Advantage Advisers, Inc.
The Mexico Equity and Income Fund, Inc.
Semiannual Report
January 31, 2000
The Mexico Equity
and Income Fund, Inc.
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The Mexico Equity and Income Fund, Inc.
March 10, 2000
Dear Fund Shareholder,
We are pleased to provide you with the unaudited financial statements of The
Mexico Equity and Income Fund, Inc. (the "Fund") for the semiannual period ended
January 31, 2000.
The Fund's net asset value ("NAV") increased by 17.8% in the six months ended
January 31, 2000, and substantially outperformed The Mexico Fund (MXF), the most
comparable closed-end Mexican fund, during the same period (17.8% vs. 5.8%). The
Bolsa Index gained 22.7% during the same period, largely on the basis of the
performance of a single stock in the Index.
However, during the one-year period ended February 29, 2000, the Fund's common
share market price increased 91%, outperforming the Bolsa Index's gain of 84%.
In comparison, the MXF's common share market price gained 35% during the same
period. We believe that our outperformance of the Bolsa Index in a one-year
period is especially impressive in light of the fact that a single stock in the
Index, Telefonos de Mexico, gained 160% during that period.
The Fund declared a US$0.121 per share dividend to shareholders of record on
December 23, 1999, which was paid on January 14, 2000.
The Fund's strategy, beginning early in the second half of 1999, of accumulating
stock in companies likely to be dominant in the Internet business in Mexico,
proved beneficial. Consequently, as of January 31, 2000, the Fund's portfolio
included significant weightings
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THE MEXICO EQUITY AND INCOME FUND, INC.
in telecommunications (20%), media (15%) and financial (11%) companies, all
three sectors related to the Internet business.
On behalf of the Board of Directors, we thank you for your participation and
continued support of the Fund. If you have any questions, do not hesitate to
call our toll-free number, (800) 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 Six Months Ended January 31, 2000
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MEXICO'S ECONOMIC OUTLOOK
Dynamic private sector investment and consumption during the final quarters of
1999 boosted the overall growth rate of the Mexican economy for the 1999
calendar year to 3.7%, a higher rate than had been expected earlier in the year.
As reflected in the relatively low 1.15% ratio of public deficit to the
country's Gross Domestic Product (GDP) for 1999, fiscal policy was not a
contributing factor to the more rapid economic growth.
In addition, inflation during 1999 was 12.3%, below the original target of 13%.
One explanation for this development is the 4.4% appreciation of the Mexican
peso vs. the U.S. dollar during the period when the Mexican Mix oil price
recorded a sustained increase. Another explanation lies in the remarkable gains
in the international financial markets (recovery in many markets and continued
expansion in the U.S. market), as well as the magnitude and timing of
restrictive monetary and fiscal policies in Mexico during the year.
Monetary policy tightening in Mexico continued in January 2000, signaling to the
market that price stability remains a top priority. Nevertheless,
Banamex-Accival financial group (Banacci) forecasts that Mexico's GDP will grow
by at least 4.5% in 2000, compared to 3.4% for the Latin American countries as a
whole and 2.5% for the emerging countries.
Although the Mexican peso appreciated against the U.S. dollar for 1999 as a
whole, the peso lost 2% against the U.S. dollar during the six months ended
January 31, 2000, ending at 9.59 pesos to the U.S. dollar.
Country risk, as measured by the spread of the Mexican global bond due in 2026
with respect to U.S. Treasury bonds of similar maturity, diminished by 99 basis
points, to 356 basis points at the end of January 2000, from 455 basis points at
the end of July 1999. Domestic real and nominal interest rates (28-day Cete)
decreased by 300 basis points, to 17% from 20% in August 1999.
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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 net
asset value is also published in Barron's on Saturdays and in The New York Times
on Mondays. The Fund is listed on the New York Stock Exchange under the ticker
symbol MXE.
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The Mexican Mix oil price climbed to as high as US$24.48 per barrel in
mid-January 2000 from US$17.40 in late July 1999, ending January 2000 at
US$22.60 per barrel.
On March 7, Moody's Investors Service announced the upgrading of Mexico's
long-term foreign debt obligations to investment grade from Ba1 to Baa3. The
upgrade recognizes the strength of the Mexican economy after several years of
structural reforms and financial consolidation. According to Moody's, the
upgrade reflects "a lower relative foreign currency debt burden, underpinned by
a dynamic export sector well integrated into the North American economy and
increasingly integrated with other regions of the world." Moody's investment
grade came four months before the Mexican presidential election scheduled for
July 2, 2000.
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THE MEXICAN STOCK MARKET
For the six-month period ended January 31, 2000, Mexico's Bolsa Index gained
22.7% in U.S. dollar terms. This gain was concentrated mainly in
Internet-related (financial groups and media) and telecommunications stocks,
clearly reflecting the greater interest in the Bolsa market in "new economy"
issues vs. the "old economy."
The best-performing sectors of the Mexican market for the six months ended
January 31, 2000 were: financial groups, with a 62% dollar return; media &
broadcasting (up 49%) and telecommunications (up 47%.) The worst-performing
sectors included food (down 16%), paper (down 12%) and construction (down 8%).
With respect to Mexico's sovereign upgrade by Moody's, domestic-oriented sectors
such as beverages, cement, food, media, retailers and banks, as well as
interest-sensitive stocks with significant leverage, should be the main
beneficiaries. However, export-oriented companies with high U.S. dollar-linked
revenues should suffer operating margin compression in a strong peso scenario.
