Steel to shape the world Annual Report

Transcription

1 Steel to shape the world 2004 Annual Report

2 Steel to shape the world The Gerdau Group manufactures steel to turn dreams into reality. Like the dream born in 1901, through the entrepreneurial spirit of German immigrant João Gerdau, who founded what is now the 13th largest steel company in the world. A dream currently shared by 24,000 people powered by the conviction that it is possible to overcome limits, generate sustainable development and improve the quality of life. This transformation capacity is in the people, in the steelmaking process and in the use of steel. Steel that is found in houses, buildings, bridges, vehicles, roads, airports, telephone and electricity towers, dams and countless other applications, making the world a better place.

3 Steel Mills 26 Downstream Operations 21 Fabricated Reinforcing Steel Facilities 44 Flat Steel Service Facilities 6 Comercial Gerdau Retail Stores 69 Scrap Collection and Processing Units 24 Solid Pig Iron Production Units 2 Iron Ore Extraction Areas 3 Private Port Terminals 2 Equity Investments 2

4 Profile Brazil The Gerdau mills in Brazil produced 54.2% of the total steel output of the Gerdau Group in 2004, the equivalent to 7.3 million metric tons. The Brazilian facilities include six market mills (which buy raw materials, mainly iron scrap, in the same region where they sell their products), four integrated mills, eight downstream operations and 11 fabricated reinforcing steel facilities. For raw material procurement/purchasing, the Group has eight scrap collection and processing units, two industrial facilities for the production of solid pig iron and iron ore reserves. It also owns two port terminals, in the states of Espírito Santo and Bahia. One advantage to Gerdau customers is Comercial Gerdau, a distributor of long and flat steel, with 69 retail stores in the main economic hubs and six facilities that provide thermal cutting services for flat steel. United States The U.S. facilities accounted for 33% of Gerdau steel production in Gerdau Ameristeel operates 11 steel mills in the U.S. and a joint venture that produces long steel, Gallatin Steel. Gerdau Ameristeel also encompasses the operations in Canada and features 29 fabricated reinforcing steel facilities, 10 downstream operations and nine scrap collection and processing units. These figures include important assets acquired in 2004, such as North Star Steel units and the Gate City, RJ Rebar and Potter Form & Tie fabricated reinforcing steel facilities pro-rated to the date when they were acquired. Canada A leader in the long steel market, Gerdau Ameristeel produced 1.3 million metric tons of steel in It owns three mills in the provinces of Ontario and Manitoba, which are focused on the civil construction and industrial sectors. Furthermore, it holds a 50% stake in two elevator guide units and in one industrial facility that manufactures superlight I beams. Gerdau Ameristeel also operates seven units specializing in the collection and processing of scrap, its main raw material. Chile Gerdau AZA produced 371,000 metric tons of steel in It operates two mills, in Colina and Renca, each catering to a specific economic segment, civil construction and industry, respectively. To add value to its products, the Gerdau Group relies on Armacero to supply welded mesh and fabricated rebar for civil construction. In addition, fabricated reinforcing steel facilities are operated by Matco. Also part of the Group are Aceros Cox, a distributor specializing in the industrial segment, and Sack, another major distribution channel. Uruguay Located in the capital city Montevideo, Gerdau Laisa produced 58,000 metric tons of steel in The facility supplements its product line with items manufactured in the Group s Brazilian mills to fully meet customer demand. Laisa focuses on the civil construction segment and its main product is fabricated rebar. Gross Revenues - R$ 23.4 billion BRAZIL CANADA AND THE UNITED STATES ARGENTINA, CHILE AND URUGUAY 4.4% 40.4% 55.2% Sales million metric tons Look up the location of Gerdau facilities in the Americas. Argentina The Gerdau Group leads the management of the Sipar rolling mill, located in the province of Santa Fé. The Group has a 38.2% equity investment in Sipar. The unit s output reached 214,000 metric tons of rolled products in As a result, the company has become one of the main suppliers in the long steel segment. Sipar provides superior quality services to customers through Siderco, a distributor of steel products and supplier of fabricated rebar for the civil construction sector. BRAZIL CANADA AND THE UNITED STATES ARGENTINA, CHILE AND URUGUAY 4.1% 43.1% 52.8%

5 2004 Annual Report Highlights The most important events of 2004 numbers Economic, environmental and social performance Message from the chairman Impressive performance in 2004 and positive perspectives for 2005 Strategic vision Conviction that growth will continue in the Americas Corporate governance Management model aligned with the world s best market practices Business Increased demand for steel drives results Finance Capital Markets Production Sales and Markets Investments Social Commitment to the development of employees and communities People and Teams Community The environment Ecoefficient practices to protect the air, water and soil Environmental Management System Environmental Performance Education for the Environment Steel production Find out how steel is produced at Gerdau facilities Timeline More than 100 years of history Glossary Definitions for technical terms employed in the report Financial statements Detailed information on financial performance

6 Highlights The most important events of 2004 Net income reaches R$ 3.3 billion, a growth of 165.8%, and gross revenues reach R$ 23.4 billion, 48.3% higher than in In the United States, the acquisition of North Star Steel assets in late 2004 consolidates the strategy of increasing the geographic reach of sales into the U.S. Midwest. The US$ 308 million deal encompasses four long steel producing mills, two scrap collection and processing units, three wire rod processing facilities and a producer of grinding balls for the mining industry. The expansion in South America is also noteworthy, with the establishment of a strategic alliance in Colombia in December, when the Group signed an agreement to acquire 59.8% of the assets of Grupo Diaco, with an annual output capacity of 460,000 metric tons of steel. The highlight in Brazil is the construction of two new mills and the expansion of the Ouro Branco unit, in the state of Minas Gerais. The investment program in Brazil may reach US$ 2.4 billion by The new industrial facility in the state of São Paulo and the new specialty Numbers Economic, environmental and social performance Metalúrgica Gerdau S.A. Dividends (R$ per share) Gerdau S.A. Dividends (R$ per share) Metalúrgica Gerdau S.A. Dividend Yield (%) * Amounts are adjusted to payments and calculated based on the current number of outstanding shares. Dividends paid on preferred shares Amounts are adjusted to payments and calculated based on the current number of outstanding shares. Dividends paid on preferred shares * Supplementary, non-recurring dividend. Dividend yield is the ratio between the dividend paid per share and the share price on the last day of the year. Metalúrgica Gerdau S.A. Average Annual Market Value (million R$) Gerdau S.A. Average Annual Market Value (million R$) Metalúrgica Gerdau S.A. Return on Equity (%) , , , ,638 2, , , ,000 2,000 3,000 4,000 5,000 Market value is calculated as share price multiplied by the number of shares outstanding in the period. 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Market value is calculated as share price multiplied by the number of shares outstanding in the period Return on equity (ROE) is the ratio between consolidated net income and consolidated equity.

7 04 05 h i g h l i g h t s steel facility in the state of Rio de Janeiro focus on the Brazilian market, whereas the Ouro Branco unit supplies the international market. The environmental management policy gains momentum with US$ 25 million invested in the upgrade of air, water and soil protection technologies. The two publicly traded companies in Brazil Metalúrgica Gerdau S.A. and Gerdau S.A. distribute R$ million (+152.1%) and R$ million (+144.5%), respectively, to shareholders in In addition, Gerdau Ameristeel, responsible for North American operations, begins paying dividends in the beginning of 2005, for an initial distribution of R$ 16.2 million. Social projects in the fields of formal education, scientific research, the arts, entrepreneurship, volunteer work, total quality, health, sports and community services receive investments of R$ 36.5 million Gerdau S.A. Dividend Yield (%) Dividend yield is the ratio between the dividend paid per share and the share price on the last day of the year Social Responsibility (million R$) Total investment in social projects Formal education Education for entrepreneurship Education for scientific research Education for total quality Education for volunteer work The arts Health Sports Community action Other Gerdau S.A. Return on Equity (%) Return on equity (ROE) is the ratio between consolidated net income and consolidated equity. Environmental Management Reuse of industrial water (% of total consumption) Emission of greenhouse gasses 550 n.a.* (kg of co 2 per metric ton of steel produced) Use of by-products internally or in other 66.0 n.a.* sectors of the economy (% of total volume generated) *Not available. Exchange Rate Year R$ =US$

8 Message from the Chairman An excellent year for steelmaking World steel consumption reached its highest peak ever in Global production topped the billion metric ton mark, boosted mainly by the growth in demand in China and the United States. As a result, the average dollar price of steel exported by Gerdau from Brazil rose 62.4%. Prices increased primarily due to rising raw material costs in many cases by over 50% and maritime freight charges. In this context, the Gerdau Group s net income totaled R$ 3.3 billion, up 165.8% from the previous fiscal year, with gross revenues up 48.3% to R$ 23.4 billion. Meeting the growing demands of the market Throughout the year, the Gerdau Group increased production to ensure that it could fully meet its customers needs and expanded its presence in major markets in the Americas. Four mills were acquired from North Star Steel in the United States for US$ 308 million, of which US$ 181 million consisted of working capital. The investment expanded the company s geographical coverage toward the Midwestern U.S. and added 1.6 million metric tons to the Group s annual installed capacity. A strategic alliance was established in Colombia to gradually take over control of the Diaco Group, which has a production capacity of 460,000 metric tons of steel per year. This initiative will allow the Gerdau Group to reach a position of leadership in that national market. The initial investment in this project was US$ 68.5 million. Low indebtedness allows for new investments The Gerdau Group s production capacity has doubled in five years to 16.4 million metric tons per year, and should reach 21 million metric tons by 2007, with the investment of US$ 3.2 billion in the construction, expansion and modernization of the Group s industrial facilities. Of this total, US$ 2.4 billion will be invested in Brazil, where annual production capacity will grow over 50%, from 7.6 to 11.7 million metric tons. Units in other countries in the Americas will receive US$ 800 million during the same period. The investment program will be based on cash generation and on the leverage allowed by the Group s current financial position. Operating cash generation (EBITDA) of R$ 5.5 billion has allowed a significant reduction of debt levels. At the end of 2004, net debt was just 0.7 times EBITDA, well below the limit of 2.5 times determined by the Group s policy. In addition, the net interest paid-per-metric- ton-sold was R$ 22.36, approximately half that of the previous fiscal year. Strategic investment decisions are based on the principle of balancing growth and profitability. For this reason, annual dollar returns of at least 15% on capital invested are always required of the Group s acquisition and expansion projects. This goal has been consistently achieved for both acquisitions and industrial plant expansions after the investments mature.

9 06 07 MESsage Commitment to economic, social and environmental sustainability Balancing economic, social and environmental demands is part of the Group s values. With this vision, the Group works to continue offering growing dividends each year. The Gerdau companies in Brazil have a policy of distributing 30% of adjusted net income each year. The absolute value of dividends has yielded shareholders an average of 6% per year for Gerdau S.A. and 10.3% for Metalúrgica Gerdau S.A. since In the social area, community development is supported through a range of projects aimed mainly at sharing knowledge, optimizing the ability of people to transform their own world and creating a culture of personal development and learning in and around all the units. In total, the Group takes part in more than one hundred initiatives to help improve the quality of life in our communities. The environmental aim is to reach increasingly demanding levels of ecoefficiency. All the steel mills are undergoing international ISO certification. A total of US$ 25 million was invested in 2004 to upgrade air, water and soil protection equipment and to promote programs that encourage environmental awareness among our employees and communities. A positive perspective for 2005 The current international conditions indicate a continued high level of steel consumption in 2005, with prices tending to stabilize. The price of steel in international markets is directly linked to raw material volumes, with iron ore and coal as the defining factors. These components are also strongly influenced by international freight costs. We believe that there is no possibility of a significant increase in the supply of these raw materials in the next two years. Another important consideration is inefficient steel, or steel produced at non-competitive costs or with government subsidies. This has been a recurring theme in the debates at the International Iron and Steel Institute (IISI) since before the global steel boom of the last few years, and is under negotiation in the Organization for Economic Co-operation and Development (OECD). The belief is that, as new, more competitive production capacity comes on line, the inefficient mills will leave the market. In this context, the Gerdau Group strives to be a worldclass company with a long-term vision. Thank you The results presented in this report were only possible because of the commitment and responsibility of each of our employees, the work of our teams and their daily attitude of servicing the needs of the market. The Gerdau Group also thanks its investors, shareholders, suppliers, communities and especially its customers. Jorge Gerdau Johannpeter Chairman

10 Strategic Vision Conviction that growth will continue in the Americas From the extreme south of the Americas to the plains of Canada: this is where the Gerdau Group intends to build its growth, focused on the long steel sector. The Gerdau Group has the strategic vision of being a worldclass international steel company. Guided by this goal, the Group strives to consolidate its place as a major player in this field of steelmaking. As a result of the logistical requirements of its products, Gerdau understands that it is more important to have a significant market share in the Americas than to have production capacity scattered around the world. Since the 1980s, the Group has invested in internationalization, expanding its operations in South and North America to become the largest producer of long steel in the region. Its growth policy is guided by investment in assets that add value and significant returns for shareholders and that allow the Group to continue its growth, always committed to its characteristic levels of financial security. In comparison with the markets where it operates, the Gerdau Group has achieved outstanding performance for its mills, through their logistical criteria, proximity to raw materials and management in line with international best practices. This performance is based on the efficiency of our teams, which have contributed decisively to the expansion of the business, so that the Gerdau Group can continue to achieve improved positions in regional markets over the coming years.

11 08 09 S T R AT e G I C v i s i o n The Gerdau Group is a world-class company Throughout its history, the Gerdau Group has developed the skill of boosting productivity in the companies of which it takes control, especially through the sharing of best management practices and investment in the technological upgrade of industrial installations. This can be seen in the turnaround of results at the units that became Gerdau Ameristeel Cambridge (Canada), Gerdau AZA (Chile), Gerdau Aços Especiais Piratini (Brazil), Gerdau Usiba (Brazil) and Gerdau Açominas Ouro Branco (Brazil). Gerdau is now among the world-class companies of the international steel sector, according to a study by World Steel Dynamics, a major steel consultancy group. Gerdau stands out for its profitability in the fiscal periods from 2000 to 2004, its environmental and safety record, its success in alliances, mergers, acquisitions and joint ventures, and its performance in the capital market over the last three years. GERDAU AMERISTEEL CAMBRIDGE, CANADA (ABOVE), AND GERDAU AÇOMINAS OURO BRANCO, STATE OF MINAS GERAIS, BRAZIL (BELOW): POSITIVE RESULTS

12 Corporate Governance Management model aligned with the world s best market practices Governance structure The Gerdau Group s corporate governance structure is based on a Board of Directors, an Executive Committee which is assisted by a Strategy Committee and Excellence Committees and coordinates the work of the Officers and a Board of Auditors. The Board of Directors is comprised of eight members whose primary responsibility is to develop the Gerdau Group corporate strategy. This includes defining the direction of the business, acceptable levels of risk and growth policies. The Board has three independent members who, through their external insights and experience, help lead the decision-making process. Board meetings are held at least four times a year. The Group s Executive Officers are invited to present and discuss strategic issues relevant to their areas of operation to provide the independent Board members with a better understanding of the Group s operations and market conditions. Business management is the responsibility of the Officers, through an Executive Committee that coordinates the daily business operations and acts as a liaison between operations and the Board of Directors. There are five business operations, defined according to product line and/or geographical location of the units: Gerdau Long Steel (Brazil), Gerdau Specialty Steel (Brazil), Gerdau Açominas Ouro Branco (Brazil), Gerdau Ameristeel (Canada and the United States) and Gerdau South America (Argentina, Chile and Uruguay). Each of the nine Executive Committee members a president and eight vice presidents is responsible for specific processes and/or business operations. The processes are: sales and marketing, industrial, logistics and transportation, raw materials, procurement, operational planning, human resources and organizational development, finance and investor relations, accounting and audit, legal, management technology, planning and strategic management, business development, information technology, and corporate communications. To assist the Board of Directors in the planning of the Group s strategy, the Strategy Committee includes Executive Committee members and the officers in charge of the main operations. The Excellence Committees provide support to the business operations and functional processes by encouraging debate and exchanging best practices. The Board of Auditors was created five years ago at the two publicly traded companies in Brazil and includes representatives elected by minority shareholders. Among other responsibilities,

13 10 11 corporate GOVernance they are in charge of monitoring the actions of the Board of Directors and controlling the accounting operations of both companies. The corporate governance structure at the Gerdau Group follows the model below: Strategy Committee Excellence Committees Board of Directors Officers Executive Committee Business Operations Board of Auditors Functional Processes Gerdau Long Steel Brazil Gerdau Specialty Steel Gerdau Açominas Ouro Branco Gerdau Ameristeel Gerdau South America Gerdau companies Gerdau Group refers to all the companies that form the Gerdau economic group and that are controlled by the same shareholders. The two publicly traded companies controlled by the Group in Brazil Gerdau S.A. and Metalúrgica Gerdau S.A. are part of the level 1 corporate governance program of the São Paulo Stock Exchange (Bovespa). This program establishes a set of standards for trading in capital markets, such as the level of transparency in the disclosure of information and the number of shares in the hands of minority shareholders. Gerdau Açominas S.A. is a non-public company that is responsible for the Group s steelmaking operations in Brazil. However, it is committed to upholding the same reporting standards as those of the publicly traded companies. Gerdau Açominas S.A. has a six-member Board of Directors. One of these members is appointed by the Açominas employee stockholding association (Clube de Participação Acionária dos Empregados da Açominas CEA). The Board members hold quarterly meetings. The management of Gerdau Açominas is carried out through an Executive Committee that coordinates three business operations: Gerdau Long Steel, Gerdau Specialty Steel and Gerdau Açominas Ouro Branco. In North America, the Gerdau Ameristeel Corporation was created in October 2002 through a merger between the Gerdau Group s operations in the region and those of Co-Steel. The Gerdau Ameristeel Board of Directors is comprised of nine members, five of them independent. The Board holds quarterly meetings. Gerdau Ameristeel created committees focused on specific areas: audit, human resources, corporate governance, safety, health and the environment.

14 Board of Directors. From left to right: Oscar de Paula Bernardes Neto, Board Member; Germano H. Gerdau Johannpeter, Vice Chairman; Jorge Gerdau Johannpeter, Chairman; Klaus Gerdau Johannpeter, Vice Chairman; André de Lara Resende, Board Member; Carlos J. Petry, Vice Chairman; Frederico C. Gerdau Johannpeter, Vice Chairman; Affonso Celso Pastore, Board Member

15 12 13 corporate GOVernance Business management is under the responsibility of an Executive Committee that operates based on industrial process and/or geographic region. In Argentina, Chile and Uruguay, governance is the responsibility of Operating Committees, which report to the Gerdau Executive Committee. Shareholders meetings Once a year, the general shareholders meeting brings together the shareholders of the Group s companies to analyze and approve financial statements and management reports, decide on the allocation of net income, confirm or supplement the distribution of dividends or interest on capital stock, and elect Board of Directors and Board of Auditors members. Additional shareholders meetings may be scheduled to deal with specific topics not covered in the general meetings and which require approval by shareholders. At Gerdau Ameristeel, the structure is similar to that described above with an annual shareholder meeting and special shareholder meetings. However, these meetings have specific agendas and are adapted to the business and legal systems of North America. Relationship with independent auditors The policy ruling the hiring of independent auditors for services not related to external audits is based on the following: auditors should not audit their own work, carry out management functions on behalf of the client, or promote the client s interests. These guidelines are followed by Gerdau s publicly traded companies for the hiring of independent auditors and services not related to external audits, in accordance with security and exchange commission regulations. Risk management The Gerdau Group is developing actions to improve risk management practices in its operations. Integrated risk management is an initiative that fosters best corporate governance practices, formalizes risk planning and defines the responsibilities of areas such as process management, internal audit and other relevant areas. The implementation of an integrated system translates into safer monitoring of potential risks and existing controls in each business process. The integrated Risk Management project, which is overseen by the Board of Auditors, is based on internationally recognized methodologies that comply with the United States

16 Sarbanes-Oxley Act. This law improves the disclosure of information and the commitment of management to internal controls and must be followed by foreign companies listed on United States stock exchanges. Both Gerdau S.A. and Gerdau Ameristeel must comply with the legal requirements, including those issued by the United States Securities and Exchange Commission (SEC), the regulating government body for the capital markets in the United States. For foreign companies with stocks traded in the North American market, the deadline for compliance with the provisions of the Sarbanes-Oxley Act is July 15, At the Gerdau Group, the process will be completed in These initiatives will ensure the development of the Group s corporate governance and risk management processes, improve safety for the operations and increase the quality of information disclosure and financial reports to the capital markets. They will also ensure that international requirements are met. Operational and administrative restructuring Since December 2004, the Gerdau Group has been working to restructure its companies in Brazil and other South American countries. The importance of this work is underscored by the plan to increase the Group s presence in South America (see Investments section). Through restructuring, we hope to obtain greater strategic advantages and improve the operating and management efficiency in South America. For that, efforts will be focused on the specialization of different units and business operations. This will be a decisive step in the development of alternatives for the future growth of the Gerdau Group. On December 3, 2004, the Board of Directors at Gerdau S.A. authorized the implementation of corporate restructuring measures for the Group s companies in Brazil and other Latin American countries in continuation of a process that began two years earlier with the merger between Gerdau S.A. and Aço Minas Gerais S.A. Açominas. This restructuring resulted in the creation of Gerdau Açominas S.A. in Brazil. On December 29, the first step in the restructuring process was taken when the dormant holding of Gerdau Participações S.A. was capitalized with the shares of Gerdau Açominas S.A. and a portion of the shares of Gerdau Internacional Empreendimentos Ltda. held by Gerdau S.A., representing 91.5% and 22.8%, respectively of the capital stock for those companies. The shares transferred to Gerdau Participações S.A. correspond to the direct or indirect participating interest of Gerdau Internacional Empreendimentos Ltda. in the capital stock of Gerdau Chile Inversiones Ltda., Gerdau Laisa S.A. and Sipar Aceros S.A. With the support of independent consultants, management is currently finalizing studies to establish the definitive shareholding structure. The restructuring involves the creation of distinct companies, one for each business operation, involving the operations in Brazil and other South American countries. The new companies will have different operational focuses, such as: long steel, specialty steel, slabs, blooms and billets and distribution services. The new companies will be created after the conclusion of studies and approval by the Board of Directors and shareholders of the companies involved.

17 14 15 corporate GOVernance The shareholders of publicly traded companies in Brazil and abroad will not be affected by the restructuring. Shareholders will keep their current position and their rights and values will be preserved. Currently, the structure of the companies that are part of the Gerdau Group 1 is as follows 2 : Metalúrgica Gerdau S.A. 99.0% Banco Gerdau S.A. Gerdau S.A. 44.8% (75.8% of voting shares) 100.0% 97.1% 72.1% 22.8% Gerdau Participações S.A. 91.5% Seiva S.A. Florestas e Indústrias Gerdau Internacional Empreendimentos Ltda. Gerdau Açominas S.A. 66.5% Gerdau Ameristeel Corporation 100.0% Gerdau Chile Inversiones Ltda. Gerdau Ameristeel US Inc % 100.0% Gerdau Laisa S.A. Gerdau Ameristeel MRM Special Sections Inc % 38.2% Sipar Aceros S.A. Gerdau Ameristeel Perth Amboy Inc % Gerdau Ameristeel Sayreville Inc. Gallatin Steel Company 100.0% 50.0% 1. Metalúrgica Gerdau stands for all the operations included in its consolidated financial statements. 2. Minus minority interests.

18 Board of Directors Chairman Jorge Gerdau Johannpeter Vice Chairmen Germano H. Gerdau Johannpeter Klaus Gerdau Johannpeter Frederico C. Gerdau Johannpeter Carlos J. Petry Board Members Affonso Celso Pastore André de Lara Resende Oscar de Paula Bernardes Neto Secretary General Expedito Luz Gerdau Executive Committee President Jorge Gerdau Johannpeter Vice Presidents Frederico C. Gerdau Johannpeter Senior Vice President Carlos J. Petry Senior Vice President André B. Gerdau Johannpeter Claudio Gerdau Johannpeter Domingos Somma Filipe Affonso Ferreira Osvaldo B. Schirmer Ricardo Gehrke Secretary General Expedito Luz Board of Auditors Metalúrgica Gerdau S.A. Carlos Roberto Schroder Domingos Matias Urroz Lopes Mário Magalhães de Sousa Substitutes Pedro Floriano Hoerde Ruben Rohde Valmir Pedro Rossi Gerdau S.A. José Antônio Cruz de Módena Peter Wilm Rosenfeld José Bernardo de Medeiros Neto Substitutes Rudolfo Teodoro Tanscheit Tranquilo Paravizi Brazil Gerdau Açominas S.A. Board of Directors Chairman Jorge Gerdau Johannpeter Vice Chairmen Germano H. Gerdau Johannpeter Klaus Gerdau Johannpeter Frederico C. Gerdau Johannpeter Carlos J. Petry Board Member Marco Antônio Pepino Substitutes Claudio Gerdau Johannpeter Expedito Luz Osvaldo B. Schirmer Ruy Lopes Filho Guilherme Rocha Murgel de Rezende Secretary General Expedito Luz Officers President Jorge Gerdau Johannpeter Vice Presidents Frederico C. Gerdau Johannpeter Senior Vice President André B. Gerdau Johannpeter Claudio Gerdau Johannpeter Osvaldo B. Schirmer Business Operations Gerdau Long Steel Brazil Ricardo Gehrke Executive Vice President Business Operations Gerdau Açominas Ouro Branco Luiz André Rico Vicente Executive Vice President Business Operations Gerdau Specialty Steel Cláudio Mattos Zambrano Executive Director

19 16 17 corporate GOVernance Executive Officers Alfredo Huallem André Felipe G. Reinaux André Pires de Oliveira Dias Cláudio Mattos Zambrano Dirceu Tarcisio Togni Érico Teodoro Sommer Expedito Luz Fladimir B. Lopes Gauto Francesco S. Merlini Francisco Deppermann Fortes Geraldo Toffanello Gerson Marcos Venzon Guilherme C. Gerdau Johannpeter Heitor L. B. Bergamini João A. de Lima João Carlos Salin Gonçalves Joaquim de Souza Gomes Joaquim G. Bauer José Maurício Werneck Guimarães da Silva Julio Carlos Lhamby Prato Luiz Alberto Morsoletto (in memoriam) Luiz Augusto Polacchini Manoel Vitor Mendonça Filho Moacir Curi Meneguzzi Nestor Mundstock Omar de Oliveira Fantoni Paulo Ricardo Tomazelli Paulo Roberto Perlott Ramos Ruy Lopes Filho Sirleu José Protti Tadeu Petterle Canada and the United States Gerdau Ameristeel Corp. Board of Directors Chairman Jorge Gerdau Johannpeter Board Members Arthur Scace André B. Gerdau Johannpeter Frederico C. Gerdau Johannpeter Joseph J. Heffernan J. Spencer Lanthier Kenneth W. Harrigan Michael D. Sopko Phillip E. Casey Officers President and CEO Phillip E. Casey Vice President and COO André B. Gerdau Johannpeter Vice Presidents Andre Beaudry Anthony S. Read Arlan Piepho Carl Czarnik Donald R. Shumake Edward C. Woodrow Glen A. Beeby Gregory Bott James S. Rogers Jerry Goodwald J. Neal McCullohs Mark Quiring Matthew C. Yeatman Michael Christy Michael Mueller Paulo Fernando Bins de Vasconcellos Robert L. Bullard Robert Thompson Roger Paiva Tom J. Landa - CFO Wilburn G. Manuel William E. Rider Yuan Wang Chile Gerdau Aza S.A. Hermann Von Mühlenbrock S. General Manager Uruguay Gerdau Laisa S.A. José Pedro Sintas García Executive Director Equity Investment Argentina Sipar Aceros S.A. Amaury Cordeiro de Oliveira Executive Director

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21 Business Increased demand for steel drives results Finance Results Indebtedness Financial operations Capital Markets Publicly traded companies in Brazil Publicly traded company in Canada Relationship with shareholders, investors and analysts Production Brazil Argentina, Chile and Uruguay Canada and the United States Sales and Markets Brazil Argentina, Chile and Uruguay Canada and the United States Investments Main initiatives in 2004 Investment program for the coming years

22 Finance Impressive performance in 2004 Results In 2004, the Gerdau Group s gross revenues grew 48.3% from R$ 15.8 billion in 2003, reaching R$ 23.4 billion. Increased international steel consumption was boosted mainly by the economic growth of China and the United States. This scenario elevated international steel prices. For the Gerdau Group, the average dollar value per metric ton exported from Brazil increased 62.4%. In addition, the improved performance of South American operations, the consolidation of the new industrial units in North America and the recovery of economic growth in Brazil contributed significantly to the positive consolidated performance. As a result of this favorable scenario, net sales increased 46.6% to R$ 19.6 billion. net income was R$ 3.3 billion, up from R$ 1.3 billion in the previous year an increase of 165.8%. Net margins (ratio between net income and net sales revenue) grew to 17.1% in 2004 from 9.4% in 2003, and gross margins increased 7.3 percentage points to 31.9%. Operating expenses (sales, general and administrative) represented 7.7% of net sales revenue in 2004 against 9.4% in 2003, and totaled R$ 1.5 billion. EBITDA (earnings before interest, taxes, depreciation and amortization) increased 108.4%, reaching R$ 5.5 billion. Net financial expenses (financial expenses minus financial revenues), excluding foreign exchange effects and monetary variations, totaled R$ million. Considering foreign exchange revenues of R$ million and monetary variation expenses of R$ 14.5 million, the interest paid in the year was R$ million. In 2004, the Group s investments outside Brazil, converted into Brazilian currency, reflected the 8.1% devaluation of the U.S. dollar in relation to the real. The foreign exchange effect is accounted for in the equity pick-up line of the balance sheet, which also includes, among others, amortization of goodwill in the period. As a result, a negative balance of R$ million was recorded for equity pick-up in Indebtedness Net debt (gross debt minus cash and cash equivalents and short-term investments) was reduced by 22.4% from R$ 5.3 billion to R$ 4.1 billion. The average life of debt increased from 2.6 to 4.2 years in Gross debt in 2004 was R$ 6.1 billion compared to R$ 6.3 billion in 2003 (a reduction of 3%). Short-term debt also decreased by 17.6% to R$ 2 billion. Long-term debt was R$ 4.1 billion (+6.4%), which reflects the lengthening of debt maturity and translates into higher flexibility for business management. From the total debt, 18.6% is in Brazilian currency, 38.7% is pegged to the U.S. dollar, and the remaining 42.7% comes from the Group s operations outside Brazil.

23 20 21 f i n a n c e Even with the acquisition of new assets in 2004, the net interest (financial expenses minus financial revenue, excluding currency exchange variation) per metric ton sold was R$ 22.36, almost half the amount recorded in the previous year. This indicates that the Gerdau Group s expansion did not compromise profitability or operating performance during the year. In December, the balance of cash, cash equivalents and financial investments was R$ 2 billion, of which 69.5% (R$ 1.4 billion) was indexed to the U.S. dollar. The financial resources invested in 2004 almost doubled in relation to 2003, reflecting a growth in cash generation. The strong generation of operating cash (EBITDA) resulted in improved debt payment capacity and availability to undertake new commitments to expand the business. In 2004, the ratio between net debt and EBITDA was 0.7, well below the limit of 2.5 established in the Group s indebtedness policy. Net Sales Revenue in 2004 (million R$) 13,367 7,307 5,570 19,597 9,976 8, % +36.5% +59.0% Financial operations In June, Gerdau Açominas S.A., the company responsible for the Group s steel operations in Brazil placed the second tranche of its Export Receivable Notes program. This was important to lengthen the company s debt profile. The operation yielded US$ 128 million with maturity in eight years and an annual interest rate of 7.321%. The transaction was completed in parallel with a derivative instrument (US Treasury Lock), which reduced the effective cost to 6.798% per year. In October, a US$ 110 million operation in euro commercial papers, with maturity on October 12, 2005 and annual interest of 3%, was concluded. In December, Gerdau Açominas S.A. obtained a US$ 240 million loan to upgrade the Ouro Branco mill (state of Minas Gerais) as part of the plant s expansion project. The guarantee for the operation was given by Nippon Export and Investment Insurance (NEXI), a credit agency associated with the Japanese government. The NEXI guarantee covers 97.5% of the political risk and 95% of the commercial risk. That means that both the risks related to the Brazilian policy for payments sent to foreign countries (political risk) and the risks related to compliance with commitments undertaken by the company (commercial risk) are covered. The total term for this loan is seven years, including two years of grace and five years for amortization. The operation, called an untied loan, is unique in that it is not linked to the origin of the equipment supplied. In addition, the loan does not require any additional guarantee from the company and there is no link with imports or receivables from exports. BRAZIL % CANADA AND THE UNITED STATES ARGENTINA, CHILE AND URUGUAY Net Income in R$ 3.3 Billion BRAZIL CANADA AND THE UNITED STATES ARGENTINA, CHILE AND URUGUAY 5.2% 26.8% 68.0%

24 Financial Indicators Firm value 2 /EBITDA 3 3.3x 5.4x Net debt/ebitda 0.7x 2.0x Net debt/total capitalization 34.2% 52.1% EBITDA/Net financial expenses x 5.2x Net income/net equity 42.5% 26.0% 1. The improvement of indicators is due to the positive performance in 2004 which is reflected, for example, in the increase in EBITDA and net income as well as in the reduction of net debt and net financial expenses. 2. Firm value: market value less net debt (Gerdau S.A. ). 3. EBITDA: earnings before interest, taxes, depreciation and amortization. 4. Net financial expenses: financial expenses minus financial revenue, excluded foreign exchange effects and monetary variation. Distribution of Value-added Metalúrgica Gerdau S.A. Total: R$ 10 billion Distribution of Value-added Metalúrgica Gerdau S.A. Governments: R$ 4.1 billion GOVERNMENTS EMPLOYEES FUNDING INSTITUTIONS SHAREHOLDERS REINVESTMENT OF PROFIT 9.6% 4.0% 23.7% 21.8% 40.9% FEDERAL TAXES AND CONTRIBUTIONS FEDERAL SOCIAL OBLIGATIONS STATE TAXES AND CONTRIBUTIONS MUNICIPAL TAXES AND CONTRIBUTIONS 7.1% 0.9% 27.0% 65.0% Distribution of Value-added Metalúrgica Gerdau S.A. Employees: R$ 2.2 billion SALARIES BENEFITS TRAINING PROFIT SHARING 1.3% 17.6% 12.9% 68.2% One century of profits For more than 100 years the Gerdau Group has believed that growth and profitability must be balanced. Our results are the ultimate proof that we follow this policy. Throughout its history, the Gerdau Group has always recorded positive results, even in adverse economic scenarios. Ethical values, well trained employees, professional management, financial seriousness, industrial and commercial competitiveness all have been at the foundation of a solid and safe expansion. Today, the Gerdau Group works to retain its position as one of the most profitable and efficient steelmakers in the world.

25 22 23 f i n a n c e Cash Flow Metalúrgica Gerdau S.A. (in thousand R$) Company NET INCOME FOR YEAR 1,437, ,179 3,341,097 1,256,874 EQUITY PICKUP (1,342,842) (610,001) 344, ,240 PROVISION FOR CREDIT RISK - - 7,647 20,618 GAIN IN FIXED ASSET DISPOSAL - - 9,058 10,056 GAIN/LOSS IN LIQUIDATION OF INVESTMENTS (170,953) (1,445) (164,058) (1,556) MONETARY AND EXCHANGE VARIATION 5,198 5,563 (94,087) 136,349 DEPRECIATION AND AMORTIZATION , ,045 INCOME TAX AND SOCIAL SECURITY CONTRIBUTION 47,393 8, ,551 (441,456) INTEREST ON DEBT , ,308 CONTINGENCIES/LEGAL ESCROW (940) 18 4, CHANGES IN TRADE ACCOUNTS RECEIVABLE - - (720,363) (167,134) CHANGES IN INVENTORIES - - (1,402,408) (207,267) CHANGES IN CONTRACTORS 58 (27) 477, ,227 OTHER ACCOUNTS IN OPERATING ACTIVITIES (33,737) 8,656 (100,288) 74,557 Net cash provided by operating activities (57,825) (13,474) 3,387,391 2,348,423 FIXED ASSETS ACQUISITION/DISPOSAL - - (1,173,491) (873,039) DEFERRED CHARGES - - (18,006) (7,246) INVESTMENTS ACQUISITION/DISPOSAL 155,144 5, ,905 (67,005) ACQUISITION OF ASSETS - - (924,457) - PROCEEDS FROM DIVIDENDS/INTEREST ON CAPITAL STOCK 351, , Cash applied to investments 507, ,205 (1,753,049) (947,290) FIXED ASSETS SUPPLIERS ,573 2,196 WORKING CAPITAL FINANCING (7,778) (7,015) (133,006) (334,804) DEBENTURES (586) (423) 85,305 (347,456) PROCEEDS FROM FIXED ASSETS FINANCING , ,989 PAYMENTS OF FIXED ASSETS FINANCING - - (677,357) (541,308) PAYMENT OF INTEREST ON FINANCING - - (379,801) (414,409) INTER-COMPANY LOANS 2,839 (2,506) 35,944 (16,937) CAPITAL INCREASE/TREASURY STOCK (14,441) (7,049) 451,704 (24,151) PAYMENT OF DIVIDENDS/INTEREST ON CAPITAL STOCK AND STATUTORY PARTICIPATIONS (358,623) (198,413) (853,710) (423,399) Net cash provided by financial activities (378,589) (215,406) (563,582) (1,645,279) Change in cash balance 70,614 (38,675) 1,070,760 (244,146) Cash Balance AT THE BEGINNING OF THE PERIOD 25,186 63,861 1,015,726 1,420,236 UPDATE OF INITIAL CASH BALANCE - - (82,541) (173,736) INITIAL BALANCE OF COMPANIES CONSOLIDATED IN THE YEAR ,372 AT THE END OF THE PERIOD 95,800 25,186 2,003,945 1,015,726

26 Capital Markets Outstanding return for shareholders The Gerdau Group is committed to cost-effective growth that does not compromise future profitability for shareholders. The company works to guarantee the continuity of its business. In the past five years, the absolute annual yield of dividends has been on average 6% for Gerdau S.A. shareholders and 10.3% for Metalúrgica Gerdau S.A. shareholders. Additionally, the Group seeks to enhance the liquidity of its shares by adopting new corporate governance practices and by joining important stock exchanges around the world. In 2004, for example, Gerdau Ameristeel, the company responsible for the Group s operations in North America, was listed on the New York Stock Exchange (NYSE). Through these actions, we have established a strong relationship with our 89.2 thousand shareholders, partners in the construction of the company s future. Publicly traded companies in Brazil Metalúrgica Gerdau S.A. and Gerdau S.A. distributed a stock bonus to shareholders in This initiative translated into an increase in the number of shares available and therefore created more opportunities for access to the stock. The operation resulted from the issuing of new shares to incorporate R$ 1.7 billion in reserves to the capital stock of Gerdau S.A. and R$ million to the capital stock of Metalúrgica Gerdau S.A. The number of Gerdau S.A. shares was doubled to million. The number of Metalúrgica Gerdau S.A. shares was also doubled to 83.2 million (30% distributed as bonus and 70% by stock split). At the end, each investor had more shares, reflecting the percent increase of each company. In December, Gerdau placed a public offering to sell common shares from its two publicly traded companies in Brazil. The aim was to increase liquidity and appreciation of these shares in the capital market. The auction offered 10.1% of the common shares of Metalúrgica Gerdau S.A. and 10% of the common shares of Gerdau S.A., the equivalent of 2.8 million and 10.3 million shares, respectively. The Metalúrgica Gerdau S.A. shares belonged to Gersul GERDAU AMERISTEEL RINGS THE OPENING BELL AT THE NEW YORK STOCK EXCHANGE (NYSE). FROM LEFT TO RIGHT: NOREEN CULHANE, NYSE EXECUTIVE VICE PRESIDENT; ANDRÉ JOHANNPETER, GERDAU AMERISTEEL VICE PRESIDENT AND COO; ROBERT BRITZ, NYSE PRESIDENT AND CO-COO; PHILLIP CASEY, GERDAU AMERISTEEL PRESIDENT AND CEO; TOM LANDA, GERDAU AMERISTEEL VICE PRESIDENT AND CFO; AND OSVALDO SCHIRMER, GERDAU GROUP FINANCIAL EXECUTIVE VICE PRESIDENT AND INVESTOR RELATIONS DIRECTOR SOURCE: nyse

27 24 25 capital markets Empreendimentos Imobiliários Ltda., the Group s controlling block holding company. The Gerdau S.A. shares belonged to Metalúrgica Gerdau S.A. and Santa Felicidade Comércio, Importação e Exportação de Produtos Siderúrgicos Ltda., a fully owned subsidiary of Metalúrgica Gerdau S.A. The operation resulted in the sale of 1.4 million Metalúrgica Gerdau S.A. shares (equivalent to R$ 75.1 million) and 10.3 million Gerdau S.A. shares (R$ million). During 2004, payments made to the shareholders of Metalúrgica Gerdau S.A. totaled R$ million ( %), and R$ million ( %) to the shareholders of Gerdau S.A. This represents a dividend yield (on December 31) of 7.8% for Metalúrgica Gerdau S.A. and 6.1% for Gerdau S.A. In 2004, the appreciation of shares corresponded to 122.7% and 66.2%, respectively. Payment of dividends and interest on capital stock is based on the net income for the year. At Metalúrgica Gerdau S.A., net income reached R$ 1.4 billion (R$ per share) and at Gerdau S.A., R$ 2.8 billion (R$ 9.59 per share). The volume of Metalúrgica Gerdau S.A. shares traded increased 260.4% at the São Paulo Stock Exchange, reaching R$ 2.1 billion. There were 63,200 trades, up 195.1% over the previous year. The average daily trading increased from R$ 2.2 million in 2003 to R$ 7.2 million. In 2004, the trading volume for Gerdau S.A. shares at the São Paulo Stock Exchange was R$ 7.2 billion, the equivalent of 224,000 trades. This was an increase of 185.2% and 116.2%, respectively. Consequently, the average daily trading reached R$ 25.9 million, against R$ 9.8 million in the previous year. The trading of Gerdau S.A. American Depository Receipts (ADRs) on the New York Stock Exchange totaled US$ 1.3 billion, equivalent to a daily average of US$ 5.1 million. At the Madrid Stock Exchange (Latibex), the company s shares were traded daily for a volume of 6.2 million. Performance of Metalúrgica Gerdau S.A. Shares in Brazil (GOUA4) JAN-00 JAN-01 JAN-02 JAN-03 JAN-04 METALÚRGICA GERDAU S.A. IBOVESPA Dollar-deflated data / Basis 100 / Source: Economática

28 Performance of Gerdau S.A. Shares in Brazil (GGBR4) JAN-00 JAN-01 JAN-02 JAN-03 JAN-04 GERDAU S.A. IBOVESPA Dollar-deflated data / Basis 100 / Source: Economática Performance of Gerdau S.A. ADRs in the U.S.A. (GGB) JAN-00 JAN-01 JAN-02 JAN-03 JAN-04 GERDAU S.A. ADRS DOW JONES Dollar-deflated data / Basis 100 / Source: Economática Performance of Gerdau Ameristeel Corp. Shares in Canada (GNA) OCT-02 OCT-03 OCT-04 GERDAU AMERISTEEL CORP. TS300 INDEX Quotes start October / Data in Cdn$ / Basis 100 / Source: Bloomberg

29 26 27 capital markets Publicly traded company in Canada The debut of Gerdau Ameristeel on the New York Stock Exchange (NYSE) in 2004 translated into a new level of liquidity for its shares. Starting in October, when trading of Ameristeel stock at the NYSE began, until the end of December, trading volume reached US$ million, representing an average daily volume of US$ 2.6 million. In addition, the listing in the U.S. increased the trading volume on the Toronto Stock Exchange, where Gerdau Ameristeel has been listed since In the first nine months of 2004, the average daily trading volume on the Toronto Stock Exchange was US$ 871,000. Taking into consideration the trades at the NYSE, this volume reached US$ 5.9 million in the last quarter. Gerdau Ameristeel is the second Gerdau Group company listed on the main world financial center. Gerdau S.A., one of the Group s publicly traded companies in Brazil, was listed in Gerdau Ameristeel carried out two capital increase operations in In April, 26.8 million common shares were purchased by Gerdau Ameristeel s parent company, Gerdau S.A., for Cdn$ 4.90 per share, for a total of US$ 100 million, generating resources for equipment financing, working capital, and debt payment. In November, Gerdau Ameristeel issued a public offering of 78.8 million common shares to raise US$ 370 million. This was the Company s first international fund raising effort through the issuance of new shares. The aim of the operation was to secure funds for the acquisition of North Star Steel assets, increase the shareholder base in the United States and increase the liquidity of shares. After these operations, Gerdau S.A. had increased its stake in Gerdau Ameristeel to 66.5%. The company s net revenues, adjusted to Brazilian accounting practices, reached R$ 8.9 billion in 2004, with a profit of R$ million. As a result, the Board of Directors decided for the quarterly payment of dividends to shareholders starting in In March, individuals holding shares on February 16, 2005, received US$ 0.02 per share in dividends. This amount refers to the first quarter of 2005, and totals US$ 6.1 million. Relationship with shareholders, investors and analysts The Gerdau Group s relationship with shareholders, investors and analysts is guided by disclosure and fast response to market demands. In 2004, six meetings were held with Apimec, the Association of Market Analysts and Investment Brokers. The meetings, broadcast in real time through the Internet and available for replay until the end of the quarter, attracted 870 people. Gerdau s investor relations team held 280 individual meetings with market professionals in Brazil, North America and Europe. It organized eight conference calls to discuss quarterly results in both Portuguese and English, attracting over 800 participants. Total Shareholder Return (Steel Companies) to 2004 (%) METALÚRGICA GERDAU GERDAU BELGO 1,016.0 CSN USIMINAS COMMERCIAL METALS NUCOR STEEL DYNAMICS , ,605.0 Total shareholder return reflects the dollar increase in the value of shares for the period indicated, assuming that the dividends distributed were reinvested in shares of the same company. Source: Bloomberg and Economática Period from December to December

30 Shareholder Base The geographic distribution of the Gerdau Group shareholder base in 2004 was as follows: % Metalúrgica Gerdau S.A. Gerdau S.A. Gerdau Ameristeel Corp. BRAZIL NORTH AMERICA EUROPE OTHER *Source: Shareholder records from the custodian bank and São Paulo Stock Exchange. All holders of ADRs are considered to be North-American. The Brazilian Securities and Exchange Commission was duly informed of equity investments representing more than 5% of the voting stock. Number of Shares The total number of Metalúrgica Gerdau S.A. shares on December 31, 2004 was 82,486,790 (27,722,930 common shares and 54,763,860 preferred shares). At Gerdau S.A., the total number of shares on the same date was 295,134,822 (102,936,448 common shares and 192,198,374 preferred shares). Gerdau Ameristeel Corp. had 304,028,122 common shares on December 31, Stock Quotes São Paulo Stock Exchange (Bovespa) Metalúrgica Gerdau S.A. Gerdau S.A. R$ HIGH LOW YEAR-END In million R$ Market cap 5, , , , , , , ,939.8 Dividend-adjusted. Source: Economática New York Stock Exchange (Nyse) Gerdau S.A. - ADR In US$ HIGH LOW YEAR-END In million US$ Market cap 5, , , , Source: Bloomberg Madrid Stock Exchange (Latibex) Gerdau S.A. - DR In * HIGH LOW YEAR-END In million Market cap 2, , *Starting December 2nd Source: Bloomberg

31 28 29 capital markets Toronto Stock Exchange Gerdau Ameristeel Corp. In Cdn$ * HIGH LOW YEAR-END In million Cdn$ Market cap 2, *Starting October Source: Bloomberg Indicators per Share Metalúrgica Gerdau S.A. Gerdau S.A. In million R$ DIVIDEND PAID NET INCOME 1, ,831 1, ADJUSTED NET INCOME 1, ,690 1, % PAY-OUT YIELD In R$ EARNINGS PER SHARE Equity value per share *Includes the payment of a supplementary non-recurring dividend. Gerdau shares have been traded in units since Previous data refer to lots of one thousand shares. Pay-out: Dividend divided by annual adjusted net income. Yield: Per share dividend divided by non-dividend adjusted price of share on the last day of the year. Long-term relationship with shareholders Generate value for shareholders. This has been our philosophy for decades. Since 1977, the Gerdau Group s publicly traded companies in Brazil have been distributing at least 30% of the yearly adjusted net income as dividends or interest on capital stock. In 2002, the Group extended the tag-along right to minority common and preferred shareholders, that is, the right to receive 100% of the amount paid to the shares of the control group in case the control on the company is sold.

