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 U.S. 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: JULY 31, 2005
ITEM 1. REPORT TO STOCKHOLDERS.
The Mexico Equity and Income Fund, Inc.
September 27, 2005
DEAR FUND SHAREHOLDERS,
We are pleased to present you with the audited financial statements of the
Mexico Equity and Income Fund, Inc. (the "Fund") for the fiscal year ending July
31, 2005. The Fund presents investors with the opportunity to own Mexican
securities. Its objective is to achieve superior long-term performance.
The Fund's net assets were $52,621,150 on July 31, 2005, an increase of 55.78%
from its net asset value of $33,779,149 on July 31, 2004. From July 31, 2004 to
July 31, 2005 the Fund's Net Asset Value ("NAV") per share increased 55.7%
(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 53.4% (including reinvested dividends
56.9%).
We are pleased to inform you that your Board of Directors has designed an
innovative rights offering scheme that will entitle you to receive, at no cost
nontransferable rights to purchase shares of Preference Common Stock. A
preliminary registration statement with details of the proposed rights offering
and the Preference Common Stock has been filed with the SEC and is available at
www.sec.gov. Please note that the preliminary registration statement is subject
to change. Directors and Officers who own shares of the Fund's common stock
intend to exercise all of the Rights initially issued to them.
Our objective is to raise cash to permit the Fund to meet its distribution
requirements of capital gains realized, if any, in an effort (i) to avoid an
excise tax and to meet its Subchapter M requirements and (ii) to avoid having to
sell portfolio securities which would further decrease the Fund's assets to
invest and would result in additional realized capital gains.
We are still waiting for the SEC staff to approve the creative Put Warrant
scheme we have been seeking for five years which would enable you, at your
option, to receive NAV from time to time. In the event the Put Warrant Program
is approved by the SEC, all issued and outstanding shares of Preference Stock
will automatically convert to common stock on a one-to-one basis.
On behalf of the Board of Directors, we thank you for participation in 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 YEAR ENDED JULY 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 fiscal year ended July
31, 2005.
--------------------------------------------------------------------------------
INTRODUCTION
Investment portfolio asset allocation and stock-picking have been extremely
challenging in view of the strong volatility seen in almost every world asset
class during the Fund's fiscal year ended July 31, 2005. Globalization and
synchronized economic growth with China re-confirming its leadership position
have resulted in unprecedented flows into emerging markets, but imbalances in
major economies. Mexico's solid macro fundamentals and expectations of high cash
flow generation by listed companies were the key drivers for global excess
liquidity into the Mexican Stock Exchange Market, "The Mexbol", during the
period.
Below we provide a review of the Mexican economy, the Mexbol's behavior and the
Mexico Equity and Income Fund Inc.'s performance and investment strategy. Our
conclusion includes some major macro estimates from the Mexican government and
our fundamental investment strategy.
--------------------------------------------------------------------------------
MEXICO'S ECONOMIC REVIEW
In general terms, Mexico's economic expansion continues and fundamentals remain
solid. The fiscal deficit continues to narrow and is expected to close 2005 at
0% following a previously projected figure of -0.2%, while public revenues
continue to increase along with public investment and expenditure. Federal
resources transferred to states and municipalities have increased considerably.
Banking credit to households and businesses continues to grow at high rates
(according to the Central Bank, consumer credit as of June 2005 increased 45%
year-over-year in real terms) and the net external debt to GDP ratio has
diminished with respect to the previous year.
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.
Nevertheless, economic growth registered in the first half of 2005 resulted
weaker than at the end of 2004, after a 3.1% increase at the end of the second
quarter led to a 2.8% GDP increase in the first six months of the year, well
below the 4.1% achieved in the same year ago period. This situation was mostly
attributed to transitory impacts on Mexico's industrial activity that resulted
from: i) the deceleration of manufacturing production in the U.S. and, ii) weak
U.S. demand for American vehicles.
It should be noted, however, that economic growth related to less sensitive
fluctuations is increasing in relative terms, as the service sector and domestic
spending (growth of private expenditure and public investment) become more
dynamic, helped by budgetary revenues for the year that are estimated at more
than US$10 billion above those originally projected, mainly due to increases in
oil related revenues associated with higher oil prices (the Mexican oil mix has
surged 61.5% in dollar terms year-to-date through July).
The strong balance of payments resulting from continued high remittances from
Mexican workers abroad together with excess oil revenue (1.9% of GDP) are among
the most important factors that have contributed to the strength of the
currency, helping the Mexican Peso to gain 5.0% year-to-date through July to
close at $10.59 to the U.S. dollar.
4
THE MEXICO EQUITY AND INCOME FUND, INC.
--------------------------------------------------------------------------------
THE MEXICAN STOCK EXCHANGE
Excess global liquidity prompted a 53.4% "Mexbol" total return in dollar terms
(including dividend reinvestment, the Mexbol increased 56.9%) for the Fund's
fiscal year ended July 31, 2005. By contrast, the AFORES, Mexico's Pension Fund
System, the largest domestic institutional investor (allowed to invest in stocks
for the first time early this year) are reported to have been on the sidelines
during this period.
For the one year period ended July 31st, 2005, the Latin American region
outperformed other emerging markets as the MSCI EMF Latam Index gained 56.2% and
the MSCI Emerging Markets Free gained 42.4% in dollar terms for the same period.
Mexico ranked fifth within the Latam region after Colombia, +146.5%, Chile
+72.6%, Argentina +63.0% and Peru +56.6%, and over-performed Brazil +47.9% and
Venezuela's loss of -23.8%. By comparison, the Dow Jones gained 7.3% and the
NASDAQ Composite Index gained 16.5% for the same period.