Furthermore, the investment grade on Mexican long-term debt should act as a
positive catalyst for the equity and debt markets this year, attracting a
broader range of investors to the country. Going forward, this upgrade should
also help to revalue the multiples of internationally competitive Mexican
blue-chip companies in line with their peers worldwide.
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THE FUND'S PERFORMANCE
For the six-month period ended January 31, 2000, the Fund's NAV gained 17.8%
vs. the Bolsa Index's 22.7% gain. (Excluding Telmex, the Bolsa Index gained
16.3%.) The NAV of The Mexico Fund (MXF) -- the closed-end Mexico fund most
comparable to The Mexico Equity and Income Fund (MXE) -- gained 5.8% during the
same period, according to Lipper Analytical, Inc.
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The Fund's 17.8% NAV gain, which was 4.9 percentage points lower than the Bolsa
Index's 22.7% return, was due to the following two factors:
o Telmex stock gained 41.1% for the six-month period ended January 31, 2000,
18.4 percentage points higher than the return for the Bolsa Index as a
whole. The Fund had a monthly average 6.6% weighting in Telmex, during the
period, vs. 26.2% in the Bolsa. Our risk control measures limit an
over-weighting in single stocks.
o The Fund's 14% daily average fixed income allocation during the six-month
period ended January 31, 2000, yielded 8.7% and its weighted contribution
to the Fund's NAV increase was 1.3%. The Fund's decision to maintain a
significant fixed income exposure has enhanced performance during volatile
market cycles. However, it limited the Fund's potential for growth during
the six months ended January 31, 2000, when the Bolsa Index grew 22.7%.
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PORTFOLIO STRATEGY
The Fund's strategy of accumulating blue chip stocks since September 1998, and
particularly its "new economy" stocks allocation (dominant in the Internet
business in Mexico) during the fourth quarter of 1999, proved beneficial for the
Fund. As a result, as of January 31, 2000, the Fund's structure mainly comprised
stocks in telecommunications (20%), media (15%) and financial companies (almost
11%, including 2% in convertible bonds), all three sectors related to the
Internet business.
The Fund declared a US$0.121 per share distribution (or 1.1% of total assets) to
shareholders of record on December 23, 1999, which was paid on January 14, 2000.
The dividend represented all of the Fund's estimated net investment income for
the 1999 fiscal year (ended July 31, 1999).
Due to the share repurchase program, for the six-month period ended January 31,
2000, the Fund's assets were reduced by nearly US$6.5 million, or approximately
6.4% of average net assets, with a view to improving the discount on the Fund's
common share market price to that of its net asset value. As of January 31,
2000, the cumulative effect of the share repurchase program and tender offer
program since inception has reduced the Fund's assets by more than US$11.6
million, or approximately 11.3% of total assets.
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OUTLOOK
We are very pleased with Mexico's investment grade and think the upgrade
formally marks what we believe is the beginning of a new stage for the Mexican
economy and for the Mexican banking system.
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At the closing of this report, Standard and Poor's raised the rating on Mexico's
foreign currency debt to BB+, one notch below investment grade. S&P said: "The
upgrade reflects its expectation that prudent macro-economic policies will be
maintained in the next administration by either of the two leading candidates in
the presidential race."
The main challenges Mexico faces in 2000 are: (1) creating a relatively smooth
change of national government administration, and (2) the possibility of a
non-soft landing of the U.S. economy, that would impact negatively on the
Mexican economy.
Finally, we are pleased to state The Mexico Equity and Income Fund maintains a
leading market performance, and we believe the Fund is an appropriate vehicle to
benefit from the consolidation of financial markets and asset revaluation that
is expected to occur in Mexico in the coming years.
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REVIEW OF KEY ECONOMIC SECTORS AS OF JANUARY 31, 2000
COMMUNICATIONS (20.5% of the Fund's total investments)
In the last quarter of calendar 1999, communications sector stocks showed an
extraordinary 59.8% U.S. dollar gain, outperforming the Bolsa Index dollar gain
of 39.7% or 20.1 percentage points over the Bolsa Index gain.
The continued growth of the telecommunications industry has significantly
increased investment in the Mexican market. Furthermore, the anticipation of
large increases in new e-content business has attracted even more global
investors into the telecommunications sector of the Bolsa. For the year ended
December 31, 1999, growth was especially strong in the wireless segment; the
number of cellular phone subscribers increased from 3.3 million in 1998 to
approximately 7.4 million in 1999. Traditional wireline usage also showed solid
growth, with an increase of 1 million lines in 1999 to 10.9 million. Internet
usage is expanding rapidly, although from a very low base.
Telmex, the second largest company in Mexico and the most representative both of
the telecommunications sector and of the Bolsa Index, invested US$2.1 billion in
1999, including US$650 million in acquisitions. For the year 2000, the company
has announced investments of US$2.9 billion, excluding possible acquisitions. Of
this US$2.9 billion, US$1.5 billion will go to wireless telecommunications.
MEDIA (15.3% of the Fund's total investments)
Increased demand for advertising by (1) new competitors in the telecom industry,
mainly in local telecommunications (Pegaso and Unefon) and the Internet (e.g.,
portals Todito.com and El Sitio.com), (2) from political campaigns, and (3) from
the Summer Olympics to be broadcast by both Televisa and TV Azteca, will
increase the industry's revenues in 2000 by 12.5% in dollar terms, according to
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projections from Banacci. Political parties' budgets for TV advertising should
amount to approximately US$100-US$120 million in 2000, according to the Banacci
projections. Televisa will receive approximately 70% of the total, and TV Azteca
approximately 30%, according to the projections.
