U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

to FORM 20-F

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999

Commission file number 1-14878 GERDAU S.A. (Exact Name of Registrant as Specified in its Charter)

Federative Republic of Brazil (Jurisdiction of Incorporation or Organization)

N/A (Translation of Registrant's name into English)

Av. Farrapos 1811 Porto Alegre, Rio Grande Do Sul - Brazil CEP 90220-005 (Address of principal executive offices) (Zip code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange in Which Registered Preferred Shares, no par value per share, each represented by American Depositary Shares New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

The total number of issued shares of each class of stock of GERDAU S.A. as of December 31, 1999 was:

19,691,010,193 Common Shares, no par value per share 37,054,842,993 Preferred Shares, no par value per share

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

Indicate by check mark which financial statement item the Registrant has elected to follow Item 17 Item 18 X . TABLE OF CONTENTS

Page INTRODUCTION ...... 1 PART I...... 2 ITEM 1.DESCRIPTION OF BUSINESS...... 2 ITEM 2.PROPERTIES...... 23 ITEM 3.LEGAL PROCEEDINGS ...... 24 ITEM 4.CONTROL OF REGISTRANT...... 25 ITEM 5.NATURE OF TRADING MARKET...... 25 ITEM 6.EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS...... 29 ITEM 7.TAXATION...... 32 ITEM 8.SELECTED FINANCIAL DATA ...... 37 ITEM 9.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...... 42 ITEM 10.DIRECTORS AND OFFICERS OF REGISTRANT...... 58 ITEM 11.COMPENSATION OF DIRECTORS AND OFFICERS ...... 60 ITEM 12.OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES ...... 60 ITEM 13.INTERESTS OF MANAGEMENT IN CERTAIN TRANSACTIONS...... 60 PART II...... 61 ITEM 14.DESCRIPTION OF SECURITIES...... 61 PART III ...... 62 ITEM 15.DEFAULTS UPON SENIOR SECURITIES...... 62 ITEM 16.CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES ...... 62 PART IV...... 62 ITEM 17.FINANCIAL STATEMENTS ITEM 17...... 62 ITEM 18.FINANCIAL STATEMENTS ITEM 18...... 62 ITEM 19.FINANCIAL STATEMENTS AND EXHIBITS...... 62

i INTRODUCTION

Unless otherwise indicated, all references herein (i) to the "Company" or to "Gerdau" are references to Gerdau S.A., a corporation organized under the laws of the Federative Republic of Brazil ("Brazil") and its consolidated subsidiaries, and (ii) to "Preferred Shares" and "Common Shares" refer to the Company's authorized and outstanding preferred stock and common stock, designated as ações preferenciais and ações ordinárias, respectively, each without par value. All references herein to the "real," "reais" or "R$" are to the Brazilian real, the official currency of Brazil. As of July 1, 1994, the denomination of the Brazilian currency unit was changed to the real from the cruzeiro real (each real being equal to 2,750 cruzeiros reais at such time), which, in turn, was changed as of August 1, 1993 from the cruzeiro (each cruzeiro real being equal to 1,000 cruzeiros at such time). All references to (i) "U.S. dollars," "dollars" or "U.S.$" are to United States dollars, (ii) "billions" are to thousands of millions, (iii) "km" are to kilometers, and (iv) "tons" denotes metric tons.

The Company has prepared the consolidated financial statements included herein in conformity with generally accepted accounting principles in the United States ("U.S. GAAP").

F-1 PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

Gerdau S.A. is a producer of long ordinary and specialty steel through its industrial units located in Brazil and its subsidiaries in Uruguay, Chile, Canada, Argentina and the United States, with installed production capacity of 7.7 million tons of crude steel, 7.0 million tons of rolled product and 0.9 million tons of drawn products. The Company produces steel based on the mini-mill concept, whereby steel is produced in electric arc furnaces, starting with scrap and pig iron acquired mainly in the region where each mill operates (the so-called mini-mill concept). Gerdau also operates plants capable of producing steel starting with iron ore in blast furnaces and through the direct reduction process. Gerdau's products are manufactured with a wide range of specifications, intended to satisfy a large spectrum of consuming groups.

The three principal markets in which the Company operates are the civil construction, manufacturing and agricultural breeding sectors, the first two of which represented approximately 97% of the total sales volume of the Company measured in tons in 1999. In 1999, Gerdau produced 5.1 million tons of crude steel, of which 3.9 million (including 0.6 million from Açominas) were produced in Brazil (15.5% of national production) and 1.2 million tons through its subsidiaries abroad. In the segment of long rolled steel, Gerdau is the largest Brazilian producer, with approximately 46.5% of total production.

For the fiscal year ended December 31, 1999, the Company achieved consolidated net sales in the amount of U.S.$ 1.72 billion, generating consolidated net income of U.S.$ 197.7 million.

Corporate History

Gerdau is part of an industrial conglomerate which began in 1901, with the acquisition by the Gerdau family of a nail factory located in Porto Alegre, in the Southern region of Brazil. In 1969, the business changed its name to Metalúrgica Gerdau S.A., which today controls Gerdau S.A.

With the objective of assuring the supply of raw material, immediately after the end of World War II, Siderúrgica Riograndense S.A., a steel producer also located in Porto Alegre, was acquired. The Company's production capacity was increased through, among other things the construction of a new mill. In the second half of the 1960s, the Company began to expand and diversify its activities.

The expansion involved the acquisition of existing companies (which increased the Company's market share) and the construction of new plants, in Brazil and abroad. The first company acquired was Indústria de Arames São Judas Tadeu S.A. in São Paulo, which is today known as "Comercial Gerdau". Comercial Gerdau, through a network of more than 60 branches, covers all of Brazil for retail sales of product. Subsequently, the Group expanded with various steel mills, drawing mills and factories for the production of strands, steel cables, soldered wire mesh and similar products located in principal Brazilian and foreign markets.

In order to assure competitive advantages in each region in which the Company operates, the Company adopted a principal strategy of acting through medium-sized companies situated in the heart of the economic regions capable of supplying raw materials originating in the same areas in which the final products were sold. See "Business Strategy".

In the beginning of 1995, a corporate restructuring program was initiated to simplify the structure resulting from the process of expansion and development through acquisition and establishment of companies, with the purpose of improving the transparency of operations, achieving greater acceptance in the modern Brazilian capital markets and enhancing the conditions for access to international capital markets.

The restructuring began with a public exchange offer of preferred shares of the former Companhia Siderúrgica da Guanabara-Cosigua (today Gerdau S.A.) held by the controlling shareholders in exchange for shares held by minority shareholders in the following affiliated companies: Siderúrgica Guaira S.A., Siderúrgica Açonorte S.A. and Cia. Siderúrgica Pains. This transaction was conducted through the São Paulo Stock Exchange in February 1995 and the

2 widespread acceptance of this process by the shareholders of these companies permitted the continuation of the restructuring process by merger, during the period of February 1995 through June 1997, of 28 companies then comprising the Gerdau group. In January 1999 Gerdau S.A. incorporated also Comercial Gerdau Ltda.. As a result, all of the steel mill operations of Gerdau installed in Brazil, and abroad are now concentrated in Gerdau S.A.

Each acquisition of minority interests during the corporate restructuring involved the issuance of common and preferred shares by the Company or a subsidiary thereof, in exchange for shares held by the minority shareholders in certain operating entities. In each case, the book value of the net assets acquired was greater than the fair value of the shares issued for such assets. The Company believes it is not unusual for the book value of a Brazilian entity to exceed its fair value because Brazilian valuation methods rely on differing factors, such as the prospects of inflation, the volatility of the economy and the political environment. [See Note 2.3 to the Financial Statements for further accounting information with respect to the Company's corporate reorganization.]

In the second half of 1997, Gerdau acquired a participation in the capital of Aço Minas Gerais S.A.-Açominas ("Açominas") and in December, 1997 it acquired control of Sociedad Industrial Puntana S.A. - SIPSA ("Sipsa") of San Luis, Argentina. More recently, in May 1998 Gerdau signed an agreement with the controllers of Sipar Laminación de Aceros S.A.I.C. ("Sipar") of Rosario, Argentina, pursuant to which the Company now holds one-third of the voting capital of Sipar (and Gerdau transferred to the controllers of Sipar one third of the voting capital of Sipsa).

In 1999, the Board of Açominas presented a request for a capital increase to its shareholders. It was approved and the amount defined as being the equivalent to US$ 175 million. This increase in capital allowed for the reorganization of the controling shareholders’ stakes in the company. Gerdau increased its position from 17.5% to 36.6%, thus becoming the largest minority shareholder in the control group. In addition, Gerdau gained the right to elect one additional Board member in addition to the already existing Board member, along with the right to nominate the chairman of the Board. Furthermore, Gerdau, through its board members, appointed the officers for Financial/Administrative, Commercial and Industrial executive directors while the other shareholders appointed the Controller.

On September 27, 1999 Gerdau acquired 88% of FLS Holdings Inc. from Kyoei Steel Ltd. of Osaka, Japan, which in turn holds 85% of the shares of AmeriSteel Corp. (“Ameristeel”), headquartered in Tampa, Florida, USA. Ameristeel is engaged in the manufacture and sale of long steel products from recycled scrap raw material and has an installed capacity of nearly 1.8 million metric tons of crude steel per annum and 1.7 million metric tons of rolled steel. Steel operations are conducted in four non union manufacturing facilities located respectively in the states of Florida, Tennessee (two) and North Carolina. In addition to these units, Ameristeel has eighteen “rebar fabrication shops”, two operations for manufacturing rail spikes and one for producing nails and welded wire mesh. See "Management's Discussion and Analysis of Financial Condition and Results of Operations – Investments".

The following table shows the main companies and investments held directly or indirectly by Gerdau S.A. as of December 31, 1999:

Company Country Participation (%) Gerdau Laisa S.A. ("Laisa") Uruguay 99 Gerdau Aza S.A. ("Aza") Chile 99 Gerdau Courtice Steel Inc. ("Courtice") Canada 100 Gerdau MRM Steel Inc. ("MRM") Canada 100 Seiva S.A. Florestas e Indústrias ("Seiva") Brazil 93 Armafer Serviços de Construção Ltda. ("Armafer") Brazil 100 Gerim Reflorestamento Ltda. ("Gerim") Brazil 100 Aços Minas Gerais S.A. - Açominas ("Açominas") Brazil 37 Sociedad Industrial Puntana S.A. - Sipsa ("Sipsa") Argentina 67 Sipar Laminacion de Aceros ("Sipar") Argentina 33 AmeriSteel Corp (“AmeriSteel”) USA 74

The following chart shows the corporate structure of the principal companies of Gerdau as of December 31, 1999:

3 Shareholding Structure – Main Companies (Direct and indirect % of participation)

Metalúrgica Gerdau S.A.

51%

Gerdau S.A.

37% 94% 100% GerdauGerdau Açominas Seiva Açominas InternacionalInternacional Seiva

74% 100% 100%100% 100% 67% 33%

AmeriSteelAmeriSteel CourticeCourtice MRMMRM AZAAZA LaisaLaisa SipsaSipsa SiparSipar

Public Companies Minority Shareholdings

Business Strategy

Historical

Gerdau's principal business focus is the decentralized production of long steel products using electric arc furnace ("EAF") mini-mills employing continuous casting technology. Plants are sized and located in order to fit in the local economy and access markets efficiently. This strategy was a response to the geographical dimensions of Brazil, its limited infrastructure and high freight costs, which motivated growth of a business focused on selling products where raw materials were readily accessible. From the mid 1970s through the early 1990s, Gerdau concentrated on improving its market share in Brazil through a combination of increasing the production capacity of its existing facilities and through strategic acquisitions, typically of distressed mini-mills where the Company's principal contribution would be management skills rather than capital. Gerdau has increased its share of Brazilian long steel production from 14.1% of total tonnage produced in 1975 to 46.5% in 1999. The Company's share of Brazilian crude steel production grew from 6.3% to 15.5% during the same period. See, "Production Process - Domestic Steel Production." Gerdau's strategy has been implemented through the following acquisitions:

• Domestic acquisitions: In the 1960s the Company acquired a mill in Pernambuco in Northeast Brazil. In the 1970s it acquired two mills (Alagoas and Paraná) and constructed its largest mill in Rio de Janeiro. Gerdau's structure further developed as a result of its participation in Brazil's privatization auctions in the late 1980s and early 1990s. In the first phase of privatizations, it acquired Barão de Cocais mill in 1988 and Usina Siderúrgica da Bahia S.A.-Usiba in 1989. In the second, broader phase of privatizations, Gerdau acquired Companhia Siderúrgica do Nordeste ("Cosinor") in 1991 and Aços Finos Piratini S.A., a specialty steel maker, in part in order to enter the market for high-value-added products. Gerdau has increased productivity of these privatized mills significantly since the acquisition (as measured in metric tons of crude steel per man-year) by reducing the number of employees and investing in technological upgrades of processes and equipment. Through these investments and business management, Gerdau has been successful in significantly improving the profitably of these businesses and achieving cost efficiencies and productivity improvements within a relatively short time after acquisition. In 1994, the Company acquired Cia. Siderúrgica Pains S.A. ("Pains"), a steel mill located in Divinópolis, Minas Gerais State, through the acquisition of Korf Gmbh, a German corporation. Gerdau has substantially divested itself of other assets

4 acquired through Korf that were unrelated to Gerdau's core business, the production of long ordinary steel. The Pains acquisition was the subject of antitrust proceedings in Brazil that were later successfully settled. In the second half of 1997, Gerdau acquired a 17.49% participation in the capital of Aço Minas Gerais S.A.- Açominas, a Brazilian producer of semi-finished products. In 1999, Gerdau purchased an additional interest of 19.14% of Açominas, and currently holds 36.63% of this company.

• Overseas Acquisitions: Gerdau has grown outside Brazil through strategic acquisitions. In 1981, the Company acquired Siderúrgica Laisa S.A. in Uruguay (now known as Gerdau Laisa S.A.), as its first steel manufacturing company outside Brazil. This was followed in 1989 by the acquisition of Courtice Steel Inc. (now known as Gerdau Courtice Steel Inc.) in Canada and, in 1992, by the acquisition of Siderúrgica Aza S.A. (now known as Gerdau Aza S.A.) in Chile. In May 1995, Manitoba Rolling Mills Inc., a profitable steel division affiliated with the Canam Manac Group located in Selkirk, Canada, was acquired by Gerdau. Gerdau assumed managerial control on June 1 , 1995, and renamed the facility Gerdau MRM Steel Inc. In December, 1997, the Company acquired control of Sociedad Industrial Puntana S.A. ("Sipsa") of Argentina, a rolling mill with a production capacity of 75,000 tons of rolled products, in order to increase its presence in an already important export market. In May 1998, the Company concluded an agreement to acquire a one- third interest in an Argentine rolling mill, Sipar Laminacion de Aceros S.A.I.C. ("Sipar"), as well as to transfer to the controllers of Sipar a one third interest in Sipsa. On September 27, 1999 Gerdau acquired 88% of FLS Holdings Inc. from Kyoei Steel Ltd. of Osaka, Japan, which in turn holds 85% of the shares of Ameristeel Corp. headquartered in Tampa, Florida, USA.

Following the period of acquisitions, the Company's strategy evolved to include downstream investment through the addition of drawn products and specialty steels, permitting diversification of its products. Having achieved a major and stable market positioning in the production of long steel products, the extent of downstream diversification is under review, to assure that the Company is invested in value-added products. Recently, the Company disposed of certain operations for the production of bolts, nuts and wire strands and cables in order to meet its profitability expectations.

The table below shows the Company's various domestic acquisitions and their respective improvements in production volumes and financial results.

Fiscal COMPANY- Date of Purchase Year Fiscal Years following Purchase Prior to Purchase 1 2 3 4 5 AÇONORTE - December/1969 1969 1970 1971 1972 1973 1974 Production of Crude Steel (in 35.1 44.8 49.1 59.6 102.8 114.3 1,000 tons) Revenue (US$ millions) ND ND ND 13.3 31.6 52.9 Net income (US$ millions) 0.6 1.2 1.4 1.8 5.9 5.4

GUAÍRA - December/1971 1971 1972 1973 1974 1975 1976 Production of Crude Steel (in 19.9 34.0 43.2 44.5 42.9 41.5 1,000 tons) Revenue (US$ millions) ND 5.8 11.2 18.3 13.3 13.9 Net income (US$ millions) 0.02 0.4 1.4 2.0 1.1 1.0

COMESA - January/1974 1973 1974 1975 1976 1977 1978 Production of Crude Steel (in 4.7 11.9 7.0 14.3 16.1 16.8 1,000 tons) Revenue (US$ millions) 0.9 4.5 4.6 6.2 6.8 8.3 Net income (US$ millions) (1.7) 0.4 0.1 0.4 0.7 0.7

HIME - February/1985 1984 1985 1986 1987 Production of Crude Steel (in 200.2 192.1 188.3 Merged into Cosigua 1,000 tons)

5 Revenue (US$ millions) 47.7 ND 68.9 (presently Gerdau S.A.) Net income (US$ millions) (5.0) ND (0.4)

USIBA - October/1989 1989 1990 1991 1992 1993 1994 Production of Crude Steel (in 336.4 315.9 310.0 330.2 377.9 401.4 1,000 tons) Revenue (US$ millions) 101.8 78.8 72.9 91.6 96.6 167.4 Net income (US$ millions) (19.2) (12.6) 1.7 (3.1) 2.3 1.2

PIRATINI February/1992 1991 1992 1993 1994 1995 Production of Crude Steel (in 171.9 141.4 178.2 192.4 Merged into 1,000 tons) Riograndense Revenue (US$ millions) 66.8 61.3 94.1 164.6 (presently Gerdau S.A.) Net income (US$ millions) (21.0) (5.1) 1.4 2.3

PAINS - February/1994 10/92 a 10/93 a 1995 1996 1997 09/93 12/94 Production of Crude Steel (in 438.2 502.7 343.5 385.5 Merged into Gerdau 1,000 tons) S.A. Revenue (US$ millions) 138.8 253.0 219.1 193.6 Net income (US$ millions) 2.6 2.6 4.5 6.0

The Company does not believe it is necessary to increase its capacity or market share through future acquisitions within Brazil, but it may do so if appropriate opportunities arise. For example, by September 1999, the Company had increased its participation to 36.63% in Aço Minas Gerais S.A. ("Açominas"), a Brazilian producer of semi-finished products, jointly with the NatSteel Group of Singapore and employee groups. Although Açominas's production process differs from that of the other Gerdau companies, management believes the fit will be complementary and given its low cost structure, Açominas will provide exceptional potential for growth.

Future

The Company will continue to implement its strategy over the near and medium-term, by undertaking the following steps:

• Financial Management: Given the high cost of financing in Brazil and the current trend toward consolidation in the steel industry world-wide, the Company's medium-term strategy is to consolidate its existing acquisitions and reduce financial expenses. This will be achieved through a financial strategy to extend the tenor of its existing debt in order to increase cash-flow available for reinvestment without substantially increasing overall leverage of the Company. The intention is to fund capital expenditures increasingly out of cash-flow, with the exception of strategic expansions required to maintain or establish market share in a profitable market segment. The focus is first on increasing the efficiency and profitability of existing operations and limiting allocation of capital for acquisitions to only the most important opportunities.

• Cost Management: The Company will continue to concentrate on securing adequate and reliable steel scrap supplies and adjusting its production levels to minimize variable costs of production. While the Company has the flexibility to switch production from the domestic market to exports, depending on market demand, domestic sales generally have been more profitable than export sales and it is likely in the future to focus heavily on regional sales for each of its companies. Nonetheless, the historical volatility of the Brazilian economy has made it a management priority that Gerdau maintain a high degree of production and market flexibility in order to quickly adapt to changing market conditions.

6 The acquisition of AmeriSteel (installed capacity of 1.8 million tons of crude steel per year in the USA) and the increase of the investment in Açominas also constitute important steps for the future development of the Company's business.

Industry Overview - Worldwide and Brazil

Since the 1940s, steel has been of vital importance to the Brazilian economy. As a result of an interruption of steel supplies during World War II, the Brazilian government began developing the domestic steel industry by forming Companhia Siderúrgica Nacional ("CSN"), a steel producer and Companhia Vale do Rio Doce, an iron ore producer. During almost 50 years of state control, the Brazilian flat steel sector was coordinated on a national basis under a steel monopoly, Siderbrás. The state had far less involvement in the non-flat sector, which has traditionally been made up of smaller private sector companies such as Gerdau. As a result of the debt crisis of the 1980s, the Brazilian government's access to foreign capital became severely restricted and further investment in the state steel sector was reduced. For a general discussion as the Brazilian Economic Environment, please see "-Risk Factors."

In 1990, the Brazilian government selected the steel industry as the first industry to become privatized. Starting in 1991, the larger integrated flat steel producers, which had operated as semi-autonomous companies under the control of Siderbrás, were individually privatized. Today, the Brazilian steel industry is composed of 14 companies, with an installed annual capacity of approximately 30 million metric tons, producing a full range of flat, non-flat, carbon, stainless and specialty steel. The flat steel industry is currently dominated by the producers that before privatization used to belong to Siderbrás, such as CSN, while Gerdau has become the leading producer of long steel products.

Since privatization began in 1991, the industry has increased production by approximately 21%through the year ended December 31, 1999. In 1999, the Brazilian Steel Industry exported 10.0 million metric tons, increasing 14.6% over 1998.Brazil is a negligible importer of foreign steel products. Steel imports in 1999 were 0.6 million metric tons or 4.6% of domestic apparent steel consumption (defined as domestic sales plus imports).

Brazil's production of crude steel rose from 22.2 million metric tons in 1987 to 25.0 million metric tons in 1999. In 1999, Brazil accounted for over 49% of total steel production in Latin America, with production over 1.7 times that of Mexico, the second largest producer in Latin America, and approximately 25.7% of U.S. production. Over the last decade, total global crude steel production decreased at an annual average growth rate of 0.15%, to 774 million metric tons. During that time, Brazilian production has had decreased an average annual growth rate of 0.04%.

Crude steel products comprise non-finished ingots, billets, blooms and slabs produced at the melting and casting stage of the production process. Rolled products are higher value-added products manufactured from crude steel at the intermediate stage of production in rolling mills. Long rolled products include wire rod, rebars, profiles, and round, square and flat bars.

All information concerning the steel industry contained herein was obtained from either IBS (the Brazilian Steel Institute) reports or IISI (International Institute for the Steel Industry) and were not prepared specifically for Gerdau. This information is publicly available and is presented in a standardized format. IBS is comprised of Brazilian steel companies, and Gerdau is included among them as an associated member.

The following table shows historical crude steel production (in millions of metric tons) and related data for the periods indicated:

World U.S. South Mexico Brazil Brazil America % of World Production (millions of metric tons)

7 1989 786.0 88.8 34.2 7.9 25.1 3.2 1990 770.5 89.7 29.3 8.7 20.6 2.7 1991 733.6 79.7 30.9 8.0 22.6 3.1 1992 719.7 84.3 32.3 8.5 23.9 3.3 1993 727.5 88.8 33.8 9.2 25.2 3.5 1994 725.2 91.2 35.0 10.3 25.7 3.5 1995 752.4 95.2 34.6 12.1 25.1 3.3 1996 750.5 95.5 35.9 13.2 25.2 3.4 1997 799.0 98.5 37.0 14.3 26.2 3.3 1998 764.7 98.7 36.9 14.2 25.8 3.4 1999 774.2 97.3 35.2 15.3 25.0 3.2 Source: IBS / IISI

The following table shows historical rolled steel production (in millions of metric tons) in Brazil for the periods indicated.

Rolled Products - Brazil Flat Long Total (millions of metric tons)

1989 9.8 6.5 16.3 1990 8.8 6.0 14.8 1991 9.4 5.5 14.9 1992 10.1 5.8 15.9 1993 10.0 6.5 16.5 1994 10.7 6.7 17.4 1995 10.6 5.5 16.1 1996 11.0 5.7 16.7 1997 11.3 6.1 17.4 1998 10.4 6.0 16.4 1999 10.1 6.7 16.8 Source: IBS

Consumption

Real GDP in Brazil grew at a rate of 0.8% in 1999 (based on preliminary data) and 0.2% and 3.7% in 1998 and 1997, respectively. Total domestic steel sales increased by over 13.0% from 11,890 million metric tons in 1994 to 13,435 million metric tons in 1999. Brazilian industrial production grew in all of the steel intensive sectors of the economy: automotive, construction, consumer durables and agricultural equipment.

Historically, the Brazilian steel industry has been affected by substantial fluctuations in domestic demand for steel. Although national per capita demand varies with GDP, fluctuations in steel demand tend to be more pronounced than changes in economic activity. For purposes of comparison, the following table sets forth global steel apparent consumption from 1992 through 1998, the most recent year for which statistics are available.

Global Finished Steel Apparent Consumption* World US Central and Mexico Brazil South America (millions of metric tons)

1992 607.0 84.1 19.8 7.8 8.9

8 1993 626.2 90.3 21.9 7.6 10.6 1994 644.0 103.0 24.2 9.9 12.1 1995 655.4 99.4 25.4 6.2 12.0 1996 661.4 106.7 26.6 8.2 13.0 1997 698.5 113.1 28.8 9.0 15.3 1998 691.6 119.1 27.9 9.9 14.5 * Domestic sales plus imports ** 1999 data are not available Source: IISI Production Costs

Brazil is one of the world's lowest cost producers of steel. Brazil's advantages include a relatively inexpensive and abundant supply of raw materials and energy, as well as low labor costs. Brazil also has the benefit of a relatively large internal market. These advantages are offset to some extent by such factors as dependence on imported coal and high internal costs of financing.

Production Process

In 1999, the Company was the largest manufacturer of long-rolled steel products and the third largest crude steel producer in Brazil. The Company offers over 34,000 products in the commodity steel, rolled steel, drawn steel and specialty steel segments of the steel market. In 1999, the Company produced 3,875 thousand metric tons of crude steel in Brazil (including 604 thousand metric tons from Açominas) and 1,191 thousand metric tons of crude steel abroad.

Domestic Steel Production

The Company's production of steel has steadily increased since 1991 mainly due to the acquisition of several steel companies and increases in production capacity of the Company's steel mills. As of December 31, 1999, the Company had an annual production capacity of 7.7 million metric tons of crude steel (including 916 thousand metric tons from Açominas), 7.0 million metric tons of long rolled products (including 110 thousand metric tons from Açominas and 41 thousand metric tons from Sipar) and 884 thousand metric tons of drawn products, as compared to a production capacity of 3.3 million metric tons of crude steel, 2.9 million metric tons of long rolled products and 747 thousand metric tons of drawn products for the year ended December 31, 1991. In 1999, 76.5%, or 3.9 million metric tons of the Company's crude steel was produced in Brazil (including 604 thousand metric tons from Açominas) and 23.5%, or 1.2 million metric tons, was produced by the Company's subsidiaries located in Argentina, Canada, Chile, Uruguay and the United States; while 72,8%, or 3.1 million metric tons, of the Company's long rolled products was produced in Brazil (including 57 thousand metric tons from Açominas), 27.2%, or 1.2 million metric tons, was produced outside Brazil (including 41 thousand metric tons from Sipar). All of the Company's drawn products are produced in Brazil.

According to IBS data, in 1975 Brazilian steel production equaled 8.3 million tons of crude steel and 3.6 million tons of long rolled products. In the same year Gerdau companies produced 525 thousand tons of crude steel and 506 thousand tons of long rolled products, 6.3% and 14.1%, respectively.

The table below sets forth, for the periods indicated, a comparison of the annual production of crude and long rolled steel for Brazil and the Company and the percentage of crude and long rolled steel production attributable to the Company:

Output - Gerdau S.A. and Brazil (in millions of metric tons) Crude Steel Long Rolled Products* Brazil Gerdau S.A. Gerdau S.A. Brazil Gerdau S.A. Gerdau S.A. (%) (%)

1989 25,055 2,395.2 9.6 6,472 1,865.2 28.8

* See also, -“—Competition.”

9 1990 20,567 2,374.0 11.5 5,921 1,900.8 31.1 1991 22,617 2,090.3 9.2 5,533 1,804.7 32.6 1992 23,934 2,427.5 10.1 5,741 2,084.9 36.3 1993 25,207 2,588.2 10.3 6,477 2,268.0 35.0 1994 25,747 3,039.4 11.8 6,618 2,673.8 40.4 1995 25,076 2,752.7 11.0 5,434 2,455.6 45.1 1996 25,237 2,877.9 11.4 5,661 2,528.6 44.7 1997 26,151 3,051.4 11.7 6,146 2,781.4 45.3 1998 25,760 2,974.2 11.6 6,047 2,753.1 46.0 1999 24,996 3,271 13.1 6,694 3,055 45,7 Source: IBS/Gerdau

The Company's production process is based on the mini-mill concept. It has six electric arc furnace ("EAF") mills, two integrated units and one direct reduction iron ("DRI") plant.

Mini-mills are smaller mills which offer several advantages over the larger integrated steel producers, including: (i) lower capital costs; (ii) lower operational risks due to the avoidance of a concentration of capital and production capacity in a single production unit; (iii) the proximity of production units to raw material sources; (iv) the proximity to the local markets and the ease of adjustments in production levels; (v) less expensive raw material costs, principally due to the use of steel scrap instead of iron ore and coke, which are employed by the larger integrated mills; and (vi) more efficient management structure due to the relative simplicity of the production process and lower manning levels required.

The Company's production process consists of (i) sourcing, (ii) melting, (iii) casting, (iv) rolling and (v) drawing.

Sourcing.

The Company's mini-mills (which have annual crude steel production capacities ranging from 70,000 metric tons to 1.28 million metric tons) use steel scrap and pig iron produced from within a radius of 120 to 300 miles and manufacture primarily products for consumption within the region in which the mill is located. This production strategy has the advantage of minimizing transportation costs of raw materials and final products and allows capacity adjustments to be made in relatively small increments. The Company acquires its main raw material, steel scrap for use in its electric arc furnaces, from an extensive network of more than 6,000 suppliers. The Company believes it is the largest purchaser of steel scrap in Brazil. Iron ore for use in its blast furnaces and DRI plant is bought from several Brazilian mining companies. Pig iron, for use in its electric arc furnaces, is produced by the Company or bought from third parties. In 1999, the Company produced approximately 70% of its pig iron consumption needs.

Liquid Steel Production.

Liquid steel is produced in electric arc furnaces, energy optimizer furnaces or in a blast furnace/converter combination. After charging the electric arc furnace with the predetermined mixture of raw materials (i.e., scrap, pig iron or DRI), electric power is applied following a computer-controlled melting profile. The Company's mixture of raw material varies from 60% steel scrap and 40% pig iron to 90% steel scrap and 10% pig iron, depending upon prices and local availability. The Company believes that these ratios optimize the use of available steel scrap without causing demand pressure in the relevant steel scrap markets. In the blast furnace/converter combination, liquid steel is produced by reducing iron ore by burning charcoal, coke or a combination of both with oxygen. DRI is a process that replaces the blast furnace and reduces the amount of iron ore used by injecting hot natural gas, producing what is commonly known as sponge iron, which will then be placed into an electric arc furnace.

The molten steel is then tapped into the ladle furnace where it is refined according to customer specification. Ferro-alloys are added in the ladle furnace according to the chemical specifications of the grade of steel being produced. In the case of high-alloy steel, or specialty steel, the ladle is taken to a vacuum degasification unit to remove carbon, oxygen and gases.

Continuous Casting.

The liquid steel is transferred from the ladle furnace into a continuous casting machine from which it emerges as

10 a continuous square strand of steel that is cut into pre-determined lengths, called billets. In the continuous casting machine, the liquid steel is poured into a mold and cooled from the outside in, so that a solidified shell is formed around the molten metal as it emerges from the mold, allowing it to hold its shape.

Downstream Processing.

