Advantage Advisers, Inc.
The Mexico Equity and Income Fund, Inc.
Annual Report
July 31, 1999
The Mexico Equity
and Income Fund, Inc.
<PAGE>
The Mexico Equity and Income Fund, Inc.
September 10, 1999
Dear Fund Shareholder,
After nine years of market-leading performance, the past twelve-month period has
been difficult for us. Historically, we have achieved our leading performance
because of a careful focus on thoughtful stock selection and portfolio
composition, enhanced by a commitment to two investment principles:
1. Consistent exposure to fixed income instruments would enhance
performance over volatile market cycles, and
2. Adherence to strong risk-control measures would avoid excessive risk
by preventing undue exposure to individual securities and,
therefore, dampen volatility.
We believe that over the long run, adherence to these principles will continue
to reward Fund investors.
Recent Year's Performance
While these two principles have served us extremely well for the past nine
years, they adversely affected our performance in the past twelve months. Two
market factors combined to cause our lagging results:
1. A sharply rising Bolsa Index beginning in February 1999 rewarded the
more heavily focused equity funds, and
2. The risk-control measures the Fund has in place limited our
participation in the dramatic outperformance of Telefonos de Mexico
(Telmex) - which constitutes about 25% of the Bolsa Index but only
9% of the Fund.
The net result was a decline in the Fund's Net Asset Value (NAV) of 0.66%; the
Bolsa Index, by reference, rose 17.7%.
1
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Continued Adherence to Our Investment Principles
Unlike those investment managers who shift their disciplines to chase last
year's performers, we will continue to adhere to our principles and to offer
investors balanced and diversified access to the Mexican market.
We will continue to focus our strategy on internationally competitive Mexican
Blue Chip companies, which are characterized by leading products, strong balance
sheets and quality management. The following portfolio description provides more
insight into our positioning and expectations.
On behalf of our Board of Directors, thank you for your continued support and
participation in the Fund. If you have any questions, do not hesitate to call
our toll-free number, (800) 421-4777.
Sincerely,
/s/ Alan Rappaport
Alan Rappaport
Chairman
2
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Report of the Mexican Adviser
Annual Report for the Year Ended July 31, 1999
- --------------------------------------------------------------------------------
MEXICO'S ECONOMIC OUTLOOK
The Mexican economy moved in opposite directions in the first and second halves
of the 12 months ended July 31, 1999 - the fiscal year of The Mexico Equity and
Income Fund, Inc. (the "Fund"). In the first half of that period, from August 1,
1998 through January 31, 1999, an adverse international financial environment
due to the Brazilian and Russian financial crises negatively impacted the
Mexican economy. Economic growth slowed; inflation increased, reaching 11.2%;
the peso fell 13.8% against the U.S. dollar; domestic interest rates rose to
32.5% and the Mexican oil mix price fell to US$9.50 per barrel.
However, the economy showed signs of recovery in the second half of the Fund's
1999 fiscal year. The distortion of economic variables of the first half was
reversed, mainly as a result of the floating exchange rate regime, growth of
exports and a rebound in oil prices. GDP grew 3.2% in the second calendar
quarter of 1999, reflecting anticipated GDP growth of 3% for the full year;
inflation declined to 5.2%; the peso appreciated 7.4% against the dollar;
domestic interest rates fell to 22.2% on average; and the average oil price rose
to US$12.80 per barrel.
- --------------------------------------------------------------------------------
THE MEXICAN STOCK MARKET
Mexico's Bolsa Index gained 17.7% in dollar terms during the Fund's 1999 fiscal
year. During this period, the Bolsa Index's volatility was the result of an
international financial crisis that provoked dramatic capital movements both
into and out of emerging markets. Nevertheless, the Bolsa was the
best-performing Latin American market during this period, primarily as a result
of the Mexican economy's solid macroeconomic performance, as well as the
outstanding performance of the Dow Jones Industrial Average, which gained 19.9%
for the same period.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
3
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
This contrasts with trends in several other Latin American markets: Brazil lost
37.1%, Argentina dropped 19.2% and Venezuela fell 6.1%, while Chile gained 4.1%,
during the Fund's 1999 fiscal year.
Like the Mexican economy, the Bolsa Index experienced dramatically different
trends in the first and second halves of the Fund's 1999 fiscal year. For the
six-month period ended January 31, 1999, the Bolsa Index posted a loss of 18.0%
in dollar terms, mainly due to the Brazilian and Russian crises. Between January
31 and July 31, 1999, the Bolsa Index gained 43.56% in dollar terms, and it
gained 106% from its low on September 10, 1998 to July 31, 1999.
Investors' renewed confidence in the Bolsa market during the second half of the
Fund's 1999 fiscal year was clearly reflected in the performance of Telefonos de
Mexico, S.A. de C.V. (Telmex). During the first half of the fiscal year, Telmex
gained 2.64% in dollar terms, while in the second half it gained 47.67%.
Telmex's 51.6% gain for the fiscal year was the main catalyst behind the Bolsa
Index's 17.7% dollar gain. Other issues in the Bolsa Index gained 5.9% in dollar
terms during the Fund's 1999 fiscal year.
- --------------------------------------------------------------------------------
THE FUND'S PERFORMANCE
For the fiscal year ended July 31, 1999, the Fund's net asset value (NAV) return
was -0.66% after accounting for the distribution to shareholders paid on January
15, 1999, and the tender offer and share repurchase program undertaken by the
Fund during June and July, 1999.
