T H E E M E R G I N G
M E X I C O
F U N D , I N C .
SEMI-ANNUAL REPORT
DECEMBER 31, 1995
[LOGO]
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THE EMERGING MEXICO FUND, INC.
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GENERAL INFORMATION
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THE FUND
The Emerging Mexico Fund, Inc. (the "Fund") is a non-diversified,
closed-end management investment company whose shares trade on the New York
Stock Exchange ("NYSE"). Its investment objective is long-term capital
appreciation through investment primarily in Mexican equity securities. Under
normal market conditions, at least 65% of the Fund's total assets will be
invested in equity securities issued by Mexican companies. The balance of the
Fund's assets will be invested in Mexican peso or U.S. dollar-denominated
fixed-income securities.
THE INVESTMENT ADVISER
Santander Management Inc. is the Fund's investment adviser. Santander
Management Inc. is an indirect subsidiary of Banco Santander, S.A.
SHAREHOLDER INFORMATION
Daily market prices for the Fund's shares are published in the NYSE
Composite Transactions section of major newspapers under the designation "EmMx"
or "EmergMexFd." The Fund's NYSE trading symbol is "MEF."
Net asset value and market price information about the Fund's shares are
published each Monday in The Wall Street Journal, each Sunday in The New York
Times and each Saturday in Barron's, as well as in other newspapers, in a table
captioned "Publicly Traded Funds." All inquiries regarding registered
shareholder accounts may be directed to the Fund's transfer agent, dividend
paying agent and registrar, PNC Bank, National Association, at (800) 852-4750.
DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Dividend Reinvestment Plan (the "Dividend Plan"),
shareholders may elect to have all dividend and capital gain distributions
(collectively referred to as "dividends") reinvested by PNC Bank, National
Association (the "Plan Agent") in additional shares of Common Stock of the Fund.
Holders of Common Stock who do not elect to participate in the Dividend Plan
will receive all dividends in cash paid by check mailed directly to the
shareholder of record (or, if the shares are held in street or other nominee
name, then to such nominee) by the Plan Agent. Participation in the Dividend
Plan is completely voluntary and may be terminated or resumed at any time
without penalty by written notice if received by the Plan Agent not less than 10
days prior to any dividend record date; otherwise, such termination will be
effective with respect to any subsequently declared dividends. Shareholders who
intend to hold their shares through a broker or nominee should contact such
broker or nominee to confirm that they may participate in the Dividend Plan.
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THE EMERGING MEXICO FUND, INC.
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GENERAL INFORMATION (continued)
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Whenever the Fund declares a dividend payable either in shares or in cash,
non-participants in the Dividend Plan will receive cash and participants in the
Dividend Plan will receive the equivalent in shares of Common Stock. The shares
will be acquired by the Plan Agent for the participant's account, depending upon
the circumstances described below, either (i) through receipt of additional
shares of unissued but authorized shares of Common Stock from the Fund ("newly
issued shares") or (ii) by purchase of outstanding shares of Common Stock on the
open market ("open-market purchases") on the NYSE or elsewhere. If on the
payment date of the dividend, the net asset value per share of the Common Stock
is equal to or less than the market price per share of the Common Stock plus
estimated brokerage commissions (such condition being referred to herein as
"market premium"), the Plan Agent will invest the dividend amount in newly
issued shares on behalf of the participant. The number of newly issued shares of
Common Stock to be credited to the participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per share on
the date the shares are issued, provided that the maximum discount from the then
current market price per share on the date of issuance does not exceed 5%. If on
the dividend payment date the net asset value per share is greater than the
market price per share (such condition being referred to herein as "market
discount"), the Plan Agent will invest the dividend amount in shares acquired on
behalf of the participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis, but in no event more than 30 days after
the dividend payment date (the "last purchase date"), to invest the dividend
amount in shares acquired in open-market purchases. If the market price of a
share of Common Stock exceeds the net asset value per share, the average per
share purchase price paid by the Plan Agent may exceed net asset value of the
Fund's shares resulting in the acquisition of fewer shares than if the dividend
had been paid in newly issued shares on the dividend payment date. Due to the
foregoing difficulty with respect to open-market purchases, the Dividend Plan
provides that if the Plan Agent is unable to invest the full dividend amount in
open-market purchases during the purchase period or if the market discount
shifts to a market premium during the purchase period, the Plan Agent will cease
making open-market purchases and will invest the uninvested portion of the
dividend amount in newly issued shares at the close of business on the last
purchase date.
2
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The Plan Agent maintains all shareholders' accounts in the Dividend Plan
and furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Dividend Plan participant will be held by the Plan Agent in
non-certificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased or received pursuant to the Dividend
Plan.
There will be no brokerage charges with respect to shares issued directly
by the Fund as a result of dividends payable either in shares or in cash.
However, each participant will be charged 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. The reinvestment of dividends
will not relieve participants of any federal income tax that may be payable (or
required to be withheld) on such dividends.
Experience under the Dividend Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Dividend
Plan. There is no direct service charge to participants in the Dividend Plan;
however, the Fund reserves the right to amend the Dividend Plan to include a
service charge payable by the participants.
Information relating to the Plan is available from the Plan Agent, PNC
Bank, National Association, at PNC Bank, National Association, Closed-End
Department-Mexico, P.O. Box 8950, Wilmington, Delaware, 19899 or by calling
(800) 852-4750.
3
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THE EMERGING MEXICO FUND, INC.