The billets are transferred to a rolling mill to produce finished, rolled or drawn products. The billets are reheated, reduced in diameter and then rolled into finished reinforcing concrete bars ("rebars"), bars, shapes, and wire rod. These products then are allowed to cool uniformly. Drawn products are created by drawing wire rod, without reheating, producing wires of various shapes and thicknesses, such as welding wires, barbed and barbless fencing wires, galvanized wires, concrete reinforcing wire, and other wires. Wire is also the input for other products such as wire meshes, chains, nails and clamps.

Set forth below is a brief description of the Company's main product lines and the markets they serve:

Crude Steel. Crude steel has a relatively low value-added process. The Company's main crude steel product is continuously cast billets, most of which is consumed by the Company in the manufacture of finished products and specialty steels. During 1999, billets accounted for 3.9% of the Company's domestic sales and 56.8% of export sales, as measured by weight.

Rolled Steel. Billets are used to manufacture rolled products such as wire rod, rebars, profiles and round, square and flat bars. In 1999, common steel rolled products accounted for 57.0% of the Company's domestic sales and 41.4% of export sales, as measured by weight. The main market for the Company's domestic sales of rebars is Brazil's civil construction market, which uses finished steel products for a variety of purposes including water dams, port docks and facilities, bridges, highways, tunnels and commercial and residential building construction.

Drawn Steel. These are high value added products and include wires of various shapes and thicknesses, welding wires, barbed and barbless fencing wires, galvanized wires, concrete reinforcing wire mesh, nails and clamps. These products are sold to the manufacturing, the civil construction and the agriculture sector. In 1999, drawn products accounted for 20.7% of the Company's domestic sales and 1.3% of exports, as measured by weight.

Specialty Steel. Specialty or high-alloy steel requires advanced manufacturing processes and normally includes some degree of customization. The Company produces specialty steel, which includes stainless steel, used for the manufacturing of tools and machinery (e.g. cold, hot and high-speed steels), chains, fasteners, railroad spikes and special spring steel, at the Piratini plant. Specialty steel products are mainly consumed by Brazil's manufacturing sector, including the automotive and mechanical industries. In 1999, production at the Piratini plant represented approximately 36.4% of the Brazilian long specialty steel production. Each level of processing adds value to the simple crude steel product and as the product goes through incremental refining processes, it commands a significantly higher price in the market. Specialty steel accounted for 6.6% of domestic sales and 0.5% of exports in the same year, as measured by weight.

The following is a description of several of the products produced by the Company:

GERDAU S.A. Products for the Construction Industry: Brazil GG-50 and CA-25 reinforcing bars, CA-60 wire for reinforced concrete, annealed tying wire, telcon welded mesh for reinforced concrete, POP ready-to-use columns and mesh, joist hangers and lattice girders, galvanized wire fences, Armafer cutting and bending system

Products for Industrial Applications: Round bars, t-bars, drawn bars, u-beams (channels), flat bars, tribars, square bars, wire rods, equal leg angles and billets

11 Products for the Farm: Barbed wires, oval wires, galvanized wires, welded wire fencing, electric wire fencing, wirelock wire fastener, fencing staples, cercafix fencing separators, wire for aerial cultivation, wire rope for corrals, steel posts

Metallurgical Products: Low and high-carbon wires, high-carbon wire for ACSR (aluminum conductor steel reinforced), optic fiber wires, welding wires (mig-mag, oxyacetylene, submerged arc and tig), coated electrodes, nibs, wire rope, welded chains, anti- theft chains, chains for dogs, victor- type chains

Nails: Polished and galvanized headed and common finishing nails, galvanized roofing nails, double-headed nails, ringed nails, flooring nails, galvanized square nails, headed and headless screwed nails

Specialty Steel: Carbon and alloy mechanical construction steels, stainless steels, round and square rolled tool steels bars, wire rods, round, square and flat forged bars, (with or without heat treatment) AÇOMINAS Brazil Billets, blooms, slabs, bars and rebars

AZA Chile Continuous casting billets, rebars (concrete reinforcing bars), round bars, square bars, flat bars, equal sided angles, t-shaped bars LAISA Uruguay Continuous casting billets, rebars (concrete reinforcing bars), round bars, square bars, flat bars, equal sided angles, wire rod. COURTICE Canada Continuous casting billets, rebars (concrete reinforcing bars), round bars, square bars, flat bars, equal sided angles. MRM Canada Continuous casting billets, elevator guide rails, truck trailer sections, cutting edges, light rails, rail cars & track accessories, rebars, and flat, round, square, channel and equal sided angle bars SIPSA Argentina Bars and rebars (concrete reinforcing bars)

SIPAR Argentina Bars and rebars (concrete reinforcing bars)

AMERISTEEL USA Rebar, fab rebar, merchants, rods, billets

Foreign Subsidiaries' Steel Production.

The Company's production of steel abroad has grown steadily between 1981 and 1999, through acquisitions and increases in the production capacity of its foreign facilities. In acquiring foreign businesses, the Company has maintained its focus on the mini-mill-based production of long common steel products, but also seeks undervalued or under- performing steel mills. The Company believes that due to the large capital investment required to build a steel mill and the existing global oversupply of steel, acquisitions are the preferred means of expansion outside Brazil.

The following table sets forth, for the periods indicated, the production of crude steel and rolled products of the

12 Company's production facilities abroad (in thousands of metric tons):

LAISA AZA COURTICE MRM SIPSA AMERISTEEL SIPAR (Uruguay) (Chile) (Canada) (Canada) (Argentina) (USA) (Argentina

Year Crude Long Crude Long Crude Long Crude Long Crude Long Crude Long Crude Long Steel Rolled Steel Rolled Steel Rolled Steel Rolled Steel Rolled Steel Rolled Steel Rolled Products Products Products Products Products Product Products s 1993 29.0 29.0 34.0 25.0 227.0 190.0 ------1994 28.9 28.3 41.8 27.9 234.0 199.2 ------1995 33.7 29.2 62.7 54.3 245.0 182.2 156.4 142.4 ------1996 43.5 36.1 72.8 68.1 244.5 206.2 273.8 258.0 ------1997 45.9 39.3 79.4 75.9 201.0 176.3 310.3 277.9 ------1998 51.4 45.2 80.3 75.7 259.8 220.5 294.9 265.0 - 39.0 - - - - 1999 45.4 41.6 140.9 122.2 260.4 250.6 290.6 261.3 - 38.5 453.9* 405.9* - 40.8 * October through December

Laisa. In 1981, the Company acquired the Laisa mini-mill, located in Uruguay. Laisa has been profitable for the last ten years and is the largest producer of long steel products in Uruguay. Laisa has a production capacity of 70,000 metric tons of crude steel and 72,000 metric tons of rolled steel per annum. Laisa is the only domestic steel producer in Uruguay. Production statistics are based on Laisa's production and sales added to Uruguayan imports. Import data is provided by the Customs of Uruguay and the Bank of the Republic, its financial agent. These two institutions report to the Ministry of Economy.

Aza. In 1992, the Company acquired the Aza mini-mill, located in Chile. The Aza mill has a production capacity of 360,000 metric tons of crude steel per annum and 430,000 metric tons of rolled steel per annum. Aza operates a second steel plant in Chile which began operations in January 1999. The new mill, in conjunction with continuing upgrading of existing facilitty, increased total annual capacity to 360 thousand metric tons of crude steel and 430 thousand metric tons of rolled steel per year. The discrepancy between figures related to crude steel and long rolled products is due to be the fact that the Company will dedicate an old long rolled products unit to the production of shares and profiles. . Based on official import statistics furnished by the Chilean Government (part of the market is supplied by imports) and information obtained from other producers (there are no official statistics about each company's production), the Company believes that it controls approximately 30% of the Market.

Courtice. The Company acquired the Courtice mini-mill, located in Canada, in 1989. At the time Courtice had incurred losses for the previous three years and offered the Company an opportunity to gain valuable managerial and technical experience competing within the highly competitive North American market. In 1999, Courtice had a production capacity of 320,000 metric tons of crude steel and 300,000 metric tons of rolled steel per annum.

MRM. MRM was acquired in June 1995. In 1995, as a result of its presence in the Canadian market, Gerdau became aware of an opportunity to acquire MRM, historically a profitable production facility and a quality producer of special shapes and other rolled products complementary to Courtice's product line. In 1999, MRM had a production capacity of 325,000 metric tons of crude steel and 300,000 metric tons of rolled steel per annum.

Sipsa. At the end of 1997 Gerdau acquired Sociedad Industrial Puntana S.A., a rolling mill installed in Argentina, with a production capacity of 75,000 tons of rolled products, with a view to increasing its presence in an important market to which it already exported steel products. Sipsa operated at approximately 51% of its installed capacity in the course of 1999.

Sipar. In May 1998 Gerdau signed an agreement with the controllers of Sipar Laminación de Aceros S.A.I.C. ("Sipar") of Rosario, Argentina, pursuant to which the Company now holds one-third of the voting capital of Sipar (and Gerdau transfered to the controllers of Sipar one third of the voting capital of Sipsa).Sipar has only a rolling mill with an installed capacity of 120,000 metric tons per annum.

AmeriSteel. On September 27, 1999 Gerdau acquired 88% of FLS Holdings Inc. from Kyoei Steel Ltd. of Osaka, Japan, which in turn holds 85% of the shares of AmeriSteel Corp., headquartered in Tampa, Florida, USA. AmeriSteel is

13 engaged in the manufacture and sale of long steel products from recycled scrap raw material and has an installed capacity of nearly 1,840,000 metric tons of crude steel per annum and 1,740,000 metric tons of rolled steel. Steel operations are conducted in four non union manufacturing facilities located respectively in the states of Florida, Tennessee (two) and North Carolina. In addition to these units, the company has eighteen “rebar fabrication shops”, two operations for manufacturing rail spikes and one for producing nails and welded wire mesh.

Other Businesses

The Company owns pine forests covering over 30,438 hectares, and eucalyptus forests, covering over 107,895 hectares. The Company has planted these forests since 1971. The forests allow the Company to obtain certain taxation advantages and to comply with environmental regulations applicable to charcoal users.

Eucalyptus is used as a raw material for the production of charcoal. Charcoal is used in the blast furnaces for the pig iron production units in Barão de Cocais and Divinópolis in the State of Minas Gerais. Under current environmental regulations, the Company is self-sufficient in its supply of eucalyptus for charcoal production.

The Company also owns 36,529 hectares of pasture fields and 46,000 cattle.

Availability of Raw Materials

Due to the nature of its business operations, the Company does not usually enter into long-term supply contracts with its suppliers and is therefore subject to fluctuations in the prices and availability of these items. In 1999, Gerdau's five largest suppliers accounted for approximately 10% of the Company's total purchases, and the ten largest suppliers (including energy) accounted for approximately 15% of purchases. In that period, the largest supplier of steel scrap to the Company accounted for approximately 3.0% of the Company's steel scrap purchases.

Metallic Inputs.

The principal raw metallic input materials used in the Company's steel making activities are steel scrap, pig iron, iron ore (used in the blast furnaces at the Divinópolis and Barão de Cocais facilities and at Usiba's - Simões Filho - DRI plant), and ferro-alloys.

The Company uses a mixture of steel scrap and pig iron or DRI for the production of steel. Pig iron is used because of the relative scarcity of good quality steel scrap in the Brazilian market (in the United States, by contrast, mini- mill steel makers usually use 100% steel scrap input).

As a mini-mill operator using electric arc furnace technology, Gerdau's principal input is steel scrap, which accounted for approximately 18.0% of cost of goods sold during 1999. Although international steel scrap prices are determined in the U.S. domestic market (as the United States is the principal exporter of scrap), the price of steel scrap in Brazil varies region by region, depending upon regional supply, demand and transportation costs. Gerdau is the largest consumer of steel scrap in Brazil, and in some markets, Gerdau consumes the vast majority of steel scrap supply. However, with over 6,000 scrap suppliers in Brazil, no single steel scrap supplier has provided more than 3.0% of total Company requirements.

Scrap.

There are two broad classifications of steel scrap: obsolescence scrap (ranging from tin drinking cans to car bodies to white goods) and industrial scrap (factory stampings, steel turnings, etc.). Obsolescence scrap, on average, accounts for approximately 65% of the Company's steel scrap purchases, and is acquired through steel scrap dealers. Industrial scrap, which on average accounts for approximately 35% of the Company's steel scrap purchases, is purchased directly from the industrial centers generating the scrap. Industrial steel scrap is also generated by the Company's own production processes. Steel scrap remains readily available in the Brazilian market, both from obsolescence scrap and industrial scrap.

The largest portion of the steel scrap consumed by the Company is bought in the State of São Paulo, the balance being evenly distributed among the other areas in which the Company's mills are located. Obsolescence scrap is usually

14 delivered to the steel mill by a scrap dealer; however, in regions where it does not have a steel mill, the Company has scrap collection centers, where scrap is collected and compacted for transport by third parties (by rail or road) to the nearest mill.

The price of scrap in Brazil varies by region, depending upon regional supply and demand and transportation costs. Each month, based on market conditions, the Company's purchasing director sets the maximum price for scrap (by category of scrap and region) to be paid by Company representatives. Due to a greater level of competition among scrap purchasers and despite a greater supply of scrap in the heavily industrialized Southeast region of Brazil (including the States of São Paulo and Rio de Janeiro), prices there tend to be higher than in other regions. However, because the Company's facilities are evenly distributed throughout Brazil, the Company is able to take advantage of lower prices in the other regions without incurring high transportation costs.

Pig Iron and Sponge Iron.

Brazil is a net exporter of pig iron. The majority of Brazilian pig iron is produced in the State of Minas Gerais by a relatively large number of small producers. Pig iron is a substitute for scrap. In Brazil, the price of pig iron is related to the cost of charcoal, an important and the most volatile cost in the production of pig iron. When the price of charcoal is seasonally high, coke can be used as a substitute which, although more expensive, provides a higher yield in pig iron production. Iron ore, the main component of pig iron, is widely available in Brazil. Brazil is among the world's leading producers and exporters of iron ore. The Company purchases its iron ore from several different regional suppliers.

The Company's sponge iron production unit is its USIBA (Simões Filho) DRI plant. The Company consumes all of its pig iron and sponge iron production in its own meltshops. Approximately 35% of the Company's pig iron requirements are bought from third parties. In purchasing, the Company seeks to preserve the flexibility resulting from a large number of suppliers in order to avoid becoming overly dependent upon a small number of large suppliers.

Other Inputs.

Brazil is an exporter of the ferro-alloys used in the Company's steel mills and all such materials are purchased in Brazil. Other significant inputs (electrodes, furnace refracting materials, oxygen, nitrogen and other industrial gases and limestone) are readily available in Brazil. Additional inputs associated with the production of pig iron and DRI at the Company's steel mills are charcoal (at Barão de Cocais and Divinópolis) and natural gas at USIBA (Simões Filho).

The cost of the basket of additional materials used in the steel refining process accounts for approximately 10% of the total production cost of a metric ton of crude steel. Therefore, the final prices of the Company's products are relatively insensitive to changes in the price of these materials. Furthermore, these materials are widely available in the Brazilian market.

Energy.

The production of steel is an energy intensive process and, therefore, energy costs constitute a significant portion of the steel production costs per metric ton, accounting for approximately 11.0% of the total cost of goods sold in 1999.

The purchase of electrical energy and natural gas is made through long term supply agreements, executed between each producing unit and the authorized public utility company of its region, with demand and consumption being agreed upon by the parties annually.

The Brazilian Federal Government, through ANEEL (Electrical Energy National Agency), establishes the prices which each authorized public utility company may charge its customers, which varies according to each consumer class. The consumers are classified according to their field of use (commercial, industrial, residential) and level of demand (tension and volume).

After Law 9,074 of July 7, 1995, consumers with demand higher than 3,000 KW (kilowatts) and tension higher than 69 KV (kilovolt) may buy electrical energy from concessionaires of other regions.

In the electrical energy industry, a privatization program of the generation and distribution sectors is under way,

15 with many of the authorized public utility companies already being privatized. It is expected that this will increase competition in the industry.

The natural gas sector is controlled by the state governments, with each adopting different policies. Some state governments organize companies to carry out the activities related to natural gas, some enter into joint ventures with other companies, and some license the concession to private companies.

The Brazilian Federal Government establishes the price which Petrobrás will charge authorized public utility companies, who in turn establish their own price chart according to the class of consumer. Since the end of 1994, the prices have been stable in reais, with a slight reduction in dollars. The price in 1998 was approximately US$0.15 per m3 and the recent trend suggests a reduction of price levels due to the devaluation of the Real. It should also be noted that there has been an increased tendency on the part of the authorized public utility companies to negotiate prices with their customers.

Mineral and vegetable charcoal are acquired from private suppliers at market prices, without Government interference.

The electricity consumed in the Company's electric arc furnaces is purchased from regional power utilities. The Company schedules production to take advantage of lower "off peak" electricity rates and believes that its electricity supplies are stable, reasonable and competitively priced. The Company believes that its energy sources will be adequate for its needs for the foreseeable future and that, in the event they should prove inadequate, the Company believes that it will be able to obtain energy from alternative sources to meet its requirements.

The following sets forth, for the periods indicated, the average costs for the Company's electricity in Brazil:

U.S.$ per MW/hour 1995 31.70 1996 31.80 1997 31.60 1998 30.80 1999 22.60

The Company consumes large quantities of electric power, particularly in the EAF furnaces. Due to the geographic dispersion of its steel mills, the Company deals with a variety of regional utilities and is not exclusively dependent upon any particular energy provider. The Company also consumes significant amounts of natural gas, particularly in connection with its sponge iron operation (DRI facilities) at its Simões Filho plant. Coal and charcoal are also used as sources of energy in some of the Company's facilities for the production of crude steel.

Sales and Marketing

Approximately 97% of the Company's shipments have historically been to the civil construction and manufacturing sectors. Although evenly dispersed, the Company's domestic sales are higher in the South and Southeastern Brazil. These regions account for over 75% of Brazil's GDP. The Company has a wide domestic customer base of over 110,000 customers (based on customers making at least one purchase in the last six months), none of which account for more than 2% of the Company's total sales and the top ten domestic customers represented less than 10% of Gerdau's domestic steel sales.

The geographic distribution of the Company's sales has remained relatively constant. Generally, the geographic diversity of the Company's production facilities has supported the diversification of its sales distribution. Consistent with the Company's strategy of increasing profitability within Brazil through increased profit margins, the Company has been shifting its sales focus to higher value-added products, such as drawn products and specialty long steel products.

The following table, sets forth, for the periods indicated, the Company's annual domestic and export sales of

16 crude steel, long rolled, drawn steel products and specialty steel products as measured by weight :

Sales Distribution by Product Line:

Billets, Slabs Common Long Specialty Steel Drawn Flat Steel Common Long Intercompanies and Blooms Rolled Products Products Products Steel Products Sales (Brazil to Total (Brazil) Products (Brazil) (Brazil) (Brazil) (Foreign Foreign (Brazil) Companies) Companies)

1,000 t (%) 1,000 t (%) 1,000 t (%) 1,000 t (%) 1,000 t (%) 1,000 t (%) 1,000 t (%) 1,000 t (%) Domestic 29.7 30.1 1,267.4 69.9 109.1 78.3 487.3 95.2 136.4 100.0 0.0 0.0 0.0 0.0 2,029.9 64.9 Exports 68.9 69.9 545.3 30.1 30.2 21.7 24.8 4.8 0.0 0.0 0.0 0.0 0.0 0.0 669.2 21.4 1995 Foreign 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 498.4 100.0 0.0 0.0 498.4 15.9 Intercompanies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 71.0 100.0 (71.0) (2.3) Total 98.6 100.0 1,812.7 100.0 139.3 100.0 512.1 100.0 136.4 100.0 498.4 100.0 71.0 100.0 3,126.5 100.0 % Of Total 3.2 58.0 4.5 16.4 4.4 15.9 2.3 100.0 Domestic 47.9 32.8 1,470.9 86.5 111.0 88.6 583.1 96.2 179.0 100.0 0.0 0.0 0.0 0.0 2,391.9 71.3 Exports 98.2 67.2 230.1 13.5 14.3 11.4 22.9 3.8 0.0 0.0 0.0 0.0 0.0 0.0 365.5 10.9 1996 Foreign 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 669.1 100.0 0.0 0.0 669.1 19.9 Intercompanies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 71.6 100.0 (71.6) (2.1) Total 146.1 100.0 1,701.0 100.0 125.3 100.0 606.0 100.0 179.0 100.0 669.1 100.0 71.6 100.0 3,354.9 100.0 % Of Total 4.4 50.7 3.7 18.1 5.3 19.9 2.1 100.0 Domestic 37.3 31.9 1,662.9 88.3 150.9 87.6 632.0 96.9 228.2 100.0 0.0 0.0 0.0 0.0 2,711.3 74.2 Exports 79.8 68.1 220.1 11.7 21.4 12.4 19.9 3.1 0.0 0.0 0.0 0.0 0.0 0.0 341.2 9.3 1997 Foreign 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 735.0 100.0 0.0 0.0 735.0 20.1 Intercompanies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 133.4 100.0 (133.4) (3.7) Total 117.1 100.0 1,883.0 100.0 172.3 100.0 651.9 100.0 228.2 100.0 735.0 100.0 133.4 100.0 3,654.1 100.0 % Of Total 3.2 51.5 4.7 17.8 6.2 20.1 3.7 100.0 Domestic 41.6 34.7 1,727.4 92.5 157.5 93.6 631.4 97.3 279.5 100.0 0.0 0.0 0.0 0.0 2,837.4 74.5 Exports 78.2 65.3 140.0 7.5 10.7 6.4 17.2 2.7 0.0 0.0 0.0 0.0 0.0 0.0 246.1 6.5 1998 Foreign 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 765.2 100.0 0.0 0.0 765.2 20.1 Intercompanies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 37.8 100.0 (37.8) (1.0) Total 119.8 100.0 1,867.4 100.0 168.2 100.0 648.6 100.0 279.5 100.0 765.2 100.0 37.8 100.0 3,810.9 100.0 % Of Total 3.1 49.0 4.4 17.0 7.3 20.1 1.0 100.0 Domestic 123.7 22.7 1,797.3 85.4 207.7 98.1 651.5 98.6 371.6 100.0 0.0 0.0 0.0 0.0 3,151.8 61.9 Exports 422.4 77.3 308.0 14.6 4.0 1.9 9.4 1.4 0.1 0.0 0.0 0.0 0.0 0.0 743.9 14.6 1999 Foreign 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1,212.2 100.0 0.0 0.0 1,212.2 23.8 Intercompanies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 13.8 100.0 (13.8) (0.3) Total 546.1 100.0 2,105.3 100.0 211.7 100.0 660.9 100.0 371.7 100.0 1,212.2 100.0 13.8 100.0 5,094.1 100.0 % Of Total 10.7 41.3 4.2 13.0 7.3 23.8 0.3 100.0

Domestic.

The Company's sales and marketing efforts are organized into the following Business Units: (1) Civil construction, (2) Manufacturing, (3) Agricultural products, (4) Nails, (5) Metallurgical products (chains, wires, staples and others), (6) Specialty steels, (7) Exports, (8) Retail and (9) Forestry. The "Business Units" are responsible for the sales and marketing of the Company's products. The Business Units are organized along product lines rather than regional or geographic divisions in order to provide a specialized and knowledgeable sales and marketing effort for each market segment and to enhance the responsibilities of the Company to each such market segment.

Each Business Unit has national coverage with a centralized sales policy and localized execution. Business Units with the most sales to a particular customer are allocated responsibility for Company relations with that customer. On average, approximately 80% of sales are made through Company employees (including Comercial Gerdau employees) and the balance through authorized representatives selling on a commission basis. The Company provides these representatives with product catalogs and other sales material, computer terminals linked to Gerdau's information system and fax and telephone equipment. Representatives cover the Brazilian country side, where customer orders are, on average, smaller. Including Comercial Gerdau's 60 sales outlets, the Company has approximately 200 points of sale in Brazil.

The Company's sales approach is to develop a close partnership with the client. As a result of its strong customer orientation, Gerdau has proactively developed products to suit client needs, established a brand image, and achieved very high standards for its products.

The Company's wide base of customers provides the Company with an extensive database as to trends in the

17 market and the ability to support price levels in the market, which provides it with a competitive advantage relative to its domestic competitors and imports.

Domestic sales have an average order period of ten days, and Gerdau arranges the delivery of goods directly to its customers in order to minimize delays. Sales trends in both the domestic and export markets are forecast monthly based on the past three months' historical data. Gerdau employs its own extensive data systems to remain informed of market developments so that it can respond swiftly to fluctuations. Gerdau considers its flexibility to shift between markets and the ability to monitor and adapt to changes in market demand, thereby keeping inventory levels at a minimum, as the keys to success.

Export and Foreign Operations Marketing.

Export marketing activities are coordinated by the Business Unit responsible for selling the Company's exportable products and are conducted (i) primarily on an FOB (Free on Board) basis, (ii) at sight against letters of credit opened by customers in more than 30 countries throughout the world and (iii) directly to clients in neighboring countries and otherwise indirectly through trading companies.

In spite of dealing primarily in commodity products such as rebars, Gerdau is very conscious of the importance of quality control. In order to ensure the satisfaction of end-users around the world with products purchased indirectly from Gerdau, the Company from time to time sends technicians to check directly the quality of products shipped to clients.

Foreign operations are primarily devoted to supplying the respective domestic markets of the countries in which they are located, with the exception of the Canadian operations, which sell almost 50% of their production in the United States. The Canadian operations market their products in the United States through direct sales to customers which are invoiced on the same terms as Canadian customers but in U.S. dollars.

Retail.

Comercial Gerdau is the Company's retail arm. It sells a full range of steel products, not only those made by the Company. The Company is able to use the sales information generated by Comercial Gerdau as a market barometer by which to formulate production and marketing strategies. Sales of products of producers unaffiliated with the Company accounted for approximately 45.5% of Comercial Gerdau's 1999 physical sales and 8.0% over Company's total sales. Gerdau believes the extensive information available to its sales force concerning its customers along with its strategy of forming strong customer relationships to be its main competitive advantage in the sale and marketing of its products.

Terms of Sale.

The Company's usual terms of sale are 21 days for domestic sales, which are made CIF (Cost Insurance and Freight). Domestic customers making purchases of more than the equivalent of U.S.$ 12,500 per month are subject to a centralized credit approval process. As a consequence of these policies, the Company's bad debt write-offs (which are made after 12 months) are an insignificant percentage of Gerdau's consolidated accounts receivable.

All Gerdau companies (Brazil and abroad) accept both immediate and deferred payment for purchase of their products, the latter in accordance with ordinary commercial terms used in each region, determined seasonally. Presently, the maximum sale term is 30 days.

Facilities

Gerdau S.A.operates ten steel mills and seven other industrial plants (rolling facilities, drawing mills, welded wire mesh, chain and nail factories) installed in Brazil and on a scale established as a result of the regional markets in which they operate.

In the Southeast region of Brazil, the largest market in the country, the Company operates the Gerdau Cosigua (melt shop, rolling mills, drawing mills and nail factory) and Gerdau Neves (rolling mill) units in the State of Rio de Janeiro; Gerdau Barão de Cocais and Gerdau Divinópolis with melt shops and rolling mills and the Gerdau Contagem (production of pig iron) in the State of Minas Gerais; and a rolling mill, drawing mill and a factory for welded wire

18 meshes and strands in São Paulo State.

In the South region, the second largest market in Brazil, the Company has three mills: Gerdau Riograndense (melt shop, rolling mills, drawing mills and nail factory) and Gerdau Aços Finos Piratini (melt shop and rolling mills for manufacture of specialty steels) in the State of Rio Grande do Sul, and Gerdau Guaíra (melt shop and rolling mill) in the State of Paraná.

The Northeast region is supplied by three other units, Gerdau Açonorte (melt shop, rolling mills, drawing mills and nail factory) in the State of Pernambuco; Gerdau Usiba (melt shop, rolling mill and drawing mill) in the State of Bahia; and Gerdau Cearense (melt shop and rolling mill) in the State of Ceará.

The largest of the Company's operating units is Gerdau Cosigua, located in the Southeast state of Rio de Janeiro. It has an installed production capacity of 1,280,000 metric tons of crude steel per annum (see Item 2 for location, installed capacity and type of facility of each Company unit).

Besides these, Gerdau has also a participation of 36.63% in the capital of Açominas, a Brazilian producer of semi-finished products located in the Southeast state of Minas Gerais. Açominas has an installed production capacity of 2,500,000 metric tons of crude steel per annum.

Competition

Shipping, freight and port loading costs are a major barrier to imports and, since the Company operates primarily in the ordinary long rolled product business where the profit margins are relatively small, the incentive for foreign competitors to enter the Brazilian market is low. In the domestic market, no single company competes against the Company across all its product range. The Company's diversification and decentralization of its business gives it, Gerdau believes, a competitive edge over its major competitors, who have more centralized operations.

Gerdau is competitively positioned in several sectors of the Brazilian steel market. In 1999, for example, Gerdau's sales in the domestic market of 2,744 (including 150 thousand of metric tons from Açominas) thousand metric tons of long steel products represented 46.4% of total tonnage of long products sold in Brazil. In the domestic market, the largest producers of long rolled steel (the sector in which Gerdau competes) are as follows:

Company Production (1,000 metric tons) % of total

Gerdau S.A. 3,055 45.6 Belgo Mineira 2,343 35.0 Acesita / Villares 391 5.9 Barra Mansa 353 5.3 Mannesmann 295 4.4 Açominas 224 3.3 Other 33 0.5 Total 6,694 100.0

Gerdau has its industrial units located in the main consuming regions of the country, while its competitors have their mills concentrated mainly in the Southeast region. As the following table shows, Gerdau has more than 80% of its sales in the most developed regions as indicated below:

Gerdau S.A. - Regional Sales Distribution (% of sales in the domestic market) 1995 1996 1997 1998 1999 South 27.7 22.3 26.2 25.5 20.9 Southeast 51.6 53.1 51.9 49.7 52.2 Northeast 12.9 13.8 13.2 15.6 15.7 Midwest 5.2 7.7 5.5 6,0 7.9 North 2.6 3.1 3.2 3.2 3.3

19 As a result of its agreement to lease assets with an option to purchase Mendes Júnior, the Belgo Mineira Group will consolidate its position as the second largest producer in the Brazilian market. Belgo Mineira's production facilities are concentrated in three plants in the Southeast region. Belgo Mineira is an integrated steel producer, not a mini-mill- based company. Gerdau's mini-mills are located near steel scrap supply, port facilities, and the markets they serve, thereby incurring low freight costs.

The Mercosul tariff and non-tariff protection for the countries that have subscribed to the Treaty of Asunción (signed on March 26, 1991 by Argentina, Brazil, Uruguay and Paraguay) is in place. Import duties have therefore been phased out in the steel segment. Gerdau does not expect the elimination of trade tariffs to adversely affect its operations or financial results. The competitive advantages of Brazilian steel producers are based primarily upon costs and abundant supply of labor, energy and raw materials. Gerdau believes that its average production cost at its facilities in Brazil is competitive with costs of other producers in Brazil and worldwide.

In 1999, Gerdau was the 3rd largest Brazilian crude steel producer. The ten largest Brazilian crude steel producers were: Company Tonnage % of total (1,000 metric tons) CSN 4,852 19.4 CST 4,414 17.7 GERDAU 3,271 13.1 Usiminas 2,980 11.9 Cosipa 2,593 10.4 Açominas 2,355 9.4 Belgo Mineira(1) 2,267 9.1 Acesita / Villares 1,418 5.7 Barra Mansa 390 1.5 Mannesmann 365 1.4 Other 91 0.4 Total 24,996 100.0 Source: IBS

In 1999, the largest producers of rolled steel were:

Flat Products Long Products 1,000 metric tons % of total 1,000 metric tons % of total CSN 4,197 41.5 - - Usiminas 3,084 30.5 - - GERDAU - - 3,055 45.6 Cosipa 2,321 22.9 - - Belgo Mineira(1) - - 2,343 35.0 Acesita / Villares 520 5.1 391 5.9 Barra Mansa - - 353 5.3 Mannesmann - - 295 4.4 Other - - 257 3.8 Total 10,122 100.0 6,694 100.0 (1) Includes Mendes Júnior Source: IBS

Environmental Standards

Environmental control in Brazil is regional rather than national, and different environmental standards are imposed by the different state authorities. Gerdau seeks to work with the relevant environmental authorities to achieve compliance with all applicable standards at a reasonable cost and in a reasonable time. The Company has invested an average of U.S.$ 9.6 million per annum over the past 5 years in environmentally related improvements to its plants, such as closed water systems, water purification plants, effluent recovery systems and dust collection systems.