The Fund's underperformance relative to the Bolsa Index was due in part to the
sale of portfolio securities equivalent to 14.9% of the Fund's assets to meet
the shareholder distribution on January 15, 1999. Also in January, as a prudent
move during a period characterized by an extremely difficult worldwide scenario
as well as capital flow constraints in the Bolsa market, an additional 10.1% in
equities was sold to rebuild the Fund's fixed income exposure to levels above
15%. In total, the Fund sold 25% of its portfolio securities during January. The
Bolsa Index rebounded 63% in dollar terms from its lowest level in January to
the end of March 1999.
The Fund's underperformance relative to the Bolsa Index was primarily due to the
51% gain in the price of Telmex during the Fund's 1999 fiscal year. Telmex had a
25.8% weighting in the Bolsa Index, while it had on average an 8.4% weighting in
the Fund for the 1999 fiscal year. Other issues in the Bolsa Index gained 5.9%
in dollar terms during the Fund's 1999 fiscal year.
The significant fixed income exposure was another factor contributing to the
Fund's underperformance relative to the Bolsa Index. The Fund's fixed income
exposure averaged 18.25% during the Fund's 1999 fiscal year. While this exposure
hedged the Fund during periods when the Bolsa declined, it limited the Fund's
potential for growth during periods when the Bolsa increased. The fixed income
portion of the Fund's portfolio contributed on average a gain of 2.02% at the
gross operational level (before accounting for the shareholders distribution and
before expenses) during the Fund's 1999 fiscal year.
4
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
- --------------------------------------------------------------------------------
PORTFOLIO STRATEGY AND OUTLOOK
For the period from August 1, 1998 through January 31, 1999, Acci Worldwide, the
Mexican Investment Adviser of the Fund, successfully swapped 14% of small cap
and illiquid stocks for blue chips. This investment strategy resulted in the
Fund being overweighted in defensive, highly liquid stocks whose characteristics
include balance sheet strength, good management and strong earnings estimates
with significant U.S. dollar revenue. This equity turnaround in the Fund
significantly reduced risks related to liquidity in the market and placed the
Fund's equity structure on a healthy footing in the midst of a distressed
environment during the first half of the Fund's 1999 fiscal year.
The Mexican Investment Adviser has consistently maintained an overweight
position in blue-chip stocks since January 1999, and has avoided the acquisition
of stocks of highly leveraged companies. The portfolio manager has also
maintained a prudent investment strategy by avoiding speculative trading
activity. The portfolio manager's strategy will continue to focus on blue chip
stocks throughout the second half of the 1999 calendar year.
Global economic and market developments will continue to exert a major impact on
the Mexican stock market. In addition, Mexico's 2000 presidential election is
likely to have a significant impact on the stock market's performance. If
Mexican and foreign investors perceive the elections to be held fairly,
confidence in the Mexican market would increase.
- --------------------------------------------------------------------------------
REVIEW OF KEY ECONOMIC SECTORS AS OF JULY 31, 1999
INDUSTRIAL CONGLOMERATES (15.8% portfolio weighting)
For the twelve months ended July 31, 1999, industrial conglomerates' EBITDA
(Earnings before Interest, Taxes, Depreciation and Amortization) rose on average
2% and net income grew 44% in real terms. Fundamentally, conglomerates have
increased their efficiency by reducing costs, increasing their vertical
integration and re-engineering their debt-to-capital ratio.
In 1998, industrial conglomerates were more affected by the Asian crisis than
other Bolsa market sectors. Industrial conglomerates underperformed the Bolsa
Index in 1997 and 1998 due to investors' perception of a greater risk related to
their high leverage and greater exposure to commodities. Most conglomerates have
lowered their debt-to-capital ratio during the past year.
Many of the industrial conglomerates cater to the automotive industry,
particularly light trucks and utility cars, which have shown the greatest growth
within the automotive sector. The major current risk for the conglomerates is a
recession in the U.S. economy.
FOOD, BEVERAGE AND TOBACCO (14.4% portfolio weighting)
In the twelve month period ended July 31, 1999, food companies' sales grew 6.9%,
EBITDA grew
5
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
4.5%, and net income grew 29.7%. Exports and operations outside Mexico continue
to grow at attractive rates, favored by price competitiveness and geographical
diversification. Among the most notable influences on industry profitability are
lower grain prices, particularly in food companies that are major users of
commodities. Weak international demand and higher supply contributed to an
average 16% drop in wheat prices and a 21% decline in corn prices in calendar
1998.
In the period from April through June 1999, Mexico's private consumption grew
2.8%, compared to 1.9% in the prior quarter. Private consumption grew 7.4%
during the Fund's 1998 fiscal year. The Mexican adviser expects private
consumption to grow 3.8% in calendar 2000.
Retail sales grew 1.9% in the period from April through June 1999. The Mexican
adviser expects sales to grow 3.6% in calendar 1999 and 6.8% in 2000.
COMMUNICATIONS (12.5% portfolio weighting)
The continued growth of the telecommunications industry has significantly
increased investment in the Mexican market. During the fiscal year ended July
31, 1999, the communications sector grew 8.5%, more than twice the Mexican
economy's growth. During this twelve month period, sales, EBITDA and net profits
of the telecommunications industry increased 4.5%, 9.3% and 19%, respectively.
During the Fund's 1999 fiscal year, Telmex, the second largest company in
Mexico, and the most representative both of the sector and the Bolsa Index,
invested US$300 million in the U.S. and US$800 million in Central America.
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS AS OF JULY 31,1999
TELEFONOS DE MEXICO, S.A. DE C.V. (TELMEX)
8.9% of the Fund's total investments(1)
Telmex is Mexico's dominant carrier, offering local, long distance, data,
cellular, Internet and paging services. With a market capitalization of US$28.7
billion, the company's sales grew 5.8%, EBITDA grew 11.3% and net profit grew
17.9% during the twelve month period ended June 30, 1999.
