================================================================================
THE MEXICO
EQUITY
AND INCOME
FUND, INC.
SEMIANNUAL REPORT
JANUARY 31, 1998
ADVANTAGE ADVISERS, INC.
================================================================================
<PAGE>
The Mexico Equity and Income Fund, Inc.
February 16, 1998
Dear Fund Shareholder,
We are pleased to provide you with the unaudited financial statements of The
Mexico Equity and Income Fund, Inc. (the "Fund") for the semiannual period
ending January 31, 1998. Over the past six months, the U.S dollar net asset
value (NAV) return was negative 5.1%. The Fund's price closed on the New York
Stock Exchange at $9.75 per share on January 31, 1998. During the same period
the Bolsa Index-in U.S. dollars $64.55 fell 16.3%. While these negative results
are discouraging, we were pleased with our outperformance caused by strong stock
selection and fixed income allocation.
The financial crisis in Asia during the latter part of 1997, along with a
forecasted slowing U.S. economy has impacted the performance of Mexico's
markets. The Fund's three largest sectors at the end of January 1998 were
Industrial Conglomerates, Retail and Specialty Stores and Food, Beverage and
Tobacco industries. These three sectors provided positive performance for the
Fund, and the Investment Adviser believes that these sectors will continue to
produce positive returns through 1998. The Investment Adviser believes that
slowing economic growth and falling inflation will lead to modest U.S dollar
returns in 1998 from the Mexican stock market.
Mexico remains a profitable emerging market. Despite fluctuations in the
emerging markets in the later part of 1997, the Fund continued to offer
investors an attractive alternative for asset diversification and remained
active in emerging markets. Thank you for your continued support of the Fund.
Sincerely,
/s/ Alan Rappaport
Alan Rappaport
Chairman
<PAGE>
Report of the Mexican Adviser The Mexico Equity and Income Fund, Inc.
For the Six Months Ended January 31, 1998
Mexico's Economic Environment
Mexico has been a top performer over the past year. Economic growth, measured by
gross domestic product (GDP) showed an increase of 7.0% (the highest in 16
years) surpassing expectations forecasted early in 1997.
For the six month period ended January 31, 1998, the Mexican Peso lost 7.7%
versus the U.S. dollar as a result of lower oil prices and a drop in the current
account deficit. Historically, the 28 day-Treasury Bill would be affected by the
devaluation of the Mexican Peso in January. However, the 28 day-Treasury bill
closed at 17.3% and did not reflect any significant variation as of January 31,
1998. Domestic demand continued to gain strength during the second half of the
year.
The Investment Advisor believes that domestic economic growth in Mexico has
slowed with the announcement of the Mexican federal budget cut and the
depreciation of the Mexican Peso against the U.S. dollar. This marked the
beginning of a less advantageous period for Mexico's macro-economic prospects.
The projected Mexican Peso dollar per U.S. dollar at the end of 1998 decreased
from P$8.5 to P$8.9. The estimated current account deficit was revised from 2.6%
to 2.9% of GDP. The trade balance deficit widened from 0.9% to 1.4% of GDP.
Inflation figures were estimated to be 12.5% to 13.5%, which is an average
increase of 3.0% over 1996. As a result, days after the release of December's
trade balance deficit and the publication of 1998's Monetary Policy, the Peso
depreciated almost 5% against the dollar.
Under the new governor of the Central Bank, Mexican monetary policy seems more
flexible and pragmatic than it has in the past. Going forward, the Central Bank
is expected to employ a neutral monetary policy through 1998. The Central Bank
will work to actively monitor inflation, depreciation of currency and interest
rates. This will enable monetary policy to respond to changes in demand and
global conditions, as is the Central Bank's policy.
- --------------------------------------------------------------------------------
Fund Updates
The Fund's toll-free phone number, (800) 421-4777, provides callers with a
recorded monthly update of the markets in which the Fund invests. It also offers
details about the Fund, its portfolio and performance.
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 NAV
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.
- --------------------------------------------------------------------------------
2
<PAGE>
The Mexican Stock Market
The Bolsa Index posted a dollar loss of 16.3% from July 31, 1997 through January
31, 1998. The Bolsa Index, however, gained 52% for the calendar year ending
December 31, 1997. For the second half of 1997, continued capital inflows caused
over-pricing in Mexican stocks. In January, the market abruptly corrected
itself, causing overreaction by investors. Industrial conglomerates were the
most impacted sector and, as a result, the full effects of January's volatility
will not be realized until the first quarter 1998. Mexico was one of the most
volatile markets in the world during January, due to a fully valued Mexican
stock market at the end of December 1997.
Fund Performance and Portfolio Strategy
For the six-month period ended January 31, 1998, the Fund's NAV return was
negative 5.1%, while the market price return was negative 7.2% in U.S. dollar
terms. For the same period, the Bolsa Index lost 16.3% in U.S. dollar terms.
The Fund's equity portfolio exposure on January 31, 1998 was 78.5% and the fixed
income proportion was 21.5%. The fixed income in Mexican Peso instruments was
20%, including 3.9% in convertible bonds, 4.2% in a Vitro real coupon promissory
note, 2.2% in long-term government bonds and treasury bills and 9.7% in banking
promissory notes. The fixed income component in U.S. dollar products was 1.5%.
During the period, the Fund's fixed income position increased from 11.1% to
21.5% as a result of our investment strategy to lower the equity exposure due to
a fully priced stock market after a 52.0% dollar return in 1997.
Based on continued GDP growth and a projected private domestic consumption
growth of 4.1% in 1998, we believe that a majority of domestic orientated
companies listed on the Mexican stock exchange will improve operating profits.
Our investment strategy continues to favor consumer-oriented companies and
defensive export-oriented stocks.