20 Gerdau's most significant environmental expenditures have been in the four steelworks acquired in the Brazilian privatization program, which were not in compliance with applicable environmental standards when they were acquired. In each case, however, agreements with the authorities as to a program for the installation of pollution control equipment and a schedule for compliance with the relevant regulations were reached. Such agreements ensure that the facility involved may continue to operate while the required modifications are being made. The former owners of the four steelworks were responsible for all remediation costs relating to these facilities.

The Company's overseas subsidiaries were in substantial compliance with applicable environmental regulations upon their acquisition and continue to operate in accordance with applicable standards.

Gerdau believes that each of its facilities is in substantial compliance with the environmental regulations applicable to it.

Maintenance and Technology

Due to the severe operating conditions in steel mills, regular maintenance of equipment is a significant ongoing expense, comprising approximately 7% of the Company's cost of goods sold for the year ended December 31, 1999. The Company employs specialized maintenance teams, each with responsibility for a particular area of production.

As is usual for mini-mill steel makers, the Company does not have any formal research and development program, since steel-making technology is readily available for purchase. However, the Company is continuously implementing improvements and technological developments. Over the past years, the Company has introduced modern technologies in its mini-mills, such as high power transformers, water-cooled side walls and roofs, oxygen lance manipulators, slag foaming and ladle furnaces. In its rolling mills, the Company has introduced automatic furnace control continuous rolling mills, high speed finishing blocks, tempcore and thermex heat treatment, stelmor wire rod processing, automatic typing machines and slit rolling. Most sophisticated production equipment used by the Company is supplied by international machinery builders and steel technology companies. Such suppliers generally enter into technology transfer agreements with the purchaser and provide extensive technical support and staff training in connection with the installation and commissioning of the equipment. Gerdau has entered into technology transfer agreements with Nippon Steel, Sumitomo Steel, Thyssen, Daido Steel and BSW.

Employees

The Company's labor costs vary in accordance with each region within Brazil. The Company believes its wages are competitive within the regional markets in which each facility is located. Personnel wage expenses accounted for U.S.$ 186 million in 1999 or approximately 17% of the total cost of goods sold.

As of December 31, 1999, the Company had 12,021 employees (this number does not includes Açominas and Sipar), comprising 7,972 engaged in steel operations in Brazil, 523 engaged in non-steel operations in Brazil, and 3,526 engaged in steel operations abroad.

As unions in Brazil are organized on a regional rather than a national basis, the Company has no nationally applicable agreements with its workers. Gerdau believes that its employee pay and benefit structure is comparable to general market rates. Gerdau also provides its employees with fringe benefits such as health and child care.

Gerdau seeks to maintain good working conditions in Company plants and as a consequence has what it believes is a comparatively low employee turnover rate. Due to the high value it places on employee training, the Company attempts to manage any necessary production curtailments through the timing of vacations, rather than workforce reductions.

The Company has not in the past experienced strikes and believes that it generally has good relations with its employees. The Company has not lost a day's production due to labor disputes in the last 40 years. The Company is, however, a party to litigation initiated by current or former employees involving disputes over employee benefits. See "Item 3 - Legal Proceedings".

21 Employee Pension Plan

The Company and affiliates co-sponsor a contributory pension plan covering substantially all Brazilian-based employees (the “Domestic Plan”). The Domestic Plan is principally a defined benefit plan with certain limited defined contributions. Additionally, the Company's Canadian and American subsidiaries sponsor defined benefit plans (the “Canadian Plans” and the “American Plans”) covering substantially all of their employees. Contributions to the Domestic Plan for defined contribution participants are based on a specified percentage of employees’ compensation and totalled US$ 1,560 in 1999, US$ 1,373 in 1998, US$ 1,208 in 1997. Contributions to the Domestic Plan for defined benefit participants and contributions to the Canadian Plan are based on actuarially determined amounts.

The Domestic Plan is administered by Gerdau - Sociedade de Previdência Privada, which was established by the Conglomerate for this purpose. Plan assets of the Domestic Plan consist of investments in bank certificates of deposit, equity and debt securities and investment funds. In ten years of existence, Gerdau Previdência Privada net worth has reached U.S.$ 111.3 million, with 100% of its capital being contributed by affiliated Brazil-based Companies. Gerdau's Domestic Plan provides its employees with an opportunity to increase their future income by means of basic no- contribution and supplementary plan, an optional contribution plan, retirement, pension and savings.

Total pension expense for 1999, 1998, and 1997 was US$ 8,058, US$ 8,729 and US$ 9,326, respectively.

Results-based Compensation System

As of this last fiscal year of 1999, Gerdau S.A. has adopted a compensation system based on performance. The system consists of the already established “Programa Metas” (Goals Program) and Participation Programs. In 1999 it distributed to its employees U.S.$ 16.8 million.

ITEM 2. PROPERTIES

The principal properties of Gerdau consist of installations for the production of steel, rolled products and drawn products. The following is a list identifying the location, capacity and type of installation, as well as the types of products manufactured:

Capacity (Thousands of tonnes per annum) Crude Rolled Drawn Type Of Facility Steel Steel Steel BRAZIL 4,816 4,010 884

GERDAU S.A. 3,900 3,900 884

22 Rio de Janeiro - RJ 1,280 1,440 240 EAF minimill / Rolling mill / Drawing mill / Nails, clamps factory

Cotia - SP - - 47 Drawing mill

Cumbica -SP - - 80 Drawing mill / Wire meshes factory

São J. dos Campos -SP - - 114 Rolling mill / Drawing mill

Barão de Cocais - MG 270 190 - Blast furnace / LD converter / Rolling mill

Divinopolis - MG 500 470 - Blast furnace / EOF converter / Rolling mill

Recife - PE 265 250 125 EAF minimill / Rolling mil / Drawing mill / Nails, clamps factory

Simões Filho - BA 435 370 28 DRI plant / Rolling mill / Drawing mill

Maracanaú - CE 100 100 - EAF minimill / Rolling mill

Araucária - PR 430 - - EAF minimill

Curitiba - PR - 135 - Rolling mill

Sapucaia do Sul - RS 310 555 250 EAF minimill / Rolling mill / Drawing mill / Nails, clamps factory

Charqueadas - RS 310 390 - EAF minimill / Rolling mill

AÇOMINAS (36.63%) 916 110 -

Ouro Branco – MG 916 - - Blast Furnace / LD converter

São Paulo – SP - 110 - Rolling mill

ABROAD 2,915 2,958 - AZA 360 430 - Santiago – Renca/Colina (Chile) EAF minimill / Rolling mill LAISA 70 72 - Montevideo (Uruguay) EAF minimill / Rolling mill COURTICE 320 300 - Cambridge (Canada) EAF minimill / Rolling mill MRM 325 300 - Selkirk (Canada) EAF minimill / Rolling mill SIPSA -75- Villa Mercedez (Argentina) Rolling mill SIPAR (33%) -41- Rosario (Argentina) Rolling mill AMERISTEEL 1,840 1,740 - Charlotte-NC, Jackson-TN, EAF minimill / Rolling mill Jacksonville-FL, Knoxville-TN

TOTAL GERDAU 7,731 6,968 884

Notes: (1) An "EAF" or electric arc furnace mini-mill produces crude steel with EAFs using scrap steel and pig iron as its principal raw materials; (2) A "blast furnace" or "DRI" mill is, in addition, able to produce pig iron or sponge iron to be used in its crude steel production using iron ore and charcoal or natural gas as its main raw materials.

ITEM 3. LEGAL PROCEEDINGS

As is the case with many other industrial companies in Brazil, the Company is engaged in several disputes with Brazilian taxation authorities. The principal disputes involve the Federal social contribution taxes, Fundo de Participação e Integração Social ("PIS"), Fundo de Investimento Social ("FINSOCIAL") and Contribuição Social Sobre o Lucro, state value added tax, Imposto Sobre Circulação de Mercadorias e Serviços ("ICMS") and another Federal social contribution tax levied on sales, Contribuição Social para o Financiamento da Seguridade Social ("COFINS"). Many of these matters have already been ruled on by the Brazilian Supreme Court, establishing precedents for the lower courts.

Therefore, although in some cases the outcome is highly predictable, because the relevant disputes have not been concluded, the contingent liability in respect of these taxes remains on the books of the Company in the aggregate amount of U.S.$ 34.5 million as of December 31, 1999 (ICMS – U.S.$ 0.6 million, PIS/COFINS – U.S.$ 27.3 million, Contribuição Social Sobre o Lucro – U.S.$ 2.6 million and FINSOCIAL – U.S.$ 4.0 million). An aggregate amount equivalent to U.S.$

23 6.0 million has been paid to the courts to be held in judicial escrow pending the outcome of these disputes; the actual amount to be paid in the event that the Company is completely unsuccessful in these tax disputes would not be greater than U.S.$ 28.5 million.

The accounting treatment adopted by the Company for the above amounts in dispute is to accrue for each contingency when the amounts are probable and reasonably estimable.

Gerdau believes that, under the Supreme Court ruling on PIS, it is entitled to a tax refund , which it had offset against monthly payments of PIS and COFINS and subsequently it had offset such tax refund only against PIS. Gerdau's offset has reached U.S.$ 27.3 million (U.S.$ 21.8 million PIS and U.S.$ 5.5 million COFINS). Tax authorities have currently denied the offset of PIS against COFINS as well as the criteria for determining the PIS refund. Tax authorities have also been denying the offset of PIS against PIS. As a consequence, Gerdau has commenced litigation to clarify the matter. In connection with this litigation, Gerdau was required to encumber certain properties to guarantee its tax liability and permit the litigation to proceed. The monthly offsets have been accounted for as contingent liabilities. On the basis of decisions in similar cases, Gerdau believes that it will receive judgment on the merits of this case in approximately two years.

Along with other electricity consumers, the Company has challenged the constitutionality of "compulsory loans" required to be made to the state-owned utility holding company Eletrobrás (Empréstimo Compulsório Eletrobras Sobre Energia Elétrica) by its customers. The amount in dispute by the Company is the equivalent of U.S.$ 47.3 million, including an aggregate amount of the equivalent of U.S.$ 15.3 million that has been paid into court (where it is held in judicial escrow pending the outcome of the relevant disputes). The Company has established a reserve relating to "compulsory loans" since: (i) in March 1995 the Brazilian Supreme Court decided against the interests of the Company as it relates to this matter, (ii) even though the payment to Electrobras was in the form of a loan, the repayment to the Company will be made in the form of Electrobras shares and (iii) based on currently available information, the Electrobras shares will most likely be worth less than 5% of the amount paid if the repayment was to be made in cash. Although the constitutionality of the charge has been sustained by the Brazilian Supreme Court, several issues are pending, including the amounts to be paid by the Company.

The Company is also party to a number of lawsuits by ex-employees. It is very difficult to anticipate the value of such employees' lawsuits because plaintiffs in Brazil generally make several alternative or complementary claims in a single lawsuit only a few of which ever result in an award. Additionally, in the Company's experience the plaintiffs in these suits tend to exaggerate the amounts of their claims. Nevertheless, the Company has estimated the probable loss amount for each lawsuit. The aggregate amount of ex-employees' lawsuits estimated by the Company as of December 31, 1999, was approximately U.S.$ 32.7 million. The Company estimates that the total loss involved in these claims should not exceed U.S.$ 2.2 million. However, due to recent judicial decisions that show new trends in Brazilian courts as well as new personal injury claims that have been asserted against the Company, the legal advisors are reviewing the amount of the estimate of total probable loss.

These labor lawsuits are characterized by multiple ex-employee demands arising from Brazilian legislation providing for additional payments over and above the employee's former base salary. These suits include, among other things, demands for (i) overtime, (ii) night work, (iii) the correction of dangerous working conditions, (iv) the reduction of fines levied due to termination and (v) requests to fine the Company for late payment of termination payments. Also, some ex-employees sue the Company on torts action because of personal injury resulting from labor accidents.

The Company believes, based in part on advice from legal counsel, that the reserve for contingencies of U.S.$ 89.6 million as of December 31, 1999, is sufficient to meet probable and reasonably estimable losses in the event of unfavorable rulings in the aforementioned matters. As such, the Company believes that the ultimate resolution of such matters will not have a material effect on the consolidated financial position as of December 31, 1999 or the results of future operations or cash flows.

ITEM 4. CONTROL OF REGISTRANT

The following table sets forth certain information as of December 31, 1999 with respect to (i) any person known to the Company to be the beneficial owner of more than 10% of the Company's outstanding shares of voting Common

24 Shares, (ii) any person known to the Company to be the beneficial owner of more than 10% of the Company's outstanding shares of Preferred Shares and (iii) the total amount of the Company's voting Common Shares and Preferred Shares owned by the executive officers and directors of the Company as a group.

Shareholder Common Shares % Preferred % Shares Metalúrgica Gerdau S.A. 16,337,636,433 83.0 10,768,309,274 29.1 Santa Felicidade Com. Imp. Exp. Prods. Sid. Ltda.* 468,474,751 2.4 1,499,879,832 4.0 Gersul Empreendimentos Imobiliários S.A.* 373,607,384 1. 9 - - Grupo Gerdau Empreendimentos Ltda.* 273,577,532 1.4 2,198,032 - Members of the Board of Directors and Executive Directors 3,321,238 85,791,094 as a group (17 persons) - 0.2 * Controlled by or affiliated with Metalúrgica Gerdau S.A.

As of December 31, 1999, 19,691,010,193 Common Shares and 37,054,842,993 Preferred Shares were issued and outstanding. Of the two kinds of shares traded in the market, only the Common Shares have voting rights. Under the terms of the Company's By-laws, however, specific rights are assured to the non-voting Preferred Shares.

The Gerdau family, through its holdings in Indac (Industria, Administração e Comércio S.A.), Grupo Gerdau Empreendimentos Ltda. and Gersul Empreendimentos Imobiliários Ltda., controls Metalúrgica Gerdau S.A. holding, collectively, 69.6% of the voting capital and 23.2% of the total capital.

Metalúrgica Gerdau S.A. and its controlled companies hold 88.7% of the voting capital of Gerdau S.A. and, consequently, as described in Item 10 - Directors and Officers of Registrant, have the ability to control the Company's board of directors and the direction and other operations of the Company.

ITEM 5. NATURE OF TRADING MARKET

The principal trading market for the Company's Preferred Shares and Common Shares is the São Paulo Stock Exchange. At December 31, 1999, there were an aggregate of 37,054,842,993 Preferred Shares and 19,691,010,193 Common Shares issued and outstanding and the Company had approximately 74,996 stockholders. As of December 31, 1999, there were approximately 122 U.S. resident holders of record of the Company's Preferred Shares and 2 U.S. resident holders of record of the Company's Common Shares. As of December 31, 1999, there were 363,075,811 Common Shares and 14,845,570,999 Preferred Shares held by foreign investors (based on their addresses).

The Company has registered one class of American Depositary Shares ("ADSs") on Form F-6 pursuant to the U.S. Securities Act of 1933, as amended: one ADS evidenced by American Depositary Receipts representing 1,000 Preferred Shares without par value (the "Preferred ADSs"). As of December 31, 1999, there were 1,274,808 Preferred ADSs outstanding, representing approximately 3.44% of the Company's outstanding Preferred Shares. The Bank of New York is the depositary issuing the Company's American Depositary Receipts.

Starting on November 11, 1997, the Preferred ADSs traded in the U.S. over-the-counter market, and dealers' prices for the ADRs had been quoted in the "pink sheets" published by the National Quotations Bureau, Inc. On March 10, 1999 Gerdau S.A. listed its Preferred ADSs on the New York Stock Exchange under the symbol GGB.

Market Price Information

The table below presents, for the indicated periods, the minimum and maximum closing prices for Preferred Shares on the São Paulo Stock Exchange. The prices are expressed in nominal reais as of the period end date. See Item 6 - "Exchange Rates" for information on the exchange rates during the indicated periods below. The sales prices included on the following table were also translated into U.S. dollars in accordance with the commercial rate of exchange for each corresponding date quoted. See "Selected Financial Data - Exchange Rates" for additional information on the applicable exchange rates during the periods indicated below.

25 Closing Sale Prices Nominal Reais per 1,000 Preferred U.S. Dollars per1,000 Preferred Shares Shares High Low High Low 1995 First Quarter 28.29 15.00 33.43 16.89 Second Quarter 19.00 11.50 20.71 12.47 Third Quarter 12.50 9.00 13.51 9.48 Fourth Quarter 10.00 6.50 10.40 6.71 1996 First Quarter 9.50 6.45 9.70 6.63 Second Quarter 7.35 5.71 7.41 5.71 Third Quarter 8.00 5.80 7.89 5.76 Fourth Quarter 9.10 7.00 8.84 6.84 1997 First Quarter 15.10 8.55 14.22 8.22 Second Quarter 19.80 14.30 18.38 13.54 Third Quarter 25.00 19.70 22.80 18.28 Fourth Quarter 27.50 13.97 25.05 12.51 1998 First Quarter 22.02 11.89 19.39 10.47 Second Quarter 24.90 21.80 16.00 13.83 Third Quarter 21.20 8.50 18.18 7.21 Fourth Quarter 18.00 7.30 9.94 5.53 1999 First Quarter 18.00 7.30 9.94 5.54 Second Quarter 29.50 18.45 16.67 10.70 Third Quarter 34.00 24.80 17.98 13.24 Fourth Quarter 50.30 31.30 27.51 16.00

The following table presents, for the months indicated, the high and low prices for the ADRs as indicated in the Over-the- Counter Market until March 10, 1999, when the Company upgraded its ADSs to level II. For periods subsequent to this date, the table presents the negotiated prices in the stock exchange. 1998 US $Price Low High January 0 0 February 11.48 15.94 March 16.51 19.41 April 16.75 21.81 May 14.74 19.49 June 13.83 16.12 July 13.38 18.18 August 9.77 16.34 September 7.21 10.11 October 7.57 10.18 November 8.59 10.01 December 6.81 9.45 1999 US $ Price Low High January 6.75 6.75 February 7.25 7.38 March 8.31 10.25 April 10.25 15.63 May 16.00 18.50 June 14.63 16.13

26 July 16.00 18.50 August 13.13 17.25 September 15.13 18.25 October 17.88 18.23 November 17.75 20.00 December 19.56 27.00

The Board of Directors of the Company authorized a 2-for-1 stock split of its Common and Preferred stock, which was approved in the General and Extraordinary Shareholders’ Meeting held on April 28, 2000. The additional shares resulting from the split were distributed by Banco Itaú S.A., the transfer agent, two days after approval, for shares negotiated in Brazil, and seven days after the approval for ADSs, to shareholders of record on April 28, 2000, at which time the shares were traded on a split-adjusted basis. Trading on the Brazilian Stock Exchanges

During 1999, the São Paulo Stock Exchange accounted for approximately 93% of the trading value on all Brazilian stock exchanges, and the São Paulo Stock Exchange and Rio de Janeiro Stock Exchange together accounted for approximately 99% of the trading value on all Brazilian stock exchanges. Securities may also be traded through the "in the Telecorrespondent" system, which allows financial institutions throughout Brazil to access the Rio de Janeiro Stock Exchange directly, provided they have contracted with a member firm of the Rio de Janeiro Stock Exchange, and through the National Electronic Trading System ("SENN"), a computerized system inaugurated in 1991 that links the Rio de Janeiro Stock Exchange electronically with seven smaller regional exchanges.

Each Brazilian stock exchange is a non-profit entity owned by its member brokerage firms. Trading on each exchange is limited to member brokerage firms and a limited number of authorized non-members. The São Paulo Stock Exchange and the Rio de Janeiro Stock Exchange have two open outcry trading sessions each day, from 10:00 a.m. to 5:00 p.m. Trading is also conducted during this time on an automated system referred to as CATS on the São Paulo Stock Exchange and on the SENN. There are no specialists or market makers for the Company's shares on the São Paulo Stock Exchange. The Comissão de Valores Mobilários (the "CVM" or the "Brazilian Securities Commission"), the Brazilian securities commission, and each of the Brazilian stock exchanges have discretionary authority to suspend trading in shares of a particular issuer under certain circumstances. Trading in securities listed on the Brazilian stock exchanges may be effected off the exchanges in certain circumstances, although such trading is very limited.

Although any of the outstanding shares of an exchange-listed company may trade on a Brazilian stock exchange, in most cases less than half of the listed shares are actually available for trading by the public, the remainder being held by small Companies of controlling persons that rarely trade their shares.

Settlement of transactions is effected three business days after the trade date. Payment for shares is made through the facilities of separate clearinghouses for each exchange, which maintain accounts for member brokerage firms. The seller is ordinarily required to deliver the shares to the exchange on the second business day following the trade date. The clearinghouse for the São Paulo Stock Exchange is Calispa S.A., which is owned by that Exchange. The clearinghouse for the Rio de Janeiro Stock Exchange is CLC-Câmara de Liquidação e Custódia S.A., which is 99% owned by that exchange.

Trading on Brazilian stock exchanges by non-residents of Brazil is subject to certain limitations under Brazilian foreign investment legislation.

Regulation of Brazilian Securities Markets

The Brazilian securities markets are regulated by the CVM, which has authority over stock exchanges and the securities markets generally, and by Banco Central do Brasil (the "Central Bank"), which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. The Brazilian securities market is governed by Law no. 6,385 dated December 7, 1976, as amended (the "Brazilian Securities Law") and the Brazilian Corporate Law (Law no. 6,404 dated December 15, 1976, as amended) (the "Brazilian Corporate Law").

Under the Brazilian Corporate Law, a company is either listed, a "companhia aberta", such as the Company, or

27 private, a "companhia fechada". All listed companies are registered with the CVM and are subject to reporting requirements. A company registered with the CVM may have its securities traded either on the Brazilian stock exchanges or in the Brazilian over-the-counter ("Brazilian OTC") market. The shares of a listed company, including the Company, may also be traded privately subject to certain limitations.

Despite the amendment of Law no. 6,404/76, there are certain cases in which the disclosure of information to CVM, the Stock Exchange, or even to the public is required. These include the direct or indirect acquisition by an investor of at least 10% (ten percent) of the common shares of a "companhia aberta", or the occurrence of a material event to the corporation. According to Instruction CVM no. 299 dated February 9, 1999, and Instruction CVM no. 31, dated February 8, 1984, the sale of shares which represents the transfer of control must be disclosed to the CVM, Brazilian Stock Exchanges and the market.

To be listed on the Brazilian stock exchanges, a company must apply for registration with the CVM and the stock exchanges where the head office of the company is located and, once the protocols have been implemented, the São Paulo Stock Exchange. Once this stock exchange has admitted a company to listing and the CVM has accepted its registration as a listed company, its securities may, under certain circumstances, be tradable on all other Brazilian stock exchanges as long as the protocols have not been implemented. Each one of the Brazilian stock exchanges has requirements to allow the negotiation of securities of a "companhia aberta" in their respective trading floors. However, once a company has been registered as a listed company by CVM and a stock exchange has commenced the trading of its securities, this company may also have its securities traded on any of the other Brazilian stock exchanges, so long as the company complies with the minimum requirements of the relevant stock exchange.

The Brazilian OTC market consists of direct trades between individuals in which a financial institution registered with the CVM serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a listed company to be traded in the Brazilian OTC market. The CVM requires that it be given notice of all trades carried out in the Brazilian OTC market by the respective intermediaries.

Trading in securities on the Brazilian stock exchanges may be suspended at the request of a company in anticipation of a material announcement. Trading may also be suspended on the initiative of a Brazilian stock exchange or the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to the inquiries by the CVM or the relevant stock exchange.

The Brazilian securities markets are principally governed by Brazilian Securities Law, by Brazilian Corporate Law and by regulations issued by the CVM and the Conselho Monetário Nacional (the "National Monetary Council"). These laws and regulations, among others, provide for disclosure requirements, restrictions on insider trading and price manipulation, and protection of minority shareholders. Nonetheless, the Brazilian securities markets are not as highly regulated and supervised as U.S. securities markets.

ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS

There are no restrictions on ownership or voting of the Company's capital stock by individuals or legal entities domiciled abroad.

The right to convert dividend payments and proceeds from the sale of the Company's capital stock into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investment has been registered with the Central Bank and obtaining a Certificate of Registration under the Annex IV Regulations. Under Annex IV to Resolution No. 1,289 of the National Monetary Council (the "Annex IV Regulations"), qualified foreign investors registered with the CVM and acting through authorized custody accounts managed by a local agent may buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of capital registration for each transaction. Investors under the Annex IV Regulations are also entitled to favorable tax treatment.

Article 1 of CVM Instruction 169/92 states that, in order to be considered a "qualified foreign investor", an investor must fall into one of the following categories :

28 I - commercial banks, investment banks, savings & loans associations, global custodians and similar institutions, regulated and monitored by the appropriate governmental authorities;

II - insurance companies, regulated and monitored by the appropriate governmental authorities, with assets equivalent to a minimum US$5,000,000.00;

III - companies and/or entities organized for underwriting or trading of securities for their own account or on behalf of third parties, duly registered and regulated by any entity similar to CVM or accredited by it;

IV - pension funds regulated by appropriate governmental authorities, with assets equivalent to a minimum US$5,000,000.00;

V – nonprofit institutions, provided that duly regulated by the appropriate tax authorities and accredited by CVM, with assets equivalent to a minimum US$5,000,000.00;

VI - any entity organized for operation in the financial and capital markets, and composed of individuals or legal entities resident and domiciled abroad, provided that not organized or operating to the benefit of one sole individual and with due regard for the following requirements :

a) it must be registered and regulated by any agency equivalent to CVM or accredited by it; or

b) it must have at least 30 (thirty) partners, shareholders, quotaholders or beneficiaries, and assets equivalent to a minimum US$5,000,000.00; or

c) it must have at least 5 (five) partners, shareholders, quotaholders or beneficiaries, and assets equivalent to a minimum US$15,000,000.00; or

d) it must have a minimum US$ 5,000,000.00 in assets, and its portfolio must be managed on a discretionary basis by a professional manager, registered and regulated by an appropriate governmental authority accredited by CVM; or

e) it must have a minimum US$ 5,000,000.00 in assets, and all its partners, shareholders, quotaholders or beneficiaries must be investors as described above, or individuals with equity in excess of US$ 1,000,000.00; or

f) all its partners, shareholders, quotaholders or beneficiaries must be institutions as described above.

Resolution No. 2,689, of January 26, 2000, of the National Monetary Council, which became effective on March 31, 2000, sets forth new Annex IV Regulations. Foreign investments registered under Annex IV Regulations must be conformed to the new rules by June 30, 2000. Such new rules allow foreign investors to invest in almost all of the financial assets and to engage in almost all transactions available in the Brazilian financial and capital markets, provided that some requirements are fulfilled. In accordance with Resolution No. 2,689/00, foreign investors are individuals, legal entities, mutual funds and other collective investments domiciled or headquartered abroad.

Pursuant to such new rules, foreign investors must: (i) appoint at least one representative in Brazil with powers to perform actions relating to the foreign investment; (ii) fill in the appropriate foreign investor registration form; (iii) obtain registration as a foreign investor with CVM; and (iv) register the foreign investment with the Central Bank.

On January 27, 2000, CVM enacted Instruction No. 325, which became effective on March 31, 2000, setting forth new requirements for obtaining registration with CVM as a foreign investor, as provided for in Resolution 2,689/00. Instruction No. 325/00, which revoked CVM Instruction 169/92, provides that the following categories of investors may qualify for obtaining registration with CVM: individual or collective investor, individuals or legal entities, fund or other collective investment entity, resident, headquartered or domiciled abroad.

The securities and other financial assets held by the foreign investor pursuant to Resolution 2,689/00 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or by the

29 CVM or be registered in register, clearing and custody systems authorized by the Central Bank or by the CVM. In addition, securities trading is restricted to transactions carried out in the stock exchanges or organized over-the-counter markets licensed by the CVM.

On January 26, 2000, the Central Bank enacted Circular No. 2,963 stating that, as of March 31, 2000, all investments made by a foreign investor under the new rules mentioned above will be subject to the electronic registration with the Central Bank. Foreign investments registered under Annex IV Regulations must be conformed to the new rules of capital registration by June 30, 2000.

Resolution No. 1,927 of the National Monetary Council, which is the Amended and Restated Annex V to Resolution No. 1,289 (the "Annex V Regulations"), provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. The ADSs have been approved under the Annex V Regulations by the Central Bank and the CVM. Accordingly, the proceeds from the sale of the ADSs by ADR holders outside Brazil are free of Brazilian foreign investment controls and holders of the ADSs will be entitled to favorable tax treatment. According to Resolution No. 2,689/00, foreign investments registered under Annex V Regulations may be transferred to the new investment system created by Resolution 2,689/00 and vice-versa, with due regard to the conditions set forth by the Central Bank and by the CVM.

A certificate of capital registration has been issued in the name of The Bank of New York, as Depositary for the Preferred ADSs (the "Depositary"), and is maintained by Banco Itaú S.A. (the "Custodian") on behalf of the Depositary. Pursuant to the certificate, the Custodian and the Depositary are able to convert dividends and other distributions with respect to the Preferred Shares represented by Preferred ADSs into foreign currency and remit the proceeds abroad. In the event that a holder of Preferred ADSs exchanges Preferred ADSs for Preferred Shares, such holder will be entitled to continue to rely on the Depositary's certificate of capital registration for only five business days after such exchange, following which such holder must seek to obtain its own certificate of capital registration with the Central Bank. Thereafter, unless the Preferred Shares are held pursuant to the Annex IV Regulations by a duly qualified investor or by a foreign investor, as of June 30, 2000, according to Resolution No. 2,689/00, such holder may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such Preferred Shares, and such holder generally will be subject to less favorable Brazilian tax treatment than a holder of Preferred ADSs.

Restrictions on the remittance of foreign capital abroad could hinder or prevent the Custodian, as custodian for the Preferred Shares represented by Preferred ADSs or holders who have exchanged Preferred ADSs for Preferred Shares from converting dividends, distributions or the proceeds from any sale of Preferred Shares into U.S. dollars and remitting such U.S. dollars abroad. Holders of Preferred ADSs could be adversely affected by delays in, or refusal to grant any required government approval for conversions of Brazilian currency payments and remittances abroad of the Preferred Shares underlying the Preferred ADSs.

Exchange Rates.

There are two principal foreign exchange markets in Brazil: the commercial rate exchange market (the "Commercial Market") and the floating rate exchange market (the "Floating Market"). Most trade and financial foreign exchange transactions, including transactions relating to the purchase or sale of shares or the payment of dividends with respect to shares are carried out on the Commercial Market. Purchases of foreign currencies in the Commercial Market may be carried out only through a financial institution in Brazil authorized to buy and sell currency in that market. The Floating Market rate generally applies to transactions to which the commercial rate does not apply. Prior to the implementation of the real plan, the commercial rate and the rate in the Floating Market differed significantly at times. Since the introduction of the real, the two rates have not differed materially, although there could be substantial differences between the two rates in the future. In both markets, rates are freely negotiated but may be strongly influenced by Central Bank intervention. In order to uniformize the exchange rates, the National Monetary Council issued Resolution No. 2,588, of January 25, 1999, which sets forth that the exchange positions held by financial institutions in both markets must not be considered separately. On August 1, 1993, the cruzeiro real replaced the cruzeiro as the unit of Brazilian currency, with each cruzeiro real being equal to 1,000 cruzeiros. On July 1, 1994, the real replaced the cruzeiro real as the unit of Brazilian currency, with each real being equal to 2,750 cruzeiros reais and having an exchange rate of R$1.00 to U.S.$ 1.00. According to Brazilian law, the issuance of reais is controlled by quantitative limits backed by a corresponding amount of U.S. dollars in reserves, but the Brazilian Government subsequently expanded those quantitative

30 limits and allowed the real to float, with parity between the real and the U.S. dollar (R$1.00 to U.S.$ 1.00) as a ceiling.

