UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06111
THE MEXICO EQUITY AND INCOME FUND, INC.
(Exact name of registrant as specified in charter)
615 E. MICHIGAN STREET
MILWAUKEE, WI 53202
(Address of principal executive offices) (Zip code)
MR. GERALD HELLERMAN
C/O US BANCORP FUND SERVICES, LLC
615 E. MICHIGAN STREET
MILWAUKEE, WI 53202
(Name and address of agent for service)
(866) 700-6104
Registrant's telephone number, including area code
Date of fiscal year end: JULY 31, 2005
Date of reporting period: JANUARY 31, 2005
ITEM 1. REPORT TO STOCKHOLDERS.
The Mexico Equity and Income Fund, Inc.
March 24, 2005
DEAR FUND SHAREHOLDERS,
We are pleased to present you with the unaudited financial statements of the
Mexico Equity and Income Fund, Inc. (the "Fund") for the six-month period ended
January 31, 2005. The Fund presents investors with the opportunity to own
Mexican securities and its objective continues to be superior long-term
performance.
The Fund's net assets were $45,625,873 on January 31, 2005, as compared to
$33,779,149 on July 31,2004, which represents an increase of 35.07% in the value
of the Fund's net assets. From July 31, 2004 to January 31, 2005 the Fund's Net
Asset Value ("NAV") per share increased 35.07% (including reinvested dividends).
For the same period, the Mexican Bolsa IPC Index, which is a measure of the
market performance of the leading stocks traded on the Mexican Stock Exchange,
increased 33.61% (including reinvested dividends).
As we have reported previously, your Board of Directors continues to pursue the
necessary regulatory approvals for the registration and listing of put warrants
that we propose to issue to our shareholders. These warrants are intended to
enable shareholders, at their option, to receive NAV from time to time. It has
been almost five years since we first advised the staff of our intent to issue
put warrants. We are frustrated about the extraordinary length of time the SEC
staff has taken to review the put warrants at a cost to the Fund of
approximately $150,000. As a result, it may unfortunately be necessary to sue
the SEC for unreasonable delay. We will continue to keep you informed about this
matter.
As we have previously stated, it is our belief that if the Fund is able to issue
put warrants, the discount at which the Fund's common stock trades relative to
its NAV will be permanently reduced. Once the discount is under control, your
Board of Directors will consider measures to increase the asset base of the Fund
in order to reduce the expense ratio. 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,
/s/ Phillip Goldstein
Phillip Goldstein
Chairman of the Board of Directors
1
(This page intentionally left blank.)
2
THE MEXICO EQUITY AND INCOME FUND, INC.
Report of the Investment Adviser
FOR THE SIX MONTHS ENDED JANUARY 31, 2005
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, 2005.
--------------------------------------------------------------------------------
MEXICO'S ECONOMIC REVIEW
In 2004 Mexico's economy grew 4.4% after 0.9% and 1.3% meager growth in 2002 and
2003 respectively. On a seasonally adjusted basis, 2004 GDP grew 1.36%
quarter-on-quarter, which represents an annualized rate of 5.5% for the whole
year.
The main factors driving Mexico's economic recovery during 2004 were: (i) 7.5%
gross fixed investment growth, (ii) 3.8% industrial production increase and
(iii) 14.7% export activity growth rate.
During the semi-annual period ended January 31, 2005 real economic activity was
also marked by ongoing strong economic data, mainly related to US manufacturing
industry. Financial indicators continued stable and in line with the observed
trend of the previous three years:
(i) 12-month inflation ended the semi-annual period at 4.54% compared to
4.49% for the same earlier period. Banco de Mexico, (the central bank),
reaffirmed its inflation 3% +- 1% target in 2005.
(ii) The 28-day CETES rate (treasury bills) increased 190 basis points to
9.2% during the semi-annual period in tandem with the FED's interest rate
hikes and it will most likely continue to increase interest rates until
pressures from Consumer Price Index subside.
(iii) The Mexican Peso gained 2.8% to the U.S. Dollar, in view of the
current low yield/lower risk environment that has triggered inflows to
emerging markets and to the Latin American region. Higher international oil
prices and inflows from Mexicans abroad have also helped for a strong
Mexican Peso during the semi-annual period.
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 EXCHANGE
For the six months ended January 31, 2005, the Mexican Bolsa IPC Index "The
"Mexbol" gained 33.6% in dollar terms as a result of:
(i) Mexico's sound economic fundamentals.
(ii) Strong corporate earnings. During the fourth quarter, financial
results, revenues, operating profit and EBITDA (earnings before interest,
taxes, depreciation and amortization) grew 16.1%, 18.9% and 14.9%,
respectively.
(iii) Continuation of the strong commodity cycle.
(iv) Strong capital inflows to emerging stock markets, and, in particular
to the Latin American region, afforded by the Fed's accommodative stance.
(v) And, to a lesser extent, Mexico's compulsory pension fund system that
was able to start investing in domestic and international equities and
bonds on January 17, 2005. According to UBS Investment Bank they estimate
they could invest up to US$2.2 billion in 2005.
In general terms, over-performing sectors for the six-month period ended January
31, 2005 continued to be related to the housing, commodities (steel and copper),
financial and wireless telephony sectors while underperforming sectors continued
to be beverages, retailing and consumer staples.
For the six-months ended January 31, 2005, the Mexbol ranked fifth in the Latin
American region after Colombia, +70.3%, Argentina +44.7%, Peru +44.0% and Chile
+34.7%, and over-performed Brazil +26.4% and Venezuela +18.0%. By comparison,
the Dow Jones gained 4.6% and the Nasdaq Composite Index gained 9.6% for the
same period.
The Mexbol's 12 month trailing EV/EBITDA multiple as at the end of January 2005
was 8.2x compared to 7.4x at the end of July 2004. Although, estimated EV/EBITDA
multiple is expected to decrease to 7.3x by the end of 2005. Strong economic
growth, a lower financing risk and the de-leveraging of companies' balance
sheets are some of the fundamentals reasons underpinning the Mexbol re-rating.
4
THE MEXICO EQUITY AND INCOME FUND, INC.
--------------------------------------------------------------------------------
THE FUND'S PERFORMANCE
For the six-months ended January 31, 2005, the Fund's Net Asset Value "NAV" per
share gained 35.1%, out-performing "The Mexbol" 's 33.6% gain and The Mexico
Fund, "The MXF" 's 28% NAV per share gain during the same period. The MXF is the
MXE's fully comparable peer.
The Fund's common share market price gained 39.2% for the semi-annual period,
and it ended January at a -11.5% discount to that of its "NAV".
The Fund's 13.78% "NAV" total dollar annual return as of January 31, 2005, since
its inception on August 30, 1990, continues to place "The MXE" as a leading
closed-end fund. (Return calculations are according to Thomson Financial.)
--------------------------------------------------------------------------------
PORTFOLIO STRATEGY
For the six months ended January 31, 2005, the Fund continued to have a balance
portfolio with a 95% weight in equities and 5% in fixed income.
