1998 gruma annual report · 2014. 12. 30. · to our shareholders: it gives me great pleasure to...

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BUSINESS PORTFOLIO

(1) Millions of Mexican pesos of constant terms as of December 31, 1998 (2) Total asset share(3) Companies from the Technology Division and Corporate Services(N.A.) Not Available

VARIATION%

Net sales

Gross profit

Operating income

Operating cash flow 4

Net income

Net majority income

Total assets

Total liabilities

Stockholder’s equity

Majority stockholder’s equity

Operating cash flow/gross interest expense

Operating cash flow per share5

Book value per share6

13,194

4,507

941

1,511

713

442

16,651

6,335

10,316

7,937

4.18

4.28

22.73

13,774

5,028

1,032

1,619

654

417

17,173

7,080

10,092

7,703

4.29

4.57

21.83

4.4

11.6

9.6

7.2

(8.4)

(5.6)

3.1

11.8

(2.2)

(2.9)

2.7

6.8

(4.0)

1997 1998

FINANCIAL RESULTS

GRUMA, S.A. DE C.V. AND SUBSIDIARIESMillions of Mexican pesos of constant terms as of December 31, 1998

(4) Operating cash flow defined as Operating income +Depreciation and Amortization

(5) Pesos over bases of 354,740,401 shares for 1997, and 354,059,496 shares for 1998

(6) Pesos over bases of 349,271,363 shares for 1997, and 353,196,619 shares for 1998

To our shareholders:

It gives me great pleasure to inform you that during 1998 GRUMA continuedstrengthening its position as a world leader in the corn flour and tortilla industry, andreported very good operating results. We had the highest sales volume and gross pro-fit in our history, 3.1 million tons and 5 billion pesos, respectively. The higher volumemade it possible for GRUMA´s net sales growth to resume, with a 4% increase over1997. Margins showed improvement with gross profit rising 12% and operating profitup 10%.

Our international operations advanced significantly, increasing sales by 10%.Gruma Corporation strengthened its leadership position in both the corn flour and thetortilla markets, showing a combined growth of 10% in sales volume over 1997, as wellas an improvement of 16% in gross profit and an 18% increase in operating profit.Gruma Centro América grew its sales volume by 6% and its gross profit by 11% com-pared to 1997. Combined sales from our foreign operations increased from 52% to 55%of GRUMA´s total sales.

In Mexico, Grupo Industrial Maseca (GIMSA) reported a 6% increase in grossprofit and a 5% rise in operating profit; both margins improved in spite of a slightdecrease of 3% in sales volume due mostly to the federal government's ceilings on cornflour sales volumes for the production of subsidized tortillas.

On December 31, 1998, the federal government issued a decree eliminating theregulations on the corn tortilla industry. This decree ended the ceiling system for cornflour sales volume, as well as the generalized subsidy and price control of corn tortilla.This environment of totally free competition is expected to have two importantresults: first, resumption of the process of substituting corn flour for the traditionalcorn method in making tortillas because of the economic and technological benefits ofcorn flour; and second, a significant growth in the consumption of packaged tortilla.As a result, GIMSA is expecting to increase its sales volumes because of the superiorquality of MASECA® and its recognized customer service.

Molinera de México, our joint venture with Archer-Daniels-Midland in thewheat flour industry, continues to report good results. This subsidiary had a 93%increase in sales volume in 1998. Molinera de México is the market leader in thecountry, with a 9% market share.

On November 20, 1998, GRUMA launched a complete line of white breadand sweet bread under the BREDDY® brand in the metropolitan area of Monterrey,Mexico. During the first six weeks of operations, sales surpassed our goals. In 1999we expect to complete our coverage of the entire northeastern region of the country,including the states of Nuevo León, Tamaulipas, Coahuila, San Luis Potosí andZacatecas.

5

LETTER FROM THE CHAIRMAN

6

In 1998, GRUMA implemented an aggressive capital investment and acqui-sition program totaling 2 billion pesos. This program provided the Company with sixmore plants (three tortilla plants, two wheat mills and one bread plant) and expandedthe existing capacity of other plants. Additionally, we continued to modernize ourinformation technology to achieve greater efficiency and productivity in our keymanagement processes. Through this capital funding, GRUMA has strengthened itscompetitive advantages in market share, production costs and growth capacity.

Our total quality management program has also made significant progress. In1998 eight additional plants were ISO-9000 certified. To date, 30 of our plants havebeen awarded this certification. Furthermore, in the United States, GrumaCorporation's Olympic plant received the California Governor's Golden State QualityAward, and three other GIMSA plants received ISO-14000 certification.

In summary, 1998 was a year of great achievement for GRUMA. OurCompany increased its market shares, sales, and gross and operating profits. In ad-dition, it strengthened its position in order to take advantage of growth opportunitiesin the corn flour, tortilla, wheat flour and bread markets. At the same time, we main-tained the sound financial structure that allows us to continue to be the only Mexicancompany with an investment grade rating.

1999 will be a special year for GRUMA, not only because of the great growthopportunities that lay ahead, but also because we celebrate our 50th anniversary.During the last five decades, GRUMA has become the undisputed leader in the cornflour and tortilla industry, and successfully entered into other businesses, such aswheat flour in Mexico and bread in Central America and Mexico.

At the meeting held on February 24, 1999, Gruma, S.A. de C.V.'s Board ofDirectors accepted the resignation submitted by Dr. Eduardo Livas Cantú asPresident and Chief Executive Officer for personal reasons. At the same meetingthe Office of the President was created. This office will be in charge of GRUMA'saffairs under the guidance of the Chairman and of the Board of Directors. TheOffice of the President will be comprised of the following executives: RicardoAlvarez-Tostado Penella, Deputy Chief Executive Officer of GRUMA, S.A. de C.V.and also Chief Executive Officer of Grupo Industrial Maseca, S.A. de C.V.; ManuelRubiralta Díaz, Executive Vice President of Marketing and Sales of GRUMA, S.A.de C.V.; Martín Ricoy Luviano, President and Chief Executive Officer of GrumaCorporation and Javier Vélez Bautista, Chief Financial and Planning Officer ofGRUMA, S.A. de C.V. This new role not only provides continuity, but also re-inforces the continuing development of the professional management structurethat GRUMA began several years ago.


7

I would like to thank our customers and investors for their trust, as well as the mem-bers of the Board of Directors and all our personnel for their active participation andsupport, and I would like to reiterate that at GRUMA we are committed to a long-termdynamic and sustained growth that creates greater value for our shareholders.


Don Roberto González BarreraChairman of the Board

OUR CORE BUSINESSES

A N D

An ongoing

commitment to

thoroughly know our

customers, to develop

efficient manufacturing

processes and better

products, and a long-

term vision have allowed

GRUMA to acquire

valuable experiences

over half a century and

to become the market

leader in all its markets.

The consumption of Mexican food in the United Statescontinues growing dynamically, generating additionaldemand for tortillas and corn flour. This has been adirect result of the increasing popularity of Mexicanfood among mainstream consumers and of the growingHispanic population.

Gruma Corporation's fundamental strategy has been toreinforce its leadership in the tortilla industry, maintain-ing a sound balance between the accelerated growth ofsales and profit generation. Gruma Corporationincreased its market share through a broader direct dis-tribution of its MISSION® and GUERRERO® tortillabrands to stores, and of MASECA® corn flour to tortillaand chip producers, as well as retailers.

In 1998, the combined sales volume of corn flour andtortillas grew 10% over the prior year, while operatingprofit increased 18% and the operating margin rose to6.9%. This is mainly a result of higher sales volumes andgreater operating efficiency in the tortilla business.

As a result of this balanced growth, in June of 1998Moody's Investors Service assigned an investment graderating of Baa2 to one of Gruma Corporation's mostimportant credit facilities. The rating reflects Moody'sexpectation that Gruma Corporation will continue tostrengthen its highly competitive position in the U.S.tortilla market and will maintain a prudent financial strategy.

A sound balance between growth and profitability

10

Growing dynamically with a food item that is becoming more popular every day in the United States: the tortilla

GRUMA CORPORATION

Gruma Corporation's market share in the total tortillamarket in the United States is estimated at 24%. TheCompany has widened its clear leadership position in anindustry that is highly fragmented and with a substantialpotential for growth.

In the corn flour industry, Gruma Corporation has an83% market share and a 43% share of the potentialmarket. The greatest opportunity for growth lies in theconversion of the segment that still uses the traditionalmethod of making tortillas from corn, which amountsto 48% of the potential market. The economic andtechnological advantages of corn flour will enableGruma Corporation to continue its dynamic growthin this market.

CORN FLOUR 52%

GRUMA CORP. 43%

TRADITIONAL METHOD 48%GRUMA CORP. 24%

Dallas Denver Houston Miami Phoenix SeattlePortland San Antonio San Diego San FranciscoLos Angeles New York

48%53%

28%

84%

58%

47%53%

56%

24%

78%

56%

86%

* SOURCE: A.C. Nielsen; 52 weeks ending December 1998

TORTILLA MARKET

CORN FLOUR POTENTIAL MARKET

TORTILLA MARKET SHARE *

In 1998, GRUMA took solid steps to extend its coverage intonew territories by acquiring two tortilla plants in the state ofTexas. Furthermore, operations were started at a new plantin Houston, and the Seattle plant is scheduled to open in thesecond half of 1999.

Additionally, Gruma Corporation enhanced its presence inthe European market by increasing sales and the number ofcustomers, establishing the basis for GRUMA's futuregrowth.

At the beginning of 1999, Gruma Corporation acquired fourtortilla-producing plants. One of them, located in NorthCarolina, has an important presence on the East Coast. Theother three plants are located in the most important con-sumption centers in Texas. With these acquisitions, GrumaCorporation has strengthened its leadership position in thetortilla market in the United States and increased the num-ber of satisfied customers.

Both the corn flour plant in Evansville, Indiana and thetortilla plant in Rancho Cucamonga, California wereISO-9000 certified in 1998.

We are proud to report that this year the Olympic tortillaplant in Los Angeles, California received the CaliforniaGovernor's Golden State Quality Award.

Important achievements were also made in the area ofinformation technology. The implementation ofSAP/R3 was completed at all five corn flour mills andduring 1999 significant advances will be made at thetortilla plants. This will not only enable us to automatethe company's processes but will also allow us toachieve greater administrative efficiency and a betteruse of our resources.

Greater coverage means greater market share

Total quality: a recognized commitment

GRUMA CORPORATION

12

.nts. One of them, located in North Carolina,has an important presence on the East Coast.The other three plants are located in the mostimportant consumption centers in Texas.With these acquisitions, Gruma Corporationhas strengthened its leadership position inthe tortilla market in the United States andincreased the number of satisfied customers.

Both the corn flour plant in Evansville,Indiana and the tortilla plant in RanchoCucamonga, California were ISO-9000certified in 1998.

We are proud to report that this year the

During the year, the federal government eliminatedthe regulations limiting the corn dough and tortillaindustry, creating enormous growth opportunities inthe market for GIMSA.

On December 31, 1998, the government issued adecree that ended both the ceiling system for cornflour sales volume, and the generalized subsidy andprice control of corn tortillas. The elimination of thesubsidy will not have an adverse impact on lowerincome groups since the government has implementedmore targeted welfare programs.

In the new environment of free competition, GIMSAis expecting to increase its sales volumes because ofthe superior quality of MASECA® and its recognizedcustomer service.

A year of achievements and a promising future

GRUPO INDUSTRIAL MASECA

14

15

The total tortilla market in Mexico grew 1% duringthe last year. The estimated volume (excluding self-consumption) is 9.4 million tons, with a value ofapproximately 4 billion dollars. The corn flourindustry had a 47% market share in the productionof tortillas.

