-----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, UpuLd/r1mWY/qATJdRPpsRpFZnBnNXUBpB5GBVVDhS87qJUFmCbarFwrmsCIXJiQ s/+q4rPBnj2/g8+qN5kX+w== 0000950123-95-002026.txt : 20040414 0000950123-95-002026.hdr.sgml : 20040414 19950724154600 ACCESSION NUMBER: 0000950123-95-002026 CONFORMED SUBMISSION TYPE: N-2/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19950724 DATE AS OF CHANGE: 19950905 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEXICO EQUITY & INCOME FUND INC CENTRAL INDEX KEY: 0000863900 IRS NUMBER: 133576061 STATE OF INCORPORATION: MD FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-83820 FILM NUMBER: 95555546 BUSINESS ADDRESS: STREET 1: U.S. BANCORP FUND SERVICES, LLC STREET 2: 615 EAST MICHIGAN STREET, LC-2 CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4147655307 MAIL ADDRESS: STREET 1: U.S. BANCORP FUND SERVICES, LLC STREET 2: 615 EAST MICHIGAN STREET, LC-2 CITY: MILWAUKEE STATE: WI ZIP: 53202 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEXICO EQUITY & INCOME FUND INC CENTRAL INDEX KEY: 0000863900 IRS NUMBER: 133576061 STATE OF INCORPORATION: MD FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-06111 FILM NUMBER: 95555547 BUSINESS ADDRESS: STREET 1: U.S. BANCORP FUND SERVICES, LLC STREET 2: 615 EAST MICHIGAN STREET, LC-2 CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4147655307 MAIL ADDRESS: STREET 1: U.S. BANCORP FUND SERVICES, LLC STREET 2: 615 EAST MICHIGAN STREET, LC-2 CITY: MILWAUKEE STATE: WI ZIP: 53202 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-2/A 1 THE MEXICO EQUITY AND INCOME FUND, INC. 1 AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1995 SECURITIES ACT FILE NO. 33-83820 INVESTMENT COMPANY ACT FILE NO. 811-06111 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ Form N-2 (Check appropriate box or boxes) /X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/ Pre-Effective Amendment No. 3 / / Post-Effective Amendment No. and/or /X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/ Amendment No. 13 THE MEXICO EQUITY AND INCOME FUND, INC. (Exact Name of Registrant as Specified in Charter) World Financial Center 200 Liberty Street New York, New York 10281 (Address of Principal Executive Offices) (212) 677-7000 (Registrant's Telephone Number, including Area Code) Alan H. Rappaport, Chairman The Mexico Equity and Income Fund, Inc. World Financial Center 200 Liberty Street New York, New York 10281 (Name and Address of Agent for Service) Copies to: Laurence E. Cranch, Esq. Rose F. DiMartino, Esq. Rogers & Wells Willkie Farr & Gallagher 200 Park Avenue One Citicorp Center New York, New York 10166 153 E. 53rd Street (212) 878-8000 New York, New York 10022 (212) 821-8000
------------------------------------ Approximate date of proposed public offering: As soon as practicable after the effective date of this Registration Statement. ------------------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, please check this box. /X/ ------------------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933 - ------------------------------------------------------------------------------------------------------------- PROPOSED AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE REGISTRATION BEING REGISTERED REGISTERED PER SHARE (1) OFFERING PRICE (1) FEE(2) - ------------------------------------------------------------------------------------------------------------- Common Stock, par value $0.001 per share............. 3,625,000 $22.375 $81,109,375 $27,969 - --------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, based on the average of the high and low sale prices reported on the New York Stock Exchange on September 6, 1994. (2) This amount was paid at the time of filing the Registration Statement on September 12, 1994. ------------------------------------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that the Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ 2 THE MEXICO EQUITY AND INCOME FUND, INC. FORM N-2 CROSS REFERENCE SHEET PARTS A AND B OF THE PROSPECTUS*
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS ----------------------- ---------------------- 1. Outside Front Cover......................... Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages... Inside Front and Outside Back Cover of Prospectus 3. Fee Table and Synopsis...................... Fee Table; Prospectus Summary 4. Financial Highlights........................ Prospectus Summary; Financial Highlights 5. Plan of Distribution........................ Outside Front Cover Page of Prospectus; Prospectus Summary; The Offer 6. Selling Stockholders........................ Not Applicable 7. Use of Proceeds............................. Use of Proceeds 8. General Description of the Registrant....... Outside Front Cover Page of Prospectus; Prospectus Summary; Market and Net Asset Value Information; The Fund; Risk Factors; Investment Objective and Policies; Investment Restrictions; Common Stock; Legal Matters 9. Management.................................. Management of the Fund; Portfolio Transactions; Common Stock; Custodians and Transfer and Dividend-Paying Agent 10. Capital Stock, Long-Term Debt, and other Securities................................ Dividends and Distributions; Dividend Reinvestment Plan; Taxation; Common Stock 11. Defaults and Arrears on Senior Securities... Not Applicable 12. Legal Proceedings........................... Not Applicable 13. Table of Contents of the Statement of Additional Information.................... Not Applicable 14. Cover Page.................................. Not Applicable 15. Table of Contents........................... Not Applicable 16. General Information and History............. Prospectus Summary; The Fund 17. Investment Objective and Policies........... Prospectus Summary; Investment Objective and Policies; Investment Restrictions 18. Management.................................. Prospectus Summary; Management of the Fund 19. Control Persons and Principal Holders of Securities................................ Management of the Fund 20. Investment Advisory and Other Services...... Prospectus Summary; Management of the Fund; Custodians and Transfer and Dividend-Paying Agent; Experts 21. Brokerage Allocation and Other Practices.... Portfolio Transactions 22. Tax Status.................................. Taxation 23. Financial Statements........................ Financial Statements - ------------------------ *Pursuant to Form N-2, all information required to be set forth in Part B has been included in Part A. Information required to be included in Part C is set forth under the appropriate item, so numbered in Part C to this Registered Statement.
3 3,000,000 SHARES THE MEXICO EQUITY AND INCOME FUND, INC. COMMON STOCK ISSUABLE UPON EXERCISE OF RIGHTS TO SUBSCRIBE FOR SUCH SHARES OF COMMON STOCK ------------------------ The Mexico Equity and Income Fund, Inc. (the "Fund") is issuing to its stockholders of record ("Record Date Stockholders") as of the close of business on July 24, 1995 (the "Record Date") transferable rights ("Rights") entitling the holders thereof to subscribe for up to an aggregate of 3,000,000 shares (the "Shares") of the Fund's common stock, par value $0.001 per share (the "Common Stock"), at the rate of one Share for each three Rights held (the "Offer"). Record Date Stockholders will receive one Right for each full share of Common Stock held and stockholders who fully exercise their Rights will be entitled to subscribe for additional shares of Common Stock pursuant to the Over-Subscription Privilege as described below. Fractional Shares will not be issued upon the exercise of Rights. Accordingly, Shares may be purchased only pursuant to the exercise of Rights in integral multiples of three. The number of Rights to be issued to a Record Date Stockholder will be rounded up to the nearest number of Rights evenly divisible by three. In the case of shares of Common Stock held of record by Cede & Co. ("Cede"), as nominee for The Depository Trust Corporation ("DTC"), or any other depository or nominee, the number of Rights issued to Cede or such other depository or nominee will be adjusted to permit rounding up (to the nearest number of Rights evenly divisible by three) of the Rights to be received by beneficial owners for whom it is the holder of record only if Cede or such other depository or nominee provides to the Fund on or before the close of business on August 8, 1995 written representation of the number of Rights required for such rounding. The Rights are transferable and the Rights and the Shares will be listed for trading on the New York Stock Exchange, Inc. (the "New York Stock Exchange"). The Fund's Common Stock is traded on the New York Stock Exchange under the symbol "MXE" and the Rights will be traded under the symbol "MXE.RT." See "The Offer." THE SUBSCRIPTION PRICE PER SHARE (THE "SUBSCRIPTION PRICE") WILL BE $9.125. THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, on August 15, 1995 unless extended as described herein (the "Expiration Date"). The Fund announced the Offer after the close of trading on the New York Stock Exchange on June 20, 1995. The net asset value per share of Common Stock at the close of business on June 15, 1995 and on July 20, 1995 was $10.01 and $11.27, respectively, and the last reported sale price of a share of the Fund's Common Stock on the New York Stock Exchange on June 15, 1995 and July 21, 1995 was $11.00 and $12.25, respectively. The Fund is a nondiversified, closed-end management investment company. The Fund's investment objective is to seek high total return through capital appreciation and current income. It is the Fund's policy to invest at least 50% of its assets in equity and convertible debt securities issued by Mexican companies and the remainder of its assets in debt (other than convertible debt) securities of Mexican issuers and, for cash management or temporary defensive purposes, in certain high quality short-term debt instruments. See "Investment Objective and Policies." There can be no assurance that the Fund's investment objective will be achieved. INVESTMENT IN THE FUND'S COMMON STOCK INVOLVES CERTAIN RISKS THAT ARE NOT TYPICALLY ASSOCIATED WITH INVESTMENTS IN SECURITIES OF U.S. ISSUERS. SEE "RISK FACTORS." Acci Worldwide, S.A. de C.V. (the "Mexican Adviser") has served as the Fund's investment adviser with respect to Mexican securities investments since the Fund's inception in 1990. Advantage Advisers, Inc. (the "U.S. Co-Adviser"), a subsidiary of Oppenheimer & Co., Inc., has served as the Fund's U.S. Co-Adviser since the Fund's inception in 1990. See "Management of the Fund." The Fund's address is World Financial Center, 200 Liberty Street, New York, New York 10281, and its telephone number is (212) 667-7000. All questions and inquiries relating to the Offer should be directed to the Information Agent, Shareholder Communications Corporation, 17 State Street, New York, New York 10004, toll free at (800) 733-8481, ext. 318, or collect at (212) 805-7000. An immediate dilution, which could be substantial, of the aggregate net asset value of the Common Stock owned by Record Date Stockholders who do not fully exercise their Rights may occur as a result of the Offer because the Subscription Price per Share may be less than the Fund's net asset value per share on the Expiration Date (and the Fund will incur expenses in connection with the Offer), and the number of shares outstanding after the Offer is likely to increase in a greater percentage than the increase in the size of the Fund's assets. In addition, as a result of the terms of the Offer, Record Date Stockholders who do not fully exercise their Rights should expect that they will, upon the completion of the Offer, own a smaller proportional interest in the Fund than would otherwise be the case. See "Risk Factors-- Dilution" and "The Offer--Terms of the Offer." THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE FUND THAT A PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING IN THE FUND. INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- SUBSCRIPTION SALES PROCEEDS PRICE LOAD(1) TO FUND(2) - --------------------------------------------------------------------------------------------------------------------- Per Share...................................... $9.125(3) $0.319 $8.806 - --------------------------------------------------------------------------------------------------------------------- Total.......................................... $27,375,000 $958,125 $26,416,875(4) - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
(Footnotes on the following page) ------------------------ OPPENHEIMER & CO., INC. ------------------------ THE DATE OF THIS PROSPECTUS IS JULY 24, 1995 4 (Continued from Previous Page) All references in this Prospectus to "U.S. dollars," "dollars," or "US$" are to United States dollars. Effective January 1, 1993, the Mexican Congress approved the establishment of a new currency unit, the new peso, which replaced the old peso at a rate of one new peso per one thousand old pesos. Unless otherwise specified, all references in this Prospectus to "new pesos," "NPs.," "pesos" or "Ps." refer to new Mexican Pesos. NO REPRESENTATION IS MADE THAT THE PESO OR U.S. DOLLAR AMOUNTS SHOWN IN THIS PROSPECTUS COULD HAVE BEEN OR COULD BE CONVERTED INTO U.S. DOLLARS OR PESOS, AS THE CASE MAY BE, AT ANY PARTICULAR RATE OR AT ALL. On July 20, 1995, the exchange rate published by Banco de Mexico (the "Published Rate") was Ps.6.1583 = US$1.00. See "Appendix A--The United Mexican States" for additional information on the historical rate of exchange between the dollar and the peso. Certain numbers and percentages have been rounded for ease of presentation which may result in amounts not totaling precisely. (Footnotes from Previous Page) (1) In connection with the Offer, the Fund has agreed to pay to Oppenheimer & Co., Inc. (the "Dealer Manager") and other broker-dealers included in the selling group to be formed and managed by the Dealer Manager ("Selling Group Members") a fee of 2.50% of the Subscription Price per Share for each Share either issued upon the exercise of Rights as a result of their soliciting efforts or sold to the public. Certain other broker-dealers that have executed and delivered a Soliciting Dealer Agreement (each a "Soliciting Dealer") and have solicited the exercise of Rights will receive fees for their soliciting efforts of 0.50% of the Subscription Price per Share. The Fund has agreed to pay the Dealer Manager a fee for financial advisory services in connection with the Offer equal to 1.00% of the aggregate Subscription Price for the Shares, and has agreed to indemnify the Dealer Manager and each Soliciting Dealer against certain liabilities under the U.S. Securities Act of 1933, as amended. See "Distribution Arrangements." Assumes that the exercise of all Rights was solicited by the Dealer Manager and other Selling Group Members. (2) Before deduction of offering expenses incurred by the Fund, estimated at $550,000, including up to $100,000 payable to the Dealer Manager as partial reimbursement for its expenses. (3) Represents the subscription price per Share payable by holders of Rights. Sales of Shares may be made during the Subscription Period by the Dealer Manager and other Selling Group Members at prices set by the Dealer Manager from time to time. See "Distribution Arrangements." (4) Assumes all Rights are exercised at the Subscription Price. IN CONNECTION WITH THIS OFFERING, THE DEALER MANAGER MAY EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE RIGHTS AND THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKETS OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information included elsewhere in this Prospectus. THE OFFER TERMS OF THE OFFER The Mexico Equity and Income Fund, Inc. (the "Fund") is issuing to its stockholders of record ("Record Date Stockholders") as of the close of business on July 24, 1995 (the "Record Date") transferable rights ("Rights") to subscribe for up to an aggregate of 3,000,000 shares (the "Shares") of the Fund's common stock, par value $0.001 per Share ("Common Stock") at the rate of one Share for each three Rights held (the "Offer"). Each Record Date Stockholder is being issued one Right for each full share of Common Stock owned on the Record Date. The number of Rights to be issued to a Record Date Stockholder will be rounded up to the nearest number of Rights evenly divisible by three. Accordingly, no fractional Shares will be issued. In the case of shares held of record by Cede & Co. ("Cede"), as nominee for The Depository Trust Corporation ("DTC"), or by any other depository or nominee (in each instance a "Nominee Holder"), the number of Rights issued to Cede or such other depository or nominee will be adjusted to permit rounding up (to the nearest number of Rights evenly divisible by three) of the Rights to be received by beneficial owners for whom it is the holder of record only if Cede or such other depository or nominee provides to the Fund on or before the close of business on August 8, 1995 written representation of the number of Rights required for such rounding. The Rights entitle the holders thereof ("Rights Holders") to acquire at the Subscription Price (as hereinafter defined) one Share for each three Rights held. The Subscription Period commences on July 26, 1995 and ends at 5:00 p.m., New York time, on August 15, 1995, unless extended by the Fund and the Dealer Manager (the "Expiration Date"). The Rights are evidenced by Subscription Certificates which will be mailed to the Record Date Stockholders other than Foreign Record Date Stockholders. See "Foreign Stockholders." The right of a Rights Holder to acquire Shares during the Subscription Period is hereinafter referred to as the "Primary Subscription." All Rights may be exercised immediately upon receipt and until 5:00 p.m., New York time, on the Expiration Date. Rights Holders purchasing Shares in the Primary Subscription, including those who purchase Shares pursuant to the Over-Subscription Privilege (as hereinafter defined), are hereinafter referred to as "Exercising Rights Holders." Nominees who hold shares of Common Stock for the account of others, such as banks, brokers, trustees or depositories for securities, should notify the respective beneficial owners of such shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Rights. If the beneficial owner so instructs, the nominee should complete the Subscription Certificate and submit it to the Subscription Agent (as hereinafter defined) with proper payment. In addition, beneficial owners of Common Stock or Rights held through such a nominee should contact the nominee and request the nominee to effect transactions in accordance with the beneficial owner's instructions. See "The Offer." OVER-SUBSCRIPTION PRIVILEGE Any Record Date Stockholder who fully exercises all Rights issued to such Record Date Stockholder by the Fund is entitled to subscribe for Shares which were not otherwise subscribed for by others in the Primary Subscription (the "Primary Over-Subscription Privilege"). In addition, any Rights Holder who exercises Rights is entitled to subscribe for Shares which are not otherwise subscribed for in the Primary Subscription or pursuant to the Primary Over-Subscription Privilege (the "Secondary Over-Subscription Privilege, " which, together with the Primary Over-Subscription Privilege, is referred to herein as the "Over-Subscription Privilege"). Shares acquired pursuant to the Over-Subscription Privilege are subject to allotment, which is more fully discussed under "The Offer--Over-Subscription Privilege." SUBSCRIPTION PRICE The Subscription Price per Share is $9.125. The Subscription Price is approximately a 19% discount to the Fund's net asset value per share on July 20, 1995 and approximately a 25% discount to the last 3 6 reported sale price per share of Common Stock on the New York Stock Exchange on July 21, 1995. See "Common Stock." The Subscription Price is discussed further under "The Offer--The Subscription Price." In addition, information with respect to the quarterly high and low market prices of the Fund's Common Stock on the New York Stock Exchange, the corresponding net asset value per share and the premium and discount at which the Fund's Common Stock was trading is provided under "Market and Net Asset Value Information." EXERCISE OF RIGHTS Rights will be evidenced by Subscription Certificates (see Appendix B) and may be exercised by completing a Subscription Certificate and delivering it, together with payment, either by means of a Notice of Guaranteed Delivery (see Appendix C) or a check, to PNC Bank, National Association (the "Subscription Agent"), by mail, express mail or overnight courier to c/o ACS, 915 Broadway, 5th Floor, New York, New York 10010, or by hand to c/o PNC Trust Company, 40 Broad Street, 5th Floor, New York, New York 10004. Exercising Rights Holders will have no right to modify or rescind a purchase after the Subscription Agent has received a properly completed and executed Subscription Certificate or Notice of Guaranteed Delivery. See "The Offer--Exercise of Rights" and "The Offer--Payment for Shares." There is no minimum number of Rights which must be exercised for the Offer to close. SALES OF RIGHTS The Rights are transferable until the last Business Day (as defined below) prior to the Expiration Date. The Rights and the Shares will be listed for trading on the New York Stock Exchange. The Fund has used its best efforts to ensure that an adequate trading market for the Rights will exist by causing the Rights to be listed on the New York Stock Exchange and by retaining the Dealer Manager, the Subscription Agent and the Information Agent. The Fund expects that a market for the Rights will develop and that the value of the Rights, if any, will be reflected by the market price. Rights may be sold directly by a Rights Holder, or may be sold through the Subscription Agent if delivered to the Subscription Agent on or before August 10, 1995. Trading of the Rights on the New York Stock Exchange will be conducted on a when-issued basis commencing on July 25, 1995, and on a regular-way basis from July 27, 1995 through the last Business Day prior to the Expiration Date. If the Subscription Agent receives Rights for sale in a timely manner, it will use its best efforts to sell the Rights through or to the Dealer Manager. Any commissions in connection with the sale of Rights by the Subscription Agent will be paid by the applicable selling Rights Holders. Neither the Fund, the Subscription Agent nor the Dealer Manager will be responsible if Rights cannot be sold, and none of them has guaranteed any minimum sale price for the Rights. For purposes of this Prospectus, a "Business Day" means any day on which trading is conducted on the New York Stock Exchange. See "The Offer--Sale of Rights." Rights Holders are urged to obtain a recent trading price for the Rights on the New York Stock Exchange from their broker, bank, financial adviser or the financial press. Exercising Rights Holders' inquiries should be directed to the Information Agent, Shareholder Communications Corporation, Investor Relations Department. See "Information Agent" below. DEALER MANAGER AND SOLICITING FEES In connection with the Offer, the Fund has agreed to pay Oppenheimer & Co., Inc., as Dealer Manager, and other Selling Group Members a fee equal to 2.50% of the Subscription Price per Share for Shares either issued upon the exercise of Rights as a result of their soliciting efforts or sold to the public. Certain other broker-dealers that have executed and delivered a Soliciting Dealer Agreement and have solicited the exercise of Rights will receive fees for their soliciting efforts of up to 0.50% of the Subscription Price per Share. The Fund will pay to the Dealer Manager a fee equal to 1.00% of the aggregate Subscription Price for Shares issued upon exercise of the Rights for financial and advisory services, including advice with respect to the advisability, timing, size and pricing of the Offer, the formation and management of the Selling Group, the coordination of soliciting efforts among soliciting dealers, the Subscription Agent and the Information Agent and market-making activities to assure a liquid and orderly market for the Rights and the Shares. The Fund 4 7 has also agreed to reimburse the Dealer Manager for its out-of-pocket expenses in connection with the Offer up to an aggregate of $100,000. See "Distribution Arrangements." FOREIGN RESTRICTIONS Subscription Certificates will not be mailed to Record Date Stockholders whose record addresses are outside the United States (for these purposes the United States includes its territories and possessions and the District of Columbia) ("Foreign Record Date Stockholders"). The Rights to which such Subscription Certificates relate will be held by the Subscription Agent for such Foreign Record Date Stockholders' accounts until instructions are received to exercise, sell or transfer the Rights. If no instructions have been received by 12:00 Noon, New York time, three Business Days prior to the Expiration Date, the Subscription Agent will use its best efforts to sell the Rights through or to the Dealer Manager. The net proceeds, if any, from the sale of those Rights will be remitted to the Foreign Record Date Stockholders on a pro rata basis. See "The Offer--Foreign Stockholders." PURPOSE OF THE OFFER The Board of Directors of the Fund has determined that it is in the best interests of the Fund and its stockholders to increase the assets of the Fund available for investment so that the Fund may take advantage of the availability of attractively priced equity and debt securities of Mexican issuers following the recent peso devaluation. The Board of Directors believes that increasing the size of the Fund should also increase the liquidity of the Fund's shares and reduce the Fund's expenses as a proportion of average net assets, although no assurance can be given that this result will be achieved. At July 20, 1995, the Fund had net assets of $99,430,851. Also, the Offer seeks to reward the Fund's stockholders by giving them the right to purchase additional shares of common stock at a price below market and net asset value without incurring any direct transaction costs. The distribution to stockholders of transferable rights which themselves may have intrinsic value will also afford non-participating stockholders the potential of receiving a cash payment upon sale of such Rights, receipt of which may be viewed as partial compensation for the possible dilution of their interest in the Fund. The Board of Directors determined to proceed with the offer of transferable Rights after having considered the dilutive effect of the Offer on stockholders who are unwilling or unable to fully exercise their Rights, as well as the alternatives of a secondary offering and the issuance of non-transferable Rights. After careful consideration, the Fund's Board of Directors unanimously voted to approve the Offer. See "The Offer--Purpose of the Offer." USE OF PROCEEDS If all of the Rights are exercised in full at the Subscription Price of $9.125 per Share and the maximum solicitation fee is paid to the Dealer Manager and other Selling Group Members, the net proceeds to the Fund would be approximately $25,866,875, after deducting offering expenses payable by the Fund estimated to be approximately $550,000. However, there can be no assurance that all Rights will be exercised in full. It is expected that the net proceeds of the Offer will be fully invested in investments conforming to the Fund's investment objective and policies within six months from their receipt by the Fund, depending on market conditions and the availability of appropriate securities for purchase. Pending such investment it is anticipated that the proceeds will be invested in certain short-term and medium-term debt instruments, as described under "Investment Objective and Policies--Temporary Investments." 5 8 INFORMATION AGENT The Information Agent for the Offer is: Shareholder Communications Corporation 17 State Street New York, New York 10004 Toll Free: (800) 733-8481, ext. 318 or Call Collect: (212) 805-7000 IMPORTANT DATES TO REMEMBER
EVENT DATE - ------------------------------------------------------- -------------------------------- Record Date............................................ July 24, 1995 Subscription Period.................................... July 26, 1995 to August 15, 1995 (unless extended) Expiration Date........................................ August 15, 1995 Payment for Shares or Notices of Guaranteed Delivery Due.................................................. August 15, 1995 Subscription Certificates and Payment for Shares Due pursuant to Notices of Guaranteed Delivery........... August 18, 1995 Confirmation Date...................................... August 29, 1995
THE FUND INFORMATION REGARDING THE FUND The Fund has been engaged in business as a non-diversified, closed-end management investment company since August 21, 1990, when it completed an initial public offering of 6,250,000 shares of its Common Stock. The Fund completed a transferable rights offering in October 1993 pursuant to which an additional 2,200,000 shares of its Common Stock were sold. The Fund's investment objective is to seek high total return through capital appreciation and current income. It is the policy of the Fund, under normal market conditions, to invest at least 50% of its assets in equity and convertible debt securities issued by Mexican companies and the remainder of its assets in debt (other than convertible debt) securities of Mexican issuers and, for cash management or temporary defensive purposes, in certain high quality short-term debt instruments. See "Investment Objective and Policies." There is no assurance that the Fund's investment objective will be achieved. See "Investment Objective and Policies" and "Risk Factors." The Fund currently has 8,825,273 shares of Common Stock outstanding, which are listed and traded on the New York Stock Exchange under the symbol "MXE." See "Common Stock." As of July 20, 1995, the net assets of the Fund were $99,430,851. As of July 20, 1995, approximately 90.0% of the Fund's assets were invested in equity securities of Mexican companies, 0.43% in convertible debt securities of one Mexican issuer, 6.74% in short term debt securities of Mexican issuers and 2.80% in U.S. dollar-denominated money market instruments. INFORMATION REGARDING THE FUND'S INVESTMENT ADVISERS, ADMINISTRATOR AND CUSTODIAN Acci Worldwide, S.A. de C.V. (the "Mexican Adviser"), a subsidiary of Acciones y Valores de Mexico, S.A. de C.V. ("AVM"), acts as the Fund's investment adviser with respect to Mexican securities investments pursuant to the terms of an Investment Advisory Agreement, dated as of October 14, 1991. The Fund pays the Mexican Adviser a monthly fee for its advisory services at an annual rate of 0.52% of the Fund's average monthly net assets. The Mexican Adviser is a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act"). AVM is one of the leading brokerage firms in Mexico and is a wholly owned subsidiary of Grupo Financiero Banamex Accival, S.A. de C.V. ("Grupo 6 9 Banacci"). Grupo Banacci also holds the controlling interest in Banco Nacional de Mexico, S.A., Mexico's largest commercial bank, in terms of total deposits. Advantage Advisers, Inc., a subsidiary of Oppenheimer & Co., Inc., acts as the Fund's U.S. co-adviser (the "U.S. Co-Adviser") pursuant to the terms of a U.S. Co-Advisory Agreement, dated as of August 14, 1990. The Fund pays the U.S. Co-Adviser a monthly fee at an annual rate of 0.40% of the Fund's average monthly net assets. The U.S. Co-Adviser is a registered investment adviser under the Advisers Act. Oppenheimer & Co., Inc. (the "Administrator") acts as the Fund's Administrator pursuant to the terms of an Administration Agreement, dated as of August 14, 1990. The Fund pays the Administrator a monthly fee at an annual rate of 0.20% of the Fund's average monthly net assets. Although the fees paid to the Mexican Adviser, the U.S. Co-Adviser and the Administrator, in the aggregate, are comparable to fees paid by other closed-end management investment companies that invest primarily in the securities of issuers of a single foreign country, they are higher than those paid by most investment companies. PNC Bank, National Association acts as the Fund's global custodian and Citibank, N.A. acts as sub-custodian of the Fund's Mexican assets. Securities of the Fund that are listed on the Bolsa Mexicana de Valores, S.A. de C.V. (the "Mexican Stock Exchange") are held by Citibank, N.A. through the book-entry system of S.D. Indeval, S.A. de C.V., the Mexican central securities depository ("Indeval"). See "Custodians and Transfer and Dividend--Paying Agent." Since the Mexican Adviser's, the U.S. Co-Adviser's and the Administrator's fees are based on the average monthly net assets of the Fund, each of the Mexican Adviser, the U.S. Co-Adviser and the Administrator will benefit from an increase in the Fund's assets resulting from the Offer. See "Management of the Fund." In addition, two of the Fund's five Directors are "interested persons" (as such term is defined under the U.S. Investment Company Act of 1940, as amended (the "1940 Act")) of the Fund who could benefit indirectly from the Offer because of such Directors' indirect affiliations with the Dealer Manager, the U.S. Co-Adviser and the Administrator. See "Management of the Fund." DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN The Fund distributes, at least annually, substantially all of its net investment income and its net realized capital gains, if any, although the Board of Directors of the Fund may decide not to distribute all or a portion of net realized capital gains under certain circumstances. Unless the Fund is otherwise instructed in writing, in the manner described under "Dividends and Distributions; Dividend Reinvestment Plan," stockholders are presumed to have elected to have all distributions automatically reinvested in shares of Common Stock. See "Dividends and Distributions; Dividend Reinvestment Plan" and "Taxation--United States Federal Income Taxes." RISK FACTORS Dilution. An immediate dilution, which could be substantial, of the aggregate net asset value of the shares of Common Stock owned by Record Date Stockholders who do not fully exercise their Rights may occur as a result of the Offer because the Subscription Price per Share may be less than the Fund's net asset value per share on the Expiration Date (and the Fund will incur expenses in connection with the Offer), and the number of shares outstanding after the Offer will increase in a greater percentage than the increase in the size of the Fund's assets. In addition, Record Date Stockholders who do not fully exercise their Rights should expect that they will, at the completion of the Offer, own a smaller proportional interest in the Fund than would otherwise be the case. Although it is not possible to state precisely the amount of such a decrease in net asset value because it is not known at this time what the net asset value per share will be on the Expiration Date or what proportion of the Shares will be subscribed for, such dilution could be substantial. For example, assuming that all Rights are exercised and that the Subscription Price of $9.125 is 19% below the Fund's net asset value of $11.27 per share as of July 20, 1995, the Fund's net asset value per share (after payment of the Dealer Manager and Soliciting Fees and estimated offering expenses) would be reduced approximately $0.67. The distribution to stockholders of transferable Rights which themselves may have intrinsic value will afford non-participating stockholders the potential of receiving a cash payment upon sale of such Rights, receipt of 7 10 which may be viewed as partial compensation for the possible dilution of their interest in the Fund. No assurance can be given, however, that a market for the Rights will develop or as to the value, if any, that such Rights will have. See "Risk Factors--Dilution." Risks of Investment in Mexican Securities. Investment in Mexican equity and debt securities involves special considerations and risks that are not normally associated with investments in U.S. securities, including (1) relatively higher price volatility, lesser liquidity and smaller market capitalization of the Mexican securities markets, (2) currency fluctuations and devaluation and the cost of converting foreign currency into U.S. dollars, (3) restrictions on foreign investment and potential restrictions on repatriation of capital invested in Mexico and remittance of profits and dividends accruing thereon, (4) political, economic and social risks and uncertainties, including risks of confiscatory taxation and expropriation or nationalization of assets, and (5) high rates of inflation, unemployment and domestic interest rates. In addition, as a result of the financial crisis that occurred in Mexico in December 1994 many private and public sector entities are faced with severe financial and operational problems, including the lack of foreign exchange needed to repay U.S. dollar denominated obligations. In the past, such financial difficulties have led to numerous restructurings of existing debt obligations. Bankruptcy and creditors' rights laws in Mexico are relatively undeveloped and it may be more difficult to obtain and execute a judgment in Mexico than in the United States. The Mexican securities market is not as large or as active as the securities markets in the United States. As of June 29, 1995, the Mexican equity market capitalization was approximately NPs. 603.9 billion (US$96.5 billion) having declined approximately 13% in new pesos and 52% in U.S. dollars from November 30, 1994. Generally, the Mexican securities market is characterized by a relatively small number of actively traded issues and high price volatility. These and other factors may make it difficult to dispose of the securities that the Fund holds in its portfolio, particularly when large numbers of investors desire to dispose of securities at the same time. In addition, these factors may limit the supply of securities available for investment by the Fund. This may affect the rate at which the Fund is able to invest in listed Mexican securities, the purchase and sale prices for such securities and the timing of conversions, purchases and sales. There is less publicly available information about the issuers of Mexican securities than is regularly published by issuers in the United States. Further, financial statements and reported earnings of Mexican companies incorporate the effects of inflation and differ from those of U.S. companies in this respect as well as others. Also, there is generally less government supervision and regulation of exchanges, brokers and issuers in Mexico than there is in the United States. Mexican corporate laws regarding fiduciary responsibility and protection of stockholders are less developed than those in the United States. The Fund is subject to the risk of a decline in the value of the peso against the U.S. dollar. Because the equity and debt securities in the Fund's portfolio and equity securities underlying the convertible debt securities in which the Fund may invest will be quoted in pesos, these securities must increase in value at a rate in excess of any rate of decline of the peso against the U.S. dollar in order to avoid a decline in their equivalent U.S. dollar value. Accordingly, a future decline in the value of the peso against the U.S. dollar may result in a corresponding decline in the value of the equity and debt securities held by the Fund that are denominated in pesos. The peso has been subject to significant devaluations in the past, and there can be no assurance that similar devaluations will not take place in the future. Prior to December 22, 1994, the Mexican Government permitted the peso/dollar exchange rate to fluctuate within a band. The ceiling of the band, which was the maximum selling rate, increased by 0.0004 new pesos per day, while the floor of the band, which was the minimum buying rate, remained fixed. On December 22, 1994, in response to extreme market pressure on the exchange rate, the Government eliminated the band and allowed the new peso to float freely against the dollar. The new peso reached a low of NPs. 7.207=US$1.00 on March 17, 1995, before strengthening to its recent level of NPs. 6.1583=US$1.00 on July 20, 1995. The devaluation has resulted in a significant rise in inflation and domestic interest rates. The free floation of the new peso against the dollar continues to be the current Mexican Government's policy. Under current Mexican regulations, the Fund may freely acquire U.S. dollar denominated securities issued by Mexican companies and may freely convert pesos acquired with respect to its Mexican investments into U.S. dollars. However, future regulatory changes in Mexico may adversely affect the Fund's ability to acquire these U.S. dollar-denominated securities or to obtain U.S. dollars with respect to its investments in 8 11 Mexican companies. If the Fund were unable to obtain U.S. dollars sufficient in amount to satisfy certain distribution requirements relating to its status as a regulated investment company for U.S. federal income tax purposes, and if it were unable otherwise to satisfy those requirements, the Fund might no longer be able to qualify as a regulated investment company or, if it continued to so qualify, it might become subject to certain U.S. federal income and excise taxes. See "Risk Factors--Currency Fluctuation and Exchange Control Laws" and "Taxation--United States Federal Income Taxes." The Fund is authorized to borrow money from banks for the purpose of making distributions required to maintain its qualification as a regulated investment company for U.S. tax purposes, for temporary or emergency purposes or for the clearance of transactions. Borrowings by the Fund increase exposure to capital risk. See "Risk Factors." Under existing restrictions on foreign investment in Mexican securities, many of the shares of Mexican companies actively traded on the Mexican Stock Exchange, and also a portion of any shares issuable upon conversion of any convertible securities acquired by the Fund, must be held by Mexican nationals. As a consequence, the Fund, in many instances, may not invest directly in the shares of a Mexican company, but instead must acquire ordinary certificates of participation issued by a trust (created under Mexican law) that holds such shares. The trustee of the trust is deemed to be the record owner of the shares held by the trust and is granted the voting rights with respect thereto. These voting rights, however, typically are limited in that the trustee must vote such shares in accordance with the votes cast by the majority of stockholders holding shares of the same class. Thus, the Fund's ability to participate in such instances in the governance of the company in which it has invested is extremely limited. The Fund will be subject to the risks of political instability, social unrest and acts of violence with respect to its investments in Mexico. For example, the leading presidential candidate of the Partido Revolucionario Institucional (the Institutional Revolutionary Party, or the "PRI"), the dominant political party in Mexico, was assassinated in March 1994. The former attorney general of the State of Jalisco was assassinated, reportedly by members of a drug cartel, in May 1995. Other recent destabilizing events include an armed insurgency in the southern state of Chiapas, the assassination of the former Secretary-General of the PRI, the kidnapping of several well-known business leaders, the ongoing investigations into the circumstances surrounding the assassinations and the financial crisis that commenced in December 1994. Future changes in Mexico could produce further political, economic and social instability which could, in turn, have an adverse effect on the Fund's operations and performance. Currency Transactions and Hedging. The equity and debt securities in the Fund's portfolio will be denominated in pesos. Currently, the value of the Fund's securities may be adversely affected by changes in the exchange rate between the peso and the U.S. dollar. The Fund does not expect to hedge against a decline in the value of the peso except in limited circumstances. Accordingly, the Fund's peso denominated investments should be considered an unhedged currency risk. Decreases in the value of the peso relative to the U.S. dollar will result in a corresponding decrease in the U.S. dollar value of the Fund's assets. On March 19, 1995, Banco de Mexico approved the establishment of over-the-counter forward and option contracts in Mexico on the new peso between banks and their clients. Also, Banco de Mexico recently authorized the issuance and trading of futures contracts in respect of the new peso on the Chicago Mercantile Exchange ("CME"). Trading of new peso futures contracts began on the CME on April 25, 1995. These markets are relatively new and have not developed significantly. The nature of the strategies adopted by the Fund and the extent to which those strategies are used will depend on the development of such a market. The ability of the Fund to utilize hedging successfully will depend on its ability to predict pertinent market movements, which cannot be assured. These skills are different from those needed to select portfolio securities. See "Investment Objective and Policies--Currency Transactions and Hedging." Net Asset Value Discount. Shares of closed-end investment companies frequently trade at a discount from their net asset value. This characteristic of shares of a closed-end fund is a risk separate and distinct from the risk that the Fund's net asset value will decrease. The Fund cannot predict whether its shares will trade at, below or above net asset value. Accordingly, the Common Stock of the Fund is designed primarily for long-term investors and should not be considered a vehicle for trading purposes. The Fund may seek to minimize any market discount through share repurchases or tender offers by the Fund; however, there can be no assurance that such measures will, if taken, result in shares of the Fund trading at a price equal to their net 9 12 asset value. The net asset value of the Fund's shares will fluctuate with, among other factors, price changes of the Fund's portfolio securities. The Fund's shares have generally traded at a discount to net asset value. See "Common Stock." Non-Diversification of Investments. The Fund is classified as a "non-diversified" investment company under the 1940 Act, which means that the Fund is not limited by the 1940 Act in the proportion of its assets that may be invested in the securities of a single issuer. As a non-diversified investment company, the Fund may invest a greater proportion of its assets in the obligations of a smaller number of issuers and, as a result, may be subject to greater risk with respect to portfolio securities. The Fund intends to continue to comply with the diversification requirements imposed on regulated investment companies by the U.S. Internal Revenue Code of 1986, as amended. See "Taxation--United States Federal Income Taxes." Operating Expenses. The operating expense ratio of the Fund is higher than that of a fund investing predominantly in the securities of U.S. issuers since the expenses of the Fund (such as investment advisory and administration fees, custodial and communication costs) are higher. The operating expense ratio of the Fund for the year ended July 31, 1994 was 1.64%. See "Management of the Fund." Certain Provisions of the Articles of Incorporation. Certain provisions of the Fund's Articles of Incorporation may have the effect of inhibiting the Fund's possible conversion to open-end status and limiting the ability of other persons to acquire control of the Fund's Board of Directors. In certain circumstances, these provisions might inhibit the ability of stockholders to sell their shares at a premium over prevailing market prices. See "Common Stock." 10 13 FEE TABLE STOCKHOLDER TRANSACTION EXPENSES: Sales Load (as a percentage of offering price)(1)(2).............................. 3.50% ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS): Management Fees................................................................... 0.92% Other Expenses(2)................................................................. 0.78% ---- Total Annual Expenses............................................................. 1.70% EXAMPLE
An investor would pay the following expenses on a $1,000 investment, assuming a 5% annual return throughout the periods indicated(3):
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF: - ------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------ ------- ------- -------- $ 52 $ 87 $ 124 $229
- --------------- (1) The Fund has agreed to pay to the Dealer Manager and each other Selling Group Member a fee equal to 2.50% of the Subscription Price per Share for each Share either issued upon the exercise of Rights as a result of their soliciting efforts or sold to the public. Certain other broker-dealers that have executed and delivered a Soliciting Dealer Agreement and have solicited the exercise of Rights will receive fees for their soliciting efforts of up to 0.50% of the Subscription Price per Share. The Fund has agreed to pay the Dealer Manager a fee for financial advisory services in connection with the Offer equal to 1.00% of the aggregate Subscription Price for the Shares. These fees will be borne by all of the Fund's stockholders, including those stockholders who do not exercise their Rights. See "Distribution Arrangements." Assumes that the exercise of Rights was solicited by the Dealer Manager and other Selling Group Members. (2) The figures provided under "Other Expenses" are based on estimated amounts for the current fiscal year and do not include expenses of the Fund incurred in connection with the Offer, estimated at $550,000. See "Management of the Fund" for additional information. (3) The Example reflects the Sales Load and other expenses of the Fund incurred in connection with the Offer and assumes that all of the Rights are exercised. The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that an investor in the Fund will bear directly or indirectly. The Example set forth above assumes reinvestment of all dividends and distributions at net asset value and an expense ratio of 1.70%. The table above and the assumption in the Example of a 5% annual return are required by Securities and Exchange Commission regulations applicable to all investment companies. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. 11 14 FINANCIAL HIGHLIGHTS The table below sets forth selected data for a share of Common Stock outstanding throughout each of the periods presented. The information contained in the table below insofar as it pertains to the period from August 21, 1990 (commencement of operations) through July 31, 1991 and for the fiscal years ended July 31, 1992, 1993 and 1994 has been audited by Price Waterhouse LLP, the Fund's independent accountants, whose report thereon was unqualified. The information contained in the table below for the six-month period ended January 31, 1995 has not been audited. The information set forth below should be read in conjunction with the financial statements and notes thereto contained in the Fund's Annual Report to Stockholders as of July 31, 1994, and Semi-Annual Report to Stockholders as of January 31, 1995, which are available upon request from PNC Bank, National Association, (800) 852-4750, and which are incorporated by reference into this Prospectus.
FOR THE SIX- MONTH PERIOD FOR THE PERIOD ENDED AUGUST 21, 1990* FOR THE YEAR FOR THE YEAR FOR THE YEAR JANUARY 31, THROUGH ENDED ENDED ENDED 1995 JULY 31, 1991 JULY 31, 1992 JULY 31, 1993 JULY 31, 1994 (UNAUDITED) ---------------- ------------- ------------- ------------- ------------ (FOR A SHARE OUTSTANDING THROUGH EACH PERIOD) PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period......................... $ 11.27** $ 15.08 $ 16.03 $ 18.51 $ 20.33 ---------------- ------------- ------------- ------------- ------------ Net investment income.......... 1.42 0.83 0.68 0.51 0.22 Net realized and unrealized gains (losses) on investments, foreign currency holdings, and other assets and liabilities denominated in foreign currencies.................. 2.97 1.09 3.33 5.47 (6.52) ---------------- ------------- ------------- ------------- ------------ Net increase (decrease) from investment operations.......... 4.39 1.92 4.01 5.98 (6.30) ---------------- ------------- ------------- ------------- ------------ Less distributions Dividends from net investment income...................... (0.58) (0.96) (0.77) (0.42) (0.03) Distributions from net realized gains....................... (0.00) (0.01) (0.76) (1.67) (3.90) ---------------- ------------- ------------- ------------- ------------ Total dividends and distributions.................. (0.58) (0.97) (1.53) (2.09) (3.93) ---------------- ------------- ------------- ------------- ------------ Dilutive effect of rights offering....................... -- -- -- (2.07) -- ---------------- ------------- ------------- ------------- ------------ Net asset value, end of period... $ 15.08 $ 16.03 $ 18.51 $ 20.33 $ 10.10 ============ ========= ========= ========= ========== Per share market value, end of period.................. $ 13.00 $ 14.875 $ 18.625 $ 21.25 $ 13.75 TOTAL INVESTMENT RETURN Based on market value***....... 18.3% 22.8% 37.1% 41.4% (16.8)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in 000's)......................... $ 94,741 $ 101,190 $ 117,627 $ 175,380 $ 89,163 Ratio of expenses to average net assets......................... 1.98%**** 1.62% 1.63% 1.64% 1.63%**** Ratio of net investment income to average net assets............. 12.18%**** 5.10% 4.14% 2.75% 2.22%**** Portfolio turnover............... 8.18% 15.08% 44.21% 43.57% 20.07%
- --------------- * Commencement of Operations. ** Initial public offering price of $12.00 per share less underwriting discount of $0.60 per share and offering expenses of $0.13 per share. *** 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 charges or brokerage commissions. **** Annualized. 12 15 MARKET AND NET ASSET VALUE INFORMATION The Fund's currently outstanding shares of Common Stock are, and the Shares offered by this Prospectus will be, listed on the New York Stock Exchange. Shares of the Common Stock commenced trading on the New York Stock Exchange on August 21, 1990. In the past, the Fund's shares have traded both at a premium and at a discount in relation to net asset value. Although the Fund's shares recently have been trading at a premium above net asset value, there can be no assurance that this premium will continue after the Offer or that the shares will not again trade at a discount. Shares of other closed-end investment companies frequently trade at a discount from net asset value. See "Risk Factors." The following table shows for each of the periods indicated the high and low market prices of the Common Stock on the New York Stock Exchange, the corresponding net asset value per share and the premium or discount at which the Fund's shares were trading.
