 for the Domestic Plan is as follows:
2001
Change in benefit obligation
Benefit obligation at the beginning of the year
Service cost
Interest cost
Actuarial loss
Benefit payments
$
F – 11
2000
60,329
1,989
5,037
(1,642)
(721)
$
51,817
2,180
5,110
7,608
(1,613)
Translation adjustment
Benefit obligation at the end of the year
(9,395)
55,597
$
$
2001
Change in plan assets
Fair value of plan assets at the beginning of the year
Employer contributions
Benefit payments
Fair value of plan assets at the end of the year
$
2000
55,370
15,111
941
(721)
(8,479)
62,222
$
Funded status:
Funded status at the end of the year
Unrecognized prior service cost
Unrecognized gains
Unrecognized transition obligation
Accrued cost
(4,773)
60,329
$
$
6,625
(25,761)
1,757
(17,379)
52,214
8,940
793
(1,613)
(4,964)
55,370
(4,959)
(16,498)
3,127
(18,330)
The unrecognized net transition obligation and net gains or losses are being amortized on a straight-line basis
over 15 years, the average remaining working life of the employees. The amortization of the net transition
obligation from January 1, 1989 (the effective date of SFAS No 87 for non-U.S. plans) through December
31, 1994 was recorded directly to equity in the opening balance sheet under U.S. GAAP and amounted to
approximately $10,956.
Following is a summary of assumptions used in the accounting for the defined benefit component of the
Domestic Plan:
2001
9.7%
8.7%
9.7%
Weighted-average discount rate
Rate of increase in compensation
Long-term rate of return on plan assets
2000
9.7%
8.7%
9.7%
1999
9.7%
8.7%
9.7%
The components of net periodic pension cost for the Canadian Plans are as follows:
Interest cost on projected benefit obligation
Expected return on plan assets, net
Net pension expense
$
$
2001
1,064
2,097
(2,278)
9
892
$
$
2000
865
2,090
(2,153)
105
907
$
$
1999
936
1,955
(1,691)
811
2,011
Assumptions used in the accounting for the Canadian Plans were:
2001
7.0%
2.5%
7.0-7.5%
F – 12
2000
7.0%
2.5%
7.0-7.5%
1999
7.5%
8.0%
8.0%
The following sets forth the funded status of the Canadian Plans as of December 31:
Actuarial present value of benefits
Unfunded pension liability
Unrecognized net losses
Additional minimum liability
Prepaid pension costs
$
$
2001
31,207
32,186
979
(3,019)
1,483
(557)
$
$
2000
33,245
31,281
(1,964)
(33)
1,377
(620)
$
$
1999
32,093
33,332
1,239
(3,129)
(1,890)
Additional information required by SFAS nº 132 for the Canadian Plans is as follows:
2001
2000
Plan assets at the beginning of the year
Exchange impact on opening balance
Benefits paid and net exchange impact
Return on assets
Plan assets at the end of the year
33,245
(1,932)
(468)
362
31,207
32,093
(1,745)
(358)
3,255
33,245
Change in the actuarial present value of benefits
Actuarial present value of benefits at the beginning of the year
Service cost
Estimated benefits paid
Interest accrued
Net exchange impact
Other
Actuarial present value of benefits at the end of the year
31,281
1,064
(1,562)
2,097
(1,277)
583
32,186
30,836
865
(1,644)
2,090
(18)
(848)
31,281
The subsidiaries in the United States 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 American subsidiary has the right to modify or terminate these benefits. The
components of net periodic pension cost for the American Plans are as follows:
Pension Benefits
2001
2000
4,039
3,302
8,822
8,008
(9,983)
(9,341)
(35)
(35)
2,843
1,934
Interest cost on projected benefit obligation
Expected return on plan assets, net
Recognized actuarial gain
Net pension expense
Assumptions used in the accounting for the American Plans were:
F – 13
Postretirement Medical
2001
2000
247
210
586
564
(11)
(18)
833
745
2001
7.25%
4.5%
9.25%
2000
7.5%
4.5%
9.5%
The following sets forth the funded status of the American Plans as of December 31:
Pension Benefits
2001
2000
101,716
108,188
131,886
116,940
(30,170)
(8,752)
(221)
(257)
16,149
(3,164)
(14,242)
(12,173)
Actuarial present value of benefits
Plan assets in excess of liability
Unrecognized net losses
Prepaid pension costs
2001
2000
9,068
7,858
(9,068)
(7,858)
(135)
246
(933)
(8,822)
(8,926)
Additional information required by SFAS nº 132 for the American Plans is as follows:
Pension Benefits
2001
2000
2001
2000
Plan assets at beginning of the year
Employer contribution
Plan participants’ contributions
Benefits paid and net exchange impact
Return on assets
Plan assets at the end of the year
108,188
774
(5,755)
(1,491)
101,716
105,304
(5,493)
8,377
108,188
937
466
(1,403)
-
800
429
(1,229)
-
Change in the actuarial present value of benefits
Actuarial present value of benefits at beginning of the year
Service cost
Estimated benefits paid
Interest accrued
Plan participants’ contributions
Plan amendments
Actuarial loss
Actuarial present value of benefits at the end of the year
116,940
4,039
(5,755)
8,822
7,840
131,886
102,345
3,302
(5,493)
8,008
8,778
116,940
7,858
247
(1,403)
586
466
135
1,179
9,068
7,834
210
(1,229)
564
429
50
7,858
The Company estimated an obligation of US$ 5,745, related to a retirement benefit to be paid to its executives. This
amount was included in the pension plan liability in the financial statements, with a counterpart in the statements of
income of the period.
F – 14
10
Short-term debt
Short-term debt consists of working capital lines of credit and export advances with interest rates ranging from
LIBOR + 1.3% per annum to 13.4% per annum, plus monetary correction and exchange variation as of December
31, 2001. All short-term debt mature in less than one year, and is payable in a single amount upon maturity.
Generally, interest is being paid in a monthly basis. This debt is guaranteed by the parent company.
11
Long-term debt and debentures
Long-term debt and debentures consisted of the following as of December 31:
Annual Interest
Rate %
Long-term debt, excluding debentures, denominated in Brazilian reais (i)
Financing for machinery
Long-term debt, excluding debentures, denominated in foreign currencies
Financing for machinery and others (Cdn$)
Working capital (US$)
Financing for machinery (US$) (ii)
9.25 to 10.0
5.53
10.4
Less: current portion
Long-term debt, excluding debentures, less current portion
$
Debentures (iii)
Less: current portion
Debentures, less current portion
(ii)
(iii)
$
9.09
3.0 to 8.36
LIBOR+11.02
Financing for investments (US$)
Financing for machinery (DM$)
(i)
2001
187,175
2000
$
248,009
333,033
220,686
19,658
479,847
194,336
85,894
826,788
(196,152)
630,636
91,716
800
1,034,366
(316,536)
$
717,830
$
96,222
(2,018)
94,204
$
$
$
115,762
(2,413)
113,349
The 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.
Interest is based on the six month London Inter-Bank Offered Rate (“LIBOR”), which as of
December 31, 2001 was 2.44%.
Debentures are represented by six outstanding issues as follows:
Issue
Third
Fifth
Seventh
Eighth
Ninth
Eleventh
Total
Issuance
1982
1989
1982
1982
1983
1990
Maturity
2011
2005
2012
2013
2014
2020
$
$
2001
20,240
8,116
6,331
17,503
37,796
6,236
96,222
$
$
2000
21,665
11,764
6,971
20,385
45,475
9,502
115,762
Debentures are denominated in Brazilian reais and bear variable interest (CDI – Certificado de Depósito
Interbancário). The annual average nominal interest rates were 16.95 % as of December 31, 2001 and
16.95% as of December 31, 2000. The Company’s public debentures prohibit the payment of dividends in
F – 15
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 Company has $8,073 of convertible debentures due at various dates through 2005, which are convertible
at the option of the holders into 263,901,675 shares of Common stock and 527,803,350 shares of Preferred
stock, computed by dividing the face value of the debt by the book value, in corporate law, of the shares at
December 31, 2001.
The Company’s debt agreements contain covenants, which require the maintenance of certain ratios, as
calculated in accordance with Brazilian GAAP. The most restrictive of these covenants are as follows:
§ A ratio of current liquidity, which consists of current assets divided by current liabilities, of 1.0 or
greater.
§ A ratio of less than 2.5 through September 30th , 2002 and 2.0 thereafter, of the total of long and shortterm indebtedness divided by operating profit plus financial expenses plus depreciation and amortization
(EBITDA).
§ A ratio of debt service coverage, consisting of total operating EBITDA less capital expenditures and cash
taxes, divided by principal plus cash interest, greater than 1.1.
§ A ratio of interest coverage, consisting of the operating EBITDA less capital expenditures, divided by
cash interest, greater than 2.0.
§ A ratio of the term debt divided by the capital of the Canadian companies not greater than 0.55 through
December 31st , 2001 and not greater than 0.4 thereafter.
§ A ratio of tangible net worth of the Canadian companies greater than US$ 117 million plus 50% of the
cumulative consolidated net income.
On January 4, 1999, the Company assumed the debt related to the Eurobonds of $130,000, issued by the
Company’s parent, Metalúrgica Gerdau, maturing in May 2004, in exchange for the existing debt with the
parent. Consequently, the Company is subject to certain financial covenants related to the issuance of these
Eurobonds. Under the most restrictive of these covenants, the Company must maintain consolidated
indebtedness at a level that is less than four times consolidated EBITDA. As of December 31, 2001, the
Company was in compliance with all restrictive covenants related to the Eurobonds. Of the total amount
issued, the subsidiary GTL Equity Investments Corp. bought $ 42,038 when some of the bondholders had the
opportunity to exercise the put option. For purposes of presentation in the accompanying financial
statements, the balance of the Eurobond debt is shown at its net amount.
Other covenants in the debt agreements restrict the payment of dividends and limit the incurrence of
additional debt. As of December 31, 2001, the Company was in compliance with these covenants.
Long-term debt matures in the following years:
2003
2004
2005
2006
2007 and thereafter
$
$
12
Commitments and contingencies
F – 16
172,056
238,737
139,340
49,104
31,399
630,636
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, 2001 or the results of
future operations or cash flows. However, it is possible that contingencies could have a material effect on
quarterly or annual operating results, when resolved in future periods.
Included in the reserve for contingencies as of December 31, 2001 is $21,744 relating to “compulsory loans”
required to be made to ELETROBRÁS (“Empréstimo Compulsório Eletrobrás sobre Energia Elétrica”), 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” has been sustained
by the Supreme Court, several issues remain pending, including the amounts to be paid by the Company. The
claims are expected to be outstanding for at least two or three more years.
The Company has established an allowance 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 reserve for contingencies are $3,063 relating to contested federal social contribution
taxes, “Fundo de Investimento Social” (“FINSOCIAL”), $398 relating to state value added tax, “Imposto
Sobre Circulação de Mercadorias e Serviços” (“ICMS”), $1,071 relating to “Contribuição Social Sobre o
Lucro”, $5,788 relating to “Contribuição Provis ória sobre Movimentação Financeira” (“CPMF”), $4,402
relating to income tax (“Imposto de Renda”), $7,684 relating to social security contribution (“INSS”) and
$3,936 relating to contested federal social contribution taxes, “Programa de Integração Social”, (“PIS”) and
“Contribuição 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
believes that it will not have judgement on the merits for at least two years.
