Dear Shareholders:
- --------------------------------------------------------------------------------
We are pleased to report that, for the year ended December 31, 1997, the
Lexington Troika Dialog Russia Fund generated a total return of 67.5%*, making
it the number 4 fund in the Overall Equity Fund Universe (4,883 funds) compiled
by Lipper Analytical Services Inc. for the year. The Fund was number 1 of 131
funds in the Lipper Emerging Market Universe for the same period. Despite the
recent turmoil in emerging markets in general, and in the Far East in
particular, Russia was the best performing equity market in the world in 1997 as
it was in 1996. The Russian market, as measured by the unmanaged Russian Trading
System Index (the "Index") rose 99% in 1997 on top of an increase of 141% in
1996. Your Fund maintains a fixed income position to provide more liquidity and
stability in contrast to the Index which has no fixed income component. This
emphasis on liquidity has helped to protect the Fund on the downside enabling it
to outperform the Index during the recent volatility in the equity markets.
Despite the recent uncertainty in emerging markets, 1997 was a very
successful year for Russia. On the political front, a strong and decisive Boris
Yeltsin returned to a very active leadership role and promptly established the
most reform-oriented government since the breakup of the Soviet Union. This
government formulated and articulated a comprehensive macroeconomic plan which
has been extremely successful to date. Inflation, which exceeded 2,500% as
recently as 1991, was 11% for 1997, which is the lowest level since 1990. After
seven consecutive years of economic contraction which rivals the Great
Depression of the United States in its severity, GDP turned upward in 1997 with
estimated growth of 0.4%. From a high of 200% in 1996, interest rates continued
to decline in 1997, falling to 17% in September before rising back to about 36%
as the Asian economic crisis unfolded. Faced with unrealistic revenue
assumptions in the 1997 budget along with poor tax receipts, the administration
took the unpopular yet responsible step of cutting government expenditures to
reduce the deficit. The government's fiscal discipline was rewarded with a
stabilizing economic situation, a rising stock market, and with renewed funding
from the IMF and from the World Bank. At the same time, President Yeltsin was
able to address one of the country's most visible and pressing problems--public
sector pension and wage arrears. In succession, pension arrears, military wage
arrears, and, as the year drew to a close, all remaining public sector wage
arrears were paid off on time and in full.
The year had its negative developments as well. Political infighting
resulted in the dismissal of Boris Berezovsky from the government and the
subsequent attacks on and demotions of Anatoly Chubais and Boris Nemtsov, the
two top reformers in the Russian government. Although Viktor Chernomyrdin's star
appears to have risen as a result, there is no doubt that the reformist
timetable has been delayed. In particular, the much needed new tax code,
considered one of the major reform objectives, is now being renegotiated with
the Parliament after having made significant progress through the legislative
process earlier in the year. Another high priority on the reformist agenda, the
continued privatization of a number of state enterprises, was also delayed as a
result. Finally, financial instability in Asia has significantly impacted all
emerging markets, including Russia, whether or not the economic fundamentals
support this "contagion". (Just as the Russian market was showing signs of
recovery from the Asian turmoil, we were again reminded of the country's
over-reliance on Yeltsin when his contraction of a flu virus brought an abrupt
halt to the market rally.) The broad uncertainty surrounding emerging markets is
bound to continue over the short term, thereby impeding the inflow of foreign
capital which is so necessary to Russia's continued economic recovery.
Even without any repercussions from the financial instability in Asia,
there are still numerous risks in the Russian market. Political risk is still
very real in a system which relies too heavily on one personality. Unemployment
and underemployment remain high. Although the economy is beginning to grow, a
great deal of investment capital is necessary to fuel that growth. A continuing
nonpayments problem exacerbates the need for capital. Regional development is
uneven, resulting in the potential for regional conflict. The country's
infrastructure, legal and otherwise, is still underdeveloped as it is in many
emerging markets;
1
<PAGE>
this produces issues and risks not typically associated with more developed
markets (shareholder rights, corruption, crime, and the like).
As we look forward to 1998, we expect continued volatility over the short
term as these risks and uncertainties continue to impact the markets.
Nevertheless, we remain very optimistic about Russia's long term prospects.
