a) Basis of presentation and translation into U.S. dollars - After the reorganization of Fior, but before the exchange offer, IBH became a wholly-owned subsidiary of Fior (see Note 1), and became the successor to the assets, liabilities and operations that Fior previously had; IBH is for accounting purposes the successor to Fior. After the reorganization, the shareholders of Fior remain in their same economic position that they had before. This transaction has been accounted for as a business combination of companies under common control in a manner similar to a pooling of interests. The accompanying financial statements of IBH for the years prior to its legal formation include the assets, liabilities, shareholders' equity and results of operations of Fior and IBH (at historical cost) as if the reorganization referred to above had been consummated as of the beginning of the first year being presented in the consolidated financial statements; the net adjustment to the equity in 1997 (distribution) relates to a portion of net assets that were not contributed by Fior to IBH and to the US$20 million note issued by IBH to Fior as result of the transfer of assets indicated in Note 1. After the exchange offer, IBH became a majority-owned subsidiary of Sivensa (see Notes 1 and 8). The transaction where Sivensa contributed its 71.9% interest in Venprecar was accounted for as a business combination of companies under common control and, therefore, accounted for under U.S. GAAP in a manner similar to a pooling of interests; the historical financial statements of IBH through November 1997 have been restated giving retroactive effect to the contribution of Sivensa's 71.9% interest in Venprecar. The 28.1% of Venprecar not owned by Sivensa was accounted for as minority interest in the restated financial statements of IBH; the transaction where the minority interest exchanged its shares for new shares of IBH, was accounted for under U.S. GAAP as a purchase transaction. IBH presents its financial statements in accordance with United States generally accepted accounting principles ("U.S. GAAP") and the U.S. dollar is its reporting currency. The main operations and main assets of IBH are located in Venezuela, which has a hyperinflationary economy. For the Venezuelan entities, the translation of the Venezuelan bolivar (Bs) financial statements into U.S. dollars has been conducted in accordance with Statement of Financial Accounting Standards ("SFAS") N° 52 "Foreign Currency Translation" as applicable to an entity operating in a hyperinflationary environment. Pursuant to SFAS N° 52, (i) nonmonetary assets and capital accounts are translated at historical exchange rates, (ii) monetary assets and liabilities are translated at current exchange rates, and (iii) revenues and expenses are translated using average exchange rates for the period, except for items related to nonmonetary assets and liabilities (e.g, cost of sales, depreciation, and amortization of intangibles), which are translated using historical exchange rates; translation adjustments are included in the results for the year. Foreign exchange gains and losses arise mainly from the effect of exchange rate fluctuations on net monetary items denominated in Venezuelan bolivars, and are included in the results for the year (see Note 12). IBH and its subsidiaries have the following monetary balances in bolivars at the dates indicated: September 30 1999 1998 (Thousands) Assets Cash and cash equivalents Bs. 5.022 Bs. 73 Accounts receivable and other monetary assets 4.299.017 4.551.879 Total monetary assets 4.304.039 4.551.952 Liabilities Accounts payable and other monetary liabilities (10.292.589) (8.756.264) Total monetary liabilities (10.292.589) (8.756.264) Total net monetary liabilities in bolivars Bs. (5.988.550) Bs. (4.204.312) Total net monetary liabilities equivalent in U.S. dollars (US$9.540) (US$7.325) The year-end exchange rates and the average exchange rates for each year were as follows: September 30, 1999 1998 1997 (Thousands) Exchange rate per U.S. dollar at end of year (bs/US$1) 628 574 498 Average exchange rate U.S. dollar at end of year (bs/US$1) 590 534 484 IBH does not engage in hedging activities. b) Principles of consolidation - The consolidated financial statements include the accounts of IBH; its wholly-owned subsidiaries: Old IBH, Siderúrgica del Caroní "Sidecar", C.A. and SVS International Steel Holding; and its majority-owned subsidiary: Venezolana de Prerreducidos Caroní "Venprecar", C.A. (see Note 8). All intercompany transactions and balances have been eliminated in consolidation. As discussed in Note 7, in September 1997 the participation of IBH in Orinoco Iron, Operaciones RDI and Brifer was reduced from 100% to 50% in conjunction with the formation of the Joint Venture; accordingly, since this date, the equity method is used for these companies. Below is Pro Forma data related to the consolidated condensed statements of operations of IBH for the years ended September 30, 1997, in which the results of Orinoco Iron, RDI and Brifer for the aforementioned period are shown under the equity method rather than on a consolidated basis: (Thousands of U.S. dollars) Pro Forma Data Net Sales 91.589 Cost of sales (66.944) General and administrative expenses (9.000) Other expenses (2.553) Equity in results of affiliates 7.444 Income tax expense (966) aaa Net Income 19.570 c) Inventories - Inventories are valued at the lower of cost or net realizable value. Costs of iron briquettes, iron-ore and raw material were determined by the average cost method. Cost of spare parts and supplies are determined by the first-in, first-out ("FIFO") method. d) Investments - Investments in companies representing 20% to 50% of the capital stock of such companies are accounted for using the equity method (see Note 2-b). e) Property, plant and equipment - Property, plant and equipment are recorded at cost (see Note 1). Additions and improvements are capitalized, whereas expenditures for maintenance and minor repairs which do not extend the useful life of the asset are expensed. Depreciation of machinery and equipment is calculated based on the unit-of-production method. Other fixed assets are depreciated on a straight-line method, over their estimated useful lives. f) Deferred income tax - IBH accounts for income taxes in accordance with SFAS N° 109 "Accounting for Income Taxes". SFAS N° 109 requires an asset and liability method of accounting for income taxes. Under this method, deferred income taxes reflect the net effect of the expected future tax consequences of: (a) "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and; (b) tax credits and loss carry-forwards. Additionally, under SFAS N° 109, the effect on deferred taxes of a change in tax rates is recognized in income for the year that includes the enactment date. If it is more likely than not that a portion or all of the deferred tax asset will not be realized, a valuation allowance is recognized. g) Accrued employee termination benefits and profit sharing - As required by the Venezuelan Labor Law (the "Labor Law"), IBH and its subsidiaries make accruals of its liability for employee termination benefits which is a vested right of employees. This liability is presented net of advances on termination benefits granted. In June 1997 the Labor Law was partially reformed. The reform, among other aspects, establishes a minimum of 45 days´ salary per year (up to 90 days, depending on years of service) and a one-time compensation bonus for the transfer to the new termination benefit system. In the event of dismissal without just cause, workers are entitled to receive an additional payment; IBH and its subsidiaries accrue additional amounts for this dismissal termination benefit based on past experience. Additionally, the Labor Law establishes mandatory profit sharing for workers and employees in an annual amount equal to 15% of after-tax profits, subject to a minimum annual payment equal to 15 days´ salary and a maximum payment equal to 120 days´ salary. IBH and its subsidiaries accrued in the years ended September 30, 1999, 1998 and 1997, a profit sharing bonus based on 120 days´ salary. IBH does not have a pension plan or other post-retirement benefit programs. h) Revenue and cost of sales - Revenue and cost of sales of iron briquettes are recorded on an accrual basis when title to goods sold is transferred. i) Cash equivalents - IBH considers as cash equivalents any highly liquid short-term investments which are readily convertible to cash and have original maturities of three months or less, as well as funds on deposit with related companies (see Note 4). j) Use of estimates in the preparation of financial statements - The preparation of financial statements in conformity with generally accepted accounting principles requires that management makes estimates which affect the recorded balances of assets and liabilities and disclosure of contingent assets and liabilities and the recorded balances of income and expenses during the respective year. The actual results may vary from initial estimates. k) Basic and diluted net income per share - Basic and diluted net income per share has been determined by dividing the net income for the year by the weighted average number of shares outstanding during the year. For the business combinations indicated in Note 2-a, the computation was based on the aggregate of the weighted average outstanding shares of the constituent businesses, adjusted to equivalent shares of IBH for all periods presented. Basic and diluted earnings per share are the same for all periods presented as the Company did not have any potentially dilutive instruments. l) Fair value of financial instruments - The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates their fair value, due to the short-term maturities of these instruments. At September 30, 1999 and 1998, long-term /short-term accounts receivable from a related company of US$48.9 million and US$45.3 million, respectively, carried a fixed interest rate; the fair value of this receivable was approximately US$50.2 million and US$45.6 million, respectively. m) Concentration of credit and foreign currency risk - Financial instruments that are exposed to a concentration of credit risk consist primarily of cash equivalents and accounts receivable. IBH´s cash is placed with a diversified group of financial institutions and the third-party commercial accounts receivable balances are dispersed among many customers and IBH routinely assesses the financial strength of its customers. From time to time, there is high concentration of accounts receivable and funds on deposit with related parties (see Note 4). The Company currently exports 90% of its annual production to foreign countries, primarily the United States of America and, as a result, the majority of the Company's sales are denominated in U.S. dollars, while a part of the Company's costs and expenses are denominated in bolivars. As a result, variations between inflation and the devaluation of the bolivar may result in an increase in the Company's costs and expenses due to inflation without a corresponding increase in sales. n) Accounting for impairment of long-lived assets - In 1995 the Financial Accounting Standards Board issued SFAS N° 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS N° 121 requires impairment losses to be recorded for long-lived assets used in operations when indicators of impairment are present, and the undiscounted cash flows estimated to be generated by those assets are less than the assets´ carrying amounts. SFAS N° 121 also addresses the accounting for impairment losses associated with long-lived assets to be disposed of. This statement was effective for fiscal year 1997; its adoption did not have a material effect on IBH´s consolidated results of operations. o) Segment reporting - SFAS N° 131 "Disclosures about Segments of an Enterprise and Related Information" requires that a business enterprise reports financial and descriptive information about its reportable operating segments. Generally, segments financial information is required to be presented on the same or similar basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. Management considers that IBH has only one operating segment and operates in only one country. p) Comprehensive income - In 1999 the Company adopted SFAS N° 130, "Reporting Comprehensive Income". SFAS N° 130 establishes guidelines for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income represents the change in shareholder's equity of the Company during the period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners. The adoption of SFAS N° 130 had no impact on total shareholders' equity. For all periods presented, the Company did not record changes in shareholders' equity from transactions and other events and circumstances from non-owner sources and, consequently, comprehensive income and accumulated income was equal to net results and retained earnings, respectively. q) Year 2000 costs - Costs related to the Year 2000 compliance issue are expensed as incurred. Cost incurred amounted to some US$12,300 for the year ending September 30, 1999.