DEAR SHAREHOLDERS:
- --------------------------------------------------------------------------------
The Lexington Troika Dialog Russia Fund finished the twelve months of 1998
with a negative total return of 82.99%* versus a negative total return of 85.2%
for the unmanaged Russian Trading System ("RTS") Index. The average emerging
market fund according to Lipper, Inc. lost 26.83% over the same period.
The Russian equity market was the worst performing equity market in 1998,
in painful contrast to having been the top performing equity market in 1997.
Political uncertainty and instability have been ongoing concerns in Russia
throughout this decade. Those concerns grew significantly in the first quarter
of 1998 when Yeltsin fired the government led by Viktor Chemomyrdin;
subsequently, Yeltsin fired the replacement government of Sergei Kiriyenko and
tried to bring back the ousted Chemomyrdin government, throwing the entire
political situation into crisis in the process. The new government, appointed
in September, led by Yevgeny Primakov, the experienced former foreign minister,
has managed to stabilize the political situation for the time being. However,
it is of necessity a coalition government, and is therefore in no position to
take any meaningful or decisive action, especially as this government remains
at least nominally under the direction of an increasingly incoherent and frail
Boris Yeltsin.
Hand-in-hand with the political crisis was an economic crisis, which
culminated in the August "meltdown scenario". Government spending continued to
outstrip government revenues with the resulting deficit being financed by a
growing mountain of short-term high cost government debt. Exacerbating the
situation was a significant decline in the world price of oil (Russia's number
one export and source of government revenues) and a growing crisis of
confidence among investors in emerging markets.
Watching Russia's government's debt accumulate even as its ability to
service the debt continued to deteriorate caused investors to redeem their
loans (in the form of GKOs) to the government. Pressure on the ruble steadily
increased to the point where even an eleventh hour bailout package of $24
billion from the IMF could not turn the tide. On August 17, 1998, the Russian
Government was forced to both devalue its currency and effectively default on
$40 billion in short-term government debt. One week later, the Kiriyenko
government fell from power.
The economic and political fallout from the events of August 1998 has not
yet subsided. Strong and decisive action on the economic front is increasingly
necessary as confidence wanes; with parliamentary elections due in late 1999
and presidential elections at latest in mid-2000 just around the corner, such
action in the near future is becoming less and less likely.
In the meantime, Russia's economic situation has deteriorated quite
significantly since August 17. GDP, which grew by 0.7% in 1997, was originally
expected to grow by 3% in 1998, but actually contracted by about 5% in 1998,
and is expected to contract by a further 5% in 1999.
Inflation hit a record low of 11% in 1997; it was estimated at over 80% in
late 1998; and forecast to average at similar levels in 1999. The ruble, which
had stabilized at between 4 and 6 rubles to the dollar over the past few years,
dropped to 22 rubles to the dollar by the end of the year.
But all is not lost-the "bark may appear worse than the bite". Although
the Communists have gained a considerable amount of influence under the new
government, in addition to the shift in influence towards the Duma- pragmatism
coupled with experience appears to be the rule. Importantly, the government and
the Central Bank have backed off from the more extreme actions suggested by
their rhetoric. For example, Central banker Geraschenko has done what many
deemed impossible: he has controlled the emission of money. Far from proceeding
to nationalize industries, the government in December sold a further stake in
1
<PAGE>
Gazprom to Ruhrgas of Germany. A more realistic approach to solving the
economic crisis seems to be emerging, albeit at a snail's pace. The GKO
restructuring process should be finalized in the near future, despite the talks
continuing in the form of a long running soap opera, and a new agency has been
created to restructure the banking system, which had been severely wounded by
the August events. In fact, this government seems to be moving toward some of
the positions of the previous government. The approach to tax reform is one
example, while real progress has been made towards passing the PSA legislation
in the oil industry. Despite the disturbing deterioration in the macroeconomic
figures cited above, the situation is still better in many respects than it was
in the early 90's when inflation exceeded 1,600% and GDP declined by 10-20% per
annum. Perhaps most importantly, Russia seems to be withstanding transitional
turmoil without a large amount of social unrest. Most importantly for our Fund,
the valuations in Russia are compelling, despite the overall increase in risk.