In addition, companies in this sector have begun to develop Internet ventures,
which will include e-commerce sites: e.g., TV Azteca, through its acquisition of
50% of Mexican portal Todito.com, and Televisa through the development of its
own portal, esmas.com.
RETAILING AND SPECIALTY STORES (12.7% of the Fund's total investments)
The retail sector will present an attractive investment opportunity in 2000 due
to: (1) an improved 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. Cifra, Soriana, Comerci and Gigante -- the four
main self-service store chains in the country -- have strong fundamentals (size,
solid financial position and market share), and they are prepared to capitalize
on growth in a more favorable economic environment.
More recently, self-service stores have substantially improved their operating
efficiencies by trying 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, self-service stores will continue
to capitalize on their efficiencies. Indeed, operating expenses less
depreciation are near 1994 lows.
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TOP TEN HOLDINGS AS OF JANUARY 31, 2000
TELEFONOS DE MEXICO, S.A. DE C.V. (TELMEX)
12.5% of the Fund's total investments
Telmex is the only Mexican company that offers integrated telecommunications
services, including local, international long distance, cellular, Internet and
paging. In August 1996, the company lost its exclusivity over the long distance
market and during the second half of 1999, it started to face competition in
local service from wireless service concessionaires. However, in 1999, the
number of active lines increased by 10% to 10.9 million from 9.9 million in
1998. The number of active lines increased by 7% and 5% during 1998 and 1997,
respectively.
In 1999, the number of new cellular subscribers in Mexico increased sharply to
5.3 million, from 2.1 million in 1998. Telmex estimates that it commands
approximately 68% of the cellular telephone market as of December 1999.
Telmex has an 18% minority stake in the Internet service provider Prodigy. At
December 31, 1999, Telmex had 403,000 Internet subscribers vs. 228,977
subscribers as of December 31, 1998, a 76% increase. In 1999, Telmex
strengthened its international expansion strategy, which is aimed at the
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Hispanic population outside of Mexico, with a special focus on wireless
telecommunications and the Internet/data business.
Telmex currently has interests in the following countries: (1) In the U.S., with
Top Telecom, Telmex resells cellular telephone services through pre-paid
telephone cards, and with Comm South Companies, Inc., it provides local
telephone services to residential customers. (2) In Puerto Rico, in association
with SBC, it conducts cellular telecommunications activities. (3) In Guatemala,
Telmex operates the recently privatized company Telgua and has an option to buy
up to 49% of the company in the next five years; and (4) In Brazil, Telmex
currently has a 25% stake in the cellular company ATL.
Telmex's sales of US$9.7 billion in 1999 vs. US$8.8 billion in 1998 (a 10%
increase) were mainly driven by higher international long distance revenues as
well as higher settlement income (charges made by Telmex to other companies due
to inter-connection calls). Nevertheless, the company's EBITDA margin decreased
by 2 percentage points to 56% from 58%, reflecting the costs of entering new
markets (cellular, data, Internet). In 1999, the company's net earnings were
US$2.5 billion vs. US$1.7 in 1998. Telmex's market capitalization as of December
31, 1999 was US$51 billion. As of December 31, 1999, the company traded at 19
times 1999 estimated earnings per share.
GRUPO FINANCIERO BANCOMER, S.A. DE C.V. (GFB)
10.1% of the Fund's total investments
Grupo Financiero Bancomer is the second largest financial group in Mexico after
Grupo Financiero Banacci. Its main subsidiaries are: (1) Bancomer (commercial
bank with 1,315 branches) with a market share of approximately 19%. As of
December 31, 1999, the Bank 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. As of December 31, 1999, GFB's market
capitalization was US$2.4 billion and the stock traded at 0.9x price/book value.
TV AZTECA, S.A. DE C.V. (TV AZTECA)
8.9% of the Fund's total investments
Television Azteca is Mexico's second-largest television company, with interests
in production and broadcasting, international distribution of television
programming, music recording, and professional
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sports. It also has unconsolidated equity in Unefon (a 50% stake), a
telecommunications company that plans to establish a nationwide digital fixed
wireless personal communications network to offer local telephone service in
Mexico. The company also owns stakes in TV channels in El Salvador (75%),
Guatemala (75%) and Costa Rica (35%).
In February 2000, TV Azteca officially acquired 50% of Todito.com, an Internet
portal that launched in August 1999. (Todito.com currently has 76,000 registered
users.) The site offers news, sports and entertainment content, as well as
e-mail, e-commerce, online auctions and chat rooms.
TV Azteca's annual sales totaled US$457 million in 1998 and were expected to
fall to US$420 million in 1999 due to lower ratings on their programs.
Nevertheless, according to Banacci's forecast, sales are expected to rise 25% to
US$524 million in 2000 due to stronger ratings, rate hikes and increased demand
for advertising. As of December 31, 1999, the company's market capitalization
was US$1.0 billion.
CARSO GLOBAL TELECOM, S.A. DE C.V. (TELECOM)
8.0% of the Fund's total investments
Carso Global Telecom (CGT) is a holding company with interests in the
telecommunications industry in Mexico, the United States and Brazil. The company
resulted from a spin-off of Grupo Carso in July 1996. GT's assets include: (1) a
26.54% stake in Telmex (25.77%% directly and 0.77% via options), as of December
31, 1999. The market value of CGT's Telmex holding as of January 31, 2000 was
US$10.6 billion. (2) a 49% stake in Prodigy as of December 31, 1999. The market
value of CGT's Prodigy holding as of January 31, 2000 was US$584 million.