PREMIUM OR (DISCOUNT) NET ASSET AS % OF NET ASSET MARKET PRICE(1) VALUE(2) VALUE --------------- --------------- ------------------ QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW - ------------------------------------------- ------ ------ ------ ------ ------- -------- July 31, 1992.............................. 17.500 13.750 17.660 16.100 (0.91)% (14.60)% October 31, 1992........................... 14.875 13.000 15.810 14.360 (5.91)% (9.47)% January 31, 1993........................... 17.500 14.500 17.740 15.890 (1.35)% (8.75)% April 30, 1993............................. 18.000 15.250 17.400 16.310 3.45% (6.50)% July 31, 1993.............................. 18.625 15.000 18.210 16.910 2.28% (11.30)% October 31, 1993........................... 20.500 16.125 21.250 19.580 (3.53)% (17.65)% January 31, 1994........................... 26.375 16.500 22.810 19.090 15.63% (13.57)% April 30, 1994............................. 25.125 17.750 23.150 18.550 8.53% (4.31)% July 30, 1994.............................. 21.875 19.375 20.320 18.920 7.65% 2.40% October 31, 1994........................... 23.625 21.500 22.710 22.020 4.03% (2.36)% January 31, 1995........................... 23.500 12.125 21.700 10.180 8.29% 19.11% April 30, 1995............................. 13.625 8.375 10.100 8.120 34.90% 3.14% through July 20, 1995...................... 13.375 10.750 11.770 10.010 13.64% 7.39%
- --------------- (1) As provided by PFPC, Inc., the Fund's Accounting Agent. (2) Based on the Fund's computations. The last reported sale price, net asset value per share and percentage premium to net asset value of the Common Stock on July 20, 1995 were $12.125, $11.27, and 7.59%, respectively. 13 16 THE OFFER TERMS OF THE OFFER The Mexico Equity and Income Fund, Inc. (the "Fund") is issuing to its stockholders of record ("Record Date Stockholders") as of the close of business on July 24, 1995 (the "Record Date") transferable rights ("Rights") to subscribe for up to an aggregate of 3,000,000 shares (the "Shares") of the Fund's common stock, par value $.001 per Share (the "Common Stock") at the rate of one Share for each three Rights held (the "Offer"). Each Record Date Stockholder is being issued one Right for each full share of Common Stock owned on the Record Date. The number of Rights to be issued to a Record Date Stockholder will be rounded up to the nearest number of Rights evenly divisible by three. Accordingly, no fractional Shares will be issued. In the case of shares held of record by Cede & Co. ("Cede"), as nominee for The Depository Trust Corporation ("DTC"), or any other depository or nominee, the number of Rights issued to Cede or such other depository or nominee will be adjusted to permit rounding up (to the nearest number of Rights evenly divisible by three) of the Rights to be received by beneficial owners for whom it is the holder of record only if Cede or such other depository or nominee provides to the Fund on or before the close of business on August 8, 1995 written representation of the number of Rights required for such rounding. The Rights entitle the holders thereof ("Rights Holders") to acquire at the Subscription Price (as hereinafter defined) one Share for each three Rights held. The Subscription Period commences on July 26, 1995 and ends at 5:00 p.m., New York time, on August 15, 1995, unless extended by the Fund and the Dealer Manager (the "Expiration Date"). The Rights are evidenced by Subscription Certificates which will be mailed to the Record Date Stockholders other than Foreign Record Date Stockholders. See "Foreign Stockholders." Completed Subscription Certificates may be delivered to the Subscription Agent at any time during the Subscription Period, which commences on July 26, 1995 and ends at 5:00 p.m., New York time, on August 15, 1995, unless extended by the Fund and the Dealer Manager. See "--Expiration of the Offer." Parties that purchase Rights prior to the Expiration Date may also purchase Shares in the Primary Subscription. All Rights may be exercised immediately upon receipt and until 5:00 p.m. on the Expiration Date. Any Record Date Stockholder who fully exercises all Rights initially issued to such Record Date Stockholder by the Fund will be entitled to subscribe for Shares which were not otherwise subscribed for by Exercising Rights Holders in the Primary Subscription (the "Primary Over-Subscription Privilege"). In addition, any Rights Holder who exercises Rights is entitled to subscribe for Shares which are not otherwise subscribed for in the Primary Subscription or pursuant to the Primary Over-Subscription Privilege (the "Secondary Over-Subscription Privilege" and, together with the Primary Over-Subscription Privilege, the "Over-Subscription Privilege"). Shares acquired pursuant to the Over-Subscription Privilege are subject to allotment, which is more fully discussed below under "--Over-Subscription Privilege." Rights will be evidenced by Subscription Certificates (see Appendix B) and may be exercised by completing a Subscription Certificate and delivering it, together with payment, either by means of a Notice of Guaranteed Delivery (see Appendix C) or a check, to the Subscription Agent. The method by which Rights may be exercised and Shares paid for is set forth below under "--Exercise of Rights" and "--Payment for Shares." An Exercising Rights Holder will have no right to rescind a purchase after the Subscription Agent has received a completed Subscription Certificate or Notice of Guaranteed Delivery. See "--Payment for Shares" below. Shares issued pursuant to an exercise of Rights will be listed for trading on the New York Stock Exchange. The Rights are transferable until the close of business on the last Business Day prior to the Expiration Date and will be listed for trading on the New York Stock Exchange. Assuming a market exists for the Rights, the Rights may be purchased and sold through usual brokerage channels, or may be sold through the Subscription Agent if delivered to the Subscription Agent on or before August 10, 1995. Although no assurance can be given that a market for the Rights will develop, trading in the Rights on the New York Stock Exchange may be conducted until and including the close of trading on the last Business Day prior to the Expiration Date. The method by which Rights may be transferred is set forth below under "--Sale of Rights." The underlying Shares will also be listed for trading on the New York Stock Exchange. 14 17 There is no minimum number of Rights which must be exercised in order for the Offer to close. PURPOSE OF THE OFFER The Board of Directors of the Fund has determined that it is in the best interests of the Fund and its stockholders to increase the assets of the Fund available for investment so that the Fund may take advantage of the availability of attractively priced equity and debt securities of Mexican issuers following the recent peso devaluation. The Board of Directors believes that increasing the size of the Fund should increase the liquidity of the Fund's shares and reduce the Fund's expenses as a proportion of average net assets, although no assurance can be given that this result will be achieved. At July 20, 1995, the Fund had net assets of $99,430,851. Also, the Offer seeks to reward the Fund's stockholders by giving them the right to purchase additional shares of common stock at a price below market and net asset value without incurring any direct transaction costs. The distribution to stockholders of transferable Rights which themselves may have intrinsic value will also afford non-participating stockholders the potential of receiving a cash payment upon sale of such Rights, receipt of which may be viewed as partial compensation for the possible dilution of their interest in the Fund. The Board of Directors determined to proceed with the offer of transferable Rights after having considered the dilutive effect of the Offer on stockholders who are unwilling or unable to fully exercise their Rights, as well as the alternatives of a secondary offering and the issuance of non-transferable Rights. After careful consideration, the Fund's Board of Directors unanimously voted to approve the Offer. In reaching its decision, the Board of Directors was advised by the U.S. Co-Adviser that the availability of new funds would provide the Fund with additional investment flexibility as well as increase the Fund's ability to invest in additional investment opportunities in the Mexican securities markets without having to sell portfolio securities that the U.S. Co-Adviser believes should be held. Furthermore, the U.S. Co-Adviser believes that additional investment opportunities exist in Mexico at this particular time by reason of, among other factors, the apparent signs of success of the Mexican Government's economic program to address the recent peso devaluation. The Mexican Adviser, the U.S. Co-Adviser and the Administrator will benefit from the Offer because their fees are based on the average net assets of the Fund. It is not possible to state precisely the amount of additional compensation the Mexican Adviser, the U.S. Co-Adviser and the Administrator will receive as a result of the Offer because it is not known how many Shares will be subscribed for and because the proceeds of the Offer will be invested in additional portfolio securities which will fluctuate in value. However, in the event that all the Rights are exercised in full and on the basis of the Subscription Price, the Mexican Adviser, the U.S. Co-Adviser and the Administrator would receive additional annual fees of approximately $134,612, $103,548 and $51,774, respectively, as a result of the increase in assets under management. Two of the Fund's Directors who voted to authorize the Offer are "interested persons" of the Fund as that term is defined in the 1940 Act. These Directors could benefit indirectly from the Offer because of their indirect affiliations with the U.S. Co-Adviser and the Administrator. The other three Directors who voted to authorize the Offer are not "interested persons" of the Fund. See "Management of the Fund." The Fund may, in the future and at its discretion, choose to make additional rights offerings from time to time for a number of shares and on terms which may or may not be similar to the Offer. OVER-SUBSCRIPTION PRIVILEGE Shares not subscribed for in the Primary Subscription will be offered, by means of the Primary Over-Subscription Privilege, to Record Date Stockholders who have exercised all Rights issued to them by the Fund and who wish to acquire more than the number of Shares for which the Rights issued to them are exercisable. Record Date Stockholders should indicate, on the Subscription Certificate which they submit with respect to the exercise of the Rights issued to them, how many Shares they are willing to acquire pursuant to the Primary Over-Subscription Privilege. If sufficient Shares remain, all over-subscriptions will be honored in full. If subscriptions for Shares pursuant to the Primary Over-Subscription Privilege exceed the Shares available, the available Shares will be allocated among those Record Date Stockholders (including beneficial owners of shares of Common Stock of the Fund on the Record Date which are held of record by a nominee 15 18 such as a broker, trustee or depository for securities), who subscribe for an aggregate of 100 or fewer Shares (inclusive of Shares subscribed for by such Record Date Stockholders in the Primary Subscription). Any Shares remaining thereafter will be allocated among all other Record Date Stockholders. In each case, if insufficient Shares are available to permit such allocation, Shares will be allocated pro rata among such other Record Date Stockholders being prorated, based on the number of Rights originally issued to them by the Fund so that the number of shares issued to Record Date Stockholders who subscribe for an aggregate of more than 100 shares pursuant to the Primary Over-Subscription Privilege will generally be in proportion to the number of Shares owned by them in the Fund on the Record Date. Any Rights Holder who exercises Rights is entitled to subscribe for Shares which are not otherwise subscribed for in the Primary Subscription or pursuant to the Primary Over-Subscription Privilege. Rights Holders should indicate, on the Subscription Certificate which they submit with respect to the exercise of any Rights, how many Shares they are willing to acquire pursuant to the Secondary Over-Subscription Privilege. If sufficient Shares remain after the Primary Over-Subscription, all over-subscriptions by Rights Holders will be honored in full in the Secondary Over-Subscription. If remaining Shares are insufficient to permit such allocation, such Shares will be allocated pro rata among Rights Holders being prorated, based on the number of Shares such Rights Holders subscribed for in the Primary Subscription relative to the aggregate number of Shares subscribed for in the Primary Subscription by all such Rights Holders then being prorated. The percentage of Shares each over-subscribing Exercising Rights Holder may acquire may be rounded up or down to result in delivery of whole Shares. The allocation process may involve a series of allocations in order to assure that the total number of Shares available for over-subscriptions is distributed on a pro rata basis. The Fund will not offer or sell any Shares which are not subscribed for pursuant to the Primary Subscription or the Over-Subscription Privilege. THE SUBSCRIPTION PRICE The Subscription Price per Share is $9.125. Exercising Rights Holders will have no right to modify or rescind a purchase after receipt by the Subscription Agent of a properly completed and executed Subscription Certificate or a Notice of Guaranteed Delivery. The Fund does not have the right to withdraw the Offer after the Rights have been distributed. The Fund announced the Offer after the close of trading on the New York Stock Exchange on June 20, 1995. The net asset value per share of Common Stock at the close of business on June 15, 1995 and on July 20, 1995 was $10.01 and $11.27, respectively, and the last reported sales price of a share of the Common Stock on the New York Stock Exchange on June 15, 1995 and July 21, 1995 was $11.00 and $12.25, respectively. The Subscription Price of $9.125 is approximately a 19% discount to the Fund's net asset value per share on July 20, 1995 and approximately a 25% discount to the last reported sale price of a share of Common Stock on the New York Stock Exchange on July 21, 1995. EXPIRATION OF THE OFFER The Offer will expire at 5:00 p.m., New York time, on August 15, 1995, unless extended by the Fund and the Dealer Manager (the "Expiration Date"). Rights will expire on the Expiration Date and may not be exercised thereafter. SUBSCRIPTION AGENT The Subscription Agent is PNC Bank, National Association, which will receive for its administrative, processing, invoicing and other services as subscription agent, a fee estimated to be $25,000, as well as reimbursement for all out-of-pocket expenses related to the Offer which are expected to be $5,000. The Subscription Agent is also the Fund's transfer agent, dividend-paying agent and registrar. Questions regarding Subscription Certificates should be directed to PNC Bank, National Association (telephone (800) 852-4750); stockholders may also consult their brokers or nominees. Signed Subscription Certificates (see Appendix B) should be sent by mail, express mail or overnight courier to PNC Bank, National Association, c/o ACS, 915 Broadway, 5th Floor, New York, New York 10010 or by hand to PNC Trust Company, 40 Broad Street, 5th Floor, New York, New York 10004. Subscription Certificates may also be sent by facsimile to 16 19 (212) 505-4576, with the original Subscription Certificate to be sent by one of the methods described above. Facsimiles should be confirmed by telephone at (212) 505-4559. INFORMATION AGENT Any questions or requests for assistance may be directed to the Information Agent at its telephone number and address listed below: Shareholder Communications Corporation 17 State Street New York, New York 10004 Toll Free: (800) 733-8481, ext. 318 or Call Collect (212) 805-7000 The Information Agent will receive a fee of $10,000, as well as reimbursement for all out-of-pocket expenses related to the Offer which are expected to be $28,000. SALE OF RIGHTS The Rights are transferable until the last Business Day prior to the Expiration Date. The Rights will be listed on the New York Stock Exchange under the symbol "MXE.RT" and may be sold on the New York Stock Exchange through the usual investment channels. The Fund has used its best efforts to ensure that an adequate trading market for the Rights will exist by causing the Rights to be listed on the New York Stock Exchange and by retaining the Dealer Manager, the Subscription Agent and the Information Agent. Although there can be no assurance that such a market for the Rights will develop, trading in the Rights on the New York Stock Exchange may be conducted until the close of trading on the last Business Day prior to the Expiration Date. Sales through Subscription Agent. Rights Holders who do not wish to exercise any or all of their Rights may instruct the Subscription Agent to sell any unexercised Rights. Subscription Certificates representing the Rights to be sold by the Subscription Agent must be received by the Subscription Agent on or before August 10, 1995. Upon timely receipt by the Subscription Agent of appropriate instructions to sell the Rights the Subscription Agent will use its best efforts to complete the sale and the Subscription Agent will remit the proceeds of sale, net of commissions, to the Rights Holders. Rights may be sold through or to the Dealer Manager on the New York Stock Exchange or otherwise. No brokerage commissions will be charged to holders of less than 100 Rights, and beneficial owners of less than 100 Rights held on their behalf by qualified financial institutions, who elect to direct the Subscription Agent to sell such Rights in whole but not in part. Any commissions on sales of 100 Rights or more will be paid by the selling Rights Holder. If the Rights can be sold, sales of such Rights will be deemed to have been effected at the weighted-average price received by the Subscription Agent on the day such Rights are sold. The sale price of any Rights sold to the Dealer Manager will be based upon the then current market price for the Rights less amounts comparable to the usual and customary brokerage fees. The Subscription Agent will also attempt to sell all Rights which remain unclaimed as a result of Subscription Certificates being returned by the postal authorities to the Subscription Agent as undeliverable as of the fourth Business Day prior to the Expiration Date. For holders of more than 100 Rights, such sales will be made net of commissions on behalf of the nonclaiming Record Date Stockholders. The Subscription Agent will hold the proceeds from those sales for the benefit of such nonclaiming Record Date Stockholders until such proceeds are either claimed or escheat. There can be no assurance that the Subscription Agent will be able to complete the sale of any such Rights, and neither the Fund, the Subscription Agent nor the Dealer Manager has guaranteed any minimum sale price for the Rights. Other Transfers. The Rights are transferable until the close of business on the last Business Day prior to the Expiration Date. The Rights evidenced by a single Subscription Certificate may be transferred in whole or in part (in a number evenly divisible by three) by delivering to the Subscription Agent a Subscription Certificate properly endorsed for transfer, with instructions to register such portion of the Rights evidenced 17 20 thereby in the name of the transferee and to issue a new Subscription Certificate to the transferee evidencing such transferred Rights. In such event, a new Subscription Certificate evidencing the balance of the Rights will be issued to the transferring Rights Holder or, if the transferring Rights Holder so instructs, to an additional transferee. The signature on the Subscription Certificate must correspond with the name as written upon the face of the Subscription Certificate in every particular, without alteration or enlargement, or any change whatever. A signature guarantee must be provided by an eligible financial institution as defined in Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended (the "1934 Act"), subject to the standards and procedures adopted by the Subscription Agent. Rights Holders wishing to transfer all or a portion of their Rights should allow up to three Business Days prior to the Expiration Date for (i) the transfer instructions to be received and processed by the Subscription Agent; (ii) a new Subscription Certificate to be issued and transmitted to the transferee or transferees with respect to transferred Rights, and to the transferor with respect to retained Rights, if any; and (iii) the Rights evidenced by such new Subscription Certificate to be exercised or sold by the recipients thereof. None of the Fund, the Subscription Agent nor the Dealer Manager shall have any liability to a transferee or transferor of Rights if Subscription Certificates are not received in time for exercise or sale prior to the Expiration Date. Except for the fees charged by the Subscription Agent and brokerage commissions charged to holders of less than 100 Rights (which will be paid by the Fund as described above), all commissions, fees and other expenses (including brokerage commissions and transfer taxes) incurred or charged in connection with the purchase, sale or exercise of Rights will be for the account of the transferor of the Rights, and none of such commissions, fees or expenses will be paid by the Fund, the Subscription Agent or the Dealer Manager. The Rights will be eligible for transfer through, and the exercise of the Primary Subscription (but not the Over-Subscription Privilege) may be effected through, the facilities of The Depository Trust Company ("DTC"); Rights exercised through DTC are referred to as "DTC Exercised Rights." The holder of a DTC Exercised Right may exercise the Over-Subscription Privilege in respect of such DTC Exercised Right by properly executing and delivering to the Subscription Agent, at or prior to 5:00 p.m., New York time, on the Expiration Date, a Nominee Holder Over-Subscription Form (see Appendix D), together with payment of the Subscription Price for the number of Shares for which the Over-Subscription Privilege is to be exercised. Copies of the Nominee Holder Over-Subscription Form may be obtained from the Subscription Agent. EXERCISE OF RIGHTS Rights may be exercised by completing and signing the reverse side of the Subscription Certificate which accompanies this Prospectus and mailing it in the envelope provided, or otherwise delivering the completed and signed Subscription Certificate to the Subscription Agent, together with payment of the Subscription Price for the Shares as described below under "--Payment for Shares." Completed Subscription Certificates and payment for the Shares must be received by the Subscription Agent prior to 5:00 p.m., New York time, on the Expiration Date (unless payment is effected by means of a Notice of Guaranteed Delivery as described below under "--Payment for Shares") at the offices of the Subscription Agent at the address set forth above. Rights may also be exercised through an Exercising Rights Holder's broker, who may charge such Exercising Rights Holder a servicing fee. Nominees who hold shares of Common Stock for the account of others, such as banks, brokers, trustees or depositories for securities, should notify the respective beneficial owners of such shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Rights. If the beneficial owner so instructs, the nominee should complete the Subscription Certificate and submit it to the Subscription Agent with the proper payment. In addition, beneficial owners of Common Stock or Rights held through such a nominee should contact the nominee and request the nominee to effect transactions in accordance with the beneficial owner's instructions. EXERCISE OF THE OVER-SUBSCRIPTION PRIVILEGE Record Date Stockholders who fully exercise all Rights issued to them by the Fund, and, secondarily, Rights Holders, may participate in the Over-Subscription Privilege by indicating on their Subscription 18 21 Certificate the number of Shares they are willing to acquire pursuant thereto. If sufficient Shares remain after the Primary Subscription, all over-subscriptions will be honored in full; otherwise the number of Shares issued pursuant to the Over-Subscription Privilege will be allocated as described above under "--Over-Subscription Privilege." Banks, brokers, trustees and other nominee holders of Rights will be required to certify to the Subscription Agent, before any Primary Over-Subscription Privilege may be exercised as to any particular beneficial owner, as to the aggregate number of Rights exercised pursuant to the Primary Subscription and the number of Shares subscribed for pursuant to the Primary Over-Subscription Privilege by such beneficial owner and that such beneficial owner's Primary Subscription was exercised in full. Before any Secondary Over-Subscription Privilege may be exercised as to any particular beneficial owner, such nominee holders of Rights will be required to certify to the Subscription Agent as to the aggregate number of Rights exercised pursuant to the Primary Subscription and the number of Shares subscribed for pursuant to the Secondary Over-Subscription Privilege by such beneficial owner. A Nominee Holder Over-Subscription Exercise Form is contained in Appendix D. PAYMENT FOR SHARES Exercising Rights Holders may choose between the following methods of payment: (1) An Exercising Rights Holder can send the Subscription Certificate, together with payment for the Shares acquired in the Primary Subscription and any additional Shares subscribed for pursuant to the Over-Subscription Privilege to the Subscription Agent based upon the Subscription Price of $9.125 per Share. A subscription will be accepted when payment, together with the properly completed and executed Subscription Certificate, is received by the Subscription Agent at its Shareholders Services Division; such payment and Subscription Certificates to be received by the Subscription Agent no later than 5:00 p.m., New York time, on the Expiration Date. The Subscription Agent will deposit all checks received by it for the purchase of Shares into a segregated interest-bearing account of the Fund (the interest from which will belong to the Fund) pending proration and distribution of Shares. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES OF AMERICA, MUST BE PAYABLE TO THE MEXICO EQUITY AND INCOME FUND, INC. AND MUST ACCOMPANY A PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE ACCEPTED AND BE RECEIVED BY 5:00 P.M. ON THE EXPIRATION DATE. (2) Alternatively, a subscription will be accepted by the Subscription Agent if, prior to 5:00 p.m., New York time, on the Expiration Date, the Subscription Agent has received a Notice of Guaranteed Delivery (see Appendix C) by facsimile (telecopy) or otherwise from a bank, a trust company, or a New York Stock Exchange member guaranteeing delivery of (i) payment of the full Subscription Price for the Shares subscribed for in the Primary Subscription and any additional Shares subscribed for pursuant to the Over-Subscription Privilege, and (ii) a properly completed and executed Subscription Certificate. The Subscription Agent will not honor a Notice of Guaranteed Delivery unless a properly completed and executed Subscription Certificate and full payment for the Shares is received by the Subscription Agent by the close of business on the third Business Day after the Expiration Date (the "Protect Period"). Within seven Business Days following the Protect Period (the "Confirmation Date"), the Subscription Agent will send to each Exercising Rights Holder (or, if the Common Stock is held by a Nominee Holder, to such Nominee Holder) the share certificates representing the Shares purchased pursuant to the Primary Subscription and, if applicable, the Over-Subscription Privilege, along with a letter explaining the allocation of Shares pursuant to the Over-Subscription Privilege. Any excess payment to be refunded by the Fund to an 19 22 Exercising Rights Holder who is not allocated the full amount of Shares subscribed for pursuant to the Over-Subscription Privilege will be refunded by the Subscription Agent within seven Business Days following the Protect Period. An Exercising Rights Holder will have no right to modify or rescind a purchase after the Subscription Agent has received a properly completed and executed Subscription Certificate or a Notice of Guaranteed Delivery. All payments by a Rights Holder must be in United States dollars by money order or check drawn on a bank located in the United States and payable to The Mexico Equity and Income Fund, Inc. WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE SHARES PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF AN EXERCISING RIGHTS HOLDER WHO ACQUIRES SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION OR OVER-SUBSCRIPTION PRIVILEGE DOES NOT MAKE PAYMENT OF ANY AMOUNTS DUE, THE FUND AND THE SUBSCRIPTION AGENT RESERVE THE RIGHT TO TAKE ANY OR ALL OF THE FOLLOWING ACTIONS: (I) FIND OTHER STOCKHOLDERS OR RIGHTS HOLDERS FOR SUCH SUBSCRIBED AND UNPAID FOR SHARES; (II) APPLY ANY PAYMENT ACTUALLY RECEIVED BY IT TOWARD THE PURCHASE OF THE GREATEST WHOLE NUMBER OF SHARES WHICH COULD BE ACQUIRED BY SUCH HOLDER UPON EXERCISE OF THE PRIMARY SUBSCRIPTION AND/OR OVER-SUBSCRIPTION PRIVILEGE, AND/OR (III) EXERCISE ANY AND ALL OTHER RIGHTS OR REMEDIES TO WHICH IT MAY BE ENTITLED, INCLUDING, WITHOUT LIMITATION, THE RIGHT TO SET-OFF AGAINST PAYMENTS ACTUALLY RECEIVED BY IT WITH RESPECT TO SUCH SUBSCRIBED SHARES. THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT PRIOR TO 5:00 P.M., NEW YORK TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER. All questions concerning the timeliness, validity, form and eligibility of any exercise of Rights will be determined by the Fund, whose determinations will be final and binding. The Fund in its sole discretion, may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or reject the purported exercise of any Right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the Fund determines in its sole discretion. The Fund will not be under any duty to give notification of any defect or irregularity in connection with the submission of Subscription Certificates or incur any liability for failure to give such notification. Nominees who hold shares of Common Stock for the account of others, such as banks, brokers, trustees or depositories for securities, should notify the respective beneficial owners of such shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Rights. If the beneficial owner so instructs, the nominee should complete the Subscription Certificate and submit it to the Subscription Agent with the proper payment. In addition, beneficial owners of Common Stock or Rights held through such a nominee should contact the nominee and request the nominee to effect transactions in accordance with the beneficial owner's instructions. DELIVERY OF SHARE CERTIFICATES Certificates representing Shares purchased pursuant to the Primary Subscription will be delivered to Exercising Rights Holders as soon as practicable after the corresponding Rights have been validly exercised and full payment for such Shares has been received and cleared. Certificates representing Shares purchased pursuant to the Over-Subscription Privilege will be delivered to Exercising Rights Holders as soon as practicable after the Expiration Date and after all allocations have been effected. Participants in the Fund's Dividend Reinvestment Plan (the "Plan") will have any Shares acquired in the Primary Subscription and pursuant to the Over-Subscription Privilege credited to their stockholder dividend reinvestment accounts in the Plan. Participants in the Plan wishing to exercise Rights issued in respect of the Shares held in their accounts in the Plan must exercise them in accordance with the procedures set forth above. Stockholders 20 23 whose Shares are held of record by Cede or by any other depository or nominee on their behalf or their broker-dealer's behalf will have any Shares acquired in the Primary Subscription credited to the account of Cede or such other depository or nominee. Shares acquired pursuant to the Over-Subscription Privilege will be certificated and stock certificates representing such Shares will be sent directly to Cede or such other depository or nominee. Stock certificates will not be issued for Shares credited to Plan accounts. FOREIGN STOCKHOLDERS Subscription Certificates will not be mailed to Foreign Record Date Stockholders. The Rights to which such Subscription Certificates relate will be held by the Subscription Agent for such Foreign Record Date Stockholders' accounts until instructions are received to exercise, sell or transfer the Rights. If no instructions have been received by 12:00 Noon, New York time, three Business Days prior to the Expiration Date, the Subscription Agent will use its best efforts to sell the Rights of those Foreign Record Date Stockholders through or to the Dealer Manager. The net proceeds, if any, from the sale of those Rights will be remitted to the Foreign Record Date Stockholders. FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER The U.S. federal income tax consequences to holders of Common Stock with respect to the Offer will be as follows: 1. The distribution of Rights to Record Date Stockholders will not result in taxable income to such holders nor will such holders realize taxable income as a result of the exercise of the Rights. 2. The basis of a Right will be (a) to a holder of Common Stock to whom it is issued and who exercises or sells the Right (i) if the fair market value of the Right immediately after issuance is less than 15% of the fair market value of the Common Stock with regard to which it is issued, zero (unless the holder elects, by filing a statement with his timely filed federal income tax return for the year in which the Rights are received, to allocate the basis of the Common Stock between the Right and the Common Stock based on their respective fair market values immediately after the Right is issued), and (ii) if the fair market value of the Right immediately after issuance is 15% or more of the fair market value of the Common Stock with regard to which it is issued, a portion of the basis in the Common Stock based upon their respective fair market values immediately after the Right is issued; (b) to a holder of Common Stock to whom it is issued and who allows the Right to expire, zero; and (c) to anyone who purchases a Right in the market, the purchase price for a Right. 3. The holding period of a Right received by a Record Date Stockholder includes the holding period of the Common Stock with regard to which the Right is issued. 4. Any gain or loss on the sale of a Right will be treated as a capital gain or loss if the Right is a capital asset in the hands of the seller. Such a capital gain or loss will be long- or short-term, depending on how long the Right has been held, in accordance with paragraph 3 above. A Right will be a capital asset in the hands of the person to whom it is issued if the Common Stock to which the Right relates would be a capital asset in the hands of that person. If a Right is allowed to expire, there will be no loss realized unless the Right had been acquired by purchase, in which case there will be a loss equal to the basis of the Right. 5. If the Right is exercised by the Record Date Stockholder, the basis of the Common Stock received will include the basis allocated to the Right and the amount paid upon exercise of the Right. 6. If the Right is exercised, the holding period of the Common Stock acquired begins on the date the Right is exercised. 7. Gain recognized by a foreign shareholder on the sale of a Right will be taxed in the same manner as gain recognized on the sale of Fund shares. See "Taxation -- United States Federal Income Taxes -- Foreign Stockholders." The Fund is required to withhold and remit to the U.S. Treasury 31% of reportable payments paid on an account if the holder of the account is a taxpayer to which the backup withholding rules apply and has provided the Fund with either an incorrect taxpayer identification number or no number at all or fails to certify that he is not subject to such withholding. 21 24 The foregoing is only a summary of the applicable federal income tax laws and does not include any state or local tax consequences of the Offer. Exercising Rights Holders should consult their own tax advisers concerning the tax consequences of this transaction. See "Taxation." NOTICE OF NET ASSET VALUE DECLINE The Fund has, pursuant to the Securities and Exchange Commission's regulatory requirements, undertaken to suspend the Offer until it amends this Prospectus if, subsequent to July 24, 1995 (the effective date of the Fund's Registration Statement) the Fund's net asset value declines more than 10% from its net asset value as of that date. EMPLOYEE PLAN CONSIDERATIONS Record Date Stockholders that are employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (including corporate savings and 401(k) plans), Keogh or H.R. 10 plans of self-employed individuals and Individual Retirement Accounts ("IRAs") and other plans eligible for special tax treatment under the Code or subject to Section 4975 of the Code (collectively, "Plans") should be aware that additional contributions of cash to the Plan (other than rollover contributions or trustee-to-trustee transfers from other Plans) in order to exercise Rights would be treated as Plan contributions and, when taken together with contributions previously made, may subject a Plan to excise taxes for excess or nondeductible contributions. In the case of Plans qualified under Section 401(a) of the Code and certain other plans, additional cash contributions could cause the maximum contribution limitations of Section 415 of the Code or other qualification rules to be violated. Furthermore, it may be a reportable distribution and there may be other adverse tax consequences if Rights are sold or transferred by a Plan to another account. A sale of Rights by a Plan account to an unrelated third party and retention of cash proceeds by the Plan account, or the direct exercise of Rights by a Plan account, should not be treated as a taxable Plan distribution. Plans contemplating making additional cash contributions to exercise Rights should consult with their counsel prior to making such contributions. Plans and other tax exempt entities, including governmental plans, should also be aware that if they borrow in order to finance their exercise of Rights, they may become subject to the tax on unrelated business taxable income ("UBTI") under Section 511 of the Code. If any portion of an IRA is used as security for a loan, the portion so used is also treated as distributed to the IRA depositor. ERISA contains fiduciary responsibility requirements, and ERISA and the Code contain prohibited transaction rules, that may impact the exercise or transfer of Rights. Due to the complexity of these rules and the penalties for noncompliance, Plans should consult with their counsel regarding the consequences of their exercise or transfer of Rights under ERISA and the Code. THE FUND The Fund, incorporated under the laws of the State of Maryland on May 24, 1990, has been engaged in business as a non-diversified, closed-end management investment company registered under the 1940 Act since August 21, 1990, when it completed an initial public offering of 6,250,000 shares of its Common Stock. The Fund completed a transferable rights offering in October 1993 pursuant to which an additional 2,200,000 shares of its Common Stock were issued. The Fund's investment objective is to seek high total return through capital appreciation and current income. It is the policy of the Fund, under normal market conditions, to invest at least 50% of its assets in equity and convertible debt securities issued by Mexican companies and the remainder of its assets in debt (other than convertible debt) securities of Mexican issuers and, for cash management or temporary defensive purposes, in certain high quality short-term debt instruments. See "Investment Objective and Policies." There is no assurance that the Fund's investment objective will be achieved. See "Investment Objective and Policies" and "Risk Factors." The Fund currently has 8,825,273 shares of Common Stock outstanding, which are listed and traded on the New York Stock Exchange under the symbol "MXE." See "Common Stock." As of July 20, 1995, the net 22 25 assets of the Fund were $99,430,851. The Fund's principal office is located at World Financial Center, 200 Liberty Street, New York, New York 10281 and its telephone number is (212) 667-7000. USE OF PROCEEDS Assuming all Shares offered pursuant to the Primary Subscription are sold at the Subscription Price of $9.125 per Share and the maximum solicitation fee is paid to the Dealer Manager and other Selling Group Members, the net proceeds of the Offer are estimated to be $25,866,875, after payment of estimated offering expenses. Expenses related to the issuance of the Shares will be borne by the Fund and will reduce the net asset value of the Common Stock. The Mexican Adviser and U.S. Co-Adviser anticipate that investment of such proceeds, in accordance with the Fund's investment objective and policies, will take up to six months from their receipt by the Fund, depending on market conditions and the availability of appropriate securities for purchase. Pending such investment in accordance with the Fund's investment objective and policies, the proceeds will be held in U.S. Government securities (which term includes obligations of the United States Government, its agencies or instrumentalities) and U.S. dollar, U.S. dollar-linked or peso-denominated money market instruments that are rated no lower than A-2 by Standard & Poor's ("S&P") or P-2 by Moody's Investors Service, Inc. ("Moody's") or the equivalent from another rating service or, if unrated, deemed to be of equivalent quality by the Mexican Adviser and the U.S. Co-Adviser. See "Investment Objective and Policies." RISK FACTORS Investing in the Fund, and in Mexican equity and debt securities in general, involves certain risks not typically associated with investing in the securities of United States issuers, including those discussed below. DILUTION An immediate dilution, which could be substantial, of the aggregate net asset value of the shares of Common Stock owned by Record Date Stockholders who do not fully exercise their Rights may occur as a result of the Offer because the Subscription Price may be less than the Fund's net asset value per share on the Expiration Date (and the Fund will incur expenses in connection with the Offer), and the number of shares outstanding after the Offer may increase in a greater percentage than the increase in the size of the Fund's assets. In addition, Record Date Stockholders who do not fully exercise their Rights should expect that they will, at the completion of the Offer, own a smaller proportional interest in the Fund than would otherwise be the case. Although it is not possible to state precisely the amount of such a decrease in net asset value because it is not known at this time what the net asset value per share will be on the Expiration Date or what proportion of the Shares will be subscribed for, such dilution could be substantial. For example, assuming that all Rights are exercised and that the Subscription Price of $9.125 is 19% below the Fund's net asset value of $11.27 per share as of July 20, 1995, the Fund's net asset value per share would be reduced approximately $0.67. The distribution to stockholders of transferable Rights which themselves may have intrinsic value will afford non-participating stockholders the potential of receiving a cash payment upon sale of such Rights, receipt of which may be viewed as partial compensation for the possible dilution and their interest in the Fund. No assurance can be given, however, that a market for the rights will develop or as to the value, if any, that such Rights will have. RISKS OF INVESTMENT IN MEXICAN SECURITIES Investment in Mexican equity and debt securities involves special considerations and risks that are not normally associated with investments in U.S. securities, including (1) relatively higher price volatility, lesser liquidity and smaller market capitalization of the Mexican securities markets, (2) currency fluctuations and devaluation and the cost of converting foreign currency into U.S. dollars, (3) restrictions on foreign investment and potential restrictions on repatriation of capital invested in Mexico and remittance of profits and dividends accruing thereon, (4) political, economic and social risks and uncertainties, including risks of confiscatory taxation and expropriation or nationalization of assets, and (5) high rates of inflation, unemployment and domestic interest rates. In addition, as a result of the financial crisis that occurred in Mexico in December 1994 many private and public sector entities are faced with severe financial and operational problems, including the lack of foreign exchange needed to repay U.S. dollar denominated obligations. In the 23 26 past, such financial difficulties have led to numerous restructurings of existing debt obligations. Bankruptcy and creditors' rights laws in Mexico are relatively undeveloped and it may be more difficult to obtain and execute a judgment in Mexico than in the United States. Market Illiquidity; Volatility. The Mexican securities market is substantially smaller, less liquid and more volatile than the major securities markets in the United States. At June 29, 1995, the aggregate market value of equity securities listed on the Mexican Stock Exchange was approximately NPs. 603.9 billion (approximately US$96.5 billion), compared to approximately US$5.27 trillion for equity securities listed on the New York Stock Exchange at June 29, 1995. At such date, the stock of Telefonos de Mexico, S.A. de C.V. ("Telmex") accounted for approximately 25.8% of the aggregate market capitalization of the Mexican Stock Exchange, while no single stock issue accounts for more than 2.5% of the aggregate market capitalization of the New York Stock Exchange. Thus, the performance of the Mexican Stock Exchange is highly dependent on the performance of Telmex. Additionally, prices of equity securities traded on the Mexican Stock Exchange are generally more volatile than prices of equity securities traded on the New York Stock Exchange. The combination of price volatility and the relatively limited liquidity of the Mexican Stock Exchange may have an adverse impact on the investment performance of the Fund. Investment in Low Rated and Unrated Securities. The Fund, the Mexican Adviser and the U.S. Co-Adviser have no established rating criteria for the Mexican debt securities in which the Fund invests. The Fund invests in debt securities of Mexican companies that the Mexican Adviser and the U.S. Co-Adviser determine to be suitable investments regardless of whether such debt is rated. As a result, the Fund's portfolio of Mexican debt securities may consist of securities that would be considered to have a credit quality rated below investment grade by internationally recognized credit rating organizations such as Moody's and S&P. Non-investment grade securities (that is, rated Ba1 or lower by Moody's or BB+ or lower by S&P) are commonly referred to as "junk bonds" and are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations and involve major risk exposure to adverse conditions. Some of the debt securities held by the Fund, which may not be paying interest currently or may be in payment default, may be comparable to securities rated as low as C by Moody's or CCC or lower by S&P. These securities are considered to have extremely poor prospects of ever attaining any real investment standing, to have a current identifiable vulnerability to default, to be unlikely to have the capacity to pay interest and repay principal when due in the event of adverse business, financial or economic conditions and/or to be in default or not current in the payment of interest or principal. Low rated and unrated debt instruments generally offer a higher current yield than that available from higher grade issues, but typically involve greater risk. Low rated and unrated securities are especially subject to adverse changes in general economic conditions, to changes in the financial condition of their issuers and to price fluctuation in response to changes in interest rates. During periods of economic downturn or rising interest rates, issuers of low rated and unrated instruments may experience financial stress that could adversely affect their ability to make payments of principal and interest and increase the possibility of default. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of low rated and unrated securities especially in a market characterized by a low volume of trading. The Mexican Economy. From 1992 through 1994, increasing amounts of foreign capital inflows were invested in the Mexican Stock Exchange and in short-term Mexican Government and private sector debt instruments, such as bank certificates of deposit. Certain foreign portfolio investors were attracted to Mexico because of its relatively high real interest rates and high returns on equity investments, compared to returns on investments in developed countries, and a variety of positive, fundamental investment factors, including Mexico's relatively stable exchange rate. During 1994, internal and external events combined to complicate the management of the Mexican economy and, in particular, adversely affected the capital inflows needed to finance Mexico's current account deficit. Externally, the U.S. monetary authorities took measures to increase interest rates in the United States in order to control inflationary pressures. The progressive increases in interest rates in the United States during 1994, as well as the prospect of further increases in those rates, made Mexican investments and investments in other emerging markets relatively less attractive to foreign portfolio investors. 24 27 Mexico's economic situation deteriorated further due to a series of internal disruptions and political events that undermined the confidence of investors in Mexico during 1994. At the beginning of 1994, armed insurgents attacked (and in certain cases temporarily seized control of) several villages in the southern state of Chiapas. While the Mexican Government responded by providing support to the local authorities by means of certain operations conducted by the Mexican army and publicly offering to negotiate a peaceful solution that would address the underlying concerns of the local population, the conflict remained a source of debate and uncertainty for the remainder of the year. Negotiations with the rebels continued through the spring of 1994, but were subsequently broken off. In December, the Mexican Congress created a Congressional peace commission responsible for mediating the negotiations between the Government and the insurgents. By late 1994, the rebels had not agreed to resume negotiations and the region experienced certain additional incidents of civil unrest. Further, the Mexican Presidential and Congressional elections held in 1994 furnished investors with additional grounds for unease. In March 1994, Luis Donaldo Colosio, the candidate for the Partido Revolucionario Institucional ("PRI"), the dominant political party in Mexico, was assassinated. This event increased the general uncertainty surrounding the elections scheduled for August 1994, and led to pressures on the foreign exchange market. While the uncertainty abated after Ernesto Zedillo was elected President in a presidential election that was perceived as fair, substantial out-flows of foreign capital occurred in the weeks preceding the elections. Other destabilizing events that occurred during 1994 included the assassination of Jose Francisco Ruiz Massieu, the former Secretary-General of the PRI, and the kidnapping of several prominent businessmen. These events caused some foreign investors to believe that Mexico's political system was less stable than had been previously believed. At the end of the first quarter of 1994, the Mexican authorities responded to the increased pressure on the new peso/dollar exchange rate by permitting the exchange rate to depreciate, but always within the limit of the Banco de Mexico intervention band. In addition, in order to retain the capital of investors who perceived a risk of further devaluation of the new peso, the Mexican Government issued increasing amounts of Tesobonos, which are short-term notes denominated in U.S. dollars but payable in dollars or in new pesos indexed to the value of the dollar. The Mexican Government also increased interest rates on its new peso denominated internal debt in an attempt to maintain capital inflows. While the Mexican Government was aware of the large current account deficit and the unease of foreign investors, its stated view was that throughout much of 1994 the real exchange rate remained competitive, particularly given the robust growth of exports, and that the factors that had provoked uncertainty among foreign investors were transitory. The Mexican Government's attempts to stabilize the exchange rate and restore capital inflows were not successful and the Mexican Government suffered a substantial loss in its gross international reserves in 1994. During the second half of December 1994, foreign capital continued to flee the country as investors grew even more concerned, resulting in a strong demand for dollars. Given the loss of reserves that had occurred throughout the year, it became impossible to maintain the new peso within the band established earlier that year and on December 20, 1994, the Mexican Government moved the ceiling of the intervention band. That action proved to be entirely insufficient to address the concerns of foreign investors, and the demand for foreign currency increased. On December 22, 1994, the Mexican Government eliminated the intervention band and allowed the new peso to float freely against the dollar. A sharp and rapid devaluation of the new peso ensued. The peso devaluation has resulted in a significant rise in inflation and domestic interest rates. These high rates of interest and inflation have led to a recessionary economy and significantly higher unemployment and continue to affect adversely the companies in which the Fund intends to invest. In addition, the new peso rates of exchange have been unstable relative to the U.S. dollar. The Government has announced that it intends to maintain its current free floating exchange rate policy, with Banco de Mexico intervening in the foreign exchange market from time to time in an effort to minimize volatility. Mexico is currently one of the largest debtor nations (among developing countries) to foreign governments. 25 28 Political Factors. Mexico is a federal, democratic republic with a tripartite division of powers: executive, legislative and judicial. The chief executive is the President, who is elected by popular vote for a period of six years and who may not be re-elected. In the presidential election held on August 21, 1994, PRI candidate Ernesto Zedillo Ponce de Leon won a clear victory over the right of center party, Partido Accion National ("PAN") and over the left of center party, Partido de la Revolucion Democratica ("PRD"). President Zedillo took office on December 1, 1994. Since the 1930s, the Mexican political climate has remained stable and exhibited continuity. The PRI is the dominant political party in Mexico. Since 1929, the PRI has won all presidential elections and has held a majority in Congress. Until 1989, it also had won all of the state governorships. In the elections held on August 21, 1994, the PRI won all four gubernatorial contests. In the event the PRI's control of the legislature were to decrease substantially in future elections, it is possible that changes in the Mexican government's economic policy could result and the Mexican securities markets could react in a negative manner. The Fund is unable to predict the future course of Mexican politics. The election of President Zedillo may have a significant effect upon the nature of future economic policies in Mexico. Questions have been raised regarding many aspects of his National Development Plan, including the ability of the Mexican economy to create 800,000 to 1 million jobs per year and the ability of the Mexican Government to convince Mexicans to increase their savings rate given the recent history of devaluations and high inflation rates. The failure of the Plan to address the problems of poverty and unemployment in Mexico may lead to social unrest and instability. The impact of future events and changes and any political and economic instability in Mexico on the Fund cannot be predicted, although they may have an adverse effect on the Fund's intended operations and performance. Currency Fluctuation and Exchange Control Laws. Most of the equity and debt securities in the Fund's portfolio and the equity securities underlying the convertible securities in which the Fund may invest will be denominated in pesos. As a result, these securities must increase in market value at a rate in excess of the rate of any decline in the value of the peso against the U.S. dollar in order to avoid a decline in their equivalent U.S. dollar value. Accordingly, a further decline in the value of the peso against the U.S. dollar may result in a corresponding change in the value of the Fund's equity and debt securities denominated in pesos. The peso has been subject to significant devaluations in the past, and there can be no assurance that similar devaluations will not take place in the future. See the discussion above under the heading "-- The Mexican Economy" for additional information regarding the events leading up to the recent devaluation of the new peso in December 1994 and the ensuing volatility in the peso/dollar exchange rate. The Fund computes its income from its peso assets on the date that such income is earned by the Fund at the foreign exchange rate in effect on that date, and if the value of the peso falls relative to the U.S. dollar between recognition of income and the date the Fund makes distributions, the Fund could be required to liquidate portfolio securities to make distributions to stockholders unless the Fund successfully hedges against declines in the value of the peso. There can be no assurance that the Fund will be able to liquidate securities in order to meet such distribution requirements. The Fund is permitted to borrow money to make distributions required to maintain its status as a regulated investment company for U.S. tax purposes. If the exchange rate declines between the time the Fund incurs expenses in U.S. dollars and the time such expenses are paid, the amount of pesos required to be converted into U.S. dollars in order to pay expenses in U.S. dollars will be greater than the equivalent amount in pesos of such expenses at the time they are incurred. THE FUND DOES NOT EXPECT TO HEDGE AGAINST A DECLINE IN THE VALUE OF THE PESO EXCEPT IN LIMITED CIRCUMSTANCES. THE RISK OF CURRENCY DEVALUATIONS AND FLUCTUATIONS SHOULD BE CAREFULLY CONSIDERED BY INVESTORS IN DETERMINING WHETHER TO PURCHASE SHARES OF THE FUND. See Appendix A "The United Mexican States--Exchange Controls and Foreign Exchange Rates" for a table which sets forth the average and closing controlled rate of exchange and free rate of exchange for the peso against the U.S. dollar for the periods indicated therein. Mexican Foreign Investment Laws. Mexico's Ley de Inversion Extranjera ("Foreign Investment Law") became effective on December 28, 1993 and established a new set of rules to provide legal certainty to foreign investors and promote the country's competitiveness. The Foreign Investment Law liberalizes certain 26 29 restrictions on foreign investment in Mexico, permitting, if certain conditions are satisfied, the ownership by foreign investors of 100% of the capital stock of a Mexican company. The law also sets forth those activities of the economy which continue to be reserved to the Mexican Government or to Mexican investors and lists the different activities in which foreign investment may not exceed 10%, 25%, 30% and 49% of the total investment. The Mexican Government recognizes that Mexico is competing for capital with many other countries, including the former communist nations in Eastern and Central Europe, but believes that, because of the increased competitiveness and productivity of its economy, Mexico will be able to maintain access to sources of investment capital. Under the new regulations, the Mexican Government has established mechanisms through which non-Mexican nationals can acquire beneficial ownership of shares of Mexican companies previously limited to ownership by Mexican nationals, through special trust arrangements established with Mexican banks. The first such arrangement was established with Nacional Financiera, S.N.C. ("Nafinsa"), the Mexican national development bank, and is administered by Indeval, the Mexican central securities depository agency. Under that arrangement, called the Master Trust, all shares of Mexican companies acquired for the benefit of non-Mexican nationals (and which otherwise would be required to be held by Mexican nationals) are held in a series of special Indeval accounts in the name of Nafinsa as trustee. Under the Master Trust arrangement, Nafinsa is the record owner of the shares held in these special Indeval accounts and must vote such shares in agreement with the votes cast by the majority of the stockholders holding shares of the same class. Under the Master Trust arrangement, the non-Mexican national beneficiaries have the right to receive dividends and other distributions in respect of the shares and certificates of ordinary participation and to dispose of the shares and certificates. The Mexican Government has amended financial legislation to allow 49% foreign participation in the capital banks, brokerage houses and financial groups. The ordinary capital stock of holding companies shall be made up of series "A" shares representing at least 51% of said capital, the remaining 49% may be made up, singly or jointly, of series "A" or "B" shares. In the case of brokerage firms the maximum percentage of ordinary capital stock that series "B" shares may represent was increased from 30% to 49%. Under this new structure of the ordinary capital stock, banking institutions and holding companies are no longer required to issue series "C" shares. Subsequent to prior authorization from the Ministry of Finance and Public Credit, the limit on individual shareholding in banks, brokerage houses and financial groups has been increased to 20% of capital stock. In the case of investments made by foreign financial institutions, this Ministry may authorize higher limits on individual holdings in order to enable Intermediaries with a majority of Mexican capital to become affiliates of said foreign institutions. Ownership of certain other industries (such as petroleum exploration and recovery) is reserved exclusively to the state. Current foreign investment regulations also contemplate that listed Mexican companies may issue neutral (or series "N") shares which have no voting rights and which may be acquired freely by non-Mexican nationals. N shares must also be held through special trust arrangements established with Mexican banks. Although current Mexican regulations and trust arrangements will permit the Fund to invest freely in most equity securities traded on the Mexican Stock Exchange and to hold stock issued upon conversion of the Fund's convertible debt securities, there can be no assurance that Mexican foreign investment regulations will not change in the future in a manner which adversely affects the ability of the Fund to acquire publicly traded Mexican securities or beneficial ownership thereof or to hold the stock issuable upon conversion of its convertible debt securities. If, as a result of a change in Mexican foreign investment regulations, the Fund were unable to hold stock (either directly or through a trust arrangement) of Mexican companies issuable upon conversion of its convertible debt securities, it would either have to dispose of the convertible debt securities prior to conversion, or convert the securities and dispose of the resulting stock at the time of conversion, in order to realize the conversion value of such convertible debt securities. Mexican Securities Laws and Accounting Rules. There is less publicly available information about the issuers of Mexican securities than is regularly published by issuers in the United States. All Mexican companies listed on the Mexican Stock Exchange must incorporate the effects of inflation directly in 27 30 accounting records and in their published financial statements. Thus, Mexican financial statements and reported earnings may differ from those of companies in other countries. However, in order to allow comparable analysis with previous accounting standards, the Mexican Securities Commission has required all companies listed on the Mexican Stock Exchange to include notes to their financial statements which report financial data in a way which is consistent with previous rules. Also, there is generally less governmental supervision and regulation of exchanges, brokers and issuers in Mexico than there is in the United States. There have been recent modifications to the regulatory framework of the securities market with the intention of bringing Mexican supervision closer to international standards. See Appendix A "The United Mexican States -- Structural Reform." Mexican corporate laws regarding fiduciary responsibility and protection of stockholders have developed in a different manner and are not as specific as those in the United States. NET ASSET VALUE DISCOUNT Shares of closed-end investment companies frequently trade at a discount from net asset value. This characteristic of shares of a closed-end fund is a risk separate and distinct from the risk that the Fund's net asset value will decrease. Among the factors which may be expected to affect whether shares of the Fund trade above or below net asset value are portfolio investment results, the general performance of the Mexican economy and Mexican securities, supply and demand for shares of the Fund and the development of alternatives to the Fund as a vehicle through which United States and other foreign investors may invest in Mexican securities. The Fund cannot predict whether its shares will trade at, below or above net asset value. The risk of purchasing shares of a closed-end fund that might trade at a discount is more pronounced for investors who wish to sell their shares in a relatively short period of time because, for those investors, realization of gain or loss on their investments is likely to be more dependent upon the existence of a premium or discount than upon portfolio performance. NON-DIVERSIFICATION OF INVESTMENTS The Fund is classified as a "non-diversified" investment company under the 1940 Act, which means that the Fund is not limited by the 1940 Act in the proportion of its assets that may be invested in the securities of a single issuer. As a non-diversified investment company, the Fund may invest a greater proportion of its assets in the obligations of a smaller number of issuers and, as a result, may be subject to greater risk with respect to portfolio securities. The Fund intends to continue to comply with the diversification requirements imposed on regulated investment companies by the U.S. Internal Revenue Code of 1986, as amended (the "Code"). See "Taxation--United States Federal Income Taxes." OPERATING EXPENSES The operating expense ratio of the Fund is higher than that of a fund investing predominantly in the securities of U.S. issuers since the expenses of the Fund (such as investment advisory and administration fees, custodial and communications costs) are higher. However, the Fund's operating expense ratio has been comparable to operating expense ratios of funds investing primarily in a single foreign country. The operating expense ratio of the Fund for the year ended July 31, 1994 was 1.64%. See "Management of the Fund." ADDITIONAL CONSIDERATIONS The Fund may invest in unlisted or restricted securities and engage in foreign currency hedging transactions each of which may involve special risks. See "Investment Objective and Policies." In addition, certain special voting provisions of the Fund's Articles of Incorporation may have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices. See "Common Stock." INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY TO ASSUME THE FOREGOING RISKS BEFORE MAKING AN INVESTMENT IN THE FUND. AN INVESTMENT IN THE COMMON STOCK OF THE FUND MAY NOT BE APPROPRIATE FOR ALL INVESTORS AND SHOULD NOT BE CONSIDERED AS A COMPLETE INVESTMENT PROGRAM. 28 31 INVESTMENT OBJECTIVE AND POLICIES GENERAL The Fund's investment objective is to seek high total return through capital appreciation and current income. The Fund will seek to achieve its objective through investment in equity and convertible debt securities issued by Mexican companies and other debt securities of Mexican issuers. Mexican companies are defined as (i) companies organized under the laws of Mexico; (ii) companies whose securities are principally traded on the Mexican Stock Exchange; and (iii) subsidiaries of companies described in clauses (i) or (ii) above that issue debt securities guaranteed by, or securities payable with (or convertible into) the stock of, the companies described in clauses (i) or (ii). The Fund will not invest in the securities of any non-Mexican parent company of a Mexican company, or in securities payable with (or convertible into) the stock of such non-Mexican parent company. Mexican issuers are defined as (i) Mexican companies and (ii) the Mexican Government and its agencies and instrumentalities. The Fund's investment objective and the percentage limitation on investments set forth in the first sentence of the next paragraph are fundamental policies that may not be changed without the approval of a majority of the Fund's outstanding voting securities. As used in this Prospectus, and for purposes of the 1940 Act, a majority of the Fund's outstanding voting securities means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. No assurance can be given that the Fund's investment objective will be achieved. Due to the risks inherent in international investing generally, the Fund should not be considered as a complete investment program. It is the policy of the Fund, under normal market conditions, to invest at least 50% of its assets in equity and convertible debt securities issued by Mexican companies. The remainder of the Fund's assets will be invested in Mexican issuer debt (other than convertible debt) securities and, for cash management or temporary defensive purposes, other instruments described below under "--Temporary Investments." In addition to any convertible debt securities acquired by the Fund, which have limited liquidity, the Fund may invest up to 10% of its assets in other securities which may be unlisted, restricted as to resale or not otherwise readily marketable. As of July 20, 1995, approximately 90.0% of the Fund's assets were invested in equity securities of Mexican companies, 0.43% in convertible debt securities of one Mexican issuer, 6.74% in short term debt securities of Mexican issuers and 2.80% in U.S. dollar-denominated money market instruments. The Fund defines equity securities to mean common stock (including ADRs and GDRs issued on deposit of common stock), preferred stock and warrants to purchase common stock and preferred stock of Mexican companies, whether acquired directly or upon conversion of debt securities. The Fund seeks to identify and invest in companies it believes offer potential for long-term capital appreciation. In evaluating prospective investments, the Mexican Adviser utilizes internal financial, economic and credit analysis resources as well as information obtained from other sources. In selecting industries and companies for investment, the Mexican Adviser generally considers such factors as overall growth prospects, competitive position in domestic and export markets, technology, financial strength, price/earnings ratios, research and development, productivity, labor costs, raw material costs and sources, profit margins, return on investment, sources of U.S. dollar-based revenues, capital resources and government regulation and management. Initially, the Fund's management anticipated that the Fund would acquire convertible debt securities in privately negotiated transactions. Because of the extremely limited number of convertible debt securities issued to date by Mexican companies, the Fund's management does not anticipate that the Fund will be acquiring significant amounts of convertible debt securities; however, the Fund may acquire convertible debt securities of Mexican companies in the future if and when they become available. A convertible debt security is a bond, debenture or note that may be converted into or exchanged for, or may otherwise entitle the holder to purchase, a prescribed amount of common stock or other equity security of the same or a different Mexican company within a particular period of time at a specified price or formula. A convertible debt security entitles the holder to receive interest paid or accrued on debt until the convertible security matures or is redeemed, 29 32 converted or exchanged. Before conversion, convertible debt securities have characteristics similar to nonconvertible debt securities in that they ordinarily provide for a fixed stream of income with generally higher yields than those of stocks of the same or similar issuers. Convertible debt securities rank senior to stock in a corporation's capital structure and, therefore, generally entail less risk than the corporation's stock. Given the volatility of the Mexican securities market and the pricing of securities in Mexico, a significant portion of the value of a Mexican convertible debt security may be derived from the conversion feature rather than the fixed income feature. The Fund defines debt securities (other than convertible debt securities) to mean bonds, notes, bills and debentures. The Fund's investments in debt securities of Mexican issuers include debt securities issued by private Mexican companies and by the Mexican Government and its agencies and instrumentalities. These debt securities may be denominated either in pesos or in U.S. dollars. The Fund has established no rating criteria for the Mexican issuers' debt securities in which it invests. The Fund invests in debt securities of Mexican issuers that it determines to be suitable investments regardless of their rating. See "Risk Factors--Risks of Investment in Mexican Securities." Although the Mexican Adviser and the U.S. Co-Adviser consider available security ratings when making investment decisions, they perform their own investment analysis. The Mexican Adviser's and the U.S. Co-Adviser's analysis may include consideration of the issuer's experience and management strength, changing financial condition, borrowing requirements or debt maturity schedules, and its responsiveness to changes in business conditions and interest rates. The Mexican Adviser and the U.S. Co-Adviser also consider relative values based on anticipated cash flow, interest coverage, asset coverage, earnings prospects and other factors. The analysis of the Mexican Adviser and the U.S. Co-Adviser is not, however, necessarily comparable to any established rating standards. Among the obligations of the Mexican Government in which the Fund may invest are Tesobonos, which are short-term bonds issued directly by the Mexican Government and which are denominated in U.S. dollars and paid at maturity in the peso equivalent calculated at the free exchange rate; Bondes, which are development bonds issued directly by the Mexican Government denominated in pesos and payable in pesos with a minimum term of 364 days; Ajustabonos, which are adjustable bonds with different terms issued directly by the Mexican Government and denominated in pesos with the face amount adjusted each quarter by the quarterly inflation rate; and instruments evidencing the foreign debt of Mexico and its public sector entities. The Fund does not expect to trade in securities for short-term gain. It is anticipated that the Fund's annual portfolio turnover rate generally will not exceed 50%. This rate is calculated by dividing the lesser of sales or purchases of portfolio securities for any given year by the average monthly value of the Fund's portfolio securities for such year. For purposes of this calculation, no regard is given to securities having a maturity or expiration date at the time of acquisition of one year or less. The Fund's portfolio turnover rate for fiscal years ended July 31, 1992, 1993 and 1994 was 15.08%, 44.21% and 43.57%, respectively. Portfolio turnover directly affects the amount of transaction costs that are borne by the Fund. In addition, the sale of securities held by the Fund for not more than one year will give rise to short-term capital gain or loss for U.S. federal income tax purposes. The U.S. federal income tax requirement that the Fund derive less than 30% of its gross income from the sale or other disposition of stock or securities held less than three months may limit the Fund's ability to dispose of its securities. See "Taxation--United States Federal Income Taxes." The Fund may invest in the securities of other investment companies that invest a substantial portion of their assets in Mexican securities to the extent permitted by the 1940 Act. Under Section 12(d)(1) of the 1940 Act, the Fund may invest up to 10% of its total assets in shares of other investment companies and up to 5% of its total assets in any one investment company, provided that the investment does not represent more than 3% of the voting stock of the acquired investment company. By investing in an investment company, the Fund bears a ratable share of the investment company's expenses, as well as continuing to bear the Fund's advisory and administrative fees with respect to the amount of the investment. Under the 1940 Act, banks organized outside of the United States are deemed to be investment companies, although the U.S. Securities and Exchange Commission (the "Commission") has adopted a rule which would permit the Fund to invest in 30 33 the securities of foreign commercial banks, under certain circumstances, without regard to the percentage limitations of Section 12(d)(1) of the 1940 Act. Mexican law recently was amended to permit foreign investment in up to 30% of the capital stock of Mexican commercial banks. The Fund may, to the extent permitted by applicable Commission rules and regulations, invest a portion of its assets in the securities of Mexican commercial banks. The Fund may be prohibited under Section 12(d)(3) of the 1940 Act from purchasing the securities of any company that, in its most recent fiscal year, derived more than 15% of its gross revenues from securities-related activities. In Mexico, the largest commercial banks act as securities brokers and dealers, investment advisers and underwriters of government securities or otherwise engage in securities-related activities, which may limit the Fund's ability to hold securities issued by banks. In addition, there are Mexican securities companies with publicly traded shares and the provisions of Section 12(d)(3) limit the Fund's ability to hold securities issued by these companies. Under the 1940 Act, the Fund may not purchase during the existence of any underwriting syndicate any security a principal underwriter of which is an affiliate of the Mexican Adviser. Acciones y Valores de Mexico, S.A. de C.V., the parent company of the Mexican Adviser, is actively engaged in the underwriting business in Mexico. The Fund may seek an exemption from the Commission permitting the Fund to purchase securities in public offerings in which Acciones y Valores de Mexico, S.A. de C.V. ("AVM"), or any of its affiliates, participates as underwriter, although there can be no assurance that such relief will be sought or obtained. In addition, the purchase by the Fund of securities being sold by an underwriting syndicate in which Oppenheimer & Co., Inc., the parent company of the U.S. Co-Adviser, is a member may be restricted. TEMPORARY INVESTMENTS For temporary defensive purposes, e.g., during periods in which the Mexican Adviser and the U.S. Co-Adviser determine that changes in the Mexican securities markets or other economic or political conditions in Mexico warrant, the Fund may vary from its investment objective and may invest, without limit (except for the limitations as described under "Investment Restrictions"), in certain high quality short-term debt instruments, including U.S. and Mexican Government securities (provided that the Fund may not invest more than 25% of its total assets in Mexican Government securities). The Fund may also at any time invest funds in such instruments as reserves for expenses and dividend and other distributions to stockholders. Also, for temporary defensive purposes, the Fund may change the relative percentages of debt securities and equity securities held in its portfolio. The short-term instruments in which the Fund may invest include (a) obligations of the United States Government and the Mexican Government, including the agencies or instrumentalities of each (including repurchase agreements with respect to these securities); (b) bank obligations (including certificates of deposit, time deposits and bankers' acceptances of United States and Mexican banks denominated in U.S. dollars or pesos); (c) obligations of United States and Mexican companies that are rated no lower than A-2 by S&P or P-2 by Moody's or the equivalent from another rating service or, if unrated, deemed to be of equivalent quality by the Mexican Adviser and the U.S. Co-Adviser; and (d) shares of money market funds that are authorized to invest in (a) through (c). Among the obligations of agencies and instrumentalities of the United States Government in which the Fund may invest are securities that are supported by the "full faith and credit" of the United States Government (such as securities of the Government National Mortgage Association), by the right of the issuer to borrow from the United States Treasury (such as those of the Export-Import Bank of the United States), by the discretionary authority of the United States Government to purchase the agency's obligations (such as those of the Federal National Mortgage Association) or by the credit of the United States Government instrumentality itself (such as those of the Student Loan Marketing Association). CURRENCY TRANSACTIONS AND HEDGING The Fund does not expect to hedge against a decline in the value of the peso except in limited circumstances. On March 19, 1995, Banco de Mexico approved the establishment of over-the-counter forward 31 34 and option contracts in Mexico on the new peso between banks and their clients. Also, Banco de Mexico recently authorized the issuance and trading of futures contracts in respect of the new peso on the Chicago Mercantile Exchange ("CME"). Trading of new peso futures contracts began on the CME on April 25, 1995. These markets are relatively new and have not developed significantly. The nature of the strategies adopted by the Fund and the extent to which those strategies are used will depend on the development of such markets. The Fund will conduct any currency exchange transactions either on a spot, i.e., cash, basis at the rate prevailing in the currency exchange market, or, if a forward market develops, through entering into forward contracts to purchase or sell currency. The Fund will not seek to hedge against a decline in the value of its portfolio securities resulting from a currency devaluation unless suitable hedging instruments for which a liquid market exists are available on a timely basis and on acceptable terms. Under these circumstances, the Fund may, in its discretion, hedge all or part of the value of its portfolio securities denominated in currencies other than U.S. dollars, although it is not obligated to do so. Unless the Fund engages in hedging transactions, it will be subject to the risk of changes in value of the non-U.S. dollar currencies in which its portfolio securities are denominated, particularly the peso. The Fund will conduct any forward currency exchange transactions, which are considered derivative transactions, only for hedging and not speculation. The risk of future currency devaluations and fluctuations should be carefully considered by investors in determining whether to purchase shares of the Fund. Although the Fund will value its assets weekly in terms of U.S. dollars, it does not intend physically to convert its holdings of pesos into U.S. dollars on a weekly basis. It will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. The Fund's dealings in forward currency contracts will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of forward currency contracts with respect to specific receivables or payables of the Fund generally arising in connection with the purchase or sale of its portfolio securities or in anticipation of receipt of dividend or interest payments. Position hedging is the purchase or sale of forward currency contracts with respect to portfolio security positions denominated or quoted in the currency. The Fund may not position hedge with respect to a particular currency to an extent greater than the aggregate market value (at the time of making such purchase or sale) of the securities held in its portfolio denominated or quoted in or currently convertible into that particular currency. If the Fund enters into a position hedging transaction, the custodian of the Fund's assets being hedged will place cash or readily marketable securities in a segregated account of the Fund in an amount equal to the value of the Fund's total assets committed to the consummation of the forward contract. If the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the account so that the value of the account will equal the amount of the Fund's commitment with respect to the contract. The Fund may enter into forward currency contracts in several circumstances. 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 contract for a fixed amount of U.S. dollars for the purchase or sale of the amount of foreign currency involved in the underlying transactions, the Fund will be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend payment is declared, and the date on which such dividend or interest payment is to be received. 32 35 At or before the maturity of a forward currency contract, the Fund may either sell a portfolio security and make delivery of the currency, or retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract pursuant to which the Fund will obtain, on the same maturity date, the same amount of the currency that it is obligated to deliver. If the Fund retains the portfolio security and engages in an offsetting transaction, the Fund, at the time of execution of the offsetting transaction, will incur a gain or a loss to the extent that movement has occurred in forward contract prices. The use of forward currency contracts does not eliminate fluctuation in the underlying prices of the securities, but it does establish a rate of exchange that can be achieved in the future. In addition, although forward currency contracts limit the risk of loss due to a decline in the value of the hedged currency, at the same time they limit any potential gain that might result should the value of the currency increase. If a devaluation is generally anticipated, the Fund may not be able to contract to sell the currency at a price above the devaluation level it anticipates. The cost to the Fund of engaging in currency transactions either on a spot or forward basis will vary with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because transactions in currency exchange are usually conducted on a principal basis, no fees or commissions are involved, although the price charged in the transaction includes a dealer's markup. Certain provisions of the Code may limit the extent to which the Fund may enter into the foreign currency transactions described above. These transactions may also affect the character and timing of income, and the amount of gain or loss recognized by the Fund and its stockholders for U.S. federal income tax purposes. See "Taxation --United States Federal Income Taxes." REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements on U.S. Government securities with primary government securities dealers recognized by the Federal Reserve Bank of New York and member banks of the U.S. Federal Reserve System. Repurchase agreements are contracts under which the buyer of a security simultaneously buys and commits to resell the security to the seller at an agreed upon price and date. Under a repurchase agreement, the seller is required to maintain the value of the securities subject to the repurchase agreement at not less than their repurchase price, including accrued interest. As required under the 1940 Act, the U.S. Co-Adviser, will monitor and mark to market the value of such U.S. Government securities daily to assure that the value equals or exceeds the repurchase price. Repurchase agreements may involve risks in the event of default or insolvency of the seller, including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. The Fund will limit its investment in repurchase agreements to no more than 50% of its total assets. SHORT SALES The Fund may make short sales of securities "against the box." A short sale is a transaction in which the Fund sells a security it does not own in anticipation that the market price of that security will decline. In a short sale "against the box," at the time of sale, the Fund owns or has the immediate and unconditional right to acquire at no additional cost the identical security. Short sales against the box are a form of hedging to offset potential declines in long positions in similar securities. BORROWING The Fund is authorized to borrow money from banks to make distributions required to maintain its qualification as a regulated investment company for U.S. tax purposes, for temporary or emergency purposes or for the clearance of transactions in an aggregate amount not exceeding 10% of its total assets (not including the amount borrowed). Borrowings by the Fund increase exposure to capital risk. In addition, borrowed funds are subject to interest costs that may offset or exceed the return earned on investment of such funds. LOANS OF PORTFOLIO SECURITIES The Fund may lend to banks and broker-dealers portfolio securities with an aggregate market value of up to one-third of its total assets. Such loans must be secured by collateral (consisting of any combination of 33 36 cash, U.S. Government securities or irrevocable letters of credit) in an amount at least equal (on a daily mark-to-market basis) to the current market value of the securities loaned. The Fund retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower. The Fund may terminate the loans at any time and obtain the return of the securities loaned within five business days. The Fund will continue to receive any interest or dividends paid on the loaned securities and will continue to have voting rights, if any, with respect to the securities. However, as with other extensions of credit, there are risks of delay in recovery or even loss of rights in collateral should the borrower default on its obligations. INVESTMENT RESTRICTIONS The Fund has adopted certain fundamental investment restrictions that may not be changed without the prior approval of the holders of a majority of the Fund's outstanding voting securities. For purposes of the restrictions listed below, all percentage limitations apply immediately after a purchase or initial investment, and any subsequent change in any applicable percentage resulting from market fluctuations does not require elimination of any security from the Fund's portfolio. Fund policies which are not fundamental may be modified by the Directors if, in the reasonable exercise of the Directors' business judgment, modification is determined to be necessary or appropriate to carry out the Fund's objectives. Under its fundamental restrictions, the Fund may not: 1. invest 25% or more of the total value of its assets in a particular industry; this restriction does not apply to investments in U.S. Government securities but does apply to investments in Mexican Government securities; 2. issue senior securities, borrow or pledge its assets, except that the Fund may borrow from a bank to make distributions required for the Fund to maintain its qualification as a regulated investment company under U.S. tax law, for temporary or emergency purposes or for the clearance of transactions in amounts not exceeding 10% (taken at the lower of cost or current value) of its total assets (not including the amount borrowed) and may also pledge its assets to secure such borrowings. Additional investments will not be made when borrowings exceed 5% of the Fund's assets; 3. lend money to other persons except through the purchase of debt obligations and the entering into of repurchase agreements in the United States or Mexico consistent with the Fund's investment objective and policies; 4. make short sales of securities or maintain a short position in any security except for short sales against the box as a form of hedging; 5. purchase securities on margin, except such short-term credit as may be necessary or routine for the clearance or settlement of transactions and the maintenance of margin with respect to forward contracts or other hedging transactions; 6. underwrite securities of other issuers, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933, as amended, in selling portfolio securities; 7. purchase or sell commodities or real estate, except that the Fund may invest in securities secured by real estate or interests in real estate or in securities issued by companies, including real estate investment trusts, that invest in real estate or interests in real estate, and may purchase and sell forward contracts on foreign currencies to the extent permitted under applicable law; or 8. make investments for the purpose of exercising control over, or management of, the issuers of any securities. 34 37 MANAGEMENT OF THE FUND DIRECTORS AND OFFICERS Overall responsibility for management and supervision of the Fund rests with the Fund's Board of Directors. The Fund's Directors approve all significant agreements between the Fund and the persons or companies that furnish services to the Fund, including agreements with the Mexican Adviser, the U.S. Co-Adviser and the Fund's custodian and transfer agent. The names of the Directors and principal officers of the Fund are set forth below, together with their positions with the Fund, their age and their principal occupations during the past five years.
