The Mexico Equity and Income Fund, Inc.
March 21, 2003
DEAR FUND SHAREHOLDER,
We are pleased to present you with the unaudited financial statements of The
Mexico Equity and Income Fund, Inc. (the "Fund") for the six months ended
January 31, 2003. The Fund's net assets were $20,019,361 on January 31, 2003, as
compared to $21,628,531 on July 31, 2002. As of January 31, 2003, the Fund had
2,473,504 shares outstanding, and the net asset value ("NAV") of each share was
$8.09. The market price on that date was $7.34, which represents a discount to
NAV of 9.27%. During the latest six-month period, the Fund's NAV has declined
7.44% and its discount has ranged between 0.37% and 13.43%. For the same period,
The Bolsa IPC Index, in U.S. dollars, decreased 10.75% and the Dow Jones
Industrial Average decreased 6.74%. As we have reported previously, we are
pursuing with the U.S. Securities & Exchange Commission ("SEC") our proposal to
issue put warrants to our shareholders. These warrants would be designed to
enable you to receive NAV from time to time. We are hopeful that this matter
will be resolved before our next shareholders letter. Of course, there can be no
assurance as to when or whether such approvals will be obtained. While the
Fund's current expense ratio of 2.69% is high, your Board of Directors continues
to closely monitor expenses. If we are successful in obtaining the SEC's
approval to issue the put warrants, we will then focus on increasing the Fund's
asset base, which should lead to a lower expense ratio. Many economic factors
and world events, including the Iraq situation and the price of oil, have
negatively impacted the market prices of publicly traded securities. The Fund's
portfolio has not been immune from such impact. As you know, the Fund's outlook
is long-term and provides a vehicle for you to own Mexican securities. While the
past performance of the Fund may not be predictive of future performance, it may
be of interest to note that the Fund's cumulative returns for the past five and
ten year periods, based on the NAV of the Fund's shares, have been -15.37% and
39.78% (assuming dividends reinvested), respectively. On behalf of the Board of
Directors, we thank you for your continued support of the Fund. If you have any
questions, please call our toll-fee number (866) 700-6104.
Sincerely yours,
Gerald Hellerman
President
1
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2
THE MEXICO EQUITY AND INCOME FUND, INC.
Report of the Investment Adviser
FOR THE SIX MONTHS ENDED JANUARY 31, 2003
Dear Fund Shareholder,
We are pleased to provide you with the report of the Investment adviser of The
Mexico Equity and Income Fund, Inc. (the "Fund") for the semi-annual period
ended January 31, 2003.
MEXICO'S ECONOMY: REVIEW AND OUTLOOK
During the semi-annual period ended January 31, 2003, the domestic market
continued to register a weakening of its role as a driver of internal demand as
the result of moderate increases in employment, as well as, slow advances in
real wages. For the calendar year ended December 31, 2002, 1.97% growth in
exports and 1.6% growth in the service sector led to higher levels of economic
activity in 2002.
At the end of January, the international economic situation remained highly
uncertain due to geopolitical risks. The growing likelihood of U.S military
action in Iraq worries consumers, businessmen and investors alike. In Mexico,
the peso's weakness in January grabbed financial headlines for most of the
month, as the result of uncertainty surrounding a war, but also in view of the
deterioration of expectations of structural reforms. Mexican economists are of
the opinion that it is unlikely that Congress will approve an energy or fiscal
reform in a special legislative session this year that could fundamentally
support the Peso in the long term. The Mexican Peso depreciated 11.5% versus the
U.S. Dollar, closing at MXP$ 10.91 and 28-day CETES (Mexican Treasury Bills)
increased by 240 basis points to approximately 9.0% from 6.7% during the
six-month period.
The Mexican economy grew 0.9% in 2002, which was lower than the projected growth
rate of 1.7%. Consumer inflation for the year 2002 was 5.7%, which was above the
4.5% target of the Central Bank.
FUND UPDATES
The Fund's toll-free phone number is (866) 700-6104.
TRACKING THE FUND'S NAV
The Fund's net asset value (NAV) is calculated daily and published in THE WALL
STREET JOURNAL every Monday under the heading "Closed End Funds." The Fund's net
asset value is also published in BARRON'S on Saturdays and in THE NEW YORK TIMES
on Mondays. The Fund is listed on the New York Stock Exchange under the ticker
symbol MXE.
3
THE MEXICO EQUITY AND INCOME FUND, INC.
THE MEXICAN STOCK MARKET
For the six-month period ending January 31, 2003, the Bolsa IPC Index decreased
10.8% in dollar terms, with sharp increases and decreases illustrated by an "M"
shape pattern. The Bolsa IPC Index is an equity only index, while the Fund
actively invests in equity and fixed income securities.
THE FUND'S PERFORMANCE
For the six-month period ending on January 31, 2003, the Fund's net asset value
(NAV) per share decreased 7.4% in dollar terms, outperforming the Bolsa IPC
Index by 340 basis points. For the same period, The Fund's common share market
price decreased 7.7%. The Fund's common share market price discount to that of
its NAV stood at 9.3% at the end of January 2003. As a reference, the Fund's NAV
per share lost 13.5% in the calendar year ended December 31, 2002, which
outperformed the Bolsa IPC index by 160 basis points. In comparison, for the
same period, the Bolsa IPC Index outperformed the U.S. and other Latin American
markets. The Dow Jones Industrial Average lost 16.8%; the NASDAQ Composite fell
31.5%; Brazil's Bovespa Index lost 45.7%; Argentina's Merval Index lost 46.6%;
Venezuela's Indice Bursatil de Caracas lost 32.7%; and Chile's IPSA Index lost
22.4%.
