Advantage Advisers, Inc.
The Mexico Equity and Income Fund, Inc.
Annual Report
July 31, 2000
The Mexico Equity
and Income Fund, Inc.
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The Mexico Equity and Income Fund, Inc.
September 11, 2000
Dear Fund Shareholder,
We are pleased to provide you with the audited financial statements of The
Mexico Equity and Income Fund, Inc. (the "Fund"or "MXE") for the fiscal year
ended July 31, 2000.
The Fund's net asset value ("NAV") increased by 32.9% (including the effect of
reinvested dividends) in the 12-month period ended July 31, 2000, outperforming
the Bolsa Index, which gained 24.5%, as well as The Mexico Fund ("MXF") which
rose 7% during the same period.
Also during the 12-month period ended July 31, 2000, the MXE's common share
market price increased 53.4% (including the effect of reinvested dividends),
outperforming the 24.5% increase in the Bolsa Index, the 38.6% rise in the stock
price of Telmex, and the 3.2% increase in the price of the MXF. The Mexican
Investment Adviser to the Fund believes that for the year ended July 31, 2000,
the MXE achieved one of the best dollar returns among its peers.
The Investment Adviser believes that the orderly transition of government power
to the first democratically-elected president in the country's history - Vicente
Fox is scheduled to succeed to the presidency this December - as well as a
strong economic outlook for Mexico, are likely to result in a positive
environment for shareholders in the Fund. The Adviser also plans to continue its
strategy of managing the Fund's portfolio on fundamental investment principles
and of overweighting it with highly liquid stocks.
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/ Bryan McKigney
Bryan McKigney
President and Secretary
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THE MEXICO EQUITY AND INCOME FUND, INC.
Report of the Mexican Adviser
For the Fiscal Year Ended July 31, 2000
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MEXICO'S ECONOMIC OUTLOOK
In the period August 1, 1999 to July 31, 2000, the Mexican economy - in both
real and nominal terms - increased more rapidly than had been expected. One key
contributor to Mexico's rapid growth was the big increase in demand for exports
from the booming U.S. economy. This export growth has translated into renewed
dynamism within the Mexican economy through both "enlargement" (job creation)
and "deepening" (more workers with higher real wages) of the labor market.
In addition, during the past 12 months, the Mexican banking industry - long
viewed as the laggard in the recovery from the 1995 peso crisis - showed
improvement. The consolidation of the Mexican banking industry - accomplished to
a great extent because of foreign investment - suggests fewer but stronger and
better-capitalized banks, and signals intense competition within, and
transformation of, that industry. Since 1994, the number of banks in Mexico has
decreased from 18 to 8, and two of the top three banks today, are foreign-owned.
In various banking business segments (e.g., credit and mortgages), the
foreign-owned banks have more than 50% of the market.
Real economic growth in Mexico was a strong 7.9% on an annual basis in the first
half of 2000. We anticipate a slight reduction in growth in the second half,
which will likely result in a 7.5% growth rate for the full calendar year,
representing the highest annual growth rate since the early 1980s.
The dynamism of both Mexico's exports and domestic capital investment have been
noteworthy. From January to May 2000, exports grew at an annual average rate of
23%, while private capital investment grew at 11%, both compared with the same
period a year earlier. Capital investment is particularly important because it
represents the means of continuing productivity growth, which is the key to
noninflationary wage gains. Productivity in the manufacturing sector increased
by an annual average of 6% in the period January through May 2000, compared with
the same period last year. The economy's productivity grew at 5% on an annual
basis through June 2000, a rate that has been close to real wage gains for this
period.
Inflation in the Mexican economy has continued to decline. The annual inflation
rate of 9.1% in July 2000 was the lowest since 1972. The low current inflation
rate reflects the stability in the exchange rate of the peso, which appreciated
0.5% during the period from July 1999 to July 2000 against the U.S. dollar and
contributed to a downward trend in interest rates. The 28-day Cete rate (a key
interest rate) improved 461 basis points from 19.4% at the end of July 1999 to
14.8% on July 31, 2000.
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Given the tightening of monetary policy on several occasions during 2000, and
the monetary authorities' confidence regarding the soundness of current economic
growth, we believe that monetary policy will continue to be tight for the rest
of the year.
Early in March 2000, Moody's Investors Service upgraded the credit ratings of
dollar-denominated Mexican debt in the direction of investment grade. We think
that Standard & Poor's (S&P) is likely to follow suit by the end of 2000. S&P
has already given Mexico's debt rating (currently one notch below investment
grade) a positive outlook. Consequently, for the 12-month period ended July
2000, Mexico's country risk (measured by the spread between the key UMS Global
2026 Mexican bond as compared against the 30-year U.S. Treasury bond), declined
by 124 basis points.
The 2000 Mexican presidential elections resulted in what we believe to be a very
positive outcome for the Mexican economy. Independent of election results, the
peaceful and orderly transfer of the presidency and the federal congress sent
out a strong signal that democracy is working in Mexico.
We believe that both outgoing President Ernesto Zedillo and the President-elect
Vicente Fox should be acknowledged for their willingness to pledge to an orderly
and smooth change of administration. Mr. Fox, a charismatic, pro-business
leader, will take power under conditions that compare very favorably with those
faced by his predecessors. However, he will also face challenges. Two such
challenges will be particularly important in the initial months of his
administration: (1) to ensure proper coordination between his administration and
the Mexican central bank concerning both monetary and fiscal policies (the
fiscal policy goal is to increase the tax base and government revenues) in order
to manage a soft landing of the current, clearly expansionary stage of the
business cycle; and (2) to establish the appropiate channels of dialogue with a
multiparty congress in order to gather the support required for the approval of
his structural reform program (e.g., energy privatization).
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THE MEXICAN STOCK MARKET
For the 12-month period ended July 31, 2000, the Bolsa Index - the benchmark for
The Mexico Equity and Income Fund, Inc. (the "Fund") - increased 24.5% in U.S.
dollar terms. The Bolsa's gain in the year ranked second in Latin America behind
the 59.3% increase in Brazil's Bovespa Index. Venezuela's market was third, with
a 22.5% during the 12 months, while Argentina's Merval market was fourth, with a
5.3% gain.
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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.
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THE MEXICO EQUITY AND INCOME FUND, INC.
In general, technology, media, and telecommunications and financial stocks
recorded the biggest dollar returns in the 12 months. Telmex, which has a large
weighting in the Bolsa Index, gained 38.6% in the year. Media stocks (Televisa
and TV Azteca) gained 77%; the communications sector (telecommunications)
increased 44.8%; and financial companies rose 76%. In comparison, the Nasdaq
market in the United States increased 58.9% during the period.
The worst-performing sectors in the Mexican market during the 12 months ended
July 31, 2000 were industrial conglomerates (down 22.6%), mining (down 17.6%),
and construction (down 17.6%).
We believe that valuations in the Mexican stock market are inexpensive today and
current one-year prospective market multiples are also cheap. As of the end of
the second quarter of 2000, the market's overall ratio of Enterprise Value
(EV)/EBITDA was 9x, and is projected to decline to 7x in 2001. That compares
with a multiple of 13x in 1994, the year prior to the Mexican financial crisis
of 1995.