Pichardo Asset Management, "PAM" 's investment strategy which is based on the
fundamental analysis of companies, classified in six asset categories, has been
the main tool for your investment adviser to better assess the stocks'
risk/return when making an investment decision and the Fund's stocks
reallocation.
PAM's own methodology valuation indicated that the Fund's "value" stocks (which
had been the engine of the Fund's performance for the last two years), have
expanded their multiples by 19% approximately since the Fund's fiscal year
ending as of July 2004.
Meanwhile, "quality growth" stocks expanded their multiples by 11% and they are
fairly valued when compared to their historic averages and in view of their
superior capabilities, i.e.: strong balance sheets, superior cost-efficient
capabilities and strong free cash flow generation.
In view of this re-rating of multiple valuations across all sectors of the
Mexbol, we decided to carefully overweight "quality-growth stocks" versus
"value" stocks and pricey commodity stocks starting December 31, 2004.
5
THE MEXICO EQUITY AND INCOME FUND, INC.
For the Fund's semi-annual period, the main asset categories that contributed
the most to the Fund's performance were:
(i) Stocks related to the "undervalued and restructuring stories" asset
class as a result of the completion of restructuring processes and/or
de-leveraging of balance sheets resulted in companies' valuations
increasing over 6 times compared to less than 5 times at the end of July
2004; and
(ii) Fast-growing business asset category where higher EV/EBITDA multiple
valuations were justified by companies' double digit revenue and EBITDA
growth.
--------------------------------------------------------------------------------
CONCLUSION AND OUTLOOK
Mexico's economic growth of 4.4% in 2004 and expected similar one in 2005; after
three years of sluggish economic growth, is the result of a solid macro scenario
and financial variables, as well as high international oil prices, capital
inflow from Mexicans abroad and the driving force of the U.S. strong economic
growth.
The high correlation between Mexican and U.S. industrial production is the
result of the 1995 NAFTA agreement that has benefited Mexico since then, ties
Mexico to the US risk however.
Approval in Congress of the long awaited energy, labor and fiscal structural
reforms may help Mexico to have a higher-sustained economic growth rate and to
reduce the high correlation to that of the U.S.
We believe that "The Mexbol" 's 50.5% rally for the 2004 calendar year, and the
Fund's 35.1% performance for the six-month period ended January 2005, were
mainly the result of: sound economic fundamentals, within a context of continued
synchronized global economic growth, and capital inflows to emerging markets.
Mexico's oil mix price +16% higher than targeted in the 2005 budget, as well as,
US Fed accommodative stance, accounted also for a sound Mexbol.
The Fund's 35.1% "NAV" per share gain for the six-month period ended January
2005 continued to over-perform "The Mexbol" by 150 basis points and "The MXF" by
710 bp.
The sectors we like the most are cement, telecommunication (mainly wireless
telephony), infrastructure, transport, media, and retail as well as commodities
(mainly copper).
We continue to maintain an overweight in equities, as we believe Mexico's
fundamentals are strong and companies are internationally competitive leading
firms, which will continue to benefit from the current global high economic
growth.
6
THE MEXICO EQUITY AND INCOME FUND, INC.
The Fund's overweight in "quality-growth" stocks, large cap companies, has set
up a solid fundamental portfolio to encounter the expected market's volatility
due to the running period for the July 2006 presidential election.
--------------------------------------------------------------------------------
RELEVANT INFORMATION
REAL ACTIVITY 1999 2000 2001 2002 2003 2004
------------------------ -------- -------- -------- -------- -------- --------
Real GDP Growth
(y-o-y)............... 3.7% 6.6% (0.3)% 0.9% 1.30% 4.4%
Industrial Production
(y-o-y)............... 4.2% 6.0% (3.5)% 0.0% (0.75)% 3.8%
Trade Balance (US
billions)............. $ (5.6) $ (8.0) $ (10.0) $ (8.0) $ (5.6) $ (8.1)
Exports................. 136.4 166.5 158.4 160.7 164.8 189.1
Export growth (y-o-y)... 16.1% 22.1% (4.9)% 1.5% 2.5% 14.7%
Imports................. $(142.00) $(174.50) $(168.40) $(168.70) $(170.50) $(197.20)
Import growth (y-o-y)... 13.2% 22.9% (3.5)% 0.2% 1.1% 15.7%
FINANCIAL VARIABLES AND PRICES 1999 2000 2001 2002 2003 2004 2/28/2005
------------------------------ -------- -------- -------- -------- -------- -------- -----------
28-Day CETES (T-bills)/
Average.................. 31.40% 15.30% 11.20% 7.10% 6.24% 8.60% 9.20%
Exchange rate (Pesos/US$)/
Average.................. 9.56 9.46 9.34 9.66 10.79 11.147 11.0913
Inflation IPC, 12 month
trailing................. 12.3% 9.0% 4.4% 5.7% 4.2% 5.4% 4.3%
12/31/04 TO
MEXBOL INDEX 1999 2000 2001 2002 2003 2004 2/28/05
------------------------- -------- -------- -------- -------- -------- -------- -----------
USD Return............... 90.39% (20.81)% 20.88% (14.43)% 33.61% 50.49% 7.30%
Market Cap. (US
Billions).............. $ 112.96 $ 111.7 $ 112.4 $ 103.8 $ 124.7 $ 169.5 $ 171.9
EV/EBITDA................ 10.5x 7.9x 8.1x 6.6x 7.8x 8.3x 8.2x
FUND'S NAV & COMMON SHARE MARKET PRICE PERFORMANCE
12/31/04 TO
USD RETURN 1999 2000 2001 2002 2003 2004 2/28/05
--------------------- ------ ------ ----- ------ ------ ------ -----------
NAV's per share...... 59.17% (14.06)% 9.98% (13.51)% 40.0% 55.6% 8.4%
Share Price.......... 74.7% (5.7)% 18.7% (18.5)% 36.0% 66.6% 7.7%
Source: Thomson
7
THE MEXICO EQUITY AND INCOME FUND, INC.
FUND'S ASSET CATEGORIES
(%) NET ASSETS) 2001(*) END 2002 END 2003 END 2004 1/31/2005 2/28/05
---------------------- ------- -------- -------- -------- --------- ---------
Strong market
position............ 22.9% 28.2% 32.7% 32.3% 24.6% 28.8%
Undervalued-restructuring
stories............. 18.5% 15.6% 27.7% 18.9% 20.8% 12.2%
Fast growing business
segments............ 14.9% 8.8% 17.8% 30.8% 35.4% 31.9%
Financial groups...... 19.4% 14.4% 7.5% 4.2% 3.4% 2.8%
Globally consolidated
industries.......... 9.1% 13.8% 6.4% 3.0% 3.3% 7.0%
Global leaders........ 9.1% 5.9% 4.6% 6.2% 6.6% 12.9%
Warrants/Equity mutual
funds............... 0.0% 1.7% 0.0% 0.0% 0.0% 0.0%
Fixed income.......... 6.0% 19.6% 3.4% 4.6% 5.9% 4.6%
* Equities allocation was initially classified by asset categories starting on
May 31, 2001.