Telmex has experienced a surge of competition in the past few years. In August
1996, the company lost its exclusivity over the long distance market and in the
Fund's 2000 fiscal year it will face competition in local service from wireless
service concessionaires.
At June 30, 1999, the number of active phone lines reached 10.2 million, up 7%
from twelve months earlier. Telmex estimates that it commands 73% of the
cellular telephone market, the total Mexican cellular market being 3.3 million
subscribers at June 30, 1999. Telmex has a 20% minority stake in the Internet
services provider Prodigy, which provides Internet services both in Mexico and
the U.S.
(1) Excludes $491,250 of convertible debentures.
6
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Telmex has imposed adequate cost and expense controls to enable it to maintain
EBITDA margins around 57% for the next two years.
Telmex plans to invest US$4.6 billion in new plant and equipment during the
period 1999-2004. For the rest of 1999 and 2000, it expects an increase of 20
million users, or 41% growth.
Telmex is one of the most solid companies in the stock market with a low
debt-to-capital ratio but with high rates of investment. Management is also very
solid, and the company's financial results are sensitive to the economic growth
in Mexico. Telmex is a value stock that is highly related to world
telecommunications valuation. Its main risk is related to the opening up of
competition in the country's local telephone service in the year 2000.
GRUPO CARSO, S.A. DE C.V. (GCARSO)
7.4% of the Fund's total investments
Gcarso is an industrial conglomerate that: produces electric cable, harnesses
and telephone cable; produces and sells copper and aluminum products; and
manages a specialty retail chain. Gcarso's business strategy consists of buying
undervalued companies and maximizing their long-term value and growth by
improving their cash and profitability.
The domestic market represented 84% of Gcarso's total sales in the twelve month
period ended June 30, 1999. For this same time period, consumer goods and
services represented 45% of the company's total sales. Gcarso is a liquid, value
stock with an EV/EBITDA multiple of 6.6x, vs. 8.7x in 1996-1997. Gcarso
currently has US$680 million in cash. In the twelve month period ended June 30,
1999, sales dropped 0.2%, EBITDA fell 7.3% and net profit fell 37.6%, primarily
as a result of a business-mix change during 1997 and 1998. The company's market
capitalization was US$1.6 billion at July 31, 1999.
GRUPO FINANCIERO BANCOMER, S.A. DE C.V. (BANCOMER)
6.9% of the Fund's total investments(1)
Grupo Financiero Bancomer (GFB) is the second largest financial group in Mexico
after Grupo Financiero Banacci. Its main subsidiaries are: Bancomer (commercial
bank with 1,357 branches); Alestra, a subsidiary of Bancomer; a
telecommunications joint venture with AT&T; Afore Bancomer (pension fund
subsidiary ); Casa de Bolsa Bancomer (brokerage house); GFB Insurance (insurance
subsidiary); Factoraje Bancomer (factoring subsidiary); Casa de Cambio Bancomer
(foreign exchange trading subsidiary); and Credito Familiar (home loan
subsidiary).
GFB, with a market capitalization of $US1.5 billion at July 31, 1999 and over
25,000 employees, has a 27.5% market share in credit loans and 24.7% in deposits
while Banacci has 30.7% and 27.8%, respectively. GFB's stock currently trades at
a 44% discount to its book value, compared to its historic
(1) Excludes $2.3 million of convertible debentures.
7
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
multiple. This undervaluation might be sharply reversed after the Mexican
Congress approves of the new credit framework (likely by the end of 1999). One
of the company's major risks is higher bank capitalization requirements. The
Mexican government currently owns 16% of GFB.
KIMBERLY CLARK DE MEXICO, S.A. DE C.V. (KIMBERLY)
6.3% of the Fund's total investments
Kimberly is the leading manufacturer, marketer and seller of bleached paper
products for personal care in Mexico. It focuses on consumer products, such as
"Petalo" toilet paper and napkins, "Scribe" notebooks, "Kotex" sanitary towels
and "Kleen Bebe" and "Huggies" diapers. It also participates in the writing and
printing paper and industrial products segment.
Kimberly has a low financial risk and a solid financial structure due to its
low-debt-level policy. The company also has experienced management with a strong
knowledge of its market. It is a growth stock and currently sells at a 4%
discount to the market's multiple. Historically, Kimberly has traded with a 10%
premium to the market's multiple. Its potential growth in the year 2000 is
mainly related to the 5% increase in demand for paper and 12% capacity expansion
in the paper tissue subsidiary. The company's market capitalization was US$4.8
billion at July 31, 1999.
During the twelve month period ended June 30, 1999, Kimberly's sales grew 2.6%,
EBITDA grew 8.1% and net profit rose 7.3%. The prices of some of its products
fell in real terms over this period, partly due to stronger competition.
Nevertheless, greater operating efficiency resulted in stronger EBITDA than
sales growth in the past twelve months.
CEMEX, S.A.
6.1% of the Fund's total investments
Cemex is the world's third largest producer of cement, ready-mix concrete and
aggregates with an annual installed capacity of 61 million metric tons. Based in
Monterrey City, Mexico, the company leads the Mexican cement market with a 63%
market share. It also has major operations in Spain, Venezuela, the United
States, Colombia, and Egypt 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 management is
recognized for its efficiency, aggressiveness and experience, and it is
considered the lowest-cost cement operator in the world.
Cemex's average annual sales growth of 21% in dollar terms in the last four
years, is the result of a US$3.7 billion investment program made during the last
five years. Sales grew only half that much (10.4%) in the twelve month period
ended June 30, 1999, while EBITDA grew 15.6% and net profit grew 19.3%. The
latest year's positive results are due to both volume and price increases in
most of its markets as well as company acquisitions, mainly in Colombia,
Indonesia and the Philippines. Cemex trades at 5.8x EBITDA, and had a market
capitalization of US$6.3 billion at July 31, 1999.
