DEAR SHAREHOLDERS:
- --------------------------------------------------------------------------------
The Lexington Troika Dialog Russia Fund finished the first six months of
1998 with a negative total return of 60.1%* versus a negative total return of
61.9% for the Russian Trading System ("RTS") Index. The average emerging market
fund according to Lipper Analytical Services, Inc. lost 15.6% over the same
period.
The Russian equity market has been the worst performing emerging market
thus far in 1998. The Russian market began to decline after the initiation of
the turmoil in the Asian markets, but continued to decline after many of the
Asian markets began to recover. There are a number of interrelated factors which
contributed to this continuing decline. First, political uncertainty increased
dramatically in the first quarter when President Yeltsin abruptly dismissed the
entire government. His nominee for Prime Minister, Sergie Kiriyenko, was at the
time a relative unknown with little political experience. The subsequent
nomination process was lengthy and contentious; progress on most reform
initiatives, including a new tax code, already slow, was brought to an abrupt
halt during this change in government. In the meantime, the world price of oil,
Russia's number one export, fell significantly, causing a sharp deterioration in
Russia's trade balance. Low tax collections associated with an archaic tax code
combined with a worsening trade picture and ongoing high government expenditures
threatened to undermine the Russian government's ability to improve its fiscal
situation. Finally, anticipation of a slowdown in the global economy caused in
part by developments in Asia has hurt Russia's growth prospects. Combined, these
factors eliminated any near term prospects for continuation of the economic
recovery begun in 1997.
Investors, already jittery from events in other emerging markets, began to
leave the Russian fixed income and equity markets. Russia was forced to dip into
its foreign exchange reserves to meet maturities in the short-term government
treasury bill market. As the reserves declined, concerns about a devaluation of
the ruble increased. Russia turned to foreign lenders and specifically the
International Monetary Fund ("IMF") for loans to bolster its reserves to restore
investor confidence and prevent a devaluation of the ruble.
Given Russia's inconsistent record in complying with IMF loan conditions in
the past, the IMF was reluctant to unconditionally grant new financing to
Russia. As negotiations dragged on, conditions in Russia worsened: equity
markets dropped further each day and redemptions in the debt market continued to
increase. The government was forced to raise interest rates to as high as 150%
to stem the flow of funds from the treasury bill market. Still, the government
was forced to dip into its reserves on a weekly basis to meet ongoing
maturities. At the same time, striking students and miners reflected the
increasing frustration of the population.
In response to the deteriorating situation, the Russian government in July
unveiled an austerity program designed to solve its financial problems. After
reviewing the program, the IMF in late July, approved a financial support
package for the Russian government which, in total amounted to more than $22
billion.
This package, to be paid out over time, is conditioned on specific targets
for revenues, expenditures, and the like. The first tranche of $5.6 billion has
already been reduced to $4.8 billion in light of the Duma's failure to pass
certain austerity measures. However, the $0.8 billion difference could be paid
out as the Duma takes further actions when it reconvenes after the summer
recess.
1
<PAGE>
The recent devaluation of the ruble demonstrates that financial support
packages alone cannot solve Russia's problems. Russia's problems will be solved
through the successful implementation of its austerity program. There is good
reason to be optimistic. The current government is regarded as the most
reformist Russia has had to date. The government is firmly committed to the
reformist agenda and has been very strongly supported by President Yeltsin at
every step. The financial support package provided by international financial
institutions together with the decision by the government to devalue the ruble
and reschedule its short-term debt should give the Russian government time to
implement its austerity program, but there is no doubt in anyone's mind
(including that of the Duma) that Russia must implement reforms to resolve its
problems. All parties are equally aware that further financing packages from
international sources are very unlikely if Russia does not implement these
reforms. Finally, Russia has proven itself to be very capable in implementing
other reforms (monetary policy and the like) and the current government has
received high marks for its handling of the current crisis. We feel that the
next two to three months will give a better indication of how successful the
government will be in implementing reforms.
During these rather tumultuous times, we have kept the Fund's portfolio
very liquid. Cash has been increased to as high as 35% of the portfolio with
most of that cash invested in U.S. treasury bills. The equity portion of the
portfolio remains concentrated in larger blue chip stocks across the three main
sectors (oil and gas, utilities, and telecommunications). We believe that these
stocks could be the first to outperform as the market recovers. We believe
demographic trends support the consumer sector.
Although we expect continued volatility over the short-term, we remain
confident in the long-term prospects for Russia and for the Fund.
We appreciate the support of our shareholders and are happy to respond to
your questions and comments. Please feel free to call us at 1-800-526-0056.