Despite recent setbacks, the reform program remains firmly in place. GDP growth
is expected to accelerate in 1998 to 2-3 percent. Inflation is expected to
decline further to between five and eight percent. The redenomination of the
ruble, although largely symbolic, has proceeded smoothly thereby enhancing the
credibility of the reform agenda. Having restructured its sovereign debt through
entrance into the Paris Club this autumn, Russia recently successfully
restructured its $35.0 billion in commercial debt to international lenders by
finalizing an agreement with the London Club of creditors. There is greater
cooperation between the government and the Duma, resulting in recent progress on
the 1998 budget, agreement on reducing government expenditures, and, with the
appointment of Mikhail Zadornov to the post of Finance Minister, the potential
for a shorter timeframe for tax reform. Although the health of Yeltsin remains a
cause for uncertainty, recent developments suggest a greater balance of power
between the government and the Duma which should lead to more professionalism
and less arbitrariness in the operation of the government.
The performance of the Russian equity market over the past two years has
been truly impressive, but these returns have been accompanied by a high level
of risk, which will continue to be a prominent feature of the Russian stock
market for some time to come. Although we caution against expecting 100% +
returns from the market in the future, we are optimistic about the long term
investment potential in Russia. To date, the returns that have been realized in
this nascent market have come from basically three sectors of the economy: oil
and gas, telecommunications, and energy. We continue to see very attractive
investment opportunities in these sectors, but believe that these sectors are
just the tip of the iceberg. As the economy continues to grow and the political,
legislative, and judicial systems continue to evolve, we believe that new
sectors of the economy will emerge and flourish, producing many more attractive
investment opportunities for our shareholders.
Within this environment, the Fund expects to maintain its strong emphasis
on liquidity by maintaining core positions in some of the larger blue chip
companies and with a substantial fixed income component. We also expect to
continue our policy of supplementing our core holdings with smaller
capitalization stocks in the same sectors. Finally, we will continue to broaden
our industry exposure by adding new sectors as they emerge. These include
transportation, engineering, auto and truck manufacturers, retail and
construction. 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 or at
(201) 845-7300.
Sincerely,
/s/Gavin Rankin /s/Richard M. Hisey /s/Robert M. DeMichele
- --------------- ------------------- ----------------------
Gavin Rankin Richard M. Hisey, CFA Robert M. DeMichele
Portfolio Manager Portfolio Manager President
February, 1998 February, 1998 February, 1998
2
<PAGE>
RESULTS OF THE SPECIAL MEETING OF SHAREHOLDERS HELD DECEMBER 19, 1997
(UNAUDITED)
Total Outstanding Shares as of October 24, 1997: 8,995,792
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstained
------ -------- ---------
<C> <C> <C> <C>
1. Consideration of the approval of an amended investment 5,999,750 71,228 141,202
sub-advisory agreement between Lexington Management
Corporation and ZAO Asset Management Company Troika
Dialog (conducting business as Troika Dialog Asset
Management) with respect to the Fund.
</TABLE>
[The following table represents a bar chart in the printed report.]
Lexington Russia Trading
Year MT Index Troika Dialog System Index
----------------------------------------------------
07/03/96 $10,000 $10,000 $10,000
09/30/96 $ 8,243 $ 8,363 $ 7,284
12/31/96 $ 9,541 $10,238 $ 8,802
03/31/97 $13,929 $16,492 $13,227
06/30/97 $16,968 $23,567 $18,378
09/30/97 $20,559 $28,796 $21,881
12/31/97 $15,981 $23,370 $17,422
* 67.50% and 36.73% are the one year and since commencement (7/3/96) average
annual standard total returns, respectively, for the period ended December 31,
1997. For the period July 3, 1996 (inception) to December 31, 1997, the Fund
Ranked #1 out of 111 emerging markets funds and #62 out of 4,321 funds in the
Overall Equity Fund Universe compiled by Lipper Analytical Services, Inc.
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.