PRINCIPAL OCCUPATIONS DURING PAST NAME AND ADDRESS POSITION WITH THE FUND AGE FIVE YEARS - ---------------- ---------------------- --- ----------------------------------- *ALAN H. RAPPAPORT............ President, Director 42 Executive Vice President (since World Financial Center and Chairman of the 1994) and Managing Director (since 200 Liberty Street Board 1986), Oppenheimer & Co., Inc.; New York, New York 10281 President and Director, Advantage Advisers, Inc. (since 1993); Executive Vice President, Advantage Advisers, Inc. (1990-1993); Chairman of the Board and Director, The Asia Tigers Fund, Inc., The India Fund, Inc., The Czech Republic Fund, Inc., The Emerging Markets Income Fund II, Inc., and The Emerging Markets Floating Rate Fund, Inc.; President and Director, Global Partners Income Fund, Inc. The Emerging Markets Income Fund, Inc.; Director, Xiosinvest Management Co., S.A.; Member, New York Stock Exchange Advisory Committee on International Capital Markets. *FREDERICK M. BOHEN........... Director 58 Director, Oppenheimer & Co., Inc. One Fifth Avenue (since 1993); Executive Vice Apt. 26A President, Rockefeller University New York, New York 10003 (since 1990); Senior Vice President, Brown University (1985-1990); Director, Apache Corporation (energy exploration, development, production and marketing) (since 1981); Director, Student Loan Marketing Association (since 1984). CARROLL W. BREWSTER........... Director 59 Executive Director, Hole in the 126 Lounsbury Road Wall Gang Fund, Inc. Ridgefield, (not-for-profit charitable Connecticut 06877 organization) (since July 1991); President, Hobart & William Smith Colleges (1982-1991). SOL GITTLEMAN................. Director 61 Senior Vice President and Provost, Ballou Hall Tufts University. Tufts University Medford, Massachusetts 02155
35 38
PRINCIPAL OCCUPATIONS DURING PAST NAME AND ADDRESS POSITION WITH THE FUND AGE FIVE YEARS - ------------------------------ ---------------------- --- ----------------------------------- DR. LUIS RUBIO................ Director 39 President, Centro de Investigacion Jaime Balme No. 11 para el Desarrollo (Center of Edificio D. Piso 2 Research for Development); Polanco Los Morales Director, Banco Nacional de Mexico, 11510 Mexico S.A. (September 1991 to April 1, 1993); Director of The Czech Republic Fund, Inc. (since 1994). DENNIS FEENEY................. Secretary and 43 Executive Vice President (since World Financial Center Treasurer 1995), Chief Financial Officer 200 Liberty Street (since 1994) and Controller, New York, New York 10281 Oppenheimer & Co., Inc. (since 1986).
- --------------- * Director who is an "interested person" within the meaning of the 1940 Act. 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 telephonic conference. In addition, the Fund reimburses the Directors for travel and out-of-pocket expenses incurred in connection with Board of Directors meetings. The following table sets forth the aggregate compensation paid by the Fund to each Director during the fiscal year ended July 31, 1994, as well as the total compensation paid by the Fund and other funds advised by the Mexican Adviser or the U.S. Co-Adviser or otherwise affiliated with the Fund to each Director.
TOTAL PENSION OR COMPENSATION RETIREMENT FROM FUND AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND COMPLEX COMPENSATION AS PART OF FUND BENEFITS UPON PAID TO NAME OF PERSON, POSITION FROM FUND EXPENSES RETIREMENT DIRECTORS - ---------------------------------- ------------ ---------------- ---------------- ---------------- Antonio S. Fernandez, Director+*...................... $ 0 0 0 $ 0 Alan H. Rappaport, Director**..... $ 0 0 0 $ 0 Frederick M. Bohen, Director+..... $ 0 0 0 $ 0 Carroll W. Brewster, Director..... $7,900 0 0 $7,900 Sol Gittleman, Director........... $8,000 0 0 $8,000 Dr. Luis Rubio, Director.......... $8,000 0 0 $8,000
- --------------- + Messrs. Fernandez and Bohen, who are considered "interested persons" of the Fund, did not receive any compensation from the Fund for their services as directors. Mr. Bohen did receive $7,800 from the U.S. Co-Adviser for his services as a director of the Fund. * Mr. Fernandez resigned as Director of the Fund effective February 15, 1995. ** Mr. Rappaport was elected as a Director of the Fund on February 15, 1995. Mr. Rappaport is considered an "interested person" of the Fund and will not receive any compensation from the Fund for his services as a director. The Fund's Board of Directors also has an Audit Committee which is responsible for reviewing financial and accounting matters. The current members of the Audit Committee are Messrs. Brewster, Gittleman and Rubio. While the Fund is a Maryland corporation, one of its Directors, Dr. Louis Rubio, is not a resident of the United States, and substantially all of his assets may be located outside of the United States. As a result, it may be Difficult for investors to effect service of process upon Dr. Rubio within the United States, or to realize judgments of courts of the United States predicated upon civil liabilities of Dr. Rubio under the federal securities laws of the United States. The Fund has been advised that there is substantial doubt as to the enforceability in the country in which Dr. Rubio resides of such civil remedies and criminal penalties as are afforded by the federal securities laws of the United States. Dr. Rubio has not appointed an agent for service of process in any action, suit or proceeding under the provisions of the U.S. securities laws. 36 39 The Articles of Incorporation of the Fund contain a provision permitted under the Maryland General Corporation Law (the "MGCL") which by its terms eliminates the personal liability of the Fund's directors to the Fund or its stockholders for monetary damages for breach of fiduciary duty as a director, subject to certain qualifications described below. The Articles of Incorporation and the By-Laws of the Fund provide that the Fund will indemnify directors, officers, employees or agents of the Fund to the full extent permitted by Maryland law. Under Maryland law, a corporation may indemnify any director or officer made a party to any proceeding by reason of service in that capacity unless it is established that (1) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (A) was committed in bad faith or (B) was the result of active and deliberate dishonesty; (2) the director or officer actually received an improper personal benefit in money, property or services; or (3) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. The Articles of Incorporation further provide that to the fullest extent permitted by the MGCL, and subject to the requirements of the 1940 Act, no director or officer will be liable to the Fund or its stockholders for money damages. Under Maryland law, a corporation may restrict or limit the liability of directors or officers to the corporation or its stockholders for money damages, except to the extent that (1) it is proved that the person actually received an improper benefit or profit in money, property or services, or (2) a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. However, nothing in the Articles of Incorporation or the By-Laws of the Fund protects or indemnifies a director, officer, employee or agent against any liability to which he would otherwise be subject by reason of acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or protects or indemnifies a director or officer of the Fund against any liability to the Fund or its stockholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. The Directors are divided into three classes, having terms of one, two and three years, respectively. At the annual meeting of stockholders in each year the term of one class expires and directors are elected to serve in that class for terms of three years. See "Common Stock--Special Voting Provisions." To the knowledge of the management of the Fund, no persons owned beneficially more than 5% of the Fund's outstanding shares as of July 20, 1995. As of July 20, 1995, the Directors and Officers of the Fund as a group owned beneficially and of record less than 1% of the Fund's outstanding shares. THE MEXICAN ADVISER Acci Worldwide, S.A. de C.V., the Fund's Mexican Adviser, was organized in 1990 as a company with limited liability under the laws of Mexico to carry on investment management activities and is registered under the Advisers Act. In addition to its services to the Fund, the Mexican Adviser acts as an adviser for the Mexico portfolio of The Hercules North American Growth and Income Fund, a U.S. registered investment company. The Mexican Adviser is a wholly owned subsidiary of Acciones y Valores de Mexico, S.A. de C.V. ("AVM"). The principal address of the Mexican Adviser is Paseo de la Reforma 398, Mexico City, D.F., Mexico 06600. AVM, organized in 1971, owns 100% of the capital stock of the Mexican Adviser. AVM provides institutional and brokerage services as well as financial advice to investors and securities issuers, specializing in money market, brokerage and corporate finance operations, and provides investment advice to Mexican investment funds. AVM is one of the leading brokerage firms in Mexico and is a wholly owned subsidiary of Grupo Financiero Banamex Accival, S.A. de C.V. ("Grupo Banacci"). As of June 1995, Grupo Banacci had over US$970 million under management invested through a family of mutual funds investing in Mexican securities. Grupo Banacci also holds the controlling interest in Banco Nacional de Mexico, S.A., Mexico's largest commercial bank in terms of total deposits. 37 40 AVM holds 100% of the capital stock of ACCI Securities, Inc., a securities brokerage firm incorporated in Delaware in June 1990, with its principal place of business in New York, New York. ACCI Securities, Inc. is registered as a broker-dealer with the United States Securities and Exchange Commission and effects transactions as a broker in Mexican securities, primarily for U.S. institutional investors and, solely incidental thereto, provides investment advice and research. For its services to the Fund, the Mexican Adviser receives a monthly fee at an annual rate of .52% of the Fund's average monthly net assets. For the fiscal years ended July 31, 1992, 1993 and 1994, the Mexican Adviser earned a fee, including the applicable Mexican value added tax, under its Advisory Agreement with the Fund of $546,299, $597,038 and $896,561, respectively which was paid or payable by the Fund. In September 1994, the Mexican Adviser obtained a ruling from the Mexican Treasury Department in which it was established that income received by the Mexican Adviser for investment advisory services rendered to the Fund, and other similar entities domiciled outside Mexico, was considered income arising from export transactions and, therefore, subject to a 0% Mexican value added tax. In early 1995, the Mexican Adviser requested re-confirmation of the value added tax treatment mentioned above, as required pursuant to the ruling. The Mexican Treasury Department has not yet responded to the Mexican Adviser's request. In the event that the Mexican Treasury Department fails to re-confirm the Mexican Adviser's value added tax treatment, the Mexican Adviser's income for advisory services to the Fund and other non-Mexican entities will be subject to a 15% value added tax. In such event, the Mexican Adviser will be required to collect the value added tax from the Fund with respect to the advisory fee paid by the Fund for any period for which the re-confirmation was not obtained, including 1995. Consequently, the advisory fee paid by the Fund would equal .598% of the Fund's average monthly assets. Pursuant to the Advisory Agreement, the Mexican Adviser makes investment decisions for the Fund, prepares and makes available to the Fund research and statistical data in connection therewith and supervises the acquisition and disposition of securities by the Fund, including the selection of brokers or dealers to carry out such transactions on behalf of the Fund, subject to the direct participation by the U.S. Co-Adviser in any investment decisions with respect to investments by the Fund in convertible debt securities. All decisions to acquire convertible debt securities require the concurrence of both the Mexican Adviser and the U.S. Co-Adviser. In the case of securities transactions other than the acquisition of convertible debt securities, the Mexican Adviser receives advice from, and consults with, the U.S. Co-Adviser regarding the Fund's overall investment strategy and the Mexican Adviser's individual decisions to buy, sell or hold particular securities. Subject to this participation by the U.S. Co-Adviser and the oversight and supervision of the Fund's Board of Directors, the Mexican Adviser is responsible for the management of the Fund's portfolio in accordance with the Fund's investment objective and policies and for making decisions to buy, sell or hold particular securities. The Advisory Agreement provides that the Mexican Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which the Advisory Agreement relates, except liability resulting from willful misfeasance, bad faith or gross negligence on the Mexican Adviser's part in the performance of its duties or from reckless disregard of its obligations and duties under the Advisory Agreement. The Advisory Agreement was last approved by a majority of the Fund's outstanding voting shares on November 7, 1994 and by the directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons (as such term is defined in the 1940 Act) of such parties, on June 5, 1995. By its terms, the Advisory Agreement continues in effect until October 14, 1996 and from year to year thereafter if it is approved annually by a vote of a majority of the members of the Fund's Board of Directors who are not parties to the Advisory Agreement or interested persons of such parties, cast in person at a meeting called for the purpose of voting on such approval, and by a majority vote of either the Fund's Board of Directors or the Fund's outstanding voting securities. The Advisory Agreement may be terminated by the Fund or the Mexican Adviser at any time, without payment of penalty, upon sixty days' written notice. The Advisory Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). 38 41 THE U.S. CO-ADVISER Advantage Advisers, Inc., the Fund's U.S. co-adviser (the "U.S. Co-Adviser"), is a corporation organized under the laws of the State of Delaware on May 31, 1990 and is registered under the Advisers Act. The U.S. Co-Adviser also acts as investment adviser to The Emerging Markets Income Fund Inc, and as investment manager to The Emerging Markets Income Fund II Inc., Global Partners Income Fund Inc., The Asia Tigers Fund, Inc., The India Fund, Inc., The Emerging Markets Floating Rate Fund, Inc., The Czech Republic Fund, Inc., Municipal Advantage Fund, Inc., Municipal Partners Fund Inc. and Municipal Partners Fund II Inc., each of which is a U.S. registered investment company. The principal address of the U.S. Co-Adviser is World Financial Center, 200 Liberty Street, New York, New York 10281. Oppenheimer & Co., Inc. ("OpCo"), World Financial Center, 200 Liberty Street, New York, New York 10281, owns all of the shares of the U.S. Co-Adviser. OpCo has been engaged in the management of investment funds for more than 35 years. As of June 29, 1995, total assets under management by OpCo and its affiliates were approximately $35 billion for investment company, corporate, pension, profit-sharing and other accounts. For its services, the U.S. Co-Adviser receives a monthly fee at an annual rate of 0.40% of the Fund's average monthly net assets. For the fiscal years ended July 31, 1992, 1993 and 1994, the U.S. Co-Adviser earned a fee under its Co-Advisory Agreement with the Fund (the "U.S. Co-Advisory Agreement") of $411,117, $417,509 and $652,949, respectively, which was paid or payable by the Fund. Pursuant to the U.S. Co-Advisory Agreement between the Fund and the U.S. Co-Adviser, the U.S. Co-Adviser provides advice and consultation to the Mexican Adviser regarding the Fund's overall investment strategy and the Mexican Adviser's individual decisions to buy, sell or hold particular securities. In addition, the U.S. Co-Adviser furnishes to the Mexican Adviser and the Fund international economic information and analysis with particular emphasis on macroeconomic issues relating to Mexico and North America. The U.S. Co-Adviser also furnishes to the Mexican Adviser investment advice regarding global and U.S. debt securities, particularly with respect to investments made during defensive periods, and regarding the Fund's assets held for distribution or payment of expenses or pending reinvestment in securities. In addition, the U.S. Co-Adviser makes investment decisions jointly with the Mexican Adviser regarding any convertible debt security acquisitions made by the Fund and would participate in the process of negotiating and structuring any future acquisitions of convertible debt securities directly from Mexican companies. The U.S. Co-Adviser also provides investors with information with respect to the Mexican economy and securities market, the net asset value of the Fund's portfolio and the general composition of such portfolio, including by making available to investors a toll free telephone number ((800) 421-4777). The U.S. Co-Adviser also supervises and coordinates the work of the Fund's administrator with respect to regulatory filings and the overall administration of the Fund in the United States. The U.S. Co-Advisory Agreement provides that the U.S. Co-Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with matters to which the U.S. Co-Advisory Agreement relates, except liability resulting from willful misfeasance, bad faith or gross negligence on the U.S. Co-Adviser's part in the performance of its duties or from reckless disregard of its obligations and duties under the U.S. Co-Advisory Agreement. The U.S. Co-Advisory Agreement was last approved by a majority of the Fund's outstanding voting shares on November 7, 1994 and by the directors, including a majority of the directors who are not parties to the U.S. Co-Advisory Agreement or interested persons (as such term is defined in the 1940 Act) of such parties, on June 5, 1995. By its terms, the U.S. Co-Advisory Agreement will continue in effect until August 14, 1996 and continues from year to year thereafter if it is approved annually by a vote of a majority of the members of the Fund's Board of Directors who are not parties to the U.S. Co-Advisory Agreement or interested persons of such parties, cast in person at a meeting called for the purpose of voting on such approval, and by a majority vote of either the Fund's Board of Directors or the Fund's outstanding voting securities. The U.S. Co-Advisory Agreement may be terminated by the Fund or the U.S. Co-Adviser at any time, without payment of penalty, upon sixty days' written notice. The U.S. Co-Advisory Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). 39 42 PORTFOLIO MANAGEMENT The Fund's portfolio is managed on a day to day basis by Maria Eugenia Pichardo. Ms. Pichardo joined AVM in May 1979 as an assistant to the International Director and was appointed Director General of the Mexican Adviser in 1990. Currently, she is Director, Secretary and Director General of the Mexican Adviser and a Vice President of AVM. Ms. Pichardo has managed the Fund's portfolio since 1990. ADMINISTRATOR Oppenheimer & Co., Inc. serves as the Fund's administrator (the "Administrator") pursuant to an agreement with the Fund, dated August 14, 1990 (the "Administration Agreement"). The Administrator is located at World Financial Center, 200 Liberty Street, New York, New York 10281. The Administrator performs various administrative services, including providing the Fund with the services of persons to perform administrative and clerical functions, maintenance of the Fund's books and records, preparation of various filings, reports, statements and returns filed with government authorities, and preparation of financial information for the Fund's proxy statements and semiannual and annual reports to stockholders. The Administrator subcontracts certain of these services to PFPC Inc., an affiliate of PNC Bank, National Association. Under the Administration Agreement, the Fund pays the Administrator a fee that is computed monthly and paid quarterly at an annual rate of 0.20% of the Fund's average monthly net assets. For the fiscal years ended July 31, 1992, 1993 and 1994, the Administrator earned a fee under its Administration Agreement with the Fund of $205,558, $208,755 and $326,475, respectively, which was paid or payable by the Fund. NON-EXCLUSIVE SERVICES The services of the Mexican Adviser, the U.S. Co-Adviser and the Administrator are non-exclusive, and nothing in the relevant service agreements will prevent any of them or their affiliates from providing similar services to other investment companies and other clients (whether or not their investment objectives and policies are similar to those of the Fund) or from engaging in other activities. OPERATING EXPENSES The Mexican Adviser, the U.S. Co-Adviser and the Administrator are each obligated to pay expenses associated with providing the service contemplated by the agreements to which they are parties, including compensation of and office space for their respective officers and employees connected with investment and economic research, trading and investment management and administration of the Fund, as well as the fees of all directors of the Fund who are affiliated with those companies or any of their affiliates. The Fund will bear travel expenses, or an appropriate fraction thereof, of directors and officers of the Fund who are directors, officers or employees of the Mexican Adviser or any of its affiliates or the U.S. Co-Adviser or any of its affiliates to the extent that such expenses relate to attendance at meetings of the Board of Directors of the Fund or any committees thereof. The Fund pays all other expenses incurred in the operation of the Fund including, among other things, expenses for legal and independent accountants' services, costs of printing proxies, stock certificates and stockholder reports, charges of the custodian, subcustodian and transfer and dividend paying agent, expenses in connection with the Dividend Reinvestment Plan, U.S. Securities and Exchange Commission fees, fees and expenses of unaffiliated directors, accounting and pricing costs, membership fees in trade associations, fidelity bond coverage for the Fund's officers and employees, directors' and officers' errors and omissions insurance coverage, interest, brokerage costs and stock exchange fees, taxes, stock exchange listing fees and expenses, expenses of qualifying the Fund's shares for sale in various states and foreign jurisdictions, litigation and other extraordinary or nonrecurring expenses, and other expenses properly payable by the Fund. 40 43 The Fund's annual operating expenses are higher than annual operating expenses of many other investment companies of comparable size, but are comparable to expenses of other closed-end investment companies registered under the 1940 Act that invest primarily in the securities of a single foreign country. The operating expense ratio of the Fund for the years ended July 31, 1992, 1993 and 1994 was 1.62%, 1.63% and 1.64%, respectively. THE MEXICAN SECURITIES MARKETS The information in this section is based on material obtained by the Fund from the Mexican Stock Exchange and from economic consultants, publications and interviews with leading participants in the market. The information is believed to be accurate but has not been independently verified by the Fund, the Mexican Adviser, the U.S. Co-Adviser or the Dealer Manager. THE EXCHANGE The Mexican Stock Exchange, located in Mexico City, is the only stock exchange in Mexico. Founded in 1894, it ceased operation in the early 1900s and was reestablished in 1907. The Mexican Stock Exchange is organized as a corporation, the shares of which are held by 34 brokerage firms. The firms are exclusively authorized to trade on the floor of the Mexican Stock Exchange which is open between the hours of 8:00 a.m. and 2:00 p.m., Mexico City time, each business day. Each trading day begins at 8:30 a.m. and is divided into six trading sessions with five-minute periods separating each session; orders may be placed beginning at 8:00 a.m. Trades in securities listed on the Mexican Stock Exchange may, subject to certain requirements, also be effected off the exchange. Due primarily to tax considerations, however, most transactions in listed Mexican securities are effected on the exchange. The Mexican Stock Exchange operates a system of automatic suspension of trading in shares of a particular issuer as a means of controlling excessive price volatility. Settlement takes place two business days after a transaction involving the purchase or sale of shares is completed on the Mexican Stock Exchange. Deferred settlement, even if by mutual agreement, is not permitted without the approval of the Comision Nacional Bancaria y de Valores. Most securities traded on the Mexican Stock Exchange are on deposit with S.D. Indeval, S.A. de C.V., Institucion para el Deposito de Valores ("Indeval"), a privately-owned central securities depositary that acts as a clearinghouse, depositary, custodian, settlement, transfer and registration institution for Mexican Stock Exchange transactions, thereby eliminating the need for physical transfer of securities. The Mexican Stock Exchange is one of Latin America's largest exchanges by market capitalization, but remains relatively small and illiquid compared to major world markets. During 1994, the five most actively traded equity issues represented approximately 46.78% of the total value of equity issues traded on the Mexican Stock Exchange. Although there is substantial participation by the public in the trading of securities, a major part of the activity of the Mexican Stock Exchange reflects transactions by approximately 60 institutional investors. There is no formal over-the-counter market for securities in Mexico. The market capitalization of the Mexican Stock Exchange was $129.9 billion at the end of 1994, representing a decrease of 35.3% in U.S. dollars from its 1993 level. The value of transactions in equity securities on the Mexican Stock Exchange reached $87.7 billion in 1994, representing a $24.0 billion increase over the 1993 level. Fixed income securities (i.e., commercial paper, notes, bonds and ordinary participation certificates) accounted for 14.4% and variable-income securities (i.e., shares and certificates of patrimonial contribution of CPOs) accounted for the remaining 85.6% of transactions. In 1994, public offerings of equity securities of private sector companies totalled approximately $1.76 billion. 41 44 The following table shows the trading volume on the Mexican Stock Exchange in U.S. dollars during the periods indicated. MEXICAN STOCK EXCHANGE TRADING VOLUME (US$ BILLIONS)
YEAR ENDED DECEMBER 31, --------------------------------------------------- SECURITIES 1990 1991 1992 1993 1994 - --------------------------------------------- ----- ------ ------ ------- ------- Equity securities............................ 12.1 31.5 44.6 62.4 84.1* ----- ------ ------ ------- ------- Total........................................ 801.3 1,760.3 3,597.5 4,633.2 4,115.7 ===== ====== ====== ====== ======
- --------------- Source: Mexican Stock Exchange * Figure does not include approximately US$3.6 billion in mutual funds. Regulation The Comision Nacional de Valores ("CNV") was established in 1946, to regulate stock market activity. On May 1, 1995 the CNV was merged with the Comision Nacional Bancaria (the Mexican National Banking Commission) and the resulting entity is known as the Comision Nacional Bancaria y de Valores (the Mexican National Banking and Securities Commission or "CNBV"). The mandate of the CNBV is to ensure consolidated supervision of the banking and securities industries. The Ley del Mercado de Valores of 1975, as amended (the "Securities Market Law"), regulates the securities markets and brokerage firms and sets standards for the registration of brokers in the Intermediaries Section of Registro Nacional de Valores e Intermediarios (the Mexican National Registry of Securities and Intermediaries or "RNVI"), a prerequisite to becoming a member of the Mexican Stock Exchange. As a result of the NAFTA accords, Mexican financial legislation has been modified so as to allow foreign securities firms increased access to trading on the Mexican Stock Exchange. The Securities Market Law also empowers the CNBV to regulate the public offering and trading of securities and to impose sanctions for the illegal use of inside information. The governing board of the CNBV is composed of representatives of the Secretaria de Hacienda y Credito Publico (the Ministry of Finance and Public Credit), Banco de Mexico (the Mexican central bank), the Secretaria de Comercio y Fomento Industrial (the Ministry of Commerce and Industrial Development), the Comision Nacional de Seguros y Fianzas (the National Insurance and Bonding Commission) and Nacional Financiera, S.N.C. (a Mexican government development bank). In order to offer securities to the public in Mexico, an issuer must meet certain requirements specified by the CNBV with respect to the issuer's assets, operating history, management and other matters, and only securities with respect to which an application for registration has been approved by the CNBV may be listed on the Mexican Stock Exchange. Issuers of registered securities are required to file unaudited quarterly financial statements and audited annual financial statements as well as various other periodic reports with the CNBV and the Mexican Stock Exchange. The CNBV has published general rules to implement an intermediate securities market in addition to the current market operated by the Mexican Stock Exchange in order to permit less liquid issues and issuers with a lower market capitalization to participate in the public securities market. In essence, the general rules divide the Securities Section of the RNVI into two subsections, Subsection "A" and Subsection "B." Registration of securities in Subsection "A" enables such securities to be eligible for certain transactions for which only securities classified as "high-liquidity" issues by the Mexican Stock Exchange are eligible (for example, the issuance of warrants). The registration of securities will be classified in Subsection "B" if the issuer meets the qualifications for such classification but does not otherwise meet the requirements for Subsection "A." In the event that an issuer does not meet the requirements to maintain the registration of its securities in Subsection "B," such registration and the listing thereof on the Mexican Stock Exchange may be cancelled by the CNBV. In August 1980, the Exchange established a contingency fund to guarantee the obligations of brokers to their clients and to create greater financial stability in the market. Brokers are obliged to make contributions to the fund on a per transaction basis (including new issues of shares or debt instruments). 42 45 Effective January 1, 1990, the Securities Market Law was amended to regulate the use of non-public information in the context of purchases and sales of securities. Directors and certain individuals involved in management of a listed company, stockholders holding more than 10% of the company's ordinary share capital, independent advisers to the company, management employees of the brokerage houses and any other individual deemed to have inside information may not trade in company securities for three months from the date they acquire the information. Stockholders must also report to the CNBV purchases or sales by reason of which their holdings exceed or fall below the 10% ownership floor. On July 24, 1993, amendments to the Securities Market Law became effective, which amendments include more flexible rules for the repurchase by Mexican companies of their own shares and a new definition of (and rules relating to) privileged information. In addition, under the new amendments, brokerage houses are authorized to act as trustees in transactions related to their trading activities, and the listing of foreign securities on the Mexican Stock Exchange is permitted upon the authorization of the Ministry of Finance and Public Credit, the CNBV and Banco de Mexico. The amendments also include the creation of an international quotation system. Beginning in July 1994 foreign securities firms were permitted to establish representative offices in Mexico with the prior approval of the Mexican Government. In addition, as permitted under NAFTA, certain foreign securities firms have incorporated Mexican affiliates to trade on the Mexican Stock Exchange. In February 1995, restrictions on the shareholding structure of securities firms and commercial banks were also relaxed. Prior to 1995, the capital of securities firms was required to be represented by at least 70% Series "A" shares (which may be owned only by Mexican persons) and up to 30% Series "B" shares (which may be owned by foreigners other than foreign governmental entities exercising functions of authority). Pursuant to the 1995 reform, the level of permissible foreign shareholding was increased by permitting securities firms to have as little as 51% of their capital represented by Series "A" shares, with the remainder to be represented by Series "B" shares. In addition, whereas formerly Series "A" shares generally could be owned only by Mexican individuals and financial group holding companies, they now may also be owned by personas morales (legal persons, such as corporations, partnerships and trusts, that are not individuals) and certain institutional investors established under Mexican law and controlled by Mexicans. Per-shareholder ownership limits (with authorization from the Ministry of Finance and Public Credit) were raised by the new legislation from 15% to 20% of capital. As was the case prior to the 1995 reform, the per-shareholder ownership limit without Ministry of Finance and Public Credit authorization is 10% of capital. These per-shareholder limits do not apply to any foreign financial institution that, in accordance with a program to acquire a Mexican-owned securities firm that has been approved by the Ministry of Finance and Public Credit, acquires shares of that securities firm. THE EQUITY MARKET Since the 1800s, equity securities have been traded in Mexico and used to finance companies in a variety of industries. Notwithstanding the long history of the Mexican equity market, when compared to markets in the U.S., Europe and parts of Asia, it is small and far less liquid. For a variety of reasons, trading volume in equities had declined in importance relative to other instruments in the securities market during the 1980s. In 1979, for example, equity trading represented 26% of total Mexican Stock Exchange trading as opposed to 1987, when equity trading represented only 7% of the total. From 1990 to 1994, the equity market grew in importance due to continued economic stability and the Government's policy of encouraging institutional investment as well as an increase in new equity issues by both private and public sector Mexican companies. The Government's privatization program was partially conducted through public offers for sale of equity. As of December 31, 1994, 206 companies were listed on the Mexican Stock Exchange, excluding mutual funds. During 1994, 23.84 billion equity securities were traded on the Mexican Stock Exchange; total turnover amounted to Ps. 293.8 billion (US$87.7 billion). Of the companies listed in 1994, the five most actively traded companies accounted for 46.78% of total turnover. 43 46 The following table shows the value in new pesos and U.S. dollars of new equity issues floated on the Mexican Stock Exchange for the periods indicated.
CORPORATE ISSUES -------------------- NEW PESOS US$ YEAR MILLIONS MILLIONS ---------------------------------------------- --------- ------ 1986.......................................... 8.8 13.7 1987.......................................... 639.3 451.2 1988.......................................... 150.2 64.7 1989.......................................... 683.3 269.6 1990.......................................... 2,256.1 791.3 1991.......................................... 7,245.3 2,390.4 1992.......................................... 2,563.2 817.9 1993.......................................... 13,968.3 4,483.9 1994.......................................... 7,040.3 1,757.5
- --------------- Source: Mexican Stock Exchange In addition to shares acquired through special trust agreements established with Mexican banks, non-voting preferred shares are currently outstanding in the market. Mexican company law grants stockholders preemptive rights to ensure that their ownership will not be diluted in the event of an issuance of additional shares. The Mexican Stock Exchange, however, does not have a rights market in which such rights may be traded. Trading of shares on the Mexican Stock Exchange is subject to limitations on advances in share prices. Shares are traded only in whole number peso values, with certain allowed increases in price determined by the price range for the security ("puja"). Thus, for shares trading in the price range Ps.5.02-10.00, for example, the share price may advance only in multiples of Ps.0.020. When the share price is Ps.10.00, a higher bid must be at least Ps.10.020. Trading units are determined in accordance with the price of the share as shown below.
"PUJA" TRADING PRICE RANGE (PS.) (PS.) UNIT ------------------------------------------------- ----- ------- 0.01-0.20........................................ 0.001 100,000 0.21-5.00........................................ 0.010 10,000 5.02-10.00....................................... 0.020 5,000 10.05-50.00...................................... 0.050 2,000 50.10-upwards.................................... 0.100 1,000
- --------------- Source: Mexican Stock Exchange The following table shows the average daily value of trading in equity securities on the Mexican Stock Exchange since 1985. MEXICAN STOCK EXCHANGE EQUITY TURNOVER
MILLIONS OF MILLIONS OF YEAR-END MARKET YEAR ENDED NEW PESOS DOLLARS CAPITALIZATION DECEMBER 31 (AVERAGE DAILY) (AVERAGE DAILY) (US$ MILLION) ------------------------------ --------------- --------------- --------------- 1985.......................... 3.14 10.12 3,241.04 1986.......................... 10.28 16.12 5,572.14 1987.......................... 63.96 45.04 8,715.68 1988.......................... 48.74 21.33 15,184.38 1989.......................... 99.39 39.76 26,562.71 1990.......................... 151.67 52.94 40,939.86 1991.......................... 332.23 109.42 101,718.65 1992.......................... 434.50 140.37 138,749.07 1993.......................... 715.00 299.50 200,613.00 1994.......................... 1,100.00 315.00 129,850.00 1995 (through May 31)......... 535.16 85.46 82,747.61
- --------------- Source: Mexican Stock Exchange 44 47 TRADING Trading on the Mexican Stock Exchange takes place from 8:30 a.m. to 2:30 p.m. each weekday other than public holidays. The Exchange's procedures are designed to ensure that transactions are effected at the first available opportunity in the market. Trading in active shares is by open outcry. "Operaciones en Corro," in which a broker must register a firm bid or asked price for a certain lot of shares, are the only transactions permitted during the first daily trading session of the Exchange. "Operaciones de Cruce," in which the broker must announce the price of the transactions on the Exchange and can effect closing if no third party makes a higher bid or lower offer for the shares, ensure market prices for share transactions between two clients of the same broker. The Mexican Stock Exchange does not have formal market makers, although in operation, companies whose shares are most actively traded can expect certain brokerage houses to make a market in their shares. The Exchange provides for automatic suspension of trading in particular securities if, during the day, a bid or offer is made or a transaction closes at a price more than 5% above or below the opening price of the security for that day (taking into account the puja). In such an event, trading of the particular security is halted for sixty minutes (although brokers may continue to make bids and offers which are recorded by the Exchange during the period). When the sixty minutes have elapsed, the original transaction, if any, is cancelled and a new transaction is consummated at the lowest offer or highest bid given during the period, which in turn establishes the new reference price. If it again becomes necessary to suspend dealing, the suspension period is ninety minutes. In any event, no suspension period may extend beyond the close of trading. Settlement of share transactions normally occurs within 48 hours although in transactions involving shares in mutual funds, settlement may occur on the same day or within 24 hours depending on the fund. Deferred settlement, even if by mutual agreement, is not permitted. Most securities are on deposit with Indeval, a privately owned central securities depository that acts as a clearinghouse for Mexican Stock Exchange transactions. Indeval has fully automated securities clearance systems. Stock Exchange Indices The Mexican Stock Exchange issues a market index, Indice de Precios y Cotizaciones ("IPC") (also known as the BMV index) based on a group of the 40 most traded issues. The composition of the index is reviewed every two months and adjusted to account for changes in the trading volume of shares. Calculation of the index differs from the standard Aggregate Value Method (which divides the current market capitalization of the shares in the index by the base market capitalization) by reason of a positive adjustment to reflect the value of paid out dividends. The IPC therefore measures growth by means of the total return to stockholders, rather than only capital growth. The base of the index was established at 781.62 on October 30, 1978; however, the base changed to 0.781 as of January 1, 1993, when Mexico instituted a new currency unit, the new peso, which replaced the old peso at a rate of one new peso per one thousand old pesos. The following table shows the number of listed companies and the IPC index in nominal and real terms.