Furthermore, many Mexican blue-chip companies currently trade (12-month trailing
multiples as of the end of the second quarter of 2000) at an EV/EBITDA discount
to their international peers. Cemex trades at a 39% valuation discount to
Swiss-based Holderbank (the largest cement producer worldwide); Kimberly-Clark
de Mexico trades at a 37% discount to Kimberly-Clark Corp. in the United States;
Walmex trades at a 15% discount to its parent Wal-Mart in the United States; and
Telmex trades at a 25% discount to AT&T and Worldcom.
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THE FUND'S PERFORMANCE
For the 12-month period ended July 31, 2000, The Mexico Equity and Income Fund,
Inc.'s (MXE) net asset value ("NAV") gained 32.9%, outperforming the Bolsa
Index's gain of 24.5% as well as The Mexico Fund (MXF), whose NAV increased 7%
during the 12 months. (Calculations of NAV for both funds are from Lipper
Analytical, Inc., and include the effect of reinvested dividends.)
During the same 12-month period, the common share market price of the MXE
increased 53.4%, (including the effect of reinvested dividends) outperforming
the Bolsa Index gain of 24.5%, Telmex's stock price increase of 38.6%, and The
Mexico Fund's common share market price gain of 3.2%. Thus, in the fiscal year
ended July 31, 2000, the MXE achieved one of the best dollar returns among its
peers.
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PORTFOLIO STRATEGY
Stock selection and sector allocation - have been focused on a value approach as
well as on companies' sales growth potential based on their business niches.
This strategy has led the Fund to outperform its benchmark in the last 12
months.
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The Fund's three largest sector weightings on July 31, 2000 as a percentage of
total investments were as follows: retail and specialty stores, 23.4%;
communications, 23.2%; and beverages, 13.3%.
Actions taken by the Fund pursuant to the decision by the Fund's Board of
Directors to improve the discount of the MXE's common share market price to its
NAV resulted in a reduction of aggregate US$10.6 million in the portfolio's
total assets for the fiscal year ended July 31, 2000, or approximately 9.68% of
average net assets during the fiscal year. Within the past two fiscal years,
actions including a tender offer in fiscal year 1999 and a share repurchase
program throughout fiscal years 1999 and 2000, have resulted in an aggregate
$US15.6 million reduction.
Our strategy from September 1998 through May 1999 of swapping
small-capitalization stocks for blue-chip stocks, and our adherence to this
investment principle throughout the end of the fiscal year, again positioned the
MXE as the leading Fund of its nature, outperforming the Bolsa Index, Telmex,
and The Mexico Fund during the fiscal year.
Total expenses of the MXE increased approximately US$443,000 during the fiscal
year ended July 31, 2000 to US$2.2 million compared with US$1.8 million in the
previous fiscal year, an increase of 25%. The large percentage increase was
mainly due to legal and proxy expenses incurred in connection with the 1999
shareholder proxy contest and the subsequent proxy solicitation seeking
liquidation of the Fund.
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OUTLOOK
After returning almost 88% in 1999, the major risks for the Mexican stock market
early this year were: (1) unpredictable political events due to competitive
presidential elections, and (2) a sharp correction in U.S. technology stocks. At
the same time, Mexican companies were immersed in strategic planning that
focused on dealing with the sweeping changes in the Internet business
environment, which resulted in their revaluing their projected multiples upward.
We believe that Mexico's first democratic presidential election -- which took
place in an environment of high prospective GDP growth rates, declining
inflation, productivity gains, and the consolidation of the banking system --
will fuel an increase in plant and equipment investment, resulting in higher and
sustained profit growth in the years ahead. Consequently, multiples should
gradually revalue upward on companies' prospective sustained growth rates as
well as the potential of the technology, media, and telecommunications Mexican
listed companies, which have already focused their growth to a greater extent
than others through their e-content activities.
We are confident that the positive economic scenario, combined with
President-elect Fox's commitment to privatizing the energy sector, could be the
main catalyst for investors' interest in Mexico, thereby creating one of the
most promising scenarios for the stock market in more than 15 years.
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Although Mexico is undoubtedly susceptible to shocks from U.S interest rates,
oil markets, and concerns regarding the country's first democratically elected
government, we believe the Fund's relatively small capitalization value, its
overweighting in highly liquid companies, and our management based on
fundamental investment principles should potentially continue to make the Fund
one of the leading funds among its peers.
Eugenia Pichardo
Acci Worldwide, S.A. de C.V.
Portfolio Manager
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RECENT DEVELOPMENTS
At a reconvened special meeting of shareholders on September 12, 2000, the Fund
did not receive the required 66 2/3% vote for the Board's earlier proposal to
liquidate and dissolve the Fund. Of the 10,060,394 outstanding shares of common
stock, 5,764,991 shares (57.30%) were voted in favor of the proposal, 446,014
shares (4.43%) were voted against the proposal, 77,051 shares (0.77%) abstained
and 3,772,340 (37.5%) shares did not vote at all.
In response to this vote, the Fund announced on September 18, 2000 that its
Board of Directors had approved a tender offer for up to 20% of the Fund's
common stock at a price equal to 92% of the Fund's NAV per share. The Board
announced that this tender offer would commence as soon as practicable after
payment of a dividend which will represent the Fund's required distribution to
satisfy both Subchapter M and excise tax requirements. The Fund anticipates that
this dividend will be paid in November 2000.
The Board also determined to hold the Fund's annual meeting of stockholders
after completion of the tender offer (expected to be in the first quarter of
2001) and indicated that it intends to resubmit the proposal to liquidate and
dissolve the Fund at that meeting. The Fund understands that the Fund's U.S
Co-Adviser, Advantage Advisers, Inc., and the Fund's Mexican Adviser, Acci
Worldwide, will seek to identify a more appropriate alternative rather than
liquidation prior to the Fund's annual meeting of stockholders.
The Fund also announced that it intends to continue its share repurchase program
pursuant to which the Fund has been purchasing shares in the open market at
times and prices determined by the management of the Fund to be in the best
interests of the stockholders of the Fund. During the fiscal year ended July 31,
2000, the Fund purchased 1,199,700 shares pursuant to the repurchase program.
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REVIEW OF KEY ECONOMIC SECTORS AS OF JULY 31, 2000
RETAILING AND SPECIALTY STORES
23.4% of the Fund's total investments
We believe that the retail sector today represents an attractive investment
opportunity due to: (1) an improved Mexican GDP outlook; (2) higher real wages;
(3) a lower unemployment rate; (4) growth in sales-floor areas; and (5) an
increase in sector productivity per square meter of sales-floor space. Walmex,
Soriana, Comerci, and Gigante - the four main self-service stores in the country
- have strong fundamentals (size, solid financial positions, and significant
market shares) and are better prepared today than in the past to capitalize on
growth in a more favorable economic environment.
More recently, the self-service stores have substantially improved their
operating efficiency by attempting to maintain margins without jeopardizing
strategies aimed at increasing market presence. Although competition has
increased, especially in the central and northern parts of the country, we
believe that self-service stores will continue to capitalize on their
efficiencies. Indeed, the "operating expenses less depreciation" on retailers'
income statements are currently near their 1994 minimum levels.