During 1998, MASECA® maintained its leadershipposition with a sales volume of 1.8 million tons,which represents 69% of the corn flour industry and32% of the potential market. GIMSA's sales volumedecreased 3% compared with 1997, mainly due to theceilings imposed by the federal government.Operating profit increased by 5% and the operatingmargin improved to 15.7%, despite the reduction insales volume.

GIMSA's marketing strategy was focused on customersatisfaction. Additionally, the Company strengthenedits sales force to improve its efficiency. This resultedin improved customer service, greater distributionand enhanced product quality. GIMSA will continue toreinforce this strategy in order to encourage traditionaltortilla manufacturers to convert to corn flourconsumption.

MASECA®, Mexico´s leading corn flour brand

CORN FLOUR 47%

GIMSA 32%

TRADITIONAL METHOD 53%

CORN FLOUR POTENTIAL MARKET

During 1998, our milling capacity was expanded bycompleting the second production unit at theVeracruz plant.

GIMSA launched corn flour with vitamins and proteinenriched corn flour to improve the nutritional level ofthe Mexican population. GIMSA was the first todevelop and market these types of corn flours. Bothproducts have a substantial growth potential sincethey increase the nutritional value of the tortilla with-out changing its characteristic flavor or color.

Our ongoing efforts to preserve the environment haveresulted in important achievements. Three plants wereISO-14000 certified this year. These advances serve toreiterate our commitment to protect the environment inthe communities where we have a presence.

As part of our information technology modernizationprogram, the SAP/R3 program was successfully imple-mented at eleven of our eighteen plants. The goal is forall plants to have this system by mid-1999. GIMSA isnow at the same level as the world's leading companies,operating with communication and informationsystems that meet the needs of the new millenium.

16

Total quality: an ongoing commitment

GRUPO INDUSTRIAL MASECA

16

Central America is a market with substantial growthopportunity, since only 12% of the tortillas consumed inthe region are made with corn flour.

During the last few years, Gruma Centro América hasgrown significantly, transforming the tortilla industryfrom the traditional method to the use of corn flour.

Substituting the traditional method of producingtortillas from corn has been our biggest challenge.We are committed to modernize the tortilla manu-facturing process by implementing specific plans toincrease the use of corn flour in two market segments:the traditional tortilla producers and home use.

Our strategy has focused on:• Promoting the economic and technological benefits of

corn flour over the traditional method.

• Training traditional tortilla producers in the use of corn flour, through the 100 Club Program that makes gas stoves, hand-pressing machines and other equipment available for them.

• Promoting the use of corn flour for preparing different dishes at home.

The results were very satisfactory. There was a 6%growth in corn flour sales volume in 1998. This allowedGruma Centro América to maintain a 78% share of thecorn flour market in the region.

In addition, during 1998 our associate company inVenezuela reported significant increases in sales volumeand corn flour market share.

Modernizing the tortilla industryand developing new businesseswith great potential

GRUMA CENTRO AMERICA 78%

CORN FLOUR MARKET

18

GRUMA CENTRO AMERICA

19

In 1998 Gruma Centro América made a strategic changein its tortilla business in Costa Rica. In the past a franchisesystem had been used, with over 40 small manufacturingcenters to cover the entire country. Production has nowbeen centralized in a new and modern plant that pro-duces higher quality tortillas with greater operating ef-ficiency.

In addition, the logistics and distribution of other pro-ducts were redesigned in Costa Rica, with the incorpora-tion of tortillas into the daily direct store delivery system.A substantial reduction in distribution expenses wasachieved, as well as greater coverage of points-of-sale. The aforementioned benefits will be even moresignificant in the second half of 1999.

In 1998, we undertook market research studies throughwhich we clearly identified consumers´ preferences andestablished strategies aimed at meeting their needs.These strategies resulted in a 27% growth in the tortillasales volume and an 85% share of the tortilla market inCosta Rica.

Tortillas in Costa Rica: a market rich in opportunities

20

In 1999 we will continue to focus our efforts on identify-ing and satisfying consumer needs in order to maintainour leadership position. Our vision has a clear objective:the consumer.

Since 1994, GRUMA has actively participated in thepackaged bread business in Costa Rica, with a com-plete white bread and pastry product line under ourBREDDY® brand. In only four years, GRUMAattained market leadership, with a 47% share.

Furthermore, we entered into the unpacked breadsegment, offering such products as baguettes, whichrepresents 82% of the total consumption of bread inCosta Rica. We started the distribution of frozen pre-cooked bread to small grocery stores where it undergoesthe final baking process. This ensures a high quality,freshly-baked product for the consumer.

Costa Rica has been an excellent testing ground forGRUMA, where we have developed new businesses thathave subsequently been successfully implemented in thelarger markets of the United States and Mexico. Amongthe businesses originally implemented in Costa Ricainclude packaged tortillas, tortilla chips, white bread andpastries. This has afforded GRUMA the opportunity totest and develop products at a relatively low cost.


GRUMA CENTRO AMERICA 85%

TORTILLA MARKET INCOSTA RICA

Bread: a new business with great potential

NEW BUSINESSES

GRUMA has diversified

its business portfolio by

successfully entering into

the wheat flour and

packaged bread markets.

GRUMA balances quality

with value through

product variety and

excellent customer

service.

Mexico's wheat flour market is estimated at 3.3 milliontons per year. The largest segment is the small mom-and-pop bakeries, which consumes approximately 50%of the total wheat flour. In addition, a smaller but high-ly profitable market is the retail segment, whichrepresents 8% of the market. The wheat flourindustry is characterized by many small producersoperating less efficient plants.

Since 1996, GRUMA has participated in the wheat flourindustry through its subsidiary Molinera de México,our joint venture with Archer-Daniels-Midland. At thebeginning, the company had only two mills.Subsequently, Molinera de México implemented anambitious expansion program and acquired five moremills, three in 1997 and two during 1998. As a result,Molinera de México is the company with the largestmilling capacity in Mexico with 9% of the total.

Wheat flour: A new field to harvest growth and profits

MOLINERA DE MEXICO 9%

WHEAT FLOUR MARKET

24

MOLINERA DE MEXICO

25

Servicio: El ingrediente selecto para nuevos mercados

During 1998, Molinera de México achieved animpressive 93% increase in sales volume, mainlydue to acquisitions and our regional marketingstrategy. Sales objectives were set by distributionchannel, experienced personnel were hired andtraining programs were strengthened, especially incustomer service.

Molinera de México's objective is to become the leadingcompany in the wheat flour industry by a wide margin.We will attain this by focusing on two market segments:small bakeries and the retail customers, and by offeringproducts and services that completely meet their needs.

Our leading brands in the retail segment areSELECTA®, DILUVIO® and MONTERREY®.PODEROSA®, BERRI® and SELECTA® are themost popular brands with our industrial customers.

Service: a distinctive ingredient for new markets

26

Molinera de México undertook a plant modernizationprogram in order to increase its competitive advantagesand become the lowest-cost producer in the industry.High priority was given to wheat procurement andstorage, as well as to efficiencies.

As a result of our total quality programs, the AmericanInstitute of Baking certified two of our mills. In ad-dition, programs have been implemented so that ourother mills will also receive this recognition.

World class quality: our continuing goal

MOLINERA DE MEXICO

Packaged tortillas and bread in Mexico: A significant market opportunity

GRUMA has been in the packaged tortilla businesssince 1994. Currently the Company operates manu-facturing facilities and direct store delivery networksin the northern region of Mexico and in Tijuana. Ourproduct line includes corn and wheat tortillas, aswell as tostadas, which are sold under the MISION®brand and have a leading share in the region.

On December 31, 1998, the federal government issued adecree that eliminated the general corn tortilla subsidyand price control. In the new competitive environment,we expect dynamic growth in the packaged tortillamarket because the price difference between packagedand non-packaged corn tortillas will be reduced.

The tortilla market in Mexico is estimated at 9.4 milliontons and valued at approximately 4 billion dollars, ofwhich less than 3% are packaged tortillas. We estimatethat in ten years half of the tortillas consumed in Mexicowill be packaged and distributed through small grocerystores, supermarkets and convenience stores.

PRODUCTOS Y DISTRIBUIDORA AZTECA

GRUMA successfully entered the Mexican style sweetbread market in Los Angeles, California more than tenyears ago obtaining significant experiences in the breadindustry. Later in 1994, GRUMA entered the packagedwhite bread and pastry business in Costa Rica launchingour BREDDY® brand. In only four years, GRUMAbecame the market leader, with a 47% share. These ex-periences in the production and marketing of packagedbread have prepared GRUMA to enter larger markets.

The bread market in Mexico is estimated at ap-proximately 4.2 billion dollars, of which the packagedsegment represents only 36%. Nearly twenty thousandsmall bakeries that produce non-packaged bread sup-ply the rest of the market.

GRUMA has accumulated valuable experiences inthe manufacturing and distribution of packagedtortillas in Mexico. The inclusion of packaged breadin the distribution system will result in synergiesand will give us the opportunity to participate inthe attractive packaged bread market, until nowsupplied by only one manufacturer.

29

BREDDY® a promising business with natural synergies

30

In November 1998, GRUMA started operations at amodern bread factory in Monterrey, Nuevo León.The plant was designed to supply the northeasternregion of the country, including the states of NuevoLeón, Tamaulipas, Coahuila, San Luis Potosí andZacatecas. Monterrey was selected because of itsstrategic advantages: it is GRUMA´s largestpackaged tortilla market, has the highest rate ofpackaged food consumption in Mexico and anongoing and a strong brand awareness ofGRUMA´s products.

A comprehensive analysis of the consumers´ preferences,competitor and distribution channels was the basis toensure a sound entry into the bread market. TheCompany launched a full line of BREDDY® white andsweet bread, supported by an aggressive promotionaland advertising campaign. After six weeks, our brandhad obtained a high awareness level with the consumerand sales had exceeded our initial targets.

Our goal is to continue to develop the packaged tortillaand bread business with the same philosophy that hasmade GRUMA a leading company in all its markets:Superior product quality, a strong customer commitment,state-of-the-art technology, outstanding service and ef-ficient distribution networks.

PRODUCTOS Y DISTRIBUIDORA AZTECA

Quality in our packaged products: A commitment to our customers

34

To be the absolute leader in the manufacturing andmarketing of corn flour and tortillas in the world, aswell as one of the main processors of grain and basicgrain-based food products in Mexico, CentralAmerica, Venezuela and Colombia.

GRUMA is committed to dynamic and long-termprofitable growth that maximizes value creation forshareholders, maintaining its principal focus on itscore businnesses corn flour and tortillas, and ad-ditionally offering corn and wheat-based basic foodproducts of superior quality to fully satisfy consumers.Our operations will be supported by efficient manu-facturing and marketing systems, including directstore delivery where profitable.

• Offer world-class quality products and services.

• Achieve thorough knowledge and understanding of our customers.

• Enhance our brand equity.

• Focus our technological and market research on developing competitive advantages.

• Participate only in markets where long-term value creation can be achieved through economies of scale.

CORPORATE PHILOSOPHY

VISION

MISSION

STRATEGIC GUIDELINES

35

VALUES

Long-term growth and visionOur fundamental objective is to maintain long-termsustained growth that maximizes value creation.

GRUMA's peopleGRUMA´s human resources are its most valuable asset.We acknowledge the need for continuous improvementof our employees and adequate balance between theirprofessional and personal lives.

Quality and customer satisfactionGRUMA is committed to customer satisfaction throughthe continuous improvement of its products, processesand service, providing the best price-value relationshipin our products.

Social responsibilityGRUMA is committed to contributing to the social,economic and environmental well-being of the com-munities where it operates.

Excellence and integrityExcellence and integrity govern our operations andbusiness relationships.