Due to the unusual and severe conditions surrounding the economic and
political crisis in Russia, the Fund maintained a high cash weighting through
December 31, 1998. We sought to minimize our exposure to the ruble by keeping
most of this cash in U.S. dollars. However, we have also maintained (and have
recently added to) significant core positions in a number of blue chip stocks
in order to benefit from any sudden upturn in the equity market. Overall in
1998, the Fund managed to outperform the index, despite having had a 15%
exposure to GKO's, which promptly dropped in value after the August
devaluation.
The Russian equity market, which bottomed in October and demonstrated a
small fourth quarter rally, has proved remarkably stable since then, albeit on
very reduced volume, and despite being effectively ignored by New Year
investors in early January 1999. We remain cautious over the near term,
concerned by the potential impact of a correction in US markets, uncertainty in
Brazil, continuing deflationary trends, and continuing political and economic
uncertainty in Russia. At the same time the downside in Russia is limited,
while a small re-allocation of funds to Russia by foreign investors would have
a substantial positive effect on the market.
While we expect little positive improvement in the near term, we remain
optimistic about Russia's and the Fund's long-term prospects.
Sincerely,
/s/ Gavin Rankin /s/ Richard M. Hisey, CFA /s/ Robert M. DeMichele
- ------------------ ------------------------- -----------------------
Gavin Rankin Richard M. Hisey, CFA Robert M. DeMichele
Portfolio Manager Portfolio Manager President
February, 1999 February, 1999 February, 1999
2
<PAGE>
Comparison of change in value of a $10,000 investment in
Lexington Troika Dialog Russia Fund, Inc. and
the unmanaged Moscow Times (MT) Index and
the unmanaged Russian Trading System (RTS) Index
[The following table represents a bar chart in the printed report.]
AVERAGE ANNUAL STANDARD TOTAL RETURNS
FOR THE PERIOD ENDED 12/31/98
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
09/30/98 $ 2,383 $ 2,241 $ 1,923
12/31/98 $ 4,090 $ 2,718 $ 2,587
AVERAGE ANNUAL STANDARD TOTAL RETURNS
FOR THE PERIOD ENDED 12/31/98
-------------------------------------------------------------
FUND/INDEX 1 YR. SINCE INCEPTION
7/3/96
-------------------------------------------------------------
LEXINGTON TROIKA
DIALOG RUSSIA FUND (82.99)% (40.63)%
-------------------------------------------------------------
MOSCOW TIMES
(MT) INDEX (79.62)% (30.08)%
-------------------------------------------------------------
RUSSIAN TRADING
SYSTEM (RTS) INDEX (85.15)% (41.79)%
-------------------------------------------------------------
This graph, prepared in accordance with SEC regulations, compares a $10,000
investment in the Fund with a similar investment in the Moscow Times (MT) Index
and the Russian Trading System (RTS) Index. Results for the Fund, the Moscow
Times (MT) Index and the Russian Trading System (RTS) Index include the
reinvestment of all dividend and capital gain distributions. 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 it is not predictive of future
results.
* -82.99% and -40.63% are the one year and since commencement (7/3/96) average
annual standard total returns, respectively, for the period ended December 31,
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.
3
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998
<TABLE>
<CAPTION>
NUMBER
OF VALUE
SHARES SECURITY (NOTE 1)
- ------------ ------------------------------------- ----------
<S> <C> <C>
COMMON & PREFERRED STOCKS: 61.9%
AEROSPACE & DEFENSE: 0.2%
32,500,000 Aviastar1,2 ......................... $ 42,250
--------
AIRLINES: 0.9%
7,700 Aeroflot2 ........................... 161,700
--------
AUTO PARTS: 0.0%
2,500 Bor Glass1,2 ........................ 5,000
--------
AUTO TRUCKS & PARTS: 1.8%
21,700 Gorkovsky Auto Plant2 ............... 336,350
--------
BREWERS: 2.9%
200 Baltika Brewery1,2 .................. 36,000
209,700 Sun Brewing (GDR)1,2 ................ 513,765
--------
549,765
--------
BUILDING MATERIALS: 0.1%
38,000 Alfa Cement1,2 ...................... 20,710
--------
FOODS: 0.0%
23,800 Samson1,2 ........................... 4,522