The company's management is aggressive; Cemex has US$4.5 billion in debt and
1.2x debt-to-equity ratio. Therefore, Cemex has significant risk exposure to
rising interest rates and a peso devaluation.
8
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Nevertheless, Cemex has never defaulted on its debt and it has successfully
managed its financial structure. In spite of its international diversification,
Cemex's results are sensitive to the Mexican economy, as domestic operations
represent 45% of total sales. Emerging countries - like Venezuela, Colombia, the
Philippines and Indonesia - represent 23% of total sales. Spain represents 20%
of sales and the U.S. represents 12%.
GRUPO INDUSTRIAL BIMBO, S.A. DE C.V. (BIMBO)
5.7% of the Fund's total investments
Bimbo is one of the bread producers with the greatest presence in the Americas.
It is the leading producer of packaged bread and cakes in Mexico (with a market
share of more than 90%) as well as in several Latin American countries. It has a
large presence in Mexico, the states of Texas and California in the United
States and in 11 countries of Latin America (Argentina, Chile, Colombia, Peru,
Venezuela, Guatemala, El Salvador, Costa Rica, Uruguay, Nicaragua and Honduras).
With more than 80 manufacturing facilities, it is involved in the production,
distribution and sale of a large variety of packaged bread, small cakes,
cookies, corn and wheat tortillas, candies, chocolates, salted and sweet snacks,
milk caramel, jellies, processed foods and pastas. It has one of the largest and
most sophisticated distribution networks in Latin America, which includes more
than 23,000 distribution routes that attend more than 550,000 clients daily. It
has 65,900 employees.
Bimbo is positioned in market niches with high growth potential. It has a solid
financial condition, and has experienced continuous growth in sales and profits.
The stock is currently trading at an EV/EBITDA ratio of 8x, the lowest level
since 1996. Bimbo is trading at a significant discount compared to the EV/EBITDA
ratio of 14x of Grupo Modelo and Cifra, two other major Mexican blue chip
companies. Bimbo's aggressive acquisition program should result in continued
growth in sales and profit margins in 1999 and 2000. International operations
currently represent 28% of total sales, 35% of total assets and 2.2% of EBITDA.
Bimbo's sales during the twelve month period ended June 30, 1999 grew 15.4%,
EBITDA grew 15.9% and net profit grew 52.3%. Its market capitalization was
US$3.2 billion at July 31, 1999.
FOMENTO ECONOMICO MEXICANO, S.A. DE C.V. (FEMSA)
5.3% of the Fund's total investments
Femsa is Mexico's leading soft drink company and second largest beer company.
Femsa has five divisions: beer, 35% of total sales; soft drinks (Kof), 32%;
packaging, 15%; convenience stores (Oxxo), 12%; and other, 6%.
The beer division has a 45% domestic market share. Jon Labbat, the second
largest Canadian beer company, owns 30% of Femsa's beer division. Femsa and
Coca-Cola Co. own 51% and 30% respective stakes in Kof, which has the largest
Coca-Cola franchise in Mexico and covers the highly populated markets of the
Valley of Mexico (including Mexico City), and the southeast through 13 bottling
plants. In addition, in 1994 Kof expanded its operation by acquiring a new
franchise in Argentina.
9
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Femsa's EBITDA growth in dollars is projected at 13% and 8.4% for the calendar
years 1999 and 2000. Currently Femsa's shares are undervalued by 16%, 40% and
47% in EBITDA, cash earnings and price-earnings multiples, respectively,
compared to their average since 1996. It is a liquid, value stock. During the
twelve month period ended June 30, 1999, Femsa's sales grew 9.9%, EBITDA grew
9.4% and net profit grew 162.3%. Its market capitalization at July 31, 1999 was
US$3.7 billion.
GRUPO IMSA, S.A. DE C.V. (IMSA)
3.7% of the Fund's total investments
Imsa is a diversified industrial conglomerate comprised of three business
segments: processed steel products; construction and related products; and
automotive batteries and related products. Its subsidiary Imsa Acero (44% of
January-June 1999 revenues and 63% of EBITDA) is the largest and most modern
manufacturer of coated steel products in Latin America, with a 41% share of the
domestic galvanized steel market (not including the Ahmsa plant). Enermex (22%
of revenues and 14% of EBITDA) is the sixth largest battery producer in the
world and ranks first in Latin America. It has an 84% share of the domestic
aftermarket. The construction products segment comprises two companies: Imsatec,
which makes steel and plastic products; and Imsalum, which makes aluminum
products.
Imsa has been growing due to a series of acquisitions and strategic alliances
that have enabled the company to strengthen its leading position in key markets.
However, multiples are currently below those of other industrial conglomerates
and steel companies. Imsa's strategy has consisted of increasing capacity by
investing in its own plants and through acquisitions and joint ventures.
Imsa's sales during the twelve month period ended June 30, 1999 grew 2.9%,
EBITDA grew 12.1% and net profit grew 53.7%. Imsa is a value stock, currently
trading with an Enterprise Value of 4.9x EBITDA. Its market capitalization was
US$1.1 billion at July 31, 1999.