FILOSOFIA CORPORATIVA

36

GRUMA, S.A. DE C.V. AND SUBSIDIARIESFinancial Highlights by subsidiary(Millions of Mexican pesos of constant terms as of December 31, 1998)

1998

Net salesGross profitOperating incomeOperating cash flowFunded debt

1997


VARIATIONS (%)


5,0691,474

795992618

6,6242,798

459683630

959306(22)

44246

1,122450

(200)(100)4,028

13,7745,0281,0321,6195,522

GIMSA


OTHER SUBSIDIARIES &ELIMINATIONS CONSOLIDATED

GRUMA CORPORATION

5,4281,395

755938388

5,9532,421

388612583

911276(5)65

241

902415

(197)(104)3.519

13,1944,507

9411,5114,731

(7)656

60

111618128

511

374(31)

2

2492

(4)14

412107

17

GIMSA


OTHERSUBSIDIARIES &ELIMINATIONS CONSOLIDATED

GIMSA


OTHERSUBSIDIARIES &ELIMINATIONS CONSOLIDATED

GRUMA CORPORATION

GRUMA CORPORATION

(1) Operating cash flow defined as Operating income.

1

1

1

37

During 1998 GRUMA achieved the highest salesvolume in the history of the Company, recording3.1 million tons of corn flour, wheat flour, tortillasand bread. GRUMA resumed its growth showing anincrease of 4% in net sales.

In 1998 GRUMA achieved the highest gross incomein its history, growing 12% versus the previous year.In operating income, GRUMA showed a 10%increase with respect to 1997, improving its marginto 7.5% from 7.1% in 1997.

GRUMA's consolidated net sales in 1998 were 13.8billion pesos, 4% higher than in 1997. This increasewas due primarily to higher net sales in GrumaCorp., Molinera de México and Gruma CentroAmérica. Foreign operations showed an increase innet sales of 10% versus 1997, increasing its proportionin GRUMA's consolidated sales to 55% in 1998 from52% in 1997.

By subsidiary, in 1998, Gruma Corp.'s combined cornflour and tortilla sales volume of 1.6 billion poundswas 10% higher than in 1997 predominantly due tohigher tortilla sales. In 1998 Gruma Corp. achievednet sales of 6.6 billion pesos. In dollar terms, these netsales were 670 million, an increase of 11% over the 603million dollars reported in the same period last year.

During 1998, GIMSA's sales volume totaled 1.8 millionmetric tons, 3% lower than in 1997. Sales volume wasaffected mainly by the quota system imposed by thegovernment for subsidized corn flour. GIMSA'srevenues for 1998 were 5.1 billion pesos, 7% lowerthan in 1997 as a result of lower sales volume andlower corn flour prices due to lower corn prices.

OPERATING RESULTS

Net Sales

38

Gruma Centro América's corn flour sales volume of 90thousand metric tons increased 6% over 1997. GrumaCentro América's net sales during 1998 were 959 millionpesos or 97 million dollars, representing a 5% increaseover 1997. In 1998, Molinera de México achieved salesvolume of 244 thousand tons of wheat flour, showing anincrease of 93% versus 1997. Net sales were 791 millionpesos in 1998.

In 1998, GRUMA's cost of sales as a percentage of netsales decreased to 63.5% from 65.8% last year. GIMSAdecreased its cost of sales as a percentage of net salesapproximately 340 basis points, Gruma Corp. 150 basispoints, Gruma Centro América 160 basis points andMolinera de Mexico 78 basis points. GIMSA's cost ofsales as a percentage of sales was reduced due to lowercost of corn. The main reason for the decrease at GrumaCorp. was due to increased volume and continued ef-ficiency improvements in the tortilla business. Over all,GRUMA's cost of sales increased 1% to 8.74 billion pesosduring 1998 from 8.69 billion pesos in 1997.

In 1998, gross profit of 5 billion pesos was 12% higherthan in 1997, mostly as a result of higher gross profit inall of its subsidiaries. GRUMA's gross margin improvedto 36.5% during 1998 from 34.2% in 1997.

During 1998, GRUMA's selling, general andadministrative expenses increased 12% to 4 billionpesos from 3.6 billion pesos during 1997. Thisincrease was primarily driven by stronger marketingand advertising activities as well as the reinforcementof the sales teams in GIMSA and Gruma Corp.

Gross profit

Cost of Sales

Selling, General and Administrative Expenses

OPERATING RESULTS

39

Gruma Centro América increased SG&A expensesrelated with the frozen dough for bread project andthe acquisition of information systems included in theinformation technology modernization program.Molinera de México reported higher expenses com-pared to a year ago, reflecting acquisitions completedlate 1997 and during 1998, as well as the reinforcementof the sales team. GRUMA's SG&A expenses as a per-centage of net sales increased to 29% in 1998 from 27%in 1997.

In 1998, GRUMA's consolidated operating income was 1billion pesos, 10% higher than in 1997. This improve-ment was due primarily to higher operating profits inGruma Corp. and GIMSA. The Company's operatingmargin of 7.5% in 1998 was 36 basis points higher thanduring 1997.

By subsidiary, in 1998, Gruma Corp.'s operatingincome increased 18% to 459 million pesos (46.5 milliondollars). GIMSA's operating income of 795 million was5% higher than in 1997. Gruma Centro América report-ed operating losses of 22 million pesos. GRUMA's"other subsidiaries", which include the packaged tor-tilla and bread operations in Mexico, reported a 200million pesos operating loss, similar to the amountreported in 1997.

During 1998, EBITDA as a percentage of net sales was11.8% amounting to 1.6 billion pesos, an increase of 7%versus 1.5 billion pesos in 1997.

In 1998, GRUMA's comprehensive financing cost was256 million pesos, an increase of 274 million pesosversus 1997, mostly due to a lower gain on monetaryposition, lower interest income and higher foreignexchange losses.

OPERATING RESULTS

Operating Income

Net Comprehensive Financing Cost

40

During 1998, net interest expense of 183 million pesosincreased 79 million pesos versus 1997. Net interestexpense consisted of interest income of 194 millionpesos minus interest expense of 377 million pesos. Theincrease in net interest expense was due mainly to lowerinterest income in GIMSA as a result of higher accountsreceivable and to higher debt in GRUMA to continuewith the expansion plans.

Foreign exchange loss was 60 million pesos, 76 millionpesos more than foreign exchange gain of 16 millionpesos in 1997.

Monetary position loss was 13 million pesos during1998, 119 million pesos less than the monetary positiongain of 107 million pesos in 1997. The reduction in themonetary position was due mainly to increases inGIMSA's monetary position resulting from higher cashbalances and accounts receivable.

In 1998, other expenses, net, were 242 million pesos.This item reflects primarily extraordinary expenses of188 million pesos related to the information technologymodernization program for GRUMA, personnelrestructuring, as well as the relocation of GrumaCorp.'s headquarter from Los Angeles to Dallas.Additionally, other expenses reflected amortization ofexcess acquisitions cost over book value.

Provisions for income taxes and employees' profitsharing turned to 51 million pesos positive, as a resultof an agreement between Gruma Corp. and theTechnology Division to formalize the technologicalsupport received by Gruma Corp. This agreementmade by suggestions of GRUMA's auditors, eliminatedthe risk of transfer pricing and generated a fiscalbenefit.

OPERATING RESULTS

Other Expenses, Net

Taxes and Employees' Profit Sharing

41

In 1998, total net income was 654 million pesos, 8%lower than last year. GRUMA recorded a net majorityincome of 417 million pesos versus 442 million pesos in1997, a decrease of 6%. Earnings per share were 1.18pesos in 1998.

OPERATING RESULTS

Net Majority Income

42

As of December 31, 1998, GRUMA's assets totaled 17.2billion pesos, of which 4.7 billion pesos were currentassets; 9.4 billion pesos represented property, plant,and equipment; and 3.1 billion pesos, other assets.

Total assets were 522 million pesos higher than thebalance as of December 31, 1997, primarily reflectinghigher property, plant and equipment, as a result ofexpansions mainly in Gruma Corp. and acquisitionsin Molinera de México and the bread plant in Mexico.Cash balances decreased 1.5 billion pesos due to theexpansion programs mentioned above, higheraccounts receivable in GIMSA and higher corn andwheat inventories in GIMSA and Molinera de México,respectively.

Total liabilities as of December 31, 1998, increased 745million pesos to 7.1 billion pesos from December 31,1997, primarily due to a higher debt level to finance theexpansion programs and to buy-back GIMSA andGRUMA shares.

Total liabilities consisted of 5.5 billion pesos of fundeddebt (5.3 billion pesos long term and 199 million pesosshort term), and 1.6 billion pesos of other liabilities.Stockholders' equity as of December 31, 1998 totaled10.1 billion pesos, 224 million pesos lower than thebalance as of December 31, 1997.

Growth in EBITDA has been in line with growth indebt service, allowing GRUMA to maintain a stronginterest coverage. In 1998, interest coverage measuredas EBITDA divided by gross interest expense was 4.3times and Gruma Corp.'s EBITDA to consolidatedGRUMA gross interest expense was 1.8 times.GRUMA's leverage ratio (total funded debt divided bytotal funded debt plus stockholders' equity) as ofDecember 1998 was 0.35:1.

FINANCIAL SITUATION

5

4

2

FINANCIAL SUMMARY

Income Statement

Net salesGross profitOperating expensesOperating incomeComprehensive financial cost (income)Other (income) expenseNet income before taxes and othersNet incomeNet majority incomeEarnings per share

Balance Statement

Current assetsWorking capitalProperty, plant and equipment, netTotal assetsOperating liabilitiesTotal funded debtTotal liabilitiesStockholder’s equityMajority stockholder’s equityBook value per share

Other Financial Data

Operating margin (%)Depreciation and amortization Operating cash flowCurrent assets/Current liabilitiesTotal liabilities/Stockholder’s equityTotal funded debt/Capitalization

3

43

1998

13,7745,0283,9971,032

256(242)

5346544171.18

4,7223,2329,352

17,1731,5585,5227,080

10,0927,70321.81

7.5587

1,6192.980.700.35

1997

13,1944,5073,566

941(18)

(109)8507134421.25

5,5112,5138,505

16,6511,6044,7316,335

10,3167,93722.73

7.1570

1,5114.180.610.31

1996

15,6714,9853,7031,282(840)

412,1631,6711,3374.54

4,8232,3498,017

15,1841,6893,6555,3449,8407,72222.50

8.2597

1,8792.920.540.27

1995

11,8864,3723,511

860(1,515)

(73)2,3021,8711,6526.00

3,1261,8737,809

13,0861,4856,0477,5335,5534,05716.33

7.2472

1,3331.551.360.52

1994

9,8633,5102,664

846150(53)6436924921.81

4,1442,2417,891

14,3891,3636,4177,7806,6095,07320.63

8.6276

1,1211.581.180.49

1993

10,1453,6542,4581,196

221(85)890

1,3449933.88

4,1582,0395,487

11,4971,3224,6465,9685,5294,16319.06

11.8351

1,5471.951.080.46

1992

9,4193,2852,416

869220(42)6075734491.89

3,3232,0524,5449,6561,1224,2315,3534,3033,52216.13

9.2275

1,1441.901.240.50

1991

7,8652,7282,075

65368

(64)5216365052.57

3,1471,9363,6827,571

6983,3424,0403,5302,80215.96

8.32458991.491.140.49

1990

7,9912,6051,683

92319648

775652433

2,6421,4062,8005,707

6602,2102,8692,8371,97411.24

11.5190

1,1131.221.010.44

1989

5,1151,572

909663316

7354230192

1,267360

1,7853,437

642937

1,5801,8571,6369.32

13.01187811.230.850.34

1988

3,27397847150725729

279226208

846431

1,6272,813

363727

1,0911,7231,4838.44

15.593

6001.060.630.30

‘97 VS. ‘98

4.4%11.6%12.1%9.6%

(37.3%)(8.4%)(5.6%)(5.6%)

(14.3%)28.6%10.0%3.1%

(2.9%)16.7%11.8%(2.2%)(2.9%)(4.0%)

3.0%

7.2%

GRUMA, S.A. DE C.V. AND SUBSIDIARIES(Millions of Mexican pesos of constant terms as of December 31, 1998)

(1) Weighted average number of shares (thousands).

