THE EMERGING
MEXICO
FUND, INC.
SEMI-ANNUAL REPORT
DECEMBER 31, 1998
[LOGO] SANTANDER
MANAGEMENT INC.
<PAGE>
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.
Gestion Santander Mexico, S.A. de C.V., an affiliate of the Investment Adviser,
serves as the Fund's sub-adviser in Mexico.
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" or "Closed-End Funds". 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
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THE EMERGING MEXICO FUND, INC.
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GENERAL INFORMATION (continued)
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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
ten 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.
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 in 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 thirty 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 the net asset value of the
Fund's shares resulting in the acquisition of fewer shares than if
2
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THE EMERGING MEXICO FUND, INC.
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GENERAL INFORMATION (continued)
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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.
The Plan Agent maintains all shareholders' accounts in the Dividend Plan and
furnishes written confirmation of all transactions in the account, including
information required by shareholders for their 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 19809 or by calling (800)
852-4750.
3
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THE EMERGING MEXICO FUND, INC.
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GENERAL INFORMATION (continued)
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CORPORATE DEVELOPMENTS
The Fund announced on February 4, 1999 that a federal judge has scheduled a
hearing for March 26, 1999 at 10:00 a.m. to consider the fairness of the
settlement of two class action lawsuits pending against the Fund and its Board
of Directors.
On October 26, 1998, the Board of Directors announced their decision to submit
to shareholder vote a recommendation to liquidate the Fund. The Fund has
scheduled a special stockholders' meeting for March 30, 1999 for the purpose of
voting on the proposed liquidation and dissolution of the Fund. The Fund's
liquidation is subject to approval of the Fund's stockholders and court approval
of the resolution of the lawsuits. If stockholders approve the Fund's
liquidation at the meeting and the settlement of the claims is approved, the
Fund's shares of common stock will cease to trade on the NYSE shortly thereafter
and the distribution of fund assets will be made in cash payments to the
shareholders.
On September 21, 1998, the Directors announced the decision to enact a Share
Repurchase Program as long as the Fund's discount to net asset value exceeded
10%. Through December 31, 1998, the Fund had repurchased approximately 20% of
its total outstanding shares since the announcement.
YEAR 2000 PROCESSING ISSUE
Many computer programs employed throughout the world use two digits rather than
four to identify the year. These programs, if not adapted, may not correctly
handle the change from "99" to "00" on January 1, 2000, and may not be able to
perform necessary functions. The Year 2000 issue affects virtually all companies
and organizations.
The Investment Adviser has advised the Fund that it has implemented steps
intended to ensure that its computer systems are capable of Year 2000
processing. In addition, the Fund is inquiring with third parties to assess the
adequacy of their Year 2000 compliance efforts. The Fund has developed
contingency plans intended to assure that third-party noncompliance will not
materially affect the Fund's operations. Based on reports provided by its
service providers, the Fund does not currently anticipate that the Year 2000
issue will have an adverse effect on its ability to continue its operations.
Companies in which the Fund invests could be adversely affected by the Year 2000
issue, but the Fund cannot predict the consequential affect on its investment
return. To the extent the impact on a portfolio holding is negative, the Fund's
investment return could be adversely affected.
4
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THE EMERGING MEXICO FUND, INC.
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LETTER TO SHAREHOLDERS
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February 3, 1999
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, 1998.
The Fund's per share net asset value at December 31, 1998 was $6.55 representing
a 29.95% decrease during the six-month period. The closing market price on the
New York Stock Exchange on December 31, 1998 was $5.8125, a decrease of 26.77%
during the six-month period. On December 31, 1998, the Funds net assets
aggregated $67.4 million and the closing price on the New York Stock Exchange
ranged from a high of $8.5625 on July 16-17, 1998 to a low of $3.25 on September
10, 1998.