As of January 31, 1998, the Fund's three largest sectors were (1) Industrial
Conglomerates, 16.6%, (2) Retailing and Specialty Stores, 14.2% and (3) Food,
Beverage and Tobacco, 13.9%. The Fund's three largest stock holdings were (1)
Telefonos de Mexico (Communications), 4.9%, (2) Pepsi-Gemex (Food, Beverage and
Tobacco), 3.9% and (3) Grupo Elektra (Specialty Stores), 3.5%.
Review of Key Economic Sectors
Industrial Conglomerates -- 16.6% of the Fund's total investments
as of January 31, 1998
The industrial conglomerates' financial results for the third quarter 1997 were
positive, despite the strengthening of the Mexican Peso. Most industrial groups
were able to maintain their operating margins despite the negative effect of a
stronger peso. During the third quarter, higher volumes were generated by a
recovery in the domestic market and by a continuous growth in exports. During
the fourth quarter, most industrial groups continued to register strong sales in
dollar terms, with some pressure on margins. Industrial activity continued to
expand, increasing 8.6% in the fourth quarter.
3
<PAGE>
Lower commodity prices and a more competitive environment for Mexican exports
should be reflected in the financial corporate results for the first quarter
1998. Export growth is expected to slow in pace, as compared to previous years.
Mexican conglomerates should continue to benefit from the domestic consumption
recovery. The slowing of exports is due to expected lower growth of the U.S.
economy and more competition for Mexican exports.
Retailing and Specialty Stores -- 14.2% of the Fund's total investments
as of January 31, 1998
Mexican retailers and specialty stores showed positive performance during the
second half of 1997. According to National Association of Self Service and
Department Stores (ANTAD) same store sales for both self-service and department
stores registered 3.3% and 11.3% increases versus the same period last year.
This rebound has been supported by higher employment and lower inflation. During
this period, most retail companies continued their aggressive expansion
programs, which started at the beginning of 1997. These expansion programs are
expected to continue in 1998. Furthermore, retail companies have enforced limits
on operating expenditures and have lowered their debt levels. We expect that
1998 should be another positive year for Mexican retailers wages are expected to
increase, employment recovery will continue, and as a consequence, domestic
consumption growth should continue during the first half of 1998.
Food, Beverage and Tobacco -- 13.9% of the Fund's total investments
as of January 31, 1998
During the second half of 1997, food companies continued to show strong growth
as a result of strong discounting and promotional campaigns. However, a price
war forced companies to become more efficient and to improve operating
expenditure controls. We believe 1998 will be a positive year for Food, Beverage
and Tobacco companies since their strength is tied to the continued domestic
consumption recovery. Export growth in this sector however is linked to U.S.
economic growth. The current Mexican export projection of an 8.8% increase could
be less if the U.S. economy slows down.
The beverage sector (beer and soft drinks) continued to perform well during the
second part of the year as a result of very attractive growth due to aggressive
promotional campaigns. We expect companies to continue making operating
improvements in 1998, particularly bottlers, as brewers already claim strong
margins. We expect growth rates in domestic volumes of beer to decrease from
4.8% to 2.5% in 1998, as a result of an average beer market price increase of
23%. 1997 exports grew approximately 30.9% and we believe they will to continue
to grow by approximately 14.8% in 1998.
Top Ten Holdings
Telefonos de Mexico, S.A. de C.V. -- 4.9% of the Fund's total investments
Telmex is the only Mexican company that offers integral telecommunication
services at the national level, including local, local distance data, cellular
and paging services. During August 1996, the company lost its exclusivity over
the long distance market and in the short term will also face competition in
local service. The company estimates that it has 73% of the cellular telephone
market and Telmex intends to compete in the U.S. long distance market in a joint
effort with its commercial
4
<PAGE>
partner Sprint. Telmex has adequately controlled cost and expenses which has
allowed it to maintain high operating margins. Telmex's annual sales totaled US$
7.4 billion in 1997 and its market capitalization was US$ 20.9 billion at year
end 1997. The Fund's position increased from 4.1% to 4.9%, due to its high
liquidity.
Pepsi-Gemex, S.A. de C.V. -- 3.9% of the Fund's total investments
Grupo Embotellador de Mexico, S.A. de C.V. is Pepsi-Cola's second largest
bottler outside the U.S., and is Pepsi-Cola's anchor bottler in Mexico. It also
owns Electropura, the largest purified water company in Mexico. In 1997, Pepsigx
commercialized its products in Mexico City, certain regions of the States of
Mexico and Hidalgo, and some parts of the southwestern, southeastern, and
central regions of Mexico.
In July of 1997, the company acquired Embotelladora Agral Regiomontana and
related companies, giving it the franchise rights to sell drinks in Monterrey, a
Mexican city and much of northeastern Mexico. Pepsi's annual sales totaled US$
495.2 million in 1997 and its market capitalization was US$ 1 billion. During
the six month period ended January 31, 1998, the Fund's position increased from
2.6% to 3.9% due to high growth prospectives for the sector.
Grupo Elektra, S.A. de C.V. -- 3.5% of the Fund's total investments
Grupo Elektra is Mexico's dominant specialty retailer of electronics,
appliances, and household furniture, which caters to the low-income population.
A key factor in its growth has been its credit financing program that allows
customers to purchase products at a fixed price during a 13 to 53 week period.
Other businesses include: money transfers to and from the U.S.; Grupo Hecali,
and a specialized clothing and footwear store which is expected to almost double
its number of stores from 110 to 210 in 1998. Elektra's annual sales totaled US$
790 million and its market capitalization is US$ 1.9 billion. During the period,
the Fund's position decreased from 4.2% to 3.5% on profit taking.