3
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(Including the Portfolio of Investments)
December 31, 1997
<TABLE>
<CAPTION>
Number of Value
Shares Security (Note 1)
- ----------------------------------------------------------------------------------------------------------
Common Stock & Preferred Stock: 74.3%
Aerospace & Defense: 0.6%
<S> <C> <C>
32,500,000 Aviastar1,2 ......................................................... $ 788,125
----------
Airlines: 1.3%
7,700 Aeroflot1,2 ......................................................... 985,600
10,000,000 Tyumen Avia Trans2 .................................................. 795,000
----------
1,780,600
----------
Auto Trucks & Parts: 2.6%
Common Stock
25,700 Gorkovsky Auto Plant2 ............................................... 2,802,585
100,000 Kamaz2 .............................................................. 183,250
----------
2,985,835
----------
Preferred Stock
10,000 Gorkovsky Auto Plant1,2 ............................................. 530,000
----------
Total Auto Trucks & Parts ........................................ 3,515,835
----------
Banking: 0.8%
151,000 Inkombank (ADR)2 .................................................... 1,094,750
----------
Brewers: 1.1%
119,700 Sun Brewing (GDR)2 .................................................. 1,568,070
----------
Building Materials: 0.6%
38,000 Alfa Cement1,2 ...................................................... 779,000
----------
Food Wholesalers: 0.3%
26,160 Krasny Oktyabr ...................................................... 457,800
----------
Foods: 0.3%
23,800 Samson1,2 ........................................................... 452,200
----------
Machinery: 3.0%
67,000 Electrosila2 ........................................................ 654,925
15,000 Izhorskie Zavody2 ................................................... 1,185,750
850,000 Krasny Kotelschik1,2 ................................................ 174,250
88,000 Leningradsky Metallurgical Plant2 ................................... 1,042,800
50,000 Zvezda1,2 ........................................................... 1,037,500
----------
4,095,225
----------
</TABLE>
4
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(Including the Portfolio of Investments)
December 31, 1997 (continued)
<TABLE>
<CAPTION>
Number of Value
Shares Security (Note 1)
- ----------------------------------------------------------------------------------------------------------
Medical Equipment: 0.2%
<S> <C> <C>
21,900 Medpolimer1,2 ....................................................... $ 224,475
----------
Merchandising: 1.0%
7,000 Gostiny Dvor1,2 ..................................................... 210,000
260,000 Trade House GUM ..................................................... 721,500
10,000 Trade House GUM (ADR)2 .............................................. 61,250
1,120,000 Tsum Jsc Torgovy .................................................... 397,600
----------
1,390,350
----------
Metals: 0.1%
2,000 Solikamsk Magnesium Plant1,2 ........................................ 186,500
----------
Natural Gas: 0.6%
Common Stock
15,000 Gazprom (ADR) ....................................................... 361,875
----------
Preferred Stock
1,800 Transneft1,2 540,000
----------
Total Natural Gas ................................................ 901,875
----------
Oil & Gas Holding Companies: 18.2%
Common Stock
261,500 Lukoil Holdings of Russia2 .......................................... 6,019,730
2,125 Lukoil Holdings of Russia (ADR) ..................................... 196,031
7,000,000 Sibneft2 ............................................................ 5,075,000
6,550,000 Slavneft1,2 ......................................................... 2,620,000
640,000 Surgutneftegaz (ADR) ................................................ 6,520,000
----------
20,430,761
----------
Preferred Stock
5,000 Lukoil Holdings of Russia (ADR) ..................................... 162,500
285,000 Lukoil Holdings of Russia ........................................... 4,488,750
----------
4,651,250
----------
Total Oil & Gas Holding Companies ................................ 25,082,011
----------
Oil & Gas Producing Companies: 6.5%
Common Stock
10,000 Megionneftegaz2 ..................................................... 52,000
165,000 Orenburgneft2 ....................................................... 965,250
290,000 Purneftegaz2 ........................................................ 2,296,800
32,300 Tatneft (ADR) ....................................................... 4,602,750
12,300 Tomskneft2 .......................................................... 147,600
----------
8,064,400
----------
</TABLE>
5
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(Including the Portfolio of Investments)
December 31, 1997 (continued)
<TABLE>
<CAPTION>
Number of Value
Shares Security (Note 1)
- ----------------------------------------------------------------------------------------------------------
Oil & Gas Producing Companies (continued):
Preferred Stock
<S> <C> <C>
140,000 Megionneftegaz2 ..................................................... $ 406,000
80,000 Purneftegaz2 ........................................................ 276,000
4,000 Samaraneftegaz2 ..................................................... 21,000
4,000 Udmurtneftegaz1,2 ................................................... 145,000
----------
848,000
----------
Total Oil & Gas Producing Companies .............................. 8,912,400
----------
Oil Drilling: 0.9%
355,000 Komitek Oil Company2 ................................................ 1,240,725
----------
Steel & Iron: 1.2%
2,000 Chelyabinsky Trubny Zavod2 .......................................... 290,000
199,000 Pervouralsk Pipe Works1,2 ........................................... 572,125
17,354 Seversky Tube Works1,2 .............................................. 56,400
46,000 Sinarsky Trubny1,2 .................................................. 280,600
4,450,000 Taganrogaky Metallurgical Plant1,2 .................................. 534,000
----------
1,733,125
----------
Telecommunications: 16.2%
Common Stock
710,000 Bashinformsvyaz1,2 .................................................. 1,171,500
4,610 Chelyabinsksvyazinform2 ............................................. 258,160
250,000 Irkutskelectrosvyaz2 ................................................ 298,750
51,000 Krasnoyarskelectrosvyaz2 ............................................ 479,400
9,500 Lensvyaz1,2 ......................................................... 451,250
34,400 Moscow Intercity International Telephone1,2 ......................... 227,040