--------
MACHINERY: 0.3%
850,000 Krasny Kotelschik1,2 ................ 9,775
50,000 Zvezda1,2 ........................... 41,300
--------
51,075
--------
MEDICAL EQUIPMENT: 0.1%
21,900 Medpolimer1,2 ....................... 15,746
--------
MERCHANDISING: 0.6%
7,000 Gostiny Dvor1,2 ..................... 17,570
235,000 Trade House GUM ..................... 98,700
--------
116,270
--------
METALS: 0.1%
4,700 Salikamsk Magnesium1,2 .............. 23,500
--------
NATURAL GAS: 1.6%
COMMON STOCK
35,000 Gazprom (ADR) ....................... 294,000
--------
PREFERRED STOCK
1,800 Transneft1,2 ........................ 6,354
--------
TOTAL NATURAL GAS .................. 300,354
--------
OIL & GAS HOLDING COMPANIES: 24.7%
COMMON STOCK
125,000 AO Tatneft (ADR) .................... 234,375
170,000 Lukoil Holdings of Russia2 .......... 688,500
</TABLE>
4
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998 (continued)
<TABLE>
<CAPTION>
NUMBER
OF VALUE
SHARES SECURITY (NOTE 1)
- ------------ ---------------------------------------------------- ------------
<S> <C> <C>
OIL & GAS HOLDING COMPANIES (continued):
50,000 Lukoil Holdings of Russia (ADR) .................... $ 787,500
7,000,000 Sibneft1,2 ......................................... 119,000
4,235,000 Slavneft1 .......................................... 22,446
690,000 Surgutneftegaz (ADR) ............................... 2,328,750
----------
4,180,571
----------
PREFERRED STOCK
75,000 Lukoil Holdings of Russia (ADR) .................... 253,125
185,000 Lukoil Holdings of Russia2 ......................... 305,250
----------
558,375
----------
TOTAL OIL & GAS HOLDING COMPANIES ................. 4,738,946
----------
OIL & GAS PRODUCING COMPANIES: 0.1%
COMMON STOCK
165,000 Orenburgneft1,2 .................................... 24,750
----------
PREFERRED STOCK
4,000 Samaraneftegaz1,2 .................................. 40
4,000 Udmurtneftegaz1,2 .................................. 3,000
----------
3,040
----------
TOTAL OIL & GAS PRODUCING COMPANIES ............... 27,790
----------
OIL DRILLING & SERVICES: 0.3%
530,000 Komitek Oil Company1,2 ............................. 53,000
----------
STEEL & IRON: 0.1%
1,002,000 Chelyabinsky Trubny Zavod1,2 ....................... 7,916
17,354 Seversky Tube Works1,2 ............................. 764
46,000 Sinarsky Trubny1,2 ................................. 6,992
4,450,000 Taganrogaky Metallurgical1,2 ....................... 4,450
----------
20,122
----------
TELECOMMUNICATIONS: 16.0%
COMMON STOCK
996,900 Bashinformsvyaz1,2 ................................. 246,234
14,110 Chelyabinskvyazinform1,2 ........................... 94,537
250,000 Irkutskelectrosvyaz1,2 ............................. 33,250
41,000 Krasnoyarskelectrosvyaz1,2 ......................... 23,411
9,500 Lensvyaz1,2 ........................................ 29,545
34,400 Moscow Intercity International Telephone1 .......... 14,551
243,890 Murmanskelectrosvyaz1 .............................. 10,243
501,000 Nizhnovsvyazinform1,2 .............................. 150,300
20,383 Novosbirskaya Telephone1 ........................... 90,704
30,000 Novosibirskelectrosvyaz1 ........................... 6,000
723,000 Rostelecom ......................................... 527,790
35,000 Rostelecom (ADR) ................................... 142,188
26,000 Samarasvyazinform1,2 ............................... 247,520
</TABLE>
5
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998 (continued)
<TABLE>
<CAPTION>
NUMBER OF
SHARES OR VALUE
PRINCIPAL AMOUNT SECURITY (NOTE 1)
- ------------------ ----------------------------------------------------------------------- -------------
<S> <C> <C>
TELECOMMUNICATIONS (continued)
50,000 Smolensksvyazinfrom1 .................................................. $ 500
500,000 St. Petersburg Telecommunication1 ..................................... 100,000
160,000 Tyumentelecom1 ........................................................ 57,600
10,000,000 Uralsvyazinform1 ...................................................... 50,000
70,400 Vimpel-Communications (ADR) ........................................... 902,000
80,020 Volgogradelectrosvyaz1,2 .............................................. 8,002