The Company is also a party to a number of lawsuits by employees. As of December 31, 2001, the Company
has accrued $6,121 relating to such lawsuits. Additionally, the Company is involved in a number of lawsuits
F – 17
arising from the ordinary course of business and has accrued $163 for these claims.
Judicial deposits, which represent restricted assets of the Comp any, relate to amounts paid to the court and
held in Judicial escrow pending resolution of related legal matters. The balance as of December 31, 2001 is
comprised principally of $11,183 relating to the ELETROBRÁS dispute (December 31, 2000: $14,244) and
$5,788 related to disputed federal contribution over financial operations, “Contribuição Provisória sobre
Movimentação Financeira” (“CPMF”) (December 31, 2000: $6,869, related to “Contribuição Provisória sobre
Movimentação Financeira”).
In addition to the matters described above, the Company is involved as plaintiff and defendant in a variety of
routine litigation incidental to the normal course of business. Management believes, based on the opinion of
legal counsel, that it has defense or insurance protection with respect of such litigation and that any losses
therefrom, whether or not insured, would not have a material adverse effect on the consolidated results of
operations or consolidated financial position of the Company. The legal advisors of the Company assessed the
amount of possible losses on contingencies as US$ 48 million, in December 31, 2001.
13
Shareholders' equity
13.1 Share capital
As of December 31, 2001, 39,382,020,386 shares of Common stock and 74,109,685,986 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 and additional 10% on dividend
payments. In the event that the Mandatory Dividend is omitted for three consecutive years, the Preferred
shares acquire voting rights until payment of such dividend is resumed.
F – 18
The following sets forth the changes in the Company’s shares from January 1, 1999 through December 31,
2001:
Balances as of January 1, 1999
Shares issued in the merger of Comercial Gerdau
Sale of Preferred shares
Shares issued in the split of shares
Common
Shares Issued
19,691,010,193
------------------19,691,010,193
19,691,010,193
------------------39,382,020,386
Preferred
Shares Issued
37,054,813,723
29,270
------------------37,054,842,993
37,054,842,993
------------------74,109,685,986
-----------------39,382,020,386
===========
-----------------74,109,685,986
===========
Treasury
Stock
(233,100,000)
233,100,000
-------------------------------------------------==========
Under Brazilian GAAP, for periods prior to December 31, 1995, statutory reserves were subject to monetary
correction with a capital reserve established to accumulate the amount of the monetary correction. During
1996 and 1995, the Company issued Common and Preferred shares to its shareholders thereby capitalizing all
remaining amounts included in the capital reserve. For U.S. GAAP purposes, this transaction has been treated
as a stock dividend; historical per share amounts have therefore been restated for all periods.
13.2
Legal reserve
Under Brazilian law, the Company is required to transfer up to 5% of annual net income, determined in
accordance with the Brazilian Corporate Law, to a legal reserve until such reserve equals 20% of paid-in
capital. The legal reserve may be utilized to increase paid-in capital or to absorb losses, but cannot be used
for dividend purposes.
13.3 Dividend payments
Brazilian law permits the payment of cash dividends from retained earnings calculated in accordance with the
provisions of the Brazilian Corporate Law and as stated in the statutory accounting records. As of December
31, 2001, the Company's retained earnings available for dividend distributions to Preferred and Common
shareholders approximated $ 440,874.
F – 19
Aggregate dividends declared by the Company for the years ended December 31 were as follows:
Common shares
$
Preferred shares
Total
14
2001
23,046
2000
21,491
$
47,851
$
70,897
$
44,495
$
1999
23,741
47,132
65,986
$
70,873
Accounting for income taxes
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. Income tax expense for the fiscal year ended
December 31 consists of the following:
2001
Current tax expense (benefit):
Brazil
United States
Canada
Other countries
$
Deferred tax expense (benefit):
Brazil
United States
Canada
Other Countries
Income tax expense
$
34,883
(2,236)
5,414
2,920
40,981
12,699
1,168
(201)
13,666
54,647
2000
$
$
37,058
(3,611)
3,357
(79)
36,725
2,522
5,321
(1,955)
3,011
8,899
45,624
1999
$
$
4,855
3,501
8,824
276
17,456
527
(1,488)
4,387
(346)
3,080
20,536
A reconciliation of the provisions for income taxes to the income taxes calculated at the Brazilian statutory rates
follows:
Net income before taxes and minority interest
Statutory Brazilian income tax rate
Income tax at statutory rate
Permanent differences:
- International rate differences
- Non-deductible expenses/non taxable revenue
- Effect of changes in tax rates
- Differences related to assets and liabilities remeasured at historical
rates, resulting from (i) indexing used for Brazilian tax purposes;
and (ii) changes in exchange rates
- Equity pickup on non-consolidated companies
- Interest on equity
- Other, net
F – 20
$
2001
219,205
34.00%
74,530
$
2000
236,997
34.00%
80,579
$
1999
217,900
35.67%
77,725
(1,655)
4,953
-
(1,085)
303
620
(2,201)
(535)
(17,514)
11,057
(5,060)
(16,135)
(6,230)
(24,105)
(3,903)
(11,547)
(22,435)
4,249
1,749
(23,388)
835
Income tax expense
$
54,647
$
45,624
$
20,536
Tax rates in the principal geographical areas in which the Company operates, for the years ended December
31, were as follows:
2001
2000
Brazil
Federal income tax
Social contribution
Composite federal income tax rate
1999
25.00%
9.00%
34.00%
25.00%
9.00%
34.00%
United States
Federal income tax (approximately)
40.00%
40.00%
43.00%
Canada
Federal income tax
Provincial rate (approximately)
Composite income tax rate
21.84%
15.16%
37.00%
21.84%
15.16%
37.00%
21.84%
15.16%
37.00%
Chile
Federal income tax
15.00%
15.00%
15.00%
Uruguay
Federal income tax
30.00%
30.00%
30.00%
*
25.00%
12.00%
37.00%
* 8% from January to April, 1999.
Deferred income tax
The more significant temporary differences that give rise to the deferred tax assets and deferred tax liabilities
as of December 31 are presented below:
2001
Deferred tax assets
Net operating loss carryforwards
Accrued liability for legal proceedings
Accrued pension costs
Other
Gross deferred income tax assets
$
Deferred tax liabilities
Capitalized interest on property, plant and equipment
Accelerated depreciation
Other
F – 21
27,403
1,177
8,195
13,340
555
50,670
3,291
142,232
8,606
2000
$
33,936
7,239
23,934
6,232
7,202
78,543
7,227
142,646
1,273
1999
$
41,294
634
18,054
13,536
6,968
80,486
3,194
139,508
520
Gross deferred income tax liabilities
154,129
Net deferred income tax assets (liabilities)
$
(103,459)
151,146
$
(72,603)
143,222
$
(62,736)
No valuation allowance has been established to reduce or eliminate net deferred tax assets as management
believes, based on the expectation of profits, 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. Tax legislation
enacted in 1995 limits the utilization of tax losses in a given year to 30% of taxable income.
Deferred tax accounts
Deferred tax assets – current
Deferred tax assets – non-current
$
Deferred tax liabilities – current
Deferred tax liabilities – non-current
15
2001
6,804 $
43,866
2,872
151,257
2000
15,605 $
62,938
6,651
144,495
1999
11,601
68,885
3,558
139,664
Earnings per share
In accordance with SFAS No. 128, the following tables reconcile net income available to Common and
Preferred shareholders and Common and Preferred shares outstanding to the amounts used to calculate basic
and diluted EPS for each of the years ended December 31, 2001, 2000 and 1999.
Due to the reverse stock split that occurred in 2000, the earnings per share computation for 1999 was
retroactively adjusted to reflect such transaction.
2001
Preferred
Commo n
Total
(In thousands, except per share data and percentages)
Basic numerator
Actual dividends declared
$
Basic allocated undistributed earnings (i)
Allocated net income available t o Common and Preferred
shareholders
$
Basic denominator
Outstanding shares
23,046 $
31,416
47,851 $
65,040
70,897
96,456
54,462 $
112,891 $
167,353
39,382
Basic earnings per share
$
F – 22
1.38
74,110
$
1.52
2001
Preferred
Common
Total
Diluted numerator
Diluted allocated undistributed earnings
Convertible securities:
Interest expense on convertible debt, net of tax (ii)
Allocated diluted net income available to Common and
Preferred shareholders
$
$
Diluted denominator
Basic outstanding shares
Convertible debentures (ii)
Diluted outstanding shares
Diluted earnings per share
$
23,046 $
31,416
54,462
47,851 $
65,040
112,891
160
300
54,622 $
113,191 $
39,382
74,110
264
39,646
528
74,638
1.38 $
Common
70,897
96,456
167,353
460
167,813
1.52
2000
Preferred
Total
Basic numerator
Allocated net income available to Common and
$
21,491
39,922
$
44,495
82,650
$
65,986
122,572
$
61,413
$
127,145
$
188,558
Basic denominator
Outstanding shares
39,382
$
F – 23
1.56
74,110
$
1.72
Common
2000
Preferred
Total
Diluted numerator
$
21,491
39,922
61,413
$
227
$
Diluted denominator
$
61,640
44,495
82,650
127,145
$
127,572
74,110
366
39,748
732
74,842
Common
65,986
122,572
188,558
427
39,382
1.55
$
$
654
$
189,212
1.70
1999
Preferred
Total
Basic numerator
Allocated net income available for Common and
Basic denominator
Outstanding shares
$
23,741
41,287
$
47,132
85,532
$
70,873
126,819
$
65,028
$
132,664
$
197,692
$
39,382
1.65 $
$
74,110
1.79
$
70,873
126,819
197,692
Diluted numerator
Diluted denominator
F – 24
$
23,741
41,287
65,028
$
196
$
65,224
47,132
85,532
132,664
407
$
133,071
39,382
74,110
246
493
603
$
198,295
39,628
(i)
$
1.65
74,603
$
1.78
The Company calculates earnings per share on Common and Preferred shares under the "two
class method". See Note 3.11. Effective January 1, 1997 Preferred shareholders are entitled to
receive per-share dividends of at least 10% greater than the per-share dividends paid to Common
shareholders. Undistributed earnings, therefore, from January 1, 1997 forward have been
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, as discussed below (ii).
(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.
16
Fair value of financial instruments
In accordance with 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 values provided are representative of the fair values as of
December 31, 2001 and 2000 and do not reflect subsequent changes in the economy, interest and tax rates,
and other variables that may impact determination of fair value. The following method and assumptions were
used in estimating fair values for financial instruments:
- Cash and short term investments: The carrying amounts approximate fair value because of the short maturity
of these instruments.
- Judicial deposits: The carrying amount of judicial deposits approximates fair value, as interest is receivable
on such deposits at a variable market rate.
F – 25
- Trade accounts receivable, accounts payable trade and payroll and related liabilities: The carrying amount of
these accounts approximates fair value.
