EX-99.1 CHARTER 2 e985586.txt CONDENSED CONSOL INTERIM FINAN INFO Exhibit 99.1 GERDAU S.A. Concensed consolidated inerim financial information at March 31, 2004 and 2003 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Gerdau S.A. We have reviewed the accompanying condensed consolidated balance sheets of Gerdau S.A. and its subsidiaries as of March 31, 2004 and March 31, 2003, and the related condensed consolidated statements of income, of comprehensive income, of changes in shareholder's equity and of cash flows for each of the three-month periods ended March 31, 2004 and March 31, 2003 . This interim financial information is the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America. We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2003, and the related consolidated statements of income, of comprehensive income (loss), and of cash flows for the year then ended (not presented herein), and in our report dated February 20, 2004 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers Auditores Independentes Porto Alegre, Brazil April 26, 2004 GERDAU S.A. CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS (in thousands of U.S. Dollars, except number of shares) --------------------------------------------------------------------------------
ASSETS March 31, (unaudlted) ----------------------- December Note 2004 2003 31,2003 ---- ---- ---- ------- Current assets Cash and cash equivalents 161,936 79,691 92,504 Restricted cash 2,294 14,999 1,935 Short-term investments 237,169 295,275 236,137 Trade accounts receivable, net 564,809 451,496 465,857 Inventories 3 879,494 712,441 797,961 Unrealized gains on derivatives 9 5,224 5,799 9,599 Deferred income taxes 38,235 26,241 49,451 Tax credits 55,514 13,332 37,953 Prepaid expenses 25,547 8,752 21,859 Other 44,219 32,582 46,576 --------- --------- --------- Total current assets 2,014,441 1,640,608 1,759,832 Non-current assets Property, plant and equipment, net 4 2,372,785 2,189,296 2,304,158 Deferred income taxes 250,009 94,239 231,306 Judicial deposits 6 73,946 21,200 66,121 Unrealized gains on derivatives 9 - 56,970 86 Equity investments 149,760 129,300 153,555 Investments at cost 7,496 6,315 23,854 Goodwill 131,733 119,204 119,531 Prepaid pension cost 36,790 27,002 35,253 Other 95,427 79,162 77,138 --------- --------- --------- Total assets 5,132,387 4,363,296 4,770,834 ========= ========= =========
F-2 GERDAU S.A. CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS (in thousands of U.S. Dollars, except number of shares) --------------------------------------------------------------------------------
LIABILITIES March 31, (unaudlted) ----------------------- December Note 2004 2003 31,2003 ---- ---- ---- ------- Current liabilities Short-term debt 5 489,486 848,704 479,586 Current portion of long-term debt 5 268,110 478,087 318,910 Trade accounts payable 494,220 337,138 372,518 Income taxes payable 44,976 41,437 27,790 Unrealized losses on derivatives 9 40,918 11,637 29,582 Deferred income taxes 11,915 9,628 7,286 Payroll and related liabilities 42,019 45,566 54,478 Dividends (interest on equity) payable 31,151 19,403 53,202 Taxes payable, other than income taxes 32,317 19,586 26,482 Other 70,542 65,702 89,328 --------- --------- --------- Total current liabilities 1,525,654 1,876,888 1,459,162 Non-current liabilities Long-term debt, less current portion 5 1,295,211 616,906 1,132,429 Debentures 5 159,025 224,440 155,420 Deferred income taxes 82,021 91,898 72,125 Accrued pension and other post-retirement benefits obligation 111,414 114,557 108,679 Provision for contingencies 6 115,686 55,232 102,060 Unrealized losses on derivatives 9 4,705 9,496 11,356 Other 76,218 50,604 61,543 --------- --------- --------- Total non-current liabilities 1,844,280 1,163,133 1,643,612 --------- --------- --------- Total liabilities 3,369,934 3,040,021 3,102,774 Minority interest 289,285 331,996 264,997 Commitments and contingencies 6 SHAREHOLDERS' EQUITY 7 Preferred shares - no par value 96,885,787 shares issued at March 31, 2004 and 2003 and December 31, 2003, after giving, at March 31, 2003, retroactive effect to stock bonus and stock split (Note 7.1) 653,344 562,801 653,344 Comn~n shares - no par value 51,468,224 shares issued at March 31, 2004 and 2003 and December 31, 2003, after giving, at March 31, 2003, retroactive effect to stock bonus and stock split (Note 7.1) 329,257 281,158 329,257 Additional paid-in capital 3,295 2,712 3,271 Treasury stock - 786,600 and 345,000 preferred shares at March 31,2004 and December 31,2003, respectively (15,256) - (5,920) Legal reserve 63,408 38,045 63,834 Retained earnings 1,249,628 1,023,894 1,161,527 Cumulative other con~rehensive loss -Foreign currency translation adjustn~nt (798,989) (898,673) (790,731) -Additional nininiim pension liability (11,519) (16,309) (11,519) -Unrealized loss on cash flow hedge - (2,349) - --------- --------- --------- Total shareholders' equity 1,473,168 991,279 1,403,063 --------- --------- --------- Total liabilities and shareholders' equity 5,132,387 4,363,296 4,770,834 ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated interim financial information. F-3 GERDAU S.A. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (in thousands of U.S. Dollars, except share data) --------------------------------------------------------------------------------
Three-month period ended March 31, (unaudited) ------------------------- Note 2004 2003 ------ ------- -------- Sales 1,581,027 1,058,386 Less: Federal and state excise taxes (142,846) (86,700) Less: Discounts (22,840) (37,717) Net sales 1,415,341 933,969 Cost of sales (1,081,116) (716,984) Gross profit 334,225 216,985 Sales and marketing expenses (32,836) (26,942) General and administrative expenses (71,534) (45,762) Operating income 229,855 144,281 Financial expenses (61,248) (41,987) Financial income 11,102 10,862 Foreign exchange gains and losses, net (8,557) 22,917 Equity in earnings of unconsolidated companies, net 11,624 6,816 Other non-operating expense, net 1,188 1,421 Income before income taxes and minority interest 183,964 144,310 Provision for income taxes 11 Current (38,149) (25,882) Deferred (11,687) 5,494 (49,836) (20,388) Income before minority interest 134,128 123,922 Minority interest (14,149) (11,952) Net income 119,979 111,970 Per share data (in US$) 8 ------------------------- Basic earnings per share Preferred 0.81 0.75 Common 0.81 0.75 Diluted earnings per share Preferred 0.81 0.75 Common 0.81 0.75 Number of weighted-average common shares outstanding after giving retroactive effect to stock bonus and reverse stock split (Note 7.1)-- Basic and diluted 51.468,224 51,468,224 Number of weighted-average preferred shares outstanding after giving retroactive effect to stock bonus and reverse stock split (Note 7.1) -- Basic 96,252,412 96,885,787 Number of weighted-average preferred shares outstanding after giving retroactive effect to stock bonus and reverse stock split (Note 7.1) -- Diluted 96,545,709 96,885,787
The accompanying notes are an integral part of these condensed consolidated interim financial information. F-4 GERDAU S.A. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (in thousands of U.S. Dollars, except share data) -------------------------------------------------------------------------------
Three-month period ended March 31, (unaudited) ------------------------- 2004 2003 ------- -------- Net Income as reported In the consolidated statement of Income 119,979 111,970 Foreign currency translation adjustments (8,258) 36,460 Unrealized loss on cash flow hedge, net of taxes (39) ------- -------- Comprehensive income for the period 111,721 148,391 ======= ========
The accompanying notes are an integral part of these condensed consolidated interim financial information. F-6 F-5 GERDAU S.A. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited) (in thousands of U.S. Dollars, except share data) --------------------------------------------------------------------------------
Additional Preferred Common paid-in Treasury Note shares shares capital stock -------- --------------- --------------- -------------- --------------- Balances as of January 1, 2003 562,801 281,158 2,086 -- Net income -- -- -- -- Apropriaton of reserves -- -- 626 -- Foreign currency translation adjustment -- -- -- -- Unrealized loss on cash flow hedge, net of tax -- -- -- -- Dividends (interest on equity) - $0.15 per Common share -- and and per Preferred share (*) 7.2 -- -- -- -- -------- --------------- --------------- -------------- --------------- Balances as of March 31, 2003 562,801 281,158 2,712 -- ======== =============== =============== ============== =============== Balances as of January 1(degree), 2004 653,344 329,257 3,271 (5,920) Net income -- -- -- -- Appropriation of reserves (22) -- Purchase of treasury preferred shares (9,336) Foreign currency translation adjustment -- -- -- -- Dividends (interest on equity) - $0.22 per Common share and per Preferred share 7.2 -- -- -- -- Stock option plan expense recognized during the period -- -- 46 -- -------- --------------- --------------- -------------- --------------- Balances as of March 31, 2004 653,344 329,257 3,295 (15,256) ======== =============== =============== ============== =============== Cumulative other Legal Retained Comprehensive Reserve earnings loss Total Balances as of January 1, 2003 36,105 936,612 (953,752) 865,010 Net income -- 111,970 -- 111,970 Apropriaton of reserves 1,940 (2,566) -- -- Foreign currency translation adjustment -- -- 36,460 36,460 Unrealized loss on cash flow hedge, net of tax -- -- (39) (39) Dividends (interest on equity) - $0.15 per Common share and and per Preferred share (*) -- (22,122) -- (22,122) --------------- --------------- -------------- --------------- Balances as of March 31, 2003 38,045 1,023,894 (917,331) 991,279 =============== =============== ============== =============== Balances as of January 1(degree), 2004 63,834 1,161,527 (802,250) 1,403,063 119,979 Net income -- 119,979 -- Appropriation of reserves (426) 448 -- -- Purchase of treasury preferred shares -- -- -- Foreign currency translation adjustment -- -- (8,258) (8,258) Dividends (interest on equity) - $0.22 per Common share and per Preferred share -- (32,326) -- (32,326) Stock option plan expense recognized during the period -- -- -- 46 --------------- --------------- -------------- --------------- Balances as of March 31, 2004 63,408 1,249,628 (810,508) 1,473,168 =============== =============== ============== ===============