IPC INDEX TOTAL LISTED ------------------- YEAR COMPANIES REAL* NOMINAL ------------------------------------- ------------ -------- -------- 1985................................. 157 196.627 11.197 1986................................. 155 401.783 47.101 1987................................. 190 347.807 105.670 1988................................. 203 459.090 211.532 1989................................. 204 759.590 418.925 1990................................. 199 877.475 628.790 1991................................. 207 1,681.558 1,431.460 1992................................. 199 1,846.416 1,759.440 1993................................. 190 2,528.970 2,602.630 1994................................. 206 2,155.390 2,875.660
- --------------- * The real index is calculated using July 30, 1993 money values. Source: Mexican Stock Exchange, and AVM for 1993 and 1994 45 48 The Mexican Stock Exchange also issues a derivatives market index, Indice Mexico ("INMEX") based on a sample of 25 companies which is adjusted every six months. The INMEX measures the daily change in the market capitalization of the 25 companies which are reflected on the basis of active trading volume. THE DEBT MARKET The debt market in Mexico began to develop rapidly after the promulgation of the Securities Market Law in 1975; prior to that time the debt market had been relatively inactive. Since 1975, the debt market has expanded rapidly and now provides an increased capital base for the Mexican Government and Mexican private sector companies. Debt Instruments Currently, securities traded in the debt market comprise a large variety of debt obligations. The list of debt obligations traded in Mexico includes the following Mexican Government-issued securities, all of which are traded on the Mexican Stock Exchange: (i) Bondes--long-term development bonds, bearing variable interest rates, sold through weekly auctions under the aegis of Banco de Mexico, (ii) Ajustabonos--long-term bonds, also issued in Banco de Mexico auctions, with a variable face amount that adjusts each quarter depending on the quarterly inflation rate, upon which face amount is applied a fixed interest rate, (iii) Tesobonos--short-term dollar denominated bonds payable at maturity in pesos according to the exchange rate published by Banco de Mexico in the stockmarket bulletin for 48 hours forward payment and (iv) Cetes--long- or short-term debt securities sold at weekly auctions held by Banco de Mexico. A variety of other special purpose bonds are traded on the Mexican Stock Exchange, including Government bonds issued by the Federal Government such as development bonds and urban renovation bonds, as well as bank development bonds and industrial development bonds. Mexican banks also issue bankers' acceptances and certificates of deposit that pay interest either at maturity or monthly. In addition to debt instruments issued by the Mexican Government and Mexican banks, Mexican private sector corporations have issued their own debt instruments, such as corporate bonds, both secured and unsecured, with short- and long-term maturities, and commercial paper. 46 49 The following table shows the amount of certain Mexican debt obligations outstanding in new pesos for the period shown. DEBT MARKET VALUE (MILLIONS OF NEW PESOS)
YEAR ENDED DECEMBER 31 ----------------------------- DEBT INSTRUMENTS 1992 1993 1994 - ---------------- ------- ------- ------- Short term: 96,135 138,044 195,940 Cetes....................................................... 59,388 81,014 40,394 Tesobonos(1)................................................ 922 3,842 94,679 Bankers' Acceptances........................................ 12,617 22,103 26,173 Negotiable Bank Promissory Notes............................ 20,551 26,795 29,516 Commercial Paper............................................ 2,643 3,563 4,058 Certificates of Deposit..................................... 64 727 1,120 Long term: 118,099 112,294 103,910 Bondes(2)................................................... 36,848 17,036 8,316 Ajustabonos(3).............................................. 36,271 33,695 28,602 Bibs(4)..................................................... 1 1 1 Bonos Renovacion Urbana..................................... 23 23 8 Debentures(5)............................................... 17,443 20,947 20,773 Bankers' Bonds(6)........................................... 6,883 15,913 20,560 Certificados de Participacion............................... 11,369 10,014 10,590 Medium-term Promissory Notes................................ 9,261 14,665 15,060
- --------------- Source: Banco de Mexico (1) Dollar-indexed bonds. (2) Includes Bondes with a 364 day maturity. (3) Inflation-indexed bonds. (4) Bonos de Indemnizacion Bancaria (bank indemnification bonds). (5) Industrial debentures, subordinated debentures, and other debentures. (6) Includes Bonos de Desarrallo (treasury bills) and Bonos Bancarios para la vivienda (bank housing bonds). Trading The Mexican debt market operates on the same schedule as the equity market. Certain Government or related issues are sold through auction, while corporate instruments are sold at fixed prices. Unit prices for peso-denominated instruments generally range from Ps.10 to Ps.100, while dollar-denominated instruments are issued in $1,000 units. Generally, debt transactions are settled within 24 hours with the exception of corporate debt transactions, which are settled in 48 hours, and certain Government issues, which are often settled on the same day. All certificates representing Mexican Government obligations are held by Banco de Mexico, while all other certificates are held by Indeval. Brokerage Commissions Currently, commissions are payable only in connection with the purchase and sale of corporate debentures. Brokers may charge up to 0.25% for transactions in corporate debentures, depending on the size of the transaction. RATING AGENCY The Mexican Securities Commission, the predecessor to the CNBV, authorized the establishment of Calificadora de Valores, S.A. de C.V. ("CAVAL"), Mexico's first credit rating agency, in November 1989. CAVAL is privately owned and rates Mexican issuers and debt obligations. Ultimately, it is expected that all debt obligations and securities registered with the National Securities and Intermediaries Register will be rated by a Mexican rating agency such as CAVAL. 47 50 PORTFOLIO TRANSACTIONS Decisions to buy and sell certain securities for the Fund are made by the Mexican Adviser and the U.S. Co-Adviser (as described under "Management of the Fund"), subject to the overall review, oversight and supervision of the Fund's Board of Directors. Portfolio securities transactions for the Fund are placed on behalf of the Fund by persons authorized by the Mexican Adviser. The parent company of the Mexican Adviser, AVM, manages other accounts that may invest in Mexican securities. Although investment decisions for the Fund are made independently from those of the other accounts managed by AVM, investments of the type the Fund may make may also be made by those other accounts. When the Fund and one or more other accounts managed by AVM are prepared to invest in, or desire to dispose of, the same security, available investments or opportunities for each will be allocated in a manner believed by the Mexican Adviser to be equitable to each. In some cases, this procedure may adversely affect the price paid or received by the Fund or the size of the position obtained or disposed of by the Fund. The Fund may utilize AVM, OpCo or their affiliates in connection with the purchase or sale of securities in accordance with rules or exemptive orders adopted by the Commission when the Mexican Adviser believes that the charge for the transactions does not exceed usual and customary levels. In addition, the Fund may purchase securities of issuers for which AVM, OpCo or their respective affiliates have acted as placement agent, consistent with applicable rules adopted by the Commission or regulatory authorization, if necessary. Transactions on United States and some foreign stock exchanges involve the payment of negotiated brokerage commissions, which may vary among different brokers. The cost of securities purchased from underwriters includes an underwriter's commission or concession, and the prices at which securities are purchased from and sold to dealers in the U.S. over-the-counter markets include an undisclosed dealer's mark-up or mark-down. In selecting brokers or dealers to execute portfolio transactions on behalf of the Fund, the Mexican Adviser seeks the best overall terms available. The Advisory Agreement provides that, in assessing the best overall terms available for any transaction, the Mexican Adviser must consider the factors it deems relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, and the reasonableness of the commission, if any, for the specific transaction and on a continuing basis. In addition, the Advisory Agreement authorizes the Mexican Adviser in selecting brokers or dealers to execute a particular transaction and in evaluating the best overall terms available, to consider the brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund and/or accounts over which the Mexican Adviser exercises investment discretion. The Mexican Adviser's fee under the Advisory Agreement is not reduced as a result of its receiving such brokerage and research services. The Fund has no obligation to deal with any broker or dealer in execution of transactions in portfolio securities. Consistent with the Fund's policy of obtaining best net results and subject to the requirements of the 1940 Act, all of the Fund's portfolio transactions conducted on an agency basis during the fiscal year ended July 31, 1994, were conducted through AVM. The Fund's Directors periodically review the commissions paid by the Fund to determine if the commissions paid over representative periods of time were reasonable in relation to the benefits inuring to the Fund. For the fiscal years ended July 31, 1992, 1993 and 1994, the Fund paid $163,702, $313,473 and $367,067, respectively, in brokerage commissions for the execution of portfolio transactions. AVM, the parent of the Mexican Adviser, received 100% of the total brokerage commissions paid by the Fund and 100% of the total aggregate dollar amount of brokerage transactions conducted by the Fund in fiscal years 1992 and 1994. In fiscal year 1993, $310,973 of such fees were paid to AVM, and $2,500 of such fees were paid to Oppenheimer & Co., Inc., the parent company of the U.S. Co-Adviser, representing 100% of the total brokerage commissions paid by the Fund and 100% of the aggregate dollar amount of brokerage transactions conducted by the Fund in fiscal year 1993. The portfolio turnover rate during the fiscal years ended July 31, 1992, 1993 and 1994 was 15.08%, 44.21% and 43.57%, respectively. 48 51 DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN The Fund intends to distribute to stockholders, at least annually, substantially all of its investment company taxable income. Investment company taxable income, as defined in section 852 of the Code, 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 stockholders generally. Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), each stockholder will be deemed to have elected, unless the Plan Agent (as defined below) is otherwise instructed by the stockholder 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"). Stockholders 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 stockholder by the Plan Agent, as dividend-paying agent. Stockholders 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 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 stockholder elects to receive dividends and distributions in cash. A stockholder 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 the stockholders 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 stockholders 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 valued at net asset value or, if the net asset value is less than 95% of the market price on the valuation date, then valued 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 stock from the Fund valued at market price. The valuation date is the dividend or distribution payment date or, if that date is not a New York Stock Exchange trading day, the next preceding trading day. If the Fund should declare an income dividend or capital gains distribution payable only in cash, the Plan Agent will, as agent for the participants, buy Fund shares in the open market, on the New York Stock Exchange or elsewhere, for the participants' accounts on, or shortly after, the payment date. The Plan Agent will maintain all stockholder accounts in the Plan and will furnish written confirmations of all transactions in the account, including information needed by stockholders for personal and tax records. Shares in the account of each Plan participant will be held by the Plan Agent in noncertificated form in the name of the participant, and each stockholder's proxy will include those shares purchased pursuant to the Plan. In the case of stockholders, such as banks, brokers or nominees, that hold shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of shares certified from time to time by the stockholders as representing the total amount registered in the stockholder's name and held for the account of beneficial owners who are to participate in the Plan. There is no charge to participants for reinvesting dividends or capital gains distributions payable in either stock or cash. The Plan Agent's fees for the handling of reinvestment of such dividends and capital gains 49 52 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. The Plan Agent will charge a participant a pro rata share of the brokerage commissions. Brokerage charges for purchasing small amounts of 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 commission 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 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 the members of the Plan at least 30 days before the record date for dividends or distributions. 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 by at least 30 days' written notice to members of the Plan. All correspondence concerning the Plan should be directed to the Plan Agent at the address set forth above. NET ASSET VALUE Net asset value is calculated (a) no less frequently than weekly, (b) on the last business day of each month and (c) at such other times as determined by the Fund's Directors. Net asset value is calculated by dividing the value of the Fund's net assets (the value of its assets less its liabilities, exclusive of capital stock and surplus) by the total number of shares of Common Stock outstanding. All securities for which market quotations are readily available are valued at the last sales price prior to the time of determination, or, if no sales price is available at that time, at the closing price quoted for the securities (but if bid and asked quotations are available, at the mean between the last current bid and asked prices, rather than the quoted closing price). Forward contracts will be 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. If bid and asked quotations are not available, then over-the-counter securities will be valued as determined in good faith by the Fund's Directors. In making this determination the Directors will consider, among other things, publicly available information regarding the issuer, market conditions and values ascribed to comparable companies. In instances where quotations are not readily available or where the price determined above is deemed not to represent fair market value, the price is determined in such manner as the Directors may prescribe. 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 this is determined by the Directors not to represent fair value. All other securities and assets are taken at fair value as determined in good faith by the Directors, although the actual calculation may be done by others. In the absence of an active trading market for any convertible debt securities acquired by the Fund (or for comparable debt securities of other Mexican companies), valuing the convertible debt securities held by the Fund will be difficult. The Fund's Directors are responsible for making a good faith determination of the fair value of the Fund's assets. Such determination must approximate market value, which means the value that the Directors reasonably believe could be received in the short term upon the sale of the securities held by the Fund. The Directors of the Fund have established and regularly monitor procedures which are used to value the Fund's convertible debt securities for which bid and ask quotations are not available. Initially, the convertible debt securities held by the Fund are valued at cost. In determining the fair value of such securities 50 53 the following factors ordinarily are considered: the existence of restrictions upon the sale of the security; an estimate of the existence and extent of a market for the security; the public trading values of comparable debt securities of comparable companies and the current yield to call on comparable securities; the proportion of the issue held by the Fund; changes in the financial condition and prospects of the issuer; and any other factors affecting fair value, all in accordance with the 1940 Act. In valuing the Fund's assets, quotations of foreign securities in a foreign currency are converted to U.S. dollar equivalents at the then current currency value. Any assets or liabilities initially expressed in terms of pesos are translated into U.S. dollars at the then current currency value. TAXATION UNITED STATES FEDERAL INCOME TAXES The Fund and Its Investments The Fund intends to continue to qualify and elect to be treated as a regulated investment company for each taxable year under the Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, the Fund must, among other things: (a) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in stock, securities or currencies; (b) derive less than 30% of its gross income in each taxable year from the sale or other disposition of the following assets held for less than three months: (i) stock or securities, (ii) options, futures and forward contracts (other than options, futures and forward contracts on foreign currencies), and (iii) foreign currencies (and options, futures and forward contracts on foreign currencies) which are not directly related to the Fund's principal business of investing in stock or securities (or options and futures with respect to stock or securities); and (c) diversify its holdings so that, at the end of each quarter of the Fund's taxable year, (i) at least 50% of the value of the Fund's assets is represented by cash and cash items, securities of other regulated investment companies, United States government securities and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater in value than 5% of the value of the Fund's assets and not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities (other than United States government securities or securities of other regulated investment companies) of any one issuer or of any two or more issuers that the Fund controls and that are determined to be engaged in the same business or similar or related businesses. The Fund expects that all of its foreign currency gains will be directly related to its principal business of investing in stocks and securities. For purposes of these requirements, assets held in the Master Trust will be treated as assets of the Fund, and earnings attributable to such assets will be treated as earnings of the Fund. As a regulated investment company, the Fund will not be subject to United States federal income tax on that portion, if any, of its net investment income (i.e., income other than its net realized long- and short-term capital gains), and net realized long-term and short-term capital gains, that it distributes to its stockholders, provided that the Fund distributes an amount equal to at least 90% of its investment company taxable income (i.e., 90% of its taxable income less 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 adjustments as specified in section 852 of the Code) for the taxable year; however, the Fund will be subject to tax at regular corporate rates on any income or gains that it does not distribute. Furthermore, the Fund will be subject to a United States corporate income tax with respect to such distributed amounts in any year that it fails to qualify as a regulated investment company or fails to meet this distribution requirement. The Fund is authorized to borrow money or liquidate assets in order to meet this distribution requirement. Any dividend declared by the Fund in October, November or December of any calendar year and payable to stockholders of record on a specified date in such a month shall be deemed to have been received by each stockholder on December 31 of such calendar year and to have been paid by the Fund not later than such December 31 provided that such dividend is actually paid by the Fund during January of the following calendar year. 51 54 The Fund intends to continue to distribute annually to its stockholders substantially all of its investment company taxable income. The Directors of the Fund will determine annually whether to distribute any net realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss carryovers). The Fund expects to distribute any such excess annually to its stockholders, 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 stockholders generally. If the Fund retains for investment or otherwise an amount equal to its net long-term capital gains in excess of its net short-term capital losses and capital loss carryovers, it will be subject to a corporate tax (currently at a rate of 35%) on the amount retained. In that event, the Fund expects to designate such retained amounts as undistributed capital gains in a notice to its stockholders, each of whom (a) will be required to include in income for United States federal income tax purposes, as long-term capital gains, its proportionate share of the undistributed amount, (b) will be entitled to credit its proportionate share of the 35% tax paid by the Fund on the undistributed amount against its United States federal income tax liabilities and to claim a refund to the extent its credits exceed its liabilities and (c) will be entitled to increase its tax basis, for United States federal income tax purposes, in its shares by an amount equal to 65% of the amount of undistributed capital gains included in the stockholder's income. The Code imposes a 4% nondeductible excise tax on the Fund to the extent the Fund does not distribute by the end of any calendar year at least 98% of its taxable income (as adjusted and not taking into account any net capital gains) for that year and at least 98% of the net amount of its capital gains (both long- and short-term) for the one-year period ending, as a general rule, on October 31 of that year plus 100% of any such taxable income and net capital gains from the prior year that was not previously distributed. For this purpose, however, any income or gain retained by the Fund that is subject to corporate income tax will be considered to have been distributed by year-end. Exchange control regulations may restrict repatriations of investment income and capital or the proceeds of securities sales by foreign investors such as the Fund and may limit the Fund's ability to make sufficient distributions to satisfy the 90% distribution requirement and to avoid the 4% excise tax. In general, gains or losses on the disposition of debt securities denominated in a foreign currency (i.e., a currency other than the U.S. dollar) that are attributable to fluctuations in exchange rates between the date the debt securities are acquired and the date of disposition, gains and losses from the disposition of foreign currencies, and gains and losses attributable to currency exchange forward contracts will be treated as ordinary income or loss. As noted above, the Fund may acquire currency exchange forward contracts to hedge its risk of currency fluctuations with regard to property held or to be held by the Fund, and before the close of the day on which the Fund enters into a forward contract the Fund will identify, on its records, that the forward contract was entered into as part of a hedging transaction. Under current law and regulations, the Fund may be required to calculate separately certain gains and losses from its currency exchange forward contracts even if the Fund acquired the forward contracts to hedge its risk of currency fluctuations with regard to capital assets held or to be held by the Fund. However, the U.S. Internal Revenue Service has issued regulations and has the authority to issue additional regulations that would permit or require the Fund either to integrate some or all of its currency exchange forward contracts with the hedged investments and treat the forward contracts and the hedged investments as a single transaction, or otherwise to treat the forward contracts in a manner that is consistent with the hedged investments. The Fund anticipates that its hedging activities will not adversely effect its regulated investment company status. Dividends and Distributions Dividends of net investment income and distributions of net realized short-term capital gains are taxable as ordinary income, whether paid in cash or in shares. Distributions of net long-term capital gains, if any, that the Fund designates as capital gains dividends are taxable as long-term capital gains, whether paid in cash or in shares and regardless of how long a stockholder has held its Fund shares. Dividends and distributions paid by the Fund will not qualify for the deduction for dividends received by corporations. 52 55 Stockholders receiving dividends or distributions in the form of additional shares pursuant to the Plan should be treated for United States federal income tax purposes as receiving a distribution in an amount equal to the amount of money that the stockholders receiving cash dividends or distributions will receive, and should have a cost basis in the shares received equal to such amount. Investors considering buying shares just prior to a dividend or capital gain distribution should be aware that, although the net asset value of shares purchased at that time may reflect the amount of the forthcoming distribution, those who purchase just prior to a distribution will receive a distribution which will nevertheless be taxable to them. If the Fund is the holder of record of any stock on the record date for any dividends payable with respect to such stock, such dividends are included in the Fund's gross income not as of the date received but as of the later of (a) the date such stock became ex-dividend with respect to such dividends (i.e., the date on which a buyer of the stock would not be entitled to receive the declared, but unpaid, dividends) or (b) the date the Fund acquired such stock. Accordingly, in order to satisfy its income distribution requirements, the Fund may be required to pay dividends based on anticipated earnings, and stockholders may receive dividends in an earlier year than would otherwise be the case. Sales of Shares Upon the sale or exchange of shares, a stockholder will realize a taxable gain or loss depending upon the amount realized and basis in shares owned. Such gain or loss will be treated as a capital gain or loss, if the shares are capital assets in the stockholder's hands, and will be long-term or short-term depending upon the stockholder's holding period for the shares. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced, including replacement through the reinvesting of dividends and capital gains distributions in the Fund under the Plan, within a period (of 61 days) beginning 30 days before and ending 30 days after the disposition of the shares. In such a case, the basis of the shares acquired will be increased to reflect the disallowed loss. Any loss realized by a stockholder on the sale of a Fund share held by the stockholder for six months or less will be treated for United States federal income tax purposes as a long-term capital loss to the extent of any distributions or deemed distributions of long-term capital gains received (or deemed received) by the stockholder with respect to such share. Foreign Taxes As set forth below under "Mexican Taxes," it is expected that interest and dividends from Mexican resident issuers and certain capital gains realized by the Fund will be subject to Mexican taxes. If the Fund qualifies as a regulated investment company, if certain distribution requirements are satisfied, and if more than 50% of the value of the Fund's assets at the close of the taxable year consists of stocks or securities of foreign corporations, the Fund may elect, for United States federal income tax purposes, to treat such Mexican taxes paid by the Fund that can be treated as income taxes of the Fund under United States federal income tax principles as paid by its stockholders. The Fund has made this election in the past and intends to continue to make this election. As a consequence, the amount of Mexican income taxes paid by the Fund will be included in the income of its stockholders, reported to the U.S. Internal Revenue Service for such stockholders and each such stockholder may be entitled to credit its portion of these amounts against its United States tax due, if any, or to deduct such portion from its United States taxable income, if any. No deduction for Mexican taxes may be claimed by a stockholder who does not itemize deductions. Shortly after any year for which it makes such an election, the Fund will report to each stockholder, in writing, the amount per share of such Mexican income tax that must be included in each stockholder's gross income and the amount which will be available for deduction or credit. The amount of Mexican income taxes that may be credited against a stockholder's United States tax liability in any particular year generally will be limited to an amount equal to the stockholder's United States federal income tax rate multiplied by its foreign source taxable income. For this purpose, the Fund expects that the capital gains it distributes to its stockholders, whether as dividends or capital gains distributions, will not be treated as foreign source taxable income. In addition, this limitation must be applied separately to 53 56 certain categories of foreign source income including foreign source "passive income." For this purpose, foreign source "passive income" includes dividends, interest, certain capital gains and certain foreign currency gains. As a consequence, although certain stockholders may be able to carryback or carryforward foreign tax credits, certain stockholders may not be able to claim a foreign tax credit for the full amount of their proportionate share of Mexican income taxes paid by the Fund. Backup Withholding The Fund may be required to withhold, for United States federal income tax purposes, 31% of the dividends and distributions payable to stockholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Corporate stockholders and certain other stockholders are exempt from backup withholding. Backup withholding is not an additional tax and any amount withheld may be credited against a stockholder's United States federal income tax liabilities. Additional tax withholding requirements which apply with respect to foreign investors are discussed below. Foreign Stockholders Taxation of a stockholder who, as to the United States, is a foreign investor depends, in part, on whether the stockholder's income from the Fund is "effectively connected" with a United States trade or business carried on by the stockholder. If the foreign investor is not a resident alien and the income from the Fund is not effectively connected with a United States trade or business carried on by the foreign investor, distributions of net investment income and net realized short-term capital gains will be subject to a 30% (or lower treaty rate) United States withholding tax. Furthermore, foreign investors may be subject to an increased United States tax on their income resulting from the Fund's election (described above) to "pass-through" amounts of foreign taxes paid by the Fund, but may not be able to claim a credit or deduction with respect to the Mexican or other foreign taxes treated as having been paid by them. Distributions of net realized long-term capital gains, amounts retained by the Fund which are designated as undistributed capital gains, and gains realized upon the sale of shares of the Fund will not be subject to United States tax unless a foreign investor who is a nonresident alien individual is physically present in the United States for more than 182 days during the taxable year and, in the case of gain realized upon the sale of Fund shares, unless (i) such gain is attributable to an office or fixed place of business in the United States or (ii) such nonresident alien individual has a tax home in the United States and such gain is not attributable to an office or fixed place of business located outside the United States. However, a determination by the Fund not to distribute long-term capital gains may reduce a foreign investor's overall return from an investment in the Fund, since the Fund will incur a United States federal tax liability with respect to retained long-term capital gains, thereby reducing the amount of cash held by the Fund that is available for distribution, and the foreign investor may not be able to claim a credit or deduction with respect to such taxes. In the case of a foreign investor who is a nonresident alien individual, the Fund may be required to withhold U.S. federal income tax at a rate of 31% of distributions of net capital gains. See "Backup Withholding" above. If a foreign investor is a resident alien or if dividends or distributions from the Fund are effectively connected with a United States trade or business carried on by the foreign investor, dividends of net investment income, distributions of net short-term and long-term capital gains, amounts retained by the Fund that are designated as undistributed capital gains and any gains realized upon the sale of shares of the Fund will be subject to United States income tax at the rates applicable to United States citizens or domestic corporations. If the income from the Fund is effectively connected with a United States trade or business carried on by a foreign investor that is a corporation, then such foreign investor also may be subject to the 30% branch profits tax. The tax consequences to a foreign stockholder entitled to claim the benefits of an applicable tax treaty may be different from those described in this section. Stockholders may be required to provide appropriate documentation to establish their entitlement to the benefits of such a treaty. Foreign investors are advised to consult their own tax advisers with respect to (a) whether their income from the Fund is or is not effectively 54 57 connected with a United States trade or business carried on by them, (b) whether they may claim the benefits of an applicable tax treaty and (c) any other tax consequences to them of an investment in the Fund. Notices Stockholders will be notified annually by the Fund as to the United States federal income tax status of the dividends, distributions and deemed distributions made by the Fund to its stockholders. Furthermore, stockholders will receive, if appropriate, various written notices after the close of the Fund's taxable year regarding the United States federal income tax status of certain dividends, distributions and deemed distributions that were paid (or that are treated as having been paid) by the Fund to its stockholders during the preceding taxable year. MEXICAN TAXES For purposes of Mexican federal income tax law, the Fund will be treated as a nonresident legal person and will be subject to Mexican taxation as set forth below. On September 18, 1992, the United States and Mexico signed the Treaty to Avoid Double Taxation (the "Treaty"). The Treaty generally became effective on January 1, 1994. The provisions of the Treaty allow the respective residents of each country to claim an income tax credit for income taxes paid in the other country. Interest income (and related income such as loan commitment and funding fees) on Mexican debt obligations may be subject, under the provisions of the Treaty, to withholding taxes at the rate of 10%. Interest and fee income, including interest and gains earned by the Fund from debt instruments that are listed on the Mexican Stock Exchange, received by the Fund with respect to convertible debt securities of Mexican issuers and other Mexican debt obligations will generally be subject to a withholding tax at a rate of 10%. For the period ending on December 31, 1995, the withholding rate is 4.9%. After the fifth year of the effectiveness of the Treaty, the withholding rate will be again reduced to 4.9%. If the Treaty ceases to be effective, higher withholding taxes may apply. Interest and gains earned by the Fund from debt instruments issued by the Mexican Government are not subject to Mexican taxes. Income received by the Fund in the form of dividends will not be subject to Mexican taxes if such dividends are paid from after-tax profits by the Mexican company making such distribution. If, however, dividends are not distributed from after-tax profits the Mexican company making such distribution will be required to pay to the Mexican tax authorities an amount equal to 34% of the amount of such distribution, in which case the Fund will not be liable for any Mexican taxes in connection therewith. Capital gains earned by the Fund from the sale of equity securities listed on the Mexican Stock Exchange are not subject to Mexican taxes if such sale is made on the Mexican Stock Exchange and such securities are considered by the Mexican Ministry of Finance and Public Credit as being placed among the greater investing public. Off-exchange transactions in both listed and unlisted securities may be subject to a 20% withholding tax on the amount paid on the transaction, or, at the election of the Fund (provided that a tax return is filed by a representative in Mexico), a 30% tax on the gain. However, under the Treaty, if the Fund has not held more than 25% of the outstanding stock of the issuer in the 12-month period preceding the disposition, capital gains will not be subject to taxes in Mexico. The Fund will be required to pay a value added tax at the rate of 15% on the amount of any fees paid for services rendered to the Fund in Mexico except for those fees paid to the Mexican Adviser (unless the Mexican Treasury Department fails to re-confirm that the advisory fees paid to the Mexican Adviser are not subject to the value added tax. See "Management of the Fund -- The Mexican Adviser"). No other Mexican taxes will be applicable to the Fund or its stockholders, other than stockholders, such as residents of Mexico, who are subject to Mexican taxes for reasons other than their status as stockholders in the Fund. 55 58 OTHER TAXATION Distributions also may be subject to additional state, local and foreign taxes depending on each stockholder's particular situation. The foregoing is only a summary of certain material tax consequences affecting the Fund and its stockholders. Stockholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Fund. COMMON STOCK The authorized capital stock of the Fund is 100,000,000 shares of Common Stock, $.001 par value per share (the "Common Stock"). All shares of Common Stock have equal rights as to dividends and voting privileges and, when issued, will be fully paid and nonassessable. There are no conversion, preemptive or other subscription rights. In the event of liquidation, dissolution or winding up of the Fund, each share of Common Stock is entitled to its proportion of the Fund's assets after debts and expenses. Set forth below is information with respect to the Common Stock as of July 20, 1995.
AMOUNT HELD BY THE FUND OR FOR ITS TITLE OF ISSUE AUTHORIZED OUTSTANDING ACCOUNT - --------------------------------------------- ------------------- ------------------- ----------- Common Stock, $0.001 par value............... 100,000,000 shares 8,825,273 shares -0-
Stockholders are entitled to one vote per share and do not have cumulative voting rights. Thus, holders of more than 50% of the shares voting for the election of directors have the power to elect 100% of the directors, and, if such event should occur, the holders of less than 50% of the shares voting for directors would not be able to elect any person or persons to the Board of Directors. The Fund has no present intention of offering additional shares, except that additional shares may be issued under the Plan. See "Dividends and Distributions; Dividend Reinvestment Plan." Other offerings of shares, if made, will require approval of the Fund's Directors. Any additional offering will be subject to the requirements of the 1940 Act that shares may not be sold at a price below the then current net asset value (exclusive of underwriting discounts and commissions) except in connection with an offering to existing stockholders or with the consent of a majority of the Fund's outstanding shares. SPECIAL VOTING PROVISIONS The Fund has provisions in its Articles of Incorporation and By-Laws (collectively, the "Charter Documents") that could have the effect of limiting (i) the ability of other entities or persons to acquire control of the Fund, (ii) the Fund's ability to engage in certain transactions or (iii) the ability of the Fund's Directors or stockholders to amend the Charter Documents or effect changes in the Fund's management. These provisions in the Fund's Charter Documents may be regarded as "anti-takeover" provisions. The Board of Directors are divided into three classes, each having a term of three years. At the annual meeting of stockholders in each year the term of one class expires. Accordingly, only those directors in one class may be changed in any one year, and it would require two years to replace a majority of the Board of Directors. In addition, a director may be removed from office, with or without cause, only by vote of the holders of at least 75% of the shares of the Fund entitled to be voted on the matter. Such a system of electing and removing directors may have the effect of maintaining the continuity of the management and, thus, make it more difficult for the Fund's stockholders to change the majority of the directors. Under the Fund's Articles of Incorporation, the Board of Directors has the authority to classify or reclassify shares of its capital stock with such rights, preferences, qualifications and limitations as the Board, in its discretion, may determine. 56 59 As permitted by the Maryland General Corporation Law ("MGCL"), the Fund has elected to be subject to the provisions of Section 3-602 of the MGCL which deals with certain "business combinations" with "interested stockholders." An "interested stockholder" is defined, in essence, as any person owning beneficially, directly or indirectly, more than ten percent of the outstanding voting stock of a Maryland corporation. A "business combination" is defined to include, among other things, any merger or similar transaction subject to a statutory vote and additional transactions involving transfers of assets or securities in specified amounts to interested stockholders or their affiliates. Unless an exemption to Section 3-602 applies, the Fund may not engage in any business combination with an interested stockholder for a period of five years after the interested stockholder became an interested stockholder, and thereafter may not engage in a business combination unless it is recommended by the Board of Directors and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by the holders of all outstanding voting stock of the Fund, and (ii) 66 2/3% of the votes entitled to be cast by all holders of outstanding shares of voting stock other than voting stock held by the interested stockholder. In addition, under the Fund's Articles of Incorporation, the affirmative vote of the holders of at least 75% of the shares of the Fund then entitled to vote is required to approve, adopt or authorize the following: (i) a merger or consolidation of the Fund with or into another corporation or a share exchange transaction in which the Fund is not the successor corporation; (ii) a sale, lease, exchange or other disposition to or with any entity or person of all or any substantial part of the assets of the Fund (except assets having an aggregate fair market value of less than US$1,000,000 or such sale, lease or exchange in the context of the ordinary course of the Fund's investment activities); (iii) issuance or transfer of any securities of the Fund to any person or entity for cash, securities or other property (or combination thereof) having an aggregate fair market value of US$1,000,000 or more excluding sales of securities in connection with a public offering and securities issued pursuant to a dividend reinvestment plan adopted by the Fund or upon the exercise of any stock subscription rights distributed by the Fund; (iv) a liquidation or dissolution of the Fund; or (v) the conversion of the Fund from closed-end to open-end status under the 1940 Act, unless any of the foregoing actions or events shall have been previously approved, adopted or authorized by the affirmative vote of 75% of the directors then in office. In such case, the affirmative vote of the holders of 66 2/3% of the outstanding shares of the Fund or such higher percentage as may be specified in the 1940 Act would be required. The affirmative vote of 75% or more of the outstanding shares of the Fund then entitled to vote is required to amend any or all of the foregoing provisions and certain other provisions contained in the Charter Documents. The Board of Directors has determined that the super-majority voting requirements described above, which are greater than the minimum requirement under Maryland law or the 1940 Act, are generally in the best interests of stockholders. Reference should be made to the Charter Documents on file with the Commission for the full text of these provisions. The Fund's Articles of Incorporation permit the Board of Directors (if they deem it necessary to avoid an adverse tax consequence to the Fund) to (i) impose restrictions on the transfer of Fund shares to Mexican residents, (ii) require the record owners of the Fund's shares to disclose the identity of the beneficial owners of the shares (including their residence), and (iii) require the disposition of shares by Mexican residents if necessary to reduce the Mexican share ownership in order to avoid an adverse tax consequence. The provisions of the Charter Documents described above could have the effect of depriving stockholders of the opportunity to sell their shares at a premium over prevailing market prices, by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The overall effect of these 57 60 provisions is to render more difficult the accomplishment of a merger with, or the assumptions of control of the Fund by, another entity or person. DISTRIBUTION ARRANGEMENTS Oppenheimer & Co., Inc., a broker-dealer and member of the National Association of Securities Dealers, Inc., will act as Dealer Manager for the Offer. Under the terms and subject to the conditions contained in a Dealer Manager Agreement dated the date of this Prospectus, the Dealer Manager will provide financial advisory services in connection with the Offer. In addition, the Dealer Manager has agreed with the Fund to form and manage a group of securities dealers ("Selling Group Members") to (a) solicit the exercise of Rights and (b) sell to the public Shares purchased by the Dealer Manager from the Fund as a result of purchases and exercise of Rights by the Dealer Manager. The Fund has agreed to pay the Dealer Manager a fee for its financial advisory services in an amount equal to 1.00% of the aggregate Subscription Price for the Shares. The Fund has also agreed to reimburse the Dealer Manager for up to $100,000 as partial reimbursement for its reasonable expenses incurred in connection with the Offer. In addition, the Fund will indemnify the Dealer Manager and each Soliciting Dealer with respect to certain liabilities, including liabilities under the U.S. Securities Act of 1933, as amended (the "Securities Act"). Oppenheimer & Co., Inc. also serves as the Administrator of the Fund and is the parent company of the Fund's U.S. Co-Adviser. Messrs. Bohen, Feeney and Rappaport, directors and officers of the Fund, are affiliated with Oppenheimer & Co., Inc. Pursuant to the Dealer Manager Agreement, the Fund has agreed to pay fees equal to 2.50% of the Subscription Price per Share to the Dealer Manager and each Selling Group Member for each Share either issued upon the exercise of Rights as a result of their soliciting efforts or sold to the public, and to the Dealer Manager for each Share issued upon the exercise of Rights but for which no dealer designation was made on the related Subscription Certificate. The Fund has also agreed that, with respect to Rights exercised not as a result of the selling or soliciting efforts of the Selling Group Members, the Fund will pay a soliciting dealer fee equal to 0.50% of the Subscription Price per Share to any securities dealer who is not a Selling Group Member but who is a member of the National Association of Securities Dealers, Inc. and who has executed and delivered a Soliciting Dealer Agreement and solicited the exercise of such Rights. From the date of this Prospectus, the Dealer Manager and Selling Group Members may offer and sell shares of Common Stock at prices set by the Dealer Manager from time to time, which prices may be higher or lower than the Subscription Price. Prior to the Expiration Date, each of those prices when set will not exceed the higher of the last sale price or current asked price of the Common Stock on the New York Stock Exchange, plus, in each case, an amount equal to an exchange commission, and any offering price set on any calendar day will not be increased more than once during that day. Any offering by the Dealer Manager or any Selling Group Member may include Shares acquired through the exercise of Rights. As a result of these offerings, the Dealer Manager and Selling Group Members may realize profits or losses independent of the Dealer Manager's financial advisory fee and any Selling Group Member fee received by them. Under applicable law, during the Subscription Period, the Dealer Manager may bid for and purchase Rights for certain purposes. Those purchases will be subject to certain price and volume limitations when the Common Stock is being stabilized by the Dealer Manager or when the Dealer Manager owns Rights without an offsetting short position in the Common Stock. Those limitations provide, among other things, that subject to certain exceptions, not more than one bid to purchase Rights may be maintained in any one market at the same price at the same time and that the initial bid for or purchase of Rights may not be made at a price higher than the highest current independent bid price on the New York Stock Exchange. Any bid price may not be increased, subject to certain exceptions, unless the Dealer Manager has not purchased any Rights for a full Business Day or the independent bid price for those Rights on the New York Stock Exchange has exceeded the bid price for a full Business Day. 58 61 CUSTODIANS AND TRANSFER AND DIVIDEND-PAYING AGENT PNC Bank, National Association, 200 Stevens Drive, Lester, Pennsylvania 19113 acts as the global custodian for the Fund's assets (the "Custodian"). Citibank, N.A., Paseo de la Reforma 390, 06600 Mexico, D.F. acts as the sub-custodian for the Fund's assets in Mexico (the "Mexican Sub-Custodian"). PNC Bank, National Association, 400 Bellevue Parkway, Wilmington, Delaware 19809 acts as the Fund's dividend paying agent, transfer agent and registrar. The Fund holds its Mexican securities listed on the Mexican Stock Exchange in an account maintained by the Mexican Sub-Custodian, with Indeval. Indeval charges a monthly custody fee of 0.003% of the market value of assets held by each brokerage firm or account holder. To the extent necessary, shares which are reserved for Mexican ownership are held in a separate account maintained by the Mexican Sub-Custodian with Indeval under the Master Trust arrangement. Citibank, N.A. has custody of the Fund's convertible debt securities. LEGAL MATTERS With respect to matters of United States law, the validity of the Shares offered hereby will be passed on for the Fund by Rogers & Wells, 200 Park Avenue, New York, New York 10166. Certain matters of United States law will be passed on for the Dealer Manager by Willkie Farr & Gallagher, 153 East 53rd Street, New York, New York 10022. Matters of Mexican law will be passed on for the Fund and the Dealer Manager by Ritch, Heather y Mueller, S.C., Amberes No. 5-PH Col. Juarez, 06600 Mexico, D.F., Mexico. Counsel for the Fund and the Dealer Manager will rely, as to matters of Maryland law, on Piper & Marbury L.L.P., 36 South Charles Street, Baltimore, Maryland 21201. The Mexican Adviser is a Mexican company and Dr. Luis Rubio, a director of the Fund, is a resident of Mexico. Substantially all of the assets of the Mexican Adviser and its directors and of Dr. Rubio are located in Mexico. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce against them in United States courts judgments predicated upon the civil liability provisions of the federal securities laws of the United States. The Fund has been advised by its Mexican counsel, Ritch, Heather y Mueller, S.C., that there is doubt as to the enforceability, in original actions in Mexican courts, of liabilities predicated solely on the U.S. federal securities laws and as to the enforceability in Mexican courts of judgments of U.S. courts obtained in actions predicated upon the civil liability provisions of the U.S. federal securities laws. EXPERTS The financial statements included in the Fund's Annual Report to Stockholders as of July 31, 1994 have been incorporated by reference in this Prospectus in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of that firm as experts in auditing and accounting. Price Waterhouse LLP is located at 1177 Avenue of the Americas, New York, New York 10036. OFFICIAL DOCUMENTS The tabular and other statistical information set forth in this Prospectus is, unless otherwise indicated, based upon or derived from public official documents or information of the Mexican Government, its ministries and Banco de Mexico. FURTHER INFORMATION Further information concerning these securities and their issuer may be found in the Registration Statement of which this Prospectus constitutes a part on file with the U.S. Securities and Exchange Commission. 59 62 FINANCIAL STATEMENTS The Fund's Annual Report for the fiscal year ended July 31, 1994 (the "Annual Report") and Semi-Annual Report for the six months ended January 31, 1995, which either accompany this Prospectus or have previously been provided to the person to whom this Prospectus is being sent, are incorporated herein by reference with respect to all information other than the information set forth in the Letter to Stockholders included therein. The Fund will furnish, without charge, a copy of its Annual Report and Semi-Annual Report, upon request to PNC Bank, National Association, 400 Bellevue Parkway, Wilmington, Delaware 19809, (800) 852-4750. 60 63 APPENDIX A THE UNITED MEXICAN STATES The information in this section is based on material obtained by the Fund from the Form 18-K filed by the United Mexican States with the U.S. Securities and Exchange Commission on June 30, 1995, and various additional Mexican governmental and other sources believed to be accurate but which have not been independently verified by the Fund, the U.S. Co-Adviser or the Mexican Adviser. References in this Appendix A to "US$", "$", "U.S. dollars" or "dollars" are to United States dollars, references to "Ps." and "pesos" are to Mexican pesos prior to January 1, 1993 and references to "NPs." and "new pesos" are to Mexican nuevos pesos on and after January 1, 1993, when the new peso replaced the peso at the rate of one nuevo peso per one thousand pesos. In certain cases, historical financial data and economic information set forth herein have been restated in new pesos. Unless otherwise indicated, (a) U.S. dollar equivalents of peso or new peso amounts as of a specified date prior to December 20, 1994 are based on the free exchange rate for such date published for statistical purposes by Banco de Mexico, and U.S. dollar equivalents of peso or new peso amounts for a period ending on or prior to December 31, 1994 are based on the average of such published daily free exchange rates for such period and (b) U.S. dollar equivalents of new peso amounts as of a specified date on or after December 20, 1994 are based on the exchange rate for such date announced by Banco de Mexico for the payment of obligations denominated in currencies other than pesos or new pesos and payable within Mexico, and U.S. dollar equivalents of new peso amounts for a period ending after December 31, 1994 are based on the average of such announced daily exchange rates for such period. The exchange rate announced by Banco de Mexico on July 20, 1995 (and published on July 21, 1995) was $1.00 = NPs. 6.1583. See "The External Sector of the Economy--Exchange Controls and Foreign Exchange Rates." The new peso has depreciated substantially in relation to the U.S. dollar since the end of 1994, when the Federal Government of Mexico (the "Mexican Government") allowed the new peso to float freely against the U.S. dollar, and the Mexican Government has established a broad economic reform program in response to these and other events. See "Recent Developments". Due to the recent volatility of the new peso/dollar exchange rate, the exchange rate on any date subsequent to the date hereof could be materially different from the rate indicated above. See "The External Sector of the Economy--Exchange Controls and Foreign Exchange Rates". The fiscal year of the Mexican Government ends December 31. The fiscal year ended December 31, 1994 is referred to herein as "1994" and other years are referred to in a similar manner. GENERAL AREA, POPULATION AND SOCIETY Mexico, a nation formed by 31 states and a Federal District (comprising Mexico City), is the fifth largest nation in the American continent and the thirteenth largest in the world, occupying a territory of 759,529 square miles (1,967,183 square kilometers). To the north, Mexico shares a border of 1,931 miles (3,107 km) with the United States of America, and to the south it has borders with Guatemala and Belize. Its coastline extends over 6,303 miles (10,143 km) along both the Gulf of Mexico and the Pacific Ocean. Mexico is the second most populous nation in Latin America, with a population of 81.2 million reported in the 1980 census. Approximately 71% of Mexico's population is located in urban areas. Mexico's three largest cities are Mexico City, Guadalajara and Monterrey, with estimated populations in 1990 of 15.0 million, 2.8 million and 2.5 million, respectively. The annual rate of population growth averaged 3.3% in the 1960s and 1970s. In the 1980s, Government efforts in the areas of family planning and birth control, together with declining birth rates among women under 35 and those living in urban areas, resulted in a reduction of the population growth rate to an estimated 1.7% in 1995. Mexico is generally classified as a middle income developing country and had a per capita GNP in 1993 of $3,610, compared with $24,740 in the United States, $2,840 in Venezuela, $3,170 in Chile and $2,930 in Brazil. Life expectancy in Mexico was 71 years in 1993, compared with 76 years in the United States, 72 A-1 64 years in Venezuela, 74 years in Chile and 67 years in Brazil. Adult illiteracy was estimated at 13% in 1993, compared with less than 5% in the United States, 12% in Venezuela, 7% in Chile and 19% in Brazil. Infant mortality in 1993 was 35.4 per 1,000 live births in Mexico, compared with 8.6 in the United States, 15.6 in Chile, 22.6 in Venezuela and 57 in Brazil. FORM OF GOVERNMENT The present form of government was established by the Constitution, which took effect on May 1, 1917. The Constitution establishes Mexico as a Federal Republic and provides for the separation of the executive, judicial and legislative branches of government. The President and the members of Congress are elected by popular vote of Mexican citizens who are 18 years of age and older. Executive authority is vested in the President, who is elected for a six-year term. The current President of Mexico is Ernesto Zedillo Ponce de Leon, whose term is scheduled to expire on December 1, 2000. The Constitution provides that the President may serve only one six-year term and may never be re-elected. The executive branch consists of 17 ministries, the office of the Federal Attorney General, the Federal District Department (Mexico City) and the office of the Attorney General of the Federal District, the chief officials of all of which are appointed by the President. Pursuant to the Constitutional amendments which took effect on December 31, 1994 (the "Constitutional Amendments"), the appointment of the Federal Attorney General and senior employees (empleados superiores) of the Ministry of Finance and Public Credit are subject to ratification by the Senate. Legislative power is vested in a bicameral Congress composed of the Senate and the Chamber of Deputies. Senators serve six-year terms and Deputies' terms are for three years. Members of neither house are permitted to serve consecutive terms in the same chamber. There are two Senators from each of the 31 states and two from the Federal District. In accordance with constitutional amendments which became effective on September 3, 1993, there will be four Senators from each state and four from the Federal District beginning with the next senatorial elections. The Chamber of Deputies is composed of up to 500 Deputies, 300 elected directly from the electoral districts and 200 elected by a system based on the proportion of the vote received by each minority party. The judicial branch is headed by the Supreme Court of Justice. The Supreme Court has 11 regular members who are appointed for 15 year terms (except in the case of the 11 newly selected members, whose appointments range from eight to twenty years) by the Senate from a pool proposed by the President. Other courts include circuit courts, district courts and other courts of local and special jurisdiction. The dominant political party in Mexico, Partido Revolucionario Institucional (the Institutional Revolutionary Party, the "PRI"), has held a majority in Congress and has won all presidential elections since 1929. Currently, the PRI holds 61 out of the 64 seats in the Senate, 320 of the 500 seats in the Chamber of Deputies and all but four of the state governorships. Since 1930, the Mexican political arena has been relatively stable. The level of continuity and stability brought by the dominance of the PRI is virtually unparalleled in Latin America. In government since its creation in 1929, the PRI has won all 14 presidential elections to date and, as such, is the world's longest ruling non-communist political party. The PRI candidate for the presidency has traditionally achieved an overwhelming majority of the votes cast: 83% in 1970, 87% in 1976 and 68% in 1982. Until 1988, the PRI candidate had never lost any of the gubernatorial or senatorial elections. Currently, the Partido Accion Nacional (the National Action Party, or the "PAN"), the oldest opposition party in the country, holds four state governorships. In the most recent elections held on May 28, 1995, the PRI narrowly won the gubernatorial contest in the Yucatan. The other election, in the State of Guanajuato, was won by the PAN. On August 21, 1994, elections were held to select a new President of Mexico for a six-year term beginning on December 1, 1994. In addition, three-quarters of the seats in the Senate and all of the seats in the Chamber of Deputies were up for election. Based on the preliminary election results released by the Instituto Federal Electoral ("IFE") on August 29, 1994, Ernesto Zedillo Ponce de Leon, the candidate of the PRI won the election, subject to Congress approval, with 50.18% of the votes, the candidate of the PAN was A-2 65 second with 26.69% of the votes and the PRD was third with 17.08% of the votes. With respect to the Congressional elections, the PRI maintained the majority in both chambers, with 93 seats in the Senate and 298 seats in the Chambers of Deputies, the PAN has the second largest representation with 25 seats in the Senate and 120 seats in the Chamber of Deputies and the PRD has the third largest representation with 10 seats in the Senate and 72 seats in the Chamber of Deputies. FOREIGN AFFAIRS Mexico maintains diplomatic relations with 175 countries throughout the world. It is a charter member of the United Nations and is a founding member of the Organization of American States ("OAS"), the International Monetary Fund ("IMF"), the International Bank for Reconstruction and Development ("World Bank"), the International Finance Corporation ("IFC") and the Inter-American Development Bank ("IDB"). Mexico is also a member of the General Agreement on Tariffs and Trade ("GATT") and a non-borrowing regional member of the Caribbean Development Bank. In 1991, Mexico became a founding member of the European Bank for Reconstruction and Development ("EBRD") and was admitted into the Pacific Basin Economic Co-operation Conference. On April 14, 1994, Mexico was admitted as a member of the Organization for Economic Cooperation and Development ("OECD"), making it the first member to be admitted into the OECD since 1973. Mexico became a member of the World Trade Organization ("WTO") on January 1, 1995, the date on which the WTO superseded the GATT. RECENT DEVELOPMENTS EVENTS DURING 1994 During the period from 1982 through 1994, Mexico pursued far-reaching and comprehensive adjustment policies designed to reform its economy and achieve a return to sustained economic growth. These policies included fiscal discipline, tax reform, trade liberalization, opening the economy to foreign investment, reform of certain public sector prices to conform to market conditions, deregulation, privatization of certain non-strategic public sector enterprises and an exchange rate and monetary policy aimed at slowing the rate of inflation in Mexico to levels approximating those of its major trading partners. See "The Economy-- General". While successful in reducing inflation from 159.2% in 1987 to 7.1% in 1994 and achieving real GDP growth averaging 3.0% over the 1990-1994 period, the Mexican economy had certain weaknesses by 1994 that made it unable to withstand the severe internal and external political and economic shocks that occurred in 1994, resulting in the destabilization of the Mexican economy at the end of 1994, a crisis of confidence on the part of foreign portfolio investors and an economic and financial crisis facing the Mexican Government since the end of 1994. A weakness of the Mexican economic model arose from the Mexican Government's exchange rate policy. Over the period from December 1987 through December 1994, representatives of the Mexican Government, business and labor entered into a series of social accords designed to limit price and wage increases so as to lower the rate of inflation, which had by 1987 reached 159.2%. Among the elements included in the first accord was a commitment by the Mexican Government to maintain a fixed peso/dollar exchange rate from February to December 1988. Thereafter, the Mexican Government implemented a schedule of gradual devaluation of the peso at rates of 16.7% in 1989, 11.4% in 1990, 4.5% in 1991 and 2.4% in 1992, as compared with annual inflation rates of 19.7% in 1989, 29.9% in 1990, 18.8% in 1991 and 11.9% in 1992. From October 1992 through December 20, 1994, the new peso/dollar exchange rate was allowed to fluctuate within a band that widened daily. The ceiling of the band, i.e., the maximum selling rate, depreciated at a daily rate of 0.0004 new pesos (equal to approximately 4.5% per year), while the floor of the band, i.e., the minimum buying rate, remained fixed. During this period, Banco de Mexico intervened in the foreign exchange market as the peso/dollar exchange rate reached either the floor or the ceiling of the band. While the Mexican Government's exchange rate policy contributed to general economic stability, encouraged foreign portfolio investment and helped reduce inflation, over time it led to a progressive overvaluation of the new peso. The A-3 66 appreciation of the new peso made imported consumer goods and services relatively more accessible in comparison with domestic products, contributing to the growth in the current account deficit, which rose from 3.0% of GDP in 1990 to 7.8% of GDP in 1994. In order to finance the growing current account deficit, Mexico relied on substantial inflows of foreign direct investment and portfolio investment. From 1990 through 1993, the capital account surplus exceeded the current account deficit, leading to an accumulation of international reserves to the level of $24.5 billion at the end of 1993. From 1992 through 1994, increasing amounts of capital inflows were made up of foreign portfolio investment, including investments in the Mexican stock market and investments in short-term Mexican Government and private sector debt instruments, such as bank certificates of deposit. The portfolio investors were attracted to Mexico because of its relatively high real interest rates and high returns on equity investments, compared to returns on investments in developed countries, and its relatively stable exchange rate. The portfolio investment flows were, however, by their nature less stable than direct foreign investment (because investors could generally liquidate their portfolio investments at any time) and left Mexico vulnerable to losing large amounts of foreign capital during 1994. During 1994, internal and external events combined to complicate the management of the Mexican economy and, in particular, adversely affected the capital inflows needed to finance the current account deficit. The U.S. monetary authorities took measures to increase interest rates in the United States in order to control inflationary pressures in that country and to defend a weakening dollar. The progressive increases in interest rates in the United States during 1994, as well as the prospect of further increases in those rates, made Mexican investments and investments in other emerging markets relatively less attractive to foreign portfolio investors and led to a reluctance on the part of investors to commit capital at fixed interest rates or for long periods of time in those markets. The economic situation deteriorated further due to a series of internal disruptions and political events that undermined the confidence of investors in Mexico during 1994. At the beginning of the year, armed insurgents attacked (and in some cases temporarily seized control of) several villages in the southern state of Chiapas. While the Mexican Government responded by providing military support to the local authorities and publicly offering to negotiate a peaceful resolution that would address the underlying concerns of the local population, the conflict remained a source of debate and uncertainty for the remainder of the year. Negotiations with the insurgents continued through the spring of 1994, but subsequently were broken off. In December, the Mexican Congress approved the creation of a Congressional peace commission, to be formed by members of both chambers of Congress, which would be responsible for mediating the negotiations between the Government and the insurgents. By late December 1994, however, the insurgents had not yet agreed to resume negotiations and the region experienced additional incidents of civil unrest. The Mexican Presidential and Congressional elections held in 1994 furnished additional grounds for investor unease. In March 1994, Luis Donaldo Colosio, the candidate of the PRI, the dominant political party in Mexico, was assassinated. That event, together with the general uncertainty regarding the outcome and fairness of the Presidential and Congressional elections scheduled to occur in August 1994, led to pressures on the foreign exchange market. While that uncertainty abated after Ernesto Zedillo Ponce de Leon of the PRI was elected President in August 1994 in an election that was widely perceived as fair and open, substantial outflows of foreign capital occurred in the weeks preceding the elections. Other destabilizing events that occurred during the year included the assassination of Jose Francisco Ruiz Massieu, the former secretary-general of the PRI, and the kidnapping of several prominent businessmen. Despite the fact that the Chiapas conflict has been confined to a relatively small geographic area and that the Mexican Government condemned the assassinations and kidnappings as criminal acts, these events caused some foreign investors to believe that the Mexican political system was less stable than previously had been believed. At the end of the first quarter of 1994, the Mexican authorities responded to the pressure on the new peso/dollar exchange rate that resulted from certain of the above-mentioned events by permitting the exchange rate to depreciate, but always within the limit of the Banco de Mexico intervention band established in the most recent social accord. In addition, in order to retain the capital of investors who perceived a risk of A-4 67 further devaluation of the new peso, the Mexican Government issued increasing amounts of Bonos de la Tesoreria de la Federacion ("Tesobonos"), short-term notes denominated in dollars but payable in new pesos indexed to the value of the dollar. The Mexican Government also increased interest rates on its new peso-denominated internal debt in an attempt to maintain capital inflows. While the Mexican Government was aware of the large current account deficit and the unease of foreign investors, it believed throughout much of 1994 that the real exchange rate remained competitive, particularly given the continued robust growth of exports of manufactured goods and the continued diversification of Mexican exports, and that the factors that had provoked uncertainty among foreign investors were transitory. The Mexican Government's attempts to stabilize the exchange rate and restore capital inflows were not, however, successful and the Mexican Government suffered a substantial loss in gross international reserves in 1994, from the level of $24.5 billion at the end of 1993 to $17.2 billion on October 31, 1994. During the second half of December 1994, foreign capital continued to flee the country as investors grew even more concerned, resulting in a strong demand for dollars. Given the loss in reserves that had occurred throughout the year, it became impossible to maintain the new peso within the band established by the most recent social accord, and on December 20, 1994, the Mexican Government increased the ceiling of the intervention band by NPs. 0.53. That action proved to be insufficient to address the concerns of foreign investors, and the demand for foreign currency continued. The exchange rate immediately depreciated to the newly established upper limit of the band. On December 22, 1994, the Mexican Government eliminated the intervention band and allowed the new peso to float freely against the dollar. A further sharp and rapid devaluation of the new peso ensued, with the new peso losing 35.1% of its value relative to the dollar between December 21, 1994 and December 31, 1994. By December 31, 1994, the country's international reserves had dropped to $6.1 billion. The devaluation at the end of 1994 has had a number of adverse repercussions on the Mexican economy. First, the weaker value of the new peso relative to the dollar increased the cost, in new peso terms, of imported goods and services, and thereby increased the rate of inflation in Mexico. To the extent that employers adjusted wages upward to compensate for the decline in purchasing power resulting from the devaluation, and then adjusted prices to reflect increased wage costs, additional inflationary pressures have arisen. The Mexican Government currently projects an inflation rate (measured by the increase in the National Consumer Price Index ("NCPI") from December 1994 to December 1995) of 42% in 1995. A-5 68 Second, the devaluation caused the new peso value of Mexico's external public debt and its dollar-denominated Tesobonos to increase significantly, from 25.6% of GDP at November 30, 1994 to 39.9% of GDP at December 31, 1994. At December 31, 1994, Mexico's public sector and private sector debt can be summarized as follows:
AT DECEMBER 31, 1994 (IN MILLIONS OF U.S. DOLLARS)(2) -------------------- Public Sector Net Internal Debt(1).................................................... $ 31,397 External Debt........................................................... 85,436 Long-term............................................................ 72,964 Short-term........................................................... 12,472 Private Sector Commercial Bank External Debt........................................... $ 25,124 Long-term............................................................ 14,274 Short-term........................................................... 10,850 Other Private Sector External Debt...................................... 22,074 Long-term............................................................ 13,866 Short-term........................................................... 8,208
- --------------- (1) This figure does not include approximately $12 billion of Tesobonos sold by Banco de Mexico in open-market operations to regulate liquidity. (2) Preliminary. Source: Ministry of Finance and Public Credit. Third, the devaluation led to a lack of confidence on the part of investors in Mexico's ability to repay its short-term obligations and, consequently, a reluctance of investors to reinvest in Mexico's maturing Tesobonos. As a result, Mexico faced a liquidity crisis linked closely to the $29.2 billion of short-term Tesobonos outstanding at the end of 1994 and maturing in 1995. Demand for foreign currency resulting from the above factors and the conversion by certain investors of the new peso proceeds of maturing Tesobonos increased the pressure on the exchange rate. The value of the new peso continued to deteriorate during early 1995, with the new peso/dollar exchange rate announced by Banco de Mexico falling to a low of NPs. 7.558 = $1.00 on March 13, 1995, a 29.8% decline from its value on December 31, 1994. The country's international reserves also fell, as many foreign investors did not choose to reinvest in maturing Government debt, including Tesobonos and Cetes (Treasury bills). At January 31, 1995, Mexico's gross international reserves totaled $3.483 billion. Fourth, the devaluation created concerns about the stability of the Mexican banking system. The devaluation of the new peso, higher domestic interest rates, higher unemployment, lower government spending, lower retail sales and anticipated recession in 1995 have combined to weaken the quality of the assets of Mexican banks. By December 31, 1994, past-due loans represented approximately 7.4% of total commercial bank loans, and, on average, Mexican banks had provisions covering only 47.9% of past-due loans. By March 31, 1995, past-due loans had increased to 9.8% of total loans, although the portion of the past-due loans as to which Mexican banks had provisions had increased to 67.4% of such loans. In addition, the new peso-denominated equity of Mexican banks is now a proportionately smaller percentage of their total assets, with certain banks having difficulty meeting required capital adequacy levels. As of December 31, 1994, the foreign currency-denominated liabilities of Mexican commercial banks totalled approximately $25.1 billion, of which $14.3 billion had a maturity of longer than 365 days. These concerns have led to sharply higher interest rates, both domestically and externally, on Mexican public and private sector debt and sharply reduced opportunities for refinancing or refunding maturing debt issues. During the first four months of 1995, interest rates on 28-day Cetes averaged 55.8%, as compared with an average interest rate of 14.1% during 1994. Mexican equity securities have also been adversely affected by A-6 69 events in recent months, with the Mexican Stock Market Index (as defined under "Financial System -- The Securities Markets") falling 36.3% in new peso nominal terms from December 20, 1994 to February 27, 1995, although the Stock Market Index subsequently recovered somewhat, increasing 34.4% in new peso nominal terms from February 27, 1995 to May 31, 1995. Overall, the Stock Market Index fell 18.1% in nominal new peso terms and 36.4% in real terms in the first five months of 1995. THE GOVERNMENT'S RESPONSE In order to address the adverse economic situation that developed at the end of 1994, the Zedillo Administration announced in January 1995 a new economic program and a new accord among the Mexican Government, business and labor, the Acuerdo de Unidad Para Superar la Emergencia Economica (Agreement to Overcome Mexico's Economic Emergency, or "AUSEE"). It became clear during the first two months of 1995, however, that the AUSEE would have to be reinforced in order to restore stability to Mexico's financial and foreign exchange markets. On March 9, 1995, the Government accordingly announced the Programa de Accion para Reforzar el AUSEE (Action Program to Strengthen the AUSEE, or "PARAUSEE"), which strengthened key aspects of the AUSEE. The PARAUSEE, together with the international support package described below, form the basis of Mexico's 1995 economic plan (the "1995 Economic Plan"). The objectives of the 1995 Economic Plan are: - To stabilize financial markets. - To mitigate the inflationary effects of the devaluation of the new peso and to ensure that the inflationary impact will be transitory. - To maintain the solvency of the banking sector. - To deepen Mexico's structural reforms, in order to increase the flexibility of the economy's adjustment process, improve Mexico's international competitiveness, promote domestic competition and reassure long-term investors of the strong underlying fundamentals of the Mexican economy. - To ensure that the burden of economic adjustment is shared by all sectors, while protecting the poorest segments of the population. The central elements of the PARAUSEE are fiscal reform, aimed at increasing public revenues through price and tax adjustments and reducing public sector expenditures; restrictive monetary policy, characterized by limited credit expansion; stabilization of the exchange rate while maintaining the current floating exchange rate policy; reduction of the current account deficit; introduction of certain financial mechanisms (described below) to enhance the stability of the banking sector; and maintenance and enhancement of certain social programs, to ease the transition for the poorest segments of society. A-7 70 The following table summarizes the key economic indicators for 1995, as projected in January 1995 (under the AUSEE) and in March 1995 (under the PARAUSEE), as compared with the actual results of the Mexican economy in 1994.