THE MEXICAN ECONOMY
We believe that the Mexican economy, though affected, has held up fairly well in
a difficult international environment the past eighteen months. First, there was
the crisis in Southeast Asia in 1997 and its contagion to other countries in the
region. Next, in 1998, we witnessed the collapse of the Russian financial
markets and the generalized drop of international commodity prices. Finally,
during the first weeks of 1999, there was the devaluation of the Brazilian Real,
which we believe will bring a recession to that economy. We believe some of the
factors contributing to the relative positive results reached by the Mexican
economy are: (1) its participation in the North American Free Trade Agreement
(NAFTA) and the large trade relations with its partners; (2) relatively low
direct exposure to the economies in crisis; (3) officials' efforts to maintain
sound government finances in this adverse environment; and (4) the market
oriented reforms that have been implemented during the past decade.
In this environment, we expect the Mexican economy to switch gears to slower
growth rates over the next year. While Gross Domestic Product ("GDP") expanded
approximately 5.3% during the first nine months of the year after a 7% expansion
in 1997, growth is expected to decelerate in the fourth quarter to about 3.3%.
The manufacturing sector has remained the most dynamic contributor to GDP growth
in this period, supported by a strong domestic economy. The weakness of
international commodity prices has contributed to the mining sector's
stagnation. We expect this economic slowdown will carry on into 1999 with
effects becoming evident across all sectors and we anticipate GDP growth to
decelerate to approximately 2.5%.
5
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THE EMERGING MEXICO FUND, INC.
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LETTER TO SHAREHOLDERS (continued)
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The current account deficit continued to deteriorate in the second half of 1998.
Despite 11.4% growth in non-oil exports, the trade deficit increased as imports
continued to grow approximately 14.0% while oil prices decreased more than 30%
from the previous year. During the fourth quarter, the Mexican oil basket price
fell below US$7.0/barrel, levels not experienced since 1986. In line with market
consensus and Mexican officials, we believe oil prices will remain weak over the
next twelve months. For 1999, it is estimated that the current account deficit
and the trade deficit will reach levels of 3.3% and 1.7% of GDP, respectively,
an improvement relative to those expected for 1998.
On the fiscal front, authorities reacted to prevent the 1998 oil price collapse
from significantly affecting the planned stability of the government's financial
situation. Although government revenues suffered a negative oil related impact
of approximately US$3.0 billion, equivalent to almost 4% of total revenues, the
government managed to reduce spending to prevent the fiscal deficit from
exceeding an estimated 1.25% of GDP. Moreover, anticipating that oil prices were
going to remain weaker than had been previously estimated, the government
reached an agreement with Congress to adjust the initial 1999 budget proposal in
order to maintain the deficit at approximately 1.25% for 1999. As such, the
final budget approved for 1999 represents the most conservative of the past 15
years when measured as a percentage of GDP.
We have certainly witnessed the effects of the international financial
volatility on the monetary indicators. Inflation reached 18.6% in 1998,
surpassing by a wide margin the 12% target originally set by the monetary
authorities and reverting the downward trend of the previous two years. In order
to prevent inflation from escalating even higher, the Central Bank tightened
even further an already restrictive monetary policy that it implemented during
the first half of 1998. Following this restrictive policy, and despite the
multiple interest rate reductions implemented by hard currency Central Banks,
Mexican nominal and real interest rates practically doubled at year-end relative
to the previous year. The Mexican Peso also served as a buffer to external
uncertainty losing more than 20% of its value versus the US Dollar.
On the political front, the 2000 Presidential election will be in the forefront.
It is likely that Vicente Fox and Cuauhtemoc Cardenas will obtain the
nominations of the PAN and PRD parties, respectively. For the officialist PRI
party, the candidate and the way the candidate will be chosen remains an open
question.
6
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THE EMERGING MEXICO FUND, INC.
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LETTER TO SHAREHOLDERS (continued)
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THE MEXICAN MARKET
Despite the relative positive results seen in the real macroeconomic indicators
in 1998, the Mexican stock market suffered a setback along with other
Latin-American markets. For the calendar year, the IPC index lost 38% in U.S.
dollar terms (24% in local currency), similar to the declines experienced by
both the Brazilian Bovespa and the Argentinean Merval. International events
increased the perceived risk associated with investing in Mexico and
Latin-American markets and significantly affected the equity market's
performance in the region. At one point, the Mexican market dropped to levels in
dollar terms not experienced since the Peso crisis in 1995. Influenced by the
International Monetary Fund's financial package to Brazil and the multiple
interest rate decreases by major Central Banks from Europe to Japan, the markets
recovered in the later part of the year.