-----------
2,734,375
-----------
PREFERRED STOCK
1,450 Moscow Telephone Systems1 ............................................. 38,686
175,000 Murmanskelectrosvyaz1 ................................................. 4,375
360,000 Nizhnovsvyazinform1,2 ................................................. 21,600
731,000 Rostelecom ............................................................ 204,680
8,300 Samarasvyazinform1,2 .................................................. 25,813
100,000 Smolensksvyazinform1 .................................................. 500
110,000 St. Petersburg Telecommunication1 ..................................... 12,980
279,099 Tyumentelecom1 ........................................................ 24,840
-----------
333,474
-----------
TOTAL TELECOMMUNICATIONS ............................................. 3,067,849
-----------
UTILITIES: 12.1%
COMMON STOCK
1,700,000 Chelyabenergo1,2 ...................................................... 15,810
5,500,000 Komienergo1,2 ......................................................... 1,540
56,000,000 Mosenergo2 ............................................................ 1,092,000
115,000 Mosenergo (ADR)2 ...................................................... 215,625
1,335,000 Sverdlovskenergo1,2 ................................................... 11,481
17,000,000 Unified Energy Systems2 ............................................... 521,900
145,000 Unified Energy Systems (GDR)2 ......................................... 453,125
-----------
2,311,481
-----------
PREFERRED STOCK
450,000 Chelyabenergo1,2 ...................................................... 1,260
24,600 Permenergo 1,2 ........................................................ 1,697
-----------
2,957
-----------
TOTAL UTILITIES ...................................................... 2,314,438
-----------
TOTAL COMMON & PREFERRED STOCKS (cost $ 80,299,810) 11,849,387
-----------
GOVERNMENT OBLIGATIONS: 3.0%
10,000,000* GKO (Russian Government Treasury Bill), 0.00%, due 11/18/981 .......... 88,230
2,000,000* GKO (Russian Government Treasury Bill), 0.00%, due 01/20/991 .......... 14,700
4,480,000* GKO (Russian Government Treasury Bill), 0.00%, due 01/27/991 .......... 30,866
7,568,000* GKO (Russian Government Treasury Bill), 0.00%, due 02/24/991 .......... 53,332
4,041,000* GKO (Russian Government Treasury Bill), 0.00%, due 03/10/991 .......... 26,911
40,951,000* GKO (Russian Government Treasury Bill), 0.00%, due 03/24/991 .......... 249,908
3,300,000* GKO (Russian Government Treasury Bill), 0.00%, due 04/07/991 .......... 20,618
15,000,000* GKO (Russian Government Treasury Bill), 0.00%, due 04/21/991 .......... 84,819
-----------
TOTAL GOVERNMENT OBLIGATIONS (cost $ 11,151,576) 569,384
-----------
</TABLE>
6
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF NET ASSETS
(INCLUDING THE PORTFOLIO OF INVESTMENTS)
December 31, 1998 (continued)
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT SECURITY (NOTE 1)
- ------------- ---------------------------------------------------------- ---------------
<S> <C> <C>
SHORT-TERM INVESTMENTS: 35.5%
U.S. GOVERNMENT AGENCY OBLIGATION: 34.5%
Federal Home Loan Mortgage Corporation,
$6,600,000 4.5%, due 01/04/99 ....................................... $ 6,597,663
U.S. GOVERNMENT OBLIGATION: 1.0%
United States Treasury Bill,
200,000 3.85%, due 01/21/99 ...................................... 199,582
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $6,797,191)....................................... 6,797,245
-----------
TOTAL INVESTMENTS: 100.4%
(cost $98,248,577+)(Note 1)............................. 19,216,016
Liabilities in excess of other assets: (0.4%) .......... (68,756)
-----------
TOTAL NET ASSETS: 100.0%
(equivalent to $2.64 per share on
7,262,538 shares outstanding) .......................... $19,147,260
===========
</TABLE>
* Principal amount represents local currency.
1 Illiquid security (Note 9).
2 Non-income producing security.
ADR-American Depository Receipt.
GDR-Global Depository Receipt.
+ Aggregate cost for Federal income tax purposes is $101,667,634.
The Notes to Financial Statements are an integral part of this statement.