1995 PROJECTIONS AS OF -------------------------------- ACTUAL JANUARY MARCH 1994 (AUSEE) (PARAUSEE) ------------- ------------- -------------- Primary balance (% of GDP)....................... 2.3% 3.4% 4.4% Average new peso/dollar nominal exchange rate.... 3.2(1) 4.5 6.0 Inflation (December-December).................... 7.1% 19.0% 42.0% Current account deficit.......................... $28.8 billion $14.1 billion $ 2.4 billion
- --------------- (1) Average free exchange rate published daily by Banco de Mexico for statistical purposes. The specific components of the 1995 Economic Plan are as follows: Foreign Exchange Policy. The Mexican Government intends to maintain its current floating exchange rate policy, with Banco de Mexico intervening in the foreign exchange market from time to time to minimize volatility and ensure an orderly market. The Mexican Government is also promoting market-based mechanisms for stabilizing the exchange rate. On March 19, 1995, Banco de Mexico approved the establishment of over-the-counter forward and options contracts in Mexico on the new peso between banks and their clients. Trading of new peso futures contracts on the Chicago Mercantile Exchange ("CME") began on April 25, 1995. The Mexican Stock Exchange also intends shortly to introduce futures on the new peso/dollar exchange rate, and amendments to its internal rules have already been introduced to permit spot peso-dollar trading. These initiatives are designed to contribute to the Mexican Government's efforts to restore confidence in the Mexican economy by providing an important risk-management tool for investors. The Mexican Government's 1995 Economic Plan projects an average nominal exchange rate for the year of 6.0 new pesos/dollar. Fiscal Reform. Fiscal measures have been undertaken to increase the Mexican Government's primary balance and promote private sector savings. Public sector revenues are expected to increase under the 1995 Economic Plan as a result of an increase (approved by the Congress on March 17, 1995 and effective as of April 1, 1995) in the general value-added tax ("VAT") rate from 10% to 15% (except in the Mexico-United States border region and in duty-free zones, where the VAT rate will remain at 10%, and except with respect to pharmaceutical products and food, which continue to be subject to a VAT rate of 0%). In addition, the price of gasoline and diesel fuel will increase by 48.5% in 1995, as a result of a gradual 1.6% increase during the first two months of 1995, a one-time increase of 35% in March 1995 and a gradual increase of 8.3% during the remainder of the year. Residential natural gas and electricity prices increased by 20% in March 1995, and will increase each month thereafter by 0.8%, resulting in an aggregate increase of 32% by the end of 1995. Prices of other services, such as railroads, airports and highways, will also gradually be increased by an average of 2.5% per month, with aggregate annual increases limited to 30%. The prices of all other goods provided by the public sector for which international market prices are available as a comparison will be adjusted to eliminate subsidies. The Government also has increased the amount that may be deducted in respect of depreciation in 1995, a measure which should provide an enhanced incentive for investment. During the same period, a 9.8% reduction (in real terms) in public spending is planned, equivalent to 1.6% of GDP. The reduction in public spending will occur primarily through departmental rationalization, staff reductions and hiring freezes, as well as the postponement of new infrastructure projects. The Government hopes, to the extent possible, to preserve spending for health, education, worker training and efforts to combat poverty. Monetary Policy; Prices and Wages. In the short term, the goal of monetary policy under the 1995 Economic Plan is to stabilize the exchange rate in order to induce capital inflows. Domestic credit will be tightened when the exchange rate depreciates, capital outflows take place or inflation is higher than projected. Banco de Mexico intends to limit net domestic credit expansion in 1995 to NPs. 10 billion, which is designed A-8 71 to result in a real decrease in the monetary base of more than 20% from its level on December 31, 1994. In addition, new reserve requirements were introduced by Banco de Mexico to facilitate the regulation of liquidity. Pursuant to these requirements, which took effect on March 11, 1995, a bank that overdraws its account with Banco de Mexico must subsequently deposit funds, and maintain amounts on deposit, at least equal to the amount of the overdraft. Substantial fines may be imposed if a bank fails to make and maintain such deposits. The new reserve requirements are intended to reduce Banco de Mexico's daily net extension of credit. An important element of the 1995 Economic Plan is the moderation of the inflationary pressures created by the devaluation of the new peso. The Mexican Government's restrictive monetary policy is designed to help control inflation. In addition, the Mexican Government hopes that businesses will increase prices only in the proportion that products sold in Mexico are comprised of imported components. Nonetheless, the Mexican Government currently projects an inflation rate (December 1994 - December 1995) of 42.0% during 1995, as compared to 7.1% during 1994. A 7% nominal increase in the minimum wage took effect on January 1, 1995, and a further 12% nominal increase took effect on April 1, 1995, as compared with the 4% increase agreed in December 1994. Wage increases for workers earning more than the minimum wage will be negotiated between employers and such workers. Under the PARAUSEE, productivity bonuses will be maintained and tax benefits for workers will be extended to those earning less than four times the minimum wage (as opposed to twice the minimum wage under the AUSEE). Mechanisms to Strengthen the Stability of the Banking Sector. A primary objective of the 1995 Economic Plan is to stabilize and strengthen the banking sector. The Mexican Government is committed to ensuring depositor safety, and, to that end, has recently taken a number of interrelated steps. First, the Mexican Government has put in place the Programa de Capitalizacion Temporal (Temporary Capitalization Program, or "PROCAPTE"), administered by the Fondo Bancario de Proteccion al Ahorro (Banking Fund for the Protection of Savings, or "FOBAPROA"). PROCAPTE is a voluntary program designed to assist banks with capitalization levels below 8% of risk-weighted assets, and is intended for use by viable banks that are currently or are expected to be facing short-term capital needs. Under PROCAPTE, FOBAPROA advances funds to participating banks in exchange for five-year mandatorily convertible subordinated bonds. The banks must deposit with Banco de Mexico the funds raised from the issuance of the bonds, thereby neutralizing any monetary impact. If a participating bank's capital falls below a specified level while the bonds are outstanding, or if the bonds are not repaid prior to their five-year maturity, the bonds will be converted to equity at a rate based on the book value of the bank at the time of conversion. Banks benefiting from PROCAPTE must maintain capitalization levels at least equal to 9.0% of their risk-weighted assets (which may decline to 8.5% if the decrease is caused by the creation of general reserves). Second, the Mexican Government intends to increase by $3 billion FOBAPROA's capitalization fund, which is used to recapitalize banks that face severe capital shortfalls and are not viable as ongoing entities. Third, FOBAPROA has also made foreign exchange available through a foreign exchange credit window to help banks meet dollar liquidity needs. As of May 31, 1995, outstanding drawings under this program amounted to $2.2 billion. Recent amendments to Mexican banking law have broadened the scope for investment by foreign and Mexican investors in the equity of Mexican financial institutions, by increasing the percentage of the capital stock of most existing Mexican financial institutions that can be owned by non-Mexicans, increasing the percentage of the capital stock of such institutions that can be owned by Mexican corporations (as opposed to Mexican individuals) and increasing, subject to regulatory approval, the percentage of the capital stock of each such institution that can be owned by any single investor. These amendments also grant the Comision Nacional Bancaria y de Valores (National Banking and Securities Commission, or "CNBV"), an entity resulting from the merger on May 1, 1995 of the Comision Nacional Bancaria (the National Banking Commission) and the Comision Nacional de Valores (the National Securities Commission), powers of administrative and management intervention in financial holding companies similar to the CNBV's existing powers with respect to banks and securities dealers. A-9 72 According to published reports, the Mexican Bankers Association ("ABM") indicated that Mexican banks had accumulated overdue debt of almost NPs. 93 billion as of May 12, 1995, compared with about NPs. 50 billion as of mid-May of 1994. According to such reports, the President of the ABM stated that, by late May 1995, Mexican banks had restructured more than 45,000 loans thus far in 1995, totaling NPs. 15.7 billion (not including the loans restructured pursuant to the Government restructuring support program described below). To reduce the risk of lower asset quality, required loan-loss reserves are being increased. The new CNBV guidelines require minimum loan-loss reserves equal to the greater of 60% of past-due loans and 4% of total loans. The increased reserve requirements are estimated to require an additional NPs. 4.4 billion of reserves. Other measures to strengthen the financial sector include a significant enhancement of the CNBV's supervisory activities through closer and more frequent inspections and heightened reporting requirements. The Mexican Government has also announced a debt restructuring support program, designed to help restructure past-due loans of borrowers facing cash flow constraints. The restructuring program will cover five types of loans: small- and medium-size business loans; mortgage loans; foreign currency-denominated loans; and certain debt of states and municipalities. Restructured loans will be converted into new financial instruments, inflation-indexed units of account ("UDIs"), with maturities ranging from five to 12 years, which are designed to mitigate the short-term effect of inflation on borrowers and improve asset quality of banks. UDIs are units of account whose value in new pesos is indexed to inflation on a daily basis, as measured by the change in the NCPI. Under a UDI-based loan, the borrower's nominal new peso principal balance is converted to a UDI principal balance and interest on the loan is calculated on the outstanding UDI balance of the loan. Principal and interest payments are made by the borrower in an amount of new pesos equivalent to the amount due in UDIs at the stated value of UDIs on the day of payment. UDI loans will be made by special trusts set up by commercial banks for this purpose and are to be funded through long-term UDI bonds to be purchased by Banco de Mexico. The outflow of money to commercial banks will in turn be neutralized by the purchase by such banks of Mexican Government bonds. The maximum size of the restructuring program is currently estimated at NPs. 160 billion, which represents approximately 28% of all commercial bank loans at March 31, 1995. Structural Reform. While the Mexican Government anticipates a 2% contraction in real GDP growth during 1995, it nonetheless expects that increased productivity and competitiveness of the economy will be achieved through deregulation and increased private sector investment. Changes to the Political Constitution of Mexico (the "Constitution") which permit the Mexican Government to privatize railway and satellite communications services have been approved and have become effective. Pursuant to these changes, Congress has recently enacted legislation which contemplates the auction of 50-year private concessions to operate parts of Mexico's railway system, and has, as part of the telecommunications liberalization described below, enacted legislation to provide for the auction of private concessions to operate satellite telecommunications systems. In addition, the Mexican Government has announced plans to privatize, within the current legal framework, power generating plants and secondary petrochemical plants, airports, ports and highways. The Mexican Congress has also approved amendments to the law regarding the natural gas industry, which will allow Mexican private-sector companies (which may be owned by non-Mexican companies or individuals) to take part in the storage, distribution and transportation of natural gas, and has enacted legislation on civil aviation which provides for the granting of 30-year concessions allowing private companies to operate commercial air transportation services within Mexico. See "The Economy--The Role of the Government in the Economy; Privatization" and "Principal Sectors of the Economy--Petroleum and Petrochemicals--Distribution". Finally, as noted above, the Mexican Congress has recently approved a telecommunications liberalization law. Pursuant to this law and upon the expiration in 1996 of the concession granting exclusivity to Telefonos de Mexico (the national domestic and long-distance telephone company, "Telmex") with respect to domestic and international long-distance telephone services in Mexico, 30-year concessions will be granted for the establishment of public telecommunications networks, without payment of a licensing fee. In addition, 20-year concessions for use of portions of the radio spectrum for telecommunications purposes will be auctioned. See "The Mexican Economy--The Role of the Government in the Economy; Privatizations". A-10 73 Through these measures, as well as the proposed sale by the Mexican Government of its remaining 22% interest in Bancomer, S.A. ("Bancomer") and certain other state-owned institutions, the Mexican Government hopes to encourage private investment and to generate substantial privatization revenues over a three-year period. The devaluation of the new peso, assuming that inflationary pressures are held in check, should also increase the competitiveness of Mexican exports and assist the Mexican Government in meeting its target for merchandise export growth of 23% during 1995. International Support. Since January 1, 1995, the Mexican Government has engaged in a series of discussions with the International Monetary Fund ("IMF"), the International Bank for Reconstruction and Development (the "World Bank"), the Inter-American Development Bank ("IDB") and the U.S. and Canadian Governments in order to obtain the international financial support necessary to relieve Mexico's liquidity crisis and aid in restoring financial stability to Mexico's economy. The proceeds of the loans and other financial support have been and will be used to refinance public sector short-term debt, primarily Tesobonos, to restore the country's international reserves and to support the banking sector. The largest component of the international support package is up to $20 billion in support from the United States Government pursuant to four related agreements entered into on February 21, 1995 (the "February 21 Agreements"). The February 21 Agreements contemplate that these resources are to be made available to Mexico in the form of (i) medium-term (i.e., up to five-year) new peso/dollar swap transactions entered into between the U.S. Treasury Department, acting through the Exchange Stabilization Fund ("ESF"), and Mexico, (ii) guarantees by the U.S. Treasury Department, acting through the ESF, of debt securities with a tenor of up to ten years issued by Mexico and (iii) short-term swap transactions entered into by Banco de Mexico with the U.S. and Canadian Governments pursuant to the North American Framework Agreement of April 26, 1994 (the "NAFA"). The resources are being used by Mexico to stabilize its foreign exchange markets, principally by refinancing short-term Government debt, including Tesobonos. Under the February 21 Agreements, provision of these resources depends upon the satisfaction by Mexico of certain economic, monetary and fiscal conditions, including compliance with the targets of the IMF stand-by program described below. Pursuant to the February 21 Agreements, Petroleos Mexicanos ("Pemex") and its sales affiliates have instructed their foreign buyers of crude oil and oil derivatives (with certain exceptions) to make payments to designated accounts of Petroleos Mexicanos and its affiliates with a bank in New York and have instructed that bank to credit the amounts received to an account of Banco de Mexico with the Federal Reserve Bank of New York ("FRBNY"). Banco de Mexico has the right to withdraw the funds deposited in the FRBNY account so long as there is no payment default by Mexico under the February 21 Agreements or the NAFA. In the event of any such payment default, FRBNY has the right to debit and set-off the funds in the account to repay any amounts due and payable by Mexico under the February 21 Agreements and the NAFA. As of May 31, 1995, $2.0 billion of swaps between Banco de Mexico and the U.S. Government pursuant to the NAFA was outstanding and $8.0 billion of swaps between the Mexican Government and the U.S. Government pursuant to the February 21 Agreements was outstanding. In addition, $237 million of swaps between Banco de Mexico and the Canadian Government pursuant to the NAFA was outstanding. The Mexican Government has used the approximately $10.2 billion of proceeds of such swaps to refinance maturing short-term debt, including Tesobonos. An additional $10.0 billion of resources from the U.S. Government may become available under the NAFA and the February 21 Agreements, subject to the conditions referred to above. The Mexican Government currently intends to draw less than this sum in the second half of 1995 (through the issuance of guaranteed securities pursuant to the February 21 Agreements and/or by entering into swaps pursuant to the February 21 Agreements), leaving the balance available for contingencies. The Mexican Government expects to enter into an additional swap with the U.S. Government pursuant to the February 21 Agreements during July 1995. On February 1, 1995, the IMF approved a $17.75 billion stand-by loan program for Mexico, based upon its review and approval of Mexico's economic program. On February 6, 1995, Mexico received $7.75 billion in disbursements under its IMF stand-by program, in the form of purchases of Special Drawing Rights by Banco de Mexico. An additional $10 billion of medium-term resources will become available to Mexico beginning in A-11 74 the second half of 1995, if Mexico meets an agreed-upon set of quarterly economic, monetary and fiscal targets under the program. The Mexican Government expects to request a waiver of certain targets agreed in the IMF program based on the performance of the Mexican economy during the first quarter of 1995 and on the revisions made to the Government's economic program in March 1995. On June 23, 1995, the Mexican Government entered into agreements with the World Bank and the IDB providing for up to $2.75 billion in adjustment loans, of which $1.75 billion will be used to support the Mexican financial system and $1.00 billion will be used to support the Mexican Government's provision of essential social services. Subject to the satisfaction of certain conditions, the Mexican Government expects to draw half of the available funds under these facilities during 1995 and the balance during 1996. It is anticipated that the first drawing will take place during July 1995 (of $875 million under the adjustment loan for the Mexican financial system). Modified Debt Profile. Using resources made available through the international support package as well as operations by Banco de Mexico, the Mexican Government expects by the end of 1995 to significantly alter its debt profile. The outstanding Tesobono balance was reduced to $16.2 billion at the end of the first quarter of 1995, and a further reduction in the amount of outstanding Tesobonos is anticipated during the remainder of 1995, with the Mexican Government currently projecting an outstanding Tesobono balance of $9.9 billion at the end of the second quarter, $2.5 billion at the end of the third quarter and $0.2 billion at the end of the fourth quarter. Moreover, by the end of 1995, it is projected that over 75% of Mexico's net internal debt will be denominated and payable in new pesos, as compared with only 44% of such debt at the end of 1994. ECONOMIC AND POLITICAL DEVELOPMENTS IN 1995 The effects of the devaluation of the new peso, as well as the Mexican Government's response to that and related events, are apparent in the performance of the Mexican economy during the first quarter of 1995. Monetary policy has been tightened, with the monetary base declining from NPs. 56.9 billion at December 31, 1994 to NPs 46.2 billion at May 31, 1995. Recent trade figures also show a correction in the trade deficit during the first four months of 1995. In January 1995, the trade deficit contracted by approximately $0.9 billion, a 64% decrease over January 1994. Exports in January 1995 increased by 39.3% compared to January 1994, while imports increased by only 12.2%. In February 1995, Mexico registered its first trade surplus since November 1990, of $234.9 million, as compared with a trade deficit of $1.5 billion in February 1994. Exports increased 28.7% over their level in February 1994, while imports fell by 7.3%. In March 1995, Mexico registered a surplus in the trade balance of $459.6 million, as compared with a trade deficit of $1.3 billion in March 1994. Exports increased 32.2% and imports fell 2% in March 1995 over their level in March 1994. In April 1995, Mexico registered a surplus in the trade balance of $801.0 million, as compared with a trade deficit of $1.4 billion in April 1994. Exports increased 23.4% and imports fell 16.2% in April 1995 in comparison with April 1994. In May 1995, Mexico registered a surplus in the trade balance of $588 million, as compared with a trade deficit of $1.5 billion in May 1994. Exports increased 30.3% and imports fell 8.4% in May 1995 in comparison with May 1994. Overall, the trade balance reached a surplus of $1.9 billion in the first five months of 1995, as compared with a trade deficit of $7.2 billion during the same period of 1994. During the first quarter of 1995, the current account deficit totaled $1.2 billion, 82.0% lower than the current account deficit for the first quarter of 1994. The capital account surplus during the first quarter of 1995 was $2.5 billion, 74.3% lower than the capital account surplus during the first quarter of 1994. The outstanding principal amount of Tesobonos was reduced sharply during the first quarter of 1995, from $29.2 billion as of December 31, 1994 to $16.2 billion as of March 31, 1995. By June 30, 1995, the outstanding principal amount of Tesobonos had declined further to $10.5 billion, a cumulative 65.8% decline from the figure as of December 31, 1994. This reduction was accomplished primarily through the payment of maturing Tesobonos and the repurchase (through auctions) by Banco de Mexico of outstanding Tesobonos held by Mexican commercial banks in exchange for the cancellation of liabilities of those banks with Banco de Mexico. By the end of the first quarter of 1995, 80.2% of Mexico's external public sector debt and outstanding A-12 75 Tesobonos consisted of long-term (i.e., one year or more) maturities, as compared with 69.0% at the end of 1994. Banco de Mexico is currently disclosing reserve figures on a weekly basis. On June 23, 1995, Mexico's international reserves amounted to $10.335 billion, as compared to $6.148 billion at December 31, 1994 and $24.538 billion at December 31, 1993. According to preliminary estimates, during the first quarter of 1995 real GDP decreased by 0.6% as compared with the same period of 1994. The Government anticipates a sharper contraction of GDP during the second quarter of 1995, as compared with the same period of 1994. For the year as a whole, the Mexican Government currently projects a 2% decline (in real terms) in GDP. Lower- and middle-income members of society have been particularly harshly affected by the economic developments since the beginning of 1995, mainly as a consequence of increased unemployment, higher inflation, higher financial payments and unavailability of credit. The Government has estimated that 945,000 Mexican workers have lost their jobs during the first four months of 1995 as a result of the current economic crisis, and additional job losses are expected during the second quarter of 1995. Increases in crime and poverty have also been reported. The fact that Mexico does not have an unemployment benefits scheme or a fully developed social welfare system has contributed to the impact of the economic crisis (although certain features of Mexican society, such as the support provided by extended families, may have helped to mitigate the effects of the economic crisis to some extent). During the first quarter of 1995, budgetary public sector revenues exceeded budgetary public sector expenditures (excluding off-budget revenue and expenditures of the public sector) by approximately NPs. 8.88 billion in nominal terms, or approximately NPs. 30.54 million in constant pesos with purchasing power as of December 31, 1980, an increase of 80% in real terms over the surplus registered in the same period of 1994. The public sector primary surplus was 25.77 billion in nominal terms, or approximately NPs. 88.62 million in constant 1980 pesos, an increase of 96.8% in real terms over the primary surplus registered during the same period of 1994. On May 31, 1995, President Zedillo announced the Plan Nacional de Desarrollo 1995-2000 (1995-2000 National Development Plan, or the "Development Plan"). The Development Plan covers five topics: sovereignty; the rule of law; democratic development; social development; and economic growth. The fundamental strategic objective of the Development Plan is to promote vigorous and sustainable economic growth. Among other things, the Development Plan calls for steps to increase domestic savings, preference to be given to channeling foreign investment into direct productive investment, the elimination of unnecessary regulatory obstacles to foreign participation in productive activities and further deregulation of the economy. The Development Plan also states that the Government must maintain fiscal discipline over the medium-term and that exchange-rate policy should systematically avoid overvaluation of the real exchange rate and should, in concert with other policy instruments, seek to ensure that evolution of the exchange rate is conducive to price stability. In addition, the Development Plan contemplates various steps to strengthen the rule of law in Mexico, including consolidating and coordinating the activities of various security organizations and police forces in Mexico and intensifying efforts to combat organized crime. In the domestic political arena, the Mexican Government has renewed its efforts to resolve its differences with the insurgents in the Chiapas region, by facilitating their participation in the political process, following an attempt at negotiations with the insurgents (and a withdrawal of certain military forces from the region) in January 1995 and a resumption of certain of military activity in February. On March 9, 1995 Congress approved a law granting temporary amnesty to insurgents who participate in peace talks with the Mexican Government, and on March 13, the law establishing the framework for these peace talks took effect. The insurgents agreed on March 17 to resume talks with the Mexican Government, and a meeting between representatives of the Ministry of the Interior and the insurgents was held on April 9. Additional meetings took place on April 22, May 12, and during the period June 7-11. The parties have agreed to resume talks in July 1995. A-13 76 On January 17, 1995, the major political parties of Mexico entered into a new accord to further the opening of the political process in Mexico. The Government believes that these reforms, together with the changes in the Mexican economy since 1982, will help restore order to the foreign exchange markets and enable the Mexican economy to recover, in the medium-term, from the economic crisis experienced in recent months. In the short-term, however, higher inflation, higher interest rates, and a contraction in GDP are expected. In addition, in the medium-term, significant new investment in infrastructure, industrial and agricultural modernization, training and environmental protection will be required for continued growth and development. The Mexican economy is likely to continue to be subject to the effects of adverse domestic and external factors such as declines in foreign direct and portfolio investment, high interest rates and low oil prices, which may lead to volatility in the foreign exchange and financial markets. However, although no assurances can be given, the Mexican Government believes that Mexico's decreased reliance on oil exports, lower debt levels and debt servicing requirements, reduced reliance on short-term financing, export growth potential, domestic investment and the reforms described above should significantly reduce the economy's vulnerability to further external shocks, restore the economy to the path of sustainable growth and enable the economy to adjust in an orderly fashion to the December 1994 devaluation of the new peso. THE MEXICAN ECONOMY GENERAL During the period from World War II through the mid-1970s, Mexico enjoyed sustained and stable growth in per capita income and GDP. In the early 1970s, the major industrial countries began to experience severe inflation. The fixed exchange rates in place since the Bretton Woods accords were replaced by floating exchange rates and the 1973 oil shock brought financial stability to the international economy. At the same time, Mexico embarked on an active and expansionary economic policy oriented towards economic growth and more equitable income distribution. These goals were promoted through Government spending and high tariffs and other barriers to foreign competition and were largely funded by oil export revenues and greatly increased external borrowings. The steep decline in oil prices in 1981 and 1982, together with high international interest rates and the credit markets' unwillingness to refinance maturing external Mexican credits, led in 1982 to record inflation, successive devaluations of the peso by almost 500% in total, a public sector deficit of 16.9% of GDP and, in August of 1982, a liquidity crisis that precipitated subsequent restructurings of a large portion of the country's external debt. In the decade that followed, Mexico consistently pursued far-reaching and comprehensive adjustment policies designed to reform its economy and assure the return to sound and sustained economic growth. These policies, set forth in the national Development Plans of the former President Miguel De la Madrid (1983-1988) and former President Salinas (1989-1994) administrations have included prudent fiscal discipline, a reduction in Mexican Government subsidies, tax reform, the limitation of Mexican Government investment to large infrastructure projects, trade liberalization, opening of the economy to foreign investment, reform of public sector prices to conform to market conditions deregulation and privatization of non-strategic public sector enterprises, encouragement of increased domestic, public and private savings and of private sector co-investment with the Mexican Government and renegotiation of the country's foreign debt. The Mexican Government's policies have been furthered by a series of short-term programs, including the Programa Inmediato de Recuperacion Economica (Immediate Program for Economic Recovery, or "PIRE"), the Programa de Aliento y Crecimiento (Program for Encouragement and Growth, or "PAC") and by social pacts, including the Pacto de Solidaridad Economica (Economic Solidarity Pact, or "PSE"), the Pacto para la Estabilidad y Crecimiento Economico (Pact for Stability and Economic Growth, or "PECE," covering 1989-1992) and the Pacto para la Estabilidad, la Competividad y el Empleo (Pact for Stability, Competitiveness and Employment, or "New PECE," covering 1993), which contained a commitment by the Mexican A-14 77 Government to maintain strict fiscal discipline and, under the PSE and PECE, commitments by all sectors of the economy to restrain wage and price increases. On September 24, 1994, the Mexican Government, together with the business and labor sectors, entered into an agreement that effectively extends PECE for 1995. Such agreement is named Pacto para el Bienestar, la Estabilidad y el Crecimiento (the Agreement for the Wellbeing, Stability and Growth, or "PABEC") (see "--Prices and Wages" below). THE ROLE OF THE GOVERNMENT IN THE ECONOMY; PRIVATIZATIONS Since 1983, the Mexican Government has sought as a matter of priority to sell to the private sector its interest in all non-strategic commercial enterprises. In 1982, the Mexican Government owned or controlled 1,155 public sector enterprises. By December 31, 1993, the number of Mexican Government-owned businesses had been reduced to 210. In part as a result of these privatizations, the share of Mexican Government expenditures in GDP fell from 41.8% in 1982 to 29.4% in 1993. The importance of subsidies also diminished significantly. Enterprises privatized include the two national airlines, copper, iron and coal mines, hotels, Telefonos de Mexico S.A. (the national telephone company, "Telmex"), the state-owned steel industry and all eighteen state-owned commercial banks, including the country's two largest commercial banks, Banco Nacional de Mexico S.A. ("Banamex") and Bancomer S.A. ("Bancomer"). The petroleum industry and the electrical power sector are the two most important strategic sectors that are required by the Constitution to remain in Mexican Government hands. In April 1995, the Mexican Government announced the formation of a Divestiture Council to coordinate upcoming privatizations in areas such as airports, ports, highways, power generating plants and secondary petrochemical plants. GROSS DOMESTIC PRODUCT In 1986, partially as a result of Mexico's debt crisis and the dramatic fall in oil prices, real GDP declined sharply by 3.8%. Since then, however, growth has resumed at moderate rates. Real GDP grew 3.3% in 1989, 4.4% in 1990, 3.6% in 1991, 2.8% in 1992 and 0.7% in 1993 and is estimated to have grown 3.5% in 1994. The following table sets forth the contribution to Mexico's GDP by major sectors of the economy for the years indicated. REAL GDP BY SECTOR (IN MILLIONS OF NEW PESOS)(1)
% OF 1989 1990 1991 1992 1993 1994(2) TOTAL -------- -------- -------- -------- -------- -------- ----- Agriculture, livestock, fisheries and forestry(3)............................. NPs395.0 NPs408.8 NPs412.7 NPs408.8 NPs414.4 NPs433.4 7.4 Mining, petroleum and gas................. 182.9 188.0 189.5 192.9 195.0 199.1 3.4 Manufacturing............................. 1,105.1 1,203.9 1,252.3 1,280.7 1,271.0 1,317.8 22.5 Construction.............................. 250.4 267.8 274.3 296.7 304.0 322.1 5.5 Electricity, gas and water................ 76.5 78.7 80.8 83.2 86.7 93.7 1.6 Commerce, restaurants and hotels.......... 1,302.0 1,355.1 1,413.6 1,464.3 1,444.7 1,487.7 25.4 Transportation and communication.......... 326.1 346.7 356.9 384.9 408.0 439.3 7.5 Financial services, insurance and real estate renting and social and community services................................ 1,458.5 1,496.4 1,562.4 1,580.8 1,621.0 1,669.2 28.5 Subtotal.................................. 5,116.8 5,345.5 5,542.6 5,700.9 5,744.8 5,962.3 - Less adjustment for banking services...... (69.4) (74.0) (79.8) (85.0) (94.5) (105.4) (1.8 ) -------- -------- -------- -------- -------- -------- Total gross domestic product.............. NPs5,049 NPs5,277 NPs5,469 NPs5,620 NPs5,659 NPs5,857 100% ======== ======== ======== ======== ======== ========
- --------------- Note: Totals may differ due to rounding. (1) Constant pesos with purchasing power at December 31, 1980, expressed in new pesos. (2) Preliminary. A-15 78 (3) The GDP figure relating to agricultural production during 1991, 1992 and 1993 set forth in this table and elsewhere in this prospectus are based on figures for the 1991, 1992 and 1993 "agricultural years," with the exact definition of the "agricultural year" varying from crop to crop based on the season during which it is grown. Calendar year figures are used for the other components of GDP. Source: Banco de Mexico, Instituto Nacional de Estadistica, Geografia e Informatica ("INEGI") The following table sets forth the annual change in Mexico's real GDP by sector for the periods indicated. REAL GDP GROWTH BY SECTOR
1988 1989 1990 1991 1992 1993 1994(1) ---- ---- ---- ---- ---- ---- ---- GDP (at 1980 prices)................... 1.2% 3.3% 4.4% 3.6% 2.8% 0.7% 3.5% Agriculture, livestock, fisheries and forestry............................. (3.2) (2.8) 6.8 1.1 (1.4) 2.6 2.0 Mining, petroleum and gas.............. 0.4 (0.6) 2.8 0.8 1.8 0.9 1.6 Manufacturing.......................... 3.2 7.2 6.1 4.0 2.3 (0.8) 3.6 Construction........................... (0.4) 2.1 7.0 2.4 7.8 2.8 6.4 Electricity, gas and water............. 6.0 7.7 2.9 2.7 3.0 4.2 7.7 Commerce, restaurants and hotels....... 2.1 3.8 4.1 4.3 3.6 (1.3) 2.8 Transportation and communications...... 2.3 4.1 6.7 5.8 7.6 3.3 7.8 Financial services, insurance and real estate renting and social and community services................... 2.1 4.3 5.6 7.5 4.3 5.9 7.1
- --------------- (1) Preliminary. Source: Banco de Mexico, INEGI The deceleration of economic growth can be attributed to several factors. First, economic activity in Mexico has been affected by the worldwide recession, and in particular, the economic recession of its principal trading partner, the United States. Second, structural changes in the Mexican economy, and the opening of the economy to foreign competition, have resulted in slower growth in certain sectors of the economy that have not adapted to the new economic environment. Finally, the increased level of investment registered in Mexico in recent years has not yet translated into an increase in productive capacity in certain sectors sufficient to meet aggregate demand. PRICES AND WAGES Between 1977 and 1981, the expansion of public sector expenditures contributed to an average annual inflation rate (measured by the NCPI) of 22.4% for the period, compared to average annual rates of 2.5% between 1960 and 1971 and 16.6% between 1972 and 1976. In the 1980s, the Mexican Government's debt service burden and large devaluations of the peso added further inflationary pressures. The NCPI rose 105.7% in 1986, and another 159.2% in 1987. In December 1987, the Mexican Government reached an agreement with labor and business representatives, the PSE, to curb the economy's inflationary pressures by freezing wages and prices. The PSE included the implementation of restrictive fiscal and monetary policies, the elimination of certain trade barriers and the reduction of import tariffs. After substantial increases in public sector prices and utility rates, price controls were introduced. These policies contributed to lower consumer inflation rates of 51.7% in 1988, 19.7% in 1989, 29.9% in 1990, 18.8% in 1991, 11.9% in 1992, and 8.0% in 1993 and 7.1% in 1994. In December 1988, the PSE was succeeded by the PECE. The PECE has been extended on seven occasions. On September 24, 1994, the Mexican Government, together with the business and labor sectors, entered into an agreement that effectively extended the PECE for 1995. In order to address the adverse economic situation that developed at the end of 1994, the Zedillo Administration announced in January 1995, a new economic program and a new accord among the Mexican Government, business and labor, the Acuardo A-16 79 Para Superar la Emergencia Economica (Agreement to Overcome Mexico's Economic Emergency, or "AUSEE"). See "Recent Developments -- The Government's Response." The following table shows in percentage terms the changes in price indices for the periods indicated. CHANGES IN PRICE INDICES
NATIONAL NATIONAL PRODUCER CONSUMER PRICE INDEX PRICE INDEX ----------- ----------- 1987................................................................ 166.5% 159.2% 1988................................................................ 37.3 51.7 1989................................................................ 15.6 19.7 1990................................................................ 29.2 29.9 1991................................................................ 11.0 18.8 1992................................................................ 10.6 11.9 1993................................................................ 4.6 8.0 1994................................................................ 9.1 7.1
- --------------- Source: Indicatores Economicos, Banco de Mexico INTEREST RATES Following the signing of the PECE in December 1987, domestic interest rates began to fall but they did not decline as rapidly as inflation. The interest rate on 28-day treasury bills ("Cetes") declined from an average of approximately 157.1% in January 1988 to slightly above 40% in August 1988. Falling commodity prices, a drop in Mexico's non-oil exports, increasing imports, continued high debt service payments and a decline in international reserves increased the perception of risk in the Mexican economy. This perception, combined with the government's tight monetary policy, caused interest rates to rise again. The rate on Cetes rose to 52% in December 1988. As a result of lower inflation,the foreign debt renegotiations, the reduction of the public sector borrowing requirements and capital inflows, domestic interest rates declined thereafter. In 1989, the average rate on Cetes was approximately 45.0% and a year later it declined to 34.8%. For 1994, the average 28-day Cetes rate was approximately 14.1%. THE EXTERNAL SECTOR OF THE ECONOMY FOREIGN TRADE The import substitution economic development model that Mexico adopted in the 1940s to promote industrialization through protection of local industries, and which in its latter stages was financed by the expansion of oil exports and debt accumulation, gave way in the late 1980s to a more outward-looking approach concentrating on export-led growth. To foster non-oil exports, the Mexican Government has promoted a comprehensive set of trade, fiscal, financial and promotional measures designed to create a macroeconomic environment in which exports will be more competitive. The Mexican Government's decision to join GATT in 1986 has resulted, among other things, in an important reduction in the protection traditionally given to domestic producers. Average tariff rates declined from 22.6% in 1986 to 13.1% in 1990. A five tier tariff structure was established at the end of 1987 with a maximum rate of 20%. In December 1987, the surcharge of 5% on imports was abolished. By 1993, approximately 98.4% of tariff items and 78.5% of imports by value were exempt from import permits and other non-tariff barriers. By reducing the cost of imported goods, the opening of domestic markets to foreign products has also complemented fiscal and monetary policies aimed at reducing domestic inflation. In recent years, the composition of Mexico's non-oil exports has also changed. Manufactured goods have increased while primary sector exports have declined. In 1994, 82.8% of Mexico's non-oil exports were A-17 80 represented by manufactured goods compared to 68.4% in 1990. During the same period, agriculture and live stock products decreased from approximately 6.3% of total non-oil exports in 1990 to 4.4% in 1994. From 1983 to 1987, imports of goods were generally depressed, primarily as a result of the general contraction of the Mexican economy. The growth of exports and the reduction of imports resulted in trade surpluses that averaged $9.0 billion per year during the period, and were largely used to finance net transfers of Mexico's external creditors. However, since 1988 imports have increased dramatically, reflecting increased demand resulting from a resumption of growth in the Mexican economy, the modernization of Mexico's industrial facilities and the decrease in tariffs that accompanied Mexico's entry into GATT. Mexico reported a deficit in its trade balance (exclusive of in-bond industry) of approximately US$4.4 billion in 1990 and reported US$11.3 billion, US$20.7 billion, US$13.5 billion and US$18.5 billion in trade deficits in 1991, 1992, 1993 and 1994, respectively. This recent deterioration in Mexico's trade balance is largely due to the strong growth of imports in response to trade liberalization and reduced levels of oil prices. On August 20, 1992, Mexico signed an Agreement on Economic Cooperation with Costa Rica, El Salvador, Honduras and Guatemala as a step towards establishing a free trade area by the end of 1996. Mexico signed a free trade agreement with Chile, which went into effect on January 1, 1992. Mexico has also taken important steps to increase its trading relations with Europe and the Pacific rim countries. For example, on February 18, 1992, Mexico and France signed a Framework Agreement for Cooperation that aims to encourage bilateral cooperation through increased trade and investment. NAFTA became effective January 1, 1994 and establishes a free trade zone between Mexico, Canada and the United States. NAFTA has removed many customs duties imposed on goods traded among Canada, Mexico and the United States; it has removed or relaxed many investment restrictions on foreign investment in banking, insurance and other financial services, it has liberalized trade in services and provided protection of intellectual property rights; it has created a specialized means for settlement of, and remedies for, trade disputes arising under NAFTA; it has promoted trilateral, regional and multilateral cooperation and certain new laws and regulations to promote these goals. Certain provisions of NAFTA will continue to be implemented over the next few years. Although not part of the NAFTA accords, there have been certain supplemental agreements entered into by the governments of Canada, Mexico and the United States that cover labor and environmental issues. The Mexican Government believes that NAFTA has provided permanent access to Mexican exports to U.S. and Canadian markets. The Mexican Government continues to eliminate certain restrictions on foreign investment and believes these measures will attract foreign investment in Mexico. As a result, NAFTA has had certain favorable effects on employment, wages and economic growth in Mexico, although the current economic situation has caused an increase in inflation, and generally, a slow down of the Mexican economy. In addition, Mexican producers and service providers have been subject to increased foreign competition as tariffs on certain imported goods and protection of certain industries from foreign competition has been reduced. These effects were felt initially after Mexico's entry into GATT in 1986, and resulted in certain changes in the composition of Mexico's economic activity. BALANCE OF INTERNATIONAL PAYMENTS In 1983, 1984, 1985 and in 1987, the current account of the balance of payments was in a surplus position, with surpluses of $5.4 billion, $4.2 billion, $1.2 billion and $3.8 billion respectively. The current account deficit observed in 1986 ($1.6 billion) was due to a sharp fall in oil prices, which more than halved oil exports from $14.6 billion in 1985 to $6.3 billion in 1986. In 1988, 1989 and 1990, the current account showed deficits of $2.5 billion, $6.1 billion and $7.1 billion, respectively, due primarily to the increase in private sector imports and the Government's trade liberalization policies. In 1991, Mexico recorded a current account deficit of $13.79 billion, again due to a surge in imports resulting from the country's economic recovery and lower tariffs. In 1994, Mexico recorded a current account deficit of $28.8 billion. Although the current account deficit has risen from 1988 to 1994, much of the increase in Mexico's imports is attributable to the expansion of Mexican industry associated with increased investment, especially direct foreign investment, the start of NAFTA and a greater demand for Mexican exports using imported components. In 1994, 70.6% (US$56.5 billion) of Mexico's imports were of intermediate and capital goods. Most imports in 1994 A-18 81 originated from the United States (69%), followed by Japan (6%), Germany (3.9%), Canada (2%), France (1.9%), Spain (1.7%), and Brazil (1.5%). The following table sets forth the principal items of Mexico's balance of payments for the periods indicated. BALANCE OF PAYMENTS (1) (IN BILLIONS OF U.S. DOLLARS)
1990 1991 1992 1993 1994(2) 1995(3) ------ ------- ------- ------ -------- ------- Current Account............... $ (7.5) $ (14.6) $ (24.4) $(23.4) $(28.8) $(1.4) Capital Account............... 8.2 25.0 26.6 32.6 11.5 1.3 Change in Gross International Reserves.................... 3.4 7.8 1.2 6.1 (18.9) 0.7
- --------------- (1) Totals may differ due to errors, omissions and rounding. (2) Preliminary. (3) First Quarter 1995. Source: Banco de Mexico EXCHANGE CONTROLS AND FOREIGN EXCHANGE RATES From late 1982 until November 10, 1991, Mexico maintained a dual foreign exchange rate system, with a "controlled" rate and a "free market" rate. The controlled exchange rate applied to certain imports and exports of goods, advances and payments of registered foreign debt, funds used in connection with the in-bond industry and payments of royalties and technical assistance under registered agreements. The free market rate was applicable to all other transactions. The dual system assisted in controlling the value of the peso, especially in 1983 and 1985. In later years, the difference between the two rates was not significant. The average differential between the rates was 3.5% in 1987, 2.2% in 1988, 3.1% in 1989, 1.4% in 1990 and 0.4% as of November 10, 1991. Mexico repealed its exchange control rules effective November 11, 1991 and now maintains only a free, or market, exchange rate. From 1982 through November 10, 1991, Mexican residents and companies were entitled to purchase and were obligated to sell foreign currencies for certain purposes at a controlled rate of exchange (the "Controlled Rate") that was set daily by the Mexican Central Bank. For all transactions to which the Controlled Rate did not apply, foreign currencies could also be purchased, if they were available, or sold at the free-market rate (the "Free Market Rate"), which was generally higher than the Controlled Rate. The Controlled Rate and the Free Market Rate were held nearly constant from December 1987 through December 1988. The price of one dollar at the Controlled Rate increased at a regular rate of 0.001 new pesos per day from December 1988 through May 28, 1990, 0.0008 new pesos per day from May 29 to November 12, 1990, and 0.0004 new pesos per day until November 10, 1991. Effective November 11, 1991, the Controlled Rate was abolished. From November 11, 1991 to October 20, 1992, Banco de Mexico permitted the Free Market Rate to fluctuate according to supply and demand within a band, the lower limit of which was fixed at 3.0152 new pesos per dollar and the upper limit of which increased by 0.0002 new pesos per day from 3.0862 new pesos per dollar. On October 20, 1992, Banco de Mexico announced that, until January 1, 1994, the Free Market Rate would be permitted to fluctuate within a band, the lower limit of which was 3.0512 new pesos per dollar and the upper limit of which would increase by 0.0004 new pesos per day. On October 3, 1993, Banco de Mexico announced that this policy would be extended until December 31, 1994. Fluctuations outside these limits were to be stabilized through open market transactions effected by Banco de Mexico. Prior to December 22, 1994, the Mexican Government had permitted the peso/dollar exchange rate to fluctuate within a band. The ceiling of the band, which was the maximum selling rate, increased 0.0004 new pesos daily, while the floor of the band, which was the minimum buying rate, remained fixed. On December 22, 1994 the Mexican Government A-19 82 eliminated the intervention band and allowed the new peso to float freely against the dollar. A further sharp and rapid devaluation of the new peso ensued, with the new peso losing 35% of its value relative to the dollar between December 21, 1994 and December 31, 1994. By December 31, 1994, Mexico's international reserves had dropped to US$6.1 billion. From January 1 through August 21, 1994, there was increased volatility in the new peso/dollar exchange rate, with the value of the new peso relative to the dollar declining at one point to an exchange rate of NPs. 3.375 to US$1.00, a decline of approximately 8.69% from the high of NPs. 3.1060 reached in early February. This increased volatility has been attributed to a number of political and economic factors, including investor reactions to the increase in U.S. interest rates, lower than expected economic growth in Mexico, uncertainty concerning the Mexican presidential elections in August 1994 and certain related developments. In March 1994, the U.S. Treasury Department and Canada announced that they had extended to Mexico a swap line of credit in the amount of US$8.8 billion for use in connection with any intervention by Banco de Mexico in support of the new peso. The following table shows the peso to dollar exchange rates for the dates and periods indicated. EXCHANGE RATES (PESOS PER DOLLAR)
FREE MARKET RATE CONTROLLED RATE(1) ---------------------------- ---------------------------- YEAR END OF PERIOD AVERAGE(2) END OF PERIOD AVERAGE(2) - ----------------------------------------- ------------- ---------- ------------- ---------- 1987..................................... 2,227.5 1,405.8 2,198.5 1,366.7 1988..................................... 2,297.5 2,289.6 2,257.0 2,250.3 1989..................................... 2,680.75 2,483.4 2,637.0 2,453.2 1990..................................... 2,943.15 2,838.4 2,939.4 2,807.3 1991..................................... 3,071.00 3,015.7 3,065.4 3,006.8 1992..................................... 3,115.4 3,094.7 -- -- 1993(3).................................. 3.1059 3.1077 -- -- 1994(3).................................. 5.3250 3.3751 -- --
- --------------- (1) Controlled Rate through November 10, 1991 only. (2) Annual average of the daily rates published by Banco de Mexico. (3) New Pesos. Source: Banco de Mexico Pursuant to modifications made to article 28 of the Mexican Constitution and the creation of a new law, the Ley del Banco de Mexico (The Law for the Bank of Mexico) approved by the Mexican Congress during late 1993, the Banco de Mexico became independent of the Mexican Government on April 1, 1994. The objective is to have Mexico's central bank take such measures as may be needed to maintain the purchasing power of Mexico's currency. To achieve this end the Banco de Mexico may not be ordered by any governmental authority to grant any entity either public or private credit. The Banco de Mexico is controlled by a Board of Governors made up of five Governors, which are appointed for staggered terms and may not be removed from office. These measures are designed to foster greater stability in the value of the new peso. DIRECT FOREIGN INVESTMENT IN MEXICO Under the Mexican Constitution and the Foreign Investment Law business activities related to petroleum, basic petrochemicals, nuclear power, mining of certain minerals, electricity, railways and telecommunications, among others, are served exclusively to the Mexican public sector, and business activities related to radio and television and public transportation are reserved exclusively to Mexican investors. Furthermore, ownership by foreigners of real property in zones along the country's borders and seacoasts is restricted. While some other restrictions apply, in recent years, Mexico has been opening its market to greater direct foreign investment. On December 28, 1993, a new Ley de Inversion Extranjera ("Foreign Investment Law") went into effect. The Foreign Investment Law established a new set of rules to provide legal certainty to foreign A-20 83 investors and promote the country's competitiveness. The new Foreign Investment Law liberalizes certain restrictions on foreign investment in Mexico, permitting, if certain conditions are satisfied, the ownership by foreign investors of 100% of the capital stock of a Mexican company. The law also sets forth which activities of the economy continue to be reserved to the Government or to the Mexican investors and lists the different activities in which foreign investment may not exceed 10%, 25%, 30% and 49% of the total investment. The Government recognizes that Mexico is competing for capital with many other countries, including the former communist nations in Eastern and Central Europe, but believes that, because of the increased competitiveness and productivity of its economy, Mexico will be able to maintain access to sources of investment capital. If certain requirements are met, the Foreign Investment Law allows foreign investors to purchase equity securities traded on the Mexican Stock Exchange that would otherwise be restricted to Mexican investors. Thus, with the authorization of the Ministry of Commerce and Industrial Development, investment trusts may be established by Mexican banks acting as trustees. These trusts issue ordinary certificates of participation that may be acquired by foreign investors; the certificates grant only economic rights to their holders and do not confer voting rights in the companies whose stock is held by the trusts (such voting rights being exercisable only by the trustee). During 1994, new direct foreign investment in Mexico totaled US$8.0 billion, representing a 42.1% increase over 1993. US$1.0 billion corresponded to projects authorized by the National Foreign Investment Commission ("NFIC") and US$7.0 billion corresponded to 3,997 projects that were only required to be registered with the National Registry of Foreign Investments ("RNIC"). At December 31, 1994, total accumulated direct foreign investment in Mexico, including new foreign investment projects authorized by the NFIC, amounted to approximately US$56.0 billion. Of the total direct foreign investment accumulated at the end of 1994, excluding that in securities, 40% has been channeled to manufacturing, 39.9% to services, 56.0% to commerce, 3.5% to construction, 0.2% to mining and agriculture. PUBLIC FINANCE At the beginning of 1983, in the wake of the financial crisis which began in 1982, the Mexican government began to reform Mexican public finance. The reform consisted of a substantial reduction in the number of enterprises under public sector control and increased fiscal discipline which resulted in a reduction in government expenditures. At the same time fiscal revenues have increased as a result of tax reforms which broadened the tax base. The combined effect of these policies has created a surplus in the primary fiscal balance, which is measured as the difference between non-formed public sector revenues and expenditures. The primary fiscal balance which amounted to a deficit equivalent to 8% of GDP in 1981, registered a surplus equal to 8.7% of GDP in 1991 and 2.3% in 1994. As a result of the fiscal policy implemented, the public sector deficit was reduced from 16.0% of GDP in 1987 to a surplus of 0.5% in 1992 (exclusive of the revenues from the sale of Government owned enterprises). For 1994, preliminary figures indicate a deficit of 0.3% of GDP (exclusive of the revenues from the sale of Government-owned enterprises). The federal budget of the Mexican Government consists of revenues and expenditures of the federal government and of certain government agencies whose particular budgets require specific legislative approval ("budget-controlled agencies"). Among the most important budget-controlled agencies are Pemex, Compania Nacional de Subsistencias Populares ("Conasupo"), Comision Federal de Electricidad, Ferrocarriles Nacionales de Mexico and the social security and social welfare agencies. A-21 84 FEDERAL GOVERNMENT BUDGET The following table sets forth the actual and budgeted revenues and expenditures of the Mexican Government. REVENUES AND EXPENDITURES OF THE MEXICAN GOVERNMENT(1) (IN BILLIONS OF NEW PESOS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC 31, 1988 DEC 31, 1989 DEC 31, 1990 DEC 31, 1991 DEC 31, 1992 DEC 31, 1993 DEC 31, 1994(2) ------------- ------------- ------------- ------------- ------------- ------------- ---------------- Revenues........ 65.5 90.2 117.7 177.4 210.4 194.8 213.5 PEMEX......... 13.5 18.0 26.1 31.2 34.5 35.0 31.1 Other......... 52.1 72.2 91.6 146.2 176.0 159.8 182.3 Taxes....... 47.3 60.9 79.1 103.5 126.5 143.0 160.0 Other Non-tax Revenues... 4.7 11.3 12.5 42.6 49.4 16.8 22.3 Expenditures.... 103.3 115.8 137.1 149.4 164.4 190.7 223.4 Current....... 98.8 107.5 118.7 125.9 139.0 162.9 191.3 Interest Payments... 59.3 57.4 57.4 42.4 35.6 28.9 27.1 Transfers... 11.1 12.7 13.6 21.0 39.0 59.0 77.2 Capital....... 7.5 9.9 18.3 19.6 24.9 22.3 29.9 Adjustments..... (3.0) (1.6) 0.2 3.8 0.4 5.5 2.2 Budgetary surplus or (deficit)..... (37.8) (25.6) (19.4) 28.0 46.0 4.1 (9.9)
- --------------- (1) Negative figures indicate a deficit. (2) Preliminary. Source: Banco de Mexico, Secretaria de Hacienda y Credito Publico Revenues of the Mexican Government consist principally of income taxes imposed on individuals and on businesses (including budget--and administratively-controlled agencies), value added tax, excise taxes, duties on imports and exports and capital receipts. The Mexican Government's expenditures consist of current expenditures and capital expenditures and include allocations to budget--and administratively-controlled agencies. A-22 85 EXTERNAL DEBT The following table sets forth a summary of the total external public debt of Mexico and debt ratios for the year 1988 through 1994. TOTAL EXTERNAL DEBT (IN BILLIONS OF U.S. DOLLARS, EXCEPT PERCENTAGES)(1)
1988 1989 1990 1991 1992 1993 1994(2) ------ ------ ------ ------ ------ ------ ------- Total External debt................................... $101.8 $ 95.3 $104.3 $116.6 $117.6 $131.9 $142.6 Total External debt as a percentage of GDP............ 58.7% 46.1% 42.7% 40.6% 35.7% 35.9 37.8 Total External debt as a percentage of exports of goods and services.................................. 241.8 198.1 186.1 201.5 190.7 194.6 182.6
- --------------- (1) Amounts calculated using the Controlled Exchange Rate. (2) Preliminary. Source: Banco de Mexico, Secretaria de Hacienda y Credito Publico DEBT RECORD Following the restructuring in 1946 of debt incurred prior to the Revolution of 1910, all external debt issued, assumed or guaranteed by the Mexican federal government was fully serviced until August 1982, when the Mexican Government requested and received from its major international bank creditors a 90-day rollover of principal payments on most public sector external debt. Based on the "restructure principles" which were established in December 1982, the government signed an agreement in October 1983 with international bank creditors to restructure, over eight years with a four year grace period, approximately $23 billion of public sector debt maturing between August 1982 and December 1984. Further negotiations on the restructuring of certain public debt were carried out during 1985 and 1987. The 1989-92 Financing Package for Mexico, implemented in March 1990, was intended to reduce the principal amount of, and the debt service burden associated with, Mexico's commercial bank debt, and to secure sufficient future financing to allow Mexico to resume sustained economic growth. The Financing Package offered commercial banks options for debt reduction, interest reduction and new money. Under the interest reduction option, existing indebtedness was exchanged for 30-year bonds ("Par Bonds") that, in the case of bonds denominated in U.S. dollars, bear interest at the fixed rate of 6.25% per annum. Under the principal reduction option, existing indebtedness was exchanged for 30-year bonds ("Discount Bonds") having a principal amount equal to 65% of the principal amount of such existing indebtedness and an interest rate of LIBOR plus 13/16% per annum. Under the new money option, certain banks committed to provide Mexico with new money (through a combination of bonds, traditional bank credits and bank credits prepayable to fund trade credits or public sector loans) over three years in an aggregate amount equal to 25% of their holdings of then existing indebtedness. A-23 86 APPENDIX B [FORM OF SUBSCRIPTION CERTIFICATE] BY MAIL, EXPRESS MAIL BY HAND: OR OVERNIGHT COURIER: PNC Bank, National Association PNC Bank, National Association c/o ACS c/o PNC Trust Company 915 Broadway, 5th Floor 40 Broad Street, 5th Floor New York, New York 10010 New York, New York 10004
THE MEXICO EQUITY AND INCOME FUND, INC. SUBSCRIPTION RIGHT FOR SHARES OF COMMON STOCK This Subscription Certificate represents the number of Rights set forth on the reverse side. The registered holder hereof (the "Holder") is entitled to acquire one (1) Share of the Common Stock of The Mexico Equity and Income Fund, Inc. (the "Fund") for each three (3) Rights held pursuant to the Primary Subscription upon the terms and conditions and at the Subscription Price for each share of Common Stock as specified in the Fund's Prospectus dated July 24, 1995 (the "Prospectus"). The terms and conditions of the rights offering (the "Offer") set forth in the Prospectus are incorporated herein by reference. To subscribe for Shares of Common Stock, the Holder must present to PNC Bank, National Association (the "Subscription Agent"), prior to 5:00 p.m., New York time, on the Expiration Date, either: (1) a properly completed and executed Subscription Certificate and a money order or check drawn on a bank located in the United States of America and payable to The Mexico Equity and Income Fund, Inc. for an amount equal to the number of Shares subscribed for under the Primary Subscription (and, if such Holder is electing to exercise the Over-Subscription Privilege, under the Over-Subscription Privilege) multiplied by the Subscription Price; or (2) a Notice of Guaranteed Delivery guaranteeing delivery of (i) a properly completed and executed Subscription Certificate and (ii) a money order or check drawn on a bank located in the United States of America and payable to The Mexico Equity and Income Fund, Inc. for an amount equal to the number of Shares subscribed for under the Primary Subscription (and, if such Holder is electing to exercise the Over-Subscription Privilege, under the Over-Subscription Privilege) multiplied by the Subscription Price (which certificate and money order or check must then be delivered by the close of business on the third Business Day after the Expiration Date) (the "Protect Period"). If the Holder of this certificate is entitled to subscribe for additional shares pursuant to the Over-Subscription Privilege, Part B of the Subscription Certificate must be completed to indicate the maximum number of Shares for which such privilege is being exercised. No later than seven Business Days following the Protect Period, the Subscription Agent will send to each Exercising Rights Holder (or, if the Fund's shares are held by Cede or any other depository or nominee, to Cede or such other depository or nominee), the share certificates representing the Shares purchased pursuant to the Primary Subscription and, if applicable, the Over-Subscription Privilege, along with a letter explaining the allocation of Shares pursuant to the Over-Subscription Privilege. Any excess payment to be refunded by the Fund to an Exercising Rights Holder who is not allocated the full amount of Shares subscribed for pursuant to the Over-Subscription Privilege will be mailed by the Subscription Agent. An Exercising Rights Holder will have no right to rescind a purchase after the Subscription Agent has received a completed Subscription Certificate or a Notice of Guaranteed Delivery. Any excess payment to be refunded by the Fund to a Rights Holder will be mailed by the Subscription Agent to him as promptly as practicable. If the Holder does not make payment of any amounts due in respect of Shares subscribed for, the Fund and the Subscription Agent reserve the right to (i) find other stockholders for the subscribed and unpaid for Shares; (ii) apply any payment actually received by it toward the purchase of the greatest whole number of Shares which could be acquired by such holder upon exercise of the Primary Subscription and/or Over-Subscription Privilege, and/or (iii) exercise any and all other rights and/or remedies to which it may be entitled, including, without limitation, the right to set-off against payments actually received by it with respect to such subscribed Shares. This Subscription Certificate may be transferred, in the same manner and with the same effect as in the case of a negotiable instrument payable to specific persons, by duly completing and signing the assignment on the reverse side hereof. Capitalized terms used but not defined in this Subscription Certificate shall have the meanings assigned to them in the Prospectus, dated July 24, 1995, relating to the Rights. THE MEXICO EQUITY AND INCOME FUND, INC. By: -------------------------------------- Alan H. Rappaport Chairman THIS SUBSCRIPTION RIGHT IS TRANSFERABLE AND MAY BE COMBINED OR DIVIDED (BUT ONLY INTO SUBSCRIPTION CERTIFICATES EVIDENCING A WHOLE NUMBER OF RIGHTS) AT THE OFFICE OF THE SUBSCRIPTION AGENT Any questions regarding this Subscription Certificate and the Offer may be directed to the Information Agent, Shareholder Communications Corporation toll-free at (800) 733-8481, ext. 318, or collect at (212) 805-7000. B-1 87 SUBSCRIPTION CERTIFICATE NUMBER: NUMBER OF RIGHTS: MAXIMUM NUMBER OF PRIMARY SHARES CUSIP NO: EXPIRATION DATE: August 15, 1995
PLEASE COMPLETE ALL APPLICABLE INFORMATION SECTION I: TO SUBSCRIBE: I hereby irrevocably subscribe for the dollar amount of Common Stock indicated as the total of A and B and C below upon the terms and conditions specified in the Prospectus related hereto, receipt of which is acknowledged. TO SELL: If I have checked either the box on line D or the box on line E, I authorize the sale of Rights by the Dealer Manager according to the procedures described in the Prospectus. The check for the proceeds of sale will be mailed to the address of record. PLEASE CHECK ('X') BELOW:
/ / A. Primary Subscription /3 = .000 X $ 9.125 = $ (Rights Exercised) (Full Shares of (Subscription Price) (Amount Required) Common Stock Requested) / / B. Over-Subscription Privilege .000 X $ 9.125 = $ (*) (Full Shares of (Subscription Price) (Amount Required) Common Stock Requested)
-------------------- (*) The Primary Over-Subscription Privilege may be exercised only by Record Date Stockholders who exercise all of the Rights issued to them, as described in the Prospectus.