PORTFOLIO STRATEGY
During the six months ending January 31, 2003, the Fund's investment strategy
continued to carefully focus on appropriate stock selections and a more
diversified portfolio in equities and fixed income securities.
o The Fund's equity allocation for the period included the common stocks
of companies in the mining industry (gold, silver and copper) which were
added to the portfolio in November as a hedge to the Mexican Peso
exposure. It also included undervalued companies that are restructuring
their debt and focusing their business segments on growth and companies
that are considered leaders in their core businesses.
o The 17.2% fixed income allocation, on a monthly average, hedged the Fund
from a high correlation to the Bolsa IPC Index performance for the
six-month period ended January 31, 2003. The Government long-term bonds
with coupon rates in the range of 14.0% with yield to maturity of
approximately 10% were added to the portfolio in October because we
believed that the end of 2002 was going to be adverse to the equity
market.
o As of January 31, 2003 the Fund's investment allocation, illustrated as
a percentage of net assets was approximately 84% in common stocks and
approximately 15% in debt securities with short-term and long-term
maturities.
4
THE MEXICO EQUITY AND INCOME FUND, INC.
CONCLUSION AND OUTLOOK
The end of January was marked by heightened international tensions over the
possibility of U.S. military intervention in Iraq. The Fund's investment
strategy will continue to be to adhere to its principles and offer investors
diversified access to the Mexican market. Adherence to this strategic principle
has been beneficial to the Fund's stockholders in the long term. The Fund's
equity allocation will continue to focus on internationally competitive Mexican
Blue Chip companies, which are characterized by leading products, strong balance
sheets and quality management. The Fund's equity allocation also includes
companies with debt restructuring and leaders in all of its core businesses that
are focusing on growth.
The main catalyst for Mexico's economic recovery in the year 2003 continues to
be the government's fiscal discipline and the approval of structural reforms.
The market consensus projects that the Mexican economy could register
approximately 3.2% as its economic growth rate in 2003. If this is coupled with
productive discussions in Congress that translate into the approval of
structural reforms, the Bolsa IPC index may likely perform better in the next
reporting period.
As always, we thank you for your continued confidence in the portfolio
management of The Mexico Equity and Income Fund, Inc. We look forward to
continuing to provide you with an investment vehicle that will assist you in
achieving your investment goals.
Sincerely,
Eugenia Pichardo Portfolio Manager Clemente Capital, Inc.
THE DISCUSSION ABOVE REFLECTS THE OPINIONS OF THE PORTFOLIO MANAGER. THESE
OPINIONS ARE SUBJECT TO CHANGE AND ANY FORECASTS MADE CANNOT BE GUARANTEED. PAST
PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. SECTOR ALLOCATIONS AND FUND
HOLDINGS ARE SUBJECT TO CHANGE AND ARE NOT RECOMMENDATIONS TO BUY OR SELL ANY
SECURITY. PLEASE REFERENCE THE FOLLOWING ANNUAL REPORT FOR MORE COMPLETE FUND
INFORMATION. THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A
SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
5
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments JANUARY 31, 2003
(UNAUDITED)
MEXICO - 100.84% SHARES VALUE
-----------------------------------------------------------------------------------------------------------
COMMON STOCKS - 83.80%
COMMUNICATIONS - 23.09%
America Movil, S.A. de C.V. - Class L ................................... 91,300 $ 1,286,417
America Telecom, S.A. de C.V. - Class A1* ............................... 563,700 330,630
Carso Global Telecom, S.A. de C.V. - Class A1* .......................... 1,685,351 1,701,672
Telefonos de Mexico, S.A. de C.V. - Class L ............................. 868,700 1,303,708
-----------
4,622,427
-----------
CONSTRUCTION - 4.84%
Cemex, S.A. de C.V. CPO* ................................................ 24,900 94,508
Consorcio ARA, S.A. de C.V.* ............................................ 473,500 699,743
Corporacion GEO, S.A. de C.V. - Class B* ................................ 100,000 174,400
-----------
968,651
-----------
ENTERTAINMENT - 1.91%
Corporacion Interamericana de Entretenimiento, S.A. de C.V. - Class B* .. 252,300 383,273
-----------
FINANCIAL GROUPS - 14.24%
Grupo Financiero BBVA Bancomer, S.A. de C.V. - Class B* ................. 1,289,300 988,173
Grupo Financiero GBM Atlantico, S.A. de C.V. - Class O*+ ................ 742,264 127,407
Grupo Financiero Banorte, S.A. de C.V. - Class O ........................ 210,000 496,351
Grupo Financiero Inbursa, S.A. de C.V. - Class O* ....................... 1,666,400 1,238,959
-----------
2,850,890
-----------
FOOD, BEVERAGE, AND TOBACCO - 10.08%
Fomento Economico Mexicano, S.A. de C.V. UBD* ........................... 540,100 1,814,462
Grupo Continental, S.A.* ................................................ 147,800 203,497
-----------
2,017,959
-----------
INDUSTRIAL CONGLOMERATES -8.68%
Alfa, S.A. - Class A .................................................... 522,100 785,462
Grupo Industrial Saltillo, S.A. de C.V. ................................. 103,100 140,060
Vitro, S.A. de C.V. - Class A* .......................................... 931,900 812,616
-----------
1,738,138
-----------
See Notes to the Financial Statements.