COMMUNICATIONS
23.2% of the Fund's total investments
During the last 12 months, the telecommunications sector (principally comprised
of Telmex and its parent company Carso Global Telecom) has outperformed the
Bolsa Index, reflecting higher valuations of the sector worldwide, as well as
strong growth in Telmex, especially its wireless telephone business.
We believe that the major issue for the next 12 months will be industry
regulation. We expect that under the new Fox administration, which will take
office in December 2000, and as a result of increased pressure from the U.S.
government, new regulations will be approved that will enhance competition in
order to reduce Telmex's dominant position in the Mexican domestic market.
FOOD, BEVERAGE, AND TOBACCO
13.3% of the Fund's total investments
We expect the beverage companies to continue to show positive results in the
remainder of 2000 with improvements in volumes, operating profits, and margins.
For the beer sector, for the 2000 and 2001 period, we expect increases in
domestic volume of 3.5% and 4.5%, export volume increases by 12.5% and 16%,
respectively. We have also taken into consideration a real domestic increase in
beer prices of about 5% and 2.5%, respectively, for the same two periods.
The bottling industry continued to show strong growth rates in volume. As of
June 2000, volume grew around 7% (as compared against the first half of 1999),
and we estimate that the industry will sustain this rate through the end of
calendar year 2000. We think that, supported by this growth as
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well as by operating efficiencies, this segment's EBITDA will continue its trend
upward. We also believe that consolidation will remain as a strategy for the
bottling industry.
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TOP TEN HOLDINGS AS OF JULY 31, 2000
TELEFONOS DE MEXICO, S.A. DE C.V. (TELMEX)
23.2% of the Fund's total investments
Telmex is Mexico's leading telephone carrier. The company offers integrated
telecommunications services, including local, long distance, wireless, data,
Internet access, and paging services. Telmex is controlled by Carso Global
Telecom, which owns 27.4% of the company, and SBC Communications, which owns
8.6%. France Telecom, which had been one of the controlling shareholders since
Telmex's privatization in 1991, sold its 7.1% stake in a public offering on June
20, 2000.
In August 1996, the long-distance market in Mexico was opened for competition,
and in 1999 competition began in local services. As the incumbent carrier,
Telmex has maintained a dominant position in each market segment: currently, 99%
in local services, 68% in long distance, 71% in wireless, and 62% in
Internet/data.
Telmex's market capitalization was US$38.5 billion as of July 31, 2000. During
the 12-month period ended June 30, 2000, sales grew 15% in constant pesos and
34% in dollar terms, reaching US$11 billion, driven by higher wireless revenue,
increased interconnection income and, to a lesser extent, higher revenue from
long-distance services. Income from local services was flat year-over-year. The
company's EBITDA margin fell 430 basis points to 53.5% year-over-year from
57.8%, due to the decrease in tariffs in real peso terms, as well as higher
costs related to the company's expansion. EBITDA increased 6% in constant pesos,
and net profit grew 19% in constant pesos.
As of June 2000, Telmex had 11.5 million fixed lines in Mexico, 12% more than
the 10.3 million lines in June 1999. During the last 12 months, the number of
wireless subscribers in Mexico increased 135% to 7.6 million at the end of June
2000 from 3.3 million at the end of June 1999. Telmex has a 10% minority stake
in Prodigy, a company that provides Internet services both in the United States
and Mexico. As of June 2000, Telmex had 528,000 Internet subscribers in Mexico,
an increase of 134% over 226,100 as of the end of June 1999. In March 2000,
Telmex launched the Internet portal T1msn, in a joint venture with Microsoft.
During the last 12 months, Telmex has intensified its international expansion
through acquisitions in Brazil (ATL), Guatemala (Telgua), Ecuador (Conecel), and
the United States (CompUSA). In June 2000, a joint venture was formed between
Telmex, Bell Canada International, and SBC. The joint venture will combine the
existing businesses of the three companies in Brazil, Colombia, and Venezuela,
as well as pursue new business opportunities in South America. In July 2000,
Telmex and Techint formed a joint venture through Techtel in order to provide
telephone services in Argentina.
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Telmex expects to invest US$2 billion outside Mexico during the next 18 months.
For 2000, the company announced investments of US$3 billion in Mexico, of which
half will go to wireless telephone service.
CEMENTOS MEXICANOS, S.A. DE C.V. (CEMEX)
10.2% of the Fund's total investments
Cemex is the world's third largest producer of cement, clinker (raw material for
cement and ready-mix), ready mix, and aggregates with an annual installed
capacity of 65 million metric tons. In addition, Cemex is the leading cement and
clinker trader in the world, with clients in more than 60 countries. Based in
Monterrey City, Mexico, the company leads the Mexican cement market with a 55%
market share. It also has major operations in Spain, Venezuela, the United
States, Colombia, the Philippines, and recently Egypt; and smaller operations in
Panama, the Dominican Republic, Costa Rica, Chile, and Indonesia. The company's
management is recognized for its efficiency, aggressiveness, and experience, and
it is considered the lowest-cost cement producer in the world.
Cemex's average annual sales growth of 18% in dollar terms in the last four
years, has been mainly the result of a US$4.2 billion investment in worldwide
acquisitions during the last eight years. Sales grew by 15% in the 12-month
period ended June 30, 2000, while EBITDA grew 19%. The latest year's positive
results are due to both volume and price increases in most of its markets, as
well as the integration of new acquisitions, mainly in Egypt. Cemex traded at
5.5x EV/EBITDA and had a market capitalization of US$7.2 billion at July 31,
2000.
Cemex has US$4.4 billion in net debt (total debt including costs less cash and
equivalents) and has risk exposure to rising interest rates and a peso
devaluation. Nevertheless, Cemex has never defaulted on its debt and has
successfully managed its financial structure through its diversification
strategy, which has contributed to debt rating upgrades by three agencies in the
last six months. In spite of its international diversification, Cemex's results
are sensitive to the Mexican economy, as domestic operations represent 47% of
total sales. Emerging markets including Venezuela, Colombia, the Philippines,
and Egypt represent a combined 26% of total sales. Spain and the United States
represent 16% and 11% of sales, respectively. The company intends to continue
evaluating opportunities to participate in the cement industry consolidation
around the world.
FOMENTO ECONOMICO MEXICANO, S.A. DE C.V. (FEMSA)
9.7% of the Fund's total investments
Femsa is Mexico's leading soft drink company and second-largest beer company.
Femsa has four main divisions: beer, soft drinks (KOF), stores (Oxxo), and
packaging. The beer division recorded domestic volume growth of 2.2% in the
first half of calendar of 2000, while export volume increased by 14.6%.
In the same period, the packaging division continued to record lower results due
to weakness in sales of glass soda bottles and coolants for soft drinks. Sales
of cans for both beer and soft drinks, however, have begun to gain momentum.
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Femsa ended the first half of 2000 with 1,261 stores, owning more than 200
additional facilities than a year earlier. Same-store sales were up 8.6% in the
first half as compared against the same time period in 1999. The KOF soft drinks
group has shown better than expected results in the first half of 2000, due
mainly to higher volumes in its Mexican territories and a better cost structure.
