-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qu6pe0DmGPAw90vO1PMPjFVAlGdYzatAP0LbafrzB1xz/5xu2lqiSKUfjkW78T+r Gy2mEhO29FiWJidmtPrxtw== 0000891554-96-000636.txt : 19961001 0000891554-96-000636.hdr.sgml : 19961001 ACCESSION NUMBER: 0000891554-96-000636 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19960930 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEXICO EQUITY & INCOME FUND INC CENTRAL INDEX KEY: 0000863900 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133576061 STATE OF INCORPORATION: MD FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-06111 FILM NUMBER: 96637199 BUSINESS ADDRESS: STREET 1: WORLD FINANCIAL CTR STREET 2: 200 LIBERTY ST CITY: NEW YORK STATE: NY ZIP: 10281 BUSINESS PHONE: 2126675000 MAIL ADDRESS: STREET 1: OPPENHEIMER TOWER STREET 2: 200 LIBERTY STREET, 38TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10281 FORMER COMPANY: FORMER CONFORMED NAME: MEXICO CONVERTIBLE ADVANTAGE FUND INC DATE OF NAME CHANGE: 19900807 FORMER COMPANY: FORMER CONFORMED NAME: MEXICO ADVANTAGE FUND INC DATE OF NAME CHANGE: 19900805 N-30D 1 ANNUAL REPORT The Mexico Equity and Income Fund, Inc. August 12, 1996 Dear Fund Shareholder, We are pleased to present you with the financial statements of The Mexico Equity and Income Fund, Inc., (the "Fund") for the fiscal year ended July 31, 1996. The Fund's net asset value (NAV) rose 5.7% during these 12 months, outperforming the Mexican Bolsa, which returned 1.4%. On July 31, 1996, the Fund's price was quoted on the New York Stock Exchange at $9.625 per share. Mexico's economic recovery from the peso devaluation of late 1994 showed uneven though increasing strength during the 12 months ended July 31, 1996, as the Fund's Mexican Adviser details in the following pages. Although consumer demand remains soft and the markets continue to be volatile, the Mexican Adviser is cautiously optimistic about Mexico's markets in the short term and remains confident in the country's ability to grow over the long term. The Fund's 44 common stock holdings in 11 sectors and 18 fixed income holdings as of July 31, 1996, provided shareholders with broad exposure to investment in Mexican companies. Emerging markets continue to play an increasingly important role in the global economy. As a percent of world market capitalization, emerging markets have grown from 3.7% in 1986 to 10.7% in 1995, according to the International Finance Corporation. In comparison, Mexico's market capitalization rose fifteen-fold over those ten years. We believe The Mexico Equity and Income Fund can provide investors with a vehicle for strategic diversification and investment in an important emerging country, as part of a global portfolio. We thank you for your participation in the Fund. If you have questions about the Fund, please call our toll-free number at (800) 421-4777. Sincerely, /s/ Alan Rappaport - ------------------ Alan Rappaport Chairman Report of the Mexican Adviser The Mexico Equity and Income Fund, Inc. Mexico's Economic Environment The economic environment in Mexico has significantly improved during the 12 months ended July 31, 1996, though Mexico's securities markets continue to be influenced by U.S. market events. The Mexican economy is picking up steam, inflation pressures appear to be easing, interest rates have fallen and the peso has begun to slowly strengthen against the U.S. dollar. Political reforms should help make next year's election more equitable and impartial. In the second quarter of 1996, Mexico's gross domestic product (GDP) registered its highest positive quarterly figure since the fourth quarter of 1990, 7.2% ahead of last year. GDP expanded at a 3% rate in the first half of 1996, supported by growing sectors such as industrials (up 7.1%), agriculture (up 2.4%) and services (up 1.0%). Inflation was 1.4% during July 1996, the smallest monthly increase in prices since December 1994. While the country's Consumer Price Index rose 31% over the 12-month period ended July 31, 1996, we estimate inflation for calendar year 1996 will fall to just over 27%. Also during July 1996, interest rates on 28-day Cetes (Mexican Treasury bills) averaged a rate of 31%, compared to 41% during July of last year. Interest rates declined unevenly during the year, however. A brief speculative bubble during October and November 1995, caused by the market's skepticism about the ability of the government's economic policies to generate growth, pushed Cetes rates up to a high of 60%. Uncertainty over long-term U.S. interest rates during the first seven months of 1996 has also increased interest rate volatility. The peso exchange rate closed at P$7.57/1US$ on July 31, 1996, after topping out at P$8.1/1US$ in mid-November 1995. Although the peso depreciated 24% against the U.S. dollar during the 12 months ended July 31, 1996, it has gained 1.5% in the first seven months of 1996. Mexico's accumulated commercial trade surplus for the first half of 1996 totaled US$4.1 billion, up 29% from the first half of 1995. We are encouraged by this development and believe this visible trend towards a smaller trade surplus is a sign of economic recovery. - -------------------------------------------------------------------------------- Fund Updates The Fund's toll-free phone number, (800) 421-4777, provides callers with a recorded monthly update of the markets in which the Fund invests. It also offers details about the Fund, its portfolio and performance. Tracking the Fund's NAV The Fund's net asset value (NAV) is calculated weekly and published in The Wall Street Journal every Monday under the heading "Closed End Funds." The Fund's net asset value is also published in Barron's on Saturdays and in The New York Times on Mondays. The Fund is listed on the New York Stock Exchange under the ticker symbol MXE. - -------------------------------------------------------------------------------- 2 At the end of July 1996, Mexico returned to the international capital markets with the issue of US$6 billion in five-year floating rate notes. Standard & Poor's and Moody's Investors Service rated the issue BBB and Baa3, respectively, each a two-step upgrade from the former foreign-denominated sovereign debt rating of Mexican Eurobonds and Brady Bonds. Mexico used the proceeds of the offering, along with other issues and recovered collateral, to repay loans to the U.S. (US$7 billion) and the International Monetary Fund (IMF) (US$1 billion). These prepayments will pay down more than 40% of the amount loaned to Mexico by the Monetary Stabilization Fund as part of its economic aid package following the peso devaluation of 1994. The operation represents a significant improvement in both the cost and the schedule of external indebtedness for Mexico. Progress was made in the political arena as well, when Congress ratified the Electoral Reform Package in early August 1996. The four most important political parties reached an agreement on constitutional changes relating to: greater independence of the Federal Electoral Institute, equitable competition among political parties, the composition of Congress, electoral justice, state constitution, and the popular election of the Mexico City Mayor. The Mexican Stock Market The Mexican stock market gained 1.4% in U.S. dollar terms for the 12 months ended July 31, 1996. The Bolsa's performance was characterized by high volatility due to nervousness in the international financial markets and events in the U.S. markets. The Bolsa fell 7.1% from July to December 1995, reflecting domestic political uncertainties and concern over rising