6
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments JANUARY 31, 2003
(continued) (UNAUDITED)
COMMON STOCKS (CONTINUED) SHARES VALUE
-----------------------------------------------------------------------------------------------------------
MEDIA - 2.11%
Grupo Televisa, S.A. ADR* ............................................... 9,800 $ 250,586
TV Azteca, S.A. de C.V. CPO ............................................. 637,000 171,317
-----------
421,903
-----------
MINING - 5.26%
Grupo Mexico, S.A. - Class B* ........................................... 609,100 721,225
Industrias Penoles, S.A. de C.V.* ....................................... 160,400 330,974
-----------
1,052,199
-----------
RETAILING - 11.40%
Organizacion Soriana, S.A. de C.V. - Class B* ........................... 91,600 152,604
Wal-Mart de Mexico, S.A. de C.V. - Class C* ............................. 1,066,425 2,130,990
-----------
2,283,594
-----------
STEEL - 2.19%
Tenaris, S.A.* .......................................................... 223,766 437,488
-----------
TOTAL COMMON STOCKS (Cost $18,275,347) 16,776,522
-----------
PRINCIPAL
AMOUNT
MEXICAN GOVERNMENT BONDS - 2.92% (IN MEXICAN PESOS)
-----------------------------------------------------------------------------------------------------------
Mexican Fixed Rate Bond, 14.0000%, 01/22/2004 ........................... 4,074,200 390,848
Mexican Fixed Rate Bond, 14.5000%, 05/12/2005 ........................... 1,916,500 194,234
-----------
TOTAL MEXICAN GOVERNMENT BONDS (Cost $626,198) 585,082
-----------
PROMISSORY NOTES - 9.40%
-----------------------------------------------------------------------------------------------------------
Banco de Comercio Exterior, 8.0494%, 02/06/2003 ......................... 8,592,382 787,808
Banco Nacional de Obras, S.A., 8.9436%, 02/03/2003 ...................... 9,008,830 826,505
Grupo Financiero Banorte, S.A de C.V., 8.8879%, 02/06/2003 .............. 2,924,000 268,061
-----------
TOTAL PROMISSORY NOTES (Cost $1,921,934) 1,882,374
-----------
TREASURY OBLIGATIONS - 3.03%
-----------------------------------------------------------------------------------------------------------
Mexican Cetes, 0.0000%, 04/16/2003 ...................................... 4,592,460 403,873
Mexican Cetes, 0.0000%, 08/07/2003 ...................................... 2,375,460 201,987
-----------
TOTAL TREASURY OBLIGATIONS (Cost $655,076) 605,860
-----------
See Notes to the Financial Statements.
7
THE MEXICO EQUITY AND INCOME FUND, INC.
JANUARY 31, 2003
Schedule of Investments (concluded) (UNAUDITED)
INVESTMENT COMPANIES - 1.69% SHARES VALUE
-----------------------------------------------------------------------------------------------------------
NAFTRAC* + (Cost $501,261) 615,000 $ 337,574
TOTAL MEXICO (Cost $21,979,816) 20,187,412
-----------
UNITED STATES - 0.07%
-----------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES - 0.07%
-----------------------------------------------------------------------------------------------------------
First American Treasury Obligations Fund - Class S (Cost $13,781) 13,781 13,781
-----------
TOTAL UNITED STATES 13,781
-----------
TOTAL INVESTMENTS (COST $21,993,597) - 100.91% 20,201,193
-----------
OTHER LIABILITIES IN EXCESS OF ASSETS - (0.91)% (181,832)
-----------
TOTAL NET ASSETS - 100.00% $20,019,361
===========
FOOTNOTES AND ABBREVIATIONS
* - Non-income producing security.
+ - At fair value as determined under the supervision of the Board of Directors.
ADR - American Depository Receipts.
See Notes to the Financial Statements.
8
THE MEXICO EQUITY AND INCOME FUND, INC.
Statement of Assets and Liabilities JANUARY 31, 2003
(UNAUDITED)
ASSETS
Investments, at value (Cost $21,993,597) ................................... $20,201,193
Foreign currency holdings (Cost $115,819) .................................. 115,404
Interest receivable ........................................................ 6,490
Prepaid expenses ........................................................... 40,290
-----------
TOTAL ASSETS ............................................................... 20,363,377
-----------
LIABILITIES
Payable for securities purchased ........................................... 167,347
Advisory fees payable ...................................................... 13,703
Directors' fees payable .................................................... 12,686
Administration fees payable ................................................ 9,327
Accrued expenses ........................................................... 140,953
-----------
TOTAL LIABILITIES ...................................... 344,016
-----------
NET ASSETS ............................................. $20,019,361
===========
NET ASSET VALUE PER SHARE
($20,019,361/2,473,504) ................................ $ 8.09
===========
NET ASSETS CONSIST OF:
Capital stock, $0.001 par value; 2,473,504 shares outstanding
(100,000,000 shares authorized) ............................................ $ 2,474
Paid-in capital ............................................................ 34,603,415
Accumulated net investment loss ............................................ (92,773)
Accumulated net realized loss on investments and foreign currency .......... (12,700,655)
Net unrealized depreciation on investments and foreign currency ............ (1,793,100)
-----------
NET ASSETS ................................................................. $20,019,361
===========
See Notes to the Financial Statements.
9
THE MEXICO EQUITY AND INCOME FUND, INC.