From its introduction through March 1995, the real appreciated against the U.S. dollar. On March 6, 1995, in an effort to address concerns about the overvaluation of the real relative to the U.S. dollar, the Central Bank introduced new exchange rate policies that established a trading band within which the real/U.S. dollar exchange rate could fluctuate and announced that it would intervene in the market and buy or sell U.S. dollars whenever rates approached the upper or lower limit of the band. The Central Bank initially set the exchange rate band with a floor of R$0.86 per U.S.$ 1.00 and a ceiling of R$0.90 per U.S.$ 1.00 and provided that, after March 10, 1995, the exchange rate band would be between R$0.88 and R$0.93 per U.S.$ 1.00. The Central Bank had periodically adjusted the exchange rate band to permit the gradual devaluation of the real against the U.S. dollar. On January 13, 1999, due to increased pressure to devalue the real, the Central Bank allowed a de facto 7.6 percent devaluation of the real and established a new exchange rate band between R$1.20 and R$1.32 per U.S.$1.00. Despite this attempt to implement a limited devaluation, further devaluation pressures caused the Central Bank on January 15, 1999, to announce that it would let the real trade freely on the foreign exchange markets. This decision was confirmed on January 18, 1999, when the Central Bank officially announced its new policy to allow the real's value to be determined by the foreign exchange markets, intervening only to limit wide swings in the value of the currency. At the close of business on December 31, 1999 the real traded at a level of R$1.78 to U.S.$1.00. It is not yet possible to predict whether the Central Bank will continue to let the real float freely or if the real will remain at its present level. In addition, no assurance can be given that the Brazilian government will not impose a band system in the future.

Brazilian law provides that, whenever there is a significant imbalance in Brazil's balance of payments or reasons to foresee such an imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. For approximately six months in 1989 and early 1990, for example, to conserve Brazil's foreign currency reserves, the Brazilian Government froze all dividend and capital repatriations that were owed to foreign equity investors and held by the Central Bank. These amounts were subsequently released in accordance with Brazilian Government directives. There can be no assurance, however, that the Brazilian Government may not take similar measures in the future.

ITEM 7. TAXATION

The following summary contains a description of the principal Brazilian and U.S. federal income tax consequences of the purchase, ownership and disposition of a Preferred Share and Preferred ADS, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase any of such securities. In particular, this summary deals only with holders that will hold Preferred Shares or Preferred ADSs as "capital assets" within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"), and does not address the tax treatment of a holder that may be subject to special tax rules, such as banks, insurance companies, dealers in securities, persons that will hold Preferred Shares or Preferred ADSs in a hedging transaction or as a position in a "straddle" or "conversion transaction" for tax purposes, persons that have a "functional currency" other than the U.S. dollar, persons liable for alternative minimum tax or persons that own or are treated as owning 10% or more of the voting shares of the Company. Prospective purchasers of any of such security should consult their own tax advisors as to the personal tax consequences of their investment which may vary for investors in different tax situations.

The summary is based upon the tax laws of Brazil and the United States and regulations thereunder as in effect on the date hereof, which are subject to change (possibly with retroactive effect). Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty no assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders or Preferred Shares of Preferred ADSs. This summary is also based upon the representations of the Depositary and on the assumption that each obligation in the Deposit Agreement relating to the Preferred ADSs and any related documents will be performed in accordance with its terms.

31 Brazilian Tax Considerations

The following discussion summarizes the material Brazilian tax consequences of the acquisition, ownership and disposition of Preferred Shares or Preferred ADSs by a holder that is not domiciled in Brazil for purposes of Brazilian taxation and, in the case of a holder of Preferred Shares which has registered its investment in such securities with the Central Bank as a U.S. dollar investment (in each case, a "non-Brazilian holder"). The following discussion does not specifically address all of the Brazilian tax considerations applicable to any particular non-Brazilian holder, and each non- Brazilian holder should consult his or her own tax advisor concerning the Brazilian tax consequences of an investment in any of such securities.

Taxation of Dividends. Dividends paid with respect to income earned since January 1, 1996, including dividends paid in kind (i) to the Depositary in respect of the Preferred Shares underlying the Preferred ADSs or (ii) to a non-Brazilian holder in respect of Preferred Shares, are not subject to any withholding tax in Brazil. The new tax legislation eliminated the then existing 15% withholding tax on dividends paid to companies, resident individuals or non- residents in Brazil. Accordingly, dividends with respect to profits generated on or after January 1, 1996 are not subject to withholding tax in Brazil. Dividends related to profits generated prior to December 31, 1993 will be subject to Brazilian withholding tax of 25%. Dividends related to profits generated between January 1, 1994 and December 31, 1995 will be subject to Brazilian withholding tax of 15%.

Taxation of Gains. Gains realized outside or inside Brazil by a non-Brazilian holder on the disposition of Preferred ADSs to another non-Brazilian holder are not subject to Brazilian tax.

The withdrawal of Preferred Shares in exchange for Preferred ADSs is not subject to Brazilian tax. The deposit of Preferred Shares in exchange for Preferred ADSs is not subject to Brazilian tax provided that the Preferred Shares are registered by the investor or its agent under the Central Bank's Annex IV Regulations and, as of March 31, 2000, under Resolution 2,689/00 (foreign investments registered under Annex IV Regulations must be conformed to the new rules set forth by Resolution 2,689/00 by June 30, 2000). In the event the Preferred Shares are not so registered, the deposit of Preferred Shares in exchange for Preferred ADSs may be subject to Brazilian capital gains tax at the rate of 15%. On receipt of the underlying Preferred Shares, a non-Brazilian holder who qualifies under the Annex IV Regulations and, as of March 31, 2000, under Resolution 2,689/00, will be entitled to register the U.S. dollar value of such shares with the Central Bank as described below.

Non-Brazilian holders are not subject to tax in Brazil on gains realized on sales of Preferred Shares that occur abroad or on the proceeds of a redemption of, or a liquidating distribution with respect to, Preferred Shares. As a general rule, non-Brazilian holders are subject to a withholding tax imposed at a rate of 15% on gains realized on sales or exchanges of Preferred Shares that occur in Brazil to or with a resident of Brazil, outside of a Brazilian stock exchange. Non-Brazilian holders are subject to withholding tax at a rate of 10% on gains realized on sales or exchanges in Brazil of Preferred Shares that occur on a Brazilian Stock Exchange unless such sale is made by a non-Brazilian holder who is not resident in a tax haven (as described below) and on a Brazilian stock exchange within five business days of the withdrawal of such Preferred Shares in exchange for Preferred ADSs and the proceeds thereof are remitted abroad within such five- day period or such sales are made under the Annex IV Regulations by certain qualified institutional non-Brazilian holders which register with the CVM. Gains realized arising from transactions on a Brazilian stock exchange by an investor under Annex IV Regulations are not subject to tax (except as described below). The "gain realized" as a result of a transaction on a Brazilian stock exchange is the difference between the amount in Brazilian currency realized on the sale or exchange and the acquisition cost measured in Brazilian currency, without any correction for inflation, of the shares sold. The "gain realized" as a result of a transaction that occurs other than on a Brazilian stock exchange will be the positive difference between the amount realized on the sale or exchange and the acquisition cost of the Preferred Shares, both such values to be taken into account in reais. There are grounds, however, to hold that the "gain realized" should be calculated based on the foreign currency amount registered with the Central Bank. There can be no assurance that the current preferential treatment for holders of Preferred ADSs and for certain non-Brazilian holders of Preferred Shares under the Annex IV Regulations will continue in the future or that such treatment will not be changed in the future.

As of January 1, 2000, the preferential treatment under Annex IV is no longer applicable if the non-Brazilian holder of the Preferred ADSs or Preferred shares is resident in a tax haven – i.e., countries which do not impose income tax or where such tax is imposed at a tax bracket within a range between 0% to a maximum rate of 20% - in accordance

32 with Law No. 9,959, of January 27, 2000. In other words, gains realized by such holder on the sale or exchange in Brazil that occur in the spot market of shares traded on a Brazilian stock exchange will be taxed at a rate of 10% (to be increased to 20% as of January 1, 2002, in accordance with the same Law). Law 9,959 also provides that such rate of 10% on gains realized on the sale or exchange in Brazil of preferred shares, that occur on a Brazilian Stock Exchange, will be increased to 20% for transactions carried out on or after January 1, 2002.

Any exercise of preemptive rights relating to the Preferred Shares will not be subject to Brazilian taxation. Any gain on the sale or assignment of preemptive rights relating to the Preferred Shares by the Depositary on behalf of holders of Preferred ADSs, will be subject to Brazilian income taxation at the rate of 15%, unless such sale or assignment is performed within Brazilian stock exchanges, in which the gains are exempt from withholding income tax .

Any gain on the sale or assignment of preemptive rights relating to Preferred Shares, will be subject to Brazilian income tax at the same rate applicable to the sale or disposition of Preferred Shares. The maximum rate of such tax is currently 15%.

National Interest Charge Attributed to Shareholder's Equity.

Distributions of interest on equity in respect of the Preferred Shares as an alternative form of payment to shareholders who are either Brazilian residents or non-Brazilian residents, including holders of ADSs, are subject to Brazilian withholding tax at the rate of 15%. In case of non-Brazilian residents that are residents in a tax haven the applicable rate for income tax is 25%. Since 1996, such payments have been tax deductible by the Company. Since 1997, the payments have also been deductible in determining social welfare contributions and income tax by the Company as long as the payment of a distribution of interest is approved at the Company's General Meeting. The distribution of interest on shareholders' equity may be determined by the Board of Directors of the Company alone. No assurance can be given that the Board of Directors of the Company will not determine that future distributions of profits be made by means of interest on shareholders' equity instead of by means of dividends.

Other Brazilian Taxes. There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of Preferred Shares or Preferred ADSs by a non-Brazilian holder except for gift and inheritance taxes which are levied by some states of Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or domiciled within the state to individuals or entities resident or domiciled within such state in Brazil. There are no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of Preferred Shares or Preferred ADSs.

Pursuant to Decree 2,219 of May 2, 1997, and Ordinance no. 5 of January 21, 1999, issued by Ministry of Finance, the amount in reais resulting from the conversion of the proceeds received by a Brazilian entity from a foreign investment in the Brazilian securities market (including those in connection with the investment in the Preferred Shares or Preferred ADSs and those made under Annex IV Regulations and, as of March 31, 2000, under Resolution 2,689/00) is subject to a transaction tax ("IOF"), although at present the rate of such tax is 0%. The Minister of Finance is empowered to establish the applicable IOF tax rate. Under Law 8,894 of June 21, 1994, such IOF tax rate may be increased at any time to a maximum of 25%, but any such increase will only be applicable to transactions occurring after such increase becomes effective. Pursuant to Law 9,311 of October 24, 1996, the Contribuição Provisória sobre Movimentação Financeira (the "CPMF tax") was levied at a rate of 0.2% on all fund transfers in connection with financial transactions in Brazil. Pursuant to Law 9,539, the CPMF tax is payable until February 1999. Pursuant to Constitutional Amendment 21, of March 18, 1999, the collection of the CPMF was extended for an additional period of 36 months. The CPMF tax rate was 0.38% during the first 12 months, and will be 0.30% for the remaining period. This payment of the CPMF tax was required as of June 17, 1999. Although the CPMF tax is set to expire on June 16, 2002, the Brazilian Congress is discussing the possibility of converting this tax into a permanent tax. The responsibility for the collection of the CPMF tax is borne by the financial institution that carries out the relevant financial transaction. Additionally, when the non-Brazilian holder remits the proceeds from the sale or assignment of Preferred Shares by means of a foreign exchange transaction, the CPMF tax will be levied on the amount to be remitted abroad in Brazilian reais. If it is necessary to perform any exchange transaction in connection with Preferred ADSs or Preferred Shares, it will bear the CPMF tax.

Registered Capital. The amount of an investment in Preferred Shares held by a non-Brazilian holder who qualifies and registered with the CVM under the Annex IV Regulations and, as of March 31, 2000, under Resolution No.

33 2,689/00, or in ADSs held by the Depositary representing such holder, as the case may be, is eligible for registration with the Central Bank; such registration (the amount so registered is referred to as "Registered Capital") allows the remittance abroad of foreign currency, converted at the Commercial Market rate, acquired with the proceeds of distributions on, and amounts realized with respect to disposition of, such Preferred Shares. The Registered Capital for Preferred Shares purchased in the form of a Preferred ADS, or purchased in Brazil and deposited with the Depositary in exchange for a Preferred ADS, will be equal to their purchase price (in U.S. dollars) paid by the purchaser. The Registered Capital for Preferred Shares that are withdrawn upon surrender of Preferred ADSs, will be the U.S. dollar equivalent of (i) the average price of the Preferred Shares on the Brazilian stock exchange on which the greatest number of such Preferred Shares was sold on the day of withdrawal, or (ii) if no Preferred Shares were sold on such day, the average price of Preferred Shares that were sold in the fifteen trading sessions immediately preceding such withdrawal. The U.S. dollar value of the Preferred Shares is determined on the basis of the average Commercial Market rates quoted by the Central Bank on such date (or, if the average price of Preferred Shares is determined under clause (ii) of the preceding sentence, the average of such average quoted rates on the same fifteen dates used to determine the average price of the Preferred Shares).

A non-Brazilian holder of Preferred Shares may experience delays in effecting the registration of Registered Capital which may delay remittances abroad. Such a delay may adversely affect the amount, in U.S. dollars, received by the non-Brazilian holder.

U.S. Federal Income Tax Considerations

As used below, a "U.S. holder" is a holder of a Preferred Share or Preferred ADS that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation organized under the laws of the United States, any State thereof or the District of Columbia, or (iii) any other person or entity that is subject to U.S. federal income tax on a net income basis in respect of the Preferred Shares or Preferred ADSs (including a nonresident alien individual or foreign corporation whose income with respect to a Preferred Share or Preferred ADS is effectively connected with the conduct of a U.S. trade or business). The following discussion assumes that the Preferred Shares and Preferred ADSs are held as capital assets.

In general, for U.S. federal income tax purposes, a holder of an American Depository Receipt ("ADR") evidencing an ADS will be treated as the beneficial owner of the Preferred Share(s) represented by the applicable ADS.

Taxation of Dividends. In general, a distribution made with respect to a Preferred Share or Preferred ADS (which for this purpose will include distributions of interest on equity) will, to the extent made from the current or accumulated earnings and profits of the Company, as determined under U.S. federal income tax principles, constitute a dividend for U.S. federal income tax purposes. If a distribution exceeds the amount of the Company's current and accumulated earnings and profits, it will be treated as a non-taxable return of capital to the extent of the U.S. holder's tax basis in the Preferred Share or Preferred ADS on which it is paid and thereafter as capital gain. As discussed below, the term "dividend" means a distribution that constitutes a dividend for U.S. federal income tax purposes.

The gross amount of any dividend paid (which will include any amounts withheld in respect of Brazilian taxes) with respect to a Preferred Share or Preferred ADS will be subject to U.S. federal income taxation as foreign source dividend income and will not be eligible for the dividends received deduction generally allowed to U.S. corporations. A dividend paid in Brazilian currency will be includible in the income of a U.S. holder at its value in U.S. dollars calculated by reference to the prevailing spot market exchange rate in effect on the day it is received by the U.S. holder or, in the case of a dividend received in respect of Preferred ADSs, on the date the dividend is received by the Depositary, whether or not the dividend is converted into U.S. dollars. Any gain or loss realized on a subsequent conversion or other disposition of the Brazilian currency will be treated as U.S. source ordinary income or loss. In the case of a U.S. holder that is not a United States person, the currency gain or loss will be U.S. source income only if the currency is held by a qualified business unit of the U.S. holder in the United States.

Subject to generally applicable limitations under U.S. federal income tax law, the Brazilian withholding tax will be treated as a foreign income tax eligible for credit against a U.S. holder's U.S. federal income tax liability. For purposes of the computation of the foreign tax credit limitation separately for specific categories of income, any dividends generally will constitute foreign source "passive income" or, in the case of certain holders, "financial services income." Alternatively, a U.S. holder may elect not to claim a credit for any of its foreign taxes and deduct all of those taxes in

34 computing taxable income.

Taxation of Capital Gains. A deposit or withdrawal of Preferred Shares by a holder in exchange for a Preferred ADS will not result in the realization of gain or loss for U.S. federal income tax purposes.

A U.S. holder generally will recognize capital gain or loss upon a sale or other disposition of a Preferred Share or Preferred ADS held by the U.S. holder or the Depositary in an amount equal to the difference between the U.S. holder's adjusted basis in the Preferred Share or Preferred ADS (determined in U.S. dollars) and the U.S. dollar amount realized on the sale or other disposition. If a Brazilian tax is withheld on the sale or disposition of a share, the amount realized by a U.S. holder will include the gross amount of the proceeds of that sale or disposition before deduction of the Brazilian tax. Capital gain recognized by certain non-corporate U.S. holders is taxed at a maximum tax rate of 20% in respect of property held more than one year. Capital gain, if any, realized by a U.S. holder on the sale or other disposition of a Preferred Share or Preferred ADS generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Consequently, in the case of a disposition of a Preferred Share that is subject to Brazilian tax imposed on the gain (or, in the case of a deposit, in exchange for a Preferred ADS or a Preferred Share that is not registered under the Annex IV regulations, on which a Brazilian capital gains tax is imposed) (see "-Brazilian Tax Considerations-Taxation of Gains"), the U.S. holder may not be able to use the foreign tax credit for that Brazilian tax unless it can apply the credit against U.S. tax payable on other income from foreign sources in the appropriate income category, or, alternatively, it may take a deduction for the Brazilian tax if it elects to deduct all of its foreign income taxes. In general, any loss will be sourced to the taxpayer's residence (as specially defined in Section 865(g) of the Code), subject to certain exceptions that can treat a loss recognized by a U.S. resident in whole or in part as a foreign source loss.

Passive Foreign Investment Company Rules. Based upon the nature of its current and projected income, assets and activities, the Company does not expect the Preferred Shares or Preferred ADSs to be considered shares of a passive foreign investment company ("PFIC") for U.S. federal income tax purposes. In general, a foreign corporation is a PFIC if at least 75% of its gross income for the taxable year (or, in general, a preceding taxable year in which the taxpayer owned stock in the corporation) is passive income or if at least 50% of its assets for the current year (or, in general, a preceding year in which the taxpayer owned stock in the corporation) produce passive income or are held for the production of passive income. In general, passive income for this purpose means, with certain designated exceptions, dividends, interest, rents, royalties, annuities, get gains from dispositions of certain assets, net foreign currency gains, income equivalent to interest, income from notional principal contracts and payments in lieu of dividends. The determination of whether the Preferred Shares or Preferred ADSs constitute shares of a PFIC is a factual determination made annually, and therefore the Company's failure to constitute a PFIC at one time is subject to change. Subject to certain exceptions, once a U.S. holder's Preferred Shares or Preferred ADSs are treated as shares of a PFIC, they remain shares in a PFIC.

If the Company is treated as a PFIC, contrary to the discussion in "U.S. Federal Income Tax Considerations- Taxation of Dividends" and "-U.S. Federal Income Tax Considerations-Taxation of Capital Gains" above, a U.S. holder would be subject to special rules with respect to (i) any gain realized on the sale or other disposition of Preferred Shares or Preferred ADSs and (ii) any "excess distribution" by the Company to the U.S. holder (generally, any distribution during a taxable year in which distributions to the U.S. holder on the Preferred Shares or Preferred ADSs exceed 125% of the average annual taxable distributions the U.S. holder received on the Preferred Shares or Preferred ADSs during the proceeding three taxable years or, if shorter, the U.S. holder's holding period for the Preferred Shares or Preferred ADSs). Under those rules, (i) the gain or excess distribution would be allocated ratably over the U.S. holder's holding period for the Preferred Shares or Preferred ADSs, (ii) the amount allocated to the taxable year in which the gain or excess distribution is realized would be taxable as ordinary income, (iii) the amount allocated to each prior year, with certain exceptions, would be subject to tax at the highest tax rate in effect for that year and (iv) the interest charge generally applicable to underpayments of tax would be imposed in respect of the tax attributable to each prior year. A U.S. holder who owns Preferred Shares or Preferred ADSs during any year the Company is a PFIC must file Internal Revenue Service Form 8621. In general, if the Company is treated as a PFIC, the rules described in the second sentence of this paragraph can be avoided by a U.S. holder making, in the first year the U.S. holder owns Preferred Shares or Preferred ADSs while the Company is treated as a PFIC, an election to treat the Preferred Shares or Preferred ADSs as shares in a qualified electing fund ("QEF"). In that event, the U.S. holder must include in income each year his pro rata share of the Company's ordinary earnings and net capital gains, whether or not distributed. In general, distributions of such previously taxed income are not taxable. A U.S. holder's basis in the Preferred Shares or Preferred ADSs increases by amounts included in income pursuant to a QEF election and decreases by any nontaxable distributions. A QEF election is available only if the Company provides certain information to its shareholders, including the amount of its ordinary earnings and net

35 capital gains computed generally in accordance with U.S. fedeal income tax rules, and the Company presently does not intend to make those computations or to provide that information. Alternatively, a U.S. holder may elect to be subject to a mark-to-market regime for stock in a PFIC. The mark-to-market rules, effective for taxable years of U.S. holders beginning after December 31, 1997, also would apply to the exclusion of the rules described in the second sentence of this paragraph, except generally to the extent that the Company is a PFIC at any time while a U.S. holder has owned Preferred Shares or Preferred ADSs and the U.S. holder has not made either the mark-to-market election or an election under current law to treat the Company as a QEF. Under the mark-to-market rules, a U.S. holder may elect mark-to-market treatment for its Preferred Shares or Preferred ADSs, provided the Preferred Shares or Preferred ADSs, for purposes of these rules, constitute "marketable stock" pursuant to Treasury regulations that have yet to be promulgated. A U.S. holder electing the mark-to-market regime generally would treat any gain recognized under mark-to-market treatment or on an actual sale of Preferred Shares or Preferred ADSs as ordinary income and would be allowed an ordinary deduction for any decrease in the value of Preferred Shares or Preferred ADSs in any taxable year and for any loss recognized on an actual sale, but only to the extent, in each case, of previously included mark-to-market income not offset by previously deducted decreases in value. A U.S. holder's basis in Preferred Shares or Preferred ADSs would increase or decrease by gain or loss taken into account under the mark-to-market regime. A mark-to-market election is generally irrevocable.

Information Reporting and Backup Withholding. A U.S. holder of a Preferred Share or Preferred ADS will generally be subject to information reporting to the U.S. Internal Revenue Service ("IRS") and to "backup withholding" at the rate of 31% with respect to dividends paid on or the proceeds of a sale or other disposition of a Preferred Share or Preferred ADS paid within the United States, or through certain U.S. related financial intermediaries unless such holder (i) is a corporation or comes within certain other exempt categories, and demonstrates this fact when so required, or (ii) provides a correct taxpayer identification number, certifies that it is not subject to backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. Any amount withheld under these rules will be creditable against the holder's U.S. federal income tax liability, and a U.S. holder may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS. While holders that are not U.S. holders generally are exempt from backup withholding and information reporting on payments made within the United States, a holder that is not a U.S. holder may be required to comply with applicable certification procedures to establish that it is not a U.S. person in order to avoid the application of U.S. information reporting requirements and backup withholding.

ITEM 8. SELECTED FINANCIAL DATA

U.S. GAAP Presentation

The selected financial information for the Company included in the following table should be read in conjunction with, and is qualified in its entirety by reference to, the U.S. GAAP financial statements of the Company and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere herein. The consolidated financial data for the Company as of December 31, 1999, 1998, and 1997, are derived from the U.S. GAAP financial statements included elsewhere herein. The financial statements as of December 31, 1999, 1998 and 1997 have been audited by Arthur Andersen S/C.

For the year ended December 31, Statement of income data: (expressed in thousands of U.S. dollars) 1999 1998 1997 Net sales 1,720,988 1,885,061 1,824,108 Cost of sales (1,101,371) (1,315,179) (1,296,453) Gross profit 619,617 569,882 527,655 Sales and marketing expenses (86,007) (101,386) (107,199) General and administrative expenses (157,755) (175,457) (198,083) Operating income 375,855 293,039 222,373 Interest expense and exchange loss (222,414) (151,739) (54,359) Interest income 64,166 86,897 31,626 Other non-operating income (expense) 5,196 18,798 17,330 Equity in results of unconsolidated subsidiaries (4,903) -- Income before income taxes and minority interest 217,900 246,995 216,970 Provision for income taxes: Current (17,456) (38,460) (17,335)

36 Deferred (3,080) (13,843) (21,710) Income before minority interest 197,364 194,692 177,925 Minority interest 328 (844) (21,182) Net income available to Common and Preferred shareholders 197,692 193,848 156,743 Basic earnings per 1,000 shares Common 3.30 3.22 2.76 Preferred 3.59 3.54 3.10 Diluted earnings per 1,000 shares Common 3.27 3.06 2.69 Preferred 3.55 3.35 3.00 Cash dividends declared per 1,000 shares Common 1.20 0.76 0.68 Preferred 1.27 0.81 0.74 Weighted average number of common shares outstanding 19,691,010,193 19,691,010,193 19,314,516,379 Weighted average number of preferred shares outstanding 36,947,487,736 36,824,060,299 33,339,040,280

As of December 31, (expressed in thousands of U.S. dollars) Balance sheet data: 1999 1998 Cash 9,570 10,938 Short-term investments 364,492 338,930 Net working capital (1) 235,993 503,931 Property, plant and equipment 1,568,051 1,279,218 Total assets 3,215,542 2,559,396 Short term debt 655,551 274,818 Long term debt, less current portion 739,315 224,309 Long term parent company 49,511 205,484 Debentures – short term 2,505 3,505 Debentures – long term 81,613 172,978 Shareholders’ equity 1,022,744 1,205,325 (1) Total current assets less total current liabilities

Brazilian Presentation

The following table presents selected financial information for the Company at the dates for each of the years indicated and has been derived from the Company’s financial statements, in reais, prepared in accordance with Brazilian GAAP and not included elsewhere herein. The Brazilian financial statements as of December 31, 1999, 1998, 1997, 1996 and 1995, and for each of the years then ended, have been audited by Arthur Andersen S/C.

The Brazilian GAAP selected financial information set forth below differs significantly from the U.S. GAAP financial statements, and the Company has not prepared a reconciliation of the Brazilian GAAP selected financial data to U.S. GAAP. As a result, the following information is not comparable with that set forth in the financial statements of the Company nor with those of other companies that prepare their financial statements in accordance with U.S. GAAP.

The conversion to Dollars from Reais was done as follows:

a) for the year 1995, the financial statements in reais were prepared in accordance with the integral monetary correction methodology, in accordance with procedures established by the Comissão de Valores Mobiliários (“CVM”). The amounts for that year were corrected to December 31, 1995, and then converted into dollars at the rate in effect on such date.

b) for the years 1996, 1997, 1998 and 1999, the financial statements in reais were prepared in accordance with corporate law methodology, which does not contemplate the recognition of the effects of inflation in the financial statements. The conversion to U.S. dollars was made based on the rate of exchange for such currency in effect at year end.

For the years ended December 31,

37 (expressed in thousands of U.S. dollars) Statement of income data: 1999 1998 1997 1996 1995 Net sales 1,850,206 1,801,718 1,774,640 1,694,623 1,726,649 Cost of sales (1,246,363) (1,266,087) (1,244,597) (1,196,874) (1,324,208) Gross profit 603,843 535,631 530,043 497,749 402,441 Sales and marketing expenses (85,333) (97,314) (103,575) (94,768) (102,316) General and administrative expenses (165,009) (177,884) (197,522) (184,667) (187,506) Operating income 353,501 260,433 228,946 218,314 112,619 Interest expense and exchange loss (303,813) (154,698) (127,360) (145,863) (84,782) Interest income 63,063 81,350 53,063 42,895 16,758 Founders’ participation rights - - - (4,429) (8,308) Other non-operating income (expense) 104,935 11,693 (6,171) (2,173) (746) Income before income taxes and minority interest 217,686 198,778 148,478 108,744 35,541 Provision for income taxes and social contribution (21,121) (40,531) (27,557) (20,233) 3,638 Minority interest 613 (811) (650) (149) (180) Net income for the year 197,178 157,436 120,271 88,362 38,999 Number of shares outstanding in thousands 56,745,853 56,512,724 56,745,824 56,745,824 40,097,214 Net income per thousand shares 3.48 2.79 2.12 1.56 0.97 Dividends declared per 1,000 shares Common 0.91 0.82 0.62 0.52 0.27 Preferred 0.99 0.90 0.68 0.52 0.27

For the years ended December 31, (expressed in thousands of U.S. dollars) Balance sheet data: 1999 1998 1997 1996 1995 Cash and cash equivalents 10,069 10,090 4,331 3,581 1,974 Short term investments 378,339 338,930 296,204 205,227 - Net working capital (1) 219,158 482,974 527,414 344,398 155,940 Property, plant and equipment 2,030,414 1,582,815 1,527,843 1,655,850 1,801,771 Total assets 3,556,019 2,770,659 2,533,306 2,477,652 2,433,294 Loans and financing – short term 721,427 260,433 228,946 218,314 112,619 Loans and financing – long term 812,849 226,920 207,137 171,530 308,421 Parent company debt – long term 29,077 205,484 184,708 191,993 2,724 Debentures – short term 2,505 3,505 3,512 3,443 5,100 Debentures – long term 81,613 172,978 126,268 72,214 123,629 Shareholders’ equity 1,216,206 1,513,512 1,496,810 1,485,041 1,458,848

(1) Total current assets less total current liabilities

Dividends and Dividend Policy

The authorized capital stock of the Company is comprised of Common and Preferred Shares. As of December 31, 1999, 37,054,842,993 Preferred Shares have been issued by the Company.

Dividends

The following table sets forth the dividends paid to holders of the Company’s Common Shares and Preferred Shares since 1995 in Reais and in U.S. dollars translated from Reais at the Commercial Rate as of the date of payment.

Date of R$ per 1,000 R$ per 1,000 U.S.$ per 1,000 U.S.$ per 1,000 Period Payment Common Shares Preferred Shares Common Shares Preferred Shares

38 1st half/1995 08/21/95 0.09 0.09 0.09554 0.09554 2nd half/1995 02/29/96 0.33 0.33 0.33529 0.33529 1st half/1996 08/15/96 0.14 0.14 0.13820 0.13820 2nd half/1996 03/07/97 0.36 0.36 0.34181 0.34181 1st half/1997 08/19/97 0.2690 0.2959 0.24692 0.27161 2nd half/1997* 02/26/98 0.42180 0.46398 0.37334 0.41067 1st half/1998* 07/27/98 0.45 0.495 0.38897 0.42787 2nd half/1998* 02/23/99 0.5360 0.5896 0.4435 0.4878 1st half/1999* 08/03/99 0.6300 0.6930 0.3447 0.3791 2nd half/1999* 02/29/00 0.9910 1.0901 0.5604 0.6164

* Represents payments of interest on equity

The Brazilian Corporate Law generally requires the By-laws of each Brazilian corporation to specify a minimum percentage of the profits for each fiscal year that must be distributed to shareholders as dividends. Under the Company’s By-laws, such percentage has been fixed as an amount equal to not less than 30% of the adjusted net income for distributions for each fiscal year (the “Mandatory Dividend”).