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GENERAL INFORMATION (concluded)
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ANNUAL SHAREHOLDERS' MEETING
The Fund's annual meeting of shareholders was held on May 5, 1995.
Shareholders voted to re-elect Gonzalo de Las Heras and Felipe de Yturbe as
Directors, ratified the appointment of Price Waterhouse LLP as the Fund's
independent accountant and approved an amended advisory agreement. The resulting
vote count for each proposal is indicated below:
1. Election of Directors:
Gonzalo de Las Heras
For: 7,190,394
Withheld Authority: 203,618
Felipe de Yturbe
For: 7,190,565
Withheld Authority: 203,447
2. Ratification of the appointment of Price Waterhouse LLP as the
Fund's independent accountant:
For: 7,257,744
Against: 75,455
Abstain: 60,813
3. Approval of amended advisory agreement:
For: 7,176,467
Against: 92,981
Abstain: 124,564
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LETTER TO SHAREHOLDERS
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February 20, 1996
Dear Shareholders:
We are pleased to present the semi-annual report of The Emerging Mexico
Fund, Inc. (the "Fund") for the six months ended December 31, 1995.
The Fund's net asset value per share at December 31, 1995 was $6.74,
representing a 0.6% decrease over the six month period, taking into
consideration the dilutive effect of the Fund's rights offering in November. On
December 31, 1995, the Fund's net assets aggregated $87.0 million and the price
on the New York Stock Exchange ranged from a high of $9.75 on July 13, 1995 to a
low of $5.25 on November 13, 1995, with the premium/(discount) to net asset
value ranging from 21.28% onJuly 7, 1995 to (13.24%) on December 20, 1995. The
aggregate trading volume for the six months ended December 31, 1995 was 7.0
million shares.
THE MEXICAN ECONOMY
The Mexican economy endured one of its most difficult years in 1995.
Following the devaluation of the peso in December 1994, the Mexican economy
adjusted to a sudden loss of over $30 billion of capital inflows, a reduction of
almost 7% in Gross Domestic Product ("GDP"), a loss of over 1 million jobs and
inflation of 52%.
Confronted by substantial fiscal hardship, the Mexican government
established several economic measures aimed at stabilizing the weakened economy.
During the second half of 1995, the Mexican government continued with the
structural reforms and economic policies that were implemented at the beginning
of the year, with the objective of maintaining strong economic fundamentals.
Accordingly, the government has maintained a balanced budget in an attempt to
drive inflation and interest rates down. At the same time, the exchange rate
policy enabled the country to transform a trade deficit of $18.5 billion to a
surplus of $7.4 billion. Finally, the government has accelerated the pace of
structural reforms designed to support economic development such as the
modification of the pension system and the privatization process.
In November 1995, after reaching a certain stability in the main economic
variables, questions regarding the viability of a newly signed economic growth
initiative known as the Growth Recovery Alliance and fear regarding the strength
of the Mexican financial system set off speculative attacks against the peso,
which reached an all-time low of 8.5 pesos to the dollar. At this point, the
Bank of Mexico stepped in to support the peso, which stabilized at 7.55 pesos to
the dollar.
The peso decline was a determining factor in the price increase that
occurred in the months of November and December 1995. Soon after this episode,
interest rates
5
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THE EMERGING MEXICO FUND, INC.
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LETTER TO SHAREHOLDERS (continued)
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followed the upward path of inflation and the benchmark 28-day Cete, rose to its
highest level since March 1995, 59.99%.
Presently, pressures on the Mexican economy have started to subside as
economic indicators are showing some signs of recovery. As a result, we are
still confident that growth will be modest but positive in 1996. As early as the
second quarter of this year, we expect GDP growth to turn slightly positive and
by the fourth quarter, to approach 5.0% on a year-to-year basis. We estimate
that for the year 1996, economic growth will range between 2.5% and 3.0%. In
addition, inflation is expected to decline to slightly less than 30% and as a
result, we expect interest rates to continue their downward trend and to average
approximately 35% for the year. We also anticipate the peso to continue
depreciating, but at a lower rate than that of inflation, signifying that the
peso will appreciate in real terms.
Among the factors that support our view are:
o The strengthening of the Mexican financial system through the
government's loan repurchase plan and the capitalization of local
banks by foreign financial institutions.
o The decline in U.S. short and long term interest rates.
o An increased flow of funds into the Mexican money and stock markets.
o Increase in employment as evidenced by the number of workers listed in
the Mexican Social Security Institute.
THE MEXICAN MARKET
During the second half of 1995, the operating performance of most Mexican
companies continued to be severely affected by the economic crisis.
Additionally, exposure to foreign exchange liabilities coupled with the
depreciation of the peso against the U.S. dollar caused Mexican companies to
incur extensive foreign exchange losses.
Nevertheless, for the six months ended December 31, 1995, the Mexican stock
market rose more that 580 points to close at 2,778, a return of 26.52% in peso
terms and almost 3% in U.S. dollar terms. We anticipate the stock market will
remain volatile during the U.S. presidential race and as long as Mexican
economic growth expectations do not materialize.
However, we predict the upward trend witnessed during the past few months
will continue throughout the year due to:
o Lower risk perception of the Mexican market.
o Prospects of earnings growth at many Mexican companies.
6
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o An increased flow of funds into emerging markets and Mexico.
o The attractive multiples in the current pricing of the Mexican stock
market, 7.9 times net earnings and 5.9 times operating earnings.
These factors along with the continuing economic recovery lead us to be
optimistic about 1996.