- Short-term debt, long-term debt (except Eurobonds) and debentures: The fair value of short-term debt, longterm debt and debentures is based on current rates offered for similar debt.
- Long-term debt, Eurobonds: The fair value of the Eurobonds presents a discount over the debt value, which
makes its balance, in fair value, different from the balance in the books.
The carrying amounts and fair values of the Company’s significant financial instruments as of December 31
are as follows:
2001
Carrying
Amount
Cash and short -term investments
Judicial deposits
Accounts payable trade
Payroll and related liabilities
Short-term debt
Long-term debt, including current portion
Debentures, including current portion
Long - term debt, Eurobonds
17
$
333,897 $
288,842
26,730
137,397
32,504
371,339
826,788
96,222
28,031
Fair
Value
333,897 $
288,842
26,730
137,397
32,504
371,339
830,402
96,222
31,645
2000
Carrying
Fair
Amount
Value
302,882 $
331,622
31,962
139,945
40,201
372,050
1,034,366
115,762
94,282
302,882
331,622
31,962
139,945
40,201
372,050
1,034,054
115,762
93,970
Derivative instruments
As of December 31, 2001, US$ 1,010,579 of the total debt of the Company was denominated in foreign
currencies and is exposed to market risk from changes in foreign-exchange rates. The Company manages risk
from fluctuations in foreign currencies exchange rates, which affect the amount of Brazilian reais necessary to
pay obligations denominated in foreign currencies, by using derivative instruments, primarily swap contracts.
The main objective in holding these instruments is to match the gains from investing the proceeds of
borrowings and loans with exchange losses generated by the devaluation of the Brazilian real against foreign
currencies. Although such instruments reduce the foreign-exchange related risk, they do not eliminate them.
F – 26
The credit risk exposure is addressed in Note 18. The Company does not hold financial instruments for
trading purposes.
Effective January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”, as amended. Under SFAS No. 133, the contracts of the Company do not meet the
criteria to qualify as the hedge of an exposure to foreign currency or interest rate risk. Therefore, the
Company has accounted for the derivative transactions by calculating the unrealized gain or loss at each
balance sheet date and changes in the fair value of all derivatives are now being recorded in current
operations. As of December 31, 2000, the Company did not have any derivative instruments.
The effect of applying the procedures of SFAS No. 133, as of December 31, 2001, was a gain of US$ 6,074
(net of income tax effects of US$ 3,129), and is presented as a reduction of the interest expenses in the
statement of income for the year then ended. The method to calculate this effect consisted of two steps, where
the first was to find the future value of each contract, through the application of the projected contractual rate,
and the second was to bring the future value of the contracts to present value, through the application of the
market rate and terms available at the balance sheet date. During the year of 2001, the gross gain realized on
derivative instruments amounted to US$ 16,661, which were recognized in the income statement. There were
no losses on derivatives contracts during the year 2001. In addition, there were no gains or losses on
derivatives contracts for the years 2000 and 1999.
The swap contracts outstanding at December 31, 2001, are listed below:
Contract
date
02/12/2001
02/12/2001
07/18/2001
03/30/2001
10/04/2001
12/05/2001
07/16/2001
07/18/2001
18
Object
Eurobonds
Eurobonds
Eurobonds
Import
Import
Import
Pre-payment
Pre-payment
Amount (US$
thousand)
50,000
50,000
30,000
9,515
32,556
12,559
30,710
10,236
Proportion CDI
rate
84.5%
87.0%
103.7%
100.0%
100.0%
100.0%
80,3%
92.8%
Maturity
05/20/2004
05/20/2004
05/20/2004
10/04/2004
06/25/2002
12/23/2002
03/01/2006
03/01/2006
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
F – 27
stainless steel. Approximately 46% of the Company's sales during 2001 were to civil construction customers,
with the remaining sales primarily to manufacturing customers. Approximately 64% of the Company's sales
are to domestic Brazilian companies, with the remainder equally split between export sales from Brazil and
sales of its foreign subsidiaries located in Canada, Chile, Argentina 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. Historically, the Company has not experienced significant losses
on trade receivables.
19
Segment information
The Company’s operations are classified into three business segments: civil construction, manufacturing and
other. The civil construction segment principally involves the production and sale of concrete reinforcing
bars, wire for reinforced concrete, annealed tying wire, welded meshes and nails. The manufacturing segment
primarily consists of the production and sale of bars, wire rods, specialty steel products and billets. The other
businesses segment consists of the agriculture and breeding sectors.
Information about the Company’s segments is as follows:
(i)
There are no significant inter-segment sales transactions.
(ii)
Operating income consists of net sales less applicable operating costs and expenses related to those
sales.
(iii)
The identifiable assets are trade accounts receivable, inventories and property, plant and equipment.
2001
Civil
Construction
Manufacturing
Other
businesses
Consolidated
total
Net sales to external customers
1,098,908
1,029,975
191,646
2,320,530
Operating income
Identifiable assets
160,380
1,110,273
179,920
877,235
51,701
129,430
392,001
2,116,938
135,322
107,087
15,913
258,322
71,180
56,328
8,370
135,878
Interest expenses
78,846
22,358
73,900
25,082
13,750
7,207
166,496
54,647
Capital expenditures
Income tax
F – 28
2000
Civil
Construction
Other
businesses
Manufacturing
Consolidated
Total
1,270,101
1,163,835
242,778
2,676,714
Operating income
Identifiable assets
183,642
1,106,707
168,278
1,014,113
35,103
211,546
387,023
2,332,366
125,647
115,135
24,017
264,799
Interest expenses
66,863
91,660
61,269
83,991
12,781
17,521
140,912
193,172
Income tax
21,648
19,837
4,139
45,624
1999
Civil
Construction
Manufacturing
Other
Consolidated
businesses
Total
839,326
663,613
218,049
1,720,988
183,304
1,245,303
144,930
903,549
47,621
180,123
375,855
2,328,975
211,384
40,412
167,131
31,952
54,916
10,499
433,431
82,863
Interest expenses
39,249
31,032
10,197
80,478
Income tax
10,015
7,918
2,603
20,536
Operating income
Identifiable assets
Geographic information about the Company follows:
Brazil
Net sales
United States
2001
Canada
Other countries
Total
1,377,759
591,353
244,151
107,267
2,320,530
Identifiable assets
930,483
768,850
235,679
181,926
2,116,938
Long lived assets
637,320
384,571
223,744
138,828
1,384,463
Operating income
371,681
(19,828)
21,734
18,414
392,001
Brazil
Net sales
1,628,996
United States
676,533
F – 29
2000
Canada
253,671
Other countries
117,514
Total
2,676,714
Identifiable assets
1,280,727
582,891
256,763
211,985
2,332,366
Long lived assets
783,568
367,218
241,371
150,452
1,542,609
Operating income
316,065
22,063
29,503
19,392
387,023
Brazil
United States
1999
Canada
Other countries
Total
Net sales
1,243,478
163,165
244,800
69,545
1,720,988
Identifiable assets
1,290,617
563,631
272,883
204,203
2,328,975
Long lived assets
891,906
344,811
174,154
157,180
1,568,051
Operating income
302,764
14,501
50,679
7,911
375,855
20
Valuation and qualifying accounts
Year ended December 31, 2001:
Balance as of
beginning
of the year
Description
Provisions offset against assets
Allowance for doubtful accounts
$
Reserves:
Provision for contingencies
Total
19,345 $
Charges
to cost
and expenses
Deductions
3,700 $
$
23,045
$
(15,225)
(15,225) $
55,170
78,215
70,395
$
89,740 $
Balances
as of end
of the year
3,700
Balance as of
beginning
of the year
Description
Charges
to costs and
expenses
$
Reserves:
87,430
(7,440)
Total
96,748 $
(8,233)
$
9,318 $
Deductions
(793) $
$
Balances
as of end
of the year
10,820 $
19,345
(9,595)
70,395
1,225 $
89,740
Balance as of
F – 30
Charges
Balances
beginning
of the year
Description
21
to costs and
expenses
$
Reserves:
115,936
(58,081)
Total
125,621 $
(61,223)
$
9,685 $
Deductions
(3,142) $
$
2,775 $
as of end
of the year
9,318
29,575
87,430
32,350 $
96,748
Goodwill of Ameristeel Corporation
In September 1999, the Company acquired a 74% interest in Ameristeel Corporation. This acquisition was
accounted for under the purchase method and the results of the acquired company have been included in the
financial statements of the Company from the respective date of acquisition. In 2000, Gerdau increased its
interest in Ameristeel to 85%.
The excess purchase price over the fair value of the net assets acquired, including expenses incurred by the
Company, has been recorded as goodwill and is included in other long-term assets. The amortization of
goodwill in 2001 and 2000 was US$ 6,529 and US$ 6,268, respectively. The net balance of goodwill at
December 31, 2001, was US$ 119,003, which was being amortized over a period of 25 years, starting
September, 1999.
22
Interest in Açominas
At December 31, 2001, the Company held a 37.90% equity interest in Aço Minas Gerais S.A. – Açominas
(“Açominas”), which is accounted for under the equity method. This investment includes an excess of
carrying value over the purchase price of the net assets acquired in the amount of US$ 191,398, which is
being amortized to income over the average remaining useful life of the fixed assets of Açominas, which is
approximately 30 years. After the conclusion of the transactions mentioned below, the Company will
include Açominas in its consolidated financial statements, and the excess of carrying value over the
purchase price will be offset against the carrying value of the fixed assets of Açominas.
On December 7, 2001 the Company offered US$ 177.7 million for the 17.67% participation on the capital
of Açominas held by Agropecuária Senhor do Bonfim. If all other major shareholders of Açominas
(Natsteel Corp., Fundação Aços de Seguridade Social, Clube de Empregados da Açominas and CEA
F – 31
Participações) resign their right of preference to acquire the shares of Açominas, the Company’s equity
interest in Açominas will increase to 54.13%. The deadline for the companies to announce their decision
was February 13, 2002, and the companies decided not to exercise their preference right.
The full financial statements of Açominas are included as an attachment to this report.
23
New accounting pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business
Combinations". SFAS No. 141 addresses financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, " Business Combinations" and SFAS No. 38, " Accounting for Preacquisition Contingencies of Purchased Enterprises". SFAS No. 141 requires that intangible assets be
recognized as assets apart from goodwill if they meet two criteria: the contractual-legal criterion and the
separability criterion. To assist in identifying acquired intangible assets, SFAS No. 141 also provides a list
of intangible assets that meet either of those criteria. In addition to the disclosure requirements prescribed
in APB Opinion No. 16, SFAS No. 141 requires disclosure of the primary reasons for a business
combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by
major balance sheet caption. SFAS No. 141 also requires that when the amounts of goodwill and intangible
assets acquire d are significant to the purchase price paid, disclosure of other information about those assets
is required, such as the amount of goodwill by reportable segment and the amount of the purchase price
assigned to each major intangible asset class. Based on an initial assessment of the provisions and
requirements of SFAS No. 141, management believes that the implementation of this statement will not
result in a significant impact to the Company's consolidated financial statements.