As always, we look forward to continuing to offer you an attractive alternative
for asset diversification and the opportunity to remain active in Mexico, which,
we believe, is one of the most promising emerging markets in the world.
Thank you for your continued support.
Sincerely yours,
/s/ MARIA EUGENIA PICHARDO
Maria Eugenia Pichardo
Portfolio Manager
Pichardo Asset Management, S.A. de C.V.
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 SEMI-ANNUAL REPORT FOR MORE COMPLETE
FUND INFORMATION.
8
THE MEXICO EQUITY AND INCOME FUND, INC.
Allocation of Portfolio Assets JANUARY 31, 2005
(CALCULATED AS A PERCENTAGE OF NET ASSETS)
(UNAUDITED)
(BAR CHART)
FOOD,
BEVERAGE,
AND INDUSTRIAL CORPORATE
COMMUNICATIONS TOBACCO RETAILING CONGLOMERATES MINING CONSTRUCTION CEMENT MEDIA BONDS
-------------- --------- --------- ------------- ------ ------------ ------ ----- ---------
20.54% 15.19% 12.33% 11.08% 8.81% 6.93% 4.91% 4.83% 4.26%
OTHER
ASSETS
IN
EXCESS
FINANCIAL REAL SPECIALTY OF INVESTMENT
GROUPS AIRLINES ESTATE STORES LIABILITIES COMPANIES
--------- -------- ------ --------- ----------- ----------
3.38% 3.21% 1.69% 1.35% 1.12% 0.37%
See Notes to the Financial Statements.
9
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments JANUARY 31, 2005
(UNAUDITED)
MEXICO - 98.88% SHARES VALUE
----------------------------------------------------------------------------------------------
COMMON STOCKS - 94.25%
----------------------------------------------------------------------------------------------
AIRLINES - 3.21%
Cintra, S.A. de C.V.*..................................... 504,700 $ 310,460
Grupo Aeropuertario del Sureste S.A. de C.V. - Class B.... 433,000 1,152,273
-----------
1,462,733
-----------
COMMUNICATIONS - 20.54%
America Movil, S.A. de C.V. - Class L..................... 1,173,300 3,096,165
America Movil, S.A. de C.V. - Class L ADR................. 42,300 2,244,438
America Telecom, S.A. de C.V. - Class A1*................. 921,000 2,680,810
Telefonos de Mexico, S.A. de C.V. - Class L............... 358,300 667,281
Telefonos de Mexico, S.A. de C.V. - Class L ADR........... 18,302 681,750
-----------
9,370,444
-----------
CEMENT - 4.91%
Cemex, S.A. de C.V. CPO................................... 299,642 2,240,971
-----------
CONSTRUCTION - 6.93%
Corporacion GEO, S.A., de C.V. - Class B*................. 503,500 1,206,569
SARE Holding, S.A. de C.V. - Class B*..................... 459,900 369,822
Urbi, Desarrollos Urbanos, S.A. de C.V.*.................. 294,200 1,587,059
-----------
3,163,450
-----------
FINANCIAL GROUPS - 3.38%
Grupo Financiero Banorte, S.A. de C.V. - Class O.......... 240,000 1,539,877
-----------
FOOD, BEVERAGE, AND TOBACCO - 15.19%
Alsea, S.A. de C.V. ...................................... 1,041,453 2,145,670
Embotelladroas Arca S.A. ................................. 81,700 170,873
Gruma S.A. - Class B...................................... 567,600 1,347,525
Grupo Bafar, S.A. - Class B............................... 100,000 311,937
Grupo Bimbo S.A. de C.V. - Class A........................ 573,000 1,596,349
Grupo Embotelladoras Unidas, S.A. de C.V. - Class B....... 312,900 1,357,100
-----------
6,929,454
-----------
See Notes to the Financial Statements.
10
Schedule of Investments (continued)
JANUARY 31, 2005
(UNAUDITED)
THE MEXICO EQUITY AND INCOME FUND, INC.
COMMON STOCKS (CONTINUED) SHARES VALUE
----------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES - 11.08%
Alfa, S.A. - Class A...................................... 353,700 $ 1,815,326
Grupo Carso, S.A. de C.V. - Class A1...................... 100,600 561,340
Grupo IMSA, S.A. de C.V. UBC.............................. 30,000 87,884
Hylsamex, S.A. de C.V. - Class B*......................... 284,900 863,310
Hylsamex, S.A. de C.V. - Class L*......................... 496,979 1,504,185
Industrias CH, S.A. - Class B*............................ 77,700 224,365
-----------
5,056,410
-----------
MEDIA - 4.83%
Grupo Televisa, S.A. ADR.................................. 13,000 764,790
Grupo Televisa, S.A. CPO.................................. 488,700 1,438,173
-----------
2,202,963
-----------
MINING - 8.81%
Grupo Mexico, S.A. de C.V. - Class B*..................... 646,100 3,248,070
Industrias Penoles, S.A. de C.V. ......................... 147,800 773,456
-----------
4,021,526
-----------
REAL ESTATE - 1.69%
Consorcio ARA, S.A. de C.V. - SER*........................ 212,600 772,919
-----------
RETAILING - 12.33%
Grupo Elektra, S.A. de C.V. .............................. 49,300 419,514
Organizacion Soriana, S.A. de C.V. - Class B.............. 496,700 1,752,642
Wal-Mart de Mexico, S.A. de C.V. - Class V................ 1,002,684 3,454,911
-----------
5,627,067
-----------
SPECIALTY STORES - 1.35%
Corporativo Fragua, S.A. - Class B........................ 173,100 615,734
-----------
TOTAL COMMON STOCKS (Cost $34,285,561).................... 43,003,548
-----------
See Notes to the Financial Statements.
11
Schedule of Investments (concluded)
JANUARY 31, 2005
(UNAUDITED)
THE MEXICO EQUITY AND INCOME FUND, INC.
CORPORATE BONDS - 4.26% TITLES VALUE
----------------------------------------------------------------------------------------------
Hylsamex, S.A. de C.V., 8.7500%, 03/08/2009............... 14,015 $ 466,797
Hylsamex, S.A. de C.V., 8.7500%, 09/08/2009............... 14,015 466,797
TVACB-04, 9.1000%, 12/15/2011............................. 11,265,000 1,009,092
-----------
TOTAL CORPORATE BONDS (Cost $1,703,721)................... 1,942,686
-----------
INVESTMENT COMPANIES - 0.37% SHARES
----------------------------------------------------------------------------------------------
GBM Fondo Corporativo de Liquidez Inmediata S.A. de C.V.