Fomento Economico Mexicano, S.A. de C.V. (Femsa) -- 3.5% of the Fund's total
investments
Fomento Economico Mexicano S.A. de C.V. is Mexico's leading soft drink company
and second-largest beer company. The company has four divisions: Beer (Femsa)
44%, Soft drinks (KOF) 38% and Convenience Stores (Oxxo) and Packaging (Femsa)
with 13% and 5%, respectively, of total sales.
The company's beer division has a 46% market share. In 1994, John Labbat, the
second largest beer company in Canada, acquired 22% of the beer division. Femsa
has a 51% share of KOF, which has the largest Coca-Cola franchise in Mexico, and
covers the markets of the Valley of Mexico (including Mexico City), and the
southeast of Mexico through 13 bottling plants. In 1994, KOF acquired a new
franchise in Argentina. Coca-Cola Co. has a 30% share of KOF's capital. Femsa's
annual sales totaled US$ 2.96 billion in 1997 and its market capitalization was
US$ 3.8 billion at December 31, 1997. During the period, the Fund's position
increased from 2.4% to 3.5% due to growth prospects and attractive valuation.
5
<PAGE>
Desc Sociedad de Fomento Industrial, S.A. de C.V. -- 3.5% of the Fund's total
investments
Desc, S.A. de C.V., one of the largest industrial conglomerates is made up of a
diversified group of businesses whose combined annual sales totaled
approximately US$ 1.8 billion in 1997. The company focused on five business
sectors and their subsidiaries: Unik (autoparts) 41%, Girsa (chemicals and
consumer products) 39%, Agriobios (agribusiness) 18%, and Dine (real estate) 2%
of total sales.
Unik produces a wide variety of autoparts, original equipment and spare parts
for the domestic and export markets. Girsa's main chemical products are
synthetic rubber, polystyrene, phosphates, carbon black and phenol. Girsa is
also responsible for the consumer products division, which produces glue and
waterproofing sealant. Agrobios produces poultry, pork, animal feed and shrimp.
Desc recently acquired Corfuerte, a food manufacturer company that produces a
variety of food products. Dine is a real estate business which focuses on the
highest market segment, including commercial, tourism and residential
developments. Exports for Desc represent 36% of their total sales (mainly
autoparts and chemicals). Desc's sales totaled US$ 1.9 billion in 1997 and the
market capitalization is US$ 2.3 billion at December 31, 1997. During the
period, the Fund's position decreased from 4.2% to 3.5% on profit taking.
Cifra, S.A. de C.V. -- 3.2% of the Fund's total investments
Cifra is the main commercial chain in Mexico with a market share of 30.3%. The
company maintains a strong balance sheet, is well managed and has the
second-highest operating margin of all Mexican retailers. In 1991, it formed a
partnership with Wal-Mart Stores Inc. in order to open wholesale clubs in
Mexico.
In May 1992, this partnership was extended to include the newly opened
self-service stores. In June 1997, Cifra announced that it had reached an
agreement with Wal-Mart Stores Inc., to merge their joint venture companies into
the Cifra holding. The agreement was finalized in July of 1997 and gave Wal-Mart
a majority controlling share of Cifra. Cifra's annual sales totaled US$ 3.5
billion and its market capitalization is US$ 8.8 billion. During the period, the
Fund's position decreased from 7.5% to 3.2% on profit taking,
Cemex, S.A. -- 3.1% of the Fund's total investments
Cemex, S.A. de C.V. is the third largest producer of cement, ready-mix concrete
and aggregates in the world and has annual installed capacity of 50.1 million
metric tons. Based in Monterrey City, Mexico, the company leads the Mexican
market, and also has major operations in Spain, Venezuela, the United States,
Colombia, and smaller operations in Panama, the Dominican Republic, and the
Philippines. In addition, Cemex is the leading cement trader in the world, with
clients in more than 60 countries. The company's administration is recognized
for its efficiency, aggressiveness and experience and it is thought to be the
lowest cement cost operator in the world. Cemex's annual sales totaled US$ 3.9
billion in 1997 and its market capitalization is US$ 5.4 billion at December 31,
1997. During the period, the Fund's position decreased from 3.9% to 3.1%.
6
<PAGE>
Grupo Industrial Bimbo, S.A. de C.V. -- 2.8% of the Fund's total investments
Grupo Industrial Bimbo, S.A. de C.V., Mexico's largest bread producer, leads the
domestic sliced bread market and is the country's leading pastry, packaged corn
and wheat tortilla producer. The company also has a significant market share in
the candy and snack food market. It has the most extensive and sophisticated
distribution network in Mexico with 15,000 daily routes that serve close to 1.5
million clients. Exports represent 18% of Bimbo's total sales. Bimbo had total
annual sales of US$ 2.2 billion in 1997 and market capitalization of US$ 3.2
billion as of December 31, 1997. During the six month period ended January 31,
1998, the position increased from 2.5% to 2.8% as part of our strategy to
increase domestic oriented companies.
Controladora Comercial Mexicana, S.A. de C.V. (Comerci) -- 2.7% of the Fund's
total investments
Controladora Comercial Mexicana, S.A. de C.V. is Mexico's second-largest
supermarket chain with a market share of 19.2%. The company operates 149
self-service retail stores at the national level, of which 79% are located in
Mexico City and the central region of the country. During June 1997, the company
announced the implementation of a credit program in a joint effort with Banco
Bital. This new in-store program will allow customers to purchase certain items
on credit. Comerci's annual sales totaled US$ 2.1 billion and its market
capitalization was US$ 1.3 billion at December 31, 1997. During the six month
period ended January 31, 1998, the position increased from 1.0% to 2.7%.