In June 2001, FASB issue SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, “Intangible Assets”. SFAS No. 142 also amends SFAS No. 121,
“Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of”, to
exclude from its scope goodwill and intangible assets that are not amortized. SFAS No. 142 addresses how
intangible assets that are acquired individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their acquisition. This
statement also addresses how goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. With the adoption of SFAS No. 142, goodwill is no
longer subject to amortization over its estimated useful life, but rather it will be subject to at least an annual
assessment for impairment by applying a fair-value-based test. Additionally, negative goodwill is
F – 32
recognized as an extraordinary gain at the time of the business combination. The provisions of SFAS No.
142 must be applied starting with fiscal years beginning after December 15, 2001. Early application is
permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim
financial statements have not been issued. An exception to SFAS No. 142 application date is for goodwill
and intangible assets acquired after June 30, 2001, which will be immediately subject of the nonamortization provisions of this statement. Based on an initial assessment of the provisions and requirements
of SFAS 142, management understands that the implementation of this statement will not result in any
significant impact to the Company’s financial statements. Initially the implementation of SFAS 142
resulted in discontinuing the amortization of goodwill on January 1, 2002. For the year of 2002 the effect of
discontinuing the amo rtization of goodwill will result in an increment of income before tax of
approximately US$ 6 million.
In June 2001, the FASB issued the SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS
No. 143 basically requires that the fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset
retirement cost is capitalized as part of the carrying amount of the long-lived asset. Under SFAS No. 143,
the liability for an asset retirement obligation is discounted and accretion expense is recognized using the
credit-adjusted risk-free interest rate in effect when the liability was initially recognized. In addition,
disclosure requirements contained in SFAS No. 143 will provide more information about asset retirement
obligations. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June
15, 2002 with earlier application encouraged. Management is still evaluating whether the implementation of
SFAS No. 143 will have a significant impact on the Company’s financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of LongLived Assets". This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", although it retains the fundamental provisions of
SFAS No. 121. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations", for segments of a business to be disposed of but retains APB
No. 30's requirement to report discontinued operations separately from continuing operations and extends
that reporting to a component of an entity that either has been disposed of or it is classified as held for sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within
those years, with early application encouraged. Based on an initial assessment of the provisions and
requirements of SFAS 144, management understands that the implementation of this statement will not
result in any impact to the Company’s financial statements.
F – 33
24
Subsequent events
As a recent development in its relations with investors, the Gerdau S.A. Executive Committee presented a
proposal at the shareholders' year-end meeting to grant all Common Stock and Preferred Shares a 100%
"tag along" right. This measure wa s approved by shareholders on April 30, 2002, and it will extend to all
shareholders a right that the new Brazilian Corporate Law extended only to minority Common stockholders
and only 80% of the tag along. Tag along grants to the minority shareholders the right to receive the same
amount paid to the major shareholder in case of transfer of control.
According to this same new law, by extending the tag along right to all shareholders, the Company no
longer needs to comply with the law that requires the payment of an additional 10% premium on dividends
pay out to preferred shareholders. The Company will pay the stated 30% (per its By-Laws) of adjusted net
profit instead of the legally required minimum if 25%.
On February 7, 2002, Gerdau signed a contract with Natsteel Corp. to acquire its 24.8% equity participation
in the capital of Açominas. According to the terms of the contract, the Company may exercise its buying
right until September 9, 2002, and pay the amount of US$ 207.6 million until the 10th day after the 30 day
preference deadline given to the other major shareholders in the control group. To protect itself against
exchange rate fluctuations, the Company carried out hedge operations through swap contracts in the same
amount and on the same date.
In order to adapt to the new economic reality in Argentina, the Company has promoted a financial and
corporate restructuring, which took place in March 28, 2002 as follows: Gerdau transferred its 71.77%
stake in Sociedad Industrial Puntana S.A. – SIPSA to its partner, Sipar Aceros S.A.. Gerdau maintains its
stake of 38.18% in Sipar, whereas SIPSA becomes an integral subsidiary of Sipar. This new structure
further reduced Gerdau’s exposure to the eventual impact of any additional currency devaluation in
Argentina and allows for better synergies between the two companies.
F – 34
Aço Minas Gerais S.A. - AÇOMINAS
Consolidated Financial Statements together with
December 31, 2001 and 2000
F – 35
To the Board of Directors of
Aço Minas Gerais S.A. - AÇOMINAS:
We have audited the accompanying consolidated balance sheets of AÇO MINAS GERAIS S.A. - AÇOMINAS (a
Brazilian corporation) and subsidiaries, translated into U.S. dollars, as of December 31, 2001 and 2000, and the
related translated consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and
cash flows for each of the three years in the period ended December 31, 2001. 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 in accordance with auditing standards generally accepted in the United States of America.
Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
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 Aço Minas Gerais S.A. - AÇOMINAS and subsidiaries as of December 31, 2001 and
2000, and the results of their operations and comprehensive loss 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.
Belo Horizonte, Brazil,
January 28, 2002
F – 36
AÇO MINAS GERAIS S.A. - AÇOMINAS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 2001 AND 2000
(Stated in thousands of U.S. dollars)
A S S E T S
2001
CURRENT ASSETS:
Cash and cash equivalents
Restricted cash
Accounts receivable - domestic
Allowance for doubtful domestic accounts
Accounts receivable - foreign
Advances to suppliers
Notes and other receivables
Inventories
Deferred tax asset
Prepaid expenses
$
Total current assets
NONCURRENT ASSETS:
Notes and other receivables
Property and equipment for sale, at fair value
Prepaid expenses
Prepaid pension cost
Deferred tax asset
Escrow deposits
Investments
Total assets
$
The accompanying notes are an integral
part of these consolidated balance sheets.
F–1
101,033
15,000
20,844
(287)
31,303
2,591
11,960
121,094
4,115
1,603
------------309,256
-------------
5,149
4,055
1,233
17,729
29,447
1,821
29
1,127,928
------------1,187,391
------------1,496,647
=======
2000
$
$
148,527
11,420
21,157
(1,579)
17,958
7,391
9,055
95,608
1,193
------------310,730
-------------
8,647
5,019
1,768
15,761
4,856
35
1,229,204
------------1,265,290
------------1,576,020
=======
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 2001 AND 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
2001
CURRENT LIABILITIES:
Loans and financing
Advances on exchange and export contracts
Financing secured by future export sales
Suppliers and contractors
Accounts payable
Salaries and payroll charges
Taxes payable
$
Total current liabilities
NONCURRENT LIABILITIES:
Loans and financing
Financing secured by future export sales
Accounts payable
Export prepayment
Total noncurrent liabilities
STOCKHOLDERS' EQUITY:
Common shares - no par value59,089,531 shares authorized and outstanding
Preferred shares - no par value17,798 shares authorized and outstanding
Legal reserve
Cumulative comprehensive loss
Accumulated deficit
Total liabilities and stockholders' equity
$
part of these consolidated balance sheets.
F–2
30,499
108,102
51,951
114,760
6,414
10,768
909
------------323,403
-------------
2000
$
23,899
79,581
56,618
93,422
9,186
10,920
1,168
------------274,794
-------------
101,206
27,703
1,732
35,000
10,299
------------175,940
-------------
51,866
67,486
2,756
18,606
------------140,714
-------------
4,273,861
4,273,861
6,468
7,046
(906,086)
(2,383,985)
-------------997,304
-------------1,496,647
========
6,468
5,082
(732,753)
(2,392,146)
-------------1,160,512
-------------1,576,020
========
$
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001
GROSS SALES OF PRODUCTS AND SERVICES
2000
$ 530,438
REVENUE DEDUCTIONS:
Taxes on sales
Freight, discounts and returns
Deductions from gross sales
NET SALES OF PRODUCTS AND SERVICES
COST OF PRODUCTS AND SERVICES SOLD
Gross profit
OPERATING EXPENSES:
Selling
General and administrative
Other operating (expense) income - net
Income from operations
Financial expenses
Financial income
Exchange losses
Non-operating expenses
Per share data:
Basic earnings per 1,000 sharesCommon
Preferred
Diluted earnings per 1,000 sharesCommon
Preferred
(51,370)
(35,469)
-----------(86,839)
-----------423,731
(320,515)
-----------103,216
(11,229)
(30,598)
(11,368)
-----------58,518
(31,376)
33,543
(47,224)
(2,358)
-----------
(15,916)
(31,345)
25,443
----------132,780
(34,448)
31,313
(33,532)
(10,013)
-----------
(15,073)
(30,588)
11,546
----------69,101
(63,819)
27,877
(136,037)
(419)
------------
11,103
32,813
----------43,916
86,100
----------86,100
(103,297)
-----------(103,297)
(173,333)
-------------$ (129,417)
=======
(106,862)
-----------$ (20,762)
======
(502,655)
------------$ (605,952)
=======
$
$
0.74
0.72
$
$
1.46
1.44
$
$
(2.27)
(2.28)
$
$
-
$
$
-
$
$
(2.19)
(2.28)
Weighted average number of Common shares outstanding
Weighted average number of Preferred shares outstanding
part of these consolidated statements.