800 Moscow Telephone Systems ............................................ 1,090,000
243,890 Murmanskelectrosvyaz2 ............................................... 596,311
501,000 Nizhnovsvyazinform2 ................................................. 1,801,095
20,383 Novosibirskaya Telephone2 ........................................... 1,487,959
30,000 Novosibirskelectrosvyaz2 ............................................ 180,000
693,000 Rostelecom2 ......................................................... 2,460,150
17,000 Samarasvyazinform2 .................................................. 1,513,000
50,000 Smolensksvyazinform1,2 .............................................. 150,000
40,000 St. Petersburg Intercity International Telephone1,2 ................. 62,000
600,000 St. Petersburg Telecommunication2 ................................... 825,000
</TABLE>
6
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(Including the Portfolio of Investments)
December 31, 1997 (continued)
<TABLE>
<CAPTION>
Number of Value
Shares Security (Note 1)
- ----------------------------------------------------------------------------------------------------------
Telecommunications (continued):
<S> <C> <C>
130,000 Tyumentelecom2 ...................................................... $ 547,300
10,000,000 Uralsvyazinform ..................................................... 580,000
80,020 Volgogradelectrosvyaz1,2 ............................................ 300,075
17,000 Yartelecom1,2 ....................................................... 85,000
----------
14,563,990
----------
Preferred Stock
650,000 Irkutskelectrosvyaz1,2 .............................................. 464,750
95,000 Krasnoyarskelectrosvyaz1,2 .......................................... 394,250
27,000 Lensvyaz1,2 ......................................................... 540,000
1,450 Moscow Telephone Systems ............................................ 1,016,450
175,000 Murmanskelectrosvyaz1,2 ............................................. 170,625
360,000 Nizhnovsvyazinform1,2 ............................................... 792,000
10,000 Novosbirskaya Telephone1,2 .......................................... 300,000
60,000 Novosbirskelectrosvyaz1,2 ........................................... 264,000
800,000 Rostelecom2 ......................................................... 1,864,000
8,300 Samarasvyazinform1,2 ................................................ 435,750
100,000 Smolensksvyazinform1,2 .............................................. 150,000
210,000 St. Petersburg Telecommunication2 ................................... 183,750
279,099 Tyumentelecom2 ...................................................... 555,407
33,500 Uraltelecom2 ........................................................ 527,625
45,000 Yartelecom1,2 ....................................................... 135,000
---------
7,793,607
----------
Total Telecommunications ......................................... 22,357,597
----------
Utilities: 18.8%
Common Stock
3,575,000 Bashkirenergo2 ...................................................... 1,930,500
1,700,000 Chelyabenergo2 ...................................................... 901,000
1,150,000 Irkutskenergo ....................................................... 227,700
500,000 Komienergo1,2 ....................................................... 75,000
1,170,000 Lenenergo2 .......................................................... 848,835
6,750,000 Mosenergo ........................................................... 8,572,500
1,600,000 Samaraenergo2 ....................................................... 880,000
1,485,000 Sverdlovskenergo2 ................................................... 854,618
19,800,000 Unified Energy Systems2 ............................................. 5,987,520
70,000 Unified Energy Systems (GDR)2 ....................................... 2,100,000
----------
22,377,673
----------
Preferred Stock
450,000 Chelyabenergo2 ...................................................... 128,250
915,000 Krasnoyarskenergo2 .................................................. 160,125
85,000 Novosbirskenergo1,2 ................................................. 459,000
</TABLE>
7
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(Including the Portfolio of Investments)
December 31, 1997 (continued)
<TABLE>
<CAPTION>
Number of shares
or Value
Principal Amount Security (Note 1)
- ----------------------------------------------------------------------------------------------------------
Utilities (continued):
Preferred Stock
<S> <C> <C>
24,600 Permenergo2 ......................................................... $ 92,250
700,000 Samaraenergo2 ....................................................... 239,750
1,906,000 Sverdloskenergo2 .................................................... 601,343
8,500,000 Unified Energy Systems .............................................. 1,857,250
-----------
3,537,968
-----------
Total Utilities .................................................. 25,915,641
-----------
Total Common & Preferred Stock
(Cost $125,164,983) ................................................. 102,476,304
-----------
Government Obligations: 4.1%
$2,000,000 City of Moscow, 9.5%, due 5/31/00 ................................... 1,875,000
2,000,000 Russia Ministry of Finance, 10.0%, due 6/26/07 ...................... 1,855,500
2,000,000 Russia Ministry of Finance, 9.25%, due 11/27/01 ..................... 1,907,000
-----------
Total Government Obligations
(Cost $6,048,933) ................................................... 5,637,500
-----------
Short-Term Investments: 18.7%
U.S. Government Agency Obligations: 17.0%
$13,500,000 Federal Home Loan Mortgage Bank, 4.75%, due 01/02/98 ................ 13,498,219
10,000,000 Federal National Mortgage Association, 5.54%, due 01/26/98 .......... 9,961,900
-----------
23,460,119
-----------
U.S. Government Obligations: 1.7%
$1,000,000 United States Treasury Bills, 5.15%, due 01/29/98 ................... 996,280
1,000,000 United States Treasury Bills, 5.325%, due 01/10/98 .................. 999,250
350,000 United States Treasury Bills, 5.35%, due 06/25/98 ................... 341,152
-----------
2,336,682
-----------
Total Short-Term Investments
(Cost $25,795,887) .................................................. 25,796,801
-----------
Total Investments: 97.1%
(Cost $157,009,803+)(Note 1) ........................................ 133,910,605
Other assets in excess of liabilities: 2.9% ......................... 3,962,677
-----------
Total Net Assets: 100.0%
(equivalent to $17.50 per share on 7,879,455 shares outstanding) .... $137,873,282
===========
</TABLE>
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 $157,440,602.