SIID para Personas Morales - Class B*................... 1,188,779 170,196
-----------
TOTAL INVESTMENT COMPANIES (Cost $169,105)................ 170,196
-----------
TOTAL MEXICO (Cost $36,158,387)........................... 45,116,430
-----------
TOTAL INVESTMENTS (COST $36,158,387) - 98.88%............. 45,116,430
-----------
OTHER ASSETS IN EXCESS OF LIABILITIES - 1.12%............. 509,443
-----------
TOTAL NET ASSETS - 100.00%................................ $45,625,873
===========
FOOTNOTES AND ABBREVIATIONS
* - Non-income producing security.
ADR - American Depository Receipts.
See Notes to the Financial Statements.
12
THE MEXICO EQUITY AND INCOME FUND, INC.
Statement of Assets & Liabilities JANUARY 31, 2005
(UNAUDITED)
ASSETS:
Investments, at value (Cost $36,158,387).................... $45,116,430
Foreign currencies (Cost $469,292).......................... 470,993
Cash........................................................ 107,772
Receivables:
Investments sold.......................................... 820,623
Interest.................................................. 6,242
Prepaid expenses............................................ 24,789
-----------
TOTAL ASSETS.............................. 46,546,849
-----------
LIABILITIES:
Payable for securities purchased............................ 797,759
Advisory fees payable....................................... 20,378
Administration fees payable................................. 13,360
Fund accounting fees payable................................ 11,697
Directors' fees payable..................................... 11,668
Custody fees payable........................................ 4,765
Accrued expenses............................................ 61,349
-----------
TOTAL LIABILITIES......................... 920,976
-----------
NET ASSETS................................ $45,625,873
===========
NET ASSET VALUE PER SHARE
($45,625,873/2,473,504)................ $ 18.45
===========
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............................................. 34,534,300
Undistributed net investment loss........................... (212,734)
Accumulated net realized gain on investments and foreign
currency.................................................. 2,341,589
Net unrealized appreciation on investments and foreign
currency.................................................. 8,960,244
-----------
NET ASSETS................................ $45,625,873
===========
See Notes to the Financial Statements.
13
THE MEXICO EQUITY AND INCOME FUND, INC.
Statement of Operations FOR THE SIX MONTHS ENDED
JANUARY 31, 2005 (UNAUDITED)
INVESTMENT INCOME:
Dividends................................................................. $ 138,608
Interest.................................................................. 4,107
-----------
TOTAL INVESTMENT INCOME................................. 142,715
-----------
EXPENSES:
Advisory fees............................................... $158,945
Legal fees.................................................. 48,264
Administration fees......................................... 24,121
Fund accounting fees........................................ 21,200
Directors' fees and expenses................................ 19,716
Insurance expense........................................... 18,940
Custodian fees.............................................. 15,568
Reports to shareholders..................................... 14,968
NYSE fees................................................... 9,708
Audit fees.................................................. 9,420
Other expenses.............................................. 8,967
Transfer agent fees......................................... 6,132
-----------
TOTAL EXPENSES.......................................... 355,949
LESS, EXPENSE REIMBURSEMENT BY ADVISER.................. (500)
-----------
NET EXPENSES............................................ 355,449
-----------
NET INVESTMENT LOSS....................................................... (212,734)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from investments and foreign currency transactions...... 5,257,114
Net change in unrealized appreciation (depreciation) from investments and
foreign currency transactions........................................... 6,802,344
-----------
Net gain from investments and foreign currency transactions............... 12,059,458
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...................... $11,846,724
===========
See Notes to the Financial Statements.
14
THE MEXICO EQUITY AND INCOME FUND, INC.
Statements of Changes in Net Assets
FOR THE
SIX MONTHS
ENDED FOR THE YEAR
JANUARY 31, 2005 ENDED
(UNAUDITED) JULY 31, 2004
---------------- -------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment loss.................................... $ (212,734) $ (41,536)
Net realized gain from investments and foreign currency
transactions......................................... 5,257,114 9,589,282
Net change in unrealized appreciation (depreciation)
from investments and foreign currency transactions... 6,802,344 (834,386)
----------- -----------
Net increase in net assets resulting from
operations........................................ 11,846,724 8,713,360
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................. -- (38,226)
Net realized gains..................................... -- --
Return of capital...................................... -- --
----------- -----------
Net decrease in net assets from distributions........ -- (38,226)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Shares repurchased under Tender Offer.................. -- --
----------- -----------
Net decrease in net assets from capital share
transactions......................................... -- --
----------- -----------
Total increase in net assets........................... 11,846,724 8,675,134
NET ASSETS:
Beginning of period.................................... 33,779,149 25,104,015
----------- -----------
End of period*......................................... $45,625,873 $33,779,149
=========== ===========
*Including undistributed net investment income (loss)
of:............................................... $ (212,734) $ --
----------- -----------
See Notes to the Financial Statements.
15
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, 2005 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) JULY 31, 2004 JULY 31, 2003 JULY 31, 2002 JULY 31, 2001 JULY 31, 2000
---------------- ------------- ------------- ------------- ------------- -------------
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $13.66 $10.15 $ 8.74 $10.19 $11.36 $ 8.64
------ ------ ------ ------ ------ ------
Net investment income
(loss)................. (0.09) (0.02)(1) 0.00(2) (0.03)(1) (0.02) 0.03
Net realized and
unrealized gains
(losses) on investments
and foreign currency
transactions........... 4.88 3.55 1.41 (1.42) (0.64) 2.62
------ ------ ------ ------ ------ ------
Net increase (decrease)
from investment
operations............. 4.79 3.53 1.41 (1.45) (0.66) 2.65
------ ------ ------ ------ ------ ------
Less: Distributions
Dividends from net
investment income... -- (0.02) -- -- (0.01) (0.12)
Distributions from net
realized gains...... -- -- -- -- (0.60) --
Return of capital...... -- -- -- -- (0.01) --
------ ------ ------ ------ ------ ------
Total dividends and
distributions.......... -- (0.02) -- -- (0.62) (0.12)
Capital Share
Transactions
Anti-dilutive effect of
Tender Offer........ -- -- -- -- 0.09 --
Anti-dilutive effect of
Share Repurchase
Program............. -- -- -- -- 0.02 0.19
------ ------ ------ ------ ------ ------
Total capital share
transactions........... -- -- -- -- 0.11 0.19
------ ------ ------ ------ ------ ------
Net Asset Value, end of
period................. $18.45 $13.66 $10.15 $ 8.74 $10.19 $11.36
====== ====== ====== ====== ====== ======
Per share market value,
end of period.......... $16.33 $11.73 $ 9.10 $ 7.95 $ 9.11 $10.69
Total Investment Return
Based on Market Value,
end of period*......... 39.22%(-) 29.10% 14.47% (12.73)% (8.64)% 53.36%
See Notes to the Financial Statements.
16
Financial Highlights (concluded)
THE MEXICO EQUITY AND INCOME FUND, INC.