32 Steel Output (thousand metric tons) 12,343 6,976 5,020 13,448 7,284 5, % +4.4% +14.3% Production Growing efficiency levels Achieve world-class operating levels and strive for maximum industrial process efficiency. Following this principle, the Gerdau Group is constantly allocating resources toward the technological upgrading of its steel mills, employee training, cost reduction and increased workplace safety. BRAZIL % CANADA AND THE UNITED STATES Output of Rolled Product (thousand metric tons) BRAZIL 9,045 3,890 4, ,274 4,339 5, CANADA AND THE UNITED STATES CHILE AND URUGUAY +13.6% +11.5% +14.2% +27.9% ARGENTINA, CHILE AND URUGUAY Brazil Long steel Gerdau mills produced 10.2% more steel than in the previous year. Melt shops and rolling mills also increased their operational efficiency. In 2004, there was an improvement of more than 20% in the number of billets that are rolled between rolling errors. The Group is also currently performing the technological upgrading of its drawing mills, which will allow for a productivity gain of 27% when the units reach their planned operational performance. Specialty steel The specialty steel segment, directed primarily at the automotive industry, also reported a positive performance for the year. Productivity increased 15.5%; the output of rolled products grew 19.4%, and of forged products, 16.5%. The new electric furnace at Gerdau Aços Especiais Piratini (state of Rio Grande do Sul) began operating at the beginning of the year, increasing the unit s melt shop capacity.

33 30 31 p r o d u c t i o n From scrap to steel GERDAU DIVINÓPOLIS (STATE OF MINAS GERAIS) SCRAP YARD Each year, the Gerdau Group recycles nearly 11 million metric tons of scrap to produce steel. As a result, it is one of the largest recyclers in the world. For society, the use of scrap in the steelmaking process represents an important contribution to improve quality of life. It reduces the volume of material disposed of in landfills and generates jobs through an extensive chain of small and medium-sized entrepreneurs dedicated to this activity. For the Gerdau Group, the use of iron scrap means an optimized production process, increased productivity and reduced energy consumption and operating costs.

34 Improved efficiency EMPLOYEES GATHERED IN EMBU DAS ARTES (STATE OF SÃO PAULO) FOR THE 1 ST QUALITY IMPROVEMENT STORY CONTEST More than 200 employees from Gerdau units in Brazil participated in the 1 st National Meeting of Quality Improvement Story Teams in July The purpose of the event was to recognize the projects that improved production, safety, and quality. The 15 teams that took part in the meeting were chosen among 767 Quality Improvement Story Teams from all over the country. At the event, a judging commission formed by employees from different areas of the Gerdau Group elected the three groups that most stood out among the participants. Gerdau Cearense (state of Ceará), for example, was able to increase the daily operating hours of its rolling mill equipment by 4.4%, a figure that represents an additional production day per month. A project at Gerdau Aços Especiais Piratini (Rio Grande do Sul) resulted in a 65% reduction in the amount of material wasted during the rolling process. Gerdau Açonorte (Pernambuco) increased the daily operating hours of the equipment used for nail production by 5%. The goal for 2005 is to hold an international meeting with representatives from all the Gerdau Group units in North and South America.

35 32 33 p r o d u c t i o n Gerdau Açominas Ouro Branco In 2004, the Ouro Branco mill produced 3.0 million metric tons of liquid steel, maintaining its 2003 performance by continuously striving for operational regularity in the various production stages. This work philosophy allowed the steel mill to make important advances which resulted in higher productivity and product quality as well as the enhanced safety of people and equipment. The mill also recorded a 22.5% growth in the output of structural shapes to meet increased demand. In 2004, it began to produce wire rod 186,000 metric tons destined for the industrial sector. Argentina, Chile and Uruguay In Uruguay, Gerdau Laisa reached record figures in The mill increased its output of billets to 58,000 metric tons (+ 24%) and of rolled products to 48,000 metric tons (+17%). It also surpassed its goal to reduce losses at the rolling mill. The output at Gerdau AZA in Chile grew 23.4% compared to the previous year, reaching a total of 371,000 metric tons. The rolling mills at Renca and Colina also reported increased productivity. In Argentina, the output of rolled products at Sipar grew 17.7% compared to The overall industrial productivity grew 40% (ton/man/year). Canada and the United States The 14 steel mills belonging to Gerdau Ameristeel, the company responsible for operations in Canada and the United States, established goals to improve efficiency and reduce costs in Electricity consumption in the furnaces dropped 4.3% in relation to 2003, a significant achievement that helped counterbalance the increased cost of the input during the year.

36 Sales and Markets Capacity to meet growing market demands Physical Sales by Geographic Region (thousand metric tons) BRAZIL 12,144 6,587 5, , CANADA AND THE UNITED STATES Physical Sales by Product Line 12.6 million metric tons SLABS, BLOOMS AND BILLETS COMMON LONG ROLLED PRODUCTS SPECIAL ROLLED PRODUCTS DRAWN PRODUCTS FLAT STEEL 6, % +0.6% 5, % 6.3% 7.9% 3.0% 18.2% 64.6% +25.0% ARGENTINA, CHILE AND URUGUAY The Gerdau Group participates in the life of millions of people. Rebar, bars, profiles, wire rod, wires and a range of other steel products are transformed into houses, buildings, bridges, roads, airports, automobiles, transmission towers and household appliances. The Group also participates in rural life, producing steel for fences and farming machinery and equipment, among other applications. In 2004, the recovery of the international market and an increase in demand in the countries where the Gerdau units are located led to an increase in sales performance. The Gerdau Group sold 12.6 million metric tons during the year, representing a 3.4% increase compared to the previous year. Brazil The steelmaking industry benefited from a strong demand in the Brazilian economy. The Gross Domestic Product (GDP) increased 5.2%, leveraged by the growth of civil construction, industry and agriculture. As a result, the national market absorbed 18.3 million metric tons of steel. From this total, 3.9 million were sold by the Gerdau Group an increase of 15% in relation to To meet domestic market needs, the Group redirected a portion of the volume normally exported from Brazil. International sales dropped 14.4% in relation to 2003 to a total of 2.7 million metric tons. Despite this result, shipments to 72 countries during the year represented 41.5% of the overall sales of the facilities in Brazil, generating a revenue of US$ 1.1 billion, a figure 39% higher than that of the previous year. This performance in the international market is also related to Gerdau s strategy of serving distinct markets, safeguarding its units from the protectionist measures currently effective in certain countries. In the civil construction sector, the domestic demand for products such as Gerdau rebar, reinforcing mesh and truss frames increased 12.7% during the year. Gerdau products were used in major construction projects: the Recife airport (state of Pernambuco), the Congonhas airport (São Paulo), the Irapé hydroelectric power station (Minas Gerais) and the Iberê Camargo museum (Rio Grande do Sul), among others. The Gerdau Group s top seller in Brazil the GG 50 rebar is destined for civil construction. Since 1992, the Gerdau brand has been imprinted onto the rebar, which is certified by the National Institute of Metrology, Standardization and Industrial Quality (Inmetro). The certification, based on best international

37 34 35 sales and markets practices, guarantees the quality of the steel. The Group also provides special services to go along with its products, delivering fabricated rebar based on each customer s specific needs. In this way, the steel arrives at the construction site ready for use. The deliveries are made in identified lots that streamline the verification of receipt, storage and use. The service increases the productivity and quality of the structures while also eliminating steel losses in structural frames, which can be as high as 15% in conventional practices (see box Suited to the customer s taste ). In the industrial sector, the demand for Gerdau products wire rod, wires, bars, profiles, angles and welded products grew 11.6%. In 2004, angle bars and profiles of certain gauges were also imprinted with the Gerdau brand for the first time, allowing the customer to verify the quality of the product at sales outlets. This practice will be extended to other types of profiles during The Group was able to fully meet the demands of its specialty steel customers, despite the significant growth of the automotive industry and the rise in auto parts exports. It increased Suited to the customer s taste The Gerdau Group develops custom-made solutions for its civil construction customers in the Americas. The fabricated reinforcing steel facilities, for example, use automated technology that increases productivity by approximately 30% in the assembly of readymade reinforcing structures, eliminates losses from surplus and reduces final construction costs. With this solution, rebar is delivered at the construction site ready for use based on the customer s specific structural plan. Deliveries can be based on a timetable established by the construction company, allowing for a higher level of organization at the construction sites and enhancing the safety of users. The Gerdau Group already has 44 units specializing in this service in Brazil, Argentina, Chile, the United States and Uruguay. FABRICATED REINFORCING STEEL FACILITY IN THE UNITED STATES (ABOVE) AND THE INAUGURATION OF THE SANTA CATARINA UNIT (TO THE RIGHT)

38 its delivery volume by 22.6% and destined 98% of all production to the domestic market. Through these and other actions, the Gerdau Group has increasingly reinforced its participation in international production chains Gerdau steel is currently used in vehicles manufactured by the major assemblers worldwide (see box Cars drive innovation ). In Brazil, there was a 4.7% increase in the sale of products for the agricultural sector compared to 2003, including wire, wire rope, posts and other items. Based on the current scenario, GDP growth in 2005 should surpass that of 2004 by 3.7%, which will have a positive impact on domestic steel consumption. Cars drive innovation The Gerdau Group keeps up to speed with the innovations in the automotive industry. Gerdau Aços Especiais Piratini (state of Rio Grande do Sul), for example, has one of the most modern laboratories in Latin America for the development of steel products, with equipment that allows technicians to simulate production and forming processes and analyze the degree of steel purity in detail. With these resources, it is possible to develop the improvements to better serve our customers. In fact, it is through the very partnership with consumers that Gerdau is able to create innovations in products and processes. Sales, marketing and technical support teams verify customer needs by maintaining constant contact with auto parts manufacturers and assemblers. The suggestions are then forwarded to the engineers in the research and development area, who work with customers to create and test new solutions. The Group also establishes partnerships with universities and research centers, as well as technology transfer agreements with consultants and other specialty steel producers in Europe and Asia who are internationally recognized in the sector. Over 40 innovations have been placed on the market during the past four years as a result of this work. It is for this reason that the Gerdau Group is increasingly present in international production chains. Today, its steel is found in vehicles made by Mercedes-Benz, Caterpillar, Toyota, General Motors, Ford, Fiat, Volvo, Scania, Honda and Volkswagen, among others, both in Brazil and abroad. THE GERDAU AÇOS ESPECIAIS PIRATINI (STATE OF RIO GRANDE DO SUL) LABORATORY: ONE OF THE MOST MODERN IN LATIN AMERICA, IT FEATURES ULTRASOUND EQUIPMENT (ABOVE) AND THERMOMECHANICAL SIMULATORS (TO THE RIGHT)

39 36 37 sales and markets Support operations for steelmaking in brazil COMERCIAL GERDAU The largest steel distributor in Brazil, Comercial Gerdau sells the most complete line of Gerdau long steel products along with flat steel products manufactured by other steel companies in the country. In 2004, it serviced over 155,000 customers for a gross revenue of R$ 2.1 billion, representing a growth of more than 30% compared to the previous year. Comercial Gerdau currently operates 69 retail stores that cover the entire market. More than products, it provides the market with solutions such as the fabricated reinforcing steel facilities located outside construction sites that rigorously follow the structural design specifications of each project. The company offers an entire line of products through its six flat steel distribution facilities, including roofs, sheets, strips and structural shapes, among others, in addition to plasma, laser and oxy-cutting systems state-of-the-art thermal cutting technologies designed primarily for industry and metallic construction. Banco Gerdau Banco Gerdau (Gerdau Bank) is a financial institution that operates with the Group s business in Brazil. The institution began operations in 1994 as a multiple bank with the mission of developing financial products and services that increase the business success and satisfaction of customers and suppliers. The bank has granted over R$ 4 billion in loans during its 10 years of operations. In 2004, it assisted 1,240 customers. The volume of financing granted grew from R$ million in 2003 to R$ million, representing a 42.8% increase. The bank s assets portfolio increased from R$ 79.5 million to R$ 135 million. The sum managed by the bank in the form of fixed income investment funds reached a total of R$ 1.6 billion, 44.6% higher than in Gerdau Florestal Gerdau Florestal owns 144 thousand hectares of pine and eucalyptus forests. With 24,000 hectares of pine plantations in the states of Santa Catarina and Mato Grosso do Sul, Gerdau Florestal sold 1.6 million cubic meters of timber in 2004, maintaining the same volume as that of the previous year. It also dedicates 120,000 hectares to eucalyptus forests. In 2004, Gerdau Florestal planted 15 million seedlings on 13,600 hectares, the main highlight of the US$ 11.5 million investment plan implemented during the year. The unit also completed the expansion of the seedling nursery, increasing its production capacity from 15 million seedlings per year to 20 million and guaranteeing Gerdau Florestal self-sufficiency in highly productive genetic material. Gerdau Florestal also develops the Forest Farmer Program. Since 1998, small rural landowners have been encouraged to grow eucalyptus trees, receiving seedlings, raw materials and technical support. Currently, 777 farmers participate in the project, caring for a planted area

40 THE CONSTRUCTION OF THE LEE ROY SELMON EXPRESSWAY IN TAMPA, FLORIDA EMPLOYS GERDAU STEEL of over 12,200 hectares. In 2004 alone, they planted more than 1,500 hectares. It is estimated that another 7,000 hectares will be incorporated into the program by Argentina, Chile and Uruguay The units in Argentina, Chile and Uruguay recorded a growth in sales, thanks to the expansion of their domestic markets. They were responsible for the sale of 520,400 metric tons of steel products during the year, 25% more than in The increase is due to the economic growth currently taking place in the three countries, which drove sales up in various sectors such as civil construction and industry. The 9% increase in GDP in Argentina in 2004 reflected the country s economic recovery, which was also observed during the previous year. This good phase had positive repercussions on the steelmaking market, increasing the demand for steel in civil construction and industry. The Sipar rolling mill, in which the Gerdau Group has a 38.2% equity investment, increased its sales volume by 16.6% to 218,800 metric tons. The prospects for the upcoming year are also optimistic, with an estimated 6% increase in GDP and a gradual recovery of infrastructure projects and industrial activity. The Chilean economy grew 6% in 2004 and maintained a sustainable pace of growth. In the steelmaking market, the highlight was the rebar, with a 36.9% increase in sales due to investments in infrastructure especially in the country s urban road network and housing constructions. In 2005, it is expected that the

41 38 39 sales and markets GDP growth rate will remain the same as that of 2004, reflecting a positive prospect for the Chilean industry. This may increase the sales of the wire rod and shapes produced by Gerdau AZA. In 2004, Uruguay achieved important economic growth with a 12% increase in its GDP. This recovery had a positive impact on the purchasing power of the population, which enjoyed an average salary increase of 10.7%. Consequently, there was a significant increase in the sale of products by Gerdau Laisa, the Group s unit in the country. The main highlight was the 21% increase in the sale of rebar a product used in civil construction in relation to For 2005, the Group expects to increase its sales in the national and international markets based on the country s economic growth, estimated at 5% of the GDP, and its solid export performance. Canada and the United States The year 2004 was a positive one for the North American economy. The United States and Canada registered economic growth of 4.4% and 2.8%, respectively, in relation to the previous year. Gerdau Ameristeel, the Group s company in the region, felt the effects of this growth. The high demand for steel, combined with low import volumes, led to an increase in both the pressure to meet domestic market needs and margins during most of the year. The fourth quarter marked a return to a more typical pattern of demand, with a rise in imports and larger inventories. Nevertheless, all of the North American operations together recorded a 5.3% growth in the volume of physical sales in comparison to 2003, with a total of 5.4 million metric tons of steel. Although the demand was strong in all economic segments in 2004, wire rod and civil construction products benefited most from this trend. The year was marked by new ventures in the shopping center and commercial building sector. The housing sector also reported growth. For example, in the fourth quarter of 2004 alone, investments in housing grew 6% in the United States and 1.7% in Canada. Industry in the United States is also experiencing a positive phase. In 2004 companies invested more to keep up with economic growth, leading to the acquisition of capital goods from North American and foreign suppliers. This industrial growth meant a higher demand for Gerdau products. It is projected that the U.S. economy will continue to grow in 2005, although at a slower pace. The market projection is that the GDP will grow at an annual rate

42 Investments Growing profitability and productivity Increase the competitiveness of our operations and reduce risks in the different markets where we operate. This is the goal of our investments: generating value. Each year, the company invests in increasing the installed capacity of its units and supplying customers with products that follow rigorous technical specifications and present superior quality. Because it operates in a capital-intensive sector, the Group invests heavily in the expansion of its units and in the acquisition of new assets with medium to long-term maturity. For this reason, the Group s decisions are guided by the conviction that the investments it makes should not only generate profitability in line with the Group s historical levels, but should also result in growing productivity. Main initiatives in 2004 Gerdau invested a total of US$ million in 2004, 161.9% more than in the previous year. One of the main strategic advances made by the Group was the purchase of the steelmaking assets of North Star Steel from Cargill Incorporated for US$ 308 million. With this investment, the geographic coverage of Gerdau Ameristeel the company responsible for the Group s operations in North America expanded into the Midwestern United States. Gerdau s annual installed capacity in the region increased by 26.2% for a total of 8.3 million metric tons, and by 23.3% for rolled products for a total of 7.6 million metric tons. Investments by Region in US$ million BRAZIL CANADA AND THE UNITED STATES 42.2% 56.5% ARGENTINA, CHILE AND URUGUAY 1.3%

43 40 41 i n v e s tm e n t s The purchase included four long steel mills in the states of Minnesota, Iowa, Kentucky and Texas. It also included three wire rod processing plants in Texas and Tennessee, in addition to a unit that produces grinding balls for the mining industry in Minnesota and two scrap collection and processing units located in Iowa and Minnesota. Throughout the year, Gerdau Ameristeel also increased the supply of products with higher value added by acquiring 12 fabricated reinforcing steel facilities in the United States. Of these, six were owned by Potter Form & Tie Co. and another six by Gate City Steel and RJ Rebar. The investment created synergy with the North Star Steel industrial plants due to the proximity of the units. In South America, the Gerdau Group entered into yet another country: Colombia. It formed a strategic alliance to become the controlling shareholder of the Diaco Group in a process of staggered acquisition of the shares held by the Mayagüez Group and The Latinamerican Enterprise Steel Holding. The transaction involved two steel mills a profile and rebar producer and a specialty steel producer three rolling units and a fabricated reinforcing steel facility. The initial investment for this project was US$ 68.5 million. In 2005, the Gerdau Group will become the owner of 59.8% of the Diaco Group s capital stock, making it the largest long steel producer in Colombia. In addition, the Gerdau units in Chile, Uruguay and Argentina received US$ 10.3 million to upgrade their facilities. The Group invested US$ million in Brazil in Nearly a third of this value, US$ million, was used to expand the Ouro Branco mill (state of Minas Gerais). The Group also invested US$ 77.9 million in the construction of the Gerdau São Paulo (state of São Paulo) mill. Another highlight was the modernization of Gerdau Cosigua (Rio de Janeiro), involving investments of US$ 21.0 million. THE NORTH STAR STEEL MILL IN CALVERT CITY, KENTUCKY, U.S.A., JOINED THE GERDAU GROUP AT THE END OF 2004 THE TUTA UNIT, A SHAPE AND REBAR PRODUCER IN COLOMBIA, IS ONE OF THE INDUSTRIAL PLANTS IN THE ALLIANCE WITH THE DIACO GROUP

44 Investment program for the coming years The Gerdau Group will invest US$ 3.2 billion in the Americas through The largest part, equal to US$ 2.4 billion, is planned for operations in Brazil. The Group s installed steel production capacity in Brazil will grow by 4.1 million metric tons (+55%) over a three-year period, from 7.6 million metric tons to 11.7 million metric tons per year. The units in North America will receive US$ 740 million and the facilities located in Argentina, Chile and Uruguay, US$ 60 million. Key projects in Brazil Gerdau São Paulo (state of São Paulo): The construction of the new rebar production unit for civil construction is in its final phase (see box Countdown in São Paulo ). Gerdau Aços Especiais Rio (state of Rio de Janeiro): A new specialty steel mill will be constructed and is scheduled to start operations in Designed to serve the automotive industry, it will have an annual installed capacity of 800,000 metric tons of steel and 500,000 metric tons of rolled products. Gerdau Açominas Ouro Branco (state of Minas Gerais): The annual capacity of the mill will increase from 3 million metric tons to 4.5 million metric tons in The Ouro Branco investment program also includes an additional phase for expansion of this facility. The studies relating to this second phase will begin after the conclusion of the current investment. Gerdau Usiba (state of Bahia): By 2007, the investment program will expand the mill s annual capacity to approximately 640,000 metric tons per year. The program also involves an increase in the rolling mill capacity during the period. Gerdau Aços Especiais Piratini (Rio Grande do Sul): The production capacity of rolled products for the automotive industry will increase from 390,000 metric tons per year to 500,000 metric tons per year before the end of Gerdau Cearense (state of Ceará): A 50% increase in the annual production of rolled products, from 100,000 metric tons to 150,000 metric tons, will be achieved ahead of schedule in Increasing productivity in the industrial area and the quality of products destined for civil construction and industry is part of the investment program. Gerdau Riograndense (Rio Grande do Sul): In 2006, improvements in the melt shop processes will create an additional production capacity of 60,000 metric tons of steel per year, reaching approximately 560,000 metric tons.

45 42 43 i n v e s tm e n t s Countdown in São Paulo CONSTRUCTION WORK AT THE STEEL MILL IN ARAÇARIGUAMA (STATE OF SÃO PAULO) The Gerdau Group steel mill in São Paulo is set to start operations in July The rolling phase, when steel is transformed into the final product, is scheduled to begin in The R$ 750 million investment will be applied in two stages. The first, which is scheduled for completion in two years, involves an investment of R$ 500 million. In the second stage, R$ 250 million will be invested. Located in Araçariguama 50 kilometers away from the capital of São Paulo the unit will have a total annual installed capacity of 1.3 million metric tons of steel and 1.2 million metric tons of rebar for the civil construction sector. In the first phase, the melt shop will have an annual installed capacity of 900,000 metric tons of steel, while the rolling mill will have an annual installed capacity of 600,000 metric tons of rebar. The concept of ecoefficiency was a highlight of the project with the installation of the most modern technologies to protect the water, air and soil.

46

47 Social Commitment to the development of employees and communities People and Teams People management Attracting talent Training and development Total workplace safety Benefits Career management and succession Organizational climate Community Social highlights 46 51

48 People and Teams Teams that add value to the business More than 24,000 people work for the Gerdau Group. Regardless of nationality, they work together toward the same objective and strategy: consolidate the Gerdau Group as an international, worldclass company. They share values and knowledge by combining technical, industrial and commercial expertise and integrating the best aspects of each business operation. They also search the market for the most efficient examples of management, performing global benchmarking research, even in other sectors of the economy. All of these actions are designed to add value to the business through teams and leaders who are committed to outstanding performance. We know, however, that this is not a short term job. We therefore continuously invest in the development of our professionals, in attracting talent and in the quality of life of employees and their families. People management To keep people motivated, the Gerdau Group challenges its employees to surpass limits and become the leaders of change. The goals are established by teams and managers together, reinforcing the spirit of team work and the feeling that each individual is responsible for results (see box Participative management ). Outstanding performance is recognized and rewarded through various compensation programs based on results. Another important tool used to increase motivation is internal communication, which encourages the involvement of people in the Group s challenges and the feeling of belonging to the organization. These practices favor the construction of a long-term bond based on mutual respect. Attracting talent The Gerdau Group works continuously to develop future leaders and attract talents from the market. The emphasis on developing leaders is reflected in its program for interns and trainees. Over 1,200 youth work side-by-side with experienced professionals absorbing new knowledge and quickly becoming prepared to take on new responsibilities.

49 46 47 People and teams The Group also searches for developed professionals that can contribute immediately to the business. Another important program is strategic recruiting, which Gerdau uses to seek senior level professionals to fill strategic positions. Distribution by Region - 24,148 Employees BRAZIL Training and development The Gerdau Group has a specific leadership program that is designed to improve the efficiency of team management and achieve world-class performance. One of the subjects addressed is coaching, which develops each team s potential to achieve superior results. CANADA AND THE UNITED STATES ARGENTINA, CHILE AND URUGUAY 3.7% 29.8% 66.5% The Group also offers full scholarships for MBA and MS programs at the world s top educational institutions. Another way of expanding the global vision of its employees is through intellectual and cultural exchange within Group operations. This program fosters the Gerdau culture and Participative management The Gerdau Group has developed programs to encourage self-management among employees for nearly 10 years. Through the Operator-Focused Management Program, the professionals themselves are responsible for the performance of their cells (teams organized by process in the industrial operation). The program gives operators greater autonomy and also reduces hierarchical levels, while increasing the transparency of communication. Cell management is shared with operators. As part of an annual rotation process, they take on the control of processes such as safety, maintenance, environment and costs in addition to the continued exercise of their normal daily activities. In Brazil, approximately 30% of the industrial unit employees perform this type of role. In this way, the leaders can more effectively perform their important function of managing and developing teams. By receiving more information and participating in the management of their cell, operators are encouraged to suggest improvements. This process is happening in all Gerdau units. These are simple proposals that reduce costs. Take the example of Gerdau Riograndense (state of Rio Grande do Sul). Based on the suggestion of an employee, the unit was able to reduce the use of a raw material and achieve an annual saving of R$ 100,000. With participative management, the teams become more autonomous, responsible, proactive and knowledgeable of the processes. The results are reflected in the Gerdau Group performance and in the satisfaction of employees, who are able to manage their own professional success. GERDAU CEARENSE (STATE OF CEARÁ) EMPLOYEES PARTICIPATE IN THE SELF-MANAGEMENT PROGRAM

50 Workplace Safety (total frequency rate*) * Accident frequency rates with time loss per million man hours worked (includes employees and service providers). the best practices adopted at the different units (see box A bridge between the Americas ). Each year, Gerdau Group employees undertake missions to learn management practices by visiting different units. In addition, more than 40 professionals work outside their country of origin. Total workplace safety For the Gerdau Group, no emergency situation, production requirement or result can justify safety risks for our employees or service providers. It is for this reason that the Total Safety System exists. It involves a strict set of practices that are currently shared by all units and it operates on three major fronts: 1. Development of the Zero Accident culture by engaging the leadership and involving all professionals. This work is performed through continuous awareness raising, training and team involvement. 2. Use of safety management methodologies to benchmark against international standards: The methodology is based on the structuring of a system that guarantees the safety of people through preventive actions. Dozens of practices are evaluated using this system, ranging from leadership and administration to critical task analysis and procedures, preparation for emergencies, individual protection equipment, health control, industrial hygiene and even off job safety. A bridge between the Americas The Gerdau Group constructed bridges of knowledge connecting the employees of its units in the Americas. Each year, different groups of professionals exchange experiences with colleagues from other countries, seeking to learn about new cultures, improve management practices and achieve increased operational results. It is an opportunity to learn about the Gerdau Management System and its practical application. It also works as an internal benchmarking method, since the group visits help facilitate dialogue between employees, who learn to speak the same management language and adopt similar practices. These employees, in turn, share information within their own units (the multiplier effect). The exchange is an opportunity to internationalize professionals, who are able to have contact with the different cultures and practices adopted by their colleagues in other countries. U.S. EMPLOYEES VISIT A UNIT IN BRAZIL

51 48 49 People and teams 3. Investment in new protection materials and industrial equipment in addition to the modernization of existing equipment. All of this work is audited periodically by an external consulting firm and internal teams. Both evaluate the strong points and areas for improvement in the system, and each unit elaborates action plans, thereby promoting the continuous improvement of safety practices. Benefits The Gerdau Group benefits program is designed to contribute to the quality of life of employees and their families. It is adjusted based on the local markets, laws and business operations. Career management and succession The Gerdau Group encourages the professional growth of employees in the organization, preparing them to occupy strategic positions by means of development programs. Individual development plans are designed together with the professionals, with goals and the evaluation of results to help employees achieve their professional aspirations and meet operational demands. We take pride Pride to work for the Gerdau Group. This is the feeling that inspires the majority of employees from all units. The 370 professionals that work in Chile for Gerdau AZA are among the most satisfied to work for the Group. The perception was confirmed by an opinion poll performed in Over 92% of all employees said they were happy to be working at the unit. The favorability index, which counts the number of positive results in relation to the total number of poll questions, was also impressive: 79.7%. The rate is the highest among all operations in the Americas. In the poll, employees emphasized factors such as safety, work stability and good relations with the leadership and other colleagues, in addition to the availability of training. AN EMPLOYEE S CHILD VISITS GERDAU AZA IN CHILE

52 Organizational climate Each year, the Gerdau Group performs an opinion poll with employees to evaluate whether people management practices are meeting the expectations of professionals and generating the desired results. In 2004, over 85.5% of the professionals in the Americas participated in the poll, and 79.9% stated that they were happy to be working for the Gerdau Group (see box Staff EMPLOYEES 24,148 20,160 OUTSOURCING 9,468 8,852 TRAINEES AND INTERNS 1, DEPENDENTS 41,259 36,517 NUMBER OF WOMEN WHO WORK AT THE COMPANY 1,657 N.A. 1 % OF LEADERSHIP POSITIONS OCCUPIED BY WOMEN 10.9 N.A. 1 % OF EMPLOYEES OVER 45 YEARS OLD AVERAGE TIME WITH THE COMPANY (IN YEARS) Training and development INVESTMENTS (MILLION R$) TOTAL NUMBER OF TRAINING HOURS (MILLION) N.A. 1 NUMBER OF TRAINING HOURS PER EMPLOYEE 2 89 N.A. 1 Workplace safety INVESTMENTS (MILLION R$) Benefits MEALS (MILLION R$) TRANSPORTATION (MILLION R$) PROFIT SHARING (MILLION R$) HEALTH (MILLION R$) PRIVATE PENSIONS (MILLION R$) Not available 2. Does not include Gerdau Ameristeel data

53 50 51 c o m m u n i t y JUNIOR ACHIEVEMENT PARTICIPANTS: AN INTERNATIONAL PROJECT SUPPORTED BY THE GERDAU GROUP THAT TEACHES ENTREPRENEURIAL PRACTICES TO MORE THAN 4 MILLION YOUTH AROUND THE WORLD Community Building a more just world The sustainability of the Gerdau Group is not only found in its business management, the efficiency of its employees and in the protection of the environment but it also extends beyond the walls of its facilities, because business success is directly linked to the development of communities. It is for this reason that the Gerdau Group supports social initiatives in all the countries where it operates. They are projects that primarily encourage the dissemination of knowledge, maximizing the ability of people to transform and generating an environment of growth near the Gerdau Group facilities. This focus on social action translates into more than 100 programs supported by the Gerdau Group. In 2004, these programs involved R$ 36.5 million in resources and benefited more than 6.5 million people in the Americas. Since 2005, the management of these initiatives was handed over to a dedicated structure: the Gerdau Institute. The Gerdau Institute was created to consolidate the Group s policies and guidelines in the area of social responsibility and coordinate projects that contribute even further to improving quality of life. It also seeks to engage and encourage partnerships with other public and private organizations in an effort to optimize resources and multiply the results of social actions. The institute promotes volunteer work among its employees, encouraging their commitment to solving society s challenges. The Gerdau Group also makes investments to ensure that the projects become self-sustainable, both from a financial point of view and in terms of management capacity. This requires satisfied people with a good quality of life both inside and outside the company.

54 Social highlights Some activities developed in 2004 A fund for social action In Brazil, an initiative of the Gerdau Group has served as a model for other companies, entities and governments: the Gerdau Professionals Pro-Childhood Fund, a project that raises the awareness of employees about donating resources to charitable entities, focused on assisting underprivileged youth. Created five years ago, the fund raises resources through tax-deductible donations. Employees use an Intranet system to select how much they want to contribute and to which project. Last year alone, the fund received over R$ 4.6 million in donations, with contributions from both the Group and its employees. The funds were used to directly assist approximately 19,000 children and adolescents from 101 Brazilian entities located in 34 cities. The Pro-Childhood Movement was one of them. It is a non-profit organization that uses art and education to promote the inclusion of 810 needy boys and girls from the Metropolitan Region of Recife (state of Pernambuco). THE GERDAU PROFESSIONALS PRO-CHILDHOOD FUND CONTRIBUTES TO THE SOCIAL INCLUSION OF BOYS AND GIRLS IN RECIFE (STATE OF PERNAMBUCO) The recipe that works The Prato Popular program brings meals and social engagement to needy communities in Brazil. At the end of 2003, the Gerdau Group started its first low-income restaurant in the State of Rio Grande do Sul near the Gerdau Riograndense mill. Since then, two other restaurants have been opened to the public, one in the city of Charqueadas (state of Rio Grande do Sul) and another in Maracanaú (Ceará). Some 3,500 people have access to the meals subsidized by the Group with the initiative. Besides a balanced meal, the communities assisted began to use the space as a community center that offers courses and lectures with themes of social interest (such as alcoholism and drugs) as well as hairdressing and dental hygiene sessions. THE PRATO POPULAR RESTAURANT ASSISTS SOME 3,500 PEOPLE IN BRAZIL

55 52 53 c o m m u n i t y Champions of the future Gerdau AZA is committed to the future of sports in Chile. To encourage the development of champions, the Group grants one scholarship each year to a talented athlete with low income. The candidates are chosen by a team comprised of athletes, specialized technicians and sports journalists. The selection criteria are technical skill, the level of the tournaments competed in, results obtained in competitions during the year, family income and school performance. Last year, 42 athletes competed for a scholarship of over R$ 20,000 to fund their training during the year. The resources are used to improve the quality of the athlete s training, meals, transportation and study. The award can be extended for one more year if the athlete is successful in his or her competitions. This was the case of the Judo fighter Erwin Guzmán Pino, who won the 2004 scholarship and will have it extended through JUDO FIGHTER ERWIN GUZMÁN PINO RECEIVES THE GERDAU AZA SCHOLARSHIP IN CHILE Holding hands with the community The social priority of Sipar, the rolling mill located in Argentina, is to work together with the institutions and population of Pérez, a city of 22,000 people. The Gerdau Group currently has a 38.2% equity investment in Sipar. Among the unit s community actions, we highlight its support for public service providers, such as the police and firefighters, and City Hall, in addition to the maintenance of a public square and cycle lane. The company also contributes to the development of local schools and charitable entities, such as the Red Cross, Liga de Ayuda contra el Cáncer (League in the Fight Against Cancer - Lalcec), Ilar, an institution created to rehabilitate people with special needs and Asociación Rosarina de Lucha contra la Poliomelitis (Association in the Fight Against Poliomyelitis - ARLPI). SIPAR, IN ARGENTINA, INTEGRATES EMPLOYEES, FAMILY MEMBERS AND THE COMMUNITY OF PÉREZ

56 From work to school Gerdau Laisa brings the philosophy of total quality to the schools of Uruguay. The 5S at School project promotes environmental management improvements at the six teaching institutions located near the mill. The efforts are focused on the fifth and sixth grade classes, with children between the ages of 10 and 11. In 2004, 540 boys and girls attended lectures on industry, quality and 5S. They received the booklets 5S at School and 5S in the Backpack and learned to put the organizational rules of this management tool to practice. Gerdau Laisa also contributes to improving the infrastructure of the schools involved, an activity that benefits 4,200 students. URUGUAYAN STUDENTS RECEIVE BACKPACKS FROM THE 5S AT SCHOOL PROGRAM PROMOTED BY GERDAU LAISA Children with wings NIÑOS CON ALAS BRINGS NEEDY CHILDREN FROM URUGUAY A NEW PERSPECTIVE ON LIFE Niños con Alas (Children with Wings) is a program that transforms the lives of low income children in Uruguay. The project is organized by a non-governmental organization with the same name that since 2001 has received the support of Gerdau Laisa, a mill located in the capital city of Montevideo. With the program, individuals and private companies sponsor children for a period of six years, offering them a brighter future. The sponsored children receive balanced meals and high quality education in a private teaching institution and participate in extracurricular activities such as foreign language classes and sports. In addition to receiving school materials and a uniform, they also receive a yearly tuition from Gerdau Laisa, which appoints an employee to follow the child s progress. This professional delivers the donations and also takes the sponsored child to see movies, plays, and have fun in amusement parks. The program helps rescue the citizenship of school-aged boys and girls, giving them the best development opportunities.

57 54 55 c o m m u n i t y House of hope The home of Maria Andrews and her five children is made of Gerdau Ameristeel material and the effort of Cartersville unit employees in the United States. The U.S. citizen is one of the individuals who received aid through the Habitat for Humanity program, which provides job opportunities and housing to families experiencing financial difficulties. Gerdau Ameristeel, in addition to construction tools and materials, provides volunteer work of nearly 50 employees who dedicated more than 1,000 hours of their free time to the project. Many of these individuals spent less time with their own families so that Maria Andrews and her children would have a home by Christmas, They were able to deliver a four-bedroom house at half the cost of a conventional project. The savings were possible through the use of materials donated by sponsors, such as Gerdau Ameristeel, and through the volunteer labor of the Cartersville steel mill employees. The North American units stand out for their community work. Last year alone, more than 2,000 Gerdau employees became involved in social initiatives in Canada and the United States. VOLUNTEER WORK ENGAGES GERDAU AMERISTEEL CARTERSVILLE EMPLOYEES IN THE UNITED STATES Running for life Gerdau Ameristeel employees in Cambridge, Canada, made running a doubly healthy habit. In addition to their own personal development, the employees are also fostering the health of the community. In Canada, various campaigns promote physical activities as fundraising events for hospitals and cancer prevention foundations. Roxane Beyette, quality control coordinator at the Gerdau Ameristeel Cambridge mill, participated in the Weekend to End Breast Cancer in September Besides walking 60 kilometers (about 37 miles), Beyette and her mother Kathy cultivated seasonings and made candies, which were sold before the walk at locally-held parties. Beyette earned Cdn$ 2,000 with the initiative. Bruno Manella, another Gerdau employee, was even more creative: he had his hair cut off in order to raise money for the campaign. He auctioned off the opportunity to cut his hair to his colleagues. With initiatives such as this one, more than 4,500 participants raised Cdn$ 14.7 million for the prevention and treatment of breast cancer. A team from the unit also participated in Run for the Cure, a different campaign. The event occurs at the same time in 40 different Canadian cities and benefits the Canadian Breast Cancer Foundation. ROXANE BEYETTE (TO THE RIGHT), QUALITY CONTROL COORDINATOR AT GERDAU AMERISTEEL CAMBRIDGE IN CANADA AND HER MOTHER KATHY WORKED HARD IN THE CAMPAIGN TO FIGHT BREAST CANCER

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59 The Environment Ecoefficient practices to protect the air, water and soil Environmental Management System Environmental Performance Raw materials Water Air Soil Energy Biodiversity Education for the Environment

60 Environmental Management System Gerdau units follow world-recognized standards Protect the environment with future generations in mind. This is a daily concern for the Gerdau Group, which produces thousands of metric tons of steel per year with a commitment to reducing the environmental impact of its operations. It is also expressed in its environmental policy, elaborated based on the international ISO standard and enforced by its 24,000 employees. The environmental management system involves the analysis of over 13,000 industrial processes along the entire production line, from raw material collection to steel distribution. It translates the principles of the Gerdau Group into well-defined rules and objectives that enable the analysis of air, water and soil protection Distribution of Investment in the Environment by Geographic Region - US$ 25 million in 2004 BRAZIL 10.3% CANADA AND THE UNITED STATES CHILE AND URUGUAY 31.8% 57.9% Distribution of Investment in the Environment by Subject - US$ 25 million in 2004 AIR WATER SOIL ISO VARIOUS 2.5% 3.6% 20.2% 14.0% 59.7%

61 58 59 environmental management measures fundamental for the continued achievement of increased ecoefficiency rates. This monitoring gives the Group a detailed view of the impacts that each activity has on nature no matter how small and allows it to develop projects to improve the performance of the units. The environmental management system also directly engages employees by encouraging them to send suggestions via the Intranet, thereby increasing their commitment to the results obtained. Environmental Performance Technologies ensure outstanding performance Raw materials Reuse is currently one of the best ways of guaranteeing the sustainability of our planet. For the Gerdau Group, this is more than a principle because recycling is actually part of the business: approximately 65% of the production in the Americas requires iron scrap. The recycling effort is also present at the end of the industrial process 66.2% of the by-products generated are reused by other economic segments, reducing the use of natural resources. Water The Gerdau Group does its part to preserve water resources. Currently, 96.7% of processed water from its units is reused, drastically reducing the need for collection. This rate results from a set of important practices, especially recirculation. This process collects the industrial water and recycles it in the production process. This means that only 3.3% of the water used in steel production is collected from the rivers. This collection is necessary because approximately 1.8% of the water used evaporates and 1.5% returns to the rivers after being treated inside the mills. Another initiative involves the capture of rain water through rainwater collection systems that are currently being modernized or expanded. SYSTEMS FOR PROCESS WATER TREATMENT AND RECIRCULATION ARE PRESENT IN ALL GERDAU STEEL MILLS By-product Disposal 3.8 million metric tons REUSED BY-PRODUCTS MILLION NON RE-USED BY-PRODUCTS MILLION 33.8% 66.2% 1. Secondary products of the industrial process reused or recycled either internally or externally. 2. Secondary products of the industrial process stored in deposits specifically designed for this purpose.