F–3
$ 510,570
(61,653)
(49,280)
-----------(110,933)
-----------541,441
(386,843)
-----------154,598
Net income (loss) for the year
Comprehensive loss
$ 652,374
(56,234)
(36,732)
-----------(92,966)
-----------437,472
(325,759)
-----------111,713
Income (loss) before income taxes
DEFERRED INCOME TAX BENEFIT
OTHER COMPREHENSIVE LOSS:
1999
59,090
18
59,090
18
45,404
18
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
paid-in capital
- Common
stock
BALANCES DECEMBER 31, 1998
Capital contribution
Conversion of debentures
Premium on share issuance
Net loss for the year
Premium on share issuance
Reverse stock split
Cancellation of treasury stock
Net income for the year
Dividends paid
Net income for the year
$ 4,055,108
101,985
27,123
2,366
--------------$ 4,186,582
82,161
5,118
------------$ 4,273,861
------------$ 4,273,861
=======
Additional
paid-in
capital Preferred
stock
Legal
reserve
Treasury
stock
$
$
$
6,468
------------$
6,468
------------$
6,468
------------$
6,468
=======
---------$
5,082
--------$ 5,082
1,964
--------$ 7,046
=====
------------$
(7)
7
-----------$
-----------$
=======
F– 1
Cumulative
comprehensive
loss
$
(123,236)
(502,655)
------------$
(625,891)
(106,862)
-----------$
(732,753)
(173,333)
-----------$
(906,086)
=======
Accumulated
deficit
$ (2,369,867)
(103,297)
-------------$ (2,473,164)
86,100
(5,082)
-------------$ (2,392,146)
(33,791)
43,916
(1,964)
-------------$ (2,383,985)
========
Total
$ 1,568,473
101,985
27,123
2,366
(502,655)
(103,297)
--------------$ 1,093,995
82,161
5,118
(7)
7
(106,862)
86,100
------------$ 1,160,512
(33,791)
(173,333)
43,916
------------$
997,304
========
F– 2
Page 1 of 2
2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Non-cash adjustments Depreciation
Provision for contingent liabilities
Noncurrent accrued interest expense
Exchange losses on long-term items
Allowance for losses on realization of noncurrent assets
Loss on disposals of property, plant and equipment
Present value adjustment on noncurrent assets
Deferred income tax benefit
Other
Changes in assets and liabilitiesIncrease in accounts receivable
Increase in inventories
(Increase) decrease in notes and other receivables
Decrease (increase) in advances to suppliers
(Increase) decrease in prepaid expenses
(Increase) decrease in escrow deposits and other
Increase in suppliers and contractors
(Decrease) increase in accounts payable
Increase (decrease) salaries and payroll charges
(Decrease) increase in other payables
Net cash provided by operating activities
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment
Decrease (increase) in property and equipment for sale
Net cash used in investing a ctivities
F–1
$ 43,916
2000
$ 86,100
1999
$ (103,297)
45,729
2,376
4,453
38,848
3,289
2,921
870
(30,875)
(268)
----------111,259
57,590
6,226
1,744
21,139
31,553
(254)
----------204,098
53,289
304
3,850
149,545
7,203
898
----------111,792
(17,649)
(37,280)
(3,983)
3,347
(550)
(4,539)
33,149
(3,143)
1,664
(7,738)
------------(36,722)
------------74,537
-------------
(10,672)
(14,116)
7,253
(4,299)
76
29,216
3,438
(19,834)
815
404
------------(7,719)
------------196,379
-------------
(11,988)
(25,379)
9,862
(2,755)
(196)
(2,290)
24,110
11,991
(4,164)
(3,331)
------------(4,140)
------------107,652
-------------
(132,814)
161
----------(132,653)
-----------
(61,140)
(2,766)
----------(63,906)
-----------
(94,189)
(319)
----------(94,508)
-----------
Page 2 of 2
2001
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances on exchange and export contracts
Repayment of advances on exchange and export contracts
Proceeds from loans and financing
Repayment of loans and financing
Proceeds from financing secured by future export sales
Repayment of financing secured by future export sales
(Increase) decrease in restricted cash
(Increase) decrease on leasing
Dividends paid
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Effects of exchange rate change on cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Supplemental disclosures of cash flow informationCash paid during the year for:
Interest
Prepayment of income taxes
Supplemental investing and financing non-cash transactionsConversion of debentures
F–2
2000
1999
$ 232,301
(180,033)
131,773
(75,955)
(39,979)
(4,946)
(1,121)
(26,198)
----------35,842
----------(22,274)
(25,220)
148,527
----------$ 101,033
======
$ 473,912
(482,234)
30,767
(66,867)
(47,481)
(1,962)
(1,588)
87,279
----------(8,174)
----------124,299
(10,955)
35,183
----------$ 148,527
======
$ 203,475
(201,322)
126,939
(150,406)
61,998
(139,875)
12,125
1,455
105,582
----------19,971
----------33,115
(303)
2,371
----------$ 35,183
======
$ 23,553
430
$ 19,941
-
$ 50,063
-
-
-
$ 49,207
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001, 2000 AND 1999
(Amounts stated in thousands of U.S. dollars, unless otherwise indicated)
1. BUSINESS AND OWNERSHIP MATTERS
(a) Ownership matters
In December 2000, the major Açominas stockholders held 72.29% of the Company’s voting capital. The major
stockholders were: Agropecuária Senhor do Bonfim Ltda., Clube de Participação Acionária dos Empregados da
Açominas - C.E.A., C.E.A. Participações S.A., Fundação Açominas de Seguridade Social - Aços, Gerdau
Participações Ltda. and NatSteel do Brasil Ltda..
On December 7, 2001, the Gerdau Group made an offer to acquire the shares held by Agropecuária Senhor do
Bonfim Ltda., in a sale transaction coordinated by the Central Bank of Brazil. As a consequence, at the conclusion
of such transaction, the Gerdau Group’s interest in the Company’s voting capital will exceed 50%.
(b) Business
Açominas is a sociedade anônima incorporated as a limited liability company under the laws of the Federative
Repubic of Brazil. Its principal business comprises the production of steel billets, blooms and slabs.
In 2001, the Company focused its efforts and invested in process and technological updating and productivity
improvement. In addition, initiatives were implemented aimed at reducing production costs and improving quality of
products. The objectives achieved during the year included the expansion of the product mix, offering to the market
products with higher value-added, as well as investments in technological improvements and in productivity gains.
The combination of such factors is part of the Company’s objective of increasing revenues and, as a consequence,
placing the Company among the world’s largest steel producers.
The revamping and modernization of the blast furnace lasted 38 days between June and July 2001. Such improvements
increased the production level from 2.7 to 3.0 million tons of liquid steel per year. The work consisted basically of the
implementation of a new internal cover for the blast furnace, known as “stave cooler”. Such system includes the
implementation of refrigerated panels made of cast iron and copper, increasing the internal volume of the blast furnace
by 15% and the useful life of the internal cover by at least 10 years, now expected to reach 20 years.
1
Also in 2001, taking advantage of the existing infrastructure, the Company made additional investments, and at the
beginning of 2002 it will start the operation of the new rolling line for structural shape steel of the “I” and “H” types,
with sizes ranging from 6 to 24 inches, manufactured according to the latest worldwide technical concepts and
principally destined to the civil construction market. At the end of the first semester of 2002, the structural shape
steel will be marketable, with sufficient inventory to meet the estimated demand.
The new structural shape steel with parallel rim profiles, manufactured according to modern international
specifications, will mark the entry of Açominas into a market segment featuring potential growth and will further
expand the higher value-added mix of products offered by the Company.
In 2001, additional investments were also approved and the construction of a rolling mill for concrete reinforcing
bars in the Ouro Branco Plant was started. Such equipment, with a production capacity of up to 600 thousand
tons/year, was budgeted at $55 million, with start-up in 2003. Management expects significant increase in revenue
and operating cash generation as a consequence of such investments.
2. BASIS FOR PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
(a) Accounting records
The Company’s accounting records are maintained in Brazilian Reais (R$), based on the criteria prescribed by the
Brazilian Corporate Law. The financial statements prepared based on such accounting records and the corporate law
criteria are the basis for determining income taxes and stockholders’ rights, such as the computation of dividends.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”), which differ in certain respects from the
accounting principles applied by the Company in its financial statements prepared in accordance with accounting
principles generally accepted in Brazil or for other statutory purposes in Brazil.
Stockholders' equity and results of operations included in these financial statements differ from those included in the
statutory accounting records as a result of (i) the effects of differences between the rate of devaluation of the
Brazilian Real against the United States dollar and the indices mandated for indexation of statutory financial
statements through December 1995, and (ii) adjustments made to reflect the requirements of generally accepted
accounting principles in the United States of America.
(b) Currency translation
The Company conducts the majority of its business in Brazilian Reais and has selected the United States dollar as its
reporting currency for purposes of these financial statements.
2
Through December 31, 1997
The U.S. dollar amounts for the periods presented up to December 31, 1997 were remeasured from Brazilian real
amounts in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation", applicable to companies operating in highly-inflationary economies as follows:
1. Inventories, property, plant and equipment, accumulated depreciation and investments, accounted
for at cost, and stockholders' equity were remeasured at historical rates of exchange.
2. The remaining assets and liabilities denominated in Brazilian Reais were remeasured at the yearend exchange rates reported by the Central Bank of Brazil (R$1.1164 at December 31, 1997).
3. Accounts in the statement of operations were translated at the average exchange rate for the month
of the charge or credit to income, except for those accounts relating to assets remeasured at
historical rates, which were calculated based on the historical U.S. dollar cost of those assets.
4. Gains and losses resulting from the remeasurement of the financial statements were included in the
net income for the year.
5. Assets and liabilities denominated in foreign currencies other than U.S. dollars were translated to
U.S. dollars at the exchange rates prevailing at each balance sheet date, and resulting gains and
losses were included in income for the year as foreign currency transaction gains or losses.
From January 1, 1998
As of January 1, 1998, the Brazilian economy ceased to be considered highly inflationary, and the Company
changed its functional currency from the reporting currency (U.S. dollars) to the local currency (Brazilian Reais).
Accordingly, at January 1, 1998 the Company translated the U.S. dollar amounts of nonmonetary assets and
liabilities into Reais at the current exchange rate (R$1.1164 to $1.00), and those amounts became the new
accounting basis for such assets and liabilities.
Pursuant to SFAS No.109, “Accounting for Income Taxes", the deferred tax benefit associated with the differences
between the new functional currency bases and the indexed tax bases was reflected as a deferred tax asset recorded
by a credit to the cumulative translation adjustment component of "other comprehensive loss" in stockholders’
equity.
For all years commencing on January 1, 1998 and thereafter, the Company translates all assets and liabilities into
U.S. dollars at the current exchange rate at each balance sheet date, and all accounts in the statements of operations
and cash flows at the average monthly rates prevailing during the period. Transactions affecting stockholders’
equity accounts, excluding those in retained earnings, are translated at historical rates. The translation gain or loss
resulting from this new translation process is included in the cumulative translation adjustment component of the
caption "other comprehensive loss “ in stockholders’ equity. The effects of exchange rate changes on monetary
assets and liabilities denominated in currencies other than the Brazilian Reais are recorded in current operations.
3. SIGNIFICANT ACCOUNTING POLICIES
3
The following is a summary of the significant accounting policies followed by the Company in the preparation of
the consolidated financial statements.
(a) Consolidation-- The consolidated financial statements include the accounts of Aço Minas Gerais
S.A. - Açominas and its subsidiaries Açominas Comércio Importação e Exportação S.A. Açotrading S.A. and Açominas Overseas Ltd.. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Cash and cash equivalents-- Temporary cash investments are stated at cost plus income accrued to
the balance sheet date, based on rates agreed upon with the financial institutions. The Company
considers as cash equivalents deposits that can be redeemed on demand and investments that have
original maturities of less then three months when required.
(c) Accounts receivable-- Accounts receivable from foreign customers are restated based on the
exchange rates prevailing at the balance sheet date. An allowance for doubtful accounts was
recorded in an amount considered sufficient to cover probable losses on accounts receivable.
Domestic receivables amounting to approximately $3,444 are pledged as collateral for loans.
(d) Inventories-- Inventories are stated at the lower of market value and production cost or average
purchase price.
(e) Property, plant and equipment-- Property, plant and equipment are recorded at cost, including
capitalized interest and other costs incurred during the construction phase of major new facilities.
Interest on loans denominated in Reais includes the effect of indexation of principal required by
certain of the loan agreements. Interest on foreign currency borrowings excludes the effects of
foreign exchange gains and losses.
Depreciation is computed under the straight-line method at rates that take into consideration the
useful lives of the related assets (Note 7). Assets under construction are not depreciated until they
are placed into service. Expenditures for maintenance and repairs are charged to expense as
incurred. Any gain or loss on the disposal of property, plant and equipment is recognized in the
year of disposal. Expenditures for modernization or increase in productivity of the property, plant
and equipment are capitalized.
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 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.
(f) Other current and long-term liabilities-- Stated at known or determinable amounts, including,
when applicable, accrued charges and monetary variations.
(g) Income taxes-- The Company accounts for income taxes under the provisions of SFAS No.109,
“Accounting for Income Taxes”, which requires the application of the comprehensive 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 except that, prior to January 1,1998 in
accordance with paragraph 9 (f) of SFAS No.109, no deferred taxes were recorded for differences
relating to certain assets and liabilities that were remeasured from reais to U.S. dollars at historical
exchange rates and that resulted from changes in exchange rates or indexing to inflation in local
currency for tax purposes. 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 for the period that includes the enactment date.