In general, the financial results announced by listed companies for the nine
months ended September 30, 1998, reflected the dynamism of the domestic economy
and the weakness of those sectors exposed to weak international commodity
prices. Consolidated results showed that both sales and operating profits
increased by more than 10% in real terms for the first nine months of 1998
compared to the previous year. Cement, construction, retail and beverages were
among the most dynamic sectors, while mining, steel and industrials lagged
behind, with flat to negative growth in both sales and operating profits. The
depreciation of the Peso and the increase in interest rates adversely affected
results at the net earnings level, reflecting the increased financial cost of
leverage that went along with international financial volatility.
We remain positive on the long-term prospect for the Mexican market. We believe
that the Mexican market will be able to differentiate itself from other markets
in the region despite the negative effect that the still evolving crisis in
Brazil could bring in the short-term. We expect the following factors to be
significant drivers for the market:
o Continued economic growth in Mexico versus a potential recession in
certain South American economies;
o Sustained economic growth with low inflation in the U.S.;
o Asian economies beginning to show signals of bottoming out;
o Attractive valuations of the Mexican market.
7
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THE EMERGING MEXICO FUND, INC.
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LETTER TO SHAREHOLDERS (concluded)
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THE PORTFOLIO
Over the past year, the Fund maintained its strategy of investing 95-100% of its
assets in shares of Mexican companies with attractive growth opportunities. Over
this period, the Fund's holdings included small, medium and large capitalization
stocks with a focus on companies with domestic exposure. As with the Mexican
market, the Fund's performance was negatively affected by the volatility and
uncertainty that reigned in the international financial markets. Moreover, the
Fund's lack of exposure to two large capitalization stocks, Telefonos de Mexico
(Telmex) and Empresas la Moderna, which had solid performance and together
accounted for approximately 25% of the IPC index at the beginning of the year,
also hindered the Fund's performance relative to the IPC index. During the
twelve month period ended December 31, 1998, the Fund's net asset value declined
52%.
During the second half of 1998, the Board of Directors made two major
announcements related to the Fund's future operations that were responsive to
the issue of the discount to net asset value. In September, the Directors
announced the decision to enact a Share Repurchase Program (the "Program") as
long as the Fund's discount to net asset value exceeded 10%. Through December
31, 1998, the Fund had repurchased approximately 20% of its total outstanding
shares when the Program commenced. In late October, the Directors announced
their decision to submit to shareholder vote a recommendation to liquidate the
Fund.
The Emerging Mexico Fund will continue with its full investment strategy in
Mexican stocks until shareholders decide the future of the Fund. In the mean
time, the portfolio's holdings will comply with the dual objective of
maintaining exposure to the Mexican equity market and of facilitating the
liquidation, process of the Fund if shareholders decide to accept the Directors'
recommendation.
Thank you for your continued interest in the Fund.
/s/ GONZALO DE LAS HERAS /s/ PABLO MANCERA DE ARRIGUNAGA
- -------------------------- -------------------------------
Gonzalo de Las Heras Pablo Mancera de Arrigunaga
President Portfolio Manager
8
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THE EMERGING MEXICO FUND, INC.