Sincerely,
[GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED]
Gavin Rankin Richard M. Hisey, CFA Robert M. DeMichele
Portfolio Manager Portfolio Manager President
August, 1998 August, 1998 August, 1998
* -62.38% and -20.15% are the one year and since commencement (7/3/96) average
annual standard total returns, respectively, for the period ended June 30,
1998. Investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than at
their original cost. Total return represents past performance and is not
predictive of future results.
2
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
June 30, 1998 (unaudited)
NUMBER
OF VALUE
SHARES SECURITY (NOTE 1)
- ------------------------------------------------------------
COMMON & PREFERRED STOCKS: 76.9%
AEROSPACE & DEFENSE: 0.2%
32,500,000 Aviastar1,2 ..................... $ 97,500
----------
AIRLINES: 1.6%
7,700 Aeroflot1,2 ..................... 500,500
8,000,000 Tyumen Avia Trans2 ............... 240,000
----------
740,500
----------
AUTO PARTS: 0.0%
2,500 Bor Glass1,2 ..................... 18,150
----------
AUTO TRUCKS & PARTS: 4.0%
COMMON STOCK
23,700 Gorkovsky Auto Plant2 ............ 1,659,000
----------
PREFERRED STOCK
10,000 Gorkovsky Auto Plant1,2 ......... 150,000
----------
TOTAL AUTO TRUCKS & PARTS ...... 1,809,000
----------
BANKING: 0.4%
103,800 Inkombank (ADR) .................. 207,600
----------
BREWERS: 6.1%
200 Baltika Brewery1,2 ............... 105,292
209,700 Sun Brewing (GDR)2 ............... 2,673,675
----------
2,778,967
----------
BUILDING MATERIALS: 0.2%
38,000 Alfa Cement1,2 .................. 82,726
----------
FOOD WHOLESALERS: 0.2%
28,160 Krasny Oktyabr2 .................. 98,560
----------
FOODS: 0.2%
23,800 Samson1,2 ........................ 90,440
----------
MACHINERY: 1.1%
67,000 Electrosila2 ..................... 93,800
15,000 Izhorskie Zavody2 ............... 221,100
850,000 Krasny Kotelschik1,2 ............ 22,950
50,000 Zvezda1,2 ........................ 165,700
----------
503,550
----------
MEDICAL EQUIPMENT: 0.1%
21,900 Medpolimer1,2 .................. 63,598
----------
MERCHANDISING: 1.2%
7,000 Gostiny Dvor1,2 .................. 67,557
235,000 Trade House Gum2 ............... 317,250
1,120,000 Tsum Jsc Torgovy ............... 152,320
----------
537,127
----------
METALS: 0.5%
60,000 Norilsk Nickel2 .................. 123,000
4,700 Salikamsk Magnesium1,2 ......... 86,574
----------
209,574
----------
NATURAL GAS: 1.1%
COMMON STOCK
35,000 Gazprom (ADR) .................. 374,500
3
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
June 30, 1998 (unaudited) (continued)
NUMBER
OF VALUE
SHARES SECURITY (NOTE 1)
- ----------------------------------------------------------------------------
NATURAL GAS (CONTINUED):
PREFERRED STOCK
1,800 Transneft1,2 .................................... $ 108,601
----------
TOTAL NATURAL GAS .............................. 483,101
----------
OIL & GAS HOLDING COMPANIES: 18.5%
COMMON STOCK
361,500 Lukoil Holdings of Russia ........................ 3,025,755
20,125 Lukoil Holdings of Russia (ADR) .................. 664,125
7,000,000 Sibneft1,2 ....................................... 987,000
6,550,000 Slavneft1,2 ....................................... 281,650
610,000 Surgutneftegaz (ADR)2 ........................... 2,287,500
----------
7,246,030
----------
PREFERRED STOCK
5,000 Lukoil Holdings of Russia (ADR) .................. 35,625
285,000 Lukoil Holdings of Russia2 ........................ 1,054,500
35,000 Surgutneftegaz (ADR) .............................. 126,000
----------
1,216,125
----------
TOTAL OIL & GAS HOLDING COMPANIES ............... 8,462,155
----------
OIL & GAS PRODUCING COMPANIES: 4.7%
COMMON STOCK
165,000 Orenburgneft .................................... 42,900
290,000 Purneftegaz2 .................................... 217,500
234,000 Tatneft (ADR) .................................... 1,798,875
12,300 Tomskneft2 ....................................... 4,305
----------
2,063,580
----------
PREFERRED STOCK
140,000 Megionneftegaz2 ................................. 49,000
80,000 Purneftegaz2 .................................... 16,000
4,000 Samaraneftegaz2 ................................. 364
4,000 Udmurtneftegaz1,2 ................................. 8,000
----------
73,364
----------
TOTAL OIL & GAS PRODUCING COMPANIES ............ 2,136,944
----------
OIL DRILLING & SERVICES: 0.5%
530,000 Komitek Oil Company2 .............................. 224,190
----------
STEEL & IRON: 0.4%
1,002,000 Chelyabinsky Trubny Zavod2 ........................ 80,160
17,354 Seversky Tube Works1,2 ........................... 12,148
46,000 Sinarsky Trubny1,2 .............................. 36,800
4,450,000 Taganrogaky Metallurgical Plant1,2 ............... 44,500
----------
173,608
----------
TELECOMMUNICATIONS: 18.1%
COMMON STOCK
996,900 Bashinformsvyaz1,2 .............................. 697,830
14,110 Chelyabinskvyazinform2 ........................... 423,300
250,000 Irkutskelectrosvyaz2 .............................. 75,000
51,000 Krasnoyarskelectrosvyaz2 ........................ 56,100
9,500 Lensvyaz1 ....................................... 9,500
34,400 Moscow Intercity International Telephone1,2 ...... 107,500