4
Deferred tax assets are reduced through the recognition 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.
(h) Use of estimates-- The preparation of financial statements in accordance with generally accepted
accounting principles requires that the Company make estimates and use assumptions, in its best
judgment, that affect the reported amounts of assets, liabilities and disclosures of contingent
assets and liabilities as of the dates of the financial statements and the reported amounts of
revenues, costs and expenses during the reporting periods. Significant estimates are used when
accounting for the allowance for doubtful accounts, depreciation, impairment of long-lived assets,
income taxes, including recognition of valuation allowances, pension and other post-retirement
benefits and contingencies, among others. Actual results could differ from those estimates.
(i) Revenues -- The Company recognizes revenues when title passes, the earnings process is
substantially complete, and the Company is reasonably assured of the collection of the proceeds
from the exchange, all of which generally occur upon shipment of the Company's products.
(j) Pension Plans-- SFAS No. 87, “Employers’ Accounting for Pensions”, has been applied from the
beginning of the earliest year presented in these financial statements. Approximately 98% of the
Company’s employees are covered by the pension plan to which the Company ma kes
contributions based on actuarially determined amounts.
(k) Income allocation-- Annual dividends are calculated in accordance with the provisions of the
Brazilian Corporate Law. Approval of the payment of such dividend is received during 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 upon
approval (declaration).
(l) Compensated absences -- Vacation expense is fully accrued in the period the employee renders
services to earn such vacation.
(m) 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. Capitalization is
considered appropriate when the expenditures will continue to provide benefits to the Company.
Provisions for non-capital expenditures are charged against earnings at the time they are
considered to be probable and reasonably estimable. Management believes that, at present, its
facilities are in substantial compliance with the applicable environmental regulations.
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.
(n) Advertising costs -- Advertising costs are expensed when incurred. Advertising costs included in
selling and marketing expenses were approximately $845, $329 and $273 for the years ended
December 31, 2001, 2000 and 1999, respectively. No advertising costs have been deferred at the
balance sheet dates herein.
(o) Reclassifications in 2000 and 1999-- Certain amounts have been reclassified to conform with the
2001 presentation.
4. CASH AND CASH EQUIVALENTS
5
2001
Cash and banks
Temporary cash investmentsBank certificates of deposit
Fixed-income funds and other
$
2000
6,947
$
863
93,223
----------101,033
======
$
$
4,382
89,370
54,775
----------148,527
======
As of December 31, 2001 and 2000, temporary cash investments include short and medium-term transactions
negotiable and with high liquidity in the market, subject basically to interest that approximates the Interbank Deposit
Certificate - CDI rate.
Restricted cash refers to funds collected from the customers in the financing transactions secured by future export
sales, whose proceeds are used to pay the financing installments. It is subject to interest that approximates 5% per
year.
5. NOTES AND OTHER RECEIVABLES
Current
BMP - Belgo Mineira Participações Ind.
e Com. Ltda.
Cia. Auxiliar de Empresas Elétricas
Brasileiras - CAEEB
Advances to employees
ICMS (State VAT) recoverable, withheld income tax on
investments and other taxes
Present value adjustment on ICMS (State VAT)
Eletrobrás compulsory loan
Excel Tubos
Other
Allowance for losses
$
2001
Noncurrent
-
1,321
7,955
1,636
5,246
--------16,158
(4,198)
--------$ 11,960
=====
$
Current
2000
Noncurrent
-
$ 1,310
533
-
1,372
4,219
(946)
5,773
189
----------9,768
(4,619)
----------$ 5,149
======
4,161
529
6,449
--------13,821
(4,766)
--------$ 9,055
=====
$
595
-
1,250
6,708
94
----------8,647
----------$ 8,647
======
The receivable from CAEEB (Cia. Auxiliar de Empresas Elétricas Brasileiras) was partially written off in 2000
based on experts’ valuation and based on the opinion of the Company’s legal department about the realization of
these receivables.
6. INVENTORIES
6
Finished products
Work in process
Raw materials
Supplies (spare parts and other)
Imports in transit
Other
$
$
2001
15,858
17,237
32,026
35,437
19,323
1,213
----------121,094
======
$
$
2000
21,943
7,708
19,768
36,146
8,829
1,214
--------95,608
=====
7
7. PROPERTY, PLANT AND EQUIPMENT
Useful life years
Steel mill
Leased plant
Administrative facilities
Marine terminal
Other
25 to 44
20
10
11 to 39
5
2001
$
Accumulated depreciation
Land
Construction in progress
Discontinued plant
$
1,505,350
2,202
79,417
30,267
8,698
------------1,625,934
(642,950)
59,688
85,256
------------1,127,928
=======
2000
$
$
1,718,228
7,554
85,855
35,543
7,900
------------1,855,080
(714,733)
70,906
17,883
68
------------1,229,204
=======
The useful lives of the Company’s plant assets were determined by a technical study prepared by an independent
expert company.
Construction in progress as of December 31, 2001 and 2000 represents principally improvements in the
manufacturing facilities (Note 1 b).
The Company capitalized interest on construction in progress in the amount of $7,815, $790 and $4,448 in 2001,
2000 and 1999, respectively.
8
8.
LOANS,
FINANCING,
ADVANCES
ON
EXCHANGE
AND EXPORT CONTRACTS AND EXPORT PREPAYMENT
Currency
Property, plant and equipmentLocal currencyCaixa Econômica Federal
Cia. Vale do Rio Doce - C.V.R.D.
Foreign currencyBanco do Brasil S.A.
Banco Santander Brasil S.A.
Marubeni Corporation
Banco BNP Paribas
Fortis Bank
Siderúrgica J.L. Aliperti S.A.
Other
US$
US$
US$
US$
US$
US$
US$
Working capital- local currencyBanco Alfa
BNDES
Banco Itaú S.A
Banco Pine
Unibanco S.A.
Other
R$
R$
R$
R$
R$
R$
R$
R$
Current
$ 4,828
-
2001
Noncurrent
$
Current
2000
Noncurrent
7,681
-
$ 4,859
415
$ 13,668
-
4,265
2,294
3,017
2,485
664
2,559
1,865
19,360
6,698
9,757
6,779
3,045
2,133
1,420
1,709
2,390
2,801
2,323
6
10,671
8,914
10,410
4,692
91
1,475
30
1,852
2,954
29
2,182
---------$ 30,499
======
17,459
10,740
3,686
1,145
10,740
563
---------$ 101,206
======
2,879
1,499
5,018
---------$ 23,899
======
1,025
791
1,604
---------$ 51,866
======
Loans in local currency are subject to a weighted average interest rate of 13.40% p.a. (13.10% p.a. in 2000),
including the TJLP, TR and IGPM indices. Loans in foreign currency are subject to exchange variation and a
weighted average rate of 3.13% p.a. (6.64% in 2000). Loans are mostly guaranteed by chattel mortgage, promissory
notes, pledge of equipment and assigned rights.
The net book value of the property, plant and equipment items pledged amounts to $98,596 as of December 31,
2001 ($111,495 in 2000).
Interest is paid on a monthly basis (loans for acquisition of property, plant and equipment in local currency and
loans for working capital after their grace period) or on a semi-annual basis (loans in foreign currency and loans for
working capital during the grace period).
In July 2000, 850,987,275 debentures were redeemed by the Company at the buyers’ option, representing $117, out
of a total amount of 797,872,340,430 debentures issued. There are no debentures outstanding as of December 31,
2001.
9
The long-term portion of loans matures as follows:
Year
2001
2002
2003
2004
2005
2006
2007 to 2009
$
$
37,085
20,293
16,141
14,517
13,170
---------101,206
======
Advances on exchange contracts are denominated in foreign currency and subject to exchange variation and an average
interest rate of 4.69% per year. These advances mature in the short term.
The export prepayment refers to a contract for advances on future exports and is subject to exchange variation and
an interest rate of 2.4% above the semiannual LIBOR with the following maturity:
Year
2003
2004
2005
2001
$
$
5,000
20,000
10,000
---------35,000
======
9. FINANCING SECURED BY FUTURE EXPORT SALES
As of December 31, 1998, the Company had financing transactions secured by future export sales made through its
subsidiary, Açominas Overseas Ltd., by means of issuance of notes denominated in U.S. dollars, due quarterly until
January 2002. In December 1999, the Company began a process of repaying all obligations to existing noteholders.
To facilitate the program, the Company refinanced its Note obligations with a Loan advanced to Açominas Overseas
Ltd. pursuant to an Advance Payment and Supply Agreement. The outstanding principal in December 31, 1999, in
the amount of $59,197, was fully paid during 2000.
The proceeds of the notes were used to purchase semi-finished products from the Company, under a Steel Sales
Agreement whereby the Company sold 100% of the steel produced for export to countries outside of South America
to Açominas Overseas Ltd., until all principal and interest on the notes had been paid in full. Following the
repayment of the remaining note obligations, the Company will continue to sell 100% of the steel produced for
export to countries outside of South America to Açominas Overseas Ltd. under a new agreement, which proceeds
will be used to repay in full the principal and interest obligations on the Loan mentioned above.
The price of the steel will be the prevailing price in the international market for semi-finished steel products.
Effective December 1, 1999, Açominas Overseas Ltd. entered into an Advance Payment and Supply Agreement
with Brazilian Steel International Trading Company (“BSIT”), a Cayman Islands special purpose company. Under
the agreement, BSIT made an advance payment to Açominas Overseas Ltd. of $112,476, representing a gross loan
of $150,000 made by a syndicate of commercial banks to BSIT less prepaid interest and related fees and other
borrowing costs. As consideration for the advance payment, Açominas Overseas Ltd. is required to supply steel on
behalf of BSIT to designated purchasers, over a specified period and of sufficient value (up to an aggregate amount
of $150,000) such that the proceeds of sale flowing to BSIT enable it to meet its obligations to the lending banks. As
BSIT does not have operations other than the financing secured by future export sales, all the assets, liabilities and
results of operations of BSIT are included in Açominas’ financial statements.
10
The loan is repayable by BSIT in quarterly installments of $15,000 from March 1, 2001 until June 1, 2003.
Prepayments are allowed, without penalty, subject to certain terms set out in the Loan agreement. The effective
interest rate is 10.49% p.a..
The maturities are as follows:
Year
Current
Noncurrent
$
2002
2003
$
2001
51,951
----------27,703
--------27,703
--------79,654
=====
$
$
2000
56,618
---------33,743
33,743
---------67,486
---------124,104
======
10. SUPPLIERS AND CONTRACTORS
Suppliers and contractors - domestic
Suppliers - foreign
$
$
2001
20,577
94,183
----------114,760
======
$
$
2000
23,154
70,268
----------93,422
======
The foreign supplier balance refers basically to acquisitions of coal, other raw materials and spare parts,
substantially denominated in U.S. dollars. Coal acquisition transactions are subject to payment term of 360 days.
11
11. PENSION PLAN
The Company sponsors a defined benefit pension plan covering approximately 98% of the employees (the “Plan”).