Statement of Operations FOR THE SIX MONTHS ENDED
JANUARY 31, 2003 (UNAUDITED)
INVESTMENT INCOME
Dividends (Net of foreign taxes withheld of $142) .............................. $ 101,946
Interest (Net of foreign taxes withheld of $3,447) ............................. 89,786
-----------
TOTAL INVESTMENT INCOME 191,732
-----------
EXPENSES
Advisory fees ............................................ $ 84,631
Legal fees ............................................... 40,551
Administration fees ...................................... 29,942
Reports to shareholders .................................. 26,076
Directors' fees and expenses ............................. 21,671
Custodian fees ........................................... 12,298
NYSE fees ................................................ 11,025
Shareholder servicing fees ............................... 10,063
Audit fees ............................................... 9,286
Other expenses ........................................... 41,987
-----------
TOTAL EXPENSES .................................................. 287,530
LESS, EXPENSE REIMBURSEMENT BY ADVISER .......................... (3,025)
-----------
NET EXPENSES .................................................... 284,505
-----------
NET INVESTMENT LOSS ............................................. (92,773)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss from investments and foreign currency transactions ........... (3,014,572)
Net change in unrealized appreciation from investments
and foreign currency transactions .............................................. 1,498,175
-----------
Net loss from investments and foreign currency transactions .................... (1,516,397)
-----------
Net decrease in net assets resulting from operations ........................... $(1,609,170)
===========
See Notes to the Financial Statements.
10
THE MEXICO EQUITY AND INCOME FUND, INC.
Statements of Changes in Net Assets
FOR THE
SIX MONTHS FOR THE
ENDED YEAR
JANUARY 31, 2003 ENDED
(UNAUDITED) JULY 31, 2002
------------ ------------
OPERATIONS
Net investment loss ................................................................ $ (92,773) $ (82,360)
Net realized gain (loss) on investments and foreign
currency transactions ............................................................. (3,014,572) 4,576,182
Net change in unrealized appreciation (depreciation) in
value of investments and foreign currency transactions ............................ 1,498,175 (2,040,371)
------------ ------------
Net increase (decrease) in net assets resulting from operations .................... (1,609,170) 2,453,451
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income .............................................................. -- --
Net realized gains ................................................................. -- --
------------ ------------
Decrease in net assets from distributions ........................................ -- --
------------ ------------
CAPITAL SHARE TRANSACTIONS
Shares repurchased under Tender Offer (0 and 6,122,069 shares,
respectively) ..................................................................... -- (68,444,728)
Shares repurchased under Stock Repurchase Program .................................. -- --
------------ ------------
Decrease in net assets from capital share transactions ........................... -- (68,444,728)
------------ ------------
Total decrease in net assets ....................................................... (1,609,170) (65,991,277)
NET ASSETS
Beginning of period ................................................................ 21,628,531 87,619,808
------------ ------------
End of period ...................................................................... $ 20,019,361 $ 21,628,531
============ ============
See Notes to the Financial Statements.
11
THE MEXICO EQUITY AND INCOME FUND, INC.
Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE SIX
MONTHS ENDED FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
JANUARY 31, 2003 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) JULY 31, 2002 JULY 31, 2001 JULY 31, 2000 JULY 31, 1999 JULY 31, 1998
------------ ------------ ------------ ------------ ------------ ------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period ..... $ 8.74 $ 10.19 $ 11.36 $ 8.64 $ 10.16 $ 16.83
------------ ------------ ------------ ------------ ------------ ------------
Net investment income (loss) ............. (0.04)(1) (0.03)(1) (0.02) 0.03 0.22 0.23
Net realized and unrealized gains
(losses) on investments and foreign
currency transactions .................. (0.61) (1.42) (0.64) 2.62 (0.87) (3.34)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) from
investment operations .................. (0.65) (1.45) (0.66) 2.65 (0.65) (3.11)
------------ ------------ ------------ ------------ ------------ ------------
Less: Distributions
Dividends from net investment
income ................................. -- -- (0.01) (0.12) -- (0.19)
Distributions from net realized
gains .................................. -- -- (0.60) -- (0.93) (3.37)
Return of capital ....................... -- -- (0.01) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total dividends and distributions ........ -- -- (0.62) (0.12) (0.93) (3.56)
------------ ------------ ------------ ------------ ------------ ------------
Capital share transactions
Anti-dilutive effect of Tender Offer .... -- -- 0.09 -- 0.04 --
Anti-dilutive effect of Share
Repurchase Program ..................... -- -- 0.02 0.19 0.02 --
------------ ------------ ------------ ------------ ------------ ------------
Total capital share transactions ......... -- -- 0.11 0.19 0.06 --
------------ ------------ ------------ ------------ ------------ ------------
Net asset value, end of period ........... $ 8.09 $ 8.74 $ 10.19 $ 11.36 $ 8.64 $ 10.16
============ ============ ============ ============ ============ ============
Per share market value, end of period .... $ 7.34 $ 7.95 $ 9.11 $ 10.69 $ 7.06 $ 7.75
TOTAL INVESTMENT RETURN BASED ON
MARKET VALUE, END OF PERIOD* ............ (7.67)%^ (12.73)% (8.64)% 53.36% 7.24% (26.23)%
See Notes to the Financial Statements.
12
THE MEXICO EQUITY AND INCOME FUND, INC.
Financial Highlights (concluded)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE SIX
MONTHS ENDED FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
JANUARY 31, 2003 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) JULY 31, 2002 JULY 31, 2001 JULY 31, 2000 JULY 31, 1999 JULY 31, 1998
------------ ------------ ------------ ------------ ------------ ------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s) ..... $ 20,019 $ 21,629 $ 87,620 $ 114,112 $ 97,150 $ 120,148
Ratios of expenses to average net assets:
Before expense reimbursement .... 2.72%+ 1.81% 1.90% 2.03% 1.88% 1.46%
After expense reimbursement ..... 2.69%+ 1.81% 1.90% 2.03% 1.88% 1.46%
Ratios of net investment income (loss) to
average net assets:
Before expense reimbursement .... (0.91)%+ (0.14)% (0.16)% 0.27% 2.72% 1.65%
After expense reimbursement ..... (0.88)%+ (0.14)% (0.16)% 0.27% 2.72% 1.65%
Portfolio turnover 85.46% 189.05% 220.85% 249.28% 163.23% 88.85%
---------------
* 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. Total investment return does not reflect brokerage
commissions.