(2) Working capital defined as accounts receivable, net plus inventories minus trade accounts payable.

(3) Number of shares (thousands).

(4) Depreciation and Amortization affecting Operating income.

(5) Operating cash flow defined as Operating income + Depreciation and Amortization.

196,623 236,924 255,967 271,165 275,268 294,259 354,740 354,059

175,570175,570175,570175,570 218,270 218,383 245,954 248,385 343,123 349,271 353,197

1

44

BOARD OF DIRECTORS

Roberto González BarreraFounder and Chairman of the Board

Allen AndreasJuan Antonio González MorenoCraig HamlinCarlos Hank RhonRoberto Hernández RamírezJuan Manuel Ley LópezEduardo Livas CantúBernardo Quintana IsaacAlfonso Romo GarzaAdrián Sada González

Roberto González Barrera is the founder andChairman of the Board. Since 1992 Mr. González hasbeen a shareholder and President of the Board ofDirectors of Grupo Financiero Banorte, S.A. de C.V.Mr. González was a member of the board of directorsof Grupo Financiero Serfín, S.A. de C.V. and also ofNacional Financiera, S.N.C. Mr. González is thefounder and President of Patronato al FomentoEducativo y Asistencial de Cerralvo A.B.P., aninstitution of regional development, and he alsoparticipates in other social and cultural developmentorganizations.

45

Ricardo Alvarez-Tostado Penella is the Deputy ChiefExecutive Officer of GRUMA, S.A. de C.V. and alsoChief Executive Officer of Grupo Industrial Maseca,S.A.de C.V. He joined the Company in October of 1997.Mr. Alvarez-Tostado previously worked forLaboratorios Schering-Plough, S.A. de C.V. for 15 years,where he served as Vice-President, Chief ExecutiveOfficer and in other senior positions. He has alsoworked for Laboratorios Smith-Kline. Mr. Alvarez-Tostado holds a B.S. in Commercial Relations from theUniversidad del Valle de México.

Manuel Rubiralta Díaz is Executive Vice President ofMarketing and Sales for GRUMA, S.A. de C.V. Hejoined the Company in 1998. Mr. Rubiralta previouslyworked as Commercial Vice-President of GrupoTelevisa, for PepsiCola Internacional Mexico, forCervecería Cuauhtémoc-Moctezuma and in severalother executive positions. He holds a B.S. in BusinessAdministration from the Universidad NacionalAutónoma de México and has studies in Marketingfrom the U.S.A., France and England.

Martín Ricoy Luviano is the President and ChiefExecutive Officer of Gruma Corporation. Mr. Ricoyjoined the Company in 1997, having previously heldexecutive positions with Kayser Roth, Campbell Soup,Ralston, Purina and Crown Cork. Mr. Ricoy holds a B.A.in Business Administration from the University ofNotre Dame and holds an M.B.A. from the University ofPennsylvania's Wharton School.

Javier Vélez Bautista is the Chief Financial andPlanning Officer of GRUMA S.A. de C.V. Mr. Vélez hasbeen with GRUMA for eight years. He was ChiefFinancial Officer of Gruma Corporation from 1991 to1995. Mr. Vélez previously worked for Booz-Allen &Hamilton, and at Fertilizantes Mexicanos as ChiefFinancial Officer. He received an M.B.A. from theUniversity of Pennsylvania's Wharton School and a B.A.in Industrial Engineering from the UniversidadIberoamericana, in Mexico City.

OFFICE OF THE PRESIDENT

46

Corporate

Guillermo Morales Elcoro is the Chief AdministrativeOfficer of the Company. Mr. Morales has been with theCompany for seven years. He served as Controller Vice-President of the Company from 1991 to 1997. Previously,Mr. Morales worked at Cementos Mexicanos asAccounting Manager, as well as for Grupo Alfa inseveral positions. He holds two B.A. degrees, one inAccounting and the other in Administration, bothfrom the Instituto Tecnológico y de EstudiosSuperiores de Monterrey, and an M.B.A. from theUniversity of Texas at Austin.

Juan Quiroga García is the Internal Auditing and TaxOfficer. Mr. Quiroga has been with GRUMA for 26years. During this time, he has served as Controllerand Internal Auditor of the Company. He holds aC.P.A. degree from the Universidad Autónoma deNuevo León.

Manuel Rubio Portilla is the Chief Technology Officerof GRUMA. He joined the Company in 1965 and duringthese 34 years has developed 40 patents for the process,as well as machinery for the corn flour and tortillaindustry. Previously he was the Chief Executive Officerof Nickel Processing Corporation and of Darr Oliver.He holds a B.S. degree in Chemical Engineering and aMasters degree. He also holds a B.S. degree inMechanical Engineering from the Universidad deOriente de Santiago of Cuba.

Salvador Vargas Guajardo is the General Counsel ofthe Company. Mr. Vargas joined the Companyapproximately two years ago. He was Senior Partnerin the law firm Rojas-González-Vargas-de la Garza yAsociados from 1990 to 1996. Dr. Vargas earned aPh.D. in Commercial Law from the UniversidadComplutense of Madrid, Spain, Masters degree inCorporate and International Law from the Universityof Illinois and a Masters degree in Comparative Lawfrom the New York University.

MAIN EXECUTIVES

47

Operating

Pedro Garza Orozco is the Chief Operating Officer ofMolinera de Mexico, S.A. de C.V.. Mr. Garza has beenwith GRUMA for five years. He served as ChiefOperating Officer for Central American Operationsfrom 1992 to 1994. Previously, he worked for PepsiCoCorp. and Grupo Gamesa for four years and for Procter& Gamble for nineteen years.

Oscar Rojas Vergara is the Chief Operating Officer ofGrupo Productos y Distribuidora Azteca, S.A. de C.V.Mr. Rojas has been with GRUMA for six years, havingpreviously worked for PepsiCo Corp. for 21 years, aswell as for Troika Mexico, Beecham Mexico and KraftGeneral Foods. He received a B.A. in Accounting fromthe Instituto Superior de Comercio in Santiago, Chile,and a M.B.A. from the Universidad Federal Rio GrandeDo Sul, Brazil.

Joaquín Rubio Lamas is the Chief Operating Officer ofGrupo Industrial Maseca, S.A. de C.V. Mr. Rubio hasbeen with GRUMA for 18 years, having previouslyworked as President of the U.S. Corn MillingOperations, as well as in other senior positions in theCompany. He received a B.A. in Administration fromthe Universidad Regiomontana.

Percy Roy Wever Sempé is the Chief Operating Officerof Gruma Centro América. Mr. Wever has been withGRUMA for five years, having previously worked forEmbotelladora Mariposa (PepsiCo Guatemala) forthree years. He received a B.A. in IndustrialEngineering from Northeastern University in Boston,Massachusetts.

MAIN EXECUTIVES

Report of independent accountants

Consolidated balance sheets

Consolidated statements of income

Consolidated statements of changes

in stockholders’ equity

Consolidated statements of changes

in financial position

Notes to consolidated financial statements

2

3

5

6

8

9

CONTENTS

GRUMA, S.A. DE C.V. AND SUBSIDIARIESAUDITED FINANCIAL STATEMENTSAS OF DECEMBER 31, 1998 AND 1997

Mexico City, March 15, 1999

To the Stockholders’ Meeting ofGruma, S.A. de C.V.:

In my capacity of statutory examiner (comisario) and in compliance with what is provided for in Article 166 of the Mexican Corporate Law and with the bylaws of Gruma, S.A. de C.V., I ren-der to you my report on the veracity, adequacy and reasonableness of the financial informationthat the Board of Directors has presented to you in relation to the progress of the Company forthe year ended December 31, 1998, which shows a net profit in the amount of 417,285 thousandof Mexican pesos.

I have attended the Stockholders’ Meetings and Board of Directors’ Meetings to which I havebeen summoned and have obtained from the directors and administrators the informationabout the operations, documentation and records that I considered necessary to examine. Myreview has been made in accordance with generally accepted auditing standards in Mexico.

In my opinion, the accounting and reporting criteria and policies followed by the Companyand considered by the administrators to prepare the financial information, presented by themto this Meeting, are adequate and sufficient and were applied on a basis consistent with thoseof the preceding year; therefore, that information reflects veraciously, reasonably and suffi-ciently the financial position of Gruma, S.A. de C.V., as of December 31, 1998, as well as theresults of its operations, the changes in stockholders’ equity and the changes in the financialposition for the year then ended, in conformity with generally accepted accounting principlesin Mexico.

Yours truly,

C.P. Humberto Murrieta NecoecheaComisario

Humberto Murrieta NecoecheaContador Público

REPORT OF INDEPENDENT ACCOUNTANTS

Monterrey, N.L., Mexico, February 18, 1999

To the Stockholders of Gruma, S.A. de C.V.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated state-ments of income, changes in stockholder´s equity and changes in financial position present fairly,in all material respect, the financial position of Gruma, S.A. de C.V. and Subsidiaries at December31, 1998 and 1997, and the results of their operations, the changes in stockholder´s equity, and thechanges in their financial position for the years then ended, in conformity with generally accept-ed accounting principles in Mexico. These consolidated financial statements have been preparedin accordance with generally accepted accounting principles in Mexico and are the responsibilityof management of Gruma, S.A. de C.V. ; our responsibility is to express an opinion on these finan-cial statements based on our audits. We conducted our audits of these statements in accordancewith generally accepted auditing standards in Mexico, which are substantially the same as thosefollowed in the United States of America. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principles used and significantestimates made by management and evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for the opinion expressed above.

Pricewaterhouse Coopers

Francisco J. Inzunza

PricewaterhouseCoopersCondominio Losoles D-21Av. Lázaro Cárdenas Poniente 240066270 Garza García, N.L.Telephone (8) 152 2000Fax (8) 363 3483

Current:Cash and cash equivalents Ps. 327,361 Ps. 1,852,348Restricted cash (Note 11) 4,851 83,391Accounts receivable, net (Note 3) 1,773,242 1,336,376Refundable taxes (Note 3) 206,919 156,470Inventories (Note 4) 2,262,992 1,919,800Prepaid expenses 146,581 162,704

Total current assets 4,721,946 5,511,089Investment in common stock (Note 5) 1,270,382 1,047,404Property, plant and equipment, net (Note 6) 9,351,930 8,505,441Intangibles, net (Note 7) 967,364 804,824Excess of cost over book value of subsidiaries acquired, net 656,737 609,104Other assets (Note 8) 204,170 173,169

Total assets Ps. 17,172,529 Ps. 16,651,031

Current:Bank loans (Note 9) Ps. 129,383 Ps. 42,178Current portion of long-term debt (Note 9) 69,099 98,713Trade accounts payable 529,786 436,850Accrued liabilities and other payables 852,859 705,859Income taxes payable - 25,682Employees’ statutory profit sharing payable 3,470 7,606

Total current liabilities 1,584,597 1,316,888Long-term debt (Note 9) 5,323,753 4,590,048Deferred income taxes (Note 15) 133,601 395,159Deferred employees’ statutory profit sharing (Note 15) 14,691 12,001Other liabilities 23,604 20,916

Total long-term liabilities 5,495,649 5,018,124Total liabilities 7,080,246 6,335,012

Commitments and contingencies (Note 11)

Majority interest (Note 12):Common stock 2,944,805 2,904,237Restatement of common stock 3,517,757 3,510,041

6,462,562 6,414,278Additional paid-in capital 2,379,227 2,383,098

8,841,789 8,797,376Deficit from restatement (7,026,024) (6,529,430)Retained earnings (Note 12–C):