7
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $98,248,577) (Note 1) ................................ $ 19,216,016
Cash ............................................................................. 220,318
Foreign currency (cost $19,134)................................................... 5,358
Receivable for shares sold ....................................................... 110,434
Dividends and interest receivable ................................................ 47,236
Other receivable ................................................................. 12,162
Deferred organization costs, net (Note 1) ........................................ 51,509
-------------
Total Assets ............................................................. 19,663,033
-------------
LIABILITIES
Due to Lexington Management Corporation (Note 2) ................................. 12,318
Payable for investment securities purchased ...................................... 148,900
Payable for shares redeemed ...................................................... 239,529
Distributions payable ............................................................ 22,957
Accrued expenses ................................................................. 92,069
-------------
Total Liabilities ........................................................ 515,773
-------------
NET ASSETS (equivalent to $2.64 per share on
7,262,538 shares outstanding) (Note 5) .......................................... $ 19,147,260
=============
NET ASSETS consist of:
Capital stock - authorized 1,000,000,000 shares,
$.001 par value per share ........................................................ $ 7,263
Additional paid-in capital (Note 1) .............................................. 147,499,708
Accumulated net investment loss (Note 1) ......................................... (67,185)
Accumulated net realized loss on investments and foreign currency transactions
(Notes 1 and 8) .................................................................. (49,246,184)
Unrealized depreciation of investments and foreign currency translation of other
assets and liabilities ........................................................... (79,046,342)
-------------
TOTAL NET ASSETS ......................................................... $ 19,147,260
=============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
8
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends ............................................................. $ 366,517
Interest .............................................................. 2,195,403
-------------
2,561,920
Less: foreign tax expense ............................................. 54,598
-------------
Total investment income ............................................. $ 2,507,322
EXPENSES
Investment advisory fee (Note 2) ...................................... 796,381
Custodian expenses .................................................... 450,948
Transfer agent and shareholder servicing expenses (Note 2) ............ 173,239
Distribution expenses (Note 3) ........................................ 159,146
Printing and mailing expenses ......................................... 110,128
Professional fees ..................................................... 81,823
Registration fees ..................................................... 78,405
Accounting expenses (Note 2) .......................................... 77,132
Directors' fees and expenses .......................................... 47,526
Amortization of deferred organization costs (Note 1) .................. 21,561
Computer processing fees .............................................. 13,156
Other expenses ........................................................ 54,270
-------------
Total expenses ...................................................... 2,063,715
Less: Redemption fee proceeds (Note 4) .............................. 624,187 1,439,528
------------- --------------
Net investment income ............................................... 1,067,794
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 6)
Net realized gain (loss) on:
Investments .......................................................... (48,990,439)
Futures contracts .................................................... 175,054
Foreign currency transactions ........................................ (26,393)
-------------
Net realized loss ................................................... (48,841,778)
Net change in unrealized depreciation of:
Investments .......................................................... (55,933,363)
Foreign currency translation of other assets and liabilities ......... (13,781)
-------------
Net change in unrealized depreciation .............................. (55,947,144)
--------------
Net realized and unrealized loss .................................. (104,788,922)
--------------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................... $ (103,721,128)
==============
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
9
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Net investment income (loss) .............................................. $ 1,067,794 $ (110,162)
Net realized gain (loss) from investments and foreign currency
transactions ............................................................ (48,841,778) 11,101,736
Net change in unrealized depreciation of investments and foreign
currency translation .................................................... (55,947,144) (24,013,755)
------------ -------------
Net decrease in net assets resulting from operations .................... (103,721,128) (13,022,181)
Distributions to shareholders from net investment income .................. (472,886) -
Distributions to shareholders from net realized gains
from security transactions .............................................. (1,834,702) (9,633,271)
Increase (decrease) in net assets from capital share transactions (Note 5) (12,697,306) 146,682,278
------------ -------------
Net increase (decrease) in net assets ................................... (118,726,022) 124,026,826
NET ASSETS:
Beginning of period ..................................................... 137,873,282 13,846,456
------------ -------------
End of period (including accumulated net investment loss of $67,185
and $27,179 in 1998 and 1997, respectively) (Note 1).................... $ 19,147,260 $ 137,873,282
============ =============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
10
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 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 currency 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.
The Fund authorizes its custodian to place and maintain equity securities in a
segregated account of the Fund having a value equal to the aggregate amount of
the Fund's commitments under forward foreign currency contracts entered into
with respect to position hedges. There were no forward foreign currency
contracts outstanding at December 31, 1998.