/ / C. Secondary Over-Subscription Privilege .000 X $ 9.125 = $ (**) (Full Shares of (Subscription Price) (Amount Required) Common Stock Requested)
Amount of Check or Money Order Enclosed (Total of A + B + C) = $ Make check payable to "The Mexico Equity and Income Fund, Inc." (**) The Secondary Over-Subscription Privilege may be exercised by any Exercising Rights Holders, as described in the Prospectus. / / D. Sell any remaining unexercised Rights / / E. Sell all of my Rights F. The following Broker-Dealer is hereby designated as having been instrumental in the exercise of the Rights: / /Oppenheimer & Co., Inc. Account # / /Other Firm: Account #
I hereby agree that if I fail to pay in full for the Shares for which I have subscribed, the Fund may exercise any of the remedies provided for in the Prospectus. Please provide your Day ( ) Signature of Subscriber(s) telephone number Evening ( )
SECTION II: TO TRANSFER RIGHTS: (except pursuant to D and E above) For value received, of the Rights represented by this Subscription Certificate are assigned to: Social Security Number or Tax ID of Assignee (Print Full Name of Assignee) Signature(s) of Assignee(s) (Print Full Address including postal Zip Code)
The signature(s) must correspond with the name(s) as written upon the face of this Subscription Certificate, in every particular, without alteration. IMPORTANT: For Transfer, a Signature Guarantee must be provided by an eligible financial institution as defined in Rule 17 Ad-15 of the Securities Exchange Act of 1934, as amended, subject to the standards and procedures adopted by the issuer. SIGNATURE GUARANTEED BY:
PROCEEDS FROM THE SALE OF RIGHTS MAY BE SUBJECT TO WITHHOLDING OF U.S. TAXES UNLESS THE SELLER'S CERTIFIED U.S. TAXPAYER IDENTIFICATION NUMBER (OR CERTIFICATION REGARDING FOREIGN STATUS) IS ON FILE WITH THE SUBSCRIPTION AGENT AND THE SELLER IS NOT OTHERWISE SUBJECT TO U.S. BACKUP WITHHOLDING. / / CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY DELIVERED TO THE SUBSCRIPTION AGENT PRIOR TO THE DATE HEREOF AND COMPLETE THE FOLLOWING: NAME(S) OF REGISTERED OWNER(S): WINDOW TICKET NUMBER (IF ANY): DATE OF EXECUTION OF NOTICE OF GUARANTEED DELIVERY: NAME OF INSTITUTION WHICH GUARANTEED DELIVERY: B-2 88 APPENDIX C [FORM OF NOTICE OF GUARANTEED DELIVERY] NOTICE OF GUARANTEED DELIVERY FOR SHARES OF COMMON STOCK OF THE MEXICO EQUITY AND INCOME FUND, INC. SUBSCRIBED FOR UNDER PRIMARY SUBSCRIPTION AND THE OVER-SUBSCRIPTION PRIVILEGE As set forth in the Prospectus under "The Offer--Payment for Shares," this form or one substantially equivalent hereto may be used as a means of effecting subscription and payment for all Shares of The Mexico Equity and Income Fund, Inc. Common Stock subscribed for under the Primary Subscription and the Over- Subscription Privilege. Such form may be delivered by hand or sent by facsimile transmission, overnight courier or mail to the Subscription Agent. The Subscription Agent is: PNC Bank, National Association By Mail, Express Mail, By Hand: or Overnight Courier: c/o ACS c/o PNC Trust Company 915 Broadway, 5th Floor 40 Broad Street, 5th Floor New York, New York 10010 New York, New York 10004 By Facsimile: Telecopier (212) 505-4576 Confirm by Telephone (212) 505-4559 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A TELECOPY OR FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY The New York Stock Exchange member firm or bank or trust company which completes this form must communicate the guarantee and the number of Shares subscribed for (under both the Primary Subscription and the Over-Subscription Privilege) to the Subscription Agent and must deliver this Notice of Guaranteed Delivery, guaranteeing delivery of (i) payment in full for all subscribed Shares and (ii) a properly completed and executed Subscription Certificate (which certificate and check must then be delivered by the close of business on the third business day after the Expiration Date) to the Subscription Agent prior to 5:00 p.m., New York time, on the Expiration Date (August 15, 1995, unless extended). Failure to do so will result in a forfeiture of the Rights. C-1 89 GUARANTEE The undersigned, a member firm of the New York Stock Exchange or a bank or trust company, guarantees delivery to the Subscription Agent by the close of business (5:00 p.m., New York City time) on the third business day after the Expiration Date (August 15, 1995, unless extended) of (A) a properly completed and executed Subscription Certificate and (B) payment of the full Subscription Price for Shares subscribed for in the Primary Subscription and pursuant to the Over-Subscription Privilege, as subscription for such Shares is indicated herein or in the Subscription Certificate. NUMBER OF SHARES SUBSCRIBED FOR IN THE PRIMARY SUBSCRIPTION FOR WHICH YOU ARE GUARANTEEING DELIVERY OF RIGHTS AND PAYMENT: ________________________________ NUMBER OF SHARES SUBSCRIBED FOR PURSUANT TO THE PRIMARY OVER-SUBSCRIPTION PRIVILEGE FOR WHICH YOU ARE GUARANTEEING DELIVERY OF RIGHTS AND PAYMENT: ________________________________ NUMBER OF SHARES SUBSCRIBED FOR PURSUANT TO THE SECONDARY OVER-SUBSCRIPTION PRIVILEGE FOR WHICH YOU ARE GUARANTEEING DELIVERY OF RIGHTS AND PAYMENT: ________________________________ Number of Rights to be delivered: ________________________________ Total Subscription Price payment to be delivered: ________________________________ Method of Delivery [circle one]: A. Through DTC* B. Direct to Corporation
Please note that if you are guaranteeing for over-subscription Shares and are a DTC participant, you must also execute and forward to PNC Bank, National Association a Beneficial Owner Certification Form. _________________________________________ _________________________________________ NAME OF FIRM AUTHORIZED SIGNATURE _________________________________________ _________________________________________ ADDRESS TITLE _________________________________________ _________________________________________ ZIP CODE NAME (PLEASE TYPE OR PRINT) _________________________________________ _________________________________________ NAME OF REGISTERED HOLDER (IF APPLICABLE) DTC PARTICIPANT NUMBER _________________________________________ _________________________________________ TELEPHONE NUMBER DATE
* IF THE RIGHTS ARE TO BE DELIVERED THROUGH DTC, A REPRESENTATIVE OF THE FUND WILL PHONE YOU WITH A PROTECT IDENTIFICATION NUMBER, WHICH NEEDS TO BE COMMUNICATED BY YOU TO DTC. C-2 90 APPENDIX D [FORM OF NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM] THE MEXICO EQUITY AND INCOME FUND, INC. RIGHTS OFFERING NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM PLEASE COMPLETE ALL APPLICABLE INFORMATION BY MAIL, EXPRESS MAIL BY HAND: OR OVERNIGHT COURIER: PNC Bank, National Association PNC Bank, National Association c/o ACS c/o PNC Trust Company 915 Broadway, 5th Floor 40 Broad St. 5th Floor New York, New York 10010 New York, New York 10010
THIS FORM IS TO BE USED ONLY BY NOMINEE HOLDERS TO EXERCISE THE OVER-SUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO WHICH THE PRIMARY SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE FACILITIES OF A COMMON DEPOSITORY. ALL OTHER EXERCISES OF OVER-SUBSCRIPTION PRIVILEGES MUST BE EFFECTED BY THE DELIVERY OF THE SUBSCRIPTION CERTIFICATES. --------------- THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE FUND'S PROSPECTUS DATED JULY 24, 1995 (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE FUND. --------------- VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY 5:00 PM, NEW YORK TIME, ON AUGUST 15, 1995, UNLESS EXTENDED BY THE FUND (THE "EXPIRATION DATE"). --------------- 1. The undersigned hereby certifies to the Subscription Agent that it is a participant in _______________________ [Name of Depository] (the "Depository") and that it has either (i) exercised the Primary Subscription Privilege in respect of Rights and delivered such exercised Rights to the Subscription Agent by means of transfer to the Depository Account of the Fund or (ii) delivered to the Subscription Agent a Notice of Guaranteed Delivery in respect of the exercise of the Primary Subscription Privilege and will deliver the Rights called for in such Notice of Guaranteed Delivery to the Subscription Agent by means of transfer to such Depository Account of the Fund. 2. With respect to Record Date Stockholders, the undersigned hereby exercises the Primary Over-Subscription Privilege to purchase, to the extent available, ____ shares of Common Stock and certifies to the Subscription Agent that such Primary Over-Subscription Privilege is being exercised for the account or accounts of persons (which may include the undersigned) on whose behalf all primary subscription rights have been exercised.(*) 3. With respect to any Exercising Rights Holders, the undersigned hereby exercises the Secondary Over-Subscription Privilege to purchase, to the extent available, ____ shares of Common Stock. 4. The undersigned understands that payment of the Subscription Price per share of each share of Common Stock subscribed for pursuant to the Over-Subscription Privilege must be received by the Subscription Agent at or before 5:00 p.m. New York time on the Expiration Date and represents that such payment, in the aggregate amount of $___________________, either (check appropriate box): / / has been or is being delivered to the Subscription Agent pursuant to the Notice of Guaranteed Delivery referred to above, or / / is being delivered to the Subscription Agent herewith, or / / has been delivered separately to the Subscription Agent; and, in the case of funds not delivered pursuant to a Notice of Guaranteed Delivery, is or was delivered in the manner set forth below (check appropriate box and complete information relating thereto): / / uncertified check / / certified check / / bank draft __________________________________________________________ _____________________________________________________________ Primary Subscription Confirmation Number Name of Nominee Holder __________________________________________________________ _____________________________________________________________ Depository Participant Number Address _____________________________________________________________ City State Zip Code By: _________________________________________________________ Name: Title: Contact Name: ____________________________________________ Phone Number: ____________________________________________ Dated: _________________, 1995
(*) PLEASE ATTACH A BENEFICIAL OWNER LISTING CONTAINING THE RECORD DATE SHARE POSITION, THE NUMBER OF PRIMARY SHARES SUBSCRIBED FOR AND THE NUMBER OF SHARES REQUESTED IN THE PRIMARY OVERSUBSCRIPTION AND THE SECONDARY OVERSUBSCRIPTION, IF APPLICABLE, BY EACH SUCH OWNER. D-1 91 THE MEXICO EQUITY AND INCOME FUND, INC. BENEFICIAL OWNER CERTIFICATION The undersigned, a bank, broker or other nominee holder of Rights ("Rights") to purchase shares of Common Stock, $0.001 par value ("Common Stock"), of The Mexico Equity and Income Fund, Inc. (the "Fund") pursuant to the Rights offering (the "Offer") described and provided for in the Fund's Prospectus dated July 24, 1995 (the "Prospectus"), hereby certifies to the Fund and to PNC Bank, National Association, as Subscription Agent for such Offer, that for each numbered line filled in below the undersigned has exercised, on behalf of the beneficial owner thereof (which may be the undersigned), the number of Rights specified on such line pursuant to the Primary Subscription (as defined in the Prospectus) and such beneficial owner wishes to subscribe for the purchase of additional shares of Common Stock pursuant to the Over-Subscription Privilege (as defined in the Prospectus), in the amount set forth in the third column of such line:
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF RIGHTS REQUESTED REQUESTED EXERCISED PURSUANT TO PURSUANT TO PURSUANT TO PRIMARY SECONDARY RECORD DATE PRIMARY OVER-SUBSCRIPTION OVER-SUBSCRIPTION SHARES SUBSCRIPTION PRIVILEGE PRIVILEGE ----------- ----------------- ----------------- ----------------- 1) ----------------- ----------------- ----------------- ----------------- 2) ----------------- ----------------- ----------------- ----------------- 3) ----------------- ----------------- ----------------- ----------------- 4) ----------------- ----------------- ----------------- ----------------- 5) ----------------- ----------------- ----------------- ----------------- 6) ----------------- ----------------- ----------------- ----------------- 7) ----------------- ----------------- ----------------- ----------------- 8) ----------------- ----------------- ----------------- ----------------- 9) ----------------- ----------------- ----------------- ----------------- 10) ----------------- ----------------- ----------------- -----------------
_______________________________________________ Name of Nominee Holder By: ___________________________________________ Name: Title: Dated: __________________________________, 1995 Provide the following information if applicable: _______________________________________________________ Name of Broker: __________________________________________________ DEPOSITORY TRUST CORPORATION ("DTC") PARTICIPANT NUMBER _______________________________________________________ Address: _________________________________________________________ DTC PRIMARY SUBSCRIPTION CONFIRMATION NUMBER(S)
D-2 92 ================================================================================ NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE HEREIN, IN CONNECTION WITH THIS OFFER, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE SUPPLEMENTED OR AMENDED ACCORDINGLY. ------------------ TABLE OF CONTENTS
PAGE ------ Prospectus Summary..................... 3 Fee Table.............................. 11 Financial Highlights................... 12 Market and Net Asset Value Information.......................... 13 The Offer.............................. 14 The Fund............................... 22 Use of Proceeds........................ 23 Risk Factors........................... 23 Investment Objective and Policies...... 29 Investment Restrictions................ 34 Management of the Fund................. 35 The Mexican Securities Market.......... 41 Portfolio Transactions................. 48 Dividends and Distributions; Dividend Reinvestment Plan.................... 49 Net Asset Value........................ 50 Taxation............................... 51 Common Stock........................... 56 Distribution Arrangements.............. 58 Custodians and Transfer and Dividend- Paying Agent......................... 59 Legal Matters.......................... 59 Experts................................ 59 Official Documents..................... 59 Further Information.................... 60 Financial Statements................... 61 Appendix A--The United Mexican States............................... A-1 Appendix B--Form of Subscription Certificate.......................... B-1 Appendix C--Form of Notice of Guaranteed Delivery.................. C-1 Appendix D--Form of Nominee Holder Over-Subscription Exercise Form...... D-1 ------------------
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF. ================================================================================ ================================================================================ 3,000,000 SHARES THE MEXICO EQUITY AND INCOME FUND, INC. COMMON STOCK ISSUABLE UPON EXERCISE OF RIGHTS TO SUBSCRIBE FOR SUCH SHARES OF COMMON STOCK ------------------------------- P R O S P E C T U S ------------------------------- OPPENHEIMER & CO., INC. JULY 24, 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 93 PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (1) FINANCIAL STATEMENTS Portfolio of Investments at July 31, 1994.+ Statement of Assets and Liabilities at July 31, 1994.+ Statement of Operations for the fiscal year ended July 31, 1994.+ Statement of Changes in Net Assets for each of the two fiscal years ended July 31, 1994 and 1993.+ Financial Highlights.+ Notes to Financial Statements.+ Report of Independent Accountants dated September 23, 1994.+ Portfolio of Investments at January 31, 1995 (Unaudited).++ Statement of Assets and Liabilities at January 31, 1995 (Unaudited).++ Statement of Operations for the six months ended January 31, 1995 (Unaudited).++ Statement of Changes in Net Assets for the six months ended January 31, 1995 (Unaudited) and for the fiscal year ended July 31, 1994.++ Financial Highlights.++ Notes to Financial Statements.++ - --------------- + Incorporated by reference to the Fund's Annual Report for the year ended July 31, 1994, filed on October 3, 1994. ++ Incorporated by reference to the Fund's Semi-Annual Report for the six months ended January 31, 1995, filed on March 31, 1995. (2) EXHIBITS (a)(1) -- Articles of Incorporation (previously filed as Exhibit 1 to the Registrant's Registration Statement on Form N-2 (File No. 33-35089)). (a)(2) -- Articles of Amendment to the Articles of Incorporation (previously filed as Exhibit 1(b) to Pre-Effective Amendment Nos. 2 and 3 to the Registrant's Registration Statement on Form N-2 (File No. 33-35089)). (b) -- Amended and Restated By-Laws (previously filed as Exhibit 2(b) to Pre-Effective Amendment No. 2 to the Registrant's Registration Statement on Form N-2 (File No. 33-35089)). (c) -- Inapplicable. (d)(1) -- Specimen certificate for Common Stock, par value $.001 per share (previously filed as Exhibit 4 to Pre-Effective Amendment No. 4 to the Registrant's Registration Statement on Form N-2 (File No. 33-35089)). (d)(2) -- Form of Subscription Certificate (included on pages B-1 to B-3 of the Prospectus forming part of this Registration Statement). (d)(3) -- Form of Notice of Guaranteed Delivery (included on pages C-1 to C-2 of the Prospectus forming part of this Registration Statement). (d)(4) -- Form of Nominee Holder Oversubscription Exercise Form (included on pages D-1 to D-2 of the Prospectus forming part of this Registration Statement). (d)(5) -- Form of Subscription Agent Agreement between the Fund and PNC Bank, National Association.* (d)(6) -- Form of Information Agent Agreement between the Fund and Shareholder Communications Corporation.*
C-1 94 (e) -- Dividend Reinvestment Plan (previously filed as Exhibit 10(b) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (f) -- Inapplicable. (g)(1) -- Investment Advisory Agreement dated as of October 14, 1991 between the Registrant and Acci Worldwide, S.A. de C.V. (previously filed as Exhibit 6(a) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (g)(2) -- U.S. Co-Advisory Agreement dated as of August 14, 1990 between the Registrant and Advantage Advisers, Inc. (previously filed as Exhibit 6(b) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (h)(1) -- Form of Dealer Manager Agreement between the Fund and Oppenheimer & Co., Inc.* (h)(2) -- Form of Soliciting Dealer Agreement between the Fund and Soliciting Dealers.* (h)(3) -- Form of Selling Group Agreement between the Dealer Manager and Selling Group Members.* (i) -- Inapplicable. (j)(1) -- Custodian Services Agreement dated as of August 13, 1990 between Registrant and PNC Bank, National Association (previously filed as Exhibit 9(a) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (j)(2) -- Sub-Custodian Agreement dated as of August 21, 1990 among Citibank, N.A., the Registrant and PNC Bank, National Association (previously filed as Exhibit 9(b) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (k)(1) -- Transfer Agency Services Agreement dated as of August 14, 1990 between Registrant and PNC Bank, National Association (previously filed as Exhibit 10(a) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (k)(2) -- Administration Agreement dated as of August 14, 1990 between Registrant and Oppenheimer & Co., Inc. (previously filed as Exhibit 10(c) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (k)(3) -- Sub-Administration Agreement and Accounting Services Agreement dated as of August 14, 1990 by and between Oppenheimer & Co., Inc. and PFPC Inc. (previously filed as Exhibit 10(d) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (l)(1) -- Opinion and Consent of Rogers & Wells.* (l)(2) -- Opinion and Consent of Piper & Marbury L.L.P.* (l)(3) -- Opinion and Consent of Ritch, Heather y Mueller, S.C.* (m) -- Irrevocable Appointment of Agent For Service of Process, Pleadings and Other Papers by Corporation Non-Resident Investment Adviser by Acci Worldwide, S.A. de C.V. (previously filed on Form 5-R on June 28, 1990 (File No. 801-37171)). (n) -- Consent of Independent Accountants.* (o) -- Inapplicable. (p) -- Inapplicable. (q) -- Inapplicable.
- --------------- * Filed herewith. C-2 95 ITEM 25. MARKETING ARRANGEMENTS See Exhibits (h)(1), (h)2) and(h)(3) to this Registration Statement. ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the expenses to be incurred in connection with the Offer described in this Registration Statement: Registration Fees............................................................... $ 27,969 National Association of Securities Dealers, Inc. fees........................... 8,611 New York Stock Exchange listing fee............................................. 10,500 Printing (other than stock certificates)........................................ 160,000 Fees and expenses of qualification under state securities laws (including fees of counsel)................................................................... 17,500 Accounting fees and expenses.................................................... 18,000 Legal fees and expenses......................................................... 125,000 Dealer Manager expense reimbursement............................................ 100,000 Information Agent's fees and expenses........................................... 38,000 Subscription Agent's fees and expenses.......................................... 30,000 Miscellaneous................................................................... 14,420 -------- Total......................................................................... $550,000 ========
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT None. ITEM 28. NUMBER OF HOLDERS OF SECURITIES (AS OF JULY 20, 1995)
NUMBER OF TITLE OF CLASS RECORD HOLDERS - ----------------------------------------------------------------------------- -------------- Common Stock, $0.001 par value per share..................................... 1,720
ITEM 29. INDEMNIFICATION Section 2-418 of the General Corporation Law of the State of Maryland, Article XI of the Fund's Articles of Incorporation, Article VII of the Fund's By-Laws and the Dealer Manager Agreement filed as Exhibit (h)(1) provide for indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "1933 Act") may be permitted to directors, officers and controlling persons of the Fund, pursuant to the foregoing provisions or otherwise, the Fund has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Fund of expenses incurred or paid by a director, officer or controlling person of the Fund in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Fund will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER The description of the business of the Mexican Adviser and U.S. Co-Adviser is set forth under the caption "Management of the Fund" in the Prospectus forming part of this Registration Statement. Neither the Mexican Adviser nor the U.S. Co-Adviser has any other business of a substantial nature. C-3 96 Information as to the directors and officers of each of the Mexican Adviser and the U.S. Co-Adviser is included in the Mexican Adviser's and the U.S. Co-Adviser's respective Forms ADV (File No. 801-37171 and 801-36997, respectively) and is incorporated herein by reference thereto. ITEM 31. LOCATION OF ACCOUNTS AND RECORDS The accounts and records of the Registrant are maintained at the office of PNC Bank, National Association, 400 Bellevue Parkway, Wilmington, Delaware 19809. ITEM 33. UNDERTAKINGS (a) Registrant undertakes to suspend the offering of its shares until it amends its Prospectus if: (1) subsequent to the effective date of this Registration Statement, the net asset value per share declines more than 10% from its net asset value per share as of the effective date of the Registration Statement; or (2) the net asset value increases to an amount greater than its net proceeds as stated in the Prospectus. (b) Registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) that for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the bona fide offering thereof. (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) that for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (c) To comply with the restrictions on indemnification set forth in Investment Company Act Release No. IC-11330, September 2, 1980. C-4 97 SIGNATURES Pursuant to the requirements of the Securities Act of 1993 and the Investment Company Act of 1940, the Registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and the State of New York, on the 21st day of July, 1995. THE MEXICO EQUITY AND INCOME FUND, INC. By: /s/ ALAN H. RAPPAPORT Alan H. Rappaport Chairman Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ------------------------------------- -------------------------------------- ----------------- /s/ ALAN H. RAPPAPORT President, Director and Chairman of July 21, 1995 - ------------------------------------- the Board of Directors Alan H. Rappaport (Chief Executive Officer) - ------------------------------------- Director July , 1995 Carroll W. Brewster * Director July 21, 1995 - ------------------------------------- Frederick M. Bohen * Director July 21, 1995 - ------------------------------------- Sol Gittleman * Director July 21, 1995 - ------------------------------------- Luis Rubio * Vice President and Treasurer July 21, 1995 - ------------------------------------- (Principal Financial and Accounting Dennis Feeney Officer) /s/ ALAN H. RAPPAPORT *By: Alan H. Rappaport Attorney-in-Fact
C-5 98 EXHIBIT INDEX
Exhibit No. Description Page No. - ----------- --------------- --------- (a)(1) -- Articles of Incorporation (previously filed as Exhibit 1 to the Registrant's Registration Statement on Form N-2 (File No. 33-35089)). (a)(2) -- Articles of Amendment to the Articles of Incorporation (previously filed as Exhibit 1(b) to Pre-Effective Amendment Nos. 2 and 3 to the Registrant's Registration Statement on Form N-2 (File No. 33-35089)). (b) -- Amended and Restated By-Laws (previously filed as Exhibit 2(b) to Pre-Effective Amendment No. 2 to the Registrant's Registration Statement on Form N-2 (File No. 33-35089)). (c) -- Inapplicable. (d)(1) -- Specimen certificate for Common Stock, par value $.001 per share (previously filed as Exhibit 4 to Pre-Effective Amendment No. 4 to the Registrant's Registration Statement on Form N-2 (File No. 33-35089)). (d)(2) -- Form of Subscription Certificate (included on pages B-1 to B-3 of the Prospectus forming part of this Registration Statement). (d)(3) -- Form of Notice of Guaranteed Delivery (included on pages C-1 to C-2 of the Prospectus forming part of this Registration Statement). (d)(4) -- Form of Nominee Holder Oversubscription Exercise Form (included on pages D-1 to D-2 of the Prospectus forming part of this Registration Statement). (d)(5) -- Form of Subscription Agent Agreement between the Fund and PNC Bank, National Association.* (d)(6) -- Form of Information Agent Agreement between the Fund and Shareholder Communications Corporation.* (e) -- Dividend Reinvestment Plan (previously filed as Exhibit 10(b) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (f) -- Inapplicable. (g)(1) -- Investment Advisory Agreement dated as of October 14, 1991 between the Registrant and Acci Worldwide, S.A. de C.V. (previously filed as Exhibit 6(a) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (g)(2) -- U.S. Co-Advisory Agreement dated as of August 14, 1990 between the Registrant and Advantage Advisers, Inc. (previously filed as Exhibit 6(b) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (h)(1) -- Form of Dealer Manager Agreement between the Fund and Oppenheimer & Co., Inc.* (h)(2) -- Form of Soliciting Dealer Agreement between the Fund and Soliciting Dealers.* (h)(3) -- Form of Selling Group Agreement between the Dealer Manager and Selling Group Members.* (i) -- Inapplicable. (j)(1) -- Custodian Services Agreement dated as of August 13, 1990 between Registrant and PNC Bank, National Association (previously filed as Exhibit 9(a) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (j)(2) -- Sub-Custodian Agreement dated as of August 21, 1990 among Citibank, N.A., the Registrant and PNC Bank, National Association (previously filed as Exhibit 9(b) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (k)(1) -- Transfer Agency Services Agreement dated as of August 14, 1990 between Registrant and PNC Bank, National Association (previously filed as Exhibit 10(a) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (k)(2) -- Administration Agreement dated as of August 14, 1990 between Registrant and Oppenheimer & Co., Inc. (previously filed as Exhibit 10(c) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (k)(3) -- Sub-Administration Agreement and Accounting Services Agreement dated as of August 14, 1990 by and between Oppenheimer & Co., Inc. and PFPC Inc. (previously filed as Exhibit 10(d) to Post-Effective Amendment No. 5 on Form N-2 to the Registration Statement under the Investment Company Act filed on November 27, 1991 (File No. 811-06111)). (l)(1) -- Opinion and Consent of Rogers & Wells.* (l)(2) -- Opinion and Consent of Piper & Marbury L.L.P.* (l)(3) -- OPINION AND CONSENT OF RITCH, HEATHER Y MUELLER, S.C.* (m) -- IRREVOCABLE APPOINTMENT OF AGENT FOR SERVICE OF PROCESS, PLEADINGS AND OTHER PAPERS BY CORPORATION NON-RESIDENT INVESTMENT ADVISER BY ACCI WORLDWIDE, S.A. DE C.V. (PREVIOUSLY FILED ON FORM 5-R ON JUNE 28, 1990 (FILE NO. 801-37171)). (n) -- CONSENT OF INDEPENDENT ACCOUNTANTS.* (o) -- INAPPLICABLE. (p) -- INAPPLICABLE. (q) -- INAPPLICABLE.