long-term U.S. interest rates. After climbing 13.1% during January 1996, the Bolsa fell 9% in February, again attributed to rising long-term U.S. interest rates. From March through July of this year, the Bolsa recovered unevenly, gaining 6%. Fund Performance and Portfolio Strategy For the 12-month period ended July 31, 1996, The Mexico Equity and Income Fund's NAV rose 5.7% (based on an exchange rate of P$7.6 for July 31, 1996), compared to the Mexican Bolsa's growth of 1.4%. The Fund's relative outperformance can be attributed to our strategic investment shift in March from dollar-based fixed income investments to Mexican equities, and to selective profit-taking in June and July. At July 31, 1996, the Fund's portfolio was 78% invested in equities, 18% in short-term peso debt instruments, 2% in Bancomer convertible bonds and 2% in dollar-denominated United Mexican States indexed notes (UMS) and U.S. dollar cash. During March 1996, the Fund reduced its holdings of U.S. dollar-denominated short-term instruments by US$10 million, and invested these proceeds in Mexican debt instruments and equities. By May 1996, this shift had raised the Fund's equity holdings to 80% of the Fund's total investments from 66% in December 1995. In late June and the beginning of July, the Fund realized profits on selected securities, eventually liquidating 7% of the equity position. Consumer demand is expected to pick up as Mexico recovers, positioning domestic companies for growth, especially those in retail and consumer goods. We have strategically shifted the Fund's holdings from cyclical stocks towards domestic-oriented companies in response to the peso's 3 continued strength. We intend to gradually increase the Fund's exposure to pharmaceuticals, retail (especially specialty stores), conglomerate groups, and financial groups, which we expect to perform as Mexico's economy recovers. Review of Key Economic Sectors Food, Beverage and Tobacco Within this sector, export participation is minor, and output growth relies on increased domestic demand. Production of meat and dairy products, edible oils, alcoholic beverages, beer and tobacco were all up in the first quarter of 1996 after declining in 1995. Soft drinks and bottled water remain depressed, reflecting slow household income recovery. Construction Materials Construction was one of the hardest-hit sectors in the economic crisis that began in late 1994. Recovery from September 1995 to January 1996 was quite definite, though several factors (such as public expenditure delay, interest rate volatility, the credit crunch, oversupply in real estate and delays in privatization) reversed the positive trend during the first quarter of 1996. We believe that industrial construction (electricity, communications and oil infrastructure) will continue to lead this sector's growth. Automotive The expanding Mexican automotive industry has been an impressive force behind GDP growth this year. During the first seven months of 1996, production of light cars and trucks increased 37%, the highest annual growth rate since data was first collected about the industry in 1970. Higher exports are responsible for 80% of the production growth in 1996, while higher domestic sales contributed only 4% to the increase in output. The remaining 16% can be attributed to a positive inventory buildup, which had sharply decreased in 1995. For 1997, however, production growth is expected to slow to 6% due to an expected decrease in exports. Unlike 1996, next year's production increases should mainly be driven by domestic sales. Sales of imports are expected to continue growing as a percentage of total sales as well. Manufacturing-Related Basic Metals. Production of basic metals has increased substantially and consistently (24% in the first quarter of 1996 versus 5.3% a year ago) as the result of newly installed capacity, improved productivity and a strong export orientation from 1995 onwards, particularly in iron and steel. Steel exports are growing quickly and production reached record levels in spite of a depressed internal market. Textiles, Apparel, and Leather. Production trends are starting to change after a four-year depression aggravated by the economic crisis in 1995. Divisions such as apparel (up 13%) drive output via exports, since the domestic market is expected to remain weak due to high prices. Soft-fiber textile output is up 13% due to industrial and consumer demand. 4 Top Ten Holdings as of July 31, 1996 Sanluis Corporacion S.A. de C.V. -- 6.2% of the Fund's total investments Sanluis Corporacion is an industrial conglomerate with exports representing 90% of its total sales, which are in auto parts (Grupo Rassini, 73% of sales) and mining (Luismin, 27% of sales). Sanluis's annual sales total US$221 million and its market capitalization is US$439 million. We have reduced the Fund's holdings of Sanluis as part of our general reduction in exposure to exporting companies. The Fund's Sanluis holdings have risen in value, and the Fund took some profits in this company earlier in 1996. Telefonos de Mexico, S.A. de C.V. -- 5.4% of the Fund's total investments With annual sales of US$6 billion and a market capitalization of US$14 billion, Telmex provides national and international long-distance and local telephone service throughout Mexico. Through 20 subsidiaries, the company supplies a variety of telecommunications-related and value-added services. By June 30, 1996, Telmex had a total of 8.9 million lines in service, representing growth of 1.7% compared to the same period last year. The price of Telmex shares has been relatively flat recently, but we believe there is room for it to appreciate. We have significantly increased the Fund's holdings of Telmex, from 3.5% of the Fund's total investments on August 1, 1995, to 5.4% on July 31, 1996. Cifra, S.A. de C.V. -- 5.1% of the Fund's total investments Operating 358 units that include department stores and restaurants, Cifra is the largest retailer in Mexico. Its annual sales total US$6 billion and its market capitalization is US$4.4 billion. In 1995, Cifra increased both sales area and seating capacity by 8%. We like this stock due to its excellent management team and continued promising results from its 50/50 joint venture with Wal-Mart Stores, Inc., which we believe can withstand Kmart's aggressive expansion in Mexico. As part of our strategy to increase domestically oriented companies, we have significantly increased our holdings in Cifra, purchasing at what we believe are undervalued levels. We think the stock should perform well over the next 12-18 months as Mexican consumer demand picks up. Cemex, S.A. -- 4.2% of the Fund's total investments A multinational company, Cemex, S.A., is Mexico's largest cement manufacturing group (with a 63% market share), and the third largest cement company worldwide. With significant operations in five countries around the globe and, through its trading and distribution network, a presence in 54 countries (including the southern U.S.), Cemex is geographically diversified. In addition to cement production, the company operates aggregates facilities, ready-mix concrete facilities, warehousing and distribution terminals and an international cement trading company with offices around the world. Cemex's annual sales are US$3 billion and its market capitalization is US$4.8 billion. This holding has been relatively stable in the Fund, fluctuating by one to three percentage points as a percent of total investments. We find its multinational range and well-diversified approach is valuable in hedging the Fund somewhat against a Mexican domestic slowdown. 