ADVANTAGE ADVISERS,INC.
The Mexico Equity and Income Fund, Inc.
Annual Report
July 31, 2001
THE MEXICO EQUITY
AND INCOME FUND, INC.
THE MEXICO EQUITY AND INCOME FUND, INC.
September 20, 2001
DEAR FUND SHAREHOLDER,
We are pleased to present you with the audited financial statements of the
Mexico Equity and Income Fund, Inc. (the "Fund") for the fiscal year ended July
31, 2001.
The total return of the Fund based on its net asset value (NAV) declined (5.8%),
which includes the effect of reinvested dividends, in the twelve months ended
July 31, 2001, as compared to the 1.4% gain in the benchmark Bolsa Index for the
same period.
On December 1, 2000, the Fund paid a dividend of US$0.62 per share to
shareholders of record on November 22, 2000. The Fund also accepted 1,272,821
shares at $8.38 per share (92%) of NAV per share as of the close of business on
January 5, 2001 pursuant to its tender offer program. The Fund repurchased
approximately US$1.7 million worth of its common shares during the fiscal year
ended July 31, 2001, pursuant to its share repurchase program.
On behalf of the Board of Directors, we thank you for your participation and
continued support of the Fund. If you have any questions, do not hesitate to
call our toll-free number, (800) 637-7549.
Sincerely,
/s/ Bryan McKigney
Bryan McKigney
President and Secretary
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THE MEXICO EQUITY AND INCOME FUND, INC.
Report of the Mexican Adviser
FOR THE FISCAL YEAR ENDED JULY 31, 2001
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MEXICO'S ECONOMY: REVIEW AND OUTLOOK
For the year ended July 31, 2001, the Mexican economy grew 3.5% in real terms,
reflecting a 6.2% growth rate in the July-December 2000 period, and a 0.9%
growth rate in the first six months of calendar year 2001.
The Mexican economy gained 1.9% in real terms during the first three months of
calendar year 2001. Nonetheless, as the U.S. and global economic slowdown
progressed, the Mexican economy recorded zero growth in the second quarter of
this year.
The slowdown in the world's economies, particularly in the U.S. economy, has
caused Mexican exports and imports to decline, which has lowered production
activity in recent months.
On the other hand, inflation has been contained during the fiscal year. For the
year ended July 2001, inflation (as measured by the Consumer Price Index) in the
Mexican economy was 5.9%, a figure below the 6.5% target rate set by Mexico's
central bank. The latest 12-month inflation rate compares favorably with the
12-month periods ended in July 2000 and December 2000, when inflation was
approximately 9.0%. The slowdown in inflation took hold in the first half of
2001. In the January-July period this year, the CPI rose only 1.8%, which is
similar to the 1.61% inflation recorded in the U.S. during the same period.
Strength in the Mexican peso largely explains the recent slowdown in inflation.
During the six months ended July 31, 2001, capital inflows have been high,
according to data from the balance of payments for the first half of the year:
capital inflows were $12 billion dollars from which $6.8 billion were from
Foreign Direct Investment (FDI). This situation significantly strengthened the
peso against the U.S. dollar and other world currencies. The peso closed July
2001 at 9.19 to the U.S. dollar, almost 2% stronger than its July 2000 average,
and 7.65% stronger than its weakest exchange rate in 2001 (9.95 pesos to the
U.S. dollar on January 16). More importantly, foreign exchange risk expectations
have significantly decreased since the beginning of the year.
FUND UPDATES
The Fund's toll-free phone number is (800) 637-7549.
TRACKING THE FUND'S NAV
The Fund's net asset value (NAV) is calculated weekly and published in THE WALL
STREET JOURNAL every Monday under the heading "Closed End Funds." The Fund's net
asset value is also published in BARRON'S on Saturdays and in THE NEW YORK TIMES
on Mondays. The Fund is listed on the New York Stock Exchange under the ticker
symbol MXE.
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THE MEXICO EQUITY AND INCOME FUND, INC.
The behavior of capital inflows, lower inflation and improved exchange rate
expectations are the main factors behind a sharp decline in nominal and real
interest rates in recent months. At the end of July 2001, the nominal rate on
28-day CETES (Mexican Treasury bills) was 9.40%, down more than 400 basis points
from a year earlier, and down about 900 basis points from mid-January 2001. On
the other hand, the "real" or inflation-adjusted rate on 28-day CETES was
approximately 4%, down sharply from the historic average of about 6.5%.
We believe that long-term growth prospects continue to be strong for the Mexican
economy, and we are optimistic that growth will accelerate in 2002. Our optimism
is linked to our expectations of an upswing in the U.S. economy and the
favorable domestic performance of inflation, interest rates, the exchange rate,
and the ongoing efforts in recent years to implement structural reforms. The
reform activities have enabled Mexico to distance itself from other emerging
economies and increase its attractiveness for long-term capital inflows.
Likewise, Mexico has positively distanced itself from other emerging economies
like Argentina and Brazil. The country's relatively stable position facilitates
the refinancing, contracting and placement of debt abroad, under terms more
favorable than what is available for countries with less than investment-grade
credit ratings.
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THE MEXICAN STOCK MARKET
During the first half of the Fund's fiscal year (August 1, 2000 - January 31,
2001), the Bolsa Index, the Fund's benchmark, lost (3.6%) in that volatile
market period, reflecting warnings of reduced profits and losses by technology
companies within the uncertain U.S. economy. In contrast, the Mexican market was
one of the best performing equity market in the world during the second half of
the fiscal year. The Bolsa Index gained 5.5% from January 31, 2001 through July
31, 2001. For the one-year period ended July 31, 2001, the Bolsa Index increased
1.4%.
It should be noted, however, that the Bolsa Index experienced remarkable growth
during January 2001. For the period from December 29, 2000 through July 31,
2001, the Bolsa Index increased 20.4%.
During the 12 months ended July 31, 2001, the Bolsa Index performed better than
the U.S. and other Latin American markets. The Dow Jones Industrial average kept
its level, the Nasdaq fell (46.0%), Brazil's market index dropped (40.0%) and
Argentina's Merval Index dropped (36.0%), all expressed in dollar terms.
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THE MEXICO EQUITY AND INCOME FUND, INC.
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THE FUND'S PERFORMANCE
For the one-year period ended July 31, 2001, the net asset value (NAV) of the
Fund lost (5.8%) in dollar terms, compared with the Bolsa Index's gain of 1.4%.
However, from December 31, 2000 through July 31, 2001 the Fund's NAV gained
15.5% in dollar terms (calculations of NAV are from Lipper Analytical, Inc., and
include the effect of reinvested dividends).
After ten years of market-leading performance, over long-term periods, the Fund
lagged the Bolsa Index during the 12 months ended July 31, 2001. The Fund's
underperformance was mainly the result of the fixed income allocation and
investment limitations.
Historically, the Fund has achieved its performance because of a balanced
portfolio, which includes equity and fixed income allocation. During the fiscal
year, the Fund changed its allocation in fixed income by approximately 560 basis
points to close to 10%. This was in anticipation of a decrease in domestic
interest rates that we forecast for calendar 2001. Our decision to lower the
fixed income allocation proved beneficial to the Fund's capital appreciation
because nominal rates 28-day CETES lowered 647 basis points during the Fund's
fiscal year.
However, even the reduced fixed income exposure limited the Fund's potential for
growth for the period December 29, 2000 to July 2001. During that period, the
Bolsa Index increased 20.4% reflecting substantial gains in the Mexican equity
market. While fixed income is an appropriate hedge during a bear market, it can
cause underperformance when the equity market is bullish. Furthermore, it is
important to note that the Mexican Bolsa Index is an equity only benchmark and
has no fixed income securities.
In addition, we attribute the Fund's underperformance to a restriction that
prevents it from investing in the stock of Grupo Financiero Banamex Accival
(Banacci). According to the Investment Company Act of 1940, U.S. registered
funds are prohibited from owning shares of affiliated companies and Banacci is
affiliated with Accival, the Investment Manager. Banacci had an 11% weighting in
the Bolsa Index as of July 31, 2001, and gained 66.1% in share price during the
Fund's fiscal year. Thus, the Bolsa grew substantially because of the
exceptional performance of Banacci's stock. Yet, the Fund's portfolio could not
share in this growth because of the regulatory restriction noted above.
Also, many of the Fund's holdings in the telecommunications and media sectors
lagged the Bolsa Index, contributing to its underperformance during the annual
period.
The Fund has outperformed its most comparable peer, The Mexico Fund Inc. ("MXF")
from August 21, 1990 (the Fund's inception) through July 31, 2001. The Fund's
cumulative NAV dollar gain over that period is 201.4%, outperforming MXF's gain
of 127.9%, according to Lipper Analytical, Inc. The Fund has paid an aggregate
of US$139.7 million in cash dividends since inception and US$54,390,950 since
January 1998 to July 2000.
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THE MEXICO EQUITY AND INCOME FUND, INC.