- --------------- * Filed herewith. EX-99.D5 2 FORM OF SUBSCRIPTION AGENT AGREEMENT 1 EXHIBIT (d)(5) SUBSCRIPTION AGENT AGREEMENT This Subscription Agent Agreement (the "Agreement") is made as of July __, 1995 between The Mexico Equity and Income Fund, Inc., a Maryland corporation (the "Fund") and PNC Bank, National Association, as subscription agent (the "Subscription Agent"). All terms not defined herein shall have the meaning given in the prospectus (the "Prospectus") included in the Registration Statement on Form N-2 (File Nos. 33-83820 and 811-06111) filed by the Fund with the Securities and Exchange Commission on September 12, 1994, as amended by any amendment filed with respect thereto (the "Registration Statement"). WHEREAS, the Fund proposes to make a subscription offer by issuing certificates or other evidences of subscription rights, in the form designated by the Fund (the "Subscription Certificates"), to stockholders of record (the "Stockholders") of its common stock, par value $0.001 per share ("Common Stock"), as of a record date specified by the Fund (the "Record Date"), pursuant to which each Stockholder will have certain rights (the "Rights") to subscribe for shares of Common Stock (the "Shares"), as described in and upon such terms as are set forth in the Prospectus, a final copy of which has been or, upon availability promptly will be, delivered to the Subscription Agent; and WHEREAS, the Fund wishes the Subscription Agent to perform certain acts on behalf of the Fund, and the Subscription Agent is willing to perform such acts, in connection with the distribution of the Subscription Certificates and the issuance and exercise of the Rights to subscribe therein set forth, all upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements set forth herein, the parties agree as follows: 1. APPOINTMENT. The Fund hereby appoints the Subscription Agent to act as subscription agent in connection with the distribution of Subscription Certificates and the issuance and exercise of the Rights in accordance with the terms set forth in this Agreement, and the Subscription Agent hereby accepts such appointment. 2. FORM AND EXECUTION OF SUBSCRIPTION CERTIFICATES. (a) Each Subscription Certificate shall be irrevocable and fully transferable. The Subscription Agent shall, in its capacity as Transfer Agent of the Fund, maintain a register of Subscription Certificates and the holders of record thereof (the "Rights Holders"). Each Subscription Certificate shall, subject to the provisions thereof, entitle each Rights Holder to the following: 2 (1) The right to acquire during the Subscription Period, at the Subscription Price, one Share for every three Rights held (the "Primary Subscription"); and (2) The right to subscribe for additional Shares, subject to the availability of such Shares and to the allotment of such Shares as may be available among Rights Holders who exercise Over-Subscription Rights on the basis specified in the Prospectus (the "Over-Subscription Privilege"). 3. RIGHTS AND ISSUANCE OF SUBSCRIPTION CERTIFICATES. (a) Each Subscription Certificate shall evidence the Rights of the Stockholder therein named to purchase Shares upon the terms and conditions therein and herein set forth. (b) Upon the written advice of the Fund, signed by any of its duly authorized officers, the Subscription Agent will, from a list of the Fund's Stockholders, which list will be compiled by the Subscription Agent in its capacity as Transfer Agent of the Fund, prepare and record Subscription Certificates in the names of the Stockholders, setting forth the number of Rights to subscribe for the Shares calculated on the basis of one Right for each share of Common Stock recorded on the books in the name of each such Stockholder as of the Record Date. The number of Rights that are issued to Stockholders will be rounded up, by the Subscription Agent, to the nearest whole number of Rights evenly divisible by three. In the case of shares of Common Stock held of record by a Nominee Holder, the number of Rights issued to such Nominee Holder will be adjusted, by the Subscription Agent, to permit rounding up (to the nearest whole number of Rights evenly divisible by three) of the number of Rights to be received by beneficial holders for whom the Nominee Holder is the holder of record only if the Nominee Holder provides to the Subscription Agent on or before the close of business on the fifth business day prior to the Expiration Date written representation of the number of Rights required for such rounding. Each Subscription Certificate shall be dated as of the Record Date and shall be executed manually or by facsimile signature of a duly authorized officer of the Fund. No Subscription Certificate shall be valid for any purpose unless so executed. Should any officer of the Fund whose signature has been placed upon any Subscription Certificate cease to hold such office at any time thereafter, such event shall have no effect on the validity of such Subscription Certificate. (c) Upon the written advice of the Fund, signed as by any of its duly authorized officers, as to the effective date of the Registration Statement, the Agent shall promptly deliver the Subscription Certificates, together with a copy of the Prospectus and any other document as the Fund deems necessary or appropriate, to all Stockholders with record addresses in the United States (including its territories and possessions and the District of Columbia). Delivery shall be by first class mail (without registration or insurance). The Subscription Agent will mail a copy of the Prospectus, a special notice and other documents as the Fund deems necessary or appropriate, if any, but not Subscription Certificates, to Stockholders whose record addresses are outside the United States (including its territories and possessions and the District of Columbia) ("Foreign Stockholders"). Delivery to Foreign Stockholders shall be by air mail (without registration or insurance) or for those Foreign Stockholders having APO or FPO addresses, by first class mail (without registration or insurance). 2 3 (d) The Subscription Agent shall hold the Rights issued by the Fund to Foreign Stockholders for such Foreign Stockholders' accounts until instructions are received to exercise, sell or transfer the Rights. If no instructions have been received by 12:00 Noon, New York City time, three Business Days prior to the Expiration Date, the Subscription Agent will use its best efforts to sell the Rights of those registered Foreign Stockholders through or to the Dealer Manager in accordance with Section 5(b) hereof. The proceeds net of commissions, if any, from the sale of those Rights will be remitted to the Foreign Stockholders. 4. EXERCISE. (a) Exercising Rights Holders may acquire Shares in the Primary Subscription and pursuant to the Over-Subscription Privilege by delivering to the Subscription Agent as specified in the Prospectus (i) the Subscription Certificate, duly executed by such Exercising Rights Holder in accordance with and as provided by the terms and conditions of the Subscription Certificate, together with (ii) the purchase price of $_____ for each Share subscribed for by exercise of such Rights, in U.S. dollars by money order or check drawn on a bank located in the United States, in each case payable to the order of the Fund. (b) Rights may be exercised at any time after the date of issuance of the Subscription Certificates with respect thereto, but no later than 5:00 P.M. New York City time, on the Expiration Date, or such later date as the Fund may designate. For the purpose of determining the time of the exercise of any Rights, delivery of any material to the Subscription Agent shall be deemed to occur when such materials are received at the Shareholder Services Division of the Subscription Agent as specified in the Prospectus. (c) Notwithstanding the provisions of Section 4(a) and 4(b) hereof regarding delivery of an executed Subscription Certificate to the Subscription Agent prior to 5:00 p.m. New York City time, on the Expiration Date, if prior to such time the Subscription Agent receives a Notice of Guaranteed Delivery by facsimile (telecopy) or otherwise from a bank, a trust company or a New York Stock Exchange member guaranteeing delivery of (i) payment of the full Subscription Price for the Shares subscribed for in the Primary Subscription and any additional Shares subscribed for pursuant to the Over-Subscription Privilege, and (ii) a properly completed and executed Subscription Certificate, then such exercise of Rights in the Primary Subscription and pursuant to the Over-Subscription Privilege shall be regarded as timely, subject, however, to receipt of the duly executed Subscription Certificate and full payment for the Shares by the Subscription Agent within three Business Days after the Expiration Date (the "Protect Period"). (d) Within seven Business Days following the end of the Protect Period, the Subscription Agent shall send to each Exercising Rights Holder (or, if shares of Common Stock on the Record Date are held by a Nominee Holder, to such Nominee Holder) the share certificates representing the Shares acquired in the Primary Subscription, and, if applicable, pursuant to the Over-Subscription Privilege, along with a letter explaining the allocation of Shares pursuant to the Over-Subscription Privilege. Any excess payment ("Excess Payment") to be refunded by the Fund to an Exercising Rights Holder who is not allocated the full amount of shares of Common Stock subscribed for pursuant to the Over-Subscription Privilege, shall be 3 4 mailed by the Subscription Agent to such Exercising Rights Holder as described in Section 9(b) hereof. 5. TRANSFER OF RIGHTS. (a) Rights Holders who do not wish to exercise any or all of their Rights may instruct the Subscription Agent to sell any unexercised Rights by delivering to the Subscription Agent at least three Business Days prior to the Expiration Date Subscription Certificates representing the Rights to be sold with the appropriate instructions to sell the Rights. Upon timely receipt by the Subscription Agent of appropriate instructions to sell the Rights, the Subscription Agent shall use its best efforts to complete the sale. The Subscription Agent shall remit the proceeds of sale, net of any commissions to the appropriate Rights Holder. The Subscription Agent shall also use its best efforts to sell all Rights which remain unclaimed as a result of Subscription Certificates being returned by the postal authorities to the Subscription Agent as undeliverable as of the fourth Business Day prior to the Expiration Date and Rights of Foreign Stockholders who do not respond to the Agent by 12:00 Noon, New York City time, three Business Days prior to the Expiration Date. Such sales will be made, net of any commissions, on behalf of such Stockholders. The Subscription Agent will hold the proceeds from those sales for the benefit of such Stockholders until such proceeds are either claimed or escheat. (b) The Subscription Agent may retain Oppenheimer & Co., Inc. ("Oppenheimer") to act as its broker in carrying out the sale on a best efforts basis of any Rights to be sold pursuant to Sections 3(c) and 5(a), provided the brokerage fees charged by Oppenheimer in connection with any such sales are not in excess of the usual and customary brokerage fees for such transactions. The Subscription Agent also may sell the Rights to Oppenheimer as principal provided that such sales are made at the then current market price for the Rights less an amount not in excess of the usual and customary brokerage fee that would have been payable had such sales been conducted through a broker. (c) Rights Holders may transfer a portion of the Rights evidenced by a single Subscription Certificate (but in a number evenly divisible by three) by delivering to the Subscription Agent within at least one Business Day prior to the Expiration Date a Subscription Certificate properly endorsed for transfer, with instructions to register such portion of the Rights evidenced thereby in the name of the transferee and to issue a new Subscription Certificate to the transferee evidencing such transferred Rights. In such event, the Subscription Agent shall issue a new Subscription Certificate evidencing the balance of the Rights to the transferring Rights Holder or, if the transferring Rights Holder so instructs, to an additional transferee. 6. VALIDITY OF SUBSCRIPTIONS. Irregular subscriptions not otherwise covered by specific instructions herein shall be submitted to an appropriate officer of the Fund and handled in accordance with such officer's instructions. Such instructions will be documented by the Subscription Agent indicating the instructing officer and the date thereof. 4 5 7. OVER-SUBSCRIPTION PRIVILEGE. Shares not subscribed for in the Primary Subscription will be offered, by means of the Primary Over-Subscription Privilege, to the Stockholders who have exercised all exercisable Rights issued to them and who wish to acquire more than the number of Shares for which the Rights issued to them are exercisable. Stockholders should indicate, on the Subscription Certificate submitted with respect to the exercise of the Rights issued to them, how many Shares they are willing to acquire pursuant to the Primary Over-Subscription Privilege. If a sufficient number of Shares remain, all over-subscriptions will be honored in full. If subscriptions for Shares pursuant to the Primary Over-Subscription Privilege exceed the number of Shares available, the available Shares will be allocated, pursuant to the terms of the Prospectus, first among Stockholders who subscribe for an aggregate of 100 or fewer Shares. Any Shares remaining thereafter will be allocated among all other Stockholders. In each case, if insufficient Shares are available to permit such allocation, Shares will be allocated pro rata among the Stockholders being prorated, based on the number of Shares such Stockholders subscribed for in the Primary Subscription relative to the aggregate number of Shares subscribed for in the Primary Subscription by all such Stockholders then being prorated. Any Exercising Rights Holder is entitled to subscribe for Shares which are not otherwise subscribed for in the Primary Subscription or pursuant to the Primary Over-Subscription Privilege. Exercising Rights Holders should indicate, on the Subscription Certificate submitted with respect to the exercise of any Rights, how many Shares they are willing to acquire pursuant to the Secondary Over-Subscription Privilege. If sufficient Shares remain, all over-subscriptions by Exercising Rights Holders will be honored in full. If remaining Shares are insufficient to permit such allocation, such Shares will be allocated pro rata among Exercising Rights Holders being prorated, based on the number of Shares such Exercising Rights Holders subscribed for in the Primary Subscription relative to the aggregate number of Shares subscribed for in the Primary Subscription by all such Exercising Rights Holders then being prorated. The percentage of Shares each over-subscribing Exercising Rights Holder may acquire may be rounded up or down to result in delivery of whole Shares. The Subscription Agent shall advise the Fund immediately upon the completion of the allocation set forth above as to the total number of Shares subscribed and distributable. 8. DELIVERY OF SHARE CERTIFICATES. The Subscription Agent will deliver (i) certificates representing those Shares purchased pursuant to exercise of Primary Subscription Rights as soon as practicable after the corresponding Rights have been validly exercised and full payment for such Shares has been received and cleared and (ii) certificates representing those Shares purchased pursuant to the exercise of the Over-Subscription Privilege as soon as practicable after the Expiration Date and after all allocations have been effected. 5 6 9. HOLDING PROCEEDS OF RIGHTS OFFERING IN ESCROW. (a) All proceeds received by the Subscription Agent from Rights Holders in respect of the exercise of Rights shall be held by the Subscription Agent, on behalf of the Fund, in a segregated, interest-bearing escrow account (the "Escrow Account"). Pending disbursement in the manner described in Section 4(d) above, funds held in the Escrow Account shall be invested by the Subscription Agent at the direction of the Fund. (b) The Subscription Agent shall deliver all proceeds received in respect of the exercise of Rights (including interest earned thereon) to the Fund as promptly as practicable, but in no event later than seven Business Days after the end of the Protect Period. Proceeds held in respect of any Excess Payment shall be refunded to the appropriate Exercising Rights Holders within ten Business Days after the end of the Protect Period. 10. REPORTS. (a) Daily, during the period commencing on the Record Date, until termination of the Subscription Period, the Subscription Agent will report by telephone or telecopier (by 12:00 Noon, New York City time), confirmed by letter, to a designated officer of the Fund, daily data regarding Rights exercised, the selling price of Rights, the total number of Shares subscribed for, payments received therefor, the number of Rights sold and the net proceeds thereof, bringing forward the figures from the previous day's report in each case so as to show the cumulative totals and any such other information as may be mutually determined by the Fund and the Subscription Agent. (b) The Subscription Agent will inform the Dealer Manager orally, on each Business Day during the Subscription Period (to be followed by written confirmation), as to the number of Rights that have been exercised since its previous daily report to the Dealer Manager and, not later than 12:00 Noon (New York City time) on the third day after the end of the Protect Period, will provide the Dealer Manager with a written statement as to the total number of Rights exercised (separately setting forth the number of Rights exercised by Stockholders). 11. LOSS OR MUTILATION. If any Subscription Certificate is lost, stolen, mutilated or destroyed, the Subscription Agent may, on such terms which will indemnify and protect the Fund and the Subscription Agent as the Subscription Agent may in its discretion impose (which shall, in the case of a mutilated Subscription Certificate include the surrender and cancellation thereof), issue a new Subscription Certificate of like denomination in substitution for the Subscription Certificate so lost, stolen, mutilated or destroyed. 12. COMPENSATION FOR SERVICES. The Fund agrees to pay to the Subscription Agent compensation for its services as such in accordance with its Fee Schedule attached, dated November __, 1994, and attached hereto as Schedule A. The Subscription Agent agrees that such compensation shall include all services 6 7 as Transfer Agent and Registrar provided in connection with the offering of the Rights. The Fund further agrees that it will reimburse the Subscription Agent for its reasonable out-of-pocket expenses incurred in the performance of its duties as such. 13. INSTRUCTIONS AND INDEMNIFICATION. The Subscription Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions: (a) The Subscription Agent shall be entitled to rely upon any instructions or directions furnished to it by an appropriate officer of the Fund, whether in conformity with the provisions of this Agreement or constituting a modification hereof or a supplement hereto. Without limiting the generality of the foregoing or any other provision of this Agreement, the Subscription Agent, in connection with its duties hereunder, shall not be under any duty or obligation to inquire into the validity or invalidity or authority or lack thereof of any instruction or direction from an officer of the Fund which conforms to the applicable requirements of this Agreement and which the Subscription Agent reasonably believes to be genuine and shall not be liable for any delays, errors or loss of data occurring by reason of circumstances beyond the Subscription Agent's control, including, without limitation, acts of civil or military authority, national emergencies, labor difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply. (b) The Fund will indemnify the Subscription Agent and its nominees against, and hold it harmless from, all liability and expense which may arise out of or in connection with the services described in this Agreement or the instructions or directions furnished to the Subscription Agent relating to this Agreement by an appropriate officer of the Fund, except for any liability or expense which shall arise out of the negligence, bad faith or willful misconduct of the Subscription Agent or such nominees. 14. CHANGES IN SUBSCRIPTION CERTIFICATE. The Subscription Agent may, without the consent or concurrence of the Stockholders in whose names Subscription Certificates are registered, by supplemental agreement or otherwise, concur with the Fund in making any changes or corrections in a Subscription Certificate that it shall have been advised by counsel (who may be counsel for the Fund) is appropriate to cure any ambiguity or to correct any defective or inconsistent provisions or clerical omission or mistake or manifest error therein or herein contained, and which shall not be inconsistent with the provision of the Subscription Certificate except insofar as any such change may confer additional rights upon the Stockholders. 15. ASSIGNMENT; DELEGATION. (a) Neither this Agreement nor any rights or obligations hereunder may be assigned or delegated by either party without the written consent of the other party. 7 8 (b) This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim or to impose upon any other person any duty, liability or obligation. 16. GOVERNING LAW. The validity, interpretation and performance of this Agreement shall be governed by the laws of the State of New York. 17. SEVERABILITY. The parties hereto agree that, if any of the provisions contained in this Agreement shall be determined invalid, unlawful or unenforceable to any extent, such provisions shall be deemed modified to the extent necessary to render such provisions enforceable. The parties hereto further agree that this Agreement shall be deemed severable, and the invalidity, unlawfulness or unenforceability of any term or provision thereof shall not affect the validity, legality or enforceability of this Agreement or of any term or provision hereof. 18. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. 19. CAPTIONS. The captions and descriptive headings herein are for the convenience of the parties only. They do not in any way modify, amplify, alter or give full notice of the provisions hereof. 20. FACSIMILE SIGNATURES. Any facsimile signature of any party hereto shall constitute a legal, valid and binding execution hereof by such party. 21. FURTHER ACTIONS. Each party agrees to perform such further acts and execute such further documents as are necessary to effect the purposes of this Agreement. 8 9 22. ADDITIONAL PROVISIONS. Except as specifically modified by this Agreement, the Subscription Agent's rights and responsibilities set forth in the Transfer Agency Services Agreement between the Fund and the Subscription Agent are hereby ratified and confirmed and continue in effect. THE MEXICO EQUITY AND INCOME FUND, INC. By:_______________________________ Alan H. Rappaport President and Chairman of the Board PNC BANK, NATIONAL ASSOCIATION By:_______________________________ Name: Title: 9 10 [LETTERHEAD] SCHEDULE A November 3, 1994 Alan H Rappaport, President The Mexico Equity and Income Fund, Inc. Oppenheimer & Co., Inc. World Financial Center 200 Liberty Street New York, NY 10281 Dear Mr. Rappaport: We welcome the opportunity to propose our servicing capabilities and fees for the upcoming Rights Offering for The Mexico Equity and Income Fund, Inc. Based on the following assumptions PNC Bank, N.A. will provide the services described in Exhibit A. - 1,700 direct fund accounts; 11,300 broker street name accounts. - Elapsed processing and administration time 90-100 days. - Work in conjunction with an experienced Information Agent. - Proration calculated on record date share balance for direct and street name accounts (initial 2,000 street name accounts covered under the base fee). - All payments (initial and oversubscription) required by Expiration Date for the Guarantee of Delivery. - Interest on all receipts accrue to the benefit of the fund. - PNC performs processing and distribution of solicitation fee. A PNC Financial Services Group Company 11 The Mexico Equity and Income Fund, Inc. Page 2 We propose a base fee of $25,000 for subscription agent services as described above plus an additional $6.00 per account fee will be applied for all accounts participating in the oversubscription allocation in excess of the initial 2,000 accounts. The out of pocket expenses including but not limited to are as follows: - Postage - New York City drop window charges - Overnight delivery charges - Cost of checks, envelopes - Printing / duplicating costs An administrative fee of $3,500 will be charged in the event the offer does not become effective. This amount includes: 1) Reviewing Registration Statement and forms with Fund's attorneys. 2) Coordinate and perform mailing of press releases and warning letters. 3) Coordinate and plan mailing of Prospectus. Should you have any questions or need additional information, feel free to contact either Bob Diaczuk at (302) 791-1043 or myself. Sincerely, /s/ ROBERT J PERLSWEIG - ----------------------------- Robert J Perlsweig Executive Vice President RJP/clc cc: R. Diaczuk 12 Exhibit A SUBSCRIPTION AGENT SERVICES - - Review registration statement and forms with Fund's Attorneys. - - Coordinate mailing of warning letters. - - Prepare record date list. - - Imprint subscription certificates with name, address, certificate number, and number of rights. - - Coordinate mailing of Rights Certificates. - - Provide management with daily activity summary. - - Interact daily with dealer manager, administrator. - - Process exercised rights certificates. - - Deposit checks / reconcile daily. - - Maintain and settle Guarantee of Deliveries. - - Solicit and receive subaccounting for proration. - - Calculate proration. - - Prepare and mail refund checks (if applicable). - - Prepare and mail stock certificates for primary and over-subscription shares. - - Solicit and pay fees to soliciting dealers. - - Prepare, mail invoices for additional monies, due to higher than estimated subscription price. EX-99.D6 3 FORM OF INFORMATION AGENT AGREEEMENT 1 EXHIBIT (d)(6) [SHAREHOLDER COMMUNICATIONS CORPORATION LOGO] AGREEMENT This document will constitute the agreement between THE MEXICO EQUITY & INCOME FUND, INC. (the "FUND"), with its principal executive offices at 200 Liberty Street, New York, NY 10281 and SHAREHOLDER COMMUNICATIONS CORPORATION ("SCC"), with its principal executive offices at 17 State Street, New York, NY 10004, relating to a Rights Offering (the "OFFER") of the Fund. The services to be provided by SCC will be as follows: (1) INDIVIDUAL HOLDERS OF RECORD AND BENEFICIAL OWNERS Target Group. SCC estimates that it may call between 2,106 to 2,503 of the approximately 20,500 outstanding beneficial and record shareholders. The estimate number is subject to adjustment and SCC may actually call more or less shareholders depending on the response of the OFFER or at the FUND's direction. Telephone Number Lookups. SCC will obtain the needed telephone numbers from various types of telephone directories. Initial Telephone Calls to Provide Information. SCC will begin telephone calls to the target group as soon as practicable. Most calls will be made during 10:00 A.M. to 9:00 P.M. on business days and only during 10:00 A.M. to 5:00 P.M. on Saturdays. No calls will be received by any shareholder after 9:00 P.M. on any day, in any time zone, unless specifically requested by the shareholder. SCC will maintain "800" lines for shareholders to call with questions about the OFFER. The "800" lines will be staffed Monday through Friday between 9:00 a.m. and 9:00 p.m. Remails. SCC will coordinate remails of offering materials to the shareholders who advise us that they have discarded or misplaced the originally mailed materials. Reminder/Extension Mailing. SCC will help to coordinate any targeted or broad-based reminder mailing at the request of the FUND. SCC will mail only materials supplied by the FUND or approved by the Fund in advance in writing. Subscription Reports. SCC will rely upon the transfer agent for accurate and timely information as to participation in the OFFER. 2 [SHAREHOLDER COMMUNICATIONS CORPORATION LOGO] (2) BANK/BROKER SERVICING SCC will contact all banks, brokers and other nominee shareholders ("intermediaries") holding stock as shown on appropriate portions of the shareholder lists to ascertain quantities of offering materials needed for forwarding to beneficial owners. SCC will deliver offering materials by messenger to New York City based intermediaries and by Federal Express or other means to non-New York City based intermediaries. SCC will also follow-up by telephone with each intermediary to insure receipt of the offering materials and to confirm timely remailing of materials to the beneficial owners. SCC will maintain frequent contact with intermediaries to monitor shareholder response and to insure that all liaison procedures are proceeding satisfactorily. In addition, SCC will contact beneficial holders directly, if possible, and do whatever may be appropriate or necessasry to provide information regarding the OFFER to this group. SCC will, as frequently as practicable, report to the Fund with response from intermediaries. (3) PROJECT FEE In consideration for acting as Information Agent SCC will receive a project fee of $10,000. (4) ESTIMATED EXPENSES SCC will be reimbursed by the FUND for its reasonable out-of-pocket expenses incurred provided that SCC submits to the FUND an expense report, itemizing such expenses and providing copies of all supporting bills in respect of such expenses. If the actual expenses incurred are less than the portion of the estimated high range expenses paid in advance by the FUND, the FUND will receive from SCC a check payable in the amount of the difference at the time that SCC sends its final invoice for the second half of the project fee. SCC's expenses are estimated as set forth below and the estimates are based largely on data provided to SCC by the FUND. In the course of the OFFER the expenses and expense categories may change due to changes in the OFFER schedule or due to events beyond SCC's control, such as delays in receiving offering material and related items. In the event of significant change or new expenses not originally contemplated, SCC will notify the FUND by phone and/or by letter for approval of such expenses. 3 [SHAREHOLDER COMMUNICATIONS CORPORATION LOGO]
Estimated Expenses Low Range High Range ------------------ --------- ---------- Distribution Expenses.................................... $ 4,500 $ 6,500 Telephone # look up 5,850 to 7,120 @ $.50 .................................. 2,925 3,560 Outgoing telephone 2,106 to 2,503 initial outgoing telephone calls @ $3.75 ........................................... 7,897 9,611 Incoming "800" calls 877 to 1,915 @ $3.75..................................... 3,288 7,181 Miscellaneous, data processing, postage, deliveries Federal Express and mailgrams............................ 1,000 2,000 ------- ------- Total Estimated Expenses............................ $19,611 $28,852 ======= =======
(5) PERFORMANCE SCC will use its best efforts to achieve the goals of the FUND but SCC is not guaranteeing a minimum success rate. SCC's Project Fee as outlined in Section 3 or Expenses as outlined in Section 4 are not contingent on success or failure of the OFFER. SCC's strategies revolve around a telephone information campaign. The purpose of the telephone information campaign is to raise the overall awareness among shareholders of the OFFER and help shareholders better understand the transaction. This in turn may result in higher overall response. (6) COMPLIANCE The FUND will be responsible for compliance with any regulations required by the Securities and Exchange Commission, National Association of Securities Dealers or any applicable federal or state agencies. In rendering the services contemplated by this Agreement, SCC agrees not to make any representations, oral or written, to any shareholders or prospective shareholders of the FUND that are not contained in the FUND's Prospectus, unless previously authorized to do so in writing by the FUND. (7) PAYMENT Payment for one half the project fee ($5,000) and one half the estimated high range expenses ($14,426) for a total of $19,426 will be made at the signing of this contract. The balance, if any, will be paid by the FUND due thirty days after SCC sends its final invoice. 4 [SHAREHOLDER COMMUNICATIONS CORPORATION LOGO] (8) MISCELLANEOUS SCC will hold in confidence and will not use nor disclose to third parties information we receive from the FUND, or information developed by SCC based upon such information we receive, except for information which was public at the time of disclosure or becomes part of the public domain without disclosure by SCC or information which we learn from a third party which does not have an obligation of confidentiality to the FUND. In the event the project is canceled for an indefinite period of time after the signing of this contract and before the expiration of the OFFER, SCC will be reimbursed by the FUND for any expenses incurred and not less than 100% of the project fee. The FUND agrees to indemnify, hold harmless, reimburse and defend SCC, and its officers, agents and employees, against all claims or threatened claims, costs, expenses, liabilities, obligations, losses or damages (including reasonable legal fees and expenses) of any nature, incurred by or imposed upon SCC, or any of its officers, agents or employees, which results, arises out of or is based upon services rendered to the FUND in accordance with the provisions of to this AGREEMENT, provided that such services are rendered to the FUND without any negligence, willful misconduct, bad faith or reckless disregard on the part of SCC, or its officers, agents and employees. This agreement will be governed by and construed in accordance with the laws of the State of New York. This AGREEMENT sets forth the entire AGREEMENT between SCC and the FUND with respect to the agreement herein and cannot be modified except in writing by both parties. IN WITNESS WHEREOF, the parties have signed this AGREEMENT this 24th day of July 1995. THE MEXICO & INCOME FUND, INC. SHAREHOLDER COMMUNICATIONS CORPORATION By /s/ Alan H. Rappaport By /s/ Robert S. Brennan ----------------------------- ---------------------------- Alan H. Rappaport Robert S. Brennan President and Senior Account Executive Chairman of the Board EX-99.H1 4 FORM OF DEALER MANAGER AGREEMENT 1 EXHIBIT (H)(1) THE MEXICO EQUITY AND INCOME FUND, INC. 3,000,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF TRANSFERABLE RIGHTS TO SUBSCRIBE FOR SUCH SHARES OF COMMON STOCK DEALER MANAGER AGREEMENT --------------------------- July 24, 1995 --------------------------- 2 THE MEXICO EQUITY AND INCOME FUND, INC. 3,000,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF TRANSFERABLE RIGHTS TO SUBSCRIBE FOR SUCH SHARES OF COMMON STOCK DEALER MANAGER AGREEMENT July 24, 1995 OPPENHEIMER & CO., INC. Oppenheimer Tower World Financial Center New York, New York 10281 Dear Sirs: The Mexico Equity and Income Fund, Inc., a corporation formed under the laws of the State of Maryland (the "Fund"), Acci Worldwide, S.A. de C.V., a limited liability company formed under the laws of the United Mexican States (the "Mexican Adviser"), and Advantage Advisers, Inc., a corporation formed under the laws of the State of Delaware (the "U.S. Co-Adviser"), each confirms its agreement with and appointment of Oppenheimer & Co., Inc., a corporation formed under the laws of the State of Delaware ("Oppenheimer"), to act as dealer manager, subject to the terms and conditions set out below, with respect to the proposed issuance by the Fund to its stockholders of transferable rights entitling the holders thereof to subscribe for shares of the Fund's Common Stock, par value $.001 per share. 1. DEFINITIONS The following terms have the following meanings when used in this Agreement: (a) "Acts" means the Securities Act and the Investment Company Act collectively. (b) "Administration Agreement" means the Administration Agreement, dated as of August 14, 1990, between the Fund and Oppenheimer, as amended. (c) "Agreement" means this Dealer Manager Agreement as originally executed and as amended, modified, supplemented or restated from time to time. 3 (d) "Business Day" means any day on which trading is conducted on the New York Stock Exchange, Inc. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Commission" means the U.S. Securities and Exchange Commission. (g) "Common Stock" means the Fund's Common Stock, par value $.001 per share. (h) "Custodian Agreement" means the Custodian Services Agreement, dated as of August 13, 1990, between the Fund and PNC Bank. (i) "Effective Date" means the date on which the Registration Statement is declared effective by the Commission. (j) "Exchange Act" means the U.S. Securities Exchange Act of 1934. (k) "Exercising Rights Holders" means Rights Holders purchasing Shares in the Primary Subscription, including those who purchase Shares pursuant to the Over-Subscription Privilege. (l) "Expiration Date" means August 15, 1995, unless extended by the Fund and the Dealer Manager. (m) "Information Agent" means Shareholder Communications Corporation, a corporation formed under the laws of the State of Delaware. (n) "Information Agent Agreement" means the agreement dated July 24, 1995, between the Fund and the Information Agent, as the same may be amended from time to time. (o) "Investment Advisers Act" means the U.S. Investment Advisers Act of 1940, as amended. (p) "Investment Company Act" means the U.S. Investment Company Act of 1940, as amended. (q) "Mexican Advisory Agreement" means the Investment Advisory Agreement, dated and effective as of October 14, 1991, between the Fund and the Mexican Adviser. (r) "Mexican Stock Exchange" means the Bolsa Mexicana de Valores, S.A. de C.V. (s) "Mexico" means the United Mexican States. -2- 4 (t) "NYSE" means the New York Stock Exchange, Inc. (u) "Offer" means the offer of Shares contemplated by the Fund's proposed issuance of Rights as more fully described in the Prospectus. (v) "Plan" means the Fund's Dividend Reinvestment Plan, as amended. (w) "PNC Bank" means PNC Bank, National Association, a corporation formed under the laws of the Commonwealth of Pennsylvania. (x) "Primary Subscription" means the right of a Rights Holder to acquire during the Subscription Period at the Subscription Price one Share for each three Rights held. (y) "Prospectus" means the prospectus contained in the Registration Statement, including any amendments or supplements thereto. (z) "Record Date" means July 21, 1995. (aa) "Record Date Stockholders" means the Fund's stockholders of record as of the close of business on the Record Date. (bb) "Registration Statement" means the Registration Statement on Form N-2 (File Nos. 33-83820 and 811-06111) under the Acts, and any amendments to that Registration Statement, relating to the Offer, initially filed by the Fund with the Commission on September 12, 1994. (cc) "Rights" means the transferable rights proposed to be issued by the Fund to Record Date Stockholders, which rights entitle such stockholders to subscribe for Shares. (dd) "Rights Holders" means the holders of Rights. (ee) "Rules and Regulations" means the rules and regulations adopted by the Commission under the Securities Act and/or the Investment Company Act. (ff) "Securities Act" means the U.S. Securities Act of 1933, as amended. (gg) "Shares" means an aggregate of 3,000,000 shares of the Fund's Common Stock for which Rights Holders may subscribe. (hh) "Subscription Agent" means PNC Bank. -3- 5 (ii) "Subscription Agent Agreement" means the agreement dated as of July 24, 1995, between the Fund and the Subscription Agent, as the same may be amended from time to time. (jj) "Subscription Period" means the period of time beginning on July 26, 1995 and ending at 5:00 p.m., New York time, on the Expiration Date, unless extended by the Fund and the Dealer Manager. (kk) "Subscription Price" means the Subscription Price per Share of $9.125. (ll) "Transfer Agency Agreement" means the Transfer Agency Services Agreement, dated as of August 14, 1990, between the Fund and PNC Bank. (mm) "U.S. Co-Advisory Agreement" means the U.S. Co-Advisory Agreement, dated and effective as of August 14, 1990, between the Fund and the U.S. Co-Adviser. 2. THE OFFER The Fund is proposing to issue transferable Rights to Record Date Stockholders, which Rights will entitle the holders thereof to subscribe for Shares. Under the Fund's proposal, each Record Date Stockholder will be issued one transferable Right for each full share of Common Stock owned on the Record Date. The number of Rights to be issued to Record Date Stockholders will be rounded up to the nearest number of Rights evenly divisible by three. No fractional Shares will be issued. The Rights will entitle the Rights Holders to acquire in the Primary Subscription at the Subscription Price one Share for each three Rights held. All Rights will be able to be exercised immediately upon receipt and until 5:00 p.m. on the Expiration Date. Any Record Date Stockholder who fully exercises all Rights initially issued to him will be entitled to subscribe for, subject to allotment, Shares that were not otherwise subscribed for by others in the Primary Subscription (the "Primary Over-Subscription Privilege"). In addition, any Rights Holder who exercises Rights will be entitled to subscribe for, subject to allotment, Shares that were not otherwise subscribed for in the Primary Subscription or in the Primary Over-Subscription Privilege (the "Secondary Over-Subscription Privilege" and, together with the Primary Over-Subscription Privilege, the "Over-Subscription Privilege"). Additional terms and conditions of the Offer are set out in the Prospectus. 3. APPOINTMENT OF DEALER MANAGER The Fund appoints Oppenheimer as the exclusive dealer manager in connection with the Offer and Oppenheimer accepts that appointment. The Fund also authorizes Oppenheimer to form and -4- 6 manage a group of securities dealers (each, a "Selling Group Member," and, collectively, the "Selling Group") to solicit the exercise of Rights and sell Shares purchased by Oppenheimer from the Fund through the exercise of Rights. Oppenheimer represents and warrants that it is a broker-dealer registered under the Exchange Act. 4. REPRESENTATIONS AND WARRANTIES OF THE FUND AND THE ADVISERS (a) The Fund represents and warrants to Oppenheimer that: (i) the Registration Statement has been prepared by the Fund and filed with the Commission in accordance with the requirements of the Acts and the Rules and Regulations; (ii) the Registration Statement has been declared effective by the Commission, the Commission has not issued any order preventing or suspending the use of the Prospectus, and the Fund has not received any notice from the Commission pursuant to Section 8(e) of the Investment Company Act with respect to its registration thereunder; (iii) the Registration Statement complies, and any post-effective amendment to the Registration Statement filed with the Commission after the Effective Date, the Prospectus, and the Prospectus as amended or supplemented, will comply in all material respects with the Acts and the Rules and Regulations; (iv) on the Effective Date, the Registration Statement did not, and any post-effective amendment to the Registration Statement filed with the Commission after the Effective Date, will not, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus did not, and the Prospectus as amended and supplemented, will not, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that this representation and warranty does not apply to statements or omissions in the Registration Statement or the Prospectus or any such supplement or amendment thereto made in reliance upon and in conformity with information furnished to the Fund in writing by Oppenheimer expressly for use therein; (v) all contracts and other documents required to be described in, or filed as exhibits to, the Registration Statement under the Acts have been so described or filed; -5- 7 (vi) the financial statements of the Fund, together with related notes and schedules, included in the Registration Statement and the Prospectus present fairly, in all material respects, the financial position of the Fund as at the date thereof and the results of its operations for the period specified in conformity with U.S. generally accepted accounting principles; (vii) Price Waterhouse LLP, the accountants who audited the financial statements of the Fund included in the Registration Statement and in the Prospectus, are independent public accountants as required by the Acts and the Rules and Regulations; (viii) the Fund has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland. The Fund has no subsidiaries and does not control, directly or indirectly, any corporation, partnership, joint venture, association or other business organization. The Fund is duly qualified and in good standing as a foreign corporation authorized to transact business in each jurisdiction in which the nature of its activities or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Fund. The Fund has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus. The Fund owns or possesses or has obtained all material United States and Mexican governmental licenses, permits, consents, orders, approvals and other authorizations necessary to own, lease and operate its properties and to carry on its businesses as contemplated in the Prospectus, and no such license, permit, consent, order, approval or other authorization contains a materially burdensome restriction other than as disclosed in the Registration Statement and the Prospectus; (ix) the Fund is registered with the Commission under the Investment Company Act as a non-diversified, closed-end management investment company. The Fund is, and at all times through the Expiration Date will be, in compliance with the terms and provisions of the Acts except for non-compliance that would not have a material adverse effect. No person is serving or acting as an officer or director of, or investment adviser to, the Fund except in accordance with the provisions of the Investment Company Act and the Investment Advisers Act; (x) there is no litigation or governmental or other proceeding or investigation before any court or before or by any governmental agency or body or self-regulatory authority pending or, to the Fund's knowledge, threatened against, or involving the properties or business of, the Fund; -6- 8 (xi) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus there has been no material adverse change in the condition (financial or otherwise) or net assets of the Fund, or in the management, capital stock, investment objectives, investment policies, earnings, liabilities, business affairs or business prospects of the Fund, whether or not arising in the ordinary course of business; (xii) the Fund is not (A) in violation of its Articles of Incorporation or By-Laws, or (B) in violation of any material law, order, rule or regulation applicable to it of any court, federal, state or foreign governmental agency or body or self-regulatory authority, stock exchange or securities association having jurisdiction over it or its properties or operations, or (C) in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which it is a party or by which it or its properties may be bound or affected; (xiii) the execution, delivery and performance by the Fund of this Agreement, the Subscription Agent Agreement and the Information Agent Agreement, and the consummation of the transactions contemplated herein and therein are within the corporate power and authority of the Fund, have been duly authorized by all necessary corporate action and proceedings on the part of the Fund and do not and will not conflict with, or constitute a breach of or a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property of the Fund pursuant to, any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Fund is a party or by which it or any of its property may be bound or affected, nor will such action result in any violation of the provisions of the Articles of Incorporation or By-Laws of the Fund or (assuming compliance by Oppenheimer with all applicable securities and blue sky laws and regulations of those jurisdictions in which it will engage in the solicitation of the exercise of Rights) of any law, rule or regulation or any judgment, order or decree of any court or governmental agency or body or self-regulatory authority having jurisdiction over the Fund or any of its properties or assets; (xiv) each of this Agreement, the Subscription Agent Agreement and the Information Agent Agreement has been duly and validly executed and delivered by or on behalf of the Fund. The Subscription Agent Agreement and the Information Agent Agreement, assuming due and valid execution and delivery by the other parties thereto, constitutes the legal, valid and binding obligation of the Fund, enforceable against the Fund in accordance with its terms, except that the enforceability of the terms hereof and thereof may be limited by applicable bankruptcy, -7- 9 insolvency, reorganization or other similar laws relating to or affecting creditors' rights generally and by general equitable principles regardless of whether such enforceability is considered in a proceeding in equity or at law, and except to the extent that the enforceability of the indemnification and contribution provisions contained therein may be limited under federal and state securities laws; (xv) no consent, approval, authorization or order of any court or governmental agency or body or self-regulatory authority is required for the consummation by the Fund of the transactions contemplated by this Agreement, the Subscription Agent Agreement or the Information Agent Agreement, except such as may be required under the Acts, the Exchange Act or foreign or state securities or blue sky laws in connection with the distribution of the Rights and the issue and sale of the Shares; (xvi) this Agreement, the Fund's Articles of Incorporation and By-Laws, the Mexican Advisory Agreement, the U.S. Co-Advisory Agreement, the Administration Agreement, the Custodian Agreement, the Fund's Sub-Custodian Agreement, the Information Agent Agreement, the Transfer Agency Agreement, the Subscription Agent Agreement and the Plan conform in all material respects to the descriptions thereof in the Prospectus and there are no other agreements or documents to which the Fund is a party which are required under the Acts to be described in the Prospectus; (xvii) the Articles of Incorporation and the By-Laws of the Fund, the Mexican Advisory Agreement, the U.S. Co-Advisory Agreement, the Administration Agreement, the Custodian Agreement, and the Transfer Agency Agreement comply in all material respects with all applicable provisions of the Investment Company Act; (xviii) the Mexican Advisory Agreement, the U.S. Co-Advisory Agreement, the Administration Agreement, the Custodian Agreement, the Transfer Agency Agreement and the Plan are in full force and effect and neither the Fund nor, to the Fund's knowledge, any other party to any such agreement is in default thereunder and, to the knowledge of the Fund, no event has occurred which with the passage of time or the giving of notice would constitute a default thereunder; (xix) the authorized, issued and outstanding capital stock of the Fund is as set forth in the Prospectus. The Offer, the Rights and the Shares have been duly authorized and, when issued, paid for and delivered as described in the Registration Statement, the Shares will be validly issued and fully paid and nonassessable. The Rights, the Shares and the Common Stock conform in all material respects to the descriptions thereof contained in the Prospectus. The issuance of the Shares -8- 10 is not subject to any preemptive, registration or other similar rights; (xx) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has been no transaction entered into by the Fund which is material to the Fund other than those in the ordinary course of business, and there has been no dividend or distribution of any kind declared, paid or made by the Fund on any class of its capital stock; (xxi) the Rights and the Shares have been approved for listing on the NYSE, subject to official notice of issuance; (xxii) the Fund has not taken, and will not take, directly or indirectly, any action designed to, or which might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Rights or the Shares; (xxiii) the Fund is a regulated investment company under Subchapter M of the Code; (xxiv) no taxes or charges of any kind are or will be payable in or to Mexico, or any political subdivision thereof, by Oppenheimer with respect to this Agreement or the distribution of the Rights and the issue and sale of the Shares; (xxv) all advertisements prepared by the Fund for use in connection with the Offer comply with the requirements of the Acts; (xxvi) the Fund is registered with the Ministry of Finance and Public Credit of Mexico as a foreign financial institution. (b) The U.S. Co-Adviser represents and warrants to Oppenheimer that: (i) the U.S. Co-Adviser has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (ii) the U.S. Co-Adviser is duly qualified to conduct business in, and is in good standing in, each jurisdiction in which the nature of its activities or the character of its assets requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the U.S. Co-Adviser; -9- 11 (iii) the U.S. Co-Adviser is duly registered as an investment adviser under the Investment Advisers Act, and is not prohibited by the Investment Advisers Act or the Investment Company Act from acting under the U.S. Co-Advisory Agreement as an investment adviser to the Fund; (iv) the execution, delivery and performance by the U.S. Co-Adviser of this Agreement, and the consummation of the transactions contemplated herein are within the corporate power and authority of the U.S. Co-Adviser, have been duly authorized by all necessary corporate action and proceedings on the part of the U.S. Co-Adviser and do not and will not constitute a breach of or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property of the U.S. Co-Adviser pursuant to, any material contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the U.S. Co-Adviser is a party or by which it or any of its property may be bound or affected nor will such action result in any violation of the provisions of the Certificate of Incorporation or By-Laws of the U.S. Co-Adviser or of any law, rule or regulation or any judgment, order or decree of any court or governmental agency or body or any self-regulatory authority having jurisdiction over the U.S. Co-Adviser or its assets; (v) each of this Agreement and the U.S. Co-Advisory Agreement has been duly and validly executed and delivered by or on behalf of the U.S. Co-Adviser. The U.S. Co-Advisory Agreement, assuming due and valid execution and delivery by the other parties thereto, constitutes the legal, valid and binding obligation of the U.S. Co-Adviser, enforceable against the U.S. Co-Adviser in accordance with its terms, except to the extent such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or affecting creditors' rights and general principles of equity, and except to the extent that the enforceability of the indemnification and contribution provisions contained herein may be limited under federal and state securities laws; (vi) no consent, approval, authorization or order of any court or governmental agency or body or self-regulatory authority is required for the consummation by the U.S. Co-Adviser of the transactions contemplated by this Agreement; (vii) the U.S. Co-Advisory Agreement is in full force and effect and neither the U.S. Co-Adviser nor, to the U.S. Co-Adviser's knowledge, any other party to such agreement is in default thereunder and, to the knowledge of the U.S. Co-Adviser, no event has occurred which with the passage of time or the giving of notice would constitute a default thereunder; -10- 12 (viii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has been no material adverse change in the condition (financial or otherwise) of the U.S. Co-Adviser; (ix) there is no litigation or governmental or other proceeding or investigation before any court or before or by any governmental agency or body or any self-regulatory authority pending or, to the U.S. Co-Adviser's knowledge, threatened against, or involving the properties or business of, the U.S. Co-Adviser which is likely to have a material adverse effect on the Fund or likely to have a material adverse effect on the ability of the U.S. Co-Adviser to perform its obligations hereunder or under the U.S. Co-Advisory Agreement. (c) The Mexican Adviser represents and warrants to Oppenheimer that: (i) the Mexican Adviser has been duly organized and is validly existing as a corporation under the laws of Mexico, with the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (ii) the Mexican Adviser is duly qualified to conduct business in each jurisdiction in which the nature of its activities or the character of its assets requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Mexican Adviser; (iii) the Mexican Adviser is duly registered as an investment adviser under the Investment Advisers Act, and is not prohibited by the Investment Advisers Act or the Investment Company Act from acting under the Mexican Advisory Agreement as an investment adviser to the Fund; (iv) the execution, delivery and performance by the Mexican Adviser of this Agreement, and the consummation of the transactions contemplated herein, are within the corporate power and authority of the Mexican Adviser, have been duly authorized by all necessary corporate action and proceedings on the part of the Mexican Adviser and do not and will not constitute a breach of or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property of the Mexican Adviser pursuant to, any material contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Mexican Adviser is a party or by which it or any of its property may be bound or affected nor will such action result in any violation of the provisions of the By-Laws (Estatutos Sociales) of the Mexican Adviser or of any law, rule or regulation or any judgment, order or decree of any court -11- 13 or governmental agency or body or self-regulatory authority having jurisdiction over the Mexican Adviser or its assets; (v) each of this Agreement and the Mexican Advisory Agreement has been duly and validly executed and delivered by or on behalf of the Mexican Adviser. The Mexican Advisory Agreement, assuming due and valid execution and delivery by the other parties thereto, constitutes the legal, valid and binding obligation of the Mexican Adviser, enforceable against the Mexican Adviser in accordance with its terms, except to the extent such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or affecting creditors' rights and general principles of equity, and except to the extent that the enforceability of the indemnification and contribution provisions contained herein may be limited under federal and state securities laws; (vi) no consent, approval, authorization or order of any court or governmental agency or body or self-regulatory authority is required for the consummation by the Mexican Adviser of the transactions contemplated by this Agreement; (vii) the Mexican Advisory Agreement is in full force and effect and neither the Mexican Adviser nor, to the Mexican Adviser's knowledge, any other party to such agreement is in default thereunder and, to the knowledge of the Mexican Adviser, no event has occurred which with the passage of time or the giving of notice would constitute a default thereunder; (viii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has been no material adverse change in the condition (financial or otherwise) of the Mexican Adviser; (ix) there is no litigation or governmental or other proceeding or investigation before any court or before or by any governmental agency or body or self-regulatory authority pending or, to the Mexican Adviser's knowledge, threatened against, or involving the properties or business of, the Mexican Adviser which is likely to have a material adverse effect on the ability of the Mexican Adviser to perform its obligations hereunder or under the Mexican Advisory Agreement. (d) Any certificate signed by any officer of the Fund, the Mexican Adviser or the U.S. Co-Adviser and delivered to Oppenheimer or to counsel for Oppenheimer shall be deemed a representation and warranty by the Fund or such adviser, as the case may be, to Oppenheimer as to the matters covered thereby. -12- 14 5. SOLICITATION OF THE EXERCISE OF RIGHTS; FINANCIAL ADVISORY SERVICES (a) On the basis of the representations and warranties, and subject to the terms and conditions, set forth in this Agreement: (i) Oppenheimer agrees to (1) solicit, in accordance with the Acts, the Exchange Act and its customary practice, the exercise of the Rights, subject to the terms and conditions of, this Agreement, the Subscription Agent Agreement and the procedures described in the Registration Statement, and (2) form and manage the Selling Group to (i) solicit, in accordance with the Acts, the Exchange Act and Oppenheimer's customary practice, the exercise of Rights, subject to the terms of this Agreement, the Subscription Agent Agreement and the procedures described in the Registration Statement, and (ii) sell Shares purchased by Oppenheimer from the Fund as provided herein. No securities dealer shall be considered a Selling Group Member until it shall have entered into a Selling Group Agreement with Oppenheimer in substantially the form of Exhibit A hereto; (ii) Oppenheimer is authorized to buy and exercise Rights and to sell Shares to the public or to Selling Group Members at the offering price set by Oppenheimer from time to time. Sales of Shares by Oppenheimer or Selling Group Members shall be at not more than the offering price set by Oppenheimer from time to time. Such offering price shall not be increased more than once during any calendar day and at the time any such price is set shall not be less than the Subscription Price specified in the Prospectus nor more than the greater of the last sale or the current offering price on the New York Stock Exchange, plus an exchange commission; (iii) the Fund agrees to furnish, or cause to be furnished, to Oppenheimer, lists, or copies of those lists, showing the names and addresses of, and number of Shares held by, Record Date Stockholders as of the Record Date, and to use its best efforts to advise Oppenheimer, or cause it to be advised, on each Business Day during the Subscription Period as to any transfers of Rights, and Oppenheimer agrees to use such information only in connection with the Offer, and not to furnish the information to any other person except for Selling Group Members or other securities brokers and dealers that Oppenheimer or the Fund has requested to solicit exercises of Rights; (iv) the Fund will arrange for the Subscription Agent to inform Oppenheimer orally, on each Business Day during the Subscription Period (to be followed by written confirmation), as to the number of Rights that have been exercised since its previous daily report to Oppenheimer under the provision of this Section 5(a)(iv) and, not later than 10:00 a.m. (New York City -13- 15 time) on August 21, 1995, to provide Oppenheimer with a written statement as to the total number of Rights exercised (separately setting forth the number of Rights exercised by Record Date Stockholders); (v) Oppenheimer agrees to notify the Fund on or prior to August 21, 1995 of the Shares purchased by Oppenheimer through the exercise of Rights and sold to the public or to each Selling Group Member and the total amount of the commissions payable by the Fund pursuant to Section 6 of this Agreement in connection with such sales. (b) Oppenheimer agrees to provide to the Fund, in addition to the services described in paragraph (a) of this Section 5, financial advisory services in connection with the Offer and general financial advisory services to the Fund. No advisory fee, other than the fees provided for in Section 6 of this Agreement and reimbursement of Oppenheimer's out-of-pocket expenses as described in Section 8(c) of this Agreement, will be payable by the Fund to Oppenheimer in connection with the general financial advisory services provided by Oppenheimer in accordance with this paragraph (b) unless the Fund requests Oppenheimer to provide additional services with respect to a particular transaction involving the Fund, in which event the fees payable to Oppenheimer will be mutually agreed upon by the Fund and Oppenheimer. (c) The Fund and Oppenheimer agree that Oppenheimer and each Selling Group Member is an independent contractor with respect to its solicitation of the exercise of Rights, the purchase of Rights or the sale of Shares as contemplated by this Agreement and with respect to the performance of financial advisory services to the Fund contemplated by this Agreement, and Oppenheimer represents and warrants that it is not a partner or agent of any other securities broker, dealer or other person soliciting the exercise of Rights, the purchase of Rights or the sale of Shares as contemplated by this Agreement, or of the Fund or any of its affiliates. (d) In rendering the services contemplated by this Agreement, neither Oppenheimer nor any Selling Group Member will be subject to any liability to the Fund, the Mexican Adviser or the U.S. Co-Adviser or any of their affiliates, for any act or omission on the part of any securities broker or dealer (other than Oppenheimer or such Selling Group Member) or any other person, and neither Oppenheimer nor any Selling Group Member will be liable for acts or omissions in performing its obligations under this Agreement, except for any losses, claims, damages, liabilities and expenses determined in a final judgment by a court of competent jurisdiction to have resulted directly from any acts or omissions undertaken or omitted to be taken by Oppenheimer or such Selling Group Member by reason of its willful -14- 16 misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of its reckless disregard of its obligations and duties under this Agreement. 