FINANCIAL FUTURES The Fund may invest in financial futures contracts in
order to gain exposure to, or protect against market fluctuation. The Fund is
exposed to market risk as a result of changes in the value of the underlying
financial instruments. Investments in financial futures require the fund to
"mark to market" on a daily basis, which reflects the change in the market
value of the contract at the close of each day's trading. Typically, variation
margin payments are received or made to reflect daily unrealized gains or
loses. Realized gains or losses are recognized when contracts are closed and
are reported in the statement of operations.
11
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
FINANCIAL FUTURES (CONTINUED) These investments require initial margin
deposits with a broker, which consist of cash or cash equivalents. The amount
of these deposits is determined by the exchange or Board of Trade on which the
contract is traded and is subject to change. At December 31, 1998, there were
no financial futures contracts outstanding.
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, 1998,
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.
DEFERRED ORGANIZATION COSTS Organization costs aggregating $107,018 have
been deferred and are being amortized on a straight-line basis over five years.
At December 31, 1998, the amount remaining to be amortized was $51,509.
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 year ended December 31, 1998.
The Fund also reimburses LMC for certain expenses, including accounting and
shareholder servicing costs of $173,493 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,
1998 were $159,146 and are set forth in the statement of operations.
12
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
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, 1998 were $991,650. The amount available for offset against Fund
expenses was $624,187 and is set forth in the statement of operations. Excess
fee proceeds of $367,463 were added to the Fund's capital.
5. CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1998 December 31, 1997
-------------------------------- ---------------------------------
Shares Amount Shares Amount
--------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Shares sold ........................................ 6,682,804 $ 46,991,263 11,666,846 $ 250,987,395
Shares issued on reinvestment of dividends ......... 893,025 2,202,785 537,246 9,215,535
Redemption fee proceeds ............................ - 367,463 - 1,088,338
--------- ------------- ---------- --------------
7,575,829 49,561,511 12,204,092 261,291,268
Shares redeemed .................................... (8,192,746) (62,258,817) (5,556,760) (114,608,990)
---------- ------------- ---------- --------------
Net increase (decrease) ............................ (616,917) $ (12,697,306) 6,647,332 $ 146,682,278
---------- ------------- ---------- --------------
</TABLE>
6. INVESTMENT TRANSACTIONS
The cost of purchases and proceeds from sales of securities for the year ended
December 31, 1998, excluding short-term securities, were $40,957,689 and
$33,277,990, respectively.
At December 31, 1998, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost amounted to $54
and aggregate gross unrealized depreciation for all securities in which there
is an excess of tax cost over value amounted to $82,465,453.
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.
13
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
7. INVESTMENT AND CONCENTRATION RISKS (continued)
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 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.
YEAR 2000 COMPLIANCE RISK The Fund seeks to ensure that the operating and
processing systems of the companies in which it invests will continue to
function when the Year 2000 arrives. However, the risk exists that one or more
of these companies may not be adequately prepared for the Year 2000 which could
have a material impact on the company itself and on the Fund's investment in
that company.
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.
8. FEDERAL INCOME TAXES-CAPITAL LOSS CARRYFORWARDS
Capital loss carryforwards1 available for Federal income tax purposes as of
December 31, 1998 are approximately $48,815,385, expiring in 2006. To the
extent any future capital gains are offset by these losses, such gains may not
be distributed to shareholders.
1Temporary book-tax differences of $4,780,969 are the result of deferred
post-October losses and wash sales.
14
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
9. 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, at the time of purchase.