(1) Net investment income per share is calculated using ending balances
prior to consideration of adjustments for permanent financial reporting
and tax differences.
+ Annualized.
^ Not Annualized.
See Notes to the Financial Statements.
13
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements JANUARY 31, 2003
(UNAUDITED)
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Mexico Equity and Income Fund, Inc. (the "Fund") was incorporated in
Maryland on May 24, 1990, and commenced operations on August 21, 1990. The Fund
is registered under the Investment Company Act of 1940, as amended, as a
closed-end, non-diversified management investment company.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
SIGNIFICANT ACCOUNTING POLICIES ARE AS FOLLOWS:
PORTFOLIO VALUATION. Investments are stated at value in the accompanying
financial statements. All securities for which market quotations are readily
available are valued at the last sales price prior to the time of determination
of net asset value, or, if no sales price is available at that time, at the
closing price last quoted for the securities (but if bid and asked quotations
are available, at the mean between the current bid and asked prices, rather than
the quoted closing price). Securities that are traded over-the-counter are
valued, if bid and asked quotations are available, at the mean between the
current bid and asked prices. Investments in short-term debt securities having a
maturity of 60 days or less are valued at amortized cost if their term to
maturity from the date of purchase was less than 60 days, or by amortizing their
value on the 61st day prior to maturity if their term to maturity from the date
of purchase when acquired by the Fund was more than 60 days. Securities for
which market values are not readily ascertainable, which aggregated $464,981
(2.32% of net assets) at January 31, 2003, are carried at fair value as
determined in good faith by, or under the supervision of, the Board of
Directors.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. The cost of investments sold is
determined by use of the specific identification method for both financial
reporting and income tax purposes. Interest income, including the accretion of
discount and amortization of premium on investments, is recorded on an accrual
basis; dividend income is recorded on the ex-dividend date or, using reasonable
diligence, when known to the Fund. The collectibility of income receivable from
foreign securities is evaluated periodically, and any resulting allowances for
uncollectible amounts are reflected currently in the determination of investment
income.
14
THE MEXICO EQUITY AND INCOME FUND, INC.
JANUARY 31, 2003
Notes to Financial Statements (continued) (UNAUDITED)
TAX STATUS. No provision is made for U.S. Federal income or excise taxes as it
is the Fund's intention to continue to qualify as a regulated investment company
and to make the requisite distributions to its shareholders that will be
sufficient to relieve it from all or substantially all U.S. Federal income and
excise taxes. At July 31, 2002, the Fund had capital loss carryovers of
$5,218,649 expiring in July 31, 2009 and $1,363,046 expiring in 2010, which are
available to offset future net realized gains on securities transactions to the
extent provided for in the Internal Revenue Code.
In accordance with U.S. Treasury regulations, the Fund elected to defer
$1,907,772 of capital losses arising after October 31, 2001. Such losses are
treated for tax purposes as arising on August 1, 2002.
The Fund is subject to the following withholding taxes on income from Mexican
sources:
Prior to January 1, 2002 dividends distributed by Mexican companies were
subject to withholding tax at an effective rate of 7.69%. Effective
January 1, 2002, the effective rate was reduced to 0.00%.
Interest income on debt issued by the Mexican federal government is
generally not subject to withholding. Withholding tax on interest from
other debt obligations such as publicly traded bonds and loans by banks or
insurance companies is at a rate of 4.9% under the tax treaty between
Mexico and the United States.
Gains realized from the sale or disposition of debt securities may be
subject to a 4.9% withholding tax. Gains realized by the Fund from the
sale or disposition of equity securities that are listed and traded on the
Mexican Stock Exchange ("MSE") are exempt from Mexican withholding tax if
sold through the stock exchange. Gains realized on transactions outside of
the MSE may be subject to withholding at a rate of 25% (20% rate prior to
January 1, 2002) of the value of the shares sold or, upon the election of
the Fund, at 35% (40% rate prior to January 1, 2002) of the gain. If the
Fund has owned less than 25% of the outstanding stock of the issuer of the
equity securities within the 12 month period preceding the disposition,
then such disposition will not be subject to capital gains taxes as
provided for in the treaty to avoid double taxation between Mexico and the
United States.
RECLASSIFICATION OF CAPITAL ACCOUNTS. The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2; Determination,
Disclosure and Financial Statement Presentation of Income, Capital, and Return
of Capital Distributions by Investment Companies. For the year ended July 31,
2002, the Fund decreased accumulated net realized loss on investments by $29,844
and paid-in capital by $112,204, due to the Fund experiencing a net investment
loss during the year.
15
THE MEXICO EQUITY AND INCOME FUND, INC.
JANUARY 31, 2003
Notes to Financial Statements (continued) (UNAUDITED)
FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, assets and liabilities at the
current Mexican peso exchange rate on the valuation date, and
(ii) purchases and sales of investment securities, income and expenses at
the Mexican peso exchange rate prevailing on the respective dates of such
transactions.