Corporative double digit EBITDA growth helped to improve companies' EV/EBITDA
multiples (enterprise value/earnings before interest, taxes, depreciation and
amortization) and at the same time, additional flows into the "Mexbol" have
pushed market prices up to all-time highs several times during the reported
period. Ten stocks out of the Mexbol's composite index of 35 gained between 67%
and 148% in dollar terms, according to Bloomberg.
For the one-year-period ended July 31st, 2005, Mexbol's over-performing sectors
were related to housing, commodities (steel and copper), financial and wireless
telephony sectors. Beverages, retailing and consumer staples, which
under-performed the Mexbol index during the first half of the fiscal year,
re-rated from their lows and their performance was in line with that of the
Mexbol, underpinned by strong domestic demand. The market's capitalization
roughly amounts to US$200 billion as it still lacks energy and utility sectors.
Meanwhile infrastructure companies and airliners recently became two new
promising sectors in the Mexbol.
--------------------------------------------------------------------------------
THE FUND'S PERFORMANCE
The Fund's 55.7% Net Asset Value "NAV" per share gain out-performed the
"Mexbol's 53.4% increase and The Mexico Fund "THE MXF"'s Net Asset Value "NAV"
per share, which gained 50.0%. The MXF is the MXE's fully comparable peer.
The Fund's common share market price increased 60.4% for the Fund's fiscal year
period, ending at a -11.5% discount to that of its "NAV".
5
THE MEXICO EQUITY AND INCOME FUND, INC.
The Fund's annualized 14.37% total "NAV" return as of July 31st, 2005, since its
inception on August 30, 1990, continues to place "The MXE" as a leading
performing Closed-End Fund. (Return calculations are according to Thomson
Financial.)
--------------------------------------------------------------------------------
PORTFOLIO STRATEGY
The investment strategy we implemented in the Mexico Equity and Income Fund
during the August-July 2005 period consisted of an overweight in Mexican stocks
relative to the Fund's overall assets, whose range was between 85%-95%. Fixed
income denominated products were defined as a temporarily investment vehicle.
Our fundamental investment thesis for such an allocation in equities was based
on our belief that Mexico's solid macro-fundamentals would continue to benefit
from synchronized global economic growth momentum.
For the first half of the fiscal year period, cyclical stocks were the Fund's
highest stock allocation relative to the Mexbol Index with quality growth stocks
constituting the second largest position relative to the Fund's overall
portfolio.
The Fund's first deviation from this investment strategy took place at the end
of December 2004, when in line with our reading that strong domestic consumption
would become the key driver of ongoing economic growth in Mexico in the year to
come, high-liquidity growth stocks become the focus of our investment thesis.
--------------------------------------------------------------------------------
CONCLUSION
We remain upbeat on the outlook for domestic consumption, as headline inflation
remains contained, thus allowing the Central Bank to loosen its monetary policy
and interest rates to trend lower while export prospects to the U.S. remain
positive for Mexico, in light of an expected inventory build-up there in the
coming two quarters. As of September 6th, 2006, the government anticipates that
the Mexican economy will grow at a 3.6% annualized rate in 2006.
The Mexbol is currently rated as "fairly valued" by some analysts, and it could
very well continue to reach all-time-highs, if global liquidity conditions
prevail and companies continue to report solid operating results.
The Mexico Equity and Income Fund Inc.'s 34.6% NAV total annual dollar return
per share gain for the three-year-period ended July 31, 2005, and its 0.9 lower
risk volatility relative to the Mexbol Index, according to Rothschild, continues
to place the "Fund" among the leading performing
6
THE MEXICO EQUITY AND INCOME FUND, INC.
Closed-End investment alternatives. Bloomberg measures risk volatility for the
common share rather than the NAV.
The Fund's investment strategy going forward will likely remain focused on
highly liquid growth stocks while selectively searching for value stocks.
--------------------------------------------------------------------------------
RELEVANT INFORMATION
REAL ACTIVITY (BILLION US$) 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) $(197.20)
Import growth (y-o-y).... 13.2% 22.9% (3.5)% 0.2% 1.1% 15.7%
FINANCIAL VARIABLES AND PRICES 1999 2000 2001 2002 2003 2004 7/31/2005
------------------------------ -------- -------- -------- -------- -------- -------- ---------
28-Day CETES
(T-bills)/Average......... 31.40% 15.30% 11.20% 7.10% 6.24% 8.60% 9.60%
Exchange rate (Pesos/US$)/
Average................... 9.56 9.46 9.34 9.66 10.79 11.147 10.59
Inflation IPC, 12 month
trailing.................. 12.3% 9.0% 4.4% 5.7% 4.2% 5.4% 4.4%
12/31/04 TO
MEXBOL INDEX 1999 2000 2001 2002 2003 2004 07/31/05
--------------------------------- ------ ------- ------ ------- ------ ------ -----------
USD Return....................... 90.39% (20.81)% 20.88% (14.43)% 33.61% 50.49% 18.90%
Market Cap. (US Billions)........ $129.6 $ 111.7 $112.4 $ 103.8 $124.7 $169.5 $ 200.0
EV/EBITDA........................ 10.5x 7.9x 8.1x 6.6x 7.8x 8.3x 8.4x
FUND'S NAV & COMMON SHARE MARKET PRICE PERFORMANCE
12/31/04 TO
USD RETURN 1999 2000 2001 2002 2003 2004 07/31/05
----------------------- ------ ------ ---- ------ ----- ----- -----------
NAV's per share........ 59.17% (14.06)% 9.98% (13.51)% 40.0% 55.6% 16.5%
Share Price............ 74.7% (5.7)% 18.7% (18.5)% 36.0% 66.6% 9.2%
7
THE MEXICO EQUITY AND INCOME FUND, INC.