For Femsa Cerveza (the group's beer division), we expect domestic volumes and
prices to grow by 3% and 3.5%, respectively, in calendar year 2000, with export
shipments to increase by 15% for the year. For soft drinks, we estimate volume
increases of 6.1% for the year, with price increases of 1.5% in Mexico and
stable prices in Argentina.
Consolidated operating margins for Femsa for 1999 were 15.6%. We project the
margin will rise to 16% for 2000. We project the company's EBITDA will grow by
12% in 2000, and that its 2000 EV/EBITDA multiple will be 5.2x.
GRUPO ELEKTRA, S.A. DE C.V. (ELEKTRA)
8.0% of the Fund's total investments
Elektra is Latin America's leading specialty retailer, with three separate
retail chains that target Latin America's growing middle class. The group
operates 945 stores in 320 cities in Mexico and five other countries in Latin
America. The principal business units include: Elektra, which offers electronic
goods, furniture, and appliances to middle and lower-middle income groups;
Hecali/The One, a family clothing merchandiser offering basic fashion clothing;
Salinas y Rocha, which focuses on furniture, electronic goods, and appliances
for the middle and upper middle income groups; CrediFacil, which extends
financing credit to all Grupo Elektra's customers; and Dinero en Minutos/Dinero
Express, which provides money transfer services from the United States to Mexico
and within Mexico.
Grupo Elektra also holds 18.3% of TV Azteca, one of two TV broadcasting networks
in Mexico. Recently, the Salinas family took a 12-month option to buy Elektra's
stake in TV Azteca with a strike price of US$11.60 per ADR. Even if the Salinas
family were to exercise the option, Elektra would maintain the advertising
contract with TV Azteca, which is an integral element of Elektra's strategy.
Elektra's 12-month trailing annual sales as of the second quarter of 2000 were
US$1,039 million, and its market capitalization as of July 31, 2000 was US$1,165
million. We estimate full year 2000 EV/EBITDA at 6.16x, and full year 2000 P/E
at 9.33x.
WAL-MART DE MEXICO, S.A. DE C.V. (WALMEX)
5.8% of the Fund's total investments
Walmex (formerly Cifra) is the main retail chain in Mexico. As of June 2000, it
had 468 operating units, of which 207 are self-service stores, 52 are department
stores, and 209 are restaurants. It has a sales-floor area of 1,572,365 square
meters, with 45,675 seats, and as of June 30, 2000, there were 71,432 employees.
In the 12 months ended June 2000, Walmex posted US$6.8 billion in revenues. In
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1991, Cifra (the predecessor firm) formed a wholesale club (Sam's Club) joint
venture with Wal-Mart Stores Inc., a company that was extended in May 1992 to
new self-service stores (Aurrera, Bodega Aurrera Superama, and Wal-Mart
Supercenter) and in January 1994 to new department stores (Suburbia) and
restaurants (Vips, Porton, and other specialized units). As of September 1,
1997, the joint venture companies were merged into Walmex, and Wal-Mart Stores
Inc. took control of the company. Walmex's market capitalization at June 30,
2000 was US$10.4 billion. We estimate full year 2000 EV/EBITDA will be 15.8x and
that full year 2000 PE will be 22.6x.
TV AZTECA, S.A. DE C.V. (TV AZTECA)
5.7% of the Fund's total investments
TV Azteca is Mexico's second largest television company. It has interests in
television production and broadcasting, international distribution of
programming, music recording, and professional soccer. TV Azteca also has an
unconsolidated 50% stake in Unefon, a telecommunications company that is trying
to establish a nationwide wireless personal communications network to offer
local telephone service in Mexico. TV Azteca also owns majority stakes in TV
channels in Central America. On September 7, 2000, the company announced that it
entered into a content-for-equity agreement with Pappas Telecasting Group to
create a Spanish broadcasting company in the United States under the name of
Azteca America Incorporated.
In February 2000, TV Azteca completed its acquisition of 50% of Todito.com, an
Internet portal launched in August 1999, which currently says it has 252,000
registered users. The site offers news, sports, and entertainment content, as
well as e-mail, e-commerce, on-line auctions, a job offers channel, and chat
rooms.
TV Azteca's sales and EBITDA during the first six months of 2000 increased 19%
and 41% respectively, as compared against the first half of 1999, due to higher
prices, better ratings, lower average production costs, and additional income
from coverage of special events such as the recent presidential elections. As of
July 31, 2000, its market capitalization was US$2.2 billion, and its EV/EBITDA
was 14.7x.
GRUPO SANBORNS, S.A. DE C.V. (GSANBOR)
5.6% of the Fund's total investments
Gsanbor is one of the largest specialized retail chain operators in Mexico, and
the one with the broadest geographical coverage. It reported accumulated sales
for the first six months of 2000 of US$2.268 billion, market capitalization at
June 30, 2000 of US$1.46 billion, and 22% float (i.e., the percentage of
outstanding shares that are not controlled in a concentrated way or family
owned). Its main divisions at June 30, 2000 were: Sears - 43 department stores
with a total sales area of 347,291 square meters; and Sanborns - 141 specialized
retail stores and restaurants with a total sales area of 161,108 square meters.
Its CompUSA division (acquired in March 2000) is one of the leading computer and
high-tech retailers in the United States. Although in the middle of a
restructuring, CompUSA
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accounted for about 67% of Gsanbor's first half 2000 consolidated sales, but
posted an operating loss. Other Gsanbor divisions are: Promusa (53 music
stores), El Globo (88 bakeries, acquired in May 1999), and Real Estate (which
includes two major malls in Mexico City). We estimate full year 2000 EV/EBITDA
at 8.2x.
GRUPO TELEVISA, S.A. (TELEVISA)
5.5% of the Fund's total investments
Televisa is the largest media company in the Spanish-speaking world and a major
participant in the international entertainment business. It has interests in
television production, broadcasting, international distribution of television
programming, direct-to-home satellite services, publishing, radio production and
broadcasting, music recording, cable television, professional sports and show
business promotions, paging services, feature film production, distribution, and
dubbing. Grupo Televisa also has unconsolidated equity stakes in several other
companies, including Univision, the leading Spanish-language television company
in the United States.
During the second quarter of 2000, Televisa launched its Spanish-language
Internet portal, "esmas.com," to leverage its news, sports, publishing, music,
and other businesses. The company offers a variety of services, including
e-mail, search engines, chat rooms, and e-commerce. Televisa also intends to
provide Internet access through cable TV in the near term. Recently, it began
talks to merge its radio operations with another leading company, Radio Centro,
but negotiations failed. Televisa's sales increased 9% in the first six months
of calendar year 2000, and its EBITDA grew 30% as compared against the same
period last year, due to higher advertising rates and coverage of special events
such as the presidential election in Mexico. As of July 31, 2000, its market
capitalization was US$10 billion, and its EV/EBITDA was 17.1x.