6. DEALER MANAGER AND SOLICITATION FEES (a) The Fund agrees to pay in New York Clearing House (next day) funds on August 30, 1995, to Oppenheimer, as compensation for its services to the Fund as financial advisor in connection with the Offer, a fee equal to an amount computed by multiplying (i) .01 by (ii) the aggregate number of Shares purchased in the Offer by (iii) the Subscription Price. (b) The Fund agrees to pay in New York Clearing House (next day) funds on August 30, 1995 to Oppenheimer for its own account a fee equal to an amount computed by multiplying (A) .025 by (B) the number of Shares purchased pursuant to each subscription form relating to the Rights upon which Oppenheimer is designated (other than Shares purchased by Oppenheimer through the exercise of Rights and sold to the public or to Selling Group Members) plus the number of Shares sold by Oppenheimer to the public as indicated in the notice provided by Oppenheimer to the Fund pursuant to Section 5(a)(v) of this Agreement, by (C) the Subscription Price. (c) The Fund agrees to pay in New York Clearing House (next day) funds on August 30, 1995 to Oppenheimer for the account of each Selling Group Member a fee equal to an amount computed by multiplying (A) .025 by (B) the number of Shares purchased pursuant to each subscription form relating to the Rights upon which the Selling Group Member is designated plus the number of Shares sold by Oppenheimer to such Selling Group Member for sale to the public as indicated in the notice provided by Oppenheimer to the Fund pursuant to Section 5(a)(v) of this Agreement, by (C) the Subscription Price. (d) The Fund agrees to pay in New York Clearing House (next day) funds on August 30, 1995 (i) to each securities broker or dealer who has executed the Fund's Soliciting Dealer Agreement (other than Oppenheimer or any Selling Group Member) designated on any subscription form related to the Rights ("Listed Broker"), a fee equal to an amount computed by multiplying (A) .005 by (B) the number of Shares purchased pursuant to each subscription form upon which the Listed Broker is designated by (C) the Subscription Price and (ii) to Oppenheimer a fee equal to an amount computed by multiplying (A) .025 by (B) the number of Shares purchased pursuant to each subscription form upon which no Selling Group Member or Listed Broker is designated by (C) the Subscription Price. -15- 17 7. CONDITIONS OF OPPENHEIMER'S OBLIGATION The obligations of Oppenheimer under this Agreement are subject to the satisfaction of each of the following conditions: (a) The Registration Statement shall have become effective not later than 5:30 P.M., New York City time, on the date of this Agreement, or at such later time and date as may be consented to by Oppenheimer, and if the Fund has elected to rely upon Rule 430A under the Securities Act, the Subscription Price and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 497(h) of the Securities Act within the prescribed time period, and the Fund shall have promptly provided evidence satisfactory to Oppenheimer of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A under the Securities Act. (b) No stop order suspending the effectiveness of the Registration Statement under the Securities Act shall have been issued and no proceedings for that purpose, or under Section 8(e) of the Investment Company Act, shall be pending or contemplated by the Commission. (c) The representations and warranties of the Fund, the Mexican Adviser and the U.S. Co-Adviser contained herein shall be true and correct in all material respects when made and at all times during the Subscription Period and the Fund, the Mexican Adviser and the U.S. Co-Adviser shall have each performed all covenants and agreements and satisfied all conditions contained herein required to be performed or satisfied by them on or before the date hereof. (d) On the date hereof, (i) the Registration Statement and the Prospectus shall contain all statements which are required to be stated therein in accordance with the Acts and in all material respects shall conform to the requirements of the Acts, the Fund shall have complied in all respects with Rule 430A under the Securities Act (if it has elected to rely thereon) and neither the Registration Statement nor the Prospectus shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change in the condition, financial or otherwise, of the Fund, the Mexican Adviser or the U.S. Co-Adviser, or in the management, capital stock, investment objectives, investment policies, earnings, liabilities, business affairs or business prospects of the Fund, whether or not arising in the ordinary -16- 18 course of business, from that set forth in the Registration Statement and the Prospectus, (iii) no litigation or governmental or other proceeding or investigation before any court or before or by any governmental agency or body or any self-regulatory authority shall be pending or, to the knowledge of the Fund, threatened against, or involving the properties or business of, the Fund and no litigation or governmental or other proceeding or investigation before any court or before or by any governmental agency or body or any self-regulatory authority shall be pending or, to the knowledge of the Mexican Adviser or the U.S. Co-Adviser, threatened against, or involving the properties or business of, either the Mexican Adviser or the U.S. Co-Adviser which is likely to have a material adverse effect on the Fund or likely to have a material adverse effect on the ability of the Mexican Adviser or the U.S. Co-Adviser to perform their respective obligations hereunder or under the U.S. Co-Advisory Agreement or the Mexican Advisory Agreement, as the case may be, (iv) none of the Fund, the U.S. Co-Adviser or the Mexican Adviser shall be in default in the performance or observance of any contract to which it is a party and which is material to the transactions contemplated by this Agreement, (v) no proceedings shall have been instituted or threatened by the Commission which would adversely affect the Fund's standing as a registered investment company under the Investment Company Act or the standing of either the Mexican Adviser or the U.S. Co-Adviser as a registered investment adviser under the Investment Advisers Act. (e) Oppenheimer shall have received, on the date hereof, certificates of the President of the Fund, the Director General of the Mexican Adviser and the President of the U.S. Co-Adviser, each dated as of the date hereof, certifying as of such date, to the extent appropriate, as to the matters set forth in Sections 7(a), (b), (c) and (d). (f) At the time of execution of this Agreement, Oppenheimer shall have received from Price Waterhouse LLP a letter, dated such date and, in form and substance satisfactory to Oppenheimer, to the effect that: (i) they are independent accountants with respect to the Fund within the meaning of the Securities Act and the applicable Rules and Regulations; (ii) in their opinion, the financial statements examined by them and included or incorporated by reference in the Registration Statement comply as to form in all respects with the applicable accounting requirements of the Acts and the respective Rules and Regulations; and (iii) in addition to the procedures referred to in clause (ii) above, they have performed other specified -17- 19 procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which have previously been specified by Oppenheimer and which shall be specified in such letter, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of the Fund. (g) On the date hereof, Oppenheimer shall have received the favorable opinion, dated as of the date hereof, of Rogers & Wells, counsel for the Fund, in form and substance satisfactory to counsel for Oppenheimer, to the effect that: (i) The Fund has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland. (ii) The Fund has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus, to execute and deliver this Agreement, the Subscription Agent Agreement and the Information Agent Agreement, and to perform its obligations hereunder and thereunder. (iii) The Fund is duly qualified and in good standing as a foreign corporation authorized to transact business in each jurisdiction in which the nature of its activities or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Fund. (iv) The Offer, the Rights and the Shares have been duly authorized and the Shares, when issued and delivered by the Fund as described in the Registration Statement against payment of the Subscription Price, will be validly issued and fully paid and nonassessable; the issuance of the Shares pursuant to the Offer is not subject to any preemptive, registration or other similar rights. (v) Each of this Agreement, the Subscription Agent Agreement and the Information Agent Agreement has been duly authorized, executed and delivered by the Fund and complies in all material respects with all applicable provisions of the Investment Company Act; each of the Subscription Agent Agreement and Information Agent Agreement, assuming due and valid execution and delivery thereof by the other parties thereto, constitutes a legal, valid and binding obligation of the Fund, enforceable against the Fund in accordance with its terms, except to the extent such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or affecting creditors' rights and general principles of equity and except to the extent that the enforceability of the -18- 20 indemnification and contribution provisions contained in this Agreement may be limited under federal and state securities laws. (vi) The Registration Statement is effective under the Securities Act and, to the best of their knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued under the Securities Act or proceedings for that purpose, or under Section 8(e) of the Investment Company Act, shall have been initiated or threatened by the Commission. (vii) On the date hereof, the Registration Statement (other than the financial statements and schedules incorporated by reference therein, as to which no opinion need be rendered) complies as to form in all material respects with the requirements of the Acts; they have participated in the preparation of the Registration Statement and Prospectus and have no reason to believe that the Registration Statement, on the date hereof, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, on the date the Registration Statement became effective, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (except for financial statements, schedules and other financial, economic and statistical information contained or incorporated by reference in the Registration Statement or the Prospectus, as to which counsel need express no belief). (viii) The Rights, the Shares and the Common Stock conform in all material respects to the description thereof contained in the Prospectus, and the forms of certificate used to evidence the Rights and the Shares are in due and proper form and comply in all material respects with all applicable statutory requirements. (ix) To the best of their knowledge, there are no legal or governmental proceedings pending or threatened against the Fund. (x) To the best of their knowledge, there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments of the Fund required by the Acts to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto; the descriptions thereof are correct in all material respects; to the best of their knowledge, no default exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, loan agreement, note or lease so described, referred to or filed. -19- 21 (xi) No consent, approval, authorization or order of any United States federal or State of New York court or governmental agency or body or of any self-regulatory authority in the United States is required in connection with any of the transactions contemplated hereunder and under the Subscription Agent Agreement and Information Agent Agreement, except such as has been obtained or such as may be required under state securities or blue sky laws; the distribution of the Rights and the issue and sale of the Shares and the execution and delivery of this Agreement, the Subscription Agent Agreement and Information Agent Agreement, and the consummation of the transactions contemplated herein and therein will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to, any material contract, indenture, mortgage, loan agreement, note, lease or other instrument known to them to which the Fund is a party or by which it may be bound or to which any of the property or assets of the Fund is subject, nor will such action result in any violation of the provisions of the Articles of Incorporation or By-Laws of the Fund, or any applicable United States federal or State of New York law, order, rule or regulation or any United States federal or State of New York court having jurisdiction over it or its properties or operations. (xii) The Fund is registered with the Commission under the Investment Company Act as a non-diversified, closed-end management investment company, and all required action has been taken by the Fund under the Acts with respect to the distribution of the Rights and the issue and sale of the Shares; the provisions of the Articles of Incorporation and By-Laws of the Fund comply as to form in all material respects with the requirements of the Investment Company Act. (xiii) The information in the Prospectus under the captions "Taxation - United States Federal Income Taxes" and "Common Stock," to the extent that it constitutes matters of United States law or legal conclusions, has been reviewed by them and is correct in all material respects. In rendering their opinion, Rogers & Wells (A) may rely as to matters involving the application of the laws of the State of Maryland, on the opinion of Piper & Marbury L.L.P., a copy of which shall be delivered to Oppenheimer, and as to matters involving the application of laws of any jurisdiction other than the States of New York or Maryland or the United States, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for Oppenheimer, (B) shall state that they have reviewed the opinion of Ritch, Heather y Mueller, S.C. concerning matters of Mexican law, and that such opinion is satisfactory to them in form and scope and that in -20- 22 their opinion Oppenheimer is justified in relying on such opinion, (C) may rely as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Fund and public officials and (D) in connection with the advice to be rendered by Rogers & Wells in accordance with the second clause of paragraph (vii) above, such counsel may state that it does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, except to the limited extent set forth in paragraph (xiii) above. (h) On the date hereof, Oppenheimer shall have received the favorable opinion, dated as of the date hereof, of Rogers & Wells, counsel for the U.S. Co-Adviser, in form and substance satisfactory to counsel for Oppenheimer, to the effect that: (i) The U.S. Co-Adviser has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The U.S. Co-Adviser has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to execute and deliver this Agreement and to perform its obligations hereunder. (iii) The U.S. Co-Adviser is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which the nature of its activities or the character of its assets requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the U.S. Co-Adviser. (iv) The U.S. Co-Adviser is duly registered as an investment adviser under the Investment Advisers Act; and to the best of their knowledge after due inquiry, the U.S. Co-Adviser is not prohibited by the Investment Advisers Act or the Investment Company Act from acting under the U.S. Co-Advisory Agreement as an investment adviser to the Fund as contemplated by the Prospectus. (v) This Agreement has been duly authorized, executed and delivered by the U.S. Co-Adviser. (vi) To the best of their knowledge, there are no legal or governmental proceedings pending or threatened against the U.S. Co-Adviser. (vii) Neither the execution and delivery of this Agreement nor the performance by the U.S. Co-Adviser of its obligations hereunder will conflict with, or constitute a breach -21- 23 of, or a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the U.S. Co-Adviser, pursuant to any material contract, indenture, mortgage, loan agreement, lease or other instrument known to them to which the U.S. Co-Adviser is a party or by which it is bound or to which any property or assets of the U.S. Co-Adviser are subject, nor will such action result in any violation of the Articles of Incorporation or By-Laws of the U.S. Co-Adviser, or any applicable United States federal or State of New York law, order, rule or regulation of the or any United States federal or State of New York court having jurisdiction over it or its properties or operations. (viii) The Mexican Adviser is duly registered as an investment adviser under the Investment Advisers Act; and to the best of their knowledge after due inquiry, the Mexican Adviser is not prohibited by the Investment Advisers Act or the Investment Company Act from acting under the Mexican Advisory Agreement as investment adviser to the Fund as contemplated by the Prospectus. (i) On the date hereof, Oppenheimer shall have received the favorable opinion, dated as of the date hereof, of Mijares, Angoitia, Iruirta y Fuentes, S.C., counsel for the Mexican Adviser, in form and substance satisfactory to counsel for Oppenheimer, to the effect that: (i) The Mexican Adviser has been duly organized and is validly existing as a corporation under the laws of Mexico. (ii) The Mexican Adviser has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to execute and deliver this Agreement and to perform its obligations hereunder. (iii) The Mexican Adviser is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which the nature of its activities or the character of its assets requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Mexican Adviser. (iv) This Agreement has been duly authorized, executed and delivered by the Mexican Adviser. This Agreement, assuming due and valid execution and delivery by the other parties thereto, constitutes the legal, valid and binding obligation of the Mexican Adviser, enforceable against the Mexican Adviser in accordance with its terms, except to the extent such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or affecting creditors' rights and general principles -22- 24 of equity and except to the extent that enforceability of the indemnification and contribution provisions contained in this Agreement may be limited under federal and state securities laws. (v) To the best of their knowledge, there are no legal or governmental proceedings pending or threatened against the Mexican Adviser. (vi) Neither the execution and delivery of this Agreement nor the performance by the Mexican Adviser of its obligations hereunder will conflict with, or constitute a breach of, or a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Mexican Adviser, pursuant to any material contract, indenture, mortgage, loan agreement, lease or other instrument known to them to which the Mexican Adviser is a party or by which it is bound or to which any property or assets of the Mexican Adviser are subject, nor will such action result in any violation of the Articles of Incorporation or By-Laws of the Mexican Adviser, or any applicable law, order, rule or regulation of the United Mexican States or any state government or any court or governmental agency or body or self-regulatory authority having jurisdiction over it or its properties or operations. (j) On the date hereof, Oppenheimer shall have received an opinion, dated the date hereof, in form and substance satisfactory to counsel for Oppenheimer of Ritch, Heather y Mueller, S.C., special Mexican counsel for the Fund, to the effect that: (i) Except for such consents, approvals, licenses and authorizations as shall be specified in such counsel's opinion, all of which have been obtained and are in full force and effect and all conditions of which have been fully satisfied, there are no other consents, approvals, licenses or authorizations required by any party to this Agreement, the Subscription Agent Agreement or the Information Agent Agreement, from any governmental agency or body or self-regulatory authority in or of Mexico for (A) the execution, delivery or performance of this Agreement, the Subscription Agent Agreement or the Information Agent Agreement, or (B) the Offer, the distribution of the Rights and the issue and sale of the Shares in the manner contemplated hereunder or by the Registration Statement and the Prospectus. (ii) There are no Mexican statutes or regulations or, to such counsel's knowledge, legal or governmental proceedings materially affecting the operation of the Fund, the Mexican Adviser or the U.S. Co-Adviser as contemplated by the Prospectus, except such as are described in the Prospectus; such counsel does not know of any contracts, indentures, mortgages, loan agreements, notes, leases or other instruments affecting the -23- 25 Fund, the Mexican Adviser or the U.S. Co-Adviser other than those described or referred to in the Registration Statement (or previously or presently filed with the Commission) or the Prospectus. (iii) The information contained in the Registration Statement at the time such Registration Statement became effective and in the Prospectus, as amended or supplemented if applicable, to the extent it relates to matters of Mexican law or Mexican legal conclusions, is accurate and complete. (iv) The choice of the laws of the United States and New York State to govern this Agreement, the Subscription Agent Agreement and the Information Agent Agreement is in each case a valid choice of law under the laws of Mexico, and accordingly would be applied by the courts of Mexico if any such agreement or any claim made thereunder is or are brought before such court upon proof of the relevant provisions of the United States or New York State; no provision in said agreements conflicts with public policy in Mexico. (v) To the best knowledge of such counsel, there is no pending or threatened action, suit or proceeding before any court or governmental agency or body or self-regulatory authority or any arbitrator questioning the validity of this Agreement, the Subscription Agent Agreement or the Information Agent Agreement or affecting the conduct of the Fund as described in the Prospectus or involving or affecting the Mexican Adviser or the U.S. Co-Adviser. (vi) No stamp duty or other documentary tax is payable in Mexico in respect of the execution, delivery or performance of this Agreement, the Subscription Agent Agreement or the Information Agent Agreement; no stamp duty or other documentary tax would be charged on, and no other deduction will be made by any court in Mexico from, the amount awarded in any judgment rendered in respect of any of the documents or instruments referred to in this paragraph or any rights thereunder or relating thereto; no stamp duty or other documentary tax of Mexico would be payable in connection with the exercise of rights or duties under any such documents or instruments by any person. (vii) The information in the Prospectus under the caption "Taxation - Mexican Taxes," to the extent that it constitutes matters of Mexican law or legal conclusions, has been reviewed by them and is correct. (viii) No taxes or charges of any kind are or will be payable in or to Mexico, or any political subdivision thereof, by Oppenheimer with respect to this Agreement or the distribution of the Rights and the issue and sale of the Shares. -24- 26 (k) The favorable opinion, dated as of the date hereof, of Willkie Farr & Gallagher, counsel for Oppenheimer, with respect to the matters set forth in (iv), (vii) and (xii) of subsection (g) of this Section. In rendering their opinion, Willkie Farr & Gallagher (A) may rely as to matters involving the application of the laws of the State of Maryland, on the opinion of Piper & Marbury L.L.P., a copy of which shall be delivered to Oppenheimer, and as to matters involving the application of laws of any jurisdiction other than the States of New York or Maryland or the United States, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for Oppenheimer, (B) may rely as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Fund and public officials and (C) in connection with the advice rendered by Willkie Farr & Gallagher in connection with the second clause of paragraph (vii) of subsection (g) of this Section, such counsel may state that it does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus. (l) On the date hereof, counsel for Oppenheimer shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the distribution of the Rights and the issue and sale of the Shares as contemplated herein and related proceedings, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Fund, the Mexican Adviser and the U.S. Co-Adviser in connection with the distribution of the Rights and the issue and sale of the Shares as herein contemplated shall be satisfactory in form and substance to Oppenheimer and counsel for Oppenheimer. (m) The Rights and the Shares shall have been duly authorized for listing on the New York Stock Exchange. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by Oppenheimer by notice to the Fund at any time prior to or during the Subscription Period and such termination shall be without liability of any party to any other party except as provided in Section 8(c). Notwithstanding any such termination, the provisions of Sections 9 and 10 shall remain in effect. 8. COVENANTS OF THE FUND AND THE ADVISERS (a) The Fund agrees with Oppenheimer as follows: -25- 27 (i) The Fund will use its best efforts to cause the Registration Statement to become effective under the Securities Act, and will advise Oppenheimer promptly as to the time at which the Registration Statement and any amendment thereto (including any post-effective amendment) becomes so effective. The Fund will notify Oppenheimer immediately, and confirm such notice in writing (A) of the effectiveness of the Registration Statement and any amendment thereto (including any post-effective amendment), (B) if Rule 430A under the Securities Act is used, when the Prospectus is filed with the Commission pursuant to Rule 497(h) of the Securities Act (which the Fund agrees to file in a timely manner in accordance with such Rule), (C) of the receipt of any comments from the Commission, (D) of any request by the Commission for any amendment or supplement to the Registration Statement or the Prospectus or for additional information, (E) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of the Prospectus, or the initiation of any proceedings, investigative or otherwise, for any such purpose, (F) of the institution of any procedures pursuant to Section 8(e) of the Investment Company Act, (G) of the suspension of the qualification of the Rights or the Shares for offering or sale in any jurisdiction, or the initiation or threatening of any proceedings for any such purpose and (H) of the happening of any event during the period described in Section 8(a)(iii) which in the judgment of the Fund makes any statement in the Registration Statement or the Prospectus untrue in any material respect or which requires the making of any changes in or addition to the Registration Statement or the Prospectus in order to make the statements therein not misleading in any material respect. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement or an order pursuant to Section 8(e) of the Investment Company Act, the Fund will make every reasonable effort to obtain the withdrawal of such order at the earliest possible moment. (ii) The Fund (A) will give Oppenheimer notice of its intention to file any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Fund proposes for use by Oppenheimer in connection with the distribution of the Rights and the issue and sale of the Shares, which differ from the prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 497 of the Securities Act), whether pursuant to the Investment Company Act, the Securities Act, or otherwise, (B) will furnish Oppenheimer and to the Selling Group Members and other dealers (whose names and addresses Oppenheimer will furnish to the Fund) with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and (C) -26- 28 will not file any such amendment or supplement or use any such prospectus to which Oppenheimer or counsel for Oppenheimer shall reasonably object. (iii) If, during such period as in the reasonable opinion of counsel to Oppenheimer the Prospectus is required by law to be delivered, any event shall occur as a result of which it is necessary to amend or supplement the Prospectus in order to make the Prospectus not misleading in light of the circumstances existing at the time they are delivered to a purchaser, or if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the law, the Fund will forthwith amend or supplement the Prospectus by preparing and furnishing to Oppenheimer and to the Selling Group Members and other dealers (whose names and addresses Oppenheimer will furnish to the Fund) a reasonable number of copies of an amendment or amendments of, or a supplement or supplements to, the Prospectus (in form and substance satisfactory to counsel for Oppenheimer), so that, as so amended or supplemented, the Prospectus will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time the prospectuses are delivered to a purchaser, not misleading and will comply with law. (iv) The Fund will make generally available to its security holders as soon as practicable, but not later than 60 days after the close of the period covered thereby, financial statements (in form complying with the provisions of Rule 158 under the Securities Act) covering a twelve-month period beginning not later than the first day of the Fund's fiscal quarter next following the "effective date" (as defined in Rule 158 under the Securities Act or any successor rule or regulation thereto) of the Registration Statement. (v) The Fund will furnish to Oppenheimer, without charge, a manually executed copy of the Registration Statement, including all exhibits, and any amendments thereto, and will furnish to Oppenheimer, without charge, copies, in reasonable quantities, of the Registration Statement and any amendments thereto, in each case as soon as available and in such additional quantities as Oppenheimer may from time to time reasonably request. (vi) The Fund will use its best efforts, in cooperation with Oppenheimer, to qualify the Rights and the Shares for offering and sale under the applicable securities laws of such states of the United States as Oppenheimer may designate, and will maintain such qualifications in effect for so long as reasonably required for distribution of the Rights and the issue and sale of the Shares; provided, however, that the Fund will not be obligated to file any general consent to service of process or -27- 29 to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not now so qualified. The Fund will file such statements and reports as may be required by the laws of each jurisdiction in which the Rights and the Shares have been qualified as above provided. (vii) For a period of five years from the date hereof, the Fund will furnish to Oppenheimer copies of all annual reports, semiannual reports, quarterly reports and current reports filed with the Commission, and such other documents, reports and information as shall be furnished by the Fund to its stockholders generally. (viii) The Fund agrees to furnish to Oppenheimer from time to time during the period when the Prospectus is required to be delivered under the Securities Act or the Exchange Act such number of copies of the Prospectus (as amended or supplemented) as Oppenheimer may reasonably request for the purposes contemplated by the Securities Act or the Exchange Act. The Fund consents to the use of the Prospectus and any amendment or supplement thereto by Oppenheimer, both in connection with the distribution of the Rights and the issue and sale of the Shares and for such period of time thereafter as the Prospectus is required by law to be delivered in connection therewith. (ix) Without the prior written consent of Oppenheimer, the Fund will not issue, sell, contract to sell, register with the Commission, or otherwise dispose of, directly or indirectly, any equity securities of the Fund (or any securities convertible into or exercisable for equity securities of the Fund), within 120 days after the date of the Prospectus, except for (i) the distribution of the Rights and the issue and sale of the Shares pursuant hereto and (ii) shares of Common Stock issued pursuant to the reinvestment of dividends or distributions under the Plan. (x) The Fund will use the net proceeds received by it from the exercise of the Rights and the purchase and sale of the Shares in the manner specified in the Prospectus under the caption "Use of Proceeds." (b) Each of the Mexican Adviser and the U.S. Co-Adviser covenants and agrees with Oppenheimer to use its best efforts to cause the Fund to comply with each of its covenants and agreements contained in Section 8(a). (c) The Fund will pay all costs, expenses, fees and taxes incident to (i) the preparation, printing and filing of the Registration Statement and of each amendment thereto, the Prospectus and any amendments or supplements thereto, (ii) the printing of this Agreement, (iii) the preparation, issuance and delivery of the certificates for the Rights and the Shares, (iv) -28- 30 the fees and disbursements of the Fund's counsel and accountants, (v) the qualification of the Rights and the Shares under securities laws in accordance with the provisions of Section 8(a)(vi) of this Agreement, including filing fees and any fees or disbursements of counsel for Oppenheimer in connection therewith and in connection with the preparation of the Blue Sky Survey, (vi) furnishing such copies of the Registration Statement and the Prospectus and all amendments and supplements thereto, as may be reasonably requested for use in connection with the distribution of the Rights and the issue and sale of the Shares, (vii) the printing and delivery to Oppenheimer of copies of the Blue Sky Survey and any legal investment survey, (viii) the fees and expenses (other than legal expenses) incurred with respect to the filing with the National Association of Securities Dealers, Inc., (ix) the fees and expenses incurred with respect to the listing of the Rights and the Shares on the NYSE and the registration thereof under the Exchange Act and (x) an aggregate of $100,000 toward reimbursement in part of the costs and expenses of Oppenheimer. If the Offer is not consummated because any condition to obligations of Oppenheimer set forth in Section 7 hereof is not satisfied when and as required to be satisfied, or because of any refusal, inability to perform any agreement herein when and as required to be performed or to comply when and as required with any provision hereof, the Fund agrees to reimburse Oppenheimer upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the Offer. 9. INDEMNIFICATION (a) The Fund, the Mexican Adviser and the U.S. Co-Adviser jointly and severally agree to indemnify and hold harmless Oppenheimer and each person, if any, who controls Oppenheimer within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all losses, claims, damages and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), as incurred, to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus or any amendment thereof or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that (A) -29- 31 such indemnity shall not inure to the benefit of Oppenheimer (or any person controlling Oppenheimer) on account of any losses, claims, damages or liabilities arising from the distribution of the Rights and the issue and sale of the Shares if such untrue statement or omission or alleged untrue statement or omission was made in the Registration Statement or the Prospectus, or such amendment or supplement, in reliance upon and in conformity with information furnished in writing to the Fund by Oppenheimer specifically for use therein; and (B) the indemnity agreement contained in this subsection (a) with respect to any untrue statement or alleged untrue statement contained in, or omission or alleged omission from the Prospectus and corrected in any supplement or amendment thereto shall not inure to the benefit of Oppenheimer on account of any losses, claims, damages or liabilities incurred by Oppenheimer arising from the distribution of the Rights and the issue and sale of the Shares if a copy of the supplement or amendment to the Prospectus shall not have been sent or given to such person in any case where such delivery was required by the Securities Act; and provided further that the obligation of the Mexican Adviser under this Section 9(a) shall not apply to any loss, claim, damage or liability to the extent arising out of or based upon any untrue statement or alleged untrue statement of or omission or alleged omission contained in the Prospectus (or any amendment or supplement thereto) except in respect of information contained under the captions "Management of the Fund -- The Mexican Adviser," "The Mexican Securities Markets" and "Appendix A -- The United Mexican States" and with respect to information relating to the Mexican Adviser under the caption "Prospectus Summary;" and provided further that the obligation of the U.S. Co-Adviser under this Section 9(a) shall not apply to any loss, claim, damage or liability to the extent arising out of or based upon any untrue statement or alleged untrue statement of or omission or alleged omission contained in the Prospectus (or any amendment or supplement thereto) except in respect of information contained under the caption "Management of the Fund -- The U.S. Co-Adviser," and with respect to information relating to the U.S. Co-Adviser under the caption "Prospectus Summary;" and provided further that the Mexican Adviser and the U.S. Co-Adviser shall be liable to any party indemnified by them under this Section 9(a) only to the extent that the Fund fails to indemnify them and hold harmless such indemnified party pursuant to this Section 9(a) and (ii) any failure of the Fund to consummate the Offer, including any failure of the Fund to issue the Rights or issue and sell the Shares, (iii) any action taken or omitted to be taken in connection with the Offer by Oppenheimer with the consent of the Fund, (iv) any action taken or omitted to be taken in connection with the Offer by the Fund and/or the Mexican Adviser and the U.S. Co-Adviser (provided, however, that the Fund shall not be liable for any action or inaction of the Mexican Adviser and/or the U.S. Co-Adviser with respect to this clause (iv)), (v) any breach by the Fund and/or the Mexican Adviser and the U.S. Co-Adviser of any representation -30- 32 or warranty, or any failure by the Fund and/or the Mexican Adviser and the U.S. Co-Adviser to comply with any agreement or covenant contained in this Agreement (provided, however, that the Fund shall not be liable for any breach or failure to comply of the Mexican Adviser and/or the U.S. Co-Adviser with respect to this clause (v)) or (vi) any of the other transactions contemplated by the Offer or by Oppenheimer's performance of its obligations under this Agreement provided no willful misfeasance, bad faith or gross negligence by Oppenheimer in the performance of its duties, or reckless disregard of its duties. The indemnification obligations under this Section 9(a) will be in addition to any liability which the Fund, the Mexican Adviser or the U.S. Co-Adviser may otherwise have. (b) Oppenheimer agrees to indemnify and hold harmless the Fund, the Mexican Adviser and the U.S. Co-Adviser, their respective directors and each officer of the Fund who signs the Registration Statement, and any person controlling the Fund, the Mexican Adviser or the U.S. Co-Adviser to the same extent as the foregoing indemnity from the Fund, the Mexican Adviser and the U.S. Co-Adviser to Oppenheimer but only with reference to information furnished in writing by Oppenheimer expressly for use in the Registration Statement and the Prospectus or any supplement or amendment thereto. The Fund, the Mexican Adviser and the U.S. Co-Adviser each acknowledge that the statements set forth in the stabilizing legend on the inside front cover page, the second paragraph of text under the sub-heading "--The U.S. Co-Adviser," the text under the subheading "--Administrator" and the first, third, sixth and seventh paragraphs of text under the heading "Distribution Arrangements" in the Prospectus constitute the only information furnished in writing by or on behalf of Oppenheimer for inclusion in the Prospectus. (c) Any party that proposes to assert the right to be indemnified under this Section 9 shall, promptly after receipt of notice of commencement of any action, suit or proceeding against any such party in respect of which a claim is to be made against an indemnifying party or parties under this Section, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served. No indemnification provided for in Section 9(a) or 9(b) shall be available to any party who shall fail to give notice as provided in this Section 9(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under this Section. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be -31- 33 entitled to participate in, and, to the extent that it wishes, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnified party of such counsel, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, except as provided below and except for the reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying parties and the indemnified party in the conduct of the defense of such action (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnifying parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying parties. An indemnifying party shall not be liable for any settlement of any action, suit, proceeding or claim effected without its written consent, which consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. 10. CONTRIBUTION In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 9 is due in accordance with its terms but for any reason is held to be unavailable to an indemnified party, then each indemnifying party under Section 9 shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages and liabilities (including any investigation, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contribution received by the Fund, the Mexican Adviser and the U.S. Co-Adviser from persons other than Oppenheimer, such as persons who control the Fund, the Mexican -32- 34 Adviser and the U.S. Co-Adviser within the meaning of the Securities Act, officers of the Fund who signed the Registration Statement and directors of the Fund, who may also be liable for contribution) in such proportion as is appropriate to reflect the relative benefits received by the Fund, the Mexican Adviser and the U.S. Co-Adviser on the one hand and Oppenheimer on the other from the distribution of Rights and the issue and sale of the Shares or, if such allocations are not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 9 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Fund, the Mexican Adviser and the U.S. Co-Adviser on the one hand and Oppenheimer on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Fund, the Mexican Adviser and the U.S. Co-Adviser on the one hand and Oppenheimer on the other shall be deemed to be in the same proportion as the total net proceeds from the subscription for the Shares (before deducting expenses) received by the Fund bears to the aggregate financial advisory and soliciting fees received by Oppenheimer pursuant to Section 6 hereof (such fees, the "Aggregate Fees"). The relative fault of the Fund, the Mexican Adviser and the U.S. Co-Adviser on the one hand and Oppenheimer on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact related to information supplied by the Fund, the Mexican Adviser and the U.S. Co-Adviser or Oppenheimer and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Fund, the Mexican Adviser and the U.S. Co-Adviser and Oppenheimer agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 10, (i) in no case shall Oppenheimer be required to contribute any amount in excess of the Aggregate Fees and (ii) the Fund, the Mexican Adviser and the U.S. Co-Adviser shall be liable and responsible for any amount in excess of the Aggregate Fees; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 10, each person, if any, who controls Oppenheimer within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as Oppenheimer, and each person, if any, who controls the Fund, the Mexican Adviser or the U.S. Co-Adviser within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, each officer of the Fund who shall -33- 35 have signed the Registration Statement and each director of the Fund, the Mexican Adviser and the U.S. Co-Adviser shall have the same rights to contribution as the Fund, the Mexican Adviser and the U.S. Co-Adviser, subject in each case to clauses (i) and (ii) in the immediately preceding sentence of this Section 10. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section, notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Section. No party shall be liable for contribution with respect to any action, suit, proceeding or claim settled without its written consent. 11. EFFECTIVE DATE; TERMINATION (a) This Agreement shall become effective upon the later of (i) execution and delivery hereof by the parties hereto and (ii) release of notification of the effectiveness of the Registration Statement by the Commission. (b) This Agreement may be terminated after it becomes effective by Oppenheimer by notifying the Fund, the Mexican Adviser and the U.S. Co-Adviser at any time: (i) if any of the following has occurred: (A) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any adverse change or development involving a prospective adverse change in or affecting the condition, financial or otherwise, of the Fund, the Mexican Adviser or the U.S. Co-Adviser or earnings, affairs, or business prospects of the Fund, the Mexican Adviser or the U.S. Co-Adviser whether or not arising in the ordinary course of business, which would, in Oppenheimer's sole judgment, make the solicitation of the exercise of the Rights or the issuance and sale of the Shares in the manner contemplated by the Prospectus impracticable, (B) any outbreak of hostilities, any escalation in any hostilities in which the United States or Mexico is engaged, or other national or international calamity or crisis or material change in economic conditions, if the effect of such outbreak, calamity, crisis or change in the financial markets of the United States or elsewhere would, in Oppenheimer's sole judgment, make the solicitation of the exercise of the Rights or the issuance and sale of the shares in the manner contemplated by the Prospectus impracticable, (C) suspension of trading in securities on the NYSE or the Mexican Stock Exchange or a material limitation on prices (other than limitations of a type which are described in the Prospectus and limitations on hours or numbers -34- 36 of days of trading) for securities on any such exchange, (D) the enactment, publication, decree or other promulgation of any U.S. federal or state or Mexican statute, regulation, rule or order of any U.S. federal or state or Mexican court or other governmental authority which in Oppenheimer's sole opinion materially and adversely affects, or will materially and adversely affect, the business or operations of the Fund, the Mexican Adviser or the U.S. Co-Adviser, (E) declaration of a banking moratorium by either U.S. federal or New York State or Mexican authorities, (F) the taking of any action by any U.S. federal or state or local government or agency in respect of its monetary or fiscal affairs which in Oppenheimer's sole opinion has a material adverse effect on the financial markets in the United States or (G) existing financial, political or economic conditions in Mexico, or international monetary conditions, shall have undergone a material change which in Oppenheimer's sole opinion makes the solicitation of the exercise of the Rights or the issuance and sale of the Shares in the manner contemplated by the Prospectus impracticable. (ii) at or before the Expiration Date if any of the conditions specified in Section 7 shall not have been fulfilled when and as required by this Agreement. If this Agreement is terminated pursuant to this Section, Oppenheimer shall not be under any liability to the Fund, the Mexican Adviser or the U.S. Co-Adviser and neither the Fund, the Mexican Adviser nor the U.S. Co-Adviser shall be under any liability to Oppenheimer except to the extent provided in Section 8(c). Notwithstanding any such termination, the provisions of Sections 9 and 10 shall remain in effect. 12. MISCELLANEOUS These respective agreements, representations, warranties, indemnities and other statements of the Fund, the Mexican Adviser, the U.S. Co-Adviser or their respective officers and of Oppenheimer set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any investigation made by or on behalf of Oppenheimer or the Fund, the Mexican Adviser, the U.S. Co-Adviser or any of the officers, directors or controlling persons referred to in Sections 9 and 10 hereof, and shall survive delivery of and payment for the Shares. The provisions of Sections 8(c), 9 and 10 hereof shall survive the termination or cancellation of this Agreement. This Agreement has been and is made for the benefit of Oppenheimer, the Fund, the Mexican Adviser, the U.S. Co-Adviser and their respective successors and assigns and, to the extent expressed herein, for the benefit of persons controlling any of Oppenheimer, the Fund, the Mexican Adviser or the U.S. Co- -35- 37 Adviser, directors and officers of the Fund, the Mexican Adviser and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser of Shares merely because of such purchase. All notices and communications hereunder shall be in writing and mailed or delivered, or transmitted by telephone or telegraph if subsequently confirmed in writing, to Oppenheimer, at Oppenheimer Tower, World Financial Center, New York, New York 10281, Attention: Legal Department, to the Fund at Oppenheimer Tower, World Financial Center, New York, New York 10281, c/o Oppenheimer & Co., Inc., Attention: President; to the Mexican Adviser at Paseo de la Reforma 398, 06600 Mexico, D.F., Mexico, c/o Acciones y Valores de Mexico, S.A. de C.V., Attention: Director General; and to the U.S. Co-Adviser at Oppenheimer Tower, World Financial Center, New York, New York 10281, c/o Oppenheimer & Co., Inc., Attention: President. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. -36- 38 Please confirm that the foregoing correctly sets forth the agreement among the Fund, the Mexican Adviser, the U.S. Co-Adviser and Oppenheimer. Very truly yours, THE MEXICO EQUITY AND INCOME FUND, INC. By:____________________________ Alan H. Rappaport President and Chairman of the Board of Directors ACCI WORLDWIDE, S.A. DE C.V. By:____________________________ Maria Eugenia Pichardo Director General ADVANTAGE ADVISERS, INC. By:____________________________ Alan H. Rappaport President Confirmed and Accepted OPPENHEIMER & CO., INC. By:____________________________ Dennis Feeney Executive Vice President EX-99.H2 5 FORM OF SOLICITING DEALER AGREEMENT 1 EXHIBIT (h)(2) THE MEXICO EQUITY AND INCOME FUND, INC. RIGHTS OFFERING FOR SHARES OF COMMON STOCK SOLICITING DEALER AGREEMENT THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, ON AUGUST 15, 1995, UNLESS EXTENDED. To Securities Dealers and Brokers: The Mexico Equity and Income Fund, Inc. (the "Fund") is issuing to its stockholders of record ("Record Date Stockholders") as of the close of business on July 24, 1995 (the "Record Date") transferable rights ("Rights") to subscribe for an aggregate of 3,000,000 shares of Common Stock (the "Shares") of the Fund upon the terms and subject to the conditions set forth in the Fund's Prospectus dated July 24, 1995 (the "Offer"). Each Record Date Stockholder is being issued one Right for each full share of Common Stock owned on the Record Date. The Rights will be traded on the New York Stock Exchange. The Rights entitle the Record Date Stockholders and holders of Rights acquired during the Subscription Period (as hereinafter defined) to acquire at $9.125 per Share (the "Subscription Price"), one Share for each three Rights held. No fractional Shares will be issued. The Subscription Period commences on July 26, 1995 and ends at 5:00 p.m., New York time, on August 15, 1995, unless extended (the "Expiration Date"). Record Date Stockholders who fully exercise all Rights issued to them and, secondarily, holders of Rights acquired during the Subscription Period, are entitled to subscribe for Shares which were not otherwise subscribed for by others in the primary subscription (the "Over-Subscription Privilege"). Shares acquired pursuant to the Over-Subscription Privilege are subject to allotment, as more fully discussed in the Prospectus. For the duration of the Offer, the Fund will pay Soliciting Fees (as defined below) to any qualified broker or dealer who solicits the exercise of Rights in connection with the Offer and who complies with the procedures described below (a "Soliciting Dealer"). Upon timely delivery to PNC Bank, National Association, the Fund's Subscription Agent for the Offer, of payment for Shares purchased pursuant to the exercise of Rights and of properly completed and executed documentation as set forth in this Soliciting Dealer Agreement, a Soliciting Dealer will be entitled to receive a soliciting fee equal to 0.50% of the Subscription Price per Share purchased pursuant to exercise of the Rights (the "Soliciting Fee"). A qualified broker or dealer is a broker or dealer that is a member of a registered national securities exchange in the United States or the National Association of Securities Dealers, Inc. ("NASD") or any foreign 2 broker or dealer not eligible for membership who agrees to conform to the Rules of Fair Practice of the NASD in making solicitations in the United States to the same extent as if it were a member thereof. The Fund hereby agrees to pay the Soliciting Fees payable to the Soliciting Dealers and to indemnify each Soliciting Dealer against all losses, claims, damages and liabilities to which such Soliciting Dealer may become subject as a result of (a) any untrue or alleged untrue statement of a material fact in the Prospectus, as amended or supplemented from time to time, or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (b) any actions taken or omitted to be taken in connection with the performance by such Soliciting Dealer of its services as a Soliciting Dealer, except to the extent any such loss, claim, damage or liability results from the negligence, willful misconduct or bad faith of such Soliciting Dealer in performing its services as a Soliciting Dealer. Solicitation and other activities by Soliciting Dealers may be undertaken only in accordance with the applicable rules and regulations of the Securities and Exchange Commission and only in those states and other jurisdictions where such solicitations and other activities may lawfully be undertaken in accordance with the laws thereof. Compensation will not be paid for solicitations in any state or other jurisdiction in which, in the opinion of counsel to the Fund or counsel to Oppenheimer & Co., Inc., the Dealer Manager in connection with the Offer (the "Dealer Manager"), such compensation may not lawfully be paid. No Soliciting Dealer shall be paid Soliciting Fees with respect to Shares purchased pursuant to an exercise of Rights for its own account or for the account of any affiliate of the Soliciting Dealer, except that the Dealer Manager shall receive the Soliciting Fees with respect to Shares purchased pursuant to an exercise of Rights for its own account provided that such Shares are offered and sold by the Dealer Manager to its clients. No Soliciting Dealer or any other person is authorized by the Fund or the Dealer Manager to give any information or make any representations in connection with the Offer other than those contained in the Prospectus and other authorized solicitation material furnished by the Fund through the Dealer Manager. No Soliciting Dealer is authorized to act as agent of the Fund or the Dealer Manager in any respect in any transaction. In addition, nothing herein contained shall constitute the Soliciting Dealers partners with the Dealer Manager or with one another, or agents of the Dealer Manager or of the Fund, or create any association between such parties, or shall render the Dealer Manager or the Fund liable for the obligations of any Soliciting Dealer. The Dealer Manager shall be under no liability to make any payment to any Soliciting Dealer, and shall -2- 3 be subject to no other liabilities to any Soliciting Dealer, and no obligations of any sort shall be implied. In order for a Soliciting Dealer to receive Soliciting Fees, the Dealer Manager must have received from such Soliciting Dealer no later than 5:00 p.m., New York time, on the Expiration Date, a properly completed and duly executed Soliciting Dealer Agreement (or a facsimile thereof). In addition, the Subscription Agent must have received from such Soliciting Dealer either (i) a properly completed and duly executed Subscription Certificate with respect to Shares purchased pursuant to the exercise of Rights and full payment for such Shares by no later than 5:00 p.m., New York time, on the Expiration Date; or (ii) a Notice of Guaranteed Delivery guaranteeing delivery to the Subscription Agent by close of business on the third New York Stock Exchange trading day after the Expiration Date, of a properly completed and duly executed Subscription Certificate with respect to Shares purchased pursuant to the exercise of Rights and full payment for such Shares. In the case of a Notice of Guaranteed Delivery, Soliciting Fees will only be paid after payment and delivery in accordance with such Notice of Guaranteed Delivery has been effected. Soliciting Fees will only be paid to a Soliciting Dealer who is designated on the Subscription Certificate. If no Soliciting Dealer is designated, the Soliciting Fee will be paid to the Dealer Manager. All questions as to the form, validity and eligibility (including time of receipt) of the Soliciting Dealer Agreement will be determined by the Fund, in its sole discretion, which determination shall be final and binding. Unless waived, any irregularities in connection with a Soliciting Dealer Agreement or delivery thereof must be cured within such time as the Fund shall determine. None of the Fund, the Dealer Manager, the Subscription Agent or the Fund's Information Agent for the Offer or any other person will be under any duty to give notification of any defects or irregularities in any Soliciting Dealer Agreement or incur any liability for failure to give such notification. Execution and delivery of this Soliciting Dealer Agreement and the acceptance of Soliciting Fees from the Fund by a Soliciting Dealer constitute a representation and warranty by such Soliciting Dealer to the Fund that: (i) it has received and reviewed the Prospectus; (ii) in soliciting purchases of Shares pursuant to the exercise of the Rights, it has complied with the applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the applicable rules and regulations thereunder, any applicable securities laws of any state or jurisdiction where such solicitations may lawfully be made, and the applicable rules and regulations of any self- -3- 4 regulatory organization or registered national securities exchange, including, without limitation, Section 24 of Article III of the Rules of Fair Practice of the NASD; (iii) in soliciting purchases of Shares pursuant to the exercise of the Rights, it has not published, circulated or used any soliciting materials other than the Prospectus and any other authorized solicitation material furnished by the Fund through the Dealer Manager; (iv) it has not purported to act as agent of the Fund or the Dealer Manager in any connection or transaction relating to the Offer; (v) the information contained in this Soliciting Dealer Agreement is, to its best knowledge, true and complete; (vi) it is not affiliated with the Fund; (vii) the Soliciting Fees being paid by the Fund pursuant to the terms hereof are not being paid with respect to Shares purchased by the Soliciting Dealer pursuant to an exercise of Rights for its own account; (viii) it will not remit, directly or indirectly, any part of Soliciting Fees paid by the Fund pursuant to the terms hereof to any beneficial owner of Shares purchased pursuant to the Offer; and (ix) it has agreed to the amount of the Soliciting Fees and the terms and conditions set forth herein with respect to receiving such Soliciting Fees. By accepting Soliciting Fees, a Soliciting Dealer will be deemed to have agreed to indemnify the Fund against losses, claims, damages and liabilities to which the Fund may become subject as a result of the breach of such Soliciting Dealer's representations and warranties made herein and described above. In making the foregoing representations, Soliciting Dealers are reminded of the possible applicability of Rule 10b-6 under the Exchange Act if they have bought, sold, dealt in or traded in any Shares for their own account since the commencement of the Offer. Soliciting Fees due to eligible Soliciting Dealers will be paid promptly after consummation of the Offer. Upon expiration of the Offer, no Soliciting Fees will be payable to Soliciting Dealers with respect to Shares purchased thereafter. This Soliciting Dealer Agreement may be signed in two or more counterparts, each of which will be an original, with the same effect as if the signatures were on the same instrument. This Soliciting Dealer Agreement will be governed by the laws of the State of New York. Please list on the Appendix attached to this Agreement and forming part of this Soliciting Dealer Agreement the number of Shares purchased pursuant to the exercise of the Rights by each beneficial owner whose purchases you, as a Soliciting Dealer, have solicited. All amounts beneficially owned by a beneficial owner, whether in one account or several, and in however many capacities, must be aggregated for purposes of -4- 5 completing the table in the Appendix to this Agreement. Any questions as to what constitutes beneficial ownership should be directed to the Fund. The number of shares not listed in the Appendix for reasons of inadequate space should be listed on a separate schedule attached to, and forming part of, this Soliciting Dealer Agreement. Please execute this Soliciting Dealer Agreement below accepting the terms and conditions hereof and confirming that you are a member firm of a registered national securities exchange or of the NASD or a foreign broker or dealer not eligible for membership who has conformed to the Rules of Fair Practice of the NASD in making solicitations of the type being undertaken pursuant to the Offer in the United States to the same extent as if you were a member thereof, and certifying that you have solicited the purchase of the Shares pursuant to exercise of the Rights, all as described above, in accordance with the terms and conditions set forth in this Soliciting Dealer Agreement. Very truly yours, Alan H. Rappaport President and Chairman of the Board of Directors ACCEPTED AND CONFIRMED _________________________________ _____________________________________ Printed Firm Name Address _________________________________ _____________________________________ Authorized Signature Area Code and Telephone Number _________________________________ Name and Title Dated: __________________________________ ALL SOLICITING DEALER AGREEMENTS SHOULD BE RETURNED TO OPPENHEIMER & CO., INC. BY FACSIMILE (TELECOPIER), ATTENTION: GAYLE MATTIMOE, AT (212) 667-5084. FACSIMILE TRANSMISSIONS MAY BE CONFIRMED BY CALLING (212) 667-4749. ALL QUESTIONS CONCERNING SOLICITING DEALER AGREEMENTS SHOULD BE DIRECTED TO SHAREHOLDER COMMUNICATIONS CORPORATION AT (800) 773-8481, EXT. 318 OR (212) 805-7000 (COLLECT). -5- 6 APPENDIX TO SOLICITING DEALER AGREEMENT TO BE COMPLETED BY THE SOLICITING DEALER
BENEFICIAL OWNERS NUMBER OF SHARES PURCHASED - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 1. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 2. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 3. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 4. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 5. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 6. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 7. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 8. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 9. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 10. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 11. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 12. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 13. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 14. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 15. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 16. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 17. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 18. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 19. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 20. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 21. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 22. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 23. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 24. - ----------------------------------------------------------------------------------------------------- Beneficial Owner No. 25. - ----------------------------------------------------------------------------------------------------- TOTAL: - -----------------------------------------------------------------------------------------------------
-6- EX-99.H3 6 FORM OF SELLING GROUP AGREEMENT 1 EXHIBIT (H)(3) THE MEXICO EQUITY AND INCOME FUND, INC. SELLING GROUP AGREEMENT July 24, 1995 Oppenheimer & Co., Inc. World Financial Center 200 Liberty Street New York, New York 10281 Dear Sirs: We understand that The Mexico Equity and Income Fund, Inc., a Maryland corporation (the "Fund"), proposes to issue to its shareholders of record as of July 24, 1995 rights ("Rights") entitling their holders to subscribe for an aggregate of 3,000,000 shares ("Shares") of the Fund's Common Stock, par value $.001 per share ("Common Stock"). We further understand that the Fund has appointed you as the exclusive Dealer Manager in connection with the offer of Shares contemplated by the proposed issuance of Rights (the "Offer"). We hereby express our interest in participating in the Offer as a Selling Group Member. We hereby agree with you as follows: I. We have received and reviewed the Prospectus dated July 24, 1995 (the "Prospectus") relating to the Offer and we understand that additional copies of the Prospectus (or of the Prospectus as it may be subsequently supplemented or amended, if applicable) and any other solicitation materials authorized by the Fund relating to the Offer ("Offering Materials") will be supplied to us in reasonable quantities upon our request therefor to you. We agree that we will not use any solicitation material other than the Prospectus (as amended or supplemented, if applicable) and such Offering Materials. II. From time to time during the subscription period (the "Subscription Period") commencing on July 26, 1995 and ending at 5:00 p.m., New York time, on August 15, 1995, unless extended (the "Expiration Date"), we may solicit the exercise of Rights in 2 connection with the Offer. We will be entitled to receive fees in the amounts and at the times described in Article IV of this Agreement with respect to Shares purchased pursuant to the exercise of Rights and with respect to which PNC Bank, National Association (the "Subscription Agent") has received, no later than 5:00 p.m., New York time, on the Expiration Date, either (i) a properly completed and duly executed Subscription Certificate (in the form attached to the Prospectus), identifying us as the broker-dealer having been instrumental in the exercise of such Rights, and full payment for such Shares or (ii) a Notice of Guaranteed Delivery (in the form attached to the Prospectus) guaranteeing to the Subscription Agent by the close of business of the third New York Stock Exchange trading day after the Expiration Date of a properly completed and duly executed Subscription Certificate, similarly identifying us, and full payment for such Shares. We understand that we will not be paid these fees with respect to Shares purchased pursuant to an exercise of Rights for our own account or for the account of any of our affiliates except that we may receive such fees with respect to Shares purchased pursuant to an exercise of Rights for our own account provided that such Shares are offered and sold by us to our clients. We also understand and agree that we are not entitled to receive any fees in connection with the solicitation of the exercise of Rights other than pursuant to the terms of this Agreement and, in particular, that we will not be entitled to receive any fees under the Fund's Soliciting Dealer Agreement. We agree to solicit the exercise of Rights in accordance with the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Investment Company Act of 1940, as amended, and the rules and regulations under each such Act, any applicable securities laws of any state or jurisdiction where such solicitations may be lawfully made, the applicable rules and regulations of any self-regulatory organization or registered national securities exchange and your customary practice and subject to the terms of the Subscription Agent Agreement between the Fund and the Subscription Agent, a form of which was filed as an exhibit to the Registration Statement (as defined below) of which the Prospectus is a part, and the procedures described in the Fund's registration statement on Form N-2 (File No. 33-83820, as amended (the "Registration Statement"). 2 3 III. From time to time during the Subscription Period, we may indicate interest in purchasing Shares from you as Dealer Manager. We understand that from time to time you intend to offer Shares obtained by you through the exercise of Rights to Selling Group Members who have so indicated interest at prices which shall be determined by you (the "Offering Price"). We agree that with respect to any such Shares purchased by us from you the sale of such Shares to us shall be irrevocable and we will offer them to the public at the Offering Price at which we purchased them from you. Shares not sold by us at such Offering Price may be offered by us after the next succeeding Offering Price is set at prices not in excess of the latest Offering Price set by you. You agree that you will set a new Offering Price prior to 4:00 p.m., New York time, on each New York Stock Exchange trading day. We agree to advise you from time to time upon request, prior to the termination of this Agreement, of the number of Shares remaining unsold which were purchased by us from you and, on your request, we will resell to you any of such Shares remaining unsold at the purchase price thereof if in your opinion such Shares are needed to make delivery against sales made to other Selling Group Members. Any Shares purchased hereunder from you shall be subject to regular way settlement through the facilities of the Depository Trust Company. IV. We understand that you will remit to us, on or shortly after August 30, 1995 (or, if the Expiration Date is extended, on such later date not more than 15 days after the Expiration Date as you may determine), following receipt by you from the Fund, a fee, equal to an amount computed by multiplying (i) .025, by (ii) the sum of (a) the number of Shares purchased pursuant to each Subscription Certificate upon which we are designated, as certified to you by the Subscription Agent, as a result of our solicitation efforts in accordance with Article II of this Agreement, plus (b) the number of Shares sold by you to us in accordance with Article III of this Agreement (less any Shares resold to you pursuant to the second paragraph thereof), by (iii) the subscription price of $9.125. Your only obligation to us with respect to payment of the foregoing fee is to remit to us amounts owing to us actually received by you from the Fund. 3 4 Except as aforesaid, you shall be under no liability to make any payments to us pursuant to this Agreement. V. We agree that you, as Dealer Manager, have full authority to take such action as may seem advisable to you in respect of all matters pertaining to the Offer. You are authorized to approve on our behalf any amendments or supplements to the Registration Statement or the Prospectus. VI. We represent and warrant that we are a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD") and, in making sales of Shares, agree to comply with all applicable rules of the NASD including, without limitation, the NASD's Interpretation with Respect to Free-Riding and Withholding and Section 24 of Article III of the NASD's Rules of Fair Practice. We understand that no action has been taken by you or the Fund to permit the solicitation of the exercise of Rights or the sale of Shares in any jurisdiction (other than the United States) where action would be required for such purpose. We represent and warrant that we have at all times complied with the provisions of Rule 10b-6 under the Securities Act applicable to the Offer and we agree that we will not, without your approval in advance, buy, sell, deal or trade in, on a when-issued basis or otherwise, the Rights or the Shares or any other option to acquire or sell Shares for our own account or for the accounts of customers (including discretionary accounts), except as provided in Articles II and III hereof and except that we may buy or sell Rights or Shares in brokerage transactions on consolidated orders which have not resulted from activities on our part in connection with the solicitation of the exercise of Rights and which are executed by us in the ordinary course of our brokerage business. We will keep an accurate record of the names and addresses of all persons to whom we give copies of the Registration Statement, the Prospectus, any preliminary prospectus (or any amendment or supplement thereto) or any Offering Materials and, when furnished with any subsequent amendment to the Registration Statement and any subsequent 4 5 prospectus, we will, upon your request, promptly forward copies thereof to such persons. We represent and warrant that we have not published, circulated, or used any soliciting materials other than the Prospectus and any other authorized solicitation material furnished by the Fund through the Dealer Manager. VII. Nothing contained in this Agreement will constitute the Selling Group Members partners with the Dealer Manager or with one another or create any association between those parties, or will render the Dealer Manager or the Fund liable for the obligations of any Selling Group Member. The Dealer Manager will be under no liability to make any payment to any Selling Group Member other than as provided in Article IV of this Agreement, and will be subject to no other liabilities to any Selling Group Member, and no obligations of any sort will be implied. We agree to indemnify and hold harmless you and each other Selling Group Member and each person, if any, who controls you and any such Selling Group Member within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, against loss or liability caused by any breach by us of the terms of this Agreement. VIII. We agree to pay any transfer taxes which may be assessed and paid on account of any sales or transfers for our account and a percentage, based upon the ratio of the fees payable to us pursuant to Article IV of this Agreement to the aggregate fees payable by the Fund to you and all Selling Group Members pursuant to Article IV of each Selling Group Agreement, of (i) all expenses incurred by you in investigating or defending against any claim or proceeding which is asserted or instituted by any party (including any governmental or regulatory body) other than a Selling Group Member relating to the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto) or any Offering Materials and (ii) any liability, including attorneys' fees, incurred by you in respect of any such claim or proceeding, whether such liability shall be the result of a judgment or as a result of any settlement agreed to by you, other than any such expense or liability as to which you receive indemnity pursuant to Article VII of this Agreement or indemnity or contribution from the Fund. 5 6 Our agreements contained in this Article VIII shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Selling Group Member or any person controlling any Selling Group Member or by or on behalf of the Fund, its directors or officers or any person controlling the Fund and (ii) acceptance of and payment for the Shares. IX. All communications to you relating to the Offer will be addressed to the Syndicate Department, Oppenheimer & Co., Inc., World Financial Center, 200 Liberty Street, New York, New York 10281, Attention: Joseph Missett. X. This Agreement will be governed by the laws of the State of New York. Very truly yours, _____________________________________ [Firm Name] By___________________________________ Name: Title: Confirmed and Accepted this ___ day of _________, 1995 OPPENHEIMER & CO., INC. By_____________________________ Name: Title: 6 EX-99.L1 7 OPINION AND CONSENT OF ROGERS & WELLS 1 EXHIBIT(l)(1) [ROGERS & WELLS LETTERHEAD] July 24, 1995 The Mexico Equity and Income Fund, Inc. Oppenheimer Tower World Financial Center 200 Liberty Street New York, New York 10281 Ladies and Gentlemen: We have acted as counsel for The Mexico Equity and Income Fund, Inc., a Maryland corporation (the "Fund"), in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as amended, of a Registration Statement on Form N-2 (File Nos. 33-83820 and 811-06111) (the "Registration Statement") relating to the issuance by the Fund of transferable rights (the "Rights") to subscribe for up to 3,000,000 shares of Common Stock of the Fund, par value $0.001 per share (the "Shares"). In rendering the opinions expressed herein, we have examined and relied upon originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, documents, certificates and other instruments as we have deemed necessary or appropriate. Based upon the foregoing, and on such examinations of law as we have deemed necessary, we are of the opinion that: 1. The Fund has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland. 2. The issuance of the Rights and the sale of the Shares have been duly authorized and the Rights, when issued as contemplated in the Registration Statement, will be legally issued and the Shares, when issued and paid for as contemplated in the 2 [ROGERS & WELLS LETTERHEAD] - 2 - The Mexico Equity and July 24, 1995 Income Fund, Inc. Registration Statement, will be legally issued, fully paid and nonassessable. We consent to the filing of this opinion with the Securities and Exchange Commission as an Exhibit to the Registration Statement and to the reference to this firm under the heading "Legal Matters" in such Prospectus. In giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the 1933 Act or the Rules and Regulations of the Securities and Exchange Commission thereunder. As to certain matters governed by the laws of the State of Maryland, we have relied on the opinion of Piper & Marbury L.L.P., a copy of which is attached hereto. Very truly yours, EX-99.L2 8 OPINION AND CONSENT OF PIPER & MARBURY L.L.P. 1 EXHIBIT (l)(2) [PIPER & MARBURY L.L.P. LETTERHEAD] July 24, 1995 Rogers & Wells 200 Park Avenue New York, New York 10166 Re: The Mexico Equity and Income Fund, Inc. Ladies and Gentlemen: We have acted as Maryland counsel to The Mexico Equity and Income Fund, Inc., a Maryland corporation (the "Company"), in connection with the Company's registration statement on Form N-2, including all amendments or supplements thereto, filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended (File Nos. 33-83820 and 811-06111) (the "Registration Statement"), and the issuance of the rights (the "Rights") to subscribe for shares of the Company's Common Stock, par value of $.001 per share (the "Shares") in accordance with the terms of the Registration Statement. In this capacity, we have examined the Company's charter and by-laws, the proceedings of the Board of Directors of the Company relating to the issuance of the Rights and the Shares and such other statutes, certificates, instruments, documents and matters of law relating to the Company as we have deemed necessary to the issuance of this opinion. In such examination, we have assumed the genuineness of all signatures, the conformity of final documents in all material respects to the versions thereof submitted to us in draft form, the authenticity of all documents submitted to us as originals, and the conformity with originals of all documents submitted to us as copies. Based upon the foregoing and limited in all respects to applicable Maryland law, we are of the opinion and advise you that: 2 Rogers & Wells July 24, 1995 Page 2 1. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland. 2. The issuance of the Rights and the sale of the Shares have been duly authorized; when issued as contemplated in the Registration Statement, the Rights will be validly issued; when issued and paid for upon exercise of the Rights as contemplated in the Registration Statement, the Shares will be validly issued, fully paid and nonassessable. You may rely upon this opinion in rendering your opinion to the Company which is to be filed as an exhibit to the Registration Statement. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving our consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the Rules and Regulations of the Commission thereunder. Very truly yours, /s/ PIPER & MARBURY L.L.P. EX-99.L3 9 OPINION AND CONSENT - RITCH, HEATHER Y MUELLER S.C 1 EXHIBIT (l)(3) [RITCH, HEATHER Y MUELLER, S.C. LETTERHEAD] July 24, 1995 The Mexico Equity and Income Fund, Inc. Oppenheimer Tower World Financial Center 200 Liberty Street New York, New York 10281 Ladies and Gentlemen: We have acted as Mexican counsel for the Mexico Equity and Income Fund, Inc., a Maryland corporation (the "Fund"), in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as amended, of a Registration Statement on Form N-2 (the "Registration Statement") relating to the issuance by the Fund of transferable rights (the "Rights") to subscribe for up to 3,000,000 shares of Common Stock of the Fund, par value $0.001 per share (the "Shares"). As such counsel, it is our opinion that the conclusions based on Mexican tax law expressed under the section captioned "Taxation -- Mexican Taxes" in the Prospectus contained in the Registration Statement are true and correct. We consent to the filing of this opinion with the Securities and Exchange Commission as an Exhibit to the Registration Statement and to the reference to this firm under the heading "Legal Matters" in such Prospectus. In giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the 1933 Act or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, Ritch, Heather y Mueller, S.C. /s/ JOSE RAZ-GUZMAN ----------------------- Jose Raz-Guzman Partner EX-99.N 10 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT (N) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of this Pre-Effective Amendment No. 3 to the registration statement on Form N-2 (the "Registration Statement") of our report dated September 23, 1994, relating to the financial statements and financial highlights appearing in the July 31, 1994 Annual Report to Shareholders of The Mexico Equity and Income Fund, Inc., which is incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Financial Highlights" and "Experts" in the Registration Statement. Price Waterhouse LLP 1177 Avenue of the Americas New York, New York 10036 July 24, 1995 -----END PRIVACY-ENHANCED MESSAGE-----