Dividends with respect to a fiscal year are payable from (i) retained earnings from prior periods and (ii) after-tax income for such period, after allocating such income to the legal reserve and other reserves (“Adjusted Net Income”). For conversion of the dividends paid by the Company from reais to dollars, the Custodian will use the relevant Commercial Market exchange rate on the date such dividends are made available to shareholders in Brazil. Please see Item 8 “Selected Financial Data – Exchange Rates”.

Under the Brazilian Corporate Law, a Brazilian company is required to maintain a legal reserve, to which it must allocate 5% of net income determined in accordance with Brazilian Corporate Law for each fiscal year until such reserve reaches an amount equal to 20% of the company’s capital stock. On December 31, 1999, in accordance with Brazilian GAAP, Gerdau S.A.’s legal reserve totaled R$ 47.8 million (U.S.$ 26.7 million) or 3.63% of total capital stock of R$ 1,316.88 million (U.S.$ 736.1 million).

According to Law 9,457 an amendment to the Brazilian Corporate Law enacted on May 5, 1997, holders of preferred shares in a Brazilian Corporation (including the Preferred Shares) are entitled to receive dividends at least 10% greater than dividends paid on Common Shares.

As a general requirement, shareholders who are not residents of Brazil must have their investment in a Brazilian company registered with the Central Bank to have dividends, sales proceeds or other amounts related to their shares eligible to conversion into foreign currency for remittance outside Brazil. Preferred Shares underlying the ADS’s will be held in Brazil by the Custodian as agent for the Depositary. The holder of Preferred Shares will be registered owner on the records of the Registrar for the Preferred Shares.

Payments of cash dividends and distributions, if any, will be made in Brazilian currency to the Custodian, on behalf of the Depositary, which will then convert such proceeds into U.S. dollars and will cause such U.S. dollars to be delivered to the Depositary for distribution to holders of ADR’s. If the Custodian is unable to immediately convert the Brazilian currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADR’s may be adversely affected by any devaluation or depreciation of the Brazilian currency in relation to the U.S. dollar that occurs before such dividends are converted and remitted. Dividends in respect of the Preferred Shares paid to holders who are not Brazilian residents, including holders of ADS’s, are not subject to Brazilian withholding tax.

In case dividends are not claimed within three years from the date when they are made available for payment, the amount of such unclaimed dividends reverts to the company paying the dividends.

Interest on Equity

Law 9,249, of December 1995, provides that a company may pay interest on equity to shareholders as an addition to or as an alternative to dividends at the Company’s discretion. A Brazilian Corporation is entitled to pay (and set off

39 against the Mandatory Dividend for each fiscal year) to its shareholders as interest on equity up to the limit of the TJLP (Long-Term Interest Rate). The payment of interest as described herein would be subject to a 15% withholding income tax. See “Item 7 - Taxation”.

Dividend Policy

The Company currently intends to pay dividends on its outstanding Preferred Shares in the amount of its required distributions for any particular fiscal year, subject to any determination by the Board of Directors that such distributions would be inadvisable in view of the Company’s financial condition. As a policy, although not required to do so by law, the Company pays dividends or interest on capital twice a year.

Exchange Rates

There were two legal foreign exchange markets in Brazil, the Commercial Market and the Floating Market. The Commercial Market is reserved primarily for foreign trade transactions and transactions that generally require prior approval from Brazilian monetary authorities, such as the purchase and sale of registered investments by foreign persons and related remittances of funds abroad. Purchases of foreign exchange in the Commercial Market may be carried out only through a financial institution in Brazil authorized to buy and sell currency in that market. The Commercial Rate is the commercial selling rate for Brazilian currency into U.S. dollars, as reported by the Central Bank. The "Floating Rate" is the prevailing selling rate for Brazilian currency into U.S. dollars which applies to transactions to which the Commercial Rate does not apply, as reported by the Central Bank. Prior to the implementation of the Real Plan, the Commercial Rate and the Floating Rate differed significantly at times. Since the introduction of the real, the two rates have not differed significantly, although there can be no assurance that there will not be significant differences between the two rates in the future. Both the Commercial Rate and the Floating Rate are reported by the Central Bank on a daily basis.

Both the Commercial Rate and the Floating Rate are freely negotiated but have been strongly influenced by the Central Bank. After implementation of the Real Plan, the Central Bank initially allowed the real to float with minimal intervention. On March 6, 1995, the Central Bank announced that it would intervene in the market and buy or sell U.S. dollars, establishing a trading band in which the exchange rate between the real and the U.S. dollar could fluctuate. On December 31, 1999 the Commercial Rate was R$ 1.789 per U.S.$ 1.00.

On January 13, 1999, due to increased pressure to devalue the real, the Central Bank allowed a de facto 7.6 percent devaluation of the real and established a new exchange rate band between R$1.20 and R$1.32 per U.S.$1.00. Despite this attempt to permit a limited devaluation, further devaluation pressures caused the Central Bank on January 15, 1999, to announce that it would let the real trade freely on the foreign exchange markets. This decision was confirmed on January 18, 1999, when the Central Bank officially announced its new policy to allow the real’s value to be determined by the foreign exchange markets, intervening only to limit wide swings in the value of the currency. After this announcement and at the close of business on January 29, 1999 the Commercial Rate was R$1.99 per U.S.$1.00. The real traded at an all time low against the U.S. dollar on March 3rd, 1999, when the rate was R$ 2.16 per US$ 1.00. The pressure on the real during the beginning of March caused the government to drop the managed band exchange rate system and to adopt a free floating exchange rate system. Since the adoption of this system and with the designation of a new Central Bank president, Armínio Fraga, as well as other macro-economic factors, the real has strengthened so that at June 23, 2000, the exchange rate was R$ 1.82 per US$ 1.00.

40 The following table sets forth information on prevailing Commercial Rates for the periods indicated.

Exchange Rates Nominal reais per U.S.$ 1.00(1) Year Closing Price (end of quarter) 1994 First quarter 0.3321 Second quarter 1.0000 Third quarter 0.8530 Fourth quarter 0.8460 1995 First quarter 0.8960 Second quarter 0.9220 Third quarter 0.9540 Fourth quarter 0.9725 1996 First quarter 0.9880 Second quarter 1.0044 Third quarter 1.0215 Fourth quarter 1.0394 1997 First quarter 1.0593 Second quarter 1.0769 Third quarter 1.0964 Fourth quarter 1.1164 1998 First quarter 1.1374 Second quarter 1.1569 Third quarter 1.1856 Fourth quarter 1.2087 1999 First quarter 1.7220 Second quarter 1.7695 Third quarter 1.9223 Fourth quarter 1.7890 Source: Economatica

The company will make any cash distributions related to the Preferred Shares in Brazilian currency. Accordingly, exchange rate fluctuations may affect the U.S. dollars amounts received by the holders of Preferred ADS’s on conversion by the Depositary of such distributions into U.S. dollars for payment to holders of Preferred ADS’s. Fluctuations in the exchange rate between reais and the U.S. dollar may also affect the U.S. dollar equivalent of the reais price of the Preferred Shares on the Brazilian stock exchanges.

Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or serious factors that enable to foresee such imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. For approximately nine months in 1989 and early 1990, for example, to maintain Brazil’s foreign currency reserves, the amounts were subsequently released in accordance with Brazilian Government directives. There can be no assurance that similar measures will not be taken by the Brazilian Government in the future.

ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Basis of Presentation

The following analysis is based on and should be read in association with the Company’s U.S. GAAP financial statements, including the notes thereto, included elsewhere in this Registration Statement. For certain purposes, such as filing financial statements with the Brazilian Securities Commission, and determining dividend payments and tax liabilities in Brazil, the Company has been and will continue to be subject to the requirements of Brazilian GAAP, and the Company will continue to prepare financial statements in Brazil in accordance with Brazilian GAAP. The information included in this section (revenues and expenditures) will be presented in dollars, according to the U.S. GAAP (notes 2.1 and 2.2 to the Financial Statements) and should be analyzed in conjunction with the financial statements, where the criteria for translation into dollars of revenues and expenditures as well as the effects of the translation are presented.

41 Currency Remeasurement

Foreign Currency Translation

The Company, which has the majority of its business in Brazilian reais, and, to a lesser extent, in U.S. and Canadian dollars, and Chilean, Uruguayan and Argetinean pesos, has selected the United States dollar as its reporting currency. The U.S. dollar amounts presented have been remeasured/translated following the guidelines established in Statement of Financial Accounting Standards (“SFAS”) #52, “Foreign Currency Translation of Financial Statements” on the basis of audited financial statements expressed in the local currency of each of the countries. Under SFAS #52, there are two methods of translation: the current rate method and the monetary/non-monetary method.

In the case of subsidiaries whose local currency is the functional currency (Chile, Canada, United States and Argentina), the current rate method of translation has been used. This method involves the translation of assets and liabilities at the exchange rate in effect at the end of each period. Average exchange rates have been applied for the translation of the accounts that make up the results of periods. In this case, translation adjustments are recorded as a separate component of shareholders’ equity.

The Company’s principal operations are in Brazil and additionally, the Company has a foreign subsidiary operating in Uruguay. Pursuant to SFAS #52 and Emerging Issues Task Force (“EITF”) D-55, “Determining a Highly Inflationary Economy”, the Company has designated Uruguay as a highly inflationary economy and Brazil was a highly inflationary economy through December 31, 1997. In accordance with SFAS #52, the functional currency of such economies is assumed to be the reporting currency (U.S. dollar) and the monetary/non-monetary method of translation has been used. This method involves the translation of monetary assets and liabilities at the exchange rate in effect at the end of each period, and the non-monetary assets and liabilities and equity at historical exchange rates (i.e., the exchange rates in effect when transactions occur). Average monthly exchange rates have been applied for the translation of the accounts that make up the results of the periods, except for those items related to non-monetary assets and liabilities, which have been translated using historical rates. Transaction gains and losses are included in the related line items in the consolidated and combined statements of income.

Effective January 1, 1998, with the determination that Brazil is no longer highly inflationary for U.S. GAAP purposes, the Company began translating its financial statements into U.S. dollars using the current rate method.

Revenue Denominations and Exchange Rate Devaluations

The table below lists the amount of gross revenue from sales denominated in Brazilian reais, Canadian dollars, Uruguayan, Chilean and Argentinean pesos and U.S. dollars in the years indicated.

IN THOUSANDS OF US$

Brazilian Canadian Uruguayan Chilean Argentinean U.S. Real % Dollar % Peso % Peso % Peso % Dollar % Total

1999 1,535,342 74.7 244,800 11.9 24,998 1.2 46,362 2.2 41,504 2.0 163,165 7.9 2,056,171 1998 1,907,250 80.7 138,831 5.9 33,665 1.4 68,412 2.9 30,504 1.3 183,483 7.8 2,362,145 1997 1,831,134 78.7 137,092 5.9 31,098 1.3 96,336 4.1 - - 231,889 10.0 2,327,549

The Company’s costs of sales denominated in currencies of Brazil, United States, Canada, Uruguay, Chile and Argentina represented 65.9%, 11.9%, 15.3%, 1.7%, 3.1% and 2.1%, respectively, of the Company’s consolidated gross revenue from sales for the year ended December 31, 1999. Additionally, as of December 31, 1999, the Company’s long- term debt and debentures (including the current portion) included U.S.$ 258.0 million, U.S.$ 800.5 million, U.S.$ 46.9 million and U.S.$ 1.5 million of Brazilian real, United States dollar, Canadian dollar and Deutsch mark denominated debt, respectively. Debt servicing costs associated with these balances are in these respective currencies. Since the Company’s U.S. GAAP financial statements are denominated in U.S. dollars, sales and other financial statement accounts could be adversely affected by a devaluation of a local currency in relation to the U.S. dollar. The Company has not entered into any arrangements to hedge its foreign currency rate exposure. Consequently, there can be no assurance that exchange rate fluctuations will not have a material adverse effect on the Company’s business, financial condition and results of operations. See “Item 1. Description of Business – Risk Factors – Factors Relating to Brazil and the Company – Effects of

42 Currency Devaluations and Exchange Rate Fluctuations”.

Brazilian Economic Environment.

Gerdau’s results of operations and its financial condition are dependent on Brazil’s general economic condition and particularly on (i) economic growth and its impact on steel demand, (ii) financing costs and the availability of financing, and (iii) exchange rates between Brazilian and foreign currencies.

For many years, Brazil experienced high rates of inflation, the effect of which was a progressive decline in purchasing power for the vast majority of the Brazilian population. During periods of high inflation, effective salaries and wages tend to fall because the frequency and size of salary and wage adjustments for inflation usually do not offset the actual rate of inflation. Since the reais introduction in July 1994, the rate of inflation in Brazil has decreased dramatically. (See table below). In addition, there had been economic growth after the implementation of the Real Plan, with GDP in Brazil increasing by 4.2% in 1995, 2.9% in 1996, 3.68% in 1997, 0.15% in 1998 and 0.82% in 1999.

Under Brazilian GAAP and corporate law, the UFIR was used as the index in highly inflationary times for inflation adjustment in the preparation of financial statements for periods through December 31, 1995. However, Federal Law 9,249, enacted on December 26, 1995, abolished the prior Brazilian price-level restatement system effective January 1, 1996 for corporate law purposes and for reporting public companies, although the CVM allows companies to prepare financial statements in accordance with the constant currency method and any general price index may be used for such restatement.

The following table sets forth Brazilian inflation and the devaluation of Brazilian currency against the U.S. dollar for the periods shown. For a discussion on the decision of the Central Bank, in January, 1999, to allow the real to float freely in the foreign exchange markets and its subsequent devaluation, see “Item 6. Exchange Controls and Other Limitations Affecting Security Holders - Exchange Rates.”

Quarter ended March 31 Year ended December 31, 2000 1999 1998 1997 Inflation (INPC base) 0.79% 8.43% 2.49% 4.34% Inflation (UFIR base) - 8.91% 1.65% 5.52% Inflation (IGP-M) 1.75% 20.10% 1.79% 7.74% Devaluation (R$ vs. U.S.$) (2.33%) 48.01% 8.27% 7.40%

Effects on Demand.

During the high inflation period there was a gap in frequency as well as in readjustment indices between price increases and corresponding salary raises, which eroded purchasing power. This gap was significantly reduced by the recent low inflation indices and increased consumer demand.

The recent devaluation of the Brazilian currency had a significant impact on the economy. Nonetheless, all the expected negative impact – i.e., higher inflation, negative GDP – did not occur as foreseen. In fact, the recovery process was significantly faster than it was thought possible. This, however, is no guarantee of future performance of the country’s economy.

Seasonal Variation

The Company’s sales are not subject to meaningful seasonal variation. Its performance is more dependent on the development in the segments that compose the Brazilian Gross Domestic Product (“PIB”). The table below shows the quarterly sales volumes for the principal consuming segments of the Company’s products in the last three years:

Sales Volume per Market Segment – Gerdau S.A. non-consolidated (1,000 t):

43 1999 1998 1997 Civil Civil Civil Quarter Construction Manufacturing Other Construction Manufacturing Other Construction Manufacturing Other First 442.8 351.1 24.1 391.8 263.5 17.8 374.7 254.6 18.4 Second 440.1 365.4 23.2 429.4 280.4 19.6 408.1 271.9 20.0 Third 483.5 403.7 24.5 437.8 284.7 23.2 458.3 305.0 21.3 Fourth 428.6 389.4 27.6 391.5 242.4 21.9 401.3 272.6 18.1 Total 1,795.0 1,509.6 99.4 1,650.5 1,071.0 82.5 1,642.4 1,104.1 77.8

Results of Operations

The table below contains information expressed in percentage of different lines per net sales revenue for the following years:

Fiscal year ending December 31, 1999 1998 1997 Net Sales Revenue 100.0% 100.0% 100.0% Cost of Goods Sold (63.7%) (69.8%) (71.1%) Gross Profit 36.3% 30.2% 28.9% Sales Expenses (5.0%) (5.4%) (5.9%) General and Administrative Expenses (9.2%) (9.3%) (10.9%) Operating Profit 22.11% 15.5% 12.2% Net Income 10.2% 10.3% 8.6%

The table below contains information about revenues and expenses per market segment for the following years:

Fiscal Year Ended on December 31, Percentage Variation 1999 1998 1997 1999-1998 1998-1997 Net Sales Revenue Civil Construction 839,326 920,852 878,857 (8.9%) 4.8% Manufacturing 663,613 699,169 756,976 (5.1%) (7.6%) Other 218,049 265,040 188,275 (17.7%) 40.8% Total 1,720,988 1,885,061 1,824,108 (8.7%) 3.3%

Cost of Goods Sold Civil Construction (521,940) (631,417) (610,320) (17.3%) 3.5% Manufacturing (487,467) (488,326) (539,543) (0.2%) (9.5%) Other (91,964) (195,436) (146,590) (52.9) 33.3% Total (1,101,371) (1,315,179) (1,296,453) (16.3%) 1.4%

Gross Profit Civil Construction 317,386 289,899 268,769 9.5% 7.9% Manufacturing 176,146 210,856 217,408 (16.5%) (3.0%) Other 126,085 69,127 41,478 82.4% 66.7% Total 619,617 569,882 527,655 8.7% 8.0%

Operating Profit Civil Construction 183,304 163,486 123,416 12.2% 32.5% Manufacturing 144,930 100,102 79,167 44.8% 26.4% Other 47,621 29,451 19,790 61.7% 48.8% Total 375,855 293,039 222,373 28.3% 31.8%

Financial Income 64,166 86,897 31,626 (26.2%) 174.8%

44 Financial Expense (222,414) (151,739) (54,359) 46.6% 179.1%

Total 197,692 193,848 156,743 2.0% 23.7%

The following table shows cost accounting for goods sold during 1999, 1998 and 1997 expressed in percentage of net sales revenue:

Breakdown of Costs of Goods Sold 1999 1998 1997 Raw materials 53% 53% 51% Direct labor costs 14% 13% 14% Total direct costs 67% 66% 65%

Indirect labor costs 3% 3% 3% Third party services 11% 7% 3% Depreciation 6% 6% 7% Power and electricity 8% 7% 7% Other 5% 11% 15% Total indirect costs 33% 34% 35% Total costs 100.0% 100.0% 100.0%

Fiscal year ended December 31, 1999 compared to fiscal year ended December 31, 1998.

Net Sales Revenue.

Even though physical sales increased 19.8%, reaching 4.6 million metric tons in 1999, net sales revenue decreased 8.7% to U.S.$ 1,721.0 million from U.S.$ 1,885.1 million in the same period of 1998. This decrease was due to effects of the variation of approximately 48% in the exchange rate between Brazilian reais and US dollars.

Cost of Sales and Gross Profits.

Cost of sales as a percentage of net sales revenues decreased to 64.0% in 1999 from 69.8% in the same period of 1998, allowing gross margin to increase to 36.0% in 1999 from 30.2% in 1998. The cost of sales decreased 16.3% in 1999 to U.S.$ 1,101.4 million from U.S.$ 1,315.2 million in 1998. This reduction is mostly a result of the devaluation of the real throughout the year. Gross profits increased 8.7% to U.S.$ 619.6 million in 1999 from U.S.$ 569.9 million in 1998.

Operating Income.

In spite of the physical sales volume increase of 19.8% in 1999 compared to 1998, operating expenses were reduced by 11.9%. This is explained due to the fact that operating expenses are essentially real denominated. The reduction in operating expenses added U.S.$ 33.1 million to the growth of U.S.$ 82.8 million obtained in gross profit raising operating income of the period to U.S.$ 375.9 million. This represents an increase of 28.3% over the U.S.$ 293.0 million obtained in the same period of 1998. With respect to net sales revenue, the operating income of 1999 represents 21.8%, while that of 1998 represented 15.5%.

Financial Expenses and Financial Revenue.

As mentioned in the notes to the financial information (see item 2.2 - currency remeasurement) effective January 1, 1998, with the determination that Brazil is no longer highly inflationary for U.S. GAAP purposes, the Company began translating its financial statements into U.S. dollars using the current rate method.

45 Non Operational Revenue.

Non-operating revenue of U.S.$ 5.2 million in 1999 is mainly due to gains resulting from the sale of fixed assets and from fiscal incentives.

Provision for Income Tax.

The provision for income tax of U.S.$ 20.5 million in 1999, compared to U.S.$ 52.3 million in 1998, was influenced, particularly, by the increase of permanent differences, specially effects of changes in tax rates.

Net Income.

Net income increased 2.0% in 1999 to U.S.$ 197.7 million from U.S.$ 193.8 million in the corresponding period in 1998. This happened mainly due to the increase in the gross margin, decrease in the operating expenses and the decrease in provision for income taxes. The percentage of net income over net sales revenue remained constant, representing 10.3% in 1998 and 11.5% in 1999.

Fiscal year ended December 31, 1998 compared to fiscal year ended December 31, 1997.

Net Sales Revenue.

Net sales revenue increased 3.3% in 1998 to U.S.$ 1,885.1 million from U.S.$ 1,824.1 million in the same period of 1997. This increase was due to an increase of a 4.3% in sales volume in spite of a decrease of 0.9% in average prices calculated in dollars (U.S.$ 494.6 per ton in 1998 as compared to U.S.$ 499.2 in 1997).

Cost of Sales and Gross Profits.

Cost of sales as a percentage of net sales revenues decreased to 69.8% in 1998 from 71.1% in the same period of 1997, allowing gross margin to increase to 30.2% in 1998 from 28.9% in 1997. The cost of sales increased 1.4% in 1998 to U.S.$ 1,315.2 million from U.S.$ 1,296.5 million in 1997. Gross profits increased 8% to U.S.$ 569.9 million in 1998 from U.S.$ 527.7 million in 1997.

Operating Income.

In spite of the physical sales volume increase of 4.3% in 1998 compared to 1997, operating expenses were reduced by 9.3%. This reduction in operating expenses added U.S.$ 28.4 million to the growth of U.S.$ 42.2 million obtained in gross profit raising operating income of the period to U.S.$ 293.0 million. This represents an increase of 31.8% over the U.S.$ 222.4 million obtained in the same period of 1997. With respect to net sales revenue, the operating income of 1998 represents 15.6%, while that of 1997 represented 12.2%.

Financial Expenses and Financial Revenue.

As mentioned in the notes to the financial information (see item 2.2 - currency remeasurement) effective January 1, 1998, Brazil is no longer deemed to be a highly inflationary economy for purposes of SFAS No. 52, “Foreign Currency Translation”. Consequently, financial expenses and revenues were translated according to different criteria in 1997. The 185.2% increase in the net finance expenses is a direct result of this change in criteria, as the effect of the devaluation of the US dollar denominated debt is now recorded on the income statement.

Non Operational Revenue.

Non-operating revenue of U.S.$ 18.8 million in 1998 is mainly due to gains resulting from the sale of fixed assets and from fiscal incentives.

Provision for Income Tax.

46 The income tax provision of U.S.$ 52.3 million in 1998 compared to U.S.$ 39.0 million in 1997 was influenced principally by the increase in the Brazilian companies’ profit.

Net Income.

Net income increased 23.7% in 1998 to U.S.$ 193.8 million from U.S.$ 156.7 million in the corresponding period in 1997. The percentage of net income over net sales revenue increased from 8.6% in 1997 to 10.3% in 1998.

Liquidity and Capital Resources

The net cash generated by operating activities totaled U.S.$ 195.2 million, U.S.$ 269.3 million and U.S.$ 153.6 million for the years ended December 31, 1997, 1998 and 1999, respectively, totaling U.S.$ 618.1 million. Net cash generated by operating activities was the main source of liquidity utilized by the Company. Short and long term financing agreements presented a total of U.S.$ 1,739.4 million in the period, contributing U.S.$ 226.1 million in 1997, U.S.$ 495.3 million in 1998 and U.S.$ 953.1 million in 1999 toward the Company’s liquidity needs. Sales of disposed fixed assets generated total proceeds of U.S.$ 116.0 million for the years of 1997, 1998 and 1999.

In 1997, the capital resources were applied as follows: U.S.$ 168.0 million in payment of short and long term debt, U.S.$ 296.2 million in short term net financial investments, U.S.$ 171.7 million for investment in fixed assets and U.S.$ 40.7 million for payment of dividends and founders’ participation rights. The main uses of funds in 1998 were: U.S.$ 344.8 million in fixed assets, U.S.$ 253.7 million in short and long term debt payments, U.S.$ 42.7 million in short term net financial investments and U.S.$ 44.9 million in payment of dividends. In 1999, the main uses of capital resources were: U.S.$ 433.4 million in fixed assets, U.S.$ 235.3 million in short and long term debt payments and U.S.$ 37.4 million in payment of dividends.

The amount of resources invested in fixed assets in the period (U.S.$ 949.9 million) was used for modernization and technological update of the Company’s industrial plants and subsidiaries.

From December 31, 1998 to December 31, 1999 net working capital decreased by U.S.$ 267.9 million, from U.S.$ 503.9 million in 1998 to U.S.$ 236.0 million in 1999. This decrease was due to the increases of U.S.$ 380.7 million from the balance of short term financing (including the short term portion of long term debt), U.S.$ 42.0 million in the balance of trade accounts payable and U.S.$ 21.6 million in the balance of other accounts payable, in spite of the increases of U.S.$ 25.6 million in short term financial investments, U.S.$ 89.2 million in the balance of receivables from clients, U.S.$ 162.8 million in the balance of inventories and the decreases of U.S.$ 68.3 million in the balance of other accounts receivables.

Indebtedness and Financial Strategy.

The loans taken by the Company are basically intended to finance investments in fixed assets, both for the modernization and technological update of the plants and for the expansion of installed capacity, for the financing of working capital, and, depending on market conditions, for short-term financial investments.

The balance of loans totaled U.S.$ 1,528.5 million and U.S.$ 881.1 million at December 31, 1999 and 1998, respectively. On the same dates, the balance of short-term financial investments totaled U.S.$ 364.5 million and U.S.$ 338.9 million, respectively.

Growth of the total debt mentioned above, resulted from the investments in property, plant and equipment and from the acquisition of shareholdings. Total debt increased to U.S.$ 1,528.5 in 1999, from U.S.$ 881.1 in 1998. Net debt increased from U.S.$ 542.2 million in 1998 to U.S.$ 1,164 million in 1999 and net financial expenses were, respectively, U.S.$ 64.8 million and U.S.$ 190.3 million, in 1998 and 1999.

The following table lists the indebtedness profile of the Company as of December 31, 1999 and 1998 (in thousands of U.S. dollars):

1999 1998

47 Short Term: Short-term debt: Debt denominated in reais 273 - Debt denominated in foreign currency 371,749 118,269 Total short term debt 372,022 118,269 Current portion of long-term debt: Debt denominated in reais 43,718 41,334 Debt denominated in foreign currency 239,811 115,215 Total current portion of long-term debt 283,529 156,549 Debentures 2,505 3,505 Short-term debt plus current portion of long-term debt plus debentures 658,056 278,323 Long Term: Long-term debt, less current portion: Debt denominated in reais 130,188 128,332 Debt denominated in foreign currency 609,127 95,977 Total long term debt 739,315 224,309 Debentures 81,613 172,978 Subtotal 820,928 397,287 Long-term debt, parent company 49,511 205,484 Long-term debt, plus debentures plus parent company 870,439 602,771 Total debt 1,528,495 881,094 Short-term investments 364,492 338,930 Net debt: 1,164,003 542,164

On December 31, 1999 the Company’s indebtedness was subject to the following terms and conditions:

Short term:

The Company’s short-term debt increased by U.S.$ 253.7 million from December 31, 1998 (U.S.$ 118.3 million) to December 31, 1999 (U.S.$ 372.0 million). The amount of short-term debt on December 31, 1999 was comprised of U.S.$ 49.9 million in pre-export contracts, which the Company financed in Brazil, and U.S.$ 322.1 million in financing contracted by the Company’s foreign subsidiaries. This short-term debt is subject to interest rates ranging from 1.3% to 11.3% per year, plus monetary restatement or variation in exchange rates.

Additionally, the Company will have to pay the current portion of long-term debt and debentures in the amount of U.S.$ 286.0 million, of which U.S.$ 43.7 million relates to financing in reais and U.S.$ 239.8 million relates to financing in foreign currencies.

Long term:

Long-term debt totaled U.S.$ 870.4 million on December 31, 1999. U.S.$ 739.3 million of this debt is comprised of loans from financial institutions, U.S.$ 130.2 million of which is denominated in reais, with a cost of monetary restatement plus interest which varies from 7.6% to 11.5% per year. U.S.$ 609.1 million of this debt is denominated in foreign currency, with a cost of monetary restatement plus interest which varies from 5.2% to 10.7% per year, and U.S.$ 81.6 million of this debt refers to debentures denominated in reais, with an interest cost of 25% per year as of December 31, 1999 (see note 10 to the financial statements).

From the loans denominated in foreign currency, U.S.$ 532.0 million or 61.1% were contracted by the Company in Brazil and 39.9% by the Company’s foreign subsidiaries.

The Company also has an outstanding loan with its controlling company, Metalúrgica Gerdau S.A., with a balance of U.S.$ 49.5 million as of December 31, 1999. The effective average cost in 1999 was 23.5% (see note 6 to the financial statements). According to the terms of the loan, which expires in 2004, the loan may be extended for another 5 years. In January, 1999, the Company assumed the debt related to the Eurobonds issued by Metalúrgica Gerdau, one of

48 which is for U.S.$ 99.8 million, expiring on November 23, 2001, which was partially redeemed on November 23, 1998, and the second for U.S.$ 130.0 million, expiring on May 26, 2004, which was partially redeemed on May 26, 1999.

The Company is subject to limitations on the incurrence of indebtedness, the granting of encumbrances on its properties and on the payment of dividends under certain circumstances, under the instruments defining creditors rights for its debentures, its Banco Nacional de Desenvolvimento Econômico e Social - BNDES (“BNDES”) financing, Eurobonds issued by Metalúrgica Gerdau S.A. in 1993 and 1996, both assumed by the Company and scheduled to mature in 2001 and in 2004, and due to the acquisition of Ameristeel.

The Company’s public debentures prohibit the payment of dividends in excess of 30% of distributable net profits if after giving effect to such distributions the Company’s long-term liabilities exceed more than 1.5 times its net worth and its current assets are less than its current liabilities. The 1993 Eurobonds limit consolidated financial indebtedness to no greater than four times Earnings Before Interest, Taxes, Depreciation and Amortizations (EBITDA). Similarly, the 1996 Eurobond contains the same limitation on consolidated financial indebtedness. The Company’s indebtedness to the BNDES requires that the current liquidity (consisting of current assets divided by Earnings Before Interest, Taxes, Depreciation and Amortizations (EBITDA)) to be less than five. These agreements also contain negative pledge clauses, subject to customary exceptions. Gerdau Steel, Inc., the Canadian subsidiary of Gerdau S.A. and responsible for the financing of the acquisition of Ameristeel, is required to fullfill the following covenants: current ratio at greater than 1.0, debt service coverage ratio greater than 1.1, interest coverage greater than 2.0, total debt over EBITDA less than 2.00, term debt over capitalization not greater than 0.55 through December 31st, 1999 and tangible net worth greater than $175 million plus 50% of cumulative consolidated net income after December 31st, 1999. The Company agrees to furnish a copy of the instruments described herein to the Securities and Exchange Commission upon request.

All covenants described above are based on financial statements prepared in accordance with Brazilian Corporate Law and on December 31, 1999, the Company was in full compliance regarding such obligations.

On December 31, 1999, the Company’s long-term debt and debentures (including current portion) totaled U.S. $ 1,107.0 million. Of this balance, U.S. $ 258.0 million (23.3%) was denominated in Brazilian reais. U.S. $ 763.0 million (68.9%) was denominated in U.S. dollars, U.S. $ 84.5 million (7.6%) was denominated in Canadian dollars and U.S. $ 1.5 million (0.2%) was denominated in German Deutschmarks. The Company did not enter into arrangements to hedge its foreign currency exchange rate exposure inherent to this debt. Part of the Company’s cash flow from operations is denominated in Brazilian reais and U.S. and Canadian dollars. See “Currency Remeasurement – Revenue Denomination and Exchange Rate Devaluations.” Such cash flows from operations may be utilized to service this debt. There can, however, be no assurance that cash flows from operations will be sufficient to service the foreign currency denominated debt obligations which are denominated principally in U.S. and Canadian dollars. Consequently, there can be no assurance that exchange rate fluctuations will not have a material adverse effect on the Company’s business, financial condition and results of operations. See “Item 1. Description of Business – Risk Factors – Factors Relating to Brazil and to the Company – Effects of Currency Devaluations and Exchange Rate Fluctuations.”