(*) After giving retroactive effect to the stock bonus and reverse stock split described in Note 7.1 and the stock bonus approved on April 29, 2004 described in Note 15(c). Preferred treasury stock shares for the three-month period ended Mar 31, 2004 are not considering outstanding. The accompanying notes are an integral part of these condensed consolidated interim financial information. F-6
GERDAU S.A. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (in thousands of U.S. Dollars) ------------------------------------------------------------------------------------------------------------------------- THREE-MONTH PERIOD ENDED MARCH 31, (UNAUDITED) --------------------------------------- 2004 2003 ------------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income 119,979 111,970 Adjustments to reconcile net income to cash flows from operating activities: Depreciation and amortization 61,009 46,306 Equity in earnings on unconsolidated companies, net (11,624) (6,816) Foreign exchange (gain) loss 8,557 (22,917) Unrealized losses (gains) on derivative instruments 17,616 (10,260) Minority interest 14,149 11,952 Deferred income taxes 11,687 (5,494) Loss on dispositions of property, plant and equipment 1,574 1,014 Provision for doubtful accounts 652 699 Provision for contingencies 10,683 1,779 Others (2,849) CHANGES IN ASSETS AND LIABILITIES: Increase in accounts receivable (96,553) (71,904) Increase in inventories (71,425) (52,163) Increase in accounts payable and accrued liabilities 116,903 54,939 Decrease in other assets 10,691 18,202 Decrease in other liabilities (30,905) (181) ------------------- ---------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 162,993 74,277 ------------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (76,398) (75,918) Proceeds from sales of property, plant and equipment 1,090 Payment of installments for acquisition of Margusa (Note 13) (8,004) Payment for acquisition of interest in Dona Francisca Energetica S.A. (5,725) Cash balance of acquired company 270 Purchases of short-term investments (43,254) (212,463) Proceeds from maturities and sales of short-term investments 51,171 293,338 Others 1,799 1,581 ------------------- ---------------- NET CASH USED IN (PROVIDED BY) INVESTING ACTIVITIES (74,416) 1,903 ------------------- ----------------
F-7
GERDAU S.A. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (in thousands of U.S. Dollars) ------------------------------------------------------------------------------------------------------------------------- Three-month period ended March 31, (unaudited) ---------------------------------- 2004 2003 ----------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends (interest on equity) paid (59,906) (54,239) Purchase of treasury shares (9,336) Decrease (increase) in restricted cash (374) 776 Debt issuance, short term 44,590 235,181 Debt issuance, long term 107,336 50,099 Repayment of debt, short term (74,633) (223,586) Repayment of debt, long term (33,859) (40,910) Net related party debt repayments (574) (1,877) ----------------- ------------- NET CASH USED IN FINANCING ACTIVITIES (26,756) (34,556) ----------------- ------------- Effect of exchange rate changes on cash (3,695) (2,390) Increase in cash 58,126 39,234 Cash at beginning of period 92,504 40,457 Cash of Dona Francisca Energetica S.A. as of January 1, 2004 (Note 2.5) 11,306 - ----------------- ------------- CASH AT END OF PERIOD 161,936 79,691 ================= ============= The accompanying notes are an integral part of these condensed consolidated interim financial information
F-8 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) -------------------------------------------------------------------------------- 1 OPERATIONS Gerdau S.A. is a sociedade anonima incorporated as a limited liability company under the laws of the Federative Republic of Brazil. The principal business of Gerdau S.A. ("Gerdau") in Brazil and of its subsidiaries in Argentina, Canada, Chile, the United States and Uruguay (collectively the "Company") comprise the production of crude steel and related long rolled products, drawn products and long specialty products. The Company produces steel based on the mini-mill concept, whereby steel is produced in electric arc furnaces from scrap and pig iron acquired mainly in the region where each mill operates. Gerdau also operates plants which produce steel from iron ore in blast furnaces and through the direct reduction process. The Company manufacture steel products for use by civil construction, manufacturing, agribusiness as well as specialty steel products. The markets where the Company operates are located in Brazil, the United States, Canada and Chile and, to a lesser extent, in Argentina and Uruguay. 2 BASIS OF PRESENTATION 2.1 STATUTORY RECORDS The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"), which differ in certain aspects from the accounting practices adopted in Brazil ("Brazilian GAAP") applied by the Company in the preparation of its statutory financial statements and for other legal and regulatory purposes. The consolidated financial statements for statutory purposes are prepared in Brazilian reais. The condensed consolidated financial information for three-month periods ended March 31, 2004 and 2003 is unaudited. However, in the opinion of management, this financial information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods presented. The results for the three-month period ended March 31, 2004 are not necessarily indicative of the results to be expected for the entire year. This condensed financial information has been prepared on substantially the same basis as the consolidated financial statements as of and for the year ended December 31, 2003 and should be read in conjunction therewith. However, as mentioned in Note 2.5, as a result of the application effective January 1(0), 2004 of Interpretation N(0) 46 (FIN 46-R) "Consolidation of Variable Interest Entities - An interpretation of ARB N(0) 51 (revised December 2003) issued by the Financial Accounting Standards Board (FASB) as from January 1(0), 2004 the investment in Dona Francisca Energetica S.A. is being consolidated. 2.2 CURRENCY REMEASUREMENT The Company has selected the United States dollar as its reporting currency. The U.S. dollar amounts have been translated or remeasured, as appropriate, following the criteria established in SFAS No. 52, "Foreign Currency Translation" from the financial statements expressed in the local currency of the countries where Gerdau and each subsidiary operates. The Company's main operations are located in Brazil, the United States, Canada and Chile. The local currency is the functional currency for those operations. These financial statements, except for those of the subsidiaries located in the United States which already prepare their financial statements in United Stated dollars, are translated from the functional currency into the US dollar. Assets and liabilities are translated at the exchange rate in effect at the end of each period. Average exchange rates are used for the translation of revenues, expenses, gains and losses in the statement of income. Capital contributions, treasury stock transactions and F-9 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) -------------------------------------------------------------------------------- dividends are translated using the exchange rate as of the date of the transaction. Translation gains and losses resulting from the translation methodology described above are recorded directly in "Cumulative other comprehensive loss" within shareholders' equity. Gains and losses on foreign currency denominated transactions are included in the consolidated statement of income. 2.3 CONTROLLING SHAREHOLDER As of March 31, 2004, the Company's parent, Metalurgica Gerdau S.A. ("MG", collectively with its subsidiaries and affiliates, the "Conglomerate") owned 48.22% (December 31, 2003 - 48.22%; March 31, 2003 - 48.31%); of the total capital of the Company. MG's share ownership consisted of 85.71% (for all periods presented) of the Company's voting common shares and 28.30% (December 31, 2003 - 28.31%; March 31, 2003 - 28.07%) of its non-voting preferred shares. 2.4 STOCK BASED COMPENSATION PLANS Gerdau Ameristeel Corp and subsidiaries and, as from April 30, 2003, Gerdau S.A. maintain stock based compensation plans. The Company accounts for the stock-based compensation plans under Accounting Principles Board Opinion ("APB") No. 25 "Accounting for Stock Issued to Employees" and related interpretations. SFAS No. 123 "Accounting for Stock-Based Compensation" as amended by SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure" allows companies to continue following the accounting guidance of APB 25 but requires pro forma disclosures of net income and earnings per share for the effects on compensation had the accounting criteria of SFAS No. 123 been adopted. The following table illustrates the effects on net income and on earnings per share if the fair value method had been applied.