5 Kimberly Clark de Mexico, S.A. -- 4.1% of the Fund's total investments Kimberly Clark de Mexico is Mexico's largest manufacturer of consumer products and systems for personal care and cleansing in both consumer and institutional markets. It also participates in the printing and writing paper markets. Kimberly's annual sales are US$1 billion and its market capitalization is US$4.7 billion. The Fund's holdings of Kimberly Clark de Mexico doubled when Kimberly bought Crisoba, which the Fund also held. We are confident of the synergy, economies of scale and additional market presence the new Kimber/Crisoba company will enjoy. Desc, Sociedad de Fomento Industrial, S.A. de C.V. -- 3.9% of the total investments Desc is the most attractive of Mexico's industrial conglomerates, given its diversification and presence in the fast-growing automotive industry. With a market capitalization of US$1.5 billion, the company's $1.4 billion in annual sales originate from auto parts and components (36%), chemicals (44%), consumer products (5%), agribusiness (13%) and real estate (2%). It also owns a 10% interest in a financial services company. Exports represent a third of Desc's total sales, reducing its vulnerability to weak domestic demand. On the other hand, Desc's domestic market exposure insulates it somewhat from peso appreciation, and allows it to benefit from the expected recovery in domestic demand. Desc performed well in 1995 due to its chemical division, which continues to be surprisingly strong in 1996 despite the peso's appreciation. Desc's growth also comes from its auto parts division, which should continue to be its principal source of growth. Desc will benefit from gradual recovery of the real estate market as well. Grupo Industrial Bimbo, S.A. de C.V. -- 3.6% of the Fund's total investments Grupo Industrial Bimbo, S.A. de C.V., is the country's largest bread loaf manufacturer with a 90% nationwide market share. It consists of eight companies, including two that market cookies and cakes, as well as one that sells salted snacks. It owns 49 factories in 16 cities, and 12,000 distribution routes that allow 400,000 sales visits a day, reaching even the smallest towns and caters to nearly one million clients. Bimbo also sells in Guatemala, Chile, Venezuela, Argentina and the USA. Its annual sales are US$1.7 billion and its market capitalization is US$1.6 billion. This stock is one of the Fund's strategic holdings that we believe can benefit from a recovery in domestic demand in Mexico and Latin America. Tubos de Acero de Mexico, S.A. ("Tamsa") -- 3.4% of the Fund's total investments Tamsa is Mexico's only manufacturer of seamless pipes, used principally in the petroleum industry. Its products include casing pipe, drilling pipe, pipe used for extraction of petroleum and gas, pipes for carrying crude petroleum and gas, mechanical pipe and extruded pipe. In 1995, Tamsa's exports, to more than 40 countries, represented 79% of total revenues. In 1995, Tamsa and its Argentinean partner, Siderca Saic, held approximately a 26% share of the world petroleum pipe market. Tamsa's annual sales total US$540 million and its market capitalization is US$391 million. Tamsa has the most attractively valued stock in the steel sector, with interesting prospects for 1997. 6 Tablex S.A. de C.V. -- 2.9% of the Fund's total investments Tablex manufactures cookies, pasta, wheat flour, plastic film for food-product packaging and cardboard boxes, with annual sales of US$172 million. It currently operates eight factories in four Mexican states, and utilizes a healthy 85% of its installed capacity of 290,000 metric tons per year. Tablex holds 5% of the cookie market and 55% of the pasta market in Mexico. Its market capitalization is US$191 million. Although Tablex's price has shown a 75% return so far in 1996, the company continues to be one of our favorite stocks within the food, beverage and tobacco sector, due to its growth potential once Mexico's domestic recovery consolidates. Alfa, S.A. -- 2.8% of the Fund's total investments Alfa is an industrial conglomerate in Mexico made up of: steel (32% of revenues), petrochemicals and synthetic fibers (49%), food (11%), other products such as aluminum heads for automotive engines; rugs and carpets and mattresses (8%), and telecommunications. Alfa is Mexico's second largest exporter of manufactured goods, after the automotive industry. The company enjoys strong export diversification in North America, Latin America, Europe and Asia. Its annual sales total US $3.4 billion and its market capitalization is US $2.4 billion. Alfa has been one of the Fund's best performing equity holdings over the last 12 months. The Fund has recently taken profits in it and reduced its exposure by half, since we feel that Mexico is reaching the low point in its business cycle. Outlook Overall, we are cautiously optimistic. We maintain a positive outlook domestically in Mexico for the balance of 1996 based on the current level of undervaluation in the Mexican stock market. We have positioned the portfolio somewhat defensively while we monitor developments in the U.S. markets (a U.S. market correction would impact the Bolsa, creating what we would view as buying opportunities, as could a rise in U.S. interest rates.) For now, we plan to continue increasing the Fund's equity position on price weakness, and are currently looking for undervalued high quality stocks. In the long run, we continue to be optimistic about the prospects for Mexico's economy and the potential for its securities markets. Respectfully, /s/ M. Pichardo - --------------- M. Eugenia Pichardo Portfolio Manager Acci Worldwide, S.A. de C.V. Mexico City August 15, 1996 Past performance is not an indication of future performance. 7 Schedule of Investments The Mexico Equity and Income Fund, Inc. July 31, 1996
Number Percent of Shares Security of Holdings Value - ------------------------------------------------------------------------------------------------------------------------------------ MEXICO 99.12% - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS 78.30% - ------------------------------------------------------------------------------------------------------------------------------------ Chemicals 0.84% 511,000 Cydsa, S.A. A........................................................ $ 1,185,709 ---------- Communications 7.94% 398,000 Carso Global Telecom A1*.............................................. 1,154,384 187,000 Grupo Televisa, S.A.* ................................................ 2,485,115 4,906,000 Telefonos de Mexico, S.A. de C.V. L ................................. 7,528,786 ---------- 11,168,285 ---------- Construction Materials 12.85% 300,000 Apasco, S.A. de C.V. ................................................. 1,675,017 200,000 Bufete Industrial, S.A.*.............................................. 1,067,897 1,800,000 Cemex, S.A. de C.V.................................................... 5,885,300 450,000 Corporacion Geo, S.A. de C.V. B...................................... 1,931,114 205,000 Empresas ICA Sociedad Controladora, S.A. de C.V. *................... 2,781,081 73,700 Tubos de Acero de Mexico ADR*......................................... 732,394 400,000 Tubos de Acero de Mexico, S.A.*...................................... 3,992,090 ---------- 18,064,893 ---------- Financial Groups 5.79% 7,395,000 Grupo Financiero Bancomer, S.A. de C.V. B*........................... 3,207,587 2,033,000 Grupo Financiero Banorte, S.A. de C.V. B ............................ 