The Fund does not generally isolate the effect of fluctuations in foreign
exchange rates from the effect of fluctuations in the market prices of
securities. The Fund does isolate the effect of fluctuations in foreign currency
rates, however, when determining the gain or loss upon the sale of foreign
currency denominated debt obligations pursuant to U.S. Federal income tax
regulations; such amounts are categorized as foreign exchange gain or loss for
income tax reporting purposes.
The Fund reports realized foreign exchange gains and losses on all other foreign
currency related transactions as components of realized gains and losses for
financial reporting purposes, whereas such gains and losses are treated as
ordinary income or loss for Federal income tax purposes.
Securities denominated in currencies other than U.S. dollars are subject to
changes in value due to fluctuations in the foreign exchange rate. Foreign
security and currency transactions may involve certain considerations and risks
not typically associated with those of domestic origin as a result of, among
other factors, the level of governmental supervision and regulation of foreign
securities markets and the possibilities of political or economic instability.
DISTRIBUTION OF INCOME AND GAINS. The Fund intends to distribute to
shareholders, at least annually, substantially all of its net investment income,
including foreign currency gains. The Fund also intends to normally distribute
annually any net realized capital gains in excess of net realized capital losses
(including any capital loss carryovers), except in circumstances where the
Directors of the Fund determine that the decrease in the size of the Fund's
assets resulting from the distribution of the gains would generally not be in
the interest of the Fund's shareholders. An additional distribution may be made
to the extent necessary to avoid payment of a 4% U.S. Federal excise tax.
Distributions to shareholders are recorded on the ex-dividend date. The amount
of dividends and distributions from net investment income and net realized gains
are determined in accordance with U.S. Federal income tax regulations, which may
differ from accounting principles generally accepted in the United States of
America. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are
16
THE MEXICO EQUITY AND INCOME FUND, INC.
JANUARY 31, 2003
Notes to Financial Statements (continued) (UNAUDITED)
reclassified within the capital accounts based on their Federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income and net realized capital gains,
respectively. To the extent they exceed net investment income and net realized
gains for tax purposes, they are reported as distributions of additional paid-in
capital.
DISTRIBUTIONS TO SHAREHOLDERS. The tax character of distributions paid to
shareholders during the periods ended January 31, 2003, July 31, 2002 and July
31, 2001 were as follows:
DISTRIBUTIONS PAID FROM 1/31/03 7/31/02 7/31/01
---------- ---------- ----------
Ordinary Income ................ $ -- $ -- $ 56,489
Long-Term Capital Gain ......... -- -- 5,970,812
Return of Capital .............. -- -- 138,967
---------- ---------- ----------
Total .......................... $ -- $ -- $6,166,268
========== ========== ==========
As of January 31, 2003, the tax basis components of distributable earnings
included in shareholders equity were as follows:
Undistributed ordinary income ...... $ --
Undistributed long-term gain ....... --
NOTE B: MANAGEMENT, INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
Clemente Capital, Inc. serves as the Fund's Investment Adviser (the "Investment
Adviser") under the terms of the new Investment Advisory Agreement (the
"Advisory Agreement") effective January 1, 2003. Pursuant to the Advisory
Agreement, the Investment Adviser makes investment decisions for the Fund and
supervises the acquisition and disposition of securities by the Fund. For its
services, the Investment Adviser receives a monthly fee at an annual rate of
0.80% of the Fund's average daily net assets. For the one-month ended January
31, 2003, these fees amounted to $14,214. The Investment Adviser has voluntarily
agreed to reimburse the Fund for certain fees and expenses on an annual basis.
These expense reimbursements may be terminated at any time. For the one-month
ended January 31, 2003, the total expense reimbursements made by the Investment
Adviser amounted to $510.
17
THE MEXICO EQUITY AND INCOME FUND, INC.
JANUARY 31, 2003
Notes to Financial Statements (continued) (UNAUDITED)
Acci Worldwide S.A. de C.V. served as the Fund's former Adviser under the terms
of the former Investment Advisory Agreement (the "former Advisory Agreement").
The former Advisory Agreement was terminated by mutual consent, as approved by
the Board of Directors of the Fund, as of December 31, 2002. Prior to the mutual
termination of the former Advisory Agreement, the former Adviser made investment
decisions for the Fund and supervised the acquisition and disposition of
securities by the Fund. For its services, the former Adviser received a monthly
fee at an annual rate of 0.80% of the Fund's average daily net assets. For the
five months ended December 31, 2002, these fees amounted to $70,417. The former
Adviser voluntarily agreed to reimburse the Fund for certain fees and expenses
on an annual basis. The expense reimbursements could have been terminated at any
time. For the five months ended December 31, 2002, the total expense
reimbursements made by the former Adviser amounted to $2,515.
The Fund pays each of its directors who is not a director, officer or employee
of the Investment 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 special telephonic meeting attended. At the Board of Directors
meeting held on December 13, 2001, Mr. Gerald Hellerman, a non-interested
director, was appointed President of the Fund. For serving the Fund as
President, in addition to the aforementioned Directors' fees, Mr. Hellerman will
receive annual compensation in the amount of $6,000. In addition, the Fund
reimburses the directors for travel and out-of-pocket expenses incurred in
connection with Board of Directors' meetings.
NOTE C: TRANSACTIONS WITH AFFILIATES
Acciones y Valores de Mexico, S.A. de C.V., the parent company of the former
Adviser, received total brokerage commissions from the Fund of $10,464 during
the six months ended January 31, 2003.
NOTE D: PORTFOLIO ACTIVITY
Purchases and sales of securities other than short-term obligations, aggregated
$15,470,508 and $15,801,249 respectively, for the six months ended January 31,
2003.