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PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998 (unaudited)
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MEXICAN EQUITIES -- 94.82%
- --------------------------------------------------------------------------------
Shares Value
- ------------ -----------
BUILDING MATERIALS & CEMENT -- 7.93%
40,000 Apasco, S.A. de C.V. ............................... $ 140,939
716,590 Cemex, S.A. de C.V.--Series CPO .................... 1,544,593
791,452 Cemex, S.A. de C.V.--Series CPO ADR ................ 3,660,466
-----------
5,345,998
-----------
COMMUNICATIONS -- 10.51%
1,047,000 Carso Global Telecom, S.A. de C.V.--Series A1 ...... 3,530,520
274,000 Grupo Televisa, S.A. de C.V.--Series CPO* .......... 3,413,589
333,632 T.V. Azteca, S.A. de C.V.--Series CPO .............. 143,153
-----------
7,087,262
-----------
CONSTRUCTION -- 10.86%
1,538,260 Corporacion Geo, S.A. de C.V.--Series B ............ 4,270,787
2,345,000 Grupo Tribasa, S.A. de C.V.* ....................... 2,036,042
603,700 Grupo Tribasa, S.A. de C.V. ADR* ................... 1,018,744
-----------
7,325,573
-----------
ENTERTAINMENT -- 8.35%
1,169,180 Corporacion Interamericana de Entretenimiento,
S.A. de C.V.--Series B* ............................ 3,187,063
1,182,957 Corporacion Interamericana de Entretenimiento,
S.A. de C.V.--Series L* ............................ 2,448,321
-----------
5,635,384
-----------
FINANCIAL SERVICES -- 6.13%
736,000 Grupo Financiero Banamex--Accival, S.A. de C.V.--
Series B .......................................... 964,491
5,022,000 Grupo Financiero Bancomer, S.A. de C.V.--
Series B .......................................... 1,074,875
2,444,000 Grupo Financiero Banorte, S.A. de C.V.--Series B ... 2,097,324
-----------
4,136,690
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9
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THE EMERGING MEXICO FUND, INC.
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PORTFOLIO OF INVESTMENTS (continued)
DECEMBER 31, 1998 (unaudited)
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Shares Value
- ------------ -----------
FOOD, BEVERAGE, TOBACCO -- 15.56%
1,811,000 Fomento Economico Mexicano, S.A. de C.V.--
Series B .......................................... $ 4,909,172
1,192,000 Grupo Embotelladoras Unidas, S.A. de C.V.--
Series B* ......................................... 1,540,394
1,031,000 Grupo Industrial Maseca, S.A. de C.V.--Series B .... 832,711
800,000 Grupo Modelo, S.A. de C.V.--Series C ............... 1,692,075
2,763,000 Pasteleria Francesa, S.A. de C.V. .................. 700,165
625,000 PepsiGemex, S.A. de C.V.--Series CPO ............... 820,293
-----------
10,494,810
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INDUSTRIAL CONGLOMERATES -- 8.95%
2,011,000 Desc, S.A. de C.V.--Series B ....................... 1,705,442
940,000 Grupo Carso, S.A. de C.V.--Series A1 ............... 3,188,693
792,000 Sanluis Corporacion, S.A. de C.V.--Series CPO ...... 1,143,422
-----------
6,037,557
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LODGING -- 1.47%
8,914,000 Grupe, S.A. de C.V.--Series B* ..................... 989,944
-----------
METALS & MINING -- 4.38%
1,011,000 Industrias CH, S.A. de C.V.--Series B* ............. 1,796,426
34,000 Tubos de Acero de Mexico, S.A. ..................... 219,687
145,400 Tubos de Acero de Mexico, S.A. ADR ................. 936,013
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2,952,126
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PAPER -- 5.15%
6,670,000 Empaques Ponderosa, S.A.--Series B* ................ 3,474,730
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RETAIL -- 9.36%
4,550,000 Controladora Comercial Mexicana, S.A. de C.V.--
Series UBC ........................................ 3,215,548
962,000 Soriana, S.A. de C.V.--Series B .................... 3,098,213
-----------
6,313,761
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10
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THE EMERGING MEXICO FUND, INC.