THE PORTFOLIO
We have continued the strategy of combining large capitalization, highly
liquid stocks with those of cyclical companies with dollar revenues and peso
costs mainly in the steel, chemical and autoparts sectors. The Fund has steadily
increased its exposure to stocks, with 87.4% and 12.6% of its investments in
equities and non-convertible fixed income securities, respectively, at December
31, 1995.
On November 3, 1995, the Fund completed its third rights offering, a
1-for-3 offer, that was fully subscribed and resulted in a dilution of the
Fund's NAV of only 3.9%. The net proceeds from the offering totaled almost $20
million, most of which was invested prior to the stock market rally that
occurred in November.
For the next few months, we anticipate the U.S. economy will begin a period
of slower growth that, when coupled with a stronger peso, will result in a
slower growth of Mexican exports. We are also anticipating a major decline in
interest rates by the end of the year. Therefore, we plan to carefully rebalance
the portfolio in favor of more domestic oriented companies, primarily in the
construction, financial and retail sectors, at the expense of cyclical
companies. At the same time, the Fund will continue to hold stocks of companies
in high growth sectors and in sectors where companies can take advantage of
Mexico's competitiveness.
In conclusion, we believe the existing economic fundamentals combined with
the ongoing political and structural reforms will lead Mexico to economic
growth.
We thank you for your continued interest in the Fund.
Sincerely,
[Signature] [Signature]
Gonzalez de Las Heras Eduardo Suarez Alvarez-Novoa
President Portfolio Manager
7
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THE EMERGING MEXICO FUND, INC.
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PORTFOLIO OF INVESTMENTS
December 31, 1995 (unaudited)
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INVESTMENTS IN MEXICO -- 95.64%
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EQUITIES -- 81.95%
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Shares Value
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Building Materials & Cement -- 6.88%
300,000 Cementos Mexicanos, S.A. de C.V.--Series A+ ......... $ 847,699
7,000 Cementos Mexicanos, S.A. de C.V.--Series CPO+ ....... 20,687
980,000 Grupo Cementos Chihuahua, S.A. de C.V.--
Series B ........................................... 657,991
1,130,000 Tolmex, S.A. de C.V.--Series B2+ .................... 4,467,272
------------
5,993,649
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Chemicals -- 3.17%
1,034,000 Celulosa y Derivados, S.A. de C.V.--Series A ........ 2,760,907
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Communications-- 11.02%
600,000 Telefonos de Mexico, S.A. de C.V.--Series A ......... 972,132
2,739,000 Telefonos de Mexico, S.A. de C.V.--Series L ......... 4,430,683
127,000 Telefonos de Mexico, S.A. de C.V.--Series L ADR ... 4,191,000
30 Videoprima, S.A. de C.V.--Series BCP+ ............... 117
------------
9,593,932
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Construction -- 5.52%
859,800 CorpGeo, S.A. de C.V.--Series B+ .................... 2,373,784
249,000 Ingenieros Civiles Asociados, S.A. de C.V.+ ......... 2,428,345
------------
4,802,129
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Financial Services -- 2.65%
585,210 Grupo Financiero Banamex--Accival, S.A. de C.V. ..... 876,866
520,000 Grupo Financiero Inbursa, S.A. de C.V.--Series B .... 1,425,535
2,200 Grupo Financiero Invermexico, S.A. de C.V.--
Series +. ........................................ 627
------------
2,303,028
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Food, Beverage, Tobacco -- 8.64%
308,000 Coca Cola Femsa--Series L ........................... 614,802
85,000 Fomento Economico Mexicano, S.A. de C.V.--
Series B ........................................... 191,484
498,000 Gruma, S.A. de C.V.--Series BCP ..................... 1,342,631
698,000 Grupo Modelo, S.A. de C.V.--Series C ................ 2,714,193
82,500 PanAmerican Beverages, S.A. de C.V.--
Series A ADR ....................................... 2,660,625
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7,523,735
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Shares Value
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Industrial Conglomerates -- 18.47%
1,100,828 Corporacion Industrial Sanluis, S.A. de C.V.--
Series CPO ........................................ $ 5,700,334
470,000 Desc-Sociedad de Fomento Industrial, S.A. de C.V.+ .. 1,541,283
722,500 Grupo Carso, S.A. de C.V.--Series A1+ ............... 3,914,517
367,000 Grupo Industrial Alfa, S.A. de C.V. ................. 4,233,701
55,000 Grupo Industrial Saltillo, S.A. de C.V.+ ............ 691,510
------------
16,081,345
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Metals & Mining -- 14.01%
736,000 Grupo Mexico, S.A. de C.V.--Series B+ ............... 3,229,242
775,000 Hylsamex, S.A. de C.V.--Series BCP+ ................. 2,441,024
970,000 Industrias Penoles, S.A. de C.V. .................... 4,130,201
185,000 Tubos de Acero Mexico, S.A. de C.V.+ ................ 1,270,901
160,000 Tubos de Acero Mexico, S.A. de C.V.--ADR+ ........... 1,120,000
------------
12,191,368
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Paper -- 4.44%
32,000 Empaques Ponderosa, S.A. de C.V.--Series B+ ......... 61,387
296,500 Kimberly-Clark de Mexico, S.A. de C.V.--
Series A ........................................... 3,804,731
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3,866,118
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Retail -- 5.12%
2,077,000 Cifra, S.A. de C.V.+ 2,137,574
2,731,000 Controladora Commercial Mexicana, S.A. de C.V.--
Series B+ .......................................... 1,628,334
90 Grupo Casa Autrey, S.A. de C.V. ..................... 312
232,000 Nacional de Drogas, S.A. de C.V.--Series L .......... 690,136
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4,456,356
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Transportation -- 2.03%
267,000 Transportacion Maritima Mexicana,
S.A. de C.V.-- Series A+ ........................... 1,765,003
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Total Equities
(cost--$76,001,291) ............................................. 71,337,570
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THE EMERGING MEXICO FUND, INC.