800 Moscow Telephone Systems2 ........................ 264,000
243,890 Murmanskelectrosvyaz2 ........................... 158,529
501,000 Nizhnovsvyazinform2 .............................. 626,250
4
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
June 30, 1998 (unaudited) (continued)
NUMBER
OF VALUE
SHARES SECURITY (NOTE 1)
- -------------------------------------------------------------------
TELECOMMUNICATIONS (CONTINUED):
20,383 Novosbirskaya Telephone2 ............... $ 203,830
30,000 Novosibirskelectrosvyaz2 ............... 36,000
823,000 Rostelecom2 ........................... 1,872,325
16,500 Samarasvyazinform1 ..................... 330,000
50,000 Smolensksvyazinfrom1,2 .................. 45,450
600,000 St. Petersburg Telecommunication2 ...... 330,000
160,000 Tyumentelecom2 ........................ 192,000
10,000,000 Uralsvyazinform ........................ 250,000
10,000 Vimpelcom (ADR)2 ........................ 445,000
80,020 Volgogradelectrosvyaz1 .................. 30,968
12,000 Yartelecom1,2 ........................... 17,316
----------
6,170,898
----------
PREFERRED STOCK
650,000 Irkutskelectrosvyaz1,2 .................. 130,000
95,000 Krasnoyarskelectrosvyaz1,2 ............ 95,000
27,000 Lensvyaz1,2 ........................... 25,326
1,450 Moscow Telephone Systems2 ............... 239,250
175,000 Murmanskelectrosvyaz1,2 ............... 21,000
360,000 Nizhnovsvyazinform1,2 .................. 216,000
10,000 Novosbirskaya Telephone1,2 ............ 40,000
60,000 Novosibirskelectrosvyaz1,2 ............ 6,000
881,000 Rostelecom .............................. 898,620
8,300 Samarasvyazinform1 ..................... 58,100
100,000 Smolensksvyazinform1,2 .................. 34,000
210,000 St. Petersburg Telecommunication2 ...... 49,350
279,099 Tyumentelecom2 ........................ 167,459
33,500 Uraltelecom2 ........................... 83,750
35,000 Yartelecom1,2 ........................... 25,340
----------
2,089,195
----------
TOTAL TELECOMMUNICATIONS ............... 8,260,093
----------
UTILITIES: 17.8%
COMMON STOCK
2,625,000 Bashkirenergo2 ........................ 199,500
1,700,000 Chelyabenergo2 ........................ 103,700
500,000 Komienergo1 ........................... 15,000
57,500,000 Mosenergo2 .............................. 2,817,500
30,000 Mosenergo (ADR)2 ........................ 142,500
1,400,000 Samaraenergo ........................... 280,000
1,335,000 Sverdlovskenergo2 ..................... 206,925
19,500,000 Unified Energy Systems .................. 2,554,500
75,000 Unified Energy Systems (GDR)2 ......... 984,375
----------
7,304,000
----------
PREFERRED STOCK
450,000 Chelyabenergo2 ........................ 18,900
77,000 Novosibirskenergo1,2 .................. 88,550
24,600 Permenergo2 ........................... 7,380
700,000 Samaraenergo ........................... 84,000
1,906,000 Sverdlovskenergo2 ..................... 49,556
9,200,000 Unified Energy Systems2 ............... 556,600
----------
804,986
----------
TOTAL UTILITIES ........................ 8,108,986
----------
5
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
June 30, 1998 (unaudited) (continued)
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT SECURITY (NOTE 1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL COMMON & PREFERRED STOCKS
(cost $126,577,895) ................................................ $35,086,369
-----------
GOVERNMENT OBLIGATIONS: 4.3%
20,000* GKO (Russian Government Treasury Bill) 0%, due 08/26/98 ............ 289,908
119,010* GKO (Russian Government Treasury Bill) 0%, due 09/09/98 ............ 1,681,162
-----------
TOTAL GOVERNMENT OBLIGATIONS
(cost $2,056,619) ................................................... 1,971,070
-----------
SHORT-TERM INVESTMENT: 15.3%
U.S. GOVERNMENT AGENCY OBLIGATION: 15.3%
$7,000,000 Federal Home Loan Bank, 5.4%, due 07/01/98
(cost $7,000,000) ................................................... 7,000,000
-----------
TOTAL INVESTMENTS: 96.5%
(cost $135,634,514+)(Note 1).......................................... 44,057,439
Other assets in excess of liabilities: 3.5% ........................ 1,591,352
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $6.99 per share on 6,529,202 shares outstanding) ...... $45,648,791
===========
</TABLE>
* Principal amount represents local currency.
1 Illiquid Security (Note 8).
2 Non-income producing security.
ADR-American Depository Receipt.
GDR-Global Depository Receipt.
+ Aggregate cost for Federal income tax purposes is $136,065,313.
The Notes to Financial Statements are an integral part of this statement.
6
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998 (unaudited)
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $135,634,514) (Note 1) ......................... $ 44,057,439
Cash ....................................................................... 660,051
Foreign currency (cost $93) ................................................ 92
Receivable for investment securities sold .................................. 1,168,050
Receivable for shares sold ................................................. 389,455
Dividends and interest receivable .......................................... 72,033