62 In 2004, the Gerdau Group invested US$ 3.5 million in actions designed to preserve water resources. Water Consumption billion m 3 CAPTURED WATER 3.3% RECIRCULATED WATER 96.7% Air Maintaining air quality is a Gerdau Group priority. In 2004, it was the area that most received investments (US$ 14.9 million), ranging from the technological upgrading of dust filtration systems to improvements in the melt shop furnaces, also designed to improve air quality. The dust removal systems are technologies developed to efficiently capture the solid particles emitted during the steel production process and are based on world-recognized best practices. Another measure is the use of natural gas as a substitute for oil in heating processes. This effort is in line with the Kyoto Protocol as it reduces greenhouse gas emissions. The Group s carbonic gas emission rate per metric ton of steel produced was 550 kilograms, as determined by the IPCC Guidelines for National Greenhouse Gas Inventories, a world reference for the indicator. The number represents the average consolidated emission rate of the Gerdau Group including market and integrated mills. That means that the Group s average is much lower than the worldwide average of 1.6 tons for the sector, according to 2003 data supplied by the International Iron and Steel Institute (IISI). Soil Care for the soil is also a concern for the Gerdau Group, involving continuous investments in improving storage conditions that translate into increasingly safer practices for raw material, product and by-product stocking.

63 60 61 environmental performance Energy The steelmaking sector is known for its intensive use of energy. For this reason, the management of this resource is a permanent concern. Although the Group s total energy consumption has grown, the specific consumption necessary for the production of steel fell, showing increased efficiency in the use of this input. Energy Consumption Electricity Consumption (million MWh) OXYGEN (in Nm 3 ) 794,654,254 NATURAL GAS (in Nm 3 ) 662,312,728 DIESEL FUEL (in l) 6,246,022 LUBRICANTS AND GREASES (kg) 1 2,656, Does not include data from Gerdau Ameristeel and Gerdau AZA Biodiversity The maintenance of green belts around the steel mills represents a commitment to nature and to the quality of life of the community. The Gerdau Group dedicates 8,000 hectares of its total area of 16,900 hectares for the preservation of green areas. Of this total, 5,500 hectares are set apart for the preservation of native forest to protect the local ecosystems Specific Consumption of Electricity (KWh per metric ton of steel produced) Chilean students receive the recycling scrap! guide The first school guide on scrap recycling was published in Chile in 2004 by Gerdau AZA together with the nongovernmental organization Casa de la Paz (House for Peace). The material is directed at elementary and high school teachers and is designed to promote the inclusion of the topic into different curriculum subjects. In addition to information about the steelmaking sector, in which scrap is a major raw material, the guide proposes a series of activities to be developed in the classroom: teachers and students can have a hands-on experience about the importance of scrap recycling for the preservation of the environment. What s more, Gerdau AZA sets an example by producing 100% of its steel from scrap. The 1,500 copies of the guide s first edition were given out in less than three months. The material was distributed at various schools in the Metropolitan Region of Santiago and forwarded to the National Environmental Commission and environmental organizations. The next edition is currently being prepared for distribution in BOOKLET TEACHES ELEMENTARY AND HIGH SCHOOL STUDENTS IN CHILE ABOUT RECYCLING

64 Education for the Environment Encouraging ecological awareness Care with the water, air, soil and green areas depends on the awareness of employees and the community. This is why environmental education actions are fundamental for preserving natural resources and have been receiving increasing attention. In 2004, more than 50,000 people, including employees, service providers and community members participated in events such as lectures and courses designed to encourage the preservation of nature. The Group increased the number of employee training hours in the environment more than eight fold in relation to the previous year. For the external public, the Group increased the number of training hours by 26.1%. In all, Gerdau Group professionals and the community had over 300,000 hours of training in ways to preserve the environment. Promoting awareness on environmental issues is also a way of encouraging the sustainable development of the regions where the Gerdau Group has units and establishing a commitment with customers, shareholders, suppliers and the community Hours of Environmental Training - Employees (thousand hours) Hours of Environmental Training - Community (thousand hours)

65 62 63 education FOR THE environment ISO mobilizes employees The Gerdau Group has a priority goal in environmental management: to obtain the ISO certification for its 26 steel mills. The mission involves employees from various units in the Americas. Gerdau AZA in Chile and Gerdau Ameristeel Cambridge in Canada already have been awarded this recognition of good environmental practices. In Brazil, Gerdau Açominas Ouro Branco (state of Minas Gerais), Gerdau Cosigua (Rio de Janeiro) and Gerdau Aços Especiais Piratini (Rio Grande do Sul) have obtained the certification. These three units account for more than 60% of the Group s capacity in the country. The ISO standard was created to help companies identify, prioritize and manage environmental risks as part of their daily practices. To obtain this recognition, the Gerdau Group implemented the Campaign for ISO Certification in Brazil to encourage employees, service providers and partner companies from the units to improve their environmental management practices. COUNTER-CLOCKWISE: OBTAINING THE CERTIFICATION IS A SOURCE OF PRIDE FOR EMPLOYEES FROM GERDAU COSIGUA (STATE OF RIO DE JANEIRO), GERDAU AÇOMINAS OURO BRANCO (MINAS GERAIS) AND GERDAU AÇOS ESPECIAIS PIRATINI (RIO GRANDE DO SUL)

66 Steel Production Find out how steel is produced at Gerdau facilities Integrated Mills Iron Ore Blast Furnace Converter Ladle Market Mills Steel Scrap Electric Arc Furnace Ladle Furnace Pig Iron Nail Machine Drawn Wire Drawing Unit Welding Manufacturing Process Galvanizing Unit Nails Welding Wires and Wires for Electrodes Barbed Wire Oval-Shaped Wire Galvanized Wire CA-60 Rebar Annealed Wire

67 64 65 steel production Raw Material Melt Shop Rolling Drawing Nail Factory Gerdau Products Ladle Billets Reheating Furnace Continuous Caster Wire Rod Laying Head Finishing Unit Rolling Mill Cooling Bed Ribbed Reinforcing Mesh Structural Profiles Bars and GG 50 Profiles Rebar

68 Timeline More than 100 years of history German immigrant João Gerdau and his son Hugo found the first Gerdau Group unit, the Pontas de Paris Nail Factory in the city of Porto Alegre in the state of Rio Grande do Sul. Curt Johannpeter, Hugo s son-in-law, leads Gerdau through a decisive stage in the expansion of the company s business. In 1947, Gerdau becomes a limited liability company listed on the Porto Alegre Stock Exchange. The Group develops its culture of social responsibility, creating the Gerdau Foundation with programs in the areas of health, education, housing and social assistance for employees and their family members. Gerdau heads toward the northeastern region of Brazil, initiating steel production in the state of Pernambuco with the Açonorte mill The business started by João Gerdau is divided into two independent companies: Hugo directs the Pontas de Paris Nail Factory and his brother, Walter, takes charge of the furniture manufacturing business, Móveis Gerdau, also located in Porto Alegre. Later on, in 1930, the two brothers take part in the creation of the Manufacturing Industry Center of Rio Grande do Sul (CINFA), which later becomes the Federation of Industries of Rio Grande do Sul (FIERGS). The Gerdau Group enters the steelmaking business with the Group s Riograndense steel mill in Porto Alegre. The Riograndense mill pioneers the technological concept of the market mill, employing scrap metal as raw material and focusing operations on regional marketing and sales, and more competitive operating costs. The company s expansion route reaches the southeastern region of Brazil with the acquisition of the São Judas Tadeu wire factory, a nail and wire manufacturer in the state of São Paulo. Construction of the Cosigua mill begins in the city of Rio de Janeiro as part of a joint venture with the German group August Thyssen Huette. This is also the year in which the Gerdau Group enters the steel distribution business with the first Comercial Gerdau store in São Paulo.

69 66 67 t i m e l i n e The Gerdau Group s process of internationalization begins with the acquisition of the Laisa steel mill in Uruguay. The Group acquires control of the AZA steel mill in Chile, currently Gerdau AZA. The Group launches the GG 50 rebar, the first in the country to bear a brand name and a guarantee of quality. Gerdau starts to produce steel in the United States with the acquisition of Ameristeel. In the same year, the shares of Gerdau S.A., one of the Group s public companies in Brazil, are listed on the New York Stock Exchange (NYSE). The Group merges its North American operations with Co-Steel. The move results in the creation of Gerdau Ameristeel, with 11 steel mills and 29 steel service facilities International growth advances into North America with the acquisition of Courtice Steel, currently Gerdau Ameristeel Cambridge, located in the province of Ontario (Canada). In 1995, Gerdau strengthens its position in Canada by acquiring a second industrial plant, MRM Steel, in the province of Manitoba. In Argentina, Gerdau becomes a shareholder of the Sipar Aceros S.A. rolling mill. The Gerdau Group completes 100 years of activity, reaching the 8.4 million metric ton mark for steel production capacity and R$ 551 million in net income. Year of expansion in the Americas. The highlight in Brazil is the construction of two new mills and the expansion of the Ouro Branco unit, in the state of Minas Gerais. In Colombia, it becomes a shareholder of the Diaco and Del Pacífico mills. In North America, Gerdau acquires the assets of North Star Steel. Gerdau Ameristeel shares are listed on the NYSE.

70 Glossary Definitions for technical terms employed in the report A ADRs ADRs, or American Depositary Receipts, are securities issued in the U.S. capital market to represent shares of non-u.s. companies. These securities were created to give foreign companies access to the North American capital market. Amortization Accounting procedure by which the original cost value of an asset with limited life or of an intangible asset is gradually written off as expense, reducing the value of the asset. In the case of fixed assets, the term used is depreciation and for goods such as natural resources, exhaustion. Assets Any goods with commercial or exchange value belonging to a society, institution or individual. B Bars and profiles Product category encompassing shapes used to manufacture diverse products such as agricultural machinery and equipment, furniture, steel grating, etc. Benchmark Standard of excellence. Billet Steel section (usually square) resulting from continuous casting or rolling of larger sections. Used as material for the production of long steel products. Blast furnace A large steel stack lined with refractory brick used in integrated steel mills to produce pig iron. By-product Desirable or undesirable secondary product of the industrial process. C Coke A raw material used in the blast furnace to produce pig iron. Coke is produced from charcoal through a process known as coking. Coking removes the volatile components of charcoal. Common share Security representing the smallest portion of capital stock in a corporation, providing voting rights. Continuous casting Process during which liquid steel is solidified. Steel may be cast into various shapes and gauges to produce billets, slabs or blooms. Controlling block Ownership by a shareholder or group of shareholders of the largest portion of shares with voting rights in a company, which entails the power of decision-making. Corporate governance System by which corporations are managed and supervised, involving the relationship between shareholders/quota holders, board of directors, executive board, independent auditors and fiscal council. Good corporate governance practices are aimed at increasing the value of a company s shares, facilitating the access of companies to capital resources and contributing to their continuity (Brazilian Institute for Corporate Governance definition). D Dividend Amount distributed to shareholders in cash for each share. Drawing Cold process by which wire rod is transformed into wire. Dust removal A highly efficient system for filtering the tiny solid particles resulting from steelmaking. E EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization. It is calculated as gross profit minus sales, general and administrative expenses, depreciation and amortization. Ecoefficiency Capacity to carry out processes with the least negative impact on the environment. Electric arc furnace Furnace used to manufacture steel primarily from steel scrap. Employs electricity through an electric arc to melt raw materials. Equity pickup Realization of equity changes in a controlled or subsidiary company in the results of the parent company. Euro commercial paper Short or medium term securities that are issued by companies in international financial markets. F Flat rolled steel Product category including products such as plates and strips. Flat steel is used in the exterior of cars, home appliances, etc. G Galvanized steel Steel coated with a thin layer of zinc that provides resistance against corrosion for use in applications exposed to the environment, such as automotive parts, cans and fencing. GGB Ticker symbol for Gerdau S.A. ADRs on the New York Stock Exchange. GGBR4 Ticker symbol for Gerdau S.A. preferred shares on the São Paulo Stock Exchange. GNA Ticker symbol for Gerdau Ameristeel shares on the New York Stock Exchange. GOAU4 Symbol for Metalúrgica Gerdau S.A. preferred shares on the São Paulo Stock Exchange. Gross debt Amount referring to bank loans plus issued debentures. Gross margin Equivalent to gross income divided by net sales revenues. Gross margin is expressed as a percentage representing the amounts of net sales revenues that produced gross income. Gross revenues Total sales before cost of materials and services. I Indebtedness Composition of long and short term debt resulting from loans and debentures. Integrated mill A mill employing iron ore to manufacture steel. It is usually comprised of a pellet mill and coking unit, a blast furnace, melt shop and rolling mill. L Ladle furnace Furnace that receives the liquid steel produced at the electric arc furnace for chemical refining. Level 1 Corporate Governance, Bovespa Set of conduct rules for companies, managers and controlling shareholders, which contribute to the appreciation of shares and other assets issued by a company. Level 1 Companies are committed to improving disclosure to the market and shareholding dispersion.

71 68 69 G L O S S a r y Liquidity Ability of an asset to be converted into cash quickly. Long steel Steel product in which one dimension (length) is predominant. Includes bars, profiles, wire rod, rebar, structural shapes and wires. The line of long steel products is Gerdau s main product line. M Majority shareholder Individual or group holding a sufficient number of voting shares to control a company. Market mills Steel mills focused on purchasing raw material and selling their production in the same region in which they are installed. Melt shop In a steel mill, the location where steel is actually produced. Minority shareholder Individual or group holding a number of shares that is not sufficient to control the company. N Net debt Gross debt minus cash and financial applications. Net income Profit after taxes and minority participations. Net margin Equivalent to net income divided by net sales revenues. Net margin is expressed as a percentage representing the amounts of net sales revenues that produced net income. Net sales revenue Gross revenues minus sales taxes, freight and discounts. O Oxy-cutting Cutting method for metallic parts. It is used to cut scrap and billets or slabs in the continuous casting process. P Pellet Small iron ore body, usually spherical, used as input in the blast furnace. Pig iron Produced in the blast furnace, pig iron results from the chemical reduction of iron ore with charcoal or coke. Preferred share Security representing the smallest portion of capital stock in a corporation, providing privileges in terms of dividend distribution and reimbursement of capital in case of dissolution. In general, preferred stock holders do not have voting rights. Productivity Ratio between what is produced and the necessary resources for production. In the steel industry, one of the most widely used productivity indicators is ton/man/year (t/m/y). Publicly traded company Company whose shares are registered with the Securities and Exchange Commission, distributed among a certain number of shareholders and negotiable in stock exchanges or over-the-counter market. R Rebar A steel rod with ridges for use in reinforced concrete. Receivables Accounts receivable less bad debts. Recycling Process through which iron scrap is re-used to produce steel. Ribbed reinforcing mesh Grid frame made of ribbed rebar used in the construction of concrete slabs. ROE Return on Equity. ROE is the ratio between net income and net equity. It reflects shareholder return on investment. Rolled product Product resulting from the rolling process, in which raw material is successively compressed until acquiring the desired shape and dimensions. Rolling Cold or hot mechanical process that changes the cross-sectional dimensions or shape of steel produced in the melt shop. Rolling block Rolling equipment, including a set of cages assembled as a single structure, used in the high-speed production of high quality wire rod. S Sarbanes-Oxley A law enacted by the U.S. Congress to protect investors from accounting fraud in corporations. The rules and regulations of the Sarbanes-Oxley Act amend and supplement the preexisting laws ruling publicly traded companies. Scrap Iron material that is reprocessed for steel production. Shareholders equity Shareholders net worth capital invested in a company. Slab A steel product that serves as the basis for the production of plates and strips. Specialty long steel Long steel produced with specific physical characteristics required for special applications, such as in the automotive, oil, tools and machinery industries. Steel An iron alloy with carbon content not more than 1.5%, which may also contain other elements that alter the physical properties. Stock bonus Shares of stock given to current shareholders in addition to dividends. May also be a security that entitles to the subscription of new shares issued by a company within the limit of capital increase authorized in the by-laws. Structural shapes Category of steel product including I and H beams and wide flange beams. Used in buildings, industrial installations, bridge reinforcements, etc. Sustainability Sustainability (or sustainable development) is the balance between economic, environmental and social aspects to avoid compromising the future growth of a company. T Total quality Management methodology in which quality is viewed as synonymous with the satisfaction of a company s stakeholders: customers, employees, shareholders, suppliers and the community. W Wire rod Round steel product obtained from the rolling process. Wire rod is usually drawn and used in the production of wire, screws and nails.

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73 2004 Financial Statements Detailed information on financial performance Metalúrgica Gerdau S.A. Gerdau S.A. Gerdau Açominas S.A

74 Metalúrgica Gerdau S.A. Balance Sheet at December 31 (In thousands of reais) Assets Company Current Assets Cash and cash equivalents... note 5 95,800 25,186 2,003,945 1,015,726 Trade accounts receivable... note ,564,192 1,561,083 Inventories... note ,236,642 2,336,598 Tax credits... note 8 11,247 16, , ,810 Deferred income tax and social contribution on net income... note , ,106 Dividends receivable ,508 62, Other accounts receivable... 3,801 4, , ,504 Total current assets , ,480 9,653,492 5,432,827 Long-term Receivables Related parties... note 21-3,390 1,231 30,509 Eletrobrás loans ,584 10,584 Deposit for future investment in subsidiaries... note ,158 - Deferred income tax and social contribution on net income... note 9 9,702 10, , ,105 Compulsory deposits and other... note 10 2,817 3, , ,287 Total long-term receivables... 12,891 18,145 1,063,086 1,081,485 Permanent Assets Investments... note 11 3,018,021 2,029, , ,224 Fixed assets... note 12 1,593 1,738 7,928,973 7,380,838 Deferred charges... note ,858 20,467 Total permanent assets... 3,019,614 2,031,217 8,075,378 7,864,529 Total assets... 3,263,861 2,156,842 18,791,956 14,378,841 The accompanying notes are an integral part of these financial statements.

75 72 73 METALÚRGICA GERDAU S.A. Liabilities and Shareholder s Equity Company Current Liabilities Trade accounts payable ,921,424 1,191,065 Financing... note ,027,865 2,461,299 Debentures... note ,986 3,651 Taxes and contributions payable... note 18 2,247 3, , ,442 Related parties... note Deferred income tax and social contribution on net income... note ,166 35,721 Salaries payable... 4,218 7, , ,289 Dividends payable... note ,374 73, , ,722 Other accounts payable... 10,630 9, , ,854 Total current liabilities ,798 94,090 5,345,258 4,424,043 Long-term Liabilities Financing... note ,490,374 3,396,085 Debentures... note , ,956 Provision for contingencies... note , , ,015 Deferred income tax and social contribution on net income... note 9 85,540 44, , ,263 Post-employment benefits... note , ,870 Other accounts payable... 40,825 44, , ,689 Total long-term liabilities ,029 90,656 5,591,103 5,117,878 Minority Interest ,894,561 2,864,824 Shareholders Equity Capital... note 23 1,664,000 1,280,000 1,664,000 1,280,000 Capital reserves... 10,842 10,659 10,842 10,659 Revenue reserves... 1,285, ,877 1,285, ,877 Retained earnings Total shareholders equity... 2,961,034 1,972,096 2,961,034 1,972,096 Shareholders Equity Including Minority Interest ,855,595 4,836,920 Total liabilities and shareholders equity... 3,263,861 2,156,842 18,791,956 14,378,841 The accompanying notes are an integral part of these financial statements.

76 Statement of Income Years Ended December 31 (In thousands of reais) Company GROSS SALES REVENUES... note ,407,573 15,782,967 Taxes on sales (2,456,568) (1,427,585) Freight and discounts (1,353,743) (988,421) Net Sales Revenues ,597,262 13,366,961 COST OF SALES AND/OR SERVICES RENDERED (13,352,238) (10,076,740) GROSS PROFIT ,245,024 3,290,221 SELLING EXPENSES (455,175) (448,131) FINANCIAL INCOME... note 17 10,239 11, ,261 86,754 FINANCIAL EXPENSES... note 17 (6,852) (5,616) (397,642) (708,130) GENERAL AND ADMINISTRATIVE EXPENSES Management fees... (3,168) (2,957) (50,654) (35,256) General expenses... (28,891) (27,036) (1,000,299) (769,245) EQUITY IN THE EARNINGS (LOSSES) OF SUBSIDIARIES AND ASSOCIATED COMPANIES... note 11 1,342, ,001 (344,628) (281,240) OTHER OPERATING INCOME (EXPENSES), NET ,043 17,208 Operating Profit... 1,314, ,659 4,436,930 1,152,181 NON-OPERATING INCOME (EXPENSES), NET ,953 1, ,102 (6,162) Profit Before Taxes and Profit Sharing... 1,485, ,104 4,581,032 1,146,019 PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION ON NET INCOME... note 9 Current... (2,624) (3,305) (957,000) (314,614) Deferred... (42,352) (6,663) (238,405) 454,470 MANAGEMENT PROFIT SHARING... note 24a (3,168) (2,957) (44,530) (29,001) Net Income Before Minority Interest... 1,437, ,179 3,341,097 1,256,874 MINORITY INTEREST... (1,904,022) (681,695) NET INCOME FOR THE YEAR... 1,437, ,179 Net income per share - R$ Net equity per share - R$ The accompanying notes are an integral part of these financial statements.

77 74 75 METALÚRGICA GERDAU S.A. Statement of Changes in Financial Position Years Ended December 31 (In thousands of reais) Company Financial Resources Were Provided By Operations: Net income for the year... 1,437, ,179 3,341,097 1,256,874 Expenses (income) not affecting working capital Depreciation and amortization , ,045 Cost of permanent asset disposals... 79,158 8, ,815 42,201 Equity in the (earnings) losses of subsidiaries and associated companies... note 11 (1,342,842) (610,001) 344, ,240 Gain on sale of shares by subsidiary... note 11 (125,969) Foreign exchange effects on working capital of foreign companies (86,946) (120,202) Monetary variations on long-term debt... 3,707 4,653 (131,822) (11,085) Third parties: Monetary variations on long-term receivables (526) (5,107) From operations... 51,274 (21,249) 4,594,065 2,048,966 Capital increase ,181 - Treasury shares... note 23 (14,441) (7,049) (41,477) (24,152) Increase (decrease) in long-term liabilities... 32,666 (2,334) 768, ,463 Contributions to capital reserves ,246 66,302 Working capital of consolidated companies ,198 Working capital - purchase of assets ,446 - Dividends not included in income for the year , , Total funds provided , ,011 6,499,506 2,820,236 Financial Resources Were Used for Investments... 3,214 5,119 41,619 80,402 Purchase of assets ,457 - Fixed assets ,262, ,462 Deferred charges ,654 7,246 Increase (decrease) in long-term receivables... (5,254) 576 (13,500) 518,612 Dividends/interest on equity... note , , , ,015 Total funds used , ,795 3,200,056 1,803,737 Changes in Working Capital... 42,168 (34,784) 3,299,450 1,016,499 Working capital... At the beginning of the year... 13,390 48,174 1,008,784 (7,715) At the end of the year... 55,558 13,390 4,308,234 1,008,784 Changes in Working Capital... 42,168 (34,784) 3,299,450 1,016,499 The accompanying notes are an integral part of these financial statements.

78 Statement of Changes in Shareholders Equity (In thousands of reais) Capital reserves Revenue reserves Premium Investments Total on issue and working Retained shareholders Capital of shares Other Total Legal capital Total earnings equity At December 31, ,000 8,686 1,973 10,659 79, , , ,576,066 Net income for the year , ,179 Capital increase through capitalization of reserve note , (640,000) (640,000) - - Treasury shares note (7,049) (7,049) - (7,049) Distribution proposed for the Annual General Meeting Legal reserve note ,759-28,759 (28,759) - Reserve for investments and working capital , ,320 (374,320) - Dividends/interest on equity note (172,100) (172,100) At December 31, ,280,000 8,686 1,973 10, , , , ,972,096 Net income for the year ,437,075 1,437,075 Capital increase note , (384,000) (384,000) - - Investment incentives Treasury shares note (14,441) (14,441) - (14,441) Distribution proposed for the Annual General Meeting Legal reserve note ,855-71,855 (71,855) - Reserve for investments and working capital , ,341 (931,341) - Dividends/interest on equity note (433,879) (433,879) At December 31, ,664,000 8,686 2,156 10, ,795 1,105,837 1,285, ,961,034 The accompanying notes are an integral part of these financial statements.

79 76 77 METALÚRGICA GERDAU S.A. Statement of Cash Flows Years Ended December 31 (In thousands of reais) Company Net income for the year... 1,437, ,179 3,341,097 1,256,874 Equity in the (earnings) losses of subsidiaries and associated companies.. note 11 (1,342,842) (610,001) 344, ,240 Provision for credit risks ,647 20,618 Gain on disposal of fixed assets ,058 10,056 Gain (loss) on disposal of investments... (170,953) (1,445) (164,058) (1,556) Monetary and exchange variations... 5,198 5,563 (94,087) 136,349 Depreciation and amortization , ,045 Income tax and social contribution on net income... 47,393 8, ,551 (441,456) Interest on debt , ,308 Contingencies/judicial deposits... (940) 18 4, Changes in trade accounts receivable (720,363) (167,134) Changes in inventories (1,402,408) (207,267) Changes in trade accounts payable (27) 477, ,227 Other operating activity accounts... (33,737) 8,656 (100,288) 74,557 Net cash provided by (used in) operating activities... (57,825) (13,474) 3,387,391 2,348,423 Acquisition/disposal of fixed assets (1,173,491) (873,039) Increase in deferred charges (18,006) (7,246) Acquisition/disposal of investments ,144 5, ,905 (67,005) Purchase of assets (924,457) - Receipt of dividends/interest on equity , , Net cash provided by (used in) investing activities , ,205 (1,753,049) (947,290) Suppliers of fixed assets ,573 2,196 Working capital financing... (7,778) (7,015) (133,006) (334,804) Debentures... (586) (423) 85,305 (347,456) Permanent asset financing , ,989 Payment of permanent asset financing (677,357) (541,308) Payment of financing interest (379,801) (414,409) Loans with related parties... 2,839 (2,506) 35,944 (16,937) Capital increase/treasury shares... note 23 (14,441) (7,049) 451,704 (24,151) Payment of dividends/interest on equity and profit sharing... (358,623) (198,413) (853,710) (423,399) Net cash used in financing activities... (378,589) (215,406) (563,582) (1,645,279) Changes in cash and cash equivalents... 70,614 (38,675) 1,070,760 (244,146) Cash and cash equivalents At the beginning of the year... note 5 25,186 63,861 1,015,726 1,420,236 Restatement of opening balance (82,541) (173,736) Opening balance of consolidated companies for the year ,372 At the end of the year... note 5 95,800 25,186 2,003,945 1,015,726

80 Notes to the Financial Statements at December 31, 2004 and 2003 (All amounts in thousands of reais unless otherwise indicated) 1 - Operations Metalúrgica Gerdau S.A. is a holding company in the Gerdau Group, which is principally dedicated to the production of common and special steel and to the sale of general steel products (flat and long), in plants located in Brazil, Uruguay, Chile, Canada, Argentina and the United States of America. The Gerdau Group has an installed capacity of 16.4 million tons of crude steel per year, basically producing steel in electrical furnaces, from scrap and pig iron purchased, for the most part, in the region near each plant (mini-mill concept). Gerdau also operates plants which are capable of producing steel from iron ore (through blast furnaces and direct reduction) and has a unit used exclusively to produce special steels. It is the largest scrap recycling group in Latin America and is among the largest in the world. The industrial sector is the most important market, including manufacturers of consumer goods such as vehicles and household and commercial equipment that basically use profiled steel in various available specifications. The next most important market is the civil construction sector, which demands a high volume of rebars and wires for concrete. There are also numerous customers for nails, staples and wires, commonly used in the agribusiness sector. 2 - Presentation of the Financial Statements The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, which are based on the provisions of Brazilian Corporate Law, together with the rules established by the Brazilian Securities Commission (CVM). A statement of cash flows (company and consolidated), prepared under the indirect method, is being presented as supplementary information in order to provide additional information. 3 - Significant Accounting Practices a) Cash and cash equivalents - financial investments are recorded at cost plus income accrued up to the balance sheet date, applying the interest rates agreed with the financial institutions, and do not exceed market value; b) Trade accounts receivable - are stated at realizable values, and accounts receivable from foreign customers are adjusted based on the exchange rates effective at the balance sheet date. The provision for credit risks is calculated based on a credit risk analysis, which includes the history of losses, the individual situation of each customer and the economic group to which they belong, the collateral and guarantees and the legal advisors opinion, and is considered sufficient to cover eventual losses on realization; c) Inventories - are stated at the lower of market value and average production or purchase cost; d) Investments in subsidiary and associated companies - are recorded on the equity method of accounting. The equity in the earnings or loss is recorded in an income statement account; e) Fixed assets - are recorded at cost, net of depreciation. Depreciation is calculated on the straight-line basis, at the rates stated in Note 12, which take into consideration the estimated useful lives of the assets. Interest on financing obtained to finance construction in progress is added to the cost of the constructions; f) Deferred charges - amortization is calculated on the straight-line basis at rates determined based on the production of the implemented projects in relation to their installed capacities; g) Financing - are stated at the contract value plus the contracted charges, including interest and monetary or foreign exchange variations. Swap contracts, which are linked to the loan agreements, are classified together with the related loans; h) Income tax and social contribution on net income - current and deferred income tax and social contribution on net income are calculated in conformity with current legislation; i) Other current and long-term assets and liabilities - are recorded at their realizable amounts (assets) and at their known or estimated amounts plus accrued charges and indexation adjustments (liabilities), when applicable; j) Related parties - loan agreements between Brazilian companies are restated by the weighted average interest rate for market funding. The agreements with foreign companies are restated by charges (LIBOR plus 3% p.a.) plus foreign exchange variation. Sales and purchases of inputs and products are made under terms and conditions similar to those of unrelated third parties; k) Determination of the results of operations - the results of operations are determined on the accrual basis of accounting; l) Use of estimates - the preparation of financial statements requires estimates to record certain assets, liabilities and other transactions. The Company s financial statements therefore include various estimates related to the useful lives of fixed assets, provisions necessary for contingent liabilities, for income tax and other similar matters. Actual results may differ from those estimated; m) Environmental investments - expenses related to compliance with environmental regulations are considered as cost of production or capitalized when incurred; and n) Translation of foreign currency balances - asset and liability balances of transactions in foreign currency are translated to local currency (R$) at the foreign exchange rate in effect at the balance sheet date ( US$ 1.00 = R$ and US$ 1.00 = R$ ).

81 78 79 METALÚRGICA GERDAU S.A. 4 - Financial Statements a) The consolidated financial statements at December 31, 2004 include the accounts of Metalúrgica Gerdau S.A. and the directly or indirectly controlled subsidiaries listed below: Percentage Shareholders company ownership equity Gerdau S.A ,073,856 Gerdau Participações S.A ,887,726 Gerdau Açominas S.A ,766,046 Gerdau Ameristeel Corporation and subsidiaries* ,622,636 Gerdau Internacional Empreendimentos Ltda. - Grupo Gerdau ,785,282 Gerdau GTL Spain S.L ,761,750 Gerdau Steel Inc ,351,341 Axol S.A ,156 Gerdau Chile Inversiones Ltda ,126 Indústria Del Acero S.A. - Indac ,063 Gerdau Aza S.A ,401 Santa Felicidade Com. Imp. e Exp. de Produtos Siderúrgicos Ltda ,298 Seiva S.A. - Florestas e Indústrias ,143 Itaguaí Com. Imp. e Exp. Ltda ,964 Sipar Aceros S.A ,037 Margusa - Maranhão Gusa S.A ,714 Gerdau Laisa S.A ,897 Aramac S.A ,355 GTL Equity Investments Corp ,286 Banco Gerdau S.A ,618 Açominas Com. Imp. Exp. S.A. - Açotrading ,583 Florestal Rio Largo Ltda ,174 Aceros Cox Comercial S.A ,110 Gerdau Açominas Overseas Ltda ,914 Florestal Itacambira S.A ,650 Siderco S.A ,958 GTL Financial Corp ,931 GTL Trade Finance Inc Dona Francisca Energética S.A (16,350) *Subsidiaries: Gerdau Ameristeel MRM Special Sections Inc. (100%), Gerdau USA Inc. (100%), Ameristeel Bright Bar Inc. (100%), Gerdau Ameristeel US Inc. (100%), Gerdau Ameristeel Perth Amboy Inc. (100%), Gallatin Steel Company (50%) e Gerdau Ameristeel Sayreville Inc. (100%). b) The more significant accounting practices used in preparing the consolidated financial statements are as follows: I) Metalúrgica Gerdau S.A. and its subsidiaries adopt consistent practices to record their operations and value their assets and liabilities. The financial statements of foreign subsidiaries were translated using the exchange rate in effect at the balance sheet date and were adjusted to conform with accounting practices adopted in Brazil; II) Asset, liability and income statement balances arising from transactions between consolidated companies have been eliminated; and III) Holdings of minority shareholders in subsidiaries are shown separately. c) During the year, the following transactions occurred: I) On February 16, 2004, the subsidiary Gerdau Ameristeel Corporation signed a sale and purchase agreement for the acquisition of all assets of Potter Form & Tie Co., headquartered in Belvidere, Illinois, in the United States of America. The acquisition price was US$ 11 million, equivalent to R$ 31,995 on that date; II) On April 16, 2004, the subsidiary Gerdau S.A., through its indirect subsidiary Gerdau Steel Inc., acquired 26,800,000 shares of Gerdau Ameristeel Corporation through a capital increase of Cdn$ 131 million, equivalent to R$ 283,937 on that date. After this transaction, Gerdau S.A. held, indirectly, 72% of Gerdau Ameristeel Corporation;

82 III) The Extraordinary General Meeting of shareholders of the subsidiary Gerdau S.A. held on June 30, 2004 approved the merger of the subsidiary GTL Brasil Ltda., without the issue of new shares. The net assets transferred to Gerdau S.A. as a result of the merger, are as follows: Assets Current assets Long-term receivables... 8 Permanent assets Investments Seiva S.A. - Florestas e Indústrias... 17,883 Gerdau Açominas S.A ,257 (-) Negative goodwill - Gerdau Açominas S.A... (280,882) Total permanent assets... 70,258 Total assets... 70,800 Liabilities Current liabilities... 1,495 Long-term liabilities... 4,591 Total liabilities... 6,086 Total net assets... 64,714 IV) On October 15, 2004, the subsidiary Gerdau S.A. announced to the market that the indirect subsidiary Gerdau Ameristeel Corporation obtained the confirmation of its registration with the Canadian securities regulatory authorities for the public offer of 70 million common shares. Gerdau S.A., through its subsidiary Gerdau Steel Inc., acquired 35,000,000 and 4,381,000 common shares on October 20, 2004 and November 18, 2004, respectively, in the total amount of US$ 185 million, equivalent to R$ 528,787 on those dates. The transaction initially was a capital increase in Gerdau Steel Inc., through the issue of 817,969 common shares. Subsequently, on December 28, 2004, Gerdau S.A. paid up capital in Gerdau Internacional Empreendimentos Ltda. (the company that holds the investments abroad) through the transfer of 817,969 common shares of Gerdau Steel Inc. in the amount of R$ 499,430. Following this transaction, Metalúrgica Gerdau S.A. held, indirectly, 66.5% of Gerdau Ameristeel Corporation. V) On October 28, 2004, the subsidiary Gerdau S.A., through its indirect subsidiary Gerdau Ameristeel Corporation, announced the signature of a sale and purchase agreement for the acquisition of the assets of Gate City Steel Inc. and RJ Rebar Inc. (cutting and folding of rebars, with and without epoxy covering), headquartered in Indianapolis, Indiana, in the United States of America. The acquisition price was US$ 16 million (R$ 42,470 at December 31, 2004); VI) On October 29, 2004, the subsidiary Armafer Serviços de Construção Ltda. was merged by the subsidiary Gerdau Açominas S.A., and the net assets of R$ 44,744 were recorded, replacing the investment account, without capital increase. The objectives of the transaction were to reduce administrative expenses and improve operating synergy; VII) On November 1, 2004, the subsidiary Gerdau S.A., through its indirect subsidiary Gerdau Ameristeel Corporation, purchased the fixed assets and working capital of four mills producing long steel, three processing units of wire rods and one producer of steel grinding balls for the mining industry owned by North Star Steel, announced on September 9, The price paid for these assets was US$ 266 million (R$ 706,070 at December 31, 2004), in cash. Gerdau Ameristeel Corporation also paid an additional US$ 52 million (R$ 138,029 at December 31, 2004) as an adjustment in the purchase price due to fluctuations in working capital up to the transaction date; VIII) On December 23, 2004, the Gerdau Group reached an agreement with the Mayaguez Group and The Latinamerican Enterprise Steel Holding, majority shareholders of Diaco S.A., the largest Colombian producer of steel and rebars, and Siderúrgica del Pacífico S.A. - Sidelpa, the only producer of special steel in that country, for the scheduled acquisition of their holdings in these companies. Initially, US$ 69 million (R$ 182,158 at December 31, 2004) were invested, recorded as deposit for future investment in subsidiaries in long-term receivables. The Mayagüez Group, which will remain as a Diaco shareholder for a maximum eight-year period, formed a strategic partnership with the Gerdau Group for the development of the Colombian steel industry; and IX) On December 3, 2004, the Board of Directors of the subsidiary Gerdau S.A. authorized the company s management to implement corporate restructuring measures to obtain greater strategic advantages, as well as greater operating and management efficiency, arising from the specialization and location of the different business units and areas of the Gerdau Group. The efforts will be concentrated in the main activities, focused operations and gain of critical mass within each of the activity areas. Also, this restructuring will consider solutions for the Group s future growth. On December 29, 2004, the first act of this process was completed, with the capital increase of the holding company Gerdau Participações S.A. through the shares held in Gerdau Açominas S.A. and part of the quotas in Gerdau Internacional Empreendimentos Ltda.. held by Gerdau S.A., representing, respectively, 91.5% and 22.8% of those companies capital. The capital of Gerdau Participações S.A. was also increased by the direct and indirect investments held by Gerdau Internacional Empreendimentos Ltda. in Gerdau Chile Inversiones Ltda., Gerdau Laisa S.A. and Sipar Aceros S.A. The final corporate restructuring model has not yet been finished and will be implemented as the management proposals are approved by the Board of Directors. Accordingly, additional measures should be implemented during this year and they will be advised, as soon as they occur.

83 80 81 METALÚRGICA GERDAU S.A. d) The financial statements of the jointly-owned subsidiary Dona Francisca Energética S.A., and the jointly-owned indirect subsidiaries Gallatin Steel Company and Sipar Aceros S.A., were consolidated proportionally based on the direct or indirect interest of the parent company in the capital of these subsidiaries. The amounts of the financial statements of these companies are shown as follows: Dona Francisca Gallatin Sipar Aceros S.A. Energética S.A. Steel Company Consolidado * Assets Current assets , , , , ,251 85,185 Long-term receivables , , ,863 Permanent assets , , , ,223 18,929 19,109 Total assets , ,399 1,198,868 1,026, , ,157 Liabilities Current liabilities... 29,381 28, , ,134 80,787 40,252 Long-term liabilities , ,722 54, ,651 4,356 4,212 Shareholders equity... (16,349) (18,845) 1,013, ,474 78,037 62,693 Total liabilities , ,399 1,198,868 1,026, , ,157 Statement of operations Gross sales revenues... 44,987 37,189 2,384,065 1,260, , ,651 Sales deductions... (2,207) (3,952) (11,215) (14,157) (87,259) (62,398) Net sales revenues... 42,780 33,237 2,372,850 1,245, , ,253 Cost of sales... (19,424) (19,520) (1,626,650) (1,194,150) (285,566) (188,139) Gross profit... 23,356 13, ,200 51,823 65,039 46,114 Selling expenses (6,224) (5,336) (4,987) (2,259) General and administrative expenses... (2,110) (2,251) (45,010) (33,376) (19,876) (12,762) Other financial income (expenses)... (17,882) (20,743) (14,030) (22,620) (8,101) 2,681 Other operating income (expenses) (76) (3,346) Operating profit (loss)... 3,364 (9,277) 680,936 (9,509) 31,999 30,428 Non-operating income (expenses), net ,790 10,225 (1,367) 759 (2,889) Provision for income tax and social contribution... (1,249) 1,871 (797) - (10,188) (7,425) Net income (loss) for the year... 2,495 (3,616) 690,364 (10,876) 22,570 20,114 * includes the subsidiary Siderco e) The Company and its direct and indirect subsidiaries have goodwill and negative goodwill balances, which are being amortized as the assets that generated them are realized or based on the realization of the projected future income, limited to ten years, as follows: Amortization period Company Goodwill included in the investments accounts Balance at December 31, ,077 (+) Goodwill recorded in the period... 1, ,899 (-) Reversal of goodwill based on the adjustment in purchase price (Margusa - Maranhão Gusa S.A.) - (5,258) (-) Write-off of goodwill as a result of the merger of the subsidiary GTL Brasil... - (280,882) (-) Foreign exchange adjustment... - (36,361) (-) Amortization for the year... up to 10 years (1,502) (365,621) Balance at December 31, 2004 (based on expectation of future profitability) ,854 Analysis of the goodwill by Margusa - Maranhão Gusa S.A ,728 Dona Francisca Energética S.A ,512 Armacero Industrial y Comercial Ltda Distribuidora Matco S.A ,066 Salomon Sack S.A ,091-52,854

84 Amortization period Company Goodwill included in the fixed asset accounts Balance at December 31, ,740 (-) Foreign exchange adjustment... - (14,860) (-) Amortization for the year... up to 10 years - (79,921) Balance at December 31, 2004 (based on undervaluation of assets) ,959 The goodwill mainly resulted from the assets of the subsidiary Gerdau Ameristeel US Inc. Negative goodwill included in the fixed asset accounts Balance at December 31, (272,130) (-) Amortization for the year ,853 Balance at December 31, 2004 (based on overvaluation of assets)... up to 10 years - (243,277) The negative goodwill arises from the assets of the subsidiary Gerdau Açominas S.A. The goodwill recorded in the investment accounts, calculated on the subsidiary Gerdau Ameristeel US Inc., were reviewed in respect of their amortization period and projected profitability. The remaining balance was amortized in accordance with accounting practices adopted in Brazil, and based on the current scenario and performance of the subsidiary Gerdau Ameristeel Corporation. The equity accounting loss in the consolidated statement of income refers, basically, to the effect of the devaluation of the U.S. dollar on the foreign investments, to goodwill amortization for the year and to the tax incentive reserves arising from the reduction of income tax on the exploitation profit of the subsidiaries Gerdau Açominas S.A. and Margusa - Maranhão Gusa S.A., both located in the Northeastern region of Brazil, as well as to benefits arising from state tax financing. 5 - Cash and Cash Equivalents Company Cash and banks , ,596 Financial investment fund , ,551 Fixed income securities... 95,702 25,163 1,101, ,116 Equities , ,463 95,800 25,186 2,003,945 1,015,726 Of the existing balance, R$ 1,004,550 - consolidated (R$ 518,315 - consolidated in 2003) refers to investments in U.S. dollars. 6 - Trade Accounts Receivable Customers in Brazil , ,968 Brazilian exports receivable , ,442 Receivables from customers of overseas companies... 1,232, ,212 Provision for credit risks... (92,414) (78,539) 2,564,192 1,561,083

85 82 83 METALÚRGICA GERDAU S.A. 7 - Inventories Finished products... 1,728, ,147 Work in process , ,373 Raw materials... 1,112, ,311 Storeroom materials , ,010 Advances to suppliers... 66,464 41,757 4,236,642 2,336,598 The inventories are covered against fire and overflow. Coverage is determined based on the amounts and the risks involved. 8 - Tax Credits Company Value-Added Tax on Sales and Services (ICMS) ,819 90,820 Social Contribution on Revenues (COFINS) to offset ,302 - Social Integration Program (PIS) to offset ,730 4,759 Excise Tax (IPI) ,310 6,358 Income tax and social contribution on net income... 11,232 16,076 46,396 30,435 Tax on Added Value (IVA) , Other ,440 4,951 11,247 16, , , Income Tax and Social Contribution on Net Income a) Analysis of the income tax and social contribution expense: Profit before income tax and social contribution, after statutory Company IR CS Total IR CS Total profit sharing... 1,482,051 1,482,051 1,482, , , ,147 Statutory rates... 25% 9% 34% 25% 9% 34% Income tax and social contribution expense at statutory rates... (370,513) (133,385) (503,898) (146,287) (52,663) (198,950) Tax effects on: - equity in earnings (losses) , , , ,500 54, ,400 - interest on equity... (685) (247) (932) permanent differences (net)... 2, ,287 (13,801) (4,680) (18,481) Income tax and social contribution expense... (33,190) (11,786) (44,976) (7,542) (2,426) (9,968) Current... (2,070) (554) (2,624) (2,575) (730) (3,305) Deferred... (31,120) (11,232) (42,352) (4,967) (1,696) (6,663) IR - Corporate income tax. CS - Social contribution on net income.