Source: Thomson
FUND'S ASSET CATEGORIES
(%) NET ASSETS) 2001(*) END 2002 END 2003 END 2004 1/31/2005 7/31/2005
---------------------- ------- -------- -------- -------- --------- ---------
Strong market
position............ 22.9% 28.2% 32.7% 32.3% 24.6% 30.3%
Undervalued+restructuring
stories............. 18.5% 15.6% 27.7% 18.9% 20.8% 10.4%
Fast growing business
segments............ 14.9% 8.8% 17.8% 30.8% 35.4% 28.9%
Financial groups...... 19.4% 14.4% 7.5% 4.2% 3.4% 6.5%
Globally consolidated
industries.......... 9.1% 13.8% 6.4% 3.0% 3.3% 2.0%
Global leaders........ 9.1% 5.9% 4.6% 6.2% 6.6% 7.9%
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% 14.1%
* Equities allocation was initially classified by asset categories starting on
May 31st, 2001.
Sincerely yours,
/s/ EUGENIA PICHARDO
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 ANNUAL REPORT FOR MORE COMPLETE FUND
INFORMATION.
THE INFORMATION CONCERNING THE FUND INCLUDED IN THE REPORT OF THE INVESTMENT
ADVISER CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS ABOUT THE FACTORS THAT MAY
AFFECT THE PERFORMANCE OF THE FUND IN THE FUTURE. THESE STATEMENTS ARE BASED ON
FUND MANAGEMENT'S PREDICTIONS AND EXPECTATIONS CONCERNING CERTAIN FUTURE EVENTS
AND THEIR EXPECTED IMPACT ON THE FUND, SUCH AS PERFORMANCE OF THE ECONOMY AS A
WHOLE AND OF SPECIFIC INDUSTRY SECTORS, CHANGES IN THE LEVELS OF INTEREST RATES,
THE IMPACT OF DEVELOPING WORLD EVENTS, AND OTHER FACTORS THAT MAY INFLUENCE THE
FUTURE PERFORMANCE OF THE FUND. MANAGEMENT BELIEVES THESE FORWARD-LOOKING
STATEMENTS TO BE REASONABLE, ALTHOUGH THEY ARE INHERENTLY UNCERTAIN AND
DIFFICULT TO PREDICT. ACTUAL EVENTS MAY CAUSE ADJUSTMENTS IN PORTFOLIO
MANAGEMENT STRATEGIES FROM THOSE CURRENTLY EXPECTED TO BE EMPLOYED.
8
THE MEXICO EQUITY AND INCOME FUND, INC.
Allocation of Portfolio Assets
(CALCULATED AS A PERCENTAGE OF NET ASSETS) July 31, 2005
[BAR CHART]
Food, Beverage, and Tobacco 14.77
Communications 14.51
Construction 12.75
Retailing 9.56
Corporate Bonds 9.27
Media 8.14
Financial Groups 6.52
Industrial Conglomerates 6.13
Mining 4.73
Investment Companies 4.70
Cement 4.27
Airlines 3.24
Paper Products 1.34
See Notes to the Financial Statements.
9
THE MEXICO EQUITY AND INCOME FUND, INC.
Schedule of Investments JULY 31, 2005
MEXICO - 99.76% SHARES VALUE
----------------------------------------------------------------------------------------------
COMMON STOCKS - 85.96%
----------------------------------------------------------------------------------------------
AIRLINES - 3.24%
Grupo Aeroportario del Sureste S.A. de C.V. - Class B..... 497,100 $ 1,701,716
-----------
COMMUNICATIONS - 14.51%
America Movil, S.A. de C.V. - Class L..................... 2,233,800 2,482,937
America Movil, S.A. de C.V. - Class L ADR................. 63,570 1,415,068
America Telecom, S.A. de C.V. - Class A1*................. 1,065,000 3,737,248
-----------
7,635,253
-----------
CEMENT - 4.27%
Cemex, S.A. de C.V. CPO................................... 354,494 1,668,109
Grupo Cementos de Chihuahua, S.A. de C.V. ................ 250,000 577,939
-----------
2,246,048
-----------
CONSTRUCTION - 12.75%
Corporacion GEO, S.A. de C.V. Class B*.................... 121,800 336,048
Empresas ICA Sociedad Controladora S.A. de C.V.*.......... 7,968,500 3,353,417
SARE Holding, S.A. de C.V. - Class B*..................... 3,104,100 2,474,962
Urbi, Desarrollos Urbanos, S.A. de C.V.*.................. 87,600 546,281
-----------
6,710,708
-----------
FINANCIAL GROUPS - 6.52%
Grupo Financiero Banorte, S.A. de C.V. - Class O.......... 254,000 2,155,093
Grupo Financiero Inbursa, S.A. de C.V. - Class O.......... 566,900 1,276,301
-----------
3,431,394
-----------
FOOD, BEVERAGE AND TOBACCO - 14.77%
Alsea, S.A. de C.V. ...................................... 1,041,453 2,456,721
Alsea II, S.A. de C.V. - Class A'......................... 29,441 66,671
Fomento Economico Mexicano, S.A. de C.V. ADR.............. 18,500 1,202,500
Fomento Economico Mexicano, S.A. de C.V. UBD.............. 335,223 2,173,667
Grupo Embotelladoras Unidas S.A. de C.V. - Class B........ 312,900 1,033,355
Grupo Modelo, S.A. de C.V. - Class C...................... 254,500 840,249
-----------
7,773,163
-----------
See Notes to the Financial Statements.
10
Schedule of Investments (continued)
JULY 31, 2005
THE MEXICO EQUITY AND INCOME FUND, INC.