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PORTFOLIO STRATEGY
We believe, adherence to our strategic principles has proven to be beneficial to
the Fund's shareholders over the long term period. The following are several
trends in the Fund's strategy and structure that began early in the fiscal year
ended July 31, 2001:
o We increased the Fund's allocation to the financial sector, since we
have observed greater efficiencies and higher profitability in companies
there.
o We shifted approximately 23% of the Fund's net assets into second-tier
stocks, as rated by liquidity. This equity allocation included companies
with: (i) strong overall market positions, (ii) global leadership in the
manufacturing of goods and (iii) globally consolidated industries.
The structure of the Fund by asset category as of July 31, 2001, was as follows:
o 34.4% of the Fund's holdings were in companies with a strong market
position; a low EV/EBITDA multiple and what we viewed as the likelihood
of an upgrade in ratings, based on a strong market share and a solid
balance sheet. Most of the companies in this category are cash
generators.
o 21.4% of the Fund's holdings were in financial holdings. The fundamental
profiles of banking institutions in Mexico are approaching those of U.S.
banks in terms of efficiency, profitability, etc.
The acquisition of Banacci by Citigroup placed 73% of Mexican deposits and
assets into well-capitalized foreign hands. Mexico's three largest banks - BBVA
Bancomer, Banacci and Serfin - are now controlled, respectively, by Spain's
Banco Bilbao Vizcaya Argentaria (BBVA), Citigroup and Banco Santander Central
Hispano, also from Spain. This substantially reduces Mexican financial risk,
since the lender of last resort has moved from the Mexican Central Bank to these
large, well-capitalized foreign organizations. The re-capitalizing of the
Mexican banking system and reduced financial risk should in turn help lead to a
positive re-leveraging of the Mexican economy which will be favorable for the
Mexican economy and market.
Within the context of higher income per capita and a less risky financial
environment, we believe that banks will likely become much more competitive by
extending more loans to lower-rated borrowers. Mexico's loan-to-GDP ratio has
been steadily falling during the last five years. We believe that as a result,
banking credit growth will accelerate rapidly during the short term and it may
become a source of fierce competition among the banking industry. The
loan-to-GDP ratio in Mexico is about 15%, versus 30% in Brazil, 22% in
Argentina, 66% in Chile, and 90% in Spain.
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THE MEXICO EQUITY AND INCOME FUND, INC.
The Citigroup acquisition underscores the relatively inexpensive valuations of
financial stocks in Mexico and may herald more takeovers to come. Mexico's
financial sector has a notable advantage in terms of average price/book value
ratios over those of banks in other Latin American markets. As of July 31, 2001,
the price/book value ratios of some Latin American banks were as follows:
Galicia (Argentina) 0.9x; Frances (Argentina) 0.9x; Banacci (Mexico) 2.5x;
Bradesco (Brazil) 1.9x; Santiago (Chile) 2.7x Santander (Spain) 3.0x.and Itau
(Chile) 3.2x.
o 11.4% of the Fund's holdings represented undervalued restructuring stories.
This stock strategy is related mostly to attractive valuations or discounts to
net asset value. When management restructures a company's investment
objective, this strategy points to their active efforts in
merger-and-acquisition activity.
o 10.3% of the Fund's holdings represent globally consolidated industries.
Companies with low EV/EBITDA multiples (5x or less) and strong regional market
share are typically candidates for mergers with global corporations.
o 7.9% of the Fund's holdings are considered global leaders as indicated by
their risk exposure, that is, those with more global risk than
country-specific risk. In Mexico, these companies are exposed mainly to a
sharper-than-expected U.S. slowdown. This group integrates consolidated
businesses with a high potential price increase due to low multiples.
o 3.7% of the Fund's holdings are in fast-growing businesses. This category
comprises companies with high-growth potential, but which are also sensitive
to the world economic slowdown in view of their huge capital investment needs
and the uncertainty in the global telecommunications sector.
o 10.6% of the Fund's holdings are in fixed income. This asset category includes
government bonds and bank certificates of deposit.
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CONCLUSION AND OUTLOOK
We believe Mexico's strength is not the result of a series of non-recurring
events, but rather of a fundamental structural change, namely the ongoing
integration of the Mexican economy with that of the U.S. Additionally, Mexico's
monetary policy aims for inflation and interest rates to converge with those of
the U.S. sometime in 2003-2004, according to statements from the Central Bank
governor.
We believe that further mergers and acquisitions and a recovery in the U.S.
economy will maintain Mexico's status as a clear play with solid growth
potential.
In our opinion, the Bolsa Index catalyst this year will be the likely approval
of the tax reform package .
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THE MEXICO EQUITY AND INCOME FUND, INC.
We continue to focus on carefully selecting stocks according to our strategy,
targeting the stock of internationally competitive Blue Chip companies.
At the time of the writing of this report, the regrettable events that occurred
in the U.S. prompted a natural reaction of support and solidarity by the Mexican
government, congressmen and Mexicans nation-wide.
The impact of the fall-out on Mexico is still difficult to quantify at this
point.
Throughout the year we held a positive macroeconomic view of Mexico, based on
strong monetary and fiscal policy response to the U.S. downturn and a surge in
capital inflows. Nevertheless, we feel oblige to share with you the idea that
after the unfortunate terrorist attack, given Mexico's large trade links with
the U.S., the prospects of lower U.S. growth can delay the recovery in Mexican
economic activity that we had projected for the fourth quarter 2001 until next
year.
On a more positive note, in view of solid macroeconomic perspectives of Mexico
prior to these unspeakable acts in the U.S., we believe that at the improvement
of current lower projected U.S. economic growth, Mexican stance will upbeat
expectations, also strengthened by the approval of a congruent fiscal reform
which we expect to be ratified before December.
With regard to the MXE's portfolio, we currently will avoid a dramatic shift in
the investment strategy. Nonetheless, in view of the extremely cheap valuations
of some internationally competitive blue chip companies, the Fund could
gradually and carefully increase its equity allocation. We favor soft drink
bottlers, cash generator companies, and stocks that have been oversold with high
market share position as well as qualitative management.
Sincerely,
Eugenia Pichardo
Mexican Portfolio Manager
Acci Worldwide, S.A. de C.V.
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THE MEXICO EQUITY AND INCOME FUND, INC.
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REVIEW OF KEY ECONOMIC SECTORS AS OF JULY 31, 2001
FINANCIAL GROUPS
21.4% OF THE FUND'S NET ASSETS
The globalization process of Mexican banks began several years ago and has
accelerated during the last 12 months. During this period, foreign investment in
Mexican banks has gone from 20% to approximately 56%. In the second quarter of
2000, Spain's Banco Santander Central Hispano acquired 100% of Serfin, Mexico's
third largest bank. Three months later, BBVA, also from Spain, merged its
Mexican operations with the second biggest financial group at that time, Grupo
Financiero Bancomer.
The latest chapter in this process occurred in August of 2001, with Citigroup's
acquisition of Grupo Financiero Banamex-Accival, the country's largest financial
group.
Following the Citigroup transaction in August 2001, nearly 70% of the financing
provided by commercial banks in Mexico was represented by three foreign
institutions: Citibank-Banamex, 31.7%, BBVA-Bancomer, 27.6% and
Santander-Serfin, 7.7%. This implies greater competition and lower country risk,
as was evidenced by the reduction in sovereign debt spreads from 500 basis
points to between 150 and 350 basis points after the transaction was announced.
Foreign acquiring banks have a better financial-operational stand than Mexican
banks; and we estimate that foreign acquiring banks will be more aggressive in
lowering borrowers' costs and improving financial services.
At the macroeconomic level, June and July 2001 were characterized by an economic
slowdown and a sharp reduction in nominal interest rates. Since real interest
rates have remained high, the credit re-activation that most analysts predicted
one year ago has failed to materialize. (Credit re-activation means that
performing loans should record a sustainable growth of 5%.) Nevertheless,
conditions are set for banks to return to normal activity levels. With
single-digit interest rates, the only element missing is higher economic growth
rates. However, the credit crunch of 1995-1999 has ended and the long-term
potential is huge, as can be inferred from the fact that credit granted by banks
is currently 25% of the historic maximum level reached at the end of 1994.
In any case, we do not expect to see explosive credit growth overnight, as
corporations have learned to operate using other sources of financing, and banks
and credit users have become more cautious. In the meantime, banks are adopting
measures to compensate for the reduction in financial income derived from
shrinking margins: The use of electronic distribution channels (e.g., ATMs) is
being encouraged. Fees have been raised (by approximately 50% between the first
and second quarters of 2001) for account management, ATM withdrawals, bounced
checks, etc. And new markets such as the Hispanic population in the U.S.,
secured mortgages and the mutual fund market are being explored.
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THE MEXICO EQUITY AND INCOME FUND, INC.
In addition, both Banamex and BBVA-Bancomer have repeatedly stated their
intentions to become more active in the Hispanic segment of the United States
population. Besides being a sector that has been underserved, this group has the
added attraction for the Mexican banks of having a very high income per capita
relative to that of the Mexican population.
RETAILING AND SPECIALTY STORES
15.7% OF THE FUND'S NET ASSETS
Good macroeconomic conditions, continued growth in consumption (which started in
December 1998), increases in real wages and lower inflation rates all translated
into double-digit sales growth for companies in the retail sector during the
first eight months of the Fund's fiscal year. In the last four months of the
fiscal year economic conditions continued to improve, but at a slower rate.