Grupo Modelo, S.A. de C.V. -- 2.7% of the Fund's total investments
Grupo Modelo is the leading producer of beer in Mexico and its production
accounts for 54.3% of the national market, as well as 80.7% of exports. GModelo
produces 10 brands of beer Corona (the leading beer on the Mexican market),
Modelo Especial, Victoria and Pacifico. In June 1993 it became associated with
the largest beer group in the world, Anheuser-Bush, which currently holds
of-line outstanding shares of GModelo and 10% of Diblo. Last year the company
opened its eighth plant in Zacatecas (northern Mexico), which will initially
increase GModelo installed capacity by 10%. GModelo maintains a strong financial
structure with no debt. GModelo has total annual sales of US$ 1.8 billion and
its market capitalization is US$ 6.1 billion. During the six month period ended
December 31, 1997, the Fund's position was lowered from 4.4% to 2.7%.
Respectfully,
/s/ M. Eugenia Pichardo
M. Eugenia Pichardo
Portfolio Manager
Acci Worldwide, S.A. de C.V.
Mexico City
February 16, 1998
7
<PAGE>
Schedule of Investments The Mexico Equity and Income Fund, Inc.
January 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Number Percent
of Shares Security of Holdings Value
==========================================================================================================
<S> <C> <C> <C>
MEXICO 98.43%
- ----------------------------------------------------------------------------------------------------------
COMMON STOCKS 78.47%
- ----------------------------------------------------------------------------------------------------------
Cement 9.03%
315,000 Apasco, S.A. de C.V. .................................................. $ 2,093,770
1,069,000 Cemex, S.A.* .......................................................... 3,920,724
97,000 Cemex, S.A. B* ........................................................ 420,237
2,950,000 Grupo Cementos de Chihuahua, S.A. de C.V. ............................. 2,731,157
2,269,980 Internacional de Ceramica, S.A. de C.V.* + ............................ 3,691,242
------------
12,857,130
------------
Communications and Transportation 7.53%
3,081,000 Biper, S.A. de C.V. B* ................................................ 1,206,801
20,000 Grupo Televisa S.A.* .................................................. 317,864
41,500 Grupo Televisa S.A. ADR* .............................................. 1,335,781
65,000 Telefonos de Mexico, S.A. de C.V. ADR ................................. 3,201,250
1,520,000 Telefonos de Mexico, S.A. de C.V. L ................................... 3,779,703
178,000 TV Azteca, S.A. de C.V.* .............................................. 889,472
------------
10,730,871
------------
Computers 0.88%
482,000 Acer Computec Latino America, S.A. de C.V.* ........................... 963,428
30,000 Acer Computec Latino America, S.A. de C.V. ADR* ....................... 285,000
------------
1,248,428
------------
Construction 6.09%
417,000 Consorcio ARA, S.A. de C.V.* .......................................... 1,831,335
1,141,000 Consorcio Hogar, S.A. de C.V. B* ...................................... 2,302,315
626,000 Corporacion Geo, S.A. de C.V. B* ...................................... 3,321,329
295,000 Empresas ICA Sociedad Controladora, S.A. de C.V. ...................... 662,481
100,000 Grupo Tribasa S. A. de C.V. ADR* ...................................... 556,250
------------
8,673,710
------------
Entertainment 2.17%
470,000 Corporacion Interamericana de Entretenimiento, S.A de C.V. B .......... 3,096,142
------------
Financial Groups 4.33%
3,094,000 Grupo Financiero Bancomer, S.A. de C.V. B* ............................ 1,659,927
2,000,000 Grupo Financiero GBM Atlantico, S.A. de C.V. B * + .................... 1,424,332
966,000 Grupo Financiero Inbursa, S.A. de C.V. B .............................. 3,084,320
------------
6,168,579
------------
</TABLE>
8
<PAGE>
Schedule of Investments (continued) The Mexico Equity and Income Fund, Inc.
January 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Number Percent
of Shares Security of Holdings Value
==========================================================================================================
COMMON STOCKS (continued)
<S> <C> <C> <C>
Food, Beverage and Tobacco 13.91%
768,000 Fomento Economico Mexicano, S.A. de C.V. B ............................ $ 5,004,534
397,000 Grupo Industrial Bimbo, S.A. de C.V. A ................................ 3,911,098
470,000 Grupo Modelo, S.A. de C.V. C .......................................... 3,849,259
601,000 Maizoro, S.A. de C.V. ................................................. 419,451
2,769,000 Pasteleria Francesa, S.A. de C.V. (Globo)* ............................ 1,084,594
2,410,000 Pepsi Gemex , S.A. de C.V. ............................................ 5,549,436
------------
19,818,372
------------
Industrial Conglomerates 16.59%
3,170,000 Accel, S.A. de C.V. B* ................................................ 586,968
9,461,626 Accel, S.A. de C.V. C* ................................................ 1,707,023
421,000 Desc Sociedad de Fomento Industrial, S.A. de C.V. A ................... 3,198,101
246,750 Desc Sociedad de Fomento Industrial, S.A. de C.V. C ................... 1,801,202
601,000 Grupo Carso, S.A. de C.V. A1 .......................................... 3,538,231
1,603,000 Grupo Imsa, S.A. de C.V. .............................................. 3,474,277
690,000 Grupo Industrial Alfa, S.A. A ........................................ 3,685,460
5,400,000 Grupo Industrial Camesa, S.A. de C.V. B* .............................. 3,108,605
394,000 Grupo Industrial Sanluis, S.A. de C.V. ................................ 2,525,341
------------
23,625,208
------------
Retailing 6.10%
1,167,000 Cifra, S.A. de C.V. C ................................................. 1,980,783
1,425,517 Cifra, S.A. de C.V. V ................................................. 2,602,309
3,220,000 Controladora Comercial Mexicana, S.A. de C.V. ......................... 3,890,754
200,000 Grupo Gigante S.A. B* ................................................. 63,620
42,000 Organizacion Soriana S.A. B ........................................... 150,552
------------
8,688,018
------------
Specialty Stores 8.11%
1,184,000 Corporativo Fragua, S.A. de C.V. B* ................................... 1,714,516
938,000 Dermet de Mexico, S.A. de C.V. B* ..................................... 846,149
792,000 Grupo Comercial Gomo, S.A. de C.V.* ................................... 1,584,940
3,225,000 Grupo Elektra, S.A. de C.V. ........................................... 5,014,540
2,999,000 Nacional de Drogas, S.A. de C.V. L .................................... 2,399,200
------------
11,559,345
------------
Textile 3.73%
2,751,000 Grupo Covarra, S.A. de C.V.* .......................................... 3,128,140
4,193,000 Hilasal Mexicana, S.A. de C.V. A* ..................................... 2,189,816
------------
5,317,956
------------
TOTAL COMMON STOCKS (Cost $110,027,786) 111,783,759
------------
</TABLE>
9
<PAGE>
Schedule of Investments (continued) The Mexico Equity and Income Fund, Inc.