<TABLE>
<CAPTION>
Initial Average Percent
Acquisition Cost Per Market of Net
Security Shares Date Share Value Assets
- ---------------------------------------------------- ------------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Alfa Cement ........................................ 38,000 3/25/97 $ 18.20 $ 20,710 0.11%
Aviastar ........................................... 32,500,000 6/25/97 0.04 42,250 0.22
Baltika Brewery .................................... 200 2/25/98 599.00 36,000 0.19
Bashinformsvyaz .................................... 996,900 6/9/97 1.95 246,234 1.29
Bor Glass .......................................... 2,500 5/8/98 21.50 5,000 0.03
Chelyabenergo ...................................... 1,700,000 1/31/97 0.71 15,810 0.08
Chelyabenergo (Preferred Stock) .................... 450,000 2/26/97 0.30 1,260 0.01
Chelyabinskvyazinform .............................. 14,110 12/9/96 45.11 94,537 0.50
Chelyabinsky Trubny Zavod .......................... 1,002,000 8/5/97 0.36 7,916 0.04
Gostinny Dvor ...................................... 7,000 10/6/97 42.50 17,570 0.09
Irkutskelectrosvyaz ................................ 250,000 2/17/97 1.09 33,250 0.18
Komienergo ......................................... 5,500,000 8/5/97 0.05 1,540 0.01
Komitek ............................................ 530,000 7/9/97 5.55 53,000 0.28
Krasnoyarskelectrosvyaz ............................ 41,000 7/2/97 17.05 23,411 0.12
Krasny Kotelschik .................................. 850,000 9/23/97 0.38 9,775 0.05
Lensvyaz ........................................... 9,500 2/14/97 48.95 29,545 0.15
Medpolimer ......................................... 21,900 8/6/97 10.50 15,746 0.08
Moscow Intercity International Telephone ........... 34,400 5/27/97 18.36 14,551 0.08
Moscow Telephone Systems (Preferred Stock) ......... 1,450 8/16/97 816.21 38,686 0.20
Murmanskelectrosvyaz ............................... 243,890 2/14/97 3.29 10,243 0.05
Murmanskelectrosvyaz (Preferred Stock) ............. 175,000 4/9/97 1.41 4,375 0.02
Nizhnovsvyazinform ................................. 501,000 8/1/96 4.15 150,300 0.79
Nizhnovsvyazinform (Preferred Stock) ............... 360,000 11/20/96 2.35 21,600 0.11
Novosbirskaya Telephone ............................ 20,383 7/17/97 93.86 90,704 0.47
Novosbirskelectrosvyaz ............................. 30,000 4/29/97 5.23 6,000 0.03
Orenburgneft ....................................... 165,000 7/4/96 8.58 24,750 0.14
Permenergo (Preferred Stock) ....................... 24,600 8/15/97 5.75 1,697 0.01
Salikamsk Magnesium ................................ 4,700 9/30/97 87.19 23,500 0.12
Samaraneftegaz (Preferred Stock) ................... 4,000 7/31/97 7.00 40 0.00
Samarasvyazinform .................................. 26,000 11/20/96 84.35 247,520 1.29
Samarasvyazinform (Preferred Stock) ................ 8,300 1/9/97 49.11 25,813 0.13
Samson ............................................. 23,800 7/9/97 50.82 4,522 0.02
Seversky Tube Works ................................ 17,354 3/21/97 2.17 764 0.00
Sibneft ............................................ 7,000,000 4/18/97 0.60 119,000 0.62
Sinarsky Trubny .................................... 46,000 4/9/97 10.63 6,992 0.04
Slavneft ........................................... 4,235,000 5/6/97 0.77 22,446 0.12
Smolensksvyazinform ................................ 50,000 6/20/97 6.40 500 0.00
Smolensksvyazinform (Preferred Stock) .............. 100,000 8/6/97 5.00 500 0.00
St. Petersburg Telecommunication ................... 500,000 6/18/96 1.93 100,000 0.52
St. Petersburg Telecommunication (Preferred Stock) 110,000 12/5/96 1.05 12,980 0.07
Sun Brewing (GDR) .................................. 209,700 7/30/97 13.06 513,765 2.68
Sverdloskenergo .................................... 1,335,000 6/18/96 0.82 11,481 0.06
Taganrogaky Metallurgical Plant .................... 4,450,000 4/24/97 0.22 4,450 0.02
Transneft (Preferred Stock) ........................ 1,800 7/27/97 1053.06 6,354 0.03
Tyumentelecom ...................................... 160,000 3/5/97 4.72 57,600 0.30
Tyumentelecom (Preferred Stock) .................... 279,099 2/6/97 1.71 24,840 0.13
</TABLE>
15
<PAGE>
LEXINGTON TROIKA DIALOG RUSSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
9. ILLIQUID SECURITIES (continued)
<TABLE>
<CAPTION>
Shares
or Foreign Initial Average Percent
Principal Acquisition Cost Per Market of Net
Security Amount* Date Share Value Assets
- ------------------------------------------ ---------------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Udmurtneftegaz (Preferred Stock) ......... 4,000 1/20/97 $ 57.00 $ 3,000 0.02%
Uralsvyazinform .......................... 10,000,000 1/24/97 0.06 50,000 0.26