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PORTFOLIO OF INVESTMENTS (concluded)
DECEMBER 31, 1998 (unaudited)
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Shares Value
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SPECIALTY RETAIL -- 6.17%
1,636,000 Data Capital, S.A. de C.V. ......................... $ 161,866
287,000 Grupo Comercial Gomo, S.A. de C.V.* ................ 237,018
7,362,000 Grupo Elektra, S.A. de C.V.* ....................... 3,760,900
-----------
4,159,784
-----------
TOTAL MEXICAN EQUITIES (cost--$102,577,555) ....................... 63,953,619
-----------
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TIME DEPOSITS -- 1.44%
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Principal
Amount
----------
$900,000 Bank of Montreal, 3.75%+ ............................ 900,000
71,000 Brown Brothers Harriman & Co
Grand Cayman, 3.75%+ .............................. 71,000
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TOTAL TIME DEPOSITS (cost--$971,000) .............................. 971,000
-----------
TOTAL INVESTMENTS (cost--$103,548,555)--96.26% .................... 64,924,619
Other assets less liabilities--3.74% .............................. 2,520,348
-----------
NET ASSETS (applicable to 10,301,731 shares; equivalent
to $6.55 per share)--100.00% ..................................... $67,444,967
===========
- ----------
ADR American Depositary Receipt.
* Non-income producing security.
+ Variable rate account--rate resets on a monthly basis; amount
available upon 48 hours' notice.
See accompanying notes to financial statements.
11
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THE EMERGING MEXICO FUND, INC.
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STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998 (unaudited)
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ASSETS
Investments, at value (cost--$103,548,555) ................... $ 64,924,619
Cash (including Mexican pesos of $134,830
with a cost of $134,395) .................................... 137,945
Receivable for investments sold .............................. 3,163,095
Dividends and interest receivable ............................ 33,592
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Total assets 68,259,251
------------
LIABILITIES
Payable for Fund shares repurchased .......................... 117,939
Investment advisory fee payable .............................. 50,605
Administration fee payable ................................... 10,970
Other accrued expenses ....................................... 634,770
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Total liabilities ......................................... 814,284
------------
NET ASSETS
Common stock, $0.10 par value; 10,301,731 shares
issued and outstanding (100,000,000 shares authorized) ...... 1,030,173
Additional paid-in capital ................................... 121,751,755
Accumulated net investment loss .............................. (740,778)
Accumulated net realized loss ................................ (15,953,869)
Net unrealized depreciation of investments and other
assets and liabilities denominated in Mexican pesos ......... (38,642,314)
------------
Net assets applicable to shares outstanding ............... $ 67,444,967
============
NET ASSET VALUE PER SHARE ....................................... $6.55
=====
See accompanying notes to financial statements.
12
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THE EMERGING MEXICO FUND, INC.
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STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 1998 (unaudited)
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INVESTMENT INCOME
Interest (net of Mexican withholding taxes of $459) .......... $ 274,843
Dividends .................................................... 249,607
------------
524,450
------------
EXPENSES
Legal fees ................................................... 446,907
Investment advisory fees ..................................... 373,657
Custodian and accounting fees ................................ 112,267
Administration fees .......................................... 79,031
Reports to shareholders ...................................... 49,185
Audit fees ................................................... 29,530
Directors' fees and expenses ................................. 22,080
Transfer agent fees and expenses ............................. 14,597
Miscellaneous expenses ....................................... 16,866
------------
1,144,120
------------
NET INVESTMENT LOSS ............................................. (619,670)
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized loss on:
Investments ................................................ (15,340,812)
Foreign currency transactions .............................. (75,370)
Net change in unrealized appreciation/depreciation of:
Investments ................................................ (25,043,637)
Other assets and liabilities denominated in Mexican pesos .. (18,583)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS .............................. (40,478,402)
------------
NET DECREASE IN NET ASSETS FROM INVESTMENT OPERATIONS ........... $(41,098,072)
============
See accompanying notes to financial statements.
13
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THE EMERGING MEXICO FUND, INC.