The Company’s long term indebtedness with financial institutions will be amortized as follows: U.S.$ million 2001 289.7 2002 107.7 2003 132.4 2004 147.4 After 2005 62.1 Total 739.3

Allowance for Contingencies.

On December 31, 1999, the provision for probable and reasonably estimable contingencies totaled U.S.$ 87.4 million. This is partially backed by legal escrow accounts controlled by the corresponding courts totaling U.S.$ 28.0 million as of that same date.

49 Investments.

In order to face the increasing demand for steel products in the markets in which the Company is directly or indirectly involved Gerdau invested during 1999 to increase output capacity, to make improvements in existing plants and to update them technologically as well as to create new products. These investments totaled US$ 314.1 million of which US$ 250.5 million were spent in plants located in Brazil and US$ 63.6 million in plants abroad. The major investments made, some of which were started in 1998, are as follows: the shapes & profile rolling mill in Rio de Janeiro, Cosigua plant, the wire mesh factory in Pernambuco, the new Armafer unit also in Pernambuco, and the new mini mill Gerdau Aza in Chile.

In addition to the investments above, the Company acquired Ameristeel for US$ 262 million on September 27, 1999. This acquisition marks the presence of Gerdau as an industrial producer in the United States. Gerdau acquired 88% of FLS Holdings Inc. from Kyoei Steel Ltd. of Osaka, Japan, which in turn holds 85% of the shares of AmeriSteel Corp., headquartered in Tampa, Florida, USA. AmeriSteel is engaged in the manufacture and sale of long steel products from recycled scrap raw material and has an installed capacity of nearly 1.84 million metric tons of crude steel per annum and 1.74 million metric tons of rolled steel. Steel operations are conducted in four non union manufacturing facilities located respectively in the states of Florida, Tennessee (two) and North Carolina. In addition to these units, the company has eighteen “rebar fabrication shops”, two operations for manufacturing rail spikes and one for producing nails and welded wire mesh. .

Furthermore, in 1997, the Company became a shareholder of Aço Minas Gerais S.A. (Açominas), through its subsidiary Gerdau Participações Ltda. and increased its participation to 36.6% in Açominas’ capital during 1999. Açominas is an integrated steel mill located in the Southeast Region of Brazil, and produces semi-finished products (billets, slabs & blooms) with a nominal installed capacity for crude steel of 2.5 million metric tons per year.

Market Risk Analysis

The company does not have substantial exposure to market risks related to pricing or raw materials. The Company’s relevant market risk exposure comes from its financing contracts. Furthermore, currency devaluation (exchange rate risk), increases in inflation and interest rates can impact on the company’s financing capabilities and its cash flow.

The company has controlled its risk exposure by managing its liquidity (cash & equivalents) through the balance between US dollar-based assets (i.e., pre-export contracts and ACCs – short and medium term pre-export contracts as well as its cash abroad (as explained below). The Company does not rely on any other formal risk management instruments (i.e. no use of formal hedging instruments). The Company does not use financial instruments for trading purposes. It contracts loans for its investment schedule and for its daily cash needs (cash & equivalents).

Contracts in foreign currencies are made at pre-determined fixed interest rates plus exchange rate variations. In such instances, the Company faces the risk of the devaluation of the Brazilian Real against the US Dollar. The devaluation of the Real which occurred in January 1999 had a negative impact on the Company’s financial results.

The Brazilian government’s exchange rate policy was changed in January of 1999 and the Real was eventually allowed to freely float against the US dollar. This change in policy caused the Real to devalue 48.75% in January 1999, varying from a rate of R$ 1.2087 to US$ 1.00 on December 31, 1998 to R$ 1.7980 per US$ 1.00 on January 31, 1999. Between December 31, 1998, and June 30, 1999 the Brazilian currency devalued 46.40%.

The impact of the devaluation on the 1999 financial results are not indicative of the devaluation’s impact on the Company’s cash flow because the cash flow will mainly be affected by financing due in 1999. The interest due in reais will increase for all periods subsequent to the devaluation. For the principal portion of long-term financing contracts, the cash flow will be affected only in the year due.

Annual Interest Dec 31, 1999 Long Term Debt (including current portion) denominated in foreign currencies Rate % (US$ thousand)

Financing for machinery and others (Cdn$) 2.25 (fixed) 46,855

50 Working capital (US$) 8.1 to 11.13 (fixed) 374,284 Financing for machinery (US$) LIBOR + 2.5 (i) 323,542 Financing for imported machinery and raw material (US$) 10.7 (fixed) 102,716 Financing for machinery (DM) 10.4 (fixed) 1,541

Less short term portion (283,529)

Total 565,409

(i) Interest is based on the six month London Inter-Bank Offered Rate (“LIBOR”) which, as of December 31, 1999 was 6.125%.

Short-term debt as of December 31, 1999 (US$ 371,749 million) consists of working capital lines of credit and export advances with interest rates ranging from 1.3% per annum to 11.3% per annum, plus exchange variations. This short term debt is exclusively in foreign currency.

Financing in Brazilian reais is generally multiplied by an index (adjustment for inflation) such as the Market General Price Index (Índice Geral de Preços do Mercado – IGP-M), along with the pre-stipulated interest rate. The risk involved in such transactions is related to the potential variation of inflation. Other financing in Brazilian reais such as debentures are adjusted monetarily according to the rates of interbank certificates of deposit (Certificados de Depósitos Interbancários - CDI), which directly reflect these variations (See Item 9 – Indebtedness and Financial Strategy).

Annual Interest Dec 31st, 1999 Long-term debt denominated in Brazilian reais Rate % (US$ thousand)

Financing for machinery (i) 9.7 to 11.5 173,906

Debentures (ii) 84,118

Total 258,024

(i) The long-term debt denominated in Brazilian reais (excluding debentures) is indexed using the TJLP –fixed by the Government on a quarterly basis or the TR, Taxa Referencial (Nominal interest reference rate) – published by the Government on a daily basis. The TJLP for Dec 31st , 1999 was 12.50% p.a., and on December 31, 1998 was 18.06% p.a. These percentages are also the actual minimum and maximum for the year. The average rate was 13.43% in 1999.

(ii) Debentures are denominated in Brazilian reais and bear variable interest (CDI – Certificado de Depósito Interbancário). The annual average nominal interest rates were 25.1 % as of December 31, 1999, which represent 95% of the full rate from January to June, 97% in July and 98% from August to December. The CDI range varied from a minimum of 18.5% to a maximum of 44.3%.

The Company’s short-term investments consist of bank certificates of deposit and investments held in a related party fund for the exclusive use of the Company (See Note 6 of the Financial Statements). These certificates of deposit and investments have maturities ranging from four months to one year at the time of the purchase and are stated at cost plus accrued interest.

Banco Gerdau, a wholly owned subsidiary of Metalurgica Gerdau (“MG”), established an investment fund in 1996 for the exclusive use of the Company. The total amount invested in this fund on December 31, 1999 was US$ 117.7 million. The fund’s investments consisted of time deposits in major Brazilian banks and treasury bills of the Brazilian government. Income earned on the Company’s investment in the fund had a yield of 25%.

In addition, the Company invested a total of US$ 135.2 million in the international financial markets. This investment consists of blue chip fixed income assets (T-bills and T-bonds and other corporate bonds) and in other variable income assets with an overall return in 1999 of 7%.

The fair value of financial instruments are valued as of December 31, 1999 and do not reflect subsequent

51 changes in the economy, interest and tax rates, and other variables that may impact determination of fair value. The following method and assumptions were used in estimating fair values for financial instruments:

Cash and short term investments: The carrying amounts approximate fair value because of the short maturity of these instruments.

Judicial deposits: The carrying amount of judicial deposits approximates fair value, as interest is receivable on such deposits at a variable market rate.

Short-term debt, long-term debt (except long-term debt with MG) and debentures: The fair value of short-term debt, long-term debt and debentures is based on current rates offered for similar debt.

Long-term debt, MG: The carrying value of long-term debt held with MG approximates fair value as interest is payable on such debt at a variable market rate.

The carrying amounts and fair values of the Company’s significant financial instruments as of December 31 are as follows:

1999 (in US$ thousands) Carrying amount Fair Value

Cash and short-term investments 374,062 374,062 Judicial deposits 28,005 28,005 Short-term debt 372,022 372,022 Long-term debt, including current portion 1,022,844 1,021,005 Debentures, including current portion 84,118 84,118 Long - term debt, Metalúrgica Gerdau S.A 49,511 49,511 Participation Certificates 0 0

Traditionally, the Company does not commercialize its products through long term contracts whether it is in the domestic market or through exports. This allows for prompt adjustments in prices reflecting the specific demand. In the domestic market, sales are booked in relatively short spans of time and payment is due in approximately 20 days. Exports are delivered according to short term orders and paid for by means of leading bank’s letters of credit (see Item 1 – Sales and marketing).

Suppliers of raw materials such as scrap, pig iron and other metallic inputs deliver their products against payment in a relatively short time previously negotiated with the Company. However, the supply contracts for electrical power supply are signed with several different concessionaires in the several locations in which the Company has plants. These contracts are long term and have clauses that allow for a yearly review. This characteristic allows for the sensible reduction in the risk that characterizes this type of contract. (See Item I – Availability of Raw Materials).

Risk Factors

Factors Relating to Brazil and to the Company Political and Economic Condition

The Brazilian economy has been affected by frequent and occasionally drastic intervention by the Brazilian Government, which has often changed monetary, credit, tariff and other policies to influence the course of Brazil's economy. The Brazilian Government’s actions to control inflation and implement other policies have often involved wage and price controls as well as other measures, such as freezing bank accounts, imposing capital controls and inhibiting exports from Brazil. Changes in policy involving tariffs, exchange controls, regulatory policy and taxation could adversely affect the Company’s business and financial results, as could inflation, devaluation, social instability and other political, economic or diplomatic developments and the Brazilian Government’s response to such developments.

52 Brazil’s latest economic stabilization plan (the “Real Plan”) which effectively reduced inflation since the introduction of the new currency, the real, in July 1994, does not contain any wage or price controls, and has been supported by the government of President Fernando Henrique Cardoso, who was Finance Minister at the time of the adoption of the Real Plan. President Cardoso has also stated his intention to continue to support the market and privatization measures of recent years, and his government has taken steps in furtherance of such intention, such as enacting measures for the liberalization of the state petroleum monopoly and the privatization of a number of state-owned enterprises. However, although these liberalization measures have enjoyed broad political and public support, some important political factions remain opposed to significant elements of the reform program. Furthermore, President Cardoso was elected as the head of a coalition of political parties and as a result, his leadership of Brazil may be subject to more compromises and accommodations than if his party controlled the Brazilian legislature. In addition, the Brazilian Government's desire to control inflation and to reduce budget deficits has caused it in the recent past to take action to slow or halt Brazilian economic growth, and the Brazilian Government may take further or similar action in the future. There can be no assurance that any Brazilian Government measures will be continued or successful.

Brazil experienced a financial and economic crisis in the first quarter of 1999 following the financial and economic crisis in Asia. In response, the Government adopted economic measures to protect the Real Plan and the stability of the Brazilian currency. These measures resulted in the freeing of the float of the foreign exchange rate vis-a-vis the Brazilian currency.

Pursuant to the Austerity Program of 1997, the maximum personal income tax rate was increased from 25% to 27.5% and has remained at this level since. The stabilization of the currency and the continuous data indicating that the economy had not been hurt as expected lead to the slow but gradual decrease in nominal rates which, with the low inflation rates registered, resulted in a significant reduction in real rates. As a result of these measures and of the improvement of economic conditions in Brazil and abroad, the Brazilian Central Bank promoted a gradual reduction of its basic interest rate, the TBC, which evolved as follows:

November 1997 40.9% per annum December 1997 38% per annum January 1998 34.5% per annum March 1998 28% per annum May 1998 21.75% per annum June 1998 21% per annum July 1998 19.75% per annum August 1998 No change September 1998 19% per annum October 1998 No change November 1998 No change December 1998 29% per annum January 1999 25% per annum Feb 1999 (*) 45% per annum March, 1999 42% per annum April 1999 39.5% per annum May 1999 17.42% per annum June 1999 20.96% per annum July 1999 19.51% per annum August 1999 19.52% per annum September 1999 19.00% per annum October 1999 18.83% per annum November 1999 19.03% per annum December 1999 19.04% per annum (*) The TBC and TBAN have been extinguished. SELIC is the new reference

On October 7, 1998, the re-election of President Fernando Henrique Cardoso removed one of the elements of uncertainty with respect to the country's future economic policies. The President announced that the Brazilian Federal Administration would be presenting a set of measures aimed at minimizing the negative effects of the aforementioned

53 crisis. In addition, international organizations have been working toward identifying possible solutions to the growing world economic crisis.

The economic reforms proposed by the Brazilian Federal Administration include a series of measures, some of which require Brazilian Congressional approval and some of which can become law by government decree. These proposed reforms are structural in nature and include changes in both the tax laws and in the social security system. Started in 1999, these measures are expected to continue in force through the year 2001.

The highlights of these measures include the approval of an increase in the CPMF (temporary financial transaction contribution) from 0.20% to 0.38%, (ii) a R$ 8.7 billion cut in the Federal Budget, (iii) an increase in the COFINS (contribution for the financing of Social Security) from 2% to 3%, (iv) an increase from 20% to 40% in the percentage of funds the Federal Administration transfers to the States, (v) a reduction in spending for state-run companies of R$ 2.7 billion and (vi) an increase in the FEF (fiscal stabilization fund). Furthermore, the Federal Administration is currently attempting to have Congress approve a Tax Reform bill. A Social Security reform bill proposed by the Federal Administration was voted and approved by Congress, in 1999.

On January 18, 1999, the Central Bank announced the confirmation of a new exchange rate policy, which has allowed the real to trade freely on foreign-exchange markets and abandoned its former policy of allowing the real to float only within a limited band. This announcement led to the devaluation of the real from its band of R$1.12 and R$1.22 per U.S.$1.00 to the level of R$1.99 per U.S.$1.00 at the close of business on January 29, 1999. A few days later, the market responded even harder by throwing out the Central bank´s foreign exchange bands and devaluing the currency beyond the pre-determined limits. It has since devalued to a maximum of R$ 2.16 per US$ 1.00 on March 3rd, 1999. At December 31, 1999, the exchange rate was quoted as being R$ 1.789 per US$ 1.00.

In the short term, these reforms are expected to have little impact on the Company. However, over the long term the Company expects that if adopted these measures could re-establish the international financial community's confidence in Brazil which, combined with the decrease in tax rates, have allowed for the resumption of economic growth in the second half of 1999 with 0.82% positive GDP growth.

Government policies to control inflation and to reduce budget deficits resulted in further actions that have slowed the Brazilian economic growth. In a meeting in the week of April 5th, Mr. Armínio Fraga, the president of the central bank of Brazil, declared that because the macro-economic indicators have been consistently lower than predicted, that he would expect the economy to recover much faster than expected. Furthermore, the decrease of the interest rates – twice in two weeks´ time --, the end of the two reference tax rates TBAN and TBC replaced by the SELIC, the devaluation of the US dollar vis-à-vis the real (falling back to R$1.74 per US$ from a high R$ 2.16 in March 99), the return of Brazilian banks to the Eurobond market along with the IMF funds being cleared has contributed significantly to the improvement of the Brazil risk perception by the international financial community. This slight improvement has been reflected in the liquidity and pricing of bonds issued by Brazilian companies.

It is not possible to predict how these measures will affect the business, financial condition, results of operations, cash flows and overall prospects of the Company. This or future economic slowdowns could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and overall prospects.

Inflation; Effects of Economic Stabilization Program and Change of Currency.

Brazil has historically experienced extremely high and generally unpredictable rates of inflation. As stated by the INPC, inflation in Brazil was 2,489.11 % in 1993, for 929.32 % in 1994, for 21.98% in 1995, for 9.12% in 1996, 4.34% in 1997, 2.49% in 1998 and 8.43% in 1999.

Inflation, as well as governmental efforts to combat inflation, have historically had significant negative effects on the Brazilian economy generally and on the profitability and results of operations of the Company in particular. In an attempt to control inflation, the Government has at times imposed wage and price controls, and reduced Government spending among other measures. Inflation, as well as governmental measures to combat inflation, combined with public speculation about possible future actions, have also contributed to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets. Furthermore, the Government’s desire to control inflation and to reduce budget deficits may cause it to make actions that may slow or halt Brazilian economic growth. A significant increase in inflation in Brazil

54 could have serious adverse consequences on the Company.

Beginning in December 1993, the Government established the Real Plan, an economic stabilization plan intended to curb inflation by reducing certain public expenditures, collection liabilities owed to the Government, increasing tax revenues and continuing the privatization program. In addition, on July 1, 1994, as part of the Real Plan, the Government introduced a new currency, the Real, the issuance of which was initially subject to quantitative limits backed by a corresponding amount of international reserves (mostly U.S. Dollars). Since the introduction of the Real, Brazil’s inflation rate has been substantially lower as compared to previous periods. There can be no assurance, however, that this lower level of inflation will continue or that future actions by the Government (including actions to adjust the value of the Brazilian currency) will not trigger an increase in inflation or that any such increase will not have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.

Effects of Currency Devaluations and Exchange Rate Fluctuations.

The value of various South American currencies, including currencies in the countries in which the Company operates, when compared to each other and to the United States and Canadian dollar, has fluctuated significantly and can be expected to continue to do so. In Brazil, the recent successive crises in the international financial markets created a significant threat to the stability of the Brazilian currency and on January 18, 1999 led to the Central Bank’s announcement that the real would now trade freely on foreign-exchange markets, with the Central Bank intervening only to limit wide swings in the real’s value. See “Risk Factors – Factors Relating to Brazil and to the Company – Political and Economic Condition.” These fluctuations may have significant effects on the Company’s results of operations and financial condition and on its consolidated financials statements, which are denominated in U.S. dollars.

The Company maintains assets, denominated in reais and, to a lesser extent, US and Canadian dollars, Chilean, Uruguayan and Argentinean pesos, and it regularly experiences gains and losses due to exchange movements between such currencies and the U.S. dollar. Moreover, at December 31,1999, the Company’s long-term debt and debentures (including the current portion) included U.S.$ 258,297 million, U.S. $ 1,134,692million and U.S. $ 84,454 million of Brazilian real and United States and Canadian dollar denominated debt, respectively. As a result, the Company may be exposed to significant exchange losses from further devaluation of the Brazilian real and/or other currencies against the U.S. dollar. The Company’s net sales, gross profit and operating margins may also be influenced by changes in exchange rates. The Company’s sales denominated in the currency of Brazil, Canada, Uruguay, Chile, Argentina and the United States represented 74.7%, 11.9%, 1.2%, 2.2%, 2.0% and 7.9%, respectively, of the Company’s consolidated gross sales for the year ended December 31, 1999. See Item 9, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Currency Remeasurement – Revenue Denomination and Exchange Rate Devaluations.” Because the Company’s U.S. GAAP financial statements are denominated in U.S. dollars, net sales and other financial statement accounts (including net income) could be adversely affected by a devaluation of a local currency relative to the U.S. dollar. The Company has not entered into arrangements to hedge its foreign currency exchange rate exposure. Consequently, there can be no assurance that exchange rate fluctuations will not have a material adverse effect on the Company’s business, financial condition and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Basis of Presentation – Foreign Currency Translation.”

Controls and Restrictions on U.S. Dollar Remittances.

Brazilian law provides that, whenever there exists, or is a serious risk of, a material imbalance in Brazil balance of payments, the Government may, for a limited period of time, impose restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil. This situation as it did occur for approximately six months in 1989 and early 1990, as well as the imposition of a restriction on the conversion of the Brazilian currency into foreign currencies. Such restrictions could hinder or prevent the Custodian or holders who have surrendered ADSs for the underlying Preferred Shares from converting dividends, distributions or the proceeds from the sale of such Preferred Shares into U.S. dollars and remitting such U.S. dollars abroad. Holders of ADSs could be adversely affected by delays in, or refusals to grant, any required governmental approvals for conversion of Brazilian currency payments and remittances abroad in respect of the Preferred Shares underlying the ADSs.

Developments in Other Emerging Market Countries

The Brazilian securities markets are, to varying degrees, influenced by economic and market conditions in other

55 emerging market countries. Although economic conditions are different in each country, investors' reaction to developments in one country can have effects on the securities of issuers in other countries. For example, in December 1994, the government of Mexico sharply devalued the peso and allowed its value to float, triggering an economic crisis in Mexico which negatively affected the securities markets in many Latin American countries, including Brazil. More recently, the economic crisis in Asia that began in 1997 has materially adversely affected the economy of Brazil and, to a lesser extent, the securities markets in Brazil and has led to the adoption of Government policies that may have further adverse effects on both economic growth and on the Brazilian securities markets. There can be no assurance that the Brazilian securities markets or economy will not continue to be affected negatively by events (including economic crises or currency fluctuations) elsewhere, especially in emerging markets, or that such effects will not adversely affect the Company's business, financial condition, results of operation or prospects or the value of the Shares or ADSs.

The Brazilian government reacted to the Asian crisis by increasing domestic interest rates (from 21.75% to 43% per annum) and imposing various deficit reduction measures. After approximately six months these initial measures were effective enough to allow the Government to return interest rates to previous levels. However, with the advent of the devaluation of the real, the Brazilian government has once again raised domestic interest rates to 41% per annum.

In response to the Russian financial crisis, the Brazilian government implemented several additional financial measures to help lessen its impact on the Brazilian Economy. These measures include: (i) the reduction from 2 years to 1 year of the time allotted to foreign financing operations and the reduction in time from 1 year to six months for allowing renewals of existing financing contracts; (ii) permission to foreign investors to transfer funds into Brazil for privatization purposes prior to the actual privatization auction and the freedom to invest these funds in Brazil; (iii) foreign loans for the agricultural sector may be invested in government securities which are corrected monetarily in accordance with the Dollar/Real Exchange variation and with a reduced tax burden.

The Brazilian Government has exercised and continues to exercise substantial influence over many aspects of the private sector. The Brazilian Government owns or controls many companies, including some of the largest in the country. Government action in the future could have a significant effect on economic and market conditions in Brazil, affecting prices and returns on Brazilian securities. There can be no assurance that future economic or market developments in Brazil will not impact the Company's results of operations.

Forward-Looking Statements

This Form 20-F contains statements which constitute forward looking statements. These statements appear in a number of places herein and include statements regarding the intent, belief or current expectations of the Company, its directors or its executive officers with respect to (i) the declaration or payment of dividends, (ii) the direction and future operation of the Company, (iii) the implementation of the principal operating strategies of the Company, including potential acquisition or joint venture transactions or other investment opportunities, (iv) the implementation of the Company's financing strategy and capital expenditure plans and (v) the factors or trends affecting the Company's financial condition or results of operations. Prospective investors are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Registration Statement, including without limitation the other information set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," identifies important factors that could cause such differences.

New accounting pronouncements

In June 1998, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No. 133 requires that all derivatives be recognized in the statement of financial position as either assets or liabilities and be measured at fair value. The impact of adopting this statement is not expected to be material to the Company’s financial position as the Company does not have any derivative instruments or hedging activities.

In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin nº 101, “Views on Selected Revenue Recognition Issues” (“SAB 101”), which sets forth the staff’s views in applying generally

56 accepted accounting principles to selected revenue recognition issues. SAB 101 is effective for the second quarter of 2000. The Company will assess the effect of this new standard in the future.

ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT

Officers and Directors

The administration of the Company is conducted by the Board of Directors (Conselho de Administração) and the Executive Officers (Diretoria). Overall strategic direction of the Company is provided by the Board of Directors, which is comprised of three members and three substitutes who must be both residents of Brazil and shareholders of the Company. Board members are elected at the annual ordinary general meeting of holders of Common Shares for a one year-term. Day-to-day management is delegated to the Executive Officers of the Company, which are appointed by the Board of Directors for a one-year-term.

The following table sets forth information with respect to the members of Board and Executive Officers of the Company. Year Initially Name Age Position Appointed Jorge Gerdau Johannpeter 63 Chairman/President 1973 Germano H. Gerdau Johannpeter 67 Board Substitute/Vice-President 1973 Klaus Gerdau Johannpeter 64 Board Substitute/Vice-President 1973 Frederico C. Gerdau Johannpeter 57 Board Substitute/Vice-President 1973 Carlos João Petry 58 Board Member 1975 Luiz Celestino Pedó 56 Board Member 1980

Executive Officers Current Position Name Age Title Held Since Sirleu José Protti 57 Director 1981 Osvaldo Burgos Schirmer 49 Director 1987 Domingos Somma 55 Director 1988 Carlos Bier Johannpeter 39 Director 1991 Luiz Alberto Morsoletto 48 Director 1992 Júlio Carlos L. Prato 53 Director 1992 Cláudio Johannpeter 36 Director 1997 Joaquim Guilherme Bauer 46 Director 1997 Francesco Saverio Merlini 57 Director 1998 João Carlos Salin Gonçalves 54 Director 1999 Heitor Luis Beninca Bergamini 42 Director 1999

The following is a brief biography of each of the Company's Officers:

JORGE GERDAU JOHANNPETER. Mr. Jorge Johannpeter has been working for the Gerdau Companies since 1954. Mr. Jorge Johannpeter and his brothers, Germano, Klaus and Frederico, started as apprentices. Mr. Jorge Johannpeter became an Executive Officer in 1973 and was appointed President in 1983. He received a degree in Law from the Federal University of Rio Grande do Sul.

GERMANO H. GERDAU JOHANNPETER. Mr. Germano Johannpeter has been working with his father and brothers since 1951. Mr. Germano Johannpeter became an Executive Officer in 1973 and was appointed Vice-President of the Gerdau Companies in 1983. He received a degree in Business Administration from the Getúlio Vargas Fundation

KLAUS GERDAU JOHANNPETER. Mr. Klaus Johannpeter has worked for the Gerdau Companies with his father and brothers since 1954. Mr. Klaus Johannpeter became an Executive Officer in 1973 and was appointed Vice-President of the Gerdau Companies in 1983. He received a degree in Civil, Electrical and Mechanical Engineering from the Federal University of Rio Grande do Sul.

57 FREDERICO C. GERDAU JOHANNPETER. Mr. Frederico Johannpeter has worked for the Gerdau Companies with his father and brothers since 1961. Mr. Frederico Johannpeter became an Executive Officer in 1973 and was appointed Vice-President of the Gerdau Companies in 1983. He received a degree in Business Administration from the Federal University of Rio Grande do Sul.

CARLOS JOÃO PETRY. Mr. Petry has worked for the Gerdau Companies since 1965. In 1975, he was appointed to the Board of Directors. Mr. Petry received a degree in Philosophy from the Federal University of Rio Grande do Sul.

LUIZ CELESTINO PEDÓ. Mr. Pedó has been worked with the Gerdau Companies since 1966. He was appointed to the Board of Directors in 1980. Mr. Pedó received a degree in Economics from the Catholic Pontiff University of Rio Grande do Sul.

SIRLEU JOSÉ PROTTI. Mr. Protti joined the Company in 1967 and became Executive Officer in 1981. He is currently the Director of the Industrial Units located in the Southern region of Brazil. Mr. Protti received a degree in Economics from the Catholic Pontiff University of Rio Grande do Sul, in 1966.

OSVALDO BURGOS SCHIRMER. Mr. Schirmer joined the Company in 1986 and became Financial Director in 1987. Mr. Schirmer received a degree in Business Administration from the Federal University of Rio Grande do Sul, in 1973, and in Industrial Agronomy Administration from the Illinois University, in 1975 and an M.B.A. in Finance and International Business from the Southern Illinois University, in 1977.

DOMINGOS SOMMA. Mr. Somma joined the Company in 1980 and became an Executive Officer in 1988. He is currently the Director of the Sales and Distribution Network (Comercial Gerdau). Mr. Somma received a degree in Economics from the Mackenzie University, in 1968.

CARLOS BIER JOHANNPETER. Mr. Carlos Johannpeter joined the Company in 1976. In 1991, Mr. Carlos Johannpeter became Executive Officer of the Gerdau Steel for Industry. Mr. Carlos Johannpeter currently is the Director of Gerdau Steel for Civil Construction Business Unit. He received a degree in Law from the Federal University of Rio Grande do Sul.

LUIZ ALBERTO MORSOLETTO. Mr. Morsoletto joined the Company in 1983 and has been an Executive Officer of the Gerdau Divinópolis Industrial Unit. Mr. Morsoletto received a degree in Metallurgical Engineering from the Mauá Engineering School -SP, in 1975.

JÚLIO CARLOS L. PRATO. Mr. Prato joined the Company in 1969 and became an Executive Officer in 1992 and is currently the Director of the Industrial Units located in the Northeast region of Brazil. Mr. Prato received a degree in Metallurgical Engineering from the Federal University of Rio Grande do Sul, in 1969.

CLÁUDIO JOHANNPETER. Mr. Cláudio Johannpeter joined the Company in 1982. In 1997, Mr. Cláudio Johannpeter became Executive Officer of Gerdau Aços Finos Piratini, the specialty steel industrial unit. Mr. Cláudio Johannpeter received a degree in Metallurgical Engineering from the Federal University of Rio Grande do Sul in 1990.

JOAQUIM GUILHERME BAUER. Mr. Bauer has worked for the Company since 1982. In 1997, Mr. Bauer became Director of the Gerdau Steel for Industry Business Unit. Mr. Bauer received a degree in Metallurgical Engineering from the Federal University of Rio Grande do Sul, in 1977.

FRANCESCO SAVÉRIO MERLINI. Mr. Merlini joined the Company in 1977 and became an Executive Officer in 1988. He is currently the Director of the Gerdau Rio de Janeiro Industrial Unit. Mr. Merlini received a degree in welding techniques from the Cuyo National University of Argentina in 1970.

JOÃO CARLOS SALIN GONÇALVES. Mr. Gonçalves joined the Company in 1969 and became an Executive Officer in 1999. He is currently the Metal Supplies Director. Mr. Gonçalves received a degree in Metallurgical Engineering from the Federal University of Rio Grande do Sul in 1969.

HEITOR LUIS BENINCA BERGAMINI. Mr. Bergamini joined the Company in 1985 and became an Executive Officer in 1999. He is currently the Director of the Comercial Gerdau (Retail Unit). Mr. Bergamini received a degree in

58 Economics from the Catholic Pontiff University of Rio Grande do Sul in 1972.

There are no pending legal proceedings to which any board member or Executive Officer of the Company is a party adverse to the Company.

All of the Executive Officers of the Company are appointed in such capacities by the Board of Directors to serve for one year terms which are renewable at the pleasure of the Board of Directors.

ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS

The Company and its subsidiaries have a profit sharing program for its Board members and Executive Officers which is determined at the Shareholders General Meeting and through individual contracts with the managers.

For the year ended December 31, 1999, the aggregate compensation paid by the Company to all members of the Board of Directors and all Executive Officers (27 persons) for services in all capacities was approximately U.S.$ 10.9 million.

For the year ended December 31, 1999, the total amount of contributions made by the Company to the employees' pension funds, for members of the Board and Executive Officers was approximately U.S.$ 169.1 thousand.

In addition, the Executive Officers receive certain additional Company benefits generally provided to Company employees and their families, such as medical assistance, educational expenses and supplementary social security benefits.

ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES

Not applicable.

ITEM 13. INTERESTS OF MANAGEMENT IN CERTAIN TRANSACTIONS

Not applicable.