GRUPO FINANCIERO BANCOMER, S.A. DE C.V. (GFB)
4.4% of the Fund's total investments
GFB is the second largest financial group in Mexico after Grupo Financiero
Banacci. Its main subsidiaries are: (1) Bancomer (a commercial bank with 1,315
branches), with a market share of approximately 19%. As of December 31, 1999,
Bancomer had US$27.4 billion in assets, US$19.6 billion in deposits, and US$2.6
billion in equity. As of December 31, 1999, its past due loan ratio had fallen
to 13.7% (from 16.4% at December 31, 1998), and its reserve coverage had risen
to 80% (from 57.6% at December 31, 1998); (2) Alestra, a subsidiary of Bancomer,
a telecommunications joint venture with AT&T; (3) Afore Bancomer (pension fund
subsidiary), also a subsidiary of Bancomer; (4) Casa de Bolsa Bancomer
(brokerage house); (5) GFB Insurance (insurance subsidiary); and (6) Credito
Familiar (home loan subsidiary).
GFB's net income rose to US$361 million in 1999 from US$103 million in 1998.
Excluding extraordinary items, GFB's net income rose to US$165 million in 1999
from US$130 million in 1998.
13
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
On June 29, 2000, Grupo Financiero Bancomer shareholders approved the merger of
Grupo Financiero BBV-Probursa (BBVORO) into GFB. The transaction includes a
US$1.4 billion injection of cash resources to strengthen the new Group's banking
operation. Grupo Financiero Bancomer's name will be changed to Grupo Financiero
BBVA Bancomer.
On August 10, 2000, Grupo Financiero Bancomer (GFB) signed an agreement with
IPAB (Banking Savings & Loan Protection Institute) to buy 100% of Banca Promex's
shares. The acquisition payment consists of Mexican pesos (P$)562 million in
cash for Promex's capital stock as of June 30, 2000 and a premium of P$1.424
billion in cash plus 145.8 million GFB Series O shares. The acquisition has been
approved by the competent regulatory authorities. Promex will become a GFB
subsidiary within three months (approximately by November 10, 2000). If the
transaction is not completed within this period, Banca Promex's capitalization
index (net capital to risk weighted assets) must be maintained at 10%. It is
estimated that consolidation costs of $95 million will nearly wipe out the
estimated $105 million in savings at both the company's headquarters and within
its branch network.
Pro forma figures relating to the new institution (Grupo Financiero BBVA
Bancomer) as of June 30, 2000 after the mergers, capital contribution, and
financial strengthening of the three banks were: assets, P$410 billion; equity,
P$36 billion; number of branches, 2,413; number of ATMs, 4,172; number of
employees, 39,141; and number of clients/customers, more than 9 million. Grupo
Financiero BBVA Bancomer (GFBB) will be Mexico's largest financial group. New
GFBB series O shares will be exchanged for BBVORO shares (GFBB is the new group
resulting from the merger) and will trade on the MSE under the ticker "GFBB" and
on Madrid's Latibex under the ticker "XGFB."
CONTROLADORA COMERCIAL MEXICANA, S.A. DE C.V. (COMERCI)
4.0% of the Fund's total investments
Comerci is Mexico's second largest supermarket chain in terms of sales and
sales-floor area. As of June 30, 2000, the company operates 160 self-service
retail stores throughout the country, with total sales area of 1,013,527 square
meters (77% of this area is located in Mexico City and the central region of the
country). The company operates under five different formats: 78 Comercial
Mexicana (supermarkets), 30 Bodega (discount stores), 17 Sumesa (supermarkets),
18 Price-Club (membership warehouses) under a joint venture partnership with the
U.S. company Price-Costco, which was formed in 1991, and 17 Mega (hypermarkets),
including the five K-Mart stores acquired in January 1997. Furthermore, Comerci
operates 42 restaurants under the name "California," with a total capacity of
9,432 seats. The company has a total of 30,592 employees. Comerci's latest
12-month sales to June 30, 2000 totaled US$2.9 billion, and its market
capitalization as of July 31, 2000 was US$1.2 billion.
14
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments July 31, 2000
MEXICO (95.66% of holdings)
COMMON STOCKS (91.07% of holdings)
<TABLE>
<CAPTION>
Number of Percent of
Shares Security Holdings Value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cement 10.21%
2,162,198 Cemex, S.A. ............................................... $ 10,141,989
------------
10,141,989
------------
Communications 23.21%
5,421,000 Telefonos de Mexico, S.A. de C.V. L ....................... 14,323,014
166,800 Telefonos de Mexico, S.A. de C.V. L ADR ................... 8,725,725
------------
23,048,739
------------
Financial Groups 4.90%
8,358,000 Grupo Financiero Bancomer, S.A. de C.V. O *................ 4,318,248
2,000,000 Grupo Financiero GBM Atlantico, S.A. de C.V. B *+.......... 545,542
------------
4,863,790
------------
Food, Beverage, and Tobacco 13.33%
1,651,000 Fomento Economico Mexicano, S.A. de C.V. B................. 6,869,968
65,200 Fomento Economico Mexicano, S.A. de C.V. B ADR ............ 2,709,875
862,000 Grupo Bimbo, S.A. de C.V. Series A......................... 1,443,966
950,000 Grupo Modelo, S.A. de C.V.................................. 2,215,329
------------
13,239,138
------------
Industrial Conglomerates 2.75%
695,000 Alfa, S.A. de C.V. A ...................................... 1,821,415
262,000 Grupo Carso, S.A. de C.V. Series A1 *...................... 909,440
------------
2,730,855
------------
Media 11.24%
183,000 Grupo Televisa, S.A. *..................................... 595,090
75,800 Grupo Televisa, S.A. ADR * ................................ 4,898,575
3,772,200 TV Azteca, S.A. de C.V. ................................... 2,808,420
244,200 TV Azteca, S.A. de C.V. ADR ............................... 2,854,088
------------
11,156,173
------------
Paper Products 2.01%
689,000 Kimberly-Clark de Mexico, S.A. de C.V. A................... 1,997,315
------------
1,997,315
------------
</TABLE>
15
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments (continued) July 31, 2000
COMMON STOCKS (concluded)
<TABLE>
<CAPTION>
Number of Percent of
Shares Security Holdings Value
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Retailing 9.86%
1,030,000 Wal-Mart de Mexico, S.A. de C.V.C *.................... $ 2,291,705
1,513,000 Wal-Mart de Mexico, S.A. de C.V.V *.................... 3,487,741
3,524,000 Controladora Comercial Mexicana, S.A. de C.V........... 4,010,842
------------
9,790,288
------------
Specialty Stores 13.56%
7,934,000 Grupo Elektra, S.A. de C.V. ........................... 7,960,734
3,399,000 Grupo Sanborns, S.A. de C.V. B1*....................... 5,504,718
------------
13,465,452
------------
TOTAL COMMON STOCKS (Cost $92,720,487)................. 90,433,739
------------
</TABLE>
<TABLE>
<CAPTION>
Par Value
(000)
--------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE DEBENTURES (1.05% of holdings)
MXP 9,465 Grupo Financiero Bancomer 20.33%, 05/16/02 **.......... 1,045,411
------------
TOTAL CONVERTIBLE DEBENTURES (Cost $1,515,903)......... 1,045,411
------------
SHORT TERM OBLIGATION (3.54% of holdings)
PROMISSORY NOTES
MXP 32,884 Nacional Financiero, S.A. de C.V. 13.4%, 08/01/00 ..... 3,517,601
------------
Total Promissory Notes (Cost $3,517,601) .............. 3,517,601
------------
TOTAL SHORT-TERM OBLIGATION (Cost $3,517,601) ......... 3,517,601
------------
TOTAL MEXICO (Cost $97,753,991) ....................... 94,996,751
------------
</TABLE>
16
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments (concluded) July 31, 2000
UNITED STATES SHORT TERM OBLIGATION (4.34% of holdings)
<TABLE>
<CAPTION>
Number of Percent of
Shares Security Holdings Value
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT COMPANY
4,304,789 Temporary Investment Fund, Inc. - Temp Cash Portfolio.......... $ 4,304,789
------------
TOTAL UNITED STATES SHORT TERM OBLIGATION
(Cost $4,304,789) 4,304,789
------------
TOTAL INVESTMENTS (Cost $102,058,780)++ 100.00% $ 99,301,540
------------
</TABLE>
Footnotes and Abbreviations
* Non-Income producing security.