1,929,809 2,000,000 Grupo Financiero GBM Atlantico, S.A. de C.V. B*....................... 1,241,925 3,417,580 Grupo Financiero Serfin, S.A. de C.V. B .............................. 1,757,226 ---------- 8,136,547 ---------- Food, Beverages, and Tobacco 14.00% 1,087,000 Embotelladoras del Valle de Anahuac, S.A. de C.V. B*.................. 874,186 438,000 Empresas La Moderna, S.A. de C.V. A .................................. 1,917,152 630,000 Grupo Embotelladoras de Mexico, S.A. de C.V. ......................... 988,398 2,937,000 Grupo Herdez, S.A. A.................................................. 937,052 1,100,000 Grupo Industrial Bimbo, S.A. de C.V. A................................ 5,104,812 1,000,000 Grupo Industrial Maseca, S.A. de C.V. B............................... 1,133,817 700,000 Grupo Modelo, S.A. de C.V. C.......................................... 3,202,373 1,800,000 Sistema Argos, S.A. B................................................. 1,409,624 1,563,600 Tablex S.A. de C.V. 2................................................. 4,122,874 ---------- 19,690,288 ---------- Industrial Conglomerates 14.09% 985,000 Alfa, S.A. de C.V. A ................................................. 3,921,820 550,000 Desc, Sociedad de Fomento Industrial, S.A. de C.V. A ................. 2,610,415 287,000 Desc, Sociedad de Fomento Industrial, S.A. de C.V. B ................. 1,362,162 324,000 Desc, Sociedad de Fomento Industrial, S.A. de C.V. C ................. 1,554,858
8 Schedule of Investments (continued) The Mexico Equity and Income Fund, Inc. July 31, 1996
Number Percent of Shares Security of Holdings Value - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (continued) Industrial Conglomerates (continued) 398,000 Grupo Carso S.A. de C.V. A1*......................................... $ 1,582,030 1,500,000 Sanluis Corporacion, S.A. de C.V..................................... 8,780,488 ---------- 19,811,773 ---------- Insurance Companies 0.05% 398,000 Invercorporacion, S.A. A1*.......................................... 64,541 ---------- Mining 2.29% 262,171 Grupo Mexico S.A de CV 108E Series Warrants (Exp. 8/15/2001)*........ 622,159 625,000 Industrias Penoles, S.A. ............................................ 2,595,583 ---------- 3,217,742 ---------- Paper Products 5.38% 327,000 Grupo Industrial Durango, S.A. A*.................................... 1,758,945 345,000 Kimberly Clark de Mexico, S.A. A .................................... 5,803,823 ---------- 7,562,768 ---------- Retailing 11.92% 5,300,000 Cifra, S.A. de C.V. C*............................................... 7,183,125 559,000 Controladora Comercial Mexicana, S.A. de C.V. B*..................... 508,517 1,975,000 El Puerto de Liverpool, S.A. de C.V. C1 ............................. 1,484,179 440,000 Grupo Elektra, S.A. de C.V. ......................................... 2,714,832 3,653,000 Grupo Gigante, S.A. de C.V. B ....................................... 1,045,090 947,000 Nacional de Drogas, S.A. de C.V. L .................................. 2,958,985 500,000 Organizacion Soriana, S.A. de C.V. B ................................ 862,228 ---------- 16,756,956 ---------- Transportation 3.15% 2,136,000 Cintra, S.A. A*..................................................... 1,802,294 470,000 Transportacion Maritima Mexicana, S.A. de C.V. A .................... 2,624,193 ---------- 4,426,487 ---------- TOTAL COMMON STOCK (Cost $104,776,268) 110,085,989 -----------
Par Value (000) - ----------
- ------------------------------------------------------------------------------------------------------------------------------------ CONVERTIBLE DEBENTURE 2.39% - ------------------------------------------------------------------------------------------------------------------------------------ MXP 24,300 Grupo Financiero Bancomer 95-2 35.99%, 05/16/02 **................. $ 3,362,302 ------------- TOTAL CONVERTIBLE DEBENTURE (Cost $3,990,079) 3,362,302 -------------
9 Schedule of Investments (continued) The Mexico Equity and Income Fund, Inc. July 31, 1996
Par Value Percent (000) Security of Holdings Value - ------------------------------------------------------------------------------------------------------------------------------------ MEXICAN-GOVERNMENT-BOND 1.04% - ------------------------------------------------------------------------------------------------------------------------------------ MXP 11,104 Bono de Desarrollo del Gobierno Federal 29.89%, 05/28/98 **......... $ 1,463,916 ---------------- TOTAL MEXICAN GOVERNMENT BOND (Cost $1,484,480) 1,463,916 ---------------- - ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM OBLIGATIONS 17.39% - ------------------------------------------------------------------------------------------------------------------------------------ MEXICAN SHORT TERM OBLIGATONS 2.48% $3,000 United Mexican States Libor/Cetes Bond 32.94%, 11/27/96 **............ 3,487,500 ---------------- TOTAL MEXICAN SHORT TERM OBLIGATION (Cost $3,060,000) 3,487,500 ----------------
PROMISSORY NOTES 14.91% MXP 12,000 Grupo Financiero Atlantico 6314 30.75%, 08/01/96................. 1,582,070 MXP 4,300 Grupo Financiero Atlantico 6325 32.25%, 08/09/96................. 566,908 MXP 13,100 Grupo Financiero Atlantico 6382 40.00%, 09/17/96................. 1,727,037 MXP 5,191 Grupo Financiero Atlantico 6412 31.75%, 10/08/96................. 684,442 MXP 2,200 Grupo Financiero Atlantico 6413 32.00%, 10/09/96................. 290,046 MXP 15,200 Grupo Financiero Atlantico 6513 32.00%, 12/18/96................. 2,003,955 MXP 11,822 Grupo Financiero Bancomer 6314 29.50%, 08/01/96................. 1,558,554 MXP 26,000 Grupo Financiero Bancomer 6323 33.00%, 08/07/96................. 3,427,818 MXP 20,000 Grupo Financiero Intenal 6314 31.00%, 08/01/96................. 2,636,783 MXP 13,189 Grupo Financiero Serfin 7245 33.00%, 06/20/97................. 1,738,817 MXP 4,000 Grupo Financiero Serfin 7255 33.25%, 06/27/97................. 527,357 MXP 12,000 Grupo Nacional Financiera 6505 31.50%, 12/13/96................. 1,582,070 ---------------- TOTAL PROMISSORY NOTES (Cost $20,968,186) 20,962,641 ---------------- TOTAL SHORT TERM OBLIGATIONS (Cost $24,028,186) 24,450,141 ---------------- TOTAL MEXICO (Cost $134,279,013) 139,362,348 ----------------
10 Schedule of Investments (continued) The Mexico Equity and Income Fund, Inc. July 31, 1996
Number of Percent Shares Security of Holdings Value - ------------------------------------------------------------------------------------------------------------------------------------ UNITED STATES 0.88% - ------------------------------------------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS 0.88% - ------------------------------------------------------------------------------------------------------------------------------------ 1,138,577 Temporary Investment Fund, Inc. - Temp Cash Portfolio.................... $ 1,138,577 98,692 Trust for Federal Securities, Inc. - Fed Fund Portfolio.................. 98,692 ------------ TOTAL SHORT-TERM INVESTMENTS 1,237,269 ------------ TOTAL UNITED STATES (Cost $1,237,269) 1,237,269 ------------ TOTAL INVESTMENTS (Cost $135,516,282)*** 100.00% $140,599,617 ============
- ---------------- Footnotes and Abbreviations * Non-income producing security. ** Variable rate security. Interest rate represents rate at July 31, 1996. *** Aggregate cost for Federal income tax purposes is $136,122,152. The aggregate gross unrealized appreciation (depreciation) for all securities is as follows: Excess of market value over tax cost $16,976,284 Excess of tax cost over market value (12,498,819) ----------- $ 4,477,465 =========== MXP Mexican Pesos ADR American Depository Receipt See accompanying notes to financial statements. 11 Statement of Assets and Liabilities. The Mexico Equity and Income Fund, Inc. July 31, 1996