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PORTFOLIO OF INVESTMENTS (continued)
December 31, 1995 (unaudited)
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CONVERTIBLE BOND -- 1.62%
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Principal
Amount
(000) Value
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MXP 8,290 Nacional Financiera, S.N.C. 11.25% PRIDES
5/15/98, exchangeable for ADSs, each
representing 20 Series L shares of
Telefonos de Mexico, S.A. de C.V.
(cost--$2,499,008) ................................... $ 1,407,600
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GOVERNMENT OBLIGATIONS -- 7.71%
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51,772 Cetes
47.00%, due 1/11/96
(cost--$6,780,816) ................................... 6,710,503
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BANKERS ACCEPTANCE -- 0.34%
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2,299 National Financiera, S.N.C.
44.00%, due 1/04/96
(cost--$297,957) ..................................... 297,957
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REPURCHASE AGREEMENTS -- 4.02%
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812 Repurchase Agreement with Casa de Bolsa
Inverlat, S.A. de C.V., 44.50%, dated 12/28/95
to be repurchased 1/04/96 in the amount of
MXP 817,128, collateralized by MXP 834,175
Nacional Financiera S.N.C. Aceptacion Bancaria
due 1/18/96 ........................................... 105,202
26,179 Repurchase Agreement with Casa de
Bolsa Santander, S.A. de C.V., 48.40%,
dated 12/27/95 to be repurchased
1/03/96 in the amount of MXP 26,421,684,
collateralized by MXP 26,433,356
Nacional Financiera S.N.C. Aceptacion
Bancaria due 1/04/96 # ................................ 3,393,219
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Total Repurchase Agreements
(cost--$3,534,524) ........................................... 3,498,421
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Total Investments in Mexico
(cost--$89,113,596) .......................................... 83,252,051
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OTHER INVESTMENTS -- 0.02%
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TIME DEPOSIT -- 0.02%
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Principal
Amount
(000) Value
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$14 Brown Brothers Harriman & Co.
Grand Cayman, 4.75%*
(cost--$14,000) .................................. $ 14,000
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Total Investments
(cost--$89,127,596)--95.66% ..................................... 83,266,051
Other assets less liabilities--4.34% ............................. 3,778,741
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Net Assets (applicable to 12,913,231 shares; equivalent
to $6.74 per share)--100.00% .................................... $ 87,044,792
============
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ADR American Depositary Receipt.
ADS American Depositary Security.
MXP Mexican pesos.
PRIDES Provisionally Redeemable Income Debt Exchangeable for Stock.
+ Non-income producing security.
# Deemed to be an affiliated security. Upon maturity, the Fund will earn
interest of MXP 242,995.
* Variable rate account--rates reset on a monthly basis; amounts
available upon 48 hours' notice.
See accompanying notes to financial statements.
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THE EMERGING MEXICO FUND, INC.
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STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995 (unaudited)
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Assets
Investments, at value (cost--$89,127,596) ....................... $ 83,266,051
Cash (including Mexican pesos of $4,908,459 with a cost
of $4,961,922) ................................................. 4,910,027
Receivable for investments sold ................................. 297,957
Interest receivable ............................................. 17,856
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Total assets ................................................. 88,491,891
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Liabilities
Payable for investments purchased ............................... 1,124,763
Investment advisory fee payable ................................. 67,603
Rights offering costs payable ................................... 18,460
Administration fee payable ...................................... 14,136
Other accrued expenses .......................................... 222,137
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Total liabilities 1,447,099
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Net assets
Common stock, $0.10 par value; 12,913,231 shares issued
and outstanding (100,000,000 shares authorized) ................ 1,291,323
Additional paid-in capital ...................................... 137,356,361
Accumulated net investment loss ................................. (3,201,765)
Accumulated net realized loss ................................... (42,484,543)
Net unrealized depreciation of investments and other assets
and liabilities denominated in Mexican pesos ................... (5,916,584)
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Net assets applicable to shares outstanding .................. $ 87,044,792
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Net asset value per share ........................................ $6.74
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See accompanying notes to financial statements.
12
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STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 1995 (unaudited)
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Investment income
Interest (net of withholding taxes of $2,921) ................... $ 1,572,254
Dividends ....................................................... 295,773
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1,868,027
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Expenses
Investment advisory fees ........................................ 331,217
Legal and audit fees ............................................ 93,585
Administration fees ............................................. 71,039
Reports to shareholders ......................................... 66,470
Custodian and accounting fees ................................... 64,835
Transfer agent fees and expenses ................................ 17,670
Directors' fees and expenses .................................... 10,790
Amortization of organizational expenses ......................... 3,983
Other expenses .................................................. 9,835
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669,424
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Net investment income ............................................ 1,198,603
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Realized and unrealized gain (loss) on investments
and foreign currency transactions
Net realized loss on:
Investments ................................................... (8,191,048)
Foreign currency transactions (36,044)
Net change in unrealized depreciation of:
Investments ................................................... 10,221,354
Other assets and liabilities denominated in Mexican pesos ..... (54,114)
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Net realized and unrealized gain on investments
and foreign currency transactions ............................... 1,940,148
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Net increase in net assets from investment operations ........... $ 3,138,751
============
See accompanying notes to financial statements.