Slower economic growth will translate into a slowdown in retail sales during the
second half of calendar 2001.
So far, the exception in the sector has been Walmex, which continued to post
excellent numbers as of the second quarter of 2001 due to the company's capacity
to generate economies of scale, constant growth and market dominance. The
"Everyday Low Prices" pricing strategy constitutes a competitive advantage for
the company and income growth has benefited at all formats. (See further
discussion of Walmex in the "Top Ten Holdings" section below.)
Looking ahead, earnings in the retailing sector should be modest with
same-store-sales forecasted to grow approximately 1% this year and 2.5% in 2002.
However, attractive valuation of some stocks, e.g., Soriana, still represented a
buying opportunity in the sector at the close of the fiscal year.
COMMUNICATIONS
14.8% OF THE FUND'S NET ASSETS
During the first half of 2001, Mexico's telecommunication's industry continued
to grow at a healthy pace, despite the economic slowdown. At the end of June,
there were 13 million fixed lines, an increase of 11% over the last twelve
months and 5% more than in December 2000. Telefonos de Mexico, S.A. (Telmex)
maintained its dominant position in Mexico: it owns 97% of the country's fixed
lines, handles a similar percentage of local calls and has approximately 65% of
the long- distance market.
Competition is expected to increase in the local segment, as long-distance
carriers Avantel and Alestra started to offer local services to their business
clients at the beginning of this year.
On February 7, 2001, America Movil started to trade on the Mexican stock market.
The company, established in September 2000 in a spin-off from Telmex, holds the
wireless assets and most of the international assets that previously belonged to
Telmex.
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THE MEXICO EQUITY AND INCOME FUND, INC.
The wireless sector continues to expand at an extremely rapid pace. Since
September 2000, the number of mobile telephones in Mexico has exceeded the
number of fixed lines. In June 2001, there were 17.3 million wireless
subscribers in the country, an increase of 60% over the last twelve months and
of 23% compared to December 2000. Telcel, a subsidiary of America Movil,
reinforced its dominant position during the period: its market share increased
to 76% at the end of June 2001, compared to 74% in December 2000, and 71% in
June 2000.
During the first half of 2001, Spain's Telefonica took control of the cellular
operators in the North of Mexico (Bajacel, Cedetel, Norcel and Movitel) that it
acquired from Motorola. Also, the ownership of Mexico's second largest wireless
company, Iusacell, changed hands, as Vodafone bought the 34.5% stake previously
held by Grupo Peralta. We expect that these ownership changes as well as the
introduction of new players (Pegaso and Unefon) will increase competition in the
mobile segment.
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TOP TEN HOLDINGS AS OF JULY 31, 2001
TV AZTECA, S.A. DE C.V. (TV AZTECA)
10.6% OF THE FUND'S NET ASSETS
During the first half of calendar 2001, TV Azteca has been a two-sided story:
good at the operating level but very disappointing in terms of its subsidiaries.
In operating terms, the company's reaction to the deterioration in economic
conditions has been surprisingly rapid and effective. Sales dropped 6.3% during
the first six months of 2001 versus the same period a year earlier, reflecting
both the current economic slowdown and a difficult comparison against 2000's
high level of television advertising by political parties. Nevertheless, TV
Azteca was able to reduce its costs and expenses by (7.6%) vs. the first half of
2000. This tempered the decrease in operating profits and EBITDA of (3.9%) and
(4.5%), respectively. TV Azteca reported a first-half 2001 net profit of 723.5
million Mexican Pesos (MXP) compared to a (MXP 236.1 million) loss for the
year-ago period caused partly by a payment to NBC in order to end the legal
dispute between the two companies.
The key element explaining the company's flexibility is its strict cost control
scheme, which has resulted in significant production savings. Likewise,
programming has been refocused to emphasize the production of lower cost
programs; the company has also resorted to reruns. This, however, has not
resulted in a deterioration of audience levels nor ratings. Indeed, with the
exception of the first two months of 2001, TV Azteca has raised its audience
level. According to the company, at the beginning of July it had a 37.4%
commercial audience share at prime time vs. 35.8% in July 2000.
The subsidiaries have been the negative side of the story with the exception of
Todito (Internet portal), which maintains a positive cash flow. In contrast, the
U.S. expansion project "Azteca America" was launched with a delay (it began
broadcasting its signal in Los Angeles on July 28), as the strategic partner,
Pappas Telecasting, has had difficulty raising funds to buy new television
channels.
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THE MEXICO EQUITY AND INCOME FUND, INC.
Nevertheless, TV Azteca's biggest problem is Unefon, which was expected to be
sold during the first half of this year. However, this transaction has been
delayed and therefore there is the ongoing risk for TV Azteca of having to
inject resources to support Unefon's expansion plans. The market has punished TV
Azteca because of this issue, despite its good operating results as of the
second quarter of 2001.
TV Azteca has responded satisfactorily to the economic slowdown and is well
positioned to benefit from an eventual recovery. Nevertheless, the biggest risk
consists of funds from the media business being used for the telephone business.
The currently low EV/EBITDA multiple (7.1x) is very attractive (its average
since 1998 is 10.2x) but is a reminder that the market is displeased about the
strategic decisions the company has adopted.
GRUPO FINANCIERO INBURSA, S.A. DE C.V. (GFINBUR)
9.9% OF THE FUND'S NET ASSETS
Grupo Financiero Inbursa (GFInbur) is the financial business of Carlos Slim,
Mexico's most prominent businessman, who also owns major stakes in Telmex,
Telecom, Gsanborns, Sears and CompUSA. Mr. Slim controls 71% of GFInbur's stock,
with the rest being publicly traded. The group's investments are split among
several subsidiaries: Banco Inbursa (bank), Seguros Inbursa (insurance),
Inversora Bursatil (brokerage), Fianzas Guardiana (bonding) and Operadora
Inbursa (fund management). The group's main subsidiaries are the bank and the
insurance company, which account for 62% and 23%, respectively, of the group's
earnings as of the second quarter of 2001.
Traditionally specialized in the corporate segment, Banco Inbursa was the bank
least affected by the 1994-95 crisis. After the peso devaluation in December
1994, banks' bad loans increased 92% through December 1995. This led to higher
banking provisions and higher banking capitalization, which in turn reduced
banking financing. In recent years, Banco Inbursa has been able to expand its
credit portfolio while most other banks were immersed in reducing the volume of
problem loans in the portfolio. Even though Banco Inbursa's portfolio represents
a small percentage of total loans in the country, in the corporate segment it
ranks third, with a 9.3% market share.
The major sources of Banco Inbursa's funding are equity (54%), time deposits
(28%) and inter-bank loans (13%). (Demand deposits are minimal.) Since about
half the bank's funding represents interest-bearing liabilities, Inbursa's cost
of funding (excluding equity) is very high compared with other banks. In the
second half of 2000, Inbursa launched a project aimed at lowering its cost of
funds. The project consists basically of attracting low cost deposits by
offering higher yields than competitors (but lower than the yield paid by
Inbursa in the Interbank market). Inbursa expects to reduce its funding cost.
Inbursa's plan relies heavily on the use of the Internet, ATMs with advanced
features and electronic means in general to serve new clients while avoiding the
type of costs associated with a traditional branch network. As a middle step,
Inbursa is setting up mini-branches (kiosks) inside Sanborns stores, one of Mr.
Slim's retail businesses.
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THE MEXICO EQUITY AND INCOME FUND, INC.
Seguros Inbursa, the insurance company, is a key player in a market that has
grown at an average rate of 17.5% per year over the last four years. As of
December 2000, it ranked fourth in terms of direct premiums, with a 7.39% market
share. Inversora Bursatil, the brokerage, is an active participant in debt and
equity markets, while Operadora Inbursa, the fund manager, ranks first in terms
of the amount of equity assets managed, and fourth in terms of the total amount
of funds managed. As of June 30, 2001, Grupo Financiero Inbursa's market
capitalization was approximately US$4.3 billion and its price/book value ratio
was 1.59x. Its estimated price-to-projected 2002 earnings ratio is 21x.
CARSO GLOBAL TELECOM, S.A. DE C.V. (CGT)
9.7% OF THE FUND'S NET ASSETS
Carso Global Telecom (CGT) is a holding company with several interests in the
telecommunications industry in Mexico, the United States, and Central and South
America. The company resulted from a spin-off of Grupo Carso in July 1996 and is
controlled by Carlos Slim. Its main assets are the controlling stakes in
Telefonos de Mexico (Telmex) and America Movil.
CGT holds a 30.8% stake in Telmex (31.6% including options). Telmex is Mexico's
incumbent telephone carrier, privatized in 1990. The market value of CGT's
participation as of July 31, 2001 was US$7.4 billion.
CGT owns 30.9% of America Movil (31.7% including options). America Movil was
established in September 2000 in a spin-off from Telmex and began trading on the
Mexican stock market on February 7, 2001. The company holds the wireless and
most of the international assets that previously belonged to Telmex. The market
value of CGT's participation as of July 31, 2001 was US$4.2 billion.