January 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value Percent
(000) Security of Holdings Value
==========================================================================================================
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
CONVERTIBLE DEBENTURES 3.89%
- ----------------------------------------------------------------------------------------------------------
MXP 16,101 Corporacion Interamericana Entretenimiento 12.00%, 06/06/99 ........... $ 2,302,873
MXP 24,113 Grupo Financiero Bancomer 23.3503%, 05/16/02** ........................ 3,234,080
------------
TOTAL CONVERTIBLE DEBENTURES (Cost $5,980,889) 5,536,953
------------
- ----------------------------------------------------------------------------------------------------------
INFLATION INDEXED BOND 4.19%
- ----------------------------------------------------------------------------------------------------------
MXP 38,180 Vitro, S.A. 13.00%, 12/07/99+ ........................................ 5,972,646
------------
TOTAL INFLATION INDEXED BOND (Cost $4,959,549) 5,972,646
------------
- ----------------------------------------------------------------------------------------------------------
MEXICAN GOVERNMENT BOND 1.87%
- ----------------------------------------------------------------------------------------------------------
MXP 10,000 Bono de Desarrollo del Gobierno Federal 19.39%, 12/14/00 .............. 1,186,940
MXP 12,500 Bono de Desarrollo del Gobierno Federal 19.28%, 01/18/01 .............. 1,483,675
------------
TOTAL MEXICAN GOVERNMENT BOND (Cost $2,664,128) 2,670,615
------------
- ----------------------------------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS 10.01%
- ----------------------------------------------------------------------------------------------------------
MEXICAN SHORT TERM OBLIGATION 0.33%
MXP 4,000 Certificados de la Tesoreria 19.75%, 7/23/98 .......................... 474,777
------------
TOTAL MEXICAN SHORT TERM OBLIGATION (Cost $481,927) 474,777
------------
- ----------------------------------------------------------------------------------------------------------
PROMISSORY NOTES 9.68%
- ----------------------------------------------------------------------------------------------------------
MXP 56,000 Banco de Comercio Exterior 18.10%, 02/02/98 ........................... 6,646,884
MXP 20,183 Banco Nacional de Obras Publicas 18.10%, 02/02/98 ..................... 2,395,550
MXP 40,000 Grupo Financiero Serfin 18.25%, 02/02/98 .............................. 4,747,774
------------
TOTAL PROMISSORY NOTES (Cost $13,790,208) 13,790,208
------------
TOTAL SHORT-TERM OBLIGATIONS (Cost $14,272,135) 14,264,985
------------
TOTAL MEXICO (Cost $137,904,487) 140,228,958
------------
</TABLE>
10
<PAGE>
Schedule of Investments (concluded) The Mexico Equity and Income Fund, Inc.
January 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Number Percent
of Shares Security of Holdings Cost Value
==========================================================================================================
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
UNITED STATES SHORT-TERM OBLIGATIONS 1.57%
- ----------------------------------------------------------------------------------------------------------
2,233,011 Temporary Investment Fund, Inc. - Temp Cash Portfolio $ 2,233,011
------------
TOTAL UNITED STATES SHORT-TERM OBLIGATIONS (Cost $2,233,011) 2,233,011
- ----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $140,137,498)++ 100.00% $142,461,969
============
</TABLE>
- ---------------------------
Footnotes and Abbreviations
* Non-income producing security.
** Variable rate security. Interest rate represents rate at January 31, 1998.
+ At fair value as determined under the supervision of the Board of
Directors.
++ Aggregate cost for Federal income tax purposes is $141,707,664. The
aggregate gross unrealized appreciation (depreciation) for all securities
is as follows:
Excess of market value over tax cost $12,272,316
Excess of tax cost over market value (11,518,011)
-----------
754,305
===========
MXP Mexican Pesos
ADR American Depository Receipt
See accompanying notes to financial statements.
11
<PAGE>
Statement of Assets and Liabilities The Mexico Equity and Income Fund, Inc.