86 Profit before income tax and social contribution, after statutory IR CS Total IR CS Total profit sharing... 4,536,502 4,536,502 4,536,502 1,117,018 1,117,018 1,117,018 Statutory rates... 25% 9% 34% 25% 9% 34% Income tax and social contribution expenses at statutory rates.. (1,134,126) (408,285) (1,542,411) (279,255) (100,532) (379,787) Tax effects on: - tax rate difference for foreign companies... (96,019) 91,649 (4,370) 38,906 (14,169) 24,737 - equity in earnings (losses)... (86,157) (31,017) (117,174) (70,310) (25,312) (95,622) - interest on equity... 90,350 32, ,876 88,569 31, ,454 - foreign exchange effect... 29,731 2,676 32,407 72,863 26,231 99,094 - recovery of deferred tax assets ,770 48, , , , ,751 - permanent differences (net)... (34,333) 28,721 (5,612) (38,028) (13,743) (51,771) Income tax and social contribution expense... (959,784) (235,621) (1,195,405) 118,469 21, ,856 Current... (789,638) (167,362) (957,000) (240,313) (74,301) (314,614) Deferred... (170,146) (68,259) (238,405) 358,782 95, ,470 IR - Corporate income tax. CS - Social contribution on net income. b) Analysis of the deferred income tax and social contribution assets and liabilities, at statutory rates: Assets Company IR CS TOTAL IR CS TOTAL IR CS TOTAL IR CS TOTAL Income tax losses... 3,572-3,572 4,499-4, , , , ,096 Social contribution losses ,023 5,023-5,260 5,260-69,255 69,255-94,826 94,826 Provision for contingencies ,846 17,465 66,311 41,133 14,680 55,813 Benefits to employees , ,474 95,839-95,839 Commissions/other ,345 2, ,688 80,178 1,492 81,670 Amortized goodwill ,391 2,319 9,710 9,696 3,274 12,970 Provision for losses ,595 29, ,641 94,462 31, ,997 4,637 5,065 9,702 5,446 5,384 10, , , , , , ,211 Current ,204 58, ,797 90,981 26, ,106 Long-term... 4,637 5,065 9,702 5,446 5,384 10, ,887 61, , , , ,105 Liabilities Company IR CS TOTAL IR CS TOTAL IR CS TOTAL IR CS TOTAL Accelerated depreciation , , , ,605 Amortized negative goodwill/ deferred capital gain... 68,903 16,637 85,540 38,590 5,725 44, ,116 31, ,381 98,263 22, ,589 Inflationary/exchange effect ,934 33, ,905 19,790-19,790 68,903 16,637 85,540 38,590 5,725 44, ,226 66, , ,804 23, ,984 Current ,195 33, ,166 35,721-35,721 Long-term... 68,903 16,637 85,540 38,590 5,725 44, ,031 32, , ,083 23, ,263

87 84 85 METALÚRGICA GERDAU S.A. The tax benefits recognized on income tax and social contribution loss carryforwards, as well as on the provision for losses, both in the Company and consolidated, are supported by projections of future taxable income adjusted to present values, based on technical feasibility studies, approved by management. These studies, which consider the history of the Company s and its subsidiaries profitability and the maintenance of the current profitability in the future, permitted the recognition of an additional benefit for the year of R$ 318,879 (R$ 422, ) in subsidiaries, whose estimated recovery is shown in item c below. Other credits, based on temporary differences, mainly tax contingencies, were maintained according to their estimate of realization. c) Estimated recovery of deferred income tax and social contribution assets: Company Up to , , ,967 65, , ,161 65, , ,784 86, , ,297 1, , , , ,548 91, to , , to ,291 9,702 10, , , Compulsory Deposits and Other Company Compulsory deposits ,767 16,421 Receivables under contract... 2,397 2,895 49,893 43,223 ICMS credits on purchases of fixed assets ,581 56,270 Income tax incentives ,230 10,314 Prepaid expenses ,036 Assets not for use ,779 52,614 Prepaid financial expenses and others ,141 46,409 2,817 3, , ,287

88 11 - Investments Company Subsidiaries Other Total Total Santa Felicidade Banco GLAM Com. Imp. Exp. Gerdau S.A. Gerdau S.A. Participações S.A. Prod. Sid. Ltda. Other Investment Goodwill Investment Investment Investment Investment Opening balance... 1,820,152-28, , ,515 2,029,479 1,596,773 Merger/capitalization (23,396) 23, Acquisition ,712 5,119 Goodwill on acquisition of investment , ,502 - Sale... (76,837) (116) (2,205) (79,158) (8,771) Equity in earnings (losses) ,228,992 (1,502) 8,625 23,290 83, ,342, ,001 Gain on sale of shares by , ,969 - Dividends/interest on equity... (376,947) - (3,564) - (23,806) (8) - (404,325) (173,643) Closing balance... 2,596,105-33, , ,018,021 2,029,479 Capital... 3,471,312-21, ,893 Adjusted shareholders equity... 6,073,856-33, ,298 Net income for the year... 2,831,339-8,695 23, ,665 Percentage of Interest (%)... 42,75% - 99,00% - 100,00% Common shares/quotas held... 77,975,404-1,352, ,892,935 Preferred shares held... 48,875,508-1,352, Includes amortization of goodwill. 2 Gain arising from the sale of shares by the subsidiary Santa Felicidade Com. Imp. Exp. Prod. Sid. Ltda. due to the Public Offer of Shares of Gerdau S.A.

89 86 87 METALÚRGICA GERDAU S.A Investment Goodwill Total Total Gerdau Ameristeel US Inc ,870 Gerdau Ameristeel Corporation ,470 Margusa - Maranhão Gusa S.A ,728 24,728 43,564 Dona Francisca Energética S.A ,512 19,512 21,951 Armacero Industrial y Comercial Ltda... 9, ,328 10,321 Distribuidora Matco S.A ,400 6,066 18,466 - Salomon Sack S.A ,873 2,091 19,964 - Corporate joint ventures... 10,036-10,036 9,984 Other... 9,513-9,513 15,064 1 Companies purchased by the indirect subsidiary Industria del Aceros S.A. - Indac. 59,693 52, , , Fixed Assets Company Anual Accumulated depreciation depreciation rate % Cost and depletion Net Net Land, buildings and structures... 0 to 4 4,918 (3,325) 1,593 1,738 4,918 (3,325) 1,593 1, Anual Accumulated depreciation depreciation rate % Cost and depletion Net Net Land, buildings and structures... 0 to 10 3,315,650 (1,083,206) 2,232,444 2,303,169 Machinery, equipment and installations... 5 to 10 7,965,817 (3,639,334) 4,326,483 4,085,090 Furniture and fixtures... 5 to ,487 (69,690) 40,797 38,005 Vehicles to 33 41,678 (31,112) 10,566 12,369 Electronic data equipment/rights/licenses to ,837 (188,113) 96,724 94,112 Construction in progress ,065,583-1,065, ,810 Forestation/reforestation... Plano de corte 207,431 (51,055) 156, ,283 12,991,483 (5,062,510) 7,928,973 7,380,838 a) Insured amounts - the assets are insured against fire, electrical damage and explosion. The coverage is determined based on the risks involved. The plants of the North American subsidiaries and the Ouro Branco plant of the subsidiary Gerdau Açominas S.A. have coverage for loss of profits. b) Capitalization of interest and financial charges - R$ 2,021 was capitalized during the year - consolidated, (R$ (14,711) consolidated in 2003). c) Guarantees offered - fixed assets were pledged as collateral for loans and financing in the amount of R$ 688,034 - consolidated (R$ 539,724 consolidated in 2003).

90 d) Summary of changes in fixed assets: Company Balance at the beginning of the year... 1,738 1,888 7,380,838 7,581,144 (+) Purchases/sales in the year ,167, ,871 (-) Depreciation and depletion in cost of sales (692,609) (538,286) (-) Depreciation and depletion in administrative expenses... (145) (150) (69,594) (61,806) (+) Companies consolidated in the year ,055 (-) Revaluation reversal (365,347) (+) Purchase of North Star and others ,948 - (-) Foreign exchange effect on foreign fixed assets (124,632) (354,793) Balance at the end of the year... 1,593 1,738 7,928,973 7,380, Deferred Charges deferred charges comprise pre-operating expenses in the construction of a power plant, as well as reforestation, research, development and restructuring projects Financing Financing are represented as follows: Anual charges CURRENT Working capital financing (R$) % to 14.00% 60,642 95,388 Fixed asset financing (R$) % - 3,054 Investment financing (R$)... CDI 4,500 4,500 Investment financing (US$)... US$ 133,955 45,649 Working capital financing (US$) % to 10.50% 1,085,418 1,341,746 Fixed asset financing and others (US$)... US$ - 8,692 Working capital financing (Clp$) % to 0.32% 31,905 30,025 Working capital financing (PA$) % to 10.00% 19,956 - Current portion of long-term financing , ,245 LONG-TERM 2,027,865 2,461,299 Working capital financing (R$) % 28,215 3,812 Fixed asset financing and others (R$) % to 9.90% 657, ,727 Investment financing (R$)... IGPM + 8.5% 29,045 35,019 Fixed asset financing and others (US$) % to 9.97% 762, ,288 Working capital financing (US$) % to 10.75% 2,473,200 2,643,325 Investment financing (US$) % 182,943 - Working capital financing (Cdn$) % to 3.25% - 164,974 Fixed assets financing (Cdn$) % to 3.25% 3,485 3,837 Working capital financing (Clp$) % to 0.43% 16,254 29,952 Fixed assets financing (Clp$) % to 0.43% 27,000 58,396 Fixed assets financing (PA$) % to 10.00% 1,663 - (-) Current portion... (691,489) (932,245) 3,490,374 3,396,085 Total financing... 5,518,239 5,857,384 CDI - Certificate of Interbank Deposit interest rate. IGPM - General Market Price Index. Summarized by currency: Brazilian real (R$) , ,500 U.S. dollar (US$)... 4,637,854 4,800,700 Canadian dollar (Cdn$)... 3, ,811 Argentine peso (PA$)... 21,619 - Chilean peso (Clp$)... 75, ,373 5,518,239 5,857,384

91 88 89 METALÚRGICA GERDAU S.A. The schedule for payment of the long-term portion of financing is as follows: In ,860 In ,896 In ,035 In ,109 In ,048 After ,300,426 3,490,374 a) Events during the year On June 3, 2004, the placement of the second tranche, of US$ 128 million (equivalent to R$ 339,763 at December 31, 2004) of a US$ 400 million Export Notes Receivable program (equivalent to R$ 1,061,760 at December 31, 2004) was concluded. This joint program between Gerdau S.A. and Gerdau Açominas S.A. has an interest rate of 7.321% p.a., maturity in April 2012, a grace period of two years and quarterly amortization as from July b) Guarantees The loans contracted under the FINAME/BNDES program are guaranteed by the financed assets, in the amount of R$ 180,109. The other loans are guaranteed by sureties from the controlling shareholders, on which the subsidiary pays a fee of 1% p.a. on the amount guaranteed. c) Covenants In replacement of the tangible guarantees usually required, the loans are being contracted with certain financial covenants, as follows: I) interest coverage ratio - measures the debt service payment capacity in relation to EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization); II) leverage ratio - measures the debt coverage capacity in relation to EBITDA; III) Required Minimum Net Worth - measures the minimum net worth required in financial agreements; and IV) Current Ratio (current liquidity ratio) - measures the capacity to comply with short-term obligations. All the covenants mentioned above are calculated on a consolidated basis, except for item IV which refers to the Company itself, and have been observed. The penalty for non-compliance is the prepayment of the contracts. d) Credit lines The North American subsidiaries have a credit line in the amount of US$ 350 million, equivalent to R$ 929,040 at the balance sheet date, falling due in June 2008, which can be drawn in U.S. dollars (at the LIBOR rate plus interest between 2.25% and 2.75% p.a. or US Prime/FED Funds plus interest of 0.5% p.a.) or in Canadian dollars (at the Bankers Acceptance (BA) rate plus interest between 2.35% and 2.85% p.a. or Canadian Prime plus interest of 1.00% p.a.). The distribution of this credit line among the companies is made in proportion to the working capital of each North American subsidiary. The subsidiary Gerdau Aza S.A. has a credit line for working capital amounting to Clp$ 28 billion, equivalent to R$ 133,582 at the balance sheet date, bearing interest of 3.90% p.a., and a credit line for fixed assets in the amount of Clp$ 6 billion, equivalent to R$ 28,625 at the balance sheet date, bearing interest of 4.50% p.a. 15- Debentures General Number Anual Issue meeting Issue In portifolio Maturity rate rd , TJLP + 4% Company Current portion - consolidated Gerdau S.A. 3 rd - A e B ,000 52, CDI 156,387 73,508 7 th ,400 6, CDI 121,068 21,628 8 th ,964 65, CDI 145,878 83,566 9 th ,640 38, CDI 170,954 29, th - A and B ,000 97, CDI 98,189 19, th ,000 30, CDI less 2% - - Gerdau Ameristeel Corp , % 232, ,021 Debentures held by consolidated subsidiaries... (252,982) (26,916) Debentures held by the Company.. (95,622) - Total , ,607 Current portion - consolidated... 2,986 3,651 Long-term portion- consolidated. 573, ,956

92 The Extraordinary General Meeting of shareholders held on April 30, 2004 approved the cancellation of the 1st issue (7,100 debentures), which were held in treasury. The Extraordinary General Meeting (EGM) of the subsidiary Gerdau S.A. held on April 29, 2004 approved the cancellation of the 4th issue (42,000 debentures) and 10th issue debentures (6,450 debentures), which were held in treasury. The same EGM approved the split of the following debenture issues: 3rd (classes A and B), 7th, 8th, 9th and 11th issues (classes A and B). On July 1, 2004, three new debentures were issued for each existing debenture, thus changing their nominal value. The Extraordinary General Meeting of the subsidiary Seiva S.A. - Florestas e Indústrias held on April 30, 2004 approved the cancellation of the 1st issue debentures, series A and B (12,000 debentures), which were held in treasury. The Board of Directors Meeting of the subsidiary Gerdau S.A. held on October 14, 2004 approved the fixed remuneration of the 13th issue debentures at the CDI interest rate less 2% p.a., during the period from November 1, 2004 to October 31, The debentures of Gerdau Ameristeel Corporation are convertible into common shares of that subsidiary, up to their maturity date. The controlling shareholders hold, directly or indirectly, R$ 181,965 at December 31, 2004 (R$ 63,216 in 2003) of the outstanding debentures Financial Instruments a) General comments - Metalúrgica Gerdau S.A. and its subsidiaries enter into transactions involving financial instruments, the risks of which are managed through financial positions and exposure limit controls. All instruments are fully recorded in the books of account and mainly relate to the instruments listed below: - financial investments - are recorded at their market value as of the balance sheet date and are explained and presented in Note 5; - investments - are explained and presented in Note 11; - related parties - are explained and presented in Note 21; - financing - are explained and presented in Note 14; - debentures - are explained and presented in Note 15; and - financial derivatives - in order to minimize the effects of fluctuations in foreign exchange rates on their liabilities, the subsidiaries Gerdau Açominas S.A. and Dona Francisca Energética S.A. entered into swap contracts that were converted into Brazilian reais on the contract date and linked to changes in the CDI rate and the IGPM, plus additional interest. The subsidiary Gerdau Ameristeel Corporation also entered into swap contracts linked to the London Interbank Offered Rate (LIBOR) plus interest between 6.05% and 6.45% p.a. The swap contracts are listed below: Contract date Purpose Amount (US$ thousand) Rate Maturity 07/16/2001 to 07/05/2002 Prepayment 32, % to % of the CDI 01/13/2005 to 03/01/ /20/2002 Resolution , % of the CDI 06/20/ /19/2003 Resolution , % of the CDI 02/04/ /17/2003 Fixed assets 6,316 IGPM % 05/16/2005 to 11/16/ /17/2003 Fixed assets 13, % to % of the CDI 05/16/2005 to 11/16/ /30 a 11/03/2003 Bank notes 200,000 LIBOR + interest between 6.09% to 6.13% 07/15/ /26/2003 Investment 55, % to 5.40% 09/02/2005 to 10/02/2006 b) Market value - the market values of the financial instruments are as follows: Company Book Market Book Market value value value value Financial investments... 95,702 95,702 25,163 25,163 Debentures Investments... 3,018,021 5,979,482 2,029,479 4,199,166 Related parties (assets) ,390 3,390 Related parties (liabilities) Treasury shares - Note ,490 45,967 7,049 9,153

93 90 91 METALÚRGICA GERDAU S.A Book Market Book Market value value value value Financial investments... 1,666,178 1,666, , ,130 Swap contracts - investments (liabilities)... 4,500 4,500 12,303 12,303 Securitization financing , , , ,282 Import financing , , , ,941 Prepayment financing , , , ,786 Financing - Resolution , , , ,235 ACC (Advances on Export Contracts) financing... 43,891 43, , ,935 Financing - Resolution ,893 20,755 24,243 24,468 Bank notes financing... 1,050,835 1,260,376 1,144,601 1,292,733 Fixed asset financing... 45,837 45,686 93,172 96,069 Other financing... 2,036,949 2,036,949 2,158,241 2,177,487 Debentures , , , ,607 Investments , , , ,224 Related parties (assets)... 1,231 1,231 30,509 30,509 Stock options (liabilities) - note ,663-8,298 The market values of the swap contracts of subsidiaries in Brazil were obtained based on future income projections for each contract, calculated based on the present value of the forward U.S. dollar + coupon rates (assets) and CDI/IGPM future rates (liabilities) and adjusted to present value on the balance sheet date, using the projected future CDI/IGPM rate for each maturity. The same methodology is applied for the calculation of the market values of the swap contracts of the subsidiary Gerdau Ameristeel Corporation, using the LIBOR rate. Swap contracts related to financing contracts are classified together with the related financing, as a contra entry to the Financial expenses/ income, net account, and are stated at cost plus accrued charges up to the balance sheet date. Contracts not linked to such financing have been recorded at their market value under the heading Other accounts payable, in long-term liabilities. The Company believes that the balances of the other financial instruments, which are recognized in the books at net contracted values, are substantially similar to those that would be obtained if they were negotiated in the market. However, because the markets for these instruments are not active, differences could exist if they were settled in advance. c) Risk factors that could affect the Company s and its subsidiaries business Price risk: this risk is related to the possibility of price variations of the products that the subsidiaries sell or in the raw material prices and other inputs used in the production process. Since the subsidiaries operate in a commodity market, their sales revenues and cost of sales may be affected by the changes in the international prices of their products or materials. In order to minimize this risk, the subsidiaries constantly monitor the price variations in the local and international markets. Interest rate risk: this risk arises as a result of the possibility of losses (or gains) due to fluctuations in interest rates relating to assets (investments) and liabilities. In order to minimize possible impacts resulting from interest rate fluctuations, the Company and its subsidiaries have adopted a policy of diversification, alternating between fixed rates and variable rates (such as LIBOR and the CDI) and periodically renegotiate contracts to adjust them to market. Exchange rate risk: this risk is related to the possibility of fluctuations in foreign exchange rates affecting financial expenses (or income) and the liability (or asset) balance of contracts denominated in a foreign currency. In addition to the foreign investments which are a natural hedge, the Company and its subsidiaries use hedge instruments, usually swaps contracts, as described in item a above, to manage the effects of these fluctuations. Credit risk: this risk arises from the possibility of the subsidiaries not receiving amounts arising from sales or investments at financial institutions. In order to minimize this risk, the subsidiaries adopt the procedure of analyzing in detail the financial and equity position of their customers, establishing a credit limit and constantly monitoring their balances. In relation to financial investments, the Company and

94 its subsidiaries invest solely in institutions with low credit risk, as assessed by rating agencies. In addition, each institution has a maximum limit for investment, determined by the Credit Committee Financial Expenses/Income, Net Company Financial income Financial investments... 1,227 8, , ,746 Interest received ,674 29,934 69,913 Monetary variations - assets ,327 3,972 Foreign exchange variations - assets (34,671) (79,356) Foreign exchange swaps - assets ,915 (62,884) Other financial income... 8,996 1, ,343 12,363 Total financial income... 10,239 11, ,261 86,754 Financial expenses Interest on debt... (844) (14) (417,041) (593,308) Monetary variations - liabilities... (5,147) (5,602) (22,983) (29,115) Foreign exchange variations - liabilities , ,672 Foreign exchange swaps - liabilities (44,127) (741,389) Other financial expenses... (861) - (111,098) (60,990) Total financial expenses... (6,852) (5,616) (397,642) (708,130) 18 - Taxes and Social Contributions Payable Company Income tax and social contribution on net income ,962 39,600 Social charges on payroll ,368 49,021 Value-added tax on sales and services (ICMS) ,131 12,865 Social contribution on revenues (COFINS)... 1,014 2,281 33,622 16,494 Excise tax (IPI) ,114 2,966 Social integration program (PIS) ,903 3,923 Income tax and social contribution withheld at source ,211 23,787 Taxes payable in installments ,819 15,427 Other ,055 14,359 2,247 3, , , Tax Recovery Program (Refis) and Special Installment Payment Program (Paes) a) REFIS On December 6, 2000, the subsidiary Gerdau S.A. enrolled in the REFIS program to pay the Social Integration Program (PIS) and the Social Contribution on Revenues (COFINS) contributions in installments. The balances of these tax liabilities are recorded in Taxes and contributions payable, in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were originally divided into 60 installments of which 5 installments are not yet due, are restated by the Long-Term Interest Rate (TJLP) rate, and are as follows at the year end: Company and consolidated Principal Interest Total Principal Interest Total PIS... 2,608 2,551 5,159 9,895 6,494 16,389 COFINS ,225 2,351 1,540 3,891 Total... 3,228 3,156 6,384 12,246 8,034 20,280 Current... 3,228 3,156 6,384 8,644 5,671 14,315 Long-term ,602 2,363 5,965 Taxes, contributions and other liabilities are paid by the subsidiary Gerdau S.A. on their due dates, which is a basic requirement to remain eligible for the REFIS program.

95 92 93 METALÚRGICA GERDAU S.A. As guarantee for this installment payment program, the subsidiary Gerdau Açominas S.A. pledged the land and buildings of the Piratini plant, located in the municipality of Charqueadas, in the state of Rio Grande do Sul, amounting to R$ 78,494. The total income tax and social contribution credits from third parties offset against fines and interest on the consolidation of the REFIS debts on December 6, 2000 totaled R$ 57,040 and were purchased for R$ 4,351. The subsidiary s own tax credits were not used. The constitutionality of the use of credits of R$ 40,118 of the total purchased is being challenged in court. This is because the Federal Revenue authorities understand that tax credits must first be used to offset the assignor s own debts, only transferring the excess to the assignee. This understanding, based solely on a REFIS Management Committee Resolution, edited subsequently to the subsidiary s enrollment in the program, does not comply with the legal order. In fact, the law which established the Program authorized, with no conditions, the purchase of third party tax credits for offset against own liabilities. b) PAES The proportionally consolidated (52%) subsidiary Dona Francisca Energética S.A. enrolled in the PAES, established by Law 10684/03, at the Federal Revenue Secretariat, to settle Corporate Income Tax (IRPJ), Social Contribution on Net Income (CSLL), Social Integration Program (PIS) and Social Contribution on Revenues (COFINS) liabilities. The balances of these tax liabilities are recorded in Taxes and contributions payable, in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were divided into 180 installments of which 161 are not yet due, are restated by the TJLP and are as follows at the year end: Principal Interest Total Principal Interest Total IRPJ... 20,303 3,160 23,463 21,816 1,255 23,071 CSLL... 7,360 1,145 8,505 7, ,363 PIS COFINS... 3, ,844 3, ,780 Total... 31,709 4,935 36,644 34,072 1,961 36,033 Current... 2, ,732 2, ,499 Long-term... 29,345 4,567 33,912 31,709 1,825 33,534 Dona Francisca Energética S.A. pays its taxes, contributions and other liabilities on their due dates, which is a basic requirement to remain eligible for the PAES program Provision for Contingencies The Company and its subsidiaries are parties in labor, civil, and tax processes. Based on the opinion of its legal advisors, management believes that the provision for contingencies is sufficient to cover probable and reasonably estimable losses from unfavorable court decisions, and that the final decisions will not have significant effects on the financial position of the Company at December 31, The balances of the contingencies are as follows: I) Contingent liabilities provided Company a) Tax contingencies Eletrobrás... (a.1) ,456 50,456 Finsocial... (a.2) - - 6,898 6,948 ICMS... (a.3) ,300 14,346 Social contribution on net income... (a.4) ,333 40,954 Corporate income tax... (a.5) , ,159 INSS... (a.6) ,900 17,375 PIS... (a.7) 469 1,382 2,372 3,739 COFINS... (a.7) - - 6,935 6,935 Emergency Capacity Charge... (a.8) ,563 10,074 Extraordinary Tariff Recomposition... (a.8) ,037 5,847 FGTS and other tax contingencies... (a.9) - - 1,503 2,330 (-) Judicial deposits... (a.10) - - (73,938) (155,138) 469 1, , ,025 b) Labor contingencies... (b.1) ,798 29,609 (-) Judicial deposits... (b.2) - - (10,538) (10,244) ,260 19,365 c) Civil contingencies... (c.1) ,559 99,688 (-) Judicial deposits... (c.2) - - (1,207) (1,063) ,352 98,625 Total liabilities provided , , ,015 INSS - National Institute of Social Security FGTS - Government Severance Indemnity Fund for employees

96 a) Tax contingencies a.1) Of the total provision, R$ 50,456 (consolidated) refers to the contingency of compulsory loans to Eletrobrás, the constitutionality of which is being questioned by the subsidiary Gerdau S.A. In March 1995, the Federal Supreme Court judged the proceedings against other taxpayers. Certain of the Company s proceedings are pending decision, but the outcomes are already foreseeable, in view of the prior decisions. The subsidiary Gerdau S.A. established a provision related to compulsory loans, taking into consideration that, although the payment to Eletrobrás was made as a loan: (i) the reimbursement to the company would probably be in the form of shares of Eletrobrás; (ii) the conversion will be made based on the net asset book value of the shares; and (iii) based on the current available information, the shares of Eletrobrás are valued at substantially less than the net asset book value. a.2) R$ 6,898 (consolidated) relating to the unconstitutionality of the Social Investment Fund (FINSOCIAL). Although the Supreme Court has confirmed the constitutionality of the tax at the rate of 0.5%, some of the Company s subsidiaries claims are still pending judgment, most of them in the Superior Courts. a.3) R$ 17,300 (consolidated) relating to amounts for Value-Added Tax on Sales and Services (ICMS), the majority of which relates to credit rights involving the Finance Secretariat and the State Courts of the First Instance in the state of Minas Gerais. a.4) R$ 7,333 (consolidated) relating to social contribution on net income. The amounts refer to challenges of the constitutionality of the contribution in 1989, 1990 and Some proceedings are pending decision, most of them in the Superior Courts. a.5) R$ 19,993 (consolidated), relating to Corporate Income Tax, challenged at the administrative sphere. Considering the many legal decisions unfavorable to the unconstitutionality of the limitation of the offset of income tax and social contribution losses to 30% of net income, the subsidiary Gerdau Açominas S.A. decided to no longer deposit in court the amounts related to the matter and requested, in the court injunction records in which it is the petitioner, the conversion of the amounts deposited in court (R$ 338,992) into tax payments, and started observing the legal limitation. The legal challenge has been maintained; however, in the event the STF reviews its current guidance and the subsidiary is successful, it will plead the offset of the amounts overpaid. a.6) R$ 24,900 (consolidated) on contributions due to the INSS which correspond to suits for annulment by the subsidiary Gerdau S.A. with judicial deposits of practically the whole amount involved, in progress in the Federal Court of the First Instance in the state of Rio de Janeiro. The provision also includes lawsuits questioning the position of the INSS in terms of charging INSS contributions on profit sharing payments made by the subsidiary Gerdau Açominas S.A., as well as on payments for services rendered by third parties, in which the Institute calculated charges for the last ten years and assessed the subsidiary because it understands that the company is jointly liable. The assessments were maintained at the administrative level, and Gerdau Açominas S.A. filled annulment actions with the judicial deposit of the corresponding amount, based on the understanding that the right to assess part of the charge had prescribed and that there is no such liability. a.7) R$ 469 (Company) and R$ 2,372 (consolidated), relating to contributions for the Social Integration Program (PIS), and R$ 6,935 (consolidated) to the Social Contribution on Revenues (COFINS), in connection with lawsuits questioning the constitutionality of Law 9718, which changed the calculation basis of these contributions. These suits are in progress in the Federal Regional Court of the 2nd Region and the Federal Supreme Court. a.8) R$ 25,563 (consolidated) relating to the Emergency Capacity Charge (ECE), as well as R$ 13,037 (consolidated) relating to the Extraordinary Tariff Recomposition (RTE), included in the electric energy bills of the subsidiaries plants. According to the Company, these charges are of a tax nature and, as such, are incompatible with the National Tax System provided in the Federal Constitution. For this reason, the constitutionality of this charge is being challenged in court. The lawsuits are in progress in the Federal Justice of the First Instance of the states of Pernambuco, Ceará, Minas Gerais, Rio de Janeiro, São Paulo, Paraná, and Rio Grande do Sul, as well as in the Federal Regional Courts of the 1st and 2nd Regions. The subsidiaries have fully deposited in court the amount of the disputed charges. a.9) R$ 1,503 (consolidated) relating to a lawsuit brought by the subsidiary Gerdau Açominas S.A. regarding the Government Severance Indemnity Fund for Employees (FGTS) increased charges, which arose from the changes introduced by Complementary Law 110/01. Currently, the corresponding court injunction is awaiting the judgment of the extraordinary appeal filed by the subsidiary. The amount provided is fully deposited in court. a.10) The judicial deposits, representing restricted assets of the subsidiary Gerdau S.A., relate to amounts deposited and maintained in court until the resolution of the related legal matters. The balances of these credits, which at December 31, 2004 amounted to R$ 73,938 (consolidated), are classified as a reduction of the provision for tax contingencies recorded in the books. b) Labor contingencies b.1) The Company s subsidiaries are also defending labor claims, for which there is a provision of R$ 49,573 (consolidated) at December 31, None of these claims refer to individually significant amounts, and the lawsuits mainly involve claims for overtime pay, health hazards and risk premium, among others. b.2) The balances of the deposits in court, which totaled R$ 10,313 at December 31, 2004 (consolidated), are classified as a reduction of the provision for labor contingencies. c) Civil contingencies c.1) The Company and its subsidiaries are also defending in court civil claims arising in the normal course of its own and the subsidiaries operations, including claims arising from work accidents, in a total amount at December 31, 2004 of R$ 195 (Company) and R$ 100,559 (consolidated) as contingent liability for these claims.

97 94 95 METALÚRGICA GERDAU S.A. The provision refers mainly to an issue involving the jointly-owned (52%) subsidiary Dona Francisca Energética S.A. According to a resolution of the Brazilian Electricity Regulatory Agency (ANEEL), the operations of the subsidiary are restricted to the South of Brazil submarket. Since some of its transactions were carried out in the remaining submarkets, Dona Francisca Energética S.A. may have to acquire the energy it sells from third parties. The subsidiary challenges in court the validity of the ANEEL resolution and has obtained a favorable preliminary injunction. c.2) At December 31, 2004, the balances of deposits in court totaled R$ 1,207 (consolidated) and are classified as a reduction of the provision for contingencies. II) Contingent liabilities not provided a) Tax contingencies a.1) The subsidiary Gerdau S.A. is defendant in assessments filed by the state of Minas Gerais demanding ICMS tax payments arising mainly from the sales of products to commercial exporters. The restated amount of the lawsuits totals R$ 32,848. The Company has not recorded any provision for contingency in relation to these claims since it considers this tax is not payable, because products for export are exempted from ICMS. a.2) The subsidiaries Gerdau S.A. and Gerdau Açominas S.A. are defendants in assessments filed by the state of Minas Gerais, which demand ICMS tax payments on the export of semi-finished manufactured products. The subsidiary Gerdau Açominas S.A. is also the petitioner of an annulment action. The total amount demanded is R$ 249,742. The companies have not recorded any provision for contingency in relation to these claims since they consider this tax is not payable because the products cannot be considered semi-finished manufactured products as defined by the federal complementary law and, therefore, are not subject to ICMS. a.3) Also, R$ 68,431 are being demanded due to the understanding of the Federal Revenue Secretariat that the transactions carried out by the subsidiary Gerdau Açominas S.A., under the drawback concession granted by DECEX, were not in conformity with the legislation. Gerdau Açominas filed a preliminary administrative defense of the legality of the arrangement, which is pending judgment. Since the tax liability has not been definitely established, and considering that the arrangement which originated the demand conforms with the assumptions required for the drawback concession, and also that the concession was granted after analysis by the legal administrative authority, Gerdau Açominas S.A. considers an unfavorable outcome to be remote and, for this reason, has not recorded any provision for the contingency. b) Civil contingencies b.1) Two civil construction syndicates in the state of São Paulo alleged that the subsidiary Gerdau S.A. and other long steel producers in Brazil divide customers among them, violating the antitrust legislation. After investigations carried out by the National Secretariat of Economic Law (SDE) and based on public hearings, the SDE is of the opinion that a cartel exists. This conclusion was also supported by an earlier opinion by the Secretariat for Economic Monitoring (SEAE). The process has now been forwarded to the Administrative Council for Economic Defense (CADE) for final decision. The subsidiary Gerdau S.A. denies having engaged in any type of anti-competitive behavior and believes, based on information available, including the opinion of its legal advisors, that the administrative process until now includes many irregularities, some of which are impossible to resolve. For example, the investigations carried out by SDE did not follow the due legal course and the representatives of the SDE influenced certain witnesses who testified in the process. In addition, the SDE report was issued before the subsidiary Gerdau S.A. had the chance to reply to the closing arguments, which indicates that there was a bias in the judgment made by the SDE. The same applies to the SEAE report, which does not analyze the economic issues and is based exclusively on the witnesses testimony. These irregularities, which also reflect non-compliance with the related constitutional provisions, will no doubt affect the administrative decision by CADE, based on the conclusions presented by the antitrust authorities until now. The subsidiary Gerdau S.A. has pointed out and tried to combat all these irregularities and will continue doing so in relation to the allegations and the irregularities in the administrative process, believing in a favorable outcome to this process, if not in the administrative sphere, possibly in the judicial sphere. Because of the above, no provision has been recorded for this case. According to Brazilian legislation, fines of up to 30% of gross revenues in the prior fiscal years may be applied to the subsidiary Gerdau S.A. and, if personal responsibility of an executive is proven, such executive may be penalized by 10% to 50% of the fine applied to the company. There are no precedents for fines exceeding 4%. In a similar case involving flat steel companies, the fine was 1%. b.2) A civil lawsuit has been filed against the subsidiary Gerdau Açominas S.A. regarding the termination of a contract for the supply of slag and indemnities for losses and damages. At December 31, 2004, the lawsuit amounts to approximately R$ 37,014. Gerdau Açominas S.A. contested all bases for the lawsuit and filed a counterclaim for termination of the contract and indemnity for breach of contract. The judge declared the contract to be terminated, since this demand was common to both parties. With regards to the remaining discussion, the judge understood that both parties were at fault and judged the requests for indemnity unfounded. This decision was maintained by the Court of Civil Appeals of the State of Minas Gerais (TAMG), and the court decision is based on expert evidence and interpretation of the contract. The process was in the High Court of Justice (STJ) and was returned to the TAMG for judgment of the appeal requesting clarification of the decision. Gerdau Açominas S.A. believes that any loss from the case is remote, since it understands that a change in the judgment is unlikely. b.3) A civil lawsuit has been filed by Sul America Cia. Nacional de Seguros against the subsidiary Gerdau Açominas S.A. and Banco Westdeustsche Landesbank Girozentrale, New York Branch (WestLB), for the payment of R$ 34,383 to settle an indemnity claim, which has been deposited in court. The insurance company pleads doubt in relation to whom payment should be made and alleges that the subsidiary

98 is resisting in receiving and settling it. The lawsuit was contested both by the Bank (which claims having no right over the amount deposited, which resolves the doubt raised by Sul América) and by the subsidiary (which claims that there is no such doubt and that there is justification to refuse payment since the amount owed by Sul América is higher than the amount involved). Subsequently, Sul América claimed fault in the Bank s representation, and this matter is therefore already settled, which resulted in the withdrawal in December 2004 of the amount deposited. The process should enter the expert evidence phase, mainly for calculation of the amount due. Based on the opinion of its legal advisors, the subsidiary expects loss to be remote and that the sentence will declare the amount payable within the amount stated in the pleading. Also, Gerdau Açominas S.A. filed, prior to this lawsuit, a lawsuit for the payment of the amount recognized by the insurance companies. The lawsuits are pending. The subsidiary expects a favorable outcome in this lawsuit. The civil lawsuits arise from an accident on March 23, 2002 with the blast furnace regenerators of the Ouro Branco steel mill, which resulted in the stoppage of several activities, with material damages to the steel mill equipment and loss of profits. The equipment, as well as the loss of profits arising from the accident, were covered by an insurance policy. The report on the event, as well as the loss claim, was filed with IRB - Brasil Resseguros S.A., and an advance payment of R$ 62,000 was received in In 2002, a preliminary and conservative estimate of indemnities related to the coverage of loss of profits and material damages, in the total amount of approximately R$ 110,000, was recorded, based on the amount of fixed costs incurred during the period of partial stoppage of the steel mill activities and the immediate expenses to be incurred to recover the equipment temporarily. This estimate approximates the advance amount received plus the amount proposed by the insurance company as a complement to settle the indemnity. Subsequently, new amounts were added to the discussion, as stated in the subsidiary s plea, although not yet recorded. Based on the opinion of its legal advisors, the Company considers that losses from other contingencies that may affect the results of operations or the Company s consolidated financial position are remote. III) Contingent assets not recorded a) Tax contingencies a.1) The subsidiary Gerdau S.A. believes that the realization of certain contingent gains is probable. Among them is a court-order debt security issued in 1999 in its favor by the state of Rio de Janeiro in the amount of R$ 26,580, arising from an ordinary lawsuit against the noncompliance with the Loan Agreement for Periodic Execution in Cash under the Special Industrial Development Program (PRODI). Due to the default by the state of Rio de Janeiro and the non-regulation of Constitutional Amendment 30/00, which granted the government a ten-year moratorium for payment of securities issued to cover court-order debts not related to food, the realization of this credit is not expected in 2004 and, also, there is no expectation of realization in 2005 and following years. For this reason, this gain is not recognized in the financial statements. a.2) The Company s subsidiaries have filed several ordinary proceedings relating to the correct basis of calculation of PIS under Complementary Law 07/70, due to the declarations of unconstitutionality of Decree Laws 2445/88 and 2449/88. The companies expect to recover the taxes incorrectly paid. The amounts under discussion total R$ 84,245. a.3) Also, the subsidiaries Gerdau S.A., Gerdau Açominas S.A. and Margusa - Maranhão Gusa S.A. expect to recover IPI premium credits. Gerdau S.A. and the subsidiary Margusa Maranhão Gusa S.A. have filed administrative appeals for recovery, which are pending judgment. With regards to the subsidiary Gerdau Açominas S.A., the proceedings were directed to the courts, with an unfavorable judgment. Currently, the process awaits judgment of the appeal filed by the subsidiary. The Company estimates the credits at R$ 394,002 but no accounting recognition has been made thereof because of uncertainty as to their realization Related Parties a) Analysis of loan balances Company Gerdau Açominas S.A... (381) 3, Fundação Gerdau ,305 16,762 Gerdau S.A Sipar Aceros S.A. and other (74) 13,747 Total... (266) 3,390 1,231 30,509 b) Commercial transactions - the Company paid R$ 300 (R$ 300 in 2003) to the associated company Grupo Gerdau Empreendimentos Ltda. for the use of the Gerdau trademark, as well as R$ 502 (R$ 524 in 2003) to the parent company Indac - Ind. Adm. e Comércio S.A. related to guarantees. c) Guarantees granted - the Company is the guarantor of the subsidiary GTL Financial Corp., in the amount of US$ 50,000, equivalent to R$ 132,720 at the balance sheet date. The subsidiary Gerdau S.A. is the guarantor of the Euro Commercial Paper program of the subsidiary GTL Trade Finance Inc., of US$ 110 million, equivalent to R$ 291,984 at the balance sheet date. The subsidiary is also the guarantor of financing agreements of the subsidiary GTL Financial Corp., of US$ 5,000, equivalent to R$ 13,272, and securitization operations of the subsidiary Gerdau Açominas Overseas Ltda., of US$ 233 million, equivalent to R$ 618,475 on the balance sheet date. The subsidiary Gerdau Açominas S.A. is the guarantor of the vendor financing loan agreement of the associated company Banco Gerdau S.A., in the amount of R$ 68,138.