GRUPO SANBORNS, S.A. DE C.V. (GSANBORNS)
3.7% of the Fund's total investments
Gsanborns is one of Mexico's largest retailers. At June 30, 1999, the company's
subsidiaries operated 185 retail stores located throughout the country,
primarily including: 41 Sears department stores with floor space of
approximately 231,000 square meters; 101 Sanborns specialty stores with a sales
floor area of 85,900 square meters and 32,463 restaurant seats; and 32 Sanborns
Cafe restaurants (5,457 seats). Additionally, during 1999, Gsanborns acquired a
99.7% equity stake in Pasteleria Francesa S.A. de C.V., a bakery company with 80
El Globo stores. Finally, Grupo Sanborns is also involved in the development,
lease, operation and management of commercial real estate. As of June 30, 1999,
the company had a mall lease area of 163,821 square meters and 365,178 square
meters in parking space. At June 30, 1999, the company had 28,741 employees.
Gsanborns is currently oversold by 21%. It is a growth stock with projected
EBITDA growth of 18% for 1999 and 2000. Gsanborns' 12-month sales to June 1999
grew 3.4%, EBITDA declined 13.9% and net profit grew 10.9%. Market
capitalization was US$1.6 billion at July 31, 1999.
10
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
CORPORACION INTERAMERICANA DE ENTRETENIMIENTO, S.A. DE C.V. (CIE)
3.6% of the Fund's total investments
CIE is the largest publicly traded, live entertainment holding company in Latin
America. With headquarters in Mexico City, it has subsidiaries in three main
business areas: entertainment, commercial and services. These divisions
encompass nearly all aspects of the live entertainment industry, from the
operation of entertainment venues such as theaters, auditoriums, stadiums and
amusement parks, to the promotion of concert and sporting events and the
organization of fairs and exhibitions. The company also sells tickets for shows
through its computerized ticketing system. It markets goods and services through
its telemarketing subsidiary.
CIE's sales during the twelve month period ended June 30, 1999 grew 67.7% and
EBITDA grew 66.8%, while net profit decreased 5.8%. Favorable sales and EBITDA
performance were due mainly to a higher events-volume and the consolidation of
activities in Argentina and Chile. The drop in net income was the result of a
higher cost of financing, as the company took out additional debt to make
acquisitions, and higher profit for minority shareholders with which CIE has
joint ventures. Due to its organic growth (same-store sales) and aggressive
acquisitions program through joint ventures, CIE's total annual average
compounded revenue growth for the last three years to June 1999 was 89% and
EBITDA growth was 146%. CIE is a growth stock (price-earnings ratio of 13x) with
a market capitalization of US$459 million at July 31, 1999.
M. Eugenia Pichardo
Acci Worldwide, S.A. de C.V.
Mexican Investment Adviser
- --------------------------------------------------------------------------------
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather than
four to identify the year. These programs, if not adapted, may not correctly
handle the change from "99" to "00" on January 1, 2000, and may not be able to
perform necessary functions. The Year 2000 issue affects virtually all companies
and organizations.
Advantage Advisers, Inc. (the "U.S. Co-Adviser") and Acci Worldwide S.A. de C.V.
(the "Mexican Adviser") have advised the Fund that they are implementing steps
intended to ensure that their computer systems are capable of Year 2000
processing. In addition, the Fund is inquiring with third parties to assess the
adequacy of their Year 2000 compliance efforts. The Fund intends to develop
contingency plans intended to ensure that third-party noncompliance will not
materially affect the Fund's operations. The Fund does not currently anticipate
that the Year 2000 issue will have an adverse effect on the U.S. Co-Adviser's or
the Mexican Adviser's ability to continue to provide the services currently
provided to the Fund.
Companies in which the Fund invests could be adversely affected by the Year 2000
issue, but the Fund cannot predict the consequential effect on its investment
return. To the extent the impact on a portfolio holding is negative, the Fund's
investment return could be adversely affected.
Announcements
On March 11, 1999, the Fund announced that the Board of Directors has approved a
share repurchase program that authorizes the Fund to buy back up to 10% of its
outstanding shares of common stock in the open market following the completion
of the tender offer. Under the program, the Fund will repurchase shares at
management's discretion at times when it considers the repurchase to be
consistent with the objectives of the program.
The Board of Directors approved the tender offer and share repurchase program at
a special meeting of the Board held on March 5, 1999.
- --------------------------------------------------------------------------------
11
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments July 31, 1999
MEXICO (98.39% of holdings)
COMMON STOCKS (89.15% of holdings)
Number of Percent of
Shares Security Holdings Value
- --------------------------------------------------------------------------------
Cement 7.70%
272,000 Apasco, S.A. de C.V............................... $ 1,519,149
1,393,893 Cemex, S.A........................................ 5,961,117