Additionally, CGT has passive investment positions in Prodigy Communications
Corporation and in Netro Corporation. As of July 31, 2001, the market values of
these positions were US$165 million and US$32 million, respectively.
CGT announced it will spin off its stake in America Movil, to create a new stock
for this company in order to improve the ability of both CGT and the new company
to address the distinct challenges and opportunities they face. The spin-off
process is expected to be completed by the end of this year.
The market capitalization of Carso Global Telecom, S.A. de C.V. was US$8.6
billion as as of July 31, 2001.
GRUPO FINANCIERO BBVA-BANCOMER, S.A. DE C.V. (GFBB)
8.2% OF THE FUND'S NET ASSETS
Grupo Financiero BBVA-Bancomer (GFBB) is one of the two biggest financial groups
in Mexico and the biggest private financial institution in Latin America in
terms of deposits. In Mexico, its
13
THE MEXICO EQUITY AND INCOME FUND, INC.
main subsidiary, Banco BBVA-Bancomer accounted for 27.8% of credits and 26.4% of
deposits as of June 2001. GFBB is the result of the acquisition by Spain's Banco
Bilbao Bizcaya (BBVA), in August 2000, of two banks, Bancomer and Promex.
Currently, BBVA has a 48.5% ownership in the group. At the time of the
acquisition, BBVA had a presence in Mexico through its subsidiary Banco
BBV-Probursa. The company's new management started a cost reduction program
based on the integration of the three institutions that aimed at increasing the
profitability of the new group. Bancomer's profits had sharply decreased in the
difficult years following the peso devaluation of 1994. The program called for a
17.65% reduction of the combined cost base of the three banks (US$410 million)
by year-end 2002. So far, the program is ahead of schedule, with 21% of the
total $410 million achieved by the end of last year. Also, the net income of the
last two quarters, which was very close to that of Banamex, which has
historically been the most profitable bank in Mexico.
This progress has been reflected in GFBB's share price, which has soared more
than 70% in dollar terms through the end of the second quarter. Like the other
Mexican banks, the main challenge GFBB currently faces is the decline in
interest rates and the economic slowdown. Banks' margins have contracted as a
result of active rates (rates charged to institutional clients by banks) falling
by a greater margin than passive rates (rates paid by banks to its depositors).
WAL-MART DE MEXICO, S.A. DE C.V., (WALMEX)
6.7% OF THE FUND'S NET ASSETS
Walmex is the main self-service store chain in Mexico. As of June 2001, it
operated 235 self-service stores, 54 department stores and 226 restaurants for a
total of 515 units nationally. Walmex has a sales floor area of 1.5 million
square meters and its restaurants have 49,407 seats in total. As of June 2001,
the company employed 82,579 workers.
In the 12 months ended June 2001, Walmex posted US$8.3 billion in revenues.
In the second quarter of 2001, Walmex posted the best results of the
self-service store sector in Mexico. During the period, Walmex recorded double
digit revenue growth of 15%, almost double the 8% reported by its nearest
competitor, implying that Walmex has won market share.
The "Everyday Low Prices" pricing strategy has constituted a competitive
advantage for the company, along with ongoing improvements in productivity and
operating expense controls. At the end of the period, operating expenses
decreased to 14.8% as a percentage of sales, a record low for the last ten
years. Going forward, although in annual terms we expect the company to end the
year with the highest growth rate in the sector, we think growth will become
sluggish in the second half of the year, due to the slowing of domestic demand.
Walmex's market capitalization was US$11.4 billion as of July 31, 2001. We
estimate the Enterprise Value/EBITDA ratio for 2001 will be 12.5x and the
Price/Cash Earnings ratio will be 17.4x.
14
THE MEXICO EQUITY AND INCOME FUND, INC.
CEMEX, S.A. DE C.V. (CEMEX)
4.8% OF THE FUND'S NET ASSETS
Cemex is the world's third largest cement producer, with an annual installed
capacity of approximately 78 million tons. It operates in 30 countries and has
trade relations in more than 60. The company is among the leading cement
producers in Mexico, the United States, Venezuela, Colombia, Costa Rica, Panama,
the Dominican Republic, Spain and Egypt, and also has a large presence in
Indonesia and the Caribbean.
The company's diversification into many markets helps to reduce downside risks,
since the risks of operating in high-growth, high-risk countries may be offset
by the more stable demand patterns in more mature markets. Also, the company's
high cash flow has enabled it not only to undertake large capital outlays, but
also to meet its financial commitments, improving the company's capital
structure and reducing its leverage ratio (i.e., the proportion of its assets
represented by debt).
During the first half of 2001, some of the main variables affecting home
building and consequently cement demand - unemployment, real wages and payroll -
benefited from a rise in real wages but were negatively affected by a higher
unemployment rate. However, in the second half of this year, we expect
unemployment to decline gradually and we expect ongoing high real wages to
contribute to a gradual recovery in cement demand. In 2001, employment in the
economy as a whole is expected to grow by 1.7%; in 2002, it is expected to
increase by 4.9%. Comparable growth rates in real wages are expected to be 4.4%
in 2001 and 3.0% in 2002. Based on these projections, total payroll expenditures
would increase by 6.1% this year and 5.9% in 2002.
Cemex's sales totaled US$6.0 billion for the year ended June 30, 2001, up 36%
from US$4.6 billion a year earlier. This increase includes the consolidation of
Southdown, the company acquired by Cemex in October 2000. Cemex reduced its
leverage (Net Debt/EBITDA) slightly at the end of the second quarter this year,
and it is now the least indebted global cement company.
As of July 31, 2001, Cemex's EV/EBITDA ratio was at a 60% premium to other
domestic cement companies. We believe this premium is justified, since Cemex is
the leading domestic producer and a global leader and also because its stock is
highly liquid. The company is showing discounts of 20% in EV/EBITDA, despite the
fact that it has the best operating margins and records better ROE (Return on
Equity) and ROA (Return on Assets) than its international peers. Cemex's
EV/EBITDA of 20% discount to its international peers is due to the fact that as
of December 2000, 80% of its EBITDA and 74% of its sales derived from emerging
markets.
Cemex's market valuation was US$7.9 billion as of July 31, 2001.
15
THE MEXICO EQUITY AND INCOME FUND, INC.
GRUPO ELEKTRA, S.A. DE C.V. (ELEKTRA)
4.0% OF THE FUND'S NET ASSETS
Grupo Elektra is Latin America's leading specialty retailer, with three separate
retail chains that target Latin America's growing middle class. The group
operates 943 stores in 320 cities in Mexico and five other countries in Latin
America. The principal business units include: Elektra, which offers electronic
goods, furniture and appliances to middle and lower-middle income groups;
Hecali/The One, a family clothing merchandiser offering basic and fashion
clothing; Salinas y Rocha, which focuses on furniture, electronic goods and
appliances for the middle and upper middle income groups; CrediMax, which
extends financing credit to all of Grupo Elektra's customers; and Dinero en
Minutos/Dinero Express, which provides money transfer services from the U.S. to
Mexico and within Mexico. Grupo Elektra also holds an 18.6% investment in TV
Azteca, one of the two major broadcasting networks in Mexico.
In August 2000, the Salinas family secured a 12-month call option to buy
Elektra's stake in TV Azteca, with a strike price of US$11.60 per ADR. Even if
the Salinas family were to exercise the option, Elektra would maintain the
advertising contract with TV Azteca, which is an integral part of its strategy.
We believe the option is far out-of-the-money and will not be exercised, so that
Elektra might receive a payment of US$16 million from the Salinas family as a
penalty.
Recently, Elektra took a series of steps to improve efficiencies on a regional
basis, tying together the credit operations of all its formats within a given
region, thus increasing the accountability of each regional structure. Also,
Elektra restructured its short-term debt in a US$130 million operation in two
tranches, both with very competitive rates (Libor + 275 basis points in the
3-year tranch, and Libor + 325 basis points for the 5-year tranch). This
refinancing not only improved Elektra's financial situation, but it also
indicates that the market gives the company a high credit rating.
Sales estimates for Elektra are approximately US$1.6 billion for 2001 and US$1.8
billion for 2002, with EBITDA growth in real peso terms of 9% and 11%,
respectively. Sales in 2000 were US$1.5 billion. We estimate the EV/EBITDA ratio
to be 5x for 2001 and 4x for 2002, and the estimated P/E ratio to be 8.6x and
7.7x for each period, respectively.
ORGANIZACION SORIANA, S.A. DE C.V. (SORIANA)
3.7% OF THE FUND'S NET ASSETS
Soriana is a regional chain of 100 self-service stores that operate under the
"hypermarkets" format (50,000 products spread over 8,500 square meters), with a
total sales area of 856,100 square meters. The company has a large presence in
the north and northeast of Mexico where most of its operations are located. As
of June 2001, Soriana had 34,257 employees. In the 12 months ended June 2001,
Soriana posted US$2.8 billion in revenues, versus US$2.4 billion in the previous
12-month period.
16
THE MEXICO EQUITY AND INCOME FUND, INC.
During the first half of 2001, same-store sales fell 1.1%, since the company is
positioned in the geographic area most sensitive to the economic activity of the
maquila sector (the sector which imports raw materials and assembles
manufactured goods for export, mainly to the U.S.). Also the U.S. economic
slowdown dragged on Soriana, since about 20% of the company's stores are located
in the border area.