Prodigy is a U.S. Internet service provider (ISP) with 1.2 million subscribers
as of September 30, 1999. (3) a 25.3% stake in Splitrock as of December 31,
1999. The market value of CGT's Splitrock holding as of January 31, 2000 was
US$497 million. Splitrock operates a digital network for high-speed data, voice
and video transmission in the United States. (4) a 40% stake in MCOM Wireless as
of December 31, 1999. The acquisition cost of CGT's holding in 1996 was US$65
million. MCOM Wireless offers paging and trunking services in Brazil.
KIMBERLY-CLARK DE MEXICO, S.A. DE C.V.
7.2% of the Fund's total investments
Kimberly Clark de Mexico, S.A. de C.V., 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 sectors.
In December 1999, the first of two new tissue machines began operations; the two
machines, together will increase tissue capacity by 15%. (This segment
represented 30% of total revenues in
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1999.) In addition, the company announced that during the year 2000, printing
and writing paper capacity (15% of total sales in 1999) will increase 15%. The
increments in installed capacity and demand for tissue and writing paper could
offset possible future price increases in Kimberly's main raw materials (pulp
and chemicals).
In our view, Kimberly represents a low financial risk and has a solid financial
structure due to its policy of maintaining a low debt-to-equity ratio. The
company also has an experienced management team with a strong knowledge of its
market. We consider it a growth stock that as of December 31, 1999 was selling
at a 24% discount to the market's multiple. Its potential growth in 2000 is
mainly related to the 5% increase in demand for paper and 15% capacity expansion
in the paper tissue subsidiary.
Kimberly's sales remained flat during 1999. However, its EBITDA grew 7% and net
profit rose 22% due to operating efficiencies and the continuing low cost of raw
materials (i.e., cellulose). Kimberly's annual net sales totaled US$1.5 billion
in 1999, and its market capitalization as of December 31, 1999 was US$3.9
billion.
GRUPO TELEVISA, S.A. (TELEVISA)
6.3% of the Fund's total investments
Grupo Televisa, S.A. 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
and 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 (approximately a 7% stake).
Televisa recently announced the first of several initiatives to enter the online
industry. This includes the launch of esmas.com, a Spanish-speaking horizontal
Internet portal, which will provide multiple services, including news, sports,
music, publications and entertainment. Televisa will invest US$80 million in the
portal (US$60 million in content and US$20 million in digitalization), which is
expected to be launched in the early part of the second quarter of 2000.
Televisa's annual sales totaled US$1.7 billion in 1998 and rose to US$1.9
billion in 1999. As of December 31,1999, its market capitalization was US$7.5
billion.
CIFRA S.A. DE C.V. (CIFRA)
4.3% of the Fund's total investments
Cifra S.A. de C.V. (Cifra) is the main retail chain in Mexico. As of December
1999, it had 458 operating units, including 203 self-service stores, 51
department stores and 204 restaurants. As of
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September 30, 1999, Cifra had a sales floor area of 1,543,371 square meters; the
number of restaurant seats totaled 44,780, and there were 66,158 employees. In
the 12 months ended September 30, 1999, Cifra posted US$5.6 billion in revenues.
In 1991, it formed a wholesale club format (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 Cifra, and Wal-Mart Stores Inc. took control of the
company. Cifra's market capitalization was US$9.0 billion as of December 31,
1999.
GRUPO SANBORNS, S.A. DE C.V. (GSANBOR)
4.2% of the Fund's total investments
Grupo Sanborns (Gsanbor), with sales during the nine-month period ended
September 30, 1999 of US$842 million, is one of the largest specialized retail
chain operators in Mexico, and the one with the broadest geographical coverage.
At September 30, 1999, market capitalization was US$2.1 billion and the market
float (outstanding shares) was 22%. Its main divisions (88% of consolidated
sales and 84% of consolidated EBITDA) at September 30, 1999 were: Sears, 41
department stores with a total sales area of 227,123 square meters, and
Sanborns, with 104 specialized retail stores in a unique Mexican format
consisting of 88,291 square meters of sales area offering hard-goods,
soft-goods, tobacco and pharmaceutical products, as well as restaurants (39,300
seats). Other divisions are Promusa (51 music stores), El Globo (82 bakeries,
acquired in May 1999) and Real Estate (which includes two major malls in Mexico
City).
In 1999, through its Sanborns subsidiary website, the group entered the
e-commerce business, and by the end of the year increased its presence in the
sector via minority interests in CDNow (9.7%) and CompUSA (14%). In February
2000, it started a tender offer for a majority stake in the latter.
Early this year, Grupo Sanborns announced a new investment in the Internet: the
company invested US$5.0 million for a 20% equity stake in Demasiado Holding
Corp., a New York company which has an Internet portal in Spanish. Demasiado.com
reported 1999 sales of US$2.2 million, which it expects to grow 492% to US$13.0
million in 2000. By the end of the first half of 2000, the company is also
expected to announce a new portal that could include on-line trading.
GRUPO ELEKTRA, S.A. DE C.V. (ELEKTRA)
4.2% of the Fund's total investments
Grupo Elektra is Latin America's leading specialty retailer, with three separate
retail chains that target Latin America's growing middle class. The group
operates 946 stores in 320 cities in Mexico
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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 U.S. to Mexico and within Mexico.
Grupo Elektra also holds a major investment in TV Azteca (18.6%), one of the two
broadcast television networks in Mexico. Mass-market advertising through TV
Azteca is an integral element of Elektra's strategy. The company is ready to
enter the Internet business through its theone.com.mx virtual store (apparel
products), which will handle the same product lines found in its stores. The
launch of this site was scheduled for February 29, 2000, followed by an Elektra
e-commerce page to be launched during the second quarter of 2000.