The Notes to Financial Statements are an integral part of this statement.
8
<PAGE>
<TABLE>
<CAPTION>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
Assets
<S> <C>
Investments, at value (cost $157,009,803) (Note1). ................................. $133,910,605
Cash ............................................................................... 519,525
Receivable for investment securities sold .......................................... 3,701,260
Receivable for shares sold ......................................................... 1,311,376
Dividends and interest receivable .................................................. 70,358
Deferred organization expense, net (Note 1) ........................................ 73,070
Other receivable ................................................................... 102,000
-----------
Total Assets ........................................................ 139,688,194
-----------
Liabilities
Due to Lexington Management Corporation (Note 2) ................................... 143,231
Payable for shares redeemed ........................................................ 1,131,498
Distributions payable .............................................................. 407,560
Accrued expenses ................................................................... 132,623
-----------
Total Liabilities ................................................... 1,814,912
-----------
Net Assets: (equivalent to $17.50 per share on
7,879,455 shares outstanding) (Note 5). .......................................... $137,873,282
===========
Net Assets consist of:
Capital stock -- authorized 1,000,000,000 shares,
$.001 par value per share .......................................................... $7,879
Additional paid-in capital (Note 1) ................................................ 159,587,173
Accumulated deficit (Note 1) ....................................................... (27,179)
Accumulated net realized gain on investments (Note 1) .............................. 1,404,607
Unrealized depreciation on investments ............................................. (23,099,198)
-----------
Total Net Assets .................................................... $137,873,282
===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
9
<PAGE>
Lexington Troika Dialog Russia Fund, Inc.
Statement of Operations
Year ended December 31, 1997
<TABLE>
<CAPTION>
Investment Income
<S> <C>
Dividends .................................................................... $ 115,632
Interest ..................................................................... 1,726,873
-----------
1,842,505
Less: foreign tax expense .................................................... 15,006
-----------
Total investment income ................................................. $ 1,827,499
Expenses
Investment advisory fee (Note 2) ............................................. 1,307,946
Custodian expense ............................................................ 967,109
Distribution expense (Note 3) ................................................ 261,583
Transfer agent and shareholder servicing expense (Note 2) .................... 115,918
Printing and mailing expenses ................................................ 71,113
Professional fees ............................................................ 67,501
Registration fees ............................................................ 54,862
Accounting expenses (Note 2) ................................................. 51,188
Directors' fees and expenses ................................................. 45,689
Amortization of deferred organization costs (Note 1) ......................... 21,463
Computer processing fees ..................................................... 13,247
Other expenses ............................................................... 43,069
-----------
Total expenses .......................................................... 3,020,688
Less: Redemption fee proceeds (Note 4 ) ................................. 1,083,027 1,937,661
----------- -----------
Net investment loss ..................................................... (110,162)
Realized and Unrealized Gain (Loss) on Investments (Note 6)
Net realized gain on investments ............................................. 11,101,736
Net change in unrealized appreciation on investments ......................... (24,013,755)
-----------
Net realized and unrealized loss on investments .............................. (12,912,019)
-----------
Decrease in Net Assets Resulting from Operations ............................. $ (13,022,181)
===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
10
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
June 3, 1996
(commencement
Year ended of operations) to
December 31, December 31,
1997 1996
------------ ----------------
<S> <C> <C>
Net investment loss ........................................................... $ (110,162) $ (58,025)
Net realized gain from security transactions .................................. 11,101,736 457,898
Net change in unrealized appreciation of investments .......................... (24,013,755) 914,557
----------- ----------
Net increase (decrease) in net assets resulting from operations .......... (13,022,181) 1,314,430
Distributions to shareholders from net realized gains
from security transactions ............................................... (9,633,271) (380,748)
Increase in net assets from capital share transactions (Note 5) ............... 146,682,278 12,912,774
----------- ----------
Net increase in net assets .......................................... 124,026,826 13,846,456
Net Assets:
Beginning of period ........................................................... 13,846,456 --
----------- ----------
End of period (including accumulated deficit of $27,179
and $0, 1997 and 1996, respectively) ..................................... $137,873,282 $13,846,456
=========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
11
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
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 Security 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 price 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 price. 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 December 31, 1997.