Assets Investments, at value (Cost $135,516,282) ......................................... $140,599,617 Cash (including Mexican Pesos of $3,231 with a cost of $3,237) .................... 3,231 Receivables: Interest (net of withholding tax of $48,303) .................................. 1,039,749 Maturities .................................................................... 6,032,506 Securities sold................................................................ 215,056 Prepaid expenses .................................................................. 12,674 ------------ Total Assets ................................................................ 147,902,833 ------------ Liabilities Payable for securities purchased................................................... 6,159,787 Due to Mexican Adviser............................................................. 63,091 Due to Co-Adviser.................................................................. 48,532 Due to Administrator............................................................... 24,257 Accrued expenses................................................................... 158,758 ------------ Total Liabilities............................................................ 6,454,425 ------------ Net Assets......................................................................... $141,448,408 ============ Net Asset Value per Share ($141,448,408/11,825,273)................................ $ 11.96 ============ Net assets consist of: Capital stock, ($0.001 par value; 11,825,273 shares issued and outstanding 100,000,000 shares authorized)................................................... $ 11,825 Paid-in capital.................................................................... 131,289,575 Undistributed net investment income............................................... 1,777,060 Accumulated net realized gain on investments and foreign currency related transactions.......................................... 3,300,620 Net unrealized appreciation in value of investments and on translation of other assets and liabilities denominated in foreign currency.... 5,069,328 ------------ $141,448,408 ============
See accompanying notes to financial statements. 12 Statement of Operations The Mexico Equity and Income Fund, Inc. For the Year Ended July 31, 1996
Investment Income Interest (Net of taxes withheld of $457,253)........................................ $ 10,377,410 Dividends .......................................................................... 1,127,430 ------------- Total investment income ........................................................ 11,504,840 ------------- Expenses Investment advisory fees ......................................... $1,192,885 Administration fees............................................... 259,218 Custodian fees ................................................... 145,249 Transfer agent fees .............................................. 42,494 Directors' fees .................................................. 23,934 Legal fees........................................................ 158,571 Insurance ........................................................ 59,615 Audit fees........................................................ 53,107 Printing ......................................................... 53,087 NYSE fees........................................................ 14,524 Amortization of organization costs................................ 1,500 Interest expense ................................................. 1,278 Miscellaneous..................................................... 14,617 Total expenses................................................................... 2,020,079 ---------- Net investment income............................................................ 9,484,761 ---------- Net Realized and Unrealized Gain (Loss) on Investments, Foreign Currency Holdings and Translation of Other Assets and Liabilities Denominated in Foreign Currency: Net realized gain (loss) from: Security transactions through affiliated brokers .............................. 3,277,903 Security transactions through non-affiliated brokers........................... 22,717 Foreign currency related transactions ......................................... (4,738,705) ------------- (1,438,085) ------------- Net change in unrealized appreciation in value of investments and translation of other assets and liabilities denominated in foreign currency.................... 8,584,186 ------------- Net realized and unrealized gain on investments, foreign currency holdings and translation of other assets and liabilities denominated in foreign currency.... 7,146,101 ------------- Net increase in net assets resulting from operations............................... $16,630,862 =============
See accompanying notes to financial statements. 13
Statements of Changes in Net Assets The Mexico Equity and Income Fund, Inc. For the Year For the Year Ended Ended July 31, 1996 July 31,1995 ------------- ------------ Increase (Decrease) in Net Assets Operations Net investment income.................................................. $ 9,484,761 $ 7,139,249 Net realized loss on investments and foreign currency related transactions....................................................... (1,438,085) (5,237,431) Net change in unrealized appreciation (depreciation) in value of investments and translation of other assets and liabilities denominated in foreign currency.................................... 8,584,186 (46,358,221) ---------- ----------- Net increase (decrease) in net assets resulting from operations 16,630,862 (44,456,403) ---------- ----------- Distributions to shareholders from Net investment income ($0.03 per share)................................ -- (258,764) Net realized gains ($0.0867 and $3.90 per share)....................... (1,025,251) (33,639,303) ---------- ----------- Decrease in net assets from distributions........................ (1,025,251) (33,898,067) ---------- ----------- Capital share transactions Proceeds from sale of 3,000,000 shares in connection with rights offering (net of sales commissions of $623,997 and offering costs of $687,339)..................................................... 26,063,664 -- Value of 199,811 shares issued in reinvestment of dividends ........... -- 2,753,390 Net increase in net assets resulting from capital share transactions... 26,063,664 2,753,390 ----------- ---------- Total increase (decrease) in net assets................................ 41,669,275 (75,601,080) ---------- ---------- Net Assets Beginning of year ..................................................... 99,779,133 175,380,213 ---------- ----------- End of year (including undistributed net investment income of $1,777,060 and $1,033,400 respectively) ........................... $141,448,408 $99,779,133 ============ ===========
See accompanying notes to financial statements. 14 Financial Highlights The Mexico Equity and Income Fund, Inc. For a Share Outstanding throughout Each Period