COMMON STOCKS (CONTINUED) SHARES VALUE
----------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES - 6.13%
Alfa, S.A. - Class A...................................... 201,800 $ 1,220,740
Grupo Carso, S.A. de C.V. - Class A1...................... 956,400 2,007,014
-----------
3,227,754
-----------
MEDIA - 8.14%
Grupo Televisa, S.A. ADR.................................. 25,100 1,655,847
Grupo Televisa, S.A. CPO.................................. 798,500 2,628,013
-----------
4,283,860
-----------
MINING - 4.73%
Grupo Mexico, S.A. de C.V. - Class B...................... 1,456,300 2,489,918
-----------
PAPER PRODUCTS - 1.34%
Kimberly-Clark de Mexico, S.A. de C.V. - Class A.......... 194,200 703,283
-----------
RETAILING - 9.56%
Grupo Elektra, S.A. de C.V. .............................. 469,000 3,658,890
Wal-Mart de Mexico, S.A. de C.V. Class V.................. 306,284 1,372,758
-----------
5,031,648
-----------
TOTAL COMMON STOCKS (Cost $37,299,803).................... 45,234,745
-----------
CORPORATE BONDS - 9.27% TITLES
----------------------------------------------------------------------------------------------
Monterrey Power S.A. de C.V., 9.6250%, 11/15/2009......... 1,691,849 1,961,071
Pemex Master TR, 4.7100%, 06/15/2010...................... 1,925,000 1,991,378
TVACB-04, 12.7200%,12/15/2011'............................ 11,265,000 923,385
-----------
TOTAL CORPORATE BONDS (Cost $4,962,182)................... 4,875,834
-----------
See Notes to the Financial Statements.
11
Schedule of Investments (continued)
JULY 31, 2005
THE MEXICO EQUITY AND INCOME FUND, INC.
INVESTMENT COMPANIES - 4.53% SHARES VALUE
----------------------------------------------------------------------------------------------
GBM Fondo Corporativo de Liquidez Inmediata S.A. de C.V.
SIID para Personas Morales - Class B*................... 15,147,929 $ 2,383,433
-----------
TOTAL INVESTMENT COMPANIES (Cost $2,369,092).............. 2,383,433
-----------
TOTAL MEXICO (Cost $44,631,077)........................... 52,494,012
-----------
UNITED STATES - 0.17%
----------------------------------------------------------------------------------------------
INVESTMENT COMPANIES - 0.17%
----------------------------------------------------------------------------------------------
First American Treasury Obligations Fund - Class A,
2.4721%................................................. 91,632 91,632
-----------
TOTAL INVESTMENT COMPANIES (Cost $91,632)................. 91,632
-----------
TOTAL UNITED STATES (Cost $91,632)........................ 91,632
-----------
TOTAL INVESTMENTS (COST $44,722,709) - 99.93%............. 52,585,644
OTHER ASSETS IN EXCESS OF LIABILITIES - 0.07%............. 35,506
-----------
TOTAL NET ASSETS - 100.00%................................ $52,621,150
===========
FOOTNOTES AND ABBREVIATIONS
* - Non-income producing security.
ADR - American Depository Receipts.
' - Fair valued security. See Note A in Notes to Financial Statements.
See Notes to the Financial Statements.
12
THE MEXICO EQUITY AND INCOME FUND, INC.
Statement of Assets and Liabilities JULY 31, 2005
ASSETS:
Investments, at value (Cost $44,722,709).................... $52,585,644
Cash........................................................ 51,894
Foreign currencies (Cost $9,146)............................ 9,099
Receivables:
Investments sold.......................................... 50,015
Dividends and Interest.................................... 58,312
Prepaid expenses............................................ 12,278
-----------
TOTAL ASSETS.............................. 52,767,242
-----------
LIABILITIES
Advisory fees payable....................................... 34,881
Administration fees payable................................. 18,462
Fund accounting fees payable................................ 15,517
Directors' fees payable..................................... 8,747
Custody fees payable........................................ 14,696
CCO's fee payable........................................... 2,000
Accrued expenses............................................ 51,789
-----------
TOTAL LIABILITIES......................... 146,092
-----------
NET ASSETS................................ $52,621,150
===========
NET ASSET VALUE PER SHARE
($52,621,150/2,473,504)................ $ 21.27
===========
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............................................. 34,562,928
Undistributed net investment income......................... 381,193
Accumulated net realized gain on investments and foreign
currency transactions..................................... 9,811,375
Net unrealized appreciation on investments and foreign
currency transactions..................................... 7,863,180
-----------
NET ASSETS................................ $52,621,150
===========
See Notes to the Financial Statements.
13
THE MEXICO EQUITY AND INCOME FUND, INC.
Statement of Operations FOR THE YEAR ENDED
JULY 31, 2005
INVESTMENT INCOME
Dividends................................................................. $ 703,329
Interest (net of foreign taxes withheld of $1,796)........................ 79,169
----------
TOTAL INVESTMENT INCOME................................. 782,498
----------
EXPENSES
Advisory fees............................................... $346,710
Legal fees.................................................. 109,256
Administration fees......................................... 50,459
Fund accounting fees........................................ 43,138
Insurance expense........................................... 39,241
Directors' fees and expenses................................ 38,874
Custodian fees.............................................. 35,272
Reports to shareholders..................................... 33,509
CCO's fee................................................... 20,808
NYSE fees................................................... 19,706
Audit fees.................................................. 19,518
Transfer agent fees......................................... 11,905
--------
TOTAL EXPENSES.......................................... 768,396
LESS, EXPENSE REIMBURSEMENT BY ADVISER.................. (500)
----------
NET EXPENSES............................................ 767,896
----------
NET INVESTMENT INCOME................................... 14,602
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain from investments and foreign currency transactions...... 13,122,119
Net change in unrealized appreciation from investments and foreign
currency transactions................................................... 5,705,280
----------
Net gain from investments and foreign currency transactions............... 18,827,399
----------
Net increase in net assets resulting from operations...................... $18,842,001
==========
See Notes to the Financial Statements.