For 2001, same-store sales growth prospects have been reduced from 1.5% forecast
at the start of this year to 0.7%. Going forward, improved company performance
will depend on a more favorable economic environment. If the U.S. slowdown
worsens, it will probably take a long time for results to improve for Soriana.
Right now it is very difficult to predict a specific period of time for the
economic cycle of U.S. to start showing strong growth again.
Soriana's market capitalization was US$1.6 billion as of July 31, 2001. We
estimate the EV/EBITDA ratio for 2001 will be 5.2x and the Price/Cash Earnings
ratio will be 7.0x. Soriana is a prime target for merger and acquisition
activity in view of its size and attractive valuation.
GRUPO TELEVISA, S.A. DE C.V. (TELEVISA)
3.7% OF THE FUND'S NET ASSETS
Televisa is Mexico's largest media company, and the world's leading producer of
Spanish-language programs. Televisa broadcasts its own and acquired programs on
its open TV channels and its Direct to Home (DTH) satellite television system.
The company also licenses its products to various foreign broadcasters and has a
minority stake in Univision, the main Spanish speaking open TV network in the
U.S. Televisa is also a leading publisher of Spanish-language magazines and
distributes magazines and other publications in Mexico, several other Latin
American countries, and the U.S. Other businesses include radio, music, soccer
teams, internet content, internet advertising, e-commerce, dubbing, film
production/distribution and live entertainment shows.
Televisa's 2000 sales totaled US$2.164 billion, of which 61% came from its core
open TV business (i.e., not satellite or cable) in Mexico. However, first half
2001 sales fell 5.7% vs. the same period in 2000, while EBITDA and operating
profit were 16.1% and 23.9% lower, respectively.
The company has been affected by the economic slowdown in Mexico and the U.S.,
as well as a difficult comparison with the first half of 2000, when, according
to the company, it obtained approximately US$78 million in advertising revenues
from Mexico's presidential election campaign. In a bid to improve profitability,
Televisa committed itself to a strict expense control program, which should
result in savings of US$60.6 million this year. One example of the cost
reductions: the production of ECO, its 24-hour cable news program, was cancelled
in the second quarter and 750 staff members were laid off. Despite the
deterioration in the economic environment, Televisa has continued to raise real
(inflation-adjusted) advertising rates; according to the company, in the second
quarter of 2001, rates were 11.3% higher than those in the year-ago quarter,
much greater than the inflation rate.
17
THE MEXICO EQUITY AND INCOME FUND, INC.
One of Televisa's major current projects is strengthening its presence in the
U.S. Hispanic market. The first option in this regard would consist of
reinforcing its venture with Univision (with which it has an agreement until
2017). Last year, Univision bought a new TV chain from USA Networks.
Nevertheless, Televisa has said that it is keeping this option open while at the
same time exploring other avenues. A coherent strategy in this regard would be a
very big plus for the company, as EV/EBITDA is currently 10.2x, well below its
1998-2001 average of 15.2x.
GRUPO MODELO, S.A. DE C.V. (GMODELO)
3.4% OF THE FUND'S NET ASSETS
Gmodelo is the leading Mexican brewer in both the domestic market (with a 56%
share), and in Mexican beer exports (with an 84% share). It sells 11 beer brands
including Corona, Modelo Especial and Victoria. It has eight beer plants with an
annual production capacity of 46 million hectoliters and capacity utilization of
85%.
Given that the company's price increases should be slightly below year-end
inflation, we expect Gmodelo to maintain its domestic market share with a
domestic beer volume growth of 4.2%, while export volume should grow 15%. We
expect the company's 2002 volume growth of 3.5% for Mexico and 12% for exports.
18
THE MEXICO EQUITY AND INCOME FUND, INC.
SCHEDULE OF INVESTMENTS JULY 31, 2001
MEXICO (95.69% OF HOLDINGS)
COMMON STOCKS (89.36% of holdings)
NUMBER OF PERCENT OF
SHARES SECURITY HOLDINGS VALUE
--------------------------------------------------------------------------------------------------------
CEMENT 4.79%
766,000 Cemex, S.A. de C.V .................................... $ 4,177,042
------------
4,177,042
------------
COMMUNICATIONS 14.82%
765,000 America Movil, S.A. de C.V. L ......................... 753,691
38,520 America Movil, S.A. de C.V. L ADR ..................... 760,385
3,712,251 Carso Global Telecom, S.A. de C.V. - A1* .............. 8,517,663
74,500 Grupo Iusacell, S.A. ADR * ............................ 447,000
70,800 Telefonos de Mexico, S.A. de C.V.L ADR ................ 2,455,344
------------
12,934,083
------------
CONSTRUCTION 1.42%
745,000 Consorcio ARA, S.A. de C.V.* .......................... 1,242,005
------------
1,242,005
------------
FINANCIAL GROUPS 21.44%
1,238,300 Grupo Financiero Banorte, S.A. de C.V.* ............... 2,433,231
8,001,281 Grupo Financiero BBVA Bancomer, S.A. de C.V. O* ....... 7,175,880
2,000,000 Grupo Financiero GBM Atlantico, S.A. de C.V. B+* ...... 408,052
2,108,100 Grupo Financiero Inbursa, S.A. de C.V.* ............... 8,701,044
------------
18,718,207
------------
FOOD, BEVERAGE, AND TOBACCO 10.88%
359,400 Fomento Economico Mexicano, S.A. de C.V. B ............ 1,411,642
38,200 Fomento Economico Mexicano, S.A. de C.V. B ADR ........ 1,497,440
979,100 Grupo Bimbo, S.A. de C.V. A ........................... 1,754,058
1,067,200 Grupo Continental, S.A. ............................... 1,684,838
1,189,500 Grupo Modelo, S.A. de C.V. C .......................... 3,012,197
122,300 Pepsi-Gemex, S.A.* .................................... 133,435
------------
9,493,610
------------
INDUSTRIAL CONGLOMERATES 0.77%
500,800 Alfa, S.A. A .......................................... 672,068
------------
672,068
------------
19
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments (continued) JULY 31, 2001
COMMON STOCKS (continued)
NUMBER OF PERCENT OF
SHARES SECURITY HOLDINGS VALUE
--------------------------------------------------------------------------------------------------------
MEDIA 14.40%
581,000 Grupo Televisa, S.A.* ................................. $ 1,141,652
53,900 Grupo Televisa, S.A. ADR* ............................. 2,107,490
13,314,000 TV Azteca, S.A. de C.V. ............................... 5,476,382
579,500 TV Azteca, S.A. de C.V. ADR ........................... 3,842,085
------------
12,567,609
------------
PAPER PRODUCTS 2.00%
598,000 Kimberly-Clark de Mexico, S.A. de C.V. A .............. 1,747,905
------------
1,747,905
------------
RETAILING 11.70%
1,180,300 Controladora Comercial Mexicana, S.A. de C.V. ......... 1,058,542
1,260,700 Organizacion Soriana, S.A. de C.V. B* ................. 3,258,522
2,114,100 Wal-Mart de Mexico, S.A. de C.V. C .................... 4,975,303
357,500 Wal-Mart de Mexico, S.A. de C.V. V .................... 921,687
------------
10,214,054
------------
SPECIALTY STORES 4.04%
4,011,100 Grupo Elektra, S.A. de C.V. ........................... 3,522,924
------------
3,522,924
------------
STEEL 3.10%
1,100,500 Tubos de Acero de Mexico, S.A. ........................ 2,705,173
------------
2,705,173
------------
TOTAL COMMON STOCKS (COST $79,281,984) ................ 77,994,680
------------
PAR VALUE
(000)
--------------------------------------------------------------------------------------------------------
MEXICAN GOVERNMENT BOND (1.77% of holdings)
MXP 13,526 Bono Tasa Fija M3, S.A. de C.V. 15.25%, 01/23/03 ...... 1,552,681
------------
TOTAL GOVERNMENT BOND (COST $1,508,014) ............... 1,552,681
------------
20
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments (concluded) JULY 31, 2001
SHORT-TERM OBLIGATIONS (4.56% of holdings)
PAR VALUE PERCENT OF
(000) SECURITY HOLDINGS VALUE
--------------------------------------------------------------------------------------------------------
MEXICAN GOVERNMENT NOTE
MXP 9,400 Certificados de la Tesoria,
S.A. de C.V. 15.85%, 10/04/01 ....................... $ 1,009,975
-----------
TOTAL MEXICAN GOVERNMENT NOTE (COST $1,001,011) ....... 1,009,975
-----------
PROMISSORY NOTE
MXP 27,205 Banco Inbursa, S.A. 9.25%, 08/01/01 ................... 2,968,174
-----------
TOTAL PROMISSORY NOTE (COST $2,968,174) ............... 2,968,174
-----------
TOTAL SHORT-TERM OBLIGATIONS (COST $3,969,185) ........ 3,978,149
-----------
TOTAL MEXICO (COST $84,759,183) ....................... 83,525,510
-----------
UNITED STATES SHORT-TERM OBLIGATION (4.31% holdings)
NUMBER OF
SHARES
--------------------------------------------------------------------------------------------------------
3,760,587 Temporary Investment Fund, Inc. - Temp Cash Portfolio . 3,760,587
-----------
TOTAL UNITED STATES SHORT-TERM OBLIGATION
(COST $3,760,587) ..................................... 3,760,587
-----------
TOTAL INVESTMENTS (COST $88,519,770)++ 100.00% $87,286,097
===========
FOOTNOTES AND ABBREVIATIONS
* Non-Income producing security.