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STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the
Six Months
Ended For the Year
December 31, 1998 Ended
(Unaudited) June 30, 1998
----------------- -------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment loss ........................ $ (619,670) $ (831,404)
Net realized gain (loss) on investments
and foreign currency transactions ......... (15,416,182) 28,149,338
Net change in unrealized appreciation/
depreciation of investments, options
written and other assets and liabilities
denominated in Mexican pesos .............. (25,062,220) (52,459,151)
------------ ------------
Total from investment operations ........... (41,098,072) (25,141,217)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Cost of Fund shares repurchased ............ (12,242,550) --
------------ ------------
Net decrease in net assets ................. (53,340,622) (25,141,217)
NET ASSETS
Beginning of period ........................ 120,785,589 145,926,806
------------ ------------
End of period .............................. $ 67,444,967 $120,785,589
============ ============
See accompanying notes to financial statements.
14
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THE EMERGING MEXICO FUND, INC.
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NOTES TO FINANCIAL STATEMENTS
December 31, 1998 (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. The Fund's investment objective is long-term capital
appreciation through investment primarily in Mexican equity securities. 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.
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--Securities which are regularly traded on Mexican and
U.S. stock exchanges are valued at the last sales price as of the close of
business on the day of valuation 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 as of the close of business on the day of
valuation or, if there was no sale, 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. 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 having a maturity of 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 value does 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
15
<PAGE>
THE EMERGING MEXICO FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
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 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
option written. Premiums received from writing options which expire unexercised
are recorded by the Fund on the expiration date as a realized gain from options
written. The difference between the premium received and the amount paid on
effecting a closing purchase transaction, including brokerage commissions, is
also treated as a realized gain, or if the premium is less than the amount paid
for the closing purchase transaction, as a realized loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
security in determining whether the Fund has a realized gain or loss. If a put
option is exercised, the premium reduces the cost basis of the security
purchased by the Fund. 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 or currency 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 ensure 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, 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.
Security Lending--The Fund may lend securities up to 33-1/3% of its total assets
to qualified institutions. When the Fund lends its securities, it continues to
earn dividends and other income on such securities. Under the terms of the
securities lending agreement, the securities on loan are to be secured at all
16
<PAGE>
THE EMERGING MEXICO FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
times by cash or liquid securities in an amount at least equal to 105% of the
market value of the securities on loan that are foreign securities, which are
marked to market daily. The Fund bears the risk of delay in recovery of, or even
loss of rights in, the securities on loan should the borrower fail financially.
The Fund's lending agent is PaineWebber Incorporated ("PaineWebber") who
administers the Fund's lending program. PaineWebber is authorized to invest the
cash collateral received in short-term securities, including investments in
affiliated mutual funds. Any income from investments of cash collateral in
excess of agency fees and of a predetermined rebate to the borrowers is retained
by the Fund and is included in interest income. For non-cash collateral, the
Fund earns a net fee after the payment of the lending agents' fees paid by the
borrowers. For the six months ended December 31, 1998, net earnings to the Fund
from investment of cash collateral was $7,809, after deducting the borrowers'
rebate of $4,154 and PaineWebber fees of $39,469.
U.S. Federal Income Taxes--The Fund intends to distribute all of its taxable
income and to comply with the other requirements of the Internal Revenue Code of
1986, as amended applicable to regulated investment companies. Accordingly, no
provision for U.S. federal income tax is required.
Mexican Withholding Taxes--Effective January 1, 1999, the Mexican government
implemented a 5% withholding tax on dividends paid to nonresidents. The 5%
withholding tax is applied on a grossed-up basis, resulting in an effective rate
of withholding of 7.7%. Interest income is subject to withholding tax at a rate
of 15% 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 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, 1998, the Fund did not realize any gains from
off-exchange transactions.
17
<PAGE>
THE EMERGING MEXICO FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
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,
using reasonable diligence, becomes aware of such dividends.
Foreign Currency Translation--The books and records of the Fund are maintained
in U.S. dollars. Mexican peso amounts are translated into U.S. dollars on the
following basis: (i) the foreign currency market value of investments and other
assets and liabilities denominated in Mexican pesos at the closing rate of
exchange on the valuation date; and (ii) purchases and sales of investments,
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 that portion of the results of operations
arising as a result of changes in foreign currency exchange rates from
fluctuations arising from changes in the market prices of securities.