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, 2005 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) JULY 31, 2004 JULY 31, 2003 JULY 31, 2002 JULY 31, 2001 JULY 31, 2000
---------------- ------------- ------------- ------------- ------------- -------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
000s)...................... $45,626 $33,779 $25,104 $21,629 $87,620 $114,112
Ratios of expenses to average
net assets:
Before expense
reimbursement............ 1.79%+ 2.09% 2.64% 1.81% 1.90% 2.03%
After expense
reimbursement............ 1.79%+ 2.08% 2.62% 1.81% 1.90% 2.03%
Ratios of net investment
income (loss) to average
net assets:
Before expense
reimbursement............ (1.07)%+ (0.15)% 0.02% (0.14)% (0.16)% 0.27%
After expense
reimbursement............ (1.07)%+ (0.14)% 0.04% (0.14)% (0.16)% 0.27%
Portfolio turnover rate...... 126.77% 234.42% 180.67% 189.05% 220.85% 249.28%
* 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 does
not reflect brokerage commissions.
(1) Net investment income (loss) per share is calculated using ending balances
prior to consideration of adjustments for permanent financial reporting and
tax differences.
(2) The amount listed is less than $0.005 per share.
+ Annualized
(-) Not Annualized.
See Notes to the Financial Statements.
17
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements JANUARY 31, 2005
(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. Other assets and
securities for which no quotations are readily available will be valued in good
faith at fair value using methods determined by the Board of Directors. As of
January 31, 2005, the Fund held no securities for which market values were not
readily ascertainable.
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.
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.
18
Notes to Financial Statements (continued)
JANUARY 31, 2005
(UNAUDITED)
THE MEXICO EQUITY AND INCOME FUND, INC.
Federal income and excise taxes. At July 31, 2004, the Fund had capital loss
carryovers of $2,727,479 expiring July 31, 2011, which are available to offset
future net realized gains on securities transactions to the extent provided for
in the Internal Revenue Code.
The Fund is subject to the following withholding taxes on income from Mexican
sources:
Dividends distributed by Mexican companies are subject to withholding tax
at an effective rate of 0.00%. Prior to January 1, 2002, the effective rate
was 7.69%.
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,
2004, the Fund increased undistributed net investment income by $63,437 and
decreased accumulated net realized loss on investments by $27,445, and decreased
paid-in capital by $90,882, due to the tax treatment of foreign currency gains
and losses.
19
Notes to Financial Statements (continued)
JANUARY 31, 2005
(UNAUDITED)
THE MEXICO EQUITY AND INCOME FUND, INC.
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
20
Notes to Financial Statements (continued)
JANUARY 31, 2005
(UNAUDITED)
THE MEXICO EQUITY AND INCOME FUND, INC.
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their Federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net realized
capital 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, 2005 and July 31, 2004 were as
follows:
DISTRIBUTIONS PAID FROM: 1/31/05 7/31/04
------------------------ ------- -------
Ordinary Income............................................. $ -- $38,226
Long-Term Capital Gain...................................... -- --
Return of Capital........................................... -- --
------- -------
Total....................................................... $ -- $38,226
======= =======
As of July 31, 2004, the components of distributable earnings on a tax basis
were as follows:
Cost of investments and foreign currency (a)................ $36,764,680
-----------
Gross tax unrealized appreciation........................... 9,122,571
Gross tax unrealized depreciation........................... (25,326)
-----------
Net tax unrealized appreciation............................. $ 9,097,245
===========
Undistributed ordinary income............................... $ --
Undistributed long-term capital gain........................ --
-----------
Total distributable earnings................................ $ --
===========
Other accumulated gains..................................... $ 1,991,854
-----------
Total accumulated earnings.................................. $11,089,099
===========
(a) Represents cost for federal income tax purposes. Differences between the
Fund's cost basis of investment and foreign currency at July 31, 2004, for
book and tax purposes, relate primarily to the deferral of losses related to
wash sales.
21
Notes to Financial Statements (continued)
JANUARY 31, 2005
(UNAUDITED)
THE MEXICO EQUITY AND INCOME FUND, INC.
NOTE B: MANAGEMENT, INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
Pichardo Asset Management, S.A. de C.V. serves as the Fund's Investment Adviser
(the "Investment Adviser") under the terms of the Investment Advisory Agreement
(the "Advisory Agreement") effective July 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 six months ended January
31, 2005, these fees amounted to $158,945. 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 six months ended January 31, 2005, the total expense reimbursements made by
the Investment Adviser amounted to $500.
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 and $100
for each special telephonic meeting attended. At the Board of Directors' meeting
held on September 28, 2004, Mr. Gerald Hellerman was appointed Chief Compliance
Officer of the Fund. For serving the Fund as Chief Compliance Officer, in
addition to the aforementioned Directors' fees, Mr. Hellerman receives annual
compensation in the amount of $24,000. In addition, the Fund reimburses the
directors for travel and out-of-pocket expenses incurred in connection with
Board of Directors' meetings.
U.S. Bancorp Fund Services, LLC ("USBFS"), an indirect wholly-owned subsidiary
of U.S. Bancorp, serves as the Fund's Administrator and, in that capacity,
performs various administrative and accounting services for the Fund. USBFS also
serves as the Fund's Fund Accountant (the "Fund Accountant"). U.S. Bank, N.A.
serves as the Fund's custodian (the "Custodian"). The Custodian is an affiliate
of the Administrator. The Administrator prepares various federal and state
regulatory filings, reports and returns for the Funds; prepares reports and
materials to be supplied to the directors; monitors the activities of the Fund's
Custodian and Fund Accountant; coordinates the preparation and payment of the
Fund's expenses and reviews the Fund's expense accruals.
For its services, the Administrator receives a monthly fee at the following
annual rate (subject to a minimum annual fee of $50,000 through July 31, 2004,
$53,000 through July 31, 2005, then $57,000 through July 31, 2006):
0.12% of average daily net assets up to $200 million, plus
0.10% of average daily net assets from $200 million to $700 million, plus
0.05% of average daily net assets on the remaining balance above $700 million
22
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements (continued)
JANUARY 31, 2005
(UNAUDITED)
For its services, the Fund Accountant receives a monthly fee at the following
annual rate:
$42,000 minimum annual fee on average daily net assets up to $100 million,
plus
0.030% of average daily net assets from $100 million to $300 million, plus
0.015% of average daily net assets on the remaining balance above $300 million
For its services, the Custodian receives a monthly fee at the following annual
rate:
$12,000 minimum base fee, plus 0.03% of average daily custody balance
For the six months ended January 31, 2005, the Mexico Equity and Income Fund,
Inc. incurred Administration fees of $24,121, Fund Accounting fees of $21,200
and Custody fees of $15,568.
Certain officers of the Fund are also officers of the Administrator.
NOTE C: PORTFOLIO ACTIVITY
Purchases and sales of securities other than short-term obligations, aggregated
$51,355,262 and $50,538,055 respectively, for the six months ended January 31,
2005.
At January 31, 2005 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 D: CAPITAL STOCK
During the six months ended January 31, 2005 and the years ended July 31, 2004,
July 31, 2003 and July 31, 2002, 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%.