Contributions to the Plan are based on actuarially determined amounts and totaled $2,364 in 2001, $3,448 in 2000
and $3,278 in 1999.
The Plan is administered by AÇOS - Fundação Açominas de Seguridade Social. Plan assets consist of investments
in bank certificates of deposit, equity and debt securities and investment funds. AÇOS holds common shares of the
Company, equivalent to approximately 3.03% of the Company’s capital, included in the shareholders’ agreement.
Net periodic pension cost (benefit) relating to the defined benefit component of the Plan was as follows:
2001
Interest cost on the projected benefit obligation
Net deferral
Amortization of net (gain) loss
Amortization of initial net transition obligation
Amortization of prior service cost
Employee contributions
$
Net pension cost (benefit)
3,257
9,795
(20,344)
7,270
(585)
(587)
576
(1,109)
--------(1,727)
=====
$
2000
$
$
3,652
11,207
(11,912)
(4,784)
(1,275)
(809)
(1,087)
--------(5,008)
=====
1999
$
$
4,071
11,087
(36,379)
23,129
557
(816)
(1,084)
--------565
=====
The funded status of the Plan as of December 31 was as follows:
2001
Actuarial present value of accumulated benefit obligation:
Vested benefits
Non-vested benefits
$
----------119,916
159,931
----------40,015
(6,381)
51,766 $
54,899
52,188
51,226
--------------------103,954
106,125
15,962
17,443
-------------------123,568
112,809
164,265
167,655
--------------------40,697
54,846
(8,330)
(9,931)
8,766
(24,671)
----------17,729
======
11,145
(27,751)
----------15,761
======
Accumulated benefit obligation
Future projected salary increase
Projected benefit obligation
Plan assets in excess of projected benefit obligation
Unrecognized prior service cost to be amortized over 15 years
beginning January 1, 2001
Unrecognized net gain
$
2000
$
$
1999
$
(36,340)
----------8,575
======
The plan was amended during 2000, in relation to the maximum limit of the benefit to be paid to participants after
retiring. Also, during 2000 the regulations of the public pensions sponsored by the Federal Government were
12
54,999
40,586
----------95,585
17,224
changed, impacting the actuarial evaluation of the Company’s pension plan. Such impacts are being reported as
unrecognized prior service costs to be recognized during the next 15 years beginning January 1, 2001.
Additional information required by SFAS No. 132 for the Plan is as follows:
2001
Change in benefit obligationBenefit obligation at the beginning of the year
Service cost
Interest cost
Actuarial gain
$
Benefit payments
Benefit obligation at the end of the year
$
(4,108)
(18,172)
----------119,916
======
$
123,568
3,257
9,795
5,576
(5,102)
(10,993)
----------123,568
======
2000
$
112,809
3,652
11,207
11,995
Change in plan assets Fair value of plan assets at the beginning of the year
Employer contributions
Participants contribution
Benefit payments
Fair value of plan assets at the end of the year
$
164,265
20,344
2,364
167,655
11,912
3,448
1,184
1,361
(4,108)
(24,118)
----------159,931
======
$
(5,102)
(15,009)
----------164,265
======
2001
Funded statusFunded status at the end of the year
Unrecognized gains
$
$
40,015
(6,381)
8,766
(24,671)
----------17,729
======
$
$
2000
40,697
(8,330)
11,145
(27,751)
----------15,761
======
The unrecognized net transition obligation and net gains or losses are being amortized on a straight-line basis over
15 years.
Following is a summary of assumptions used in the accounting for the Plan:
2001
10.24%
4.00%
10.24%
2000
10.24%
4.00%
10.24%
1999
10.24%
4.00%
10.24%
13
12. DEFERRED INCOME AND SOCIAL CONTRIBUTION TAXES
Temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:
2001
Deferred tax assets:
Allowance for doubtful accounts- accounts receivable
- notes and other receivables
Reserve for contingent liabilities
Reserve for losses on fixed assets
Tax loss carryforwards
Difference of indices and depreciation of property,
plant and equipment
$
Gross deferred income tax assets
Deferred tax liabilities:
Capitalized interest on property, plant and equipment
Reserve for refurbishing and maintenance
Other
Gross deferred income tax liabilities
Valuation allowance
Net deferred income tax assets
$
112
1,644
3,308
94,847
268,631
2000
$
537
1,620
6,326
139,949
295,787
106,116
----------474,658
-----------
136,930
----------581,149
-----------
5,851
81,916
6,147
1,058
----------94,972
----------(346,124)
----------33,562
======
5,359
130,210
7,733
790
----------144,092
----------(437,057)
----------======
$
As a consequence of the capitalization process, the productivity increase, the cost reduction and the technological
updating, management is expecting an increase in the Company's profitability. Based on this estimate, as well as the
fact that the Company had profits in the last two years, the Company has reversed a portion of the valuation
allowance during 2001 based upon management’s belief that it is more likely than not such deferred tax assets will
be realized in the future upon the generation of taxable income. The tax loss carryforwards do not expire and may be
carried forward for an indefinite period. Utilization of the tax carryforwards in any year, however, is limited to 30%
of taxable income generated in such year. The amount of the deferred tax asset considered realizable, however,
could be reduced if estimates of future taxable income are reduced.
14
The tax rates for the periods are:
Income tax
Additional income tax
15%
10%
Social contribution tax- from January 1 through April 30, 1999
- from May 1 through January 31, 2000
- from February 1 through December 31, 2002
- after January 1, 2003
8%
12%
9%
8%
13. CONTINGENCIES
2001
Tax litigation
Civil litigation
Labor litigation
$
$
3,441
2,685
4,173
--------10,299
=====
2000
$
$
9,879
3,629
5,098
--------18,606
=====
The Company is party to claims with respect to certain taxes, contributions and labor. Management believes, based
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, 2001 or the results of future operations or cash flows.
However, it is possible that these contingencies could have a material effect on quarterly or annual operating results,
when resolved in future periods.
The tax litigation reserve includes $2,787 ($2,916 in 2000) related to value-added tax (ICMS) charged by State of
Santa Catarina on acquisition of coal in 1991. The Company has been challenged in the courts and prepared its
defense, based on favorable reports of experts. Currently the Company is awaiting decision from the court. The
remaining amount of $654 ($304 in 2000) in the tax litigation reserve relates to other tax claims and assessments
that arose from the ordinary course of business.
Approximately $3,893 of the tax litigation reserve recorded at December 31, 2000 related to federal social
contribution tax on revenues (COFINS) being challenged by the Company due to the requirement for the inclusion
of positive monetary variation in the calculation of such tax. Additionally, $2,766 related to a claim to recover the
salary premium for education monthly paid by the Company, based on the argument of unconstitutionality of this
premium. As part of the tax recovery program (Refis), the Company fully paid the amounts in 2000.
The civil litigation reserve includes $2,276 ($2,351 in 2000) related to accidents and $409 ($585 in 2000) related to
claims from contractors, which are being contested by the Company.
The Company is also a party to a number of labor lawsuits. As of December 31, 2001, the Company has accrued
$4,173 ($5,098 in 2000) relating to such lawsuits.
Escrow 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, 2001 is comprised
principally of $786 ($652 in 2000) of labor claims and $553 ($604 in 2000) of payroll related charges.
14. STOCKHOLDERS' EQUITY
15
Capital stock, fully paid-up, is represented by 59,107,329 authorized and outstanding shares, without par value, of
which 59,089,531 are common shares and 17,798 are preferred shares. Preferred shares have the same rights as
common shares, except for voting rights, and have priority to dividend distributions, as well as to capital
reimbursement, without premium. The Company’s Capital Stock based on the criteria prescribed by the Brazilian
Corporate Law is R$1,699,503 thousand (approximately $732,418) and the Authorized Capital is limited to
R$2,000,000 thousand (approximately $861,920), according to the Company’s bylaws.
In September 2000, the Company carried out a reverse stock split, in the proportion of 10,000 old shares for 1 new
share. As a result of this reverse split, 483 shares (374 common shares and 109 preferred shares) were canceled,
after having been recorded as “treasury stock” until the approval of their cancellation at the 60th Extraordinary
Stockholders’ Meeting. As a consequence, the Company’s capital was reduced by $7.
In September 1999, 165,501,872,821 common shares were issued upon the approval of the capital increase in the
amount of $184,146, which was paid in seven monthly installments from the approval date.
In January, February and March 2000, the last three installments were paid in the total amount of $87,279 ($82,161
refers to the installments and $5,118 refers to monetary restatement of the installments).
During 1999, 191,994,048,462 debentures were converted into shares at the original value of $21,655, plus $5,468
of accrued interest, in the total amount of $27,123, equivalent to 38,398,809,691 common shares before the reverse
split. There are no outstanding debentures as of December 31, 2001 or 2000. The book value of these shares was
R$160.013 thousand (equivalent to $88,200) at the conversion date.
The following sets forth the changes in the Company’s shares from December 31, 1998 through December 31, 2001:
Common
shares
Shares issued
Conversion of debentures
Reverse stock split - (10,000 for 1)
Treasury shares due to reverse split
Treasury stock canceled
Preferred
shares
Treasury
stock
386,998,357,110
179,077,595
-
165,501,872,821
38,398,809,691
----------------------590,899,039,622
---------------179,077,595
------
59,089,531
374
(374)
----------------------59,089,531
----------------------59,089,531
=============
17,798
109
(109)
---------------17,798
---------------17,798
=========
483
(483)
----------===
The bylaws establish the distribution of mandatory minimum dividend of 25% of net income after the recognition of
the legal reserve, in accordance with Brazilian corporate law.
The preferred shares are non-voting but have rights to an additional annual dividend 10% higher than the common
shares and preference with respect to the distribution of capital in the event of liquidation. However, according to
Brazilian corporate law, after three years without receiving dividends, the preferred shares obtain voting rights.
In 2001, the Company paid dividends in the amount of $33,791, equivalent to 35% of net income of 2000, after
computation of the legal reserve, as decided by the Company’s majority stockholders and approved at the 58th
Annual Stockholders’ Meeting.
Brazilian legislation permits dividend payments limited to the retained earnings in the statutory financial statements
prepared in accordance with Brazilian Corporation Law. As of December 31, 2001, the Company has proposed
16
dividends equivalent to $9,680, to be approved at the Annual Stockholders’ Meeting. The remaining accumulated
profit included in the financial statements per Brazilian Corporate Law is R$205,796, equivalent to $88,690 at the
exchange rate prevailing at that date.
For US GAAP financial statement purposes, the absorption of accumulated deficits recorded in the financial
statements per Brazilian Corporate Law was not considered.
In accordance with SFAS No. 128, the following tables reconcile net income available to Common and Preferred
shareholders and weighted average Common and Preferred shares outstanding to the amounts used to calculate basic
and diluted EPS for the year ended December 31 1999, as well as to the amounts used to calculate basic EPS for the
years ended December 31, 2001 and 2000. Due to the reverse stock split in 2000, the earnings per share computation
for 1999 was retroactively adjusted to reflect such transaction.