January 31, 1998 (Unaudited)
<TABLE>
<S> <C>
Assets
Investments, at value (Cost $140,137,498) ................................................................. $ 142,461,969
Cash (including foreign currency holdings of $2,136,811 with a cost of $2,134,559) ........................ 2,136,811
Receivables:
Interest (net of withholding tax of $10,794) ........................................................... 295,940
Maturities ............................................................................................. 64,354,605
Securities sold ........................................................................................ 227,323
Prepaid expenses .......................................................................................... 36,185
-------------
Total Assets ........................................................................................... 209,512,833
-------------
Liabilities
Payable for securities purchased .......................................................................... 68,783,093
Due to Mexican Adviser .................................................................................... 66,493
Due to Co-Adviser ......................................................................................... 51,148
Due to Administrator ...................................................................................... 25,574
Accrued expenses .......................................................................................... 77,027
-------------
Total Liabilities ...................................................................................... 69,003,335
-------------
Net Assets ................................................................................................ $ 140,509,498
=============
Net Asset Value per Share ($140,509,498/11,825,273) ....................................................... $ 11.88
=============
Net assets consist of:
Capital stock, $0.001 par value; 11,825,273 shares issued and outstanding
(100,000,000 shares authorized) ........................................................................ 11,825
Paid-in capital ........................................................................................... 131,288,786
Distributions in excess of net investment income .......................................................... (759,218)
Accumulated net realized gain on investments and foreign currency
related transactions ................................................................................... 8,050,940
Net unrealized appreciation in value of investments and on
translation of other assets and liabilities denominated in foreign currency ............................ 1,917,165
-------------
$ 140,509,498
=============
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
Statement of Operations The Mexico Equity and Income Fund, Inc.
For the Six Months Ended January 31, 1998 (Unaudited)
<TABLE>
<S> <C> <C>
Investment Income
Interest (Net of taxes withheld of $70,403) ................................................................ $ 1,553,770
Dividends .................................................................................................. 239,350
------------
Total investment income ................................................................................. 1,793,120
------------
Expenses
Mexican Advisory fees ........................................................................ $ 496,769
Co-Advisory fees ............................................................................. 382,130
Administration fees .......................................................................... 191,065
Custodian fees ............................................................................... 98,152
Legal fees ................................................................................... 50,410
Insurance .................................................................................... 36,497
Audit fees ................................................................................... 28,104
Transfer agent fees .......................................................................... 27,826
Printing ..................................................................................... 15,123
NYSE fees .................................................................................... 12,230
Directors' fees .............................................................................. 11,796
Miscellaneous ................................................................................ 8,067
------------
Total expenses .......................................................................................... 1,358,169
------------
Net investment income ................................................................................... 434,951
------------
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 ................................................................................... 26,157,600
Foreign currency related transactions ................................................................... (155,456)
------------
26,002,144
Net change in unrealized depreciation in value of investments and
translation of other assets and liabilities denominated in foreign currency ............................. (42,895,331)
------------
Net realized and unrealized loss on investments, foreign currency holdings
and translation of other assets and liabilities denominated in foreign currency ......................... (16,893,187)
------------
Net decrease in net assets resulting from operations ....................................................... ($16,458,236)
============
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
Statement of Changes in Net Assets The Mexico Equity and
Income Fund Inc.
<TABLE>
<CAPTION>
For the Six
Months Ended For the
January 31, 1998 Year Ended
(Unaudited) July 31, 1997
---------------- -------------
Increase (Decrease) In Net Assets
<S> <C> <C>
Operations
Net investment income ................................................................ $ 434,951 $ 5,109,358
Net realized gain on investments and foreign currency
related transactions ........................................................... 26,002,144 25,891,614
Net change in unrealized apprecation (depreciation) in value of
investments and translation of other assets and liabilities
denominated in foreign currency ................................................... (42,895,331) 39,743,168
------------- -------------
Net increase (decrease) in net assets resulting from operations ................ (16,458,236) 70,744,140
------------- -------------
Distributions to shareholders from
Net investment income ($0.1894 and $0.44 per share, respectively) .................... (2,239,707) (5,203,120)
Net realized gains ($3.3706 and $0.67 per share, respectively) ....................... (39,858,265) (7,922,933)
------------- -------------
Decrease in net assets from distributions ...................................... (42,097,972) (13,126,053)
------------- -------------
Capital share transactions
Offering costs charged to paid-in capital ............................................ -- (789)
------------- -------------
Total increase (decrease) in net assets .............................................. (58,556,208) (57,617,298)
------------- -------------
Net Assets
Beginning of period .................................................................. 199,065,706 141,448,408
------------- -------------
End of period (including undistributed net investment
income of $1,045,538, as of July 31, 1997) ........................................ $ 140,509,498 $ 199,065,706
============= =============
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
Financial Highlights The Mexico Equity and Income Fund, Inc.
For a Share Outstanding throughout Each Period
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year For the Year For the Year For the Year For the Year
January 31, 1998 Ended Ended Ended Ended Ended
(Unaudited) July 31, 1997 July 31, 1996 July 31, 1995 July 31, 1994 July 31, 1993
----------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $16.83 $11.96 $11.31 $20.33 $18.51 $16.03
------ ------ ------ ------ ------ ------
Net investment income ............... 0.04 0.43 0.81+ 0.82 0.51 0.68
Net realized and unrealized gains
(losses) on investments, foreign
currency holdings, and translation
of other assets and liabilities
denominated in foreign currency ... (1.43) 5.55 0.67+ (5.98) 5.47 3.33
------ ------ ------ ------ ------ ------
Net increase (decrease) from
investment operations ............. (1.39) 5.98 1.48 (5.16) 5.98 4.01
------ ------ ------ ------ ------ ------
Less Distributions
Dividends from net
investment income .............. (0.19) (0.44) -- (0.03) (0.42) (0.77)
Distributions from net
realized gains ................. (3.37) (0.67) (0.09) (3.90) (1.67) (0.76)
------ ------ ------ ------ ------ ------
Total dividends and distributions . (3.56) (1.11) (0.09) (3.93) (2.09) (1.53)
------ ------ ------ ------ ------ ------
Capital share transactions
Anti-dilutive effect of
dividend reinvestment .......... -- -- -- 0.07 -- --
Dilutive effect of rights offering -- -- (0.74) -- (2.07) --
------ ------ ------ ------ ------ ------
Total capital share transactions .. 0.00 0.00 (0.74) 0.07 (2.07) 0.00
------ ------ ------ ------ ------ ------
Net asset value, end of period ...... $11.88 $16.83 $11.96 $11.31 $20.33 $18.51
====== ====== ====== ====== ====== ======
Per share market value, end of period $9.75 $14.125 $9.625 $11.25 $21.25 $18.625
Total Investment Return Based
on Market Value* .................. (7.19)% 62.52% (8.26)% (31.96)% 41.40% 37.10%
Ratios/Supplemental Data
Net assets, end of
period (in 000s) ............... $140,509 $199,066 $141,448 $99,779 $175,380 $117,627
Ratios of expenses to
average net assets ............. 1.42%++ 1.49% 1.56% 1.71% 1.64% 1.63%
Ratios of net investment income
to average net assets .......... 0.46%++ 3.29% 7.32% 5.73% 2.75% 4.14%
Portfolio turnover ................ 46.49% 127.44% 42.59% 50.52% 43.57% 44.21%
Average commission rate paid** .... $0.0057 $0.0050 $0.0030 N/A N/A N/A
</TABLE>
* 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 period 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.