Prior years 5,063,566 4,877,211Net income for the year 417,285 442,234

Foreign currency translation adjustments (Note 12-E) 406,254 350,006Total majority interest 7,702,870 7,937,397

Minority interest 2,389,413 2,378,622Total stockholders’ equity 10,092,283 10,316,019Total liabilities and stockholders’ equity Ps. 17,172,529 Ps. 16,651,031

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

GRUMA, S.A. DE C.V. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31, 1998 AND 1997(Expressed in thousands of Mexican pesos of constant purchasing power as of December 31, 1998)(Notes 1 and 2)

3

19971998ASSETS

LIABILITIES

STOCKHOLDERS’ EQUITY

5

GRUMA, S.A. DE C.V. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEFOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997(Expressed in thousands of Mexican pesos of constant purchasing power as of December 31, 1998, except per share amounts)(Notes 1 and 2)

Net sales (Note 13) Ps. 13,773,818 Ps. 13,194,305 Cost of sales (8,745,517) ..(8,687,509)

Gross profit 5,028,301 4,506,796

Selling, general and administrative expenses (3,996,738) (3,565,855)Operating income 1,031,563 940,941

Comprehensive financing income (cost), net: Interest expense (377,275) ..(366,687)Interest income 193,951 262,024Monetary position (loss) gain, net (12,591) 106,698Foreign exchange (loss) gain, net (Note 16-A) (59,826) 15,741

(255,741) 17,776Other expense, net (Note 14) (242,423) .. (108,633)

Income before income taxes, employees’ statutory profit sharing, equity in earnings of associated companies, extraordinary item and minority interest 533,399 ..850,084

Income taxes (Note 15):Current (182,220) (192,447)Deferred .. 242,301 .... (5,712)

..60,081 ...(198,159)Employees’ statutory profit sharing (Note 15):

Current (5,367) ..(8,080)Deferred (3,317) (534)

(8,684) (8,614)

Income before equity in earnings of associated companies, extraordinary item and minority interest 584,796 ..643,311

Equity in earnings of associated companies, net 68,757 86,463

Extraordinary loss on early extinguishment of debt - ..(16,516)

Income before minority interest 653,553 713,258

Minority interest (236,268) ..(271,024)

Majority net income Ps. 417,285 Ps. 442,234

Earnings per share Ps. 1.18 Ps. 1.25

Weighted average shares outstanding (thousands) 354,059 ..354,740


19971998

GRUMA, S.A. DE C.V. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997(Expressed in thousands of Mexican pesos of constant purchasing power as of December 31, 1998, except share amounts)(Notes 1 and 2)

6

Balances at December 31,1996 343,123 6,326,747 2,159,043 (6,108,366)

Appropriation of prior year net income

Shares issued under executive stock purchase plan 900

Stock and minority interest dividends 6,841 118,551 225,391

Net sales of common stock (1,593) (31,020) (1,336)

Issuance of subsidiaries’ stock

Recognition of inflation effects for the year (421,064)..

Foreign currency translation adjustments

Net income for the year

Balances at December 31, 1997 349,271 6,414,278 2,383,098 (6,529,430)..

Appropriation of prior year net income

Stock and minority interest dividends 5,810 120,285

Net sales of common stock (1,884) (72,001) (3,871)

Issuance of subsidiaries’ stock

Recognition of inflation effects for the year (496,594)..

Foreign currency translation adjustments

Net income for the year

Balances at December 31, 1998 353,197 Ps. 6,462,562 Ps. 2,379,227 Ps. (7,026,024)


Number ofshares (thousands)

Additional paid-incapitalAmount

Deficit fromrestatement

Common stock(Note 12 A)

7

3,697,906 1,346,909. 296,169 7,718,408 2,133,535 9,851,943

1,346,909 (1,346,909). - - -

-. -. -

(343,942) -.. (100,495) (100,495)

(39,723) (72,079) 8,215 ..(63,864)

- . 75,436 75,436

216,061 (205,003) (9,093) (214,096)

53,837 53,837 - 53,837

442,234. 442,234 271,024 713,258

4,877,211 442,234. 350,006 7,937,397 2,378,622 10,316,019

442,234 (442,234).. - - -

(120,285) - (60,798) (60,798)

.(3,501) (79,373) (21,545) (100,918).

- 166,029 166,029

.(132,093) (628,687). (309,163) (937,850).

56,248 56,248... -....... 56,248..

417,285. 417,285 236,268 653,553

Ps. 5,063,566 Ps. 417,285. Ps. 406,254 Ps. 7,702,870 Ps. 2,389,413 Ps. 10,092,283

Prior yearsNet incomefor the year

Foreign currencytranslation

adjustments (Note 12 E)

Total majorityinterest Minority interest

Total stockholders’

equity

Retained earnings(Note 12 C)

8

GRUMA, S.A. DE C.V. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITIONFOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997(Expressed in thousands of Mexican pesos of constant purchasing power as ofDecember 31, 1998)(Notes 1 and 2)

Operating activities:Net income Ps. 417,285 Ps. 442,234Minority interest 236,268 271,024Consolidated income 653,553 713,258Extraordinary loss on early extinguishment of debt - 16,516

653,553 729,774

Adjustments to reconcile net income to net resources provided by operating activities:Depreciation and amortization 653,881 642,228Equity in earnings of associated companies, less dividends received (68,757) (86,463)Deferred income taxes and employees’ statutory profit sharing (238,984) 6,246Seniority premium 8,409 3,488

1,008,102 1,295,273Changes in working capital:

Restricted cash 78,540 50,990Accounts receivable, net (499,841) (169,253)Inventories (569,905) (230,551)Prepaid expenses 2,772 (28,990)Trade accounts payable 90,588 17,464Accrued liabilities and other payables 144,382 (60,041)Income taxes and employees’ statutory profit sharing (47,058) (49,598)

(800,522) (469,979)Net resources provided by operating activities 207,580 825,294

Financing activities:Proceeds from bank loans and long-term debt 2,479,741 3,374,426Repayment of bank loans and long-term debt (1,769,267) (2,341,280)Proceeds from issuance of subsidiaries’ stock 166,029 75,436Purchases of Company’s common stock (100,918) (63,864)Dividends paid by subsidiary to minority stockholders (60,798) (100,495)Other 31,028 158,154

Net resources provided by financing activities 745,815 1,102,377Investing activities:

Purchases of property, plant and equipment (1,540,895) (1,097,008)Purchases of new plants (125,060) (61,584)Deferred assets (448,534) (213,079)Investment in common stock (325,124) (88,042)Other (38,769) 33,097

Net resources used in investing activities (2,478,382) (1,426,616)Net (decrease) increase in cash and cash equivalents (1,524,987) 501,055Cash and cash equivalents at beginning of year 1,852,348 1,351,293Cash and cash equivalents at end of year Ps. 327,361 Ps. 1,852,348


19971998

1. ENTITY AND NATURE OF BUSINESS

Gruma, S.A. de C.V. (“Gruma”), a Mexican corporation, is a holding company whose subsidiaries arelocated in Mexico, the United States, and Central America. These subsidiaries are primarily engaged inmanufacturing and distributing corn flour, tortillas, bread and other related products. The Company andits subsidiaries are herein collectively referred to as “the Company”.

2. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Mexico.

A) BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of Gruma and all of its subsidiaries. Allintercompany balances and transactions have been eliminated from the consolidated financial statements..

The principal subsidiaries of the Gruma are:

Grupo Industrial Maseca, S.A. de C.V. and subsidiariesGruma Corporation and subsidiariesGruma Centro América, S.A. and subsidiariesProductos y Distribuidora Azteca, S.A. de C.V. and subsidiariesDesarrollo Industrial y Tecnológico, S.A. de C.V. and subsidiariesMolinera de México, S.A. de C.V. and subsidiariesAsesoría de Empresas, S.A. de C.V.Transporte Aéreo Técnico Ejecutivo, S.A. de C.V.Inmobiliaria Residencial San Pedro, S.A. de C.V. and subsidiaries

At December 31, 1998, Gruma owned all the capital stock of the above mentioned entities, except forGrupo Industrial Maseca, S.A. de C.V. and Molinera de México, S.A. de C.V., in which Gruma’s own-ership interest represents 70.59 % and 60.00%, respectively.

B) USE OF ESTIMATES

The preparation of the financial statements in conformity with generally accepted accounting prin-ciples requires management to make certain estimates and assumptions that affect the amountsrecorded for certain assets and liabilities and certain revenues, costs and expenses at the dates andfor the periods being reported. The actual results may differ from these estimates.

C) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS

Effective January 1, 1997, the financial statements of foreign subsidiaries are restated for the effectsof inflation and translated to Mexican pesos of constant purchasing power as of December 31, 1998applying the provisions of Bulletin B-15, as follows:

9

GRUMA, S.A. DE C.V. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 1998 AND 1997(Expressed in thousands of Mexican pesos of constant purchasing power of December 31, 1998, except where otherwise indicated)

10

GRUMA, S.A. DE C.V. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

Financial statements are restated to year-end constant local currencies following the provisionsof Bulletin B-10, applying the General Consumer Price Index (“GCPI”) from the foreign coun-try, which reflects the change in purchasing power of the local-currency in which the sub-sidiary operates.

Once financial statements are restated, assets, liabilities, income and expenses are translated toMexican pesos applying the exchange rate in effect on December 31, 1998. The effects of trans-lation are recognized as a component of equity entitled “Foreign Currency Translation Effects”(Note 12-E).

D) RECOGNITION OF THE EFFECTS OF INFLATION

The consolidated financial statements of Gruma have been restated to recognize the effects ofinflation and are expressed in thousands of Mexican pesos of constant purchasing power as ofDecember 31, 1998, determined as follows:

For comparability purposes, financial statements as of and for the year ended December 31,1997 have been restated to Mexican pesos by utilizing a weighted average restatement factor,which considers the relative total sales contribution by country for the year ended December31, 1997 and the corresponding inflation and exchange rate fluctuations since December 31, 1997.

The consolidated statements of income and changes in stockholders’ equity for the year endedDecember 31, 1998 were restated applying GCPI factors from the country in which the sub-sidiary operates, applied to periods in which the transactions occurred.

The consolidated statements of changes in financial position present, in Mexican pesos of constantpurchasing power, the resources provided by or used in operating, financing and investingactivities.

The factors used to recognize the effects of inflation were:

1998 18.61% 21.52%1997 15.72% 33.51%

The methodology used to restate financial statement items is as follows:

Restatement of non-monetary assets

Inventory and cost of sales are restated using the replacement cost method. As set forth in Note2-I, effective January 1, 1997 property, plant and equipment is restated using the NationalConsumer Price Index (“NPCI”) factors, except for machinery and equipment of foreign originwhich is restated on the basis of a specific index composed of the GPCI factor from the foreigncountry and the devaluation of the Mexican peso against the foreign currency.

Restatement of common stock and retained earnings

Restatement of common stock and retained earnings is determined by applying NCPI factorsfrom the dates on which capital was paid-in and earnings were generated, and reflect theamounts necessary to maintain the stockholders’ investment at the purchasing power of the

•

•

•

•

•

•

NCPI factorWeighted averagerestatement factorYear

•

•

11


original amounts. The restatement of these items is included within the related stockholders’ equi-ty captions.

Deficit from restatement

Deficit from restatement primarily represents the difference between the replacement cost valuesor specific index restatement of non-monetary assets as described above and the historical cost ofthose assets restated for inflation, as measured by NCPI factors and GCPI factors for foreign sub-sidiaries.

Monetary position gain

Monetary position gain represents the inflationary effect, measured by NCPI and GCPI factors, onthe net balance of monetary assets and liabilities at the beginning of each month as expressed inthe local currency.