At January 31, 2003, unrealized depreciation on investment securities, for
federal income tax purposes was as follows:
Appreciation ....................................... $ 404,654
(Depreciation) ..................................... (3,394,369)
Net unrealized depreciation on investments ......... $ (2,989,715)
18
THE MEXICO EQUITY AND INCOME FUND, INC.
JANUARY 31, 2003
Notes to Financial Statements (concluded) (UNAUDITED)
At January 31, 2003, the cost of investments and foreign currency for federal
income tax purposes was $23,306,031. Differences between the Fund's cost basis
of investments and foreign currency at January 31, 2003, for book and tax
purposes, relate primarily to the deferral of losses related to wash sales.
At January 31, 2003, substantially all of the Fund's assets were invested in
Mexican securities. The Mexican securities markets are substantially smaller,
less liquid, and more volatile than the major securities markets in the United
States. Consequently, acquisitions and dispositions of securities by the Fund
may be limited.
NOTE E: CAPITAL STOCK
At a meeting of the Board of Directors held on December 13, 2001, the Board of
Directors approved a tender offer (the "Tender").
The Tender allowed the Fund to purchase up to 100% of each shareholder's shares
of common stock, not to exceed 80% of the total outstanding shares of common
stock of the Fund, for cash at a price equal to 100% of the Fund's net asset
value per share as of the closing date. The Tender commenced on February 19,
2002 and expired on March 20, 2002. In connection with the Tender, the Fund
purchased 6,122,069 shares of capital stock at a total cost of $68,444,728.
There were no gains or losses to the Fund because the repurchase of tendered
shares was executed at 100% of the Fund's NAV as calculated on the expiration
date.
At a special meeting of the Board of Directors held on October 11, 1999, the
Board of Directors approved a share repurchase program. Pursuant to the share
repurchase program, the Fund was authorized to commence a two phase share
repurchase program for up to 2,800,000 shares, or approximately 25% of the
Fund's then outstanding shares of common stock, through a combination of share
purchases and tender offers.
During the periods ended July 31, 2002 and January 31, 2003, the Fund made no
repurchases pursuant to the program. Pursuant to the share repurchase program,
during the year ended July 31, 2001, the Fund purchased 174,000 shares of
capital stock in the open market at a total cost of $1,703,552. The weighted
average discount of these purchases comparing the purchase price to the net
asset value at the time of purchase was 9.01%. During the fiscal year ended July
31, 2000, the Fund purchased 1,199,700 shares of capital stock in the open
market at a total cost of $10,573,159. The weighted average discount of these
purchases comparing the purchase prices to the net asset value at the time of
purchase was 16.40%.
19
THE MEXICO EQUITY AND INCOME FUND, INC.
Dividends and Distributions (unaudited)
DIVIDEND REINVESTMENT PLAN
The Fund intends to distribute to shareholders substantially all of its net
investment company taxable income at least annually. Investment company taxable
income, as defined in section 852 of the Internal Revenue Service Code of 1986,
includes all of the Fund's taxable income minus the excess, if any, of its net
realized long-term capital gains over its net realized short-term capital losses
(including any capital loss carryovers), plus or minus certain other required
adjustments. The Fund also expects to distribute annually substantially all of
its net realized long-term capital gains in excess of net realized short-term
capital losses (including any capital loss carryovers), except in circumstances
where the Fund realizes very large capital gains and where the Directors of the
Fund determine that the decrease in the size of the Fund's assets resulting from
the distribution of the gains would not be in the interest of the Fund's
shareholders generally.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), each shareholder
will be deemed to have elected, unless the Plan Agent (as defined below) is
otherwise instructed by the shareholder in writing, to have all distributions,
net of any applicable U.S. withholding tax, automatically reinvested in
additional shares of the Fund by The Fifth Third Bank, the Fund's transfer
agent, as the Plan Agent (the "Plan Agent"). Shareholders who do not participate
in the Plan will receive all dividends and distributions in cash, net of any
applicable U.S. withholding tax, paid in U.S. dollars by check mailed directly
to the shareholder by the Plan Agent, as dividend-paying agent. Shareholders who
do not wish to have dividends and distributions automatically reinvested should
notify the Plan Agent for The Mexico Equity and Income Fund, Inc., c/o The Fifth
Third Bank, ATTN: Mr. Randolph J. Stierer, Stock Transfer Department MD#10AT60,
38 Fountain Square Plaza, Cincinnati, Ohio 45202. Dividends and distributions
with respect to shares of the Fund's Common Stock registered in the name of a
broker-dealer or other nominee (i.e., in "street name") will be reinvested under
the Plan unless the service is not provided by the broker or nominee or the
shareholder elects to receive dividends and distributions in cash. A shareholder
whose shares are held by a broker or nominee that does not provide a dividend
reinvestment program may be required to have his shares registered in his own
name to participate in the Plan. Investors who own shares of the Fund's Common
Stock registered in street name should contact the broker or nominee for
details.
The Plan Agent serves as agent for the shareholders in administering the Plan.
If the Directors of the Fund declare an income dividend or a capital gains
distribution payable either in the Fund's Common Stock or in cash, as
shareholders may have elected, nonparticipants in the Plan will receive cash and
participants in the Plan will receive Common Stock, to be issued by the Fund. If
the market price per share on the valuation date equals or exceeds net asset
value per share on that date, the Fund will issue new shares to participants at
net asset value; or, if the net asset value is less than 95% of the market price
on the valuation date, then such shares will be issued at 95% of the market
price.
20
THE MEXICO EQUITY AND INCOME FUND, INC.