+ At fair value as determined under the supervision of the Board of Directors.
++ Aggregate cost for Federal income tax purposes is $89,874,232.
The aggregate gross unrealized appreciation (depreciation) for all securities
for tax purposes is as follows:
Excess of market value over tax cost $ 4,099,126
Excess of tax cost over market value (6,687,261)
-----------
$(2,588,135)
===========
ADR - American Depository Receipt
MXP - Mexican Pesos
See accompanying notes to financial statements.
21
THE MEXICO EQUITY AND INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES JULY 31, 2001
ASSETS
Investments, at value (Cost $88,519,770) ..................................... $ 87,286,097
Foreign currency holdings (Cost $1,196,382) .................................. 1,195,403
Receivables:
Interest .................................................................. 138,796
Maturities ................................................................ 4,788,203
Securities sold ........................................................... 446,511
Prepaid expenses ............................................................. 24,253
------------
TOTAL ASSETS ............................................... 93,879,263
------------
LIABILITIES
Payable for securities purchased ............................................. 6,054,713
Mexican Advisory fees payable ................................................ 38,966
Co-Advisory fees payable ..................................................... 29,974
Administration fee payable ................................................... 14,987
Accrued expenses ............................................................. 120,815
------------
TOTAL LIABILITIES .......................................... 6,259,455
------------
NET ASSETS ................................................. $ 87,619,808
============
NET ASSET VALUE PER SHARE
($87,619,808/8,595,573) .................................. $ 10.19
============
NET ASSETS CONSIST OF:
Capital stock, $0.001 par value; 11,825,273 shares issued
(100,000,000 shares authorized) ........................................... $ 11,825
Paid-in capital .............................................................. 131,149,819
Cost of 3,229,700 shares repurchased ......................................... (27,998,823)
Accumulated net realized loss on investments ................................. (14,292,109)
Net unrealized depreciation in value of investments and on
translation of other assets and liabilities denominated in foreign currency (1,250,904)
------------
$ 87,619,808
============
See accompanying notes to financial statements.
22
THE MEXICO EQUITY AND INCOME FUND, INC.
FOR THE YEAR ENDED
STATEMENT OF OPERATIONS JULY 31, 2001
INVESTMENT INCOME
Interest (Net of taxes withheld of $35,171) ................ $ 1,053,236
Dividends (Net of taxes withheld of $48,655) ............... 584,174
-----------
TOTAL INVESTMENT INCOME .................. 1,637,410
-----------
EXPENSES
Mexican Advisory fees .................... $490,294
Co-Advisory fees ......................... 377,149
Legal fees ............................... 320,597
Administration fees ...................... 188,575
Transfer agent fees ...................... 126,194
Custodian fees ........................... 84,561
Insurance ................................ 58,058
Audit fees ............................... 57,704
NYSE fees ................................ 29,455
Directors' fees .......................... 27,071
Printing ................................. 24,051
Miscellaneous ............................ 8,995
--------
TOTAL EXPENSES ........................... 1,792,704
-----------
NET INVESTMENT LOSS ...................... (155,294)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY HOLDINGS AND TRANSLATION OF OTHER ASSETS
AND LIABILITIES DENOMINATED IN FOREIGN CURRENCY:
Net realized gain (loss) from:
Security transactions ................................. (9,661,218)
Foreign currency related transactions ................. 383,528
-----------
(9,277,690)
Net change in unrealized appreciation of investments and
translations of other assets and liabilities
denominated in foreign currency ....................... 1,478,315
-----------
Net realized and unrealized loss on investments, foreign
currency holdings and translation of other assets and
liabilities denominated in foreign currency ........... (7,799,375)
-----------
Net decrease in net assets resulting from operations ....... $(7,954,669)
===========
See accompanying notes to financial statements.
23
THE MEXICO EQUITY AND INCOME FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2001 JULY 31, 2000
------------ -------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) ..................................... $ (155,294) $ 288,951
Net realized gain (loss) on investments and foreign currency
related transactions .......................................... (9,277,690) 23,309,764
Net change in unrealized appreciation in value of investments,
foreign currency holdings and translation of other assets and
liabilities denominated in foreign currency ................... 1,478,315 5,231,592
------------ ------------
Net increase (decrease) in net assets resulting from operations (7,954,669) 28,830,307
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income ($0.01 and $0.12 per share, respectively) .. (56,489) (1,295,474)
Net realized gains ($0.60) ....................................... (5,970,812) --
Return of capital ($0.01) ........................................ (138,967) --
------------ ------------
Decrease in net assets from distributions ..................... (6,166,268) (1,295,474)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Shares repurchased under Tender Offer (1,272,821 shares) ......... (10,667,767) --
Shares repurchased under Stock Repurchase Program
(174,000 and 1,199,700 shares respectively) ................... (1,703,552) (10,573,159)
------------ ------------
Decrease in net assets from capital share transactions ........ (12,371,319) (10,573,159)
------------ ------------
Total increase (decrease) in net assets .......................... (26,492,256) 16,961,674
NET ASSETS
Beginning of year ................................................ 114,112,064 97,150,390
------------ ------------
End of year ...................................................... $ 87,619,808 $114,112,064
============ ============
See accompanying notes to financial statements.
24
THE MEXICO EQUITY AND INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
JULY 31, 2001 JULY 31, 2000 JULY 31, 1999 JULY 31, 1998 JULY 31, 1997
------------- ------------- ------------- ------------- -------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year ........ $11.36 $ 8.64 $10.16 $16.83 $11.96
------- -------- ------- ------- --------
Net investment income (loss) .............. (0.02) 0.03 0.22 0.23 0.43
Net realized and unrealized gains
(losses) on investments, foreign
currency holdings, and translation
of other assets and liabilities
denominated in foreign currency ........ (0.64) 2.62 (0.87) (3.34) 5.55
------- -------- ------- ------- --------
Net increase (decrease) from
investment operations .................. (0.66) 2.65 (0.65) (3.11) 5.98
------- -------- ------- ------- --------
Less: Distributions
Dividends from net investment income ... (0.01) (0.12) -- (0.19) (0.44)
Distributions from net realized gains .. (0.60) -- (0.93) (3.37) (0.67)
Return of capital ...................... (0.01) -- -- -- --
------- -------- ------- ------- --------
Total dividends and distributions ......... (0.62) (0.12) (0.93) (3.56) (1.11)
------- -------- ------- ------- --------
Capital share transactions
Anti-dilutive effect of Tender Offer ... 0.09 -- 0.04 -- --
Anti-dilutive effect of Share Repurchase
Program .............................. 0.02 0.19 0.02 -- --
------- -------- ------- ------- --------
Total capital share transactions .......... 0.11 0.19 0.06 -- --
------- -------- ------- ------- --------
Net asset value, end of year .............. $10.19 $11.36 $ 8.64 $10.16 $16.83
======= ======== ======= ======= ========
Per share market value, end of year ....... $9.1100 $10.6875 $7.0625 $7.7500 $14.1250
TOTAL INVESTMENT RETURN BASED ON
MARKET VALUE* .......................... (8.64)% 53.36% 7.24% (26.23)% 62.52%
25
THE MEXICO EQUITY AND INCOME FUND, INC.
FINANCIAL HIGHLIGHTS (CONCLUDED)
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
JULY 31, 2001 JULY 31, 2000 JULY 31, 1999 JULY 31, 1998 JULY 31, 1997
------------- ------------- ------------- ------------- -------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000s) ....... $87,620 $114,112 $97,150 $120,148 $199,066
Ratios of expenses to average net assets 1.90% 2.03% 1.88% 1.46% 1.49%
Ratios of net investment income (loss) to
average net assets ................... (0.16)% 0.27% 2.72% 1.65% 3.29%
Portfolio turnover ...................... 220.85% 249.28% 163.23% 88.85% 127.44%
* Total investment return is calculated assuming a purchase of common stock at
the current market price on the first day and a sale at the current market
price on the last day of each year reported. Dividends and distributions, if
any, are assumed for purposes of this calculation to be reinvested at prices
obtained under the Fund's dividend reinvestment plan. Total investment return
does not reflect brokerage commissions.
See accompanying notes to financial statements.