59 PART II

ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED

Not applicable.

60 PART III

ITEM 15. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES

Not applicable.

PART IV

ITEM 17. FINANCIAL STATEMENTS

The Company has responded to Item 18 in lieu of responding to this item.

ITEM 18. FINANCIAL STATEMENTS

Reference is made to Item 19 for a list of all financial statements filed as part of this Annual Report.

ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements for the years ended December 31, 1999, 1998, and 1997 Page

Report of Independent Accountants F-1

Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2

Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 F-4

Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 1999, 1998 and 1997 F-6

Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997 F-7

Notes to Consolidated and Combined Financial Statements F-9

(b) List of Exhibits

None.

61 SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

GERDAU S.A.

By: /s/ Jorge Gerdau Johannpeter Name: Jorge Gerdau Johannpeter Title: Chief Executive Officer

By: /s/ Osvaldo Burgos Schirmer Name: Osvaldo Burgos Schirmer Dated: June 29, 2000 Title: Chief Financial Officer

62 63 REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Gerdau S.A.:

We have audited the accompanying consolidated balance sheets of Gerdau S.A. and its subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended; and the statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 1999, all expressed in United States dollars. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gerdau S.A. and subsidiaries as of December 31, 1999 and 1998, and the consolidated results of operations and cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles in the United States of America.

Arthur Andersen S/C Porto Alegre, Brazil

February 22, 2000

F-1 GERDAU, S.A. CONSOLIDATED BALANCE SHEETS As of December 31, 1999 and 1998 (in thousands of U.S. Dollars) ______

ASSETS

1999 1998

Current assets Cash $ 9,570 $ 10,938 Short-term investments 364,492 338,930 Trade accounts receivable, net 305,720 216,562 Inventories 455,204 292,385 Deferred income taxes 11,601 6,267 Other 39,198 107,508 Total current assets 1,185,785 972,590

Non-current assets Property, plant and equipment, net 1,568,051 1,279,218 Deferred income taxes 68,885 87,389 Judicial deposits 28,005 35,823 Equity investments 185,023 - Investments at cost 14,049 138,555 Other 165,744 45,821

Total assets $ 3,215,542 $ 2,559,396

The accompanying notes are an integral part of these consolidated balance sheets.

F-2 GERDAU S.A. CONSOLIDATED BALANCE SHEETS As of December 31, 1999 and 1998 (in thousands of U.S. Dollars) ______

LIABILITIES

1999 1998 Current liabilities Short-term debt $ 372,022 $ 118,269 Current portion of long-term debt 283,529 156,549 Debentures 2,505 3,505 Accounts payable trade 133,638 91,655 Income taxes payable 5,272 3,164 Deferred income taxes 3,558 6,560 Payroll and related liabilities 37,925 23,229 Dividends (interest on equity) payable 33,486 - Taxes payable, other than income taxes 28,314 37,740 Other 49,543 27,988 Total current liabilities 949,792 468,659 Non-current liabilities Long-term debt, less current portion 739,315 224,309 Debentures 81,613 172,978 Long-term debt, parent company 49,511 205,484 Deferred income taxes 139,664 69,074 Founders’ Participation Certificates - 23,046 Accrued pension liability 19,808 30,891 Reserve for contingencies 87,430 115,936 Other 62,670 29,528 Total non-current liabilities 1,180,011 871,246

Total liabilities 2,129,803 1,339,905 Minority interest 62,995 14,166 SHAREHOLDERS' EQUITY (Note 13) Preferred shares - no par value 37,054,842,993 shares authorized and outstanding 558,971 558,971 Common shares - no par value 19,691,010,193 shares authorized and outstanding 277,580 277,580 Legal reserve 37,690 27,831 Retained earnings 563,513 444,873 Accumulated other comprehensive income (loss) (415,010) (101,072) Treasury stock - (2,858) Total shareholders' equity 1,022,744 1,205,325

Total liabilities and shareholders' equity $ 3,215,542 $ 2,559,396

The accompanying notes are an integral part of these consolidated balance sheets.

F-3 GERDAU S.A. CONSOLIDATED AND COMBINED STATEMENTS OF INCOME for the years ended December 31, 1999, 1998 and 1997 (in thousands of U.S. Dollars, except per share amounts) ______

1999 1998 1997 Sales $ 2,056,171 $ 2,362,145 $ 2,327,549 Less: federal and state excise taxes (282,308) (368,430) (386,603) Less: freight and discounts (52,875) (108,654) (116,838) ------Net sales 1,720,988 1,885,061 1,824,108 Cost of sales (1,101,371) (1,315,179) (1,296,453) ------Gross profit 619,617 569,882 527,655 Sales and marketing expenses (86,007) (101,386) (107,199) General and administrative expenses (157,755) (175,457) (198,083) ------Operating income 375,855 293,039 222,373 Interest expense (80,478) (151,739) (54,359) Exchange loss (141,936) -- Interest income 64,166 86,897 31,626 Equity pickup on non-consolidated company (4,903) Other non-operating income (expense) 5,196 18,798 17,330 ------Income before income taxes and minority interest 217,900 246,995 216,970 Provision for income taxes (Note 14): Current (17,456) (38,460) (17,335) Deferred (3,080) (13,843) (21,710) ------(20,536) (52,303) (39,045) ------Income before minority interest 197,364 194,692 177,925 Minority interest 328 (844) (21,182) ------Net income 197,692 193,848 156,743 ------Net income available to Common and Preferred shareholders $ 197,692 $ 193,848 $ 156,743 ======

The accompanying notes are an integral part of these consolidated and combined financial statements.

F-4 GERDAU S.A. CONSOLIDATED AND COMBINED STATEMENTS OF INCOME for the years ended December 31, 1999, 1998 and 1997 (in thousands of U.S. Dollars, except per share amounts) ______

Per share data

1999 1998 1997 Basic earnings per 1,000 shares Common $ 3.30 $ 3.22 $ 2.76 Preferred $ 3.59 $ 3.54 $ 3.10 Diluted earnings per 1,000 shares Common $ 3.27 $ 3.06 $ 2.69 Preferred $ 3.55 $ 3.35 $ 3.00 Weighted average number of Common shares outstanding 19,691,010,193 19,691,010,193 19,314,516,379 ======Weighted average number of Preferred shares outstanding 36,947,487,736 36,824,060,299 33,339,040,280 ======

The accompanying notes are an integral part of these consolidated and combined financial statements.

F-5 GERDAU S.A. CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY for years ended December 31, 1999, 1998 and 1997 (in thousands of U.S. Dollars, except share data)

Cumulative Common Preferred Legal Retained translation Treasury Stock Stock reserve earnings adjustments stock Total

Balances as of January 1, 1997 $ 267,761 $ 425,368 $ 14,494 $ 193,224 $ (1,964) $ - $ 898,883 Net income available to Common and Preferred shareholders - - - 156,743 - - 156,743 Shares issued to acquire minority interest in subsidiary 9,819 133,603 - - - - 143,422 Translation adjustments - - - - (2,395) - (2,395) Cash dividends paid ($0.68 per 1,000 Common shares and $0.74 per 1,000 Preferred shares) - - - (40,731) --(40,731) Treasury stock acquired at cost - - - - - (2,360) (2,360) Transfer to legal reserve - - 5,465 (5,465) ------Balances as of December 31, 1997 $ 277,580 $ 558,971 $ 19,959 $ 303,771 $ (4,359) $ (2,360) $ 1,153,562 Net income available to Common and Preferred shareholders - - - 193,848 - - 193,848 Translation adjustments - - - - (92,823) - (92,823) Deferred taxes related to indexation for fixed assets for tax purposes - - - - (3,890) - (3,890) Cash dividends (interest on equity) paid ($0.76 per 1,000 Common shares and $0.81 per 1,000 Preferred shares) - - - (44,874) --(44,874) Treasury stock acquired at cost - - - - - (498) (498) Transfer to legal reserve - - 7,872 (7,872) ------Balances as of December 31, 1998 $ 277,580 $ 558,971 $ 27,831 $ 444,873 $ (101,072) $ (2,858) $ 1,205,325 ======Net income available to Common and Preferred shareholders - - - 197,692 - - 197,692 Translation adjustments - - - - (313,938) - (313,938) Treasury stock sold - - - - - 2,858 2,858 Gain on treasury stock sold - - - 1,680 - - 1,680 Cash dividends (interest on equity) paid ($1.20 per 1,000 Common shares and $1.27 per 1,000 Preferred shares) - - - (70,873) --(70,873) Transfer to legal reserve - - 9,859 (9,859) ------Balances as of December 31, 1999 $ 277,580 $ 558,971 $ 37,690 $ 563,513 $ (415,010) $ - $ 1,022,744 ======F-6 The accompanying notes are an integral part of these consolidated and combined financial statements.

F-7 GERDAU S.A. CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS for years ended December 31, 1999, 1998 and 1997 (in thousands of U.S. Dollars) ____

1999 1998 1997

Cash flows from operating activities Net income $ 197,692 $ 193,848 $ 156,743 Adjustments to reconcile net income to cash flows from operating activities: Depreciation 82,863 94,825 95,453 Equity pickup 4,903 -- Exchange loss on long-term debt 141,936 -- Minority interest (328) 844 21,182 Deferred income taxes 28,278 13,843 21,710 (Gain) loss on dispositions of property, plant and equipment 6,285 (9,994) (3,991) Allowance for doubtful accounts 2,775 6,077 2,164 Provision for contingencies 9,100 12,294 (17,905) Gain on sale of short-term investments (22,908) (29,883) (16,608) Others - - (2,395)

Changes in assets and liabilities: (Increase) decrease in accounts receivable (58,852) (30,091) (33,787) Increase in inventories (104,612) (17,172) (15,292) Decrease in judicial deposits (3,802) 2,518 6,411 Increase in accounts payable and accrued liabilities 77,838 21,032 13,485 (Increase) decrease in other current assets 7,503 (17,511) (38,466) Decrease (increase) in other non-current assets (124,201) (12,613) 12,862 (Decrease) increase in other current and non-current liabilities 55,946 41,240 (6,320) ------Net cash provided by operating activities 300,416 269,257 195,246 ------Cash flows from investing activities Additions to property, plant and equipment (433,431) (344,802) (171,709) Proceeds from dispositions of property, plant and equipment 9,700 40,989 65,299 Acquisition of investments at cost (351,494) (116,594) (28,751) Purchases of short-term investments (366,170) (994,986) (392,074) Proceeds from maturities and sales of short-term investments 253,577 956,842 317,705 Translation 40,462 ------Net cash used in investing activities (847,356) (458,551) (209,530) ------

F-8 GERDAU S.A. CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS for years ended December 31, 1999, 1998 and 1997 (in thousands of U.S. Dollars) ____

1999 1998 1997

Cash flows from financing activities Cash dividends paid $ (37,386) $ (44,874) $ (40,731) Sale of treasury stock 4,538 (498) (2,360) Receipts of short-term debt 516,864 126,885 91,200 Payments of short-term debt (56,821) (14,600) (115,451) Proceeds from long-term debt 294,295 368,448 134,911 Repayment of long-term debt (178,516) (239,129) (52,535) ------Net cash provided by financing activities 542,974 196,232 15,034 ------Increase (decrease) in cash (3,966) 6,938 750 Effect of exchange rate changes on cash (4,362) (331) - Cash at beginning of year 10,938 4,331 3,581 Cash of companies purchased 6,960 ------Cash at end of year $ 9,570 $ 10,938 $ 4,331 ======Supplemental cash flow data Cash paid during the year for: Interest (net of amounts capitalized) $ 267,445 $ 141,926 $ 50,373 Income taxes 15,599 37,597 18,054

Supplemental investing and financing non-cash transactions Issuance of common shares for acquisition of minority interests $ - $ - $ 9,819 Issuance of preferred shares for acquisition of minority interests - - 133,603 ------143,422 Allocation of purchase price to non-current assets - - (18,228)

The accompanying notes are an integral part of these consolidated and combined financial statements.

F-9 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts)

1 Nature of operations

Gerdau S.A. is a sociedade anônima incorporated as a limited liability company under the laws of the Federative Republic of Brazil. The principal business of Gerdau S.A. (“Gerdau”) and its subsidiaries in Uruguay, Chile, Canada, Argentina and the United States (collectively the “Company”) comprise the production of crude steel and related long rolled products, drawn products and long specialty products. The Company produces steel based on the mini-mill concept, whereby steel is produced in electric arc furnaces, starting with scrap and pig iron acquired mainly in the region where each mill operates. Gerdau also operates plants capable of producing steel starting with iron ore in blast furnaces and through the direct reduction process.

The main markets in which the Company operates are the civil construction, manufacturing, agriculture and cattle raising sectors, the first two of which represented approximately 97% of the total sales volume of the Company measured in tons in 1999 (unaudited). These markets are located in Brazil, United States, Canada and Chile and, to a lesser extent, Uruguay and Argentina.

2 Basis of presentation

The principal accounting policies followed by the Company in the preparation of these financial statements are summarized below:

2.1 Statutory records

The accompanying consolidated and combined financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), which differ in certain aspects from generally accepted accounting principles in Brazil (“Brazilian GAAP”) and applied by the Company in the preparation of its statutory financial statements and for other purposes.

Shareholders' equity and results of operations included in these financial statements differ from those included in the statutory accounting records as a result of (i) the effects of differences between the rate of devaluation of the Brazilian real against the United States Dollar (“U.S. dollar” or “U.S. $”) and the indices mandated for indexation of statutory financial statements through December 1995, and (ii) differences in the methods of measuring amounts under U.S. GAAP and Brazilian GAAP.

2.2 Currency remeasurement

F-10 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) The Company, which transacts the majority of its business in Brazilian reais, and, to a lesser extent, in U.S. dollars, Canadian dollars and Chilean pesos, has selected the United States dollar as its reporting currency. The U.S. dollar amounts for all periods presented have been remeasured/translated following the guidelines established in Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation” on the basis of audited financial statements expressed in the local currency of each of the countries. Under SFAS No. 52, there are two methods of translation: the current rate method and the monetary/non-monetary method.

- For subsidiaries whose local currency is the functional currency (Chile, Canada and Argentina), the current rate method of translation has been used. This method involves the translation of assets and liabilities at the exchange rate in effect at the end of each period. Average exchange rates have been applied for the translation of the accounts that make up the results of the periods. Translation adjustments are recorded as a separate component of shareholders’ equity. - The Company’s principal operations are in Brazil and additionally, the Company has a foreign subsidiary operating in Uruguay. Pursuant to SFAS No. 52 and Emerging Issues Task Force (“EITF”) D-55, “Determining a Highly Inflationary Economy”, the Company has designated Uruguay as a highly inflationary economy and Brazil was a highly inflationary economy through December 31, 1997. In accordance with SFAS No. 52, the functional currency of such economies is assumed to be the reporting currency (U.S. dollar) and the monetary/non-monetary method of translation has been used. This method involves the translation of monetary assets and liabilities at the exchange rate in effect at the end of each period, and the non-monetary assets and liabilities and equity at historical exchange rates (i.e., the exchange rates in effect when transactions occur). Average monthly exchange rates have been applied for the translation of the accounts that make up the results of the periods, except for those items related to non-monetary assets and liabilities, which have been translated using historical rates. Transaction gains and losses are included in the related line items in the consolidated and combined statements of income.

Gains and losses on currency remeasurement included in the Statements of Income aggregated $32,482 in 1997. These gains and losses were allocated to the following line items:

1997 Sales $ (13,804) Federal and state excise taxes 1,181 Cost of sales 5,882 General and administrative expenses (1,797) Interest expense 64,313 Interest income (23,293) Total translation gains, net $ 32,482

Effective January 1, 1998, and concurrent with the determination that Brazil is no longer a highly inflationary economy for U.S. GAAP purposes, the Company began translating its financial statements for periods subsequent to 1997 into United States dollars using the current rate method in accordance with the criteria of SFAS No. 52.

F-11 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) 2.3 Corporate reorganization

As of December 31, 1999, the Company’s parent, Metalúrgica Gerdau S.A. (“MG” and collectively with its subsidiaries and affiliates, the “Conglomerate”) owned 47.77% of the Company. MG’s share ownership consisted of 82.97% of the Company’s common shares and 29.06% of its non-voting preferred shares. During June 1997, MG completed a corporate reorganization which began in 1995 and involved (i) transferring to the Company all of the operating entities and operations of the Conglomerate involved in the production of steel and steel products, (ii) simplification of the existing corporate structure through a series of legal mergers of entities under common control, and, (iii) the acquisition of the minority shareholder interests in operating entities, where possible. The contribution of operating entities and operations to Gerdau S.A. by MG has been accounted for in a manner similar to a pooling of interest since they were contributed by the Company’s controlling shareholder. Prior period financial statements of the Company have been restated to include the effects of these operating entities and operations for all periods in which common control existed.

Accordingly, the financial statements of the Company are presented on a combined basis for periods prior to such reorganization actions, and on a consolidated basis subsequent to the effective date of the acquisition of the operating subsidiaries.

The Company has accounted for the acquisition of minority interests in operating entities pursuant to the purchase method. Each acquisition of minority interests during the corporate reorganization period involved the issuance of common and preferred shares by the Company or a subsidiary thereof, in exchange for the common and preferred shares held by the minority shareholders in such operating entities. In each case, the book value of the net assets acquired exceeded the fair value of the shares issued. In the opinion of the Company’s management, such excess was not caused by any underlying impairment of assets; each of the subsidiaries involved in the minority interest acquisitions has historically been profitable with positive operating cash flows. Management believes that, in each case the excess of the book value of the net assets acquired exceeded the fair values of the shares issued because of market conditions at the time of the transaction. This excess has been used to reduce, on a proportional basis, the carrying value of non-current assets acquired. Minority interest acquisitions during the years ended December 31, 1997 and 1996 are summarized as follows:

Percentage of minority interest Company Date of acquisition acquired* Purchase price Siderúrgica Riograndense S.A. June 30, 1997 64.36% $143,422 Siderúrgica Açonorte S.A. December 23, 1996 5.46% 6,879 Siderúrgica Guaira S.A. May 31, 1995 2.73% 1,717 Siderúrgica Guaira S.A. February 6, 1995 13.60% 10,890 Siderúrgica Açonorte S.A. February 6, 1995 6.27% 6,468 Cia. Siderúrgica Pains February 6, 1995 3.79% 2,226 * Includes common and non-voting preferred shares.

F-12 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts)

3 Significant accounting policies

The following is a summary of the significant accounting policies followed by the Company in the preparation of the combined and consolidated financial statements.

3.1 Consolidation and combination The accompanying consolidated and combined financial statements include the accounts of the Company and its majority-owned subsidiaries, as follows (ownership percentages as of December 31, 1999): Percentage ownership Seiva S.A. – Florestas e Indústrias 93 GTL Trade Corp. 99 Armafer Serviços de Construção Ltda. 100 Gerdau Laisa S.A., formerly Siderúrgica Laisa S.A. 99 Gerdau Aza S.A., formerly Siderúrgica Aza S.A. 99 Gerdau MRM Steel Inc. 100 Gerdau Courtice Steel Inc. 100 Gerim Reflorestamento Ltda. 100 Ameristeel Corporation 74

All significant intercompany balances and transactions have been eliminated in consolidation and combination.

3.2 Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are used when accounting for the allowance for doubtful accounts, depreciation, long-lived assets, income taxes and contingencies. Actual results could differ from those estimates.

3.3 Short-term investments

Short-term investments consist of bank certificates of deposit and investments held in a related party fund for the exclusive use of the Company (see note 6). These certificates of deposit and investments have maturities ranging from four months to one year at the time of the purchase and are stated at cost plus accrued interest.

3.4 Inventories

F-13 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) Inventories are valued at the lower of cost or market. Cost is determined using the average cost method. Inventories of packaging and maintenance supplies are valued at cost.

3.5 Property, plant and equipment

Property, plant and equipment is recorded at cost, including capitalized interest and other costs incurred during the construction phase of major new facilities. Interest on loans denominated in reais includes the effect of indexation of principal required by some of the loan agreements. Interest on foreign currency borrowings excludes the effects of foreign exchange gains and losses.

Depreciation is computed under the straight-line method at rates which take into consideration the useful lives of the related assets: mainly, 25 years for buildings and improvements, 10 years for machinery and equipment, 10 years for furniture and fixtures, and 5 years for vehicles and computer equipment. Assets under construction are not depreciated until they are placed into service. Expenditures for maintenance and repairs are charged to expense as incurred. Any gain or loss on the disposal of property and equipment is recognized in the year of disposal.

The Company periodically evaluates the carrying value of its long-lived assets for impairment. The carrying value of a long-lived asset is considered impaired by the Company when the anticipated undiscounted cash flow from such asset is separately identifiable and less than its carrying value. In that event, a loss would be recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using discounted anticipated cash flows.

No impairment losses have been recorded for any of the periods presented.

3.6 Non-current investments

Investments in 20 percent to 50 percent-owned affiliates where the Company does not have effective control are accounted for under the equity method. Investments in less than 20 percent-owned affiliates are accounted for under the cost method. As of December 31, 1999, the Company’s equity investment is comprised of a 36.63% equity interest in the capital of Aço Minas Gerais S.A. – Açominas and a 33.33% interest in the capital of Sipar Aceros S.A. – Sipar.

3.7 Revenues

Revenues from the sales of products and services are recognized when products are shipped or services are performed.

F-14 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) 3.8 Accounts receivable

Accounts receivable are stated at estimated realizable values. Allowances are provided, when necessary, in an amount considered by management to be sufficient to meet probable future losses related to uncollectible accounts.

3.9 Income taxes

The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes” which requires the application of the comprehensive liability method of accounting for income taxes. Under this method, a company is required to recognize a deferred tax asset or liability for all temporary differences and except that, prior to January 1,1998 in accordance with paragraph 9(f) of SFAS No. 109, deferred taxes were not recorded for differences relating to certain assets and liabilities that were remeasured from reais to U.S. dollars at historical exchange rates and that resulted from changes in exchange rates or indexing to inflation in local currency for tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of changes in tax rates is recognized in income for the period that includes the enactment date.

Deferred tax assets are reduced through the establishment of a valuation allowance, as appropriate, if, based on the weight of available evidence, it is more likely than not that the deferred tax asset will not be realized.

3.10 Earnings per share

Each share of Common and Preferred stock entitles the shareholder to participate in earnings; however, in accordance with Brazilian law, effective January 1, 1997 Preferred shareholders are entitled to receive per-share dividends of at least 10% greater than the per-share dividends paid to Common shareholders (hereinafter referred to as the Mandatory Dividend). In calculating earnings per-share (“EPS”), preferred stock has been treated as a participating security.

In calculating EPS, the Company has adopted the two-class method. This method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights to undistributed earnings. Under this method, net income is first reduced by the amount of dividends declared in the current period for each class of stock; the remaining earnings are then allocated to common stock and participating securities to the extent that each security may share in earnings. The total earnings allocated to each security (i.e. actual dividends declared and the amount allocated for the participation feature) is then divided by the weighted average number of shares for each class of security outstanding during the period.

Basic EPS excludes dilution, while diluted EPS reflects the potential dilution that could occur if the convertible

F-15 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) debentures were converted into shares. In calculating diluted EPS, interest expense net of tax on the convertible securities is added back to “Allocated net income available to Common and Preferred shareholders”, with the resulting amount divided by the weighted average number of dilutive shares outstanding. Convertible securities are considered in the weighted average number of dilutive Common and Preferred shares outstanding. See Note 15.

All EPS data are calculated giving retroactive consideration to stock dividends (Note 13.1) and shares issued in connection with the transfer of entities and operations to the Company by the controlling shareholder, MG (Note 2.3).

EPS is disclosed in amounts per 1,000 shares, which corresponds to the minimum number of shares that can be traded on the Brazilian stock exchanges.

3.12 Dividends and interest on share capital

The Company's Articles of Incorporation require it to pay its Common and Preferred shareholders annual dividends in the amount of 30% of net income calculated in accordance with the provisions of the Brazilian Corporation Law. Approval of the payment of such dividends is received during the Company's Annual General Meeting, which must be held on or before April 30 of each year. Dividends are payable in Brazilian reais, and reflected in these financial statements upon approval (declaration).

Effective January 1, 1996, companies are allowed to declare and distribute tax deductible interest on equity, determined utilizing the Taxa de Juros Longo Prazo (“TJLP”) (long-term interest rate) to a maximum of 50% of net income, as calculated in accordance with the Brazilian Corporation Law, or 50% of retained earnings. Such interest payments are reflected in these financial statements as dividends and are charged to retained earnings upon payment.

The benefit to the Company, as opposed to making a dividend payment, is a reduction in its income tax charge equivalent to 33% of such amount. Income tax is withheld from the stockholders relative to interest at the rate of 15%, except for interest due to the Brazilian government, which is exempt from tax withholdings.

3.13 Pension plans

Statement of Financial Accounting Standards No. 87 “Employers’ Accounting for Pensions” (“SFAS 87”) has been applied as from the beginning of the earliest year presented in these financial statements. The majority of the Company’s employees are covered by pension plans to which the Company makes contributions based on either a percentage of employees compensation for defined contribution plans or actuarially determined amounts for participants of the defined benefit plans.

F-16 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts)

3.14 Compensated absences

Vacation expense is fully accrued in the period the employee renders services to earn such vacation.

3.15 Environmental and remediation costs

Expenditures relating to ongoing compliance with environmental regulations, designed to minimize the environmental impact of the Company’s operations, are capitalized or charged against earnings, as appropriate. Capitalization is considered appropriate when the expenditures will continue to provide benefits to the Company; such expenditures are recorded on the date expended. Provisions for non-capital expenditures are charged against earnings at the time they are considered to be probable and reasonably estimable. Management believes that, at present, each of its facilities is in substantial compliance with the environmental regulations applicable to it.

Future information and developments will require the Company to continually reassess the expected impact of environmental matters. However, the Company has evaluated its total environmental exposure based on current available data and believes that compliance with all applicable laws and regulations will not have a material impact on the Company’s liquidity, consolidated financial position or results of operations.

3.16 Advertising costs

Advertising costs are expensed when incurred. Advertising costs included in selling and marketing expenses were approximately $6,000, $6,000 and $7,000 for the years ended December 31, 1999, 1998 and 1997 respectively. No advertising costs have been deferred at the balance sheet dates herein.

3.17 Research and development expenditures

Research and development expenditures are related principally to improvements in the operating processes and quality of products and are charged to the Statement of Income as incurred. Amounts of approximately $1,200, $7,900 and $6,052, were incurred relating to research and development expenditures in the years ended December 31, 1999, 1998 and 1997, respectively.

3.18 Accounting for sales of shares by subsidiaries

Gains or losses arising from the sale of shares by subsidiaries are recognized in the Statement of Changes in Shareholders’ Equity, to the extent that the net book value of the shares owned by the Company after the sale exceeds or is lower than the net book value per share immediately prior to the sale of the shares.

F-17 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts)

4 Trade accounts receivable, net

Trade accounts receivable consisted of the following as of December 31: 1999 1998 Trade accounts receivable $ 315,038 $ 226,247 Less: allowance for doubtful accounts (9,318) (9,685) $ 305,720 $ 216,562

5 Inventories

Inventories consisted of the following as of December 31: 1999 1998 Finished products $ 170,428 $ 108,375 Work in process 57,488 37,228 Raw materials 103,613 76,933 Packaging and maintenance supplies 123,675 69,849 $ 455,204 $ 292,385

6 Transactions with related parties

1999 1998 Short-term investments - Banco Gerdau S.A. $ 117,709 $ 137,803 Long-term debt, MG $ 44,316 $ 205,484

(i) Banco Gerdau, a wholly owned subsidiary of MG, established an investment fund in 1996 for the exclusive use of the Company. The fund’s investments consist of time deposits in major Brazilian banks and treasury bills of the Brazilian government. Income earned on the Company’s investment in the fund aggregated $19,931 in 1999 and $32,227 in 1998, representing average yields of 24.6 % and 28.0 %, respectively.

(ii) Borrowings of the Company with MG as of December 31, 1999 and 1998 are denominated in Brazilian reais and bear interest at the average composite-borrowing rate of the Conglomerate (23.5% as of December 31, 1999) and mature in 2001. Interest expense related to such loans aggregated $4,326 in 1999, $38,483 in 1998 and $15,106 in 1997, representing average effective rates of 25.4 %, 23.4% and 21.1%, respectively.

7 Property, plant and equipment, net

Property, plant and equipment consisted of the following as of December 31:

F-18 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts)

1999 1998 Buildings and improvements $ 319,077 $ 250,800 Machinery and equipment 1,526,400 1,342,253 Vehicles 14,644 15,508 Furniture and fixtures 28,474 37,624 Other 139,604 125,027 2,028,199 1,771,212 Less: accumulated depreciation (778,089) (851,177) 1,250,110 920,035 Land 114,291 123,574 Construction in progress 203,650 235,609 Total $ 1,568,051 $ 1,279,218

Construction in progress as of December 31, 1999 represents principally renewals and improvements in the manufacturing facilities of the Company located in Brazil.

The Company capitalized interest on construction in progress in the amount of $11,934 in 1999, $16,066 in 1998 and $3,663 in 1997.

As of December 31, 1999, machinery and equipment with a net book value of approximately $13,500 was pledged as collateral for certain long-term debt.

8 Accrued pension liability

The Company and other related companies in the Conglomerate co-sponsor a contributory pension plan covering substantially all Brazilian-based employees (the “Domestic Plan”). The Domestic Plan is principally a defined benefit plan with certain limited defined contributions. Additionally, the Company's Canadian subsidiaries sponsor defined benefit plans (the “Canadian Plans”) covering substantially all of their employees. Contributions to the Domestic Plan for defined contribution participants are based on a specified percentage of employees’ compensation and totalled $ 1,560 in 1999, $1,373 in 1998, $1,208 in 1997. Contributions to the Domestic Plan for defined benefit participants and contributions to the Canadian Plan are based on actuarially determined amounts.

The Domestic Plan is administered by Gerdau - Sociedade de Previdência Privada, which was established by the Conglomerate for this purpose. Plan assets of the Domestic Plan consist of investments in bank certificates of deposit, equity and debt securities and investment funds.

Total pension expense for 1999, 1998, and 1997 was $ 8,058, $8,729 and $9,326, respectively.

F-19 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) Net periodic pension cost relating to the defined benefit component of the Domestic Plan was as follows:

1999 1998 1997 Service costs of benefits earned during the period $ 2,073 $ 2,037 $ 2,952 Interest cost on the projected benefit obligation 4,182 3,407 2,104 Actual return on plan assets (16,505) (14,069) (2,470) Deferred gain on plan assets 13,108 11,751 1,642 Amortization of (gain) loss (597) (1,260) - Amortization of unrecognized transition obligation 1,123 1,755 1,826 Net pension expense $ 3,384 $ 3,621 $ 6,054

The funded status of the defined benefit components of the Domestic Plan as of December 31, was at follows: 1999 1998 1997 Actuarial present value of accumulated benefit obligation: Vested benefits $ 11,188 $ 13,167 $ 4,193 Non vested benefits 11,352 13,762 12,512

Accumulated benefit obligation 22,540 26,929 16,705 Future projected salary increase 29,277 38,007 19,810 Projected benefit obligation 51,817 64,936 36,515 Plan assets at fair value 52,214 51,080 24,038 Projected benefit obligation in excess of plan assets (397) 13,856 12,477 Unrecognized net transition obligation (4,557) (8,432) (10,959) Unrecognized net (gain) loss (23,281) (18,970) (23,162) Accrued pension liability recognized in the balance sheet $ 18,327 $ 24,394 $ 24,680

Additional information required by Financial Accounting Standards Board Statement nº 132 for the Domestic Plan is as follows: 1999 1998 Change in benefit obligation Benefit obligation at the beggining of the year $ 64,936 $ 36,515 Service cost 2,073 2,037 Interest cost 4,182 3,407 Participants contribuition - - Actuarial loss (gain) 2,210 4,921 Participants transferred from Metalúrgica Gerdau to Gerdau S.A. - 21,422 Benefit payments (619) (369) Translation adjustment (20,965) (2,997) Benefit obligation at the end of the year 51,817 64,936

1999 1998 Change in plan assets Fair value of plan assets at the beginning of the year 51,080 24,038 Actual return on plan assets 16,505 14,069

F-20 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) Employer contributions 1,565 1,946 Participants contribution - - Benefit payments (619) (369) Translation adjustments (16,317) (2,457) Assets transferred with respect to Metalúrgica Gerdau - 13,853 Fair value of plan assets at the end of the year 52,214 51,080

Funded status Funded status at the end of the year 397 (13,856) Unrecognized prior service cost - - Unrecognized (gains) losses (23,281) (18,970) Unrecognized transition obligation 4,557 8,432 Prepaid (accrued) cost (18,327) (24,394)

The unrecognized net transition obligation and net gains or losses are being amortized on a straight-line basis over 15 years, the average remaining working life of the employees. Amortization of net transition obligation from December 31, 1988 (the effective date of SFAS No 87 for non-U.S. plans) through December 31, 1994 was recorded directly to equity in the opening balance sheet under U.S. GAAP and amounted to approximately $10,956.