E) FOREIGN CURRENCY TRANSACTIONS

Foreign currency transactions are recorded at the exchange rate prevailing on the dates the transac-tions are entered into and settled. Assets and liabilities denominated in foreign currencies are trans-lated into Mexican pesos at the exchange rate in effect at the balance sheet dates. Currency exchangefluctuations are credited or charged to income, except those described below.

The effects of translation arising from foreign currency denominated liabilities which are accountedfor as a hedge of the Gruma’s net investment in foreign subsidiaries are recognized as a componentof equity entitled “Foreign Currency Translation Effects”.

F) CASH AND CASH EQUIVALENTS

All highly liquid investments with original maturities of three months or less at the date of purchaseare considered to be cash equivalents and are stated at cost, which approximates market value.

G) INVENTORIES (Note 4) AND COST OF SALES

Inventories are stated at the lower of replacement cost or market. Replacement cost is determined bythe last purchase price or production cost. Cost of sales is determined from replacement costs calcu-lated for the month in which inventories are sold.

H) INVESTMENT IN COMMON STOCK (Note 5)

Investments in common stock with ownership between 10% and 50% of the investees’ voting stockare accounted for by the equity method. The excess of cost over book value of an investment in commonstock is restated by NCPI factors. The restated amount is amortized based on the straight-linemethod, over a period not to exceed 20 years.

I) PROPERTY, PLANT AND EQUIPMENT, NET (Note 6)

Effective January 1, 1997, the Company adopted the “Fifth Amendment of Bulletin B-10 - Modified”(Fifth Amendment) issued by the Mexican Institute of Public Accountants. The Fifth Amendmenteliminates the use of replacement cost for property plant and equipment. The net replacement costas of December 31, 1996 became the basis for future restatements. Under the Fifth Amendment, theCompany restated all property plant and equipment utilizing the NCPI factors with the exceptionmachinery and equipment of foreign origin which is restarted on the basis of a specific index

•

•

12


composed of the GPCI from the foreign country and devaluation of the Mexican peso against theforeign currency.

Depreciation expense is calculated based on the net book value less salvage value, using thestraight-line method over the estimated useful lives of the assets. Useful lives of the assets are asfollows:

Buildings 30 - 53Machinery and equipment 3 - 27

Maintenance and repairs are expensed as incurred. Costs of major replacements and improve-ments are capitalized. Comprehensive financing cost, including interest expense, currencyexchange fluctuations and monetary position of the related debt for major construction projects, iscapitalized as part of the assets during the construction period. When assets are retired or otherwisedisposed of, the replacement cost and accumulated depreciation are removed from the appropri-ate accounts and any gain or loss is included in “Other Expense, Net”.

Direct internal and external costs related to the development of internal use software are capitalizedand will be amortized over the estimated useful life beginning when such software is ready for itsintended use.

J) INTANGIBLES, NET (Note 7)

Intangibles are restated using NCPI factors. Amortization expense is computed on the restatedvalues, based on the straight-line method, over a period of 5 to 20 years.

Expenses incurred during stages dedicated to the beginning of industrial and commercial opera-tions are capitalized as preoperating expenses. This capitalization stage concludes when theCompany begins its commercial activities. Preoperating expenses are amortized by the straight-line method over a period not to exceed 12 years.

The excess of cost over book value of subsidiaries acquired is restated using the NCPI factors.Amortization expense is computed based on the restated values using the straight-line method,over a period not to exceed 20 years. The Company periodically reviews the realization of itsexcess of cost over book value of subsidiaries acquired based on estimated gross undiscountedcash flows from the related assets. In the event that the gross undiscounted cash flows exceed thecarrying amounts, a loss is recognized based on the amount by which the carrying value exceedsthe estimated fair value of the assets.

K) SENIORITY PREMIUM PLANS AND INDEMNITIES (Note 10)

Seniority premiums, to which the personnel of Mexican companies are entitled after 15 years ofservice, are charged to income as determined by annual actuarial valuations. Indemnities towhich Mexican workers may be entitled in the case of dismissal, under certain circumstancesestablished by Mexican Labor Law, are charged to income when they become payable.

L) REVENUE RECOGNITION

Sales are recognized when goods are shipped. Complementary revenue (Note 13) is recognizedwhen corn flour subject to complementary revenue is sold.

Years

13


M) INCOME TAXES AND EMPLOYEES’ STATUTORY PROFIT SHARING (Note 15)

Income taxes and employees’ statutory profit sharing are recorded based on the partial liabilitymethod, which recognizes the deferred tax effects of identifiable and non-recurring temporary differencesbetween financial and taxable income. The income tax benefit from tax loss carryforwards isrecorded in the year in which such carryforwards are used.

N) EARNINGS PER SHARE

Earnings per share is computed by dividing majority net income for the year by the weighted averagenumber of common shares outstanding during the year.

3. ACCOUNTS RECEIVABLE, NET AND REFUNDABLE TAXES

Accounts receivable, net are comprised of the following as of December 31:

Trade accounts receivable Ps. 1,559,298 Ps. 1,082,934 Allowance for doubtful accounts (60,727) (52,887)

1,498,571 1,030,047Related parties 61,396 67,354Employees 22,460 32,491Notes receivable 41,973 61,414Other debtors 148,842 145,070

Ps. 1,773,242 Ps. 1,336,376

Refundable taxes are comprised of the following as of December 31:

Value-added tax Ps. 121,338 Ps. 132,496..Income taxes 48,949 3,497..Production and services taxes 36,632 20,477..

Ps. 206,919 Ps. 156,470..

4. INVENTORIES

Inventories consist of the following as of December 31:

Finished products Ps. 164,618 Ps. 140,385Production in process 36,581 42,198Raw materials (mainly corn) 1,829,698 1,498,472Inventory in transit 192,964 188,793Spare parts and other 30,544 23,563Advances to suppliers and other 8,587 26,389

Ps. 2,262,992 Ps 1,919,800

19971998

19971998

19971998

14


5. INVESTMENT IN COMMON STOCK

Investment in common stock is composed primarily of 9.8% of the common stock of Grupo FinancieroBanorte, S.A. de C.V. and subsidiaries (“GF Banorte”), which is a financial institution regulated by therules and accounting practices of the CNBV ( Comisión Nacional Bancaria y de Valores ).

Investments in common stock, which are accounted for by the equity method, are comprised of thefollowing as of December 31:

GF Banorte:Book value Ps. 620,891 Ps. 570,681 9.8%Excess of cost over book value, net 284,126 364,464

905,017 935,145Convertible debentures in GF Banorte 42,500 51,646Derivados de Maíz Seleccionado Demaseca, S. A 202,146 45,728 50.0%Harinera de Monterrey, S.A. de C.V. 106,375 - 40.0%Other 14,344 14,885

Ps. 1,270,382 Ps. 1,047,404

The convertible debentures in GF Banorte bear interest at TIIE or CETES rates plus an additional twopercentage points, payable each 28 days, and mature in December 2002.

6. PROPERTY, PLANT AND EQUIPMENT, NET

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

Land Ps. 668,457 Ps. 585,709Buildings 2,542,269 2,196,348Machinery and equipment 8,435,435 8,348,657Construction in progress 640,169 73,587Software 415,577 102,762Advances to suppliers 26,939 113,895Other 229,066 74,254

12,957,912 11,495,212Accumulated depreciation (3,605,982) (2,989,771)

Ps. 9,351,930 Ps. 8,505,441

For the years ended December 31, 1998 and 1997, property, plant and equipment include capitalizedcomprehensive financing cost of Ps.51,216 and Ps.3,886, respectively. Depreciation expense for the yearsended December 31, 1998 and 1997 amounted to Ps.541,890 and Ps.538,862, respectively.

7. INTANGIBLES, NET

Intangibles, net are comprised of the following as of December 31:

Covenants not to compete Ps. 571,804 Ps. 560,360Preoperating expenses 240,189 148,181Debt issue costs 85,429 79,079Research of new projects 44,030 37,783Patents 117,523 49,564Other 86,124 73,842

1,145,099 948,809Accumulated amortization (177,735) (143,985)

Ps. 967,364 Ps. 804,824

1997 Ownership1998

19971998

19971998

8. OTHER ASSETS

Other assets as of December 31, consist of the following:

Trust funds for research and development of technology Ps. 170,318 Ps. 137,185Long-term notes receivable 19,695 17,967Guaranty deposits 14,157 18,017

Ps. 204,170 Ps. 173,169

Ps. 2,470,000 Ps. 2,454,703

- 1,227,352

1,185,600 392,753

1,022,774 -

393,827 344,111

154,331 -

129,383 -

121,623 223,761

43,225 55,231

- 15,671

- 12,973

15


19971998

9. SHORT-TERM BANK LOANS AND LONG-TERM DEBT

Short-term bank loans and long-term debt as of December 31 are summarized as follows:

Eurobonds denominated in U.S. dollars, maturing in October 2007; and bearing interest annually at a rateof 7.625%

Eurobonds denominated in U.S. dollars, maturing inMarch 1998; and bearing interest annually at a rate of9.75%

Loans in U.S. dollars, which are supported byrevolving credit agreements terminating in 2001.Loans under these agreements bear variable interest rates in effect at the dates the advances are made(from 6.12% at December 31, 1998)

Loans in U.S. dollars, which are supported byrevolving credit agreements terminating through 2001. Loans under these agreements bear variable interest rates in effect at the dates theadvances are made (from 7.43% to 8.90% atDecember 31, 1998)

Loans in U.S. dollars bearing interest at annual ratesfrom 5 .2% to 7 .96% with annual pr inc ipalinstallments from 1999 through 2009. The majorityof these loans have been collateralized by fixed assetsof subsidiaries for approximately Ps.321,298

Loans which are supported by revolving credit agreements terminating through 2001, bearing interest at annual rates of TIIE plus 1.90%

Short-term bank loans in U.S. dollars dollars bearing interest at annual variable rates

Loans in U.S. dollars bearing interest at annual ratesof 9.52% (payable semi-annually) with principalinstallments from 1999 through 2002

Loans in U.S. dollars due in June, 2002, bearing interest at annual rates of Libor plus 4.5%

Loans in U.S. dollars bearing interest at annual variable rates of 7.5% tp 10.5% due between 1999 and 2000

Loans in Honduran lempiras, bearing interest at annualrates ranging from 19.0% to 32.0%.

19971998

16


At December 1998, the Company has long-term credit agreements (two to three years) for a maximum amountof U.S.$234 million (Ps.2,311,920), bearing interest at variable rates. One line of credit for U.S.$120 million(Ps.1,185,600) requires a commitment fee of 1/2% per annum over the unused amounts. Management intendsto use these lines of credit to fund the payment of short-term borrowings. Accordingly, the Company hasreflected these short-term borrowings as long-term debt at December 31, 1998.

Various credit agreements contain covenants requiring the Company to maintain certain financial ratios. TheCompany’s ability to pay dividends is restricted upon the failure to maintain such financial ratios. AtDecember 31, 1998, the Company was in compliance with these covenants.

The annual maturities of long-term debt outstanding are as follows as of December 31, 1998:

2000 Ps. 78,8822001 2,407,5422002 30,7662003 and thereafter 2,806,563

Ps. 5,323,753

As of December 31, 1998, the Company had uncommitted lines of credit with several banks totaling approximately U.S.$357 million (Ps.3,527,160).

10. SENIORITY PREMIUM AND SAVINGS PLAN

Seniority premium cost and other employee retirement benefits for employees are determined byindependent actuaries and are principally based on the employees’ years of service, age, and salaries.The Company has established trust funds to meet these obligations.