Deferred organization expense, net (Note 1) ................................ 62,378
------------
Total Assets ....................................................... 46,409,498
------------
LIABILITIES
Due to Lexington Management Corporation (Note 2) ........................... 56,949
Payable for investment securities purchased ................................ 17,460
Payable for shares redeemed ................................................ 611,065
Accrued expenses ........................................................... 75,233
------------
Total Liabilities .................................................. 760,707
------------
NET ASSETS: (equivalent to $6.99 per share on
6,529,202 shares outstanding) (Note 5) .................................... $ 45,648,791
============
NET ASSETS consist of:
Capital stock - authorized 1,000,000,000 shares,
$.001 par value per share .................................................. $ 6,529
Additional paid-in capital ................................................. 142,307,966
Accumulated deficit ........................................................ (285,468)
Accumulated net realized loss on investments and
foreign currency transactions ............................................. (4,803,161)
Unrealized depreciation on investments and foreign currency holdings ....... (91,577,075)
------------
TOTAL NET ASSETS ................................................... $ 45,648,791
============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
7
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF OPERATIONS
Six months ended June 30, 1998 (unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends ...................................................... $ 185,312
Interest ......................................................... 726,152
------------
911,464
Less: foreign tax expense ....................................... 22,340
------------
Total investment income ....................................... $ 889,124
EXPENSES
Investment advisory fee (Note 2) ................................. 620,919
Custodian expenses ............................................. 362,341
Distribution expenses (Note 3) ................................. 231,232
Transfer agent and shareholder servicing expenses (Note 2) ...... 99,507
Printing and mailing expenses .................................... 66,978
Professional fees ................................................ 40,217
Registration fees ................................................ 76,028
Accounting expenses (Note 2) .................................... 45,586
Directors' fees and expenses .................................... 24,281
Amortization of deferred organization costs (Note 1) ............ 10,692
Computer processing fees ....................................... 8,078
Other expenses ................................................... 23,403
------------
Total expenses ................................................ 1,609,262
Less: Redemption fee proceeds (Note 4) ........................ 461,849 1,147,413
------------ ------------
Net investment loss .......................................... (258,289)
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 6)
Net realized loss on:
Investments ................................................... (6,205,410)
Foreign currency transactions ................................. (2,358)
------------
Net realized loss ............................................. (6,207,768)
Net change in unrealized depreciation on investments ............ (68,477,877)
------------
Net realized and unrealized loss .............................. (74,685,645)
------------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS .............. $(74,943,934)
============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
8
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
------------- ------------
<S> <C> <C>
Net investment loss ........................................................... $ (258,289) $ (110,162)
Net realized gain (loss) from investments and foreign currency
transactions ................................................................ (6,207,768) 11,101,736
Net change in unrealized depreciation on investments and foreign
translations ................................................................ (68,477,877) (24,013,755)
------------ ------------
Decrease in net assets resulting from operations ............................ (74,943,934) (13,022,181)
Distributions to shareholders from net realized gains
from security transactions .................................................. -- (9,633,271)
Increase (decrease) in net assets from capital share transactions (Note 5) ... (17,280,557) 146,682,278
------------ ------------
Net increase (decrease) in net assets ..................................... (92,224,491) 124,026,826
NET ASSETS:
Beginning of period ........................................................... 137,873,282 13,846,456
------------ ------------
End of period (including accumulated deficit of $285,468
and $27,179, 1998 and 1997, respectively) ................................... $ 45,648,791 $137,873,282