23
Notes to Financial Statements (continued)
JANUARY 31, 2005
(UNAUDITED)
THE MEXICO EQUITY AND INCOME FUND, INC.
NOTE E: SUBSEQUENT EVENT
At a Board of Directors meeting held on March 22, 2005, the Board unanimously
approved the continuation of the Investment Advisory Agreement between the Fund
and Pichardo Asset Management, S.A. de C.V. through June 30, 2006.
24
THE MEXICO EQUITY AND INCOME FUND, INC.
Additional Information JANUARY 31, 2005
(UNAUDITED)
Information about Proxy Voting
Information regarding how the Fund votes proxies relating to portfolio
securities is available without charge upon request by calling toll-free at
1-888-294-8217 and the SEC's website at www.sec.gov. Information regarding how
the Fund voted proxies relating to portfolio securities during the twelve months
ending June 30, 2004 is available.
Availability of Quarterly Portfolio Schedule
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The filing will be
available, upon request, by calling 1-888-294-8217. Furthermore, you will be
able to obtain a copy of the filing on the SEC's website at http://www.sec.gov
beginning with the filing for the period ended October 31, 2004. The Fund's
Forms N-Q may also be reviewed and copied at the SEC's Public Reference Room in
Washington, DC, and information on the operation of the Public Reference Room
may be obtained by calling (800) SEC-0330.
25
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 Computershare Trust Company, Inc., 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 Computershare Investor Services, ATTN: Mr. Charles Zade, 2 North La
Salle Street, Chicago, Illinois 60602. 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
26
THE MEXICO EQUITY AND INCOME FUND, INC.
Dividends and Distributions (unaudited) (continued)
95% of the market price on the valuation date, then such shares will be issued
at 95% of the market price.
If net asset value per share on the valuation date exceeds the market price per
share on that date, participants in the Plan will receive shares of Common Stock
from the Fund valued at market price. The valuation date is the dividend or
distribution payment date or, if that date is not a New York Stock Exchange
trading day, the next preceding trading day. If the Fund should declare an
income dividend or capital gains distribution payable only in cash, the Plan
Agent will, as agent for the participants, buy Fund shares in the open market on
the New York Stock Exchange or elsewhere, for the participants' accounts on, or
shortly after, the payment date.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in an account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in noncertified form in the
name of the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan.
In the case of shareholders such as banks, brokers or nominees that hold shares
for others who are beneficial owners, the Plan Agent will administer the Plan on
the basis of the number of shares certified from time to time by the
shareholders as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who participate in the Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions payable in either Common Stock or cash. The Plan Agent's fees for
the handling 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.
27
THE MEXICO EQUITY AND INCOME FUND, INC.
Dividends and Distributions (unaudited) (concluded)
The receipt of dividends and distributions in Common Stock under the Plan will
not relieve participants of any income tax (including withholding tax) that may
be payable on such dividends or distributions.
Experience under the Plan may indicate that changes in the Plan are desirable.
Accordingly, the Fund and the Plan Agent reserve the right to terminate the Plan
as applied to any dividend or distribution paid subsequent to notice of the
termination sent to participants at least 30 days before the record date for
such dividend or distribution. The Plan also may be amended by the Fund or the
Plan Agent, but (except when necessary or appropriate to comply with applicable
law, 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.
28
THE MEXICO EQUITY AND INCOME FUND, INC.
Results of Annual Stockholders Meeting (unaudited)
The Fund's Annual Stockholders meeting was held on October 25, 2004, at 405
Lexington Avenue, New York, New York 10174. As of September 24, 2004, the record
date, outstanding shares of common stock ("shares") of the Fund were 2,473,504.
Holders of 2,218,654 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
one proposal. The stockholders elected a Director to the Board of Directors.
The following table provides information concerning the matter voted on at the
meeting:
I. ELECTION OF DIRECTOR
NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
Gerald Hellerman 2,152,465 66,189
29
THE MEXICO EQUITY
AND INCOME FUND, INC.
INVESTMENT ADVISER:
Pichardo Asset Management, S.A. de C.V.
408 Teopanzolco Avenue
3rd Floor - Reforma
Cuernavaca, 62260 Morelos
Mexico
INDEPENDENT AUDITOR:
Tait, Weller & Baker
1818 Market Street, Suite 2400
Philadelphia, PA 19103
ADMINISTRATOR AND FUND ACCOUNTANT:
U.S. Bancorp Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
TRANSFER AGENT AND REGISTRAR:
Computershare Investor Services, LLC
2 North La Salle Street
Chicago, IL 60602
CUSTODIAN:
U.S. Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
The Mexico Equity
and Income Fund, Inc.
Semi-Annual Report
January 31, 2005
ITEM 2. CODE OF ETHICS.
Not applicable for semi-annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable for semi-annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable for semi-annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Effective March 24, 2004, the standing audit committee is comprised of Mr.
Andrew Dakos, Mr. Phillip Goldstein, and Mr. Rajeev Das.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments is included as part of the report to shareholders filed
under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
PROXY VOTING POLICIES AND GUIDELINES
The Proxy Voting Policies and Guidelines contained in this document
summarize The Mexico Equity and Income Fund, Inc.'s (the "Fund") positions on
various issues of concern to the Fund's shareholders. These Guidelines give
general indication as to how the Fund's Advisor will vote Fund shares on each
issue listed. However, this listing does not address all potential voting issues
or the intricacies that may surround individual proxy votes. For that reason
there may be instances in which votes may vary from the guidelines presented
here. The Fund endeavors to vote Fund shares in accordance with the Fund's
investment objectives and strategies.
The Fund will vote NO on any proposals that would limit or restrict a
shareholders rights.
I. CORPORATE GOVERNANCE
A. BOARD AND GOVERNANCE ISSUES
1. BOARD OF DIRECTOR/TRUSTEE COMPOSITION
The Board of Directors is responsible for the overall governance of the
corporation.
1
The Fund advisor will OPPOSE slates without at least a majority of
independent directors (1/3 of directors who are outsiders to the corporation).
The Fund advisor will vote FOR shareholder proposals that request that the
board audit, compensation and/or nominating committees include independent
directors exclusively.
2. INCREASE AUTHORIZED COMMON STOCK
The Fund advisor will generally SUPPORT the authorization of additional
common stock necessary to facilitate a stock split.
The Fund advisor will generally SUPPORT the authorization of additional
common stock, if the company already has a large amount of stock authorized but
not issued or reserved for its stock option plans. In this latter instance,
there is a concern that the authorized but unissued shares will be used as a
poison pill or other takeover defense, which will be OPPOSED. In addition, we
will require the company to provide a specific purpose for any request to
increase shares by more than 100 percent of the current authorization.
3. BLANK CHECK PREFERRED STOCK
Blank check preferred is stock with a fixed dividend and a preferential
claim on company assets relative to common shares. The terms of the stock
(voting dividend and conversion rights) are set by the Board at a future date
without further shareholder action. While such an issue can in theory have
legitimate corporate purposes, most often it has been used as a takeover defense
since the stock has terms that make the entire company less attractive.