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THE EMERGING MEXICO FUND, INC.
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STATEMENT OF CHANGES IN NET ASSETS
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For the
Six Months
Ended For the Year
December 31, 1995 Ended
(unaudited) June 30, 1995
----------------- -------------
Income (loss) from investment operations:
Net investment income ..................... $ 1,198,603 $ 3,924,013
Net realized loss on investments and
foreign currency transactions ............ (8,227,092) (28,092,920)
Net change in unrealized appreciation/
depreciation of investments
and other assets and liabilities
denominated in Mexican pesos ............. 10,167,240 (50,311,353)
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Total from investment operations .......... 3,138,751 (74,480,260)
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Dividends and distributions:
From net investment income ................ -- (888,036)
From net realized gain on investments ..... -- (8,228,561)
In excess of net realized gain on
investments .............................. -- (12,737,253)
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Total dividends and distributions ......... -- (21,853,850)
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Capital share transactions:
Reinvestment of dividends resulting in
the issuance of common stock ............. -- 1,470,290
Proceeds from sale of shares in
rights offering .......................... 20,251,928 --
Offering costs charged and adjustments
to additional paid-in capital ............ (375,000) 426,596
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Total capital share transactions .......... 19,876,928 1,896,886
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Net increase (decrease) in net assets ..... 23,015,679 (94,437,224)
Net assets:
Beginning of period ....................... 64,029,113 158,466,337
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End of period ............................. $ 87,044,792 $ 64,029,113
============ ============
See accompanying notes to financial statements.
14
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NOTES TO FINANCIAL STATEMENTS (unaudited)
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ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Emerging Mexico Fund, Inc. (the "Fund") was incorporated in the State
of Maryland on June 25, 1990, as a non-diversified, closed-end management
investment company. Prior to commencing investment operations on October 11,
1990, the Fund had no operations other than the sale to Santander Management
Inc. (the "Investment Adviser") of 9,000 shares of common stock for $100,440 on
September 26, 1990. Organizational costs of $70,000 have been deferred and
amortized on a straight-line basis over a 60-month period from the date the Fund
commenced operations.
The preparation of financial statements in accordance with generally
accepted accounting principles requires Fund management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by
the Fund.
Valuation of Investments--Portfolio securities which are regularly traded
on the Mexican Stock Exchange are valued at the last sales price as of the close
of business on the day the securities are being valued, or lacking any sales, at
the last available bid price. Securities traded in the over-the-counter market
are generally valued at the last reported sales price available to the Fund as
of the close of business on the day the securities are being valued or, if none
is available, at the mean of the bid and offer prices at the close of business
on such day or, if none is available, the last reported sales price available to
the Fund. Securities and assets for which market quotations are not readily
available (or for which market quotations are not considered representative of
fair value) are valued at fair value as determined in good faith by or under the
direction of the Fund's Board of Directors. Short-term investments that mature
in 60 days or less are valued at amortized cost or by amortizing their value on
the 61st day prior to maturity if their term to maturity from date of purchase
was greater than 60 days, unless the Board of Directors determines that such
values do not represent the fair value of such investments.
Option Transactions--For hedging purposes, the Fund may purchase and write
(sell) put and call options on Mexican securities. The risk associated with
purchasing an option is that the Fund pays a premium whether or not the option
is exercised. Additionally, the Fund bears the risk of loss of premium and
change in market value should the counterparty not perform under the contract.
Put and call options purchased are accounted for in the same manner as portfolio
securities. The cost of securities
15
<PAGE>
THE EMERGING MEXICO FUND, INC.
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
acquired through the exercise of call options is increased by the premiums paid.
The proceeds from securities sold through the exercise of put options are
decreased by the premiums paid.
When the Fund writes an option, the premium received by the Fund is
recorded as a liability and is subsequently adjusted to the current market value
of the written option. The premium received from writing an option which expires
unexercised is recorded by the Fund on the expiration date as a realized gain.
If a written call option is exercised, the premium received is added to the
proceeds from the sale of the underlying security in determining whether the
Fund has realized a gain or loss. If a written put option is exercised, the
premium received reduces the cost basis of the underlying security in
determining whether the Fund has realized a gain or loss. In writing an option,
the Fund bears the market risk of an unfavorable change in the price of the
security or currency underlying the written option. Exercise of an option
written by the Fund could result in the Fund selling or buying a security at a
price different from the current market value.
Repurchase Agreements--The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to assure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. If the seller defaults and the value of the collateral declines or
if bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Fund may be delayed or limited.
Tax Status--The Fund intends to distribute all of its taxable income and to
comply with the other requirements of the Internal Revenue Code applicable to
regulated investment companies. Accordingly, no provision for U.S. federal
income taxes is required. In addition, by distributing during each calendar year
substantially all of its net investment income, capital gains and certain other
amounts, if any, the Fund intends not to be subject to a U.S. federal excise
tax.
Dividends distributed by Mexican companies from after tax profits are not
subject to tax. However, any other dividends distributed by Mexican companies
are subject to withholding tax at a rate of 35%. Interest income is subject to
withholding tax at a rate of 10% in Mexico with the exception of debt issued by
the Mexican federal government. Realized gains from the sale or disposition of
equity securities listed on the Mexican Stock Exchange that are either directly
available to foreign investors or
16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
available through the Neutral Trust arrangements are exempt from Mexican
withholding tax. Realized gains from off-exchange transactions in both listed
and unlisted securities are subject to 20% withholding tax on the amount
received, or at the election of the Fund, 30% tax on the realized gain. For the
six months ended December 31, 1995, the Fund did not incur any realized gains
from off-exchange transactions.