THREE-MONTH PERIOD ENDED MARCH 31, --------------------------- 2004 2003 --------- --------- Net income as reported 119,979 111,970 Reversal of stock-based compensation cost included in the determination of net income as reported 46 Stock-based compensation cost following the fair value method (202) (124) --------- --------- Pro-forma net income 119,823 111,846 ========= ========== Earnings per share - basic and diluted Common - As reported and pro-forma 0.81 0.75 Preferred - As reported and pro-forma 0.81 0.75 GERDAU GERDAU AMERISTEEL S.A. CORP ---------- ---------- Expected dividend yield: 7% 0% Expected stock price volatility: 43% 55% Risk-free rate of return: 8% 4% Expected period until exercise: 3.5 years 5 years
F-10 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) -------------------------------------------------------------------------------- 2.5 RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities", an interpretation of ARB No. 51". In December of 2003, the FASB issued a revised version of FIN 46, FIN 46-R. The primary objectives of FIN 46-R are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (variable interest entities or VIEs) and how to determine when and which entity should consolidate the VIE (the primary beneficiary). This new model for consolidation applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46-R requires that the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures regarding the nature, purpose, size and activities of the VIE and the enterprise's maximum exposure to loss as a result of its involvement with the VIE. The Company adopted FIN 46-R as of January 1, 2004. The company also has a 51,82% interest in Dona Francisca Energetica S.A. ("Dona Francisca") a non public corporation which has as business purposes: (a) build and own a hydroelectric power plant, Usina Hidroeletrica Dona Francisca, (b) operate such plant, (c) provide technical assistance services in its area of specialty, and (d) participate in other companies if related to the construction and operation of the plant or as a temporary financial investment. In accordance with an agreement between the shareholders of Dona Francisca, the principal operational and financial decisions including the selection of members of the Administrative Counsel, requires the approval of at least 65% of voting shares. In accordance with Emerging Issues Task Force (EITF) No. 96-16 "Investor's Accounting for a Investee When the Investor Has a Majority of the Voting Interest but Minority Shareholder or Shareholders Have Certain Approval or Veto Rights", because the minority interest shareholders have certain approval or veto rights, up to December 31, 2003, the financial position and results of Dona Francisca have not been consolidated, but included as an investment in subsidiary and accounted for using the equity method of accounting. As described in Note 13 the Company has issued a guarantee of certain debt of Dona Francisca. In accordance with FIN 46-R the Company has concluded that as of January 10, 2003, the most recent date on which the Company would have been required to reconsider the consolidation of Dona Francisca if FIN 46-R would have been effective, Dona Francisca is a variable interest entity and that the Company is the primary beneficiary. Therefore, as from January 1(0), 2004, Dona Francisca Energetica S.A. has been consolidated. Total consolidated assets of Dona Francisca as of March 31, 2004 amount to $122,706 and would be available to creditors of Dona Francisca to satisfy the obligations of Dona Francisca. In addition to the amount of the investment in Dona Francisca amounting to $13,056 as of March 31, 2004 the Company may be required by creditors of Dona Francisca to honor up to $36,036 in the events of arrears by Dona Francisca. F-11
GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (unaudited) (in thousands of U.S. Dollars, unless otherwise stated) ----------------------------------------------------------------------------------------------------------------------------------- 3 INVENTORIES MARCH 31 DECEMBER ----------------------------------- 2004 2003 31, 2003 ------------- --------- ---------- Finished products 329,819 450,559 302,701 Work in process 125,945 82,708 111,718 Raw materials 222,831 93,858 171,038 Packaging and maintenance supplies 178,766 75,954 198,657 Advances to suppliers of materials 22,133 9,362 13,847 ------------- --------- ---------- 879,494 712,441 797,961 4 PROPERTY, PLANT AND EQUIPMENT, NET MARCH 31 DECEMBER ----------------------------------- 2004 2003 31, 2003 ------------- --------- ---------- Buildings and improvements 944,677 781,127 913,625 Machinery and equipment 2,180,450 1,966,812 2,166,415 Vehicles 14,049 9,517 11,567 Furniture and fixtures 39,507 50,963 23,602 Other 146,502 132,523 148,921 ------------- --------- ---------- 3,325,185 2,940,942 3,264,130 Less: accumulated depreciation (1,424,141) (1,035,231) (1,385,604) ------------- ----------- ---------- 1,901,044 1,905,711 1,878,526 Land 249,089 139,261 219,887 Construction in progress 222,652 144,324 205,745 ------------- ---------- ----------- Total 2,372,785 2,189,296 2,304,158 ============= ========== ===========
As of March 31, 2004, machinery and equipment with a net book value of $171,933 was pledged as collateral for certain long-term debt. 5 DEBT AND DEBENTURES SHORT-TERM DEBT Short-term debt consists, mainly, of working capital lines of credit and export advances, U.S. dollar denominated debt and with interest rate of 1.36% p.a. to 11.13% p.a. (taxa referencial - a nominal interest rate) for reais denominated debt. Advances received against export commitments are obtained from commercial banks with a commitment that the products be exported. F-12
GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (unaudited) (in thousands of U.S. Dollars, unless otherwise stated) ----------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT Long-term debt consisted of the following: ANIMAL INTEREST ------------------------ RATE % AT MARCH 31, DECEMBER 31, MARCH 31, 2004 2004 2003 2003 ------------------------ ---------- -------- ------------ LONG-TERM DEBT, EXCLUDING DEBENTURES, DENOMINATED IN BRAZILIAN REAIS Working capital - 13,367 1,319 Financing for machinery TJLP + 9.32% to 9.66% 238,622 185,678 208,651 LONG-TERM DEBT, EXCLUDING DEBENTURES, DENOMINATED IN FOREIGN CURRENCIES (a) Long-term debt of Gerdau, Gerdau Acominas and Gerdau Aza S.A. Working capital (US$) 1.36% to 11.13% 183,163 129,626 270,034 Financing for machinery and others (US$) 4.61% to 6.83% 246,964 153,504 205,107 Securitization of export receivables by Acominas (US$) 7.37% 105,000 104,971 Advances on export (US$) 6.63% to 7.40% 182,191 72,702 63,842 Working capital (Chilean pesos) Chilean banking rate - 7,272 8,889 10,367 TAB + 1.5% a 4.49% Financing for machinery (Chilean pesos) Chilean banking rate - 17,765 25,968 20,212 TAB + 1.5% a 449% (b) Long-term debt of Gerdau Ameristeel - 2004 and December 2003 Senior notes. net of original issue discount (US$) 10.375% 397,445 - 397,271 Senior secured credit facility (Canadian dollar - LIBOR + 2.0 to 3.25% 150,699 - 135,027 Cdn$ and US$) Industrial Revenue Bonds (US$) 3.25% to 3.75% 27,400 - 27,400 Other 6,800 - 7,138 (c) Long-term debt of Gerdau Ameristeel - March 2003 Gerdau Canada Group U.S. Dollar Floating Rate Term - 49,920 - Canadian dollar revolving loan - 42,810 - Other - 1,434 - Gerdau USA Inc ("GUSA") and subsidiaries Ameristeel Revolving Credit Agreement - 101,800 - Ameristeel Term Loan - 62,500 - Term loan - American Bright Bar - 36,795 - IRB - Industrial Revenue Bonds - 3,461 - Other - 755 - Former Co-Steel group Bank indebtedness - - Canadian dollar revolving loan - 59,756 - U.S. Dollar Fixed Rate Reducing Term Loan - 104,239 - U.S. dollar revolving loan - 34,284 - Other - 7,505 - ----------- ---------- ----------- 1,563,321 1,094,993 1,451,339 Less: current portion (268,110) (478,087) (318,910) ----------- ---------- ----------- Long-term debt, excluding debentures, less current 1,295,211 616,906 1,132,429 portion =========== ========== ===========
Long-term debt denominated in Brazilian reais is indexed for inflation using the TJLP - fixed by the Government on a quarterly basis DEBENTURES Debentures include seven outstanding issuances of Gerdau and convertible debentures of Gerdau Ameristeel as follows: F-13
GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) ------------------------------------------------------------------------------------------------------------------------ MARCH 31 DECEMBER ------------------------ ----------- ISSUANCE MATURITY 2004 2003 31, 2003 --------- --------- ---------- --------- ----------- Third series 1982 2011 25,182 18,392 25,442 Seventh series 1982 2012 7,755 10,823 7,486 Eighth series 1982 2013 42,257 21,742 28,924 Ninth series 1983 2014 1,130 15,354 10,358 Eleventh series 1990 2020 9,555 5,295 6,662 Thirteenth series 2001 2008 - 97,956 - Gerdau Ameristeel's convertible debentures 1997 2007 77,541 64,704 78,230 ---------- --------- ----------- 163,420 234,266 157,102 Less debentures held by consolidated companies eliminated on consolidation (1,812) (7,522) (634) ------------ ----------- ------------ Total 161,608 226,744 156,468 Less: current portion (presented under other in the consolidated balance sheet) (2,583) (2,304) (1,048) Total debentures long-term 159,025 224,440 155,420 ============= ============ ============
Debentures issued by Gerdau Debentures are denominated in Brazilian reais and bear variable interest at a percentage of the CDI rate (Certificado de Deposito Interbancario, interbank interest rate). The annual average nominal interest rates were 21.02%, 20.78% and 23.15% as of March 31, 2004 and 2003 and December 31, 2003, respectively. Debentures issued by Gerdau AmeriSteel Corp. The unsecured subordinated convertible debentures issued by Gerdau AmeriSteel Corp. bear interest at 6.5% per annum, mature on April 30, 2007, and, at the holders' option, are convertible into Common Shares of Gerdau AmeriSteel Corp. at a conversion price of Cdn$26.25 per share. 6 COMMITMENTS AND CONTINGENCIES The Company is party to claims with respect to certain taxes, contributions and labor issues. Management believes, based in part on advice from legal counsel, that the provision for contingencies is sufficient to meet probable and reasonably estimable losses in the event of unfavorable rulings, and that the ultimate resolutions will not have a significant effect on the consolidated financial position as of March 31, 2004, although they may have a significant affect on results of future operations or cash flows. The following table summarizes the contingencies and related judicial deposits:
CONTINGENCIES JUDICIAL DEPOSITS ---------------------------------------- -------------------------------------- MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------ ------------------------ CLAIMS 2004 2003 2003 2004 2003 2003 -------------- ------------ --------- ------------ ----------- ----------- ------------ Tax 102,885 45,421 89,424 69,982 19,157 62,140 Labor 10,331 7,625 10,248 3,530 2,043 3,546 Other 2,470 2,186 2,388 434 - 435 ------------ --------- ------------ ----------- ----------- ------------ 115,686 55,232 102,060 73,946 21,200 66,121 ============ ========= ============ =========== =========== ============
F-14 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) ------------------------------------------------------------------------------- The amounts presented below for contingencies, provisions and relayed judicial deposits are as for March 31, 2004. PROBABLE LOSSES ON TAX MATTERS, FOR WHICH A PROVISION WAS RECORDED o Included in the reserve for contingencies as of March 31, 2004, is $17,347 relating to "compulsory loans" required to be made to Eletrobras ("Emprestimo Compulsorio Eletrobras sobre Energia Eletrica"), the government-owned energy company, by its customers. The Company has, along with other electricity customers, challenged the constitutionality of these loans. In March 1995, the Supreme Court decided against the interests of the Company. Even though the constitutionality of the "compulsory loans" was sustained by the Supreme Court, several issues remain pending, including the amounts to be paid by the Company. The Company has established a provision relating to the "compulsory loans" as: (i) the Supreme Court has initially decided against the interests of the Company as it relates to this matter, (ii) even though the payment to Eletrobras was in the form of a loan, the re-payment to the Company will be made in the form of Eletrobras shares, and (iii) based on currently available information, the Eletrobras shares will most likely be worth substantially less than the amount that would be paid if the re-payment was to be made in cash. o $2,389 in reference to contested federal social contribution taxes - "Fundo de Investimento Social" ("FINSOCIAL"). In spite of the matter being ruled by Federal Supreme Court regarding the constitutionality of the collection of 0.5% rate, some processes of the Company are still awaiting judgment by the Superior Courts in this matter o $6,225 relating to state value added tax - "Imposto Sobre Circulacao de Mercadorias e Servicos" ("ICMS"). The most significant item being challenged is the right to claim credits for certain processes of the company. These matters are in progress and before the State Treasury Department and State Justice of Minas Gerais o $16,398 relating to "Contribuicao Social Sobre o Lucro". The balance of the provision is in reference to discussions related to the constitutionality of the contributions that we made in 1989, 1990 and 1992. There are some processes awaiting judgment, the majority with the Superior Courts. Of the total provision, the Company made a judicial deposit of $13,985, in reference to the social contribution over the 30% limit in the reduction of net earnings by the subsidiary Gerdau Acominas S.A. The matter is in progress with the Regional Federal Court of 1st Region. o $40,204 related to income tax, "Imposto Renda de Pessoa Juridica" ("IRPJ"). Of the total provision outstanding, the Company has made a judicial deposit of $33,347, the portion that subsidiary Gerdau Acominas will be required to pay to the IRPJ after compensation of tax losses, without observing the limit of using tax losses of 30% of net income. o $8,882 regarding social security contributions (INSS). The processes refer mainly to abrogation of liabilities, which is a matter in discussion with the Federal Justice of Rio de Janeiro, and challenging the INSS interpretation of charging social security contributions on payments of participation in results, as well as services rendered for work co-operatives, by subsidiary Gerdau Acominas. A judicial deposit, covering substantially all of the value of these issues, has been made. o $811 relating to amounts of contributions to the Social Integration Program ("PIS") and $2,386 regarding Social Contribution on Revenues ("COFINS") related to the constitutionality of Law #9,718 that introduced changes in the base of the calculation of these contributions. This process is before the Federal Regional Court of 2nd Region and Federal Supreme Court. F-15 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) ------------------------------------------------------------------------------- o $842 regarding a judicial discussion related to increase of FGTS contributions, established by changes introduced by Complementary Law #110/01. The corresponding warrant is awaiting judgment of Extraordinary Appeals. The Company has made a deposit in escrow for the amount provided. o $4,551 related to "Encargo de Capacidade Emergencial - ECE", as well as $2,544 related to "Recomposicao Tarifaria Extraordinaria - RTE", which are tolls charged in the cost of electricity of the industrial units of the Company. These tolls have, according to management understanding, a nature of tax, and, being so, are incompatible with the National Tax System as described in the Federal Constitution, and this is the reason why its constitutionality is being questioned. The processes are in progress in First Instance of the Federal Justice in the States of Pernambuco, Ceara, Minas Gerais, Rio de Janeiro, Sao Paulo, Parana, Rio Grande do Sul, as well as in the Regional Federal Courts of 1st and 2nd Regions. The Company has currently deposited in escrow the total amount of the questioned charges. o $306 refers to other processes related to tax issues. Judicial deposits have been made for most of the total amount in dispute. POSSIBLE LOSSES ON TAX MATTERS FOR WHICH NO PROVISION WAS RECORDED There are other contingent tax liabilities, for which the probability of losses are possible and, therefore, are not