-----------
7,480,266
-----------
Communications 12.54%
142,000 Grupo Carso Global Telecom - A1 *................. 829,340
32,000 Grupo Televisa S.A. ADR *......................... 1,228,000
45,000 Grupo Televisa S.A. *............................. 870,798
89,500 Telefonos de Mexico, S.A. de C.V. ADR............. 6,757,250
494,000 Telefonos de Mexico, S.A. de C.V. L............... 1,878,777
2,269,200 TV Azteca S.A. de C.V. *.......................... 617,995
-----------
12,182,160
-----------
Construction 1.65%
199,000 Consorcio Ara S.A. de C.V. *...................... 757,894
849,900 Grupo Tribasa S. A. de C.V. ADR *................. 849,900
-----------
1,607,794
-----------
Entertainment 3.62%
1,438,750 Corporacion Interamericana de Entretenimiento,
S.A de C.V. L*.................................. 3,520,346
-----------
3,520,346
-----------
Financial Groups 9.38%
26,097,000 Grupo Financiero Bancomer, S.A. de C.V. O......... 6,746,352
2,000,000 Grupo Financiero GBM Atlantico, S.A. de C.V. B *+. 510,638
660,000 Grupo Financiero Inbursa, S.A. O *................ 1,860,638
-----------
9,117,628
-----------
Food, Beverage, and Tobacco 14.35%
73,200 Fomento Economico Mexicano, S.A. de C.V. B ADR.... 2,516,250
765,000 Fomento Economico Mexicano, S.A. de C.V. ......... 2,632,739
2,456,000 Grupo Industrial Bimbo, S.A. de C.V. A............ 5,499,872
873,000 Grupo Modelo, S.A. de C.V. C..................... 2,419,325
682,000 Pepsi Gemex , S.A. de C.V. *...................... 879,345
-----------
13,947,531
-----------
12
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments (continued) July 31, 1999
COMMON STOCKS (concluded)
Number of Percent of
Shares Security Holdings Value
- --------------------------------------------------------------------------------
Industrial Conglomerates 15.76%
199,500 Alfa, S.A. de C.V. A.............................. $ 701,434
2,335,000 Desc Sociedad de Fomento Industrial, S.A. de
C.V. A.......................................... 2,583,404
420,000 Desc Sociedad de Fomento Industrial, S.A. de
C.V. B.......................................... 436,979
1,823,000 Grupo Carso, S.A. de C.V. A1 *.................... 7,224,122
1,781,000 Grupo Imsa, S.A. de C.V. UBC...................... 3,562,000
243,000 Grupo Industrial Saltillo, S.A. de C.V. B......... 809,138
-----------
15,317,077
-----------
Mining 1.54%
371,000 Grupo Mexico, S.A. B.............................. 1,495,840
-----------
1,495,840
-----------
Paper Products 6.27%
1,718,000 Kimberly-Clark de Mexico, S.A. de C.V. A.......... 6,095,245
-----------
6,095,245
-----------
Retailing 4.63%
874,000 Cifra, S.A. de C.V. C *........................... 1,443,030
1,087,000 Cifra, S.A. de C.V. V *........................... 2,012,106
256,000 Organizacion Soriana, S.A. de C.V. B.............. 1,043,064
-----------
4,498,200
-----------
Specialty Stores 5.67%
2,050,000 Grupo Sanborns, S.A. de C.V. B1 *................. 3,554,787
2,452,000 Nacional de Drogas, S.A. de C.V. L................ 1,956,383
-----------
5,511,170
-----------
Steel 4.80%
857,000 Hylsamex S.A. B *................................. 2,461,596
784,000 Industrias, S.A. de C.V. B *...................... 2,151,830
5,000 Tubos de Acero de Mexico, S.A. de C.V............. 50,797
-----------
4,664,223
-----------
Textiles 1.24%
2,760,000 Grupo Covarra, S.A. de C.V. *..................... 469,787
3,016,000 Hilasal Mexicana, S.A. de C.V. A *................ 737,958
-----------
1,207,745
-----------
TOTAL COMMON STOCKS (Cost $94,613,433)............ 86,645,225
-----------
13
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments (concluded) July 31, 1999
Par Value Percent of
(000) Security Holdings Value
- --------------------------------------------------------------------------------
CONVERTIBLE DEBENTURES (2.86% of holdings)
MXP 21,505 Grupo Financiero Bancomer 25.20%, 05/16/02**....... $ 2,287,808
$ 500 Telefonos de Mexico, S.A. de C.V. 4.25%, 06/15/04.. 491,250
-----------
TOTAL CONVERTIBLE DEBENTURES (Cost $4,015,118) 2,779,058
-----------
INFLATION INDEXED BOND (6.38% of holdings)
MXP 38,180 Vitro, S.A. 14.054%, 12/07/99**.................... 6,200,550
-----------
TOTAL INFLATION INDEXED BOND (Cost $4,959,549) 6,200,550
-----------
TOTAL MEXICO (Cost $103,588,100) 95,624,833
-----------
UNITED STATES SHORT TERM OBLIGATION (1.61% of holdings)
Number of Percent of
Shares Security Holdings Value
- --------------------------------------------------------------------------------
1,560,831 Temporary Investment Fund, Inc. - Temp Cash
Portfolio........................................ 1,560,831
-----------
TOTAL UNITED STATES SHORT TERM
OBLIGATION (Cost $1,560,831) 1,560,831
-----------
TOTAL INVESTMENTS (Cost $105,148,931)++ 100.00% $97,185,664
===========
Footnotes and Abbreviations
*Non-income producing security.
**Variable rate security. Interest rate represents rate at July
31, 1999.
+At fair value as determined under the supervision of the Board
of Directors.
++Aggregate cost for Federal income tax purposes is
$106,306,586.
The aggregate gross unrealized appreciation (depreciation) for
all securities is as follows:
Excess of market value over tax cost $ 6,929,319
Excess of tax cost over market value (16,050,241)
------------
$ (9,120,922)
============
MXP - Mexican Pesos
ADR - American Depository Receipt
See accompanying notes to financial statements.