For the Year Ended July 31, ------------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Per Share Operating Performance Net asset value, beginning of year ..... $11.31 $20.33 $18.51 $16.03 $15.08 ------ ------ ------ ------ ------ Net investment income................... 0.81+ 0.82 0.51 0.68 0.83 Net realized and unrealized gains (losses) on investments, foreign currency holdings, and translation of other assets and liabilities denominated in foreign currencies..... 0.67+ (5.98) 5.47 3.33 1.09 ------ ------ ------ ------ ------ Net increase (decrease) from investment operations................. 1.48 (5.16) 5.98 4.01 1.92 ------ ------ ------ ------ ------ Less Distributions Dividends from net investment income.. -- (0.03) (0.42) (0.77) (0.96) Distributions from net realized gains. (0.09) (3.90) (1.67) (0.76) (0.01) ------ ------ ------ ------ ------ Total dividends and distributions .... (0.09) (3.93) (2.09) (1.53) (0.97) ------ ------ ------ ------ ------ Capital share transactions Anti-dilutive effect of dividend reinvestment.......................... -- 0.07 -- -- -- Dilutive effect of rights offering ... (0.74) -- (2.07) -- -- ------ ------ ------ ------ ------ Total capital share transactions...... (0.74) 0.07 (2.07) 0.00 0.00 ------ ------ ------ ------ ------ Net asset value, end of year ........... $11.96 $11.31 $20.33 $ 18.51 $ 16.03 ====== ====== ====== ====== ====== Per share market value, end of year..... $9.625 $11.25 $21.25 $18.625 $14.875 Total Investment Return Based on Market Value*......................... (8.26)% (31.96)% 41.40% 37.10% 22.80% Ratios/Supplemental Data Net assets, end of year (in 000s)...... $141,448 $99,779 $175,380 $117,627 $101,190 Ratios of expenses to average net assets.......................... 1.56% 1.71% 1.64% 1.63% 1.62% Ratios of net investment income to average net assets.................. 7.32% 5.73% 2.75% 4.14% 5.10% Portfolio turnover..................... 42.59% 50.52% 43.57% 44.21% 15.08% Average commission rate paid**......... $0.003 N/A N/A N/A N/A
* Total investment return is calculated assuming a purchase of common stock at the current market price on the first day and a sale at the current market price on the last day of each period reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Fund's dividend reinvestment plan. Rights offerings, if any, are assumed for purposes of this calculation to be fully subscribed under the terms of the rights offering. Total investment return does not reflect sales loads or brokerage commissions. **Computed by dividing the total amount of brokerage commissions paid by the total number of shares of investment securities purchased and sold during the period for which commissions were charged as required by the SEC for fiscal years beginning after September 1, 1995. + Based on average shares outstanding. See accompanying notes to financial statements. 15 Notes to Financial Statements The Mexico Equity and Income Fund, Inc. July 31, 1996 NOTE A: Summary of Significant Accounting Policies The Mexico Equity and Income Fund, Inc., (the "Fund") was incorporated in Maryland on May 24, 1990, and commenced operations on August 21, 1990. The Fund is registered under the Investment Company Act of 1940, as amended, as a closed-end non-diversified management investment company. Prior to commencing its operations on August 21, 1990, the Fund had no activities other than the sale of 8,772 shares of capital stock to Oppenheimer & Co., Inc., at $11.40 per share. Significant accounting policies are as follows: Portfolio Valuation. Investments are stated at value in the accompanying financial statements. All securities for which market quotations are readily available are valued at the last sales price prior to the time of determination of net asset value, or, if no sales price is available at that time, at the closing price last quoted for the securities (but if bid and asked quotations are available, at the mean between the current bid and asked prices, rather than the quoted closing price). Forward contracts are valued at the current cost of covering or offsetting the contracts. Securities that are traded over-the-counter are valued, if bid and asked quotations are available, at the mean between the current bid and asked prices. Investments in short-term debt securities having a maturity of 60 days or less are valued at amortized cost if their term to maturity from the date of purchase was less than 60 days, or by amortizing their value on the 61st day prior to maturity if their term to maturity from the date of purchase when acquired by the Fund was more than 60 days, unless it is determined by the Directors not to represent fair value. All other securities and assets are carried at fair value as determined in good faith by, or under the direction of, the Directors. Investment Transactions and Investment Income. Investment transactions are accounted for on the trade date. The cost of investments sold is determined by use of the specific identification method for both financial reporting and income tax purposes. Interest income, including the accretion of discount and amortization of premium on investments, is recorded on an accrual basis; dividend income is recorded on the ex-dividend date or when known. The collectibility of income receivable from foreign securities is evaluated periodically, and any resulting allowances for uncollectible amounts are reflected currently in the determination of investment income. Tax Status. No provision is made for U.S. federal income or excise taxes as it is the Fund's intention to continue to qualify as a regulated investment company and to make the requisite distributions to its shareholders that will be sufficient to relieve it from all or substantially all U.S. federal income and excise taxes. In accordance with U.S. Treasury regulations, the Fund elected to defer $2,408,969 of net realized foreign currency losses arising after October 31, 1995. Such losses are treated for tax purposes as arising on August 1, 1996. 16 Notes to Financial Statements The Mexico Equity and Income Fund, Inc. July 31, 1996 (continued) The Fund is subject to the following withholding taxes on income from Mexican sources: Dividends distributed by Mexican companies are not subject to Mexican withholding tax if such dividends are paid out of taxed profits. Dividends distributed by Mexican companies from other sources are subject to a 34% withholding tax. Interest income on debt issued by the Mexican federal government and certain other public sector obligations is not subject to withholding. Withholding tax on interest from other debt obligations is at a rate of 4.9%. Gains realized by the Fund from the sale or disposition of equity securities that are listed and traded on the Mexican Stock Exchange are exempt from Mexican withholding tax if sold through the stock exchange. Gains realized from the sale or disposition of debt securities are not presently subject to taxation, provided that such securities were originally issued to the Fund or that no more than 10% of the Fund's shares are owned by Mexican residents. Gains realized on transactions outside of the Mexican stock exchange are subject to withholding at a rate of 20% of the amount received or, upon the election of the Fund, at 30% of the gain. Foreign Currency Translation. The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (i) market value of investment securities, assets and liabilities at the current peso exchange rate on the valuation date, and (ii) purchases and sales of investment securities, income and expenses at the peso rate orexchange rate prevailing on the respective dates of such transactions. Securities denominated in currencies other than U.S. dollars are subject to changes in value due to fluctuations in foreign exchange. The Fund does not generally isolate the effect of fluctuations in foreign exchange rates from the effect of fluctuations in the market prices of securities. The Fund does isolate the effect of fluctuations in foreign currency rates, however, when determining the gain or loss upon the sale of foreign currency denominated debt obligations pursuant to U.S. federal income tax regulations; such amounts are categorized as foreign exchange gain or loss for both financial reporting and income tax reporting purposes. The Fund reports foreign exchange realized gains and losses on all other foreign currency related transactions as components of realized gains and losses for financial reporting purposes, whereas such components are treated as ordinary income for Federal income tax purposes. Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of domestic origin as a result of, among other factors, the level of governmental supervision and regulation of foreign securities markets and the possibilities of political or economic instability. 17 Notes to Financial Statements The Mexico Equity and Income Fund, Inc. July 31, 1996 (continued) Forward Foreign Currency Exchange Contracts. When the Fund enters into a contract for the purchase or sale of securities denominated in a foreign currency, or when the Fund anticipates the receipt in a foreign currency of interest or dividend payments, the Fund may desire to "lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of such interest or dividend payment, as the case may be, by entering into a forward foreign currency exchange contract. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movement in the value of a foreign currency relative to the U.S. dollar. Distribution of Income and Gains. The Fund intends to distribute to shareholders, at least annually, substantially all of its net investment income, including foreign currency gains, and to normally distribute annually any net realized capital gains in excess of net realized capital losses (including any capital loss carryovers), except in circumstances where the Fund realizes very large capital gains and where the Directors of the Fund determine that the decrease in the size of the Fund's assets resulting from the distribution of the gains would not be in the interest of the Fund's shareholders generally. An additional distribution may be made to the extent necessary to avoid payment of a 4% Federal excise tax. Distributions to shareholders are recorded on the ex-dividend date. The amount of dividends and distributions from net investment income and net realized gains are determined in accordance with U.S. federal income tax regulations, which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. 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 that exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income and net realized gains. To the extent they exceed net investment income and net realized gains for tax purposes, they are reported as distributions of paid-in capital. During the year ended July 31, 1996, the Fund reclassified a loss of $7,715,850 from accumulated net realized gain on investments and foreign currency related transactions to undistributed net investment income as a result of permanent book and tax differences relating primarily to foreign currency losses. Net investment income and net assets were not affected by the change. Other. Costs incurred by the Fund in connection with its organization have been fully amortized by the Fund. 18 Notes to Financial Statements The Mexico Equity and Income Fund, Inc. July 31, 1996 (continued) NOTE B: Management, Investment Advisory and Administrative Services Acci Worldwide, S.A. de C.V., serves as the Fund's Mexican Adviser (the "Mexican Adviser") under the terms of the Advisory Agreement (the "Advisory Agreement"). Pursuant to the Advisory Agreement, the Mexican Adviser makes investment decisions for the Fund and supervises the acquisition and disposition of securities by the Fund. For its services, the Mexican Adviser receives a monthly fee at an annual rate of 0.52% of the Fund's average monthly net assets. For the year ended July 31, 1996, these fees amounted to $673,966. Advantage Advisers, Inc., a subsidiary of Oppenheimer & Co., Inc., serves as the Fund's U.S. Co-Adviser (the "Co-Adviser") under the terms of the U.S. Co-Advisory Agreement (the "Co-Advisory Agreement"). Pursuant to the Co-Advisory Agreement, the Co-Adviser makes all investment decisions regarding the Fund's convertible debt securities jointly with the Mexican Adviser and provides advice and consultation to the Mexican Adviser on investment decisions for the Fund. For its services, the Co-Adviser receives a monthly fee of 0.40% of the Fund's average monthly net assets. For the year ended July 31, 1996, these fees amounted to $518,919. Oppenheimer & Co., Inc., serves as the Fund's Administrator (the "Administrator"). The Administrator provides certain administrative services to the Fund. For its services, the Administrator receives a monthly fee at an annual rate of 0.20% of the value of the Fund's average monthly net assets. For the year ended July 31, 1996, these fees amounted to $259,218. The Fund pays each of its directors who is not a director, officer or employee of the Mexican Adviser, the U.S. Co-Adviser, the Administrator or any affiliate thereof an annual fee of $5,000 plus $700 for each Board of Directors meeting attended in person and $100 for each meeting attended by means of a telephone conference. In addition, the Fund reimburses the directors for travel and out-of-pocket expenses incurred in connection with Board of Directors meetings. NOTE C: Capital Stock The authorized capital stock of the Fund is 100,000,000 shares of common stock, $0.001 par value. During the year ended July 31, 1996, the Fund issued 3,000,000 shares in connection with a rights offering to the existing shareholders. Shareholders of record on July 24, 1995, were issued one 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 $9.125 per share. Offering costs of $687,339 attributed to the rights offering were charged to paid-in capital, of which $100,000 was paid to Oppenheimer & Co. as reimbursement for its expenses. On August 23, 1995, the Fund received proceeds of $26,751,003, net of sales commissions of $623,997 from the offering, of which Oppenheimer & Co. received $273,750 for financial advisory services and $179,179 for solicitation fees. 19 Notes to Financial Statements The Mexico Equity and Income Fund, Inc. July 31, 1996 (continued) NOTE D: Portfolio Activity Purchases and sales of securities other than short-term obligations, aggregated $61,566,003 and $42,088,310 respectively, for the year ended July 31, 1996. NOTE E: Transactions with Affiliates Brokerage Commissions. Acciones y Valores de Mexico, S.A. de C.V., the parent company of the Mexican Adviser, received total brokerage commissions of $238,233 during the year ended July 31, 1996. NOTE F: Other At July 31, 1996, substantially all of the Fund's assets were invested in Mexican securities. The Mexican securities markets are substantially smaller, less liquid, and more volatile than the major securities markets in the United States. Consequently, acquisitions and dispositions of securities by the Fund may be inhibited. - -------------------------------------------------------------------------------- Federal Taxation Notice (unaudited) The Fund paid foreign taxes of $408,950 during the fiscal year ended July 31, 1996, which it intends to pass through pursuant to Section 853 of the Internal Revenue Code, to