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 to 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.
12
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996 (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 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 1997, 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 year ended December 31, 1997.
The Fund reimbursed LMC for certain expenses, including accounting and
shareholder servicing costs of $101,046 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 year ended December 31,
1997 were $261,583 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 year ended December
31, 1997 were $2,171,365. The amount available for offset against Fund expenses
was $1,083,027 and is set forth in the statement of operations. Excess fee
proceeds of $1,088,338 were added to the Fund's capital.
13
<PAGE>
Lexington Troika Dialog Russia Fund, Inc. Notes to Financial Statements December
31, 1997 and 1996 (continued) 5. Capital Stock Transactions in capital stock
were as follows:
<TABLE>
<CAPTION>
June 3, 1996
(commencement of
Year ended operations) to
December 31, 1997 December 31, 1996
------------------- --------------------
Shares Amount Shares Amount
------- -------- ------- --------
<S> <C> <C> <C> <C>
Shares sold .................................... 11,666,846 $250,987,395 1,211,091 $12,667,903
Shares issued on reinvestment of dividends ..... 537,246 9,215,535 33,799 376,183
Redemption fee proceeds ........................ -- 1,088,338 -- --
--------- ----------- --------- -----------
12,204,092 261,291,268 1,244,890 13,044,086
Shares redeemed ................................ (5,556,760) (114,608,990) (12,767) (131,312)
--------- ----------- --------- -----------
Net increase ................................... 6,647,332 $146,682,278 1,232,123 $12,912,774
========= =========== ======== ==========
</TABLE>
6. PURCHASES AND SALES OF INVESTMENT SECURITIES
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1997, excluding short-term securities, were $162,304,648 and
$53,786,844, respectively.
At December 31, 1997, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to
$3,777,484 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $27,307,481.
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 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 Fund
14
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996 (continued)
7. INVESTMENT AND CONCENTRATION RISKS (CONTINUED)
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.
15
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996 (continued)
8. ILLIQUID 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.
<TABLE>
<CAPTION>
Initial Average
Acquisition Cost Per Market % of Net
Security Shares Date Share Value Assets
------- ------ ---------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Aeroflot 7,700 6/16/97 $161.13 $985,600 0.71%
Alfa Cement 38,000 3/25/97 18.20 779,000 0.57
Aviastar 32,500,000 6/25/97 0.04 788,125 0.57
Bashinformsvyaz 710,000 6/9/97 2.25 1,171,500 0.85
Gorkovsky Auto Plant (Preferred Stock) 10,000 7/2/97 40.70 530,000 0.38
Gostiny Dvor 7,000 10/6/97 42.50 210,000 0.15
Irkutskelectrosvyaz (Preferred Stock) 650,000 2/17/97 1.00 464,750 0.34
Komienergo 500,000 8/5/97 0.50 75,000 0.05
Krasnoyarskelectrosvyaz (Preferred Stock) 95,000 4/28/97 7.25 394,250 0.29
Krasny Kotelschik 850,000 9/23/97 0.38 174,250 0.13
Lensvyaz 9,500 2/14/97 48.94 451,250 0.33
Lensvyaz (Preferred Stock) 27,000 2/14/97 35.38 540,000 0.39
Medpolimer 21,900 8/6/97 10.50 224,475 0.16
Moscow Intercity International Telephone 34,400 5/27/97 18.36 227,040 0.17
Murmanskelectrosvyaz (Preferred Stock) 175,000 4/9/97 1.41 170,625 0.12
Nizhnovsvyazinform (Preferred Stock) 360,000 11/20/96 2.35 792,000 0.57
Novosbirskaya Telephone (Preferred Stock) 10,000 8/7/97 40.00 300,000 0.22
Novosbirskelectrosvyaz (Preferred Stock) 60,000 5/30/97 5.59 264,000 0.19
Novosbirskenergo (Preferred Stock) 85,000 2/27/97 5.65 459,000 0.33
Pervouralsk Pipe Works 199,000 3/21/97 5.64 572,125 0.41
Samarasvyazinform (Preferred Stock) 8,300 1/9/97 48.11 435,750 0.32
Samson 23,800 7/9/97 50.82 452,200 0.33
Seversky Tube Works 17,354 3/21/97 3.17 56,400 0.04
Sinarsky Trubny 46,000 4/9/97 10.63 280,600 0.20
Slavneft 6,550,000 5/6/97 0.72 2,620,000 1.90
Smolensksvyazinform 50,000 6/20/97 6.40 150,000 0.11
Smolensksvyazinform (Preferred Stock) 100,000 8/6/97 5.00 150,000 0.11