14
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Statement of Assets and Liabilities July 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at value (Cost $105,148,931) ............................ $ 97,185,664
Foreign currency holdings (Cost $97,142) ............................. 97,348
Receivables:
Interest (net of withholding tax of $6,069) ...................... 129,428
Securities sold .................................................. 506,671
Prepaid expenses ..................................................... 54,885
------------
Total Assets ............................................. 97,973,996
------------
LIABILITIES
Payable for securities purchased ..................................... 483,787
Due to Mexican Adviser ............................................... 47,498
Due to Co-Adviser .................................................... 36,537
Due to Administrator ................................................. 18,268
Accrued expenses ..................................................... 237,516
------------
Total Liabilities ........................................ 823,606
------------
Net Assets ............................................... $ 97,150,390
============
NET ASSET VALUE PER SHARE ($97,150,390/11,242,094) ....... $ 8.64
============
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
Cost of 583,179 shares held in treasury stock ........................ (5,054,345)
Undistributed net investment income .................................. 1,178,572
Accumulated net realized loss on investments and foreign currency
related transactions ............................................. (22,313,637)
Net unrealized depreciation of investments and on translation of other
assets and liabilities denominated in foreign currency ........... (7,960,811)
------------
$ 97,150,390
============
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
For the Year Ended
Statement of Operations July 31, 1999
<TABLE>
<CAPTION>
Investment Income
<S> <C> <C>
Interest (Net of taxes withheld of $137,568) ........................... $ 3,304,938
Dividends (Net of taxes withheld of $32,169) ........................... 1,025,031
------------
Total investment income .................................... 4,329,969
------------
Expenses
Mexican Advisory fees .................................... $ 488,702
Co-Advisory fees ......................................... 375,924
Legal fees ............................................... 255,652
Administration fees ...................................... 187,962
Transfer agent fees ...................................... 103,801
Printing ................................................. 92,498
Custodian fees ........................................... 79,951
Audit fees ............................................... 70,499
Insurance ................................................ 40,207
Directors' fees .......................................... 27,900
NYSE fees ................................................ 24,261
Miscellaneous ............................................ 22,102
------------
Total expenses ............................................. 1,769,459
------------
Net investment income ...................................... 2,560,510
------------
Net Realized and Unrealized Gain (Loss) on Investments,
Foreign Currency Holdings and Translation of Other Assets and
Liabilities Denominated in Foreign Currency:
Net realized loss from:
Security transactions .............................................. (20,203,931)
Foreign currency related transactions .............................. (777,344)
------------
(20,981,275)
Net change in unrealized appreciation of investments and translation of
other assets and liabilities denominated in foreign currency ....... 11,474,896
------------
Net realized and unrealized loss on investments, foreign currency
holdings and translation of other assets and liabilities denominated
in foreign currency ................................................ (9,506,379)
------------
Net decrease in net assets resulting from operations ................... $ (6,945,869)
============
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
July 31, 1999 July 31, 1998
- ----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
<S> <C> <C>
Net investment income .............................................. $ 2,560,510 $ 2,688,766
Net realized gain (loss) on investments and foreign currency
related transactions ........................................... (20,981,275) 24,739,811
Net change in unrealized appreciation (depreciation) of investments,
foreign currency holdings and translation of other assets and
liabilities denominated in foreign currency .................... 11,474,896 (64,248,203)
------------- -------------
Net decrease in net assets resulting from operations ........... (6,945,869) (36,819,626)
------------- -------------
Distributions to shareholders from
Net investment income ($0.00 and $0.19 per share, respectively) ... -- (2,239,707)
Net realized gains ($0.93 and $3.37 per share, respectively) ....... (10,997,504) (39,858,265)
------------- -------------
Decrease in net assets from distributions ...................... (10,997,504) (42,097,972)
------------- -------------
Capital share transactions
Shares repurchased under Tender Offer (463,179 shares) ............. (4,173,245) --
Shares repurchased under Stock Repurchase Program
(120,000 shares) ............................................... (881,100) --
------------- -------------
Decrease in net assets from capital share transactions ......... (5,054,345) --
------------- -------------
Total decrease in net assets ....................................... (22,997,718) (78,917,598)
NET ASSETS
Beginning of year .................................................. 120,148,108 199,065,706
------------- -------------
End of year (including undistributed net investment income
of $1,178,572 and $597,968 respectively) ...................... $ 97,150,390 $ 120,148,108
============= =============
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Financial Highlights
For a Share Outstanding throughout Each Year
<TABLE>
<CAPTION>
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
July 31, 1999 July 31, 1998 July 31, 1997 July 31, 1996 July 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year ......... $ 10.16 $ 16.83 $ 11.96 $ 11.31 $ 20.33
------------ ----------- ------------ ------------ ----------
Net investment income ...................... 0.22 0.23 0.43 0.81+ 0.82
Net realized and unrealized gains (losses)
on investments, foreign currency holdings,
and translation of other assets and
liabilities denominated in foreign
currency ................................. (0.87) (3.34) 5.55 0.67+ (5.98)
------------ ----------- ------------ ------------ ----------
Net increase (decrease) from investment
operations ............................... (0.65) (3.11) 5.98 1.48 (5.16)
------------ ----------- ------------ ------------ ----------
Less: Distributions
Dividends from net investment income ..... -- (0.19) (0.44) -- (0.03)
Distributions from net realized gains .... (0.93) (3.37) (0.67) (0.09) (3.90)
------------ ----------- ------------ ------------ ----------
Total dividends and distributions .......... (0.93) (3.56) (1.11) (0.09) (3.93)
------------ ----------- ------------ ------------ ----------
Capital share transactions
Anti-dilutive effect of dividend
reinvestment ........................... -- -- -- -- 0.07
Anti-dilutive effect of Tender Offer ..... 0.04 -- -- -- --
Anti-dilutive effect of Share Repurchase
Program ................................ 0.02 -- -- -- --
Dilutive effect of rights offering ....... -- -- -- (0.74) --
------------ ----------- ------------ ------------ ----------
Total capital share transactions ........... 0.06 -- -- (0.74) 0.07
------------ ----------- ------------ ------------ ----------
Net asset value, end of year ............... $ 8.64 $ 10.16 $ 16.83 $ 11.96 $ 11.31
============ =========== ============ ============ ==========
Per share market value, end of year ........ $ 7.0625 $ 7.75 $ 14.125 $ 9.625 $ 11.25
Total Investment Return Based
on Market Value* ......................... 7.24% (26.23)% 62.52% (8.26)% (31.96)%
Ratios/Supplemental Data
Net assets, end of period (in 000s) ........ $ 97,150 $ 120,148 $ 199,066 $ 141,448 $ 99,779
Ratios of expenses to average net assets ... 1.88% 1.46% 1.49% 1.56% 1.71%
Ratios of net investment income
to average net assets .................... 2.72% 1.65% 3.29% 7.32% 5.73%
Portfolio turnover ......................... 163.23% 88.85% 127.44% 42.59% 50.52%
</TABLE>
18
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Financial Highlights (concluded)
* 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.