============ ============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
9
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (unaudited) and December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Lexington Troika Dialog Russia Fund, Inc. (the "Fund") is an open-end
non-diversified management investment company registered under the Investment
Company Act of 1940, as amended. The Fund's investment objective is to seek
long-term capital appreciation through investments primarily in the equity
securities of Russian companies. The Fund commenced operations on June 3, 1996.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements:
INVESTMENTS Securities transactions are accounted for on a trade date
basis. Realized gains and losses from investment transactions are reported on
the identified cost basis. Securities traded on a recognized stock exchange are
valued at the last sales price reported by the exchange on which the securities
are traded. If no sales price is recorded, the mean between the last bid and
asked prices is used. However, when Fund management deems it appropriate, prices
obtained for the day of valuation from a third party pricing service will be
used. Securities traded on the over-the-counter market are valued at the mean
between the last current bid and asked prices. Short-term securities having a
maturity of 60 days or less are stated at amortized cost, which approximates
market value. Securities for which market quotations are not readily available
and other assets are valued by Fund management in good faith under the direction
of the Fund's Board of Directors. All investments quoted in foreign currencies
are valued in U.S. dollars on the basis of the foreign currency exchange rates
prevailing at the close of business. Dividend income is recorded on the
ex-dividend date. Occasionally, dividend information on foreign securities is
received after the ex-dividend date and the income is recorded as soon as the
information is available to the Fund. Interest income, adjusted for amortization
of premiums and accretion of discounts, is accrued on a straight line basis as
earned.
FOREIGN CURRENCY TRANSACTIONS Foreign currencies (and receivables and
payables denominated in foreign currencies) are translated into U.S. dollar
amounts at current exchange rates. Translation gains or losses resulting from
changes in exchange rates and realized gains and losses on the settlement of
foreign currency transactions are reported in the statement of operations. In
addition, the Fund may enter into forward foreign exchange contracts in order to
hedge against foreign currency risk in the purchase or sale of securities
denominated in a foreign currency. The Fund may also enter into such contracts
to hedge against changes in foreign currency exchange rates on portfolio
positions. These contracts are marked to market daily, by recognizing the
difference between the contract exchange rate and the current market rate as
unrealized gains or losses. Realized gains or losses are recognized when
contracts are closed and are reported in the statement of operations. There were
no forward foreign currency exchange contracts outstanding at June 30, 1998.
FEDERAL INCOME TAXES It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated investment
companies" and to distribute all of its taxable income to its shareholders.
Therefore, no provision for Federal income taxes is required.
DISTRIBUTIONS Dividends from net investment income and net realized capital
gains are normally declared and paid annually, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code. The character of income and gains to
be distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principals. At December 31, 1997,
reclassifications were made the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distribution under
income tax regulations. Net investment income, net realized gains and net assets
were not affected by this change.
10
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (unaudited) and December 31, 1997 (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED ORGANIZATION EXPENSES Organization expenses aggregating $107,018
have been deferred and are being amortized on a straight-line basis over five
years.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATE
The Fund pays an investment advisory fee to Lexington Management Corporation
("LMC") at an annual rate of 1.25% of the Fund's average daily net assets. In
connection with providing investment advisory services, LMC has entered into a
sub-advisory contract with Troika Dialog Asset Management, ZAO ("TDAM") under
which TDAM provides the Fund with investment management services. Pursuant to
the terms of the sub-advisory contract between LMC and TDAM, LMC pays TDAM a
monthly sub-advisory fee at the annual rate of 0.625% of the Fund's average
daily net assets. For 1998, LMC has agreed to voluntarily limit the total
expenses of the Fund (excluding interest, taxes, brokerage commissions and
extraordinary expenses but including management fee, 12B-1 fees and operating
expenses) to an annual rate of 3.35% of the Fund's average net assets. No
reimbursement was required for the six months ended June 30, 1998.