Rights offerings, if any, are assumed for purposes of this calculation to
be fully subscribed under the terms of the rights offering. Total
investment return does not reflect sales loads or brokerage commissions.
** Computed by dividing the total amount of brokerage commissions paid by the
total number of shares of investment securities purchased and sold during
the period for which commissions were charged as required by the SEC for
fiscal years beginning on or after September 1, 1995.
+ Based on average shares outstanding.
++ Annualized.
See accompanying notes to financial statements.
15
<PAGE>
Notes to Financial Statements The Mexico Equity and
January 31, 1998 (Unaudited) Income Fund, Inc.
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 generally accepted
accounting principles 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. All other
securities and assets are carried at fair value as determined in good faith by,
or under the direction of, the 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 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 when known. 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.
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.
In accordance with U.S. Treasury regulations, the Fund elected to defer $621,681
of net realized foreign currency losses arising after October 31, 1996. Such
losses are treated for tax purposes as arising on August 1, 1997.
16
<PAGE>
Notes to Financial Statements -- (continued) The Mexico Equity and
January 31, 1998 (Unaudited) Income Fund, Inc.
The Fund is subject to the following withholding taxes on income from Mexican
sources:
Dividends distributed by Mexican companies are not subject to Mexican
withholding tax if such dividends are paid out of taxed profits. Dividends
distributed by Mexican companies from other sources are subject to a 34%
withholding tax.
Interest income on debt issued by the Mexican federal government is not
subject to withholding. Withholding tax on interest from other debt
obligations is at a rate of 4.9%.
Gains realized from the sale or disposition of debt securities are not
presently subject to taxation unless such securities are listed and traded
on the Mexican Stock Exchange, (MSE), in which case a 4.9% withholding may
apply. Gains realized by the Fund from the sale or disposition of equity
securities that are listed and traded on the 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 30% 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 peso exchange rate on the valuation date, and
(ii) purchases and sales of investment securities, income and expenses at
the peso rate of exchange prevailing on the respective dates of such
transactions.
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
both financial reporting and income tax reporting purposes. The Fund reports
foreign exchange realized 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.
17
<PAGE>
Notes to Financial Statements -- (continued) The Mexico Equity and
January 31, 1998 (Unaudited) Income Fund, Inc.
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, and 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 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. An
additional distribution may be made to the extent necessary to avoid payment of
a 4% 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 generally accepted accounting principles. 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 that 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 gains. To the
extent they exceed net investment income and net realized gains for tax
purposes, they are reported as distributions of paid-in-capital.
During the year ended July 31, 1997, the Fund reclassified a loss of $637,760
from accumulated net realized gain on investments and foreign currency related
transactions to undistributed net investment income as a result of permanent
book and tax differences relating primarily to foreign currency losses. Net
investment income 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 monthly net assets. For the
six months ended January 31, 1998, these fees amounted to $496,769.
On November 3, 1997, CIBC Wood Gundy Securities Corp., the broker-dealer
subsidiary of The Canadian Imperial Bank of Commerce, acquired all of the stock
of Oppenheimer Holdings, the indirect parent of Advantage Advisers, Inc., the
Fund's U.S. Co-Advisor (the "Co-Advisor"). In connection with the acquisition,
CIBC Wood Gundy Securities Corp. merged into Oppenheimer & Co., Inc., whose name
was changed to CIBC Oppenheimer Corp. ("CIBC Oppenheimer").
Advantage Advisers, Inc., a subsidiary of CIBC Oppenheimer, serves as the Fund's
U.S. 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 all investment decisions regarding the Fund's
18
<PAGE>
Notes to Financial Statements -- (continued) The Mexico Equity and
January 31, 1998 (Unaudited) Income Fund, Inc.
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 of 0.40% of the Fund's
average monthly net assets. For the six months ended January 31, 1998, these
fees amounted to $382,130.
CIBC Oppenheimer, 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 monthly net assets. For the six months ended
January 31, 1998, these fees amounted to $191,065.
The Fund pays each of its directors who is not a director, officer or employee
of the Mexican Adviser, the U.S. 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 by means of a telephone
conference. For the six months ended January 31, 1998, the fees paid to such
directors, including meeting fees and annual retainer, amounted to $3,700 and
$7,500, respectively. 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
$81,394,431 and $123,596,525 respectively, for the six months ended January 31,
1998.
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 of $57,503 during the six months
ended January 31, 1998.
NOTE E: Other
At January 31, 1998, 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 inhibited.