Elektra's annual sales for the full year 1999 were US$1.2 billion with a market
capitalization of US$1.4 billion as of December 31, 1999. Banacci's sales
and EBITDA growth forecasts for 2000 for Elektra were 15.3% and 27.7%,
respectively. The debt-to-equity ratio is expected to improve from 89% at the
end of 1999 to 67% at the end of 2000.
CORPORACION INTERAMERICANA DE ENTRETENIMIENTO, S.A. DE C.V. (CIE)
3.9% of the Fund's total investments
CIE is the leading live entertainment holding company in Latin America, with
growing operations in Mexico, Argentina, Brazil, Chile, Colombia, Spain and the
Latin market in the United States. With headquarters in Mexico City, CIE has
subsidiaries in three main business areas: entertainment, commerce and services.
These divisions encompass nearly all aspects of the live entertainment industry,
from the promotion of live events, the operation of entertainment venues and
amusement parks, to the organization and administration of fairs and
exhibitions. In addition, the company operates computerized ticket sales for its
own entertainment events as well as for third parties, and develops
telemarketing sales programs for clients.
Recently, CIE announced its entry into the Internet business through an
agreement with Aspel Grupo (a leading Mexican software package development
company) for supplying live entertainment content for two of Aspel's Internet
subsidiaries: www.elfoco.com, a sports and entertainment portal for the Spanish
and Portuguese speaking world, and www.correoweb.com, the largest integrated
Mexican communications/community Internet site, based on e-mail services. As of
January 2000, these sites had 620,000 subscribers in Mexico and Argentina, with
an estimated 40 million hits a month.
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CIE's market capitalization was US$815 million as of December 31, 1999. Its
12-month sales as of the end of the third quarter of 1999 were US$240 million.
Estimated sales and EBITDA for 2000 are, respectively, US$363 million vs. the
US$282 million estimated for 1999 (a 28.5% increase), and US$87 million vs. the
US$72 million estimated for 1999 (a 21.4% increase).
M. Eugenia Pichardo
Acci Worldwide, S.A. de C.V.
Mexican Investment Adviser
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<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments January 31, 2000
(Unaudited)
Mexico (99.87% of holdings)
COMMON STOCKS (92.00% of holdings)
<TABLE>
<CAPTION>
Number of Percent of
Shares Security Holdings Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cement 3.34%
794,893 Cemex, S.A.............................................................. $ 3,486,155
------------
3,486,155
------------
Communications 20.47%
820,000 Carso Global Telecom - A1*.............................................. 8,364,205
230,000 Telefonos de Mexico, S.A. de C.V. L..................................... 1,232,999
110,600 Telefonos de Mexico, S.A. de C.V. L ADR................................. 11,778,900
------------
21,376,104
------------
Construction 0.45%
828,200 Grupo Tribasa S. A. de C.V. ADR*........................................ 465,862
------------
465,862
------------
Entertainment 3.93%
666,000 Corporacion Interamaericana de Entretenimiento
S.A. de C.V.B*........................................................ 2,743,742
337,000 Corporacion Interamaericana de Entretenimiento
S.A. de C.V.L*........................................................ 1,356,717
------------
4,100,459
------------
Financial Groups 8.49%
22,647,000 Grupo Financiero Bancomer, S.A. de C.V. O*.............................. 8,337,913
2,000,000 Grupo Financiero GBM Atlantico, S.A. de C.V. B*+........................ 531,915
------------
8,869,828
------------
Food, Beverage, and Tobacco 8.83%
65,200 Fomento Economico Mexicano, S.A. de C.V. B ADR.......................... 2,681,350
312,000 Fomento Economico Mexicano, S.A. de C.V. B.............................. 1,283,730
1,649,000 Grupo Bimbo, S.A. de C.V.*.............................................. 2,768,972
1,084,000 Grupo Modelo, S.A. de C.V. C............................................ 2,492,929
------------
9,226,981
------------
Industrial Conglomerates 6.25%
881,000 Alfa, S.A. de C.V. A*................................................... 3,307,885
455,000 Grupo Carso, S.A. de C.V. A1*........................................... 1,883,969
738,000 Grupo Imsa, S.A. de C.V. UBC............................................ 1,331,602
------------
6,523,456
------------
</TABLE>
14
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments (continued) January 31, 2000
(Unaudited)
COMMON STOCKS (continued)
<TABLE>
<CAPTION>
Number of Percent of
Shares Security Holdings Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Media 15.25%
31,000 Grupo Televisa S.A.*.................................................. $ 847,424
103,600 Grupo Televisa S.A. ADR*.............................................. 5,749,800
16,273,200 TV Azteca S.A. de C.V................................................. 8,469,260
103,000 TV Azteca S.A. de C.V. ADR............................................ 856,187
-----------
15,922,671
-----------
Mining 3.67%
706,000 Grupo Mexico, S.A. B.................................................. 3,836,316
-----------
3,836,316
-----------
Paper Products 7.23%
2,471,000 Kimberly-Clark de Mexico, S.A. de C.V. A.............................. 7,551,137
-----------
7,551,137
-----------
Retailing 4.26%
1,955,000 Cifra, S.A. de C.V. C................................................. 3,262,411
670,000 Cifra, S.A. de C.V. V*................................................ 1,192,136
-----------
4,454,547
-----------
Specialty Stores 8.41%
5,306,000 Grupo Elektra S.A. de C.V. ........................................... 4,371,861
2,126,000 Grupo Sanborns, S.A. de C.V. B1*...................................... 4,408,102
-----------
8,779,963
-----------
Steel 1.42%
579,000 Industrias, S.A. de C.V. B*........................................... 1,479,506
-----------
1,479,506
-----------
TOTAL COMMON STOCKS (Cost $93,203,652) ............................... 96,072,985
-----------
</TABLE>
15
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments (continued) January 31, 2000
(Unaudited)
CONVERTIBLE DEBENTURE (2.15% of holdings)
<TABLE>
<CAPTION>
Par Value Percent of
(000) Security Holdings Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MXP 21,50 5 Grupo Financiero Bancomer 23.33%, 05/16/02** ............. $ 2,248,557