Solikamsk Magnesium Plant 2,000 9/30/97 115.13 186,500 0.14
St.Petersburg Intercity
International Telephone 40,000 5/27/97 2.60 62,000 0.04
Taganrogaky Metallurgical Plant 4,450,000 4/24/97 0.22 534,000 0.39
Transneft (Preferred Stock) 1,800 7/27/97 53.06 540,000 0.39
Udmurtneftegaz (Preferred Stock) 4,000 1/20/97 57.00 145,000 0.11
Volgogradelectrosvyaz 80,020 4/21/97 3.91 300,075 0.22
Yartelecom 17,000 4/14/97 7.34 85,000 0.06
Yartelecom (Preferred Stock) 45,000 4/14/97 4.26 135,000 0.10
Zvezda 50,000 8/21/97 29.90 1,037,500 0.75
---------- -----
$16,743,015 12.14%
========== =====
</TABLE>
9. TAX INFORMATION (UNAUDITED)
Capital gain distributions paid to shareholders by the Fund during the year
ended December 31, 1997, whether taken in shares or cash were:
$964, 632 are designated as 28 percent long-term capital gains.
16
<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
(effective SEC
Year ended registration date)
December 31, to December 31,
1997 1996**
------------ -------------
<S> <C> <C>
Net asset value, beginning of period. ................................. $ 11.24 $ 12.12
-------- --------
Income (loss) from investment operations:
Net investment loss ................................................ (0.01) (0.05)
Net realized and unrealized gain (loss) on investments ............. 7.57 (0.51)
-------- --------
Total income (loss) from investment operations ........................ 7.56 (0.56)
-------- --------
Less distributions:
Distributions from net realized gains .............................. (1.30) (0.32)
-------- --------
Net asset value, end of period. ....................................... $ 17.50 $ 11.24
======== ========
Total return 67.50% (9.01%)*
Ratio to average net assets:
Expenses, before reimbursement or redemption fee proceeds. ......... 2.89% 5.07%*
Expenses, net of reimbursement or redemption fee proceeds. ......... 1.85% 2.65%*
Net investment loss, before reimbursement or
redemption fee proceeds .......................................... (1.14%) (3.69%)*
Net investment loss ................................................ (0.11%) (1.27%)*
Portfolio turnover rate ............................................ 66.84% 115.55%*
Average commission paid on equity security transactions*** ......... -- --
Net assets, end of period (000's omitted). ......................... $ 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 Highlights Table.
***The average commission paid on equity security transactions for the year
ended December 31, 1997 and for the period ended December 31, 1996 was less
than $0.005 per share of securities purchased and sold.
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lexington Troika Dialog Russia Fund, Inc.:
We have audited the accompanying statements of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Troika Dialog
Russia Fund, Inc. as of December 31, 1997, the related statements of operations
for the year then ended, the statement of changes in net assets and the
financial highlights for the year then ended and for the period from July 3,
1996 (effective SEC registration date) to December 31, 1996. These financial
statements and financial highlights 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.
We conducted our audit in accordance with generally accepted auditing
standards. 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
December 31, 1997 by correspondence with the custodian. As to securities sold,
but not yet delivered, we performed other appropriate auditing procedures. 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 audit provides 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
Lexington Troika Dialog Russia Fund, Inc. as of December 31, 1997, the results
of its operations for the year then ended, and changes in its net assets and the
financial highlights for the year then ended and for the period from July 3,
1996 (effective SECregistration date) to December 31, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 12, 1998
18
<PAGE>
LEXINGTON
INVESTOR SERVICES
As a Lexington shareholder, you should be aware of the many services available
to you.
NO LOAD--The Lexington Funds are no load funds. That is, investments and
redemptions are made without any sales charges, commissions or redemption fees.
--------
FREE TELEPHONE EXCHANGE--Investments in the Lexington Funds may be exchanged for
shares of a different Lexington Fund at any time.