The components of the net seniority premium cost for the years ended December 31, consist of thefollowing:

Service cost Ps. 1,719 Ps. 1,292Interest cost 454 457Expected return on plan assets (616) (688)Reorganization adjustment (811) -Net amortization of gain (107) (373)

Net cost Ps. 639 Ps. 688

1,472 4,3845,522,235 4,730,939(129,383) (42,178)(69,099) (98,713)

Ps. 5,323,753.. ..Ps. 4,590,048

Loans in U.S. dollars with annual variable interestrates and semi-annual payments due through 1999

Short-term bank loansCurrent portion of long-term debtLong-term debt

19971998

AmountYear ended

19971998

As of December 31, the status of the plan is as follows:

Actuarial present value of benefit obligations:Vested benefit obligation Ps. (7,480) Ps. (4,824)Non-vested benefit obligation (436) (3,508)Accumulated benefit obligations (7,916) (8,332)

Excess of projected benefit obligation over accumulated benefit obligation (3,297) (3,034)

Projected benefit obligation (11,213) (11,366)Plan assets at fair value 12,428 13,817Plan assets in excess of projected benefit obligations 1,215 2,451Unrecognized amounts to be amortized over 17 years:

Unrecognized cumulative net gain (2,188) (3,667)Unrecognized net transition obligation (37) (248)Unrecognized additional liability (457) -Unrecognized prior service cost (211) (139)

Seniority premium liability Ps. (1,678) Ps. (1,603)

Significant assumptions (weighted average rates, net of expected inflation) used in determining theseniority premium cost were as follows

Discount rate 4.0% 4.0%Rate of increase in future compensation levels 2.0% 2.0%Expected long-term rate of return on plan assets 5.0% 5.0%Inflation rate 8.0% 8.0%

In the United States, the Company has a savings and investment plan that incorporates voluntaryemployee 401(K) contributions with Company contributions. For the years ended December 31, 1998and 1997, total expenses related to this plan were U.S.$1,989 (Ps.19,651) and U.S.$1,793 (Ps.17,715),respectively.

11. COMMITMENTS AND CONTINGENCIES

The Mexican tax authorities have disallowed certain deductions for income tax purposes, the effect ofwhich on prior years’ income tax amounted to Ps.1,037 plus the related surcharges and penalties. TheCompany is also involved in a number of claims arising in the ordinary course of business in the UnitedStates which have not been finally adjudicated. The resolution of these matters is not expected to havea material adverse effect on the Company’s consolidated financial position or results of operations.

The Company entered into sale-leaseback agreements for various production equipment located in itsUnited States plants. The Company has a purchase option at fair market value at the expiration of theleases and an early purchase option, which permits the Company to acquire the equipment at fair marketvalue at approximately 75% of the lease term. These agreements are accounted for as operating leases.

Rental expense was approximately U.S. $27.7 million (Ps.273,636) and U.S. $25.0 million (Ps.245,303) forthe years ended December 31, 1998 and 1997, respectively.

17


19971998

19971998

Year ended December 31,

18


As of December 31, 1998, the Company is leasing certain of its equipment under long-term operatinglease agreements expiring through 2011. Future minimum lease payments under such leases amountto approximately U.S. $156.3 million (Ps.1,543,878), as follows:

1999 U.S.$ 5,609 U.S.$ 22,600 U.S.$ 28,209 2000 4,286 22,487 26,7732001 3,771 15,003 18,7742002 2,704 13,178 15,8822003 2,107 12,235 14,3422004 and thereafter 6,968 45,315 52,283

U.S.$ 25,445 U.S.$ 130,818 U.S.$ 156,263 Ps. 251,397 Ps. 1,292,482 Ps. 1,543,879

As of December 31, 1998, the Company has various outstanding commitments in the United States topurchase commodities of approximately U.S.$52.6 million (Ps.519,224), which will be delivered during1999.

As of December 31, 1998, restricted cash of Ps.4,851 (Ps.83,391 in 1997) includes undisbursed proceedsfrom the issuance of tax-exempt industrial development revenue bonds in the United States amount toPs.1,680 (Ps.56,478 in 1997) which are available to fund further development of two plants. AtDecember 31, 1997, restricted cash includes an interest-bearing deposit of Ps.26,913, for claims pursuant tothe self-insured workers’ compensation retention program for operations in the United States. In 1998,this restricted cash balance was released.

To minimize the risk created by price fluctuations of corn, wheat and soybean oil, the Company followsa policy of hedging the purchase of a portion of their production requirements through commodityfutures contracts. The Company’s open positions for hedging of purchases do not exceed the maximumproduction requirements for a one-year period. Unrealized gains or losses on open futures contracts arenot recognized in the financial statements until the futures contracts are settled. Realized gains orlosses are deferred as a component of inventory and recognized as production costs as the inventoryis used. Total amortization of deferred losses to cost of sales for the period ended December 31, 1998was Ps.29,694. Total amortization of deferred gains to cost of sales for the year ended December 31,1997 was Ps.6,392. The deferred loss included as a component of inventory at December 31, 1998 and1997 was Ps.51,231 and Ps.28,780, respectively. At December 31, 1998, the Company had open futuresin the amount of Ps.45,399. The contracts expire during 1999.

12. STOCKHOLDERS’ EQUITY

A) COMMON STOCK

At the stockholders’ meeting held on April 28, 1998, an issuance of 5,809,656 common shares via astock dividend was approved as a result of a retained earnings capitalization.

At the stockholders’ meeting held on April 21, 1997, an issuance of 6,840,537 common shares via astock dividend was approved as a result of a retained earnings capitalization.

As of December 31, 1998, the Company’s outstanding common stock consisted of 353,196,619shares of Series “B”, with no par value, which can only be retired with stockholders’ approval, and2,631,681 shares held in Treasury (349,271,363 shares subscribed and paid and 8,441,337 commonauthorized shares held in Treasury as of December 31, 1997).

Facilities Equipment

U.S. dollars (thousands)

TotalYear

19


B) EXECUTIVE STOCK PURCHASE PLAN

The Company has established through an irrevocable grantor trust an “Executive StockPurchase Plan” designating up to 5,422,519 common shares which are reserved for issuancepursuant to this plan, which are subscribed and paid. The shares will be granted to execu-tives, and such executives will have the right to receive dividends during the six year termafter joining the plan.

As of December 31, 1998, the Company had granted 2,645,385 Series “B” shares under this plan,844,250, 821,850, 749,285 and 230,000 shares will fully vested by December 31, 1999, 2001, 2002 and2003, respectively.

The Company recognizes as an expense, by the straight-line method, the market value of the sharesat grant date over the six year period. The amount recognized as expense for the years endedDecember 31, 1998 and 1997 was Ps.8,305 and Ps.5,160, respectively.

C) RETAINED EARNINGS

In accordance with Mexican law, the legal reserve must be increased by 5 % of annual net profitsuntil it reaches 20 % of the capital stock amount.

A 53.85% tax is payable by the Company if dividends are paid from earnings that have not beensubject to Mexican income tax. Additionally, starting 1999 dividends paid to individuals and foreignresidents will be subject to a withholding tax of a 7.69% as maximum of the dividend paid.

D) PURCHASE OF COMMON STOCK

At the stockholders’ meeting held on April 21, 1997, an increase of Ps.500,00 to Ps.650,000 in thereserve was approved to allow the Company to repurchase its own shares. The amount of sharesrepurchased can not exceed the reserve amount or 5% of total equity. As of December 31, 1998, theCompany has repurchased 3,700,400 of its own shares for Ps.92,510, the market value at this date.

E) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS

As of December 31, 1998 and 1997, “Foreign currency translation adjustments” consist of the following:

Accumulated effect on translating the opening net investment in foreign subsidiaries Ps. 341,622 Ps. 309,735

Effect from translating income and expense items at the monthly average exchange rates and assets and liabilitiesat the year-end closing rates 673,554 124,161

Exchange differences arising on foreign currency liabilities accounted for as a hedge of the Company’s net investments in foreign entities (608,922) (83,890)

Ps. 406,254 Ps. 350,006

19971998

20


F) INFLATION EFFECTS

As of December 31, 1998, the majority stockholders’ equity is comprised of the following:

Common stock Ps. 2,944,805 Ps. 3,517,757 Ps. 6,462,562Additional paid-in capital 1,279,191 1,100,036 2,379,227Deficit from restatement - (7,026,024) (7,026,024)Retained earnings from prior years 1,947,113 3,116,453 5,063,566Net income for the year 378,086 39,199 417,285Foreign currency translation adjustments 288,023 118,231 406,254

Ps. 6,837,218 Ps. 865,652 Ps. 7,702,870

13. COMPLEMENTARY REVENUE AND SUBSECUENT EVENT

In connection with the Mexican government’s program of providing price supports for corn growers andprice controls for tortillas, the company as a corn flour producer received in 1998 and 1997 complemen-tary revenues from the Mexican government based on their related volume of corn flour sales.

For purpose of the complementary revenue payment program, the Mexican government established the“Indifference Price”, which is used by the corn flour producers in determining their cost and this indif-ference price based on international corn prices at the Chicago Board of Trade (CBOT). Corn flour pro-ducers received complementary revenues based on international corn price instead of domestic cornprice.

Starting in 1997, the Mexican government periodically increased the tortilla price resulting in a gradualdecrease in the amount of complementary revenues received by the Company. On September 18, 1998, thetortilla’s official price was three pesos per kilogram, at which time the complementary revenues receivedby the Company were practically reduced to zero, except in the state of Chiapas whereby tortilla priceswere maintained at Ps.2.60 per kilogram.

As of December 31, 1998, the Mexican government adopted a new regulation that completely eliminatedtortilla related subsidies and price controls relating to tortillas and corn flour. Consequently, January 1,1999 was the end of the regulation of tortilla and corn flour industry in Mexico; and such, complementaryrevenues will no longer be received by the Company.

For the years ended December 31, 1998 and 1997, net sales include complementary revenues of Ps.620,423and Ps.1,724,004, respectively.

14. OTHER EXPENSE, NET

Other expense, net is comprised of the following:

Reorganization expenses Ps. (188,420) Ps (64,876)Amortization of excess of cost over book value and

other (53,174) (54,685)Other (829) 10,928

Ps (242,423) Ps (108,633)

Restatement TotalNominal

19971998

Year ended December 31,

21


15. INCOME TAXES, ASSET TAX AND EMPLOYEES’ STATUTORY PROFIT SHARING

A) INCOME TAX AND ASSET TAX

Gruma files a consolidated income tax return for Mexican income tax purposes, consolidating taxableincome and losses of Gruma and its controlled Mexican subsidiaries. Filing a consolidated taxreturn had the effect of reducing income tax expense for the years ended December 31, 1998 and1997 by Ps.393,759 and Ps.170,373, respectively, as compared to filing a tax return on anunconsolidated-basis. Effective January 1, 1999, new tax regulations limit the income tax consolidationto 60% of the ownership interest of controlled Mexican subsidiaries.

In accordance with the applicable tax law, Mexican corporations must pay the higher of eitherincome tax or asset tax (1.8%). Asset tax is determined on the average value of substantially all ofthe Company’s Mexican assets less certain liabilities. Payments of asset tax are recoverable againstthe excess of income tax over asset tax of the three prior years and the ten subsequent years. Forthe years ended December 31, 1998 and 1997, asset tax amounted to Ps.69,077 and Ps.74,763,respectively, and is included as a component of income tax expense for those years.

B) RECONCILIATION OF FINANCIAL AND TAXABLE INCOME

In Mexico, differences arise between financial and taxable income, causing the statutory incometax rate (34%) to be different from the effective income tax rate. The most important differencesare: (a) permanent differences, mainly attributable to inflation effects, and (b) temporary differencesbetween financial and taxable income, primarily due to the increase in corn inventory levels (purchasesof inventories are deductible when purchased), contributions made to research and developmenttrust funds and prior years tax loss amortization.