The Fund also reimburses LMC for certain expenses, including accounting and
shareholder servicing costs of $103,475 which are incurred by the Fund, but paid
by LMC.
3. DISTRIBUTION PLAN
The Fund has a distribution Plan (the "Plan") which allows payments to finance
activities associated with the distribution of the Fund's shares. The Plan
provides that the Fund may pay distribution fees on a reimbursement basis,
including payments to Lexington Funds Distributor, Inc. ("LFD"), the Fund's
distributor, in amounts not exceeding 0.25% per annum of the Fund's average
daily net assets. Total distribution expenses for the six months ended June 30,
1998 were $231,232 and are set forth in the statement of operations.
4. REDEMPTION FEE
A fee is charged on the redemption of shares equal to 2% of the redemption price
of shares of the Fund held less than 365 days that are being redeemed.
Redemption fee proceeds will be applied to the Fund's aggregate expenses
allocable to providing custody and redemption services, including transfer agent
fees, postage, printing, telephone costs and employment costs relating to the
handling and processing of redemptions. Any excess fee proceeds will be added to
the Fund's capital. Total redemption fee proceeds for the six months ended June
30, 1998 were $752,069. The amount available for offset against Fund expenses
was $461,849 and is set forth in the statement of operations. Excess fee
proceeds of $290,220 were added to the Fund's capital.
11
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (unaudited) and December 31, 1997 (continued)
5. CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Six months ended
June 30, 1998 Year ended
(unaudited) December 31, 1997
----------------------------- -------------------------------
Shares Amount Shares Amount
--------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
Shares sold .................................... 2,076,592 $ 27,888,424 11,666,846 $ 250,987,395
Shares issued on reinvestment of dividends ...... -- -- 537,246 9,215,535
Redemption fee proceeds ........................ -- 290,220 -- 1,088,338
--------- ------------- ---------- --------------
2,076,592 28,178,644 12,204,092 261,291,268
Shares redeemed ................................. (3,426,845) (45,459,201) (5,556,760) (114,608,990)
---------- ------------- ---------- --------------
Net increase (decrease) ........................ (1,350,253) $ (17,280,557) 6,647,332 $ 146,682,278
---------- ------------- ---------- --------------
</TABLE>
6. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of securities for the six months
ended June 30, 1998, excluding short-term securities, were $19,268,846 and
$16,017,191, respectively. At June 30, 1998, the aggregate gross unrealized
appreciation for all securities in which there is an excess of value over tax
cost amounted to $3,000 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over value amounted to
$92,010,874.
7. INVESTMENT AND CONCENTRATION RISKS
The Fund's investments are concentrated in Russian securities and are therefore
exposed to the risks associated with that country. These risks which may not be
present in domestic investments or in other developed countries, include:
MARKET, CONCENTRATION, AND LIQUIDITY RISKS The Russian securities markets
are substantially smaller, less liquid, and significantly more volatile than the
securities markets in the United States. A limited number of issuers represent a
disproportionately large percentage of market capitalization and trading volume.
Due to these factors, obtaining prices on portfolio securities from independent
sources may be more difficult than in other markets. In addition, despite the
Fund's policies and procedures addressing liquidity, it may be difficult for the
Fund to obtain or dispose of some investment securities because of poor
liquidity.
SETTLEMENT AND CUSTODY RISKS Because of the recent formation of the
securities markets as well as the underdeveloped state of the banking and
telecommunications systems, settlement, clearing, and registration are subject
to significant risks not normally associated with investments in the United
States and more developed markets. Ownership of shares is defined according to
entries in the company's share register (maintained by third party registrars)
and normally evidenced by extracts from the register. These registrars are not
necessarily subject to effective state supervision, and it is possible for the
fund to lose its registration through fraud, negligence, or even mere oversight.
In addition, the extracts have no legal enforceability, and it is possible that
subsequent illegal amendment or other fraudulent acts may deprive the fund of
its ownership rights. Uncertainty in settlement results from the time necessary
for buyers and sellers to physically deliver
12
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (unaudited) and December 31, 1997 (continued)
7. INVESTMENT AND CONCENTRATION RISKS (CONTINUED)
documents to the registrars which may be located in remote areas. In the case of
purchases, payment is not made until the custodian has physically received the
extract. For sales, the client may be forced to remit securities before payment
is received.