14
THE MEXICO EQUITY AND INCOME FUND, INC.
Statements of Changes in Net Assets
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JULY 31, 2005 JULY 31, 2004
------------- -------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss).............................. $ 14,602 $ (41,536)
Net realized gain investments and foreign currency
transactions............................................ 13,122,119 9,589,282
Net change in unrealized appreciation (depreciation) in
value of investments and foreign currency
transactions............................................ 5,705,280 (834,386)
----------- -----------
Net increase in net assets resulting from
operations......................................... 18,842,001 8,713,360
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income..................................... -- (38,226)
Net realized gains........................................ -- --
Return of capital......................................... -- --
----------- -----------
Decrease in net assets from distributions............ -- (38,226)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Shares repurchased under Tender Offer..................... -- --
----------- -----------
Decrease in net assets from capital share transactions.... -- --
----------- -----------
Total increase in net assets.............................. 18,842,001 8,675,134
NET ASSETS
Beginning of year......................................... 33,779,149 25,104,015
----------- -----------
End of year*.............................................. $52,621,150 $33,779,149
=========== ===========
*Including undistributed net investment income of: ....... $ 381,193 $ --
----------- -----------
See Notes to the Financial Statements.
15
THE MEXICO EQUITY AND INCOME FUND, INC.
Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
JULY 31, 2005 JULY 31, 2004 JULY 31, 2003 JULY 31, 2002 JULY 31, 2001
------------- ------------- ------------- ------------- -------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
year.......................... $ 13.66 $ 10.15 $ 8.74 $ 10.19 $ 11.36
------- ------- -------- -------- --------
Net investment income (loss).... 0.01 (0.02) 0.00(1) (0.03) (0.02)
Net realized and unrealized
gains (losses) on investments
and foreign currency
transactions.................. 7.60 3.55 1.41 (1.42) (0.64)
------- ------- -------- -------- --------
Net increase (decrease) from
investment operations......... 7.61 3.53 1.41 (1.45) (0.66)
------- ------- -------- -------- --------
Less: Distributions
Dividends from net investment
income..................... -- (0.02) -- -- (0.01)
Distributions from net
realized gains............. -- -- -- -- (0.60)
Return of capital............. -- -- -- -- (0.01)
------- ------- -------- -------- --------
Total dividends and
distributions................. -- (0.02) -- -- (0.62)
------- ------- -------- -------- --------
Capital share transactions
Anti-dilutive effect of Tender
Offer...................... -- -- -- -- 0.09
Anti-dilutive effect of Share
Repurchase Program......... -- -- -- -- 0.02
------- ------- -------- -------- --------
Total capital share
transactions.................. -- -- -- -- 0.11
------- ------- -------- -------- --------
Net asset value, end of year.... $ 21.27 $ 13.66 $ 10.15 $ 8.74 $ 10.19
======= ======= ======== ======== ========
Per share market value, end of
year.......................... $ 18.82 $ 11.73 $ 9.10 $ 7.95 $ 9.11
TOTAL INVESTMENT RETURN BASED ON
MARKET VALUE, END OF YEAR*.... 60.44% 29.10% 14.47% (12.73)% (8.64)%
See Notes to the Financial Statements.
16
THE MEXICO EQUITY AND INCOME FUND, INC.
Financial Highlights (concluded)
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
JULY 31, 2005 JULY 31, 2004 JULY 31, 2003 JULY 31, 2002 JULY 31, 2001
------------- ------------- ------------- ------------- -------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in
000s)....................... $ 52,621 $ 33,779 $ 25,104 $ 21,629 $ 87,620
Ratios of expenses to average
net assets:
Before expense
reimbursement............ 1.77% 2.09% 2.64% 1.81% 1.90%
After expense
reimbursement............ 1.77% 2.08% 2.62% 1.81% 1.90%
Ratios of net investment
income (loss) to average net
assets:
Before expense
reimbursement............ 0.03% (0.15)% 0.02% (0.14)% (0.16)%
After expense
reimbursement............ 0.03% (0.14)% 0.04% (0.14)% (0.16)%
Portfolio turnover rate....... 259.60% 234.42% 180.67% 189.05% 220.85%
* 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 year 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) The amount listed is less than $0.005 per share.
See Notes to the Financial Statements.
17
THE MEXICO EQUITY AND INCOME FUND, INC.
Notes to Financial Statements JULY 31, 2005
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. At July
31, 2005, the Fund held two such securities which represented 1.88% of the
Fund's net assets.
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.
18
Notes to Financial Statements (continued)
JULY 31, 2005
THE MEXICO EQUITY AND INCOME FUND, INC.
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.
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,
2005, the Fund increased undistributed net investment income by $366,591,
decreased accumulated net realized gain on investments by $416,986 and increased
paid-in capital by $50,395 due to the tax treatment of foreign currency gains
and losses.
19
Notes to Financial Statements (continued)
JULY 31, 2005
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
permanent in nature. To the extent these differences are permanent in nature,
such amounts are
20
Notes to Financial Statements (continued)
JULY 31, 2005
THE MEXICO EQUITY AND INCOME FUND, INC.
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 years ended July 31, 2005 and July 31, 2004 were as
follows:
DISTRIBUTIONS PAID FROM: 7/31/05 7/31/04
------------------------ ------- -------
Ordinary Income............................................. $ -- $38,226
Long-Term Capital Gain...................................... -- --
Return of Capital........................................... -- --
----- -------
Total....................................................... $ -- $38,226
===== =======
As of July 31, 2005, the components of distributable earnings on a tax basis
were as follows:
Cost of investments and foreign currency (a)................ $44,801,501
-----------
Gross tax unrealized appreciation........................... 7,988,022
Gross tax unrealized depreciation........................... (110,501)
-----------
Net tax unrealized appreciation............................. $ 7,877,521
===========
Undistributed ordinary income............................... $ 6,099,501
Undistributed long-term capital gain........................ 4,107,408
-----------
Total distributable earnings................................ $10,206,909
===========
Other accumulated losses.................................... $ (28,682)
-----------
Total accumulated earnings.................................. $18,055,748
===========
(a) Represents cost for federal income tax purposes. Differences between the
Fund's cost basis of investments and foreign currency at July 31, 2005, for
book and tax purposes, relate primarily to the deferral of losses related to
wash sales.