recognized in the provision for contingencies. These claims are comprised by: o The Company is a party to tax processes filed by the State of Minas Gerais to collect presumable added value tax credits, based mainly on sales of products to exporting companies. The total amount of the processes is $10,818. The Company has not recognized any provision related to these issues, due to management's understanding that this tax is not applicable, since sales of products for export purposes are free of added value tax. o The Company and its subsidiary Gerdau Acominas S.A. are defendants in tax processes filed by the State of Minas Gerais, in which demands added value tax credits on exports of industrialized semi-finished products. The total amount claimed is $59,525. The Company does not account for a provision for such processes as the management believes this tax is not applicable, since its products do not fit in the definition of industrialized semi-finished products, as established in federal law and, therefore, are not subject to added value tax. o The Federal Revenue Service claims an amount of $18,827 related to operations of subsidiary Gerdau Acominas S.A. under the drawback concession act given by DECEX, which would not be in the Federal Revenue Service interpretation, according to the law. Gerdau Acominas awaits judgment of its previous administrative defense, claiming that the operation is legal. Since the tax credit has not yet been definitely constituted, and considering that the operation that generated the demand fits in the requirements of concession and that the concession act was sustained after analysis of the competent administrative authority, management sees as remote the probability of loss in this case, and therefore did not recognized a provision for this contingency. UNRECOGNIZED CONTINGENT TAX ASSETS Management believes the realization of certain contingent assets is possible. However, no amount has been recognized for these contingent tax assets that would only be recognized upon final realization of the gain: o Among those, there is an amount of $9,238 related to an Ordinary Action against the State of Rio de Janeiro, for breaking the Mutual Contract of Periodic Execution in Cash, signed in the scope of the Special Program of Industrial Development - PRODI. Due to the insolvency of the State of Rio de Janeiro, as well as the lack of regulation, by the State, of Constitutional Amendment #30/00, which granted the State a 10 F-16 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) ------------------------------------------------------------------------------- year moratorium for payment of non-feeding debts, there is no expectation of realization of this credit in the year of 2004. o The Company is plaintiff in many ordinary actions challenging changes in the base of calculation of PIS defined by Complementary Law #07/70, based on the sentences of non-constitutionality of Edicts #2.445/88 and #2.449/88, and there is an expectation of recovery of the tax credits related to the payment of the difference. Management estimates the total amount of tax credits to be approximately $59,510. o Based on previous decisions on early judgments at Court, the Company and its subsidiary Gerdau Acominas S.A. have claimed to recover tax credits of IPI. Gerdau S.A. filed administrative requests of reimbursement, and awaits for their judgment. In the case of subsidiary Gerdau Acominas S.A., the claim was taken to Justice, and awaits the sentence. The Company estimates the amount reimbursable to be approximately $135,461. LABOR CONTINGENCIES The Company is also a party to a number of lawsuits by employees. As of March 31, 2004, the Company accrued $10,331 relating to such lawsuits. None of these processes refer to amounts individually significant, and disputes involve mainly claims of overtime, health and danger bonuses. Balances of escrow deposits related to labor contingencies, at March 31, 2004, represent $3,530. OTHER CONTINGENCIES The Company is also involved in a number of lawsuits arising from the its ordinary course of business and has accrued $2,470 for these claims. Escrow deposits related to these contingencies, at March 31, 2004, amount to $434. Other contingent liabilities with remote chances of loss, involving uncertainties as its occurrence, and therefore, not included in the provision for contingencies, are comprised by: o There is an antitrust proceeding pending against Gerdau S.A. which refers to a complaint brought by two Sao Paulo's civil constructors' unions alleging that Gerdau S.A. and the other long steel producers in Brazil were dividing clients among themselves, therefore breaking antitrust laws. After investigations conducted by SDE - Secretaria de Direito Economico and based on some public hearings, the Secretary's opinion was that a cartel existed. This conclusion was also backed by an opinion of SEAE - Secretaria de Acompanhamento Economico that had been previously presented. The proceeding will now be followed through its final stage at CADE - Conselho Administrativo de Defesa Economica, who will decide the case. Gerdau S.A. denies being engaged in any anticompetitive conduct and management believes, based on available information, including opinion of its legal counselors, that the administrative process, until this moment, had many irregularities, and some are impossible to be corrected. Also, SDE's opinion was issued before Gerdau S.A. had a chance to respond to final allegations, which indicates a mistrial by SDE. The same applies to SEAE's opinion, which does not consider the economic aspects and is based solely on the statements of the witnesses. These irregularities, which represent disrespect to constitutional dispositions, will definitely affect an administrative decision based on the conclusions presented so far by antitrust authorities. Gerdau S.A. has been identifying and fighting all these irregularities and will keep proceeding this way regarding the allegations against the Company, as well as the irregular procedures in the administrative process, believing that it will succeed in the process; if not in the administrative scope, possibly in a Court of Law. Therefore, the Company did not recognize any provision in this case. According to Brazilian applicable law, the Company may be fined in amounts up to 30% of gross sales revenue of previous fiscal years and, if F-17 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) ------------------------------------------------------------------------------- there is proof of personal responsibility of an executive, such person might be fined in amount between 10% and 50% of the fine applied to the Company. There is no precedent of fines higher than 4% of gross sales revenue in the country. In a similar case involving plain steel companies, the fines were approximately equal to 1% of gross sales revenue. o There is a process against Gerdau Acominas S.A., related to the rescission of a contract of supply of slag and indemnification for losses. The amount of the claim, at March 31, 2004, was approximately $12,503. Gerdau Acominas S.A. contested all claims and filed a process requesting, with the plaintiff, rescission of the contract and indemnification for breaking the contract. The Judge decided to rescind the contract, since the request was common to both parties. Regarding the remaining claim of indemnification, the judge ruled that there was reciprocal guilt and denied the request for indemnification. This decision was sustained by the Competence Court of Minas Gerais, and is based on proof by expert witnesses and interpretation of the contract. The process currently remains in the Superior Court of Justice, for trial of appeal. The expectation of Gerdau Acominas S.A. is that remote loss, since it is difficult to be a change in the previous decision. INSURANCE CLAIM A process filed by Sul America Cia Nacional de Seguros on August 4, 2003 against Gerdau Acominas S.A. and Bank Westdeustsche Landesbank Girozentrale, New York Branch (WestLB), having as object the consignation of payment of the amount of $11,820, as a way for settling the indemnification of an insurable event, which was deposited in escrow. The insurance company alleges that it is not certain who is to be paid and that there was resistance by the Company to receive the amount and settle the issue. The allegations were challenged