In accordance with U.S. Treasury regulations, the Fund elected to defer
realized capital and foreign currency losses occurring after October 31, 1994 in
the amounts of $33,604,566 and $4,400,368, respectively. Such losses are treated
for tax purposes as arising on July 1, 1995.
Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date (the date on which the order to buy or sell is
executed). Realized gains and losses from investments and foreign currency
transactions are calculated on the identified cost basis. Interest income is
recorded on an accrual basis. Dividend income and other distributions are
recorded on the ex-dividend date ("ex-date") except for certain dividends from
Mexican securities which are recorded as soon after the ex-date as the Fund
becomes aware of such dividends.
Foreign Currency Translation--The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities and other assets and liabilities stated in Mexican pesos
are translated at the prevailing exchange rates as quoted by one or more banks
or dealers at the end of the period; and (2) purchases and sales of investment
securities, income and expenses are translated at the rate of exchange
prevailing on the respective dates of such transactions. The resulting net
foreign currency gain or loss is included in the Statement of Operations.
The Fund does not generally isolate the effect of fluctuations in foreign
currency rates from the effect of fluctuations in the market prices of
securities. However, the Fund does isolate the effect of fluctuations in foreign
currency rates when determining the gain or loss upon the sale or maturity of
foreign currency denominated debt obligations pursuant to U.S. federal income
tax regulations.
Net foreign currency gain (loss) from valuing Mexican peso denominated
assets and liabilities at the period end exchange rate is reflected as a
component of net unrealized depreciation of investments and other assets and
liabilities denominated in Mexican pesos.
17
<PAGE>
THE EMERGING MEXICO FUND, INC.
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Net realized foreign currency losses of $36,044 represent foreign currency
gains and losses from sales and maturities of debt securities, transactions in
Mexican pesos, currency gains or losses realized between the trade and
settlement dates on security transactions, and the difference between the
amounts of interest and dividends recorded on the Fund's books and the U.S.
dollar equivalent of the amounts actually received or paid.
Dividends and Distributions--Dividends and distributions to shareholders
are recorded on the ex-date. The amount of dividends and distributions from net
investment income and net realized capital gain are determined in accordance
with federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
and net realized capital gain for financial reporting purposes, but not for tax
purposes, are reported as dividends in excess of net investment income and
distributions in excess of net realized gain on investments. To the extent they
exceed net investment income and net realized capital gain for tax purposes,
they are reported as distributions of additional paid-in capital.
INVESTMENT ADVISER AND ADMINISTRATOR
The Investment Adviser has an Investment Advisory Agreement with the Fund.
In accordance with the Investment Advisory Agreement, the Investment Adviser
provides or arranges for the provision of investment advisory services to the
Fund subject to the oversight and supervision of the Fund's Board of Directors.
In addition to the management of the Fund's portfolio in accordance with the
Fund's investment objectives and policies, it is the responsibility of the
Investment Adviser to make decisions to buy, sell or hold particular
investments. As compensation for its services to the Fund, the Investment
Adviser receives a monthly fee, computed weekly, at the annual rate of 0.90% of
the Fund's average weekly net assets up to $200 million and 0.80% of the Fund's
average weekly net assets in excess of $200 million.
Mitchell Hutchins Asset Management Inc. (the "Administrator"), has an
Administration Agreement with the Fund. Under the terms of the Administration
Agreement, the Administrator provides certain administrative services to the
Fund. As compensation for its services, the Administrator receives a monthly
fee, computed weekly, at the annual rate of 0.20% of the Fund's average weekly
net assets up to $50
18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
million, 0.18% of the Fund's next $25 million of average weekly net assets, and
0.16% of such assets in excess of $75 million, with a minimum annual fee of
$125,000.
TRANSACTIONS WITH AFFILIATES
For the six months ended December 31, 1995, the Fund paid $30,540 in
brokerage commissions to Casa de Bolsa Santander, S.A. de C.V., an affiliate of
the Investment Adviser.
The Fund paid or accrued approximately $60,035 for the six months ended
December 31, 1995 for legal services to Brown & Wood, the law firm in which the
Fund's secretary is a partner.
INVESTMENTS IN SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at
December 31, 1995 was substantially the same as the cost of securities for
financial statement purposes. Accordingly, net unrealized depreciation of
investments of $5,861,545 was composed of gross appreciation of $6,130,742 for
those investments having an excess of value over cost, and gross depreciation of
$11,992,287 for those investments having an excess of cost over value.
For the six months ended December 31, 1995, aggregate purchases and sales
of portfolio securities, excluding short-term securities, were $34,972,750 and
$18,946,967, respectively.
CAPITAL STOCK
At December 31, 1995, the Investment Adviser owned 12,000 shares of the
Fund. Transactions in shares of common stock were as follows:
For the
Six Months For the Year
Ended Ended
December 31, 1995 June 30, 1995
----------------- -------------
Shares outstanding, beginning of period ..... 9,115,223 8,956,496
---------- ---------
Shares issued resulting from dividend
reinvestment .............................. -- 158,727
Shares issued in connection with rights
offering .................................. 3,798,008 --
---------- ---------
Net increase in shares outstanding ......... 3,798,008 158,727
---------- ---------
Shares outstanding, end of period ........... 12,913,231 9,115,223
========== =========
19
<PAGE>
THE EMERGING MEXICO FUND, INC.