The Fund advisor will generally OPPOSE the creation of blank check
preferred stock.
4. CLASSIFIED OR "STAGGERED" BOARD
On a classified (or staggered) board, directors are divided into separate
classes (usually three) with directors in each class elected to overlapping
three-year terms. Companies argue that such Boards offer continuity in direction
which promotes long-term planning. However, in some instances they may serve to
deter unwanted takeovers since a potential buyer would have to wait at least two
years to gain a majority of Board seats.
The Fund advisor will vote no on proposals involving classified boards.
5. SUPERMAJORITY VOTE REQUIREMENTS
Supermajority vote requirements in a company's charter or bylaws require a
level of voting approval in excess of a simple majority. Generally,
supermajority provisions require at least 2/3 affirmative vote for passage of
issues.
The Fund advisor will vote no on proposals involving supermajority voting.
6. RESTRICTIONS ON SHAREHOLDERS TO ACT BY WRITTEN CONSENT
Written consent allows shareholders to initiate and carry out a shareholder
action without waiting until the annual meeting or by calling a special meeting.
It permits action to be taken by the written consent of the same percentage of
outstanding shares that would be required to effect the proposed action at a
shareholder meeting.
2
The Fund advisor will vote no on proposals to limit or eliminate the right
of shareholders to act by written consent.
7. RESTRICTIONS ON SHAREHOLDERS TO CALL MEETINGS
The Fund advisor will generally OPPOSE such a restriction as it limits the
right of the shareholder.
8. LIMITATIONS, DIRECTOR LIABILITY AND INDEMNIFICATION
Because of increased litigation brought against directors of corporations
and the increased costs of director's liability insurance, many states have
passed laws limiting director liability for those acting in good faith.
Shareholders however must opt into such statutes. In addition, many companies
are seeking to add indemnification of directors to corporate bylaws.
The Fund advisor will generally SUPPORT director liability and
indemnification resolutions because it is important for companies to be able to
attract the most qualified individuals to their Boards. Note: Those directors
acting fraudulently would remain liable for their actions irrespective of this
resolution.
9. REINCORPORATION
Corporations are in general bound by the laws of the state in which they
are incorporated. Companies reincorporate for a variety of reasons including
shifting incorporation to a state where the company has its most active
operations or corporate headquarters, or shifting incorporation to take
advantage of state corporate takeover laws.
While each reincorporation proposal will be evaluated based on its own
merits, the Fund advisor will generally SUPPORT reincorporation resolutions for
valid business reasons (such as reincorporating in the same state as the
corporate headquarters).
10. CUMULATIVE VOTING
Cumulative voting allows shareholders to "stack" their votes behind one or
a few directors running for the board, thereby helping a minority of
shareholders to win board representation. Cumulative voting gives minority
shareholders a voice in corporate affairs proportionate to their actual strength
in voting shares.
The Fund advisor will generally SUPPORT proposals calling for cumulative
voting in the election of directors.
11. DUAL CLASSES OF STOCK
In order to maintain corporate control in the hands of a certain group of
shareholders, companies may seek to create multiple classes of stock with
differing rights pertaining to voting and dividends.
The Fund advisor will generally OPPOSE dual classes of stock. However, the
advisor will SUPPORT classes of stock offering different dividend rights (such
as one class which pays cash dividends and a second which pays stock dividends)
depending on the circumstances.
12. LIMIT DIRECTORS' TENURE
3
In general corporate directors may stand for re-election indefinitely.
Opponents of this practice suggest that limited tenure would inject new
perspectives into the boardroom as well as possibly creating room for directors
from diverse backgrounds; however, continuity is important to corporate
leadership and in some instances alternative means may be explored for injecting
new ideas or members from diverse backgrounds into corporate boardrooms.
Accordingly, the Fund advisor will vote on a case-by-case basis attempts to
limit director tenure.
13. MINIMUM DIRECTOR STOCK OWNERSHIP
The director share ownership proposal requires that all corporate directors
own a minimum number of shares in the corporation. The purpose of this
resolution is to encourage directors to have the same interest as other
shareholders.
The Fund advisor will SUPPORT resolutions that require corporate directors
to own shares in the company.
14. SELECTION OF AUDITOR
Annual election of the outside accountants is standard practice. While it
is recognized that the company is in the best position to evaluate the
competence of the outside accountants, we believe that outside accountants must
ultimately be accountable to shareholders. Furthermore, audit committees have
been the subject of a report released by the Blue Ribbon Commission on Improving
the Effectiveness of Corporate Audit Committees in conjunction with the NYSE and
the National Association of Securities Dealers. The Blue Ribbon Commission
concluded that audit committees must improve their current level of oversight of
independent accountants. Given the rash of accounting irregularities that were
not detected by audit panels or auditors, shareholder ratification is an
essential step in restoring investor confidence.
The Fund advisor will OPPOSE the resolutions seeking ratification of the
auditor when fees for financial systems design and implementation exceed audit
and all other fees, as this can compromise the independence of the auditor.
The Fund advisor will OPPOSE the election of the audit committee chair if
the audit committee recommends an auditors whose fees for financial systems
design and implementation exceed audit and all other fees, as this can
compromise the independence of the auditor.
B. EXECUTIVE COMPENSATION
1. DISCLOSURE OF CEO, EXECUTIVE, BOARD AND MANAGEMENT COMPENSATION
On a case-by-case basis, the Fund advisor will SUPPORT shareholder
resolutions requesting companies to disclose the salaries of top management and
the Board of Directors.
2. COMPENSATION FOR CEO, EXECUTIVE, BOARD AND MANAGEMENT
The Fund advisor will OPPOSE an executive compensation proposal if we
believe the compensation does not reflect the economic and social circumstances
of the company (i.e. at times of layoffs, downsizing, employee wage freezes,
etc.).
3. FORMATION AND INDEPENDENCE OF COMPENSATION REVIEW COMMITTEE
4
The Fund advisor will SUPPORT shareholder resolutions requesting the
formation of a committee of independent directors to review and examine
executive compensation.
4. STOCK OPTIONS FOR BOARD AND EXECUTIVES
The Fund advisor will generally OPPOSE stock option plans that in total
offer greater than 15% of shares outstanding because of voting and earnings
dilution.
The Fund advisor will generally OPPOSE option programs that allow the
repricing of underwater options. (Repricing divides shareholder and employee
interests. Shareholders cannot "reprice" their stock and, therefore, optionees
should not be treated differently).
The Fund advisor will generally OPPOSE stock option plans that have option
exercise prices below the marketplace on the day of the grant.
The Fund advisor will generally SUPPORT options programs for outside
directors subject to the same constraints previously described.
5. EMPLOYEE STOCK OWNERSHIP PLAN (ESOPS)
The Fund advisor will SUPPORT ESOPs created to promote active employee
ownership. However, they will OPPOSE any ESOP whose purpose is to prevent a
corporate takeover.