The Mexico Equity and Income Fund designates 100% of dividends declared after
July 31, 2003 from net investment income as qualified dividend income under the
Jobs and Growth Tax Relief Reconciliation Act of 2003 (unaudited).
21
Notes to Financial Statements (continued)
JULY 31, 2005
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 year ended July 31, 2005,
these fees amounted to $346,710. 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 year ended July
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 in person
and $100 for each special telephonic meeting attended. At the Board of
Directors' meeting held on September 28, 2004, Mr. 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
Notes to Financial Statements (continued)
JULY 31, 2005
THE MEXICO EQUITY AND INCOME FUND, INC.
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 year ended July 31, 2005, the Mexico Equity and Income Fund, Inc.
incurred Administration fees of $50,459, Fund Accounting fees of $43,138 and
Custody fees of $35,272.
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
$114,219,867 and $112,739,746 respectively, for the year ended July 31, 2005.
At July 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
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
23
Notes to Financial Statements (continued)
JULY 31, 2005
THE MEXICO EQUITY AND INCOME FUND, INC.
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 years ended July 31, 2005, 2004, 2003 and 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%.
24
THE MEXICO EQUITY AND INCOME FUND, INC.
Report of Independent Registered Public Accounting Firm
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
THE MEXICO EQUITY AND INCOME FUND, INC.
MILWAUKEE, WISCONSIN
We have audited the accompanying statement of assets and liabilities of the
Mexico Equity and Income Fund, Inc. (the "Fund"), including the schedule of
investments, as of July 31, 2005, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
four years in the period then ended. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the year ended July 31, 2001 were audited
by other auditors whose report, dated September 20, 2001, expressed an
unqualified opinion.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 2005, by correspondence with the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mexico Equity and Income Fund, Inc. as of July 31, 2005, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the four years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
TAIT, WELLER & BAKER LLP
Philadelphia, Pennsylvania
September 6, 2005
25
THE MEXICO EQUITY AND INCOME FUND, INC.
Additional Information (unaudited) JULY 31, 2005
NOTE A: 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 most recent
twelve month period ended June 30 is available on the SEC's website at
www.sec.gov or by calling the toll-free number listed above.
NOTE B: 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 1-866-700-6104. 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 1-800-SEC-0330.
NOTE C: FACTORS IN APPROVING THE INVESTMENT ADVISORY AGREEMENT
The Fund's Board of Directors, including the directors who are not interested
persons of any party to the Investment Advisory Agreement or its affiliates,
approved the Investment Advisory Agreement at a meeting of the Board of
Directors held on June 29, 2004, with legal counsel in attendance. In approving
the Investment Advisory Agreement, the Board of Directors considered the best
interests of the stockholders and took into account factors they deemed
relevant, as described below.
The Investment Adviser provided the Board with written materials concerning: (a)
information on the investment performance of the Investment Adviser; (b) the
economic outlook and the general investment outlook in the markets in which the
Fund invests; (c) the procedures employed to determine the value of Fund assets;
(d) the Investment Adviser's management of the relationships with the Fund's
Administrator and Custodian; (e) the resources devoted to compliance with the
Fund's investment policies and restrictions and with policies on personal
securities transactions; and (f) the nature, cost and character of
non-investment management services provided by the Investment Adviser.
The factors considered by the independent directors, who met in executive
session, included the nature, quality and scope of the operations and services
to provided by the Investment Adviser, while focusing on the prior experience of
Investment Adviser's principals with respect to: (i) the structure of closed-end
investment companies in general; (ii) management of portfolios of foreign equity
securities; (iii) the fact that the Fund's current portfolio manager, Maria
Eugenia Pichardo, would
26
Additional Information (unaudited) (continued)
JULY 31, 2005
THE MEXICO EQUITY AND INCOME FUND, INC.
continue to act as the Fund's portfolio manager at the Investment Adviser; and
(iv) implementing policies to cut costs and expenses of closed-end investment
companies. Furthermore, the Board considered the opportunity to obtain
investment management and research services at costs that it deemed appropriate
and reasonable and at such fees which fall within the range of the standard
industry fees for comparable investment companies.
During the Board's deliberations, it was noted that they did not identify any
single piece of information that was all-important or controlling with respect
to the Investment Advisory Agreement. Based on the Board's deliberations and its
evaluation of the information described above, the Board, including all of the
independent directors, unanimously concluded that: (a) the terms of the
Investment Advisory Agreement are fair and reasonable; (b) the Investment
Adviser's fees are reasonable in light of the services that it provides to the
Fund; (c) the Investment Advisory Agreement was in the best interests of the
Fund and its stockholders; and (d) agreed to approve the Investment Advisory
Agreement for a term of one year.
27
THE MEXICO EQUITY AND INCOME FUND, INC.
Dividends and Distributions (unaudited) JULY 31, 2005
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
28
Dividends and Distributions (unaudited) (continued) JULY 31, 2005
THE MEXICO EQUITY AND INCOME FUND, INC.
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.
29
Dividends and Distributions (unaudited) (continued) JULY 31, 2005
THE MEXICO EQUITY AND INCOME FUND, INC.
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.
30
THE MEXICO EQUITY AND INCOME FUND, INC.