For the years ended December 31, 1998 and 1997, the Company’s subsidiaries recognized deferredincome taxes and employees’ statutory profit sharing relating to non-recurring temporary differencesarising between financial and taxable income in the amounts of Ps.(238,984) and Ps.6,246, respectively,which consist of the following:

Differences between financial and taxable basis of inventory Ps. 25,861 Ps 9,862

Tax deduction of contributions made to research and development trust funds 4,844 5,221

Differences between financial and taxable revenues and other provisions (34,199) (78,231)

Differences between financial and taxable revenues of subsidiaries located in the United States (235,490) 69,394

Ps. (238,984) Ps. 6,246

At December 31, 1998, the Company’s Mexican subsidiaries had additional recurring temporarydifferences with an indefinite future reversal, whose effect on income tax and employees’ statutoryprofit sharing amounts to approximately Ps.162,761. Under Mexican GAAP, the deferred tax effectsof these types of items are not recognized.

19971998

22


C) TAX LOSS CARRYFORWARDS AND RECOVERABLE ASSET TAX

At December 31, 1998, the Company has tax loss carryforwards in Mexico of approximatelyPs.732,846 available to offset its taxable income in subsequent years, as shown below:

2004 Ps. 308,8132005 424,033

Ps. 732,846

At December 31, 1998, the asset tax available in Mexico to offset the excess of income tax over assettax in future years is as follows:

2001 Ps. 23,7152002 26,4892003 21,4402004 26,4882005 19,2952006 21,3432007 79,6162008 57,624

Ps. 276,010D) EMPLOYEES’ STATUTORY PROFIT SHARING

In Mexico, employees’ statutory profit sharing is determined for each subsidiary (not on consoli-dated basis) on a basis similar to income tax, except that the employee’s statutory profit sharing doesnot consider inflation effects (inflationary component), the depreciation expense is based on the his-torical cost, and the foreign exchange gain or loss is recognized when a monetary asset or liability iscontractually due.

16. FOREIGN CURRENCY

A) EXCHANGE DIFFERENCES

For the years ended December 31, 1998, and 1997, the effects of exchange rate fluctuations on theCompany’s monetary assets and liabilities amounted to Ps.(726,736) and Ps.(68,149), respectively,which were recognized as follows:

Exchange differences arising from foreign currency liabilities accounted for as a hedge of the Company’s net investments in foreign subsidiaries were recorded directly to stockholders’ equityas an effect of foreign currency translation adjustments Ps. (608,922) Ps. (83,890)

Exchange differences arising from foreign currency transactionscharged to income for the year (59,826) 15,741

Exchange differences arising from foreign currency transactionscharged to property, plant and equipment (57,988) -

Ps. (726,736) Ps. (68,149)

AmountExpiration year

AmountExpiration year

19971998

B) FOREIGN CURRENCY POSITION

As of December 31, 1998 and 1997, monetary assets and liabilities held or payable in U.S. dollars are:

By companies located in Mexico:

Assets U.S.$ 12,926 U.S.$ 111,114Liabilities (483,498) (429,631)

U.S.$ (470,572) U.S.$ (318,517)

By foreign companies:

Assets U.S.$ 95,946 U.S.$ 98,250Liabilities (185,302) (154,528)

U.S.$ (89,356) U.S.$ (56,278)

At December 31, 1998 and 1997, the exchange rates used to translate U.S. dollar assets and liabilitieswere Ps.9.88 and Ps.8.08, respectively. On February 18, 1998 (date of issuance of these financial state-ments), the exchange rate for the U.S. dollar was Ps.9.90.

Gruma and its Mexican subsidiaries had transactions in U.S. dollars as follows for the years endedDecember 31:

Corn purchases and other inventories U.S.$ 66,120 U.S.$ 17,717Interest expense 17,171 29,856Equipment purchases 4,916 4,160Services 427 821

U.S.$ 88,634 U.S.$ 52,554

Fixed assets of foreign origin, which are restated on the basis of the GPCI from the foreign country,are as follows:

U.S. dollars 309,677 9.88 309,677 8.08Swiss francs 13,522 7.17 12,840 5.55Deutsche marks 35,186 5.92 36,682 4.51Italian lira 3,689,218 0.0060 3,169,676 0.0046Czechoslovakia koruna 6,620 0.3290 5,984 0.2335Japanese yen 127,272 0.0871 8,256 0.0621Spanish pesetas 712,602 0.0695 1,816 0.0538Costa Rican colones 21,606,737 0.0364 18,101,952 0.0330

23


19971998

19971998

Thousands of U.S. dollars


19971998


Foreigncurrency

(thousands)

Foreigncurrency

(thousands)

Exchange rate at the end of

the year

Exchange rate at the end of

the year

19971998

17. SEGMENT INFORMATION

A summary of information by geographic segments is as follows:

NET SALES:Mexico Ps. 5,541,385 40 Ps. 5,811,276 44United States 7,228,467 53 6,422,970 49Central America 1,003,966 7 960,059 7

Ps. 13,773,818 100 Ps. 13,194,305 100

OPERATING INCOME (LOSS):Mexico Ps. 647,799 63 Ps. 602,794 65United States 406,389 39 342,964 36Central America (22,625) (2) (4,817) (1)

Ps. 1,031,563 100 Ps. 940,941 100

IDENTIFIABLE ASSETS:Mexico Ps. 9,951,144 58 Ps. 10,980,749 66United Statess 5,788,719 34 4,352,301 26Central America 1,432,666 8 1,317,981 8

Ps. 17,172,529 100 Ps. 16,651,031 100

DEPRECIATION AND AMORTIZATION:Mexico Ps. 353,863 54 Ps. 370,650 58United States 229,731 35 239,765 37Central America 70,287 11 31,813 5

Ps. 653,881 100 Ps. 642,228 100

CAPITAL EXPENDITURES:Mexico Ps. 799,623 48 Ps. 749,379 65United States 678,019 41 331,140 28Central America 188,313 11 78,073 7

Ps. 1,665,955 100 Ps. 1,158,592 100

The main subsidiaries of the Company are Grupo Industrial Maseca, S.A. de C.V. and subsidiaries, GrumaCorporation and subsidiaries and Gruma Centro América, S.A. and subsidiaries.

Grupo Industrial Maseca, S.A. de C.V. and subsidiaries is located in Mexico. The summary financial data forthis subsidiary, expressed in Mexican pesos is as follows:

Net sales Ps. 5,069,169 Ps. 5,428,356Operating income 794,587 755,037Identifiable assets 6,169,558 5,900,566

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19971998 %%

19971998

Grupo Industrial Maseca S.A. de C.V.and subsidiaries

25


Gruma Corporation is located in the United States. Its summary financial data expressed in U.S. dollars isas follows:

Net sales U.S.$ 670,424 U.S.$ 602,540Operating income 46,501 39,986Identifiable assets 591,391 440,429

18. FINANCIAL INSTRUMENTS

A) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, accounts receivable, restricted cash, tradeaccounts payable, bank loans, current portion of long-term debt and accrued liabilities and otherpayables approximate their fair value, due to their short maturity.

The estimated fair value of the Company’s long-term debt is as follows:

At December 31, 1998

Liabilities:Eurobonds in U.S. dollars bearing

interest at annual rate of 7.625% Ps. 2,470,000 Ps. 2,453,945

At December 31, 1997

Liabilities:Eurobonds in U.S. dollars bearing

interest at annual rate of 7.625% Ps. 2,454,703 Ps. 2,438,747Eurobonds in U.S. dollars bearing

interest at annual rate of 9.75% 1,227,352 1,231,648

The fair value amounts have been determined by the Company using available market information.

The carrying amount of the remainder of the Company’s long-term debt approximates fair value.

B) CONCENTRATION OF CREDIT RISK

The financial instruments that are subject to a concentration of risk are principally cash and cashequivalents and trade accounts receivable.

The Company invests its excess cash in recognized financial institutions. The concentration of thecredit risk with respect to the accounts receivable is limited, as the Company sells its products toa large number of clients which are located in different parts of Mexico, United States and CentralAmerica.

Carrying amount Fair value

Carrying amount Fair value

19971998

Gruma Corporation and Subsidiaries (thousands of U.S. dollars)

26


19. RELATED PARTY TRANSACTIONS

As disclosed in Note 5, the Company owns a 9.8% interest in GF Banorte, a Mexican financial institu-tion. As of December 31, 1998, the Company has convertible debentures exchangeable by shares in GFBanorte, S.A. de C.V., amounting to Ps.42,500.

In the normal course of business, the Company obtains long-term financing from the banking and othersubsidiaries of this institution at market rates and terms. As of December 31, 1997, the Company hadoutstanding loans with GF Banorte for Ps.10,464. All loans were paid off in 1998. The interest paid tosuch subsidiaries of this institution for the year ended December 31, 1997 was Ps.3,446.

During 1998 and 1997, the Company purchased U.S.$43.7 (Ps.431,657) and U.S.$34.4 million (Ps.339,427)of inventory ingredients from ADM, respectively.

20. YEAR 2000 ISSUE

The Year 2000 issue results from software programs and electronic components that are integrated intocomputer programs, which were developed using two digits, instead of four to define the year. If theCompany’s programs with “date” functions are not compatible with the year 2000, the system mayrecognize “00” as 1900 rather than 2000. This may result in system failures or incorrect calculationswhich could disrupt operations, including among other things, the temporary inability to processtransactions, issue invoices or execute normal business activities.

As part of an operational and administrative modernizing effort for the past two years, the Companyhas been developing a process for change, which includes an integral technological conversion. Theoverall modernization project is referred as the “ Maseca 2000 ” project. This project, among otherthings, includes the implementation of the integral system SAP R/3. The scope of this system includessales and distribution, production, quality control and administration. Management believes thissystem, when implemented will eliminate a significant component of the Year 2000 problems. However,the Company, recognizing the need to ensure that its operations are not adversely impacted by thisevent, launched in June 1998 a company-wide program to become Year 2000 compliant, the program notonly covers our information technology, but also for our extended business network. In order to achievethese objectives, teams where created within each subsidiary of the Company, with direct responsibilityto develop and implement a plan of action in order to maintain the integrity of the information systems.

The Company is currently in the process of implementing these plans, with the objective of relying onits current information systems, both technological (IT) and non technological (Non-IT), functioningappropriately with respect to the Year 2000 issues. The plan has the following phases: strategic analysis,evaluation and planning, system changes and testing, implementation, relation with its businessenvironment and contingency planning.

The following is the status of the implementation plan for Gruma’s main subsidiaries:

Grupo Industrial Maseca, S.A. de C.V. and subsidiaries 95% June 99 50% July 99Gruma Corporation and subsidiaries 60% July 99 50% May 99Gruma Centro América, S.A. and subsidiaries 20% October 99 15% October 99Productos y Distribuidora Azteca, S.A de C.V. and subsidiaries 95% June 99 50% July 99Desarrollo Industrial y Tecnológico, S.A. de C.V. and subsidiaries 10% November 99 10% August 99Molinera de México S.A. de C.V. and subsidiaries 10% November 99 50% July 99

Percentage ofplan completed Deadline

Percentage ofplan completed Deadline

Non - IT ComponentsIT Components

27


In the event the automated system were to fail, the Company is maintaining current the documentationfor manual operating procedures. If needed, the Company has developed a methodology for communicationand training for this contingency plan.

As of December 31, 1998, the total cost of the project was U.S.$11.9 (Ps.118,279).

As a result of the above, Management believes that the effects of the year 2000 issue on the Company’ssystems, equipment and processes will not significantly affect the operations of the Company.

In addition, the Company has initiated a formal communications process with clients and suppliers(both actual and potential) to determinate the extent to which the Company is vulnerable if such externalagents fail to remedy their own year 2000 issue. The satisfactory solution of the year 2000 issue isdependent upon, among other factors, the proper execution of the Company’s implementation planand SAP R/3 conversion, as well as the Company’s and its external agents timely detection and correctionof all significant year 2000 implications before the beginning of the next century.

1998 gruma annual report · 2014. 12. 30. · to our shareholders: it gives me great pleasure to...

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