+ Based on average shares outstanding.
See accompanying notes to financial statements.
19
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements July 31, 1999
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. Securities for
which market values are not readily ascertainable, which aggregated $510,638
(0.53% of net assets) at July 31, 1999, 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.
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, 1999, the Fund had a capital loss carryover of
$9,621,668 expiring on July 31, 2007, which is available to offset future net
realized gains on securities transactions to the extent provided for in the
Internal Revenue Code.
20
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements (continued) July 31, 1999
In accordance with U.S. Treasury regulations, the Fund elected to defer
$11,534,315 of capital losses and $119,738 of net realized foreign currency
losses arising after October 31, 1998. Such losses are treated for tax purposes
as arising on August 1, 1999.
The Fund is subject to the following withholding taxes on income from Mexican
sources:
Effective January 1, 1999, dividends distributed by Mexican companies are
subject to a withholding tax at an effective rate of 7.69%. Mexican
companies that reinvest profits are subject to income tax at a rate of
35%. Mexican companies that decide to distribute profits through dividends
are also subject to income tax at a rate of 35%. Prior to January 1, 1999,
dividends distributed by Mexican companies were not subject to Mexican
withholding tax if such dividends were paid out of taxed profits.
Dividends distributed by Mexican companies from other sources generate a
tax payment for the Mexican corporation.
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%. Beginning January 1, 2000, the
withholding tax on interest from other debt obligations will be at a rate
of 15%.
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% (prior to January 1,
1999 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.
21
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements (continued) July 31, 1999
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.
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.
During the year ended July 31, 1999, the Fund reclassified a loss of $581,157
from accumulated net realized loss 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. In
addition, the Fund reclassified $1,398,749 from undistributed net investment
income to accumulated net realized loss on investments and foreign currency
related transactions as a result of recharacterization of distributions. Net
investment income and net assets were not affected by the reclassification.
22
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements (continued) July 31, 1999
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
year ended July 31, 1999, these fees amounted to $488,702.
Advantage Advisers, Inc., a subsidiary of CIBC World Markets Corp. (formerly
CIBC Oppenheimer Corp.) 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 monthly net assets.
For the year ended July 31, 1999, these fees amounted to $375,924.
CIBC World Markets Corp., 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 year ended July 31, 1999, these fees amounted to $187,962.
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 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
$139,902,892 and $143,825,736 respectively, for the year ended July 31, 1999.
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 $183,092 during the year ended
July 31, 1999.
23
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements (concluded) July 31, 1999
NOTE E: CAPITAL STOCK
At a special meeting of the Board of Directors on March 5, 1999, the Board of
Directors approved a tender offer and share repurchase program.
The tender offer program allowed the Fund to purchase up to 10% of each
shareholder's shares of common stock of the Fund for cash at a price equal to
90% of the Fund's net asset value per share as of the closing date. The tender
offer commenced on April 12, 1999 and expired on May 14, 1999. In connection
with the tender offer, the Fund purchased 463,179 shares of capital stock at a
total cost of $4,173,245.
The share repurchase program authorized the Fund to buy back up to 10% of its
outstanding shares of common stock in the open market following the completion
of the tender offer. Pursuant to the share repurchase program, during the year
ended July 31, 1999, the Fund purchased 120,000 shares of capital stock on the
open market at a total cost of $881,100. The weighted average discount of these
purchases comparing the purchase price to the net asset value at the time of
purchase was 16.70%. Subsequent to July 31, 1999, the Fund made additional
purchases aggregating 82,400 shares of capital stock on the open market at a
total cost of $566,635. The weighted average discount of these purchases was
17.38%.
The shares purchased pursuant to the tender offer and share repurchase program
during the year ended July 31, 1999 are held in treasury.
NOTE F: OTHER
At July 31, 1999, 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.
FEDERAL TAXATION NOTICE (UNAUDITED)
The Fund paid foreign taxes of $173,977 during the fiscal year ended July 31,
1999, which it intends to pass through pursuant to Section 853 of the Internal
Revenue Code, to its shareholders, which is deemed to be foreign source income
for tax information reporting purposes. During the fiscal year ended July 31,
1999, the Fund made long-term capital gains distributions of $5,794,383.
24
<PAGE>
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, 1999, 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 generally accepted accounting principles.
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 generally accepted auditing standards 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, 1999 by correspondence with the custodians and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
September 24, 1999
25
<PAGE>
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 PFPC Inc., 400
Bellevue Parkway, Wilmington, Delaware 19809. 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. If net
26
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Dividends and Distributions (continued)
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.
27
<PAGE>
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.
28
<PAGE>
(This page intentionally left blank.)
<PAGE>
(This page intentionally left blank.)
<PAGE>
(This page intentionally left blank.)
<PAGE>
THE MEXICO EQUITY
AND INCOME FUND, INC.
Mexican Investment Adviser:
ACCI Worldwide S.A. de C.V.
U.S. Co-Adviser:
Advantage Advisers, Inc., a wholly-owned
subsidiary of CIBC World Markets Corp.
Administrator:
CIBC World Markets Corp.
Sub-Administrator:
PFPC Worldwide, Inc.
Transfer Agent and Registrar:
PFPC Inc.
Custodian:
PFPC Trust Co.
Citibank, N.A.