-------------
TOTAL CONVERTIBLE DEBENTURE (Cost $3,515,117) ............ 2,248,557
-------------
SHORT TERM OBLIGATIONS (5.72% of holdings)
PROMISSORY NOTES
MXP 28,028 Banco Inbursa, S.A. 19.00% 02/01/00** .................... 2,923,218
MXP 29,206 Banco Nacional de Obras y Servicias Publicas,
S.A. de C.V. 19.00% 02/01/00** ......................... 3,046,110
-------------
TOTAL PROMISSORY NOTES (Cost $5,969,328) ................. 5,969,328
-------------
TOTAL SHORT-TERM OBLIGATIONS (Cost $5,969,328) ........... 5,969,328
-------------
TOTAL MEXICO (Cost $102,688,097) ......................... 104,290,870
-------------
</TABLE>
UNITED STATES SHORT TERM OBLIGATION (0.13% of holdings)
<TABLE>
<CAPTION>
Number of
Shares Security Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
135,851 Temporary Investment Fund, Inc. - Temp Cash Portfolio..... 135,851
-------------
TOTAL UNITED STATES SHORT TERM
OBLIGATION (Cost $135,851) ............................ 135,851
-------------
TOTAL INVESTMENTS (Cost $102,823,948)++ 100.00% $ 104,426,721
=============
</TABLE>
16
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments (continued) January 31, 2000
(Unaudited)
Footnotes and Abbreviations
* Non-Income producing security.
** Variable rate security. Interest rate represents
rate at January 31, 2000.
+ At fair value as determined under the supervision
of the Board of Directors
++ Aggregate cost for Federal income tax purposes is
$ 103,782,553
The aggregate gross unrealized appreciation
(depreciation) for all securities is as follows:
<TABLE>
<S> <C>
Excess of market value over tax cost $12,778,349
Excess of tax cost over market value (12,134,181)
-----------
$ 644,168
===========
</TABLE>
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 January 31, 2000
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Investments, at value (Cost $102,823,948) ............................... $ 104,426,721
Foreign currency holdings (Cost $70,120) ................................ 70,244
Receivables:
Interest (net of withholding tax of $510) ............................. 21,802
Maturities ............................................................ 5,960,447
Securities sold ....................................................... 1,969,186
Prepaid expenses ........................................................ 28,402
-------------
Total Assets .................................................... 112,476,802
-------------
LIABILITIES
Payable for securities purchased ........................................ 6,967,176
Payable for Fund share repurchased ...................................... 208,745
Due to Mexican Adviser .................................................. 99,285
Due to Co-Adviser ....................................................... 76,374
Due to Administrator .................................................... 38,187
Accrued expenses ........................................................ 165,408
-------------
Total Liabilities ............................................... 7,555,175
-------------
Net Assets ...................................................... $ 104,921,627
=============
NET ASSET VALUE PER SHARE ($104,921,627/10,422,594) $ 10.07
=============
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 1,402,679 shares held in treasury stock ......................... (11,550,747)
Undistributed net investment income ..................................... 90,286
Accumulated net realized loss on investments and foreign currency
related transactions .................................................. (16,533,900)
Net unrealized appreciation in value of investments and on translation
of other assets and liabilities denominated in foreign currency ....... 1,615,377
-------------
$ 104,921,627
=============
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
For the Six Months Ended
Statement of Operations January 31, 2000 (Unaudited)
<TABLE>
<S> <C> <C>
Investment Income
Interest (Net of taxes withheld of $47,564) ....................... $ 982,205
Dividends (Net of taxes withheld of $18,397) ...................... 223,702
------------
Total investment income ............................. 1,205,907
------------
Expenses
Mexican Advisory fees ............................................. $ 263,645
Legal fees ........................................................ 224,463
Co-Advisory fees .................................................. 202,804
Administration fees ............................................... 101,402
Transfer agent fees ............................................... 69,007
Custodian fees .................................................... 44,325
Audit fees ........................................................ 31,471
Insurance ......................................................... 19,418
NYSE fees ......................................................... 12,196
Directors' fees ................................................... 11,763
Printing .......................................................... 8,082
Miscellaneous ..................................................... 10,143
------------
Total expenses ...................................... 998,719
------------
Net investment income ............................... 207,188
------------
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 .......................................... 5,891,719
Foreign currency related transactions .......................... (111,982)
------------
5,779,737
Net change in unrealized appreciation of investments and
translations of other assets and liabilities denominated
in foreign currency ............................................ 9,576,188
------------
Net realized and unrealized gain on investments, foreign
currency holdings and translation of other assets and
liabilities denominated in foreign currency .................... 15,355,925
------------
Net increase in net assets resulting from operations .............. $ 15,563,113
============
</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 Six
Months Ended For the Year
January 31, 2000 Ended
(Unaudited) July 31, 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income ........................................... $ 207,188 $ 2,560,510
Net realized gain (loss) on investments and foreign currency
related transactions ......................................... 5,779,737 (20,981,275)
Netchange in unrealized appreciation in value of investments,
foreign currency holdings and translation of other