** Variable rate security. Interest rate represents rate at July 31,
2000.
+ At fair value as determined under the supervision of the Board of
Directors.
++ Aggregate cost for Federal income tax purposes is $104,172,256
The aggregate gross unrealized appreciation (depreciation) for all
securities is as follows:
Excess of market value over tax cost $ 2,124,898
Excess of tax cost over market value (6,995,614)
-----------
($4,870,716)
===========
ADR - American Depository Receipt
MXP - Mexican Pesos
See accompanying notes to financial statements.
17
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Statement of Assets and Liabilities July 31, 2000
<TABLE>
<S> <C>
ASSETS
Investments, at value (Cost $102,058,780) ............................................... $ 99,301,540
Foreign currency holdings (Cost $76,028) ................................................ 76,223
Receivables:
Dividends ........................................................................... 114,387
Interest ............................................................................ 22,859
Maturities .......................................................................... 3,513,925
Securities sold ..................................................................... 15,044,423
Prepaid expenses ........................................................................ 19,276
-------------
Total Assets ................................................................ 118,092,633
-------------
LIABILITIES
Payable for securities purchased ........................................................ 3,517,601
Mexican Advisory fees payable ........................................................... 53,231
Co-Advisory fees payable ................................................................ 40,947
Administration fee payable .............................................................. 20,473
Accrued expenses ........................................................................ 348,317
-------------
Total Liabilities ........................................................... 3,980,569
-------------
Net Assets .................................................................. $ 114,112,064
=============
NET ASSET VALUE PER SHARE ($114,112,064/10,042,394) ......................... $ 11.36
=============
NET ASSETS CONSIST OF:
Capital stock, $0.001 par value; 11,825,273 shares issued (100,000,000 shares authorized) 11,825
Paid-in capital ......................................................................... 131,288,786
Cost of 1,782,879 shares held in treasury stock ......................................... (15,627,504)
Accumulated net investment loss ......................................................... (171,745)
Accumulated net realized gain on investments ............................................ 1,339,921
Net unrealized depreciation of investments and on
translation of other assets and liabilities denominated in foreign currency .......... (2,729,219)
-------------
$ 114,112,064
=============
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
For the Year Ended
Statement of Operations July 31, 2000
<TABLE>
<S> <C> <C>
Investment Income
Interest (Net of taxes withheld of $78,256) ............................. $ 1,668,793
Dividends (Net of taxes withheld of $45,903) ............................ 832,739
------------
Total investment income ........................................ 2,501,532
------------
Expenses
Mexican Advisory fees ........................... $ 567,982
Legal fees ...................................... 462,384
Co-Advisory fees ................................ 436,909
Transfer agent fees ............................. 225,010
Administration fees ............................. 218,455
Custodian fees .................................. 96,046
Audit fees ...................................... 77,359
Insurance ....................................... 38,707
Directors' fees ................................. 27,165
NYSE fees ....................................... 24,258
Printing ........................................ 21,449
Miscellaneous ................................... 16,857
------------
Total expenses ................................................. 2,212,581
------------
Net investment income .......................................... 288,951
------------
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 .............................................. 23,693,232
Foreign currency related transactions .............................. (383,468)
------------
23,309,764
Net change in unrealized appreciation of investments and
translations of other assets and liabilities denominated in
foreign currency ................................................... 5,231,592
------------
Net realized and unrealized gain on investments, foreign currency
holdings and translation of other assets and liabilities denominated
in foreign currency ................................................ 28,541,356
------------
Net increase in net assets resulting from operations .................... $ 28,830,307
============
</TABLE>
See accompanying notes to financial statements
19
<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, 2000 July 31, 1999
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income .............................................. $ 288,951 $ 2,560,510
Net realized gain (loss) on investments and foreign currency
related transactions .......................................... 23,309,764 (20,981,275)
Net change in unrealized appreciation in value of investments,
foreign currency holdings and translation of other assets and
liabilities denominated in foreign currency ................... 5,231,592 11,474,896
------------- -------------
Net increase (decrease) in net assets resulting from operations 28,830,307 (6,945,869)
------------- -------------
Distributions to shareholders from
Net investment income ($0.12 and $0.00 per share, respectively) ... (1,295,474) --
Net realized gains ($0.00 and $0.93 per share, respectively) ....... -- (10,997,504)
------------- -------------
Decrease in net assets from distributions ..................... (1,295,474) (10,997,504)
------------- -------------
Capital share transactions
Shares repurchased under Tender Offer (463,179 shares) ............. -- (4,173,245)
Shares repurchased under Stock Repurchase Program
(1,199,700 and 120,000 shares respectively) ................... (10,573,159) (881,100)
------------- -------------
Decrease in net assets from capital share transactions ........ (10,573,159) (5,054,345)
------------- -------------
Total increase (decrease) in net assets ............................ 16,961,674 (22,997,718)
NET ASSETS
Beginning of year .................................................. 97,150,390 120,148,108
------------- -------------
End of year (including undistributed net investment income
of $1,178,572 at July 31, 1999) ................................ $ 114,112,064 $ 97,150,390
============= =============
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Financial Highlights
For a Share Outstanding throughout Each Period
<TABLE>
<CAPTION>
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
July 31, 2000 July 31, 1999 July 31, 1998 July 31, 1997 July 31, 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year ........... $ 8.64 $ 10.16 $ 16.83 $ 11.96 $ 11.31
-------- ------- -------- -------- --------
Net investment income ........................ 0.03 0.22 0.23 0.43 0.81+
Net realized and unrealized gains
(losses) on investments, foreign
currency holdings, and translation
of other assets and liabilities
denominated in foreign currency ........ 2.62 (0.87) (3.34) 5.55 0.67+
-------- ------- -------- -------- --------
Net increase (decrease) from
investment operations .................. 2.65 (0.65) (3.11) 5.98 1.48
-------- ------- -------- -------- --------
Less: Distributions
Dividends from net investment income ... (0.12) -- (0.19) (0.44) --
Distributions from net realized gains .. -- (0.93) (3.37) (0.67) (0.09)
-------- ------- -------- -------- --------
Total dividends and distributions ............ (0.12) (0.93) (3.56) (1.11) (0.09)
-------- ------- -------- -------- --------
Capital share transactions
Anti-dilutive effect of Tender Offer ... -- 0.04 -- -- --
Anti-dilutive effect of Share Repurchase
Program ............................. 0.19 0.02 -- -- --
Dilutive effect of rights offering ..... -- -- -- -- (0.74)
-------- ------- -------- -------- --------
Total capital share transactions ............. 0.19 0.06 -- -- (0.74)
-------- ------- -------- -------- --------
Net asset value, end of year ................. $ 11.36 $ 8.64 $ 10.16 $ 16.83 $ 11.96
======== ======= ======== ======== ========
Per share market value, end of year .......... $10.6875 $7.0625 $ 7.75 $ 14.125 $ 9.625
Total Investment Return Based on
Market Value* .......................... 53.36% 7.24% (26.23)% 62.52% (8.26)%
Ratios/Supplemental Data
Net assets, end of year (in 000s) ............ $114,112 $97,150 $120,148 $199,066 $141,448
Ratios of expenses to average net assets ..... 2.03% 1.88% 1.46% 1.49% 1.56%
Ratios of net investment income to
average net assets .................... 0.27% 2.72% 1.65% 3.29% 7.32%
Portfolio turnover ........................... 249.28% 163.23% 88.85% 127.44% 42.59%
</TABLE>
21
<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.