Accordingly, such foreign currency gain (loss) is included in net realized and
unrealized gain (loss) on investments. However, the Fund does isolate the effect
of fluctuations in foreign currency exchange rates when determining the gain or
loss upon the sale or maturity of Mexican peso denominated debt obligations
pursuant to U.S. federal income tax regulations; such amount is categorized as
foreign currency gain or loss for both financial reporting and income tax
reporting purposes.
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. Net realized foreign currency gain (loss) is
treated as ordinary income (loss) for income tax reporting purposes.
18
<PAGE>
THE EMERGING MEXICO FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Dividends and Distributions--Dividends and distributions to shareholders are
recorded on the ex-date. Dividends and distributions from net investment income
and net realized capital gains are determined in accordance with federal income
tax regulations, which may differ from generally accepted accounting principles.
These "book/tax" differences are considered either 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.
INVESTMENT ADVISER, MEXICAN 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 Board of Directors. As
compensation for its services, the Investment Adviser receives a monthly fee,
computed weekly, at an annual rate of 0.90% of the Fund's average weekly net
assets up to $200 million and 0.80% of such net assets in excess of $200
million.
The Fund and the Investment Adviser have a Sub-Advisory Agreement with Gestion
Santander Mexico, S.A. de C.V. (the "Mexican Adviser"), an affiliate of the
Investment Adviser. Under the terms of the Sub-Advisory Agreement, the Mexican
Adviser is responsible for making investment decisions on behalf of the Fund and
providing other portfolio management services. As compensation for its services,
the Investment Adviser, out of its investment advisory fee, pays the Mexican
Adviser a monthly fee, computed weekly, at an annual rate of 0.15% of the Fund's
average weekly net assets.
19
<PAGE>
THE EMERGING MEXICO FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
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 an annual rate of 0.20% of the Fund's average weekly
net assets up to $50 million, 0.18% of the Fund's next $25 million of average
weekly net assets and 0.16% of such net assets in excess of $75 million, subject
to a minimum annual fee of $125,000.
TRANSACTIONS WITH AFFILIATES
Banco Santander de Negocios Mexico, S.A., an affiliate of the Investment
Adviser, in its capacity as the Fund's subcustodian in Mexico, earned fees of
approximately $24,000 for the six months ended December 31, 1998, of which
approximately $3,500 was payable at December 31, 1998.
For the six months ended December 31, 1998, the Fund paid $8,038 in brokerage
commissions to Casa de Bolsa Santander Mexico, S.A. de C.V., an affiliate of the
Investment Adviser.
The Fund paid or accrued approximately $122,000 for the six months ended
December 31, 1998 for legal services to Brown & Wood LLP, 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, 1998 was substantially the same as the cost of securities for financial
statement purposes. Accordingly, net unrealized depreciation of investments of
$38,623,936 was composed of gross appreciation of $907,564 for those investments
having an excess of value over cost and gross depreciation of $39,531,500 for
those investments having an excess of cost over value.
For the six months ended December 31, 1998, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $11,900,052 and
$27,269,841, respectively.
20
<PAGE>
THE EMERGING MEXICO FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------------------------
CAPITAL STOCK
At December 31, 1998, the Investment Adviser owned 12,000 shares of the Fund.
There were no transactions in shares of common stock for the year ended June 30,
1998. Transactions in shares of common stock for the six months ended December
31, 1998 were as follows:
Shares outstanding, beginning of period 12,913,231
Shares repurchased (2,611,500)
----------
Shares outstanding, end of period 10,301,731
----------
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 other
factors, 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.
21
<PAGE>
THE EMERGING MEXICO FUND, INC.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
Selected data for a share of common stock outstanding throughout each period is presented below.