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (concluded)
- -------------------------------------------------------------------------------
CONCENTRATION OF RISK
The Fund invests in securities listed on the Mexican Stock Exchange through
Neutral Trust arrangements pursuant to which the Fund obtains the monetary and
economic rights but not voting rights with respect to the securities.
Investments in Mexico may involve certain considerations and risks not
typically associated with investments in the United States as a result of, among
others, the possibility of future political and economic developments and the
level of Mexican governmental supervision and regulation of its securities
markets.
The ability of the issuers of the debt securities held by the Fund to meet
their obligations may be affected by economic and political developments in a
specific industry or region.
RIGHTS OFFERING
During the six months ended December 31, 1995, the Fund issued 3,798,008
shares in connection with a rights offering of the Fund's shares. Shareholders
of record on October 10, 1995 were issued one non-transferable right for each
share of common stock owned, entitling shareholders the opportunity to acquire
one newly issued share of common stock for every three rights held at a
subscription price of $5.54 per share. Offering costs of approximately $375,000
were charged to additional paid-in capital. Dealer manager and soliciting fees
of $789,036 were netted against the proceeds of the subscription. PaineWebber
Incorporated, an affiliate of the Administrator, earned approximately $350,500
and $33,500 in dealer manager and soliciting fees, respectively, with respect to
its participation in the rights offering.
20
<PAGE>
- --------------------------------------------------------------------------------
QUARTERLY RESULTS OF OPERATIONS (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Realized
and Unrealized
Gain (Loss) on
Investments and
Net Investment Foreign Currency
Income (Loss) Transactions
---------------------- ----------------------
Total Per Total Per
Quarter Ended (000) Share (000) Share
- ------------- -------- ------ -------- -------
<S> <C> <C> <C> <C>
December 31, 1995 .......... $ 750 $ 0.07 $ (3,843) $ (0.79)
September 30, 1995 ......... 449 0.05 5,783 0.63
-------- ------ -------- -------
Totals .................... $ 1,199 $ 0.12 $ 1,940 $ (0.16)
======== ====== ======== =======
June 30, 1995 .............. $ 2,117 $ 0.23 $ 10,505 $ 1.15
March 31, 1995 ............. 1,310 0.14 (42,129) (4.67)
December 31, 1994 .......... 306 0.04 (72,515) (8.09)
September 30, 1994 ......... 191 0.02 25,735 2.87
-------- ------ -------- -------
Totals .................... $ 3,924 $ 0.43 $(78,404) $ (8.74)
======== ====== ======== =======
June 30, 1994 .............. $ 1,312 $ 0.15 $(12,005) $ (1.34)
March 31, 1994 ............. (114) (0.02) (22,295) (3.05)
December 31, 1993 .......... (335) (0.05) 50,896 7.62
September 30, 1993 ......... 15 0.00 10,333 1.55
-------- ------ -------- -------
Totals .................... $ 878 $ 0.08 $ 26,929 $ 4.78
======== ====== ======== =======
<CAPTION>
Net Increase
(Decrease) in
Net Assets
from Investment Market Price
Operations on NYSE
---------------------- -------------------
Total Per
(000) Share High Low
-------- ------ -------- ------
<S> <C> <C> <C> <C>
December 31, 1995 .......... $ (3,093) $ (0.72) $ 8.625 $ 5.250
September 30, 1995 ......... 6,232 0.68 9.750 7.875
Totals .................... $ 3,139 $ (0.04)
======== ======
June 30, 1995 .............. $ 12,622 $ 1.38 $ 9.875 $ 7.000
March 31, 1995 ............. (40,819) (4.53) 11.375 5.750
December 31, 1994 .......... (72,209) (8.05) 20.000 11.000
September 30, 1994 ......... 25,926 2.89 21.875 16.750
-------- -------
Totals .................... $(74,480) $ (8.31)
======== ======
June 30, 1994 .............. $(10,693) $ (1.19) $19.625 $15.000
March 31, 1994 ............. (22,409) (3.07) 27.500 17.875
December 31, 1993 .......... 50,561 7.57 28.000 17.375
September 30, 1993 ......... 10,348 1.55 18.875 13.750
-------- -------
Totals .................... $ 27,807 $ 4.86
======== ======
</TABLE>
21
<PAGE>
THE EMERGING MEXICO FUND, INC.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of common stock outstanding throughout each
period is presented below.