19
<PAGE>
Results of Annual Shareholders Meeting The Mexico Equity and
Income Fund, Inc.
The Fund held its annual shareholders meeting on November 7, 1997. At the
meeting, shareholders elected each of the nominees proposed for election to the
Fund's Board of Directors and ratified the selection of Price Waterhouse LLP as
the independent accountants of the Fund for the year ending July 31, 1998. The
following table provides information concerning the matters voted on at the
meeting:
I. Election of Directors
Nominee Votes For Votes Abstained
- ------- --------- ---------------
Alan Rappaport 9,737,759 89,280
At January 31, 1998, in addition to Alan Rappaport the other directors of the
Fund were as follows:
Luis Rubio
Frederick M. Bohen
Carroll W. Brewster
Sol Gittleman
II. Ratification of Price Waterhouse LLP as the Independent Accountants of the
Fund
Votes For Votes Against Votes Abstained
- --------- ------------- ---------------
8,912,666 45,495 868,878
Results of Special Meeting
The Fund held a Special Meeting of Shareholders on September 30, 1997. At the
meeting a new U.S. Co-Advisory Agreement with Advantage Advisers, Inc. was
approved. The following table provides information concerning the matter voted
on at the meeting:
I. Approval of a new U.S. Co-Advisory Agreement
Votes For Votes Against Votes Abstained
- --------- ------------- ---------------
7,103,958 2,702,466 107,557
20
<PAGE>
Dividends and Distributions The Mexico Equity and
Dividend Reinvestment and Cash Purchase Plan Income Fund, Inc.
The Fund intends to distribute annually to shareholders substantially all of its
net investment income, and to distribute any net realized capital gains at least
annually. Net investment income for this purpose is income other than net
realized long and short-term capital gains net of expenses.
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
shareholders whose shares of Common Stock are registered in their own names will
be deemed to have elected to have all distributions automatically reinvested by
PNC Bank (the "Plan Agent") in Fund shares pursuant to the Plan, unless such
shareholders elect to receive distributions in cash. Shareholders who elect to
receive distributions in cash will receive all distributions in cash paid by
check in dollars mailed directly to the shareholder by PNC Bank, as dividend
paying agent. 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 such
shareholders' names and held for the account of beneficial owners that have not
elected to receive distributions in cash. Investors that own shares registered
in the name of a bank, broker or other nominee should consult with such nominee
as to participation in the Plan through such nominee, and may be required to
have their shares registered in their own names in order to participate in the
Plan.
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,
nonparticipants in the Plan will receive cash and participants in the Plan will
receive Common Stock, to be issued by the Fund or purchased by the Plan Agent in
the open market, as provided below. 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; provided,
however, that 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. The
valuation date will be 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 net asset value exceeds the market price of Fund shares at such time, or
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. If, before
the Plan Agent has completed its purchases, the market price exceeds the net
asset value of a Fund share, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the distribution had been paid in shares
issued by the Fund on the dividend payment date. Because of the foregoing
difficulty with respect to open market purchases, the Plan provides that if the
Plan Agent is unable to invest the full dividend amount in open market purchases
during the purchase period or if the market discount shifts to a market premium
during the purchase period, the Plan Agent will cease making open-market
purchases and will receive the uninvested portion of the dividend amount in
newly issued shares at the close of business on the last purchase date.
Participants have the option of making additional cash payments to the Plan
Agent, annually, in any amount from $100 to $3,000, for investment in the Fund's
Common Stock. The Plan Agent will use all such funds received from participants
to purchase Fund shares in the open market on or about February 15.
21
<PAGE>
Dividends and Distributions (continued) The Mexico Equity and
Dividend Reinvestment and Cash Purchase Plan Income Fund, Inc.
Any voluntary cash payment received more than 30 days prior to this date will be
returned by the Plan Agent, and interest will not be paid on any uninvested cash
payment. To avoid unnecessary cash accumulations, and also to allow ample time
for receipt and processing by the Plan Agent, it is suggested that participants
send in voluntary cash payments to be received by the Plan Agent approximately
ten days before an applicable purchase date specified above. A participant may
withdraw a voluntary cash payment by written notice, if the notice is received
by the Plan Agent not less than 48 hours before such payment is to be invested.
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 the name of the
participant, and each shareholder's proxy will include those shares purchased
pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions or voluntary cash payments. The Plan Agent's fees for the
reinvestment of dividends and capital gains distributions and voluntary cash
payments 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 and capital gains distributions and voluntary cash
payments made by the participant. Brokerage charges for purchasing small amounts
of stock for individual accounts through the Plan are expected to be less than
the usual brokerage charges for such transactions, because the Plan Agent will
be purchasing stock for all participants in blocks and prorating the lower
commission thus attainable.
The receipt of dividends and distributions under the Plan will not relieve
participants of any income tax that may be payable on such dividends or
distributions.
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 voluntary cash payments made and any dividend or distribution
paid subsequent to notice of the termination sent to members of the Plan 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, rules or policies of a regulatory
authority) only by at least 30 days' written notice to participants in the Plan.
All correspondence concerning the Plan should be directed to the Plan Agent at
101 Barclay Street, New York, New York 10826.
22
<PAGE>
================================================================================
THE MEXICO EQUITY AND
INCOME FUND, INC.
INVESTMENT ADVISERS:
ACCI WORLDWIDE, S.A. DE C.V.
ADVANTAGE ADVISERS, INC.
ADMINISTRATOR:
CIBC OPPENHEIMER CORP.
SUB-ADMINISTRATOR:
PFPC INC.
TRANSFER AGENT AND REGISTRAR:
PNC BANK, N.A.
CUSTODIANS:
PNC BANK, N.A.
CITIBANK, N.A.
================================================================================