Results of Annual Stockholders Meeting (unaudited) JULY 31, 2005
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
31
THE MEXICO EQUITY AND INCOME FUND, INC.
Privacy Policy (unaudited) JULY 31, 2005
The Mexico Equity and Income Fund, Inc. (the "Fund") has adopted the following
privacy policy in order to safeguard the personal information of its consumers
and customers in accordance with SEC Regulation S-P, 17 CFR 284.30:
COMMITMENT TO CONSUMER PRIVACY. The Fund recognizes and respects the privacy
expectations of each of our customers and believes that the confidentiality and
protection of consumer information is one of our fundamental responsibilities.
The Fund is committed to maintaining the confidentiality, integrity and security
of the customers' personal information and will handle personal consumer and
customer information only in accordance with Regulation S-P and any other
applicable laws, rules and regulations. The Fund will ensure: (a) the security
and confidentiality of customer records and information; (b) that customer
records and information are protected from any anticipated threats and hazards;
and (c) that unauthorized access to, or use of, customer records or information
is protected against.
COLLECTION AND DISCLOSURE OF SHAREHOLDER INFORMATION. Consumer information
collected by, or on behalf of, The Fund, generally consists of the following:
- Information received from consumers or customers on or in applications or
other forms, correspondence, or conversations, including, but not limited
to, their name, address, phone number, social security number, assets,
income and date of birth; and
- Information about transactions with us, our affiliates, or others,
including, but not limited to, shareholder account numbers and balance,
payments history, parties to transactions, cost basis information, and
other financial information.
The Fund does not disclose any nonpublic personal information about our current
or former consumers or customers to nonaffiliated third parties, except as
permitted by law. For example, as The Fund has no employees, it conducts its
business affairs through third parties that provide services pursuant to
agreements with The Fund (as well as through its officers and directors).
SECURITY OF CONSUMER AND CUSTOMER INFORMATION. The Fund will determine whether
the policies and procedures of its affiliates and service providers and
reasonably designed to safeguard customer information and require only
appropriate and authorized access to, and use of, customer information through
the application of appropriate administrative, technical, physical, and
procedural safeguards that comply with applicable federal standards and
regulations. The Fund directs each of its service providers to adhere to The
Fund's privacy policy and to their respective privacy policies with respect to
all customer information of The Fund and to take all actions reasonably
necessary so that The Fund is in compliance with the provisions of 17 CFR
248.30, including, as applicable, the
32
Privacy Policy (unaudited) (continued) JULY 31, 2005
THE MEXICO EQUITY AND INCOME FUND, INC.
development and delivery of initial and annual privacy notices and maintenance
of appropriate and adequate records. The Fund will require its service providers
to confirm to The Fund, in writing,that they are restricting access to nonpublic
personal information about customers to those employees who need to know that
information to provide products or services to customers.
The Fund requires its service providers to provide periodic reports, no less
frequently than annually, to the Board of Directors outlining their privacy
policies and implementation and promptly report to The Fund any material changes
to their privacy policy before, or promptly after, their adoption.
33
THE MEXICO EQUITY AND INCOME FUND, INC.
Management of the Fund (unaudited) JULY 31, 2005
BOARD OF DIRECTORS. The management and affairs of the Fund are supervised by
the Board of Directors. The Board consists of five individuals, all of whom are
not "interested persons" of the Fund as the term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). The Directors are fiduciaries
for the Fund's shareholders and are governed by the laws of the State of
Maryland in this regard. The Board establishes policies for the operation of the
Fund and appoints the officers who conduct the daily business of the Fund. The
Directors and Interested Officers of the Fund are listed below with their
addresses, present position(s) with the Fund, length of time served, principal
occupations over at least the last five years, and any other Directorships held.
Please note that there is only one fund in the complex that is overseen by the
Directors.
TERM OF
YEAR POSITION(S) OFFICE/LENGTH PRINCIPAL OCCUPATION OTHER DIRECTORSHIPS
NAME AND ADDRESS BORN WITH THE FUND OF TIME SERVED DURING THE PAST FIVE YEARS HELD BY DIRECTOR
----------------------- ---- ------------- -------------------- -------------------------- ----------------------
Gerald Hellerman....... 1937 Director, 2007 / 4 years Managing Director, Director, AirNet
10965 Eight Bells Lane Chief Hellerman Associates Systems, Inc.;
Columbia, MD 21044 Financial Director, MVC Capital,
Officer and Inc.; Director,
Chief Brantley Capital
Compliance Corporation
Officer
Phillip Goldstein...... 1945 Director 2005 / 5 years President, Kimball & Director, Brantley
60 Heritage Drive Winthrop, Inc.; and Capital Corporation;
Pleasantville, NY 10570 general partner of Director, Emerging
Opportunity Partners, Markets
L.P.; Managing Member of Telecommunications
the general partner of Fund; Director, First
Full Value Partners, L.P. Israel Funds
Glenn Goodstein........ 1963 Director 2005 / 4 years Registered Investment None
2308 Camino Robledo Advisor; held numerous
Carlsbad, CA 92009 executive positions with
Automatic Data Processing
until 1996.
Rajeev Das............. 1968 Director 2006 / 4 years Senior analyst, Kimball & None
68 Lafayette Avenue Winthrop, Inc.; prior
Dumont, NJ 07628 Credit Manager, Muriel
Siebett & Company.
Andrew Dakos........... 1966 Director 2006 / 4 years President and CEO, UVitec None
43 Waterford Drive Printing Ink, Inc.; and
Montville, NJ 07045 Managing Member of the
general partner of Full
Value Partners, L.P.;
President of Elmhurst
Capital, Inc.
34
THE MEXICO EQUITY AND INCOME FUND, INC.