6. PAY EQUITY
The Fund advisor will SUPPORT shareholder resolutions that request that
management provide a race and/or gender pay equity report.
7. RATIO BETWEEN CEO AND WORKER PAY
The Fund advisor will generally SUPPORT shareholder resolutions requesting
that management report on the ratio between CEO and employee compensation.
8. MAXIMUM RATIO BETWEEN CEO AND WORKER COMPENSATION AND/OR CAP ON CEO
COMPENSATION
The Fund advisor will vote on a case-by-case basis shareholder resolutions
requesting management to set a maximum ratio between CEO and employee
compensation and/or a cap on CEO compensation.
9. CHANGES TO CHARTER OR BY-LAWS
The Fund advisor will conduct a case-by-case review of the proposed changes
with the voting decision resting on whether the proposed changes are in
shareholder's best interests.
10. CONFIDENTIAL VOTING
Typically, proxy voting differs from voting in political elections in that
the company is made aware of shareholder votes as they are cast. This enables
management to contact dissenting shareholders in an attempt to get them to
change their votes.
The Fund advisor will SUPPORT confidential voting because the voting
process should be free of coercion.
11. EQUAL ACCESS TO PROXY
5
Equal access proposals ask companies to give shareholders access to proxy
materials to state their views on contested issues, including director
nominations. In some cases, they would actually allow shareholders to nominate
directors. Companies suggest that such proposals would make an increasingly
complex process even more burdensome.
In general, the Fund advisor will OPPOSE resolutions for equal access
proposals.
12. GOLDEN PARACHUTES
Golden parachutes are severance payments to top executives who are
terminated or demoted pursuant to a takeover. Companies argue that such
provisions are necessary to keep executives from "jumping ship" during potential
takeover attempts.
The Fund advisor will SUPPORT the right of shareholders to vote on golden
parachutes because they go above and beyond ordinary compensation practices. In
evaluating a particular golden parachute, we will examine total management
compensation, the employees covered by the plan, and the quality of management.
C. MERGERS AND ACQUISITIONS
1. CONSIDERING THE NON-FINANCIAL EFFECTS OF A MERGER PROPOSAL
Such a proposal allows or requires the Board to consider the impact of
merger decisions on various "stakeholders," such as employees, communities,
customers and business partners. This proposal gives the Board the right to
reject a tender offer on the grounds that it would adversely affect the
company's stakeholders.
The Fund advisor will SUPPORT shareholder resolutions that consider
non-financial impacts of mergers.
2. MERGERS, RESTRUCTURING AND SPIN-OFFS
A merger, restructuring, or spin-off in some way affects a change in
control of the company's assets. In evaluating the merit of each issue, we will
consider the terms of each proposal. This will include an analysis of the
potential long-term value of the investment.
The Fund advisor will SUPPORT management proposals for merger or
restructuring if the transaction appears to offer fair value and other proxy
voting policies stated are not violated. For example, the advisor may oppose
restructuring resolution which include in it significant takeover defenses and
may again oppose the merger of a non-nuclear and a nuclear utility if it poses
potential liabilities.
3. POISON PILLS
Poison pills (or shareholder rights plans) are triggered by an unwanted
takeover attempt and cause a variety of events to occur which may make the
company financially less attractive to the suitor. Typically, directors have
enacted these plans without shareholder approval. Most poison pill resolutions
deal with putting poison pills up for a vote or repealing them altogether.
The Fund advisor will SUPPORT proposals to put rights plans up for a
shareholder vote. In general, poison pills will be OPPOSED unless management is
able to present a convincing case fur such a plan.
4. OPT-OUT OF STATE ANTI-TAKEOVER LAW
6
A strategy for dealing with anti-takeover issues has been a shareholder
resolution asking for a company to opt-out of a particular state's anti-takeover
laws.
The Fund advisor will generally SUPPORT bylaws changes requiring a company
to opt-out of state anti-takeover laws. However, resolutions requiring companies
to opt-into state anti-takeover statutes will be OPPOSED.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not applicable to closed-end funds without a fiscal year ending on or after
December 31, 2005.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASES.
(d)
(c) MAXIMUM NUMBER (OR
TOTAL NUMBER OF APPROXIMATE DOLLAR
PERIOD (a) (b) SHARES (OR UNITS) VALUE) OF SHARES (OR
TOTAL NUMBER OF AVERAGE PRICE PAID PURCHASED AS PART OF UNITS) THAT MAY YET
SHARES (OR UNITS) PER SHARE (OR UNIT) PUBLICLY ANNOUNCED BE PURCHASED UNDER
PURCHASED PLANS OR PROGRAMS THE PLANS OR PROGRAMS
----------------------------------------------------------------------------------------------------------------------
08/01/04 to 08/31/04 0 0 0 0
----------------------------------------------------------------------------------------------------------------------
09/01/04 to 09/30/04 0 0 0 0
----------------------------------------------------------------------------------------------------------------------
10/01/04 to 10/31/04 0 0 0 0
----------------------------------------------------------------------------------------------------------------------
11/01/04 to 11/30/04 0 0 0 0
----------------------------------------------------------------------------------------------------------------------
12/01/04 to 12/31/04 0 0 0 0
----------------------------------------------------------------------------------------------------------------------
01/01/05 to 01/31/05 0 0 0 0
----------------------------------------------------------------------------------------------------------------------
Total 0 0 0 0
----------------------------------------------------------------------------------------------------------------------
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------------------------------------------------------------
The registrant's independent directors/trustees serve as its nominating
committee, however they do not make use of a nominating committee charter.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's President and Chief Financial Officer have concluded that
the Registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940 (the "1940 Act")) are
effective as of a date within 90 days of the filing date of the report that
includes the disclosure required by this paragraph, based on the evaluation
of these controls and procedures required by Rule 30a-3(b) under the 1940
Act and Rules 15d-15(b) under the Securities Exchange Act of 1934, as
amended.
(b) There were no significant changes in the Registrant's internal controls
over financial reporting that occurred during the Registrant's last fiscal
half-year that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial
reporting.
7
ITEM 12. EXHIBITS.
(a) (1) Any code of ethics or amendment thereto, that is subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy Item 2 requirements through filing an exhibit. Filed herewith.
(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1 under
the Act sent or given during the period covered by the report by or on
behalf of the registrant to 10 or more persons. None.
(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) The Mexico Equity and Income Fund, Inc.
---------------------------------------------------------
By (Signature and Title) /s/ Maria Eugenia Pichardo
----------------------------------------------
Maria Eugenia Pichardo, President
Date April 8, 2005
-----------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /s/ Maria Eugenia Pichardo
---------------------------------------------
Maria Eugenia Pichardo, President
Date April 8, 2005
-----------------------------------------------------------------
By (Signature and Title) /s/ Gerald Hellerman
---------------------------------------------
Gerald Hellerman, Chief Financial Officer
Date April 8, 2005
-----------------------------------------------------------------
9