Volgogradelectrosviaz .................... 80,020 2/28/97 3.91 8,002 0.04
Zvezda ................................... 50,000 8/21/97 29.90 41,300 0.22
GKO (Russian Government Treasury Bill),
0.00%, due 11/18/98 ..................... 10,000,000* 7/24/98 14.88 88,230 0.46
GKO (Russian Government Treasury Bill),
0.00%, due 01/20/99 ..................... 2,000,000* 7/16/98 13.91 14,700 0.08
GKO (Russian Government Treasury Bill),
0.00%, due 01/27/99 ..................... 4,480,000* 7/24/98 13.47 30,866 0.16
GKO (Russian Government Treasury Bill),
0.00%, due 02/24/99 ..................... 7,568,000* 7/17/98 12.97 53,332 0.28
GKO (Russian Government Treasury Bill),
0.00%, due 03/10/99 ..................... 4,041,000* 7/24/98 12.45 26,911 0.14
GKO (Russian Government Treasury Bill),
0.00%, due 03/24/99 ..................... 40,951,000* 7/16/98 12.44 249,908 1.31
GKO (Russian Government Treasury Bill),
0.00%, due 04/07/99 ..................... 3,300,000* 7/28/98 11.75 20,618 0.11
GKO (Russian Government Treasury Bill),
0.00%, due 04/21/99 ..................... 15,000,000* 7/17/98 12.09 84,819 0.44
---------- -----
$2,871,213 15.00%
========== =====
</TABLE>
10. TAXATION INFORMATION (UNAUDITED)
The following tax information represents the designation of various tax
benefits relating to the year ended
December 31, 1998:
The percentage of ordinary income distributions paid by the Fund derived from
agency and direct obligations of the United States government were as follows:
<TABLE>
<S> <C>
U.S. Treasury .................................. 0.66%
Federal Home Loan Bank ......................... 11.24
Federal Home Loan Mortgage Corporation ......... 10.49
Federal National Mortgage Association .......... 1.57
</TABLE>
The Fund designates $1,835,406, whether taken in shares or cash, as 20%
long-term capital gain distributions.
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 December 31, registration date)
----------------------------- to December 31,
1998 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 income (loss) ................................... 0.15 (0.01) (0.05)
Net realized and unrealized gain (loss) on investments ......... (14.70) 7.57 (0.51)
-------- ------- --------
Total income (loss) from investment operations .................. (14.55) 7.56 (0.56)
-------- ------- --------
Less distributions:
Distributions from net investment income ....................... (0.07) - -
Distributions from net realized gains .......................... (0.24) (1.30) (0.32)
-------- ------- --------
Total distributions ............................................. (0.31) (1.30) (0.32)
-------- ------- --------
Net asset value, end of period .................................. $ 2.64 $ 17.50 $ 11.24
======== ======= ========
Total return .................................................... (82.99)% 67.50% (9.01)%*
Ratio to average net assets:
Expenses, before reimbursement or redemption fee
proceeds ...................................................... 2.64% 2.89% 5.07%*
Expenses, net of reimbursement or redemption fee
proceeds ...................................................... 1.84% 1.85% 2.65%*
Net investment income (loss), before reimbursement or
redemption fee proceeds ....................................... 0.57% (1.14)% (3.69)%*
Net investment income (loss) ................................... 1.36% (0.11)% (1.27)%*
Portfolio turnover rate ......................................... 65.76% 66.84% 115.55%*
Net assets, end of period (000's omitted) ....................... $ 19,147 $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.
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lexington Troika Dialog Russia Fund, Inc.:
We have audited the accompanying statement of net assets (including the
portfolio of investments) and assets and liabilities of Lexington Troika Dialog
Russia Fund, Inc. as of December 31, 1998, the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the two-year period 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 and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998 by correspondence with the custodian
and brokers. 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, 1998, the results
of its operations for the year then ended, and changes in its net assets for
each of the years in the two-year period then ended and the financial
highlights for the years in the two-year period then ended and for the period
from July 3, 1996 (effective SEC registration date) to December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG LLP
New York, New York
February 19, 1999
18
<PAGE>
------------------------------------------------------
L E X I N G T O N
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.