by the Bank (which claims to have no rights over the amount deposited, a fact that clears the question raised by Sul America about who should be paid) and by the Company (who alleges that there is no doubt about who should be paid and that there is a justified motive to refuse settlement, since the amount owed by Sul America is higher than the amount deposited). After this challenge, Sul America alleged lack of representation by the Bank, and the process is in its initial phase. The Company's expectation, based on the opinion of its legal counselors, is that the change of loss is remote and that the sentence will declare that the amount requested by the Company should be paid. Gerdau Acominas S.A. also previously filed, in the process aforementioned, a collection process in the amount recognized by the insurance companies, which is still in progress. The Company expects to succeed in this matter. These processes are related to the accident in March 23, 2002 with the regenerators of the blast furnace plant of the Presidente Arthur Bernardes mill, which caused the shutdown of various activities, with material damages to the equipments of the mill and resulted in financial losses. The Company was insured against property and casualty losses in relation to the equipments and against losses related to business interruption. The report of the event, as well as the "claim of losses", was filed with IRB - Brasil Resseguros S.A., and the Company received an advance of $21,317 during 2002. In 2002, a preliminary estimate of the indemnification related to the coverage of both property and casualty losses and losses related to business interruption, in the total amount of approximately $37,819, was accounted for, including the amounts advanced during 2002 of $21,317 and an additional amount recorded as receivable for $16,502. The amount recorded was based on the amount of the losses recognized in our financial statements related to fixed costs incurred during the period of partial shutdown of the activities in the mill and on the expenditures incurred to temporarily repair the equipment. Considering the litigation initiated in August 2003 by the insurers we have the reduced the amount of the receivable as of March 31, 2004 to $11,820; the amount proposed by the insures to settle the indemnification. Subsequently, new amounts were added to the claim, as mentioned in the Company's challenge, but these amounts have not been accounted for. F-18 Management believes, based on the opinion of legal counsel, that the probability of occurrence of losses as a consequence of other contingencies additional to those disclosed above is remote, and that eventual losses in these contingencies would not have a material adverse effect on the consolidated results of operations, consolidated financial position of the Company or its future cash flows. 7 SHAREHOLDERS' EQUITY 7.1 SHARE CAPITAL As of March 31, 2004, 51,468,224 shares of Common stock and 96,885,787 shares of Preferred stock are issued. 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 Common shares and 480,000,000 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. At a meeting of shareholders held on April 30, 2003, shareholders approved a bonus to both common and preferred shareholders of 3 shares per 10 shares held. The bonus resulted in the issuance of 34,235,541,169 new shares (11,877,282,535 Common shares and 22,358,258,634 Preferred shares). At the same shareholders meeting, a reverse stock split of 1 share for each 1,000 shares held (after taking into consideration the above mentioned bonus) was approved. At a meeting held on November 17, 2003, the Board of Directors of the Company authorized the acquisition of shares of the Company in accordance with corporate and statutory laws. The shares held in treasury will be sold in the capital market or cancelled. At March 31, 2004, the Company held in treasury 786,600 preferred shares at a value of $15,256 (December 31, 2003 - 345,000 preferred shares at a value of $5,920). 7.2 DIVIDENDS At March 30, 2004, interest on equity was credited to shareholders in the amount of $ 32,326, as an anticipation of the minimum statutory dividend of the present year. Brazilian corporations are permitted to distribute interest on equity, similar to a dividend distribution, which is deductible for income tax purposes. The amount payable may not exceed 50% of the greater of net income for the year or retained earnings, as measured under Brazilian Corporate Law. It also may not exceed the product of the Taxa de Juros Longo Prazo ("TJLP") (long-term interest rate) and the balance of shareholders' equity, as measured under Brazilian Corporate Law. Payment of interest on equity is beneficial to the Company when compared to making a dividend payment, since it recognizes a tax deductible expense on its income tax return for such amount. The related tax benefit is recorded in the consolidated statement of income. Income tax is withheld from the stockholders relative to interest on equity at the rate of 15%, except for interest on equity due to the Brazilian government, which is exempt from tax withholdings. 8 EARNINGS PER SHARE (EPS) Pursuant to SFAS No. 128, "Earnings per Share" the following tables reconciles net income to the amounts used to calculate basic and diluted EPS. All computations of EPS presented below have been retroactively adjusted to reflect: (a) a stock bonus of 3 shares per each 10 shares hold approved by the Shareholder's Meeting on April 30, 2003, and (b) a 1000 to 1 reverse stock split approved by the Shareholder's Meeting on April 30, 2003. F-19 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) ------------------------------------------------------------------------------- THREE-MONTH PERIOD ENDED MARCH 31, 2004
COMMON PREFERRED TOTAL -------------- ------------ ----------- (in thousands, except per share data) BASIC NUMERATOR Dividends declared 11,275 21,051 32,326 Allocated undistributed earnings 30,540 57,113 87,653 -------------- ------------ ----------- Allocated net income available to Common and Preferred shareholders 41,815 78,164 119,979 ============== ============ =========== BASIC DENOMINATOR Weighted-average outstanding shares considering the average treasury shares (Note 7.1) 51,468,224 96,252,412 ============== ========== Earnings per share (in US$) - Basic 0.81 0.81 ============== ========== THREE-MONTH PERIOD ENDED MARCH 31, 2004 DILUTED NUMERATOR ALLOCATED NET INCOME AVAILABLE TO COMMON AND PREFERRED SHAREHOLDERS Net income allocated to preferred shareholders 78,164 Add: Adjustment to net income allocated to preferred shareholders in respect to the potential increase in number of preferred shares outstanding, as a result of options granted to acquire stock of Gerdau 95 ---------- 78,259 =========== Net income allocated to common shareholders 41,815 Less: Adjustment to net income allocated to preferred shareholders in respect to the potential increase in number of preferred shares outstanding, as a result of options granted to acquire stock of Gerdau (95) ---------- 41,720 ========== DILUTED DENOMINATOR WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING Common Shares 51,468,224 Preferred Shares Weighted-average number of preferred shares outstanding 96,252,412 Potential increase in number of preferred shares outstanding in respect of stock option plan 293,297 ---------- Total 96,545,709 ========== Earnings per share - Diluted (Common and Preferred Shares) 0.81 ----------
F-20
GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) -------------------------------------------------------------------------------------------------------------------- THREE-MONTH PERIOD ENDED MARCH 31, 2003 COMMON PREFERRED TOTAL ------------ ------------ --------- (in thousands, except per share data) NUMERATOR - BASIC AND DILUTED Dividends declared 7,675 14,447 22,122 Allocated undistributed earnings 31,170 58,678 89,848 ------------ -------------- --------- Allocated net income available to Common and Preferred shareholders 38,845 73,125 111,970 ============ ============== ========= DENOMINATOR - BASIC AND DILUTED Weighted-average outstanding shares after giving retroactive effect to stock bonus and reverse stock split (Note 7.1) 51,468,224 96,885,787 ============ ============== Earnings per share (in US$) - Basic 0.75 0.75 ============ ==============