22
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements July 31, 2000
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 $545,542
(0.48% of net assets) at July 31, 2000, 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 distribu-
23
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements (continued) July 31, 2000
tions to its shareholders that will be sufficient to relieve it from all or
substantially all U.S. Federal income and excise taxes. During the fiscal year
ended July 31, 2000 the Fund utilized $9,621,668 of capital losses carried
forward from prior periods.
In accordance with U.S. Treasury regulations, the Fund elected to defer
$2,477,741 of capital losses and $294,395 of net realized foreign currency
losses arising after October 31, 1999. Such losses are treated for tax purposes
as arising on August 1, 2000.
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 withholding tax at an effective rate of 7.69%. Mexican
companies that reinvest profits are subject to income tax at a rate of
30%. 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 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 at a rate of 35%.
Interest income on debt issued by the Mexican federal government is
generally not subject to withholding. Withholding tax on interest from
other debt obligations such as publicly traded bonds and loans by banks or
insurance companies is at a rate of 4.9% under the tax treaty between
Mexico and the United States.
Gains realized from the sale or disposition of debt securities may be
subject to a 4.9% withholding tax. Gains realized by the Fund from the
sale or disposition of equity securities that are listed and traded on the
Mexican Stock Exchange ("MSE") are exempt from Mexican withholding tax if
sold through the stock exchange. Gains realized on transactions outside of
the MSE may be subject to withholding at a rate of 20% of the amount
received or, upon the election of the Fund, at 40% (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.
24
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements (continued) July 31, 2000
Foreign Currency Translation. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, assets and liabilities at the
current Mexican peso exchange rate on the valuation date, and
(ii) purchases and sales of investment securities, income and expenses at
the Mexican peso 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
income tax reporting purposes.
The Fund reports realized foreign exchange gains and losses on all other foreign
currency related transactions as components of realized gains and losses for
financial reporting purposes, whereas such gains and losses are treated as
ordinary income or loss for Federal income tax purposes.
Securities denominated in currencies other than U.S. dollars are subject to
changes in value due to fluctuations in the foreign exchange rate. Foreign
security and currency transactions may involve certain considerations and risks
not typically associated with those of domestic origin as a result of, among
other factors, the level of governmental supervision and regulation of foreign
securities markets and the possibilities of political or economic instability.
Distribution of Income and Gains. The Fund intends to distribute to
shareholders, at least annually, substantially all of its net investment income,
including foreign currency gains. The Fund also intends to normally distribute
annually any net realized capital gains in excess of net realized capital losses
(including any capital loss carryovers), except in circumstances where the
Directors of the Fund determine that the decrease in the size of the Fund's
assets resulting from the distribution of the gains would generally not be in
the interest of the Fund's shareholders. An additional distribution may be made
to the extent necessary to avoid payment of a 4% 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
25
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements (continued) July 31, 2000
accounts based on their Federal tax-basis treatment; temporary differences do
not require reclassification. Dividends and distributions which exceed net
investment income and net realized capital gains for financial reporting
purposes but not for tax purposes are reported as dividends in excess of net
investment income and net realized capital gains, respectively. To the extent
they exceed net investment income and net realized gains for tax purposes, they
are reported as distributions of additional paid-in capital.
During the year ended July 31, 2000, the Fund reclassified a loss of $343,794
from accumulated net realized gain on investments to accumulated net investment
loss 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 weekly net assets. For the
year ended July 31, 2000, these fees amounted to $567,982.
Advantage Advisers, Inc., a subsidiary of CIBC World Markets 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, 2000, these fees
amounted to $436,909.
CIBC World Markets Corp., an indirect wholly-owned subsidiary of Canadian
Imperial Bank of Commerce, serves as the Fund's administrator
(the"Administrator"). The Administrator provides certain administrative services
to the Fund. For its services, the Administrator receives a monthly fee at an
annual rate of 0.20% of the value of the Fund's average monthly net assets. For
the year ended July 31, 2000, these fees amounted to $218,455.
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
26
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements (continued) July 31, 2000
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
$236,473,714 and $268,784,876 respectively, for the year ended July 31, 2000.
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 $339,309 during the year ended
July 31, 2000.
NOTE E: CAPITAL STOCK
At a special meeting of the Board of Directors held 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.
At a special meeting of the Board of Directors held on October 11, 1999, the
Board of Directors approved a new share repurchase and tender offer program (the
"New Program"). Pursuant to the New Program, the Fund was authorized to commence
a two phase share repurchase program for up to 2,800,000 shares, or
approximately 25% of the Fund's then outstanding common stock, through a
combination of share purchases and tender offers. Pursuant to the New Program,
in April 2000 (six months following the commencement of the first phase of the
New Program), to the extent the Fund had not purchased 1,400,000 shares (or
one-half of 2,800,000), the Fund would commence a tender offer to purchase the
balance of the 1,400,000 shares not yet purchased in the open market. At a
meeting of the Board of Directors held on April 4, 2000, the Board of Directors
determined that in light of the decision of the Board of Directors regarding
liquidation of the Fund (see note F on next page), the Fund would not conduct a
tender offer pursuant to the New Program. The Board of Directors also determined
that the Fund would continue to purchase shares of its common stock in the open
market pursuant to the New Program.