99 96 97 METALÚRGICA GERDAU S.A Post-employment Benefits Considering all types of benefits to employees granted by the Company, the asset and liability positions at December 31 are as follows: Company Pension plan actuarial liability - defined benefit , ,719 Actuarial liability with post-employment health benefit , ,964 Retirement and discharge benefits payable ,996 10,187 Total liabilities , ,870 Unrecognized actuarial assets... 1,964 1, , ,107 a) Pension plan - defined benefit The Company and other Group subsidiaries in Brazil are the co-sponsors of defined benefit pension plans that cover substantially all employees in Brazil ( Açominas Plan and Gerdau Plan ). The Açominas Plan is managed by Fundação Açominas de Seguridade Social - Aços, a closed supplementary pension entity to complement the social security benefits of employees and retired employees of the Ouro Branco unit of Gerdau Açominas S.A. The assets of the Açominas Plan mainly comprise investments in bank deposit certificates, federal public securities, marketable securities and properties. The Gerdau Plan is managed by Gerdau - Sociedade de Previdência Privada, a closed supplementary pension entity to complement the social security benefits of employees and retired employees of the Company of the other units of Gerdau Açominas S.A. and other subsidiaries in Brazil. The assets of the Gerdau Plan comprise investments in bank deposit certificates, federal public securities and marketable securities. Also, the Canadian and American subsidiaries sponsor defined benefit plans (Canadian Plan and American Plan) that cover substantially all of their employees. The Canadian and American plans are managed by CIBC Mellon and Wells Fargo, respectively, to complement the social security benefits of employees of Gerdau Ameristeel Corporation and its subsidiaries, The assets of the Plans mainly comprise marketable securities. The sponsors contributions to the pension plans were R$ 13 in 2004 and R$ 11 in 2003 for the Company and R$ 68,288 in 2004 and R$ 63,733 in 2003 for the consolidated. The current expenses of the defined pension plan are as follows: Company Cost of current service ,884 41,261 Interest cost , ,212 Expected return of plan assets... (204) (1,310) (162,001) (122,362) Amortization of unrecognized liability Amortization of past service costs ,332 Amortization of (gain) loss... (18) - 2,550 2,764 Employees expected contribution (4,383) (3,576) Pension plan cost (benefit), net... (59) (550) 12,344 30,098 The reconciliation of the assets and liabilities of the plans is presented below: Company Total liabilities... (7,065) (6,223) (1,790,639) (1,623,000) Fair value of plan assets... 14,993 12,366 1,867,506 1,663,567 Net assets... 7,928 6,143 76,867 40,567 Unrecognized (gains) losses... (5,964) (4,251) (96,827) (91,405) Past service costs ,342 7,722 Other ,929 5,504 Total assets (liabilities), net... 1,964 1,892 11,311 (37,612) Actuarial asset... 1,964 1, , ,107 Pension plan liability recorded in balance sheet (154,199) (162,719) Assets (liabilities), net... 1,964 1,892 11,311 (37,612)

100 Changes in plan assets and actuarial liabilities were as follows: Company Changes in benefit Benefit liabilities at the beginning of the year... 6,223 6,901 1,623,000 1,554,443 Cost of service ,884 41,261 Interest cost , ,212 Actuarial loss (gain) (1,336) 88,360 75,148 Payment of benefits... (115) (102) (69,534) (58,588) Past service costs due to changes in the plan ,516 - Foreign exchange effect on foreign companies (45,000) (99,476) Initial liability recognition adjustment ,359 - Benefit liabilities at the end of the year... 7,065 6,223 1,790,639 1,623,000 Company Changes in plan assets Fair value of plan assets at the beginning of the year... 12,366 10,515 1,663,567 1,396,928 Return on plan assets... 2,729 1, , ,371 Sponsor contributions ,288 63,733 Participant contributions ,202 4,232 Payment of benefits... (115) (102) (69,534) (58,588) Foreign exchange effect on foreign companies (32,060) (57,109) Fair value of plan assets at the end of the year... 14,993 12,366 1,867,506 1,663,567 The method for calculating the actuarial liability is the Projected Unit Credit Method, as determined by CVM Deliberation 371/2000. The amount of the actuarial gains and losses to be recognized as income or expense is the unrecognized amount that exceeds, in each period, the higher of the following limits: (i) 10% of the present value of the total actuarial liability of the defined benefit plan and (ii) 10% of the fair value of the plan assets. The resulting amount will be amortized annually based on the average remaining years of service estimated for the employees that participate in the plan. The table below shows a summary of the assumptions made to calculate and record the defined benefit plan for both the Company and consolidated: North american Gerdau Plan Açominas Plan plan Average discount rate % 11.30% 5.75% % Increase in compensation % 8.675% 2.50% % Expected rate of return on assets % 12.35% 7.25% % Mortality chart... GAM 83 (-1 year) AT-83 GAM 83 Disabled mortality chart... RRB 1944 AT-83 RRB 1977 Turnover rate... Based on service Null Based on age and salary level and service (plan experience) b) Pension plan - defined contribution The Company and its subsidiaries in Brazil are also the co-sponsors of a defined contribution pension plan administered by Gerdau - Sociedade de Previdência Privada. Contributions are based on a percentage of the compensation of employees. The foreign subsidiary Gerdau AmeriSteel US Inc. has a defined contribution plan, the contributions to which are equivalent to 50% of the amount paid by the participants, limited to 4% of salary. The other companies do not have this type of pension plan. The total cost of this plan was R$ 55 in 2004 and R$ 62 in 2003 for the Company and R$ 12,005 in 2004 and R$ 9,827 in 2003 consolidated. c) Other post-employment benefits The Company estimates that the amount payable to executives on their retirement or discharge totals R$ 9,996 (consolidated) at December 31, 2004 (R$ 10,187 in consolidated).

101 98 99 METALÚRGICA GERDAU S.A. The American Plan includes, in addition to pension benefits, specific health benefits for employees who retire after a certain age and with a certain number of years of service. The American subsidiary has the right to change or eliminate these benefits, and the contributions are based on amounts actuarially calculated. The composition of the net periodic cost for the post-employment health benefits is as follows: Cost of service... 3,007 2,542 Interest cost... 5,715 6,492 Amortization of past service costs... (563) - Amortization of (gain) loss Expense for post retirement health benefits, net... 8,239 9,034 The status of the fund for post-employment health benefits is as follows: Plan assets at market value Projected benefit liabilities... (130,559) (111,390) Fund status... (130,559) (111,390) Unrecognized gains and losses, net... 8,101 5,426 Past service costs... (7,825) - Post-retirement health benefit liabilities recorded in thebalance sheet... (130,283) (105,964) The changes in plan assets and actuarial liabilities was as follows: Changes in projected benefit liabilities Projected benefit liabilities at the beginning of the year , ,991 Purchase of North Star... 23,136 - Cost of service... 3,007 2,542 Interest cost... 5,715 6,492 Participant contributions... 1,946 1,870 Actuarial loss... 4,759 3,432 Administrative benefits and expenses paid... (6,639) (6,528) Foreign exchange effect... (4,364) (9,409) Initial liability recognition adjustment... (8,391) - Projected benefit liabilities at the end of the year , , Changes in plan assets Plan assets a the beginning of the year Sponsor contributions... 4,693 4,658 Participant contributions... 1,946 1,870 Administrative benefits and expenses paid... (6,639) (6,528) Plan assets at the end of the year

102 The assumptions adopted in the accounting for post-employment health benefits were as follows: North american plan Average discount rate % % Health treatment - rate for the next year % % Health treatment - rate for cost decrease to be reached from 2010 to % to 5.50% 23 - Shareholders Equity a) Capital - authorized capital at December 31, 2004, comprises 50,000,000 common shares (50,000,000 at December 31, 2003) and 100,000,000 preferred shares (100,000,000 at December 31, 2003), with no par value. The Extraordinary General Meeting of shareholders held on April 30, 2004 approved the capital increase of R$ 384,000 through the capitalization of the reserve for investments and working capital, with a bonus of 30% on the shares on that date, representing 12,475,319 new shares (4,158,440 common and 8,316,879 preferred). Also, a split of 70% of these new shares was approved, with the issue of 29,109,076 shares (9,703,025 common and 19,406,051 preferred). At December 31, 2004, 27,722,930 common shares (13,861,465 at December 31, 2003) and 55,445,860 preferred shares (27,722,930 at December 31, 2003) are subscribed and paid-up, totaling R$ 1,664,000 (R$ 1,280,000 at December 31, 2003). Preferred shares do not have voting rights and cannot be redeemed, but have the same rights as common shares in terms of profit sharing. b) Treasury stock - at December 31, 2004, the Company had 682,000 preferred shares (137,500 preferred shares in 2003), held in treasury for subsequent sale in the market or cancellation, totaling R$ 21,490 (R$ 7,049 in 2003). c) Interest on equity and dividends - the Company calculated interest on equity in accordance with the terms established by Law 9249/95. The corresponding amount was recorded as financial expenses for tax purposes. For presentation purposes, this amount was recorded as dividends, not affecting net income. The related tax benefit through the reductions of the income tax and social contribution on net income charges for the year was R$ 55,250 (R$ 58,514 in 2003). Shareholders are entitled to receive, each year, a minimum mandatory dividend of 30% of adjusted net income. The amount of interest on equity and dividends credited for the year was R$ 433,879, shown as follows: Net income for the year... 1,437, ,179 Transfer to legal reserve... (71,855) (28,759) Adjusted net income... 1,365, ,420 Distributions during the year Period Nature R$/share Credit Payment st quarter... Interest /30/2004 5/18/ ,368 34,307 2 nd quarter... Interest /30/2004 8/17/ ,142 23,287 Dividends /30/2004 8/17/ ,944-3 rd quarter... Interest /13/ /17/ ,990 34,099 Dividends /3/ /17/ ,062-4 th quarter... Interest - 80,407 Dividends /11/2005 2/22/ ,373 - Interest on equity and dividends , ,100 % interest/dividends paid or credited... 32% 31% Credit per share (R$)... 5,26 4,15 Outstanding shares (thousands)... 82,487 41,447 The remaining income for the year was transferred to the statutory reserve for investments and working capital in accordance with the by-laws Statutory Profit Sharing a) The management profit sharing is limited to 10% of net income for the year, after income tax and management fees, as stated in the Company s by-laws; b) The employees profit sharing is linked to the attainment of operating goals and was charged to cost of production and general and administrative expenses, as applicable.

103 METALÚRGICA GERDAU S.A Long-term Incentive Plans I) Gerdau S.A. The Extraordinary General Meeting of shareholders held on April 30, 2003 decided, based on a previously agreed plan and within the limit of the authorized capital, to grant options to purchase preferred shares to management, employees or persons who render services to the subsidiary or the companies under its control, and approved the formation of the Long-Term Incentive Program that represents a new form of compensation of the strategic executives of the subsidiary. The options should be exercised in a maximum of five years after the grace period. a) Summary of changes in the plan: Stock options grants (Number of shares) Total Opening balance at December 31, , , ,068 Grants in , , ,555 Share bonus on April 29, , ,840 2, , ,623 Closing balance at December 31, , ,680 4, ,250 1,715,246 Exercise price - R$ Grace period... 3 anos - 3 anos - Grace period anos - 5 anos The subsidiary Gerdau S.A. has a total of 1,573,200 preferred shares in treasury at December 31, 2004, These shares can be used for this plan. b) Plan status at December 31 Stock options grants Average Total stock options granted ,109 1,368,137 Exercise price - R$ Fair value of options date of grant - R$ per option (*) Average term of option to be exercised (years) (*) Calculated using the Black-Scholes model The percentage of dilution in interest that the current shareholders may experience if all options are exercised is approximately 0.6%. II) Gerdau Ameristeel Corporation - ( Gerdau Ameristeel ) Gerdau Ameristeel Corporation and its subsidiaries have stock compensation plans for their employees, as follows: a) Former Co-Steel Plan According to the terms of the Co-Steel Plan, the Stock-Based Option Plan, the company was authorized to grant purchase options to employees and directors up to the limit of 3,041,335 common shares. The exercise price was based on the closing price of the common shares in the market on the day prior to the issue of the option. The options have a maximum term of ten years and are granted during various periods, as determined by the administrator of the plan at the date of the grant, up to April 13, b) Gerdau AmeriSteel US Inc. ( AmeriSteel ) Plans According to the terms of the Transaction Agreement relating to the acquisition of Co-Steel, the minority shareholders of AmeriSteel exchanged their shares and stock options for shares and stock options of Ameristeel at the ratio of 9,4617 shares and stock options for each share or stock option of AmeriSteel. This exchange occurred on March 31, b.1) Stakeholder Plan In March 2000, the Board of Directors of AmeriSteel a approved long-term incentive plan available to the executive management (Stakeholder Plan) to assure that the interests of the senior management of AmeriSteel are in line with those of the AmeriSteel shareholders. The awards are determined by a formula based on the return on employed capital of AmeriSteel in a given year of the plan. The awards are granted and paid over a period of four years. The participants may choose payment in cash or in shares of AmeriSteel and Gerdau, for which a premium of 25% is given, if chosen. Expenses related to the benefits for the years ended December 31, 2004 and 2003 totaled US$ 1,300 thousand (R$ 3,450) and US$ 150 thousand (R$ 433), respectively. A premium of approximately US$ 14,000 thousand (equivalent to R$ 37,161) was recorded at December 31, 2004 and will be granted on March 1, This premium will be provided in accordance with the payment schedule established by the plan.

104 b.2) SAR Plan In July 1999, the Board of Directors of AmeriSteel approved the SAR/Shares Purchase Plan (SAR Plan) available to basically all employees. The SAR Plan authorizes the sale of 946,170 common shares to the employees during three offer periods, from July to September in 1999, 2002 and The employees who purchase the shares are rewarded with stock appreciation rights (SARs) equal to four times the number of shares purchased. SARs at market value were granted at the date of grant, determined based on an independent appraisal at the end of the prior year. SARs can be exercised at 25% annually as from the date of the grant, to be exercised over a period of ten years as from the date of the grant. In July 2002, the Board of Directors of AmeriSteel approved the issue of new purchase options under the SAR Plan, which were granted to the executive directors, with the exercise price determined by the fair value at the date of grant. A total of 6,244,722 SARs were authorized and issued. One-third of all awarded options and common shares are vested two years as from the date of concession, and one third after each subsequent two-year period. The options may be exercised in up to ten years after the date of concession. At December 31, 2004, an expense related to this plan of US$ 20,700 thousand, equivalent to R$ 54,946, was recorded in the consolidated financial statements (at December 31, 2003, an expense of US$ 9,400 thousand, equivalent to R$ 27,158 was recorded). b.3) Equity Ownership In September 1996, the Board of Directors of AmeriSteel approved the Equity Ownership Plan of AmeriSteel Corporation (the Equity Ownership Plan), which grants common shares, purchase options for common shares and SARs. The maximum number of shares that may be issued under this plan is 4,152,286, AmeriSteel granted 4,667,930 incentive stock options and 492,955 common shares under the Equity Ownership Plan up to December 31, One-third of all options and common shares issued become vested two years from the date of the grant, and one third after each subsequent two-year period. All grants were carried out at the market value of the common shares at the date of grant, determined based on an independent appraisal at the end of the prior year. The options may be exercised for ten years as from the date of the grant. b.4) Purchase Plan In May 1995, the Board of Directors of AmeriSteel approved an option/purchase plan (the Purchase Plan ), available to essentially all employees. The employees who purchased shares were rewarded with options for six times the number of shares purchased. A total of 356,602 shares were sold under the Purchase Plan at a purchase price of US$ 1.12 per share. The options were granted at market value at the date of the grant, determined based on an independent appraisal at the end of the prior year. A total of 2,139,612 options were granted under the Purchase Plan. No options are available for future grant. All shares granted can already be exercised, which may occur for ten years as from the date of the grant. A summary of the Gerdau Ameristeel plans is as follows: Number Weighted average Number Weighted average of shares exercise price - R$ of shares exercise price - R$ Available at the beginning of the year... 3,606, ,367, Exchange of Ameristeel Planfor options of the Gerdau Ameristeel Plan (*) ,660, Exercised... (374,609) Cancelled... (76,973) Expire d... (321,700) (421,431) Available at the end of the year... 2,833, ,606, (*) Exchange mentioned in item b above.

105 METALÚRGICA GERDAU S.A. The table below summarizes the information on the purchase options of Gerdau Ameristeel shares available at December 31, 2004: Quantity exercisable Available Average Weighted average at december 31, Exercise price (R$) quantity grace period exercise price - R$ to , , to , , to , , to , , to , ,500 2,833,288 2,350,378 The effect on net income for the year and shareholders equity would have been as follows, had the expenses for the option plans of Gerdau S.A. and Gerdau Ameristeel Corporation been recorded: Net income Shareholders equity Balances based on financial statements... 3,341,097 2,961,034 Expenses for the period*... (2,649) (8,383) Proforma balances... 3,338,448 2,952,651 *using the fair value method (Black-Scholes model) 26 - Calculation of EBITDA Gross profit... 6,245,024 3,290,221 Selling expenses... (455,175) (448,131) General and administrative expenses... (1,050,953) (804,501) Depreciation and amortization , ,045 EBITDA... 5,505,715 2,642,634

106 27 - Information by Geographic Area and Business Segment Information by geographic area: Geográphic Área Brazil South america (*) North america Gross sales revenues... 12,914,377 9,024,250 1,039, ,829 9,453,210 6,105,888 23,407,573 15,782,967 Net sales revenues... 9,975,760 7,306, , ,122 8,857,637 5,569,912 19,597,262 13,366,961 Cost of sales... (5,668,217) (4,444,848) (488,120) (325,333) (7,195,901) (5,306,559) (13,352,238) (10,076,740) Gross profit... 4,307,543 2,862, , ,789 1,661, ,353 6,245,024 3,290,221 Selling expenses... (400,317) (407,717) (7,079) (5,140) (47,779) (35,274) (455,175) (448,131) General and administrative expenses... (751,200) (554,218) (45,934) (33,492) (253,819) (216,791) (1,050,953) (804,501) Financial income (expenses), net... 33,673 (437,013) (4,491) (3,831) (177,563) (180,532) (148,381) (621,376) Operating profit (loss)... 3,022,950 1,197, , ,012 1,194,708 (165,655) 4,436,930 1,152,181 Net income (loss) for the year... 2,270,548 1,224, ,240 93, ,309 (61,274) 3,341,097 1,256,874 EBITDA (**)... 3,657,500 2,256, , ,524 1,597, ,695 5,505,715 2,642,634 (*) Does not include Brazilian operations, (**) Income before financial expenses, income tax and social contribution on net income, and depreciation and amortization, as mentioned in Note 26, The segments shown below correspond to the business units through which the Gerdau Executive Committee manages its operations: Long Steel Brazil, Açominas (corresponding to the operations of the plant located in Ouro Branco, state of Minas Gerais), South America (excluding Brazilian operations) and North America (Gerdau Ameristeel): Information by business segment: Business sector Long Brazil Açominas Ouro Branco South America (*) Nort América Net sales revenues... 7,329,008 5,359,998 2,646,752 1,946, , ,122 8,857,637 5,569,912 19,597,262 13,366,961 Identifiable assets (**)... 4,447,413 3,183,362 3,482,517 3,241, , ,385 6,131,526 4,273,441 14,729,807 11,278,519 Capital expenditure , , , ,984 27,367 22,253 1,156, ,803 2,097, ,039 Depreciation/amortization , , , ,392 28,251 25, , , , ,045 (*) Does not include Brazilian operations, (**)Identifiable assets: accounts receivable, inventories and fixed assets

107 METALÚRGICA GERDAU S.A. Board of Directors Chairman JORGE GERDAU JOHANNPETER Vice Chairman GERMANO H. GERDAU JOHANNPETER KLAUS GERDAU JOHANNPETER CARLOS JOÃO PETRY Board members AFFONSO CELSO PASTORE ANDRÉ PINHEIRO DE LARA RESENDE OSCAR DE PAULA BERNARDES NETO Secretary General EXPEDITO LUZ Executive Committee President JORGE GERDAU JOHANNPETER Vice Presidents FREDERICO C. GERDAU JOHANNPETER, Senior Vice President CARLOS JOÃO PETRY, Senior Vice President ANDRÉ BIER JOHANNPETER CLAUDIO JOHANNPETER OSVALDO BURGOS SCHIRMER DOMINGOS SOMMA FILIPE AFFONSO FERREIRA RICARDO GEHRKE Secretary General EXPEDITO LUZ Corporate Officers EXPEDITO LUZ GERALDO TOFFANELLO GERALDO TOFFANELLO Accountant CRC RS No CPF N

108 Report of Independent Auditors To the Board of Directors and Shareholders Metalúrgica Gerdau S.A. 1. We have audited the accompanying balance sheets of Metalúrgica Gerdau S.A. and the consolidated balance sheets of Metalúrgica Gerdau S.A. and its subsidiaries as of December 31, 2004 and 2003, and the related statements of income, of changes in shareholders equity and of changes in financial position of Metalúrgica Gerdau S.A., as well as the related consolidated statements of income and of changes in financial position, for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements. 2. We conducted our audits in accordance with approved Brazilian auditing standards, which require that we perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented in all material respects. Accordingly, our work included, among other procedures: (a) planning our audit taking into consideration the significance of balances, the volume of transactions and the accounting and internal control systems of the companies, (b) examining, on a test basis, evidence and records supporting the amounts and disclosures in the financial statements, and (c) assessing the accounting practices used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 3. In our opinion, the financial statements audited by us present fairly, in all material respects, the financial position of Metalúrgica Gerdau S.A. and of Metalúrgica Gerdau S.A. and its subsidiaries at December 31, 2004 and 2003, and the results of operations, the changes in shareholders equity and the changes in financial position of Metalúrgica Gerdau S.A., as well as the consolidated results of operations and of changes in financial position, for the years then ended, in accordance with accounting practices adopted in Brazil. 4. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The statement of cash flows is presented for purposes of additional analysis and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly presented in all material respects in relation to the financial statements taken as a whole. Porto Alegre, March 4, 2005 Auditores Independentes CRC 2SP000160/O-5 F RS Carlos Alberto de Sousa Accountant CRC 1RJ /O-0 S RS

109 METALÚRGICA GERDAU S.A. Opinion of the Fiscal Council The Fiscal Council of Metalúrgica Gerdau S.A., in performance of its legal and statutory duties, in compliance with article 163 of Law 6404/76, having examined the Company s Management Report, the individual (parent company) and consolidated balance sheets and the related statements of income, of changes in shareholders equity and of changes in financial position for the years ended December 31, 2004 and 2003, as well as the distribution of interest on equity and dividends, and based on the report of PricewaterhouseCoopers Auditores Independentes, is of the opinion that these accounting statements fairly reflect the Company s individual and consolidated financial position, in conformity with current accounting practices, and are in prefect condition to be approved at the Ordinary General Meeting. Porto Alegre, March 11, 2005 CARLOS ROBERTO SCHRÖDER DOMINGOS MATIAS URROZ LOPES MÁRIO MAGALHÃES DE SOUSA

110 Gerdau S.A. Balance Sheet at December 31 (In thousands of reais) Assets Company Current Assets Cash and cash equivalents... note 5 15, ,684 2,041,967 1,017,006 Trade accounts receivable... note ,496,808 1,526,176 Inventories... note ,236,642 2,336,598 Tax credits... note 8 32,038 1, , ,815 Deferred income tax and social contribution on net income... note , ,868 Dividends receivable , , Other accounts receivable... 1, , ,417 Total current assets , ,089 9,556,265 5,334,880 Long-Term Receivables Related parties... note ,448 26,979 Eletrobrás loans... 8,908 8,908 10,212 10,212 Deposit for future investment in subsidiaries... note ,158 - Deferred income tax and social contribution on net income... note 9 42,296 29, , ,346 Compulsory deposits and other... note 10 25,495 25, , ,720 Total long-term receivables... 76,699 64,097 1,034,319 1,051,257 Permanent Assets Investments... note 11 7,100,464 4,248, , ,412 Fixed assets... note ,927,363 7,378,725 Deferred charges... note ,858 20,467 Total permanent assets... 7,100,464 4,248,312 8,073,238 7,860,604 Total assets... 7,373,150 4,727,498 18,663,822 14,246,741 The accompanying notes are an integral part of these financial statements.

111 GERDAU S.A. Liabilities and Shareholders Equity Company Current Liabilities Trade accounts payable ,935,953 1,192,428 Financing... note ,968,397 2,414,376 Debentures... note ,986 3,027 Taxes and contributions payable... note 18 6,808 42, , ,776 Related parties... note , Deferred income tax and social contribution on net income... note ,166 35,721 Salaries payable , , ,626 Dividends payable... note , , , ,220 Other accounts payable... 4,838 11, , ,725 Total current liabilities , ,261 5,247,668 4,342,899 Long-Term Liabilities Financing... note ,490,374 3,396,085 Debentures... note , , , ,039 Related parties... note 21-20, Provision for contingencies... note 20 94,882 95, , ,212 Deferred income tax and social contribution on net income... note 9 54,669 57, , ,096 Post-employement benefits... note , ,870 Other accounts payable , , ,393 Total long-term liabilities , ,841 5,803,107 5,048,695 Minority Interest ,539, ,751 Shareholders Equity Capital... note 23 3,471,312 1,735,656 3,471,312 1,735,656 Capital reserves , , , ,672 Revenue reserves... 2,225,872 2,016,068 2,225,872 2,016,068 Total shareholders equity... 6,073,856 4,128,396 6,073,856 4,128,396 Shareholders Equity Including Minority Interest ,613,047 4,855,147 Total liabilities and shareholders equity... 7,373,150 4,727,498 18,663,822 14,246,741 The accompanying notes are an integral part of these financial statements.

112 Statement of Income Years ended December 31 (In thousands of reais) Company GROSS SALES REVENUES... note 26-6,087,658 23,407,573 15,782,967 Taxes on sales... - (1,068,692) (2,456,568) (1,427,585) Freight and discounts... - (148,765) (1,353,743) (988,421) Net Sales Revenues ,870,201 19,597,262 13,366,961 COST OF SALES... - (3,041,635) (13,352,238) (10,076,740) Gross Profit ,828,566 6,245,024 3,290,221 SELLING EXPENSES... - (312,873) (455,175) (448,131) FINANCIAL INCOME... note 17 42,326 3, ,846 52,029 FINANCIAL EXPENSES... note 17 (49,329) (396,812) (385,952) (698,599) GENERAL AND ADMINISTRATIVE EXPENSES... Management fees... (1,261) (16,323) (43,562) (27,089) General expenses... (42,681) (305,054) (960,264) (736,351) EQUITY IN THE EARNINGS (LOSSES) OF SUBSIDIARIES AND ASSOCIATED COMPANIES... note 11 2,836, ,064 (343,116) (299,357) OTHER OPERATING INCOME (EXPENSES), NET... 28,057 11, ,866 14,489 Operating Profit... 2,813,598 1,314,901 4,454,667 1,147,212 NON-OPERATING INCOME (EXPENSES), NET... (1,065) (26,664) (24,930) (7,608) Profit before Taxes and Profit Sharing... 2,812,533 1,288,237 4,429,737 1,139,604 PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION ON NET INCOME... note 9 Current... 4 (93,129) (951,201) (308,681) Deferred... 20,063 (41,569) (202,286) 449,605 MANAGEMENT PROFIT SHARING... note 24a (1,261) (16,323) (41,363) (26,043) Net Income before Minority Interest... 2,831,339 1,137,216 3,234,887 1,254,485 MINORITY INTEREST... (403,548) (117,269) Net Income for The Year... 2,831,339 1,137,216 Net income per share - R$ Net equity per share - R$ The accompanying notes are an integral part of these financial statements.

113 GERDAU S.A. Statement of Changes in Financial Position Years ended December 31 (In thousands of reais) Company Financial Resources Were Provided by Operations: Net income for the year... 2,831,339 1,137,216 3,234,887 1,254,485 Expenses (income) not affecting working capital Depreciation and amortization , , ,887 Cost of permanent asset disposals... 76, , ,585 33,434 Equity in the (earnings) losses of subsidiaries and associated companies... note 11 (2,836,486) (503,064) 343, ,357 Foreign exchange effects on working capital of foreign companies (54,312) (120,202) Monetary variations on long-term debt... 44,942 1,621 (138,490) (15,737) Monetary variations on long-term receivables... - (1,493) (526) (5,107) From operations , ,111 4,276,925 2,051,117 Third parties: Capital increase ,181 - Treasury shares... note 23 (27,036) (17,103) (27,036) (17,103) Contributions to capital reserves ,304 16,246 66,304 Increase (decrease) in long-term liabilities ,245 (422,659) 1,055, ,723 Working capital of consolidated companies ,198 Working capital - operational integration , Working capital - purchase of assets ,446 Dividends not included in income for the year , , Total funds provided... 1,226,071 1,122,964 6,484,662 2,793,698 Financial Resources Were Used for Investments , ,913 35,395 75,280 Purchase of assets ,457 - Fixed assets ,483 1,262, ,461 Deferred charges ,304 18,654 7,246 Increase (decrease) in long-term receivables... 12,602 (30,465) (12,039) 506,376 Dividends/interest on equity... note , , , ,546 Total funds used... 1,712, ,482 3,168,046 1,783,909 Changes in Working Capital... (486,108) 379,482 3,316,616 1,009,789 Working capital At the beginning of the year ,828 (154,654) 991,981 (17,808) At the end of the year... (261,280) 224,828 4,308, ,981 Changes in Working Capital... (486,108) 379,482 3,316,616 1,009,789 The accompanying notes are an integral part of these financial statements.

114 Statement of Changes in Shareholders Equity (In thousands of reais) Capital reserves Revenue reserves Special Investments Total Investment Law and working Retained shareholders Capital incentives 8200/91 Other Total Legal capital Total earnings equity At December 31, ,335, ,606 21,487 12, , ,569 1,520,169 1,647,738-3,293,226 Net income for the year ,137,216 1,137,216 Capital increase , (400,536) (400,536) - - Investment incentives , , ,304 Treasury shares... note (17,103) (17,103) - (17,103) Distribution proposed for the Annual General Meeting Legal reserve... note ,860-56,860 (56,860) - Reserve for investments and working capital , ,109 (729,109) - Interest on equity... note (351,247) (351,247) At December 31, ,735, ,910 21,487 12, , ,429 1,831,639 2,016,068-4,128,396 Net income for the year ,831,339 2,831,339 Capital increase... note 23 1,735, (1,735,656) (1,735,656) - - Treasury shares... note (27,036) (27,036) - (27,036) Distribution proposed for the Annual General Meeting Legal reserve... note , ,567 (141,567) - Reserve for investments and working capital ,830,929 1,830,929 (1,830,929) - Dividends/interest on equity... note (858,843) (858,843) At December 31, ,471, ,910 21,487 12, , ,996 1,899,876 2,225,872-6,073,856 The accompanying notes are an integral part of these financial statements.

115 GERDAU S.A. Statement of Cash Flows Years Ended December 31 (In thousands of reais) Company Net income for the year... 2,831,339 1,137,216 3,234,887 1,254,485 Equity in the (earnings) losses of subsidiaries and associated companies... note 11 (2,836,486) (503,064) 343, ,357 Provision for credit risks ,594 7,323 20,705 Gain on disposal of fixed assets ,928 9,058 10,056 Gain (loss) on disposal of investments... 1,065 (1,645) 4,382 (111) Monetary and exchange variations... (9,556) 82,483 (99,284) 130,790 Depreciation and amortization , , ,887 Income tax and social contribution on net income... (34,703) (12,204) 463,938 (438,731) Interest on debt... 53, , , ,143 Contingencies/judicial deposits... (110) 4,997 5, Changes in trade accounts receivable... - (160,073) (687,562) (180,879) Changes in inventories... - (106,405) (1,402,408) (207,267) Changes in trade accounts payable , , ,378 Other operating activity accounts... (42,524) 135,319 (56,428) 84,468 Net cash provided by (used in) operating activities... (37,626) 1,090,597 3,485,974 2,352,905 Acquisition/disposal of fixed assets... - (262,887) (1,173,491) (873,039) Increase in deferred charges... - (2,304) (18,006) (7,246) Acquisition/disposal of investments... (802,735) (25,488) (37,686) (71,603) Purchase of assets (924,457) - Receipt of dividends/interest on own capital ,126 38, Net cash provided by (used in) investing activities... 30,391 (252,428) (2,153,640) (951,888) Suppliers of fixed assets , ,574 2,196 Working capital financing ,645 (136,784) (336,901) Debentures ,560 (426,154) 399,120 (394,340) Increase in permanent asset financing , , ,989 Payment of permanent asset financing... - (272,111) (677,357) (541,308) Payment of financing interest... - (142,343) (372,676) (402,611) Loans with related parties ,195 7,574 32,872 (11,316) Capital increase/treasury shares... note 23 (27,036) (17,103) 466,146 (17,103) Payment of dividends/interest on equity and profit sharing... (735,459) (402,793) (843,493) (407,910) Net cash used in financing activities... (154,740) (1,026,165) (224,832) (1,654,304) Changes in cash and cash equivalents... (161,975) (187,996) 1,107,502 (253,287) Cash and cash equivalents At the beginning of the year... note 5 177, ,680 1,017,006 1,430,656 Restatement of opening balance (82,541) (173,735) Opening balance of consolidated companies for the year ,372 At the end of the year... note 5 15, ,684 2,041,967 1,017,006

116 Notes to the Financial Statements at December 31, 2004 and 2003 (All amounts in thousands of reais unless otherwise indicated) 1 - Operations Gerdau S.A. is a holding company in the Gerdau Group, which is principally dedicated to the production of common and special steel rods and sale of general steel products (flat and long), in plants located in Brazil, Uruguay, Chile, Canada, Argentina and the United States of America. The Gerdau Group has an installed capacity of 16.4 million tons of crude steel per year, basically producing steel in electrical furnaces, from scrap and pig iron purchased, for the most part, in the region near each plant (mini-mill concept). Gerdau also operates plants which are capable of producing steel from iron ore (through blast furnaces and direct reduction) and has a unit used exclusively to produce special steels, It is the largest scrap recycling group in Latin America and among the largest in the world. The industrial sector is the most important market, including manufacturers of consumer goods such as vehicles and household and commercial equipment that basically use profiled steel in various available specifications. The next most important market is the civil construction sector, which demands a high volume of rebar and wire for concrete. There are also numerous customers for nails, staples and wires, commonly used in the agribusiness sector. 2 - Presentation of the Financial Statements The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, which are based on the provisions of Brazilian Corporate Law, together with the rules established by the Brazilian Securities Commission (CVM). A statement of cash flows (company and consolidated), prepared under the indirect method, is being presented as supplementary information in order to provide additional information. 3 - Significant Accounting Practices a) Cash and cash equivalents - financial investments are recorded at cost plus income accrued up to the balance sheet date, applying the interest rates agreed with the financial institutions, and do not exceed market value; b) Trade accounts receivable - are stated at realizable values, and accounts receivable from foreign customers are adjusted based on the exchange rates effective at the balance sheet date. The provision for credit risks is calculated based on a credit risk analysis, which includes the history of losses, the individual situation of each customer and the economic group to which they belong, the collateral and guarantees and the legal advisors opinion, and is considered sufficient to cover eventual losses on realization; c) Inventories - are stated at the lower of market value and average production or purchase cost; d) Investments in subsidiary and associated companies - are recorded on the equity method of accounting. The equity in the earnings or loss is recorded in an income statement account; e) Fixed assets - are recorded at cost, net of depreciation. Depreciation is calculated on the straight-line basis, at the rates stated in Note 12, which take into consideration the estimated useful lives of the assets. Interest on financing obtained to finance construction in progress is added to the cost of the constructions; f) Deferred charges - amortization is calculated on the straight-line basis at rates determined based on the production of the implemented projects in relation to their installed capacities; g) Financing - is stated at the contract value plus the contracted charges, including interest and monetary or foreign exchange variations. Swap contracts, which are linked to the loan agreements, are classified together with the related loans; h) Income tax and social contribution on net income - current and deferred income tax and social contribution on net income are calculated in conformity with current legislation; i) Other current and long-term assets and liabilities - are recorded at their realizable amounts (assets) and at their known or estimated amounts plus accrued charges and indexation adjustments (liabilities), when applicable; j) Related parties - loan agreements between Brazilian companies are restated by the weighted average interest rate for market funding. The agreements with foreign companies are restated by charges (LIBOR plus 3% p.a.) plus foreign exchange variation. Sales and purchases of inputs and products are made under terms and conditions similar to those of unrelated third parties; k) Determination of the results of operations - the results of operations are determined on the accrual basis of accounting; l) Use of estimates - the preparation of financial statements requires estimates to record certain assets, liabilities and other transactions. The Company s financial statements therefore include various estimates related to the useful lives of fixed assets, provisions necessary for contingent liabilities, for income tax and other similar matters. Actual results may differ from those estimated; m) Environmental investments - expenses related to compliance with environmental regulations are considered as cost of production or capitalized when incurred; and n) Translation of foreign currency balances - asset and liability balances of transactions in foreign currency are translated to local currency (R$) at the foreign exchange rate in effect at the balance sheet date ( US$ 1.00 = R$ and US$ 1.00 = R$ ),

117 GERDAU S.A. 4 - Financial Statements a) The consolidated financial statements at December 31, 2004 include the accounts of Gerdau S.A. and the directly or indirectly controlled subsidiaries listed below: Percentage Shareholders company ownership equity Gerdau Participações S.A ,887,726 Gerdau Açominas S.A ,766,046 Gerdau Ameristeel Corporation and subsidiaries* ,622,636 Gerdau Internacional Empreendimentos Ltda. - Grupo Gerdau ,785,282 Gerdau GTL Spain S.L ,761,750 Gerdau Steel Inc ,351,341 Axol S.A ,156 Gerdau Chile Inversiones Ltda ,126 Indústria Del Acero S.A. - Indac ,063 Gerdau Aza S.A ,401 Seiva S.A. - Florestas e Indústrias ,143 Itaguaí Com. Imp. e Exp. Ltda ,964 Sipar Aceros S.A ,037 Margusa - Maranhão Gusa S.A ,714 Gerdau Laisa S.A ,897 Aramac S.A ,355 GTL Equity Investments Corp ,286 Açominas Com. Imp. Exp. S.A. - Açotrading ,583 Florestal Rio Largo Ltda ,174 Aceros Cox Comercial S.A ,110 Gerdau Açominas Overseas Ltd ,914 Florestal Itacambira S.A ,650 Siderco S.A ,958 GTL Financial Corp ,931 GTL Trade Finance Inc Dona Francisca Energética S.A (16,350) * Subsidiaries: Gerdau Ameristeel MRM Special Sections Inc. (100%), Gerdau USA Inc. (100%), Ameristeel Bright Bar Inc. (100%), Gerdau Ameristeel US Inc. (100%), Gerdau Ameristeel Perth Amboy Inc. (100%), Gallatin Steel Company (50%) e Gerdau Ameristeel Sayreville Inc. (100%). b) The more significant accounting practices used in preparing the consolidated financial statements are as follows: I) Gerdau S.A. and its subsidiaries adopt consistent practices to record their operations and value their assets and liabilities. The financial statements of foreign subsidiaries were translated using the exchange rate in effect at the balance sheet date and were adjusted to conform with accounting practices adopted in Brazil; II) Asset and liability, and income and expense, accounts arising from transactions between consolidated companies have been eliminated; and III) Holdings of minority shareholders in subsidiaries are shown separately. c) The following transactions occurred during the year: I) On February 16, 2004, the subsidiary Gerdau Ameristeel Corporation signed a sale and purchase agreement for the acquisition of all assets of Potter Form & Tie Co., headquartered in Belvidere, Illinois, in the United States of America. The acquisition price was US$ 11 million, equivalent to R$ 31,995 on that date;

118 II) On April 16, 2004, Gerdau S.A., through its indirect subsidiary Gerdau Steel Inc., acquired 26,800,000 shares of Gerdau Ameristeel Corporation through a capital increase of Cdn$ 131 million, equivalent to R$ 283,937 on that date. After this transaction, Gerdau S.A. held, indirectly, 72% of Gerdau Ameristeel Corporation; III) The Extraordinary General Meeting of shareholders held on June 30, 2004 approved the merger of the subsidiary GTL Brasil Ltda., without the issue of new shares. The net assets transferred to Gerdau S.A. as a result of the merger, are as follows: Assets Current assets Long-term receivables... 8 Permanent assets Investments Seiva S.A. - Florestas e Indústrias... 17,883 Gerdau Açominas S.A ,257 (-) Negative goodwill - Gerdau Açominas S.A... (280,882) Total permanent assets... 70,258 Total assets... 70,800 Liabilities Current liabilities... 1,495 Long-term liabilities... 4,591 Total liabilities... 6,086 Total Net Assets... 64,714 IV) On October 15, 2004, Gerdau S.A. announced to the market that the indirect subsidiary Gerdau Ameristeel Corporation obtained the confirmation of its registration with the Canadian securities regulatory authorities for the public offer of 70 million common shares. Gerdau S.A., through its subsidiary Gerdau Steel Inc., acquired 35,000,000 and 4,381,000 common shares on October 20, 2004 and November 18, 2004, respectively, in the total amount of US$ 185 million, equivalent to R$ 528,787 on those dates. The transaction initially was a capital increase in Gerdau Steel Inc., through the issue of 817,969 common shares. Subsequently, on December 28, 2004, Gerdau S.A. paid up capital in Gerdau Internacional Empreendimentos Ltda. (the company that holds the investments abroad) through the transfer of 817,969 common shares of Gerdau Steel Inc. in the amount of R$ 499,430. Following this transaction, Gerdau S.A. held, indirectly, 66.5% of Gerdau Ameristeel Corporation; V) On October 28, 2004, Gerdau S.A., through its indirect subsidiary Gerdau Ameristeel Corporation, announced the signature of a sale and purchase agreement for the acquisition of the assets of Gate City Steel Inc. and RJ Rebar Inc. (cutting and folding of rebar, with and without epoxy covering), headquartered in Indianapolis, Indiana, in the United States of America. The acquisition price was US$ 16 million (R$ 42,470 at December 31, 2004); VI) On October 29, 2004, the subsidiary Armafer Serviços de Construção Ltda. was merged by the subsidiary Gerdau Açominas S.A., and the net assets of R$ 44,744 were recorded, replacing the investment account, without capital increase. The objectives of the transaction were to reduce administrative expenses and improve operating synergy; VII) On November 1, 2004, Gerdau S.A., through its indirect subsidiary Gerdau Ameristeel Corporation, purchased the fixed assets and working capital of four mills producing long steel, three processing units of wire rods and one producer of steel grinding balls for the mining industry owned by North Star Steel, announced on September 9, The price paid for these assets was US$ 266 million (R$ 706,070 at December 31, 2004), in cash. Gerdau Ameristeel Corporation also paid an additional US$ 52 million (R$ 138,029 at December 31, 2004) as an adjustment in the purchase price due to fluctuations in working capital up to the transaction date; VIII) On December 23, 2004, the Gerdau Group reached an agreement with the Mayaguez Group and The Latinamerican Enterprise Steel Holding, majority shareholders of Diaco S.A., the largest Colombian producer of steel and rebar, and Siderúrgica del Pacífico S.A. - Sidelpa, the only producer of special steel in that country, for the scheduled acquisition of their holdings in these companies. Initially, US$ 69 million (R$ 182,158 at December 31, 2004) were invested, recorded as deposit for future investment in subsidiaries in long-term receivables. The Mayagüez Group, which will remain as a Diaco shareholder for a maximum eight-year period, formed a strategic partnership with the Gerdau Group for the development of the Colombian steel industry; and IX) On December 3, 2004, the Board of Directors of Gerdau S.A. authorized the Company s management to implement corporate restructuring measures to obtain greater strategic advantages, as well as greater operating and management efficiency, arising from the specialization and location of the different business units and areas of the Gerdau Group. The Company s efforts will be concentrated in its main activities, focused operations and gain of critical mass within each of the activity areas. Also, this restructuring will consider solutions for the Group s future growth. On December 29, 2004, the first act of this process was completed, with the capital increase of the holding company Gerdau Participações S.A. through the shares held in Gerdau Açominas S.A. and part of the quotas held in Gerdau Internacional Empreendimentos Ltda. by Gerdau S.A., representing, respectively, 91.5% and 22.8% of those companies capital. The capital of Gerdau Participações S.A. was also increased by the direct and indirect investments held by Gerdau Internacional Empreendimentos Ltda. in Gerdau Chile Inversiones Ltda., Gerdau Laisa S.A. and Sipar Aceros S.A. The final corporate restructuring model has not yet been finished and will be implemented as the management proposals are approved by the Board of Directors. Accordingly, additional measures should be implemented during this year and they will be advised, as soon as they occur.