9 DERIVATIVE INSTRUMENTS The use of derivatives by the Company is limited. Derivative instruments are used to manage clearly identifiable foreign exchange and interest rate risks arising out of the normal course of business. GERDAU AND GERDAU ACOMINAS As part of its normal business operations Gerdau and Gerdau Acominas obtained U.S. dollar denominated debt generally at fixed rates and are exposed to market risk from changes in foreign exchange and interest rates. Changes in the rate of the Brazilian real against the U.S. dollar expose Gerdau and Gerdau Acominas to foreign exchange gains and losses which are recognized in the statement of income as also to changes in the amount of Brazilian reais necessary to pay such U.S. dollar denominated debt. Changes in interest rates on its fixed rate debt expose Gerdau and Acominas to changes in fair value on its debt. In order to manage such risks Gerdau and Acominas enter into derivative instruments, primarily cross-currency interest rate swap contracts. Under the swap contracts Gerdau and Gerdau Acominas have the right to receive on maturity United States dollars plus accrued interest at a fixed rate and have the obligation to pay Brazilian reais at a variable rate based on the CDI rate. Although such instruments mitigate the foreign exchange and interest rate risks, they do not necessarily eliminate them. The Company generally does not hold financial instruments for trading purposes. All swaps entered into have been recorded at fair value and realized and unrealized losses are presented in financial expenses in the consolidated statement of income. The notional amount of such cross-currency interest rate swaps amounts to $446,048 ($550,064 as of March 31, 2003 and $459,684 as of December 31, 2003) and mature between April 2004 and March 2006 (April 2003 and March 2006 as of March 31, 2003 and January 2004 and March 2006 as of December 31, 2003) with Brazilian reais interest payable which varies between 84.50% and 105% (between 2.97 and 105.00% as of March 31, 2003 and between 71.60% and 105.00% of CDI as of December 31, 2003). Unrealized gains on swaps outstanding as of March 31, 2004 amounts to $5,224 ($62,769 as of March 31, 2003 and $9,685 as of December 31, 2003) and unrealized losses amount to $45,623 ($21,133 as of March 31, 2003 and $40,938 as of December 31, 2003). F-21 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) ------------------------------------------------------------------------------- GERDAU AMERISTEEL CORPORATION Derivative instruments are not used for speculative purposes but they are used to manage well-defined interest rate risks arising out of the normal course of business. In order to reduce its exposure to changes in the fair value of its Senior Notes, the company entered into interest rate swaps subsequent to the June 2003 refinancing. The agreements have a notional value of $200 million and expiration dates of July 15, 2011. The Company receives a fixed interest rate and pays a variable interest rate based on LIBOR. The aggregate mark-to-market (fair value) of the interest rate agreements, which represents the amount that would be received if the agreements were terminated at March 31, 2004 was approximately $2,743 ($89 at December 31, 2003). 10 SEGMENT INFORMATION There are no significant inter-segment sales transactions and operating income consists of net sales less cost of sales, operating costs and expenses. The identifiable assets are trade accounts receivable, inventories and property, plant and equipment. The following segments correspond to the business units for which the Executive Committee manages its operations.
THREE-MONTH PERIOD ENDED MARCH 31, 2004 ---------------------------------------------------------------------------------------------------------- TOTAL AS ACOMINAS PER OURO SOUTH NORTH ADJUSTMENTS AND FINANCIAL LONG BRAZIL BRANCO AMERICA AMERICA TOTAL RECONCILIATIONS STATEMENTS ----------- ------ ------- ------- ----- --------------- ---------- Net sales 530,329 159,446 54,144 697,101 1,441,020 (25,679) 1,415,341 Operating income 144,171 34,453 18,191 48,960 245,775 (15,920) 229,855 Capital expenditures 35,666 14,291 2,551 23,272 75,780 618 76,398 Depreciation and 20,183 15,582 2,303 21,166 59,234 1,775 61,009 amortization Identifiable assets 1,277,817 1,142,862 199,367 1,462,039 4,082,085 (264,997) 3,817,088 THREE-MONTH PERIOD ENDED MARCH 31, 2003 ---------------------------------------------------------------------------------------------------------- TOTAL AS ACOMINAS PER OURO SOUTH NORTH ADJUSTMENTS AND FINANCIAL LONG BRAZIL BRANCO AMERICA AMERICA TOTAL RECONCILIATIONS STATEMENTS ----------- ------ ------- ------- ----- --------------- ---------- Net sales 492,711 155,835 29,541 445,578 1,123,665 (189,696) 933,969 Operating income 99,158 55,252 8,564 (5,172) 157,802 (13,521) 144,281 Capital expenditures 20,341 35,804 1,559 22,081 79,785 (3,867) 75,918 Depreciation and 13,759 8,891 1,816 19,782 44,248 2,058 46,306 amortization Identifiable assets 932,440 1,053,429 160,295 1,454,457 3,600,621 (247,388) 3,353,233
F-22
GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) ----------------------------------------------------------------------------------------------------------------------------------- YEAR-END DECEMBER 31, 2003 ---------------------------------------------------------------------------------------------------------- TOTAL AS ACOMINAS PER OURO SOUTH NORTH ADJUSTMENTS AND FINANCIAL LONG BRAZIL BRANCO AMERICA AMERICA TOTAL RECONCILIATIONS STATEMENTS ----------- ------ ------- ------- ----- --------------- ---------- Identifiable assets 1,143,326 1,070,552 197,881 1,479,110 3,890,869 (322,893) 3,567,976 Capital expenditures 103,243 115,643 7,702 57,041 283,629 14,126 297,755
The segment information above has been prepared under Brazilian GAAP and consistent with those demonstrated at the year end financial statements. Financial expenses and income tax are no longer presented since as result of the incorporation of Acominas by the Company and as from January 1, 2004 such information is no longer included in the measurement of segment performance for management purposes. Corporate activities performed for the benefit of the Group as a whole are not separately presented and are included as part of the information of Gerdau Brazil. The information presented above has been translated from Brazilian reais (the currency on which financial information is presented to the Gerdau Executive Committee) into United States dollars. Net sales, operating income, capital expenditures and depreciation and amortization have been translated using average exchange rates for the period while identifiable assets have been translated at the period-end exchange rate. Geographic information about the Company presented on the same basis as the segment information above is as follows:
THREE-MONTH PERIOD ENDED MARCH 31, 2004 ------------------------------------------------------------------------------------------- TOTAL AS PER SOUTH AMERICA ADJUSTMENTS AND FINANCIAL BRAZIL (EXCEPT BRAZIL) NORTH AMERICA TOTAL RECONCILIATIONS STATEMENTS ----------- -------------- ------------- ----------- ---------------- ---------- Net sales 689,775 54,144 697,101 1,441,020 (25,679) 1,415,341 Operating income 178,624 18,191 48,960 245,775 (15,920) 229,855 Long lived assets 1,490,839 139,829 780,697 2,411,365 (38,580) 2,372,785 Identifiable assets 2,420,679 199,367 1,462,039 4,082,085 (264,997) 3,817,088 THREE-MONTH PERIOD ENDED MARCH 31, 2004 ------------------------------------------------------------------------------------------- TOTAL AS PER SOUTH AMERICA ADJUSTMENTS AND FINANCIAL BRAZIL (EXCEPT BRAZIL) NORTH AMERICA TOTAL RECONCILIATIONS STATEMENTS ----------- -------------- ------------- ----------- ---------------- ---------- Net sales 648,546 29,541 445,578 1,123,665 (189,696) 933,969 Operating income 154,410 8,564 (5,172) 157,802 (13,521) 144,281 Long lived assets 1,340,585 118,336 797,537 2,256,458 (67,162) 2,189,296 Identifiable assets 1,985,869 160,295 1,454,457 3,600,621 (247,388) 3,353,233
F-23 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) -------------------------------------------------------------------------------- 11 INCOME TAX RECONCILIATION A reconciliation of the income taxes in the statement of income to the income taxes calculated at the Brazilian statutory rates follows:
THREE-MONTH PERIOD ENDED MARCH 31 --------------------------------------- 2004 2003 ------------------ ---------------- Net income before taxes and minority interest 183,964 144,310 Brazilian composite statutory income tax rate 34% 34% ------------------ ---------------- Income tax at Brazilian income tax rate 62,548 49,065 Permanent differences: Foreign income having different statutory rates (885) (3,253) Non-taxable income net of non-deductible expenses (3,841) (2,163) Reversal of valuation allowance (11,259) Benefit of deductible interest on equity paid to shareholders (11,803) (7,521) Other, net 3,817 (4,481) ------------------ ---------------- Income tax expense 49,836 20,388 ================== ================
12 PENSION PLANS The Company and other related companies in the Conglomerate co-sponsor contributory pension plans (the "Brazilian Plans") covering substantially all employees based in Brazil. The Brazilian Plans consists of a plan for the employees of Gerdau and its subsidiaries ("Gerdau Plan") and one plan for the employees of Gerdau Acominas and its subsidiaries ("Gerdau Acominas Plan"). The Brazilian Plans are mainly defined benefit plans with certain limited defined contributions. Additionally, the Company's Canadian and American subsidiaries, including Gerdau Ameristeel, sponsor defined benefit plans (the "North American Plans") covering the majority of their employees. Contributions to the Brazilian Plans and the North American Plans are based on actuarially determined amounts. The subsidiaries in North America currently provide specified health care benefits to retired employees. Employees who retire after a certain age with specified years of service become eligible for benefits under this unfunded plan. F-24 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) -------------------------------------------------------------------------------- The following tables summarize the pension benefits cost and postretirement medical benefit cost included in the Company's consolidated statements of financial position: BRAZIL PLANS
THREE-MONTH PERIOD ENDED MARCH 31 --------------------------------------- 2004 2003 ------------------- ------------------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost 1,727 1,184 Interest cost 5,644 3,538 Expected return on plan assets (8,979) (4,784) Amortization of transition obligation (128) 40 Amortization of prior service cost 125 104 Recognized actuarial gain (732) (480) Employees contributions (378) (256) Net periodic benefit cost (2,721) (654)
NORTH AMERICA PLANS
PENSION BENEFITS OTHER BENEFIT PLANS -------------------------- -------------------------- THREE-MONTH PERIOD ENDED THREE-MONTH PERIOD ENDED MARCH 31 MARCH 31 ----------- ---------- ----------- ----------- 2004 2003 2004 2003 ----------- ---------- ----------- ----------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost 2,454 2,007 232 220 Interest cost 5,593 5,2008 546 562 Expected return on plan assets (5,239) (4,626) - - Amortization of transition obligation 43 41 - - Amortization of prior service cost 72 115 (53) - Recognized actuarial gain 582 239 7 - Settlement loss - 35 - - ----------- ------------ ----------- ----------- Net periodic benefit cost 3,505 3,019 732 782 =========== =========== =========== ===========
13 ACQUISITIONS 13.1 ASSETS AND LIABILITIES OF POTTER FORM & TIE CO. In March 2004, the Company concluded the acquisition of certain assets and assumed certain liabilities of Potter Form & Tie co., a leading supplier for fabricated rebar and concrete construction supplies for the concrete construction industry in the Midwest of United States, for approximately $11.1 million. The transaction was accounted for as a business combination. 13.2 MARGUSA On November 18, 2003, the Company exchanged certain forestry holdings in exchange for 1,776,638 newly issued shares of Maranhao Gusa S.A. ("Margusa"), a producer of pig iron obtaining a 17% interest in total and in voting interest in Margusa. On December 2, 2003, the Company signed a purchase agreement to buy the remaining shares of Margusa for $18,000. The cash portion is payable in 8 installments with the first paid on F-25 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) -------------------------------------------------------------------------------- December 2003 and the remaining 7 installments payable during 2004. As at December 31, 2003, the Company recorded the investment in Margusa at cost ($16,300) represented by a cash payment of $2,234 (corresponding to the first installment of the eight due at the year-end exchange rate) and the value of the forestry holdings transferred to Margusa of $14,066. Control was transferred to the Company on January 5, 2004 which is considered the acquisition date for accounting purposes. As from that date, the financial statement of Margusa has been consolidated. The purchase price was finally reduced to $16,337 as a result of the contractually agreed adjustments. The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of the acquisition. Current assets 2,364 Property plant and equipment 7,567 Other assets 90 Current and long term liabilities (5,376) ----------------- Net assets acquired 4,645 ----------------- Purchase price 16,337 ----------------- Unallocated goodwill and intangible assets 11,692 ================= Management believes that goodwill arising from the transaction is attributable to future results which are expected to with the integration of this operation with the other existing plants. The Company retained an independent appraiser to perform a detailed fair value valuation of Margusa's assets and liabilities. This valuation is expected to be completed prior to December 31, 2004. Therefore, intangible assets and goodwill in the amount of $11,692 remain unallocated at March 31, 2004. This amount might be reallocated to other tangible or intangible assets once the appraiser's valuation of assets and liabilities is complete. 14 GUARANTEE OF INDEBTEDNESS OF NON CONSOLIDATED ENTITIES (a) Gerdau has provided a surety to Dona Francisca Energetica S.A., in financing contracts which amount to R$ 104,810 thousand (equivalent of US$ 36,036 at period-end exchange rate), corresponding to 51.82% of the debt of Dona Francisca Energetica. This guarantee was established before December 2002, and, therefore, is not covered by the accounting requirements of FASB Interpretation No. 45 ("FIN 45"). The guarantee may be executed by lenders in the event of default by Don Francisca Energetica S.A. (b) During the period ended 31, 2004 Gerdau Ameristeel Corporation, a Company's subsidiary, obtained a $20.000 and $5,000 loans from a Brazilian bank which carries interest at 2.6525% p.a. and 2.56375% p.a., respectively. Both loans mature on February 2005. As the guarantee is between a parent company (the Company) and its subsidiary (Gerdau Ameristeel Corporation) it is not subject to the recognition provisions under FIN 45. The guarantee may be executed upon the failure by Gerdau Ameristeel of satisfying their financial obligation. (c) Gerdau Acominas S.A. provides guarantees to Banco Gerdau S.A. that finance sales to selected customers. These sales are recognized at the time the products are delivered. Under the vendor program, the Company is the secondary obligor to the bank. At March 31, 2004 customer guarantees provided by the company totaled $15,671. Since Banco Gerdau S.A. and Gerdau Acominas S.A. are under the common control of MG this guarantee is not covered by the requirements of FASB Interpretation No 45 ("FIN 45"). F-26 GERDAU S.A. NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (Unaudited) (in thousands of U.S. Dollars, unless otherwise stated) -------------------------------------------------------------------------------- 15 SUBSEQUENT EVENTS (a) On April 16, 2004, the Company, through its subsidiary Gerdau Steel Inc., acquired 26,800,000 shares of Gerdau Ameristeel Corporation by capitalization of Cdn$ 131 millions, equivalents to R$ 283.937 thousand and US$ 97,569 at the exchange rate of that date). (b) At the Shareholders Meeting, to be hold on April 29, 2004, will be appreciate the Board Directors' proposal of a capital increase, through capitalization of statutory reserve in the amount of R$ 1.735 mil, equivalents to US$ 600 mil at the exchange rate of December 31, 2003, which the issue of 148.354.011 new shares (51,468,224 common and 96,885,787 preferred). * * *