Dividends and Distributions (unaudited) (continued)
If net asset value per share on the valuation date exceeds the market price per
share on that date, participants in the Plan will receive shares of Common Stock
from the Fund valued at market price. The valuation date is the dividend or
distribution payment date or, if that date is not a New York Stock Exchange
trading day, the next preceding trading day. If the Fund should declare an
income dividend or capital gains distribution payable only in cash, the Plan
Agent will, as agent for the participants, buy Fund shares in the open market on
the New York Stock Exchange or elsewhere, for the participants' accounts on, or
shortly after, the payment date.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in an account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in noncer-tified form in
the name of the participant, and each shareholder's proxy will include those
shares purchased pursuant to the Plan.
In the case of shareholders such as banks, brokers or nominees that hold shares
for others who are beneficial owners, the Plan Agent will administer the Plan on
the basis of the number of shares certified from time to time by the
shareholders as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who participate in the Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions payable in either Common Stock or cash. The Plan Agent's fees for
the handling or reinvestment of such dividends and capital gains distributions
will be paid by the Fund. There will be no brokerage charges with respect to
shares issued directly by the Fund as a result of dividends or capital gains
distributions payable either in stock or in cash. However, each participant will
pay a pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
or capital gains distributions payable in cash.
Brokerage charges for purchasing small amounts of Common Stock for individual
accounts through the Plan are expected to be less than usual brokerage charges
for such transactions because the Plan Agent will be purchasing stock for all
participants in blocks and prorating the lower commissions thus attainable.
Brokerage commissions will vary based on, among other things, the broker
selected to effect a particular purchase and the number of participants on whose
behalf such purchase is being made.
The receipt of dividends and distributions in Common Stock under the Plan will
not relieve participants of any income tax (including withholding tax) that may
be payable on such dividends or distributions.
21
THE MEXICO EQUITY AND INCOME FUND, INC.
Dividends and Distributions (unaudited) (concluded)
Experience under the Plan may indicate that changes in the Plan are desirable.
Accordingly, the Fund and the Plan Agent reserve the right to terminate the Plan
as applied to any dividend or distribution paid subsequent to notice of the
termination sent to participants at least 30 days before the record date for
such dividend or distribution. The Plan also may be amended by the Fund or the
Plan Agent, but (except when necessary or appropriate to comply with applicable
law, or rules or policies of a regulatory authority) only upon at least 30 days'
written notice to participants. All correspondence concerning the Plan should be
directed to the Plan Agent at the address above.
22
THE MEXICO EQUITY AND INCOME FUND, INC.
Results of Annual Stockholders Meeting (unaudited)
The Fund's Annual Stockholders meeting was held on February 14, 2003, at 405
Park Avenue, New York, New York 10022. As of December 30, 2002, the record date,
outstanding shares of common stock ("shares") of the Fund were 2,473,504.
Holders of 2,136,673 shares of the Fund were present at the meeting either in
person or by proxy. These holders, as being holders of a majority of the
outstanding shares of the Fund, constituted a quorum. The stockholders voted on
four proposals.
The stockholders elected three Directors to the Board of Directors, approved a
new Investment Advisory agreement between Clemente Capital, Inc. and the Fund,
and approved the creation and registration of put warrants, which are designed
to afford stockholders an opportunity to realize net asset value for their
shares. The stockholders also ratified the selection of Tait, Weller & Baker as
the Fund's independent auditor for the fiscal year ending July 31, 2003.
The following table provides information concerning the matters voted on at the
meeting:
I. ELECTION OF DIRECTORS
NOMINEE FOR WITHHELD
Glenn Goodstein 2,015,470 121,203
Phillip Goldstein 2,016,023 120,650
Leopoldo M. Clemente, Jr. 2,019,996 116,677
II. APPROVAL OF THE NEW INVESTMENT ADVISORY AGREEMENT BETWEEN CLEMENTE
CAPITAL, INC. AND THE FUND
VOTES FOR VOTES AGAINST VOTES ABSTAINED BROKER NON-VOTES
1,993,353 96,489 46,831 2
III. ADOPTION OF A PROPOSAL TO APPROVE THE CREATION, ISSUANCE AND
REGISTRATION OF PUT WARRANTS, WHICH ARE DESIGNED TO AFFORD
STOCKHOLDERS THE OPPORTUNITY TO REALIZE NET ASSET VALUE FOR THEIR
SHARES
VOTES FOR VOTES AGAINST VOTES ABSTAINED BROKER NON-VOTES
724,401 169,275 79,677 1,163,322
IV. RATIFICATION OF THE SELECTION OF TAIT, WELLER & BAKER AS THE FUND'S
INDEPENDENT AUDITOR
VOTES FOR VOTES AGAINST VOTES ABSTAINED BROKER NON-VOTES
2,033,955 59,381 43,339 0
23
The Mexico Equity
and Income Fund, Inc.
THE MEXICO EQUITY
AND INCOME FUND, INC.
Semi-Annual Report
INVESTMENT ADVISER:
January 31, 2003
Clemente Capital, Inc.
Carnegie Hall Tower
152 West 57th Street
25th Floor
New York, NY 10019
INDEPENDENT AUDITOR:
Tait, Weller & Baker
8 Penn Center Plaza, Suite 800
Philadelphia, PA 19103
ADMINISTRATOR AND FUND
ACCOUNTANT:
U.S. Bancorp Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
TRANSFER AGENT AND REGISTRAR:
The Fifth Third Bank
Attn: Corporate Trust Services
38 Fountain Square Plaza
Cincinnati, OH 45202
CUSTODIANS:
U.S. Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
Deutsche Bank Trust Company
100 Plaza One, JCY03-0301
Jersey City, NJ 07311