assets and liabilities denominated in foreign currency ....... 9,576,188 11,474,896
------------- -------------
Net increase (decrease) in net assets resulting from operations 15,563,113 (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
(819,500 and 120,000 shares respectively) (6,496,402) (881,100)
------------- -------------
Decrease in net assets from capital share transactions (6,496,402) (5,054,345)
------------- -------------
Total increase (decrease) in net assets 7,771,237 (22,997,718)
------------- -------------
NET ASSETS
Beginning of period ............................................. 97,150,390 120,148,108
------------- -------------
End of period (including undistributed net investment income
of $90,286 and $1,178,572 respectively) $ 104,921,627 $ 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 Six
Months Ended For the Year For the Year
January 31, 2000 Ended Ended
(Unaudited) July 31, 1999 July 31, 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year ....... $ 8.64 $ 10.16 $ 16.83
---------- -------- --------
Net investment income .................... 0.02 0.22 0.23
Net realized and unrealized gains (losses)
on investments, foreign currency
holdings, and translation of other
assets and liabilities denominated
in foreign currency ................... 1.39 (0.87) (3.34)
---------- -------- --------
Net increase (decrease) from
investment operations ................. 1.41 (0.65) (3.11)
---------- -------- --------
Less: Distributions
Dividends from net investment
income ............................. (0.12) -- (0.19)
Distributions from net realized gains . -- (0.93) (3.37)
---------- -------- --------
Total dividends and distributions ........ (0.12) (0.93) (3.56)
---------- -------- --------
Capital share transactions
Anti-dilutive effect of dividend
reinvestment ........................ -- -- --
Anti-dilutive effect of tender offer .. -- 0.04 --
Anti-dilutive effect of share
repurchase program .................. 0.14 0.02 --
Dilutive effect of rights offering .... -- -- --
---------- -------- --------
Total capital share transactions ......... 0.14 0.06 --
---------- -------- --------
Net asset value, end of year ............. $ 10.07 $ 8.64 $ 10.16
========== ======== ========
Per share market value, end of year ...... $ 8.4375 $ 7.0625 $ 7.75
Total Investment Return Based
on Market Value* ...................... 21.08 % 7.24 % (26.23)%
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
July 31, 1997 July 31, 1996 July 31, 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year ....... $ 11.96 $ 11.31 $ 20.33
-------- -------- -------
Net investment income .................... 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 ................... 5.55 0.67+ (5.98)
-------- -------- -------
Net increase (decrease) from
investment operations ................. 5.98 1.48 (5.16)
-------- -------- -------
Less: Distributions
Dividends from net investment
income ............................. (0.44) -- (0.03)
Distributions from net realized gains . (0.67) (0.09) (3.90)
-------- -------- -------
Total dividends and distributions ........ (1.11) (0.09) (3.93)
-------- -------- -------
Capital share transactions
Anti-dilutive effect of dividend
reinvestment ........................ -- -- 0.07
Anti-dilutive effect of tender offer .. -- -- --
Anti-dilutive effect of share
repurchase program .................. -- -- --
Dilutive effect of rights offering .... -- (0.74) --
-------- -------- -------
Total capital share transactions ......... -- (0.74) 0.07
-------- -------- -------
Net asset value, end of year ............. $ 16.83 $ 11.96 $ 11.31
======== ======== =======
Per share market value, end of year ...... $ 14.125 $ 9.625 $ 11.25
Total Investment Return Based
on Market Value* ...................... 62.52% (8.26)% (31.96)%
</TABLE>
21
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Financial Highlights (concluded)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratios/Supplemental Data
Net assets, end of year (in 000s) ........ $ 104,922 $ 97,150 $120,148 $199,066 $141,448 $99,779
Ratios of expenses to average net assets . 1.97%++ 1.88% 1.46% 1.49% 1.56% 1.71%
Ratios of net investment income to average
net assets ............................. 0.41%++ 2.72% 1.65% 3.29% 7.32% 5.73%
Portfolio turnover ....................... 91.56% 163.23% 88.85% 127.44% 42.59% 50.52%
</TABLE>
* Total investment return is calculated assuming a purchase of common stock
at the current market price on the first day and a sale at the current
market price on the last day of each period reported. Dividends and
distributions, if any, are assumed for purposes of this calculation to be
reinvested at prices obtained under the Fund's dividend reinvestment plan.
Rights offerings, if any, are assumed for purposes of this calculation to
be fully subscribed under the terms of the rights offering. Total
investment return does not reflect sales loads or brokerage commissions.
+ Based on average shares outstanding.
++ Annualized
See accompanying notes to financial statements.
22
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements January 31, 2000
(Unaudited)
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 $531,915
(0.51% of net assets) at January 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 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.
23
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
January 31, 2000
Notes to Financial Statements (continued) (Unaudited)
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 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 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 is 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.
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
24
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
January 31, 2000
Notes to Financial Statements (continued) (Unaudited)
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 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.
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,
25
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
January 31, 2000
Notes to Financial Statements (continued) (Unaudited)
the Mexican Adviser makes investment decisions for the Fund and supervises the
acquisition and disposition of securities by the Fund. For its services, the
Mexican Adviser receives a monthly fee at an annual rate of 0.52% of the Fund's
average monthly net assets. For the six months ended January 31, 2000, these
fees amounted to $263,645.