Following is a summary of assumptions used in the accounting for the defined benefit component of the Domestic Plan:

1999 1998 1997 Weighted-average discount rate 9.7% 9.7% 5.0% Rate of increase in compensation 8.7% 8.7% 4.0% Long-term rate of return on plan assets 9.7% 9.7% 5.0%

The components of net periodic pension cost for the Canadian Plans are as follows:

1999 1998 1997 Service costs of benefits earned during the period $ 936 $ 808 $ 827 Interest cost on projected benefit obligation 1,955 1,922 1,865 Expected return on plan assets, net (4,327) (2,287) (1,404) Amortization of unrecognized transition obligation 3,447 1,890 776 Net pension expense $ 2,011 $ 2,333 $ 2,064

Assumptions used in the accounting for the Canadian Plans were:

1999 1998 1997 Weighted-average discount rate 7.5% 7.5% 7.5% Rate of increase in compensation 8.0% 8.0% 8.0% Long-term rate of return on plan assets 8.0% 8.0% 8.0%

The following sets forth the funded status of the Canadian Plans as of December 31:

F-21 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) 1999 1998 1997 Plan assets at fair value $ 32,093 $ 24,503 $ 23,914 Actuarial present value of benefits 33,332 30,494 29,599 Unfunded pension liability 1,239 5,991 5,685 Unrecognized net losses (3,129) (7,146) (6,426) Prepaid pension costs $ (1,890) $ (1,155) $ (741)

Additional information required by Financial Accounting Standards Board Statement nº 132 for the Canadian Plans is as follows:

1999 1998 Change in plan assets Plan assets at the beginning of the year $ 24,503 $ 23,703 Exchange impact on opening balance 1,808 - Benefits paid and net exchange impact 1,062 (1,537) Return on assets 4,720 2,337 Plan assets at the end of the year 32,093 24,503

Change in the actuarial present value of benefits Actuarial present value of benefits at the beginning of the year 30,494 29,334 Service cost 908 808 Estimated benefits paid (1,579) (1,568) Interest accrued 1,920 1,922 Benefit upgrade - 168 Other 1,589 (170) Actuarial present value of benefits at the end of the year 33,332 30,494

The components of net periodic pension cost for the American Plans are as follows:

1999 Service costs of benefits earned during the period $ 861 Interest cost on projected benefit obligation 1,869 Expected return on plan assets, net (2,222) Amortization of unrecognized transition obligation (9) Net pension expense $ 499

Assumptions used in the accounting for the American Plans were:

1999 Weighted-average discount rate 7.75% Rate of increase in compensation *% Long-term rate of return on plan assets 9.5%

* - hourly 4.0%; salaried scale ranging from 8.3% at age 25 to 4.5% at age 55 and over

F-22 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) The following sets forth the funded status of the American Plans as of December 31:

1999 Plan assets at fair value $ 105,304 Actuarial present value of benefits 102,345 Plan assets in excess of liability 2,959 Unrecognized prior service cost (292) Unrecognized net losses (12,882) Prepaid pension costs $ (10,215)

Additional information required by Financial Accounting Standards Board Statement nº 132 for the American Plans is as follows:

1999 Change in plan assets Plan assets at September 30, 1999 99,572 Benefits paid and net exchange impact (1,370) Return on assets 7,102 Plan assets at the end of the year 105,304

Change in the actuarial present value of benefits Actuarial present value of benefits at September 30, 1999 101,115 Service cost 861 Estimated benefits paid (1,370) Interest accrued 1,869 Other (130) Actuarial present value of benefits at the end of the year 102,345

9 Short-term debt

Short-term debt consists of working capital lines of credit and export advances with interest rates ranging from 6.0% per annum to 11.3% per annum, plus monetary correction or exchange variation as of December 31, 1999.

10 Long-term debt and debentures

Long-term debt and debentures consisted of the following as of December 31:

Annual Interest Rate % 1999 1998 Long-term debt, excluding debentures, denominated in Brazilian reais (i) Financing for machinery 9.7 to 11.5 $ 173,906 $ 161,259 Other 8.5 8,407

F-23 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) Long-term debt, excluding debentures, denominated in foreign currencies Financing for machinery and others (Cdn$) 2.25 (fixed) 46,855 68,005 Working capital (US$) 8.1 to 11.13 374,284 52,019 Financing for machinery (US$) LIBOR + 2.5 (ii) 323,542 35,879 Financing for imported machinery and raw material (US$) 10.7 (fixed) 102,716 52,589 Financing for machinery (DM) 10.4 (fixed) 1,541 2,700 1,022,844 380,858 Less: current portion (283,529) (156,549) Long-term debt, excluding debentures, less current portion $ 739,315 $ 224,309

Debentures (iii) $ 84,118 $ 176,483 Less: current portion (2,505) (3,505) Debentures, less current portion $ 81,613 $ 172,978

(i) The long-term debt denominated in Brazilian reais is indexed for inflation using the TJLP –fixed by the Government on a quarterly basis or the TR – Taxa Referencial (Nominal interest reference rate) published by the Government on a daily basis.

(ii) Interest is based on the six month London Inter-Bank Offered Rate (“LIBOR”) which as of December 31, 1999 was 6.125%.

(iii) Debentures are represented by seven issues as follows:

Issue Issuance Maturity 1999 1998 Third 1982 2002 $ 26,770 $ 48,757 Fifth 1989 2005 15,110 24,671 Seventh 1982 2004 4,031 12,040 Eighth 1982 2005 20,798 26,652 Ninth 1983 2006 4,181 41,571 Eleventh 1990 1999 13,228 22,361 Twelfth 1994 1999 - 431 Total $ 84,118 $ 176,483

Debentures are denominated in Brazilian reais and bear variable interest (CDI – Certificado de Depósito Interbancário). The annual average nominal interest rates were 25.1 % as of December 31, 1999 and 27.1% as of December 31, 1998.

The Company has $24,540 of convertible debentures due at various dates to 2005, which are convertible at the option of the holders into 246,472,398 shares of Common stock and 492,944,796 shares of Preferred stock, computed by dividing the face value of the debt by the book value, in corporate law, of the shares at December 31, 1999.

The Company’s debt agreements contain covenants, which involve the maintenance of certain ratios, as calculated in accordance with Brazilian GAAP. The most restrictive of these covenants are as follows:

F-24 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) ! A ratio of current liquidity, which consists of current assets divided by current liabilities, of 1.5 or greater. ! A ratio of less than 5.0 of the total of long and short-term indebtedness divided by operating profit plus financial expenses plus depreciation and amortization (EBITDA).

In January 4th, 1999, the Company assumed the debt related to the Eurobonds of $100,000 and $130,000, issued by the Company’s parent, Metalúrgica Gerdau, with maturity in November 2001 and in May 2004, in exchange for the existing debt with the parent. As a result of this operation, the Company is subject to certain financial covenants related to the issuance of these Eurobonds. Under the most restrictive of these covenants, the Company must maintain consolidated indebtedness at a level that is less than 4 times the consolidated EBITDA. As of December 31, 1999, the Company was in compliance with all restrictive covenants related to the Eurobonds.

Other covenants in the debt agreements restrict the payment of dividends and limit the incurrence of additional debt. As of December 31, 1999, the Company was in compliance with these covenants.

Long-term debt matures in the following years:

2001 $ 289,769 2002 107,688 2003 132,373 2004 147,411 2005 and thereafter 62,074 $ 739,315

11 Commitments and contingencies

The Company is party to claims with respect to certain taxes, contributions and labor. Management believes, based in part on advice from legal counsel, that the reserve for contingencies is sufficient to meet probable and reasonably estimable losses in the event of unfavorable rulings, and that the ultimate resolution will not have a significant effect on the consolidated financial position as of December 31, 1999 or the results of future operations or cash flows. However, it is possible that contingencies could have a material effect on quarterly or annual operating results, when resolved in future periods.

Included in the provision for contingencies as of December 31, 1999 is $47,298 relating to “compulsory loans” required to be made to ELETROBRÁS (“Empréstimo Compulsório Eletrobrás sobre Energia Elétrica”), the government-owned energy company, by its customers. The Company has, along with other electricity customers, challenged the constitutionality of these loans. In March 1995, the Supreme Court decided against the interests of the Company. Even though the constitutionality of the “compulsory loans” has been sustained by the Supreme Court, several issues remain pending, including the amounts to be paid by the Company. The claims are expected to be outstanding for at least two or three more years.

F-25 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts)

The Company has established a reserve relating to the “compulsory loans” as: (i) the Supreme Court has initially decided against the interests of the Company as it relates to this matter, (ii) even though the payment to Eletrobras was in the form of a loan, the re-payment to the Company will be made in the form of Eletrobras shares, and (iii) based on currently available information, the Eletrobras shares will most likely be worth less than 5% of the amount that would be paid if the re-payment was to be made in cash.

Also included in the reserve for contingencies are $4,027 relating to contested federal social contribution taxes, “Fundo de Investimento Social” (“FINSOCIAL”), $648 relating to state value added tax, “Imposto Sobre Circulação de Mercadorias e Serviços” (“ICMS”), $2,565 relating to “Contribuição Social Sobre o Lucro”, $3,367 relating to “Contribuição Provisória sobre Movimentação Financeira” (“CPMF”) and $27,333 relating to contested federal social contribution taxes, “Programa de Integração Social”, (“PIS”) and “Contribuição para o Financiamento da Seguridade Social” (“COFINS”). The Company believes that, under the Supreme Court ruling on PIS, it is entitled to a tax refund which it has offset against monthly payments of PIS and COFINS. The amounts offset have been accounted for as a contingent liability. The Company believes that it will not have judgement on the merits for at least two years.

The Company is also a party to a number of lawsuits by employees. As of December 31, 1999, the Company has accrued $2,156 relating to such lawsuits. Additionally, the Company is involved in a number of lawsuits arising from the ordinary course of business and has accrued $36 for these claims.

Judicial deposits, which represent restricted assets of the Company, relate to amounts paid to the court and held in Judicial escrow pending resolution of related legal matters. The balance as of December 31, 1999 is comprised principally of $15,248 relating to the ELETROBRÁS dispute (December 31, 1998: $21,368) and $5,969 related to disputed federal social contribution taxes, “Fundo de Investimento Social” (“FINSOCIAL”) (December 31, 1998: $3,512).

12 Acquisition of Ameristeel Corporation

In September, 1999, the Company acquired a 74% interest in Ameristeel Corporation. This acquisition was accounted for under the purchase method and the results of the acquired company have been included in the financial statements of the Company from the respective date of acquisition.

The excess purchase price over the fair value of the net assets acquired, including expenses incurred by the Company, has been recorded as goodwill. The amortization of goodwill, recorded in 1999, was of US$ 2,267.

F-26 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) The unaudited pro forma results of operations for the years ended December 31, 1999 and 1998, as if the Company had acquired a controlling interest in Ameristeel on January 1, 1998, are as follows:

Year Ended December 31, 1999 1998 (unaudited) Net revenues 2,248,574 2,564,762 Income (loss) befores extraordinary items 31,970 220,438 Extraordinary item, net of income taxes (2,325) (2,073) Net income (loss) 29,645 218,365

13 Shareholders' equity

13.1 Share capital

As of December 31, 1999, 19,691,010,193 shares of Common stock and 37,054,842,993 shares of Preferred stock were issued and outstanding. The share capital of the Company is comprised of Common shares and Preferred shares, all without par value. Only the Common shares are entitled to vote. Under the Company’s By-laws, specific rights are assured to the non-voting Preferred shares. There are no redemption provisions associated with the Preferred shares. The Preferred shares have preferences in respect of the proceeds on liquidation of the Company.

In the event that the Mandatory Dividend is omitted for three consecutive years, the Preferred shares acquire voting rights until payment of such dividend is reserved.

The following sets forth the changes in the Company’s shares from January 1, 1997 through December 31,1999:

Common Preferred Treasury shares issued shares issued stock Balances as of January 1, 1997 18,935,953,917 29,602,850,500 - Shares issued to acquire minority interest in Cia. Siderurgica Pains S.A. on June 30th, 1997 8,607,969 31,270,224 Shares issued to acquire minority interest in Siderurgica Riograndense S.A. on June 30th, 1997 746,448,307 7,420,692,999 Repurchase of Preferred shares - - (175,200,000) ------Balances as of December 31, 1997 19,691,010,193 37,054,813,723 (175,200,000) Repurchase of Preferred shares - - (57,900,000) ------Balances as of December 31, 1998 19,691,010,193 37,054,813,723 (233,100,000) Shares issued in the merger of Comercial Gerdau - 29,270 - Sale of Preferred shares - - 233,100,000 ------Balances as of December 31, 1999 19,691,010,193 37,054,842,993 - ======

F-27 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) Under Brazilian GAAP, (for periods prior to December 31, 1995), statutory reserves were subject to monetary correction with a capital reserve established to accumulate the amount of the monetary correction. During 1996 and 1995, the Company issued Common and Preferred shares to its shareholders thereby capitalizing all remaining amounts included in the capital reserve. For U.S. GAAP purposes, this transaction has been treated as a stock dividend; historical per share amounts have therefore been restated for all periods.

In accordance with Brazilian law, a Company is entitled to purchase up to 10% of each type of its own stock traded on the Brazilian stock exchange. On November 3, 1997, the Company’s Board authorized the purchase, at market rates, of its own Common and Preferred shares on the São Paulo Stock Exchange and the retention of such shares in Treasury with the option to resell in the market. During 1999, the Company sold all the 233,100,000 Preferred shares in treasury.

13.2 Legal reserve

Under Brazilian law, the Company is required to transfer up to 5% of annual net income, determined in accordance with the Brazilian Corporation Law, to a legal reserve until such reserve equals 20% of paid-in capital. The legal reserve may be utilized to increase paid-in capital or to absorb losses, but cannot be used for dividend purposes.

13.3 Dividend payments

Brazilian law permits the payment of cash dividends from retained earnings calculated in accordance with the provisions of the Brazilian Corporation Law and as stated in the statutory accounting records. As of December 31, 1999, the Company's retained earnings available for dividend distributions to Preferred and Common shareholders approximated $319,432.

Aggregate dividends declared by the Company for the years ended December 31 were as follows:

1999 1998 1997 Common shares $ 23,741 $ 14,949 $ 13,390 Preferred shares 47,132 29,925 27,341 Total $ 70,873 $ 44,874 $ 40,731

14 Accounting for income taxes

Income tax payable is calculated separately for Gerdau and each of its subsidiaries as required by the tax laws of the countries in which Gerdau and its subsidiaries operate. Income tax expense for the fiscal year ended December 31 consists of the following: 1999 1998 1997 Current tax expense:

F-28 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) Brazil $ 4,855 $ 27,501 $ 14,213 United States 3,501 Canada 8,824 10,481 1,978 Other countries 276 478 1,144 17,456 38,460 17,335 Deferred tax expense (benefit): Brazil 527 7,864 10,529 United States (1,488) Canada 4,387 5,979 11,181 Other Countries (346) 3,080 13,843 21,710 Income tax expense $ 20,536 $ 52,303 $ 39,045

A reconciliation of the provisions for income taxes and expected income taxes at the Brazilian statutory rates follows:

1999 1998 1997 Net income before taxes and minority interest $ 217,900 $ 246,995 $ 216,970

Income tax rate 35.67% 33.00% 33.00%

Income tax at statutory rates $ 77,725 $ 81,508 $ 71,600 Permanent differences: - International rate differences (2,201) 1,357 1,609 - Non-deductible expenses/non taxable revenue (535) 2,062 (830) - Effect of changes in tax rates (17,514) -- - Differences related to assets and liabilities remeasured at historical rates that result from (i) indexing used for Brazilian tax purposes; and (ii) changes in exchange rates (16,135) (19,241) (29,544) - Interest on equity (23,388) (16,869) - - Adjustments of inflationary effects for Brazilian tax purposes not provided under U.S. GAAP: - Depreciation - 234 1,257 - Other, net 2,584 3,252 (5,047) Income tax expense $ 20,536 $ 52,303 $ 39,045

Tax rates in the principal geographical areas in which the Company operates, for the years ended December 31, were as follows:

1999_ 1998 1997 Brazil Federal income tax 25.00% 25.00% 25.00% Social contribution 12.00% * 8.00% 8.00% Composite federal income tax rate 37.00% 33.00% 33.00%

United States Federal income tax (approximately) 43.00%

Canada Federal income tax 21.84% 21.84% 21.84% Provincial rate (approximately) 15.16% 16.16% 16.16% Composite federal income tax rate 37.00% 38.00% 38.00%

Chile

F-29 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) Federal income tax 15.00% 15.00% 15.00%

Uruguay Federal income tax 30.00% 30.00% 30.00%

* 8% from January to April, 1999.

For 1996, social contribution tax was deductible for federal income tax and social contribution purposes. As a result of legislation enacted in 1996, the social contribution tax is no longer deductible for income tax purposes or in its own computation bases so that, as from the beginning of 1997, the combined rate increased to 33%. In 1999, a provisional measure (temporary rule which must be reissued every 30 days or it lapses) was passed, increasing social contribution to 12% since May, 1999.

Deferred income tax

The most significant temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of December, 31, are presented below:

1999 1998 1997 Deferred tax assets Property, plant and equipment $ 41,294 $ 47,423 $ 19,931 Net operating loss carryforwards 634 3,093 5,606 Accrued liability for legal proceedings 18,054 28,386 29,087 Accrued pension costs 13,536 10,519 7,900 Other 6,968 4,235 3,649 Gross deferred income tax assets 80,486 93,656 66,173

Deferred tax liabilities Capitalized interest on property, plant and equipment 3,194 7,105 5,332 Accelerated depreciation 139,508 68,336 25,087 Other 520 193 - Gross deferred income tax liabilities 143,222 75,634 30,419

Net deferred income tax assets (liabilities) $ (62,736) $ 18,022 $ 35,754

No valuation allowance has been established to reduce or eliminate net deferred tax assets as management believes, based on the expectation of profits, that realization is more likely than not.

Brazilian tax law allows tax losses to be carried forward indefinitely to be utilized to offset future taxable income. Tax legislation enacted in 1995 limits the utilization of tax losses in a given year to 30% of taxable income.

Deferred tax accounts 1999 1998 1997

Deferred tax assets – current $ 11,601 $ 6,267 $ 2,661

F-30 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) Deferred tax assets – non-current 68,885 87,389 63,512

Deferred tax liabilities – current 3,558 6,560 - Deferred tax liabilities – non-current 139,664 69,074 30,419

15 Earnings per share

In accordance with SFAS No. 128, the following tables reconcile net income available to Common and Preferred shareholders and weighted average Common and Preferred shares outstanding to the amounts used to calculate basic and diluted EPS for each of the years ended December 31, 1999, 1998 and 1997.

1999 Common Preferred Total (In thousands, except per share data and percentages) Basic numerator Actual dividends declared $ 23,741 $ 47,132 $ 70,873 Basic allocated undistributed earnings (i) 41,287 85,532 126,819 Allocated net income available to Common and Preferred shareholders $ 65,028 $ 132,664 $ 197,692 Basic denominator Weighted average shares 19,691 36,947

Basic earnings per share $ 3.30 $ 3.59

1999 Common Preferred Total (In thousands, except per share data and percentages) Diluted numerator Actual dividends declared $ 23,741 $ 47,132 $ 70,873 Basic allocated undistributed earnings (i) 41,287 85,532 126,819 Diluted allocated undistributed earnings 65,028 132,664 197,692 Convertible securities: Interest expense on convertible debt, net of tax (ii) 196 407 603 Allocated dilutive net income available to Common and Preferred shareholders $ 65,224 $ 133,071 $ 198,295

Diluted denominator Basic weighted average shares 19,691 36,947 Convertible securities: Convertible debentures (ii) 246 493 Diluted weighted average shares outstanding 19,937 37,440

Diluted earnings per share $ 3.27 $ 3.55

F-31 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts)

1998 Common Preferred Total (In thousands, except per share data and percentages) Basic numerator Actual dividends declared $ 14,950 $ 29,924 $ 44,874 Basic allocated undistributed earnings (i) 48,500 100,474 148,974 Allocated net income available to Common and Preferred shareholders $ 63,450 $ 130,398 $ 193,848

Basic denominator Weighted average shares 19,691 36,824

Basic earnings per share $ 3.22 $ 3.54

1998 Common Preferred Total (In thousands, except per share data and percentages) Diluted numerator Actual dividends declared $ 14,950 $ 29,924 $ 44,874 Basic allocated undistributed earnings (i) 48,500 100,474 148,974 Diluted allocated undistributed earnings 63,450 130,398 193,848 Convertible securities: Interest expense on Participation Certificates debt, net of tax (ii) 508 1,053 1,561 Interest expense on convertible debt, net of tax (ii) 427 885 1,312 Allocated dilutive net income available to Common and Preferred shareholders $ 64,385 $ 132,336 $ 196,721

Diluted denominator Basic weighted average shares 19,691 36,824 Convertible securities: Participation Certificates (ii) 1,031 2,062 Convertible debentures (ii) 308 617 Diluted weighted average shares outstanding 21,030 39,503

Diluted earnings per share $ 3.06 $ 3.35

1997 Common Preferred Total (In thousands, except per share data and percentages) Basic numerator Actual dividends declared $ 13,390 $ 27,341 $ 40,731 Basic allocated undistributed earnings (i) 40,002 76,010 116,012 Allocated net income available for Common and Preferred shareholders $ 53,392 $ 103,351 $ 156,743

F-32 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) Basic denominator Weighted average shares 19,315 33,339 Basic earnings per share $ 2.76 $ $ 3.10

Diluted numerator Actual dividends declared $ 13,390 $ 27,341 $ 40,731 Basic allocated undistributed earnings (i) 40,002 76,010 116,012 Diluted allocated undistributed earnings 53,392 103,351 156,743 Convertible securities: Interest expense on Participation Certificates debt, net of tax (ii) 334 634 968 Interest expense on convertible debt, net of tax (ii) 665 1,263 1,928 Allocated dilutive net income available to Common and Preferred shareholders $ 54,391 $ 105,248 $ 159,639

Diluted denominator Basic weighted average shares 19,315 33,339 Convertible securities: Participation Certificates (ii) 563 941 Convertible debentures (ii) 379 757 Diluted weighted average shares 20,257 35,037

Diluted earnings per share $ 2.69 $ 3.00

(i) The Company calculates earnings per share on Common and Preferred shares under the "two class method". See note 3.11. Effective January 1, 1997, Preferred shareholders are entitled to receive per-share dividends of at least 10% greater than the per-share dividends paid to Common shareholders. Undistributed earnings, therefore, from January 1, 1997 forward have been allocated to Common and Preferred shareholders on a 100 to 110 basis respectively, based upon the weighted average number of shares outstanding during the period to total shares (allocation percentage). Because the allocation percentage for each class differs for basic and diluted EPS purposes, allocated undistributed earnings differ for such calculations.

(ii) For purposes of computing diluted EPS, convertible securities are assumed to be converted into Common and Preferred shares at the beginning of the period or from the point at which such securities were outstanding. In accordance with Brazilian Corporation Law, on conversion of convertible debt, a maximum of 66.67% of the debt can be applied towards the acquisition of Preferred stock. In calculating diluted EPS, therefore, the Company has assumed a conversion ratio for convertible securities of 66.67: 33.33 Preferred to Common stock.

16 Fair value of financial instruments

In accordance with SFAS No. 107, “Disclosures About Fair Value of Financial Instruments”, the Company is required to disclose the fair value of financial instruments, including off-balance sheet financial instruments, when

F-33 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) fair values can be reasonably estimated. The values provided are representative of the fair values as of December 31, 1999 and 1998 and do not reflect subsequent changes in the economy, interest and tax rates, and other variables that may impact determination of fair value. The following method and assumptions were used in estimating fair values for financial instruments:

Cash and short term investments: The carrying amounts approximate fair value because of the short maturity of these instruments.

Judicial deposits: The carrying amount of judicial deposits approximates fair value, as interest is receivable on such deposits at a variable market rate.

Short-term debt, long-term debt (except Eurobonds) and debentures: The fair value of short-term debt, long-term debt and debentures is based on current rates offered for similar debt.

Long-term debt, Eurobonds: The fair value of the Eurobonds presents a discount over the debt value, which makes its balance, in fair value, different from the balance in the books.

Participation Certificates: The carrying amount of the Participation Certificates approximates fair value as interest is payable on such debt at a variable market rate.

The carrying amounts and fair values of the Company’s significant financial instruments as of December 31 are as follows:

1999 1998 Carrying Fair Carrying Fair Amount Value Amount Value

Cash and short-term investments $ 374,062 $ 374,062 $ 349,868 $ 349,868 Judicial deposits 28,005 28,005 35,823 35,823 Short-term debt 372,022 372,022 118,269 118,269 Long-term debt, including current portion 1,022,844 1,021,005 380,858 380,858 Debentures, including current portion 84,118 84,118 176,483 176,483 Long - term debt, Eurobonds 79,818 77,979 205,484 205,484 Participation Certificates --23,046 23,046

17 Concentration of credit risks

F-34 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) The Company's principal business is the production and sale of long ordinary steel products, including: crude steel; long rolled products, such as merchant bars and concrete reinforcing bars used in the construction industry; drawn products, such as wires and meshes; and long specialty steel products, such as tool steel and stainless steel. Approximately 50% of the Company's sales during 1999 were to civil construction customers, with the remaining sales primarily to manufacturing customers. Approximately 72% of the Company's sales are to domestic Brazilian companies, with the remainder equally split between export sales from Brazil and sales of its foreign subsidiaries located in Canada, Chile, Argentina and Uruguay.

No single customer of the Company accounted for more than 10% of net sales and no single supplier accounted for more than 10% of purchases. Historically, the Company has not experienced significant losses on trade receivables.

18 Segment information

The Company’s operations are classified into three business segments: civil construction, manufacturing and other. The civil construction segment principally involves the production and sale of concrete reinforcing bars, wire for reinforced concrete, annealed tying wire, welded meshes and nails. The manufacturing segment primarily consists of the production and sale of bars, wire rods, specialty steel products and billets. The other businesses segment consists of the agriculture and breeding sectors.

Information about the Company’s segments is as follows: (i) There are no significant inter-segment sales transactions. (ii) Operating income consists of net sales less applicable operating costs and expenses related to those sales. (iii) The identifiable assets are trade accounts receivable, inventories and property, plant and equipment.

1999 Civil Other Consolidated Construction Manufacturing businesses total

Net sales to external customers 839,326 663,613 218,049 1,720,988 Operating income 183,304 144,930 47,621 375,855 Identifiable assets 1,245,303 903,549 180,123 2,328,975 Capital expenditures 211,384 167,131 54,916 433,431 Depreciation 40,412 31,952 10,499 82,863

1998

F-35 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) Civil Other Consolidated Construction Manufacturing businesses total

Net sales to external customers 920,852 699,169 265,040 1,885,061 Operating income 163,486 100,102 29,451 293,039 Identifiable assets 880,314 732,969 174,882 1,788,165 Capital expenditures 169,746 141,334 33,722 344,802 Depreciation 46,682 38,869 9,274 94,825

1997 Civil Other Consolidated Construction Manufacturing businesses Total

Net sales to external customers $ 878,857 $ 756,976 $ 188,275 $ 1,824,108 Operating income 123,417 79,165 19,791 222,373 Identifiable assets 800,101 695,422 171,355 1,666,878 Capital expenditures 82,403 72,169 17,137 171,709 Depreciation 45,808 40,119 9,526 95,453

Geographic information about the Company follows:

1999 Brazil United States Canada Other countries Total

Net sales 1,243,478 163,165 244,800 69,545 1,720,988

Identifiable assets 1,290,617 561,930 272,225 204,203 2,328,975

Operating income 302,764 14,501 50,679 7,911 375,855

1998 Brazil Canada Other countries Total

Net sales 1,518,203 249,938 116,920 1,885,061

Identifiable assets 1,347,732 225,375 215,058 1,788,165

Operating profit 244,442 26,074 22,523 293,039

1997 Brazil Canada Other countries Total

F-36 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) Net sales $ 1,459,903 $ 247,827 $ 116,378 $ 1,824,108

Identifiable assets 1,347,671 215,027 104,180 1,666,878

Operating profit 157,018 46,209 19,146 222,373

19 Acquisition of interest in Açominas

During 1999, the Company acquired additional sharers of Aço Minas Gerais S.A. – Açominas (“Açominas”), for a total of 36.63% of capital. The excess of fair value over the purchase price of the net assets acquired, in the amount of US$ 210,733, has been recorded as na offset to property, plant and equipment of Açominas, and will offset depreciation expense over the average useful lives of the fixed assets, which is 30 years. The condensed balance sheet and result of operations of Açominas are as follows:

Year Ended December 31, 1999 1998 Net revenues 423,731 486,630 Net loss (103,297) (98,223) Current assets 187,948 202,315 Total assets 1,626,433 2,276,265 Current liabilities 299,800 321,507 Stockholders’ equity 1,093,995 1,568,473

20 Valuation and qualifying accounts

Year ended December 31, 1999: Balance as of Effects of Balances Beginning Changes in Charges as of end Description of the year Exchange rates (deductions) of the year Provisions offset against assets balances: Allowance for doubtful accounts $ 9,685 $ (3,142) $ 2,775 $ 9,318 Reserves: Provision for contingencies 115,936 (58,081) 29,575 87,430 Total $ 125,621 $ (61,223) $ 32,350 $ 96,748

Year ended December 31, 1998:

F-37 GERDAU S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except per share amounts) Balance as of Charges (credits) Balances beginning to costs and as of end Description of the year Expenses Deductions of the year Provisions offset against assets balances: Allowance for doubtful accounts $ 4,165 $ 5,520 $ - $ 9,685 Reserves: Provision for contingencies 112,736 3,200 - 115,936 Total $ 116,901 $ 8,720 $ - $ 125,621

Year ended December 31, 1997: Balance as of Charges (credits) Balances beginning to costs and as of end Description of the year expenses Deductions of the year Provisions offset against assets balances: Allowance for doubtful accounts $ 2,001 $ 2,164 $ - $ 4,165 Reserves: Provision for contingencies 130,641 (17,905) - 112,736 Total $ 132,642 $ (15,741) $ - $ $116,901

21 New accounting pronouncements

In June 1998, the FASB issued Statement of Financial Accounting Standards nº 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), which will be effective for fiscal years beginning after June 15, 2000, and establishes accounting and reporting standards for derivative instruments and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. The Company is currently evaluating the potencial impact of this standard on its financial position and results of operations. However, no material effects are expected to be generated.

In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin nº 101, “Views on Selected Revenue Recognition Issues” (“SAB 101”), which sets forth the staff’s views in applying generally accepted accounting principles to selected revenue recognition issues. SAB 101 is effective for the second quarter of 2000. The Company will assess the effect of this new standard in the future.

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