its shareholders. During the fiscal year ended July 31, 1996, the Fund made long-term capital gains distributions of $1,025,251. - -------------------------------------------------------------------------------- 20 Report of The Mexico Equity and Independent Accountants Income Fund, Inc. To the Board of Directors and Shareholders of The Mexico Equity and Income Fund, Inc. In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The Mexico Equity and Income Fund, Inc. (the "Fund") at July 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at July 31, 1996 by correspondence with the custodians and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, New York September 17, 1996 21 Dividends and Distributions; The Mexico Equity and Dividend Reinvestment Plan Income Fund, Inc. The Fund intends to distribute to shareholders substantially all of its net investment company taxable income at least annually. Investment company taxable income, as defined in section 852 of the Internal Revenue Service Code of 1986, includes all of the Fund's taxable income minus the excess, if any, of its net realized long-term capital gains over its net realized short-term capital losses (including any capital loss carryovers), plus or minus certain other required adjustments. The Fund also expects to distribute annually substantially all of its net realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss carryovers), except in circumstances where the Fund realizes very large capital gains and where the Directors of the Fund determine that the decrease in the size of the Fund's assets resulting from the distribution of the gains would not be in the interests of the Fund's shareholders generally. Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), each shareholder will be deemed to have elected, unless the Plan Agent (as defined below) is otherwise instructed by the shareholder in writing, to have all distributions, net of any applicable U.S. withholding tax, automatically reinvested in additional shares of the Fund by PNC Bank, National Association, the Fund's transfer agent, as the Plan Agent (the "Plan Agent"). Shareholders who do not participate in the Plan will receive all dividends and distributions in cash, net of any applicable U.S. withholding tax, paid in U.S. dollars by check mailed directly to the shareholder by the Plan Agent, as dividend-paying agent. Shareholders who do not wish to have dividends and distributions automatically reinvested should notify the Plan Agent for The Mexico Equity and Income Fund, Inc., c/o PNC Bank, National Association, 400 Bellevue Parkway, Wilmington, Delaware 19809. Dividends and distributions with respect to shares of the Fund's Common Stock registered in the name of a broker-dealer or other nominee (i.e., in "street name") will be reinvested under the Plan unless the service is not provided by the broker or nominee or the shareholder elects to receive dividends and distributions in cash. A shareholder whose shares are held by a broker or nominee that does not provide a dividend reinvestment program may be required to have his shares registered in his own name to participate in the Plan. Investors who own shares of the Fund's Common Stock registered in street name should contact the broker or nominee for details. The Plan Agent serves as agent for the shareholders in administering the Plan. If the Directors of the Fund declare an income dividend or a capital gains distribution payable either in the Fund's Common Stock or in cash, as shareholders may have elected, nonparticipants in the Plan will receive cash and participants in the Plan will receive Common Stock, to be issued by the Fund. If the market price per share on the valuation date equals or exceeds net asset value per share on that date, the Fund will issue new shares to participants at net asset value; or, if the net asset value is less than 95% of the market price on the valuation date, then such shares will be issued at 95% of the market price. If net asset value per share on the valuation date exceeds the market price per share on that date, participants in the Plan will receive shares of Common Stock from the Fund valued at market price. The valuation date is the dividend or distribution payment date or, if that date is not a New York Stock Exchange trading day, the next preceding trading day. If the Fund should declare an income dividend or capital gains distribution payable only in cash, the Plan Agent will, as agent for the participants, buy Fund shares in the open market on the New York Stock Exchange or elsewhere, for the participants' accounts on, or shortly after, the payment date. 22 Dividends and Distributions; The Mexico Equity and Dividend Reinvestment Plan (continued) Income Fund, Inc. The Plan Agent maintains all shareholder accounts in the Plan and furnishes written confirmations of all transactions in an account, including information needed by shareholders for personal and tax records. Shares in the account of each Plan participant will be held by the Plan Agent in noncertified form in the name of the participant, and each shareholder's proxy will include those shares purchased pursuant to the Plan. In the case of shareholders such as banks, brokers or nominees that hold shares for others who are beneficial owners, the Plan Agent will administer the Plan on the basis of the number of shares certified from time to time by the shareholders as representing the total amount registered in the shareholder's name and held for the account of beneficial owners who participate in the Plan. There is no charge to participants for reinvesting dividends or capital gains distributions payable in either Common Stock or cash. The Plan Agent's fees for the handling of reinvestment of such dividends and capital gains distributions will be paid by the Fund. There will be no brokerage charges with respect to shares issued directly by the Fund as a result of dividends or capital gains distributions payable either in stock or in cash. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases in connection with the reinvestment of dividends or capital gains distributions payable in cash. Brokerage charges for purchasing small amounts of Common Stock for individual accounts through the Plan are expected to be less than usual brokerage charges for such transactions because the Plan Agent will be purchasing stock for all participants in blocks and prorating the lower commissions thus attainable. Brokerage commissions will vary based on, among other things, the broker selected to effect a particular purchase and the number of participants on whose behalf such purchase is being made. The receipt of dividends and distributions in Common Stock under the Plan will not relieve participants of any income tax (including withholding tax) that may be payable on such dividends or distributions. Experience under the Plan may indicate that changes in the Plan are desirable. Accordingly, the Fund and the Plan Agent reserve the right to terminate the Plan as applied to any dividend or distribution paid subsequent to notice of the termination sent to participants at least 30 days before the record date for such dividend or distribution. The Plan also may be amended by the Fund or the Plan Agent, but (except when necessary or appropriate to comply with applicable law, rules or policies of a regulatory authority) only upon at least 30 days' written notice to participants. All correspondence concerning the Plan should be directed to the Plan Agent at the address above. 23 -----END PRIVACY-ENHANCED MESSAGE-----