FOREIGN CURRENCY AND EXCHANGE RISK The Fund's assets are invested in
securities denominated in rubles, which are not yet freely convertible into
other currencies outside Russia. The value of the assets of the Fund and its
income, as measured in U.S. dollars, may suffer significant declines due to
disruptions in the ruble market, or be otherwise adversely affected by exchange
control regulations.
POLITICAL AND ECONOMIC RISK Since the breakup of the Soviet Union at the end
of 1991, Russia has experienced dramatic political and social change. The
political system in Russia is emerging from a long history of extensive state
involvement in economic affairs. The country is undergoing a rapid transition
from a centrally-controlled command system to a market-oriented, democratic
model. The Fund may be affected unfavorably by political or diplomatic
developments, social instability, changes in government policies, taxation and
interest rates, currency repatriation restrictions and other political and
economic developments in the law or regulations in Russia and, in particular,
the risk of expropriation, nationalization and confiscation of assets and
changes in legislation relating to foreign ownership.
In addition to the risks described above, risks may arise from forward foreign
currency contracts as a result of the potential inability of counterparties to
meet the terms of their contracts.
13
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (unaudited) and December 31, 1997 (continued)
8. RESTRICTED SECURITIES
Pursuant to guidelines adopted by the Fund's Board of Directors, the following
securities have been deemed to be illiquid. The Fund currently limits investment
in illiquid securities to 15% of the Fund's net assets, at market value, at the
time of purchase.
<TABLE>
<CAPTION>
Initial Average
Acquisition Cost Per Market Percent of Net
Security Shares Date Share Value Assets
-------- ------------ ------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Aeroflot 7,700 6/16/97 $ 161.13 $ 500,500 1.10%
Alpha Cement 38,000 3/25/97 18.20 82,726 0.18
Aviastar 32,500,000 6/25/97 0.04 97,500 0.21
Baltika Brewery 200 2/25/98 599.00 105,292 0.23
Bashinformsvyaz 996,900 6/9/97 1.95 697,830 1.53
Bor Glass 2,500 5/8/98 21.50 18,150 0.04
Gorkovsky Auto Plant (Preferred Stock) 10,000 7/2/97 40.70 150,000 0.33
Gostiny Dvor 7,000 10/6/97 42.50 67,557 0.14
Irkutskelectrosvyaz (Preferred Stock) 650,000 2/17/97 1.00 130,000 0.28
Komienergo 500,000 8/5/97 0.50 15,000 0.03
Krasnoyarskelectrosvyaz (Preferred Stock) 95,000 4/28/97 7.25 95,000 0.21
Krasny Kotelschik 850,000 9/23/97 0.38 22,950 0.05
Lensvyaz 9,500 2/14/97 48.95 9,500 0.02
Lensvyaz (Preferred Stock) 27,000 2/14/97 35.38 25,326 0.05
Medpolimer 21,900 8/6/97 10.50 63,598 0.14
Moscow Intercity International Telephone 34,400 5/27/97 18.36 107,500 0.24
Murmanskelectrosvyaz (Preferred Stock) 175,000 4/9/97 1.41 21,000 0.05
Nizhnovsvyazinform (Preferred Stock) 360,000 11/20/96 2.35 216,000 0.47
Novosbirskaya Telephone (Preferred Stock) 10,000 8/7/97 40.00 40,000 0.09
Novosbirskelectrosvyaz (Preferred Stock) 60,000 2/27/97 5.75 6,000 0.19
Novosbirskenergo (Preferred Stock) 77,000 5/30/97 5.59 88,550 0.01
Salikamsk Magnesium 4,700 9/30/97 87.19 86,574 0.19
Samarasvyazinform 16,500 11/20/96 125.72 330,000 0.72
Samarasvyazinform (Preferred Stock) 8,300 1/9/97 49.11 58,100 0.13
Samson 23,800 7/9/97 50.82 90,440 0.20
Seversky Tube Works 17,354 3/21/97 3.17 12,148 0.03
Sibneft 7,000,000 4/18/97 0.60 987,000 2.16
Sinarsky Trubny 46,000 4/9/97 10.63 36,800 0.08
Slavneft 6,550,000 5/6/97 0.72 281,650 0.62
Smolensksvyazinform 50,000 6/20/97 6.40 45,450 0.10
Smolensksvyazinform (Preferred Stock) 100,000 8/6/97 5.00 34,000 0.07
Taganrogaky Metallurgical Plant 4,450,000 4/24/97 0.22 44,500 0.10
Transneft (Preferred Stock) 1,800 7/27/97 53.06 108,601 0.24
Udmurtneftegaz (Preferred Stock) 4,000 1/20/97 57.00 8,000 0.02
Volgogradelectrosviaz 80,020 4/21/97 3.91 30,968 0.07
Yartelecom 12,000 4/14/97 7.77 17,316 0.04
Yartelecom (Preferred Stock) 35,000 4/14/97 4.26 25,340 0.06
Zvezda 50,000 8/21/97 29.90 165,700 0.36
---------- -----
$4,922,566 10.78%
========== =====
</TABLE>
14
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data for a share outstanding throughout the period:
<TABLE>
<CAPTION>
July 3, 1996
Six months (effective SEC)
ended Year ended registration date)
June 30, 1998 December 31, to December 31,
(unaudited) 1997 1996**
--------------- -------------- -------------------
<S> <C> <C> <C>
Net asset value, beginning of period .................. $ 17.50 $ 11.24 $ 12.12
--------- -------- ---------
Income (loss) from investment operations:
Net investment loss ................................. (0.04) (0.01) (0.05)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions .................. (10.47) 7.57 (0.51)
--------- -------- ---------
Total income (loss) from investment operations ......... (10.51) 7.56 (0.56)
--------- -------- ---------
Less: distributions from net realized gains ............ -- (1.30) (0.32)
--------- -------- ---------
Net asset value, end of period ........................ $ 6.99 $ 17.50 $ 11.24
========= ======== =========
Total return .......................................... (84.29)%* 67.50% ( 9.01)%*
Ratio to average net assets:
Expenses, before reimbursement or redemption fee
proceeds ............................................. 3.24%* 2.89% 5.07%*
Expenses, net of reimbursement or redemption fee
proceeds ............................................. 2.31%* 1.85% 2.65%*
Net investment loss, before reimbursement or redemption
fee proceeds ....................................... (1.45)%* ( 1.14)% ( 3.69)%*
Net investment loss ................................. (0.52)%* ( 0.11)% ( 1.27)%*
Portfolio turnover rate .............................. 39.47%* 66.84% 115.55%*
Average commissions paid on equity security
transactions*** ....................................... -- -- --
Net assets, end of period (000's omitted) ............ $ 45,649 $137,873 $ 13,846
</TABLE>
* Annualized.
** The Fund's commencement of operations was June 3, 1996 with the investment
of its initial capital. The Fund's registration statement with the
Securities and Exchange Commission became effective on July 3, 1996.
Financial results prior to the effective date of the Fund's registration
statement are not presented in this Financial Highlight Table.
*** The average commission paid on equity security transactions was less than
$0.005 per share of securities purchased and sold.
15
<PAGE>
LEXINGTON
TROIKA DIALOG RUSSIA FUND, INC.
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
LEXINGTON MANAGEMENT CORPORATION
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
SUB-ADVISER
- --------------------------------------------------------------------------------
Troika Dialog Asset Management
4 Romanov Pereulok
Moscow, 103009 Russia
DISTRIBUTOR
- --------------------------------------------------------------------------------
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
--------------------------------------------------------
ALL SHAREHOLDER REQUESTS FOR SERVICES OF
ANY KIND SHOULD BE SENT TO:
TRANSFER AGENT
------------------------------------------------------
STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
1004 Baltimore
Kansas City, MIssouri 64105
OR CALL TOLL FREE:
SERVICE AND SALES: 1-800-526-0056
24 HOUR ACCOUNT INFORMATION:
1-800-526-0052
OUTSIDE U.S. (201) 845-7300
-------------------------------------------------------
- --------------------------------------------------------------------------------
(800) 526-0052
"LEXLINE"
24 hour toll-free telephone access to your
Lexington Fund account
Price/Yield o Account Balances o Exchanges o
Last Transactions o Total Return o Duplicate Statements
- --------------------------------------------------------------------------------
This report has been prepared for the information of the shareholders of
Lexington Troika Dialog Russia Fund, Inc. and is authorized for distribution to
the public only if it is accompanied or preceded by a currently effective
prospectus which sets forth expenses and other material information.
---------------
LEXINGTON
---------------
[GRAPHIC]
LEXINGTON
TROIKA
DIALOG
RUSSIA
FUND, INC.
---------------
Seeks long-term capital appreciation
through investments primarily in
the equity securities of
Russian Companies.
---------------
SEMI-ANNUAL REPORT
JUNE 30, 1998
The Lexington Group
of NO LOAD
Investment Companies