--------
CHECK WRITING PRIVILEGES--Lexington Money Market Trust permits investors
immediate access to their funds with check writing for withdrawals from their
account.
--------
TAX SHELTERED PLANS--IRA, Keogh, Pension, and Profit Sharing Prototype Plans are
available to qualified individuals. These plans offer investment flexibility
through the Share Exchange Service, simplified record keeping, convenience and
investment supervision.
--------
CUSTODIAL ACCOUNTS FOR MINORS--Investments may be made on behalf of minors under
the Uniform Gifts to Minors Act currently in effect in all states.
--------
SYSTEMATIC WITHDRAWAL PLAN--An investor may elect to receive a fixed amount from
his or her account each month or quarter, subject to certain minimums.
--------
COMPLETE RECORD KEEPING--A statement is provided for every transaction in
addition to a year-end statement with tax information.
THE LEXINGTON GROUP OF
NO LOAD INVESTMENT COMPANIES
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC.--Seeks long-term growth of
capital primarily through investment in equity securities of companies domiciled
in, or doing business in, emerging countries and emerging markets.
LEXINGTON GLOBAL FUND, INC.--Seeks long-term growth of capital primarily through
investment in common stocks of companies domiciled in foreign countries and the
United States.
LEXINGTON INTERNATIONAL FUND, INC.--Seeks long-term growth of capital through
investment in companies domiciled in foreign countries.
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.--Seeks long-term capital appreciation
through investments primarily in the equity securities of Russian companies.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.--Seeks long-term capital
appreciation through investment in companies domiciled in the Asia Region with a
market capitalization of less than $1 billion.
LEXINGTON RAMIREZ GLOBAL INCOME FUND--Seeks high current income. Capital
appreciation is a secondary objective. The Fund invests in a combination of
foreign and domestic high-yield, lower rated debt securities.
LEXINGTON GOLDFUND, INC.--Seeks capital appreciation through investment in gold
bullion and shares of gold mining companies.
LEXINGTON GROWTH AND INCOME FUND, INC.--Seeks capital appreciation over the
long-term through investments in the stocks of large, ably managed and well
financed companies.
LEXINGTON CORPORATE LEADERS TRUST FUND--Seeks capital growth and reasonable
income through investment in an equal number of shares of an established list of
American blue chip corporations.
LEXINGTON SMALLCAP VALUE FUND, INC.--Seeks long-term capital appreciation
through investment in common stocks of companies domiciled in the United States
with a market capitalization of less than $1 billion.
LEXINGTON CONVERTIBLE SECURITIES FUND--Seeks total return by providing capital
appreciation, current income and conservation of capital through investments in
a diversified portfolio of securities convertible into shares of common stock.
LEXINGTON GNMA INCOME FUND, INC.--Seeks to achieve a high level of current
income, consistent with liquidity and safety of principal, through investment
primarily in mortgage-backed GNMA ("Ginnie Mae") certificates that are
guaranteed as to the timely payment of principal and interest by the United
States Government.
LEXINGTON MONEY MARKET TRUST--Seeks a high level of current income consistent
with preservation of capital and liquidity through investments in interest
bearing short-term money market instruments.
For more complete information about any of the Lexington Funds and a prospectus
which includes management fee and expenses call the distributor toll-free at
1-800-526-0057. Read the prospectus carefully before you invest or send money.
*Redemptions on shares of Lexington Troika Dialog Russia Fund, Inc. held less
than 365 days are subject to a redemption fee of 2% of the redemption proceeds.
<PAGE>
LEXINGTON
LEXINGTON
TROIKA DIALOG RUSSIA FUND, INC. [Logo]
Investment Adviser
- ----------------------------------
LEXINGTON
LEXINGTON MANAGEMENT CORPORATION TROIKA
P.O. Box 1515 DIALOG
Park 80 West Plaza Two FUND, INC.
Saddle Brook, New Jersey 07663
-------------------------
Sub-Advisor
- ----------------------------------
Troika Dialog Asset Management
6/3 1st Kolobovsky Per -------------------------
Moscow, 103051 Russia
Distributor ANNUAL REPORT
- ---------------------------------- DECEMBER 31, 1997
LEXINGTON FUNDS DISTRIBUTOR, INC.
P.O. Box 1515 The Lexington Group
Park 80 West Plaza Two of No Load
Saddle Brook, New Jersey 07663 Investment Companies
All Shareholders 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 - Account Balances - Exchanges
Last Transactions - Total Return - Duplicate Statements
- -------------------------------------------------------
This report has been prepared for the information of the shareholders of
Lexington Strategic Silver 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.