119 GERDAU S.A. d) The financial statements of the jointly-owned subsidiary Dona Francisca Energética S.A., and the jointly-owned indirect subsidiaries Gallatin Steel Company and Sipar Aceros S.A., have been consolidated proportionally based on the direct or indirect interest of the parent company in the capital of these subsidiaries. The amounts of the financial statements of these companies are shown as follows: Dona Francisca Gallatin Sipar Aceros S.A. Energética S.A. Steel Company * Assets Current assets , , , , ,251 85,185 Long-term receivables , , ,863 Permanent assets , , , ,223 18,929 19,109 Total assets , ,399 1,198,868 1,026, , ,157 Liabilities Current liabilities... 29,381 28, , ,134 80,787 40,252 Long-term liabilities , ,722 54, ,651 4,356 4,212 Shareholders equity... (16,349) (18,845) 1,013, ,474 78,037 62,693 Total liabilities , ,399 1,198,868 1,026, , ,157 Statement of operations Gross sales revenues... 44,987 37,189 2,384,065 1,260, , ,651 Sales deductions... (2,207) (3,952) (11,215) (14,157) (87,259) (62,398) Net sales revenues... 42,780 33,237 2,372,850 1,245, , ,253 Cost of sales... (19,424) (19,520) (1,626,650) (1,194,150) (285,566) (188,139) Gross profit... 23,356 13, ,200 51,823 65,039 46,114 Selling expenses (6,224) (5,336) (4,987) (2,259) General and administrative expenses... (2,110) (2,251) (45,010) (33,376) (19,876) (12,762) Other financial income (expenses)... (17,882) (20,743) (14,030) (22,620) (8,101) 2,681 Other operating income (expenses) (76) (3,346) Operating profit (loss)... 3,364 (9,277) 680,936 (9,509) 31,999 30,428 Non-operating income (expenses), net ,790 10,225 (1,367) 759 (2,889) Provision for income tax and social contribution... (1,249) 1,871 (797) - (10,188) (7,425) Net income (loss) for the year... 2,495 (3,616) 690,364 (10,876) 22,570 20,114 * includes the subsidiary Siderco S.A. e) The Company and its direct and indirect subsidiaries have goodwill and negative goodwill balances, which are being amortized as the assets that generated them are realized or based on the realization of the projected future income, limited to ten years, as follows: Amortization period Company Goodwill included in the investment accounts Balance at December 31, , ,077 (+) Goodwill recorded in the period , ,397 ( - ) Reversal of goodwill based on the adjustment in purchase price (Margusa - Maranhão Gusa S.A.).. - (5,258) ( - ) Write-off of goodwill as a result of the merger of the subsidiary GTL Brasil Ltda.... (280,882) (280,882) ( - ) Foreign exchange adjustment... - (36,361) ( - ) Amortization during the year... up to 10 years (2,439) (364,119) Balance at December 31, 2004 (based on expectation of future profitability)... 19,512 52,854 Analysis of the goodwill by subsidiary: Margusa - Maranhão Gusa S.A ,728 Dona Francisca Energética S.A ,512 19,512 Armacero Industrial y Comercial Ltda Distribuidora Matco S.A ,066 Salomon Sack S.A ,091 19,512 52,854

120 Amortization period Company Negative goodwill included in the investment accounts Balance at December 31, (270,949) - ( - ) Amortization during the year... up to 10 years 28,877 - ( - ) Write-off of negative goodwill as a result of the capitalization of the subsidiary Gerdau Participações S.A ,072 - Balance at December 31, Goodwill included in the fixed asset accounts Balance at December 31, ,740 ( - ) Foreign exchange adjustment... - (14,860) ( - ) Amortization during the year... up to 10 years - (79,921) Balance at December 31, 2004 (based on undervaluation of assets) ,959 The goodwill mainly resulted from the assets of the subsidiary Gerdau Ameristeel US Inc. Negative goodwill included in the fixed asset accounts Balance at December 31, (272,130) ( - ) Amortization during the year... up to 10 years - 28,853 Balance at December 31, 2004 (based on overvaluation of assets)... - (243,277) The negative goodwill mainly resulted from the assets of the subsidiary Gerdau Açominas S.A. The goodwill recorded in the investment accounts, calculated on the subsidiary Gerdau Ameristeel US Inc., were reviewed in respect of their amortization period and projected profitability. The remaining balance was amortized in accordance with accounting practices adopted in Brazil, and based on the current scenario and performance of the subsidiary Gerdau Ameristeel Corporation. The equity accounting loss in the consolidated statement of income refers, basically, to the effect of the devaluation of the U.S. dollar on the foreign investments, to goodwill amortization for the year and to the tax incentive reserves arising from the reduction of income tax on the exploitation profit of the subsidiaries Gerdau Açominas S.A. and Margusa - Maranhão Gusa S.A., both located in the Northeastern region of Brazil, as well as to benefits arising from state tax financing. 5 - Cash and Cash Equivalents Company Cash and Banks... 1, , ,615 Financial investment fund... 12, , , ,551 Fixed income securities... 1,989 2,832 1,098, ,377 Equities , ,463 15, ,684 2,041,967 1,017,006 Of the existing balance, R$ 1,004,550 - consolidated (R$ 518,315 - consolidated in 2003) refers to investments in U.S. dollars. 6 - Trade Accounts Receivable Customers in Brazil , ,631 Brazilian export receivables , ,442 Receivables from customers of overseas companies... 1,232, ,212 Provision for credit risks... (91,661) (78,109) 2,496,808 1,526,176

121 GERDAU S.A. 7 - Inventories Finished products... 1,728, ,147 Work in progress , ,373 Raw materials... 1,112, ,311 Storeroom materials , ,010 Advances to suppliers... 66,464 41,757 4,236,642 2,336,598 The inventories are covered against fire and overflow. Coverage is determined based on the amounts and the risks involved. 8 - Tax Credits Company Value-Added Tax on Sales and Services (ICMS) ,803 90,804 Social Contribution on Revenues (COFINS) to offset ,302 - Social Integration Program (PIS) to offset... 24,621 1,786 36,730 4,759 Excise Tax (IPI) ,310 6,358 Income tax and social contribution on net income... 7, ,023 13,485 Tax on Added Value (IVA) , Other ,433 4,922 32,038 1, , , Income Tax and Social Contribution on Net Income a) Analysis of the income tax and social contribution expense: Company IR CS Total IR CS Total Profit before income tax and social contribution, after statutory profit sharing... 2,811,272 2,811,272 2,811,272 1,271,914 1,271,914 1,271,914 Statutory rates of tax... 25% 9% 34% 25% 9% 34% Income tax and social contribution expense at statutory rates... (702,818) (253,014) (955,832) (317,979) (114,472) (432,451) Tax effects on: - equity in earnings (losses) , , , ,766 45, ,042 - interest on capital... 15,669 5,641 21,310 87,694 31, ,263 - permanent differences (net)... (7,340) (2,477) (9,817) 4,790 2,658 7,448 Income tax and social contribution expense... 14,633 5,434 20,067 (99,729) (34,969) (134,698) Current (74,640) (18,489) (93,129) Deferred... 14,629 5,434 20,063 (25,089) (16,480) (41,569) IR - Corporate income tax. CS - Social contribution on net income.

122 IR CS Total IR CS Total Profit before income tax and social contribution, after statutory profit sharing... 4,388,374 4,388,374 4,388,374 1,113,561 1,113,561 1,113,561 Statutory rates of tax... 25% 9% 34% 25% 9% 34% Income tax and social contribution expense at statutory rates... (1,097,094) (394,954) (1,492,048) (278,390) (100,220) (378,610) Tax effects on: - tax rate difference for foreign companies... (96,019) 91,649 (4,370) 38,906 (14,169) 24,737 - equity in earnings (losses)... (85,779) (30,880) (116,659) (74,839) (26,942) (101,781) - interest on own capital... 90,100 32, ,536 87,887 31, ,526 - foreign exchange effect... 29,731 2,676 32,407 72,863 26,231 99,094 - recovery of deferred tax assets ,770 48, , , , ,751 - permanent differences (net)... (40,554) 26,322 (14,232) (32,015) (12,778) (44,793) Income tax and social contribution expense... (928,845) (224,642) (1,153,487) 120,136 20, ,924 Current... (785,225) (165,976) (951,201) (235,130) (73,551) (308,681) Deferred... (143,620) (58,666) (202,286) 355,266 94, ,605 IR - Corporate income tax. CS - Social contribution on net income. b) Analysis of the deferred income tax and social contribution assets and liabilities, at the statutory rates of tax: Assets Company IR CS Total IR CS Total IR CS Total IR CS Total Income tax losses... 8,655-8, , , , ,597 Social contribution losses ,758 3, ,651 60,651-89,175 89,175 Provision for contingencies... 12,918 4,651 17,569 12,916 4,650 17,566 48,673 17,403 66,076 40,732 14,536 55,268 Benefits to employees , ,474 95,839-95,839 Commissions/other ,148 2, ,420 80,071 1,453 81,524 Amortized goodwill... 1, , , , Provision for losses... 9, ,655 9, ,654 87,595 29, ,641 94,462 31, ,981 32,457 9,839 42,296 23,308 6,378 29, , , , , , ,214 Current ,959 58, ,464 90,818 26, ,868 Long-term... 32,457 9,839 42,296 23,308 6,378 29, ,231 51, , , , ,346 Liabilities Company IR CS Total IR CS Total IR CS Total IR CS Total Accelerated depreciation , , , ,605 Amortized negative goodwill... 40,198 14,471 54,669 42,301 15,229 57,530 50,341 14,628 64,969 55,821 16,601 72,422 Inflationary/exchange effect ,934 33, ,905 19,790-19,790 40,198 14,471 54,669 42,301 15,229 57, ,451 49, , ,362 17, ,817 Current ,195 33, ,166 35,721-35,721 Long-term... 40,198 14,471 54,669 42,301 15,229 57, ,256 15, , ,641 17, ,096

123 GERDAU S.A. The tax benefits recognized on income tax and social contribution losses, as well as on the provision for losses, both in the Company and consolidated, are supported by projections of future taxable income adjusted to present values, based on technical feasibility studies, approved by management. These studies, which consider the history of the Company s and its subsidiaries profitability and the maintenance of the current profitability in the future, permitted the recognition of an additional benefit for the year of R$ 318,879 (R$ 422, ) in subsidiaries, whose estimated recovery is shown in item c below. Other credits, based on temporary differences, mainly tax contingencies, were maintained according to their estimate of realization. c) Estimated recovery of deferred income tax and social contribution assets: Company Up to , , , , ,201 65, , ,839 6,723 65, , ,298 9,371 71, , ,948 2, ,649 91, to ,794 6, , , to ,417-99,852 34,291 42,296 29, , , Compulsory Deposits and Other Company Compulsory deposits... 15,550 15,558 28,052 16,566 Receivables under contract ,496 40,328 ICMS credits on purchases of fixed assets ,978 55,612 Income tax incentives... 9,945 9,945 10,122 10,155 Prepaid expenses ,036 Assets not for use ,779 52,614 Prepaid financial expenses ,143 46,409 25,495 25, , ,720

124 11 - Investments Company Subsidiaries Other Total Total Gerdau Itaguaí Gerdau Internacional Com. Imp. Dona Seiva S.A. - Participa- Gerdau Empreend. e Export Francisca Florestas e GTL ções S.A. 1 Açominas S.A. Ltda. 2 Ltda. Energética S.A. Indústrias Brasil Ltda. 3 Other Negative Provision Investment Investment Goodwill Investment Investment for loss Goodwill Investment Investment Goodwill Investment Opening balance ,512,502 (270,949) 1,820,606 98,777 (9,765) 21,951 74, ,248,312 4,410,913 Merger/ capitalization... 4,879,338 (4,146,662) 242,072 (684,769) 97, (80,316) (64,714) (280,882) - - (38,801) (805,785) Acquisition , , , ,100 Goodwill on aquisition of investment , ,882 - Sale (15,426) (17,882) (33,308) (99,199) Equity in earnings (losses) ,920 2,203,954 28, ,467 22,783 1,293 (2,439) 23,720 44,913 - (2) - 2,836, ,064 Dividends/ interest on own capital... (147,287) (569,794) - - (24,728) (6,460) - (2) - (748,271) (273,781) Closing balance... 4,887, ,007, ,964 (8,472) 19, ,100,464 4,248,312 Capital... 15,227, ,663, ,110-66, Adjusted shareholder s equity... 4,887, ,785, ,964 - (16,350) Net income for the year ,974 2,483, ,571 21,719-2,495 48,517 55,522 55,522 Holding in capital (%) % % % % Common shares/ quotas held... 9,249,199, ,919,769, ,109, ,109, On December 29, 2004, the Company increased the capital in Gerdau Participações S.A. (previously Siderúrgica Riograndense S.A.) paid through the merger of its total shareholding in the subsidiary Gerdau Açominas S.A. (91.5%) and the equivalent of a 22.8% holding in the subsidiary Gerdau Internacional Empreendimentos Ltda., relating to the indirect holding of this company in Gerdau Chile Inversiones Ltda., Gerdau Laisa S.A. and Sipar Aceros S.A. These investments were valued at the economic values of their net assets by an expert company based on projections of cash flows, discounted to present values, in the total amount of R$ 15,226,656. The difference between the book value of these investments and the amount appraised represents an unrealized capital gain of R$ 10,347,318, recorded as a reduction of the corresponding capitalization. The realization of the capital gain will be made in accordance with the realization of the goodwill recorded by the subsidiary Gerdau Participações S.A. 2 Company holder of the investments in foreign subsidiaries. 3 Company merged on June 30, Includes amortization of goodwill/negative goodwill.

125 GERDAU S.A Investment Goodwill Total Total Gerdau Ameristeel US Inc ,870 Gerdau Ameristeel Corporation ,470 Margusa - Maranhão Gusa S.A ,728 24,728 43,564 Dona Francisca Energética S.A ,512 19,512 21,951 Armacero Industrial y Comercial Ltda... 9, ,328 10,321 Distribuidora Matco S.A ,400 6,066 18,466 - Salomon Sack S.A ,873 2,091 19,964 - Corporate joint ventures... 10,036-10,036 9,984 Other investments... 8,983-8,983 13,252 59,163 52, , ,412 1 Companies purchased by the indirect subsidiary Industria del Aceros S.A. - Indac Fixed Assets Annual Accumulated depreciation depreciation rate - % Cost and depletion Net Net Land, buildings and structures... 0 to 10 3,310,732 (1,079,881) 2,230,851 2,301,431 Machinery, equipment and installations... 5 to 10 7,965,817 (3,639,334) 4,326,483 4,085,090 Furniture and fixtures... 5 to ,424 (69,644) 40,780 37,979 Vehicles to 33 41,678 (31,112) 10,566 12,369 Eletronics data equipment/rights/licenses to ,837 (188,113) 96,724 93,764 Construction in progress ,065,583-1,065, ,810 Forestation/reforestation... Felling plan 207,431 (51,055) 156, ,282 12,986,502 (5,059,139) 7,927,363 7,378,725 a) Insured amounts - the assets are insured against fire, electrical damage and explosion. The coverage is determined based on the risks involved. The plants of the North American subsidiaries and the Ouro Branco plant of the subsidiary Gerdau Açominas S.A. have coverage for loss of profits. b) Capitalization of interest and financial charges - R$ 2,021 was capitalized during the year - consolidated (R$ 1,174 - Company and R$ (14,711) consolidated in 2003). c) Guarantees offered - fixed assets were pledged as collateral for loans and financing in the amount of R$ 688,034 - consolidated (R$ 539,724 consolidated in 2003). d) Summary of changes in fixed assets: Balance at the beginning of the year... 7,378,725 7,597,318 ( + ) Purchases/sales for the year... 1,167, ,583 ( - ) Depreciation and depletion in cost of sales... (692,610) (538,286) ( - ) Depreciation and depletion in administrative expenses... (69,440) (61,648) ( + ) Companies consolidated in the year ,898 ( - ) Revaluation reversal... - (365,347) ( + ) Purchase of North Star and others ,948 - ( - ) Foreign exchange effect on foreign fixed assets... (124,632) (354,793) Balance at the end of the year... 7,927,363 7,378,725

126 13 - Deferred Charges deferred charges comprise pre-operating expenses in the construction of a power plant, as well as reforestation, research, development and restructuring projects Financing Financing are represented as follows: Annual charges CURRENT Working capital financing (R$) % to 14.00% 1,174 48,465 Fixed asset financing (R$) % - 3,054 Investment financing (R$)... CDI 4,500 4,500 Investment financing (US$)... US$ 133,955 45,649 Working capital financing (US$) % to 10.50% 1,085,418 1,341,746 Fixed asset financing and others (US$)... US$ - 8,692 Working capital financing (Clp$) % to 0.32% 31,905 30,025 Working capital financing (PA$) % to 10.00% 19,956 - Current portion of long-term financing , ,245 1,968,397 2,414,376 LONG-TERM Working capital financing (R$) % 28,215 3,812 Fixed asset financing and others (R$) % to 9.90% 657, ,727 Investment financing (R$)... IGPM + 8.5% 29,045 35,019 Fixed asset financing and others (US$) % to 9.97% 762, ,288 Working capital financing (US$) % to 10.75% 2,473,200 2,643,325 Investment financing (US$) % 182,943 - Working capital financing (Cdn$) % to 3.25% - 164,974 Fixed asset financing (Cdn$) % to 3.25% 3,485 3,837 Working capital financing (Clp$) % to 0.43% 16,254 29,952 Fixed asset financing (Clp$) % to 0.43% 27,000 58,396 Fixed asset financing (PA$) % to 10.00% 1,663 - (-) Current portion... (691,489) (932,245) 3,490,374 3,396,085 Total financing... 5,458,771 5,810,461 CDI - Certificate of Interbank Deposit interest rate. IGPM - General Market Price Index. Summarized by currency: Brazilian real (R$) , ,577 U.S. dollar (US$)... 4,637,854 4,800,700 Canadian Dollar (Cdn$)... 3, ,811 Argentine Peso (PA$)... 21,619 - Chilean Peso (Clp$)... 75, ,373 5,458,771 5,810,461 The schedule for payment of the long-term portion of financing is as follows: In ,860 In ,896 In ,035 In ,109 In ,048 After ,300,426 3,490,374

127 GERDAU S.A. a) Events during the year On June 3, 2004, the Company concluded the placement of the second tranche, of US$ 128 million (equivalent to R$ 339,763 at December 31, 2004) of a US$ 400 million Export Notes Receivable program (equivalent to R$ 1,061,760 at December 31, 2004). This joint program with Gerdau Açominas S.A. has an interest rate of 7.321% p.a., maturity in April 2012, a grace period of two years and quarterly amortization as from July b) Guarantees The loans contracted under the FINAME/BNDES program are guaranteed by the financed assets, in the amount of R$ 180,109. The other loans are guaranteed by sureties from the controlling shareholders, on which the subsidiary pays a fee of 1% p.a. on the amount guaranteed. c) Covenants In replacement of the tangible guarantees usually required, the loans are being contracted with certain financial covenants, as follows: I) interest coverage ratio - measures the debt service payment capacity in relation to EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization); II) leverage ratio - measures the debt coverage capacity in relation to EBITDA; III) Required Minimum Net Worth - measures the minimum net worth required in financial agreements; and IV) Current Ratio (current liquidity ratio) - measures the capacity to comply with short-term obligations. All the covenants mentioned above are calculated on a consolidated basis, except for item IV which refers to the parent company Metalúrgica Gerdau S.A., and have been observed. The penalty for non-compliance is the prepayment of the contracts. d) Credit lines The North American subsidiaries have a credit line in the amount of US$ 350 million, equivalent to R$ 929,040 at the balance sheet date, falling due in June 2008, which can be drawn in U.S. dollars (at the LIBOR rate plus interest between 2.25% and 2.75% p.a. or US Prime/FED Funds plus interest of 0.5% p.a.) or in Canadian dollars (at the Bankers Acceptance (BA) rate plus interest between 2.35% and 2.85% p.a. or Canadian Prime plus interest of 1.00% p.a.). The distribution of this credit line among the companies is made in proportion to the working capital of each North American subsidiary. The subsidiary Gerdau Aza S.A. has a credit line for working capital amounting to Clp$ 28 billion, equivalent to R$ 133,582 at the balance sheet date, bearing interest of 3.90% p.a., and a credit line for fixed assets in the amount of Clp$ 6 billion, equivalent to R$ 28,625 at the balance sheet date, bearing interest of 4.50% p.a. 15- Debentures General Number Annual Issue meeting Issued In portfolio Maturity rate rd - A and B ,000 52, CDI 156,387 73,508 7 th ,400 6, CDI 121,068 21,628 8 th ,964 65, CDI 145,878 83,566 9 th ,640 38, CDI 170,954 29, th - A and B ,000 97, CDI 98,189 19, th ,000 30, CDI less 2% - - Company 692, ,878 Gerdau Ameristeel Corp , % 232, ,021 Debentures held by consolidated subsidiaries... (7,022) (1,833) , ,066 Current portion... 2,986 3,027 Long-term portion , ,039 The Extraordinary General Meeting of shareholders held on April 29, 2004 approved the cancellation of the 4 th issue (42,000 debentures) and 10 th issue debentures (6,450 debentures), which were held in treasury. The same EGM approved the split of the following debenture issues: 3 rd (classes A and B), 7 th, 8 th, 9 th and 11 th issues (classes A and B). On July 1, 2004, three new debentures were issued for each existing debenture, thus changing their nominal value. The Extraordinary General Meeting of the subsidiary Seiva S.A. - Florestas e Indústrias held on April 30, 2004 approved the cancellation of the 1 st issue debentures, series A and B (12,000 debentures), which were held in treasury. The Board of Directors Meeting held on October 14, 2004 approved the fixed remuneration of the 13 th issue debentures at the CDI interest rate less 2% p.a., during the period from November 1, 2004 to October 31, The debentures of Gerdau Ameristeel Corporation are convertible into common shares of that subsidiary, up to their maturity date. The controlling shareholders hold, directly or indirectly, R$ 523,546 at December 31, 2004 ( R$ 88,284) of the outstanding debentures.

128 16 - Financial Instruments a) General comments - Gerdau S.A. and its subsidiaries enter into transactions involving financial instruments, the risks of which are managed through financial positions and exposure limit controls. All instruments are fully recorded in the books of account and mainly relate to the instruments listed below: - financial investments - are recorded at their market value as of the balance sheet date and are explained and presented in Note 5; - investments - are explained and presented in Note 11; - related parties - are explained and presented in Note 21; - financing - are explained and presented in Note 14; - debentures - are explained and presented in Note 15; and - financial derivatives - in order to minimize the effects of fluctuations in foreign exchange rates on their liabilities, the subsidiaries Gerdau Açominas S.A. and Dona Francisca Energética S.A. entered into swap contracts that were converted into Brazilian reais on the contract date and linked to changes in the CDI rate and the General Market Price Index (IGP-M), plus additional interest. The subsidiary Gerdau Ameristeel Corporation also entered into swap contracts, linked to the London Interbank Offered Rate (LIBOR) plus interest of between 6.05% and 6.45% p.a. The swap contracts are listed below: Contract date Purpose Amount (US$ thousand) Rate Maturity 07/16/2001 to 05/07/2002 Prepayment 32, % to % of the CDI 01/13/2005 to 03/01/ /20/2002 Resolution , % of the CDI 06/20/ /19/2003 Resolution , % of the CDI 02/04/ /17/2003 Fixed assets 6,316 IGPM % 05/16/2005 to 11/16/ /17/2003 Fixed assets 13, % to % of the CDI 05/16/2005 to 11/16/ /30 to 11/03/2003 Bank notes 200,000 LIBOR + interest between 6.09% to 6.13% 07/15/ /26/2003 Investment 55, % to 5.40% 09/02/2005 to 10/02/2006 b) Market value - the market values of the financial instruments are as follows: Company Book Market Book Market Value Value Value Value Financial investments... 14,362 14, , ,674 Debentures , , , ,878 Investments... 7,100,464 7,100,464 4,248,312 4,248,312 Related parties (liabilities) , ,549 20,961 20,961 Stock options (liabilities) - note ,096-5,088 Treasury shares - note ,139 74,727 17,103 21, Book Market Book Market Value Value Value Value Financial investments... 1,708,247 1,708, , ,391 Swap contracts - investments (liabilities)... 4,500 4,500 12,303 12,303 Eurobonds ,235 72,581 Securitization financing , , , ,282 Import financing , , , ,941 Prepayment financing , , , ,786 Financing - Resolution , , , ,235 ACC (Advances on Export Contracts) financing... 43,891 43, , ,935 Financing - Resolution ,893 20,755 24,243 24,468 Bank notes financing... 1,050,835 1,260,376 1,144,601 1,292,733 Fixed asset financing... 45,837 45,686 93,172 96,069 Other financing... 1,977,481 1,977,481 2,111,318 2,130,564 Debentures , , , ,066 Investments , , , ,412 Related parties (assets)... 1,448 1,448 26,979 26,979 Stock options (liabilities) - note ,663-8,298

129 GERDAU S.A. The market values of the swap contracts of subsidiaries in Brazil were obtained based on future income projections for each contract, calculated based on the present value of the forward U.S. dollar + coupon rates (assets) and CDI/IGPM future rates (liabilities) and adjusted to present value on the balance sheet date, using the projected future CDI/IGPM rate for each maturity. The same methodology is applied for the calculation of the market values of the swap contracts of the subsidiary Gerdau Ameristeel Corporation, using the LIBOR rate. Swap contracts related to financing contracts are classified together with the related financing, as a contra entry to the Financial expenses/ income, net account, and are stated at cost plus accrued charges up to the balance sheet date. Contracts not linked to such financing have been recorded at their market value under the heading Other accounts payable, in long-term liabilities. The Company believes that the balances of the other financial instruments, which are recognized in the books at net contracted values, are substantially similar to those that would be obtained if they were negotiated in the market. However, because the markets for these instruments are not active, differences could exist if they were settled in advance. c) Risk factors that could affect the Company s and its subsidiaries business Price risk: this risk is related to the possibility of price variations of the products that the subsidiaries sell or in the raw material prices and other inputs used in the production process. Since the subsidiaries operate in a commodity market, their sales revenues and cost of sales may be affected by the changes in the international prices of their products or materials. In order to minimize this risk, the subsidiaries constantly monitor the price variations in the local and international markets. Interest rate risk: this risk arises as a result of the possibility of losses (or gains) due to fluctuations in interest rates relating to assets (investments) and liabilities. In order to minimize possible impacts resulting from interest rate fluctuations, the Company and its subsidiaries have adopted a policy of diversification, alternating between fixed rates and variable rates (such as LIBOR and the CDI) and periodically renegotiate contracts to adjust them to market. Exchange rate risk: this risk is related to the possibility of fluctuations in foreign exchange rates affecting financial expenses (or income) and the liability (or asset) balance of contracts denominated in a foreign currency. In addition to the foreign investments which are a natural hedge, the Company and its subsidiaries use hedge instruments, usually swaps contracts, as described in item a above, to manage the effects of these fluctuations. Credit risk: this risk arises from the possibility of the subsidiaries not receiving amounts arising from sales or investments at financial institutions. In order to minimize this risk, the subsidiaries adopt the procedure of analyzing in detail the financial and equity position of their customers, establishing a credit limit and constantly monitoring their balances. In relation to financial investments, the Company and its subsidiaries invest solely in institutions with low credit risk, as assessed by rating agencies. In addition, each institution has a maximum limit for investment, determined by the Credit Committee Financial Expenses/Income, Net Company Financial income Financial investments... 18,674 25, , ,860 Interest received ,072 29,928 30,318 Monetary variations - assets ,486 3,325 4,438 Foreign exchange variations - assets... 1 (18) (34,671) (79,356) Foreign exchange swaps - assets... - (62,884) 3,915 (62,884) Other financial income... 23,288 13,162 65,955 19,653 Total financial income... 42,326 3, ,846 52,029 Financial expenses Interest on debt... (53,662) (291,462) (411,365) (587,143) Monetary variations - liabilities... (743) (23,741) (17,836) (24,018) Foreign exchange variations - liabilities... 10, , , ,672 Foreign exchange swaps - liabilities... - (452,210) (44,127) (741,389) Other financial expenses... (5,260) (22,999) (110,231) (62,721) Total financial expenses... (49,329) (396,812) (385,952) (698,599)

130 18 - Taxes and Social Contributions Payable Company Income tax and social contribution on net income , ,862 37,222 Social charges on payroll ,822 48,131 Value-added tax on sales and services (ICMS) ,131 12,865 Social contribution on revenues (COFINS) ,609 14,057 Excise tax (IPI) ,114 2,966 Social Integration Program (PIS) ,683 3,607 Income tax and social contribution withheld at source ,058 7,349 23,016 Taxes payable in installments... 6,459 12,883 11,819 15,427 Other ,432 31,849 14,485 6,808 42, , , Tax Recovery Program (Refis) and Special Installment Payment Program (PAES) a) REFIS On December 6, 2000, the Company enrolled in the REFIS program to pay the Social Integration Program (PIS) and the Social Contribution on Revenues (COFINS) contributions in installments. The balances of these tax liabilities are recorded in Taxes and contributions payable, in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were originally divided into 60 installments of which 5 installments are not yet due, are restated by the Long-Term Interest Rate (TJLP) rate, and are as follows at the year end: Company and Principal Interest Total Principal Interest Total PIS... 2,608 2,551 5,159 9,895 6,494 16,389 COFINS ,225 2,351 1,540 3,891 Total... 3,228 3,156 6,384 12,246 8,034 20,280 Current... 3,228 3,156 6,384 8,644 5,671 14,315 Long-term ,602 2,363 5,965 Taxes, contributions and other liabilities are paid by the Company on their due dates, which is a basic requirement to remain eligible for the REFIS program. As guarantee for this installment payment program, the Company pledged the land and buildings of the Piratini plant, located in the municipality of Charqueadas, in the state of Rio Grande do Sul, amounting to R$ 78,494. The total income tax and social contribution credits from third parties offset against fines and interest on the consolidation of the REFIS debts on December 6, 2000 totaled R$ 57,040 and were purchased for R$ 4,351. The Company s own tax credits were not used. The constitutionality of the use of credits of R$ 40,118 of the total purchased is being challenged in court. This is because the Federal Revenue authorities understand that tax credits must first be used to offset the assignor s own debts, only transferring the excess to the assignee. This understanding, based solely on a REFIS Management Committee Resolution, edited subsequently to the Company s enrollment in the program, does not comply with the legal order. In fact, the law which established the Program authorized, with no conditions, the purchase of third party tax credits for offset against own liabilities. b) PAES The proportionally consolidated (52%) subsidiary Dona Francisca Energética S.A. enrolled in the PAES, established by Law 10684/03, at the Federal Revenue Secretariat, to settle Corporate Income Tax (IRPJ), Social Contribution on Net Income (CSLL), Social Integration Program (PIS) and Social Contribution on Revenues (COFINS) liabilities. The balances of these tax liabilities are recorded in Taxes and contributions payable, in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were divided into 180 installments of which 161 are not yet due, are restated by the TJLP and are as follows at the year end:

131 GERDAU S.A Principal Interest Total Principal Interest Total IRPJ... 20,303 3,160 23,463 21,816 1,255 23,071 CSLL... 7,360 1,145 8,505 7, ,363 PIS COFINS... 3, ,844 3, ,780 Total... 31,709 4,935 36,644 34,072 1,961 36,033 Current... 2, ,732 2, ,499 Long-term... 29,345 4,567 33,912 31,709 1,825 33,534 Dona Francisca Energética S.A. pays its taxes, contributions and other liabilities on their due dates, which is a basic requirement to remain eligible for the PAES program Provision for Contingencies The Company and its subsidiaries are parties in labor, civil, and tax processes. Based on the opinion of its legal advisors, management believes that the provision for contingencies is sufficient to cover probable and reasonably estimable losses from unfavorable court decisions, and the final decisions will not have significant effects on the financial position of the Company at December 31, The balances of the contingencies are as follows: I) Contingent liabilities provided Company a) Tax contingencies Eletrobrás... (a.1) 50,456 50,456 50,456 50,456 Finsocial... (a.2) 6,891 6,891 6,898 6,948 ICMS... (a.3) 1,099 1,099 17,300 14,346 Social contribution on net income... (a.4) 7,216 8,978 7,333 40,756 Corporate income tax... (a.5) 19,993 20,247 19, ,134 INSS... (a.6) 12,963 12,954 24,900 17,372 PIS... (a.7) 1,831 1,831 1,903 2,357 Cofins... (a.7) 6,387 6,387 6,935 6,935 Emergency Capacity Charge... (a.8) 9,368 9,306 25,563 10,074 Extraordinary Tariff Recomposition... (a.8) 5,283 5,283 13,037 5,847 FGTS and other tax contingencies... (a.9) ,503 2,330 ( - ) Judicial deposits... (a.10) (34,818) (36,703) (73,938) (155,138) 86,974 87, , ,417 b) Labor contingencies... (b.1) 16,257 16,257 49,573 29,609 ( - ) Judicial deposits... (b.2) (8,349) (8,285) (10,313) (10,244) 7,908 7,972 39,260 19,365 c) Civil contingencies... (c.1) ,364 99,493 ( - ) Judicial deposits... (c.2) - - (1,207) (1,063) ,157 98,430 Total liabilities provided... 94,882 95, , ,212 INSS (National Institute of Social Security). FGTS (Government Severance Indemnity Fund for Employees). a) Tax contingencies a.1) Of the total provision, R$ 50,456 (Company and consolidated) refers to the contingency of compulsory loans to Eletrobrás, the constitutionality of which is being questioned by the Company. In March 1995, the Federal Supreme Court judged the proceedings against the taxpayers. Certain of the Company s proceedings are pending decision, but the outcomes are already foreseeable, in view of the prior decisions. The Company established a provision related to compulsory loans, taking into consideration that, although the payment to Eletrobrás was made as a loan: (i) the reimbursement to the Company would probably be in the form of shares of Eletrobrás; (ii) the conversion will be made based on the net asset book value of the shares; and (iii) based on the current available information, the shares of Eletrobrás are valued at substantially less than the net asset book value.

132 a.2) R$ 6,891 (Company) and R$ 6,898 (consolidated) relating to the unconstitutionality of the Social Investment Fund (FINSOCIAL). Although the Supreme Court has confirmed the constitutionality of the tax at the rate of 0.5%, some of the Company s claims are still pending judgment, most of them in the Superior Courts. a.3) R$ 1,099 (Company) and R$ 17,300 (consolidated) relating to amounts for Value-Added Tax on Sales and Services (ICMS), the majority of which relates to credit rights involving the Finance Secretariat and the State Courts of the First Instance in the state of Minas Gerais. a.4) R$ 7,216 (Company) and R$ 7,333 (consolidated) relating to social contribution on net income. The amounts refer to challenges of the constitutionality of the contribution in 1989, 1990 and Some proceedings are pending decision, most of them in the Superior Courts. a.5) R$ 19,993 (Company and consolidated), relating to Corporate Income Tax, challenged at the administrative sphere. Considering the many legal decisions unfavorable to the unconstitutionality of the limitation of the offset of income tax and social contribution losses to 30% of net income, the subsidiary Gerdau Açominas S.A. decided to no longer deposit in court the amounts related to the matter and requested at September 30, 2004, in the court injunction records in which it is the petitioner, the conversion of the amounts deposited in court (R$ 338,992) into tax payments, and started observing the legal limitation. The legal challenge has been maintained; however, in the event the STF reviews its current guidance and the subsidiary is successful, it will plead the offset of the amounts overpaid. a.6) R$ 12,963 (Company) and R$ 24,900 (consolidated) on contributions due to the INSS which correspond to suits for annulment by the Company with judicial deposits of practically the whole amount involved, in progress in the Federal Court of the First Instance in the state of Rio de Janeiro. In the consolidated statements, the remaining amount refers to lawsuits questioning the position of the INSS in terms of charging INSS contributions on profit sharing payments made by the subsidiary Gerdau Açominas S.A., as well as on payments for services rendered by third parties, in which the Institute calculated charges for the last ten years and assessed the company because it understands that the company is jointly liable. The assessments were maintained at the administrative level, and Gerdau Açominas S.A. filled annulment actions with the judicial deposit of the corresponding amount, based on the understanding that the right to assess part of the charge had prescribed and that there is no such liability. a.7) R$ 1,831 (Company) and R$ 1,903 (consolidated), relating to contributions for the Social Integration Program (PIS), and R$ 6,387 (Company) and R$ 6,935 (consolidated) to the Social Contribution on Revenues (COFINS), in connection with lawsuits questioning the constitutionality of Law 9718, which changed the calculation basis of these contributions. These suits are in progress in the Federal Regional Court of the 2 nd Region and the Federal Supreme Court. a.8) R$ 9,368 (Company) and R$ 25,563 (consolidated) relating to the Emergency Capacity Charge (ECE), as well as R$ 5,283 (Company) and R$ 13,037 (consolidated) relating to the Extraordinary Tariff Recomposition (RTE), included in the electric energy bills of the companies plants. According to the Company, these charges are of a tax nature and, as such, are incompatible with the National Tax System provided in the Federal Constitution. For this reason, the constitutionality of this charge is being challenged in court. The lawsuits are in progress in the Federal Justice of the First Instance of the states of Pernambuco, Ceará, Minas Gerais, Rio de Janeiro, São Paulo, Paraná, and Rio Grande do Sul, as well as in the Federal Regional Courts of the 1 st and 2 nd Regions. The companies have fully deposited in court the amount of the disputed charges. a.9) R$ 305 (Company) and R$ 1,503 (consolidated) relating to a lawsuit brought by the subsidiary Gerdau Açominas S.A. regarding the Government Severance Indemnity Fund for Employees (FGTS) increased charges, which arose from the changes introduced by Complementary Law 110/01. Currently, the corresponding court injunction is awaiting the judgment of the extraordinary appeal filed by the company. The amount provided is fully deposited in court. a.10) The judicial deposits, representing restricted assets of the companies, relate to amounts deposited and maintained in court until the resolution of the related legal matters. The balances of these credits, which at December 31, 2004 amounted to R$ 34,818 (Company) and R$ 73,938 (consolidated), are classified as a reduction of the provision for tax contingencies recorded in the books. b) Labor contingencies b.1) The Company and its subsidiaries are also defending labor claims, for which there is a provision of R$ 16,257 and R$ 49,573 (consolidated) at December 31, None of these claims refer to individually significant amounts, and the lawsuits mainly involve claims for overtime pay, health hazards and risk premium, among others. b.2) The balances of the deposits in court, which totaled R$ 8,349 at December 31, 2004 (Company) and R$ 10,313 (consolidated), are classified as a reduction of the provision for labor contingencies. c) Civil contingencies c.1) The Company and its subsidiaries are also defending in court civil claims arising in the normal course of its own and the subsidiaries operations, including claims arising from work accidents, in a total amount at December 31, 2004 of R$ 100,364 (consolidated) as contingent liability for these claims. The provision refers mainly to the issue involving the jointly-owned (52%) subsidiary Dona Francisca Energética S.A. According to a resolution of the Brazilian Electricity Regulatory Agency (ANEEL), the operations of the subsidiary are restricted to the South of Brazil submarket. Since

133 GERDAU S.A. some of its transactions were carried out in the remaining submarkets, Dona Francisca Energética S.A. may have to acquire the energy it sells from third parties. The subsidiary challenges in court the validity of the ANEEL resolution and has obtained a favorable preliminary injunction. c.2) At December 31, 2004, the balances of deposits in court totaled R$ 1,207 (consolidated) and are classified as a reduction of the provision for contingencies. II) Contingent liabilities not provided a) Tax contingencies a.1) The Company is defendant in assessments filed by the state of Minas Gerais demanding ICMS tax payments arising mainly from the sales of products to commercial exporters. The restated amount of the lawsuits totals R$ 32,848. The Company has not recorded any provision for contingency in relation to these claims since it considers this tax is not payable, because products for export are exempted from ICMS. a.2) The Company and its subsidiary Gerdau Açominas S.A. are defendants in assessments filed by the state of Minas Gerais, which demand ICMS tax payments on the export of semi-finished manufactured products. The total amount demanded is R$ 249,742. The companies have not recorded any provision for contingency in relation to these claims since they consider this tax is not payable because the products cannot be considered semi-finished manufactured products as defined by the federal complementary law and, therefore, are not subject to ICMS. a.3) Also, R$ 68,431 are being demanded due to the understanding of the Federal Revenue Secretariat that the transactions carried out by the subsidiary Gerdau Açominas S.A., under the drawback concession granted by DECEX, were not in conformity with the legislation. Gerdau Açominas filed a preliminary administrative defense of the legality of the arrangement, which is pending judgment. Since the tax liability has not been definitely established, and considering that the arrangement which originated the demand conforms with the assumptions required for the drawback concession, and also that the concession was granted after analysis by the legal administrative authority, Gerdau Açominas S.A. considers an unfavorable outcome to be remote and, for this reason, has not recorded any provision for the contingency. b) Civil contingencies b.1) Two civil construction syndicates in the state of São Paulo alleged that Gerdau S.A. and other long steel producers in Brazil divide customers among them, violating the antitrust legislation. After investigations carried out by the National Secretariat of Economic Law (SDE) and based on public hearings, the SDE is of the opinion that a cartel exists. This conclusion was also supported by an earlier opinion by the Secretariat for Economic Monitoring (SEAE). The process has now been forwarded to the Administrative Council for Economic Defense (CADE) for final decision. Gerdau S.A. denies having engaged in any type of anti-competitive behavior and believes, based on information available, including the opinion of its legal advisors, that the administrative process until now includes many irregularities, some of which are impossible to resolve. For example, the investigations carried out by SDE did not follow the due legal course and the representatives of the SDE influenced certain witnesses who testified in the process. In addition, the SDE report was issued before Gerdau S.A. had the chance to reply to the closing arguments, which indicates that there was a bias in the judgment made by the SDE. The same applies to the SEAE report, which does not analyze the economic issues and is based exclusively on the witnesses testimony. These irregularities, which also reflect non-compliance with the related constitutional provisions, will no doubt affect the administrative decision by CADE, based on the conclusions presented by the antitrust authorities until now. Gerdau S.A. has pointed out and tried to combat all these irregularities and will continue doing so in relation to the allegations and the irregularities in the administrative process, believing in a favorable outcome to this process, if not in the administrative sphere, possibly in the judicial sphere. Because of the above, no provision has been recorded for this case. According to Brazilian legislation, fines of up to 30% of gross revenues in the prior fiscal years may be applied to the Company and, if personal responsibility of an executive is proven, such executive may be penalized by 10% to 50% of the fine applied to the Company. There are no precedents for fines exceeding 4%. In a similar case involving flat steel companies, the fine was 1%. b.2) A civil lawsuit has been filed against Gerdau Açominas S.A. regarding the termination of a contract for the supply of slag and indemnities for losses and damages. At December 31, 2004, the lawsuit amounts to approximately R$ 37,014. Gerdau Açominas S.A. contested all bases for the lawsuit and filed a counterclaim for termination of the contract and indemnity for breach of contract. The judge declared the contract to be terminated, since this demand was common to both parties. With regards to the remaining discussion, the judge understood that both parties were at fault and judged the requests for indemnity unfounded. This decision was maintained by the Court of Civil Appeals of the State of Minas Gerais (TAMG), and the court decision is based on expert evidence and interpretation of the contract. The process was in the High Court of Justice (STJ) and was returned to the TAMG for judgement of the appeal requesting clarification of the decision. Gerdau Açominas S.A. believes that any loss from the case is remote, since it understands that a change in the judgment is unlikely. b.3) A civil lawsuit has been filed by Sul America Cia. Nacional de Seguros against Gerdau Açominas S.A. and Banco Westdeustsche Landesbank Girozentrale, New York Branch (WestLB), for the payment of R$ 34,383 to settle an indemnity claim, which has been deposited in court. The