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 six months ended January 31, 2000, these fees amounted to $202,804.
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 six months ended January 31, 2000, these fees amounted to $101,402.
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
$85,125,823 and $92,926,467 respectively, for the six months ended January 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 $99,629 during the six months
ended January 31, 2000.
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.
26
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
January 31, 2000
Notes to Financial Statements (continued) (Unaudited)
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 six
months ended January 31, 2000, the Fund purchased 819,500 shares of capital
stock on the open market at a total cost of $6,496,402.
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 18.58% for the six months ended January
31, 2000 and 16.70% for the year ended July 31, 1999 respectively. Subsequent to
January 31, 2000, the Fund made additional purchases aggregating 120,500 shares
of capital stock on the open market at a total cost of $1,249,722. The weighted
average discount of these purchases was 14.20%.
The shares purchased pursuant to the tender offer and share repurchase program
are held in treasury.
NOTE F: OTHER
At January 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.
27
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
Results of Annual Shareholders Meeting
The Fund's annual shareholders meeting was scheduled for December 3, 1999. The
meeting was adjourned three times for failure to obtain the necessary quorum to
transact business. At the meeting, as reconvened on February 4, 2000,
shareholders approved the shareholder proposals presented by Mr. Phillip
Goldstein, including his election as a director of the Fund and a proposal that
Advantage Advisers, Inc., the Fund's U.S. Co-Adviser ("Advantage") and Acci
Worldwide, S.A. de C.V., the Fund's Mexican Adviser ("Acci Worldwide") present
to the Board of Directors a proposal designed to afford shareholders an
opportunity to promptly realize net asset value ("NAV"). At the meeting as
reconvened on February 28, 2000, shareholders ratified the selection of
PricewaterhouseCoopers LLP as independent accountants of the Fund for the fiscal
year ended July 31, 2000. The shareholder proposal to terminate the Fund's
advisory agreements if Advantage Advisers, Inc. and Acci Worldwide, S.A. de C.V.
do not present a plan for shareholders to promptly realize net asset value for
their shares was withdrawn at the meeting by a representative of Mr. Goldstein,
the proponent of the shareholder proposal.
The following table provides information concerning the matters voted on at the
meeting:
I. Election of Directors
Nominee Votes For Votes Abstained
------- --------- ---------------
Phillip Goldstein 4,358,896 29,863
At February 4, 2000, in addition to Phillip Goldstein, the other directors of
the Fund were as follows:
Carroll W. Brewster
Sol Gittleman
Alan Rappaport
II. Ratification of PricewaterhouseCoopers LLP as the Independent Accountants of
the Fund
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
6,542,906 687,118 831,351
III. Shareholder Proposal
1. Within 30 days of approval of this proposal, Advantage and Acci Worldwide
shall present to the Board of Directors a proposal designed to afford
shareholders an opportunity to promptly realize NAV for all their shares.
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
4,364,375 3,714,209 9,515
28
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
2. If (a) Proposal No. 1 is approved and (b) within 30 days of such approval
Advantage and Acci Worldwide fail to present to the Board of Directors a
plan designed to afford shareholders an opportunity to promptly realize
NAV for all their shares, the Fund's investment advisory agreements with
Advantage and Acci Worldwide shall be terminated as soon as permissible.
Withdrawn on February 28, 2000.
3. If (a) the Board of Directors opposes Proposal No. 1 and (b) Proposal No.
1 is approved, the following Bylaw shall be adopted: "All compensation
earned by the directors shall be held in escrow and not paid to them until
the shareholders are able to realize NAV for their shares. This Bylaw may
only be altered or repealed by the shareholders."
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
4,315,462 3,752,837 19,800
4. The following Bylaw shall be adopted: "The expenses incurred by the Fund
related to any contested meeting of the shareholders shall be limited to
those legally required to achieve a quorum and to allow shareholders to
cast an informed vote on all matters to be present at such meeting. This
Bylaw may only be altered or repealed by the shareholders."
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
4,675,510 3,387,585 25,004
29
<PAGE>
THE MEXICO EQUITY AND INCOME FUND, INC.
REQUEST TO INVESTMENT ADVISERS
In light of the results of the shareholders' meeting, the Board of Directors
requested that Advantage and Acci Worldwide present to the Board of Directors
for consideration at a meeting of the Board of Directors on March 3, 2000 a
proposal designed to afford shareholders an opportunity to promptly realize net
asset value for all their shares. The Fund announced this request by way of a
press release issued February 10, 2000. At the meeting held on March 3, 2000,
the Board considered alternatives presented by Advantage and Acci Worldwide for
affording shareholders the opportunity to promptly realize net asset value for
all their shares. At the meeting, the Board of Directors determined that the
alternatives require further review and agreed to again consider the
alternatives at a Special Meeting to be held in approximately 30 days.
SHARE REPURCHASE AND TENDER OFFER PROGRAM
At a meeting of the Board of Directors held on October 11, 1999, the Board
approved a share repurchase and tender offer program for up to 2,800,000 shares,
or 25%, of the Fund's common stock. As the Fund indicated in a press release
dated February 10, 2000, the Fund intends to continue to purchase shares in the
open market pursuant to this program at times and prices determined by
management of the Fund to be in the best interests of shareholders of the Fund,
and intends to tender for shares if necessary under the terms of the program.
30
<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
31
<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.
32
<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.
33
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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:
PFPC Inc.
Custodian:
PFPC Trust Co.
Citibank, N.A.