26
THE MEXICO EQUITY AND INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS JULY 31, 2001
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Mexico Equity and Income Fund, Inc. (the "Fund") was incorporated in
Maryland on May 24, 1990, and commenced operations on August 21, 1990. The Fund
is registered under the Investment Company Act of 1940, as amended, as a
closed-end, non-diversified management investment company.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
SIGNIFICANT ACCOUNTING POLICIES ARE AS FOLLOWS:
PORTFOLIO VALUATION. Investments are stated at value in the accompanying
financial statements. All securities for which market quotations are readily
available are valued at the last sales price prior to the time of determination
of net asset value, or, if no sales price is available at that time, at the
closing price last quoted for the securities (but if bid and asked quotations
are available, at the mean between the current bid and asked prices, rather than
the quoted closing price). Securities that are traded over-the-counter are
valued, if bid and asked quotations are available, at the mean between the
current bid and asked prices. Investments in short-term debt securities having a
maturity of 60 days or less are valued at amortized cost if their term to
maturity from the date of purchase was less than 60 days, or by amortizing their
value on the 61st day prior to maturity if their term to maturity from the date
of purchase when acquired by the Fund was more than 60 days. Securities for
which market values are not readily ascertainable, which aggregated $408,052
(0.47% of net assets) at July 31, 2001, are carried at fair value as determined
in good faith by, or under the supervision of, the Board of Directors.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
income tax purposes. Interest income, including the accretion of discount and
amortization of premium on investments, is recorded on an accrual basis;
dividend income is recorded on the ex-dividend date or, using reasonable
diligence, when known to the Fund. The collectibility of income receivable from
foreign securities is evaluated periodically, and any resulting allowances for
uncollectible amounts are reflected currently in the determination of investment
income.
27
THE MEXICO EQUITY AND INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2001
TAX STATUS. No provision is made for U.S. Federal income or excise taxes as it
is the Fund's intention to continue to qualify as a regulated investment company
and to make the requisite distributions to its shareholders that will be
sufficient to relieve it from all or substantially all U.S. Federal income and
excise taxes. At July 31, 2001, the Fund had a capital loss carryover of
$5,218,649 expiring July 31, 2009, which is available to offset future net
realized gains on securities transactions to the extent provided for in the
Internal Revenue Code.
In accordance with U.S. Treasury regulations, the Fund elected to defer
$7,718,998 of capital losses arising after October 31, 2000. Such losses are
treated for tax purposes as arising on August 1, 2001.
The Fund is subject to the following withholding taxes on income from Mexican
sources:
Dividends distributed by Mexican companies are subject to withholding tax
at an effective rate of 7.69%.
Interest income on debt issued by the Mexican federal government is
generally not subject to withholding. Withholding tax on interest from
other debt obligations such as publicly traded bonds and loans by banks or
insurance companies is at a rate of 4.9% under the tax treaty between
Mexico and the United States.
Gains realized from the sale or disposition of debt securities may be
subject to a 4.9% withholding tax. Gains realized by the Fund from the
sale or disposition of equity securities that are listed and traded on the
Mexican Stock Exchange ("MSE") are exempt from Mexican withholding tax if
sold through the stock exchange. Gains realized on transactions outside of
the MSE may be subject to withholding at a rate of 20% of the amount
received or, upon the election of the Fund, at 40% of the gain. If the
Fund has owned less than 25% of the outstanding stock of the issuer of the
equity securities within the 12 month period preceding the disposition,
then such disposition will not be subject to capital gains taxes as
provided for in the treaty to avoid double taxation between Mexico and the
United States.
FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, assets and liabilities at the
current Mexican peso exchange rate on the valuation date, and
(ii) purchases and sales of investment securities, income and expenses at
the Mexican peso exchange rate prevailing on the respective dates of
such transactions.
28
THE MEXICO EQUITY AND INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2001
The Fund does not generally isolate the effect of fluctuations in foreign
exchange rates from the effect of fluctuations in the market prices of
securities. The Fund does isolate the effect of fluctuations in foreign currency
rates, however, when determining the gain or loss upon the sale of foreign
currency denominated debt obligations pursuant to U.S. Federal income tax
regulations; such amounts are categorized as foreign exchange gain or loss for
income tax reporting purposes.
The Fund reports realized foreign exchange gains and losses on all other foreign
currency related transactions as components of realized gains and losses for
financial reporting purposes, whereas such gains and losses are treated as
ordinary income or loss for Federal income tax purposes.
Securities denominated in currencies other than U.S. dollars are subject to
changes in value due to fluctuations in the foreign exchange rate. Foreign
security and currency transactions may involve certain considerations and risks
not typically associated with those of domestic origin as a result of, among
other factors, the level of governmental supervision and regulation of foreign
securities markets and the possibilities of political or economic instability.
DISTRIBUTION OF INCOME AND GAINS. The Fund intends to distribute to
shareholders, at least annually, substantially all of its net investment income,
including foreign currency gains. The Fund also intends to normally distribute
annually any net realized capital gains in excess of net realized capital losses
(including any capital loss carryovers), except in circumstances where the
Directors of the Fund determine that the decrease in the size of the Fund's
assets resulting from the distribution of the gains would generally not be in
the interest of the Fund's shareholders. An additional distribution may be made
to the extent necessary to avoid payment of a 4% U.S. Federal excise tax.
Distributions to shareholders are recorded on the ex-dividend date. The amount
of dividends and distributions from net investment income and net realized gains
are determined in accordance with U.S. Federal income tax regulations, which may
differ from accounting principles generally accepted in the United States of
America. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their Federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net realized
capital gains for financial reporting purposes but not for tax purposes are
reported as dividends in excess of net investment income and net realized
capital gains, respectively. To the extent they exceed net investment income and
net realized gains for tax purposes, they are reported as distributions of
additional paid-in capital.
During the year ended July 31, 2001, the Fund reclassified a gain of $383,528
from accumulated net realized loss on investments to accumulated net investment
loss as a result of permanent book
29
THE MEXICO EQUITY AND INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2001
and tax differences relating primarily to realized foreign currency gains. Net
investment loss and net assets were not affected by the reclassification.
NOTE B: MANAGEMENT, INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
Acci Worldwide, S.A. de C.V. serves as the Fund's Mexican Adviser (the "Mexican
Adviser") under the terms of the Advisory Agreement (the "Advisory Agreement").
Pursuant to the Advisory Agreement, the Mexican Adviser makes investment
decisions for the Fund and supervises the acquisition and disposition of
securities by the Fund. For its services, the Mexican Adviser receives a monthly
fee at an annual rate of 0.52% of the Fund's average weekly net assets. For the
year ended July 31, 2001, these fees amounted to $490,294.
Advantage Advisers, Inc., a subsidiary of CIBC World Markets Corp. ("CIBC WM")
serves as the Fund's U.S. Co-Adviser ("Co-Adviser") under the terms of the U.S.
Co-Advisory Agreement (the "Co-Advisory Agreement"). Pursuant to the Co-Advisory
Agreement, the Co-Adviser makes investment decisions regarding the Fund's
convertible debt securities jointly with the Mexican Adviser and provides advice
and consultation to the Mexican Adviser on investment decisions for the Fund.
For its services, the Co-Adviser receives a monthly fee at an annual rate of
0.40% of the Fund's average weekly net assets. For the year ended July 31, 2001,
these fees amounted to $377,149. The Co-Advisory Agreement has been terminated
by mutual consent of the parties, as approved by the Board of Directors of the
Fund, as of September 1, 2001.
CIBC WM, an indirect wholly-owned subsidiary of Canadian Imperial Bank of
Commerce, serves as the Fund's administrator (the "Administrator"). The
Administrator provides certain administrative services to the Fund. For its
services, the Administrator receives a monthly fee at an annual rate of 0.20% of
the value of the Fund's average weekly net assets. For the year ended July 31,
2001, these fees amounted to $188,575. Effective September 1, 2001, CIBC WM
resigned as Administrator of the Fund and Firstar Mutual Fund Services, LLC
("FMFS"), began to serve as the Fund's Administrator and provides fund
accounting services to the Fund. For administration services rendered, FMFS will
receive fees at an annual rate of 0.09% of the Fund's average weekly net assets
on the first $200 million with a minimum annual fee of $58,000. For fund
accounting services rendered, FMFS will receive fees at an annual rate of
$42,000 for the first $100 million of the Fund's average weekly net assets;
0.03% on the next $200 million of the Fund's average weekly net assets and
0.015% of the Fund's average weekly net assets over $300 million.
The Fund pays each of its directors who is not a director, officer or employee
of the Mexican Adviser, the Co-Adviser, the Administrator or any affiliate
thereof an annual fee of $5,000 plus $700 for each Board of Directors meeting
attended in person and $100 for each meeting attended
30
THE MEXICO EQUITY AND INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2001
by means of a telephone conference. In addition, the Fund reimburses the
directors for travel and out-of-pocket expenses incurred in connection with
Board of Directors meetings.
NOTE C: PORTFOLIO ACTIVITY
Purchases and sales of securities other than short-term obligations, aggregated
$189,996,806 and $193,463,400 respectively, for the year ended July 31, 2001.
NOTE D: TRANSACTIONS WITH AFFILIATES
Acciones y Valores de Mexico, S.A. de C.V., the parent company of the Mexican
Adviser, received total brokerage commissions from the Fund of $276,817 during
the year ended July 31, 2001.
NOTE E: CAPITAL STOCK
At a meeting of the Board of Directors held on September 15, 2000, the Board of
Directors approved a tender offer program (the "Tender").