134 insurance company pleads doubt in relation to whom payment should be made and alleges that the subsidiary is resisting in receiving and settling it. The lawsuit was contested both by the Bank (which claims having no right over the amount deposited, which resolves the doubt raised by Sul América) and by the subsidiary (which claims that there is no such doubt and that there is justification to refuse payment since the amount owed by Sul América is higher than the amount involved). Subsequently, Sul América claimed fault in the Bank s representation, and this matter is therefore already settled, which resulted withdrawal in December 2004 of the amount deposited. The process should enter the expert evidence phase, mainly for calculation of the amount due. Based on the opinion of its legal advisors, the subsidiary expects loss to be remote and that the sentence will declare the amount payable within the amount stated in the pleading. Also, Gerdau Açominas S.A. filed, prior to this lawsuit, a lawsuit for the payment of the amount recognized by the insurance companies. The lawsuits are pending. The subsidiary expects a favorable outcome in this lawsuit. The civil lawsuits arise from an accident on March 23, 2002 with the blast furnace regenerators of the Ouro Branco steel mill, which resulted in the stoppage of several activities, with material damages to the steel mill equipment and loss of profits. The equipment, as well as the loss of profits arising from the accident, were covered by an insurance policy. The report on the event, as well as the loss claim, was filed with IRB - Brasil Resseguros S.A., and an advance payment of R$ 62,000 was received in In 2002, a preliminary and conservative estimate of indemnities related to the coverage of loss of profits and material damages, in the total amount of approximately R$ 110,000, was recorded, based on the amount of fixed costs incurred during the period of partial stoppage of the steel mill activities and the immediate expenses to be incurred to recover the equipment temporarily. This estimate approximates the advance amount received plus the amount proposed by the insurance company as a complement to settle the indemnity. Subsequently, new amounts were added to the discussion, as stated in the subsidiary s plea, although not yet recorded. Based on the opinion of its legal advisors, the Company considers that losses from other contingencies that may affect the results of operations or the Company s consolidated financial position are remote. III) Contingent gains not recorded a) Tax contingencies a.1) The Company believes that the realization of certain contingent gains is probable. Among them is a court-order debt security issued in 1999 in favor of the Company by the state of Rio de Janeiro in the amount of R$ 26,580, arising from an ordinary lawsuit against the noncompliance with the Loan Agreement for Periodic Execution in Cash under the Special Industrial Development Program (PRODI). Due to the default by the state of Rio de Janeiro and the non-regulation of Constitutional Amendment 30/00, which granted the government a ten-year moratorium for payment of securities issued to cover court-order debts not related to food, the realization of this credit is not expected in 2004 and, also, there is no expectation of realization in 2005 and following years. For this reason, this gain is not recognized in the financial statements. a.2) Gerdau S.A. and its subsidiaries have filed several ordinary proceedings relating to the correct basis of calculation of PIS under Complementary Law 07/70, due to the declarations of unconstitutionality of Decree Laws 2445/88 and 2449/88. The companies expect to recover the taxes incorrectly paid. The amounts under discussion total R$ 84,245. a.3) Also, the Company and its subsidiaries Gerdau Açominas S.A. and Margusa - Maranhão Gusa S.A. expect to recover IPI premium credits. Gerdau S.A. and the subsidiary Margusa Maranhão Gusa S.A. have filed administrative appeals for recovery, which are pending judgment. With regards to the subsidiary Gerdau Açominas S.A., the proceedings were directed to the courts, with an unfavorable judgment. Currently, the process awaits judgment of the appeal filed by the subsidiary. The Company estimates the credits at R$ 394,002 but no accounting recognition has been made thereof because of uncertainty as to their realization Related Companies a) Analysis of loan balances Company Fundação Gerdau... - (32) 1,304 16,762 Sipar Aceros S.A. and other ,677 (122) 13,607 Metalúrgica Gerdau S.A.... (115) (3,390) Gerdau Açominas S.A.... (51,245) (22,606) - - GTL Financial Corp.... (113,189) Total... (164,549) (20,961) 1,448 26,979 Financial income (expenses)... 5,890 62,497 20,448 70,071

135 GERDAU S.A. b) Commercial transactions Company Company Income Accounts Income Accounts (expenses) receivable Sales Purchases (expenses) receivable Armafer Serviços de Construção Ltda Aço Minas Gerais S.A. - Açominas , , Açominas Overseas Ltd. (*) , Gerdau Laisa S.A Gerdau Aza S.A , Sipar Aceros S.A , Banco Gerdau S.A , ,113 Grupo Gerdau Empreendimentos Ltda. (**)... (600) (600) - Indac - Ind. Adm. e Comércio S.A. (***)... (3,345) (7,098) - (*) Transaction carried out due to securitization operations. (**) Payments for the use of Gerdau trademark. (***) Payments of guarantees of loans. c) Guarantees granted - The Company is the guarantor of loan agreements of the jointly-owned subsidiary Dona Francisca Energética S.A., in the total amount of R$ 97,275, corresponding to 51.82% of the joint guarantee. The Company is the guarantor of the Euro Commercial Paper program of the subsidiary GTL Trade Finance Inc., of US$ 110 million, equivalent to R$ 291,984 at the balance sheet date. The Company is also the guarantor of financing agreements of the subsidiary GTL Financial Corp., of US$ 5,000, equivalent to R$ 13,272, and securitization operations of the subsidiary Gerdau Açominas Overseas Ltda., of US$ 233 million, equivalent to R$ 618,475 on the balance sheet date. The subsidiary Gerdau Açominas S.A. is the guarantor of the vendor financing loan agreement of the associated company Banco Gerdau S.A., in the amount of R$ 68, Post-Employment Benefits Considering all types of benefits to employees granted by the Company, the asset and liability positions at December 31 are as follows: Company Pension plan actuarial liability - defined benefit , ,719 Actuarial liability with post-employment health benefit , ,964 Retirement and discharge benefits payable ,996 10,187 Total liabilities , ,870 Unrecognized actuarial assets , ,683 a) Pension plan - defined benefit The Company and other Group subsidiaries in Brazil are the co-sponsors of defined benefit pension plans that cover substantially all employees in Brazil ( Açominas Plan and Gerdau Plan ). The Açominas Plan is managed by Fundação Açominas de Seguridade Social - Aços, a closed supplementary pension entity to complement the social security benefits of employees and retired employees of the Ouro Branco unit of Gerdau Açominas S.A. The assets of the Açominas Plan mainly comprise investments in bank deposit certificates, federal public securities, marketable securities and properties. The Gerdau Plan is managed by Gerdau - Sociedade de Previdência Privada, a closed supplementay pension entity to complement the social security benefits of employees and retired employees of the Company of the other units of Gerdau Açominas S.A. and of other subsidiaries in Brazil. The assets of the Gerdau Plan comprise investments in bank deposit certificates, federal public securities and marketable securities. Also, the Canadian and American subsidiaries sponsor defined benefit plans (Canadian Plan and American Plan) that cover substantially all of their employees. The Canadian and American plans are managed by CIBC Mellon and Wells Fargo, respectively, to complement the social security benefits of employees of Gerdau Ameristeel Corporation and its subsidiaries. The assets of the Plans mainly comprise marketable securities. The sponsors contributions to these pension plans were R$ 40 in 2004 and R$ 1,508 in 2003 for the Company and R$ 68,258 in 2004 and R$ 63,708 in 2003 consolidated.

136 The current expenses of the defined pension plan are as follows: Company Cost of current service ,612 49,798 41,068 Interest cost , , ,114 Expected return of plan assets... (569) (15,297) (161,554) (120,556) Amortization of unrecognized liability Amortization of past service costs ,332 Amortization of (gain) loss... (49) - 2,589 2,764 Employees expected contribution (4,383) (3,576) Pension plan cost (benefit), net... (162) 4,717 12,472 30,613 The reconciliation of the assets and liabilities of the plans is presented below: Company Total liabilities... (50,196) (44,164) (1,779,443) (1,613,516) Fair value of plan assets ,988 64,759 1,844,817 1,645,528 Net assets... 58,792 20,595 65,374 32,012 Unrecognized (gains) losses... (58,491) (20,445) (87,897) (85,274) Past service costs ,323 7,722 Other ,929 5,504 Total assets (liabilities), net ,729 (40,036) Actuarial asset , ,683 Pension plan liability recorded in balance sheet (154,199) (162,719) Assets (liabilities), net ,729 (40,036) Changes in plan assets and actuarial liabilities were as follows: Company Changes in benefit liabilities Benefit liabilities at the beginning of the year... 44, ,739 1,613,516 1,543,659 Cost of service ,612 49,798 41,068 Interest cost , , ,114 Actuarial loss (gain)... 8,485 (11,789) 86,910 77,637 Payment of benefits... (2,960) (2,779) (69,419) (58,486) Past service costs due to changes in the plan ,497 - Effect of merger/operational integration... - (103,021) - - Foreign exchange effect on foreign companies (45,000) (99,476) Initial liability recognition adjustment ,359 - Benefit liabilities at the end of the year... 50,196 44,164 1,779,443 1,613,516

137 GERDAU S.A. Company Changes in plan assets Fair value of plan assets at the beginning of the year... 64, ,865 1,645,528 1,381,584 Return on plan assets... 47,149 67, , ,599 Sponsor contributions ,508 68,258 63,708 Participant contributions ,202 4,232 Payment of benefits... (2,960) (2,779) (69,419) (58,486) Operational integration... - (151,064) - - Foreign exchange effect on foreign companies (32,060) (57,109) Fair value of plan assets at the end of the year ,988 64,759 1,844,817 1,645,528 As a result of the operational integration on November 28, 2003, the assets and liabilities of the Gerdau Plan, relating to the employees transferred to Gerdau Açominas S.A., were allocated to the Açominas Plan, and the Supplementary Social Security Secretariat approved the addition of Gerdau Açominas S.A. as a sponsor of the Retirement and Supplementary Retirement Plans managed by Gerdau - Sociedade de Previdência Privada. The method for calculating the actuarial liability is the Projected Unit Credit Method, as determined by CVM Deliberation 371/2000. The amount of the actuarial gains and losses to be recognized as income or expense is the unrecognized amount that exceeds, in each period, the higher of the following limits: (i) 10% of the present value of the total actuarial liability of the defined benefit plan and (ii) 10% of the fair value of the plan assets. The resulting amount will be amortized annually based on the average remaining years of service estimated for the employees that participate in the plan. The table below shows a summary of the assumptions made to calculate and record the defined benefit plan for both the Company and consolidated: North American Gerdau plan Açominas plan plan Average discount rate % 11.30% 5.75% % Increase in compensation % 8.675% 2.50% % Expected rate of return on assets % 12.35% 7.25% % Mortality chart... GAM 83 (-1 year) AT-83 GAM 83 Disabled mortality chart... RRB 1944 AT-83 RRB 1977 Turnover rate... Based on service Null Based on age and service and salary level (plan experience) b) Pension plan - defined contribution The Company and its subsidiaries in Brazil are also the co-sponsors of a defined contribution pension plan administered by Gerdau - Sociedade de Previdência Privada. Contributions are based on a percentage of the compensation of employees. The foreign subsidiary Gerdau AmeriSteel US Inc. has a defined contribution plan, the contributions to which are equivalent to 50% of the amount paid by the participants, limited to 4% of salary. The other companies do not have this type of pension plan. The total cost of this plan was R$ 149 in 2004 and R$ 2,145 in 2003 for the Company and R$ 11,892 in 2004 and R$ 9,713 in 2003 consolidated. c) Other post-employment benefits The Company estimates that the amount payable to executives on their retirement or discharge totals R$ 9,996 (consolidated) at December 31, 2004 (R$ 10,187 in consolidated). The American Plan includes, in addition to pension benefits, specific health benefits for employees who retire after a certain age and with a certain number of years of service. The American subsidiary has the right to change or eliminate these benefits, and the contributions are based on amounts actuarially calculated.

138 The composition of the net periodic cost for the post-employment health benefits is as follows: Cost of service... 3,007 2,542 Interest cost... 5,715 6,492 Amortization of past service costs... (563) - Amortization of (gain) loss Expense for post retirement health benefits, net... 8,239 9,034 The status of the fund for post-employment health benefits is as follows: Plan assets at market value Projected benefit liabilities... (130,559) (111,390) Fund status... (130,559) (111,390) Unrecognized gains and losses, net... 8,101 5,426 Past service costs... (7,825) - Post-retirement health benefit liabilities recorded in the balance sheet... (130,283) (105,964) The changes in plan assets and actuarial liabilities were as follows: Changes in projected benefit liabilities Projected benefit liabilities at the beginning of the year , ,991 Purchase of North Star... 23,136 - Cost of service... 3,007 2,542 Interest cost... 5,715 6,492 Participant contributions... 1,946 1,870 Actuarial loss... 4,759 3,432 Administrative benefits and expenses paid... (6,639) (6,528) Foreign exchange effect... (4,364) (9,409) Initial liability recognition adjustment... (8,391) - Project benefit liabilities at the end of the year , , Changes in plan assets Plan assets at the beginning of the year Sponsor contribution... 4,693 4,658 Participant contributions... 1,946 1,870 Administrative benefits and expenses paid... (6,639) (6,528) Plan assets at the end of the year

139 GERDAU S.A. The assumptions adopted in the accounting for post-employment health benefits were as follows: North American plan Average discount rate % % Health treatment - rate for the next year % % Health treatment - rate for cost decrease to be reached from 2010 to % to 5.50% 23 - Shareholders Equity a) Capital - authorized capital at December 31, 2004 comprises 240,000,000 common shares (240,000,000,000 at December 31, 2003) and 480,000,000 preferred shares (480,000,000,000 at December 31, 2003), with no par value. The Extraordinary General Meeting (AGE) of shareholders held on April 29, 2004 approved the capital increase of R$ 1,735,656 through the capitalization of the reserve for investments and working capital, with a bonus of 100% on the shares on that date, representing 148,354,011 new shares (51,468,224 common and 96,885,787 preferred). At December 31, 2004, 102,936,448 common shares (51,468,224 at December 31, 2003) and 193,771,574 preferred shares (96,885,787 at December 31, 2003) are subscribed and paid-up, totaling R$ 3,471,312 (R$ 1,735,656 at December 31, 2003). Preferred shares do not have voting rights and cannot be redeemed, but have the same rights as common shares in terms of profit sharing. b) Treasury stock - at December 31, 2004, the Company had 1,573,200 preferred shares (345,000 preferred shares in 2003) held in treasury for subsequent sale in the market or cancellation, totaling R$ 44,139 (R$ 17,103 in 2003). c) Interest on own capital and dividends - the Company calculated interest on own capital in accordance with the terms established by Law 9249/95. The corresponding amount was recorded as financial expenses for tax purposes. For presentation purposes, this amount was recorded as dividends, not affecting net income. The related tax benefit through the reduction of the income tax and social contribution on net income charge for the year was R$ 114,395 (R$ 119,424 in 2003). Shareholders are entitled to receive, each year, a minimum mandatory dividend of 30% of adjusted net income. The amount of interest on own capital and dividends credited for the year was R$ 858,843, shown as follows: Net income for the year... 2,831,339 1,137,216 Transfer to legal reserve... (141,567) (56,860) Adjustment net income... 2,689,772 1,080,356 Distributions during the year Period Nature R$/share Credit Payment st quarter... Interest /30/ /18/ ,443 74,177 2 nd quarter... Interest /30/ /17/ ,249 50,440 Dividens /30/ /17/ ,589-3 rd quarter... Interest /13/ /17/ ,762 75,661 Dividens /03/ /17/ ,422-4 th quarter... Interest - 150,969 Dividens /11/ /22/ ,378 - Interest on own capital and dividends , ,247 % interest/dividends paid or credited... 32% 33% Credit per share (R$) Outstanding shares (thousands) , ,009 The remaining income for the year was transferred to the statutory reserve for investments and working capital in accordance with the by-laws Statutory Profit Sharing a) The management profit sharing is limited to 10% of net income for the year, after income tax and management fees, as stated in the Company s by-laws; b) The employees profit sharing is linked to the attainment of operating goals and was allocated to cost of production and general and administrative expenses, as applicable.

140 25 - Long-Term Incentive Plans I) Gerdau S.A. The Extraordinary General Meeting of shareholders held on April 30, 2003 decided, based on a previously agreed plan and within the limit of the authorized capital, to grant options to purchase preferred shares to management, employees or persons who render services to the Company or the companies under its control, and approved the formation of the Long-Term Incentive Program that represents a new form of compensation of the strategic executives of the Company. The options should be exercised in a maximum of five years after the grace period. a) Summary of changes in the plan: Stock option grants (Number of shares) Total Opening balance at December 31, , , ,068 Grants in , , ,555 Share bonus at April 29, , ,840 2, , ,623 Closing balance on December 31, , ,680 4, ,250 1,715,246 Exercise price - R$ Grace period... 3 years - 3 years - Grace period years - 5 years As mentioned in Note 23b, at December 31, 2004 the Company has a total of 1,573,200 preferred shares in treasury. These shares can be used for this plan. b) Plan status at December 31 Stock option grants Average Total stock options granted ,109 1,368,137 - Exercise price - R$ Fair value of options at date of grant - R$ per option (*) Average term of option to be exercised (years) (*) calculated using the Black-Scholes model. The percentage of dilution in interest that the current shareholders may experience if all options are exercised is approximately 0.6%. II) Gerdau Ameristeel Corporation - ( Gerdau Ameristeel ) Gerdau Ameristeel Corporation and its subsidiaries have stock compensation plans for their employees, as follows: a) Former Co-Steel Plan According to the terms of the Co-Steel Plan, the Stock-Based Option Plan, the company was authorized to grant purchase options to employees and directors up to the limit of 3,041,335 common shares. The exercise price was based on the closing price of the common shares in the market on the day prior to the issue of the option. The options have a maximum term of ten years and are granted during various periods, as determined by the administrator of the plan at the date of the grant, up to April 13, b) Gerdau AmeriSteel US Inc. ( AmeriSteel ) Plans According to the terms of the Transaction Agreement relating to the acquisition of Co-Steel, the minority shareholders of AmeriSteel exchanged their shares and stock options for shares and stock options of Ameristeel at the ratio of shares and stock options for each share or stock option of AmeriSteel. This exchange occurred on March 31, b.1) Stakeholder Plan In March 2000, the Board of Directors of AmeriSteel approved a long-term incentive plan available to the executive management (Stakeholder Plan) to assure that the interests of the senior management of AmeriSteel are in line with those of the AmeriSteel shareholders. The awards are determined by a formula based on the return on employed capital of AmeriSteel in a given year of the plan. The awards are granted and paid over a period of four years. The participants may choose payment in cash or in shares of AmeriSteel and Gerdau, for which a premium of 25% is given, if chosen. Expenses related to the benefits for the years ended December 31, 2004 and 2003 totaled US$ 1,300 thousand (R$ 3,450) and US$ 150 thousand (R$ 433), respectively. A premium of approximately US$ 14,000 thousand (equivalent to R$ 37,161) was recorded at December 31, 2004 and will be granted on March 1, This premium will be provided in accordance with the payment schedule established by the plan.

141 GERDAU S.A. b.2) SAR Plan In July 1999, the Board of Directors of AmeriSteel approved the SAR/Shares Purchase Plan (SAR Plan) available to basically all employees. The SAR Plan authorizes the sale of 946,170 common shares to the employees during three offer periods, from July to September in 1999, 2002 and The employees who purchase the shares are rewarded with stock appreciation rights (SARs) equal to four times the number of shares purchased. SARs at market value were granted at the date of grant, determined based on an independent appraisal at the end of the prior year. SARs can be exercised at 25% annually as from the date of the grant, to be exercised over a period of ten years as from the date of the grant. In July 2002, the Board of Directors of AmeriSteel approved the issue of new purchase options under the SAR Plan, which were granted to the executive directors, with the exercise price determined by the fair value at the date of grant. A total of 6,244,722 SARs were authorized and issued. One-third of all awarded options and common shares are vested two years as from the date of concession, and one third after each subsequent two-year period. The options may be exercised in up to ten years after the date of concession. At December 31, 2004, an expense related to this plan of US$ 20,700 thousand, equivalent to R$ 54,946, was recorded in the consolidated financial statements (at December 31, 2003, an expense of US$ 9,400 thousand, equivalent to R$ 27,158 was recorded). b.3) Equity Ownership In September 1996, the Board of Directors of AmeriSteel approved the Equity Ownership Plan of AmeriSteel Corporation (the Equity Ownership Plan), which grants common shares, purchase options for common shares and SARs. The maximum number of shares that may be issued under this plan is 4,152,286. AmeriSteel has granted 4,667,930 incentive stock options and 492,955 common shares under the Equity Ownership Plan up to December 31, One-third of all options and common shares issued become vested two years from the date of the grant, and one third after each subsequent two-year period. All grants were carried out at the market value of the common shares at the date of grant, determined based on an independent appraisal at the end of the prior year. The options may be exercised for ten years as from the date of the grant. b.4) Purchase Plan In May 1995, the Board of Directors of AmeriSteel approved an option/purchase plan (the Purchase Plan ), available to essentially all employees. The employees who purchased shares were rewarded with options for six times the number of shares purchased. A total of 356,602 shares were sold under the Purchase Plan at a purchase price of US$ 1.12 per share. The options were granted at market value at the date of the grant, determined based on an independent appraisal at the end of the prior year. A total of 2,139,612 options were granted under the Purchase Plan. No options are available for future grant. All shares granted can already be exercised, which may occur for ten years as from the date of the grant. A summary of the Gerdau Ameristeel plans is as follows: Number Weighted average Number Weighted average of shares exercise price - R$ of shares exercise price - R$ Available at the beginning of the year... 3,606, ,367, Exchange for options of the Gerdau Ameristeel Plan (*) ,660, Exercised options... (374,609) Cancelled options... (76,973) Expired options... (321,700) (421,431) Available at the end of the year... 2,833, ,606, (*) Exchange mentioned in item b above. The table below summarizes the information on the purchase options of Gerdau Ameristeel shares available at December 31, 2004: Quantity Available Average Weighted average exercisable at Exercise price (R$) quantity grace period exercise price - R$ December 31, to , , to , , to , , to , , to , ,500 2,833,288 2,350,378

142 The effect on net income for the year and shareholders equity would have been as follows, had the expenses for the option plans of Gerdau S.A. and Gerdau Ameristeel Corporation been recorded: Company Net Shareholders net Shareholders income equity income equity Balances based on financial statements... 2,831,339 6,073,856 3,234,887 6,073,856 Expenses for the period (Black-Scholes model)... (1,959) (4,936) (2,649) (8,383) Pro forma balances... 2,829,380 6,068,920 3,232,238 6,065, Calculation of EBITDA Gross profit... 6,245,024 3,290,221 Selling expenses... (455,175) (448,131) General and administrative expenses... (1,003,826) (763,440) Depreciation and amortization , ,887 EBITDA... 5,552,688 2,683, Information by Geographic Area and Business Segment Information by geografic area: Geographic area Brazil South America (*) North America Gross sales revenues... 12,914,377 9,024,250 1,039, ,829 9,453,210 6,105,888 23,407,573 15,782,967 Net sales revenues... 9,975,760 7,306, , ,122 8,857,637 5,569,912 19,597,262 13,366,961 Cost of sales... (5,668,217) (4,444,848) (488,120) (325,333) (7,195,901) (5,306,559) (13,352,238) (10,076,740) Gross profit... 4,307,543 2,862, , ,789 1,661, ,353 6,245,024 3,290,221 Selling expenses... (400,317) (407,717) (7,079) (5,140) (47,779) (35,274) (455,175) (448,131) General and administrative expenses... (704,073) (513,157) (45,934) (33,492) (253,819) (216,791) (1,003,826) (763,440) Financial income (expenses), net... 5,948 (462,207) (4,491) (3,831) (177,563) (180,532) (176,106) (646,570) Operating profit (loss)... 3,040,687 1,192, , ,012 1,194,708 (165,655) 4,454,667 1,147,212 Net income (loss) for the year... 2,164,338 1,222, ,240 93, ,309 (61,274) 3,234,887 1,254,485 EBITDA (**)... 3,704,473 2,297, , ,524 1,597, ,695 5,552,688 2,683,537 ( * ) Does not include Brazilian operations. (**) Income before financial expenses, income tax and social contribution on net income, and depreciation and amortization, as mentioned in Note nº 26. The segments shown following correspond to the business units through which the Gerdau Executive Committee manages its operations: Long Steel Brazil, Açominas (corresponding to the operations of the plant located in Ouro Branco, state of Minas Gerais), South America (excluding Brazilian operations) and North America (Gerdau Ameristeel):

143 GERDAU S.A. Information by business segment: Business sector Long Brazil Açominas Ouro Branco South America (*) North America Net sales revenue... 7,329,008 5,359,998 2,646,752 1,946, , ,122 8,857,637 5,569,912 19,597,262 13,366,961 Identifiable assets (**)... 4,378,419 3,146,342 3,482,517 3,241, , ,385 6,131,526 4,273,441 14,660,813 11,241,499 Capital expenditures , , , ,984 27,367 22,253 1,156, ,803 2,097, ,039 Depreciation/amortization , , , ,392 28,251 25, , , , ,887 ( * ) Does not include Brazilian operations. (**) Identifiable assets: accounts receivable, inventories and fixed assets.

144 Board of Directors Executive Committee Chairman JORGE GERDAU JOHANNPETER Vice Chairmen GERMANO H. GERDAU JOHANNPETER KLAUS GERDAU JOHANNPETER FREDERICO C. GERDAU JOHANNPETER Board Members AFFONSO CELSO PASTORE ANDRÉ PINHEIRO DE LARA RESENDE OSCAR DE PAULA BERNARDES NETO Secretary General EXPEDITO LUZ President JORGE GERDAU JOHANNPETER Vice Presidents FREDERICO C. GERDAU JOHANNPETER, Senior Vice President CARLOS JOÃO PETRY, Senior Vice President ANDRÉ BIER JOHANNPETER CLAUDIO JOHANNPETER DOMINGOS SOMMA OSVALDO BURGOS SCHIRMER FILIPE AFFONSO FERREIRA RICARDO GEHRKE Secretary General EXPEDITO LUZ Corporate Officers DIRCEU TARCÍSIO TOGNI ELIAS PEDRO VIEIRA MANNA EXPEDITO LUZ FRANCESCO SAVERIO MERLINI SIRLEU JOSÉ PROTTI Clemir Ühlein Accountant CRC RS N S - RJ CPF N

145 GERDAU S.A. Report of Independent Auditors To the Board of Directors and Shareholders Gerdau S.A. 1. We have audited the accompanying balance sheets of Gerdau S.A. and the consolidated balance sheets of Gerdau S.A. and its subsidiaries as of December 31, 2004 and 2003, and the related statements of income, of changes in shareholders equity and of changes in financial position of Gerdau S.A., as well as the related consolidated statements of income and of changes in financial position, for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements. 2. We conducted our audits in accordance with approved Brazilian auditing standards, which require that we perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented in all material respects. Accordingly, our work included, among other procedures: (a) planning our audit taking into consideration the significance of balances, the volume of transactions and the accounting and internal control systems of the companies, (b) examining, on a test basis, evidence and records supporting the amounts and disclosures in the financial statements, and (c) assessing the accounting practices used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 3. In our opinion, the financial statements audited by us present fairly, in all material respects, the financial position of Gerdau S.A. and of Gerdau S.A. and its subsidiaries at December 31, 2004 and 2003, and the results of operations, the changes in shareholders equity and the changes in financial position of Gerdau S.A., as well as the consolidated results of operations and of changes in financial position, for the years then ended, in accordance with accounting practices adopted in Brazil. 4. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The statement of cash flows is presented for purposes of additional analysis and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly presented in all material respects in relation to the financial statements taken as a whole. Porto Alegre, March 4, 2005 Auditores Independentes CRC 2SP000160/O-5 F RJ Carlos Alberto de Sousa Accountant - CRC 1RJ /O-0 Opinion of the Fiscal Council The Fiscal Council of Gerdau S.A., in performance of its legal and statutory duties, in compliance with Article 163 of Law 6404/76, having examined the Company s Management Report, the individual (parent company) and consolidated balance sheets and the related statements of income, of changes in shareholders equity and of changes in financial position for the years ended December 31, 2004, as well as the distribution of interest on equity and dividends, and based on the report of PricewaterhouseCoopers Auditores Independentes, is of the option that these accounting statements fairly reflect the Company s individual and consolidated financial position, in conformity with current accounting practices. Under these circumstances, the Fiscal Council recommends to the Stockholders the approval of the accounting statements, which will be submitted to them in the upcoming Ordinary General Shareholders Meeting. Rio de Janeiro, March 14, 2005 JOSÉ ANTÔNIO CRUZ DE MÓDENA JOSÉ BERNARDO DE MEDEIROS NETO PETER WILM ROSENFELD

146 Gerdau Açominas S.A. Balance Sheet at December, 31 (In thousands of reais) Assets Company Current Assets Cash and cash equivalents... note 5 597, , , ,327 Trade accounts receivable... note 6 1,398, ,542 1,269, ,045 Inventories... note 7 1,732,128 1,172,964 1,742,064 1,179,545 Tax credits... note 8 169,655 96, ,067 98,665 Deferred income tax and social contribution on net income... note 9 304,190 98, ,190 98,412 Other accounts receivable , , , ,760 Total current assets... 4,320,660 2,524,173 4,371,823 2,548,754 Long-Term Receivables Related parties... note 19 8,178-21,804 - Eletrobrás loans... 1,304 1,304 1,304 1,304 Deferred income tax and social contribution on net income... note 9 109, , , ,373 Compulsory deposits and other... note ,877 53, ,811 62,823 Total long-term receivables , , , ,500 Permanent Assets Investments... note , ,463 43,669 66,638 Fixed assets... note 12 4,866,670 4,397,120 4,924,735 4,504,438 Deferred charges... note 13 23,608 10,515 29,665 12,386 Total permanent assets... 5,044,650 4,605,098 4,998,069 4,583,462 Total assets... 9,589,967 7,569,500 9,619,530 7,584,716 The accompanying notes are an integral part of these financial statements.

147 GERDAU AÇOMINAS S.A. Liabilities and Shareholder s Equity Company Current Liabilities Trade accounts payable , , , ,675 Financing... note ,613 1,889, ,067 1,898,976 Taxes and contributions payable... note , , , ,126 Deferred income tax and social contribution on net income... note 9 149,905 19, ,905 19,790 Salaries payable... 83,535 64,212 83,667 65,454 Dividends payable... note , , , ,986 Related parties... note , ,320 Other accounts payable... 98,356 90,208 99,225 91,175 Total current liabilities... 2,647,960 3,055,693 2,674,073 3,058,502 Long-Term Liabilities Financing... note 14 2,079,721 1,412,705 2,083,176 1,424,506 Provision for contingencies... note 18 51,993 31,533 51,993 31,645 Post-employment benefits... note 20 6,418 7,794 6,418 7,794 Other accounts payable... 37,829 31,455 37,824 31,949 Total long-term liabilities... 2,175,961 1,483,487 2,179,411 1,495,894 Shareholders Equity Capital... note 21 2,340,576 2,340,576 2,340,576 2,340,576 Capital reserves ,667 98, ,667 98,762 Revenue reserves... 2,135,803 60,222 2,135,803 60,222 Retained earnings , ,760 Total shareholders equity... 4,766,046 3,030,320 4,766,046 3,030,320 Total liabilities and shareholders equity... 9,589,967 7,569,500 9,619,530 7,584,716 The accompanying notes are an integral part of these financial statements.

148 Statement of Income Years Ended December, 31 (In thousands of reais) Company GROSS SALES REVENUES... 12,964,674 3,164,358 13,090,660 3,174,613 Taxes on sales... (2,300,771) (292,972) (2,305,821) (292,970) Freights and discounts... (627,550) (233,792) (629,425) (233,801) Net Sales Revenues... 10,036,353 2,637,594 10,155,414 2,647,842 COST OF SALES... (5,828,901) (1,638,289) (5,914,999) (1,647,875) Gross Profit... 4,207, ,305 4,240, ,967 SELLING EXPENSES... (396,972) (94,133) (400,301) (94,702) FINANCIAL INCOME... note 16 81,317 (30,847) 82,364 (29,052) FINANCIAL EXPENSES... note 16 (59,337) (93,827) (57,529) (94,173) GENERAL AND ADMINISTRATIVE EXPENSES Management fees... (39,603) (9,460) (40,267) (9,706) General expenses... (599,077) (164,086) (605,243) (164,334) EQUITY IN THE EARNINGS (LOSSES) OF SUBSIDIARIES AND ASSOCIATED COMPANIES... note 11 10,391 6,458 (10,025) (1,323) OTHER OPERATING INCOME (EXPENSES), NET... note ,473 (1,068) 145,150 (1,046) Operating Profit... 3,347, ,342 3,354, ,631 NON-OPERATING INCOME (EXPENSE), NET... (13,916) 43,127 (13,363) 49,856 Profit Before Taxes and Profit Sharing... 3,333, ,469 3,341, ,487 PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION ON NET INCOME... note 9 Current... (610,180) (142,204) (617,176) (142,357) Deferred... (200,462) 346,038 (200,939) 346,173 MANAGEMENT PROFIT SHARING... note 23 (39,603) (9,460) (39,603) (9,460) Net Income for yhe Year... 2,483, ,843 2,483, ,843 Net income per share - R$ Net equity per share - R$ The accompanying notes are an integral part of these financial statements.

149 GERDAU AÇOMINAS S.A. Statement of Changes in Financial Position Years Ended December 31 (In thousands of reais) Company Financial Resources Were Provided By Operations Net income for the year... 2,483, ,843 2,483, ,843 Expenses (income) not affecting working capital: Depreciation and amortization , , , ,450 Cost of permanent asset disposals... 74,995 6,435 79,505 6,462 Equity in the (earnings) losses of subsidiaries and associated companies... note 11 (10,391) (6,458) 10,025 1,323 Foreign exchange effects on working capital of foreign companies (611) (44,901) Monetary variations on long-term debt... (180,542) (48,893) (180,542) (45,369) Monetary variations on long-term receivables... (399) 102 (399) 102 From operations... 2,852, ,302 2,883, ,910 Third parties Contributions to capital reserves ,905 6, ,905 6,950 Increase (decrease) in long-term liabilities ,334 (82,578) 864,059 (45,516) Working capital - operational integration... - (256,530) - (256,530) Working capital of merged/consolidated companies... 2, (1,157) Dividends not included in income for the year... 5, Total funds provided... 3,915, ,744 3,939, ,657 Financial Resources Were Used For Investments... 6,441 52, ,814 Fixed assets , , , ,552 Deferred charges... 13,803 1,581 18,654 1,639 Increase (decrease) in long-term receivables... (217,730) 274,841 (203,261) 275,079 Dividends/interest on equity... note , , , ,986 Total funds used... 1,711,710 1,006,723 1,731,660 1,009,070 Changes in Working Capital... 2,204,220 (389,979) 2,207,498 (389,413) Working capital At the beginning of the year... (531,520) (141,541) (509,748) (120,335) At the end of the year... 1,672,700 (531,520) 1,697,750 (509,748) Changes in Working Capital... 2,204,220 (389,979) 2,207,498 (389,413) The accompanying notes are an integral part of these financial statements.

150 Statement of Changes in Shareholders Equity (In thousands of reais) Capital reserves Revenue reserves Premium Investments Total Investment on issue and working Revaluation Retained shareholders Capital Incentives of Shares Other Total Legal capital Total reserve earnings equity At December 31, ,699,503 65,615 23,822 2,375 91,812 17,730-17, , ,694 2,437,481 Net income for the year , ,843 Capital increase 641, (255,694) 385,379 Investment incentives - 6, , ,950 Realization and reversal of reserve (372,742) 7,395 (365,347) Distribution proposed for the Annual General Meeting: Legal reserve note ,492-42,492 - (42,492) - Proposed dividends note (283,986) (283,986) At December 31, ,340,576 72,565 23,822 2,375 98,762 60,222-60, ,760 3,030,320 Net income for the year ,483,483 2,483,483 Investment incentives - 190, , ,905 Distribution proposed for the Annual General Meeting: Legal reserve note , ,174 - (124,174) - Reserve for investments and working capital ,951,407 1,951,407 - (1,951,407) - Interest on equity/ proposed dividends note (938,662) (938,662) At December 31, ,340, ,470 23,822 2, , ,396 1,951,407 2,135, ,766,046 The accompanying notes are an integral part of these financial statements.

151 GERDAU AÇOMINAS S.A. Statement of Cash Flows Years Ended December 31 (In thousands of reais) Company Net income for the year... 2,483, ,843 2,483, ,843 Equity in the (earnings) losses of subsidiaries and associated companies... note 11 (10,391) (6,458) 10,025 1,323 Provision for credit risks... 5,135 8,461 5,135 8,461 Loss on disposal of fixed assets... 9,771 1,492 9,843 1,537 Loss on disposal of investment... 4,227-3,574 - Monetary and exchange variations... (128,671) 85,604 (128,234) 85,398 Depreciation and amortization , , , ,450 Income tax and social contribution on net income ,856 (343,445) 318,769 (344,086) Interest on debt ,641 79, ,827 79,356 Contingencies/judicial deposits... 6,469 (4,394) 6,136 (4,509) Changes in trade accounts receivable... (604,478) 164,479 (541,337) 59,154 Changes in inventories... (555,229) (106,265) (562,455) (105,083) Changes in trade accounts payable ,590 54, ,557 54,381 Other operating activity accounts ,071 (21,756) 244,826 (31,452) Net cash provided by operating activities... 2,695, ,735 2,786, ,773 Purchase/disposal of fixed assets... (913,233) (405,273) (919,758) (407,342) Increase in deferred charges... (13,803) (1,581) (18,006) (1,639) Acquisition/disposal of investments... (7,984) (52,814) 650 (52,814) Receipt of interest on own capital/profit distribution Net cash used in investing activities... (934,120) (459,668) (937,114) (461,795) Suppliers of fixed assets ,445 8, ,022 8,511 Working capital financing ,262 (331,504) 232,498 (290,395) Permanent asset financing , , , ,881 Payments of permanent asset financing... (892,765) (175,108) (898,300) (175,460) Payment of financing interest... (176,594) (104,768) (177,706) (104,973) Loans with related parties... (146,502) (19,012) (148,141) (10,695) Payment of dividends/interest on equity and profit sharing... (940,345) (18,226) (939,655) (23,679) Net cash used in financing activities... (1,343,193) (371,280) (1,337,629) (327,810) Changes in cash and cash equivalents ,642 77, ,839 13,168 Cash and short-term investments At the beginning of the year... note 5 179, , , ,444 Restatement of opening balance (6,345) (31,895) Opening balance of consolidated/merged companies for the year At the end of the year... note 5 597, , , ,327

152 Notes to the Financial Statements at December, and 2003 (All amounts in thousands of reais unless otherwise indicated) 1 - Operations Gerdau Açominas S.A. is the company that includes the steel producing assets of the Gerdau Group in Brazil and has an installed capacity of 7.6 million tons of crude steel per year. The Gerdau Group is dedicated mainly to the production of common and special steel rods and sale of general steel products (plates and rods), in plants located in Brazil, Uruguay, Chile, Canada, Argentina and the Unites States of America. The Gerdau Group has an installed capacity of 16.4 million tons of crude steel per year, basically producing steel in electrical furnaces, from scrap and pig iron purchased, for the most part, in the region near each plant (mini-mill concept). Gerdau also operates plants which are capable of producing steel from iron ore (through blast furnaces and direct reduction) and has a unit used exclusively to produce special steels. It is the largest scrap recycling group in Latin America and among the largest in the world. The industrial sector is the most important market, including manufacturers of consumer goods, such as vehicles and household and commercial equipment that basically use profiled steel in various available specifications. The next most important market is the civil construction sector, which demands a high volume of rebar and wires for concrete. There are also numerous customers for nails, staples and wires, commonly used in the agribusiness sector. 2 - Presentation of the Financial Statements The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, which are based on the provisions of Brazilian Corporate Law, together with the rules established by the Brazilian Securities Commission (CVM). A statement of cash flows (company and consolidated), prepared under the indirect method, is being presented as supplementary information in order to provide additional information. 3 - Significant Accounting Practices a) Cash and cash equivalents - financial investments are recorded at cost plus income accrued up to the balance sheet date, applying the interest rates agreed with the financial institutions, and do not exceed market value; b) Trade accounts receivable - are stated at realizable values, and accounts receivable from foreign customers are adjusted based on the exchange rates effective at the balance sheet date. The provision for credit risks is calculated based on a credit risk analysis, which includes the history of losses, the individual situation of each customer and the economic group to which they belong, the collateral and guarantees and the legal advisors opinion, and is considered sufficient to cover eventual losses on realization; c) Inventories - are stated at the lower of market value and average production or purchase cost; d) Investments in subsidiary and associated companies - are recorded on the equity method of accounting. The equity in the earnings or loss is recorded in an income statement account; e) Fixed assets - are recorded at cost, net of depreciation. Depreciation is calculated on the straight-line basis, at the rates stated in Note 12, which take into consideration the estimated useful lives of the assets. Interest on financing obtained to finance construction in progress is added to the cost of the constructions; f) Deferred charges - amortization is calculated on the straight-line basis at rates determined based on the production of the implemented projects in relation to their installed capacities; g) Financing - are stated at the contract value plus the contracted charges, including interest and monetary or foreign exchange variations. Swap contracts, which are linked to the loan agreements, are classified together with the related loans; h) Income tax and social contribution on net income - current and deferred income tax and social contribution on net income are calculated in conformity with current legislation; i) Other current and long-term assets and liabilities - are recorded at their realizable amounts (assets) and at their known or estimated amounts plus accrued charges and indexation adjustments (liabilities), when applicable; j) Related parties - loan agreements between Brazilian companies are restated by the weighted average interest rate for market funding. The agreements with foreign companies are restated by charges (LIBOR plus 3% p.a.) plus foreign exchange variation. Sales and purchases of inputs and products are made under terms and conditions similar to those of unrelated third parties; k) Determination of the results of operations - the results of operations are determined on the accrual basis of accounting; l) Use of estimates - the preparation of financial statements requires estimates to record certain assets, liabilities and other transactions. The Company s financial statements therefore include various estimates related to the useful lives of fixed assets, provisions necessary for contingent liabilities, for income tax and other similar matters. Actual results may differ from those estimated; m) Environmental investments - expenses related to compliance with environmental regulations are considered as cost of production or capitalized when incurred; and n) Translation of foreign currency balances - asset and liability balances of transactions in foreign currency are translated to local currency (R$) at the foreign exchange rate in effect at the balance sheet date ( US$ 1.00 = R$ and US$ 1.00 = R$ ).