<CAPTION>
For the
Six Months
Ended
December 31, For the Year Ended June 30,
1998 -------------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
----------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..................... $ 9.35 $ 11.30 $ 8.57 $ 7.02 $ 17.69 $ 15.79
------- -------- -------- -------- ------- --------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss) ............................. (0.05)* (0.07) 0.06 0.25* 0.43 0.08*
Net realized and unrealized gain (loss) on
investments, options written and foreign
currency transactions ................................... (3.03)* (1.88) 2.77 1.67* (8.74) 4.78*
------- -------- -------- -------- ------- --------
Total from investment operations ....................... (3.08) (1.95) 2.83 1.92 (8.31) 4.86
------- -------- -------- -------- ------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ............................... -- -- (0.02) -- (0.10) (0.21)
In excess of net investment income ....................... -- -- (0.08) -- -- --
From net realized gain on investments .................... -- -- -- -- (0.92) (2.18)
In excess of net realized gain on
investments ............................................. -- -- -- -- (1.42) --
------- -------- -------- -------- ------- --------
Total dividends and distributions to
shareholders .......................................... -- -- (0.10) -- (2.44) (2.39)
------- -------- -------- -------- ------- --------
CAPITAL SHARE TRANSACTIONS
Anti-dilutive effect of shares repurchased ............... 0.28 -- -- -- -- --
Anti-dilutive effect of dividend
reinvestment ............................................ -- -- -- -- 0.03 0.02
------- -------- -------- -------- ------- --------
Dilutive effect of rights offering ....................... -- -- -- (0.32) -- (0.57)
Offering costs charged and adjustments to
additional paid-in capital .............................. -- -- -- (0.05) 0.05 (0.02)
------- -------- -------- -------- ------- --------
Total capital share transactions ....................... 0.28 -- -- (0.37) 0.08 (0.57)
------- -------- -------- -------- ------- --------
Net asset value, end of period ........................... $ 6.55 $ 9.35 $ 11.30 $ 8.57 $ 7.02 $ 17.69
======= ======== ======== ======== ======= ========
Market value, end of period .............................. $ 5.81 $ 7.94 $ 9.25 $ 7.00 $ 8.00 $ 17.38
======= ======== ======== ======== ======= ========
TOTAL INVESTMENT RETURN(1) (2) ........................... (26.77)% (14.19)% 33.71% (10.42)% (41.83)% 36.71%
======= ======== ======== ======== ======= ========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) .................. $67,445 $120,786 $145,927 $110,696 $64,029 $158,466
======= ======== ======== ======== ======= ========
Ratio of expenses to average net assets .................. 2.76%(3) 1.89% 1.66% 1.77% 1.75% 1.56%
Ratio of net investment income (loss) to
average net assets ...................................... (1.49)%(3) (0.53)% 0.60% 3.29% 3.38% 0.62%
Portfolio turnover ....................................... 15% 87% 71% 67% 83% 36%
- ----------
* 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) Annualized.
</TABLE>
22
<PAGE>
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.
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, as amended, that from time to time the Fund may purchase
shares of its common stock in the open market.
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.
MEF
[LOGO] Listed
NYSE
<PAGE>
THE EMERGING MEXICO FUND, INC.
- --------------------------------------------------------------------------------
Gonzalo de Las Heras President & Director
Philip L. Bullen Director
Edgar R. Fiedler Director
Rodney B. Wagner Director
Richard S. Weinert Director
Paul H. Schubert 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
MEXICAN ADVISER
- --------------------------------------------------------------------------------
Gestion Santander Mexico, S.A. de C.V.
Paseo de la Reforma No. 211 Piso 9
Col. Cuauhtemoc C.P.
11560 Mexico, D.F.
ADMINISTRATOR
- --------------------------------------------------------------------------------
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
CUSTODIANS
- --------------------------------------------------------------------------------
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Banco Santander de Negocios Mexico, S.A.
Monte Pelvoux No. 220 Piso 2
Lomas de Chapultepec
11000 Mexico, D.F.
SHAREHOLDER SERVICING AGENT
- --------------------------------------------------------------------------------
PNC Bank, National Association
400 Bellevue Parkway
Wilmington, Delaware 19809
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Brown & Wood LLP
One World Trade Center
New York, New York 10048
TO OBTAIN ADDITIONAL INFORMATION, INCLUDING UPDATED NET ASSET VALUES AND SHARE
PRICES, CALL TOLL-FREE: (800) 852-4750.