TERM OF
YEAR POSITION(S) OFFICE/LENGTH PRINCIPAL OCCUPATION OTHER DIRECTORSHIPS
NAME AND ADDRESS BORN WITH THE FUND OF TIME SERVED DURING THE PAST FIVE YEARS HELD BY DIRECTOR
----------------------- ---- ------------- -------------------- -------------------------- ----------------------
Maria Eugenia 1950 Interested Indefinite / 1 year Portfolio Manager of the None
Pichardo............. Officer, Fund since the Fund's
408 Teopanzolco Avenue President Inception; President and
3rd Floor-Reforma General Partner, Pichardo
Cuernavaca, 62260 Asset Management, S.A. de
Morelos Mexico C.V. since 2003; Managing
Director, Acciones y
Valores de Mexico, S.A. de
C.V. from 1979 to 2002.
Francisco Lopez........ 1971 Interested Indefinite / 1 year Research Director, None
408 Teopanzolco Avenue Officer, Pichardo Asset Management,
3rd Floor-Reforma Secretary S.A. de C.V. since 2003;
Cuernavaca, 62260 Assistant Portfolio
Morelos Mexico Manager, Acciones y
Valores de Mexico, S.A. de
C.V. from 1997 to 2002.
Matthew Verhaalen...... 1974 Interested Indefinite / 1 year Compliance Officer, U.S. Not Applicable
615 E. Michigan Street Officer, Bancorp Fund Services, LLC
Milwaukee, WI 53202 Assistant
Treasurer
Jon Gitter............. 1973 Interested Indefinite / 1 year Compliance Administrator, Not Applicable
615 E. Michigan Street Officer, U.S. Bancorp Fund
Milwaukee, WI 53202 Assistant Services, LLC
Secretary
35
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 REGISTERED PUBLIC ACCOUNTING FIRM:
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.
Annual Report
July 31, 2005
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer and principal financial officer. The registrant has
not made any amendments to its code of ethics during the covered period. The
registrant has not granted any waivers from any provisions of the code of ethics
during the covered period. The registrant undertakes to provide to any person
without charge, upon request, a copy of its code of ethics by mail when they
call the registrant at 1-414-765-4499.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of directors has determined that it does not have an
audit committee financial expert serving on its audit committee. At this time,
the registrant believes that the experience provided by each member of the audit
committee together offers the registrant adequate oversight for the registrant's
level of financial complexity.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The registrant has engaged its principal accountant to perform audit services,
audit-related services, tax services and other services during the past two
fiscal years. "Audit services" refer to performing an audit of the registrant's
annual financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those fiscal years. "Audit-related services" refer to the assurance and
related services by the principal accountant that are reasonably related to the
performance of the audit. "Tax services" refer to professional services rendered
by the principal accountant for tax compliance, tax advice, and tax planning.
"Other services" were not provided by the principal accountant. The following
table details the aggregate fees billed for each of the last two fiscal years
for audit fees, audit-related fees, tax fees and other fees by the principal
accountant.
FYE 07/31/2005 FYE 07/31/2004
-------------- --------------
Audit Fees $ 21,500 $ 18,400
Audit-Related Fees $ 0 $ 0
Tax Fees $ 2,200 $ 2,100
All Other Fees $ 0 $ 0
The audit committee has adopted pre-approval policies and procedures that
require the audit committee to pre-approve all audit and non-audit services of
the registrant, including services provided to any entity affiliated with the
registrant. All of the principal accountant's hours spent on auditing the
registrant's financial statements were attributed to work performed by full-time
permanent employees of the principal accountant.
The following table indicates the non-audit fees billed by the registrant's
accountant for services to the registrant and to the registrant's investment
adviser (and any other controlling entity, etc.--not sub-adviser) for the last
two years. The audit committee of the board of trustees/directors has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser is compatible with maintaining the principal
1
accountant's independence and has concluded that the provision of such non-audit
services by the accountant has not compromised the accountant's independence.
Non-Audit Related Fees FYE 07/31/2005 FYE 07/31/2004
---------------------- --------------- ---------------
Registrant $0 $0
Registrant's Investment Adviser $0 $0
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The standing audit committee is comprised of Mr. Andrew Dakos, Mr. Phillip
Goldstein, Mr. Glenn Goodstein 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.
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
2
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.
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.
3
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
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.
4
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
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)
5
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
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.
6
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
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 for closed-end funds until a fiscal year ending on or after
December 31, 2005.
7
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
(a) SHARES (OR UNITS) VALUE) OF SHARES (OR
TOTAL NUMBER OF (b) PURCHASED AS PART OF UNITS) THAT MAY YET
SHARES (OR UNITS) AVERAGE PRICE PAID PUBLICLY ANNOUNCED BE PURCHASED UNDER
PERIOD PURCHASED PER SHARE (OR UNIT) PLANS OR PROGRAMS THE PLANS OR PROGRAMS
------ ----------------- ------------------- -------------------- ---------------------
02/01/05 to 02/28/05 0 0 0 0
03/01/05 to 03/31/05 0 0 0 0
04/01/05 to 04/30/05 0 0 0 0
05/01/05 to 05/31/05 0 0 0 0
06/01/05 to 06/30/05 0 0 0 0
07/01/05 to 07/31/05 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 reviewed the
Registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940 (the "Act")) as of a
date within 90 days of the filing of this report, as required by Rule
30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the
Securities Exchange Act of 1934. Based on their review, such officers have
concluded that the disclosure controls and procedures are effective in
ensuring that information required to be disclosed in this report is
appropriately recorded, processed, summarized and reported and made known
to them by others within the Registrant and by the Registrant's service
provider.
(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.
8
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.
9
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 October 5, 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 October 5, 2005
By (Signature and Title) /s/ Gerald Hellerman
----------------------------------------------
Gerald Hellerman, Chief Financial Officer
Date October 4, 2005
10