153 GERDAU AÇOMINAS S.A. 4 - Financial Statements a) The consolidated financial statements at December 31, 2004 include the accounts of Gerdau Açominas S.A. and the directly controlled subsidiaries listed below: Percentage Shareholders company ownership equity Margusa - Maranhão Gusa S.A ,714 Açominas Com. Imp. Exp. S.A.- Açotrading ,583 Gerdau Açominas Overseas Ltd ,914 Florestal Itacambira S.A ,650 b) The more significant accounting practices used in preparing the consolidated financial statements are as follows: I) Gerdau Açominas S.A. and its subsidiaries adopt consistent practices to record their operations and value their assets and liabilities. The financial statements of the subsidiary Gerdau Açominas Overseas Ltd. were translated using the exchange rate in effect at the balance sheet date and were adjusted to conform with accounting practices adopted in Brazil; and II) Asset and liability, and income and expense accounts balances arising from transactions between consolidated companies have been eliminated. c) The subsidiary Armafer Serviços de Construção Ltda. was merged on October 29, 2004 and the net assets of R$ 44,744 were recorded in Gerdau Açominas S.A., replacing the investment account, without capital increase. The objectives of the transaction were to reduce administrative expenses and improve operating synergy. d) The Company has goodwill which is being amortized in up to three years based on the realization of projected future results, as follows: Amortization Period Company Goodwill in the investment account Balance at December 31, ,564 43,564 (-) Reversal of goodwill based on the adjustment in purchase price (Margusa - Maranhão Gusa S.A.)... (5,258) (5,258) (-) Amortization for the year... Up to 3 years (13,578) (13,578) Balance at December 31, 2004 (based on expectation of future profiability)... 24,728 24,728 The goodwill arises from the assets of the subsidiary Margusa - Maranhão Gusa S.A. 5 - Cash and Cash Equivalents Company Cash and banks... 49,758 64,110 49,915 64,969 Financial investment fund , , , ,156 Fixed income securities ,955 78, , , , ,327 Fixed income securities and financial investment fund include R$ 165,369 - consolidated (R$ 78,076 - consolidated in 2003) of investments in U.S. dollars. 6 - Trade Accounts Receivable Company Customers in Brazil , , , ,985 Brazilian export receivables , , , ,509 Provision for credit risks... (69,827) (63,449) (69,827) (63,449) 1,398, ,542 1,269, ,045

154 7 - Inventories Company Finished products , , , ,180 Work in process , , , ,808 Raw materials , , , ,470 Storeroom materials , , , ,635 Advances to suppliers... 60,181 38,270 60,726 38,452 1,732,128 1,172,964 1,742,064 1,179,545 The inventories (company and consolidated) are covered against fire and overflow. Coverage is determined based on the amounts and the risks involved. 8 - Tax Credits Company Value-Added Tax on Sales and Services (ICMS)... 94,547 87,636 97,207 88,631 Social Contribution on Revenues (COFINS) to offset... 55,579-56,302 - Social Integration Program (PIS) to offset... 11,130 2,811 11,344 2,812 Excise Tax (IPI)... 3,107 6,097 3,310 6,358 Income tax and social contribution on net income... 2, , Other... 3, , ,655 96, ,067 98, Income Tax and Social Contribution on Net Income a) Analysis of the income tax and social contribution expense: Company IR CS Total IR CS Total Profit before income tax and social contribution, after statutory profit sharing... 3,294,125 3,294,125 3,294, , , ,009 Statutory rates of tax... 25% 9% 34% 25% 9% 34% Income tax and social contribution expense at statutory rates... (823,531) (296,471) (1,120,002) (161,502) (58,141) (219,643) Tax effects on: - equity in earnings (losses)... 2, ,533 1, ,196 - interest on equity... 74,824 26, ,761 (150) (54) (204) - recovery of deferred tax assets ,864 48, , , , ,751 - permanent differences (net)... 20,337 (6,244) 14,093 (343) (923) (1,266) Income tax and social contribution expense... (583,908) (226,734) (810,642) 145,344 58, ,834 Current... (447,281) (162,899) (610,180) (103,857) (38,347) (142,204) Deferred... (136,627) (63,835) (200,462) 249,201 96, , IR CS Total IR CS Total Profit before income tax and social contribution, after statutory profit sharing... 3,301,598 3,301,598 3,301, , , ,027 Statutory rates of tax... 25% 9% 34% 25% 9% 34% Income tax and social contribution expenses at statutory rates... (825,400) (297,144) (1,122,544) (161,507) (58,142) (219,649) Tax effects on: - equity in earnings (losses)... (2,506) (902) (3,408) (331) (119) (450) - interest on equity... 74,824 26, , recovery of deferred tax assets ,864 48, , , , ,751 - permanent differences (net)... 21,844 (5,741) 16,103 1,471 (307) 1,164 Income tax and social contribution expense... (589,374) (228,741) (818,115) 145,357 58, ,816 Current... (452,402) (164,774) (617,176) (103,962) (38,395) (142,357) Deferred... (136,972) (63,967) (200,939) 249,319 96, ,173 IR - Corporate income tax. CS - Social contribution on net income.

155 GERDAU AÇOMINAS S.A. b) Analysis of the deferred income tax and social contribution assets and liabilities, at the statutory rates of tax: Assets Company IR CS Total IR CS Total IR CS Total IR CS Total Income tax losses , , , , , , , ,506 Social contribution losses ,403 52,403-83,867 83,867-53,060 53,060-84,662 84,662 Provision for contingencies... 12,071 4,345 16,416 3,998 1,439 5,437 12,405 4,345 16,750 4,353 1,446 5,799 Commissions/other... 6,221 2,239 8,460 4,038 1,453 5,491 6,221 2,239 8,460 4,038 1,453 5,491 Amortized goodwill... 1, , , , Provision for losses... 77,931 28, ,986 84,799 30, ,327 77,931 28, ,986 84,799 30, , ,052 87, , , , , ,816 88, , , , ,785 Current ,685 58, ,190 72,362 26,050 98, ,685 58, ,190 72,362 26,050 98,412 Long-term... 80,367 28, , ,186 91, ,423 82,131 29, , ,334 92, ,373 Liabilities Company IR CS Total IR CS Total IR CS Total IR CS Total Inflationary/exchange effect ,934 33, ,905 19,790-19, ,934 33, ,905 19,790-19,790 Current ,934 33, ,905 19,790-19, ,934 33, ,905 19,790-19,790 The tax benefits recognized on income tax and social contribution loss carryforwards, as well as on the provision for losses, both in the Company and consolidated, are supported by projections of future taxable income adjusted to present values, based on technical feasibility studies, approved by management. These studies, which consider the history of the Company s and its subsidiaries profitability and the maintenance of the current profitability in the future, permitted the recognition of an additional benefit for the year of R$ 189,973 (R$ 422,751 in 2003) in the Company and consolidated, whose estimated recovery is shown in item c below. Other credits, based on temporary differences, mainly tax contingencies, were maintained according to their estimate of realization. c) Estimated recovery of deferred income tax and social contribution assets: Company Up to ,412-98, ,190 93, ,190 93, ,128 84,086 22,128 86, ,979 83,905 19,284 84, ,367 76,707 25,367 77, ,947 20,377 11,063 20, to ,497 27,247 23,497 27, to ,380-10, , , , , Compulsory Deposits and Other Company Compulsory deposits... 12, , Receivables under contract... 23,770 20,544 23,770 20,546 ICMS credits on purchases of fixed assets... 69,992 32,722 69,992 32,730 Assets not for use ,665 8,665 Income tax incentives ,877 53, ,811 62,823

156 11 - Investments Company Subsidiaries Other Total Total Açominas Com. Gerdau Florestal Imp. e Exp. S.A. - Açominas Itacambira Armafer - Serv. Açotrading Overseas Ltd. S.A. Margusa - Maranhão Gusa S.A. Constr. Ltda. 2 Other Investment Investment Investment Investment Goodwill Investment Investment Opening balance... 22,592 7,504 7,211 53,248 43,564 41,470 3,897 17, ,463 29,870 Merger/capitalization (47,066) - 32 (47,034) 108,921 Reversal of goodwill (5,258) (5,258) 52,814 Acquisition Sale (4,294) (4,294) - Equity in earnings (losses) 1... (9) ,643 (13,578) (3,030) ,391 6,458 Deposit for future capital increase , ,639 - Dividends (137) (5,176) (300) (5,613) (600) Closing balance... 22,583 7,914 7,650 73,715 24,728-3,910 13, , ,463 Capital... 17, ,790 10,702 - Shareholders equity... 22,583 7,914 7,650 73,714 - Net income (loss) for the year... (9) 1, ,860 (3,030) Percentage of interest (%) % 100% 100% 100% - Common shares/quotas held ,000 50, ,985 8,615,249 - Preferred shares held ,086,310-1 Includes amortization of goodwill. 2 Company merged on October 29, 2004.

157 GERDAU AÇOMINAS S.A Investment Goodwill Total Total Margusa - Maranhão Gusa S.A ,728 24,728 43,564 MRS Logística S.A.... 4,772-4,772 4,772 Corporate joint ventures... 10,036-10,036 9,984 Other investments... 4,133-4,133 8,318 18,941 24,728 43,669 66, Fixed Assets Company Annual Accumulated depreciation depreciation rate - % Cost and depletion Net Net Land, buildings and structures... 0 to 4 2,385,691 (944,679) 1,441,012 1,508,988 Machinery, equipment and installations ,571,194 (2,213,718) 2,357,476 2,126,167 Furniture and fixtures ,572 (36,584) 23,988 25,110 Vehicles ,848 (18,581) 4,267 4,368 Electronic data equipment/rights/licenses ,201 (177,950) 88,251 85,268 Construction in progress , , ,748 Forestation/reforestation... Feeling plan 123,431 (34,950) 88,481 64,471 8,293,132 (3,426,462) 4,866,670 4,397, Annual Accumulated depreciation depreciation rate - % Cost and depletion Net Net Land, buildings and structures... 0 to 4 2,403,143 (946,302) 1,456,841 1,529,014 Machinery, equipment and installations ,586,568 (2,220,908) 2,365,660 2,160,821 Furniture and fixtures ,657 (36,827) 23,830 25,367 Vehicles ,561 (18,797) 4,764 4,495 Electronic data equipment/rights/licenses ,217 (178,003) 88,214 86,383 Construction in progress , , ,647 Forestation/reforestation... Feeling plan 156,672 (34,950) 121,722 97,711 8,360,522 (3,435,787) 4,924,735 4,504,438 a) Insured amounts - the assets are insured against fire, electrical damage and explosion. The coverage is determined based on the risks involved. The Ouro Branco plant has coverage for loss of profits. b) Capitalization of interest and financial charges - R$ 1,084 was capitalized during the year - Company and consolidated ((R$ 16,715) - Company and consolidated in 2003). c) Guarantees offered - fixed assets were pledged as collateral for loans and financing in the amount of R$ 371,494 - Company and consolidated (R$ 249,924 - Company and consolidated in 2003).

158 d) Summary of changes in fixed assets: Company Balance at the beginning of the year... 4,397,120 2,825,208 4,504,438 2,825,208 ( + ) Purchases/sales for the year , , , ,090 ( + ) Company merger... 48, ( - ) Depreciation and depletion in cost of sales... (423,312) (131,180) (430,213) (132,352) ( - ) Depreciation and depletion in administrative expenses... (61,459) (16,028) (61,493) (16,033) ( - ) Revaluation reversal... - (365,347) - (365,347) ( + ) Operational integration with Gerdau ,697,400-1,791,555 ( + ) Companies consolidated in the year ,317 Balance at the end of the year... 4,866,670 4,397,120 4,924,735 4,504, Deferred Charges Deferred charges (Company and consolidated) comprise pre-operating expenses with reforestation, research, development and restructuring projects Financing Financing are represented as follows: Annual Company charges Current Working capital financing (R$) % to 14.00% ,173 1,173 48,173 Fixed asset financing (R$) % - 3,054-3,054 Investment financing (R$)... CDI 4,500 4,500 4,500 4,500 Investment financing (US$)... US$ 1,387 45,649 1,387 45,649 Working capital financing (US$) % to 10.50% 267, , , ,847 Fixed asset financing and others (US$)... US$ - 2,912-5,082 Current portion of long-term financing , , , , ,613 1,889, ,067 1,898,976 Long-term Working capital financing (R$) % 28,215 3,812 28,215 3,812 Fixed asset financing and others (R$) % to 9.90% 599, , , ,124 Investment financing (R$)... IGPM + 8.5% 29,045 35,019 29,045 35,019 Fixed asset financing and others (US$) % to 6.00% 619, , , ,837 Working capital financing (US$) % to 7.34% 1,406,166 1,066,385 1,406,166 1,066,385 (-) Current portion... (603,406) (863,501) (603,406) (866,671) 2,079,721 1,412,705 2,083,176 1,424,506 Total financing... 2,957,334 3,302,297 2,978,243 3,323,482 CDI - Certificate of Interbank Deposit interest rate. IGPM - General Market Price Index.

159 GERDAU AÇOMINAS S.A. Summarized by currency: Company Brazilian real (R$) , , , ,682 U.S. dollar (US$)... 2,295,234 2,653,586 2,312,038 2,659,800 2,957,334 3,302,297 2,978,243 3,323,482 The schedule for payment of the long-term portion of financing is as follows: Company In , ,889 In , ,954 In , ,712 In , ,776 In , ,715 After , ,130 2,079,721 2,083,176 a) Events during the year On June 3, 2004, the Company concluded the placement of the second tranche, of US$ 128 million (equivalent to R$ 339,763 at December 31, 2004), related to a US$ 400 million Export Notes Receivable program (equivalent to R$ 1,061,760 at December 31, 2004). This joint program with Gerdau S.A. has an interest rate of 7.321% p.a., maturity in April 2012, a grace period of two years and quarterly amortization as from July b) Guarantees The loans contracted under the FINAME/BNDES program are guaranteed by the financed assets, in the amount of R$ 180,109. The other loans are guaranteed by sureties from the controlling shareholders, on which the Company pays a fee of 1% p.a. on the amount guaranteed. c) Covenants In replacement of the tangible guarantees usually required, the loans are being contracted with certain financial covenants, as follows: I) interest coverage ratio - measures the debt service payment capacity in relation to EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization); II) leverage ratio - measures the debt coverage capacity in relation to EBITDA; III) Required Minimum Net Worth - measures the minimum net worth required in financial agreements; and IV) Current Ratio (current liquidity ratio) - measures the capacity to comply with short-term obligations. All the covenants mentioned above are calculated on a consolidated basis of the parent company Gerdau S.A., except for item IV which refers to the parent company Metalúrgica Gerdau S.A., and have been observed. The penalty for non-compliance is the prepayment of the contracts Financial Instruments a) General comments - Gerdau Açominas S.A. and its subsidiaries enter into transactions involving financial instruments, the risks of which are managed through financial positions and exposure limit controls. All instruments are fully recorded in the books of account and mainly relate to the instruments listed below: - financial investments - are recorded at their market value as of the balance sheet date and are explained and presented in Note 5; - investments - are explained and presented in Note 11; - related parties - are explained and presented in Note 19; - financing - are explained and presented in Note 14; and - financial derivatives - in order to minimize the effects of fluctuations in foreign exchange rates on its liabilities, the Company entered into swap contracts that were converted into Brazilian reais on the contract date and linked to changes in the CDI rate. The swap contracts are listed below: Company and Contract date Purpose Amount US$ thousand Rate Maturity 07/16/2001 to 05/07/2002 Prepayment 32, % to % of the CDI 01/13/2005 to 03/01/ /20/2002 Resolution , % of the CDI 06/20/ /19/2003 Resolution , % of the CDI 02/04/2005

160 b) Market value - the market values of the financial instruments are as follows: Company Book Market Book Market Value Value Value Value Financial investments , , , ,156 Eurobonds , ,956 Securitization financing , , , ,282 Import financing , , , ,941 Prepayment financing , , , ,786 Financing - Resolution , , , ,235 ACC (Advances on Export Contracts) financing... 27,088 27, , ,935 Financing - Resolution ,893 20,755 24,243 24,468 Other financing , , , ,067 Investments , , , ,463 Related parties (assets)... 8,178 8, Related parties (liabilities) , , Book Market Book Market Value Value Value Value Financial investments , , , ,358 Eurobonds , ,956 Securitization financing , , , ,282 Import financing , , , ,941 Prepayment financing , , , ,786 Financing - Resolution , , , ,235 ACC financing... 43,891 43, , ,935 Financing - Resolution ,893 20,755 24,243 24,468 Other financing , , , ,251 Investments... 43,669 43,669 66,638 66,638 Related parties (assets)... 21,804 21, Related parties (liabilities) , ,320 The market values of swap contracts were obtained based on future income projections for each contract, calculated based on the present value of the forward U.S. dollar + coupon rates (assets) and CDI future rates (liabilities) and adjusted to present value on the balance sheet date, using the projected future CDI rate for each maturity. Swap contracts related to financing contracts are classified together with the related financing, as a contra entry to the Financial expenses/income, net account, and are stated at cost plus accrued charges up to the balance sheet date. The Company believes that the balances of the other financial instruments, which are recognized in the books at the net contracted values, are substantially similar to those that would be obtained if they were negotiated in the market. However, because the markets for these instruments are not active, differences could exist if they were settled in advance. c) Risk factors that could affect the Company s business Price risk: this risk is related to the possibility of price variations of the products that the Company sells or in the raw material prices and other inputs used in the production process. Since the Company operates in a commodity market, its sales revenues and cost of sales may be affected by the changes in the international prices of its products or materials. In order to minimize this risk, the Company constantly monitors the price variations in the local and international markets. Interest rate risk: this risk arises as a result of the possibility of losses (or gains) due to fluctuations in interest rates relating to Company assets (investments) and liabilities. In order to minimize possible impacts resulting from interest rate fluctuations, the Company has adopted a policy of diversification, alternating between fixed rates and variable rates (such as LIBOR and the CDI) and periodically renegotiates contracts to adjust them to market.

161 GERDAU AÇOMINAS S.A. Exchange rate risk: this risk is related to the possibility of fluctuations in foreign exchange rates affecting financial expenses (or income) and the liability (or asset) balance of contracts denominated in a foreign currency. In order to manage the effects of these fluctuations, the Company uses hedge instruments, usually swap contracts, as described in item a above. Credit risk: this risk arises from the possibility of the Company not receiving amounts arising from sales or credit instruments at financial institutions. In order to minimize this risk, the Company adopts the procedure of analyzing in detail the financial and equity position of its customers, establishing a credit limit and constantly monitoring their balances. In relation to financial investments, the Company invests solely in institutions with low credit risk, as assessed by rating agencies. In addition, each institution has a maximum limit for investment, determined by the Company s Credit Committee Financial Expenses/Income, Net Company Financial income Financial investments... 45,684 42,239 46,699 43,962 Interest received... 31,265 3,934 29,025 3,962 Monetary variations - assets... 2,410 2,351 2,842 2,351 Foreign exchange variations - assets... (35,422) (81,329) (34,756) (81,329) Other financial income... 37,380 1,958 38,554 2,002 Total financial income... 81,317 (30,847) 82,364 (29,052) Financial expenses Interest on debt... (180,450) (79,159) (180,231) (79,356) Monetary variations - liabilities... (18,058) (4,143) (18,464) (4,279) Foreign exchange variations - liabilities , , , ,991 Foreign exchange swap - liabilities... (40,741) (275,736) (40,741) (275,736) Other financial expenses... (40,397) (9,726) (38,435) (9,793) Total financial expenses... (59,337) (93,827) (57,529) (94,173) 17 - Taxes and Social Contributions Payable Company Income tax and social contribution on net income ,762 21, ,983 21,945 Social charges on payroll... 46,208 46,759 46,380 47,591 Value-added tax on sales and services (ICMS)... 32,129 12,563 32,131 12,897 Social contribution on revenues (COFINS)... 32,485 13,800 32,512 13,904 Excise tax (IPI)... 14,114 2,912 14,114 2,966 Social Integration Program (PIS)... 6,659 3,575 6,666 3,607 Income tax and social contribution withheld at source... 6,892 2,937 6,912 3,096 Other... 10,254 1,025 10,408 1, , , , , Provision for Contingencies The Company and its subsidiaries are parties in labor, civil, and tax processes. Based on the opinion of its legal advisors, management believes that the provision for contingencies is sufficient to cover probable and reasonably estimable losses from unfavorable court decisions, and the final decisions will not have significant effects on the financial position of the Company at December 31, 2004.

162 The balances of the contingencies are as follows: I) Contingent liabilities provided Company a) Tax Contingencies Social contribution on net income... (a.1) - 31,660-31,660 Corporate income tax... (a.1) - 80,887-80,887 Emergency Capacity Charge... (a.2) 16, , Extraordinary Tariff Recomposition... (a.2) 7, , ICMS... (a.3) 16,201 13,248 16,201 13,248 INSS... (a.4) 11,937 4,418 11,937 4,418 FGTS and other tax contingencies... (a.5) 1,198 1,273 1,198 1,392 ( - ) Judicial deposits... (a.6) (39,012) (118,252) (39,012) (118,326) 14,273 14,499 14,273 14,611 b) Labor contingencies... (b.1) 33,316 13,352 33,316 13,352 ( - ) Judicial deposits... (b.2) (1,964) (1,959) (1,964) (1,959) 31,352 11,393 31,352 11,393 c) Civil contingencies... (c.1) 7,575 6,704 7,575 6,704 ( - ) Judicial deposits... (c.2) (1,207) (1,063) (1,207) (1,063) 6,368 5,641 6,368 5,641 Total liabilities provided... 51,993 31,533 51,993 31,645 INSS (National Institute of Social Security). FGTS (Government Severance Indemnity Fund for Employees). a) Tax Contingencies a.1) Considering the many legal decisions unfavorable to the unconstitutionality of the limitation of the offset of income tax and social contribution loss carryforwards to 30% of net income, the Company decided to no longer deposit in court the amounts related to the matter and requested, in the court injunction records in which it is the petitioner, the conversion of the amounts deposited in court (R$ 338,992) into tax payments, and started observing the legal limitation. The legal challenge has been maintained; however, in the event the STF reviews its current guidance and the Company is successful, it will plead the offset of the amounts overpaid. a.2) R$ 16,195 (Company and consolidated) relating to the Emergency Capacity Charge (ECE), as well as R$ 7,754 (Company and consolidated) related to the Extraordinary Tariff Recomposition (RTE), included in the electric energy bills of the Company s plants. According to the Company, these charges are of a tax nature and, as such, are incompatible with the National Tax System provided in the Federal Constitution. For this reason, the constitutionality of this charge is being challenged in court. The lawsuits are in progress in the Federal Justice of the First Instance of the states of Pernambuco, Ceará, Minas Gerais, Rio de Janeiro, São Paulo, Paraná, and Rio Grande do Sul, as well as in the Federal Regional Courts of the 1 st and 2 nd Regions. The Company has fully deposited in court the amount of the disputed charges. a.3) R$ 16,201 (Company and consolidated) relating to amounts for Value-added tax on sales and services (ICMS), the majority of which relates to credit rights involving the Finance Secretariat and the State Courts of the First Instance in the state of Minas Gerais. a.4) R$ 11,937 (Company and consolidated) refers to lawsuits questioning the position of the National Institute of Social Security (INSS) in terms of charging INSS contributions on profit sharing payments made by the Company, as well as on payments for services rendered by third parties, in which the Institute calculated charges for the last ten years and assessed the Company because it understands that the Company is jointly liable. The assessments were maintained at the administrative level, and the Company filed annulment actions with the judicial deposits of the related amounts, based on the understanding that the rights to assess part of the charge had prescribed and that there is no such liability. a.5) R$ 1,198 (Company and consolidated) relating to a lawsuit regarding the Government Severance Indemnity Fund for Employees (FGTS) increased charges, which arose from the changes introduced by Complementary Law 110/01. Currently, the corresponding court injunction is awaiting the judgment of the extraordinary appeal filed by the Company. The amount provided is fully deposited in court. a.6) The judicial deposits, representing restricted assets of the Company, relate to amounts deposited and maintained in court until the resolution of the related legal matters. The balances of these credits, which at December 31, 2004 amounted to R$ 39,012 (Company and consolidated), are classified as a reduction of the provision for tax contingencies recorded in the books. b) Labor Contingencies b.1) The Company is also defending labor claims, for which there is a provision of R$ 33,316 at December 31, 2004 (Company and consolidated). None of these claims refer to individually significant amounts, and the lawsuits mainly involve claims for overtime pay, health hazards and risk premium, among others.

163 GERDAU AÇOMINAS S.A. b.2) The balances of the deposits in court, which totaled R$ 1,964 at December 31, 2004 (Company and consolidated), are classified as a reduction of the provision for labor contingencies. c) Civil Contingencies c.1) The Company is also defending in court civil claims arising in the normal course of its operations, including at December 31, 2004 claims arising from work accidents totaling R$ 7,575 (Company and consolidated) as contingent liability for these claims. c.2) At December 31, 2004, the balances of deposits in court totaled R$ 1,207 (Company and consolidated) and are classified as a reduction of the provision for contingencies. II) Contingent liabilities not provided a) Tax Contingencies a.1) Gerdau Açominas S.A. is defendant in an assessments filed by the state of Minas Gerais, as well as the petitioner of an annulment action, relating to the export of semi-finished manufactured products. The total amount demanded is R$ 225,486. The Company has not recorded any provision for contingency in relation to these claims since it considers this tax is not payable because the products cannot be considered semi-finished manufactured products as defined by the federal complementary law and, therefore, are not subject to ICMS. a.2) Also, R$ 68,431 are being demanded due to the understanding of the Federal Revenue Secretariat that the transactions carried out by the Company, under the drawback concession granted by DECEX, were not in conformity with the legislation. The Company filed a preliminary administrative defense of the legality of the arrangement, which is pending judgment. Since the tax liability has not been definitely established, and considering that the arrangement which originated the demand conforms with the assumptions required for the drawback concession, and also that the concession was granted after analysis by the legal administrative authority, the Company considers an unfavorable outcome to be remote and, for this reason, has not recorded any provision for the contingency. b) Civil Contingencies b.1) A civil lawsuit filed against Gerdau Açominas S.A. regarding the termination of a contract for the supply of slag and indemnities for losses and damages. At December 31, 2004, the lawsuit amounts to approximately R$ 37,014. Gerdau Açominas S.A. contested all bases for the lawsuit and filed a counterclaim for termination of the contract and indemnity for breach of contract. The judge declared the contract to be terminated, since this demand was common to both parties. With regards to the remaining discussion, the judge understood that both parties were at fault and judged the requests for indemnity unfounded. This decision was maintained by the Court of Civil Appeals of the State of Minas Gerais (TAMG), and the court decision is based on expert evidence and interpretation of the contract. The process was in the High Court of Justice (STJ), and returned to the TAMG for judgment of the appeal requesting clarification of the decision. The Company believes that any loss from the case is remote, since it understands that a change in the judgment is unlikely. b.2) A civil lawsuit filed by Sul America Cia Nacional de Seguros against the Company and Banco Westdeustsche Landesbank Girozentrale, New York Branch (WestLB), for the payment of R$ 34,383 to settle an indemnity claim, which has been deposited in court. The insurance company pleads doubt in relation to whom payment should be made and alleges that the Company is resisting in receiving and settling it. The lawsuit was contested both by the Bank (which claims having no right over the amount deposited, which resolves the doubt raised by Sul América) and by the Company (which claims that there is no such doubt and that there is justification to refuse payment since the amount owed by Sul América is higher than the amount involved). Subsequently, Sul América claimed fault in the Bank s representation, which matter is already settled, which resulted in the withdrawal in December 2004 of the amount deposited. The process should enter the expert evidence phase, mainly for calculation of the amount due. Based on the opinion of its legal advisors, the Company expects loss to be remote and that the sentence will declare the amount payable within the amount stated in the pleading. Also, Gerdau Açominas S.A. filed, prior to this lawsuit, a lawsuit for payment of the amount recognized by the insurance companies. The lawsuits are pending. The Company expects a favorable outcome in this lawsuit. The civil lawsuits arise from an accident on March 23, 2002 with the blast furnace regenerators of the Ouro Branco steel mill, which resulted in the stoppage of several activities, with material damages to the steel mill equipment and loss of profits. The equipment, as well as the loss of profits arising from the accident, were covered by an insurance policy. The report on the event, as well as the loss claim, was filed with IRB - Brasil Resseguros S.A., and an advance payment of R$ 62,000 was received in In 2002, a preliminary and conservative estimate of indemnities related to the coverage of loss of profits and material damages, in the total amount of approximately R$ 110,000, was recorded, based on the amount of fixed costs incurred during the period of partial stoppage of the steel mill activities and the immediate expenses to be incurred to recover the equipment temporarily. This estimate approximates the advance amount received plus the amount proposed by the insurance company as a complement to settle the indemnity. Subsequently, new amounts were added to the discussion, as stated in the Company s plea, although not yet recorded. Based on the opinion of its legal advisors, the Company considers that losses from other contingencies that may affect the results of operations or the Company s consolidated financial position are remote. III) Contingent assets not recorded a) Tax Contingencies The Company and its subsidiary Margusa - Maranhão Gusa S.A. expect to recover IPI premium credits. Margusa Maranhão Gusa S.A. has filed an administrative appeal, which is pending judgment. The Company has filed an injunction requesting the return of credits, which was judged unfavorably. Currently, the process awaits judgment of the appeal filed by the Company. The Company estimates the credits at R$ 145,786 (Company) and R$ 160,365 (consolidated) but no accounting recognition has been made thereof because of the uncertainty as to their realization.

164 19 - Related Parties a) Analysis of loan balances Company Gerdau S.A... 51,245 22,606 51,245 22,606 Fundação Gerdau... 1,304 16,795 1,304 16,795 Armafer Serviços de Construção Ltda Seiva S.A. - Florestas e Indústrias , ,657 GTL Brasil Ltda ,958-5,958 Florestal Rio Largo Ltda... (8,302) (4,676) (8,302) (4,676) Metalúrgica Gerdau S.A (3,390) 381 (3,390) Açominas Com. Imp. e Export. S.A. - Açotrading... (13,912) (13,921) - - GTL Financial Corp... - (173,885) - (173,885) Gerdau Internacional Empreend Ltda.... (23,556) (7) (23,556) (7) Sipar Aceros S.A. and other , ,622 TOTAL... 8,178 (138,309) 21,804 (125,320) Financial income (expenses) ,840 (1,017) 2,845 b) Commercial transactions Company Company Income/ Accounts Purchases/ Accounts Sales expenses receivable Sales expenses receivable Gerdau S.A ,020 (5,112) - Açominas Overseas Ltd. (*)... 3,633, ,485 1,711, ,549 Armafer Serviços de Construção Ltda Gerdau Laisa S.A Gerdau Ameristeel Corporation , Sipar Aceros S.A ,337-7,509 Gerdau AZA.S.A Indac - Ind. Adm. e Comércio S.A. (**)... - (8,154) - - (624) - (*) Transactions carried out due to securitization operations. (**) Payments of guarantees of loans. c) Guarantees granted - The Company is the guarantor of vendor loan agreements of the associated company Banco Gerdau S.A., in the total amount of R$ 68,138 at December 31, Post-Employment Benefits Considering all types of benefits to employees granted by the Company, the asset and liability positions at December 31 are as follows: Company Retirement and discharge benefits payable... 6,418 7,794 6,418 7,794 Total liabilities... 6,418 7,794 6,418 7,794 Unrecognized actuarial assets , , , ,154 a) Pension plan - defined benefit The Company and its subsidiaries are the co-sponsors of defined benefit pension plans that cover substantially all employees ( Açominas Plan and Gerdau Plan ). The Açominas Plan is managed by Fundação Açominas de Seguridade Social - Aços, a closed supplementary pension entity to complement the social security benefits of employees and retired employees of the Ouro Branco unit. The assets of the Açominas Plan mainly comprise investments in bank deposit certificates, federal public securities, marketable securities and properties. The Gerdau Plan is managed by Gerdau - Sociedade de Previdência Privada, a closed supplementay pension entity to complement the social security benefits of employees and retired employees of the other units of Gerdau Açominas S.A. The assets of the Gerdau Plan comprise investments in bank deposit certificates, federal public securities and marketable securities.

165 GERDAU AÇOMINAS S.A. The sponsors contributions to these pension plans were R$ 12,911 in 2004 and R$ 8,784 in 2003 for the Company and R$ 12,957 in 2004 and R$ 8,828 in 2003 consolidated. Current expenses of the defined pension plan are as follows: Company Cost of current service... 20,364 11,365 20,511 11,443 Interest cost... 64,749 34,200 65,213 34,287 Expected return of plan assets... (104,382) (51,170) (105,145) (51,220) Amortization of (gain) loss... (3,157) (873) (3,224) (873) Employees expected contribution... (4,383) (3,576) (4,383) (3,576) Pension plan cost (benefit), net... (26,809) (10,054) (27,028) (9,939) The reconciliation of the assets and liabilities of the plans is presented below: Company Total liabilities... (620,166) (527,213) (620,166) (527,977) Fair value of plan assets , , , ,985 Net assets , , , ,008 Unrecognized (gains) losses... (102,021) (122,407) (102,021) (122,754) Past service costs... 10,377-10,377 - Total assets, net , , , ,254 Changes in plan assets and actuarial liabilities were as follows: Company Changes in benefit liabilities Benefit liabilities at the beginning of the year , , , ,756 Cost of service... 20,364 11,365 20,511 11,443 Interest cost... 64,749 34,200 65,213 34,287 Actuarial loss... 11,474 57,198 10,962 56,944 Payment of benefits... (14,874) (12,474) (14,874) (12,474) Past service costs due to changes in the plan... 10,171-10,377 - Effect of merger/operational integration... 1, , ,021 Benefit liabilities at the end of the year , , , ,977 Company Changes in plan assets Fair value of plan assets at the beginning of the year , , , ,079 Return on plan assets... 97, ,249 97, ,256 Sponsor contributions... 12,911 8,784 12,957 8,828 Participant contributions... 5,202 4,232 5,202 4,232 Payment of benefits... (14,874) (12,474) (14,874) (12,474) Effect of merger/operational integration , ,064 Fair value of plan assets at the end of the year , , , ,985

166 As a result of the operational integration on November 28, 2003, the assets and liabilities of the Gerdau Plan, related to the employees transferred to Gerdau Açominas S.A., were allocated to the Açominas Plan, and the Supplementary Social Security Secretariat approved the addition of Gerdau Açominas S.A. as a sponsor of the Retirement and Supplementary Retirement Plans managed by Gerdau - Sociedade de Previdência Privada. The method for calculating the actuarial liability is the Projected Unit Credit Method, as determined by CVM Deliberation 371/2000. The amount of the actuarial gains and losses to be recognized as income or expense is the unrecognized amount that exceeds, in each period, the higher of the following limits: (i) 10% of the present value of the total actuarial liability of the defined benefit plan and (ii) 10% of the fair value of the plan assets. The resulting amount will be amortized annually based on the average remaining years of service estimated for the employees that participate in the plan. The table below shows a summary of the assumptions made to calculate and record the defined benefit plan for both the Company and consolidated: Gerdau plan Açominas plan Average discount rate % 11.30% Increase in compensation % 8.675% Expected rate of return on assets % 12.35% Mortality chart... GAM 83 (-1 year) AT-83 Disabled mortality chart... RRB 1944 AT-83 Turnover rate... Based on service Null and salary level b) Pension plan - defined contribution The Company and its subsidiaries are also the co-sponsors of a defined contribution pension plan administered by Gerdau - Sociedade de Previdência Privada. Contributions are based on a percentage of the compensation of employees. The total cost of this plan was R$ 2,661 in 2004 and R$ 181 in 2003 for the Company and R$ 2,682 in 2004 and R$ 195 in 2003 consolidated. c) Other post-employment benefits The Company estimates that the amounts payable to executives on their retirement or discharge totals R$ 6,418 (Company and consolidated at December 31, 2004, (R$ 7,794 in Company and consolidated) Shareholders Equity a) Capital - authorized capital at December 31, 2004 comprises 200,000,000 common shares (200,000,000 at December 31, 2003) and 200,000,000 preferred shares (100,000,000 at December 31, 2003), with no par value. At December 31, 2004, 158,633,709 common shares (158,633,709 at December 31, 2003) and 17,798 preferred shares (17,798 at December 31, 2003) are subscribed and paid-up, totaling R$ 2,340,576 (R$ 2,340,576 at December 31, 2003). Preferred shares do not have voting rights and cannot be redeemed, but have the same rights as common shares in terms of profit sharing. b) Interest on equity and dividends - the Company calculated interest on equity in accordance with the terms established by Law 9249/95. The corresponding amount was recorded as financial expenses for tax purposes. For presentation purposes, this amount was recorded as dividends, not affecting net income. The related tax benefit through the reduction of the income tax and social contribution on net income charge for the year was R$ 101,761. Shareholders are entitled to receive, each year, a minimum mandatory dividend of 30% of adjusted net income. The amount of interest on equity and dividends credited for the year was R$ 938,662, shown as follows: Net income for the year... 2,483, ,843 Realization of revaluation reserve ,395 Transfer to legal reserve... (124,174) (42,492) Adjusted net income... 2,359, ,746

167 GERDAU AÇOMINAS S.A. Distributions during the year Period Nature R$/share Credit Payment st quarter... Interest /30/ /18/ ,915 - Dividends /30/ /18/ ,288-2 nd quarter... Interest /30/ /17/ ,884 - Dividends /30/ /17/ ,536-3 rd quarter... Interest /31/ /17/ ,498 - Dividends /03/ /17/ ,344-4 th quarter... Dividends /11/ /22/ , ,986 Interest on equity and dividends , ,986 % interest/dividends paid or credited... 40% 35% Credit per share (R$) Outstanding shares (thousands) , ,651 The remaining income for the year was transferred to the statutory reserve for investments and working capital in accordance with the by-laws. c) Reserve for tax incentives The Company recorded a reserve for tax incentives in the amount of R$ 190,905 due to the reduction of income tax on the exploitation profit of the units located in the Northeastern region of Brazil, as well as benefits arising from state tax financing Calculation of EBITDA Gross profit... 4,240, ,967 Selling expenses... (400,301) (94,702) General and administrative expenses... (645,510) (174,040) Depreciation and amortization , ,450 EBITDA... 3,687, , Other Operating Income (Expenses), Net The amount recorded as operating income (expenses), net mainly refers to the recognition of R$ 102,449 (Company and consolidated) arising from the favorable outcome obtained in the lawsuit regarding PIS incorrectly paid Statutory Profit Sharing a) The management profit sharing is limited to 10% of net income for the year, after income tax and management fees, as stated in the Company s by-laws; b) The employees profit sharing is linked to the attainment of operating goals and was charged to cost of production and general and administrative expenses, as applicable.

168 Board of Directors Chairman JORGE GERDAU JOHANNPETER Vice Chairmen GERMANO H. GERDAU JOHANNPETER KLAUS GERDAU JOHANNPETER FREDERICO C. GERDAU JOHANNPETER CARLOS JOÃO PETRY Board Member MARCO ANTÔNIO PEPINO Secretary General EXPEDITO LUZ EXECUTIVE COMMITTEE President JORGE GERDAU JOHANNPETER Vice Presidents FREDERICO C. GERDAU JOHANNPETER, Senior Vice President ANDRÉ BIER JOHANNPETER CLAUDIO JOHANNPETER OSVALDO BURGOS SCHIRMER DOMINGOS SOMMA FILIPE AFFONSO FERREIRA RICARDO GEHRKE Secretary General EXPEDITO LUZ Sérgio Braz Domingues Accountant CRC RS No S - MG CPF No Corporate Officers ALFREDO HUALLEM ANDRÉ FELIPE GUEIROS REINAUX ANDRÉ PIRES DE OLIVEIRA DIAS CLÁUDIO MATTOS ZAMBRANO DIRCEU TARCÍSIO TOGNI ÉRICO TEODORO SOMMER EXPEDITO LUZ FLADIMIR BATISTA LOPES GAUTO FRANCISCO DEPPERMANN FORTES GERALDO TOFFANELLO GERSON MARCOS VENZON GUILHERME CHAGAS GERDAU JOHANNPETER HEITOR LUIS BENINCA BERGAMINI JOAQUIM DE SOUZA GOMES JOAQUIM GUILHERME BAUER JOÃO APARECIDO DE LIMA JOÃO CARLOS SALIN GONÇALVES JOSÉ MAURÍCIO WERNECK GUIMARÃES DA SILVA JULIO CARLOS LHAMBY PRATO LUIZ ALBERTO MORSOLETTO LUIZ ANDRÉ RICO VICENTE, Vice President on Gerdau Açominas LUIZ AUGUSTO POLACCHINI MANOEL VÍTOR DE MENDONÇA FILHO NESTOR MUNDSTOCK OMAR DE OLIVEIRA FANTONI PAULO RICARDO TOMAZELLI PAULO ROBERTO PERLOTT RAMOS RUY LOPES FILHO SIRLEU JOSÉ PROTTI TADEU PETTERLE

169 GERDAU AÇOMINAS S.A. Report of Independent Auditors To the Board of Directors and Shareholders Gerdau Açominas S.A. 1. We have audited the accompanying balance sheets of Gerdau Açominas S.A. and the consolidated balance sheets of Gerdau Açominas S.A. and its subsidiaries as of December 31, 2004 and 2003, and the related statements of income, of changes in shareholders equity and of changes in financial position of Gerdau Açominas S.A., as well as the related consolidated statements of income and of changes in financial position, for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements. 2. We conducted our audits in accordance with approved Brazilian auditing standards, which require that we perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented in all materials respects. Accordingly, our work included, among other procedures: (a) planning our audit taking into consideration the significance of balances, the volume of transactions and the accounting and internal control systems of the companies; (b) examining, on a test basis, evidence and records supporting the amounts and disclosures in the financial statements, and (c) assessing the accounting practices used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 3. In our opinion, the financial statements audited by us present fairly, in all material respects, the financial position of Gerdau Açominas S.A. and of Gerdau Açominas S.A. and its subsidiaries at December 31, 2004 and 2003, and the results of operations, the changes in shareholders equity and the changes in financial position of Gerdau Açominas S.A., as well as the consolidated results of operations and of changes in financial position, for the years then ended, in accordance with accounting practices adopted in Brazil. 4. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The statement of cash flows is presented for purposes of additional analysis and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly presented in all material respects in relation to the financial statements taken as a whole. Porto Alegre, March 4, 2005 Auditores Independentes CRC 2SP000160/O-5 F MG Carlos Alberto de Sousa Accountant CRC 1RJ056561/O-0 - S MG

170 Services to Analysts and Investors I n v e s t m e n t a n a l y s t s a n d c a p i t a l m a r k e t institutions may obtain additional information and copies of this report by contacting the Office of Investor Relations at: Av. Farrapos, 1811 CEP Porto Alegre, RS Brazil Phone: +55 (51) Fax: +55 (51) Website: inform@gerdau.com.br Analysts and investors of Gerdau Ameristeel Corp. must contact the Office of Investor Relations at the following address: 4221 W. Boy Scout Blvd. Suite 600 Tampa, FL U.S.A. Phone: +1 (813) Website: ir@gerdauameristeel.com Shareholder Services Book-entry shares issued by the listed companies are held at Banco Itaú S. A. at the following address: Superintendência de Serviços para Empresas Av. Engenheiro Armando de Arruda Pereira, 707 Jabaquara CEP São Paulo, SP Brazil Phone: +55 (11) Fax: +55 (11) For the purposes of exercising rights or obtaining information concerning the status of shares, please refer to any branch of the Depositary Institution (Banco Itaú) or contact Shareholder Relations at Gerdau: Av. Farrapos, 1811 CEP Porto Alegre, RS Brazil Phone: +55 (51) Fax: +55 (51) Toll free: acionistas@gerdau.com.br

171 Corporate Communications Av. Farrapos, 1811 CEP Porto Alegre, RS Brazil Phone: +55 (51) Fax: +55 (51) gerdau@gerdau.com.br Writing and Coordination Gerdau Group Corporate Communications Graphic Design and Production Supervision GAD Design Printing Impresul Serviço Gráfico e Editora Ltda. Translation Scientific Linguagem Photo Credits Conception and production of images on the cover and pages 18, 44 and 56: SLM Ogilvy Gerdau archive (pages 41, 53, 54, 55, 64, 65, 66, 67) Junior Achievement archive (page 51) Ary Diesendruck (pages 43, 67) Carlos Alberto Pereira (page 63) Carlos Levitanus (page 64) Cláudio Meneghetti (page 18) Eliana Pereira (page 32) Eneida Serrano (pages 52, 67) Felipe Hellmeister (cover, pages 44, 56) Flávio Luiz Russo (pages 5, 8, 40, 46, 51, 58, 62, 64, 65) GH Digital (pages 35, 36, 48) Juliana Maria Carniel (page 63) Leonid Streliaev (pages 9, 12, 31, 47) Luis Fernando Arenas (page 41) Lya Huguet (pages 53, 61) Mathias Cramer (pages 6, 59) Matías del Campo (page 49) New York Stock Exchange, Inc. (page 24) Osmar de Souza Raposo (page 63) Rodrigo Antônio Moreira (page 52) Rosangela Reitz (page 35) Rudolph Lopez (page 38) Paper High whiteness produced by Cia. Suzano from cultivated trees. Print Run 3,800 copies in Brazilian Portuguese and 1,000 copies in English. We would like to thank all of those who contributed by supplying information and images for this publication. Porto Alegre, May 2005.

172 2004 GERDAU Annual Report Brazil Canada and the United States Chile Uruguay Argentina