27
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements (continued) July 31, 2000
Pursuant to the share repurchase programs, during the year ended July 31, 2000,
the Fund purchased 1,199,700 shares of capital stock in the open market at a
total cost of $10,573,159. The weighted average discount of these purchases
comparing the purchase price to the net asset value at the time of purchase was
16.40%. During the year ended July 31, 1999, the Fund purchased 120,000 shares
of capital stock in the open market at a total cost of $881,100. The weighted
average discount of these purchases comparing the purchase prices to the net
asset value at the time of purchase was 16.70%. Subsequent to July 31, 2000, the
Fund made additional purchases aggregating 20,000 shares of capital stock in the
open market at a total cost of $206,200. The weighted average discount of these
purchases was 11.35%.
The shares purchased pursuant to the tender offer and share repurchase programs
are held in treasury.
NOTE F: PROPOSED LIQUIDATION OF THE FUND
At its special meeting held on April 4, 2000, the Fund's Board of Directors
deemed that in its judgement it is advisable to liquidate and dissolve the Fund,
and by unanimous written consent dated May 9, 2000, the Board of Directors
adopted a Plan of Liquidation and Dissolution (the "Plan") of the Fund. Further,
the Board of Directors directed that the Plan be submitted to the stockholders
of the Fund for approval. The Plan provided that the liquidation and dissolution
of the Fund shall become effective only upon (a) the adoption and approval of
the Plan by the affirmative vote of the holders of 66 2/3% of the outstanding
shares of capital stock of the Fund at a meeting of the stockholders called for
the purpose of voting upon the Plan and (b) the satisfactory resolution in the
sole discretion of the Board of Directors of any and all claims pending against
the Fund and its Board of Directors. After the effective date of the Plan, the
Fund would cease its business as an investment company and not engage in any
business activities except for the purpose of paying, satisfying, and
discharging any existing debts and obligations, collecting and distributing its
assets, and doing all other acts required to liquidate and wind up its business
and affairs and would dissolve in accordance with the Plan.
A special meeting of the stockholders was convened on July 14, 2000 to consider
and act upon the proposal to liquidate and dissolve the Fund, as set forth in
the Plan adopted by the Board of Directors of the Fund. As there were
insufficient votes in favor of the proposal to liquidate and dissolve the Fund,
the meeting was adjourned and first reconvened on August 11, 2000 and then on
September 12, 2000. At the reconvened meeting on September 12, 2000, the Fund
did not receive the required vote of the stockholders to approve the Plan. As
the Plan was not approved, in accordance with the Plan, the Fund will continue
to exist as a registered investment company in accordance wih its stated
investment objectives and policies.
28
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements (concluded) July 31, 2000
At its meeting held on September 15, 2000, the Fund's Board of Directors
approved a tender offer for up to 20% of the Fund's common stock at a price
equal to 92% of the Fund's net asset value per share. The Board of Directors
announced that the tender offer would commence shortly after the payment of a
dividend (representing a distribution in order to satisfy U.S. Federal income
and excise tax requirements). The Board of Directors also indicated that it
intends to resubmit the proposal to liquidate and dissolve the Fund at the next
annual stockholders meeting to be held after the completion of the tender offer
unless a more appropriate alternative is identified prior to the stockholders
meeting.
NOTE G: OTHER
At July 31, 2000, 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.
29
<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, 2000, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, 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, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
As described in Note F, the Plan of Liquidation and Dissolution of the Fund did
not receive the required approval of the shareholders of the Fund at the
shareholders' meeting held on September 12, 2000. As such, the Fund's Board of
Directors intends to resubmit a proposal to liquidate and dissolve the Fund for
shareholders' approval at the next annual meeting of the Fund's shareholders.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
September 22, 2000
30
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Results of Special Shareholders Meeting
A special meeting of the stockholders was convened on July 14, 2000 to consider
and act upon the proposal to liquidate and dissolve the Fund, as set forth in
the Plan of Liquidation and Dissolution of the Fund (the "Plan") adopted by the
Board of Directors of the Fund. As there were insufficient votes in favor of the
proposal to liquidate and dissolve the Fund, the meeting was adjourned and
reconvened on August 11, 2000. As there were insufficient votes in favor of the
proposal to liquidate and dissolve the Fund at the August 11, 2000 meeting of
the stockholders, the meeting was adjourned and reconvened on September 12,
2000. There were insufficient votes to approve the liquidation and dissolution
at the reconvened meeting, and the meeting was adjourned and will not be
reconvened. The Board has announced its intention to resubmit the liquidation
proposal at the Fund's annual stockholders meeting which the Fund expects to
hold in the first quarter of 2001.
The following table provides information concerning the matters voted on at the
September 12, 2000 meeting:
I. The approval of the liquidation and dissolution of the Fund, as set forth
in the Plan of Liquidation and Dissolution
Votes For Votes Against Votes Withheld Total Voting Shares
--------- ------------- -------------- -------------------
5,764,991 446,014 77,051 6,288,056
--------------------------------------------------------------------------------
FEDERAL TAXATION NOTICE (UNAUDITED)
The Fund paid foreign taxes of $124,159 during the fiscal year ended July 31,
2000, 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.
--------------------------------------------------------------------------------
31
<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
32
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Dividends and Distributions (continued)
price. If net asset value per share on the valuation date exceeds the market
price per share on that date, participants in the Plan will receive shares of
Common Stock from the Fund valued at market price. The valuation date is the
dividend or distribution payment date or, if that date is not a New York Stock
Exchange trading day, the next preceding trading day. If the Fund should declare
an income dividend or capital gains distribution payable only in cash, the Plan
Agent will, as agent for the participants, buy Fund shares in the open market on
the New York Stock Exchange or elsewhere, for the participants' accounts on, or
shortly after, the payment date.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in an account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in noncertified form in the
name of the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan.
In the case of shareholders such as banks, brokers or nominees that hold shares
for others who are beneficial owners, the Plan Agent will administer the Plan on
the basis of the number of shares certified from time to time by the
shareholders as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who participate in the Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions payable in either Common Stock or cash. The Plan Agent's fees for
the handling or reinvestment of such dividends and capital gains distributions
will be paid by the Fund. There will be no brokerage charges with respect to
shares issued directly by the Fund as a result of dividends or capital gains
distributions payable either in stock or in cash. However, each participant will
pay a pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
or capital gains distributions payable in cash.
Brokerage charges for purchasing small amounts of Common Stock for individual
accounts through the Plan are expected to be less than usual brokerage charges
for such transactions because the Plan Agent will be purchasing stock for all
participants in blocks and prorating the lower commissions thus attainable.
Brokerage commissions will vary based on, among other things, the broker
selected to effect a particular purchase and the number of participants on whose
behalf such purchase is being made.
The receipt of dividends and distributions in Common Stock under the Plan will
not relieve participants of any income tax (including withholding tax) that may
be payable on such dividends or distributions.
33
<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.
34
<PAGE>
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<PAGE>
THE MEXICO EQUITY
AND INCOME FUND, INC.
Mexican Investment Adviser:
ACCI Worldwide, S.A. de C.V.
U.S. Investment Adviser:
Advantage Advisers, Inc., a wholly owned
subsidiary of CIBC World Markets Corp.
Administrator:
CIBC World Markets Corp.
Sub-Administrator:
PFPC, Inc.
Transfer Agent and Registrar:
PNC Bank, N.A.
Custodian:
PFPC Trust Company
Citibank, N.A.