Basic numeratorActual dividends declared
Basic allocated undistributed earnings
Common
2001
Preferred
$
$
33,781
10,122
----------
Basic denominatorWeighted average shares
$
43,903
---------
13
---
59,090
--------0.74
===
18
-----0.72
===
$
2000
Preferred
$
$
$
86,074
---------86,074
----------
26
------
59,090
---------1.46
===
18
-----1.44
===
$
1999
Preferred
$
$
$
(103,256)
-------------
33,791
10,125
--------43,916
---------
$
86,100
---------86,100
----------
Total
(41)
------
(103,256)
------------
(41)
-----
45,404
---------(2.27)
====
18
-------(2.28)
====
$
$
Total
26
---
Common
Allocated net loss available to Common and
10
3
----
Common
Total
$
(103,297)
-----------(103,297)
------------
17
Diluted numeratorActual dividends declared
Common
1999
Preferred
$
$
Interest expense on convertible debentures, net of tax
Allocated dilutive net loss available to Common and Preferred
shareholders
Diluted denominatorBasic weighted average shares
Convertible debentures
Diluted weighted average shares outstanding
Diluted earnin gs per share
$
(103,256)
-----------(103,256)
541
------------
(41)
----(41)
------
(102,715)
------------
(41)
-----
45,404
1,595
---------46,999
---------(2.19)
=====
18
----18
------(2.28)
====
$
Total
$
(103,297)
-----------(103,297)
541
-----------(102,756)
------------
18
15. RELATED-PARTY TRANSACTIONS
The principal balances and transactions with stockholders and other related companies are summarized as follows:
December 31, 2001
Gerdau
S.A.
BALANCES:
Assets CurrentAccounts receivable
$
LiabilitiesCurrentSuppliers
Accounts payable
Advances on exchange
and export contracts
TRANSACTIONS:
Sales
Purchases
3,168 $
(112)
(31)
-
$
44,930
(1,670) $
Holderci
m
do Brasil
S.A.
494 $
(154)
-
3,510
(1,803) $
Fundação
Açominas
de
Seguridade
Social AÇOS
-
Banco
Real S.A.
ABN
Amro
$
- $
Sipar
Aceros
Natsteel
Trading
Total
1,894 $
1,958 $
7,514
(16)
(28)
-
-
(266)
(75)
-
(1,204)
-
-
(1,204)
-
$
- $
12,133
- $
42,997
- $
103,570
(3,473)
19
Companh
ia
Vale do
Rio Doce
CVRD
BALANCES:
AssetsCurrentAccounts receivable
$
LiabilitiesCurrentLoans and financing
Suppliers
Accounts payable
Freight payable
TRANSACTIONS:
Sales
Purchases
Freight
$
Companhia
Siderúrgica
de Tubarão
CST
- $
- $
Companh
ia
Siderúrgi
ca
Nacional
CSN
2,283 $
December 31, 2000
Fundação
Açominas
Holderci
de
Gerdau
m
Seguridade
S.A.
do Brasil
Social S.A.
AÇOS
488 $
374 $
(415)
(267)
(79)
-
(820)
-
(138)
-
(253)
-
(39,590) $
275
(8,537)
- $
42,234
(9,365)
- $
59,722
(1,929)
- $
4,225
(3,193)
- $
Banco
Real S.A.
ABN
Amro
- $
(442)
-
- $
(5,074)
-
- $
- $
Natsteel
Trading
Total
13,863 $
-
75,497
- $
17,008
(415)
(1,290)
(5,516)
(267)
181,953
(23,024)
(39,590)
December 31, 1999
Companhi
a
Vale do
Rio Doce
CVRD
TRANSACTIONS:
Sales
Purchases
Freight
$
$
- $
(29,643) $
Companh
ia
Siderúrgi
ca de
Tubarão
CST
48 $
(536)
- $
Companhia
Siderúrgica
Nacional
CSN
329 $
(5,679)
- $
Gerdau
S.A.
22,279 $
(1,218)
- $
Holderci
m do
Brasil
S.A.
3,951 $
(498)
- $
Natsteel
Trading
39,417 $
- $
Total
66,024
(7,931)
(29,643)
20
21
GERDAU S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of US Dollars, except per share amounts)
Cia. Vale do Rio Doce - CVRD was a shareholder of DOCEPAR S.A., which was part of the Company’s
stockholders agreement at December 31, 2000. DOCEPAR S.A. also held equity interest in Cia. Siderúrgica de
Tubarão - CST and Companhia Siderúrgica Nacional - CSN. As of December 31, 2001 these companies are not
considered related parties.
Banco Real S.A. ABN Amro is a stockholder of the Company.
Transactions with related parties were made under conditions that include monetary restatement and interest when
applicable and considered by management to be in line with market conditions.
16. TAX RECOVERY PROGRAM - REFIS
The Brazilian Government authorized, under the so-called REFIS program (Tax Recovery Program), that Federal
taxes then under dispute could be paid by taxpayers on deferred terms and that certain tax credits either originally
belonging to the relevant taxpayer or acquired from third parties could be used as payment currency. The Company
took part in the Tax Recovery Program (REFIS), according to the terms of Law Nos. 9,664 and 10,002 dated April
10 and September 14, 2000, respectively, and complementary legislation. The Company totally amortized the
balance of INSS and salary premium for education installments making use of this recovery program. The option for
REFIS occurred in December 12, 2000.
In 2000, the Company used social contribution tax losses in the total amount of $136,988, generated in prior years,
to amortize interest and fines owe d by the Company, limited to 8% of the Social Contribution Tax Losses, according
to the REFIS legislation.
The Company recorded the gain generated in the operation as a financial income in the amount of $10,959.The
Company decided to fully pay the principal due in December 2000.
17. COMMITMENTS
(a) In September 1998 the Company signed two agreements with Holdercim do Brasil S.A., one for an annual
supply of 560,040 tons of granulated slag and another for the purchase of an annual total of 300,000 tons of
limestone, both for a period of 120 months beginning October 1, 1998, in the aggregate amount of $25,347 and
$16,708, respectively, the prices of which are subject to annual review by the parties.
(b) For the purpose of maintaining and expanding its product line, in October 1998 the Company leased properties
and industrial assets from Siderúrgica J.L. Aliperti S.A. for periods of 60 and 240 months, respectively. For
U.S. GAAP purposes, the lease of these properties and industrial assets was classified as a capital lease.
1
GERDAU S.A.
The future lease payments as of December 31, 2001, included in loans and financing (Note 8) are as follows:
Year
2002
2003
2001
$
2,559
2,133
---------4,692
======
$
The assets included in such lease are as follows:
Plant
Accumulated amortization
$
$
2001
2,002
(358)
---------1,644
======
The net amortization of the capital lease ($216) is included in depreciation expense.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with 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 values provided are representative of the fair values as of December 31,
2001 and 2000 and do not reflect subsequent changes in the economy, interest and tax rates, and other variables that
may impact determination of fair value. The following method and assumptions were used in estimating fair values
for financial instruments:
• Cash, short-term investments, other receivables and payables: The carrying amounts approximate
fair value because of the short maturity of these instruments.
• Escrow deposits: The carrying amount of judicial deposits approximates fair value, as interest is
receivable on such deposits at a variable market rate.
• Short-term and long-term debt, including the financing secured by future export sales: The fair
value of short-term and long-term debt is based on current rates offered for similar debt.
2
GERDAU S.A.
The carrying amounts and fair values of the Company’s significant financial instruments as of December 31 are as
follows:
Cash and cash equivalent and restricted cash
Escrow deposits
Loans and financing, advances on exchange and export
contracts, financing secured by future export sales and
export prepayments
2001
2000
Carrying
Fair value
Carrying
Fair value
amount
amount
$
116,033 $
116,033 $
159,947 $
159,947
1,821
1,821
4,856
4,856
$
354,461 $
353,835 $
279,450 $
278,523
19. CONCENTRATION OF CREDIT RISKS
No single customer of the Company, other than the related parties described in the note 15, accounted for more than
10% of net sales and no single supplier accounted for more than 10% of purchases. Historically, the Company has
not experienced significant losses on trade receivables.
20. SEGMENT INFORMATION
The Company’s operations are classified into two business segments: manufacturing and civil construction. The
manufacturing segment primarily consists of the production and sale of billets, slabs and blooms. The civil
construction segment principally involves the production and sale of concrete reinforcing bars and wire for
reinforced concrete.
Information about the Company’s segments is follows:
Manufacturing
2001
Civil
Construction
Total
Net sales
Identifiable assets
$
359,729
36,944
1,442,936
131,187
$
77,743
21,574
53,711
1,627
$
437,472
58,518
1,496,647
132,814
Depreciation
$
45,368
$
361
$
45,729
3
GERDAU S.A.
Manufacturing
2000
Civil
Construction
Total
Net sales
Identifiable assets
$
473,459
107,940
1,509,360
57,156
$
67,982
24,840
66,660
3,984
$
541,441
132,780
1,576,020
61,140
Depreciation
$
57,451
$
139
$
57,590
Manufacturing
1999
Civil
Construction
Total
Net sales
Identifiable assets
$
358,621
56,414
1,592,763
89,317
$
65,110
12,687
33,670
4,872
$
423,731
69,101
1,626,433
94,189
Depreciation
$
52,619
$
670
$
53,289
Geographic information about net sales of the Company is as follows:
Region
Domestic
Asia
North America
Latin America (other than Brazil)
Europe
Other
2001
$
$
181,376
152,809
48,516
38,279
8,706
7,786
-----------437,472
=======
2000
$
$
244,370
178,780
87,975
8,677
19,579
2,060
-----------541,441
=======
1999
$
$
191,205
139,810
50,848
11,933
29,935
-----------423,731
=======
The operating assets are substantially located in Brazil.
21. NEW PRONOUNCEMENTS
In June 2001 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141, “Business Combinations”. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for using the purchase method for which
the date of acquisition is July 1, 2001, or later. SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. The Company does not anticipate that this new standard
4
GERDAU S.A.
will have any impact on its financial position or results of operations.
In June 2001 the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001. Early application of SFAS No. 142 is permitted for entities with
fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously
been issued. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated
useful life, but rather it will be subject to at least an annual assessment for impairment by applying a fair-valuebased test. Additionally, negative goodwill is recognized as an extraordinary gain at the time of the business
combination. The Company does not anticipate that this new standard will have a significant impact on its financial
position or results of operations.
In June 2001 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for
Asset Retirement Obligations”. The new standard will be effective for financial statements issued for fiscal years
beginning after June 15, 2002, with early application encouraged. The Company plans to adopt this new standard in
January 1, 2003. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or
the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement requires that the
fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The Company has not yet quantified all of the effects of adopting SFAS No.
143 on its financial statements.
In August 2001 the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”. The new standard will be effective for financial statements issued for fiscal years beginning after
December 15, 2001, with early application encouraged. The Company plans to adopt this new standard in January
1, 2002. SFAS No. 144 supersedes SFAS No. 121, “ Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of”, although it retains the fundamental provisions of SFAS No. 121. SFAS No.
144 als o expands the scope of discontinued operations presentation to a component of an entity and eliminates the
exception to consolidation for a temporarily controlled subsidiary. The Company has not yet quantified all of the
effects of adopting SFAS No. 144 on its financial statements.
* * * * * * * * *
5

Form 20-F - Gerdau GERDAU

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