<TABLE>
<CAPTION>
For the
Six Months For the Year
Ended Ended June 30,
December 31,1995 --------------------
(unaudited) 1995 1994
---------------- ------- ---------
<S> <C> <C> <C>
Net asset value, beginning of period .................................... $ 7.02 $ 17.69 $ 15.79
------- ------- --------
Income (loss) from investment operations:
Net investment income ................................................... 0.12 * 0.43 0.08*
Net realized and unrealized gain (loss) on investments
and foreign currency transactions ...................................... (0.16)* (8.74) 4.78*
------- ------- --------
Total from investment operations ..................................... (0.04) (8.31) 4.86
------- ------- --------
Dividends and distributions:
From net investment income .............................................. -- (0.10) (0.21)
From net realized gain on investments ................................... -- (0.92) (2.18)
In excess of net realized gain on investments ........................... -- (1.42) --
Total dividends and distributions .................................... -- (2.44) (2.39)
Capital share transactions:
Anti-dilutive effect of dividend reinvestment ........................... -- 0.03 0.02
Dilutive effect of rights offering ...................................... (0.20) -- (0.57)
Offering costs charged and adjustments to additional paid-in capital .... (0.04) 0.05 (0.02)
------- ------- --------
Total capital share transactions ..................................... (0.24) 0.08 (0.57)
------- ------- --------
Net asset value, end of period .......................................... $ 6.74 $ 7.02 $ 17.69
======= ======= ========
Market value, end of period ............................................. $ 6.13 $ 8.00 $ 17.38
======= ======= ========
Total investment return (1)(2) .......................................... (22.51)% (41.83)% 36.71%
------- ------- --------
Ratios/Supplemental data:
Net assets, end of period (000 omitted) ................................. $87,045 $64,029 $158,466
Ratio of expenses to average net assets ................................. 1.82%(4) 1.75% 1.56%
Ratio of net investment income to average net assets .................... 3.26%(4) 3.38% 0.62%
Portfolio turnover ...................................................... 30% 83% 36%
<CAPTION>
For the Year For the Period
Ended June 30, October 11, 1990+
-------------------- through
1993 1992 June 30, 1991
-------- ------- ------------------
<S> <C> <C> <C>
Net asset value, beginning of period .................................... $ 19.94 $ 17.23 $ 11.16
-------- ------- -------
Income (loss) from investment operations:
Net investment income ................................................... 0.38* 0.19 0.66
Net realized and unrealized gain (loss) on investments
and foreign currency transactions ...................................... 1.29* 5.24 5.89
-------- ------- -------
Total from investment operations ..................................... 1.67 5.43 6.55
-------- ------- -------
Dividends and distributions:
From net investment income .............................................. (0.22) (0.32) (0.30)
From net realized gain on investments ................................... (4.68) (2.40) (0.01)
In excess of net realized gain on investments ........................... -- -- --
-------- ------- -------
Total dividends and distributions .................................... (4.90) (2.72) (0.31)
-------- ------- -------
Capital share transactions:
Anti-dilutive effect of dividend reinvestment ........................... -- -- --
Dilutive effect of rights offering ...................................... (0.86) -- --
Offering costs charged and adjustments to additional paid-in capital .... (0.06) -- (0.17)
-------- ------- -------
Total capital share transactions ..................................... (0.92) -- (0.17)
-------- ------- -------
Net asset value, end of period .......................................... $ 15.79 $ 19.94 $ 17.23
======== ======= =======
Market value, end of period ............................................. $ 14.13 $ 17.63 $ 14.63
======== ======= =======
Total investment return (1)(2) .......................................... 8.18% 38.25% 35.10%
-------- ------- -------
Ratios/Supplemental data:
Net assets, end of period (000 omitted) ................................. $105,423 $99,890 $86,281
Ratio of expenses to average net assets ................................. 1.82% 1.72%(3) 2.22%(4)
Ratio of net investment income to average net assets .................... 2.44% 0.95%(3) 6.86%(4)
Portfolio turnover ...................................................... 53% 65% 87%
</TABLE>
- ----------
+ Commencement of investment operations.
* Based on average shares outstanding.
(1) Total investment return is calculated assuming a purchase of common stock
at the current market price on the first day, the purchase of common stock
pursuant to any rights offering occurring in the period 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.
Total investment return does not reflect sales charges or brokerage
commissions.
(2) Total investment return for a period of less than one year is not
annualized.
(3) During this year, Santander Management Inc. waived a portion of its
advisory fees. If such waiver had not been made, the ratio of expenses to
average net assets would have been 1.79% and the ratio of net investment
income to average net assets would have been 0.88%.
(4) Annualized.
22 & 23
<PAGE>
This report, including the financial statements herein, is sent to the
shareholders of the Fund for their information. It is not a prospectus, circular
or representation intended for use in the purchase or sale of shares of the Fund
or of any securities mentioned in this report.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase from time to time shares of its
Common Stock in the open market.
[LOGO]
<PAGE>
THE EMERGING MEXICO FUND, INC.
- --------------------------------------------------------------------------------
Gonzalo de Las Heras President and Director
Edgar R. Fiedler Director
Pablo Mancera Director
Richard S. Weinert Director
Felipe de Yturbe Director
C. William Maher Treasurer
Thomas R. Smith, Jr. Secretary
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Santander Management Inc.
P.O. Box N-1682
Bahamas Financial Centre, 3rd Floor
Charlotte and Shirley Streets
Nassau, Bahamas
ADMINISTRATOR
- --------------------------------------------------------------------------------
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, NY 10019
CUSTODIANS
- --------------------------------------------------------------------------------
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Citibank, N.A.
Sucursal en Mexico
Paseo de la Reforma 390
06695 Mexico, D.F.
SHAREHOLDER SERVICING AGENT
- --------------------------------------------------------------------------------
PNC Bank, National Association
400 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT ACCOUNTANT
- --------------------------------------------------------------------------------
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Brown & Wood
1 World Trade Center
New York, NY 10048
TO OBTAIN ADDITIONAL INFORMATION, INCLUDING UPDATED NET ASSET VALUES AND SHARE
PRICES, CALL TOLL-FREE: (800) 852-4750.
The financial information included herein is taken from the records of the Fund
without examination by independent accountants who do not express an opinion
thereon.
Comparisons between changes in the Fund's net asset value per share and changes
in the Mexican Stock Exchange Index should be considered in light of the Fund's
investment policies and objective, the characteristics and quality of the Fund's
investments, the size of the Fund and variations in the Mexican peso/U.S. dollar
exchange rate.