The Tender allowed the Fund to purchase up to 20% of each shareholder's shares
of common stock of the Fund for cash at a price equal to 92% of the Fund's net
asset value per share as of the closing date. The Tender commenced on December
4, 2000 and expired on January 5, 2001. In connection with the Tender, the Fund
purchased 1,272,821 shares of capital stock at a total cost of $10,667,767.
At a special meeting of the Board of Directors held on October 11, 1999, the
Board of Directors approved a share repurchase program. Pursuant to the share
repurchase program, the Fund was authorized to commence a two phase share
repurchase program for up to 2,800,000 shares, or approximately 25% of the
Fund's then outstanding shares of common stock, through a combination of share
purchases and tender offers.
Pursuant to the share repurchase program, during the year ended July 31, 2001,
the Fund purchased 174,000 shares of capital stock in the open market at a total
cost of $1,703,552. The weighted average discount of these purchases comparing
the purchase price to the net asset value at the time of purchase was 9.01%.
During the fiscal year ended July 31, 2000, the Fund purchased 1,199,700 shares
of capital stock in the open market at a total cost of $10,573,159. The weighted
average discount of these purchases comparing the purchase prices to the net
asset value at the time of purchase was 16.40%.
31
THE MEXICO EQUITY AND INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED) JULY 31, 2001
NOTE F: OTHER
At the September 15, 2000 meeting, the Board of Directors, in addition to
approving the Tender discussed above, determined that in its judgment it was
advisable to resubmit a plan of liquidation and dissolution to the stockholders
of the Fund for approval at the next annual meeting of stockholders. At a
meeting held on November 10, 2000, the Board adopted a plan of liquidation and
dissolution of the Fund (the "Plan") and directed that it be submitted for
approval by the Fund's stockholders at the next annual meeting of stockholders.
The Plan indicated that in the event that 66 2/3% of the outstanding shares of
capital stock of the Fund are not voted in favor of the Plan, with the result
that the Plan is not approved, the Fund will continue to exist as a registered
investment company in accordance with its stated investment objective and
policies. In addition, it was agreed with the Fund that in the event the Plan is
not approved, three of the four directors of the Fund intend to resign as
directors of the Fund effective immediately after the stockholders' meeting is
adjourned without setting a date for reconvening the meeting. As the
stockholders did not approve the proposal to liquidate the Fund by the required
vote at the stockholders' meeting held on March 16, 2001, the Fund continues to
exist as a registered investment company in accordance with its stated
investment objective and policies. Further, as the Plan was not approved, three
of the four directors of the Fund resigned as directors and the remaining
director became the sole director of the Fund. The Fund has appointed a three
member advisory committee to assist the Fund's sole director who intends to
elect these advisory committee members to the Fund's Board of Directors subject
to stockholders' approval at the next meeting of the stockholders.
At July 31, 2001, substantially all of the Fund's assets were invested in
Mexican securities. The Mexican securities markets are substantially smaller,
less liquid, and more volatile than the major securities markets in the United
States. Consequently, acquisitions and dispositions of securities by the Fund
may be limited.
FEDERAL TAXATION NOTICE (UNAUDITED)
The Fund paid foreign taxes of $83,826 during the fiscal year ended July 31,
2001, which it intends to pass through pursuant to Section 853 of the Internal
Revenue Code, to its shareholders.
32
THE MEXICO EQUITY AND INCOME FUND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
THE MEXICO EQUITY AND INCOME FUND, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Mexico Equity and Income Fund,
Inc. (the "Fund") at July 31, 2001, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at July
31, 2001 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
September 25, 2001
33
THE MEXICO EQUITY AND INCOME FUND, INC.
DIVIDENDS AND DISTRIBUTIONS
DIVIDEND REINVESTMENT PLAN
The Fund intends to distribute to shareholders substantially all of its net
investment company taxable income at least annually. Investment company taxable
income, as defined in section 852 of the Internal Revenue Service Code of 1986,
includes all of the Fund's taxable income minus the excess, if any, of its net
realized long-term capital gains over its net realized short-term capital losses
(including any capital loss carryovers), plus or minus certain other required
adjustments. The Fund also expects to distribute annually substantially all of
its net realized long-term capital gains in excess of net realized short-term
capital losses (including any capital loss carryovers), except in circumstances
where the Fund realizes very large capital gains and where the Directors of the
Fund determine that the decrease in the size of the Fund's assets resulting from
the distribution of the gains would not be in the interest of the Fund's
shareholders generally.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), each
shareholder will be deemed to have elected, unless the Plan Agent (as defined
below) is otherwise instructed by the shareholder in writing, to have all
distributions, net of any applicable U.S. withholding tax, automatically
reinvested in additional shares of the Fund by PFPC Inc., the Fund's transfer
agent, as the Plan Agent (the "Plan Agent"). Shareholders who do not participate
in the Plan will receive all dividends and distributions in cash, net of any
applicable U.S. withholding tax, paid in U.S. dollars by check mailed directly
to the shareholder by the Plan Agent, as dividend-paying agent. Shareholders who
do not wish to have dividends and distributions automatically reinvested should
notify the Plan Agent for The Mexico Equity and Income Fund, Inc., c/o Firstar
Mutual Fund Services, LLC,615 East Michigan Street, Milwaukee, WI 53202.
Dividends and distributions with respect to shares of the Fund's Common Stock
registered in the name of a broker-dealer or other nominee (i.e., in "street
name") will be reinvested under the Plan unless the service is not provided by
the broker or nominee or the shareholder elects to receive dividends and
distributions in cash. A shareholder whose shares are held by a broker or
nominee that does not provide a dividend reinvestment program may be required to
have his shares registered in his own name to participate in the Plan. Investors
who own shares of the Fund's Common Stock registered in street name should
contact the broker or nominee for details.
The Plan Agent serves as agent for the shareholders in administering the Plan.
If the Directors of the Fund declare an income dividend or a capital gains
distribution payable either in the Fund's Common Stock or in cash, as
shareholders may have elected, nonparticipants in the Plan will receive cash and
participants in the Plan will receive Common Stock, to be issued by the Fund. If
the market price per share on the valuation date equals or exceeds net asset
value per share on that date, the Fund will issue new shares to participants at
net asset value; or, if the net asset value is less than 95% of the market price
on the valuation date, then such shares will be issued at 95% of the market
price.
34
THE MEXICO EQUITY AND INCOME FUND, INC.
DIVIDENDS AND DISTRIBUTIONS (CONTINUED)
If net asset value per share on the valuation date exceeds the market price per
share on that date, participants in the Plan will receive shares of Common Stock
from the Fund valued at market price. The valuation date is the dividend or
distribution payment date or, if that date is not a New York Stock Exchange
trading day, the next preceding trading day. If the Fund should declare an
income dividend or capital gains distribution payable only in cash, the Plan
Agent will, as agent for the participants, buy Fund shares in the open market on
the New York Stock Exchange or elsewhere, for the participants' accounts on, or
shortly after, the payment date.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in an account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in noncertified form in the
name of the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan.
In the case of shareholders such as banks, brokers or nominees that hold shares
for others who are beneficial owners, the Plan Agent will administer the Plan on
the basis of the number of shares certified from time to time by the
shareholders as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who participate in the Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions payable in either Common Stock or cash. The Plan Agent's fees for
the handling or reinvestment of such dividends and capital gains distributions
will be paid by the Fund. There will be no brokerage charges with respect to
shares issued directly by the Fund as a result of dividends or capital gains
distributions payable either in stock or in cash. However, each participant will
pay a pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
or capital gains distributions payable in cash.
Brokerage charges for purchasing small amounts of Common Stock for individual
accounts through the Plan are expected to be less than usual brokerage charges
for such transactions because the Plan Agent will be purchasing stock for all
participants in blocks and prorating the lower commissions thus attainable.
Brokerage commissions will vary based on, among other things, the broker
selected to effect a particular purchase and the number of participants on whose
behalf such purchase is being made.
The receipt of dividends and distributions in Common Stock under the Plan will
not relieve participants of any income tax (including withholding tax) that may
be payable on such dividends or distributions.
35
THE MEXICO EQUITY AND INCOME FUND, INC.
DIVIDENDS AND DISTRIBUTIONS (CONCLUDED)
Experience under the Plan may indicate that changes in the Plan are desirable.
Accordingly, the Fund and the Plan Agent reserve the right to terminate the Plan
as applied to any dividend or distribution paid subsequent to notice of the
termination sent to participants at least 30 days before the record date for
such dividend or distribution. The Plan also may be amended by the Fund or the
Plan Agent, but (except when necessary or appropriate to comply with applicable
law, or rules or policies of a regulatory authority) only upon at least 30 days'
written notice to participants. All correspondence concerning the Plan should be
directed to the Plan Agent at the address above.
36
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THE MEXICO EQUITY
AND INCOME FUND, INC.
MEXICAN INVESTMENT ADVISER:
ACCI Worldwide, S.A. de C.V.
ADMINISTRATOR:
Firstar Mutual Fund Services, LLC.
TRANSFER AGENT AND REGISTRAR:
Firstar Mutual Fund Services, LLC.
CUSTODIAN:
PFPC Trust Co.
Citibank, N.A.